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Bar Exam (Austin) > Corporations > Flashcards

Corporations Flashcards

1
Q

3 Requirements to form a Corporation

A
  1. Person -> Incorporator
    o Executes articles and serves on secretary of state
    o Can be person or entity
  2. Paper -> Articles of Incorporation
    - Requirements
     Name must include -> Corporation, company, incorporated, or limited
     Name and address of incorporator
     Name of registered agent and street address of office
     Information regarding corporation stock
  3. Act -> Deliver articles to Secretary of State with required fees
    - Corporate existence begins upon this filing by the state!!
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2
Q

Internal Affairs Doctrine

A

Internal affairs of a corporation are governed by the law of the state of incorporation

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3
Q

De Facto Corporation

A

If all corporate laws have not been followed, a de facto corporation might

Requirements
1. Relevant incorporation statute (automatically met!)
2. Good faith colorable attempt to comply with the statute
3. Act like a corporation -> some form of actions

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4
Q

Corporation by Estoppel

A

Persons who have dealt with the entity as if it were a corporation will be estopped from denying the corporation’s existence

Not a de jure corp (legal corp), but related that way for people who treated the business like a corp

Applies only in contract cases, not tort

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5
Q

Liability for Pre-Incorporation Contracts - Promoters liability and corporations liability

A

Occurs when a person (the promoter), is acting on behalf of a corporation not yet formed

Corporation -> Liable only if it adopts
 Express Adopt -> takes an action adopting contract with knowledge of material facts such as board resolution
 Implied Adopt -> accepts benefit of adopting contract with knowledge of material facts

Promoter -> Liable until novation
 Liability continues after corporation is formed!
 Promoter will not be liable on a pre-incorporation contract if the agreement between the parties expressly indicates that the promoter is not to be bound

**Adoption is correct word to use, not ratify!!

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6
Q

Debt Securities

A

Corp borrows money (bonds)

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7
Q

Equity Securities

A

Corp sells ownership (stock)

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8
Q

Issuance

A

Corp sells its own stock

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9
Q

Subscription

A

Written offers to buy stock from a corp

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10
Q

Pre and Post-Subscriptions

A

Pre-incorporation Subscriptions
- Irrevocable for 6 months unless otherwise provided!

Post-Incorporation Subscription
- Revocable anytime until it is accepted by corp

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11
Q

Consideration - Form and Amount of Stock

A

Form -> Stock may be issued for any tangible or intangible property or benefit to corp

Amount -> Par = minimum issuance price

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12
Q

Watered Stock

A

Occurs when par value stock is issued for less than its par value!

Who is liable?
 Directors if they knew about it
 Person who bought the stock!

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13
Q

Board Determines Value

A

Allows corporations to issue shares for whatever consideration the directors deem appropriate

The board’s valuation is conclusive if made in good faith

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14
Q

Preemptive Rights

A

Right to existing shareholder to maintain % of ownership by buying stock if there is a new issuance

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15
Q

Requirements Directors

A
  • Adult natural persons
  • One or more
  • Initial directors named in articles/elected by incorporators
  • Shareholders elect thereafter
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16
Q

Staggered Board

A

Board that is divided into half or thirds, with ½ or 1/3rd elected each year

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17
Q

Removal of Directors

A

**Directors are removable with or without cause - removed by shareholders
- Exception -> Staggered board = only with cause!

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18
Q

Board Action

A

Board must act as a group!!
o Individual directors have no authority to speak or bind corp

Methods of Board Action
- Unanimous agreement in writing
- At a meeting

Directors, incorporators, and officers may ratify defective corporate actions

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19
Q

Notice for Meetings

A

Regular meetings -> No notice

Special meetings -> Must give at least 2 days notice!
o Failure to give notice means whatever happened at meeting is voidable unless directors who were not notified waive the defect

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20
Q

Can Directors use proxies?

A

Directors cannot give proxies or enter into voting agreements -> any efforts to do so are void!
- Shareholders can use proxies! BUT NOT DIRECTORS!

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21
Q

Meeting Requirements

A
  • Quorum -> majority of all directors
  • Majority of those present required to pass resolution
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22
Q

Do Directors have power to bind the corporation?

A

Director does not have the power to bind the corporation in contract unless there is actual authority act

Actual authority generally can arise only if:
1. Proper notice was given for a directors meeting, a quorum was present, and A majority of the directors approved the action OR
2. There was unanimous written consent of the directors

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23
Q

Directors Fiduciary Duties (MEMORIZE THESE)

A

Duty of Loyalty
Discharge duties in good faith and reasonable belief that actions are in best interest of corp

Duty of Care
Use care that prudent person in like position would reasonably believe appropriate under circumstances

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24
Q

Duty of Care (Burden on Plaintiff) Nonfeasance and Misfeasance

A

Nonfeasance -> Director does nothing
o A lazy director
o Liable only if breach causes loss to corporation!

Misfeasance -> Board makes decision that hurts business

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25
Q

Business Judgment Rule (MEMORIZE THIS)

A

Presumption that a director’s decision may not be challenged if the director (1) acted in good faith, (2) with care that a person would use in a like position, and (3) in a manner the director reasonably believed to be in the best interest of the corporation

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26
Q

Duty of Loyalty (Burden on Defendant)

A
  • Self-dealing/interested director transaction
  • Competing ventures
  • Corporate opportunity
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27
Q

Self-Dealing/Interested Director Transaction - Duty of Loyalty

A

Interested Director transaction will be set aside unless the director shows:
1. Approved by a majority of disinterested directors OR
2. Approved by a majority of votes entitled to be cast by disinterested shareholders OR
3. The decision as fair to the corporation

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28
Q

Competing ventures

A

Rule -> A director cannot compete directly with their corporation

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29
Q

Corporate Opportuntiy

A

Rule -> Cannot usurp a corporate opportunity, UNTILL he:
1. Tells the board about it and
2. Waits for the board to reject to the opportunity

  • Corporate opportunity is something corp has an interest or expectancy in
  • Lack of financial ability is not a defense to this!
  • Remedies -> must sell to corp at cost or corp will get profit!
30
Q

Can corporation make loans to Directors?

A

Corp can make loan to director if reasonably expected to benefit corp

31
Q

Determining Director Liability for Actions

A

Director presumed to concur with board action unless dissent/abstention is noted in writing in corp records
- In writing means the dissent is in meeting minutes, delivered to presiding officer at meeting, or written dissent to corp immediately after the meeting
- Oral dissents are not effective by themselves!!

Exception
o Not liable if absent from the board meeting (for example, was sick that day)

32
Q

Officers

A

Officers are agents of the corporation

Officers owe same duties of care and loyalty as directors

Officers selected and removed by board
- Shareholder hire and fire directors!
- Shareholders do NOT hire and fire officers!
- Board of Directors hire and fire officers!

33
Q

Indemnification Categories - (3 of them)

A

Category 1 -> Corp cannot indemnify (D/O held liable to corp or received improper benefit)

Category 2 -> Corp must indemnify (D/O successful in defending on merits or otherwise)

Category 3 -> Corp may indemnify (D/O shows acted in good faith and believed was in best interest to the corporation)
- Director sued for breaching duties to the corp, then settles case -> category 3!
- Category 3 is a catch all!

Articles can eliminate D/O liability only for duty of care cases

34
Q

Closely Held Corporations

A
  • Small number of shareholders
  • Stock not publicly traded
  • Shareholders can manage directly

Shareholders in close corporations owe a fiduciary duty of utmost good faith

35
Q

Professional Corporations

A
  • Corp where directors, officers, and shareholders must be licensed professionals
  • Professionals are personally liable for their own malpractice
  • Shareholders are not liable for corporate obligations or other professionals’ malpractice
36
Q

Piercing the Corporate Veil

A

“Shareholders are generally not held liable for corporate debts or obligations” then state requirements for piecing the veil - HOWEVER

Doctrine that allows shareholders to be sued for debts of corp
- Available only in close corporations!!!

Requirements for piercing veil
- Shareholders have abused the privilege of incorporating
- Fairness requires holding them liable

37
Q

Two common fact patterns for piercing the corporate veil

A

Alter ego (Identity of Interests)
- Ignoring corporate formalities such that corporation may be considered the alter ego

Undercapitalization
- Inadequately capitalized, so that at the time of formation there is not enough unencumbered capital to reasonably cover prospective liabilities

Bonus -> Necessary to prevent fraud

38
Q

Derivative Suit

A
  • Shareholder sues to enforce corporation’s claim
  • Could the corporation have brought this suit? -> If yes, it is derivative
39
Q

Derivative Suit Outcomes

A

Plaintiff shareholder wins
o Money from judgment goes to corp
o Plaintiff recovers costs and fees only

Plaintiff shareholder loses
o Liable for defendant’s fees if sued without reasonable cause
o Other shareholders barred from suing on same transaction again

40
Q

Requirements to bring a derivative suit

A
  • Stock ownership when claim arose
    o Must have been a shareholder at the time the claim arose or must have become a shareholder through transfer by operation of law from someone who did own stock at the time claim arose
  • Adequate representation of corp’s interest AND
  • Written demand on corp

**Court approval required to settle or dismiss derivative suit

41
Q

Standard to Dismiss Derivative Suit

A

Independent investigation concludes suit is not in corp’s best interest

42
Q

Proxy

A

Writing authorizing another to vote the shares

Requirements
1. A writing
2. Signed by the record shareholder
3. Directed to the secretary of the corporation
4. Authorizing another to vote the shares

  • A proxy is good for 11 months unless it says otherwise

Proxy may be revoked by:
o Writing to the corporate secretary
o Attending meeting and voting

Irrevocable Proxy
o Must state that it is irrevocable
o Must be combined with an interest in shares

43
Q

Voting Trust

A

A written agreement of shareholders under which all of the shares owned by the parties to the agreement are transferred to a trustee, who votes the shares and distributes the dividends in accordance with the provisions of the voting trust agreement

Requirements
o Written agreement controlling how shares will be voted
o Give copy of agreement to corp
o Transfer legal title to voting trustee
o Give original shareholders trust certificates

44
Q

Voting (Pool) Agreements

A

Shareholders can enter into voting agreement providing for how they’ll vote their shares

Requirements
o Must be in writing and signed

45
Q

Where does shareholder voting happen?

A
  • At meeting, or
  • By unanimous written consent
46
Q

Shareholder Meeting Notice

A
  • Must be in writing and delivered 10-60 days before meeting
  • Failure to give notice? -> action at meeting are voidable unless waiver occurred
47
Q

Shareholder Meeting Quorum

A
  • Majority of voting shares
48
Q

Straight Voting

A

Separate election for each seat on the board being elected

Each outstanding share gets one vote for each seat

49
Q

Cumulative Voting

A
  • Method to give small shareholders better chance of electing someone to the board
  • Number of shares (x) number of directors to be elected
50
Q

Restrictions on Stock Transfer

A
  • Allowed if not absolute restraints on alienation
  • Usually must offer the stock to the corporation first
51
Q

Right to Inspect

A

Shareholder’s right to review corp’s books and records on written demand

Directors have unfettered access to all these materials so do not have to go through the written demand process

52
Q

Distributions

A

Payments from corp to shareholders (BOARD HAS DISCRETION)

  • Dividend
  • Repurchase
  • Redemption -> Forced sale to corp at price set in articles

Corporation cannot make any distribution if insolvent or distribution would render it insolvent

Directors are jointly and severally liable for improper distributions
- Exception -> Good faith reliance

53
Q

Types of Fundamental Corporate Changes

A
  • Amending articles
  • Mergers and consolidations
  • Transfer of all or substantially all assets
  • Conversion
  • Voluntary dissolution
54
Q

Fundamental Corporate Change Requirements

A
  • Board action
  • Written notice to shareholders
  • Shareholder approval
    o Shareholder vote that is required to approve a fundamental corporate change
    is majority of the shares entitled to vote
  • Deliver to secretary of state

**Quick test
1. Directors first pass a resolution to implement the plan AND
2.The plan is then approved by the shareholders

55
Q

Dissenting Shareholder’s Right of Appraisal

A

Shareholders who voted in the losing direction have a right to force corporation to buy their stock at fair value -> Exists in close corporations

To use this right
1. file an objection to the transfer before or at the shareholders’ meeting
2. not vote in favor of the change AND
3. Send the corporation a written demand of the fair value of the shares

Only certain fundamental changes will trigger this right
o Merging or consolidating
o Transferring substantially all assets
o Stock being acquired in a share exchange
o Converting to another form of business

56
Q

Amending Articles of Incorporation

A

Requires majority of shares entitled to vote

57
Q

Mergers and Consolidations

A

o Merger -> One corp is absorbed into another
o Consolidation -> Two corps become one new corp
o Successor Liability -> Corporation’s creditors can sue survivor

58
Q

Transfer of all or substantially all assets

A

Fundamental for the selling corporation only – not the buyer
Successor liability -> Corporation’s creditors can sue survivor
 Company that buys another’s assets is not liable for its debts

59
Q

Conversion

A

Corporation converts into another business entity

Ex -> Corporation converts into LLC

60
Q

Dissolution

A

o Voluntary requires board action and shareholder approval
o Involuntary requires court order

**Dissolution is not the end of the corporation -> it is the beginning of a process that will end the corporate existence!

61
Q

Winding Up

A
  • Provide written notice
    o To known creditors
    o In newspaper in county of PPB
  • Gather cash
  • Liquidate assets
  • Pay creditors
  • Distribute remaining sums to shareholders
62
Q

Director’s has personal interest in the transaction

A

**A transaction cannot be set aside merely because a director had a personal interest in the transaction if (1) the director disclosed the material facts of the transaction to disinterested members of the board who approved the transaction or (2) the transaction was fair to the corporation

**resembles the duty of loyalty and self-dealing

63
Q

Record Shareholder and Record Date

A

Only shareholders of record on the record date may vote at a shareholder’s meeting
- Record Shareholder = Person shown as stock owner in corporate records

**Record date will generally be said in the question. If a shareholder acquires another shareholder’s votes after the record date, only the OG shareholder can vote them unless they give new shareholder a proxy

Exceptions to this rule
- Corporation reacquires the stock
- Shareholder dies

64
Q

Outstanding Shares

A

Shares that are issued and are NOT reacquired
- Outstanding shares can be voted!

65
Q

Articles of Incorporation conflict with Bylaws???

A

ARTICLES OF INCORPORATION TRUMP BYLAWS!

65
Q

Repurchased Shares

A

Outstanding shares that have been repurchased
- These shares are NOT counted in determining the number of votes needed to approve a proposal and CANNOT be voted!

Example -> Shareholder owns shares. Corporation purchases them from the shareholder. Corporation has therefore, reacquired the outstanding shares and these shares cannot be used in a vote and cannot be counted in a vote!

66
Q

President’s Authority

A

A corporation president’s authority is governed by Agency Law

A corporate president is an agent of the corporation and has whatever power (actual authority) the corporation grants him

Generally, a president will have the power/authority to enter into ordinary contracts involving the day-to-day operations of the corporation

67
Q

Board’s Authority to grant to the President

A

The board cannot give the president power that the board itself does not have

Board must be able to delegate authority

Board cannot authorize fundamental corporate changes without shareholder approval

68
Q

Board’s Authority to grant to the President

A

The board cannot give the president power that the board itself does not have

Board must be able to delegate authority

Board cannot authorize fundamental corporate changes without shareholder approval

68
Q

President’s Authority

A

A corporation president’s authority is governed by Agency Law

A corporate president is an agent of the corporation and has whatever power (actual authority) the corporation grants him

Generally, a president will have the power/authority to enter into ordinary contracts involving the day-to-day operations of the corporation

69
Q

President’s Authority

A

A corporation president’s authority is governed by Agency Law

A corporate president is an agent of the corporation and has whatever power (actual authority) the corporation grants him

Generally, a president will have the power/authority to enter into ordinary contracts involving the day-to-day operations of the corporation

69
Q

Board’s Authority to grant to the President

A

The board cannot give the president power that the board itself does not have

Board must be able to delegate authority

Board cannot authorize fundamental corporate changes without shareholder approval

Bar Exam (Austin) (17 decks)

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