Corporations Flashcards
(143 cards)
1
Q
What is the business judgment rule?
A
Directors of a corporation are generally not held personally liable for decisions they make on behalf of the corporation.
2
Q
What are the 3 prerequisites for the business judgment rule to protect a director?
A
(1) the director acted with a reasonable belief that the decision was in the best interest of the corporation.
(2) the director acted in good faith
(3) the director acted as a reasonably prudent person would under similar circumstances.
3
Q
When will board approval relieve a director’s personal liability for engaging in personal transactions with the company for which they are a director?
A
(1) the director discloses all material facts of the transaction (and the board approves)
OR
(2) the transaction is fair to the corporation and shareholders
4
Q
What is an exculpatory clause?
A
Exculpatory clauses in the articles of incorporation or bylaws relieve directors of personal liability to the corporation and or shareholders.
5
Q
When will an exculpatory clause NOT relieve a director of personal liability?
A
(1) when the act of the director was illegal
(2) when the director acts to intentionally injure the corporation or its interests
(3) when the act results in illegal distributions
(4) the director improperly benefits from their own actions
6
Q
What is the name for shares repurchased by the corporation?
A
Treasury Shares
7
Q
Are treasury shares entitled to vote at shareholder meetings?
A
No.
8
Q
What type of shares are generally entitled to vote at shareholder meetings?
A
Outstanding shares.
9
Q
Are voting proxies allowed?
A
Yes, unless the proxy is irrevocable and given with a property interest or consideration.
10
Q
How can voting proxies be revoked?
A
(1) any written instrument / notice
(2) the shareholder can also simply attend the shareholder meeting and vote their shares
11
Q
What are the requirements for a valid proxy vote?
A
(1) authorized in writing
(2) signed by the shareholder (or a person who received the share by operation of law)
(3) proxy writing is sent to the secretary of record for the corporation
(4) the writing articulates the authorization to vote the share
12
Q
What instruments define what percentage of votes is needed to pass a resolution at a shareholder meeting?
A
(1) articles of incorporation
Or
(2) the bylaws
13
Q
Which document wins if the articles of incorporation and the bylaws conflict?
A
The articles of incorporation.
14
Q
What is the primary limitation on the corporate president’s power to act and authority?
A
The board of directors discretion.
A corporate president may enter into ordinary contracts.
A corporate president may not enter into extraordinary contracts (beyond the scope of normal business) without the consent of the board of directors.
15
Q
What powers is the board of directors unable to bestow on the president of the corporation?
A
The board of directors may not give the president powers which the board itself does not have.
16
Q
When is a proxy authorization irrevocable?
A
(1) when the proxy writing states it is irrevocable
AND
(2) the authorization is given in exchange for consideration, as a surety, or the proxy holder has an interest in the authorization.
17
Q
What body of law governs the relationship between the president and the corporation?
A
Agency law.
18
Q
What general powers is the president trusted with?
A
(1) the power to act as an agent for the corporation
(2) in additional capacities authorized by the board of directors
19
Q
What contracts may the president enter into on behalf of the corporation without board approval?
A
Ordinary contracts (contracts within the scope of normal business practices).
20
Q
What document authorizes the scope of acts that the board of directors may take?
A
The articles of incorporation.
21
Q
If the articles of incorporation are silent, how many directors and what percentage of those directors must vote to pass a resolution?
A
(1) a meeting and decision are valid if a quorum of the directors are present (usually a majority)
(2) a resolution will pass if a majority (of the quorum) votes in favor
22
Q
What is required for a fundamental change to the corporation?
A
Fundamental change is only valid if . . .
(1) the board passes a resolution in favor of the fundamental changed (with quorum present)
And then
(2) a majority of shareholders approve
23
Q
What remaining option is available to shareholders when there is a fundamental change to the corporation that they disagree with, BUT, they don’t have enough votes to prevent it?
A
Appraisal. Shareholders opposing a fundamental corporate change may force the corporation to buy back their shares.
24
Q
What is the procedure for appraisal?
A
The shareholders must
(1) object to the fundamental change
(2) not vote in favor of the fundamental change
(3) demand in writing that the corporation given them market value for their shares.
25
What is a promoter in corporation law?
A person who organizes for a corporation which is not yet formed and obtains equipment, funding, land, capital. They also may enter into contracts.
26
Are promoters personally liable for contracts made on behalf of a corporation before it exists?
Yes.
27
Are promoters still liable for contracts adopted by the formed corporation?
Yes.
28
How may contracts be adopted?
(1) Express
Or
(2) Implied
29
When will a promoter not be liable NOT be personally liable for contracts made on behalf of the to-be corporation?
The contract expressly and definitively states that the promoter will not be personally liable.
30
Are corporations generally liable for the contracts entered into by promotes.
Generally no. The corporation is only bound if the contract is expressly or impliedly adopted by the corporation.
31
What is express adoption?
Written consent acknowledging that the corporation is liable for the contract.
32
What is implied adoption?
The corporation acts and accepts value from or the benefit of the contract with knowledge of the circumstances.
33
What is a shareholder derivative lawsuit?
A shareholder (or several) sues on behalf of a corporation against (1) 3rd party actors (2) officers of the corporation, or (3) a member or members of the board of directors for breaching duties owed to the corporation.
34
Who receives damages that are awarded as a result of a shareholder derivative suit?
The corporation itself.
35
What obligations does a shareholder have when bringing a shareholder derivative lawsuit?
(1) to fairly and adequately represent the interest of the corporation
(2) to demand in writing that the corporation cure the problem (unless the shareholder knows the demand is useless)
36
Who is permitted to bring a shareholder derivative lawsuit?
(1) one who owned shares at the time of that the transaction or occurrence occurred
(2) one who receives shares by operation of law from an owner who owned the shares at the time of transaction or occurrence.
37
What are the primary responsibilities of the board of directors?
(1) Appoint / hire officers
(2) manage the high-level affairs of the corporation
38
What are the 3 main duties of directors?
(1) to act in good faith
(2) to act in the best interest of the corporation
(3) to act with the care of a reasonably prudent person under similar circumstances.
39
Under the business decision rule, what is the legal presumption when a person alleges that a director violated their duties?
(1) the director was acting in the best interest of the corporation
(2) the decision was made in good faith
I.e., the accusers have the burden of proof.
40
What information may directors properly rely on when making a decision?
(1) Information provided from outside the corporation that one would reasonably believe to be competent.
(2) Information from corporate officers and employees that one would reasonably believe to be competent.
41
What duty is breached if a director deals personally with a corporation and improperly profits from the transaction?
The duty of loyalty.
42
When may a director properly have personal dealings with a corporation?
(1) all material aspects and facts of the transaction are disclosed
(2) the transaction is approved by a majority of either (a) disinterested board members or (b) shareholders
(3) the transaction is fair
43
For the purposes of approval, is dissolution a fundamental change of the corporation?
Yes!
44
What is the notice requirement for a shareholder meeting in which there will be a vote on a fundamental change?
Minimum 10 days notice.
Minimum 10 days notice.
45
What must be contained within the notice of a vote for fundamental change?
(1) Place
(2) When
(3) Description and purpose of the fundamental change
46
Can a defective notice of a meeting be waived by shareholders?
Yes, by going to the meeting and voting.
47
What is the effect of a defective notice that is not waived for a meeting in which a fundamental change is voted?
Any adopted resolution is considered voidable.
48
Who may void a resolution based on deficient notice?
Any shareholder (or anyone with the right to vote) who did not receive proper notice.
49
Corporation - Define
A distinct legal entity that (1) that can conduct business in its own right by buying, selling, and holding property or by suing and being sued (2) and lasting forever.
50
Shareholders - define
investors, ultimate owners of a residuary interest in corporation
51
Directors - define
elected by shareholders, responsible for major corp decisions, appoint officers
52
Officers - define
Run corporation on a daily basis
53
Promoter - define
(1) find investors willing to invest in corporation (2) enter into contracts on behalf of corporation (3) fiduciaries of corp (no secret profits)
54
Corporation liability w/r/t promoters
Corporation is not liable for pre-incorporation agreements. Promoters are personally liable for any contracts entered into before the corp exists, UNLESS:
- novation shifting liability to corp
- agreement b/w promoter, corp, 3P
- corp substituted for promoter under the agreement
55
Incorporators
(1) must sign and file articles of incorporation (2) pay a fee (3) not liable for promoter contracts
56
Articles of Incorporation - requirements
- name of corp + "inc., co., ltd." etc.
- agent of corp (name, address w/i state of incorp.)
- incorporators (names, addresses)
- duration of corporation
- purpose of corporation
- authorized shares (max number for each class of stock corp can issue)
57
Ultra vires
Acts beyond the powers of the corp stated in the articles of incorporation. Shareholders, corporation, and state can sue to enjoin ultra vires actions. If ultra vires found, actions held unenforceable.
58
Define - articles of incorporation
Contract between (1) state and corp (2) shareholders and corp -- establishes basic rights
59
When is a corporation incorporated
When Sec of State (1) accepts the fee and (2) files the articles
60
Bylaws - define
Non-obligatory rules created to govern the day-to-day management and operations of the corp
61
Changing bylaws v changing articles
Bylaws can be changed by the board; articles may only be changed by shareholders
62
Conflict between articles and bylaws
Articles win
63
De jure corporation
Corporation complying with all statutory requirements for incorporation
64
De facto corporation
Corporation will be treated as a corporation w limited liability if the organizers enter into obligations after supposed formation and (1) made a good faith effort to comply w incorp process (2) have no actual knowledge of a defect in corp status
65
Veil Piercing - Rule
Shareholders are not personally liable for the debts of a corporation but only liable for the amount invested UNLESS court must pierce limited liability veil to avoid fraud.
66
Three factors to decide whether to pierce the veil
(1) alter ego (2) under capitalization (3) fraud
More likely in tort and small, closely held corps
67
Alter ego - define
Investor or shareholders fail to observe any corp formalities b/w the person and the corporation -- treated company like itself (i.e., commingling of personal and company funds)
68
Under capitalization - define
Failure to maintain funds sufficient to cover foreseeable liabilities
69
Fraud - define
Parties engaged in fraud or fraud-like behavior
70
Stock - define
Ownership of corp represented by shares of "stock," which carries both voting attributes and economic rights.
71
Who holds the debt of a corporation?
Creditors -- entitled to repayment of loan+interest
72
Who owns the equity in the corporation?
Stockholders -- entitled to all value that remains in corp after debts are paid
73
Classes of stock - define
Usually just one, but corp may have as many as they choose w diff econ and voting rights
74
Preferred stock
preference over common stock w/r/t (1) dividends and (2) ???
75
Issuance of stock - define
Sale of stock from corp to investing public
76
Authorized Shares - define
(1) Max number of shares that directors of corp can sell (2) set in articles of incorp (3) must get shareholder approval to sell more
77
Issue shares - define
number of shares from authorized shares pool that directors have actually sold
78
Outstanding shares - define
shares that were once issued to shareholders and still remain in possession of shareholders (i.e., not reacquired by corp)
79
Treasury shares - define
Stock previously issued to shareholders but then reacquired by corp
80
Par value stock - define
Minimum "par value" of an issue stock - not required
81
Value of consideration for stock
Corp can receive *any valid consideration* board of directors deems adequate (labor, IP rights, etc.)
82
Watered stock - define
Stock sold for less than stated amount of par value stock
83
Stock subscription - define
(1) agreement in adv to buy stock before corp is formed (2) irrevocable for 6 months prior to incorp
84
Preemptive rights - define
Right to acquire stock to maintain the percentage of ownership any time new shares are issued. No preemptive rights unless negotiated or included in articles.
85
Two methods to get money out of corporation? ("Distribution")
board can (1) declare a dividend (2) buy back shares of the corp
86
Power to authorize dividends?
ONLY board of directors, not shareholders
87
When can the board not declare dividends?
(1) corp is insolvent (2) by issuing dividend, corp would become insolvent
88
Unlawful dividends - effect on directors who voted to authorize
(1) jointly and severally liable to corp for (2) amount in excess of lawful amount (3) UNLESS director(s) relied in good faith on financial statements
89
When can a shareholder not freely sell shares at any time for any price?
(1) closely held corps (2) federal restrictions
90
Closely held corporations issuing private restrictions on sale of securities (stocks)--how?
(1) stock certificate contains either (2) full and conspicuously noted statement of what the restriction is OR (3) statement that says there are restrictions whose content is provided on request
91
Types of restrictions on sale of stock
(1) outright prohibition (2) requirement of company consent (3) company has option to buy (4) company has right of first refusal
92
Challenge to restrictions on sale of stock
Ask: is it reasonable to restrict to maintain legal status of the corp?
93
10b-5 Action for Fraudulent Purchase or Sale of Stock requirements
(1) P purchased/sold security
(2) transaction involves interstate commerce
(3) D engaged in fraudulent/deceptive conduct (untrue statement of material fact NOT opinions and predictions)
(4) conduct related to material info (reasonable investor would find fact imp in deciding to purchase or sell)
(5) D acted with scienter (intentional or reckless NOT negligent)
(6) P relied on D's conduct
(7) P suffered harm (causality + damages -- either diff b/w stock value and price paid NOT punitive)
94
16(B) Insider Trading Action elements
(1) Corporate insider (directors, officers, shareholders w 10+% of a class of stock)
(2) in a corp w securities traded on national securities exchange OR has assets more than $10 mil AND more than 500 shareholders
(3) who BOTH buys and sells corp stock is liable for any profits made on those transactions
95
Shareholder annual meeting
Obligatory, annual meeting to (1) elect directors and (2) conduct other shareholder business
96
Shareholder special meetings
called to vote upon fundamental changes in life of corp (i.e., dissolution, merger)
97
Notice for shareholder annual AND special meetings
(1) no fewer than 10 but no more than 60 days before meeting
(2) date, time, location of meeting
98
Notice requirement for special shareholder meetings
PURPOSE of meeting
99
Insufficient notice of shareholder meeting
Shareholder may challenge any actions taken at meeting but WAIVED if shareholder attends meeting
100
Record date - define
Date fixed by directors used to determine shareholder voting eligibility. Must be no more than 70 days before meeting. Only shareholders owning shares on record date can vote.
101
Shareholder action w/o meeting OK with
unanimous, written consent
102
Proxy shareholder voting
Authorizes others to vote shares in accordance w wishes of shareholder when (1) in writing (2) signed by shareholder as of record date (3) sent to corp sec (4) states authorization for another to vote shareholder's shares (5) not valid for more than 11 months unless otherwise specified
103
Shareholders vote on
- election of directors
- mergers
- share exchanges
- amendments to articles of incorp
- sales of all or substantially all of corp assets
- dissolution
104
Shareholder approval requirements
(1) Quorum of shares (NOT shareholders)
- at meeting in person or via proxy
- majority of corp's outstanding shares represented at start of meeting
(2) necessary vote
- among quorum, votes cast in favor of proposal exceed votes cast against
105
Cumulative voting - define
Voting for ONLY election of directors that:
(1) gives shareholders votes = to number of shares owned
(2) MULTIPLIED by number of director positions being voted on
106
Shareholder inspection rights
Rule: shareholder may inspect corp's records in person or through an agent as long as shareholder has a proper purpose (related to shareholder's financial interest in the corp.)
107
Direct shareholder lawsuit
Shareholder sues (1) in own name (2) for harm directly to shareholder (i.e., interference in voting rights, dividends, misinfo) (3) damages go directly to shareholder
108
Derivative shareholder lawsuit
(1) P first demands board bring lawsuit in corp's name (unless it would be futile)
(2) P suing on behalf of corp
(3) P with standing (contemporaneous stock ownership -- shareholder at time of harm, throughout litigation)
(4) for harm, principally, to corp (i.e., bad business decisions)
(5) damages to corp + P attorneys if litigation produces a "substantial benefit" to corp
109
Shareholders' duties to other shareholders
No duties (except controlling shareholders)
110
Controlling shareholder fiduciary duties to minority shareholders
(1) sale of stock to an outsider: liability possible if (a) CS sells stock to outsider intent on looting or destroying company (2) damage to other SHs
(2) controlling shareholder transacts w the corp: CS (a) receives special distribution or (b) conducts major business transactions to own benefit (c) owes a duty of loyalty
111
Controlling Shareholder - Define
Owns 50% + 1 or more of stock OR comparatively HUGE ownership stake
112
Board of directors tasks
- appoint and oversee officers
- make high-level corp decisions
- usually receive compensation
113
Board of directors requirements
(1) at least one
(2) natural persons
114
Board of directors - term and selection
(1) limited term
(2) elected by SHs
115
Removal of board of directors members
(1) by shareholders
(2) with or without cause UNLESS
(3) classes of directors elected at diff times; then only for cause
116
Replacement of board of directors members
(1) upon vacancy or board size increase,
(2) shareholders at special meeting OR board itself
(3) may elect new directors
117
Notice for board meetings
(1) special meetings NOT regular
(2) attendance waives notice unless prompt object at meeting
118
Voting requirements - board of directors
(1) quorum (majority of total number of directors unless bylaws say otherwise)
(2) with quorum, pass on a majority vote of present members
(3) no votes by proxy or agreement
OR with agreed upon, unanimous, written consent of all members
119
Dissent from board decision by board member
(1) enter dissent in meeting minutes
(2) file written dissent before meeting adjourns
(3) provides written dissent by certified/registered mail to corp sec immediately after meeting
120
Officers of corp - members
President, sec, treasurer
121
Officers - selection process
By board
122
Duties owed by officers to corp
(1) duty of care (2) duty of loyalty
123
Corporate officer duty of care
Rule: act with care that a person in a like position would reasonably believe appropriate under similar circumstances
Exceptions: (1) Business Judgment Rule - in the absence of fraud, illegality, or self-dealing, courts won't disturb good faith business decisions OR (2) officer relied on expertise of others
124
Officer duty of loyalty
Rule: may not receive an unfair benefit to the detriment of the corporation w/o effective disclosure and ratification.
125
Violations of duty of loyalty
(1) self-dealing: transaction in which director, officer, or relative receives substantial benefit directly from corp (2) corporate opportunity: usurping or stealing a corp opportunity
126
Insulation from duty of loyalty liability
Rule: a self interested transaction may be upheld if
(1) disclosed AND
(2) ratified by either
(3) a majority of disinterested directors OR
(4) majority of disinterested shareholders
OR if the transaction was *fair*
127
Indemnification - definition
Practice of a corporation paying for the costs of a director or officer's defense in litigation, usually by purchasing insurance
128
Required/Mandatory Indemnification
Corp is ALWAYS required to pay the costs of defense if the director or officer successfully defends the case
129
Prohibited Indeminification
Crop may NEVER indemnify a director or officers who is liable for receiving improper benefit from the corp or otherwise loses a lawsuit
130
Permissive Indemnification
Corp MAY indemnify a director or officer for the costs of a suit if the director or officer (1) acted in good faith w no intent to harm the corp OR (2) had no reasonable cause to believe the conduct was illegal
131
Fundamental Changes to a Corporation - approval
requires both shareholders and directors for merger, consolidation, or dissolution
132
Merger
the combination of two or more corporations where one corporation survives and assumes the assets and the liabilities of the other corporation
133
Consolidation
a combination in which neither of the two corps survive because (1) a new entity is created and (2) new entity assumes the assets and liabilities of both corps
134
Dissolution - definition
The existence of a corporation is extinguished either voluntarily by the shareholders and the directors or involuntarily by disgruntled parties.
135
Involuntary dissolution
Creditors can dissolve if the creditors show the corporation is not paying its debts. OR
Shareholders can dissolve if they can show (1) corporate assets are being wasted (2) directors are acting fraudulently (3) or directors and shareholders are deadlocked.
136
Fundamental changes process requirements
(1) board must adopt a resolution proposing the change
(2) notice must be sent to shareholders of special meeting and
(3) fundamental changes require majority of shares entitled to vote
137
Dissenters' or appraisal rights
Shareholder entitled to rights--shares purchased by corp at fair value--when SH doesn't want to participate in an authorized merger, asset sale, share exchange, or article amendment.
138
Invoking dissenters' rights process
shareholder must
(1) send WRITTEN notice to the corporation prior to the vote of her intent to dissent
(2) abstain or vote “no” (dissent) at the meeting
(3) make prompt written demand for fair market value after the action has been approved
139
Close corporation - definition
Corporation w few shareholders; usually not publicly traded w relaxed rules
140
Close corporation voting
Can form voting agreements
141
S Corporation -- definition
Corporation with limited number of shareholders that is only taxed once--NOT at entity level
142
Limited Liability Corporation -- LLC definition
- Limited liability of traditional corp + tax treatment of partnership
- no lims on shareholders
- no natural person requirement
- owners = "members"
- managed by all members
143
LLC requirements for formation
(1) file articles of organization
(2) file an operating agreement w state
