CORPORATIONS Flashcards
What does it take to form a corporation?
People: Incorporators–must have one or more
Paper: Articles of Incorporation
Act: Incorporators have notarized articles delivered to the SoS and pay req’d fees. If SoS accepts–>conclusive proof of valid formation
What does an incorporator do?
Executes (signs) the articles and deliver them to the Secretary of State.
Can WXY, Inc. serve as an incorporator for AB Beauty Supply Corp.?
Yes, incorporator can be an individual or an entity.
What are the Articles of Incorporation?
a. A contract between the corporation and the shareholders
b. A contract between the corporation and the state.
What information is included in the Articles?
- Names and Addresses
•Corporate name w/ magic words
•Name and address of each incorporator
•Name and address of each initial director
•Name of registered agent and address of teh
registered office - If no statement of duration, presume perpetual existence.
- Statement of purpose
•General: “engage in all lawful activity, after
first obtaining necessary state agency
approval”
•Specific: If specific statement of purpose
possible ultra vires.
•UV contracts are valid as to 3rd parties
•Shareholders can seek an injunction to
stop an UV act
•The corporation itself can sue
responsible managers for UV losses
4. Capital Structure
• authorized stock
• number of shares per class
• information on voting rights and preferences
of each class.
What is the organizational meeting?
Occurs after a de jure corporation is formed, where the board of directors selects officers and adopts any bylaws and conducts other appropriate business.
The internal affairs of a corporation are governed by what law?
The law of the state in which the corporation is formed. (Even if all business is done in Iceland).
Internal affairs= roles and duties of directors, officer, and shareholders.
A corporation is a separate _______ __________.
legal person. It can sue and be sued, hold property, be a partner in a partnership, make charitable contributions, etc.
What is double taxation?
Applies to a corporation (non-S) because a corp. is taxed on its profits and additionally, shareholders are taxed on distributions.
What is an S corporation?
An S corporation has no more than 100 shareholders, all of whom are human and US citizens or residents. There is only one class of stock and it is not publicly traded.
In a corporation, are the directors or officers liable for what the entity does? What about shareholders?
NOPE. The corporation itself is liable for what the corporation does. Limited liability means that shareholders generally cna only lose the amount that they invested in the company.
Requirements for de facto corporation:
(Anyone asserting the doctrine must be unaware of the failure to form a de jure corporation)
- There is a relevant incorporation statute (there is)
- the parties made a good faith, colorable attempt to comply with the statute, AND
- Some exercise of corporate privileges (acting like there is a corporation).
If de facto corporation requirements are met, then _______.
the business is treated as a corporation for all purposes except in an action by the state.
Shareholders not liable on contract, e.g.
What is corporation by estoppel?
•One who treats a business as a corporation may be estopped from denying that it is a corporation.
(you dealt with it like it was a corporation, so can’t get the benefit of it not being).
•It can also prevent the improperly-formed “corporation” from avoiding liability by saying it was not property formed.
Corporation by estoppel applies only in what kinds of cases?
Contracts, not torts.
What is the status of corporation by estoppel and de facto corporation?
The doctrines don’t exist in may states. Point this out on the exam.
Are corporations required to have bylaws?
No, but usually do for internal governance–e.g. responsibilities of officers, times and places for regular meetings of the board, methods of giving notice, etc.
Are bylaws filed with the state?
No. Articles are, not bylaws.
Who adops the initial bylaws?
The Board of Directors at the organizational meeting.
Who can amend or repeal the bylaws of a corporation?
Shareholders and, in some states, the Board as well.
If bylaws conflict with the articles, which controls?
The articles because they are seen as a contract with the state.
What/ Who is a promoter?
a person acting on behalf of a corporation not yet formed. She might enter into a contract on behalf of a corporation not yet formed.
When does the corporation become liable on pre-incorporation contracts?
Not until it adopts the contract.
How does a corporation adopt a contract?
- Expressly: Board takes an action adopting the contract (e.g. board resolution).
- Implied: The corporation accepts the benefits of the contract.
Unless the contract clearly provides otherwise, the promoter is liable on pre-incorporation contracts until there is _________.
Novation.
What is a novation?
an agreement of the promoter, the corporation, and the other contracting party that the corporation will replace the promoter under the contract?
Will a promoter be liable on the lease of the corporation is never formed?
Yup.
Will a promoter be laible on the lease if the corporation is formed and adopts the lease?
Yup. Promoter is liable until there is a novation.
- Adoption makes the corporation liable too, but does not relieve P. Here, both corporation & promoter would be liable.
What is a foreign corporation?
A corporation incorporated outside this state.
Foreign corporations transacting business in this state must ______ and _________.
qualify and pay prescribed fees.
Transacting business means the regular course of ________ activity. It doesn’t include _____ or _____ activity in this state. It also doesn’t include simply ____________.
intrastate
occasional or sporadic
owning property here.
How does a foreign corporation qualify to transact business in this state?
- get a certificate of authority from the SoS
- give information from articles
- proves good standing in home state
- must have registered agent in this state
- pay fees.
If a foreign corporation transacts business without qualifying what happens?
- civil fine
- cannot sue in this state (though can be sued and defend).
(Generally if corp. qualifies and pays back fees and fines, it can sue here).
What is an issuance?
When the corporation sells its own stock. (never the stock of an other corporation).
It is a way for the corporation to raise capital.
What is a subscription?
a written offer to buy stock from corporation.
Pre-incorporation subscriptions are irrevocable for ______ unless ______ or _________.
6 months; the subscription says otherwise; all subscribers agree to let you revoke.
Are post-incorporation subscriptions revocable?
Yes, until acceptance. Until the Board accepts the offer.
_______ must be given to the corporation when it issues stock.
Consideration
What are the forms of consideration permitted in every state?
What are the controversial, split causing forms?
- money (cash/ check)
- tangible or intangible property
- services already performed for the corporation
- —————- - promissory notes
- future services
*Discuss the split regarding the last 2 on the exam.
If forms used in a state where prohibited, results in “unpaid stock” meaning its all treated as water.
What does par mean?
Minimum issuance price If C.Corp is issuing 10,000 shares of $3 par stock, it must receive at least $30,000.
If C Corp issues 10,000 shares of $3 par stock, can it accept $40,000.
Yes. Par means minimum. No maximum.
Who sets the par price?
the Board of Directors.
What is treasury stock? How is the issuance price set?
Stock the company issued then reacquired. It is considered authorized but unissued, and the corporation can then resell it. If it does, the board sets any issuance price it wants.
If a corporation issues stock in exchange for property or past services, who determines the value of the property or services?
the Board of Directors. The Board’s valuation is conclusive if it is made in good faith.
C Corp. issues 10,000 shares of $3 par stock to X for $22,000. The corporation wants to recover the $8,000 of “water.” Who is liable?
- The directors if they knowingly authorized the watered issuance.
- X (the guy who bought the stock). No defense; he is charged with notice of the par value.
- If X transfers the stock to a 3rd party, TP is not laible if she didn’t know about the water.
What are pre-emptive rights?
the right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock FOR MONEY (cash or its equivalent–check).
Is the issuance of treasury stock a “new issuance” for purposes of pre-emptive rights?
Split–some say yes, some no.
Authorized stock is:
the maximum number of shares the corporation can sell.
Issued stock is:
the number of shares the corporation actually sells
Outstanding stock is:
the shares that have been issued and not reaquired.
S owns 1000 shares of C corp. There are 5,000 shares outstanding. C Corp. is planning to issue an additional 3,000 shares. If S has pre-emptive rights, then S has the right to ______________.
Buy 600 shares in order to maintain her 20% ownership interest.
*This is a choice–there is no obligation to buy.
If the articles are silent, are there pre-emptive rights?
In most states, no.
Suppose the C Corp articles provide for pre-emptive rights. You own 20% of the stock of C corp. C Corp. issues stock to Peggy to purchase property from her. Do you have preemptive rights?
Nope–must be an issuance for money. Here, the Corp. is issuing stock for property.
Statutorily, how many directors must there be in a corporation?
1 or more (must be adult, natural person).
Initial directors are usually ____________. Thereafter, who elects directors?
named in the articles
shareholders at the annual meeting. The entire board is elected each year unless there is a “staggered” board. Staggered board is usually set in the articles.
Shareholders can remove directors before their terms expire but this requires a vote of a _______________________.
majority of the shares entitled to vote.
On what basis can shareholders remove a director?
with or without cause.
If there is a vacancy on teh board, who selects the person who will serve as a director for the rest of the term? What if shareholders created the vacancy by removing a director?
Generally, either the Board or the shareholders, but if shareholders removed the director, then normally, they must replace the director.
What are the two ways in which the board of directors can act?
- unanimous agreement in writing (common in closely held corporations)
- meeting (has to satisfy quorum and voting requirements).
If directors act through individual conversations without a meeting or unanimous written agreement then ____________.
the act is void unless ratified later validly.
What are the notice rules for board meetings?
Regular meeting: no notice required
Special meeting: notice is required. Must state time and place, but not purpose.
Failure to give required notice ______ whatever happened at the meeting, unless _____________.
Voids; the directors not notified waive the notice defect. They can do this in writing at anytime or by attending the meeting without objecting.
Can directors give proxies or enter into voting agreements for how they will vote as directors?
Nope. (shareholders can).
Void and against public policy–shareholders must show up.
There must be a __________ for meetings of the board, which generally means a _________ of all directors to do business (unless a different percentage is set in the bylaws).
quorum; majority
If a quorum is present at a meeting, passing a resolution requires only a _____________.
majority vote of those present.
If there are 9 directors, at least ____ directors must attend the meeting to constitute a quorum. If ____ (minimum #) directors attend, at least ____ must vote for a resolution for it to pass.
5; 5; 3.
A quorum of the board can be _____ or _____ if people leave. Once a quorum is no longer present, the board ________________.
lost; broken; cannot take an act at that meeting.
different for shareholders
Generally, what does the board of directors do?
The board manages the business of a corporation. It sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corporate changes to shareholders, etc.
The board can delegate to a committee of one or more directors. What can’t a committee do?
- Fill vacancies on the board
- Declare dividends
- The committee can always recommend such things to the full board for its action.
What is the duty of care standard for a director?
A director owes the corporation a duty of care. She must act in good faith and do what a prudent person would do with regard to her own business.
If a director does nothing (called ___________), the director is liable for a breach of duty of care only if ___________.
nonfeasance; his breach caused a loss to the corporation.
JT a director of C Corp fails to attend any meeting or keep abreast of the co. business in any way.
• state and apply the standard: a prudent person would attend some meetings and do some work. Becuase he didn’t do anything he has breached the duty of care.
• liable only if the breach caused a loss to corp.
If the board does something that hurts the corporation this is called _____________.
misfeasance.
A director is not liable for misfeasance if she meets the __________.
business judgment rule
The business judgment rule states that:
A court will not second guess a business decision if it:
(1) was informed,
(2) was made in good faith,
(3) was made without conflicts of interest, and
(4) had a rational basis.
As long as a board decision was made on an informed basis, in good faith, with no conflicts of interst, and with a rational basis, a court won’t second guess the decision if it turns out badly.
Questions to consider when analyzing a decision under BJR:
(1) Was the board reasonably informed?
(2) Did it do appropriate homework before making the decision? (analyze & deliberate)
(3) Did it act in good faith, free of self-interest, with the belief that the decision was in the best interest of the corporation?
The BJR recognizes that a director is not a ___________.
guarantor of success
Duty of loyalty standard for directors:
A director owes the corporation a duty of loyalty. She must act in good faith and with a reasonable belief that what she does is in the corporation’s best interest.
The BJR _______ apply in duty of loyalty cases. Why?
does not. Because no conflicts of interest is a prerequisite to the BJR, so BJR never applies when there is a conflict of interest.
An interested director transaction is:
any deal between the corporation ( on the one hand) and one of its directors, or a clos relative of a director, or another business of the director (on the other hand).
(not per se liable).
The interested director transaction will be set aside (or the director will be liable in damages) UNLESS the director shows either:
(1) the deal was fair to the corporation when entered, OR
(2) her interest and the relevant facts were disclosed or known and the deal was approved by either:
• a majority of disinterested directors
• or, a majority of disinterested shares
*Even if the deal is approved by an appropriate group, always say “some courts also require a showing of fairness even if (1) or (2) was met above.
Directors can set their own compensation as directors or officers, but it must be _________ and ___________. If excessive, it is a __________ and a breach of __________.
reasonable; in good faith; waste of corporate assets; duty of loyalty.
Competing Ventures is when a director
competes with her corporation. Director is a fiduciary.
So Sharon as a director of Ozzie’s music co. can also serve on directors of Home Depot but can’t start her own music company.
Remedy against Sharon = a constructive trust on profits.
A breach of the duty of loyalty can occur where a director usurps a ________ _________. Director cannot take an opportunity until he
Corporate opportunity
(1) tells the board about it and
(2) waits for the board to reject the opportunity.
What is a corporate opportunity? (3 tests)
- something in the corporation’s line of business
- something the company has an interest or expectancy in
- something the director found on company time or with company resources
What is the remedy for director breach of loyalty via usurpation of corporate opportunity?
If D still has it, he must sell it to the corporation at his cost. If D has sold it at profit, the corporation gets the profit through a constructive trust.
Besides breaches for duty of care and duty of loyalty, what are other state law bases of director liability?
- ultra vires acts: responsible officers and directors are liable for ultra vires losses.
- improper distributions
- improper loans: loans generally are only permitted if it is reasonable expected to benefit the corporation (maybe business school loan).
*Sarbanes-Oxley Act (federal law) generally forbits loans to executives in large, publicly traded (“registered”) corporations. It requires the board of such a large 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.
Which directors are liable for all the things directors can be liable for? A director is _______ to concur with board action unless her _____ or ______ is noted in writing in _______. In writing means:
Exceptions:
presumed; her dissent or abstention is noted in writing in corporate records.
In writing means:
(1) in the minutes
(2) delivered in writing to the presiding officer at the meeting
(3) written dissent delivered to the corporation immediately after the meeting. (So an oral dissent alone is not effective).
Exceptions:
• An absent director is not liable for stuff done at the meeting she missed.
• A director is entitled to rely in good faith on information (including financial information) presented by an officer, employee, or committee (of which the relying director was not a member), or professional reasonably believed competent. This is a defense to liability.
Officers owe the same ________ and _______ as directors.
duties of care and duties of loyalty
