Corporations Flashcards
(43 cards)
1
Q
Corporations
- Promoters
- Defined
- Duty generally
A
- Promoter - Person who directly or indirectly takes initiative in founding and organizing the business or enterprise of the issuer.
- Fiduciary - Promoters owe a fiduciary to other promoters and the corporation.
a. Cannot make secret profit in dealing with corporation.
b. Subject to rules against self dealing.
2
Q
Corporations
- Promoter Liability to obligations
A
- A promoter is jointly and severably personally liable on contracts he enters into on behalf of the corp. to be formed unless the third party clearly agrees to contract with another party and not hold promoter liable.
3
Q
Corporations
- Promoter
- Corporation adoption of contract obligation
- Continued promoter liability
A
- A corporation becomes liable only when it adopts the contract. An adoption may occur by:
a. Express adoption, usually be board of director’s resolution.
b. Implied adoption, Usually through knowledge of the contract and acceptance of its benefits. - A promoter remains liable on the contract adopted by corp. until there has been a novation.
4
Q
Corporation
- Promoter liability
- Novation
A
- A promoter remains liable on a contract adopted by the corp. until there has been a novation.
- Novation - Agreement between promoter, corp. and the contracting party that the corp. will replace the promoter as the party to the contract
5
Q
Corporation
- De Facto Corporation
A
- Business fails to achieve formal corporate status. Treated as a corporation. Organizers made a good faith effort in effort to comply with formation statutes. Organizers have no knowledge of the lack of corporate status.
6
Q
Corporation
- Piercing the Veil
A
- Court may disregard the corporate entity and hold the owners personally liable when required to avoid fraud or unfairness.
- When facts tend to show that the corporation is merely an alter ego of the owner.
7
Q
Corporation
- Piercing the veil
- Common situations
A
a. Failing to observe corporate formalities, rather treats corporation as part of owner’s overall activities.
b. Undercapitalization - Where corporation has insufficient capital to cover foreseeable liabilities.
c. Clear use of corp. form for fraud or misconduct
8
Q
Corporations
- Piercing the veil
- Factors
A
a. Control - Personal decision making and control by defendant.
b. Capitalization - including insurance.
c. Siphoning funds.
d. Lack of director function
e. Commingling and use of funds for defendant’s individual obligations.
9
Q
Corporation
- Shareholder Liability
- Below par or adequate value stock sales
A
- A shareholder is liable to pay full consideration for the shares held.
- If shares issued below par value, directors or shareholder can be held liable.
- If no par value on stock, any valid consideration can be received if deemed adequate by the board.
10
Q
Corporations
- Preemptive Rights
- Articles
A
- The right given to existing shareholders to maintain an existing percentage of ownership by buying stock when there is a new issuance of stock for cash.
- Preemptive rights only exist if expressly granted in the Articles, and to the extent given in Articles.
11
Q
Corporations
- Right to vote shares general
A
- The shareholder of record on the record date is entitled to vote the share at a meeting.
- Record date - The voter eligibility cut off date set by the board can be set on any day within a 70 day period leading up to the meeting date.
12
Q
Corporation
- Meetings
- Notice to shareholders
A
- The corporation must hold an annual shareholder meeting and may hold special meeting for special purpose.
- Special meeting may be called by board of directors, president, shareholders holding 10% or more of stock, or anyone authorized in articles.
- Notice - Must be given not less than 10 or more than 60 days before the meeting.
13
Q
Corporation
Voting Mechanics
- Quorum
- Approval vote
A
- Meeting must be represented by a quorum of shares either in person or by proxy.
- Quorum - A quorum is represented if a majority of shares is present.
- Vote - If quorum exists, action is approved if the votes cast in favor exceed the votes cast against. Not all shares must vote.
14
Q
Corporations
Voting mechanics
- Proxies
- Requirements
A
- Proxy - Shareholder can give another person the right to vote the shareholder’s shares.
- Requirements
a. Must be in writing
b. Must be signed by record holder
c. Must be sent to secretary of corp.
d. Must authorize another to vote.
e. Valid no more than 11 months
15
Q
Corporation
- Proxy
- Revocability
A
- A proxy is generally revokable even if labeled irrevocable.
- Irrevocable requirements
a. Labeled irrevocable.
b. Proxy coupled with an interest. - Interest - Usually created by proxy having given consideration for the shares or having security interest.
16
Q
Corporation
- Derivative Suit
- Requirements
A
- Derivative Suit - Shareholder is suing to enforce the corporation’s cause of action.
- Requirements
1. Must have ones at least one share of stock when claim arose. Usually must maintain ownership through entire litigation
2. Shareholder who brings suit must fairly and adequately represent the corporation.
3. Must make demand on board to cause corp. to bring suit; must be rejected or at least 90 days pass.
17
Q
Corporation
- Director Duties
- General
A
- Directors have a duty to manage the corporation, and may delegate to a committee of one or more board members to recommend action.
- Fiduciary - Directors owe to the corporation fiduciary duties of due care and loyalty.
- Due care - Director must act with the care that a prudent person would use in managing a like business of their own, and
- in a manner directors reasonably believe in best interest of corp.
- IN - director failure must constitute willful misconduct or recklessness, not neg.
- Articles - May limit the liability for lack of care, but not loyalty.
18
Q
Corporation
- Director Duties
- Business judgment rule
A
- Directors and officers acting in good faith enjoy a strong presumption that they are acting in the best interest of the company.
- Poor business decisions do not give rise to breach of obligations when acting in good faith.
19
Q
Corporations
- Loyalty
- Self dealing
- Two ways to avoid liability
A
- Directors owe a duty of loyalty and may not receive an unfair benefit to the detriment of the corp. or shareholders.
- Self Dealing - Transactions between a director and the corporation can be allowed if there is:
A. independent ratification - requiring:
a. Material disclosure
b. Independent ratification. - Ratification methods
1. Majority vote of independent directors
2. Majority vote of committee
3. Majority vote of independent shareholders, or
B. If transaction is found to be fair to corporation.
20
Q
Corporations
- Loyalty
- Interested Transaction
A
- Conflict of interest transaction if director or knows someone related to director:
a. Is a party to the transaction
b. Has a beneficial financial interest.
c. The interest would reasonably be expected to influence the director’s judgment with regard to the transaction.
21
Q
Corporations
- Loyalty
- Usurpation
A
- Duty of loyalty can be breached if director takes a business opportunity for himself that should be reserved to the corporation.
22
Q
Corporation
- Usurpation of business opportunity
A
- Usurpation found when director or senior executive becomes aware of business activity:
- In connection with position or where person should reasonably believe it offered to corp.
- Through use of corp. information or property, and person should reasonably believe would be of interest to the corporation.
- Person should know that opportunity is closely related to corp. line of business or one corp. expects to engage in.
23
Q
Corporations
- Four types of stock
A
- Common stock
- Preferred Stock
- Preferred Participating Stock
- Preferred Cumulative Stock
24
Q
Corporations
- Fundamental Changes to corporate entity
A
- Most amendments to Articles
- Mergers
- Share Exchanges
- Disposition of substantially all assets outside the usual course of business
- Dissolution
25
Corporations
| - Voting Trust
- Written agreement under which all shared owned by parties are transferred to a trustee, who votes the shares and distributes dividends in accordance with agreement.
- Only valid for 10 years unless extended by separate agreement.
26
Corporations
| - Voting agreement
- Agreements between shareholders to cooperate in voting are enforceable.
27
Corporations
| - Procedure for fundamental changes
1. The board of directors must adopt a resolution recommending the change.
2. Written notice must be given to shareholders, which must:
(i) describe the change
(ii) Inform the holders that if the transaction is approved, dissenting shareholders have right to invoke appraisal remedy.
(iii) be given between 10 and 60 days before meeting.
(iv) Shareholders must approve by majority of votes entitled to be case.
28
Corporations
| - Closely Held corp. management agreements
- Shareholders may enter agreement among themselves regarding almost any aspect of corporate powers or management.
- May eliminate board or restrict its power.
29
Corporation
| - Restrictions on share transfer
- Articles, bylaws, or shareholder agreement may impose restriction on transfer of outstanding shares.
- Restrictions are valid for any reasonable purpose.
- Enforceability - A transfer restriction is enforceable against the holder or transferee:
a. if the restriction is noted conspicuously on the stock certificate.
b. the holder or transferee knew of the restriction
30
Corporations
| - Shareholder Suits
- Direct Action - May be brought for a breach of a fiduciary duty owed to the shareholder by an officer or director.
- If the holder suffered the most immediate and direct damage, and the defendant's duty ran to shareholder.
- Derivative action - Shareholder asserts the corporation's rights of a breach of duty to the corporation.
31
Corporations
| - Shareholder inspection
- May inspect records
- Five day written notice
- State proper purpose for inspection
- Must be made in good faith
- Describe records with particularity
- Records subject must be directly connected to the stated purpose
- Right may not be abolished or limited by articles or bylaws
32
Corporations
- Preemptive Rights
- Limitations
- Even if articles provide preemptive rights; do not apply to:
1. shares issued as compensation to corp. people
2. authorized shares issued in first 6 mos after incorporation
3. shares issued for consideration other than money
4. shares w/o gen voting rights but have a distribution preference
- Non-preferential shares have no preemptive right in preferred shares unless the preferred share are convertible into shares w/o preferential rights
33
Corporations
- Shareholder Suits
- IN closely held derivative rule
- In closely held corp, individual recovery may be allowed if will not
1. unfairly expose corp to multiple suits
2. materially prejudice creditors
3. interfere with fair distribution among all interested parties.
34
Corporations
Distributions
- Solvency limitation
- Not permitted if
1. corp. would not be able to pay debts as become due in ordinary course of business
2. total assets would be less than the sum of its total liabilities plus the amount that would be needed, if to dissolve to satisfy preferential rights
35
Corporations
| Directors
- Directors cannot override articles.
36
Corporations
Directors
Interested Transaction allowed
- Allowed if:
- material facts of trans disclosed and was approved by majority of the disinterested directors or a committee of directors
- material facts disclosed and approved by maj of shares entitled to vote on trans
- judged according to cir, at the time, was fair to corp.
37
Corporations
| Officers
- Get powers from bylaws or directors to manage
- Agents of corp., and auth may be actual or apparent
- As agents, owe duty of loyalty and must act in corp best interest.
38
Corporation
| Indemnification of officers/directors
- Mandatory - unless art change, must when wholly successful in defending proceeding for reasonable expenses
- Discretionary - may for reasonable expenses is defense unsuccessful and;
1. suit brought on account of position
2. acted in good faith
3. believed conduct was;
a. in best interest
b. not opposed to best interests if conduct not w/n actual authority
c. lawful
- Prohibited - When received improper benefit or is liable to corp. for action
39
Corporations
| Changes in Corp structure
- Act provides rights of shareholder vote and right to have corp buy shares after fundamental change
- Procedure for fundamental change
1. majority of board must adopt recommended change
2. notice to shareholders that; describes change and inform that vote will occur
3 not be given less than 10 days or more than 60 days before the meeting
4. must be approved by vote
5. must be formalized in articles
40
Corporations
| Amendments to Articles
- w/o shareholder approval
1. extend duration
2. change names of original directors
3. number of shares to implement split, if only one class of shares
4. changes co. name
5. reduce authorized shares based on reqcquisition
41
Corporations
| Disposal of property/not usual business
- sale, lease, other disposition of all or substantially all corp prop. outside normal business is fundamental change
42
Corporations
| Dissolution
- Voluntary may be accomplished by
1. majority of directors if shares not issued and business not commenced
2. by following fundamental change procedure
- Attorney General - may seek judicial if corp fraudulently obtained its acticles or corp is exceeding or abusing its authority
43
Corporations
| Judicial Dissolution
- By shareholders:
1. directors are deadlocked, unable to break deadlock, and irreparable injury threatened, or affairs cannot be done advantageously
2. deadlocked in voting power, 2, have failed to elect one or more directors in two consec. meetings
- By creditors:
-
