Florida Corporations Flashcards
Formation > Pre-incorporation Transactions
Typically, a promoter will engage in activities to bring a corporation into existence
Duties of the promoters
- fiduciary duties to other promoters in a joint venture
- fiduciary dutires to Corporation and Investors such that promoter cannot benefit personally at expense of the corporation
Promoter Liability
- personally liable for pre-incorporation transactions
- The corporation can release the promoter from personal liability through a subsequent novation
- Is an express adoption or use of the contractual benefits enough? no
Reimbursing the promoters
- Promoter has a right to reimbursement if held personally liable for a pre-incorporation agreement made in good faith
- Promoter does not, however, automatically receive reimbursement for corporate formation costs
Corporation’s liability for pre-incorporation transactions
- Not generally liable for pre incorporation transactions unless corporation adopts the contract by accepting the benefits or loability
The incorporator
- NOT liable for pre-incorporation contracts formed by the promoter
Formation > Articles of Incorporation
The primary document that must be filed with the Florida Department of State (“the Department”) to form a corporation
- When all the requirements have been met, the corporation is effective.
- A major consequence of a de jure corporation is that the other parties associated with the corporation (shareholders, officers, directors, etc.) will enjoy LIMITED LIABILITY for activities undertaken by the corporation.
Articles of Incorporation MUST state:
1) The name of the corporation
- Name cannot be misleading.
- Must end in Corporation, Incorporated, Company (or) Corp., Inc., Co.
2) Names/addresses of the incorporators
3) Main Office Address
4) Name/Address of Registered Agent
- Must be resident of the State
- and their written acceptance
5) Number of shares authorized shares
6) Classes of stock authorized
- preffered: first dibs on dividends, no voting.
- common: voting rights
Optional provisions
1) Stock Preemptive rights, par value
2) number of directors
3) personal liability on shareholders to a specific extent and on specific conditions
4) Corporate purpose
Other Requirements
- Need at least one director
- articles CANNOT prohibit internal corporate claims from being brought in Florida
- CANNOT require the claims to go to arbitration
- CANNOT require a provision that shifts legal fees to shareholders seeking to prosecute an internal corporate claim
Defective Formation
- As long as someone/promoter makes a good faith effort to comply with the incorporation requirements without knowing that there is a defect, they will be treated as a de-facto corporation
- The owner, as de-facto shareholder is not personally liable for obligations incurred in the corporation’s name.
A second possibility is “corporation by Estoppel.”
- An outsider who deals with a business entity as if it were a valid corporation is estopped from denying its existence (even if improperly formed).
- If a person or entity wanted to sue this corporation, the person suing will be estopped from denying existence of that corporation even though it legally does not exist because Parties acted as if there was a corporation.
- The outside party cannot normally recover from the personal assets of the business owner (typically limited to contractual claims)
Formation > Amending the Articles
Generally OK, but the mechanics for amending will differ depending on the timing of the amendment.
- If no stock has been issued, then the BOD may amend. Or, If the initial board of directors has not been selected, then the INCORPORATORS may amend.
- If stock has been issued, then any amendment is more complicated and will usually require a two-step process:
- If an amendment is really minor, then the BOD may approve the amendment even if there is outstanding stock.
1) First, the BOD must approve the amendment
2) Second, the Shareholders must vote to approve.
- What is the required vote? By default, it is majority vote.
- If there are multiple classes of stock, then each class impacted by the amendment will hold a separate vote (even non-voting stock, if impacted)
Once the required approvals are obtained, then the amended articles are delivered to the Department
Formation > Corporate Purpose
Corporate Purpose
- Presumed Purpose – “to engage in any lawful activity,”
- If more narrow business purpose stated and the firm subsequently conducts activities outside this stated purpose? The acts will be deemed Ultra Vires
Ultra Vires Acts– An ultra vires act can only be challenged in a few circumstances:
- A shareholder,
- The *Corporation *can take action against a director or officer who engages in such an act, and
- the state can initiate a proceeding against the corporation to enjoin
EXAM TIP
- THIRD PARTIES who contract with the corporation for an ultra vires activity CANNOT assert that the corporation has acted outside of its purpose to escape liability
Formation > Bylaws
These cannot be inconsistent with the Articles of Incorporation. If there is a conflict, then the articles control.
- A bylaw that increases a quorum or voting requirement for the board may only be amended or repealed by SHAREHOLDERS (if shareholders adopted the bylaw) unless it states otherwise.
Who can amend the bylaws?
- If no stock has been issued, then the BOD can amend the bylaws (or promoters)
- If stock has been issued, either the BOD or the Shareholders can amend the bylaws. You don’t need both groups to approve. But the articles can reserve the power of bylaw amendment to shareholders alone.
Formation > Corporate Powers
Unless the articles states otherwise, a corporation will have the following powers:
- To sue or be sued
- To make and amend bylaws
- To purchase and transfer property
- To contract
- To lend money
- To elect/appoint officers
- Etc.
Loans
- Personal loans to directors, officers, and employees prohibited under federal law for corporations with stock listed on a national stock exchange
- Florida allows this for smaller, unlisted firms, whenever such a loan might be reasonably expected to benefit the corporation (subject to conflict of interest rules)
Formation > Reporting of Corporations
Entity-level federal and state tax
Florida corporations must also file an annual report with the Department of State containing
- the firm’s name,
- date of incorporation,
- office location,
- tax ID, and
- names and addresses of all directors and principal officers.
However, Annual report does NOT need to include the corporation’s annual revenues.
Time to File
- When must this be filed? Between Jan 1 and May 1.
- What if it forgets to file? A fee will be charged for late filing and the firm will be barred from maintaining any action in court until the report is filed.
- The state may also cancel the firm’s certificate to do business.
Types of Securities: Equity and Debt
2 ways in which a corporation finances its obligations:
- Equity securities convey ownership and control interests in the corporation, while debt securities do not.
1) Debt Instruments: X gives Corporation $10,000. Corporation gives X a corporate bond, a promise to pay back (plus interest)
- Bond/Debt financing gives NO ownership rights to anyone.
- Only thing a bondholder has over a shareholder is in bankruptcy and liquidation. Debts get paid to creditors before remaining assets are distributed to SH’s
2) Equity Instruments: Buying ownership into the corporation. Equity is then given by giving out stock (shares).
- These shareholders now are owners of the corporation in proportion to how many shares they own. 100 shares total, 20 shares bought = 20% ownerhsip
- Shareholders have rights to manage the corporation through an election process
Common Stock
- Arise when the corporation issues stock and does not set forth any special terms or conditions
Preffered Stock A very flexible security; It may enjoy a number of different rights or conditions:
- Special voting rights
- The right to redeem or convert the shares at the corporation’s option
- The right to redeem the stock for property
- The right to redeem the stock according to a formula in the articles
- The right to allow for a distribution in any manner
- The right to have a preferrance (get paid first) over any other class of stock for distributions
a redemption price of stock can be dependent on facts from an outside source that are objectively ascertainable.
Issuing Shares of Stock
Authorization– by the BOD (unless specified otherwise in the articles of incorporation)
- May not issue more shares than are authorized in the articles of incorporation.
- Can increase the number of authorized shares by AMENDING articles
- Unauthorized shares are void and the purchaser can recover her money
Consideration
- Shares can be issued for any type of benefit to the corporation (e.g., cash, property, services, a promissory note)
- The amount of consideration will be determined for the corporation by the BOD
What if property is contributed?
- The directors must evaluate whether the value of the property exceeds the par value.
- This evaluation will be binding unless there is a knowing and intentional overvaluation of the property.
Stock subscriptions – After the articles are filed, but before the directors are elected, a person may subscribe to purchase stock from the corporation when it comes alive.
- Irrevocable for 6 months by default, unless all parties agree to revoke
- Can also explicitly specify a longer or shorter period of irrevocability.
To be enforceable against the subscriber – it must be in writing and signed by the subscriber. While a corporation may pursue normal collection methods when a subscriber fails to pay the subscription amount, it may rescind the agreement and sell the stock to someone else if:
- the corporation makes a written demand for payment, and
- the debt remains unpaid for more that 20 days after the corporation delivers the demand to the subscriber.
Options and warrants
- Convey the right, but not the obligation, to buy stock at a stated strike price
- The board will generally have the authority to issue these instruments and set the terms.
Preemptive rights – corporation does not automatically have preemptive rights to shares, but may provide for them in the articles (allow shareholders to maintain a proportional share % ownership in the corporation)
- If the articles do provide for preemptive rights, then several statutory provisions apply (though these can be changed in the articles):
1) Preemptive rights are granted on uniform terms.
2) A shareholder may waive these rights, and this will be irrevocable if the waiver is in writing.
3) Holders of voting only stock (i.e., stock without economic rights) will not have preemptive rights for shares with economic rights
4) Holders of shares with economic rights only (i.e., no vote) have no preemptive rights
5) Preemptive rights don’t apply to shares issued:
- To directors, officers, and employees as compensation
- To satisfy option grants for compensation to this same group
- Within 6 months of incorporation
- Via a court-ordered reorganization
- For consideration other than money
Stocks (Shares) > Preemptive Rights
Preemptive rights give existing shareholders the right, but not the obligation, to purchase their proportionate share of the new issuance of shares before anyone else in order to maintain their percent ownership interest.
* If you want this, you must state it in the articles of incorporation.
Example:
1) Corporation has 100 shares
* A buys 50 shares = A owns 50%
* B buys 50 shares = B owns 50%
* Great!
2) Corporation (board of directors) now decides it needs more money, so it amends the articles of incorporation to increase the authorized shares to 150 shares.
* This is not good for A because they would become 33% owners.
3) Premptive rights would give A the opportunity to purchase 50% of the 50 additional shares = 25 shares
* A would now have 75 of the 150 shares, maintaining their 50% percent ownership interest in the corporation.
If you want this, you must state it in the articles of incorporation.
Stocks (Shares) > Distribution to Shareholders
(aka “Dividends”)
Profits from corporation > shareholders
Decision to issue dividends is a matter exclusively reserved for the Board of Directors
2 tests that give the board of directors a presumption of correctness when distributions are made. Essence of both of these tests is that a corporation cannot pay out more money than what the corporation needs to run their business:
* equitable solvency test
* modified balance sheet test
Stocks (Shares) > Transfers of Stock and Right of First Refusal
Shares are freely transferable *
Restrictions must be reasonable and conspicuous.
* Reasonable: total refusal or bar on transfer is unreasonable
* Conspicuous: put somewhere where someone can see it. Usually on the certificate/stock itself
Right of first refusal: Type of restriction giving corporation the chance to buy shares first before selling to someone else. Reasonable.
This is what makes a corporation a corporation
Stocks (Shares) > Stock Subscription Agreements
Subscriber agrees to purchase a certain number of shares at a certain price point.
Bar will test on 2 things:
1) Revocable?
* Irrevocable for 6 months
2) What qualifies as consideration?
* Anything that the board of directors finds adequate.
* can be cash, promissory notes, past service, contracts, IOU’s
Shareholders > Shareholder Powers
ONLY powers to VOTE for
Board of Directors and Corporate proposals
* Amending Articles of Incorporation
* Merging or Dissolving the Corporation
Can only vote at Shareholder Meetings
ZERO power to run the Corporation!
Shareholders > Shareholder Meetings (2 types)
1) Annual Meeting: Once every 13 months
* Must give Shareholders 10 days notice!
2) Special Meeting: As the Circumstances Warrant
* Must give Shareholders 10 days notice!
* For meeting to be valid, at least half the voting shares (quorum) must be present. (100 = 50) SH’s could send in a proxy to vote on their behalf.
* To get something to pass, need majority vote of present voting shares at the meeting. (26 of 50 votes)
1st Q you want to ask yourself: was the action properly taken? (at a shareholder meeting)
