Corporations Flashcards
(99 cards)
1
Q
What is a corporation?
A
A corporation is a distinct legal entity that can conduct business in its own right by buying, selling, and holding property, and suing or being sued.
2
Q
What is a shareholder?
A
Shareholders are the investors in a corporation and ultimate owners of a residuary interest in a corporation
3
Q
What is a director?
A
Directors are elected by shareholders and are responsible for major corporate decisions and the appointment of officers
4
Q
What is an officer?
A
Officers run the corporation on a daily basis
5
Q
What is a promoter?
A
Promoters try to find investors who are willing to invest in the corporation before a corporation is incorporated. They enter into contracts on behalf of the corporation. They are also fiduciaries of the corporation and cannot make secret profits
6
Q
As a general rule, corporations are ________________ for pre-incorporation agreements. Instead ___________ are.
A
As a general rule, corporations are not liable for pre-incorporation agreements. Instead, promoters are personally liable for any contracts entered into before the corporation exist
7
Q
Under what circumstances can a corporation be liable for pre-incorporation agreements?
A
the corporation, promoter, and third party can execute a special agreement called a novation that alters this default rule, shifting liability from the promoter to the corporation
8
Q
What has to be done in order to incorporate a corporation?
A
incorporators must sign and file the articles of incorporation and pay a fee
9
Q
Are incorporators liable for contracts formed by promoers?
A
No
10
Q
What (6) must articles of incorporation include?
A
(i) the name of the corporation, which must include “corporation,” “company,” “incorporated,” “limited” or an abbreviation
(ii) the agent of the incorporation (and their name and address within the state of incorporation
(iii) the names and addresses of the incorporators
(iv) the duration of the corporation (most are perpetual)
(v) the purpose of the corporation
(vi) the maximum number of authorized shares of each class of stock that the corporation can issue
11
Q
What does a corporation have to do if it wants to increase the number of shares its authorized to sell or issue?
A
If the corporation wants to raise the number of shares they’re authorized to issue, they must go back to the shareholders and amend the articles of incorporation accordingly
12
Q
What does it mean for a corporation to act ultra vires?
A
This is when a corporation acts outside of its stated purpose or in a way that goes beyond the power of the corporation
13
Q
Who can take action to enjoin ultra vires behavior?
A
Shareholders can sue to enjoin an ultra vires action, and such acts will be held unenforceable. A corporation can also take action against ultra vires actions of directors or officers. The state can also initiate proceedings to enjoin such actions.
14
Q
What can corporations do today to avoid liability for ultra vires conduct?
A
In their articles of incorporation, they can state the puropse of the corporation to simply be “engaging in any lawful activity”
15
Q
When does the existence and limited liability of a corporation begin?
A
● The moment of incorporation—when the Secretary of State accepts the fee and files the articles— is when the corporation’s existence and limited liability begins.
16
Q
When is a de jure corporation created?
A
● When all of the statutory requirements for incorporation have been satisfied, a de jure corporation is created.
17
Q
Can a corporation that is not properly formed still be treated as such (with limited liability)
A
Yes, if the organizers (promoters or incorporators):
○ (i) made a good faith effort to comply with the incorporation process, and
○ (ii) have no actual knowledge of the defect in the corporate status
18
Q
Is there a legal obligation for a corporation to file bylaws?
A
no
19
Q
What do bylaws do?
A
Bylaws set forth the day-to-day rules regarding the operation and management of the corporation
20
Q
what is easier to amend: bylaws or articles of incorporation?
A
Bylaws – because because while a board of directors can typically change bylaws, articles can only be amended by the shareholders
21
Q
In the event of a conflict between the bylaws and the articles of incorporation, what controls?
A
Articles of incorporation control
22
Q
Generally, are shareholders personally liable for the debts of a corporation?
A
● As a general rule, shareholders are NOT personally liable for the debts of a corporation, but rather only for the amount invested into the corporation. However, a court may “pierce the veil” of limited liability to avoid fraud or unfairness.
23
Q
What is piercing the corporate veil?
A
Piercing the corporate veil is when the court looks through the corporation after taking all the assets from the corporation, and looks through to the personal assets of the shareholders to obtain more money to satisfy a judgment.
24
Q
What the factors for deciding whether to pierce the corporate veil?
A
● Three factors are considered in deciding whether to pierce the veil:
○ First, was the invester or shareholder acting as an alter ego of the corporation
○ Second, was there a capitalization issue, meaning that the corporation failed to maintain the funds sufficient to cover foreseeable liabilities in its accounts
○ Third, was there evidence that the parties engaged in fraud or fraud-like behavior.
25
When are courts more likely to pierce the veil?
In situation with tort liability and for small, closely held corporations
26
What represents ownership in a corporation ?
● Ownership in a corporation is represented by shares of stock. Stock ownership carries with it both voting attributes and economic rights.
27
What types of stock is there?
Preferred and Common
28
What's the difference between preferred and common stock?
● Preferred stock has preference over common stock with respect to dividends (payments to shareholders) and liquidation. However, upon liquidation, secured creditors will generally take priority over preferred stockholders.
29
Is there a limit to classes of stock a corporation may have?
● Corporations can have as many classes of stock as they choose, associated with different voting and economic rights.
30
What are authorized shares?
● Authorized Shares are the maximum number of shares that the directors of a corporation can sell. This number is set out in the articles of incorporation and shareholder approval is needed in order to sell more.
31
What are issued shares?
● Issued Shares are the number of shares from the authorized pool that the directors have actually sold.
32
What are outstanding shares?
● Outstanding Shares are shares that were once issued to a shareholder and still remain in the possession of the shareholders. That is, they have not been reacquired by the corporation
33
Typically, which kind of shares are allowed to vote and participate in the life of the business?
OUtstanding shares
34
What are Treasury Shares?
Treasury Shares are stock that was previously issued to shareholders but then reacquired by the corporation.
35
Must a corporation issue shares at par value?
● A corporation may, but is not required to, issue stock at par value. If the corporation does, it must sell the shares for at least the minimum par value amount.
36
What is Watered Stock
○ Watered Stock occurs when a corporation sets a par value amount but then sells the stock for less than the stated amount. When this occurs, the shareholders who bought the stock below par value are liable to creditors of the corporation.
37
What is sufficient consideration for shares of stock?
● A corporation can receive any valid consideration that the board of directors deems adequate in exchange for shares of stock. This includes money, but also includes labor, IP rights, etc.
38
Can there be agreement to buy stock before a corporation is formed?
● People can be asked to agree in advance to buy stock before a corporation is formed. This is called a stock subscription. Stock subscription agreements are irrevocable for 6 months prior to incorporation.
39
What are preemptive rights?
● Preemptive rights are rights to acquire stock to maintain a percentage of ownership any time new shares are issued and prevent one’s percentage share in a company from being watered down upon the issuance of new stock.
40
Do shareholders always get preemptive rights?
No, as a default rule, shareholders do not get preemptive rights unless they are negotiated or included in the articles of incorporation.
41
How do shareholders get money out of a corporation?
● There are two ways to get money out of a corporation:
○ (1) The board can declare a dividend, which is usually cash, but could be company assets
○ (2) The board can buy back shares of the corporation
42
Where does the power to authorize dividends lie?
● The power to authorize dividends lies with the board of directors. Shareholders have no right to dividends.
43
Is there any time a board cannot declare dividends?
● The board cannot declare dividends under two circumstances:
○ (1) If the corporation is insolvent or bankrupt, and
○ (2) If by issuing the dividend the corporation would become insolvent
44
Are directors who vote for an unlawful dividend personally liable?
● Directors who vote to authorize an unlawful dividend are personally liable, jointly and severally, to the corporation for the amount in excess of the lawful amount
○ However, a director will not be liable if in doing so he relied in good faith on the corporation’s financial statements
45
What is a shareholder's most important duty?
● The most important duty of shareholders is to elect the board of directors.
● Shareholders also vote on major decisions that affect fundamental changes in the corporation.
46
Is a meeting of the shareholders required?
● Every corporation must hold an annual meeting to elect directors and conduct other shareholder business.
● Special meetings may also be called to vote upon fundamental changes in the life of the business, such as dissolution or mergers. State law typically specifies who may call special meetings.
47
What is the required notice for shareholders meetings?
● Shareholders must be given notice of either type of meeting (annual or special) no fewer than 10, but no more than 60 days before the meeting. This notice must include the time, date, and location of the meeting. For special meetings, notice must also include the purpose of the meeting.
48
What happens if proper notice of a shareholder meeting is not provided?
○ Insufficient notice allows a shareholder to challenge any actions taken at the meeting. However, that notice can be waived by attending the meeting.
49
Are there circumstances when shareholders can take action without a meeting?
● Shareholders can take any action without a meeting by unanimous written consent. This option is usually exercised by closely-held, small companies.
50
Are all shareholders entitled to vote?
● Record dates are used to determine which shareholders are eligible to vote. Directors fix a record date no more than 70 days before a meeting, and only shareholders who actually own shares on the record date are entitled to vote.
51
What is proxy voting?
● Proxy voting authorizes others to vote in accordance with the wishes of the shareholders when they will not be present at a meeting. To be legally effective, a proxy must:
○ (i) be in writing
○ (ii) be signed by the shareholder as of the record date
○ (iii) be sent to the secretary of the corporation
○ (iv) state that it authorizes another to vote the shareholder’s shares, and
○ (v) cannot be valid for more than 11 months, unless otherwise specified
52
What kinds of things do shareholders typically vote on?
Shareholders typically vote on:
○ (i) election of directors
○ (ii) mergers
○ (iii) share exchanges
○ (iv) amendments to the articles of incorporation
○ (v) sales of all or substantially all of their assets, or
○ (vi) dissolution
53
What is a quorum?
● For a vote to be effective, a quorum of the corporation’s shares (not shareholders) must be represented at the meeting either in person or by proxy at the start of the meeting.
A quorum is a majority of the corporation’s outstanding shares.
If a quorum is present, a shareholder vote is effective if the votes cast in favor of the proposal exceed the votes cast against the proposal. It is not required that the full quorum vote on every issue during a meeting.
54
What is cumulative voting?
● Cumulative voting allows shareholders to pool all their votes for electing a board of directors together, so that minority shareholders can put all their votes behind one candidate and guarantee some representation on the board, rather than losing the vote for the election of every individual member. Cumulative voting is not the default, but corporations can choose to permit cumulative voting in their articles of incorporation. Under this system, shareholders are given a number of votes equal to the number of shares they have, multiplied by the number of director positions being voted on.
55
Can a shareholder inspect the corporation's records?
● A shareholder may inspect the corporation’s records in person or through an agent so long as the shareholder states a proper purpose for doing so that relates to the shareholder’s financial interest in the corporation.
56
What are the 2 types of lawsuits that a shareholder can bring against the corporation?
● Direct and derivative
57
What is a direct lawsuit by a shareholder against a corporation
● In a direct lawsuit, a shareholder is suing in the shareholder’s own name for damages and the damages go directly to the shareholder. A shareholder can sue directly if they have been harmed directly. Examples of direct harms include interference with a shareholder’s voting rights or dividends, misinformation about important issues, and tort injuries.
58
What is a derivative lawsuit by a shareholder?
● In derivative lawsuits, shareholders are suing on behalf of the corporation and alleging harm principally to the corporation. One of the most common claims in derivative suits is for breach of fiduciary duties.
○ In derivative lawsuits, the claim must be made in the corporation’s name and any recovery belongs to the corporation. Plaintiff’s attorneys are entitled to have their fees paid by the corporation if the litigation produces a substantial benefit to the corporation.
59
what shareholders have standing to bring a derivative lawsuit against the corporation?
● To have standing to bring a derivative suit, the shareholder must maintain contemporaneous stock ownership. They must have:
○ (1) been a shareholder at the time of the harm
○ (2) hold shares throughout the litigation, and
○ (3) fairly and adequately represent the interests of the corporation.
60
What is the demand futility doctrine?
● The plaintiff shareholder is generally required to first demand that the board of directors bring a lawsuit in the corporation’s name before the shareholder can bring the suit. However, under the demand futility doctrine recognized in most states, demand is not required if it would be futile. This is the case, for example, when directors have been named as potential defendants. This exception is not recognized in states that have adopted the RMBCA.
61
What are controlling shareholders?
● A controlling shareholder is one who owns 50% of the shares + 1 (or more). Someone can also be a controlling shareholder if they own less than that, if they own a substantial percentage of shares in a widely held, large company.
62
When do controlling shareholders owe a duty to fellow shareholders?
● Shareholders generally do not owe a duty to fellow shareholders in the corporation. However, an exception to this rule exists for controlling shareholders. Controlling shareholders may owe a fiduciary duty to minority shareholders in two circumstances:
○ (1) When they sell stock to an outsider/looter
■ A controlling shareholder may be liable for damages caused to others when the controlling shareholder sells stock to an outsider if it was an outsider intent on looting or destroying the company.
○ (2) When they transact with the corporation
■ A controlling shareholder who receives a special distribution or otherwise conducts major business transactions with the corporation to his own benefit owes a duty of loyalty to other shareholders.
63
What does the board of directors do?
● A board of directors manages and directs the management of a corporation’s business affairs. Their main tasks include appointing officers, overseeing officers, and making high-level corporate decisions.
64
Does a corporation have to have a board of directors?
● A corporation must have at least 1 director, and directors must be natural persons. Directors are elected by shareholders and serve limited terms—usually one year.
65
can shareholders remove directors?
● Shareholders can remove directors with or without cause, unless the board is a staggered board. In this system, different classes of directors are elected at different times. These directors can only be removed for cause (if the articles of incorporation so provide). Moreover, only directors elected by a particular class can be removed by that class.
66
when and how are new directors chosen?
● If there’s a vacancy in the board or the size of the board has increased, new directors can either be chosen by shareholders at a special meeting or by the board of directors itself for an interim appointment.
67
compare shareholder meetings with board meetings
● Boards are relatively small and meet regularly. Directors on the board must be given notice for special meetings, but not for regular recurring meetings (contrary to shareholders for their recurring annual meetings). Attendance at a meeting usually waives notice unless the director promptly objects at the meeting.
● Unlike shareholders, directors cannot vote by proxy or enter into voting agreements.
68
What is a quorum for a board of directors' meeting?
● A quorum is a majority of the total number of directors, unless the bylaws specify a higher or lower number. As long as a quorum is present, a resolution of the board will pass upon a majority vote of those present at the meeting. The board may also approve a proposal and avoid a meeting if agreed upon by unanimous written consent.
69
How does a director avoid liability for for a decision with which she disagrees?
● In order to avoid potential liability for a board decision with which a director disagrees, the director must dissent by:
○ (i) entering dissent in the meeting minutes
○ (ii) filing written dissent before the meeting is adjourned, or
○ (iii) providing written dissent by certified or registered mail to the corporation’s secretary immediately following the adjournment of the meeting
70
Who runs the corporation on a daily basis?
Officers, selected by the board. Usually consisting of a president secretary and treasurer
71
Do officers or directors owe fiduciary duties of loyalty and care to the corporation?
both - trick question :)
72
what is the business judgement rule?
● Under the business judgment rule, directors and officers are protected from legal liability. In the absence of fraud, illegality or self dealing, courts will not disturb good-faith business decisions.
73
what is the duty of care?
● Directors and officers owe a fiduciary duty of care to the corporation.
○ They must act with the care that a person in a like position would reasonably believe appropriate under similar circumstances. If an officer has special skills, they are expected to use them.
○ In exercising care, a director or officer is entitled to rely on the expertise of officers and other employees, outside experts, and committees of the board.
74
what is the duty of loyalty?
● In accordance with their duty of loyalty, officers and directors may not receive an unfair benefit to the detriment of the corporation without effective disclosure and ratification.
75
what is the corporate opportunity doctrine?
● Under the corporate opportunity doctrine, directors and officers also cannot usurp or steal a corporate opportunity.
76
what are self-dealing and self-interested transactions?
includes self-dealing transactions in which the director, officer, or their relative receives a substantial benefit directly from the corporation. Not all self-dealing transactions are prohibited, however, since this includes things like salary payments.
○ A self-interested transaction may be upheld if it is disclosed and ratified by either a majority of disinterested directors or a majority of disinterested shareholders.
○ Such a transaction may also be upheld if the director or officer can show the transaction was fair.
77
Are directors indemnified for costs associated with a suit against them that arises out of their role as director?
● Corporations typically pay for the costs of a director or officer’s defense in litigation by purchasing insurance.
○ A corporation is always required to pay the costs of their defense if the director or officer successfully defends the case.
○ A corporation cannot indemnify a director or officer who is liable for receiving an improper benefit from the corporation or otherwise loses a lawsuit.
○ A corporation may (but is not required to) indemnify a director or officer for the costs of a suit if the director or officer:
■ (i) acted in good faith with no intent to harm the corporation, or
■ (ii) had no reasonable cause to believe the conduct was illegal.
78
When can shareholders not sell shares to anyone at any time for any price?
● In general, shareholders can sell shares to anyone at any time for any price. The two major exceptions are (1) closely held corporations and (2) federal restrictions
79
Why are there restrictions on the sale of securities for closely held corporations?
● Private restrictions on the sale of securities for closely held corporations are allowed to prevent outsiders from becoming involved in the corporation, and allow initial shareholders to retain control over shares.
80
What is required for a restriction on the sale of securities to be valid?
○ To be valid, such restrictions must be conspicuously noted in the stock certificate, with a statement of either what the restriction is or a statement saying there are restrictions that will be provided upon request.
81
82
List some typical restrictions imposed by a closely held corporation on the sale of securities.
● Typically, these restrictions include:
○ (i) outright prohibition on transfers
○ (ii) requirements to get the company’s consent before transferring
○ (iii) giving the company the option to buy
○ (iv) giving the company the right of first refusal
83
Can shareholders challenge private restrictions?
● Shareholders can challenge restrictions because they are restraints on alienation. When they do, courts will apply a test of reasonability.
84
What is rule 10b-5?
● Rule 10b-5 governs the fraudulent purchase or sale of stock or other securities like bonds or options.
85
For a private person to pursue a 10b-5 action, what must be true?
○ (1) the plaintiff must have purchased or sold the security
○ (2) the transaction must have involved interstate commerce
○ (3) the defendant must have engaged in fraudulent or deceptive conduct
■ This means that they must have made an untrue statement of material fact or failed to state a material fact that is necessary to prevent statements already made from being misleading. Opinions are predictions, however, do not count as untrue statements of material fact.
○ (4) the conduct must have related to material information
■ Information is material if a reasonable investor would find the fact important in deciding whether to purchase or sell
○ (5) the defendant must have acted with the requisite scienter
■ The statements must have been made either intentionally or recklessly.
○ (6) the plaintiff must have relied on the defendant’s conduct
○ (7) the plaintiff must have suffered harm
■ There must have been a causal connection between the conduct and the harm.
86
What do courts look at to calculate damages in a 10b-5 violation?
● In computing damages for violations of 10b-5, courts look at the difference between the stock’s value and the price the plaintiff paid or received. No punitive damages are allowed.
87
What is section 16(B)?
● Under § 16(B), a corporate insider can be forced to return short-swing profits to the corporation. These are profits made from buying and selling securities within a 6 month window. The reason for buying or selling is irrelevant.
88
Does Section 16(B) apply to all corporations?
No, Section 16(B) only applies to corporations with securities traded on national exchanges, or corporations with assets of more than $10 million and more than 500 shareholders.
● This section also only applies to purchases or sales by corporate insiders, which includes directors, officers, or shareholders who hold more than 10% of any class of stock.
○ For this purpose, Officers include the president, vice president, security, treasurer and comptroller
89
True or False: Section 16(B) changes in stock ownership be reported to the DOJ
False: corporate insiders must report changes in stock ownership to the SEC.
90
What are some fundamental changes to a corporation that must be approved by the shareholders and directors?
merger, sale of assets, stock acquitisiton [Kenz -this seems weird], amending the articles of incorporation, dissolution
91
What is the difference between a merger and a consolidation?
● Merger involves the combination of two or more corporations where one corporation survives and assumes the assets and liabilities of the other.
● Consolidation is when two corporations combine but neither survive. A new entity is created, and that new entity assumes the liabilities and assets of both corporations.
92
What is dissolution?
● Dissolution is when the existence of a corporation is extinguished voluntarily by the shareholder and the directors or involuntarily by disgruntled parties.
93
Can a corporation be dissolved involuntarily?
○ A corporation may be dissolved involuntarily by creditors if the creditors show that the corporation is not paying its debts.
○ A corporation may also be dissolved by shareholders if the shareholders can show:
■ (1) that the corporation’s assets are being wasted
■ (2) that the directors are acting fraudulently, or
■ (3) that the directors and shareholders are deadlocked
94
What is a dissenter's right of appraisal?
● If a shareholder does not wish to participate in a duly authorized merger, asset sale, share exchange, or amendment of articles, the shareholder is entitled to a dissenters’ right of appraisal.
○ This means that they are entitled to have their shares purchased from them by the corporation at a fair value, determined by the court if the shareholder and the corporation disagree as to the value.
95
How does a shareholder invoke dissenters' rights of appraisal?
● To invoke dissenter’s rights, three things must happen:
○ (1) The shareholder must send written notice to the corporation prior to the vote of her intent to dissent
○ (2) At the meeting, the shareholder must abstain or vote “no”
○ (3) The shareholder must make prompt written demand for fair market value after the action has been approved
96
What is a close corporation?
● A close corporation is a term describing a corporation with few shareholders.
○ In closely held corporations, the shareholders are also often directors and officers. These corporations are typically not publicly traded.
○ Relaxed rules govern closely held corporations. For example, while directors of large corporations cannot agree to voting blocks, those in closely held corporations can.
97
What is an S Corp?
● An S Corporation is largely treated like a regular corporation, but it gets special treatment for tax purposes. It is not taxed at the entity level. [kenz-this is not a complete answer but it is what was in your outline]
98
what is an LLC?
Limited liability corporation; ● An LLC combines the limited liability of corporations with the tax treatment of a partnership. Generally there are no limitations on the number of shareholders an LLC can have, no residency requirements, and no natural person requirements, so the formation of LLCs is more flexible than S Corps.
99
Name some key characteristics of an LLC
● The key characteristic of an LLC is that an LLC files articles of organization and an operating agreement with the state.
● Moreover, the owners of an LLC are called members rather than shareholders. And, an LLC is presumed to be managed by all of its members.
