FL Corporations

Question 1

Corporations Roadmap

Answer 1

1. Corporate Form
2. Forming the Corp
3. Financing the Corp
4. Preincorporation Transactions
5. Management of the Corp’s Affairs
6. Responsibilities and Duties of Corporate Directors and Officers
7. Shareholders
8. Fiduciary Obligations of Shareholders
9. Securities Fraud and Insider Trading
10. Fundamental Corp Changes
11. Tender Offers and Takeover Defenses
12. Dissolution and Liquidation
13. Foreign Corps
14. Not-For-Profit Corps

Question 2

Corporation Defined

Answer 2

= a legal entity separate and distinct from its owners (the shareholders), with its own rights and obligations.

• Free transferability: Shares can be transferred.
• Perpetual existence: No fixed date of termination or dissolution, unless otherwise stated in the articles of incorp.
• Centralized management: Decision-making powers are vested with the corp’s board of directors.
• Limited liability: Each sharehlder is liable only for the amount of his/her investment*.

Question 3

Taxation (C-Corp vs. S-Corp)

Answer 3

1. Corps are taxed as an entity (EXCEPT FOR S-CORPS)
2. Shareholders are also taxed on any distributions from the corp (double taxation).

C-Corporations: = Corps that do not elect otherwise (i.e. check the box.) For tax purposes, all corps are formed as C-Corps.
* Taxed as entities.
* Ex. C-Corp’s net income was $300 million. There are 100 shareholders, each of whom made $5,000 in dividends. C-Copr must pay state and fed income taxes on the full $300 million, and each shareholder must pay an additional tax on the $5,000 received.

S-Corporations: = a corp that meets certain criteria may elect to be taxed as an S-Corp.
* An S-Corp is taxed as a partnership.
* The corp itself pays no taxes on its income; all income is deemed to be earned by its shareholders.
** Shareholders, based on the number of shares owned, pay a proportional amount of the corp’s income. **
* Ex. S-Corp has a profit of $100,000. The corp has 4 shareholders, each who hold 25% of the shares. Each shareholder must include an additional $25,000 on his personal income tax return, representing his share of the corp’s profit.

Question 4

S-Corp Qualifications

Answer 4

To qualify to elect s-corp status, the corp must:
1. Be closely held (i.e. not publically held);
2. Have no more than 100 individual shareholders who are nonresident aliens; and
3. Not have issued more than one class of stock (except for classes of common stock that differ only in voting rights.)

Question 5

Powers of a Corporation

Answer 5

A corporation has the power to:
1. Sue and be sued;
2. Purchase, own, lease, mortgage, and sell real or personal property or any interest therein;
3. Lend money or use their credit to assist officers, directors, or employees;
4. Purchase or sell any interest or obligations in any other entity;
5. Enter into contracts, incur liability, borrow money, and issue notes, bonds, etc.;
6. Conduct business and locate offices within or outside Florida;
7. Elect directors and appoint officers, employees, and agents of the corp and define their duties and compensation, and loan them money;
8. Make and amend bylaws;
9. Make charitable donations;
10. Provide life insurance for directors and employees;
11. Etc.

Question 6

Ultra Vires Acts

Answer 6

= lack of power to act.
* The board of directors is NOT permitted to undertake any ultra vires acts, or acts that are beyond the corporation’s authority or beyond limitations as set forth in the articles of incorporation.
* Neither the corp nor the other party to a contract with the corp can maintain an ultra vires defense
** EXCEPTION: **The defense can be used if one contracting party knew or should have known that the transaction exceeded the corp’s authority.

Question 7

How to Serve Process on a Corp

Answer 7

1. Can be served via its registered agent;
2. If no registered agent or agent cannot be located, can serve the chair of the board, the president, ANY vice president, secretary, or treasurer of the corp at the principal office of the corp in Florida.

Question 8

Forming a Corporation
(+ Requirements of Articles of Incorporation)

Answer 8

• A corp is created by delivering a properly completed set of articles of incorporation to the Secretary of State, along with the required filing fee.
  ** Articles of Incorporation MUST include the following:**
  1. The corp’s name; must be unique and contain the word corp, incorporated, or Inc.
  2. Corp’s street and mailing address;
  3. Number of shares the corp is authorize to issue, or authorized shares;
  4. Street address of the corp’s initial registered office and name of its registered agent; and
  5. The name and address of each incorporator.
• Organizational Meeting: After incorporation, the initial directors MUSThold an organizational meeting to appoint officers (or naming directors ) and adopting bylaws.

Question 9

Bylaws

Answer 9

• Must be consistent with the articles of incorporation and FL and Fed law.
• Unless the Articles provide otherwise, the Board of Directors has the right to alter, amend or repeal the bylaws WITHOUT SHAREHOLDER APPROVAL, although any alteration is subject to repeal or change by shareholder action.

Question 10

De Jure Corps

Answer 10

= a properly formed corporation.
* May also exist where there has been substantial, but not incomplete, compliance with the statutory requirements for formation.
* In most cases, Articles of Incorporation must have been filed for there to be a de jure corp.

Question 11

De Facto Corps

Answer 11

Exists when there has been a good faith attempt to comply with the statutory requirements for formation, AND there has been some actual use of the purported corporate existence, such as carrying on business openly as a corp.

NOTE: Differ from a de jure corporation because no articles of incorp. were filed.

Question 12

Corporations by Estoppel

Answer 12

• Persons acting on behalf of the corporation under the mistaken assumption or belief that a corporation has been formed have NO PERSONAL LIABILITY.
• When neither de jure, de facto, or corp. by estoppel, there will be personal liability against those who:
  1. Participated in the management of the corp and
  2. Had actual knowledge that there was no incorporation.

Question 13

Piercing the Corporate Veil

Answer 13

Despite adequate formation, a court will hold individual shareholder’s personally liable for corporate obligations when necessary to prevent fraud or misconduct.

3 Requirements:
1. Alter Ego: The shareholder controlled the corp to such an extent that the corporation’s independent existence was in fact nonexistent and the shareholder was in fact the alter ego of the corp;
2. Improper Conduct: The corporation must have been used fraudulently or for an improper purpose; AND
3. Proximate Cause: The fraudulent or improper use of the corporate form caused injury to the claimant.

Question 14

What must the articles of incorporation state about stocks?
(MEMORIZE)

Answer 14

1. Set forth the classes of equity securities and series of shares within a class the corp is authorized to issue;
2. Set forth the number of shares of each class and series, as well as the rights, preferences, privileges and limitations of each class r series of securitiesauthorized to issue;
3. Designate at least one class or series:
   * with unlimited voting rights, and
   * entitled to receive the corp’s net assets on dissolution.

Question 15

Common Stock

Answer 15

The holders of common stock are the owners of the corporation.
* Common stock holders have the right to vote for directors and on any other matters put to them for a vote by the board of directors.

Question 16

Equity Securities

Answer 16

= shares of stock.
* Shareholders are paid only after all other creditors have been paid.
* Articles of Incorp. must state the classes of equity stock and series of shares within the classes that a corp. is authorized to issue, as well as the number of shares of each class and series, as well as rights, privileges, preferences and limitations.

Question 17

Preferred Stock
(Definition + 5 Types Listed)

Answer 17

= a class of equity stock with rights to distribution of dividends or assets preferential to those assigned to common shares.
* Upon liquidation of the corp preferred stock holders receive their proportional amount before common stock holders.
* Typically do not have voting rights; the preferential treatment refers to money, not a voice in the corp’s operation.
* 5 Types of Preferred Stock:
1. Staight Preferred Stock (Most Common)
2. Participating Preferred Stock (Preferred + bonus)
3. Cumulative Preferred Stock (Straight Preferred + can collect dividends from past years that wasnt issued by corp)
4. Convertable Preferred Stock: Option to convert into cmmon stock or bonds
5. Redeemable Preferred Stock: Can be cashed in at the option of the corp or stock holder at the predetermined amount.

Question 18

Par Value

Answer 18

= the value of a single common share as set by the corporation’s articles.
* It is not typically related to the actual value of the shares; in fact, it is often lower.
* Serves no purpose other than to set the floor price value for the issuance of shares.
* NP REQUIREMENT IN FLORIDA THAT A PAR VALUE BE SET.

Question 19

Watered Stock

Answer 19

= any stock issued by a corporation to someone in exchange for assets that under-compensate for the stock.
* Example: Corp issues 1,000 shares of stock to Sam for $10,000 even though the stock’s fair market value is $15,000.
* Corps may NOT recover the difference between the amount paid and the actual value of the stock UNLESS the shares were issued via a beach of fiduciary duty.
* Ex. Sam’s aunt is the president of Corp and issued the stock to Sam. Because the shares were obtained via a breach of fiduciary duty, Corp can recover the $5,000 difference.
* NOTE: Individual shareholders cannot recover the difference because the action lies with the corp.

Question 20

Dividends

Answer 20

= Distributions issued by the corp, either in the form of cash or property, to its shareholders in proportion to their shares owned.
* One issued, shareholder becomes a creditor. Corp CANNOT revoke a dividend after being issued WITHOUT SHAREHOLDER CONSENT.
* Unless otherwise provided in the articles, the decision to issue dividends lies with the board of directors.
* CANNOT be compelled to issue dividends by shareholders (since they have no right to dividends) UNLESS the director’s refusal to do so was in bad faith.
* Directors CANNOT issue dividends that would cause the corp to become insolvent.
* Generally, dividends can only be paid out of a corp’s surplus.
* Surplus = The difference between a corp’s net assets (total assets - liabilities) and its stated capital (stated value of the corp’s stock x its outstanding shares).

Question 21

Record Date

Answer 21

The board of directors may fix a record date for determining which sharehlders are entitled to a dividend.
* Date cannot be retroactive.
* If no record date is fixed, the record date defaults to the date that the board authorized the distribution.

Question 22

Federal Registration

Answer 22

• Corp can sell up to $5 million in restricted securities in any 12-month period without federal registration.
• No general advertising or solicitation is allowed.
• Offering can be sold to no more than 35 investors.

Question 23

FL Law Registration

Answer 23

= All offerors of securities in FL must file with the Florida Securities Commission a document similar to the SEC filing.

Question 24

Promoters

Answer 24

= a person who, prior to incorporation, prepares the corporation for commencing business and supervises compliance with the requisites necessary for it to come into existence.
* Prior to existence, promoters are in fact partners.
* They owe a fiduciary duty to full disclosure to the corp and CANNOT partake in self-dealing to the detriment to the corp.
* A corporation is not liable for contracts enrered into on its behalf by promoters prior to incorporation unless the corp expressly or impliedly ratifies it after formation.
* If not ratified, the promoter is personally liable for the contract.
* NOTE: IN Florida, corps DO NOT automatically become a party to a contract upon ratification. UST be a novation.

Question 25

Stock Subscriptions

Answer 25

= contracts that contain a promise to purchase a specific number of shares at a set amount after the corp is formed.
* Must be in writing and signed by the subscriber (purchaser) to be enforced.
* Irrevocable for 6 months unless the agreement provided a longer or shorter term.

Question 26

Management of the Corporation

Answer 26

1. Management of a corp is vested exclusively in its board of directors, with a few exceptions which require SHAREHOLDER APPROVAL.
   * Fundamental changes such as the sale of all or substantially all of the corp’s assets
   * Mergers
   * Liquidations
   * Changes in the articles.

NOTE: In FL, shareholders can also vote to eliminate a board of directors and treat it as a closely held corp.

Question 26

Management of the Corporation

Answer 26

1. Management of a corp is vested exclusively in its board of directors, with a few exceptions which require SHAREHOLDER APPROVAL.
   * Fundamental changes such as the sale of all or substantially all of the corp’s assets
   * Mergers
   * Liquidations
   * Changes in the articles.

NOTE: In FL, shareholders can also vote to eliminate a board of directors and treat it as a closely held corp.

Question 27

Election of Directors

Answer 27

1. The original board is usually chosen by the incorporators at the initial organizational meeting, with the number of directors being prescribed in the articles (though not required).
2. AFTER, directors are typically elected by shareholders at each annual shareholder’s meeting.
3. Unless the articles state otherwise, when a vacancy occurs on a board, including a vacancy due to increase in the number of directors, shareholders or the board may fill the vacancy.

Question 28

Tenure of Directors

Answer 28

1. Usually hold their position on the board for one year.
2. Typically elected at each annual shareholder meeting.

Question 29

Removal of Directors

Answer 29

• Shareholders may remove one or more directors WITH OR WITHOUT CAUSE unless the articles require removal for cause only.
• Florida protects minority shareholders by prohibiting removal of a director elected under cumulative voting if the number of cumulative votes sufficient to elect the director is voted against his removal.

Question 30

Board Meetings

Answer 30

• Corporate powers are generally exercised pursuant to EXPRESS REOLUTIONS adopted by a majority of the directors present at a properly called board meeting.
• Unless otherwise provided in the articles, a majority of the directors = a quorum.
• 2 Days notice required for special meetings. (“uncheduled meetings called by the board for a specific purpose; matters that need immediate attention.”)
• Proxies or agreements to vote a particular way among directors are typically VOID.

Question 31

Board of Directors: Appointment of Officers and Agents

Answer 31

1. The corp’s president, VP’s, secretary, and treasurer are all corporate officers appointed by the board.
2. Can be removed, WITH OR WITHOUT CAUSE, by the board.

Question 32

Authority of Corporate Officers and Agents

Answer 32

1. A corp may repudiate an agreement or transaction entered into by an officer/agent who lacked proper authority.
2. A corp officer/agent may enter into any agreement which he has been expressly or implicitly authorized under the articles, bylaws, or a corp resolution. (Any transactions reasonably related to performing their job duties).
3. Corp cannot avoid an agreement if it should have recognized that a third-party would likely have viewed the officer as having authority to enter into the K.
4. Unauthorized transactions may be ratified by the corp.

Question 33

Business Judgment Rule

Answer 33

= a REBUTTABLE PRESUMPTION that directors and officers are better equipped than courts to make business judgments, because they are more intimately familiar with the corp’s affairs.
* Directors or officers are shielded from personal liability if:
1. The act with reasonable dilligence; and
2. In good faith.
* Directors are NOT entitled to the presumption of the BJ Rule if their actions are:
1. Fraudulent, illegal, or motivated by personal interest (all = lack of good faith);
2. Lack a rational business purpose; or
3. Are grossly negligent and uninformed.

Question 34

Corporate Opportunity Doctrine

Answer 34

• Directors and officers may NOT eploit info or opportunities acquired or made available as a consequence of their corporate position (even if obtained in their individual capacity) for personal gain, UNLESS:
  1. The corp declines, after FULL DISCLOSURE, to pursue the opportunity, or
  2. The corp is, and would continue to be by any reasonable efforts, clearly unable to exploit the opportunity.

Question 35

Shareholder Power
(MEMORIZE)

Answer 35

While shareholders have direct control over the management of the corp, they do have the power to influence corporate management by voting.
1. Can elect or remove directors;
2. Can vote on major corporate changes;
3. Can vote (on a limited basis), matters of corporate reform and policy;
4. Can vote on the elimination or restriction of director discretion or power pursuant to a shareholder agreement.

Question 36

Board of Directors (General)

Answer 36

Must act in good faith and in a manner reasonably believed to be in the best interests of the corporation.

Question 37

Director Conflicts of Interest

Answer 37

= any financial or other interest which conflicts with the director’s judgment because it could 1) impair the director’s objectivity; or 2) creates an unfair competitive advantage for any person or company.
1. Indirect Material Interest: A director has a indirect material financial interest if he or she has a material financial interest in or materially associated with another party to the transaction; or if he or she has a family member with a material financial interest in the transaction.
2. Directors and officers are NOT automatically disqualified from serving the corp if they engage in a competing business. HOWEVER, if he or she uses their corporate position in any manner to gain a competitive advantage, they areliable to all losses or damagesresulting to the corp.

Question 38

Interlocking (Concurrent) Directorships

Answer 38

Concurrent Directorships: A director who holds a seat on two different boards transacting business with one another must disclose the conflict

Question 39

Remedies - Conflicts of Interest

Answer 39

1. Corp may rescind transactions that are determined not to have been entirely fair (if feasible).
2. If not feasible, corp can recover any damages or lossesit incurred by entering into the transaction.

Question 40

Distributing Improper Dividends

Answer 40

A director who votes for or assents to a distribution made in violation of Florida law or the articles of incorporation is PERSONALLY LIABLE for the amount of the distribution that exceeds what could have been distributed without such violation.

Question 41

Exectuive Compensation

Answer 41

1. When approved by disinterested directors, it is subject only to the business judgment rule. (Must prove the disinterested directors were grossly uninformed and constituted a waste of corporate assets.)
2. Executive compensation that has NOT been approved by disinterested, informed directors is subject to fairness review. FACTORS TO CONSIDER:
   * Compensation paid to executives performing similar services at other corps;
   * The amount of time and energy necessary to perform corporate responsibilities;
   * The experience and expertise of the recipient of the compensation;
   * etc.

Question 42

Shareholder Meetings

Answer 42

The FBCA requires every corporation to hold an annual shareholders meeting. Special meetings may also be called.
1.** Annual Shareholder Meeting**: Held to elect directors and transacting other business. Typically held on a date prescribed in the articles.
2. Special Meetings: Can be called by the boar dof directors, officers, or shareholders. Most special meetings are called when a shareholder vote is needed to approve a major corporate decision.

Question 43

Notice (MEMORIZE)

Answer 43

• Notice of the annual shareholder meeting MUST indicate the following:
  1. Date;
  2. Time; and
  3. Place;

As well as the notice date for determining the shareholders entitled to vote if different from the nrecord date for determining notice of the meeting

• Notice must be provided between 10 and 60 days prior to the special meeting.
• No seperate notice required for annual meeting since it is provided in the articles or bylaws.
• HOWEVER, notice is required for regular meetings if special business issues will be discussed.
• Special Meetings: Notice MUST include the matter to be vote on.
• Shareholders may waive notice under the FBCA in writing.
• Notice will be deemed waived if the shareholder attends the meeting and fails to object.

Question 44

Quorum

Answer 44

A shareholder action will only be valid if a quorum (a prescribed number of individuals) was present at the meeting in which the action was approved.
* Typically, persons representing a majority of outstanding shares must be present, either in person or by proxy.
* In FL, once a quarum is present, it does not cease to exist because persons holding the necessary shares or proxies leave the meeting.

Question 45

Voting

Answer 45

• Each shareholder who is entitled to vote may vote in accordance to the number of shares owned.
• Straight Voting: Allows each shareholder to vote his or her total number of shares for each candidate. (Ex. 500 shares total; 3 directors up for election. Can allocate up to 500 votes for each.
• Cumlative Voting: If permitted by the articles, minority strengthens minority shareholder’s chances of voting a director. Grants each share as many votes as there are directors to be elected, and allows the shareholder to allocate his votes as he chooses. (Ex. 500 shares total, 3 directors up for election, can vote 1,500 total for any director he likes).
• FORMULA FOR CUMULATIVE VOTING (shares needed to elect a director):
  Total Shares Voting (by shareholder) / (Directors to be elected + 1) + 1
• EXAMPLE: Election is for FOUR DIRECTORS, shareholder holds 500 SHARES. Under the regular method, you can vote a maximum of 500 shares for each one candidate (giving you 2,000 votes total - a max 500 votes per each of the four candidates). With cumulative voting, you are afforded 2,000 votes from the start and can choose to vote all 2,000 votes for one candidate, 1,000 each to two candidates, or divide them as you like.

Question 46

Voting by Proxy

Answer 46

= shareholder gives another person the right to vote in their place.
* Proxy must be in writing.
* Can be revoked (unless states it is irrevocable) by:
1. Notifying the party exercising the proxy;
2. Giving the proxy to another person;
3. Personally voting at the shareholder’s meeting.

Question 47

Shareholder Inspection of Corporate Books / Records

Answer 47

Shareholders are entitled to inspect and copy corporate books during normal business hours, provided that:
1. the demand is made in good faith and for a proper purpose;
* Proper Purpose: obtaining stockholder names to solicit proxies; shareholder is consideringn selling his stock and needs date to determine share price; investigating proper mismanagement; determining the reason for non-payment of dividends.
* Improper Purpose: Seeking info to give to a business comoetitor; obtaining info to promote the shareholder’s personal, social or political concerns.
2. shareholder describes with reasonable particularity the purpose and the records inspected; AND
3. the records are directly connected to the shareholder’s purpose.

Question 48

Derivative Suits

Answer 48

= shareholders suing the corporate fiduciaries on behalf of the corporation (which they own).
* Differs from a direct action, where a shareholder can sue fiduciaries as either individuals or as part of a class action, with recovery going to the shareholders.
* Recovery is paid directly to the corporation.

Question 49

Requirements for a Derivative Suit

Answer 49

• Standing (MUST have been a shareholder at the time the harm occurred).
• A plaintiff who was NOT a shareholder at the time MAY commence an action if:
  1. Plaintiff acquired their shares though operation of law (i.e. inherited).
  2. ….; or
  3. A substantial injustice will occur unless action is allowed.

Question 50

Settlement or Dismissal of Derivative Suit

Answer 50

1. Must be approved by court
2. Notice of settlement/dismissal must be given to shareholders
3. Dismissal or settlement is res judicata (i.e. shareholder cannot bring suit again).

Question 51

Derivative Suit: Recovery

Answer 51

• If successful by way of judgment or settlement, Plaintiff is entitled ro attorneys fees and litigation expenses.
• If defendants are successful, further litigation based upon the underlying actions are barred under res judicata.
• Plaintiffs may be ordered to pay attorneys fees ad litigation costs if court finds that action was brought without good cause.

Question 52

Controlling/Majority Shareholder Fiduciary Duties

Answer 52

Majority or controlling shareholders have a duty to refrain from exercising their position in a manner that takes undue advantage or oppresses minority shareholders.

Question 53

Duties of Shareholders in Closely Help Corps

Answer 53

• In a close corporation, all shareholders owe eachother an even stricter duty that that which is owed by controlling shareholders in publicly-held corps.
• Must be equal treatment of all shareholders.

Question 54

Amending the Articles

Answer 54

1. A board may propose an amendment to the articles.
2. The board MUST recommend the amendment to shareholders and (unless otherwise provided in the articles) requires a majority shareholder approval.
3. The amendment and notice of its adoption must be signed by a director, the president, or another officer of the corp and filed with the secretary to state.

**NOTE: **Unless otherwise stated in the articles, shareholders of a copr with 35 or less shareholders may amend the articles without an act of the directors at a meeting for which notice of the changes has been made.

Question 55

Selling or Transferring Corporate Assets (in the regular course of business)
(MEMORIZE)

Answer 55

Unless otherwise stated in the articles, a corp may conduct the following transactions WITHOUT SHAREHOLDER APPROVAL:
1. Sell, lease, exchange, or otherwise dispose of corporate assets in the regular course of business;
2. Motgage, pledge, or create a security interest in, or otherwise encumber assets REGARDLESS of whether in the ordinary course of business;
3. Transfer any or all of the corp’s assets to a corporation or other entity which the corporation owns all the shares in;

Question 56

Appraisal Rights

Answer 56

= shareholders who object to fundamental corporate changes are entitled to an appraisal and payment of fair value for their shares.
* To assert their appraisal rights, shareholders MUST:
1. File a written objection to the sale prior to the shareholder’s meeting to consider the action;
2. Vote against it;
3. Give prompt written notice of their desire to assert the appraisal remedy; AND
4. Surrender their shares to the corp.

Question 57

Tender Offers

Answer 57

= an offer of cash or securities to the shareholders of a corp in exchange for their shares at a premium over the market price.

Example: Corp A’s shares currently trade at $1.00 per share. Corp B offers to purchase Corp A’s shares for $1.15 per share if a majority of Corp A’s shareholders agree.

NOTE: No shareholder vote needed; just individual shareholders. Not considered a corporate transaction.

NOTE: No board approval needed either. Can be friendly or hostile.

Question 58

Statutory Merger

Answer 58

= when one corp (target corp) is acquired fully by another corp (surviving corp).
* Target corp is absorbed into the surviving corp;
* Shareholders of the target corp receive shares in the surviving corp in exchange for their target shares.
* Merger must be adopted by the board and approved by majority vote by both corps’ shareholders.
* Plan of merger must be filed eith the state.

Question 59

Short-Form Merger

Answer 59

= parent corp oens at least 80% of a subsidiary, the subsidiary may be merged into the parent, or vice versa, WITHOUT SHAREHOLDER APPROVAL OF EITHER CORP.

Question 60

Regulation of Tender Offers (Federal)

Question 61

Hostile Tender Offer Defenses: Poison Pill

Answer 61

Permits the board to make distinctions within a class upon issuanceof rights and options to purchase additional shares.