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Flashcards in Business Entities Deck (137):
1

Who may incorporate?

One or more natural or artificial persons capable of contracting may form a corporation.

2

What is the internal affairs doctrine?

Laws of the state of incorporation govern the internal structure/actions of a corporation. Only Louisiana chartered corporations are governed by LA law.

3

How do you file appication for corporate name?

Application must be filed with the Secretary/State and the name will be reserved for 60 days with TWO 30-days extensions allowed.

4

What are the requirements for the corporate name?

Corporate name, except in cases of railroad/telegraph/telephone corporations, shall contain the word CORPORATION/INC/LTD, or Company/Co. However (& Co. is not allwed). No business corporation shall include any word in its corporate name that suggests it might be a bank or insurance company/charitable/nonprofit entity. Every business corp must have a name that is DISTINGUISHABLE from every other PREVIOUSLY REGISTERED corproation ot trade name.

5

What are the requirements for the articles of incorporation?

1. Articles shall be written in English; 2. Signed by each incorporator; or 3. By a mandatary of each incorporator. An incorporator can be a mere functionary/need not be anyone important to the corporation.

6

What are the mandatory statements for the articles of incorporations?

1. The name of the corporation; 2. The corporate purpose--cannot simply say that the the purpose is to make money; 3. The aggregate number of shares which the corporation shall have authority to issue/if only one class, the par value of each share; 4. The full name and address of each incorporator.

7

What happens if the Secretary of State accepts flawed articles of incorporation, e.g., do not include all mandatory articles of incorporation?

No substantive effect on the corporate existence or powers; Sec of State may ask for a correction.

8

What other clauses must be added to the articles of incorporation in order to be oeprative?

1. Preemptive rights; 2. Cumulative voting; 3. Cumulative and/or participating rights for preferred shareholders in dividend distributions; 4. Limiting liability for breach of fiduciary duty; 5. A statement that if any paid out dividences are unclaimed, they revert to the corporation (otherwise,r evert to state). Note: anything LAWFUL may be put in the articles.

9

How are the articles of incorporation filed?

Filed, with an INITIAL REPORT, with S/State. Certified copy is filed in the mortgage office of the parish in which the registered office of the corporation is located.

10

What is the initial report?

Unique to LA. Must be signed by EACH incorporator/agent, and must state: 1. Location and municipal street address of the corporation's registered office; 2. Full name and municipal street address of each registered agent; and 3. Names/municipal street addresses of each of the initial directors if selected by the time the articles are filed.

11

When does the corporation's legal existence begin?

Legal existence begins with the issuance of the certificate of incorporation by Sec/State, but it is effective RETROACTIVELY to the date the articles were filed.

12

When must a corporation file an annual report?

A corporation is required to file an annual report EVERY year with Sec/State on or before the anniversary date of incorporation. Must be signed by an officer/any two directors, and it UPDATES the initial report.

13

What are the consequences of failing to file the annual report?

1. Sec/state can demand that the report be filed; 2. If the report is not filed within 15 days, the Atty Gen an institute a civil action and collect $50 fee for every fifteen days that goes by that the corporation fails to file the report. 3. If the corporation fails to file an annual report for three consecutive years the Sec/State shall give notice of intention to revoke the articles and franchise--corp and thirty days to cure the defect.

14

What are the various menthods to accomplish filings?

Filings related to ANY type of business entity (partnerships/LLC/corps/LLPs) may be by: 1. HARD COPY in person at Sec/State's office; 2. Electrontically on state internet website; 3. Fax to Sec/state; 4. PDF emailed to Sec/state. Note: documents must be signed by those authorized, i.e., incorporators. Electronic filings must have either an electronic/digital signature.

15

When does a filing NOT need the signature witnessed by a notary public?

Dispened with if the document is filed: 1. Electronically, or, 2. In person, if the ard copy is signed by person authority/verified in presence of employee of SecState.

16

What is the function of bylaws? What is the primary distinction between bylaws and articles of incorporation?

1. Regulate more mundane internal affairs of the corporation; 2. Board may adopt/amend the bylaws without shareholder approval unless the articles say otherwise--subject to the power of the shareholders to change or repeal any by-laws. 3. Bylaws are INVALID if inconsistent with any terms in the articles. 4. Primary distinction between bylaws and articles is that articles may ONLY be amended by shareholder vote.

17

What general rule governs the issuing of shares? What about the issuance of first shares?

1. All shares issued by a corporation MUST be authorized in the articles--may authorize shares of different classes, each with stated designations/voting powers/preferences/divided or redemption rights/other relative rights or restrictions/limitations/qualifications. 2. First shares may be issued to the corporation promoters at the time a corporation is first formed, or, they may be issued AFTER incorporation by the board of directors.

18

What are permitted types of consideration for shares?

1. Cash; 2. Any kind of property; 3. Services already rendered to the corporation--however, pre-incorporation services, such as an attorney drafting the articles of incorporation--are not valid consideration; 4. Unexecuted promises/promises to perform services/transfer property, even if secured or through NI, are NOT valid consideration. (can get through 3&4 by giving person cash to buy stock).

19

What is the result of issuing stock for invalid consideration?

Stock issued for invalid consideration is VOID and must be cancelled by the corporation (which can then reissue the stock for valid consideration).

20

What is the required AMOUNT of consideration for stock?

1. Par value stock--(cannot be sold for less than par, but it may be sold for any amount greater than par that the Board sets); 2. No-par stock--can be sold at a price set by the Board (provided it is a FMP); 3. If stock is sold for property, the Board's determination of the value of the property is upheld if it was made in good faith without a confict of interest.

21

What is dilution?

If the board sells stock at different prices, DILUTION will occur. If the Board does so WITHOUT a valid reason, the directors will be liable to the shareholder whose stock was diluted.

22

What is appropriate consideration for treasury stock?

Stock once sold and then REPURCHASED by the corporation, par/no par, may be sold for any type of consideration determined by board of directors, subject only to the fiduciary duty to the corporation. Limitations in ISSUING never before issued stock DO NOT apply to treasury stock.

23

What are the stock certificate requirements?

All shares MUST be represented by certificates of stock UNLESS the corporation is a participant in the Direct Registration System/Depositary Trust & Clearing Corporation.

24

What information must be on the stock certificate?

1. Name of issuing corp; 2. Name of person who owns shares; 3. Number/class/series of shares; 4. Rights/prefs/limiations on class/series of shares, if the corporation has different classes/and or series of shares.

25

What is the effect of not providing stock certificates?

If the corporation does not provide stock certificates, the corporation will provide within a reasonable period of time, written summary of all info required to be on the face of the stock certificate.

26

What are the duties of promoters?

Promoters have a fiduciary duty of DISCLOSURE and FAIR DEALING to the corporation to disclose fully to an ind board of directors or to all existing and contemplated shareholers any self-interest in ANY dealings between the promoter and corporation, including all MATERIAL facts that might affect a corporate decision to deal with the promoter.

27

What is the corporation's remedy for breach of promoters' fidcuiary duty? What are the creditors' rights for breach of promoters' fiduciary duties? What is the innocent shareholders' remedy for breach of promoters' fiduciary duty?

1. Corporation remedy for breach of fidcuiary duty by the promoter is a suit for recission of any contract/or for damages. 2. Creditors MAY be albe to sue IN THE PLACE of a corporation that has become insolvent after fraud/breach of fidcuiary duty by a promoter; 3. Innocent shareholders may be able to sue on behald of the corporation in a DERIVATIVE suit, or they may have remedies under federal/state securities laws.

28

When will a promoter be liable on a pre-incorporation contract?

Unless the contract CLEARLY says otherwise, promoters are personally liabe for pre-incorporation contracts (ie with third parties), if the promoter knew the corporation had NOT YET come into existence.

29

When will the corporation be liable on a pre-incorporation contract?

The corporation will be liable on such a contract if it has ratified/adopted it after coming into existence, either explicitly OR implicitly. Promoter ALSO remains personally liable, however, even after the corporation adopts the contract, UNLESS the other party discharges him.

30

Who is liable for contracts on behalf of a corporation believed to exist?

If a promoter enters into a contract on behalf of a NOT YET FORMED corporation, ERRONEOUSLY believing that it HAD come into existence, he wil NOT be personally liable if: 1. Made good faith effort to incorporate (de facto corporation); 2. Other party had relied only on the corporation's name and assets (corporation by estoppel doctrine)

31

Can shareholders be liable for the debts of the corporation?

Shareholders are only liable for the debts of the corporation up to the LIMIT of their investment. DISREGARD of the corporate entity to impose personal liability on the shareholders is called piercing the corporate veil.

32

What are the grounds for veil piercing?

1. Buienss has not been conducted in PROPER CORPORATE FORM; 2. Assets of the corporation have been treated as the shareholder's own or COMINGLED with his personal assets; 3. Corporation is UNDERCAPITALIZED; 4. Corporation is THINLY capitalized.

33

Can the Board be compelled to pay dividends?

The payment of dividends is solely within DISCRETION of the Board. Must be a BONA FIDE BUSINESS reason for not paying dividends--but this will almost always be found under the BUSINESS JUDGMENT RULE, which required bard decisions to be upheld if there is any reasonable corporate justification for those decisions.

34

What are the limitations on dividend payments to shareholders?

Dividends are paid to shareholder of RECORD as of a specified record date. Limitations on how much of corporation's assets may be paid to shareholders in dividends.

35

What are the two alternative methods for calculating the limits of paying dividends?

1. Dividends may be PAID out of SURPLUS--first the earned surplus, then the capital surplus (if capital surplus used, notice to shareholders is required). Dividends MAY NOT be paid out of surplus if the corporation is insolvent/would be made insolvent. 2. NO SURPLUS, NET PROFITS--if there is no surplus available, the corporation may pay dividends out of its NET PROFITS for the then current/or preceding fiscal year/or both. Method is available only to the extent that assets are greaters than liabiliies plus liquidation preference of all outstanding preferred shares.

36

Who will be liable for an unlawful dividend?

Directors VOTING IN FAVOR of an unlawful dividend WILL BE LIABLE to the corporation, and/or its creditors, when it is paid. Directors are JOINTLY LIABLE--full amount may be recovered from one director. Shareholders will ALSO be liable for any illegal dividends received--NO defense that shareholder received the dividend without knowledge of its illegality. Note: director can sue SH for indemnification within two years.

37

Can a cash dividend be cancelled once it is declared?

Yes, a cash dividend once declared may be cancelled ONLY FOR CAUSE; a stock dividend once declared may be cancelled for ANY REASON.

38

What is redemption?

Redemption is when the corporation exercises a UNILATERAL right stated in the stock certificate to buy back its shared from shareholders. SH may not refuse sale if corporation has the right of redemption.

39

What is repurchase?

When a corporation and one or more shareholders MUTUALLY negotiate a purchase by the corporation of its stock owned by the shareholder.

40

What are the limitations on redemption or repurchase of shares?

A corporation may NEVER repurchase or redeem its shares when it is insolvent/when such purchase or redemption would render it insolvent. In other words, stock repurchase may only be funded out of earned surplus account (can't look to profits).

41

What is director liability for voting in favor of a stock redemption or repurchase?

Directors voting in FAVOR will be LIABLE to the corporation and/or to its creditors, if paid for with funds NOT legally available. There is an exception if directors relied on statements prepared by qualified accountants or corporate records. Note: BEFORE directors are liable to creditors, the creditors MUST get a judgment against the corporation and FAIL to satisfy it.

42

What is the distinction between cumulative and noncumulative dividend guarantees?

1. Cumulative--if FULL guaranteed dividend amount on a preferred share is not paid, does the UNPAID amount carry over and get added to the guarantee for the next year? 2. In LA, if the ARTICLES and the STOCK CERTIFICATES are silent, preferred dividend guarantees are noncumulative. If you want cumulative dividends, you need to state expressly in the articles.

43

Can preferred shareholders participate in residual dividends?

After the preferred shares receive their guaranteed amount, there is often a question whether the preferred shares are also entitled to receive a pro rata share of the residual distributions--participating/non-participating. 2. In LA, if the ARTICLES and the STOCK CERTIFICATES are SILENT, preferred shares are NONPARTICIPATING in dividends and liquidations. If you want participating preferred shares, need to state that in article. (Appears inconsistent with 51(c), but based on older case law.

44

What is a corporation's purpose? Where must it be stated? Can it be held liable for exceeding its powers as stated in the articles?

A corporation's purpose must be stated in the articles and may be as broad or narrow as it wishes. If the corporation EXCEEDS it powers as stated in the articles, ACTS ULTRA VIRES, it will be liable on a contract or for a tort.

45

When may the ultra vires doctrine be raised?

May only be raised in a suit by or against a corporation: 1. For an injunction before the corporation commits the act; 2. For damages by the corporation against the offending directors or officers; or 3. By the state in a suit to dissolve the corporation.

46

When will an agent have the power to bind the corporation?

1. ACTUAL AUTHORITY--either express or implied; 2. APPARENT AUTHORITY--corporation is bound, but has a right to recover any damages it suffers against person who acted in excess of her authority; 3. RATIFICATION--when a person without actual authority acts, the corporation is bound if it subsequently ratifies the act expressly/accepts benefit of transaction.

47

What are the size limits on the baord of directors?

The size of the board should be FIXED in the ARTICLES or BYLAWS. If not set therein, the size shall be names in initial/supplemental report. As of 1998, only ONE director is REQUIRED.

48

What is the role of the board of directors?

1. All corporate powers shall be vested in, and the business affairs of the corporation shall be managed by, the Board of Directors. 2. The shareholders own but do not run the corporation. 3. NO individual director/shareholder has any mandatary/agency authority in her capacity as a director to act for/or bind the corporation with third parties.

49

What are the qualifications for a board of directors? What is their length of term?

May be stated in ARTICLES or BYLAWS, otherwise, any COMPETENT person may be a director. Don't need to be a shareholder unless the bylaws require it. Each director's term is ONE YEAR, unless the articles or by-laws EXTEND the term up to a MAXIMUM OF FIVE YEARS. (if greater, should be staggered, but not a requirement)

50

When does the office of a director become vacant? When can the seat be DECLARED vacant?

1. The office of a director shall become vacant if she dies or resigns; 2. A board may DECLARE vacant the office of a director if: she is bankrupt; she is interdicted; she is too sick for six months or longer; she ceases to have qualifications required by the articles or by-laws.

51

When may a shareholder dismiss a director or directors?

May be dismissed WITH OR WITHOUT CAUSE by vote of a majority of the TOTAL VOTING POWER at any special meeting called for the purpose. In other words, the required vote is a majority of all shares outstanding whether or not repped at the meeting/actually voted. Notes: need to be at a special meeting specifically called for that purpose; directors elected by a SPECIAL class of stock can only be removed by a majority of the shares of THAT class.

52

Is a director entitled to notice before being removed for cause?

LA law is unclear, but general rule is that if the articles require CAUSE to remove a director, some reasonable notice and opportunity must be given.

53

What are the two ways to fill board vacancies?

1. A board vacancy can be filled for the remainder of the vacant term by a MAJORITY vote of the remaining directors, EVEN IF they do not constitute a quorum; 2. A vacant director's seat may be filled by a majority vote of the shareholders at a special meeting, INCLUDING the meeting at which a director was removed.

54

When may the board of directors act?

The Board may only act at a REGULAR or SPECIAL meeting called with adequate notice toe ach director. To vote, a director myst be PRESENT at the meeting, and MAY NOT VOTE by PROXY unless, (and only if the articles so provide), the proxy I sheld by another director or a shareholder. EXCEPTION: May also take action by UNANIMOUS WRITTEN CONSENT of all the directors or committee members.

55

Can the board of directors meet by conference telephone call? Can the board of directors delegate duties?

Yes, may meet by conference telephone call in which ALL of the directors can SIMULTANEOUSLY participate. The articles/bylaws/or the Board itself may delegate any specified powers of the Baord to a committee made up of one or more directors, which shall then EXERCISE those delegated powers, but only at meetings similar to those required for full board action.

56

What is the quorum requirement for a board meeting?

A majority of the Board--which prob includes VACANT seats on a fixed sized board--must be PRESENT at the beginning of a meeting in order for board action to take place at that meeting. If directors LEAVE after the meeting has started, action may still be taken, but ONLY IF the number of directors voting for the action is a majority of the quorum. Note: because of the quorum requirements, an abstention is equivalent of a "no" vote.

57

What is the effect of improper board action?

If board action is discovered to have been improper because NOT ALL directors were given ADEQUATE NOTICE of the meeting, the action is VOIDABLE, not void; it may later be RATIFIED retroactively by the board. Note: chairperson of the board only has one vote; cannot break ties.

58

When are directors and officers of a corporation PERSONALLY LIABLE for the debts of a corporation?

Generally, are NOT personally liable for the debts of the corporation--can become liable if they fail to fulfill their duties to the corporation.

59

What are the duties of directors and officers?

Directors and officers owe the corporation fiduciary duties of reasonable care and of loyalty--including a duty to stay informed/make reasonable inquiry when the facts require it. NOTE: ONE YEAR LIBERATIVE PRESCRIPTION for suits against officers/directors for breach of duty of care, TWO-YEARS for breach of the duty of loyalty; also, that a director served without compensation is NOT a defense.

60

What is the business judgment defense?

If a director is sued for LACK OF DUE CARE, the defense is the "business judgment rule"--director claims that decision was reasonable one the turned out badly. Need: (1) Does not have CONFLICT OF INTEREST; (2) reasonably believes that she has APPROPRIATELY informed herself about the matter in question, and (3) reasonably believes that she acted in the BEST INTERESTS of the corporation and its shareholders, UNLESS the director's conduct constituted GROSS NEGLIGENCE.

61

Can the artices of incorporation eliminate or limit the ability of a director to be held responsible for the breach of duty of care?

Yes--allows directors to be grossly negligence without penalty. However, DOES NOT protect a director against suits for breach of the DUTY OF LOYALTY/bad faith acts/improper payment of dividends or stock repurchases.

62

What is the board's ability to indemnify a directorr/officer/corporate agent involved in a lawsuit?

Alows board to indemify/insure any officer/director/corporate agent involved in proceeding/lawsuit for their conduct engaged in on behalf of the corporation IN GOOD FATIH (only applies to the breach of duty of care). If the person Is liable to the corporation ITSELF in a shareholder derivative suit, indemnification can only cover the person's expenses (including atty fees).

63

What happens if a director/officer/corporate agent is sued for acts on behalf of the corporation and sucessfully defends on the merits?

All litigation fees WILL be paid by the corporation.

64

What is the duty of loyalty?

A director ALWAYS owes a generic fiduciary duty to ACT in the BEST INTEREST OF THE CORPORATION. This means that a transaction entered into by the Board with a CONFLICT OF INTEREST by ANY DIRECTOR is presumed to be TAINTED and MAY BE VOIDABLE.

65

What are three situations in which a director's action demonstrating a conflict of interest may be excused?

1. Full disclosure made to the Board BEFORE IT VOTED, and the vote of the INTERESTED director did not count toward the passage of the motion; 2. Full disclousure was made to the SHAREHOLDERS, who approved or subsequently ratified the action; OR, 3. The transaction was fair to the corporation as of the time it was authorized/approved/ratified.

66

How are self-dealing transactions prohibited?

A director CANNOT take any business opp that PROPERLY belongs to the corporation. However, if she FULLY INFORMS the board of the opportunity, and the Board WITHOUT HER VOTE decides NOT to pursue it, she may then go out after it. Note: if director wrongly appropriates biz opp, the remedy for the corporation is a CONSTRUCTIVE TRUST to require the property transferred to the corporation.

67

When may a director or officer be excused from liability for absence from meeting?

Director/shareholder WILL NOT be liable for any unlawful acts if she was ABSENT from the meting at which such act was authorized, or, if she was present but CLEARLY RECORDED a dissent to the action in the meeting minutes/writing filed promptly thereafter.

68

What LIMITATIONS are there on the powers of directors?

Directors DO NOT have the POWER to: 1. Amend the articles; 2. Dissolve the corporation; 3. Sell all or substantially all of the corporation's assets (I.e., liquidate) or, 4. Merge with another entity (unless entity already 90% owned).

69

What four types of corporate action must be proposed and submitted to the shareholders before it can be approved?

1. LIQUIDATIONS/MERGERS--only the Board can proose them to the shareholders; 2. AMENDING ARTICLES/DISSOLVING CORPORATION--action can be proposed either by the Board, shareholders holding at least 20% of the stock, or the president (or anyone else authorized by the articles) by calling a special meeting with proper notice.

70

What are the approval procedures for the four types of corporate action that must be submitted to the shareholders?

1. Article amendments; liquidations; mergers--proposed action must be approved by at least 2/3 of the shareholder voting power present at the shareholder meeting; 2. Dissolution--must be approved by a majority of the voting power present, or larger % approvied in articles.

71

What are the required officer positions? Can the Board remove officers without cause?

1. PRESIDENT; 2. SECRETARY; 3. TREASURER. Vice-presidents are option. Two of the three mandated offices may be combined in one person, but there must be TWO DIFFERENT PEOPLE AS OFFICERS. The Board may remove officers without cause, but this is limited by the rights of officers under their employment contract.

72

What is the scope of an officer's authority?

Officer has such power/authority as prescrived in bylaws or by the board; the PRESIDENT has inherent authority to act for the corporation in legal proceedings in a variety of specified ways unless the articles/bylaws/Board expressly deny it.

73

What are the rights of the shareholder to inspect corporate books and records?

Upon AT LEAST five days written demand, any shareholder who has been the HOLDER OF RECORD of at least FIVE PERCENT of all outstanding hsares of the corporation for AT LEAST SIX MONTHS and who is NOT a business competitor, shall have the right to examine any and all of the corporation's records/accounts. Note: if shareholder is a competitor, 25% ownership is required. Note1: Aggregation of shares is permitted to reach the required percentage; Note2: Shareholder must have a PROPER PURPOSE for insp.

74

What are preemptive rights?

Preemptive rights give a SHAREHOLDER the right to purchase the SAME percentage of NEWLY ISSUED stock as she currently holds fo the total outstanding voting shares. (prevents SH's voting power from being diluted by issuance of new shares). Must be EXPRESSLY STATED in articles; otherwise, preemptive rights do not exist-- must be spelled out.

75

What is the purpose of an annual shareholders' meeting?

Directors are elected and other busines conducted. Louisiana is the ONLY STATE that allows no meeting to be held if NO directors are up for election. Meetings may be held anywhere inside/outside LA. NOTE: Under LA law, a SINGLE shareholder may call a regular shareholder's meeting at the corporation's registered office IF the corporation has NOT held a regular annual meeting for 18 months.

76

Who can call special meetings?

May be called by the Board, the President, or the shareholders holding at least 1/5 of the voting shares. Articles can make it easier, but NOT harder to call a meeting.

77

When must notice of a shareholders' meeting go out?

1. Written notice of meting/specific matters to be voted on must be SENT TO ALL SHAREHOLDERS not less than 10 DAYS nor more than 60 DAYS before the meeting. However, a meeting may be adjourned and reconvened on a specified date WITHOUT new notice being sent to shareholders. Note: no express provision permitteing SH meetings to be conducted by telephone conferene call, so presumably teleconference meetings are NOT permitted. Note: shareholders of RECORD on a specified date are entitled to vote.

78

When can shareholders take action without a meeting?

Shareholders can take action WITHOUT a meeting if ALL shareholders having a vote on the matter agree in writing to the action. Less than unanimous shareholder written consent may ALSO constitute valid action if the articles generically so provide.

79

What is q auorum for a shreholders meeting?

A majority of the TOTAL VOTING power must be represented in person or by PROXY at a meeting in order for business to be transacted. Articles and bylaws may ADJUST the quorum requirement, but not to less than one-fourth of the total voting power. Once meeting is convened, business may contine to be conducted until adjournment even if shareholders leave so that LESS than a quorum is present.

80

What shares are entitled to vote?

Unless articles provide otherwise--every share is entitled to ONE VOTE, meaning that treasury shares/unissued shares/shares owned by a subsidary are NOT entitled to vote. Note: fractional shares cannot be voted.

81

What are the exceptions to the majority rule for shareholder action?

1. Amending articles--requires 2/3 vote of the voting power PRESENT at the meeting (abstention--not vote); 2. If proposed amendment would diminish the rights of a certain class of stock, 2/3 of that class of stock must approve action; 3. 2/3 of voting power PRESENT at the meeting to authorize mergers; 4. 2/3 of voting power PRESENT at the meeting to authorize a sale of all or substantially all of the corporate assets; 5. To approve a dissolution of the corporation, need AFFIRMATIVE vote of a majority of the voting power present.

82

How is the election of directors accomplished?

Can be either by STRAIGHT or CUMULATIVE voting. 1. Straight voting--each director's seat is separately voted on, and the candidate for each seat receives a PLURALITY of votes cases. Default unless articles provide otherwise. 2. Cumulative voting--all directors' seats up for election at a given time are elected SIMULTANEOUSLY with all candidates running for all seats. Each share is entitled to all votes, and may be case all for one candidate/distributed among candidates.

83

What are the number of shares needed to elect one director with cumulative voting?

Total number of outstanding shares//Number of directors to be elected + 1. (next whole number must be less than the amount of shares available to be cast).

84

Can cumulative voting privileges be undermined?

Yes, can stagger terms for directors; decrease the size of the board; issue more shares and dilute voting power; amending the articles to abolish cumulative voting.

85

When can proxies be assigned to vote?

A shareholder may assign to a proxy holder the power to vote her stock at shareholder meetings. The proxy must be IN WRITING and FILED with the corporate secretary. 1. A proxy is normally recovable at the will of the shareholder. To revoke, corporation must have WRITTEN NOTICE of 1. a revocation; 2. a subsequent superseding proxy; or, 3. the shareholder's death. Also, a proxy is REVOKED when the shareholder attends the meeting and votes.

86

How can a proxy be made irrevocable? How long is ANY proxy valid?

A prixy can be IRREVOCABLE if coupled with an INTEREST. Well-established by case law. Any proxy is valid for only 11 months from the date of execution UNLESS some other period is provided in the proxy--however, CANNOT be valid for more than three years.

87

What are voting trusts?

One or more shareholders may create a trust into which all the shares DONATED by them are TRANSFERRED to a trustee who votes the shares and distributes the dividends in accordance with the trust document. Trustee holds all shareholders rights--e.g., right to inspect corporate books, dissenters rights, etc.

88

How long is a voting trust valid? Does a voting trust agreement need to be made public?

1. A voting trust is valid for FIFTEEN years or any other period states in the trust agreement that does not exceed fifteen years. Trust agreement may provide for the extension of the trust by at least a MAJORITY of the founding shares for an additional TEN year period under same terms and conditions. 2. A voting trust agreement is a public document and must be deposited with the corporation.

89

What are vote pooling agreements?

A written agreement among shareholders in which they agree to cast all of their votes together as a block in a manner determined by some procedure specified in the agreement. Can be either 1. As shareholders voing on matters needing shareholder approval; 2. As directors voting on management matters. Note: Secrecy is allowed because they are WHOLLY private contracts.

90

What vote pooling agreements are prohibited?

Shareholder agreements to block vote as directors are NOT ALLOWED in virtually any state--under Section 29, LA codified rule that shareholder agreements cannot commit directors' votes in advance UNLESS the agreement is unanimously agreed to by the shareholders. HOWEVER, shareholder agreements to block vote of their stock as shareholders are allowed in every state--not blocked be section 29.

91

What are stock transfer restrictions?

Stock is always transferable (UNLIKE partnership interest) unless something expressly limits its alienability. Note: A shareholder cannot require a corporation to buy back its stock UNLESS the articles provide expressly for it; Note: Also, a corporation cannot force a shareholder to sell back his shares unless the corporation holds a right of redemption against the shares. However, PUBLICLY traded corporations do not have such restrictions. Close corporations may often introduce such restrictions.

92

What is the retroactivity of the new Section 59?

Provides that any restriction on the transferability of shares, whether by articles/bylaws/private shareholder agreement, DOES NOT affect shares issued before the restriction was adopted UNLESS the holders of the shares voted in FAVOR of te restriction/parties to private shareholder agreement.

93

What are the requirements of the conspicuous statement for restrictions on trasnferability of shares?

2005 enactment of Section 59--also provides that ANY restriction on the transferability of shares MUST BE NOTED CONSPICUOUSLY on the front or back of the stock certificate (caontained in statement)--OTHERWSIE, the restriction will NOT be enforceable against an acquirer of stock who has no knowledge of the restriction.

94

What are typical transfer restrictions?

1. Mandatory buy and sell clauses; 2. First refusal clauses; 3. Transfers to certain types of persons; 4. Approval clauses. Note: Restrictions must be REASONABLE or they will not be enforced by the courts.

95

What is the effect of a violative transfer?

A transfer violating a valid restriction may be ineffective; the corporation may refuse to register the sock in the transferee's name and not let her vote her shares, etc. However, transferee not bound by a restrictive agreement unless either notice of restriction appears conspicuously on the stock certificate OR she has actual knowledge of it.

96

What are shareholder derivative suits?

A shareholder derivative suit is a suit in equity, brought by a shareholder or shareholders on behalf of the corporation against ANY party against whom the corporation had a legitimate action, by asserting that the corporation is UNWILLING to bring the suit. The corporation is a NOMINAL defendant and an INDISPENSABLE party. Note: the suit lies in equity, but if the corporate right asserted would justify an action at law, there is a right to a jury trial.

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What are the requirements for a plaintiff in a shareholder derivative suit?

1. Be a shareholder in the corporation/have a beneficial interest in hsares at the time the suit was filed; 2. Own his shares/hold the interest throughout the course of the litigation; 3. Owned shares at the time of the alleged wrong, UNLESS 1. The wrong is a continuin gone/plaintiff acquired his shares by will or inheritance/operation of law; 4. Not have participated in the wrong or ratified it.

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What is the demand requirement before filing a derivative lawsuit?

The shareholder must FIRST make demand on the board that it bring suit to enforce the corporation's right. If the directors make a REASONABLE, GOOD-FAITH business decision not to sue, the derivative suit is BARRED.

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Who obtains the recovery in a derviative suit?

Any damages to ONLY to the corporation, not to the shareholder-plaintiffs individually. Prevailing plaintiffs DO recover their costs, incuding attorneys fees. There can be NO voluntary dismissal or settement without court approval (like in class action settlements).

100

What is dissolution? What are the two categories of dissolution?

Dissolution of a corporation is a process by which ALL corporate assets are liquidated, all corporate liabilitys are paid off, and any remaining cash (or other assets) are distributed to the shareholders. When all the assets are distributed, the Sec/State is notified and the corporation ceases to exist.

101

What is voluntary dissolution?

1. May be commenced upon authorization by the shareholders (majority of voting power present), or, if no shares have yet been issued, by all of the incorporators. 2. Must be PROPOSED initially by the board for consideration at an annual/special shareholder meeting, or by anyone else authorized to call a special meeting.

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What is involuntary dissolution?

1. Occurs via court order. 2. Parties who may bring a suit to dissolve a corporation are: shareholders controlling 20% of the voting shares; a majority of the board; a frustrated creditor with a judgment against the corporation; a corporate receiver previously appointed by a court to take charge of the corporation's property. 3. Court may appoint a receiver to take charge of the corporation's property.

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What is a merger?

In a merger, one corporation is absorbed into another and shareholders of the first corporation exchange their shares for shares of the surviving corporation. Need proposal before board and a 2.3 vote. The acquiring corporation stands in place of the predecessory corporation--acquires rights/privileges; take and own all of the properly/assets of any kind owned by any precessor/be responsible for any iabilies.

104

What is a limited liability company?

Pursuant to a 1992 statute, a new type of business form was created combining the attributes of both corporations and partnerships. Two primary attributes--1. Neither members NOR managers are liable for any of its debts; 2. Income will NOT be subjected to federal or Louisiana income tax at the entity level.

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What are four characteristics of an LLC?

1. Legal status--legal entity capable of being sued/owning property; 2. No profit motive is required; 3. No requirement to keep stated capital or surplus accounts; 4. Minimal operational formalities required.

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Who may form an LLC?

1. An LLC can only be formed and operated by ONE OR MORE PERSONS (legal persons, not only natural persons) capable of contracting.

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What are the name requirements for an LLC?

1. The name shall be distinguishable from the name of every other foreign/domestic corporation and LLC registered or qualified to do business in the state. 2. Name MUST contain the words LIMITED LIABILITY COMPANY or the abbreviation LLC or LC. Low-profit limited liability companies must contain those words, or the abbreviation L3C/l3e. 3. Name must NOT falsely suggest a charitable or non-profit nature; nor can the name contain any word or phrase which indicates its purpose is something which is not lawful for an LLC.

108

What is the only purpose for which an LLC CANNOT be conducted? What are the powers of the LLC?

1. An LLC may condcut business for any LAWFUL purpose, for profit or non-profit, EXCEPT INSURANCE UNDERWRITING. 2. An LLC has the same powers as a corporation or partnership.

109

What are the articles of organization?

1. Analagous to the articles of corporation. 2. Must be written in Enighlish; must be signed by at least one person--may/may not be a member or manager. 3. MANDATORY that the articles state: the name of the LLC, the purposes for which the LLC is formed, and, if so, whether it is a low-profit limited liability company.

110

What are permitted inclusions in the articles of organization?

Extent on limitations on authority of LLC members to bind LLC; extent to which the LLC will be managed by managers; latest date, if any, on which the LLC is to dissolve; any other provision not inconsistent with the law that the members choose to include.

111

What are the filing requirements for the articles of organization? When does the LLC's legal existence commence?

1. Articles, along with an INITIAL REPORT, must be filed with the Secretary of State. NO parish filing is required. 2. Legal existence begins upon the issuance of the certificate of organization by the Secretary of State, but it is effective RETROACTIVELY to the date the articles are filed. 3. If immovable property is acquired in the name of an LLC that has not yet ben issued a certificate of organization, the LLC's existence will be BACKDATED to the date of acquiring the immovable.

112

Is an LLC required to file an annual report?

Yes. Annual report shall be signed by a manager (or member, if member-managed), and must be filed every year with the Secretary of State on or before the anniversary date of formation. 1. Municpal address of registered office; 2. Name and municipal address of each registered agent; 3. Name and municipal address of each manager. If LLC FAILS to file annual report for three consecutive, the Sec/State shall revoke the articles of organization following 30 days notice. NO FINE, unlike corporation.

113

How does the LLC amend its articles of organization?

If the LLC wishes to AMEND the articles of organization, it must fie an ARTICLES OF AMENDMENT.

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Who must sign the initial report? What information must the initial report contain?

1. Initial report must be signed by EACH PERSON (or agent) who signed the articles of organization. 2. Must also state name/location/municipal address of the LLC itself; each of its registered agents, and the PERSONS VESTED with the power to manage the LLC.

115

What is an operating agreeement?

Similar to BYLAWS, but SIGNIF different. Defined as any agreement, WRITTEN OR ORAL, of the members as to the affiars of an LLC and the conduct of its business. There can be MORE THAN ONE operating agreement, as ong as they are not inconsistent. If inconsistent, the MORE RECENT prevails, except that a WRITTEN agreement prevails OVER an oral agreement.

116

What are members of the LLC?

Members are the equity owners of the LLC. 1. Anyone can be a member that is a legal person. 2. Unless the management of the LLC is DELEGATED to managers, ALL THE MEMBERS will manage the business, subject to any provisions subject to any provision in the articles/written operating agreement--such an LLC will be deemed member-managed.

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Do members who manage an LLC incur any risks?

No risk to the limited liability of members if they participate in the management and/or control of the LLC.

118

What is a manager?

A person/persons designated by the members to manage the business of the LLC. Members can be/often are managers. An LLC is NOT required to have managers. If it does not, it will be managed by its members. Management may be by ONE OR MORE managers.

119

Must the articles of organization specifically state that the LLC can be managed by managers that are NOT members?

Yes. If the members WANT the option of having one or more of the board of persons who manage the LLC to be non-members, the articles must SPECIFICALLY STATE so. Once it is specificed that the LLC will be managed by a BOARD OF MANAGERS, it is thereafter deemed a MANAGER-MANAGED LCC, even if the only managers happen to be members.

120

How are managers of an LLC selected and removed?

Unless otherwise provied in articles, each manager position shall be filled by PLURALITY vote of the members. Manager may be removed, with or without cause, by a MAJORITY vote of the members.

121

What are the duties of any member or manager entrusting with running the LLC?

1. Stands in a fiduciary relationship to the LLC; 2. Acts in good faith, with the diligence, care, judgment, and skill which an ordinary prudent person in a LIKE position would exercise, and, in the manner he REASONABLE believes to be in the BEST INTERESTS of the LLC.

122

What is the rule for liability of members? What are the limits of liability for members?

1. Any manager/member who FULFILLS the duties in GOOD FAITH shall not be liable for her actions taken on behalf of the LLC. 2. Articles of a WRITTEN operating agreement may limit member's liability for breach of duty of care/loyalty. Cannot eliminate liability for receipt of improper benefit/intentional violation of criminal law.

123

Can members or managers receive automatic reimbursement of costs/attorneys fees for successfully defending a suit?

No. Articles may provide indemnification/isnruance for any judgments/settlements/penalites/fines/expenses incurred as a manager/member.

124

What is the possibility of LLC veil piercing?

A member WILL NOT lose limited liability because of participation in the management of the LLC. Courts will not PIERCE the LLC VIEL because formalities of the LLC are not followed (in part because there are few formalities required of an LLC).

125

What is the scope of agency authority for members of an LLC?

Each manager/member is a mandatary of the LLC for all matters in the ORDINARY course of business EXCEPT the alienation/lease/encumbrance of the LLC's immovable property. (except a member who is not a manager in a manager-managed LLC). The mandatary authority of a manager/member may be taken away in articles/operating agreement/majority vote of the members/managers.

126

What are the voting requirements for management decisions?

Unless the articles or operating agreement provides otherwise, each manager/member is entitled to a SINGLE VOTE, and all decisions shall be made by majority vote. Single vote REGARLDESS of amount contributed to capital account. Note: many of the requirements imposed on corporations' meetings DO NOT apply to LLC meetings.

127

What LLC activities require a majority vote of the members, regardless of whether management is vested in managers/less than all members?

1. Dissolution/winding up LLC; 2. Disposal/encumbrance of all or substantially all of the LLC's assets; 3. Merger of consolidation; 4. Incurrence of debt other than in the ordinary course of business; 5. Alienation/lease/encumbrance of any immocables; 6. Amendment to the articles or operating agreement.

128

When if a conflict of interest transaction not voidable?

Even if the transaction voted on by a manager/member having a FINANCIAL INTEREST in the transaction, it will not be void/voidable PROVIDED THAT: 1. Interested manager/member's interest was disclosed to the other voters and a disinterested majority approved the transaction; or, 2. The transaction was fair to the LLC at the time it was approved.

129

How are profits and losses allocated throughout the LLC? What form may contributions to the LLC take?

Allocated EQUALLY among the members, unless the articles of a WRITTEN operating agreement provide otherwise. Contributions may be in the form of CASH/PROPERTY/SERVICES RENDERED/PROM NOTE/OTHER BINDING OBLIGATION to contribute cash or property or to perform services.

130

What are promises to contribute unenforcable? When can a valid promise to contribute be compromised?

1. If NOT in a writing signed by the member; 2. If the member is unable to perform because of death/disability/other reason unless the articles or a written operating agreement provides otherwise. 2. A valid promise to contribute CANNOT be compromised EXCEPT with the unanimous consent of the other members.

131

When are distributions to members prohibited?

1. LLC would be unable to pay its debts as they come due; 2. LLC's total assets are LESS than total liabilities plus any preferential rights of members upon dissolution; 3. Distribution violates provision in the ARTICLES or a WRITTEN operating agreement.

132

What may an LLC rely on in deciding to pay a distribution? How are distributions allocated among members?

1. May rely on financial statements prepared by using reasonable accoutning methods. 2. Distributions shall be made EQUALLY unless a WRITTEN operating agreement provides otherwise.

133

What is an LLC's liability for wrongful distributions?

1. All managers/members who knowingly or without exercising reasonable care and inquiry VOTE for a wrongful distribution are JOINTLY AND SEVERALLY LIABLE to the LLC for the amount the distribution EXCEEDED what was proper. Members who pay more cann collect contribution from others who are also liable.

134

What is a member's liability for receiving a wrongful distribution?

Every member who receives a WRONGFUL distribution is liable to the LLC for the amount received in violation of the rule, EVEN if the amount was received WITHOUT KNOWLEDGE of the violation. Note: TWO-YEAR PRESCRIPTIVE PERIOD to enforce limitations on wrongful distributions.

135

What is the nature of an interest in an LLC? Are LLC interests assignable?

A membership interest is an incorporeal movable. A member has NO INTEREST in the LLC's property. Unless the articles or an operating agreement provides otherwise, a membership interest is assignable in WHOLE or in PART, but that only entitles the assignee to receive distributions the assignor would have been entitled to receive. Note: Assignees must be approved unanimously/or other vote allowed in articles BEFORE exercising her rights as a member. May be liable for all obligations/rights of assignor, except those unknown to her at time she became a member.

136

What is the effect of death or incompetency of a member?

If a member DIES or becomes LEGALLY INCOMPETENT, her membership CEASES and the executor/guardian/other legal representative is treated as an assignee.

137

How many a member withdraw if an LLC is constituted for a term?

If the LLC is constituted for a term, a member may ony withdraw if either: 1. She gets the CONSENT of other members, or, 2. There is JUST CAUSE for withdrawal arising out of another member's failure to perform a material obligation.