Flashcards in Corporations Deck (130):
Six Fact Patterns of Corporations
1. Organization of a corporations
2. Issuance of Stock
3. Directors and officers
5. Fundamental corporate changes
6. Federal Securities
What does it take to form a corporations?
People of Corporations
Must have one or more
Person or Entity
What does an Incorporator do?
You execute the Articles and deliver them to the SoS
Paper of Corporations
Articles of Incorporation
Articles of Incorporation
1. The articles are contract between corporation and shareholders.
2. And also a contract between corporation and state.
Information in the Articles
1. Names and Addresses,
2. No durational requirement.
3. Statement of Purpose
4. Capital Structure
Names and Addresses
1. Corporate Name
2. Names and address of each incorporator
3. Names and address of each initial director
4. Name and address of the registered agent and office
**Corporation, Company, Limited, Incorporated MUST be there
What if no comment on duration?
It has perpetual existence
Can the articles of Van Refrigeration, Inc. indicate that the corporation's purpose is to "engage in all lawful activity, after first obtaining necessary state agency approval"?
-In some state, general purpose is presumed and the articles need not say anything about the coproration's purpose.
What about ultra vires rules?
1. Ultra Vires contracts are valid
2. Shareholders can seek an injunction.
3. Responsible managers are liable to the Corporation for ultra vires losses
Ultra Vires Activity
It's beyond the scope of the articles.
Capital Stock Requirement of Aritcles
1. Authorized stock,
2. Number of shares per class,
3. Information on voting rights and preferences of each class.
maximum number of shares the corporation can sell
number of shares the corporation actually sells
shares that have been issued and not reacquired.
Deliver the Articles to the SoS:
1. Conclusive proof of valid formation
2. De jure corporation
What happens after Act?
The board of directors select officers and adopts any bylaws and conducts other appropriate business
Legal Significant of Formation of Corporation
1. Internal affairs of a corporation are governed by law of the state in which the corporation is formed.
2. Corporation is a separate legal person.
3. Taxed on its profits, in addition, shareholders are taxed on distributions.
Can we form a corporation and avoid having it pay income tax at the corporate level/
- No more than 100 human shareholders
- US citizens or residents
= One class of stock
- Not publicly traded.
Are the directors or officers liable for ehat the entity does?
Are the shareholders liable for what the entity does?
Generally, who is liable for what the corporation does?
**Everybody is responsible for their own torts
De Facto Corporation
1. There is a relevant incorporation statute (there is in every state)
2. The parties made a good faith, colorable attempt to comply with it.
3. Some exercise of corporate privileges
De Facto and Corproation by Estoppel
Anyone asserting either doctrine must be UNAWARE of failure to form de jure corporation.
De Facto Corporation v. State
Not treated as a corporation.
What if the documents are sent and lost in the mail, are the SHs personally liable on the contract?
Yes unless the court applies DFC
Corporation by Estoppel
One that treats a business like a Corporation will be estopped from claiming that it is something else.
When does Corporation by estoppel apply?
Contract, NOT TORT
What is the status of these two doctrines (DFC, CBE)
Abolished in many states
-Not required, but useful
-Not filed with the State, internal
-Adopted by the Board at the Organizational Meeting (Page 3)
-SHs (Many states Board also) can amend
If the bylaws conflict with the articles, which controls?
Corporation must adopt, they are not automatically liable.
How does a Corporation adopt a Contract?
1. Accepting a benefit
What about the liability of the promoter?
The promoter is liable on pre-incorporation contracts until there is novation.
An agreement of the promote, the corporation, and the other contracting party that the corporation replaces the promoter under the contract?
Will P be liable on the lease if Oscar de la Rental Cars, Inc. is never formed?
Will P be liable on the lease if Oscar de la Rental Cars, Inc. is formed and adopts the lease?
Yes, because no novation corporation is liable as well.
Foreign Corporation transacting business in this state must qualify and pay prescribed fees
1. One incorporated outside this state.
2. Transacting business means the regulare course of intrastate business activity.
- not sporadic
1. Get Certificate of Authority from the SoS
2. Gives information on Articles
3. Good standing in Home state
What is an issuance?
Corporation selling its OWN stock.
Written offers to buy stock from corporation
Revocation of Pre-Incorporation Subscriptions
Irrevocable for Six months.
UNLESS, says otherwise or all subscribers agree
Are post-incorporation subscriptions revocable?
Yes until accepted by corporation.
At what point are the corporation and the subscriber obligated under a subsctiption agreement?
When the board accepts the offer.
Consideration for Stock
1. Form of Consideration
2. Amount of Consideration
Form of Consideration
1. Every State:
- tangible or intangible property
- Services already performed for the corporation
2. Split authority (unpaid stock)
- promissory notes
- future services
Amount of Consideration
1. Par Stock or not
2. Treasury Stock
3. Property or Past Services
Minimum issuance price
Stock the company issued and then reacquired
Who determines value of property or services?
Board of Directors
Is the board's valuation conclusive?
Yes, if made in good faith.
Difference between actual and par value
Who is liable for watered Stock?
Board if they knowingly authorized the issuance.
X is liable for the water, you are charged with notice of par value
Third party is NOT if they did not know about the water.
Right of existing SH to maintain their percentage of ownership by buying stock whenever there is a new issuance.
MUST BE FOR MONEY
If the articles are silent, do we have pre-emptive rights?
Split, some states yes, some no
LOOK FOR: Mention of pre-emptive rights and issuance for money.
DIRECTORS AND OFFICER
DIRECTORS AND OFFICERS
Statutory Requirements of Directors
1. One or more person
2. Elected by SHs at annual meeting.
Must tell you.
Cycle to have a rotation.
How to remove a director?
SH Vote of majority;
With or without cause UNLESS staggered board (for cause)
What about board vacancies?
Board or SHs.
If SHs created it, SHs should select the replacement.
General Characteristics of Corporations
Limited Liability for Owners, Directors, and Officers
Free Transferability of Ownership
Continuity of Life
Double Taxation (S taxed like Partnership)
Federal Diversity Jurisdiction
Corps deemed citizen of state of incorporation and principal place of business
Principal place of business will be state high level officers direct, control, and coordinate activities
Mary Ann and Ginger incorporate a business called Castaway Foods, Inc. The articles include a purpose clause stating that the corporation was formed for the purpose of baking and selling coconut cream pies. The business is successful, and a few years later, in an attempt to expand business, Mary Ann enters into a contract with "skipper to purchase his tour boat. When Mary Ann tells Ginger about the deal she is furious and brings action to enjoin purchase. What result?
The court will grant the injunction only if Skipper knew that the transaction was beyond CF's purpose clause.
Are Charitable Donations Ultra Vires?
Most states and RMBCA now allow corporations to make charitable donations.
Note this also extends to loans to employees, officers, or directors.
Andrea and Bart agree to form AbbeyCorp. They properly draw up the necessary papers and Bart tells Andrea that he will file them the next day. Bart forgets to file the papers and forgets to tell Andrea of his failure. The following week, Andrea enters into a contract with a supplier on behalf of AbbeyCorp. Can Andrea avoid personal liability?
Andrea will probably avoid personal liability on the contract under the de facto corporation doctrine.
A and B agree to form AbbeyCorp. They draw up the necessary papers and mail them to secretary of state. A few days later A enters into a contract with a supplier on behalf of AbbeyCorp. Thereafter A and B receive letter stating AbbeyCorp articles are not filed due to missing incorporators' signatures. Will A be personally liable?
A can probably avoid personal liability under the de facto corporation doctrine.
X, an outsider, deals with entity as though it were a valid corporation. Upon discovering defect in formation X seeks to hold A, a shareholder, personally liable. Will A, the shareholder, be liable?
If A has no prior knowledge of the defect they can assert X is estopped, as X has treated the corporation as though it were properly formed.
A is bound by a covenant not to compete with B. Can B avoid covenant by forming corporation and having it compete with B?
No: B's corporation will be pierced on a Fraud theory.
E.g. B subject to personal liability for competing with A.
A and B have agreed to form a corporation to engage in a real estate business. A tells B that he can acquire piece of land suitable for subdividing for $100,000. A acquires land for $70,000 and pockets the difference. Is A liable to B as a promoter?
Yes: A is liable to B for $30,000.
A has breached fiduciary duty as a promoter.
A, B, and C decide to form a corporation with 200,000 shares of authorized common stock. they plan to sell 50,000 to the public. Prior to formation they obtain subscriptions to 20,000 shares. A, B, and C contribute property in exchange for 150,000 shares and "profit" on the transaction. Obtain approval of transaction from subscribers for 20,000 shares. Remaining 30,000 shares are sold within three weeks following formation, but promoters do not disclose profits to new shareholders. Are A, B, and C liable to corporation?
Yes: Under Bigelow rule the transaction was not approved by all shareholders contemplated as part of original plan.
F and B pool their money to form a corporation to run a rock quarry. F approaches Mr. S, explains the plans, and enters into a contract to purchase small quarry from S for $100,000, with $50,000 at closing and $50,000 to be paid 6 months later. Contract provides for closing to occur in 45 days so that F and B can incorporate before the closing. F signs contract "F, on behalf of Corp." F and B have falling out and do not incorporate. Is F liable?
F will likely be personally liable. F entered K with S knowing that corporation was yet to be formed.
Promises from subscribers to buy stock in corporation.
Irrevocable for six months unless otherwise provided or all subscribers consent to revocation.
Promoter's Relations with Each Other
Occupy fiduciary relationship
Breach fiduciary duty if secretly pursue personal gain
Promoter's Relationship with Corporation
Promoter's fiduciary duty one of fair disclosure and good faith
Breach of Fiduciary Duty Arising from Sales to Corporation
Promoter profiting by selling property to corporation may be liable for profit unless all material facts of transaction disclosed
Disclosure must be to all who are contemplated
Fraud by Promoters
May always be liable if plaintiffs show fraudulent misrepresentations or fraudulent failure to disclose
State or Federal Securities law
Federal law preempts state regulation of securities except penny stocks, intrastate offerings exempt under 1933 Act; actions against brokers for fraud; and notice filing requirements
Promoter Liability: Promoter Contracts
Under RMBCA anyone acting on behalf of corporation knowing that it is not in existence is jointly and severally liable for obligations
Promoters personally liable until corporation adopts contract and benefits from it
Released by Novation or express agreement
Corporation Liability: Promoter Contracts
enerally none until express or implied adoption
Shareholder Control Over Management
Power to manage corporation generally vested in directors
Annual meeting--court may order if within 6 months of end of fiscal year or 15 months after last meeting
Special--may be called by board of directors, holders 1/10 more of all shares entitled to be cast
Notice Requirement: Shareholder Meetgin
Must be notified not less than 10 or more than 60 days prior
Special Meetings must state place, day, and hour of meeting
Eligibility to Vote
Record date is fixed by board
Must be shareholder of record to vote
Proxies: Shareholder Voting
Shareholders may vote by proxy executed in writing
Duration--valid for 11 months unless states irrevocable or coupled with an interest
Mechanics of Shareholder Voting
Quorum--majority of outstanding shares entitled to vote unless articles or bylaws require greater number
Voting--Absent contrary provision in articles each share entitled to one vote
If quorum present votes case in favor of matter exceed votes cast against matter unless articles or bylaws require greater proportion
Directors are elected by plurality of shareholder votes
Cumulative Vote-multiply number of board to be elected by shares and that is number of votes each person has
Shareholder Management Agreements
Restrictions on Transfer of Stock--must be reasonable and conspicuously noted
Written agreement of shareholders under which shares owned by parties to agreement are transferred to trustee who votes shares and distributes dividends in accordance with provisions of voting trust agreement
Rather than create trust shareholders may enter into written and signed agreement providing for manner of how shares will be voted
Shareholder Inspection Rights
Qualified Right--under RMBCA shareholder may inspect corporate books and records on five days written notice stating proper purpose
Unqualified Right to Articles and Bylaws, Board Resolutions, etc...
Must be provided for in articles
Right of shareholder to purchase newly issued shares in proportional ownership interest
Direct Actions--may be brought for breach of fiduciary duty owed to shareholder
Derivative Actions--shareholder asserts corporation's rights
Derivative Action Requirements
Shareholder must have ownership at time of wrong
Must make written demand 90 days prior to filing unless notified of rejected demand or irreparable injury would result
Dismissed if not in Corporation's Best Interest
Burden for Derivative Action
On shareholder to show not in best interests of corporation
Dividends, Redemption of Shares, Repurchase of Shares, Distribution of Assets upon liquidation, etc...
Rights to Distribution
One class must have other than that largely discretionary
"Solely within the directors discretion"
Solvency Limitation--cannot pay if would be unable to pay debts as become due or total assets would be less than sum of total liabilities
Articles may limit board's right to declare dividends
Contractual Rights Regards to Distributions
May be divided into classes with varying rights
Common Preference Terms--Preferred Shares have right to receive dividends before common shareholders
May or may not accumulate if unpaid in particular year
Rights After Declaration
Generally treated as creditors
May receive if record holder on record date
Liability for Unlawful Distributions
Directors who votes or assents to distribution that violates rules is personally liable to corporation for amount of distribution that exceeds what could have been properly distributed
Not liable distributions approved in good faith
Generally no fiduciary duty
Liability pursuant to shareholder agreement
Board of Directors
Responsible for management
Do not have to be shareholders
Need only one, can require as many as desired
Removal of Directors
May be removed by shareholders with or without cause
May act in regular or special meetings
Regular meetings may be held without notice; special meetings need two days written notice of date, time and place
Attendance constitutes waiver unless for sole purpose of protesting lack of notice
Majority of board of directors constitutes a quorum unless higher or lower required
Action approved through majority of directors present
Unanimous Written Consent also ok
Director Duties and Liabilities
Personal Liability of Directors may be limited
Duty of Care
Duty to Disclose
Duty of Loyalty
Limitation of Director Liability
May eliminate for money damages
May not limit or eliminate liability for financial benefit received by director which she is not entitled; intentionally inflicted harm; unlawful distributions; or intentional violation of criminal law
Director Duty of Care
Duty to manage to best of their ability through good faith, care that an ordinarily prudent person in a like position, and manner reasonably believe to be in the best interest of the corporation
Will be protected by business judgment rule if meet this standard
Burden on Challenger
Director may rely on reports or other information
Director Duty to Disclose
Must disclose all material facts
Director Duty of Loyalty & Conflicting Interest Transactions
Conflicting Interest Transactions
Conflicting interest if director or family is party to the transaction; has beneficial interest/interest would be reasonably expected to influence director's judgment; or director, general partner, agent, or employee of another entity that transaction so important that it should be brought up in the normal course of business
Standard to Uphold--Will not be enjoined if transaction approved by majority of directors without conflicts after all material facts were disclosed; transaction approved by majority of votes entitled to be cast by shareholders without conflicting interest after all materials disclosed; or fair to corporation
Special Quorum Requirements
Corporate Opportunity Doctrine
Directors fiduciary duties prohibit them from diverting business opportunity from corporation themselves without first disclosing to corporation
Corporation must have interest or expectancy
Lack of Financial Ability Not a Defense
May recover profits which director usurps
RMBCA does not require
Provides shall have as described in bylaws
Duties determined by bylaws
Rules of Agency determine authority and powers
Must carry out duties in good faith and with care of ordinarily prudent person in like situation
Power to resign at any time by deliverying notice
Power to remove officer any time with or without cause
Indemnification of Directors, Officers, and Employees
Must indemnify if prevailed in defending proceeding
May indemnify for reasonable expenses incurred unsuccessfully defending suit if acted in good faith and believed conduct was in best interest of corporation; not opposed to best interests; or not unlawful
Does not have to indemnify if director found liable or director received improper benefit
Fundamental Change Requirements
Written Notice to Shareholders;
Shareholders approve by majority of votes to be cast; and
Changes in form filed with state
Types of Fundamental Changes
Merger, Share Exchange, and Conversion
Disposition of Property Outside Usual and Regular Course of Business
Merger: No Significant Change to Surviving Corporation
Approval of surviving corporations not required if articles of surviver will not differ from articles before; each shareholder whose shares are outstanding will hold same number with identical preferences, limitations, and rights; and voting power issued as result of merger will comprise no more than 20% of voting power
Short Form Merger of Subsidiary
Parent company owning at least 90% may merge without approval of shareholders of directors of subsidiary
Disposition of Property Outside Usual and Regular Course of Business
Sale, lease, exchange, or other disposition of all or substantially all (75% plus)
Must follow fundamental change procedure
Protection from Fundamental Changes
Dissenting Shareholders' Appraisal Remedy
Applies to shareholders entitled to vote and shareholders of subsidiary in short form; shares are being acquired in share exchange; entitled to vote on disposition of all or substantially all of corporation's property and rights will be materially and adversely affected
Not available if publicly held corporation
Procedure for Appraisal Right
Give corporation notice
Before vote written notice of intent to demand payment
Corporation must give notice within 10 days after approval
Shareholders must demand payment
Corporation must pay fair value (estimated)
If shareholder is dissatisfied has 30 days to counter with own estimate
Court will determine if corporation files action protesting
The Williams Act
controls tender offers
If bidder makes a tender offer and offer will result in bidder obtaining 5% of class of securities bidder must file schedule 14D.
Dissolution by Incorporators or initial directors--if shares not yet issued or business not yet commission a majority vote and return to secretary of state of articles
Dissolution by Corporate Act--may dissolve by corporate act approved under fundamental change procedure
Effect--not allowed to carry on business other than what is appropriate to wind up
State may bring administrative action
Corporation has 60 days to correct or show grounds do not exists
Action by Attorney General
Action by Shareholder--may seek if directors are deadlocked and irreparable injury is threatened; directors acted illegally, oppressively, or fraudulently; deadlock in voting power and failed to elect one or more directors for period including at least two consecutive meetings; or corporate assets being wasted, misapplied, or diverted for noncorporate purposes
Professional practicing in corporation will be personally liable for malpractice