Corporations Flashcards
Forming a Corporation
People
Paper
Act
Forming a Corporation: people
One or more incorporators
Forming a Corporation: Paper
File articles of incorporation
Articles of incorporation:
Corporate name
—Must include corporation, company, incorporated, or limited etc
—Public needs to know they’re dealing with a corporation
Name/address of incorporators
Name/address of each initial director
Name/address of registered agent
Statement of purpose
Stock Voting rights and preferences
Ultra vires activity
If corp goes beyond action stated in articles
How to deal:
Valid as to third parties
Shareholders can seek injunction for ultra vires act
Managers can be sued for losses from ultra vires activity
Forming a Corporation: Act
Deliver notarized articles to the secretary of state
Internal Affairs Doctrine
Under the internal affairs doctrine, the internal affairs (for example, the roles and duties of directors, officers, and shareholders) of a corporation are governed by the law of the state of incorporation.
S-Corporation and C-Corporation
Corporation with pass through taxation
Must:
They must have no more than 100 shareholders, all of whom are human U.S. citizens or residents;
They must have one class of stock; and
The stock must not be publicly traded.
C-corp: No pass through taxation
Limited Liability
Owners (shareholders) are not liable for the debts of the corporation
Corporation itself is liable
Corporation Improperly Formed?
One important characteristic of both of these doctrines is that anyone asserting them must be unaware of the failure to form a de jure corporation.
De Facto Corporation
Corporation by Estoppel
Abolished in many states though
Say this on exam
If not, how they work
Bylaws
Document that contains most of the governing rules for a corporation
Private, not filed with state
Shareholders can amend or appeal
Some states: board of directors too
Articles control over bylaws because they are a contract with the state
De Facto Corporation
anyone asserting them must be unaware of the failure to form a de jure corporation.
Three requirements:
Relevant incorporation statute
Good faith attempt to comply
Act like a corporation
Corporation by Estoppel
Not a de jure corp, but treated that way for people who treated the business like a corporation
Ie. you assumed you were dealing with corp, estopped from going after shareholders
Exam tip: Will not work for torts cases, only contracts cases
Abolished in many states though
Say this on exam
If not, how they work
Pre-Incorporation Contracts
Contracts entered into on behalf of the corp before formation
Promoter Liability
Liability of people acting on behalf of corp for pre-incorporation contracts
Corporation is not liable on pre-incorporation contracts
The corporation may become liable only if it expressly or impliedly adopts the promoter’s contract.
Corporation Liability for Pre-Incorporation Contracts
The corporation may become liable only if it expressly or impliedly adopts the promoter’s contract.
Express
Board takes action adopting the contract
Implied
Corporation accepts the benefits of the contract
Promoter Liability for Pre-Incorporation Contracts
Promoter is liable on pre-incorporation contracts
Unless it says otherwise in the contract, novation
Novation: Agreement between promoter, corp, other contracting party that corp will replace promoter on contract
Must have evidence of novation not just adoption, adoption doesn’t relieve promoter of liability
Novation
Agreement between promoter, corp, other contracting party that corp will replace promoter on contract
Foreign Corporations Rules
Corp incorporated in another state
Foreign corporations transacting business in a state must register and pay prescribed fees.
Failure to Register:
Civil fine
Unable to sue in the state
—But can be sued and defend
Issuance of Stock
When corp sells its own stock
Way to raise capital
Borrow (debt)
Sell ownership interest (equity)
Rules apply here only when corp selling its own stock
Subscription
Written offer to buy stock from a corp
Irrevocable for 6 months unless otherwise stated
Post-incorporation subscription revocable until accepted
Consideration for stock
Money, tangible property, past services
There’s a split of authority over two additional forms:
promissory notes to the corporation and future services to the corporation.
In some states, these work as consideration; in others, they’re prohibited (so using them results in “unpaid stock,” meaning it’s treated as watered stock
Par
Minimum stock issuance price
Treasury Stock
Stock the corp issued and then reacquired
Watered Stock
When par value stock is issued for less than its par value.
Liability to those who authorized transfer
3P not liable if they didn’t know about the water, liable if they did know
Pre-emptive Right for Stockholders
Right of existing shareholder to maintain % of ownership by buying stock when there is a new issuance of stock for money
Split in states, some states consider treasury stock and some don’t
Anti-dilution right, maintain same ownership interest
Don’t have to buy it, but right to
ISSUANCE FOR MONEY ONLY
Must opt into them in articles, but easy to get around
Directors
Director must be an adult natural person
Shareholders elect directors at annual meeting
Directors removable with or without cause
Board or shareholders select replacement
Shareholders create vacancy then must elect
Methods of Board Action
At a meeting
Without a meeting with unanimous written consent
Meeting Requirements
Notice required for special meetings
Failure to give notice will void whatever happened at meeting
But can be ratified later
Proxies and voting agreements for board of director meetings are invalid
Must be a quorum:
Minimum number of directors that must attend for meeting to be valid
Majority of directors present vote to pass resolution
Board May Create Committees
Unless the articles or bylaws provide otherwise, the board may create one or more committees, with one or more members, and appoint members of the board of directors to serve on them. The committees may act for the board, but the board remains responsible for supervision of the committees. The board may also delegate authority to officers.
Committees Cannot Take Certain Actions
While the board can delegate actions to a committee, a committee may not take the following actions:
Declare a distribution
Fill a board vacancy
Recommend a fundamental change to shareholders
Note, however, that a committee can recommend such actions to the full board for its action.
Director’s Duty of Care
To the corporation
Burden on Plaintiff
Standard:
In good faith AND
With the care that a person in a like position would exercise under similar circumstances
Only liable if breach caused a loss. NEED damages.
Nonfeasance:
Director does nothing
Misfeasance:
Misfeasance occurs when the board makes a decision that hurts the corporation
Business Judgment Rule
Directors who meet the standard will not be liable for corporate decisions that in hindsight turn out to be erroneous.
Under the business judgment rule, 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.
Duty of Loyalty
Burden on defendant
They must act in good faith and with a reasonable belief that what they do is in the corporation’s best interest.
BJR does not apply here
About conflicts of interest
Interested Director Transaction
Corp does business with a director or relative of a director
Void unless:
Fair to corp, or
Relevant facts disclosed and transaction approved by majority of disinterested directors or
approved by a majority of votes entitled to be cast by disinterested shareholders
Some jdx always require a showing of fairness though
Factors to Be Considered in Determining Fairness in Interested Director Transaction
Courts look to factors such as adequacy of the consideration, corporate need to enter into the transaction, financial position of the corporation, and available alternatives.
Director starting a competing venture
Breach of the duty of loyalty
Remedy is constructive trust on the profits (relinquish profits to corporation)
Corporate Opportunity
Director taking a corporate opportunity for themself is a breach of duty of loyalty
Must:
Tell company about opportunity first
If they don’t want it, then can take it
Corporate Opportunity What is
Something in the line of business
Something the company has an interest or expectancy in
Interest: Contract or property right
Expectancy: Tentative claim in something
Or director found on company time or with company resources
The corporation’s lack of financial ability to take advantage of the opportunity probably is probably not a defense.
Remedies for Corporate Opportunity Breach
If a director usurps a corporate opportunity, the corporation can sue to recover under a constructive trust theory.
If they still own the property, they can be compelled to transfer it to the corporation at the price they paid.
If they’ve sold the property at a profit, the corporation may recover that profit.
Determining Director Liability
Directors may be liable to the corporation for:
Ultra vires acts (that is, making the company do things it has no power to do, in which case responsible officers and directors are liable for ultra vires losses)
Improper distributions AND
Improper loans
Sarbanes-Oxley Act generally forbids loans to executives in large, publicly traded (“registered”) corporations. It requires the board of such large corporations to establish an audit committee and to oversee the work of a registered public accounting firm.
Which Directors Are Liable?
A director is presumed to concur with board action unless their dissent or abstention is noted in writing in the corporate records.
In writing means
(1) in the minutes,
(2) delivered in writing to the presiding officer at the meeting, or
(3) written dissent to the corporation immediately after the meeting.
So an oral dissent, by itself, is not effective.
Note also that a director cannot dissent if they voted for the resolution at the meeting.
Exceptions to Director Liability
A director is not liable under the rule above if:
They were absent from the board meeting (for example, they were sick that day, in which case they’re not liable for stuff that happened at the meeting they missed).
They relied 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 they reasonably believed was competent.
Remember, the reliance must be in good faith; this exception doesn’t work if the director knew the person giving the information wasn’t reliable
Directors and Officers Defined
Inside director: Director who is also employed by corp
Outside director: Director not employed by corp
Officers: Day-to-day management of corp
Officers
Owe same duties of care and loyalty to the corporation as directors
Also agents of the corporation, entity is principle
Same person can do multiple jobs
Common to have officers but don’t need them
Shareholders appoint directors, directors appoint officers
Termination of Officers:
Corp can terminate authority, may need damages with employment contract
Indemnification
Director or officer gets sued as a part of their role in corp and seeks reimbursement from corp
