Corporations Flashcards
(123 cards)
1
Q
what does a promoter do prior to the corporation ever being formed?
A
procuring capital and entering into contracts in order to get funding for the corporation
2
Q
Can a promoter be liable for actions they did before the corporation ever formed?
A
Yes. A promoter is personally liable because they’re a fiduciary of the corporation
A promoter is personally liable if they knowingly act on behalf of a corporation before incorporation and is jointly and severally liable for all liabilities created while so acting
3
Q
what is a corporation?
A
a distinct legal entity that can conduct business in its own right by buying, selling, and holding property or by suing or being sued, and by lasting
forever.
3
Q
why are corporations typically formed?
A
to limit liability and promote investment/money growth
4
Q
What are the 3 typical parties involved in a corporation?
A
1) Officers: people who run the corporation on a daily basis
2) Shareholders: investors who own shares, aka, the ultimate residuary interest in the corporation
3) Directors: elected by shareholders and responsible for the major decisions of the corporation
5
Q
who is a promoter of a corporation?
A
A person who tries to form the corporation by procuring capital and entering into contracts in order to get funding for the corporation
6
Q
are corporations liable for contracts entered into before the corporation existed?
A
no, but the promoter will be
7
Q
what is a novation?
A
A mutual agreement between the corporation, promoter, and third party that shifts the liability for a pre-corporation agreement from the promoter onto the corporation
7
Q
what is an incorporator?
A
The party who actually creates the corporation
8
Q
How does an incorporator create the corporation?
A
They must sign and file the articles of incorporation, and pay a fee
9
Q
are incorporators responsible for pre-corporation actions/agreements of promoters?
A
No, incorporators are not liable
10
Q
when does a corporation “officially” form?
A
When the Secretary of State accepts the fee paid by the incorporator and files the submitted articles of incorporation
11
Q
what is ultra vires?
A
an old school doctrine referring to acts beyond the powers of the corporation.
If a corp commits ultra vires by acting outside the scope of its stated purpose, then the shareholders, the corp itself, or even the govt can initiate proceedings to stop the acts
12
Q
What info/terms typically are included in the articles of incorporation?
A
-The name of the corporation. Must include a word like “corporation,” “inc.,” or “limited”
-the name and address of the agent of the corporation
-the names and addresses of the incorporators
-the duration of the corp
-the purpose of the corp
-the number of authorized shares
13
Q
what are easier to amend: the bylaws or the articles of incorporation?
A
Bylaws are easier to amend. Articles can only be amended if all the shareholders agree to it
14
Q
If the articles of incorporation and bylaws conflict, which wins?
A
the articles of corporation
15
Q
What is a De Facto corporation?
A
A defective corporation, i.e., one that wasn’t properly formed
16
Q
Are Defective (De Facto) Corporations still treated as being valid?
A
They will be treated like a normal corporation so long as the organizers:
1) made a good faith effort to comply with the incorporation process; and
2) they had no actual knowledge of the defect in the incorporation attempt
17
Q
what is “piercing the veil” in relation to shareholder personal liability?
A
Normally, shareholders aren’t personally liable for a corporation’s debts.
However, a court may “pierce the veil” of
limited liability and go after shareholders’ personal funds in order to satisfy the corporation’s debts. This is typically done to avoid unfairness or fraud
18
Q
Are shareholders liable for the debts of a corporation?
A
Typically, no. Shareholders are only personally liable for the amount they invested into the corporation
This doesn’t apply if the veil is pierced
18
Q
what two rights typically come with owning a share of a corporation?
A
Voting rights and economic rights
19
Q
what factors are used to decide whether a court can “pierce the veil” and make shareholders personally liable for all the corporation’s debts?
A
1) Alter ego: The investor or shareholder are treating the corporation not like a separate entity, but like their own alter ego (ex. intermingling your funds with the company’s funds)
2) Under-capitalization: failing to maintain funds sufficient to cover
foreseeable liabilities
3) Fraud: parties engaged in fraud or fraud-like behaviors
20
Q
what makes preferred stock better than common stock?
A
Holders of preferred stock have preference over common stock with respect to dividends (payments to shareholders) and liquidation proceeds
21
Q
how are the number of authorized shares set?
A
it’s set forth in the articles of incorporation. If the corp wants to change the number of max shares, they need to amend the articles.
22
what are authorized shares?
The maximum number of shares that the corp director can sell/issue to the public
23
what are outstanding shares?
Shares that were issued and still remain in the possession of shareholders
24
what are treasury shares?
Shares that were previously issued to shareholders but bought back by the corporation
25
what are issued shares?
The shares from the authorized pool of shares that the corp has actually sold off
26
what is a stock's par value?
an arbitrary price a corporation puts on their stock
26
is par value required to be placed on a stock?
No. A company can choose to sell their stock at par value. If the corp do choose to sell at par value, it must sell the shares for at least the minimum par value amount.
27
what is watered stock?
The corporation sets a par value amount and sells the stock for less than the stated amount. That less-than par stock is called watered stock
28
What is a stock subscription?
When someone agrees in advance to buy stock before the corporation is formed.
29
Can a subscriber back out of a stock subscription?
If the subscription was before incorporation, the subscription cannot be revoked for up to 6 months
29
What are preemptive rights?
Right to acquire stock to maintain the percentage of ownership any time new shares are issued
ex. You own 25% of a corp. New shares are issued and dilute your ownership percentage to 20%. If you have a preemptive right, you are entitled to enough shares so that your percentage goes back up to 25% ownership
30
what's the default rule in most jurisdictions for preemptive rights?
shareholders don't have preemptive rights unless negotiated for or included them in the articles
31
who can issue a dividend (direct payment to shareholders)?
Only the board of directors
32
what are the two main ways a corporation distributes money out to its shareholders?
1) When the corporation buys back shares from the shareholders
2) The corporation directly pay the shareholders (called a dividend)
33
When can the board of directors NOT issue dividends?
1) if the corp is insolvent
2) If, by issuing the dividend, the corporation would become insolvent
34
What happens if the board issue an unlawful dividend?
the board of directors are now personally liable, both jointly and severally, to the corporation for the amount in excess of the lawful amount
A director won't be liable if they relied in good faith on a financial statement when they approved the unlawful dividend
35
what is a cumulative preferred share, and how does its priority work?
it's a combination of currently owed and past owed shares (ex. a preferred share that was owed last year gets combined into a preferred share that's owed this year)
36
what is a participating preferred share, and how does its priority work?
It works like a normal preferred stock, where it gets paid before the common stock. But once its preferred stock gets paid, it gets to get back in line as a common stock, thereby double dipping
37
What are the two situations where a corporation can restrict
a shareholder's ability to freely sell their shares?
1) Closely held corporations
2) federal restrictions
38
What is a 10b-5 action?
Securities fraud. Involves a private person buying or selling stock or other securities suing someone
38
when can a closely held corporation restrict a shareholder's ability to sell their shares?
the restriction must be conspicuously noted. A restriction isn't unenforceable if the shareholder doesn't know about it.
39
What sort of sale/trade restrictions can a closely held corp use?
1) right a first refusal
2) corp has an option to buy
3) any sale requires the corp's consent
40
how does a court test to see if a closely held corp's trade restrictions are legal?
It's a reasonability test. Is it reasonable to restrict to maintain stock trade/sale restrictions so that the corp can maintain its status as a closely held corp?
41
what are the elements necessary for a private person to bring a 10b-5 action against someone?
1) Plaintiff bought the security
2) transaction involved interstate commerce
3) defendant engaged in deceptive or fraudulent conduct
4) Conduct related to material information
5) Defendant acted with scienter (intentionally or recklessly done)
6) plaintiff relied on defendant's conduct
7) plaintiff suffered harm
42
what constitutes damages in a 10b-5 action?
out of pocket costs, i.e., the difference between the stock’s value and the
price the plaintiff paid or received
punitive damages are not available in a 10b-5
42
Under a 10b-5 action, can a statement of opinion or prediction be grounds for an action?
No. To constitute fraudulent or deceptive conduct, a defendant's statement must be an untrue statement of a material fact
43
What is Section 16b?
The federal restriction that forces a corporate insider to return short-swing profits to the corporation.
44
what are the necessary elements of 16b action?
1) must involve a corporation that's publicly traded
2) corporation must have assets more than $10 million and more than 500 shareholders
3) the corporate insider must be an officer, director, or shareholder who holds more than 10% of the shares
4) transaction in question occurred while or after the insider was at the corporation
5) Transaction must involve short swing profits (insider bought or sold corp stock within a 6 month window)
45
Under 16b, what counts as a "short term profit"?
When they bought and sold the corp's stock within a 6 month window.
46
Do corporate insiders need to report their stock ownership to the SEC?
Yes. Any time a corporate insider buys or sells their stock in the corp, they need to report it to the SEC
47
are corporations required to hold meetings?
Yes. A corp is required to have at least 1 annual meeting so the shareholders can elect the board of directors and conduct other shareholder business.
48
What must a shareholder meeting notice include?
The time, date, and location of the meeting. If it's a special meeting, the notice must also include the purpose of the meeting.
48
must shareholders be given notice of an upcoming meeting?
Yes. Shareholders must notified of either type of meeting (annual or special) no fewer than 10 days but no more than 60 days from the meeting date
49
what's a special meeting?
may be called when the shareholders need to vote on a fundamental change in the corporation (merger, dissolution, bankruptcy, etc)
50
What can a shareholder do if the notice of a shareholder meeting was insufficient?
They can challenge any actions taken at the meeting.
If the shareholder attends the meeting and doesn't raise the objection for insufficient notice, that counts as a waiver of grounds to challenge for insufficient notice
51
What is a record date?
A fixed date, set by the directors, used to determine which shareholders are eligible to vote at an upcoming shareholders meeting
only shareholders who actually own shares on the record date are entitled to vote
52
what is a proxy?
a written instrument that authorizes someone to vote shares in accordance with the wishes of the shareholder
53
how many days out from the shareholder meeting must the record date be?
Must be no more than 70 days before the meeting
54
can shareholders take a significant action without needing to hold a meeting?
Yes. If all the shareholders unanimously agree, in writing, to take an action, they don't need a meeting
55
what elements must be met for a proxy to be valid?
1) proxy must be in writing
2) must signed by the shareholder as of the record date
3) must be sent to the secretary of the corporation
4) Proxy can't be valid for more than 11 months after it's issued
5) must state that it authorizes the third party to vote on the shareholder's behalf
56
Is quorum necessary for a shareholder meeting vote to be enforceable?
a quorum of the corporation’s shares must be represented (physically present or via proxy) for a vote to be effective
57
what is "quorum" in relation to shareholder voting?
A quorum is a majority of the corporation’s outstanding shareholders (ex. there are 10 shareholders. A quorum would be 6)
58
What is cumulative voting?
Shareholders are given a number of votes that is equal to the number of shares they have multiplied by the number of director seat positions being voted on.
ex. Shareholder owns 100 shares. There are 9 director seats up for election. You can therefore cast 900 votes total, spread across the open seats however you want (100 to a candidate for seat #1, 400 to a candidate for seat #2, etc.)
59
when is cumulative voting used in the context of corporations and shareholder votes?
Only used when electing directors
A corp can choose to use cumulative voting, but they must state whether they permit cumulative voting in the articles of incorporation
60
What is a shareholder derivative litigation?
When a shareholder sues a third party on behalf of the corporation for harms that the corporation suffered
61
do shareholders have a right to inspect the corporation's books and records?
Yes, if their inspection is being done for a proper purpose.
A "proper purpose" is one that's related to the shareholder’s financial
interest in the corporation.
62
what is a shareholder direct lawsuit?
when a shareholder is bringing a lawsuit in their own name against the corporation for damages (i.e., the corp wronged the shareholder, so they're suing the corp)
63
When can a shareholder bring a direct lawsuit?
When they've been harmed directly, such as an Interference in voting rights or dividends, misinformation about important issues, and tort
injury
64
what are the requirements for a shareholder to have standing to launch a derivative lawsuit?
1) at the time of the harm, the shareholder had shares in the corp
2) Must hold the shares throughout the litigation
3) Must fairly and adequately represent the interests of the corporation.
4) Shareholder must bring a demand upon the board to bring a suit. If board doesn't bring the suit within 90 days, the suit can be brought
64
what is the demand requirement for derivative lawsuits?
A requirement that the shareholder first demand that the board of directors
bring the lawsuit in the corporation’s name before the shareholder can bring the suit. If the corp doesn't bring the suit within 90 days, then the shareholder can go and launch the derivative suit
Not required in some states if the demand would be futile (ex. the board is the one who caused the harm)
65
in a derivative lawsuit, who gets the recover in the event that the suit succeeds?
Any recovery goes to the corporation, NOT the shareholder.
66
what are the 2 exceptions where a controlling shareholder will owe a fiduciary duty to other shareholders?
1) a controlling shareholder may be liable for damages caused to other shareholders when the
controlling shareholder sells stock to an outsider if the stock was sold to an outsider intent on destroying/looting the company
2) A controlling shareholder who receives a special distribution or otherwise conducts major
business transactions to his own benefit owes a duty of loyalty.
67
do shareholders typically owe a fiduciary duty to the other shareholders?
No, unless one of the 2 exceptions apply
68
what is a controlling shareholder?
A shareholder who owns over 50% of a corp's shares, or a shareholder who doesn't own over 50%, but based on the context of the corporation, is still a controlling shareholder
69
generally, when can shareholders remove a director from the board?
Whenever they want. Directors can be removed for cause or without cause
70
how are board members typically selected?
elected by the shareholders to serve a limited term, usually 1 year
71
who select the corporate officers?
the board of directors
72
what duties do directors and officers owe?
fiduciary duties of loyalty and care
73
What is the business judgment rule, and does it apply to corporate officers and directors?
The business judgment rule: In the absence of fraud, illegality, or self-dealing, a court won't interfere with an officer's good faith business decisions
Yes, it applies to corp officers and directors
74
How are the duty of care officers and directors measured?
Officers must act with the care that a prudent person in a like position would reasonably believe appropriate
under similar circumstances. This includes a duty to investigate a situation if a reasonable person would in that situation.
If the officer has special skills (i.e., accounting background, legal background), they're expected to be used
75
when is a corporation barred from indemnifying?
when the director or officer is liable for receiving an improper benefit from the corporation or otherwise loses a lawsuit.
75
who can ratify an officer or director's unfair benefit so that it doesn't violate their fiduciary duty of care
a majority of disinterested shareholders or a majority of disinterested directors
75
how does an officer or director's duty of loyalty operate?
They may not receive an unfair benefit to the detriment of the corporation without effective disclosure and ratification
76
when is a corporation required to indemnify an officer or director?
if the officer or director successfully defend the case
77
when may a corporation (not required to but can choose to) indemnify an officer or director?
1) if the director or officer acted in good faith with no intent to harm the corporation; or
2) Had no reasonable cause to believe the conduct was illegal.
78
Who has to approve a fundamental change to a corporation?
Both the directors and the shareholders
79
what's the difference between a corporate merger and a consolidation?
A merger is where one corp swallows/absorbs another corp and takes on the liabilities and assets of the swallowed corp.
In a consolidation, the two corps merge into a totally new entity
80
How can a corporation be dissolved?
1) Voluntary, where the shareholders and directors agree to dissolve the corp
2) Involuntary
81
How can a corporation be dissolved involuntarily?
1) Creditors can dissolve the corp if they show that the corp isn't paying their debts
2) Disgruntled shareholders can dissolve the corp if they show one of the following scenarios: -corporate assets are being wasted,
-The directors are acting fraudulently; or
-The directors and shareholders are deadlocked.
82
If a shareholder doesn't want to go along with some authorized corporate action (merger, share exchange, amendment to the articles, etc.), do they have any rights as minority dissenters?
Yes, they're entitled to have their shares appraised and purchased from them by the corporation at a fair value determined by the court
83
How can a shareholder invoke their dissenter/appraisal rights?
1) the shareholder must send written notice to the corp prior to the vote, stating their intent to dissent; then
2) At the meeting, the shareholder must abstain or vote no; then
3) The shareholder must make prompt written demand for fair market
value after the action has been approved.
84
what's a close/closely held corporation?
A small corporation that typically isn't publicly traded and have relaxed corporate rules
84
who in the court determines what the "fair value" of a dissenting shareholder's shares when it comes to appraisal rights?
A court-appointed appraisal expert
85
what is an S Corporation?
a corporation for state corporate law purposes, but it gets special
treatment for tax purposes.
It only gets taxed once via its individual members, like a partnership. The entity itself isn't taxed.
86
what is a limited liability company (LLC)?
a hybrid between the limited liability of corporations with the tax treatment of a
partnership.
Generally, no limitations on the number of shareholders, no residency requirements, and no
natural person requirements
87
what is a de jure corporation?
A corp that was properly formed, i.e., all the necessary elements for corp formation were met
88
who can a director rely on when making their decisions?
A director may rely on information and opinions of officers, employees, outside experts (e.g., attorneys, accountants), or committees, so long as the director reasonably believes them to be reliable and competent.
89
what is a corporation by estoppel?
a very rare situation where an entity will be found to be a validly formed corporation, even if it didn't properly follow the steps of formation.
Occurs when a third party engaged with the entity like the entity was a corp and treated them like a corp.
89
how can a promoter get out of being personally liable for things they do on behalf of the corp?
Two ways:
1) Novation: the corp and the third party agree to let the promoter out of the contract
2) Adoption: if the corp adopts and/or takes the benefits from that third party contract that the promoter had entered into, that releases the promoter from liability
90
During shareholder meetings, can the shareholders pass resolutions that bind the other parts of the corp, such as the board or officers?
Typically, no, unless the shareholder resolution involves amending bylaws; can also regulate political expenditures
A shareholder resolution to change a bylaw is enforceable and binding on the rest of the corp, including the board
91
If a shareholder launches a derivative lawsuit, can the corporation attempt to dismiss the lawsuit?
Yes, if a majority of qualified directors decide in good faith
after reasonable inquiry that the action is not in the corporation’s best interest
92
What factors are considered by a court when deciding whether to pierce the veil and hold shareholders personally liable for a corp's debt?
1) undercapitalization, 2) disregard of corporate formalities,
3) shareholders using corporate
assets as their own assets,
4) self-dealing within the corp,
5) siphoning of corp's funds
93
Does a shareholder need to be physically present in order to considered "present" at the meeting and able to vote at the meeting?
No. A shareholder can participate via phone or video call. As long as they can hear what's being said and speak, they're considered present and counted towards quorum.
94
Can the business judgment rule be used as a shield even if the officer/director violated their duty of care?
Yes. As long as the director/officer didn't act fraudulently, illegality, or in a self-dealing way, and they in good faith thought their decision/action was in the best interest of the corporation
Doesn't apply if the director didn't investigate the situation/offer sufficiently
94
When doesn't the business judgment rule apply as a shield for directors/officers?
These are some situations where the rule won't apply:
1) if they didn't act in good faith
2) they were not
informed to the extent he reasonably believed was necessary
3) they had material
interests in the challenged conduct and was not objective
4) They failed to devote attention
to corp's affairs
5) They failed to timely investigate matters of material concern
6) They received financial benefits to which he was not entitled
95
What are the 2 situations where the director's fiduciary duty of loyalty will be violated?
1) director engages in self-dealing transactions with the corp
2) director usurps corporate opportunities for their own benefit
96
what is a safe harbor rule and how does it relate to the duty of loyalty?
A rule that protects a director/officer from violating their fiduciary duty of loyalty, even if they're engaging in self-dealing or usurpations
97
What are the 3 situations where a safe harbor will shield a director?
1) the director discloses all material info about the violating transaction, and a disinterested majority of the board or shareholders approve of it
2) disclosure of all material facts to, and approval by a majority of, the board of directors without a conflicting interest
3) the transaction is fair to the corp both in substance and procedure
98
When a corporation is being dissolved and wound up, what is the order by which the corp assets are distributed?
1) Any creditors get paid off first
2) any shareholders who hold preferred stock
3) all other shareholders (common stockholders)
99
how is an LLC created?
It's created by filing articles of organization with the state, including the LLC’s name,
mailing address, and, if there are no members upon filing, a statement to that effect.
The LCC does not
come into existence until it has at least one member
100
Can courts pierce the veil of an LCC like a typical corporation?
Yes, the same pierce the veil rules apply to LLCs and their members' actions
101
does an LLC member have to be an individual person, or can it be some entity/business?
A member can be a person or an entity (partnership, corporation, etc.). It doesn't matter.
102
In an LLC, when are its members liable?
Members are generally not liable for the LLC’s obligations; managers are not personally
liable for obligations incurred on behalf of the LLC
Exception is when the veil can be pierced
103
can a derivative lawsuit be brought in an LLC?
Yes. The derivative litigant can represent the LLC against other members or even against themself
104
when can an LLC member withdraw from the LLC?
Whenever they want, so long as they provide notice that they're leaving
105
when does an LLC get involuntarily dissolved?
when a member go to a court and ask that they dissolve the LLC. The member must show the court that there's a controlling member who's acting in a way that is
oppressive and directly harmful to the member asking for the dissolution
106
If a director is elected by a voting class of stock (ex. preferred shareholders), who can remove that director?
Only that voting class that elected them
107
must directors be given notice of an upcoming board of directors meeting?
Yes, within 2 days of the meeting date
108
What must a board of directors meeting notice include?
If it's a normal meeting, nothing. If it's a special meeting, the time, date, and location of the meeting.
Unlike shareholder meetings, if it's a special meeting, the notice DOES NOT need to include the purpose of the meeting.
109
when is a director personally liable?
If they breach a fiduciary duty (ex. self-dealing, voting for or assenting to an unlawful distribution, etc.)
