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Flashcards in Corporations Deck (30)
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What is Required to Find the Formation of Corporation?

De Jure Corp: acceptance of articles of incorporation by secretary if state's office.

De Facto Corp: good faith attempt to comply with the incorporation statute.


What is "Corporation by Estoppel?"

A person dealing with an entity they believe is a corporation is estopped room on arguing that it is not a corporation.


What Are Promoters?

People who enter contracts on behalf of a forming corporation; promoter is liable until there is a notation substituting the corporation or until the corporation adopts the agreement.

Promoters owe the corporation a duty of loyalty to not usurp the corporations opportunities.


What Are Subscriptions?

Written offers to buy corporate stock. Pre incorporation subscriptions are irrevocable for 6 months unless provided otherwise. Post incorporation subscriptions are revocable until the corporation accepts them.


What is Validly Issued Stock?

Issued pursuant to articles of incorporation and authorized by appropriate body as noted in by laws.


What is Fully Paid Stock?

Traditional rule allowed money, tangible property, intangible property, or services already performed to constitute valid consideration. The modern trend is to allow any tangible or intangible property of benefit to the corporation.


What is Par Value?

The minimum issuance price for corporation's stock


What is Watered Stock?

Stock that is not fully paid or was issued at a price below par value.


What Are a Shareholder's Preemptive Rights?

A shareholder has the right to purchase more stock in order to maintain her percentage share of ownership whenever new common (voting) stock is issued for consideration.


What is the Function of Corporate Directors?

Statute requires one or more adults, shareholders must elect at an annual meeting or as provided in the by laws, shareholders can remove directors with or without cause, and a corporation may act through its board by unanimous written consent or through votes at a meeting.


What are a Director's Duties to the Company?

Care - must act as prudent person. Nonfeasance creates liability for director if it caused a corporate loss; malfeasance creates liability only if the business judgment rule does not shield the director.

Loyalty - must not usurp corporate opportunity. Deals with interested directors are void unless they are fair to the corporation or the interest and relevant facts are disclosed to the corporation with an approval of majority of disinterested directors.


What is the Presumption of Director Action?

A director is presumed to have concurred with any board action unless her dissent or abstention is noted in rewriting. This will not apply to absent directors or if the director relies on another to note her dissent in good faith.


What is the Role of Indemnification in Corporate Affairs?

A Director is entitled to indemnification from legal expenses by the corporation if it is successful defending a suit rising out of its responsibilities as director.

A corporation may not indemnify a director if the director is liable to the corporation or received an improper personal benefit.


What are Shareholder Derivative Suits?

Shareholder sues to enforce claim of corporation against directors. Plaintiff must have

1) held shares at the time of questionable conduct;

2) must be able to adequately represent the corporation; and

3) must make a written demand of the corporation to bring suit, unless such demand would be futile.


What Are the Requirements for Share Voting Proxies?

A shareholder authorizes another shareholder to vote according to his interest. Valid for 11 months unless otherwise agreed, and revocable unless the proxy is coupled with an interest. Shareholders may also enter voting trusts or arrangements whereby their shares will be voted by a trustee or single proxy.


What is a Quorum?

For a meeting, a majority of outstanding shares, but no less than 1/3 must be present in order to take action. To pass a resolution requires majority of shares present at meeting or majority of shares actually voting (Split in authority)


What is Cumulative Voting?

A method of voting all of your available votes for one board member. A shareholder with 100 shares and two available board seats has 100 votes to cast for either under regular statutory voting. Under a cumulative voting scheme the shareholder may vote 200 votes for a single director.


Shareholder's Right to Inspect Books

Traditional view is that the shareholder must have owned the stock for 6 months or own at least 5%, but the modern trend allows any shareholder to exercise this right.


What Are the Requirements on Corporate Distributions?

Board has discretion to declare a dividend distribution. A strong showing of Abuse of Discretion is required to force a distribution.

Order of Distribution:

Preferred Shareholders then Common Stockholders.

Dividends come from earned surplus (earnings minus losses minus previously distributed dividends) or capital surplus (sale of stock over par value).


What Are the Requirements for Merger and Consolidation?

Directors must adopt resolution and submit to vote of shareholders by majority. Dissenting shareholders are entitled to appraisal rights upon:

1) their written objection;
2) their vote against the merger; and
3) written demand for purchase.

A short form merger does not require shareholder approval.


What is a Required to Execute a Sale of Corporate Assets?

Sale of substantially all assets requires director approval and majority of shareholders.

Sale of all assets (de Facto merger) may trigger appraisal rights (and successor liability for next company).

Shareholders must still VOD


What is Required to Amend the Corporate Articles of Incorporation?

Requires board action and approval by majority of voting shareholders.


What Is the Procedure for Corporate Dissolution?

Voluntary - board action, shareholder majority

Involuntary - court ordered via shareholder petition because of:

1) director abuse;
2) director deadlock that harms the company; or
3) shareholder deadlock and failure for at least two annual meetings to fill vacant board seat.

The court may order the buy out of a dissenting shareholder.


What Are the Duties of Controlling Shareholders?

Shareholders with controlling interests have a duty to not act in a way that unfairly prejudices minor shareholders, such as:

Selling to corporate looters;

Selling corporate assets;

Selling board seats through controlling votes.


When is Misappropriation Used as a Theory of Recovery?

A duty to disclose is imposed on someone who has misappropriated public information.

A director or controlling shareholder who has breached a fiduciary duty owed to someone else is liable under misappropriation when brought by the government.


What Conduct is Prohibited by Securities Act 16(b)?

Director, officer, or 10% shareholder's profit from sale of equity stock in the corporation must be returned to the corporation if gains are made within a 6 month period. A profit is deemed to occur if at any point during the 6 months, the stock was also sold at a lower price.


What Conduct Is Prohibited By Securities Act section 10b-5?

Requires knowledge of falsity and intent to mislead (scienter)


What is Insider Trading?

Fiduciary trades on or provides nonpublic information to another who purchases stock at a price higher or lower because of exposure to nonpublic information,


What Are the Requirements Imposed by Sarbanes Oxley?

Attorneys for a company must report known wrongdoing or financial fraud first to the GC, then to the Board, and then to the shareholders. If nothing is done to correct the wrong, the lawyer may report to SEC or other authority.

Directors must certify financial statements and disclosures that they are accurate to the best of their knowledge.


What is required to Pierce the Corporate Veil?

Commingling Funds as shareholder and individual (alter ego);

Failure to Observe corporate Formalities; or