Business Associations Flashcards
(51 cards)
Corporation
is a legal entity that exists separate from its owners thus shielding its owners and managers from personal liability for the actions of the corporation
Formation - de jure
meets all mandatory req's , signed, and filed articles of incorporation with sec of state. including authorized number of shares purpose of corp (any lawful) agent's name and address incorporators' name and address name of corporation
de facto
actual use of corp power and good faith attempt at incorporation
treat corp as ltd liability
by estoppel
if you treat a business entity as a corp, then may be estopped form denying corp status. K only
piercing the corp veil
generally SH not personally liable for corp liabilities unless SH treat corp as alter ego (corp formalities ignored, funds comminged) or undercapitalized (monetary investment insufficient to cover foreseeable liabilities). also fraud, estoppel (SH personally represents) If pierced, the SH are joint and personally liable
Corporate Powers
u a i
ultra vires acts - acts outside business purpose. generally enforceable.
acquire debt - may borrow funds from outside of corporation
issue stock
Stock
a contract where a subscriber makes a written promise agreeing to buy a specified number of shares of stock. pre-incorporation agreement is irrevocable for 6 months and must be accepted by the corp
Stock is equity security that gives ownership an interest in the corporation
articles of incorp authorize number, and consideration is required
Pre-Incorporation Actions by Promoter
a person acting on behalf of the corporation that is not yet formed. Raises capital and signs contracts for land, etc.
Liability - personally liable unless clear intent otherwise or a novation. right or reimbursement under quasi - K
corp. can be liable if expressly accepts or benefits from K
Duties - has fiduciary duty, can not make secret profit
Corp. Management, directors, officers
Corp structure:
director, (at least one)
articles of incorp filed with state - govern corp
bylaws - management provisions
election of B.O,D - by SH
officers appointed by BOD - carry out ops
Officer auth - can act based on agency law principles
removal - dir can be removed with maj. SH vote
officer with BOD
resignation- anytime with notice
Actions of BOD
must operate as a Board to take action so actions require a majority to be present at a properly noticed meeting to be valid
quorum- maj must be present
disinterested director - does not count to quorum
dir may withdraw to break quorum
no proxy
no voting agreements
Duties of Directors and Officers
a director or officer owes a duty of care, duty of loyalty and a duty of disclosure to the corp
Duty of Care
a dir or off owes a duty to act as a reasonably prudent person would act under the circumstances
BJR- standard of care that applies to business judgments and provides the presumption that the dir or off will manage the corporation in good faith and in the best interests of the corporation. Violated when conduct is unreasonable
Duty of Loyalty
A dir or off must put the interests of the corporation above his own interests and arises three ways
conflict of interest - self-dealing when he (or family member or own corp) enters into a contract with the corp or has a beneficial financial interest in the contract.
Presumed unfair and voidable unless :
authorized by disinterested BOd after material disclosure
approved by SH after material disclosure
its fair
usurping a corp opportunity
may not personally act on a business opportunity without first offering it to the corporation where the corporation would expect to be presented the opportunity UNLESS
good faith rejection by BOD after material disclosure of facts
can require disgorge. ALSO can’t compete unfairly
duty to disclose
dir and off have duty to disclose material info relevant to the corp to board members
Rts and Liabilities
rt to compensation, indemnification and inspection of corp’s records. No personally liability.
SH
r a s d l
rights
mtgs once year unless special
voting - rt to vote BOD and approve fundamental changes to corp structure. comes with stock ownership, common or preferred
proxy - signed writing allowing another to vote for them
quorum - maj of shares must be represented at mtg
fundamental changes require maj of all outstanding shares
inspection with proper purpose
dividends the distribution of cash property or stock the SH may receive from the company
agreements
voting trust - may place votes in trust to vote as block
voting agreement - in writing
SH suits
direct - breach of fiduciary duty
derivative suit - brought on behalf of the corp for harm done to the corp. the corporation receives the recovery and the plaintiff may be reimbursed for litigation expenses. SH bringing suit must:
own stock at time claim rose and throughout litigation
and make demand to bring suit or redress unless futile
SH Duty
generally a SH owes no duty to corporation. modernly. a controlling SH owes a fiduciary duty of care to the corp and a duty of care and loyalty to minority SH. Requires enough voting strength to have a substantial impact on the corp
looter- cannot sell to looter who knows will harm company
premium - can make if fair BUT no personal benefit for the sale of a corporate asset
Federal Security Laws
16(b)
10(b)5
Sarbanes-Oxley
16(b)
any short swing trading profits received within a 6 month period by a corp insider must be disgorged to the corp.
req’s:
listed on national exchange or 10 mil assets and 500+SH
insider - off. or dir and SH more than 10%
10(b)5
disallows insider trading and provides liability for any person who employs fraud or deception in connection with the purchase or sale of securities by means of any instrumentality of interstate commerce
Fraud 6
1. intent to defraud - scienter
2. material misrep - material where there is a substantial likelihood that a reasonable investor would consider it important in making a decision. omission only if duty to disclose
3. reliance -actual reliance on the omission or misrep
4. purchase or sale of securities
5. interstate commerce - use interstate commerce, email, phone, post
6. remedy -difference between actual proceeds and what should have happened. disgorged to company
10 (b) 5 violators 4
direct trading by insider which req’s
insider - off, dir, SH or holder of non-public corp info who must disclose the material non-public info or refrain from trading. that’s fraud.
tippers - information shared for an improper purpose of direct or indirect gain and that info used by another
tippee - liable only if scienter is present such that the tippee breached a fiduciary duty and the tippee knew the duty had been breached
misappropriators - anyone who obtained private corp info through other means may be in a breach of duty owed to the source
sarbanes oxley
sets standards for public companies by creating a board that oversees public accounting firms that perform audits and create rules pertaining to corp financial reporting
audit board established
senior exec’s must take personal responsibility for financial reports. if the report is wrong must return any compensation received as a result
criminal penalties for destroying evidence, securities fraud and whistleblowers have protection
