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Flashcards in Corporations Deck (68):

Promoter & Liab

person who acts on behalf of corp not yet formed
-REMAINS liable on Pre-Inc Ks until NOVATION!

-Corp is liable ONLY once adoption of K via:
1. board resolution (express) OR
2. Implied Ratification through knowledge and acceptance of benefits


Formation of Corporation

A. DE JURE Corp:
1. SIGNS and files Articles of Inc w/ SOS (see req below); proof of valid formation; (K betw corp & SH/State; Trumps anything said in bylaws)
-Incorporator (person or entity);
-name= Corporation, Company, Inc., Limited
-presume perpetual duration

Later- Bd has organizational mtg to select D/O and adopt bylaws (optional); SHs (& some states bd) can amend/repeal bylaws

FAILED to form de jure corp so proprietors personally liable bc GP UNLESS Juris allows:

W/O Knowledge of lack of corporate status!
1. Relevant incorp statute (there is)
2. Parties made g/f colorable attempt to comply with statute AND
3. Some exercise of corporate privileges (acting like corp)
-Biz treated as corp for All purposes except in "quo warranto" action by state

Contract Cases ONLY!
W/O knowledge of lack of corp formation!
One who treats biz as corp may be estopped from denying that it is corp (to avoid liab or get indivs)

*LIMITED LIABILITY - shields SH and D/O from Entity Liability, unless PCV; only lose investment; (SH only pierce-able in close corp if fraud/abuse and fairness requires)


Pierce Corporate Veil & Theories

1. General Rule: SH not liable for corp obligations
2. Courts may PCV and reach the BAD SH (in close corp) or Parent Company if:
a. abused privilege of incorporating AND
b. Fairness must require holding them liable

3. Court more milling to PCV for TORT victim (than K claimant who came willingly)

1. Alter Ego - Identity of Interests
Failure to observe sufficient corporate formalities, comingling, treating corp assets as his own

2. Undercapitalization - failure to maintain sufficient funds to cover reasonably forseeable liabilities

3. Fraud - pierce when necessary to prevent fraud or to prevent individual from using entity to avoid existing personal obligations


Consideration for Stock

Corp must receive some form of consideration for stock! Bd determines value; conclusive if in G/F!
Majority approves:
1. money (cash/check),
2. tangible/intangible property,
or 3. services already performed for Corp

SPLIT - SOME states permit Promissory Notes or Future Svc


!!! Preemptive Rights

1. Right of existing SH to maintain same % of ownership by buying stock whenever there is new issuance of stock for MONEY (fundraising)
2. No preemptive rights unless expressly in articles (most states)

some states say issuance of treasury stock is "new", some don't!


Corp Duty of Due Care

1. Director owes Corp a duty of care to manage corp in G/F in the best interests of the corp, exercising due care in making business decisions = doing what an ordinarily prudent person would do in a like position;

Breach = Need CAUSATION and DAMAGES!
-Nonfeasance (doing nothing)
-Misfeasance (bd does something that hurts Corp

2. NOT liable if Business Judgment Rule Defense: Ct/Bd will not 2nd guess biz decision if it was:
1. informed
2. made in good faith
3. w/o conflicts of interest and
4. with a rational basis
policy - Dir is not guarantor of success


Business Judgment Rule

(rebuttable) Presumption that Directors managed Corp w/ due care provided that biz decision was:
1. informed
2. made in good faith
3. w/o conflicts of interest and
4. with a rational basis
policy - Dir is not guarantor of success


Corp Duty of Loyalty

1. Dir owes Corp a duty of LOYALTY. act in best interests of Corp, not themselves. -may not receive an UNFAIR benefit to detriment of Corp or its SH, unless there has been material disclosure and independent ratification:

1. No Self Dealing (extreme salary, Interested trans)
2. No competing w/ Corp
3. No Usurping of Corp Opportunity/expectancy

A. Interested Dir. Transaction
(Deal betw Corp and Dir or related)
-Transaction set aside (and Dir liable for damages) UNLESS Directors shows either:
1. deal was FAIR to corp when entered
2. Dir interest & relevant facts disclosed/known AND deal was approved by:
a. Majority disinterested dirs OR
b. majority of disinterested Shares
c. some states also require showing of FAIRNESS

B. Competing Ventures
-may not compete,
REMEDY: constructive trust

C. Corp Opportunity
1. Corp has interest/expectancy in
2. Opp is w/in corp's scope of business
*Dir found on Co time w/ Co resources

Dir Cannot act UNLESS:
1. tells Bd about Opp and
2. waits for Bd to reject opportunity

REMEDY: must sell to Corp at cost, & Corp gets profit


Derivative Suit


SH brings suit on behalf of Corp's interests, ALWAYS ASK:
1. Could Corp have brought this suit? if so, Deriv
2. Is SH suing for Personal Claim? If so, NOT deriv

A. claim arose AND B. (Maj) throughout suit
(or received through operation of law by person who did, inheritance/divorce)
2. Adequate representation of Corp Interest AND
3. Written Demand to Corp to bring suit, rejected or ignored for 90 days UNLESS would be FUTILE
5. Demand made on SH to ratify contract or bring suit; (SOME juris)

-Corp must be joined as Defendant at 1st
-can only settle/dismiss w/ ct approval/inquiry

**Corp can move to dismiss if
1. INDEPENDENT investigation showed suit
2. NOT in BEST INTERESTS of Corp. (low win rate, overly expensive) by indie directors or ct appointed panel of indie Indivs
-some states court will eval if truly indie/best Int

-If SH wins, recovery goes to Corp and individual is reimbursed for costs & attorney fees
-if SH loses, NO reimbursement for costs and Liable for Defendant's costs if sued w/o reasonable cause; Claim preclusion applies


SH Proxies

Decision to have another Vote on behalf of SH. MUST be:
1. written (fax or email ok)
2. Signed by Record SH
3. Directed to Corp secretary
4. Authorizing another to vote your shares
5. valid for 11 months ONLY

1. conspicuously made irrevocable AND
2. Proxy holder has interest in shares other than mere voting


SH agmts to control Voting

SH vote at meetings OR can act by UNanimous written consent signed by holders of all voting shares (email ok), can meet anywhere

**Need NOTICE (unless waived acts void)
Annual Mtg (time and place)
OR SPECIAL Mtg (10 day minimum notice stating purpose which is LIMIT on acts allowed) called by:
1) bd 2) president 3) 10% of voting shares OR 4) anyone authorized by bylaws

1. Pooling Agmt: binding Written Signed agmt to vote shares as required in agmt, no time limit
-some states specifically enforceable

2. Voting Trust: Formal written agmt delegating voting power to trustee, 10 yrs MAX
1. written, controlling how share will be voted
2. copy to corp, on file
3. transfer legal title to shares to trustee
4. orig SH receives trust certificates and retains all SH rights except voting

3. SH agmts to eliminate corp formalities (close corp)
-need unanimous election in articles, by laws or filed agmt and reasonable share transfer restriction
-no piercing even if fail to observe and may elect S corps status

4. Stock Transfer Restriction (must be reasonable)


10b5 Action

10b5- makes it unlawful for any person (Directly/indirectly) to use any means or instrumentality of interstate commerce to 1) employ any scheme to defraud, 2) make an untrue statement (or omission) of material fact, or 3) engage in any practice that operates as a fraud IN CONNX w/ the PURCHASE or SALE of any SECURITY

Fed law prohibits any fraudulent conduct in CONNECTION w/ purchase or sale of a Security in interstate commerce.

Private Plaintiff Or SEC can bring
1. Juris - Trans involves instrumentality of ISC
(sale on Natl stock xchange, mail, telephone)

2. Fraudulent Conduct
a. Insider Trading (must disclose or abstain)
1. Insider 2. trades in ISC 3. on basis of material inside information, 4. breaching DUTY to abstain/disclose
b. Tipping
Insider w/ duty passes along material inside info for a wrongful purpose

Insider = D/O, Controlling SH, EE w/ access of issuer, indiv w/ access)

c. Misrepresentation or Omission of MATERIAL info
a reasonable investor would consider important in making investment/stock decisions

3. Material information

4. Scienter- w/ INTENT to DECEIVE, manipulate, defraud; Recklessness may suffice

5. Reliance
Private P MUST've bought or sold on basis of info
OR presumed in public misrepresentation and nondisclosure cases

6. Proximately caused Damages

Possible Defendants!:
-Co that issued misleading press release
-buyer or seller who misrepresents material info
-buyer or seller who TRADES on material inside info (when there is duty to disclose)
-Tipper or Tippee

**no 10b5 liab? try for misappropriation

Relief or Remdy?


Insider Trading 10b5 violation

Insider breaches 10b5 if by trading he breaches a Fiduciary DUTY of trust and confidence owed to
1. issuer 2. SH or issuer or 3. in case of misappropriation, another person who is source of Material non public info
1. Person must be insider
2. bought or sold stock via ISC
3. Based on non public info


Tipper Liability

1. Insider w/ duty
2. w/ improper purpose (not accident)
3. gives material inside info to TP who trades on basis of that information,
4. Tipper receives some personal gain direct or indirect (monetary or reputation)


Tippee Liability

liable under 10b5 if:
1. Tippee bought/sold on ISC
2. Tippee KNEW or should've known tipper breached fid duty in sharing

-if so must disgorge profits
-a Tippee is not liable unless TIpper Liable too....


Misappropriation Theory

brought by Gov under 10b5, on any person who trades on non public market info in breach of a duty of trust and confidence owed to the SOURCE OF THE INFO; duty need not be owed to corp or SH; imposes a DUTY
1. misappropriated confidential material info from ANY source
2. in breach of a duty of trust and confidence owed to SOURCE of information
3. trades

Ex. indiv trades in TP Co, but impugns duty (to source) to TP corp

Disgorge profits, maybe punitive damages too.


16b Short Swing Profits - S/L

Fed law provides that any profit realized by Dir, O, or 10% SH(BEFORE PURCHASE & SALE!!!) from any purchase and sale, of any equity security of his corp w/in a 6 mos period must be returned to corp. (bad for market confidence)

S/L! Often Derivative suit
Dir, Officer, or + 10%SH when bought AND sold;

Applies to Reporting Corps:
1. buying/selling w/in 6 month period AND
2. listed on natl Stock exchange OR
3. at least 2k SH (or 500 non accredited SH) AND 10 million in assets

SOL: profits Recoverable IF w/in 6 mos BEFORE OR AFTER ANY SALE, there was purchase at a lower price. (order of buy/sell doesn't matter);
profit = largest # she bought AND sold w/in 6 mos. (the number of shares she made profit on)


Sarbanes Oxley

violation if willful certifying of false report
-5 mil fine + 20 yrs


CL Liab for insider Trading

Tort, Fraud, Misrep
(Remedies -
liable for profits, or can impose constructive trust, or punitive damages)


D/O disclosure duty

Fiduciary Duty NOT to disclose material non public information, do not breach!

Fid duty to disclose material corp info to other members of Board!


Remedies for Ultra Vires Acts

1. UV Contracts are valid as to TPs
2. SHs can seek injunction to stop UV act
3. Corp can sue responsible Mgrs for UV losses


authorized stock

max number of shares the corp can sell


issued stock

number of shares corp actually sells


outstanding stock

shares that have been issue and not reacquired


Articles of Inc MUST include:

*If Specific Purpose w/ Ultra Vires Rules BEWARE Ultra Vires acts beyond scope of auth & remedies
name/address of each incorporator

2. name/address of each initial director
3. name of registered agent & address of registered office
4. authorized stock (max shares can sell)
5. number of shares per class
6. info on voting rights/preferences of each class
-preemptive rights
-cumulative voting
-preferred stock or liquidation


Law governing Corp

Law of state where Corp is formed! No matter where Inc. does business


Taxation for Corp

Double Taxation - entity taxed on income/profits and indivs taxed on dividends

UNLESS - Form S Corp
-has no more than 100 SH,
-all SH human, US citizens or residents;
1 class of stock only,
NOT publicly traded


Foreign Corporation

Corp incorporated outside of this state.

need "CERTIFICATE of Authority" from SOS & registered agent - qualify and pay prescribed fees to transact instra state biz (regular course of biz).

-no permission? 1. civil fine or 2. cannot sue in this state (but can be sued and defend); until paid off



CORP (not indiv) sells its own stock, way to raise capital



written offer to buy stock from CORP,

PRE Inc - irrevocable for 6 months (unless says otherwise or subs release you)
Post Formation - revocable until Board accepts offer



means "minimum issuance price"
ex. 10k of shares worth 3$= 30k par (minimum)


No Par

no minimum issuance price; Bd sets price


treasury stock

stock company issued then reacquired. authorized but unissued. Re-sellable for any price bd wants


!!! Watered Stock (exam!)

Stock that was sold under the Minimum par price. Directors liable for deficiency "water" if they knowingly issued watered stock.

Purchaser liable for stock purchase, no defense as he is charged w/ notice of par; TP NOT liable unless knew of water


Election/Termination of Directors

A. SHs elect Directors at annual mtg (w/in 15 mos)
unless "STAGGERED BOARD" divided into halves/thirds; (in Articles)
B. SHs can remove directors (w or w/o cause) before term expires w/ MAJORITY vote of shares entitled to vote
C. Vacancy? SH or bd, unless SH created vacancy..then SH


Bd of Dir (managers) can take act ONLY by:

1. Unanimous agreement in writing
2. at a Meeting (satisfying quorum & voting reqs)
-NOTICE required only for SPECIAL mtg (time & place) (unless waived, actions at mtg VOID)

DIR vote:
1. Quorum for Mtg - need Majority of ALL directors (unless diff in bylaws) (ppl must stay whole time or Q is broken) (diff than SH)
2. if Q is present, need Majority vote of Present Dirs to Pass resolution



NOT permitted for Directors!


Scope of Bd Committee

Bd can delegate jobs to committee EXCEPT to fill bd vacancies or declare dividends (can only recommend)


Dir Compensation

Ds can set their own salary as D/O but must be reasonable and in G/F, or it is WASTE of corp assets (breach of loyalty)


Director Liability for:

1. breach of Fid Duties (Care, Loyalty)
2. Ultra vires acts (liable for losses)
3. Improper Distributions
4. Improper loans (not reasonably expected to benefit corp)
-Sarbanes Oxley forbids large loans to Execs in public corps; requires audits to oversee & D/Os to certify accuracy

**Director presumed to concur w/ Board UNLESS
1. absent from meeting OR
2. her dissent or Abstention is noted IN WRITING in corp records (Corp Minutes; delivered to presiding officer at meeting; or written dissent delivered immediately after) OR
3. entitled to rely on g/f report, information, staetments presented by officer/EE or committee by professional believed reasonably competent


Officer Liability

Officers are AGENTs of Corp, Authority
1. breach of Fid duties (Care, Loyalty)


Election of Officers

BOARD hires/fires officers, and sets compensation

(compare: SHs hire/fire Board, NOT officers



Indiv seeks reimbursement when sued in D/O capacity

1. NO indem: D/O held liable to Corp OR held to have received improper Benefit

2. Mandatory Indemnification:
D/O successful in defending suit on MERITS or otherwise

3. Permissive Indemnification: Not 1,2, (Settlement)
a. MUST meet duty of LOYALTY ! acted in G/F & reasonable belief actions were in best interest of Co. (determined by DISinterested Dirs/Shares or indie legal counsel)

1. court can require reimbursement of costs and attorney fees (not judgment) if justified in view of circs
2. Articles can eliminate some DIRECTOR liability but NOT for intentional misconduct, usurping Corp opp, unlawful dist, or improper personal benefit
Split - Some states can limit officer liability


Shareholders SH rights

-hire/fire board (no management rights)
-Limited Liab - not liable for corp obligations or professionals' malpractice UNLESS PCV in Close Corps ONLY

-voting rights (per their share)
-vote belongs to RECORD SH (owner in corp records) as of Record date (eligibility cut off)
1. corp reacquires stock b4 record date (corp does NOT vote)
2. Death of SH (executor votes)
3. Proxies


Close Corp

2. Stock NOT publicly traded
3. SH owes DUTY not to OPPRESS minority SH (bc not freely alienable)
4. SH in close corp owe dutyies of loyalty/g/f to other SHs (like partners)f

1. SH Can elim board and run corp directly (rare) by
a. articles/bylaws and approved by all SH
or b. unanimous written SH agreement
2. SH can put reasonable restrictions on Close corp transfer of shares (if actual knoweldge)
-BOTH must be conspicuously noted on front/back of stock certs
-managing SH then owes fid duties


Professional Corp

licensed professionals may incorp. Must have in name P.C. or P.A. (association) (articles must state purpose is to practice profession)
-may employ non profs but not to practice


How do SH vote generally ? !!

1. Must be Quorum at mtg;
= Majority of outstanding VOTING SHARES (ex. 12k shares? need 6k+1 shares at mtg)
*Quorum is NOT broken if ppl leave (unlike Dir Mtg)

2. vote must get majority of quorum (unless bylaws diff)


cumulative voting

avail only when SH elect Directors; better chance of election; Multiply shares times number of directors to be elected;
Generally MUST be provided in Articles


Right of SH to inspect Corp records !

any SH can demand access if:
1. make written demand stating
2. documents desired AND
3. proper purpose (related to role as SH)
(directors have unfettered access)

denied? seek court order, and get atty fees


Preferred Stock

means paid first; (no vote default)


Participating Stock

means Paid AGAIN (2x) before common stock


Cumulative Stock

accrues year to year



payments by corp to SH
1. Dividends
given to Preferred, Participating, Cumulative, Common SH
-in Bd Discretion, SH must make VERY strong showing of abuse to compel/breach of care

*Dirs Jointly/Severally liable for improper dist, but remember G/F reliance defense.
-SH are personally liable ONLY if KNEW dist improper when received it!

2. Repurchase
(Voluntary sale of SH stock to Corp)

3. Redemption
Forced sale of SH stock to Corp at price set in articles

Payments made from:

TRADITIONAL VIEW (has been tested way back)
1. Earned Surplus:
earned from Biz activity, all earnings minus losses & prior distributions

2. Stated Capital: NEVER used for distributions!!
gets Par Value Generated from issuing stock
or if no par bd decides

3. Capital Surplus:CAN be used Dist if INFORM SH
Also Generated from issuing stock, gets Excess above Par value and amts allocated in a no par issuance

does not look at funds. Corp can NOT make distribution if insolvent or if dist would render it insolvent meaning:
1. Corp is unable to pay its debts as they become due OR
2. Total assets are less than total liabilites


Fundamental Corp Changes

Amendment of Articles
Mergers or Consolidations
Transfer of all/nearly all assets NOT in ordinary biz
Share Exchange

Extraordinary so NEED:
1. Bd adopting resolution of fundamental change
2. Bd submits proposal to SH w/ written notice
3. SH Approval (Maj of shares entitled to vote)
4. Deliver doc to SoS

REMEDY - unless fraud, ONLY...
!!! Dissenting SH RIGHT of APPRAISAL-
ONLY AVAIL TO CLOSE corp NOT if Natl or 2k+ SH
Right to force Corp to buy your stock @fair value if:
1. merger or consolidation
2. transfer of substantially all assets NOT in ordinary course of business OR
3. transfer of shares in share exchange
1. file written notice of objection & intent to demand payment
2. abstain or vote against proposed change AND
3. after vote, w/in time set, make written demand to be bought out and deposit stock w/ corp


Amendment of Articles - fundamental!

1. bd action and notice to SH
2. SH approval (maj of voting shares regardless of quorum!)
3. if approved, deliver to SoS
4. no dissenting right of appraisal


Merger or Consolidation, need

1. bd action (both corps) and notice to SH
2. SH approval (both corps), maj of voting shares
3. NO SH approval required if "Short Form Merger" 90% or more owned Subsidiary merged into Parent
4. if approved, deliver to SoS
5. Remember Right of Appraisal! (for both corps)

Surviving Corp liable for All rights and liabilities of the constituent corp (bc disappeared), so survivor can be sued


Transfer of ALL or substantially all assets not in ordinary course of business
Share Exchange

-substantially all is at least 75%, diff juris
-fundamental for seller only
-NO successor Liability

1. Bd action
2. notice to SELLING SH
3. approval by SELLING SH (Maj voting shares)

!! 4. NO APPROVAL NEEDED BY buying SH bc not fund chg
5. DISSENTING Right of Appraisal for SELLER SH

6. deliver to SoS


!! Dissenting SH RIGHT of APPRAISAL

only SH REMEDY for Fundamental Change
unless fraud,

ONLY AVAIL TO CLOSE corp NOT if Natl or 2k+ SH
Right to force Corp to buy your stock @fair value if:

1. merger or consolidation
2. transfer of substantially all assets NOT in ordinary course of business OR
3. transfer of shares in share exchange



Beginning of winding up process to end corp, and Liquidate

1. Voluntary
Bd and SH approval; file notice of intent to dissolve w/ SoS. notify creditors, and wind up

2. Involuntary Dissolution
A. SH can Petition to Court if:
a. Director abuse, oppression, or waste
b. Dir deadlock that harms corp w irrep injury
c. SH deadlock - SH have failed at 2 consecutive annual mtgs to fill bd spot
OR -
in Close Corp, oppressed SH can force buyout of his Shares

B. Creditor can petition bc corp insolvent, has unsatisfied judgment, or corp admits debt in writing


Winding Up

a. gathering all assets
b. converting to cash
c. paying creditors
and d. distributing remainder to SH, pro rata by share, unless "Liquidation preference" (PAY 1st) in Articles


Securities =



Debt Securities

investor LENDS CAPITAL to corp to be repaid (w/ interest) per agmt. Lender is CREDITOR. not owner
1. BOND - secured by corporate assets
2. "debenture" - Unsecured


Equity Securities

investor buys STOCK from corp to generate capital; = OWNER, not creditor


accredited investor

investor who can handle risk (institution, wealthy)


Misrepresentation (CL FRAUD)

requires 1. Misrep 2. knowing it false or reckless as to truth 3. intent to induce reliance 4. causation 5. actual justificable reliance 6. damages


Director Duties

1. care (BJR)
2. Loyalty
3. Disclosure (to bd) NOT to public confi info
4. Duty not to commit WASTE


Direct Action

SH may bring direct action for breach of duty if SH faces immediate and direct damage


controlling SH duty, CL

modern-Fid duty to minority SHs; must refrain from obtaining a special advantage or to cause corp to take action prejudicing minority SH

EX -
*liable for selling corp to LOOTER Unless reas measures taken to Investigate
*SH who illegally sells Corp assets for personal benefit (get a premium price)
*Selling Dir/Officer Positions
*Controlling SH oppressing minority, in vote or control

-RED FLAG - SH gets Premium price above market, should serve as NOTICE of issue