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129 Cards in this Set

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Corporations: What are four advantages of corporations?
1. Shareholders have limited liability.
2. Shareholders may freely transfer ownership rights.
3. Corp. may have perpetual life.
4. Corp. has regular form of management decisionmaking established by statute.
Corporations: What is a certificate of formation?
Describes the purposes and structure of a corporation. Required when organizing a corp.
Corporations: What are bylaws?
Contain specific statement of management procedures.
Corporations: When is a corporation a citizen? Not a citizen?
1. Due process, equal protection, and diversity of citizenship jurisdiction.
2. Privileges & Immunities clause.
Corporations: What is a de jure corporation?
A corporation formed in accordance with all applicable laws.
Corporations: What are the elements of the de facto corporation doctrine?
1. Colorable compliance with statutory formation requirements.
2. Business has been conducted in the corporation's name.
Corporations: What is the corporation by estoppel doctrine?
In a contractural situation, have the parties acted as if they were a corporation?
Corporations: When can the veil be pierced?
1. Corporate formalities have been ignored AND injustice has resulted.
2. The corporation was inadequately capitalized.
3. Is it necessary to prevent fraud?
Corporations: When can a shareholder be held personally liable for corporate obligations?
1. If there is no corporation (de jure, de facto, by estoppel).
2. If the veil can be pierced.
Corporations: If sharehiolders are held liable, who will be held liable, and for how much?
1. Normally, only shareholders active in management or opertaion of the business.
2. Entire amount of claim, joint and several.
Corporations: Who may pierce the veil?
1. Creditors, particularly with tort, not K claims.
2. S/h, but rarely.
Corporations: For what dealings may a promoter be held liable?
1. Breach of fiduciary duty arising from sales to corporation.
2. Fraudulent misrepresentation.
3. Securities violations (10b-5 or Texas Securities Law)
Corporations: Is a corporation held liable on promoters contracts?
No, unless the corporation adopts the contracts. Even if there is adoption, the promoter remains j&s liable unless there is a novation.
Corporations: What do promoters do? How does this affect corporation liability?
They form a new corporation. Because the corporation does not exist at time of making the contract, someone has to be liable. That would be the promoter.
Corporations: What is a subscription agreement?
A continuing offer that does not become an enforceable contract until accepted by the corporation.
Corporations: When can a subscription agreement be revoked for an existing corporation? A corporation to be formed?
1. Any time prior to acceptance.
2. Irrevocable for six months.
Corporations: How may a corporation accept a subscription?
Corporations: When are subscribers deemed to be shareholders?
Only after paying for shares.
Corporations: What must a corporation do when it issues stock?
Register with the SEC.
Corporations: What are the three major exceptions to the requirement that a corporation issuing stock register with the SEC?
1. Intrastate offerings (ONLY to state of incorporation && operating)
2. Regulation D offerings
3. Regulation A offerings
Corporations: What are the three limits for Regulation D offerings in a twelve month period?
1. Up to $1M to unlimited number of investors (R504)
2. Up to $5M to an unlimited number of accredited investors + 35 or fewer nonaccredited investors (R505)
3. Any amount to unlimited accredited invstors + 35 unaccredit investors w/sufficient knowledge and experience
Corporations: What is a Regulation A offering?
Not exactly an exemption. Provides a simplified registration form for sales of securities up to $5M annually.
Corporations: What consideration may be provided for shares?
Any benefit to the corporation, whether tangible or intangible. Shares may only be issued when full amount is recieved.
Corporations: If shares are issued without full payment, who is liable and for what?
The immediate buy of the stock is liable to pay the full amount of the corporation.
Corporations: Who generally has the power to run the day to day affairs of a corporation?
The Board of Directors.
Corporations: When may shareholders run a corporation?
To the extent that the certificate, bylaws, or shareholder agreement provides. Otherwise, power is vested in the Board, which the shareholders elect.
Corporations: How may shareholders act?
1. At a shareholder meeting.
2. Without a meeting with consent of ALL shareholders entitled to vote.
Corporations: When are proxies irrevocable?
When the proxy form conspicuously states that the proxy is irrevocable AND the proxy is coupled with an interest.
Corporations: How many votes may a share have?
One share, one vote, unless a class is made nonvoting by the articles.
Corporations: What is the procedure to allow cumulative voting?
If incorporated before September 1, 2003, may vote unless certificate provides otherwise. If after, may vote only if expressly permitted by the certificate.
Corporations: When cumulative voting, how many votes does each share recieve?
One per director being elected.
Corporations: How many shares need to be represented at a meeting for a vote to be valid?
A quorum.
Corporations: If shareholder action involves an ordinary matter, how many votes are necessary?
A majority of the votes cast at the meeting.
Corporations: If shareholder action involves a fundamental change, how many votes are necessary?
Two-thirds of all shares ENTITLED to vote (unless directors require a greater vote)
Corporations: if shareholder action involves electing a board of directors, how many votes are necessary?
Regardless of cumulative voting, candidates getting the most votes win.
Corporations: Upon which amendments may a class of shares vote as a class, regardless of the articles?
1. Changing par value shares into no par value shares.
2. Vice versa
3. Shares of any class into a different number of shares of the same class.
Corporations: What is a voting trust?
A written agreement that all shares owned by parties to the agreement are transferred to a trustee, who votes and distributes dividends according to the agreement. Only valid if for a proper purpose.
Corporations: What is a pooling agreement?
A written agreement among shareholders to vote their shares as a majority of signers direct. No formal separation of voting power and beneficial ownership.
Corporations: What is the requirement to form a close corporation?
The certificate must state "this corporation is a close corporation."
Corporations: How does one terminate statues as a close corporation?
By amending the certificate, with approval of two-thirds of each class of shares, or as provided in the articles and the filing of a termination certificate.
Corporations: How can a close corporation be managed?
By the board of directors, or by directors with limited powers, outsiders, or shareholders, if the certificate or shareholders agreement so provides.
Corporations: What are the conditions on restriction of transfer of stock in Texas?
1. Restrictions do not unrsbl restrain or prohibit transferability.
2. Existence of restricions is conspicously disclosed on stock certificates.
3. Restrictions are set forth in certificate of formation, bylaws, or shareholder's agreement.
Corporations: When is a restriction on transfer of stock effective against a third party?
1. If restiction was known to third party.
2. If restriction is conspicously noted on the certificate of stock.
Corporations: Which shareholders have a right to examine the corporations books and records upon written demand?
1. Shareholders of record for more than six months.
2. Shareholders who own more than 5%
Corporations: What are preemptive rights?
Shareholder's rights to purhcase newly issued shares to maintain proportional voting stock. Only default if corporation incorporated before September 1, 2003.
Corporations: How may distributions be paid?
1. Cash
2. Property
3. Bonds
Corporations: What forms may distributions be made?
1. Dividend
2. Share purchases
3. Liquidation payment.
Corporations: What is stated capital?
Amount recieved for par and other amounts allocated or transfered to the account. Not allowed for distributions, but reserved for creditors.
Corporations: When will a court enjoin payment of distributions?
When payment
1. Discriminates between members of a same class of stock
2. Violates preferences of a preferred class of shareholders.
Corporations: Who are preferred shareholders?
The first shareholdres to be paid distributions.
Corporations: What are the three cumulative provisions for stock dividends?
1. Cumulative (if preferred not paid in a year, must make up for missed payment before common stock can recieve money)
2. Noncumulative
3. Cumulative if earned.
Corporations: What are participation rights?
Preferred shareholders that are participating have a right to receive additional distributions in any one year above and beyond the stated preference.
Corporations: May a payment be made that will render a corporation insolvent?
Corporations: For how much is a director who votes for or assents to a wrongful payment liable?
Joint and several liability to the extent of the impermissible payment. Directors held liable are entitled to contribution from other directors who could have been held liable.
Corporations: How is a director deemed to have assented to a payment?
Presence at the meeting where the payment was approved, unless files a written dissent.
Corporations: When is a director protected from liability for a wrongful distribution?
1. In the exercise of ordinary care, relies and acts on good faith on financial statements or other information of the corporation.
2. In the exercise of ordinary care, relies and acts on good faith upon a written opinion of an attorney for the corporation.
Corporations: When may a declared cash dividend be revoked? Stock dividends?
1. If the declaration itself was illegal.
2. If payment would be illegal (insolvency or lack of surplus).

Stock dividends may be revoked at any time.
Corporations: What is the standing requirement for a shareholder (derivative) suit?
Must have been a shareholder at the time of the act or omission complained of; or become a shareholder by operation of law.
Corporations: What must be filed with the corporation before filing a derivative suit?
A written demand that the corp. file suit in its own right, stating particularly the nature of the claim.
Corporations: How long may a shareholder wait after filing a demand with the corporation.
90 days, unless the corporation rejects the demand sooner or the dela would cause irreparable injury during the waiting period.
Corporations: What is the pleading requirement for a derivative suit after rejection by the corporation?
Must show that the decision was not made in the corporation's best interest by a disinterested majority of the board.
Corporations: What are the three options that a corporation has after a derivative suit is filed?
1. Go along with the suit.
2. Seek a stay in order to investigate the matter further.
3. If determined not to be in best interests of the corporation, move to dismiss.
Corporations: What is required for the discontinuance or settlement of a derivative suit?
Approval of the court, and if court determines that a proposed discontinuance or settlement may substantially affect other shareholders, may require notice to those shareholders.
Corporations: Upon what circumstances may a court order a corporation to pay the expenses for a derivative suit?
Upon a finding that the suit substantially benefited the corporation.

Damages are awarded to the corporation.
Corporations: If a court determines that a shareholder suit was omaintained without rsbl cause or brought for an improper purpose, what may the court do?
Have the plaintiff pay costs.
Corporations: Are directors liable for bad business judgment?
No. Need fraud or illegal conduct.
Corporations: When does actual authority arise for a director to have power to bind a corporation?
1. Proper notice must be given for a director's meeting.
2. A quorum must be present.
3. A majority of directors must approve the action.
Corporations: Is a formal meeting of directors always required?
No, unless prohibited by certificate or formation, the unanimous written consent will be allowed. Also, remote meetings are fine.
Corporations: How may vacancies in the Board of Directors be filled? If resulting from increase in number of directors?
1. Remaining directors, or shareholder meeting.
2. Same, but board may not fill more than two vacancies between annual meetings.
Corporations: How may directors be removed if the certificate or bylaws don't provide otherwise?
With or without cause by a vote of a majority of the shares entitled to vote for directors.
Corporations: What is the duty of care required by directors? Liability?
Ordinary care and prudence. Liable for losses resulting from officer's misconduct if the directors fail to supervise the officer.
Corporations: If a director will benefit from a transaction, what must the director do? The corporation? ***IMPORTANT***
1. Disclose the information to the board.
2. Disinterested directors or the shareholders must approve.
Corporations: May a undisclosed interested director transaction be set aside? Are damages available?
Yes, unless it is fair to the corporation.

Yes, equal to the director's profit.
Corporations: How does a director have an interest in a transaction?
1. If he is a party to the transaction.
2. Has a material financial state in the transaction.
3. Is an immediate family member of a party.
Corporations: What is the first of three options for an interested director transaction to be valid?
The material facts of the relationship must be known to the board, and the board in good faith authorizes the transaction by a vote of a majority of the disinterested directors (does not have to be a quorum)
Corporations: What is the second of three options for a interested director transaction to be valid?
The material facts of the relationship are disclosed to the shareholders who then by vote approve the transaction in good faith.
Corporations: What is the third of three options for an interetsed director transaction to be valid?
The transaction is FAIR to the corporation at the time it is authorized or ratified by the board of the shareholders.
Corporations: What is the Corporate Opportunity Doctrine?
A director or offier may not usurp a business opportunity in which his corporation may rsbl be interested w/o first giving the corp an opportunity to act. Failure = liabiliby for profits made & the opportunity.
Corporations: To whom is Section 16(b) apply?
1. Corporations with more than $10M of assets and at least 500 record holders of a class of equity securities.
2. Corporations registered on a national securities exchange.
Corporations: What does Rule 16(b) provide?
Any profit realized by a director, officer, or 10%+ s/h of any ale of equity security w/in 6 month period must be returned to corporation.
Corporations: How are damages computed for violations of Section 16(b)?
Matching the highest sales price against the lowest purchase price during any six-month period.
Corporations: What are the three things that Rule 10b-5 makes it unlawful for any person to use interstate commerce, mails, or national security exchanges to do?
1. Employ any device, scheme, or artifice to defraud.
2. Make any untrue statement of a material fact or omit to state a material fact.
3. Engage in any act/practice/course of business that would operate as fraud or deceit, in connection with purchase or sale of any security.
Corporations: What is a security?
Stock, bonds, and even notes under some circumstances.
Corporations: To whom does Rule 10b-5 apply?
All persons who commit fraud in connection with the purchase and sale of securities.
Corporations: What does the class of persons to whom Rule 10b-5 apply, include?
1. Persons who trade on the basis of inside information.
2. Persons who trade on the basis of misappropriated market information, in breach of duty of trust and confidence.
Corporations: How can a tippee of an insider be liable under 10b-5?
1. Only if the insider has breached his fiduciary duty by disclosing to the tippee;
2. Any the tippee knows or should know that there has been a breach.
Corporations: Who may the government prosecute under 10b-5 via the Misappropriation Theory?
Any person trading on the basis of market information misappropriated, no breach of duty needed.
Corporations: What are three contexts in which 10b-5 liability is likely to be asserted?
1. A sale or purchase of shares transaction.
2. Dissemination of misleading corporate info
3. Corp fiduciary duty or loyalty cases incidentally involving purchase or sale of a security.
Corporations: What is materiality for 10b-5?
Information is material if a rsbl person would attach importance to it in making an investment decision.
Corporations: What standing is required to sue under 10b-5
Must be a purchaser or seller.
Corporations: What 10b-5 cases require reliance?
Misinformation cases not involving omission.
Reliance is also presumed in fraud on the market cases.
Corporations: What is the fraud on the market theory?
Purchase in an impersonal market where the price is distorted by the defendant's public misrepresentation.
Corporations: Is strict privity required for 10b-5?
Usually not, at least in dissemination of misleading information cases.
Corporations: Is scienter required for 10b-5?
Yes, reckless disregard for truth usually sufficient. Negligence sufficient for anti-fraud.
Corporations: What remedies may the SEC seek under 10b-5?
1. Injunctive relief.
2. Civil penalties (not to exceed 3x profit gained or loss avoided)
3. Criminal penalties.
4. Private relief.
Corporations: Who are the two required officers?
1. President
2. Secretary
Corporations: What powers do officers have, generally?
Authority provided in bylaws or determined by board.
Corporations: What must a CFO, CEO, or other top executive officer certify in a filing per Sarbanes-Oxley?
1. Officer has reviewed the report.
2. Based upon the officer's knowledge, the report is true and does not contain material omissions.
3. Fairly presents financial position of the comiany.
4. Signing officer is responsible.
Corporations: If a reporting company is required to restate financial reports because of misconduct in respect to the reports, what must the company's CEO and CFO do?
Reimbures the company for any bonus or other incentive-based compensation recieved by them during the 12-month period after filing or publication, plus any profit made from sale of company securities during that period.
Corporations: What is the standard procedure for making fundamental changes?
1. Board resolution setting forth proposed action is adopted.
2. Notice sent not less than 21 days before shareholder meeting.
3. Action must be approved by 2/3 holders of shares entitled to vote.
Corporations: What limitations exist on the amendment of articles?
May amend in any way and as many respects, so long as amendment would currently be lawful in original articles.
Corporations: What is required for a sale of all or substantially all of the assets of a corporation to be considered such?
Corporation must not engage in business after the sale.
Corporations: When are shareholders permitted to compel the corporation to buy their shares?
1. When dissatisfied with the terms of a merger or share exchange.
2. The sale of all or substantially all assets.
Corporations: When is the right of shareholders to compel the corporation to buy their assets?
1. When listed on nat'l security exchange.
2. Listed on NASDAQ.
3. Held of record by 2000+ s/h.
Corporations: Who may dissent from mergers and share exchanges?
Any shareholder.
Corporations: What is the basic procedure for shareholder's dissenting appraisal remedy?
1. Corporation notifies shareholder.
2. Shareholder makes demand and tenders shares.
3. Corporation responds.
Corporations: What are the requirements for a corporation to be voluntarily wound up by its organizers or directors before business commences?
1. No shares of stock issued.
2. Corp has not commenced businees.
3. Majority of organizers or directors agree.
4. File certificate of termination with Sec Steate.
Corporations: When may a corporation wind up by shareholder consent?
When all s/h agree in writing.
Corporations: What are the procedures for a corporation to wind up by corporate act?
1. Send notice of intent to wind up to all creditors and claimants.
2. Must collect all of its assets
3. Discharge all of its obligations
3. Distribut remainder of assets, in cash or in kind, to shareholdres.
4. File certificate of termination.
Corporations: When may a corporation revoke a voluntary decision to wind up?
1. Any time before certificate filed; requires process similar to that of of winding up.
Corporations: What is an affiliated shareholder?
One who owns 20%+ of the corporation's stock.
Corporations: What are covered corporations prohibited from doing with affiliated shareholders?
Business combinatiosn (mergers, share exchanges, dispositions of 10%+ of assets)
Corporations: Who are covered corporations for purposes of the business combintaion limitation?
Issuing public corporations (100+ s/h or registered per Securities Exchange Act of 1934) that have not opted out of the law.
Corporations: When is a business combination with an affiliated shareholder not prohibited?
1. Approved before shareholder became affiliated.
2. Approved by 2/3 of all outstnding voting shares not owned by affiliated shareholder at meeting called at least 6 months after shareholder became affiliated.
Corporations: Who may bring an actin to involuntarily terminate a corporation?
1. State agency.
2. Shareholder
3. Creditor
Corporations: What are five reasons why the AG may seek termination of a corporation?
1. Failure to comply with condition precedent to information.
2. Fraudulent procurement of certificate of incorporation.
3. Transacting business beyond scope provided in certificate.
4. Misrepresenting any matter in any required report, application, affidavit, etc.
5. If public interst requires.
Corporations: What are three reasons why the Secretary of State would administratively terminate a corporation?
1. Failure to pay any required fee or tax.
2. Failure to file any required reports.
3. Failure to maintain a registered agent.
Corporations: What happens if a corporation is administratively terminated for failure to pay franchise taxes?
1. Corporation may not sue or defend actions in state court.
2. Each director and officer of the corporation is personally liable for each debt created on the date after the tax or tax report was due.
Corporations: What must be first obtained before a minority shareholder may move for involuntary dissolution of a corporation?
A reciever must be appointed.
Corporations: What are five grounds for appointment of a receiver?
1. Insolvency or danger of;
2. Deadlock and irreparable injury in mgmt of corp;
3. Deadlock and failure to elect directors.
4. Oppression by directors or those in control
5. Waste of corporate assets.
Corporations: If a problem requiring receivership of a corporation is not remedied within one year, what may a court order?
Involuntary dissolution.
Corporations: When may a creditor seek immediate liquidation of a corporation?
Only when it establishes irreparable damage will ensue to the unsecured creditors of the corporation.
Corporations: What is the SoL for rights or claims existing or liability incurred prior to the termination of a corporation?
Three years.
Corporations: May a corporation be abandoned?
No. Franchise taxes accrue until the corporation is termianted.
Corporations: What power does the state have regarding foreign corporations?
Unlimited power to exclude or reglulate, unless engaged in interstate commerce.
Corporations: What must a foreign corporation do in order to have the right to transact business in Texas?
Register with the Secretary of STate.
Corporations: What does not constitute transacting business in Texas? (not exclusive)
1. Isolated txns completed in 30 days.
2. Having bank account in TX.
3. Effecting sales through independent contractors.
4. Bringing suits or collecting debts
Corporations: What happens if a foreign corporation fails to register in TX?
May not bring suits in TX.
Corporations: What must a corporation doing business in a name other than the name in its articles?
File an assumed name certificate with the secretary of state.