Corporations

Question 1

All Texas corporations are governed by

Answer 1

the Texas Business Organization Code

Question 2

Formation Requirements

Answer 2

People, Paper, Act

Question 3

People needed to form a corporation

Answer 3

Organizer, must have one or more

Question 4

What does an organizer do?

Answer 4

execute the certificate and deliver it to secretary of state

Question 5

Who can be an organizer?

Answer 5

Natural Persons or entity

Question 6

Does an organizer have to be a Texas Resident?

Answer 6

No

Question 7

Paper needed to form a corporation

Answer 7

certificate of formation (use to be called articles of incorporation)

Question 8

What is a certificate

Answer 8

• Contract between corporation and shareholders

- Contract between corporation and state

Question 9

Information required in certificate formation

Answer 9

1. Names and Addresses
   - Must have corporation, company, or incorporated or abbreviation
2. Name and address of each organizer
3. Number of initial directors
4. Name and address of each initial director
   - What if the corporation will not be managed by directors? Give names and address of those who will manage
5. Name of the corporate agent (registered agent) and post office address for the corporate agent (this agent is official legal representative for the corporation ie can received served of process for the corporation)
6. Certificat must include statement of purpose
7. Authorized stock
8. Number of shares per class and
9. Info on par value, voting rights and preferences of each class

Question 10

Can company use the name “bank” in corporation name?

Answer 10

No because it misleads the public about it’s purpose and a bank must be formed under a special purpose statute
- Must have corporation, company, or incorporated or abbreviation

Question 11

Before forming the corporation you can reserve an appropriate corporate name with secretary of state. For how long?

Answer 11

120 days

Question 12

What if the corporation does business under a name other than that in the certificate?

Answer 12

It must file an assumed name certificate with the secretary of state and the county clerk in the county of its registered office (or of its principal office if principal office is in Texas)
- Cannot sue in Texas until it does so (but can be sued)

Question 13

What if the certificate of formation does not say anything about the duration of the corporation?

Answer 13

Perpetual existence

Question 14

Statement of purpose needed but it can be

Answer 14

General, like to conduct lawful activity

Question 15

Ultra Vires Activity Defined

Answer 15

• Putting your purpose as one thing and then doing a different thing is called ultra vires (beyond the scope of certificate)
• Ultra vires contracts are valid contracts
• Shareholders can seek an injection (can stop activity)
• Responsible managers liable to corporation for ultra vives law suit

Question 16

How do we handle Ultra Vires Activity?

Answer 16

• Ultra vires contracts are valid contracts
• Shareholders can seek an injection (can stop activity)
• Responsible managers liable to corporation for ultra vives law suit

Question 17

Authorized Stock

Answer 17

Maximum number of shares the corporation can sell

Question 18

Issued Stock

Answer 18

Shares the corporation actually sells

Question 19

Outstanding Stock

Answer 19

Shares the corporation has issued and not reacquired

Question 20

What Act is needed for formation?

Answer 20

Organizers sign the certificate, deliver it to the Texas secretary of state and pay the required fee. Electronic submission its ok. Fax of signature Ok.
If the certificate of formation is in order, what does the secretary of state do? Files it, and sends acknowledgement of filing to corporation
What is the effect of the secretary of states filing the certificate? Forms de jure corporation (legal corporation) true even if there are errors in certificate

Question 21

If the certificate of formation is in order, what does the secretary of state do?

Answer 21

Files it, and sends acknowledgement of filing to corporation

Question 22

What is the effect of the secretary of states filing the certificate?

Answer 22

Forms de jure corporation (legal corporation), true even if there are errors in certificate

Question 23

After filing of certificate board holds an ___. What happens at his?

Answer 23

organizational meeting.
At the meeting the directors: 1. Select officers 2. Adopt any bylaws 3. Transact other company business.
- Need to give 3 days notice of this meeting
Must this meeting be held in Texas? no

Question 24

If a company forms in Texas what law is it governed by?

Answer 24

Internal affairs of a Texas corporation (ie roles and duties of directors, officer, and shareholders) are governed by Texas law.

• Is this true even if the corporation only does business in Iceland? Yes (internal affairs doctrine, if you form in Texas it governs your affairs)
• True even if you do business in another state

Question 25

A corporation is:

Answer 25

a separate legal person it can sue or be sued, hold property, must pay income taxes, can serve as a partner in partnership

Question 26

Double Taxation in a Corporation

Answer 26

income tax is paid by the entity and by the shareholders on their dividends.
How can we avoid income tax at the corporate level? Form an S Corporation 
S corporation- does not pay income tax (shareholder does, corporation does not) 
- These have 100 or fewer shareholders all of whom are human us citizens or resident, only one class of stock and is not publicly traded 
C Cropration; double taxation

Question 27

Generally if the corporation incurs a debt or breaches a contract or commits a tort are the directors of officers liable for it?
Generally are the shareholders liable for it?
Generally who is liable for what corporation does?
- This is limited liability:

Answer 27

No, No, Corporation itself is liable

- that shareholders are liable only to pay for their stock not for business obligation

Question 28

The proprietors failed form a de jure corporation, so they will be personally liable for what the business does (because its just a partnership). Under these doctrines the business is treated as corporation, so shareholders are not liable for what the business did

Answer 28

De Facto Corporation or Corporation by Estoppel

Anyone asserting either doctrine must be unaware of failure to form de jure corporation

Question 29

De Facto Corporation Requirements

Answer 29

1. There is a relevant incorporation (always met, TBOC)
2. The parties made a good faith colorable attempt to comply with it and
3. Some exercise of corporate privileges (acting like we have a corporation)
   IF the doctrine applies the business is treated as a corporation for all purposes except in an action by the state (such an action would be quo warranto)

Question 30

Corporation by Estoppel

Answer 30

one who treats a business as a corporation may be estopped from denying that it’s a corporation
- Under this doctrine you are estopped to deny that the business was a corporation.
- Can also prevent the business from avoiding liability by saying that is not properly formed corporation
Generally applies in what kind of cases: Contract, not torts
- Status of this doctrine in Texas: may be abolished

Question 31

Must a Corporation have Bylaws?

Answer 31

Yes except in a close corporation
But the TBOS does not require any particular contents in bylaws. Generally they are internal governance only ie lay out responsibilities, set regular meeting times and places, prescribe methods of notice
Are they filed with secretary of state? No, internal

Question 32

Who adopts initial bylaws? who can repeal or amend bylaws or adopt new ones?

Answer 32

Board at organizational Meeting

Board or shareholder
The certificate can reserve this power to shareholds exclusively
If bylaws conflict with certificate of formation which takes precedence? The certificate but the bylaws can change the number of directors

Question 33

Who is a promoter?

Answer 33

A promoter is a person acting on behalf of a corporation not yet formed. She might contract with a third party on behalf of corporation that is not yet formed

Question 34

Liability of Corporation pre-incorporation

Answer 34

A corporation is not liable on pre-incorporation contracts until it adopts the contract

How can company adopt the contract? 2 ways express and implied
Express: Board Action
Implied: If the corporation accepts a benefit of the contract

Question 35

Liability of promoter pre-incorporation

Answer 35

unless the contract clearly says otherwise the promoter is liable on pre-incorporation contracts until there is a novation ie an agreement of the promoter, the corporation, and the other contracting party that the corporation replaces the promoter under the contract
- Corporation never formed, promoter is liable
- What if corporation is formed and corporation adopts a lease: promoter still liable, liable until novation
Adoption makes the corporation liable too but does not relieve promoter. So both corporation and promoter would be liable

Question 36

Foreign Corporations

Answer 36

Foreign corporations transacting business in Texas must qualify and pay prescribed fees
Foreign means: anything outside the state of Texas (including other states)
What is transaction business? Intrastate transactions on a recurring basis.
Recurring basis: the regular course of business in Texas not just sporadic activity

Qualify by getting a certificate of authority from Texas secretary of state. Apply by giving basic information form certificate and proving good standing in home state
What happens if a foreign corporation transacts business in Texas without qualifying? 1. Civil fine 2. Cannot sue in Texas on a claim arising form business in Texas
Although it can be sued and defend
- Once it qualifies and pays fees and fines can the foreign corporation assert a claim in Texas? Yes

Question 37

What is an issuance of stock?

Answer 37

What is an issuance: when corporation sells its own stock

• It is a way for corporation to raise capital
• Only when they sell own stock, not another companies

Question 38

Subscriptions and Stock

Answer 38

Written, signed offers to buy stock from corporation
Revocation of pre-incorporation subscriptions
- Irrevocable for 6 months
Unless it says otherwise or all subscribers agree to let you revoke
Are post incorporation subscriptions revocable? Yes, until accepted by the corporation
At what point are the corporation and the subscriber obligated under a subscription agreement? When the board accepts the offer and the corporation notifies the subscriber in writing
At what point does a subscriber whose subscription is accepted become a shareholder? When she pays for stock

Question 39

Form of Consideration for Stock

Answer 39

Form of Consideration:
Permitted any tangible or intangible benefit to the corporation. That includes money (cash or equivalent) discharge of debt, property, services already rendered for the corporation, even notes and contracts for future services
Prohibited: anything else, if used its unpaid stock (treated as water)

Question 40

Amount of Consideration for Stock

Answer 40

Par means minimum issuance price: (par stock is not required if we have it, it is set in the certificate)
Ex: If selling 10,00 sahres for $3 par stock. Must receive at least $30,000
- Can it receive more then $30,000? Yes, just means minimum
no par means no minimum issuance price. Board can set any price
When there is an issuance for property or services the board puts a valuation on the consideration received. Is its valuation conclusive? Yes, absent fraud

Question 41

Treasury Stock

Answer 41

this is stock that was previously issued and has been reacquired by the corporation: what is its statues- authorized and issued, but not outstanding
- So corporation can resell it
Ex: selling $3 par treasure stock, don’t have to sell if for $3, treat treasury as no par

Question 42

Consequences of issuing par stock for less than par value (watered stock)

Answer 42

Who is liable?
Directors? Yes, if they knowingly authorized the issuance
Guy who brought it? Yes
- There is no defense he is charged with notice of par value
What if person who brought it transfers it to third party? Third party not liable if she acted in good faith (ie didn’t know about the water)

Question 43

Pre-Emptive Rights

Answer 43

A pre-emptive right is the right of an existing shareholder of common stock to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock for money (cash or its equivalent ie check)
Does new issuance include the issuance of treasury stock? Yes

Suppose the certificate of formation is silent as to whether there are preemptive rights. Are there preemptive rights? No, have to tell you in certificate

There are also no preemptive rights if the issuance is within 6 months of formation of the corporation (unless certificate says otherwise)

Question 44

Statutory Requirements for Directors

Answer 44

One or more adult natural persons.

Initially the number is set in the certificate. After that where is the number set? Certificate or bylaws

Question 45

Who Elects Directors?

Answer 45

shareholders elect directors at the annual meeting. Bylaws can provide for classified board which divides the board by half or thirds, with half or one-third elected each year

Question 46

Who can remove a director before the term expires?

Answer 46

areholders. They can do this by vote of a majority of the shares entitled to vote. On what bases can they remove a director? With or without cause

Question 47

If there is a vacancy on board who selects person to serve remainder of term?

Answer 47

Board or shareholders

Question 48

Two ways the board of directors can act

Answer 48

A. Unanimous written consent (email and fax ok) to do something or
B. A meeting that satisfies quorum and voting requirements
What if director agree that corporation will do something in individual conversations, without meeting without written consent is that ok? No that act is void unless ratified by a valid act
Does a conference call (simultaneous oral communications so each can hear all others) count as meeting? Yes

Question 49

Notice of Board Meetings

Answer 49

Is notice required for regular meetings? No
Is notice required for a special meetings? Yes, and must state time and place (not purpose)
Failure to give proper notice voids whatever was done at the meeting unless the defect is waived by the person not notified either in writing anytime or by attending without objection
Does meeting have to be in Texas? No

Question 50

Method of Giving Notice of Board Meetings

Answer 50

The method for giving notice can be set in the bylaws.

Would it be ok to give email notice? Yes, if the director authorizes it

Question 51

Can directors give proxies for how they will vote? Can directors enter into voting agreements?

Answer 51

No and No

Question 52

Quorum of Board of Directors

Answer 52

To do business at a meeting we must have a majority of all directors (unless a different percentage is required in the certificate of bylaws)
IF we have a quorum passing a resolution (which is how the board takes an act at a meeting) requires only a majority vote of those present
- What if you have quorum but then someone leaves meeting do you lose quorum? Yes, the quorum is broken and the board cannot act

Question 53

General Role of Directors

Answer 53

Generally board of directors manages business of corporation. It sets policy, supervises officers, declares distributions, decides when the corporation should issue stock, recommends fundamental corporate changes to shareholders etc.
EXCEPTIONS:
- Close corporations
- Shareholder agreement
- Committee of one or more directors. IF the certificate or bylaws allow, the board can appoint a committee to which it can delegate management power. But a committee cannot amend bylaws, select officers, or recommend a fundamental corporate change to shareholders. Committee can declare dividends only if the certificate of bylaws allow

Question 54

Duty of Care Standard

Answer 54

Burden on Plaintiff
Duty of care standard: a director owes the corporation a duty of care. She must act in good faith and exercise ordinary care and prudence. She must do what a prudent person would do in similar circumstances.

Question 55

Nonfeasance (director does nothing)

Answer 55

(state duty of care standard) a director owes the corporation a duty of care. She must act in good faith and exercise ordinary care and prudence. She must do what a prudent person would do in similar circumstances.
- A prudent person would attend some meetings and do something to learn about the business. If director doesn’t attend any meetings and does nothing for business he has breached standard of care but only liable if: his breach caused a loss to corporation

Question 56

Misfeasance (the board does something that hurts the corporation- causation is clear)

Answer 56

(state duty of care) a director owes the corporation a duty of care. She must act in good faith and exercise ordinary care and prudence. She must do what a prudent person would do in similar circumstances. Breach if you hurt company by making it lose money BUT:
Directors are not liable if they meet business judgment rule
- Prudent people do appropriate homework before making a decision (did they deliberate? Did they analyze)
- If you did appropriate homework you are not liable, even if you lose money

Business judgment rule: so a court will not second- guess decision if it was made in good faith, was informed and had rational basis, a director is not a guarantor of success

Question 57

Duty of Loyalty

Answer 57

Burden on Defendant
a director owes the corporation a duty of loyalty. She must act in good faith and with reasonable belief that what she does is in the corporations best interest
- Why does business judgment rule not apply in duty of loyalty cases: It does not apply when there is a conflict of interest

Question 58

Interested Director Transaction (duty of loyalty)

Answer 58

his is any deal between the corporation and one of its directors (or the directors close relative or another business of which the director is a manager or has a financial interest)
State the duty of loyalty standard (Duty of loyalty standard: a director owes the corporation a duty of loyalty. She must act in good faith and with reasonable belief that what she does is in the corporations best interest
). Interested director transaction will be set aside unless the directors shows
1. The deal was fair to the corporation when approved OR
2. Her interest and the material facts were disclosed or known and the deal was approved in good faith by either 1. shareholders or 2. Majority of disinterested directors

Question 59

Board and Compensation for the board

Answer 59

Interest directors count toward a quorum
Board can set its own compensation as long as it is reasonable. If pay is excessive it is a waste of corporate assets and a breach of the duty of loyalty

Question 60

Competing Ventures (duty of loyalty)

Answer 60

Duty of loyalty standard: a director owes the corporation a duty of loyalty. She must act in good faith and with reasonable belief that what she does is in the corporations best interest
- She cannot compete without approval form a disinterested majority of directors
Remedy: constructive trust on profits.

Question 61

Corporate Opportunity (duty of loyalty)

Answer 61

Director learns of opportunity but buys it for himself. What are corporation’s rights?
State the duty of loyalty standard (Duty of loyalty standard: a director owes the corporation a duty of loyalty. She must act in good faith and with reasonable belief that what she does is in the corporation’s best interest).
Director cannot usurp a corporate opportunity. That means the director cannot take it until he
1. Tells the board and
2 waits for the board to reject the opportunity.
What is a corporate opportunity? Anything a director has reason to know the company would be interested in
If directory has the opportunity still he must sell it to corporation at his cost. IF he has sold it for profit corporation gets profit (constructive trust)
Corporation can renounce opportunity in certificate of formation or by board action. That clears the way for director to take advantage of the opportunity

Question 62

Improper Loans (Duty of Loyalty)

Answer 62

Improper Loans
Directors vote to lend another director corporate funds is this ok? Yes if reasonably expected to benefit the corporation
Sarbanes-Oxley Act: basically prohibits loans to executives in large publicly traded corporations. It requires the board of such corporation to establish an audit committee and oversee work of registered public accounting firm. Chief executive and financial officers must certify accuracy and completeness of financial reports

Question 63

When are directors liable?

Answer 63

A director is presumed to have concurred with board action unless her dissent or abstention is noted in writing in corporate records. This is done by:
1. Having it put in the minutes
2. Sending a note to the corporation secretary at the meeting
3. Sending a registered letter to the corporate secretary immediately after meeting
IS oral dissent effective? Not by itself, need writing
- Cannot dissent if voted for the resolution at the meeting
Exceptions:
- Absent directors are not liable
- Good faith reliance on financial statements of other information represented as correct by an officer or on information provided by a competent professional (ie attorney CPA investment banker) or by an employee or by a committee of which the director relying was not a member

Question 64

Officers of corporation

Answer 64

owe the same duties of care and loyalty as directors

Officers are agents of the corporation. So they can bind the corporation by acts within their authority (watch for cross over with agency corporation is principal and officer is the agent)

Regarding inherent authority, not that the president has authority to convey corporate real property only if board gives her such authority. Outside that, she might have inherent authority to bind the corporation to a contract entered in the ordinary course of business
- Must have a president and a secretary. Can have others as well
Can one person hold multiple offices at the same time? Yes
Do officers have to be directors too? No, might be but do not have to be

Question 65

Selection and Removal of officers

Answer 65

officers are selected by and removed by the board which also sets officer compensation
- Only can sue for damages, not for the job back
Shareholders hire and fire directors but the board hires and fires officers. Generally then shareholders do not hire and fire officers

Question 66

Indemnification of directors and officers

Answer 66

Someone is sued as a director or officer she incurs costs, attorneys fees, maybe fines, a judgment or settlement she seeks reimbursement from the corporation

Question 67

Reimbursement of director or officer for being sued is prohibited when?

Answer 67

If the director or officer is held liable for willful or intentional misconduct in performing a duty to the corporation.

Question 68

Reimbursement of director or officer for being sued is required when?

Answer 68

If she won a judgment on the entire case `

Question 69

Reimbursement of director or officer for being sued may be permitted when?

Answer 69

But if she was held liable to the corporation or to have received an improper personal benefit she can get only expenses and attorneys fees (not the judgment)
What’s’ a good example of when a case would fall within permitted reimbursement? The case against her settled

Eligibility standards- Must show she acted in good faith and with the reasonable belief there her actions were in the corporations best interest (duty of loyalty standard, so must meet this)
Who determines eligibility
1. Majority vote of he disinterest directors or of a diinterested shares or
2. Independent legal counsel

Question 70

Can a court order reimbursement of director or officer for being sued?

Answer 70

the court in which the director or officer is sued can order reimbursement if it finds it justified on all the circumstances. Limited to expenses, not judgment

Question 71

Can the certificate eliminate director and officer liability?

Answer 71

yes but but never for willful or intentional misconduct

Question 72

Can a company advance litigation expenses to director or officer being sued?

Answer 72

The company can advance litigation expenses if the director or officer gives an affidavit of her good faith belief that she has met the standards by acting in good faith and with the reasonable belief that her actions were in the corporations best interest (duty of loyalty) and a written undertaking to repay the expenses if it is determined that she did not

Question 73

Do shareholders get to manage the corporation?

Answer 73

No because the board manages it
Exception: But in a close corporation management can be set up differently from that in an ordinary corporation. A close corporation can have a board of directors. But there need not be a board of directors. It can be abolished and shareholders can take over management or management can be vested in a particular person

Question 74

What is a close corporation? How do your form it?

Answer 74

What is a close corporation? Few shareholders and stock is not publicly traded

How do you form a close corporation? Same as with any corporation, but the certificate must say that this corporation is a close corporation

Question 75

How do we change the management structure in close corporation?

Answer 75

How do we change the management structure in close corporation? You need a share holders agreement authorizing the change ie abolishing the board, making management much less formal than an ordinary corporation

What is an absolute required for such an agreement?

1. In certificate and approved by all share holders or
2. A written agreement of all shareholders

Question 76

What stock certificates in close corporation should note.

Delivering shareholder agreement

Answer 76

Stock certificates should note close corporation status and that shareholders are to manage, but failure to do so does not affect close corporation status

The corporation should deliver to each shareholder a copy of the agreement, but failure to do so does not affect its validity

Question 77

What happens once a corporation starts operating under a shareholders agreement?

Answer 77

Once the corporation starts operating under the shareholders agreement it may file with the secretary of state a “statement of operation” which makes its manner of operation a matter of public record

If that filing is made the agreement is binding on all shareholders and transferees.
Is this true even if a transferee does not have knowledge of the agreement? Yes, filing is notice to the world

Question 78

Whenever the shareholders manage the corporation who owes the duties of care and loyalty to the corporation?

Answer 78

Managing shareholders

Question 79

In a Texas close corporation shareholders do shareholders have a fiduciary duty towards one another?

Answer 79

In a Texas close corporation shareholders do not owe each other fiduciary duties as a matter of law (this is different from the rule in many states) but a court may find a fiduciary duty depending on the facts of a given case. So be prepared to argue for such a duty.
Especially watch for controlling shareholder oppressing minority shareholders
1. Freezing out minority shareholders or
2. Selling control without reasonable investigation to one who loots the company or 3 selling corporate asset for personal profit

Question 80

Are shareholders liable for acts of debts of the corporation?

Answer 80

General answer no. Why? Because the corporation is liable for what it does
But a court might pierce the corporate veil and hold shareholders personally liable if 1. They have abused the privilege of incorporation and
2. Limitation on liability would be unfair
Court might pierce corporate veil to: prevent fraud or achieve equity
Piercing corporate veil happens in only what kind of corporation? Close corporations

Piercing corporation is never automatic: make the argument

Question 81

Piercing corporate veil can happen in what type of corporation?

Answer 81

Close corporation

Question 82

Alter Ego Theory and Close Corporation

Answer 82

(not available for mere failure to observe corporate formalities, such as failure to select officers and hold meeting)

• Make sure you start with shareholders and not generally liable and then make piercing veil argument
• If shareholder treats the corporation assets as his own, alter ego
• Only the shareholder that used it as alter ego is liable, not shareholder who didn’t

Question 83

Undercapitalization theory and close corporation

Answer 83

• Start with shareholders not generally liable
• Shareholders failed to invest enough to cover prospective liabilities (Ex: dangerous business and have no insurance and only put minimal amount into business)

Question 84

In what kinds of cases is piercing the corporate veil most likely?

Answer 84

Torts, Not Contract

Question 85

Can you pierce the corporate veil if shareholders are another company?

Answer 85

Remember piercing veil allows imposition on a shareholder. The shareholder might be another corporation
Ex: a parent corporation forms a subsidiary to avoid its obligations

Question 86

When can you pierce the corporate veil for a contract claim based on fraud?

Answer 86

We cannot pierce veil for a contract claim based on fraud unless the shareholder made the corporation commit fraud of his own personal benefit

Question 87

What is a derivative suit?

Answer 87

In a derivative suit, a shareholder is suing to enforce the corporations claim, not her own personal claim.
Why? Because corporation did not sue
Always ask: Could the corporation have brought this suit?
- If so it’s a derivative suit

Question 88

If shareholder sues board of corporation for duty of care or the duty of loyalty is that a derivate suit?

Answer 88

Yes because corporation could sue for breach of duties owed to it

Question 89

If shareholders sue board of corporation for issuing new stock without honoring her preemptive rights is that derivate?

Answer 89

No, direct suit to vindicate personal claim

Question 90

If shareholder wins derivative suit what happens?

Answer 90

Who gets the money from judgment? Corporation
What does shareholder receive? Cost and attorney fees from corporation
After all shareholder conferred a benefit on the corporation by suing and winning

Question 91

If shareholder loses derivative suit what happens?

Answer 91

If the shareholder plaintiff loses what happens?
Can shareholder still get cost and attorney fees? No
Is shareholder liable to the defendant he sued for the defendants attorneys fees? Yes if the court finds that the shareholder sued without reasonable cause or for an improper purpose
Can other shareholders later sue that defendant on the same transaction? No

Question 92

What are the requirements for bringing shareholder derivative suit?

Answer 92

Stock ownership: one must have owned stock when the claim arose, or have gotten it by operation of law form someone who did
Examples of operation of law: inheritance or divorced decree

Must fairly and adequately represent the corporations interest. This may mean among other things that you own stock throughout the ligation
Must also make a written demand on directors that the corporation bring suit. Cannot file a derivative suit until 90 days after demand unless demand is rejected before that or waiting 90 days would cause irreparable damage to corporation

Is the demand ever excused? No, must be made even if it would be futile
The demand must set forth the nature of the claim with particularity

Corporation must be joined as defendant (even though we are asserting the corporations claim) because it did not sue on its own

Question 93

Can the parties settle or dismiss a derivative suit?

Answer 93

Only with court approval
If the proposed settlement or dismissal may substantially affect shareholders, the court may require notice to those shareholders

Question 94

Corporation may move to dismiss a derivative claim based on what?

Answer 94

based upon determination by independent and disinterested directors (or committee of two or more such directors) what is the basis of the motion to dismiss? That suit is not in corporations best interest
Ex: low chance of success, cost of suit would exceed recovery, money would better be spent on advertising or expanding business
In ruling of motion to dismiss what would court consider? Court must dismiss if it finds the determination was made in good faith by independent disinterested directors

Question 95

In a close corporation of 35 or fewer shareholders how the court might treat a derivate suit

Answer 95

In a close corporation of 35 or fewer shareholders the court might treat a derivate suit as a direct action so the various requirements don’t have to be met. Treating it as a direct suit means the recovery would go to the plaintiff not the corporation

Question 96

Shareholder Voting. Who votes?

Answer 96

Who votes?
The record shareholder as of the record date has the right to vote
The record shareholder is the person shown as the owner in the corporate records. The record date is a voter eligibility cut-off set no more then 60 days before the meeting

Question 97

Exceptions to the rule that record owner on record date votes for shareholder

Answer 97

Treasury stock owner (corporation doesn’t vote), death of shareholder, proxies

Question 98

Proxy

Answer 98

A proxy is a
1. Writing (fax and email are ok)
2. Signed by record shareholder (fax and email are ok)
3. Directed to secretary of corporation
4. Authorizing another to vote the shares. Basically an agency
- Good for 11 months unless it says otherwise
- Can freely revoke proxies
Are they revocable even if it states is irrevocable? Yes

Can we ever have irrevocable proxy? Yes if it’s a proxy couple with an interest. This requires

1. The proxy says its irrevocable and
2. the proxy holder has some interest in the shares other then voting
   - Any interest in shares such as option to buy them.

Question 99

Requirement for Voting Trust

Answer 99

(no time limit imposed by corporate law)

1. Written trust agreement controlling how the shares will be voted
2. File a copy with the corporation
3. Transfer legal title of shares to voting trustee
4. Original shareholders receive trust certificates and retain all shareholder rights other than voting

Question 100

Requirement for voting (pooling) agreement

Answer 100

no time limit imposed by corporate law
Can shareholders enter into voting agreements? Yes
What is required? In writing, copied to the corporation
Remember voting trust and agreements must be for a proper shareholder purpose, it is ok for shareholders to agree to vote shares to elect each other as directors
- Suppose though that shareholders agree on what they will do once they become directors, is that ok? No, directors cannot have voting agreements
Are voting agreements specifically enforceable against transferees? Yes if the affected stock certificates conspicuously note the agreement

Question 101

Where do shareholders vote?

Answer 101

Two ways shareholders can take a valid corporate act

1. Unanimous consent in writing and signed or by electronic transmission of holders of all voting shares or
2. A meeting that satisfies quorum and voting rules

Question 102

What are the two kinds of shareholder meetings?

Answer 102

Meetings can be held anywhere
Annual meeting must be held if none is held within 13 months (or no unanimous consent in lieu of meeting), a shareholder may petition the court to order one 
- Elect directors
Special meeting can be called by 
1. The board 
2. The president 
3. The holders of at least 10 percent of the shares entitled to vote or 
4. Anyone else permitted in certificate 

Suppose 10% of the shares call a special meeting to remove an officer. Is that ok?
- No shareholders do not remove officers

Question 103

Notice Requirement of Shareholder Meetings

Answer 103

must give written notice to every shareholder entitled to vote, for every meeting (annual or special) between 10 and 60 days before the meeting (21 to 60 days if the meeting is to consider a fundamental change)
Notice is given personally or by mail or if the shareholder consents by email
Contents of the notice: must always state
1. When
2. Where
and
3. Why (the purpose of the meeting)
Why does the state purpose of the meeting matter? Because you cannot do anything else but stated purpose

Question 104

Consequence of failure to give proper notice of shareholder meeting

Answer 104

Consequence of failure to give proper notice to all shareholders entitled to vote- action taken at the meeting is void unless those not sent notice (or those who got defective notice) waive the notice defect how does the waiver occur?
Express: in writing anytime or
Implied attend meeting without objection

Question 105

How do shareholders vote?

Answer 105

There must a quorum represented at the meeting. Determination of a quorum focuses on the number of shares represented. Not the number of shareholder. Generally a quorums requires a majority of outstanding shares
Once a quorum is established it is not lost if people leave the meeting. This is clear. (Different then directors)
If quorum requirement is met a majority of all votes case acts to bind. That means all votes cast for, against, or expressly abstaining

Question 106

Cumulative Voting

Answer 106

Cumulative voting is only available in electing directors it is a device to give small shareholders a better chance of electing someone to the board
- Multiply number of share times number of directors to be elected
Suppose the certificate of formation is silent as to whether shareholders can vote cumulative. Can they vote cumulatively? No, have to tell you

When cumulative voting exists at lease one shareholder must give written notice to the corporate secretary of her intent to cumulate. IF one shareholder gives such notice no later than the day before the meeting, all shareholders can vote cumulatively

Question 107

Stock Transfer Restrictions (or limit on how much stock someone can own)

Answer 107

One of the great things about a corporation is transferability of the ownership interest. Sometimes in close corporations, shareholders want to impose restrictions on that freedom, usually to keep outsiders out.
Where can such restrictions be set up? In the certificate, by laws or by agreement

Question 108

Will stock transfer restrictions be enforceable?

Answer 108

Stock transfer restrictions are ok if it is not an undue restrain on alienation
The right of first refusals is ok assuming the corporation offers a reasonable price

Question 109

Are stock transfer restrictions enforceable against transferee?

Answer 109

Look for transfers knowledge or notice
Even if the restriction is reasonable and thus valid it cannot be invoked against the transferee unless either
a. conspicuously noticed on stock certificate or
b. transferee had actual knowledge of restriction

Question 110

Right of shareholder (personally or by an agent) to inspect and copy the books and records of the corporation

Answer 110

What shareholders are eligible? Any shareholder who has
1. Owned stock (or held voting certification) for at least 6 months OR
2. Owns at least 5 percent of the outstanding chares
Can other shareholders ever inspect? Only with court order
Procedures: written demand stating a proper purpose.
What is proper purpose: one related to your interest as a share holder (can be hostile to board)
IF the corporation does not allow inspection shareholder gets a court order and recover expenses and attorneys fees. If there is litigation the corporation has the burden of showing that the shareholders purpose was improper
Do directors have to make a similar showing to get to inspect books and records? No they have unfettered access

Question 111

Distributions

Answer 111

Payments by the corporation to shareholders
Can be
1. A dividend or
2. To repurchase shares or
3. To redeem shares (forced sale to corporation at price set in certificate)

Question 112

Who declares distributions?

Answer 112

Distributions are declared in the boards discretion. When do shareholders have right to distribution? When board declares it
So a suit by shareholders to force the declaration of a distribution requires a strong showing of abuse of discretion.
Ex: Is if the corporation consistently makes profits ad the board refused to declare dividends while paying itself a bonus

Question 113

Which Shareholders get dividends?

Answer 113

Common stock: divide it out, total amount of money divided by shares
Preferred Stock: means paid first. Then you go and distribute to common stock
- Preferred doesn’t mean paid more, just paid first
Preferred Stock that is Participating: (means pay again), Means that share gets paid twice, once as preferred and then again with left over money because they are participating (participate with common stock)
Preferred that is cumulative: cumulative means you add them up for years stock was not paid. Multiply years not paid by stock value. Then the rest goes to common

Question 114

Surplus

Answer 114

How is surplus computed? Assets – liabilities – stated capital
Can surplus be used for distributions? Yes
On a no par issuance within 60 days of the issuance the board can allocate any part but not all to surplus

Question 115

Sated Capital

Answer 115

Can stated capital be sued for distributions? Never
How is stated capital computed? Stated capital is the par value of the issuance (whatever stock is worth) Surplus is excess over that value

Question 116

When can a corporation not make a distribution?

Answer 116

A corporation cannot make a distribution if its insolvent or if the distribution would render it insolvent or if the distribution would exceed surplus
What does insolvent mean? Corporation unable to pay debts as it comes do

Question 117

Are directors liable to a corporation for an unlawful distribution?

Answer 117

Yes, Directors are jointly and severally liable to the corporation for a unlawful distribution to the extent it is was impermissible
Can a director held liable for unlawful distribution seek contribution form others?
Yes from other directors who approved it and from shareholders who knew it was improper when they received it
- Think about directors defense as good faith reliance

Question 118

What happens if directors want to fundamentally change a corporation?

Answer 118

Extraordinary occurrences, board of directors cannot do them alone
First, board take an action adopting a resolution of a fundamental corporate change
Second, the board must submit the proposal to the shareholders with written notice
Third the fundamental change must be approved by the shareholders .
- What vote is required? 2/3s of shares entitled to vote
Fourth, usually a document is delivered to the secretary of state for filing
q

Question 119

Dissenting shareholder right of appraisal

Answer 119

What is it? Right to force the corporation to buy your stock for fair value

When will a shareholder have a dissenting shareholder right of appraisal?
Actions by corporation that trigger right:
1. Merger
2. Sale of shares in a share exchange
3. Transfer of substantially all assets or
4. Conversion
But the rights is not available if stock is listed on a national exchange or market or has 2,000 or more shareholders. In such a big corporation there is a public market for the stock so an unhappy shareholder can sell her stock on the market

So the right of appraisal exists in what kind or corporation? Close

Actions by shareholders to perfect the right
1. Before shareholder vote, file with the corporation written notice of objection and of intent to demand payment
2. Abstain or vote against the proposed change and
3. After the vote within 20 days of notification by the corporation make written demand to be brought out
Within 20 days of the shareholders demand the corporation must notify the shareholder whether it accepts or rejects the demand. If it rejects the demand it counters with its own estimate of fair value.
IF they cannot agree on fair value who happens? The shareholder sues for determination of the price
The court can appoint an appraiser
IS the right of appraisal the exclusive remedy for a shareholder who does not like the fundamental change? Yes absent fraud

Question 120

Amendment of the certificate of formation

Answer 120

Board of director and shareholder approval
- How many votes for shareholder approval? 2/3 (fundamental change)
- What if there are lots of shares but only a percentage of owners show up at meeting to consider amendment? Still need 2/3 of shares entitled to vote, doesn’t matter who is present
If approve deliver the amended certificate to the secretary of state for filing

Question 121

Mergers

Answer 121

Board of director action (both corporations) and Shareholder approval. Always required from shareholder of disappearing company.
- Must be 2/3 shares entitle to vote
Shareholders of surviving company do not vote (unless the company and rights are substantially changed)
No shareholder approval is required if a 90 percent or more owned subsidiaries is merged into parent. Called a short form merger
If approve deliver certificate of merger to secretary of state for filing

Remember the right of appraisal. It is available to shareholders of the disappearing company in a regular merge. Even the shareholders of subsidiary in a short form merger.
Effect of merger: surviving company succeeds to all rights and liabilities of the constituent company
- Because one corporation disappears “Successor liability”

Question 122

Conversion from one corporation to another form of business organization

Answer 122

Corporation can convert to another form of business.
Requires board action and approval by 2/3 of shares entitled to vote.
Deliver certificate of conversion to secretary of state for filing.
Dissenting shareholders can demand appraisal rights

Question 123

Transfer of all or substantially all of the assets not in the ordinary course of business or share exchanged (one company acquires all stock of other)

Answer 123

• Transfer will not be of substantially all assets if the corporation continues to engage in the same business fate the transfer
  Key point: these are fundamental corporate changes for which corporation: Seller not buyer
• Not fundamental changes for the buyer corporation

Are there dissenting shareholders rights of appraisal? Yes for shareholders of the selling corporation only. Not for the shareholders of the buyer because it is not a fundamental change for the buyer corporation

Generally do we expect successor liability in the sale of all assets? No, because selling corporation still exists

Question 124

Voluntary Termination

Answer 124

1. Written consent of all or
2. Board of directory action and approval by 2/3 of the shares entitled to vote
3. After either of these is met, send notice of intent to wind up to creditors
4. Then follow the liquidation.
5. A court can revoke termination if terminated as a result of fraud.
   Corporation may revoke its voluntary termination any time before its corporate existences ceases

Question 125

Involuntary (court ordered) Termination

Answer 125

Texas Attorney General can institute a proceeding for involvuntary termination and winding up for:
1. Fraudulent procurement of certificate
2. Ultra vires activities
3. Misrepresentation in required reports
4. Public interest requires it
- Does not happen often
Creditors can seek immediate termination based on irreparable hard to unsecured creditors

Question 126

Creditors can seek termination or ____

Answer 126

Creditors can seek appointment of a receiver because the corporation is insolvent and the creditor has an unsatisfied judgment or the company admits in writing that the amount is due

Question 127

A shareholder can seek appointment of receiver for

Answer 127

A shareholder can seek appointment of receiver for insolvency waste of assets, director deadlock causing irreparable harm to the company; shareholders deadlocked and have failed at two annual meetings to fill a vacant board position; or illegal, oppressive, or fraudulent acts by directors
- Note can’t seek termination

How long does the receiver serve? 12 months
What if things are not fixed by the end of 12 months? Court can order termination

Question 128

In a close corporation if management is so divided that action cannot be taken

Answer 128

a court may avoid dissolution by appointing a provisional director to break tie

Question 129

Administrative Termination

Answer 129

The Texas Secretary of state issues a certificate of termination for corporations failure to pay fees or failure to maintain registered agent to file required reports?
Does this required court action? No, secretary of state issues certificate of termination
The corporation must be given at least 90 days notice.
Why are directors and officers nervous about this type of termination? Because they are personally liable for debts incurred after termination until reinstatement

If the corporation is not reinstated it is treated as one that has voluntarily terminated, and proceeds to liquidation.
Also the comptroller of the state may forfeit a corporations privileges for failure to pay franchise tax or to file tax reports if the cooperation does not cure the failure within 45 days notice
- Such forfeiture means the corporation cannot sue or defend cases in state court and each officer and director is personally liable for debts incurred after the date on which the tax was due

Question 130

Does termination end the existence of the corporation right then?

Answer 130

No, just starts process 
The steps in the liquidation process: 
A. Gather all assets 
B. Convert to cash 
C. Pay creditors 
D. Distribute remainder to shareholders, pro-rata by share unless there is a liquidation preference(means pay first)

Question 131

Who manages the winding up process?

Answer 131

Board of directors unless the court decides to do it

Question 132

After winding up what must corporation do?

Answer 132

After winding up the corporation must deliver a certificate of termination to the secretary of state, including statement that debts have been paid, with any remaining sums having been distributed to shareholders.
What is the effect of the states filing of the certificate of termination? Ends corporation existence
How late can claims against the corporation that arose before termination be asserted? Within 3 years after the termination

Question 133

Conversion from one corporation to another form of business organization

Answer 133

Corporation can convert to another form of business.
Requires board action and approval by 2/3 of shares entitled to vote.
Deliver certificate of conversion to secretary of state for filing.
Dissenting shareholders can demand appraisal rights

Question 134

Transfer of all or substantially all of the assets not in the ordinary course of business or share exchanged (one company acquires all stock of other)

Answer 134

• Transfer will not be of substantially all assets if the corporation continues to engage in the same business fate the transfer
  Key point: these are fundamental corporate changes for which corporation: Seller not buyer
• Not fundamental changes for the buyer corporation

Are there dissenting shareholders rights of appraisal? Yes for shareholders of the selling corporation only. Not for the shareholders of the buyer because it is not a fundamental change for the buyer corporation

Generally do we expect successor liability in the sale of all assets? No, because selling corporation still exists

Question 135

Voluntary Termination

Answer 135

1. Written consent of all or
2. Board of directory action and approval by 2/3 of the shares entitled to vote
3. After either of these is met, send notice of intent to wind up to creditors
4. Then follow the liquidation.
5. A court can revoke termination if terminated as a result of fraud.
   Corporation may revoke its voluntary termination any time before its corporate existences ceases

Question 136

Involuntary (court ordered) Termination

Answer 136

Texas Attorney General can institute a proceeding for involvuntary termination and winding up for:
1. Fraudulent procurement of certificate
2. Ultra vires activities
3. Misrepresentation in required reports
4. Public interest requires it
- Does not happen often
Creditors can seek immediate termination based on irreparable hard to unsecured creditors

Question 137

Creditors can seek termination or ____

Answer 137

Creditors can seek appointment of a receiver because the corporation is insolvent and the creditor has an unsatisfied judgment or the company admits in writing that the amount is due

Question 138

A shareholder can seek appointment of receiver for

Answer 138

A shareholder can seek appointment of receiver for insolvency waste of assets, director deadlock causing irreparable harm to the company; shareholders deadlocked and have failed at two annual meetings to fill a vacant board position; or illegal, oppressive, or fraudulent acts by directors
- Note can’t seek termination

How long does the receiver serve? 12 months
What if things are not fixed by the end of 12 months? Court can order termination

Question 139

In a close corporation if management is so divided that action cannot be taken

Answer 139

a court may avoid dissolution by appointing a provisional director to break tie

Question 140

Administrative Termination

Answer 140

The Texas Secretary of state issues a certificate of termination for corporations failure to pay fees or failure to maintain registered agent to file required reports?
Does this required court action? No, secretary of state issues certificate of termination
The corporation must be given at least 90 days notice.
Why are directors and officers nervous about this type of termination? Because they are personally liable for debts incurred after termination until reinstatement

If the corporation is not reinstated it is treated as one that has voluntarily terminated, and proceeds to liquidation.
Also the comptroller of the state may forfeit a corporations privileges for failure to pay franchise tax or to file tax reports if the cooperation does not cure the failure within 45 days notice
- Such forfeiture means the corporation cannot sue or defend cases in state court and each officer and director is personally liable for debts incurred after the date on which the tax was due

Question 141

Does termination end the existence of the corporation right then?

Answer 141

No, just starts process 
The steps in the liquidation process: 
A. Gather all assets 
B. Convert to cash 
C. Pay creditors 
D. Distribute remainder to shareholders, pro-rata by share unless there is a liquidation preference(means pay first)

Question 142

Who manages the winding up process?

Answer 142

Board of directors unless the court decides to do it

Question 143

After winding up what must corporation do?

Answer 143

After winding up the corporation must deliver a certificate of termination to the secretary of state, including statement that debts have been paid, with any remaining sums having been distributed to shareholders.
What is the effect of the states filing of the certificate of termination? Ends corporation existence
How late can claims against the corporation that arose before termination be asserted? Within 3 years after the termination