Corporations Flashcards
(34 cards)
What are the three components needed to form a Corporation?
And what makes up those components?
People, Paper, and an Act are need to form a Corporation.
People: Incorporators
- 2 or more
- Incorporators execute the articles, and deliver them to the secretary of state
- Can be a person or entity
Paper: Articles of Incorporation–a contract between the corporation and the shareholders, and a contract between corporation and state. Need–
- Corporate name: Needs “Corp.”, “Company”, “Inc.”, or “Limited” with its name
- Name and address of each incorporator
- Name of registered agent, and address of the registered office (must be in GA)
- Address of the principal office (or HQ), which may be anywhere.
- Corporation can have perpetual existence, and its purpose can be all lawful business
- Capital structure
Act: Incorporators execute articles and deliver them to the GA Secretary of State, along with a certificate of request to publish the corporation’s formation–this is conclusive proof of valid formation
- Once done, there is a De Jure Corporation
- Then Corp has board meet, select officers, and adopt any bylaws and conduct appropriate business
How did we handle ultra vires activity (activity beyond scope of Articles) at common law, and how do we handle it today?
At common law, any ultra vires contract could be voided as beyond the corporation’s capacity
Today:
- Ultra vires contracts are valid
- Shareholders can seek an injunction
- Responsible managers are liable to the corporation for ultra vires losses
What is the basic capital structure of a corporation? What must the articles contain about stock?
1) Capital structure:
- Authorized stock: Maximum number of shares the corporation can sell
- Issued stock: Number of shares the corporation actually sells
- Outstanding stock: Shares that have been issued and not reacquired by the corporation.
2) Articles must show the authorized stock, the number of shares per class, and information on voting rights and preferences of each class
Does GA law always govern the internal affairs of a GA corporation?
YES, even if the company does business in Hawaii or Alaska–the business affairs doctrine
How is a corporation held liable and taxed?
Corporation is a separate legal person–can sue and be sued, hold property, be a partner, make charitable contributions, and pay income taxes.
- Are directors/officers liable for what corp does? NO
- Are shareholders liable for what corp does? NO
- How can a corp avoid paying income tax? Form an S-Corp instead of a C-Corp
What is required to form a De Facto Corporation?
Corporation by Estoppel only applies in what kind of cases?
1) There is a relevant incorporation statute
2) The parties made a good faith, colorable attempt to comply with it
3) Some exercise of corporate privileges
Corporation by estoppel applies only in contract case, NOT tort cases
What are rules regarding Bylaws?
Bylaws: Not a requirement but corps usually have them for internal governance. Completely internal
- Adopted by Board of Directors or Incorporators
- Can be amended or repealed by Board OR Shareholders
- ->But Articles can reserve this power to SHs only
- If Bylaws and Articles conflict, Articles always win
Liability for Pre-Incorporation Contracts?
Corporation: Not liable on pre-incorporation contracts UNTIL it adopts the contract
-Can be express through Board action, or implied
Promoter: Unless the contract clearly provides otherwise, the promoter remains liable on pre-incorporation contracts until there has been a novation
-Novation: agreement that the corporation will replace the promoter
What is a foreign corporation, and what is required to qualify as one?
A foreign corporation is one formed outside GA–if it transacts business inside GA, it must qualify and pay certain fees
- Transacting business means the regular course of intrastate business
- To qualify, it needs a certificate of authority from the GA SoS. Must appoint a registered agent in GA and pay fees
- If it fails to qualify within 30 days of transacting business,:
- -> There’s a civil fine
- ->Cannot assert a claim in GA
What is involved in the issuance of stock? How is it acquired, and what rights attach?
Issuance of stock: a way for the corporation to raise capital
Subscriptions: Written offers to buy stock
- Pre-incorporation subscriptions are irrevocable for six months
- Post-incorporations are revocable until acceptance (when Board accepts the offer)
Consideration: In exchange for stock, the corporation can receive any tangible or intangible property or benefit to the corporation
- Amount: Board requires adequate amount of consideration
- ->Par: Minimum issuance price (Board can go lower)
- ->No par: No minimum issuance price–Board sets a price
- Re-acquired stock: Stock previous issued, but since reacquired by the corporation
Pre-emptive rights: Right of an existing shareholder to maintain her percentage of ownership by buying the stock whenever there is a new issuance of stock for money
- If Articles are silent on this, NO pre-emptive rights (unless in a statutory close corporation)
- Rights only attach to issuances of MONEY
What are the statutory requirements for Directors?
Number: Must be 1 or more adult humans–number can be set in bylaws or in the Articles
Election: Initial directors can be named in the articles or elected by the incorporators–thereafter, shareholders elect directors at the annual meeting
-Entire board is elected each year unless the articles or a shareholder-adopted bylaw divide the board into half or thirds–“Staggered Board”
Shareholders can remove directors if a majority of shares entitled to vote actually vote to remove (can be removed with or without cause–for staggered board, only for cause)
- Vacancy: Board or Shareholders elect interim director
- Class: Class of stock elects replacement for director elected by that class of stock
Board of Directors takes an act in two ways:
- 1) Unanimous agreement in writing (e-mail OK)
- 2) By passing a resolution at a meeting (individual acton is void UNLESS ratified by a valid act) (conference calls also count)
- Notice: Methods usually set in the bylaws
- ->Required for regular meetings? NO
- ->Required for special meetings? YES. Need 2 days notice of the time and place–purpose isn’t necessary (if there is defect/no notice, defect can be waived)
- ->Directors cannot give proxies or enter voting agreements
- Quorum: Must have majority of all directors to do business (unless bylaws specify otherwise)
- ->If quorum exists, need ONLY majority of those present to pass a resolution
- ——–>But if someone leaves the quorum during the meeting, it is broken
What is the role of the Board of Directors?
The board manages the business–sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental changes to shareholders, etc.
- Board can delegate to committees of directors–BUT committee cannot:
- Fill a board vacancy
- Amend or repeal bylaws
- Propose a fundamental corporate change
What is the Duty of Care?
What is the Duty of Loyalty?
Duty of Care (Burden on the plaintiff): Director must act in what she believes in good faith to be in the best interests of the corporation, and with the care an ordinarily prudent person in similar circumstances would use. Should consider interests of the larger community, not just shareholders.
- Nonfeasance: Director does nothing–liable ONLY IF there’s a loss to the corporation
- Misfeasance: Director does something to hurt the corporation–not liable IF she meets the Business Judgment Rule (BJR) (did they deliberate/analyze?)
Duty of Loyalty (Burden on the Defendant): BJR never applies when there’s a conflict of interest. Duty of Loyalty comes up in a few ways–
- Interested Director Transaction:
- ->Corporation must enter the transaction
- ->Director must know of the deal/her interest
- ->Deal is between the corporation and the director, or a member of the director’s household, or another business of the director’s
- Interest director transaction will be set aside UNLESS directors shows:
- ->Deal was fair to the corporation when entered
- ->Her interest and the relevant facts were disclosed and deal was approved by
- —–>Majority of the disinterested directors voting (at least 2) OR majority of all disinterested shares
- Competing Ventures:
- ->Director cannot compete unfairly with her corporation
- ->Unfair to divulge corporate info to to steal that of customers/employees
- ->Making plans to compete is probably competing
- Corporate Opportunity: Director cannot usurp a corporate opportunity. Cannot take it until he–
- ->Tells the board
- ->Waits for the board to reject the opportunity
- Corporate opportunity: Something the corporation has a legitimate interest or expectancy in, and the corporation can afford
Which directors are liable for board action?
A director is presumed to have concurred with board action UNLESS she objected to transacting business, OR her dissent or abstention is noted in writing (minutes, delivered to presiding officer, written dissent to the corporation immediately after meeting) (E-mail is OK)
Exceptions:
- Absent director not liable for things she missed
- Good faith reliance on info presented by an officer, employee, or committee (ex: when charged with improper distributions)
What are officers and how are they selected?
Officers: are agents of the corporation, so they can bind the corporation by acts for which they have authority
-President has inherent authority to bind the corporation to contracts in the ordinary course of business, but no authority to fire other officers
Selection: Officers are selected by and removed by the board, which also sets officer compensation
How are officers and directors indemnified?
Indemnification:
- BarreD: Corp barred from indemnifying when officer/director is held liable on the basis of an improper financial benefit
- Mandatory: If director is “wholly successful”, on the merits in winning the suit
- Permissive: If the case settle–disinterested directors will look at her good faith and reasonable belief that actions were in corp’s best interest
- Court can always order reimbursement if it is justified in view of all circumstances
- Articles can exculpate directors only for breach of the duty of care
Shareholder management in a close corporation?
Close Corporation: Shareholders ordinarily can’t manage a corporation but can run the corp directly in a close corporation (few shareholders +stock is not publicly traded)
- GA: Where stock is not traded on a national exchange, shareholders can authorize elimination of the board and run the corp
- ->Authorization can come from articles or bylaws, OR unanimous written shareholder agreement
- SHs in close corporations owe fiduciary duties to each other
Licensed professionals may incorporate as a professional corporation–must included “associated” “professional association”, etc.
- Articles must state that purpose is to practice in the profession named and that the corp is governed by the GA Professional Corporation Act
- At least one director and the president must be a licensed professional, and the SHs must be licensed professionals
- No vicarious liability
- When a SH in a PC dies, PC purchases his stock within six months
Shareholder derivative suits? What are the requirements?
Derivative suit: Shareholder is suing to enforce the corporation’s claim, not her own personal claim.
- If SH wins the suit, Corporation receives the money from the judgment
- SH gets costs and attorneys’ fees, usually from the corporation
- If SH loses the suit, can’t recover costs and attorneys’ fees
- SH is liable to the defendant for its costs and attorneys’ fees, IF she sued without reasonable cause
- Res judicata precludes same claim by other SHs
Requirements for bringing a derivative suit?
- Stock ownership when the claim rose and throughout litigation
- Adequate representation of corp’s interest
- Written demand of the board that corp bring suit
- ->Can’t sue until 9 days after demand unless directors reject it before waiting period is up
- Corporation must be initially joined as a defendant
- Suit can be dismissed or settled by parties ONLY WITH court approval
Corporation can move to dismiss the suit upon showing that independent investigation showed the suit was not in the corp’s best inerest
Shareholder voting–who votes
Who votes: Generally, the record shareholder as of the record date has he right to vote
-Record shareholder is the person shown as the owner in the corp records. The record date is a voter eligibility cut-off
Exceptions
-Corp re-acquires stock before the record date–not voted because it’s not outstanding
-Death of a shareholder: Executor can vote the shares
- Proxies:
- ->Must be in writing (fax or e-mail OK)
- ->Signed by the record shareholder
- ->Directed to the secretary of corporation
- ->Authorizes another to vote the shares (Proxy is good for 11 months unless it says otherwise, and can revoke whenever you want, unless it’s coupled with an interest)
- Voting trust: Allows one to pool voting power
- ->Written trust agreement
- ->Transfer of legal title of shares to trustee
- ->Transfer or legal title recorded with corp
- ->Original SHs receive trust certificates and retain all other rights
- ->10 year max
- Voting Agreement (pooling)
- ->SHs can enter into agreement
- ->Needs to be in writing and signed
- ->Specifically enforceable
- ->20 year max; Renewable up to 20 years more
Shareholder voting–where do SHs vote?
Usually take action at a meeting that satisfies quorum and voting rules. They can also act by unanimous written consent(fax or e-mail OK) of the holders of all voting shares
Meetings (Can be anywhere, and by telephone or internet)
- Annual: To elect directors
- Special meeting: Called by board, holders of 25% of voting shares, or anyone authorized in bylaws
Need notice (fax, e-mail, reasonable oral notice) to every SH, for every meeting (between 10-60 days before meeting)
- Contents: When, where, and why (need PURPOSE)
- If fundamental corp change or removal of a director is on agenda, notice MUST say so
- If corp fails to give notice to any SH, ANY act at the meeting is void, UNLESS lack of notice is waived
Waiver can be:
- Express–in writing and signed anytime
- Implied–attending the meeting without objection
Shareholder voting–how do SHs vote?
There must be a quorum represented at the meeting. Determination of quorum is based on the number of SHARES represented, not the number of SHs
- Quorum generally requires a majority of outstanding shares
- Quorum NOT lost if people leave the meeting
- Just need a majority of shares VOTING to have a proper majority
Cumulative voting: Only available when SHs are electing directors
- Multiply number of shares x number of directors to be elected = number of votes
- Only exists if Articles allow for it
Stock transfer restrictions?
Can always sell or give stock away, but can restrict transferability
- Test: Restriction can’t be an undue restrain on alienation
- A Right of First Refusal is valid as long as the Corp pays a reasonable price
- Restriction can’t be invoked against the transferee, unless:
- ->It’s noted on the stock certificate
- ->Transferee has actual knowledge of the restriction
Right of Shareholder to Inspect (And Copy) the Books and Records?
Routine Material: Articles. Bylaws, registration statements, minutes of shareholder meetings
- Can demand access to inspect and copy during regular business hours
- Demand must be in writing at least 5 business days before inspection
- Don’t ned to state purpose
Sensitive material: accounting records, minutes of directors’ meetings
- Can make written demand at least 5 business days in advance
- Must describe the documents and state a proper purpose (related to interest as shareholder)
If corp fails to allow proper inspection, superior court has power to compel production of the records
Directors have unfettered access to corporate books and records
Distributions by Corp to SHs?
Distributions: 3 different types
-Dividends
-Repurchase SH’s stock
Redemption (forced sale of stock to corp)
Distributions are made at the board’s discretion.
- Shareholders have a right to distribution only when board declares it
- Very tough to win an action to compel distribution (would need to make a strong showing of abuse of discretion)
Order of dividends
- Cumulative and Cumulative Preferred (Cumulative over a number of years)
- Preferred and Common Stock (Preferred always first)
For a distribution, can use funds:
- Even if money was lost that year, UNLESS insolvent or distribution would make corp insolvent
- ->Unable to pay its debts as they come due, OR
- Total assets are less than liabilities
Directors are jointly and severally liable for improper distribution IF declaring the dividends was negligent, reckless, or intentional
-SHs are personally liable IF they knew the distribution was improper when they received it (knowledge)
