Study your flashcards anywhere!

Download the official Cram app for free >

  • Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off

How to study your flashcards.

Right/Left arrow keys: Navigate between flashcards.right arrow keyleft arrow key

Up/Down arrow keys: Flip the card between the front and back.down keyup key

H key: Show hint (3rd side).h key

A key: Read text to speech.a key


Play button


Play button




Click to flip

105 Cards in this Set

  • Front
  • Back
what is required for incorporation?
1) incorporators (people who sign and file articles)
2) articles of information
what are the aritcles of incorporation
it is basically a contract between corporation and shareholders. it is also a contract between the corporation and the state.
what must the articles of incorporation include?
1) authorized stock
2) number of shares per class and
3) information on par value, voting rights and preferences of each class.
describe the principle of "limited liability"
officers and directors are not personally liable for what the entity does. shareholders are generally only liable for the price of their stock.
what is required for a de facto corporation?
1) there is a relevant incorporation statute;
2) the parties made a good faith, colorable attempt to comply with it; and
3) some exercise of corporate privileges.

Note: a person asserting this doctrine must be unaware of failure to form a de jure corporation.
what is required for a corporation by estoppel?
1)one dealing with a business as a corporation, treating it as a corporation may be estopped from denying the business's corporate status.
usually available in contract, not tort.

Note: a person asserting this doctrine must be unaware of failure to form a de jure corporation.
Which wins--bylaws or articles--when there is a conflict?
the articles control because bylaws are just internal documents and not filed with a state agency. the articles are a contract with teh state.
what is the liabilty of a corporation on pre-incorp contracts?
not liable until it adopts the contract.
what must a foreign (out of state) corporation do to be able to transact business in state?
need a "certificate of authority" from secretary of state. must pay fees to state and appoint a registered agent.
without doing this, a foreign corp cannot sue (but can be sued)
what is issuance?
its when a corporation sells or trades its own stock. it is a way to raise capital for the corporation.
what is a subscription?
a written offer to buy stock from corporation
can pre-incorporation subscriptions be revoked?
no, at least not for six months unless it provides otherwise or all subscribers agree.
does the corporation need consideration when it issues stock?
yes. can be money, tangible/intangible property or services.
traditionally prohibited: future services, promissory notes

modern trend: increasing number of states allow payment with any tangible or intangible property or benefit to the corporation (including promissory notes and future services)
what is par? no par?
par is the minimum issuance price.
no par means no minimum issuance price. board of directors sets a price.
what is treasury stock?
this is stock that was previously issued and has been reacquired by the corporation. corp can then resell it.
what is watered stock?
it is par stock issued for less than par value. directors would be liable if they authorized it and also the purchaser.
what is the pre-emptive right of the shareholder?
it's the right of an existing shareholder to maintain percentage of ownership by buying stock whenever there is a new issuance of common stock for money. (some states don't include sale of treasury stock as "new issuance")
who elects directors and when?
shareholders do at the annual meeting
what two ways can the board take a valid act?
1) unanimous written consent to act without a meeting; or
2) a meeting (can be held anwyere) that satisfies a quorum and voting requirements. If neither 1 or 2 is met, the act is void unless later ratified by a valid corporate act.
what is a quorum?
a majority of all directors is required to do business (unless different % required in bylaws).
meetings only require a majority vote of those present.
if there is no quorum, any action taken is void unless ratified by a valid act.
quorum can be lost (broken) if people leave. board then cannot take an act (but different for shareholder meeting).
what is the role of teh board of directors?
to manage teh business of teh corporation. board can delegate substantial management functions to a committee but a committee cannot amend bylaws, declare dividends or recommend a fundamental corporate change to shareholders.
describe the duty of care standard
a director owes the corporation a duty of care. she must act in good faith and do what a prudent person would do with regard to her own business.
if a director does nothing, what is he liable for?
this is nonfeasance. he is only liable for loss.
if the baord does something that hurts the corporation, what are they liable for?
this is misfeasance. even if there is a loss, a director is not liable if she meets the business judgment rule.
what is the business judgment rule?
a court will not second guess a business decision if it was made in good faith and was informed and had a rational basis. only liable for grossly negligent or irrational acts.
describe the duty of loyalty standard
a director owes the corproation a duty of loyalty. she must act in good faith and with a reasonable belief that what she does is in the corporation's best interest.
what is the rule regarding an interested director transaction?
an interested director transaction will be set aside unless the director shows: 1) the deal was fair to the corporation when entered, or 2) her interest and the relevant facts were disclosed or known and the deal was approved by either majority of disinterested shares or directors.
what is the rule regarding corporate opportunities?
director cannot usurp a corporate opportunity. he must tell the board and wait for the board to reject the opportunity.
what is the general rule for director liability and dissent?
generally a director is presumed to have concurred with board action unles her dissent or absentention is in writing in corporate records.
exceptions: absent directors are not liable. good faith reliance on financial statements, book value of assets, competent employees.
when will indemnification of directors and officers be allowed?
when person sued in capacity as officer or director has incurred costs and seeks reimbursement from the corp, there will be no indemnification if held liable to the corp. if she wins a judgment then argue mandatory indemnification.
describe the "piercing the corporate veil" doctrine
generally a shareholder is not liable for the acts or debts of a corporation but a court might PCV and hold shareholders personally liable if 1) they have abused the privilege of incorporating and 2) fairness requires it.

courts are generally more willing to PCV for tort victims than for contract victims.
what is the alter ego rule regarding PCV
alter ego-a director cannot treat the corp as his alter ego by interchanging personal assets with corporate assets
what the rule regarding undercapitalization for PCV
if a sharehodlers failed to invest enough to cover prospective liablities a court might PCV and subordinate shareholder debt to that of outsiders
what is a close corporation?
1) few shareholders and
2) stock not publicly traded.
shareholders can manage a corporation directly in a close corporation.
what is the rule regarding liability for professional corporations?
professionals and the P.C. remain personally liable for their own malpractice or misconduct in rendering professional services.
what is a shareholder's derivative suit?
a shareholder is suing to enforce the corporation's claim, not her own personal claim.
what are the consequences of a successful shareholder's derivative suit?
the recovery goes to the corproation. s receives costs and attorney's fees
what are the consequences of an unsuccessful shareholder's derivative suit?
no recovery for costs and attorneys fees. if no reasonable cuase, then s will be liable to the defendant she sued as well. there can be no suit by other shareholders because of res judicata.
what is required for bringing a shareholder's derivative suit?
1) stock ownership when the claim arose
2) must also adequately represent the interest of the corporation
3) must also make a written demand on the directors that the corporation bring suit unless demand would be futile (like when directors will be defendants)
4) must plead with particularity
5) in some states, s required to post seucirty for costs
6) corp can move to dismiss if disinterested directors find it's not in corp's best interest

there can be no dismissal or settlement without court approval
who is allowed to vote as a shareholder?
the record shareholder as of the record date has thte right to vote. record date is the voter eligibility cut off.
what is teh exception to the general rule that record owner on record date votes?
the corporation does not vote treasury stock even if it was teh record owner on teh record date.
can dead shareholders vote?
yes. s's executor can vote teh shares.
what is a proxy?
a proxy is
1) a writing
2) signed by record shareholder
3) directed to the secretary of corporation
4) authorizing another to vote the shares.
when can a proxy be irrevocable?
when it is a proxy coupled with interest in teh shares other than voting. (like ownership, option, pledge)
what are the requirements for a voting trust?
1) a written trust agreement controlling how the shares will be voted;
2) give a copy to the corporationg
3) transfer legal title of shares to voting trustee;
4) original shareholders receive trust certificates and retain all shareholder rights except for voting (10 year max).
what are the requirements for voting ("pooling") agreement?
1) shareholders can enter into voting agreements.
2) must be in writing and signed
3) voting agreements may be specifically enforceable (split in jxs)
where do shareholder's vote?
1) annual meeting to elect directors or shareholder can petition court to order one
2) special meeting can be called by (a)board of directors, (b) the president, (c) the holders of at least 10 percent of the voting shares or (d) someone else provided in teh articles.
what are the two ways shareholders can take a valid corporate act?
1) unanimous written consent of the holders of all voting shares; or
2) a meeting (held anywhere) that satisfies quorum and voting rules.
why is it not okay for 10 percent of shares to call a meeting to remove an officer?
because shares don't remove officers. they can remove directors. shareholder meeting must be for something they can vote on.
What are officers and how are they selected and removed?
OFficers are agents of the corporation. They can bind teh corporation by acts they have authority to bind with.
Officers are selected by and removed by directors. directors also set officer comepnsation.
traditionally, must have a president, secretary and treasurer. one person can have multiple officer positions
what is the notice required for shareholders meetings?
written notice must be given to every shareholder entitled to vote for every meeting (annual or special).
what must notice for shareholders meetings contain?
must tell shareholders
1) when and
2) where and
3) must state the purpose of the meeting.

only the stated purpose can be transacted at the meeting.
what is the consequence of failure to properly notify shareholders?
any action at the meeting is void unless those not sent notice waive the notice defect.
how do shareholders vote?
1) there must be a quorum at teh meeting (focus on number of shares represented, not number of shareholders). generally a quorum requires a majority of outstanding shares.
generally shareholder quorum is not lost if people leave the meeting (different from directors)
how and when do shareholders use cumulative voting?
cumulative voting is only available for directors. it is a device to give small shareholders a better chance of electing someone to the board.
how: multiply number of shares times number of directors to be elected. (you own 1000 shares and ther eare 9 directors. so you can vote 9,000 votes for one person if you want)
When will a stock transfer restriction be valid?
if they are reasonable under the circumstances and are not an undue restraint on alienation.

even if teh restriction is reasonable and thus valid, it cannot be invoked against the trasnferee unless either (a) it is conspicuously noted on the stock certificate or (b) the transferee had actual knowledge of the restriction
traditionally what is the right of a shareholder to access corporate records?
traditional: must have owned stock as least six months or own at least 5% of outstanding shares.
modern trend: any shareholder
what is the procedure for getting access to corporate records by a shareholder?
written demand stating a proper purpsoe, which means related to her role as a shareholder (can be hostile to the board).
when does a shareholder have a right to distributions?
distributions are declared in the board's discretion. you have to show a VERY strong showing of abuse of discretion.
what are distributions?
they are payments to shareholders. they can be dividends or right to repurchase shareholder's stock or redeem stock (force sale of corporation at price set in articles)
which shareholders get dividends?
preferred, participating, cumulative, common
what is a preferred shareholder?
preferred means pay first.
what is a participating shareholder?
participating means pay again.
what is a cumulative shareholder?
a cumulative dividend accrues year to year so add them up.
what is earned surplus and which funds can be used?
earned surplus is all earnings minus all losses minus distributions previously paid.
it can be used for distributions
what is stated capital and how is it computed?
stated capital is generated by issuing stock.

stated capital cannot be used for distributions.
it is computed depending on par issuance or no-par issuance...
par issuance: put the par value of the issuance into stated capital and put the excess over par into capital surplus.

no par issuance: the board allocates between stated capital and capital surplus. if board takes no act, it goes to stated capital.
what is capital suprplus and how is it computed?
capital surplus is also generated by issuing stock (like stated capital)
it is computed by payments of excess of par plus amounts allocated on the no-par issuance.
capital surplus can be used for distributions but only if you inform the shareholders.
what is a nimble divident?
it is a divident paid out of current earnings when there is not sufficient surplus for a divident.
what does it mean to be insolvent?
it means inability to pay debts as they come due.
what are the characteristics of fundamental corporate change?
1) extraordinary occurences so they require board of director action and
2) approval by a majority of shares entitled to vote. (majoirty of shares present is not enough)
what is a right of appraisal?
the right of appraisal is the right of a shareholder to force the corporation to buy her shares at fair value. she opposes the change and wants out. the right may be the shareholder's exclusive remedy regarding a fundamental change unless there is fraud.
when will a shareholder have a dissenting shareholder right of appraisal?
actions by a corp to trigger right (any of these: merger or consolidation, transfer of subs all assets, transfer of shares in a share exchange)

actions by shareholder to perfect right (must do all 3)
1) before shareholder vote, file with teh corp a written notice of objection and intent to demand payment;
2) abstain or vote against the proposed change; and
3) after the vote, make written demand to be bought out.

note some states do not grant the right of appraisal if company's stock is listed on national exchange since the shareholder could just simply sell her stock on the market.
what is required for amendment of the articles?
1) board of director action and notice to shareholders
2) shareholder approval (need majority of shares entitled to vote)
3) if approved, file amended articles with secretary of state.
what is class voting?
if the amendment to an article harms a class of stock, the amendment must be approved by the shares of that class itself as well as by the overall majority of shares entitled to vote.
for mergers or consolidations what do you need to remember?
1) board of director action (both corporations) and notice to shareholders
2) shareholder approval (gen both corp). need majority of shares to vote.
3) no shareholder approval required in short form merger (where 90% or more owned subsidiary is merged into a parent corporation).
4) if approved, file articles of merger (or consolidation) with Secretary of State.
5) Remember dissenting shareholder right of appraisal! generally for both shareholders in regular merger and shareholders of subsidiary for short form.

if approved file articles of merger or consolidation with sec. of state.
what is short form merger?
where 90% or more owned subsidairy is merged into a parent corporation.
what is the effect of merger or consolidation?
the surviving ocmpany suceeds to all rights and liabiliteis of the constituent companies.
to eitehr transfer all or substantially all of the assets (basically one company will acquire all stock of another), what do you need?
1) board of director action (both corps) and notice to selling corp's shareholders
2) approval by transferring corporation's shareholders (majority of shares entitled to vote). shares of buying corp dont need to vote because it's not a fundamental change for the buyer.
file articles of exchave in share exchagne. no filing in transfer of assets.
Is teh company acquiring assets liable for debts of teh acquired company?
no. teh corporation that sold its assets still exists so a creditor can still sue it.
what is required for voluntary dissolution?
1) board of directors resolution and approval by a majority of the shares entitled to vote, or
2) in some states, unanimous written shareholder agreement (without board involvement) is ok.
3) file articles of dissolution and give notice to creditors.
what is required for involutnary (by court order) dissolution?
shareholder can petition or creditor can petition.

shareholder can petition because of
1) director abuse, waste of assets, or misconduct; or
2) director deadlock that harms the company; or
3) shareholder deadlock and failure for at least two annual meetings to fill a vacant board position.

Creditor can petition because the corporation is insolvent and the creditor either has an unsatisfied judgment against the corporation or the corporation admits the debt in writing.
what is "winding up"?
after filing articles of voluntary dissolution or after court ordered dissolution, corp stays in existence to wind up. this consists of:
1) gathering all assets,
2) converting them to cash,
3) paying off creditors and
4) distributing any remainder to shareholders. the shareholders recover pro-rata by shre unless there is a dissolution (or liquidation) preference.
what is a liquidation or dissolution preference?
it works like a divident preference to "pay first".
what is debt in terms of security?
investor lends capital to the corporation to be repaid (usually with interest) as specified in the agreement. The debt holder is the creditor, not an owner.
what is debt secured by corporate assets called?
what is unsecured debt called?
what is equity?
it is when an investor buys stock and has an ownership interest in the corporation. teh equity holder is an owner, not a creditor.
are debt and equity redeemable (forced sale to corporation) or convertible (into another security at the option of the holder)?
what is a put option?
it is an option to sell securities at a set price.
what is a call option?
it is an option to buy securities at a set price.
what is a controlling shareholder
one with a majority of shares or a minor in a situation that gives working control over the corporation
what is a control premium
because this persons' stock carries control, she can sell it for more than its value simply as ownership of that portion of the corporation. the extra is control premium. selling for control premium is okay.
can a controlling shareholder be liable for selling to looters?
yes if she does so without making a reasonable investigation of the buyer.
what is the disguised sale of corporate asset?
buyer pays a premium to the controlling shareholder so she can get her hands on an asset of the corporation. controlling shareholder has no right to sell a corporate asset. all shareholders should share in premium.
is a sale of a board position allowed?
no beause a fidiciary cannot get paid to relinquish her position.
what is teh duty of the controlling shareholder to minority shareholders?
the controlling shareholder cannot subject minority shareholders to detriment.
what are special facts?
those a reasonable investor would consider important in making an investment decision. this is common law insider trading.
many courts impose upon directors and officers an affirmative duty to disclose special facts in securities transactions.

shareholder with whom the insider deals can sue.
when do you use Fed rule 10b-5?
10b-5 makes it illegal to use any fraudulent scheme in connection with the purchase or sale of any security.
what are the elements for rule 10b-5?
1) instrumentality of interstate commerce
2) possible defendants (company, buyer or seller who misrepresents material info or fails to disclose material inside info, tippers and tippees);
3) possible plaintiffs (SEC, private buyer or seller of securities);
4) possible "bad acts" by def (misrep of material info, nondisclosure of material info or trading on secrets, tipping);
5) the bad act must be in connection with teh purchase or sale of security;
6) materiality--misrep or ommission must concern a material fact--one that a reas investor would consider in making investment decisions;
7) scienter (def must have intent to deceive, recklessness will suffice but negligence will not);
8) reliance (presumed)
if you did not have interstate commerce and could not use rule 10b-5, what other theory could we use?
special facts
when does 16B apply?
this federal law applies only to publicly traded companies
1) a reporting corporation (i) listed on national exchange or (ii) at least 500 shareholders adn $10 million assets. registered per sec 12 of SEC Act of 1934.

2) type of defendant--(i)director when bought or sold or (ii)officer when bought or sold or (iii) shareholder who owns more than 10% both when bought and sold.

3) type transaction--buying and selling stock within a single six month period (short swing trading). fraud is not required. no requirement of inside information.

4) defendant must have bought and sold equity securities (stock).
how do you determine if a shareholder is above 10% ownership?
to determine if she is above 10% take a snapshot of what her ownership level was immediately before the event.
does 16B require fraud?
no it is strict liability
What happens when 16B applies?
All profits from such short swing trading are recoverable by the corporation. if within 6 months before or after any sale there was a purchase at a lower price there is a profit. So it's a profit even if you buy after you sell, so long as you buy at the lower price than at which you would sell.
how do you calculate the largest number of shares that a shareholder could buy within the six month period?
multiply the profit times how many shares.