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Flashcards in Corporations Deck (65):
1

FORMATION

People, paper, act:

People:
- Organizers
- Paper:
- COF
Act
- Organizers sign COF
- Deliver to SOS (corp existing begins at SOS’s filing)

2

FORMATION

Paper:
- COF (required and optional):

Paper:
- COF
- Corp name (can’t be misleading—e.g. can’t be “Bank” if you’re not a bank)
- Name/address of each organizer
- Number of initial directors
- Name/address of each director
- Registered agent
- Statement of purpose (“engage in all lawful activity”)
- Capital structure:
- Authorized stock
- Number of shares per class
- Par value
- Voting rights
- Pre-emptive rights (optional)
- Close corp status (optional)
- Cumulative voting (optional)

3

FORMATION

Ultra vires acts

Ultra vires acts
- Anything beyond the scope of the Statement of Purpose in COF
- The K is VALID—not VOID as under common law
- ONLY way to challenge these acts:
- SHs can seek an injunction (ONLY available if all parties are before the court)
- The CORP can sue responsible managers for losses
- TXAG can seek injunction

4

FORMATION

organizational meeting

organizational meeting

* Give 3 days NOTICE of the organizational meeting*

At the meeting
- Select officers
- (BOD already chosen in COF)
- Adopt BYLAWS (unless a close corporation)
- Anything else they want to do

5

S corp

S corp
- Fewer than 100 SHs
- Only one class of stock, not publicly traded
- No double taxation—the corp doesn’t pay tax on its income, but SH’s still pay taxes on their distributions

6

DE FACTO and ESTOPPEL

*This doctrine may have been abolished in TX—it’s at least disfavored.
*Applies ONLY IN CONTRACTS*
*Cannot avoid tort obligations by asserting that you were a de facto corporation*

“De facto” corporation.
- There is a relevant incorporation statute (TBOC)
- Good faith, colorable attempt to comply
- Exercised corporate privileges (acted like a corp)

Estoppel
- If a third party treats you like a corp, they are estopped from arguing otherwise later.

7

BYLAWS

Are they necessary?

Amending the bylaws:

What if the COF conflicts?

BYLAWS

*EVERY corporation—except close corp—must have bylaws*

Govern internal management, not filed with SOS

Amending the bylaws
- SHs can amend
- BOD can ament
- COF can limit who can amend

COF trumps any conflicting language in the bylaws.

8

PRE-INCORPORATION K’s

When is CORP liable?

Promoter liability:

PRE-INCORPORATION K’s

Corporation is NOT liable on pre-incorporation K’s unless it ADOPTS them.
- Express action of the BOD
- Implied, accepting the benefit of the K

Promoter liability
- Unless the K says otherwise, the promoter IS LIABLE
- UNLESS there is a novation (adoption is not enough)

9

ISSUANCE OF STOCK

Who authorizes issuance?

ISSUANCE OF STOCK

BOD authorizes issuance

10

ISSUANCE OF STOCK

Outstanding:
Treasury:
Issued:

Outstanding: in the hands of a SH
Treasury: has been issued before, but is now back in the hands of corp
Issued: sold to a SH at least once

11

ISSUANCE OF STOCK

Subscriptions—when are they revocable?

Revocable
- PRE-incorporation subscriptions are IRREVOCABLE for 6 MONTHS
- POST-incorporation subscriptions are revocable until ACCEPTED by the corp (BOD accepts and NOTIFIES the subscriber in writing)

12

ISSUANCE OF STOCK

Consideration

Consideration
- REQUIRED—otherwise you have watered stock
- Par value
- Minimum issuance price
- Can change this in the COF
- “No par” = no min price for the stock
- TREASURY stock has NO PAR VALUE, can be sold for any price
- When stock is sold, BOD determines the VALUATION for the consideration received. This is considered valid, unless fraud.

13

WATERED STOCK LIABILITY

Director liable IF:

Purchaser liable IF:

Subsequent third party purchaser liable IF:

WATERED STOCK LIABILITY

Selling stock for less than par value = watered stock. Someone has to pay.

Director liable
- IF KNOWINGLY authorized

Purchaser liable
- No defense. Purchaser is charged with notice of par value.

Subsequent third party purchaser
- IF purchased with NOTICE of the water

14

PRE-EMPTIVE RIGHTS

When can SH assert these rights?

PRE-EMPTIVE RIGHTS

New issuance of stock FOR MONEY that will dilute the percentage of ownership by existing SHs. SH has the right to purchase some of the stock to maintain his same share of ownership.

*COF must OPT IN to create these rights—if silent, no pre-emptive rights
*NO PRE-EMPTIVE RIGHTS for stocks sold for money within 6 MONTHS OF FORMATION

15

SH RIGHT TO INSPECT BOOKS

SH has a right to inspect books IF:

SH RIGHT TO INSPECT BOOKS

SH has a right to inspect books IF:
- Owned shares for 6 months, or owns 5% of outstanding shares
AND
- Makes a written demand for a PROPER PURPOSE (reasonably related to interests as a SH)

Corp owes SH expenses if SH has to enforce the right.

16

BOD

How many DRs?

How many DRs?
- Initially set in the COF
- BYLAWS can change this

17

BOD

Who elects them?

Election
- SH’s elect directors at the annual meeting
- Classified/staggered elections can be set in the bylaws

18

BOD

How can a director be removed?

Removal
- SH’s, by majority vote
- With OR without cause

19

BOD

If there's a vacancy, who fills it?

Vacancy
- SH’s or the BOD can fill the vacancy

20

BOD MEETINGS:

- Notice:
- Quorum:
- Voting:

BOD MEETINGS:
- Notice:
- Required for SPECIAL meetings
- Time
- Place
- Not required for regular meetings
- Failure to give notice VOIDS action taken at the meeting
- UNLESS the DR waived in writing or by attending and not objecting
- Quorum
- Maj of BOD
- Broken if someone leaves
- Voting
- BOD action = majority vote of those present
- DR’s CANNOT vote by proxy or sign voting agreements

21

DIRECTOR LIABILITY

Which DR’s are liable?

Ways to get out of liability:

DIRECTOR LIABILITY

Which DR’s are liable?
- BOD is presumed to have acted with consent of ALL DR’s
- Ways to get out of liability:
- Objected in WRITING
- Put in the minutes
- Send note to corp secretary (Joan) at the meeting
- Reg letter to corp sec immediately after the meeting
- Absent (e.g. sick that day)
- Good faith RELIANCE on information provided by a competent professional

22

BOD DUTY OF CARE

DUTY OF CARE
- DR must act in GOOD FAITH and exercise ordinary care—must do what a REASONABLY PRUDENT PERSON would do under the circumstances.
- P has the BOP—must show HARM to the corp


***BJR applies**

23

BOD DUTY OF LOYALTY

DUTY OF LOYALTY
- DR must act in GOOD FAITH and with reasonable belief that her act is in the CORPORATION’s BEST INTEREST.
- DR has BOP

24

BOD DUTY OF LOYALTY

Interested DR transaction (DR benefits personally from the corp obligation)

Interested DR transaction (DR benefits personally from the corp obligation)
- DR must show:
- The deal was fair when approved
- OR
- DR disclosed his interest and all material facts, and EITHER the SH’s or the BOD approved the deal

25

DUTY OF LOYALTY

Competing ventures

Competing ventures
- DR must show:
- Approval by majority of disinterested DRs
- Remedy: constructive trust on the profits

26

DUTY OF LOYALTY

If a DR wants to avoid liability for a COMPETING VENTURE transaction or an INTERESTED DIRECTOR transaction, must he show BOD approval or SH approval of his action?

Interested DR >>> SH or BOD

Competing venture >>> BOD

27

DUTY OF LOYALTY

Usurping a corporate opportunity

Usurping a corporate opportunity
- Any opportunity DR has reason to know the corp would be interested in
- DR must show:
- BOD knew of the opportunity and rejected it
- Remedy: constructive trust on the profits

28

IMPROPER LOANS
- Corp loans DR some money
- DR must show:

IMPROPER LOANS
- Corp loans DR some money
- DR must show:
- Reasonably expected it to BENEFIT the corp

29

IMPROPER DISTRIBUTIONS
- Defense:

IMPROPER DISTRIBUTIONS
- Defense: good faith reliance on financial professionals (e.g. that the distribution will not render the corp insolvent)

30

OFFICERS

MUST have which ones?

Selected and removed by whom?

President:

Secretary:

Treasurer

Sale of corp real property by an officer:

MUST have a PRESIDENT and a SECRETARY (but they can be the same person).

Selected and removed by the BOD.

President
- Conducts meetings of officers and employees

Secretary
- Keep corporate records
- Certify actions of the board

Treasurer
- Receive and manage corp $$$

Sale of corp real property
- Must be authorized by BOD
- Officer name on the deed is prima facie proof of approval

31

Can an officer sell CORP real property?

Officer (e.g. President) authority to sell corp real property
- ONLY IF BOD approval

32

CLOSE CORPORATION STATUS

Requirements:

CLOSE CORPORATION STATUS

SH managed

Requirements:
- Few SHs
- Stocks not publicly traded
- Must say so in COF

33

CLOSE CORPORATION STATUS

Electing CC status

After you switch

CLOSE CORPORATION STATUS

Electing CC status
- SH revolt—abolishes and removes BOD and officers
- SH agreement
- Written agreement of ALL SHs
- In the COF, Bylaws, and approved by ALL SH’s

After you switch
- Should note CC status on stock certificates
- Should send SH’s a copy of the SH agreement
- May notify SOS of the change

34

SH DUTIES IN CLOSE CORP

Do SH’s owe each other fiduciary duty?

SH DUTIES IN CLOSE CORP

SH’s do not owe each other fiduciary duties.

But courts may impose duty in the event of a freeze out.
- Vote SH off the board
- Fire SH from employment
- Refuse to declare dividends

35

PIERCING THE CORP VEIL

PCV IF:

PIERCING THE CORP VEIL

Generally, SHs are not liable for debts of the corporation.

PCV IF:
- Prevents fraud
- Achieves equity

* More likely if the corp form was abused to perpetuate a TORT than take on losing contracts.

* For contracts, need to show ACTUAL FRAUD.

36

PIERCING THE CORP VEIL

Alter ego

Undercapitalization

Alter ego
- Commingle personal and corp funds
- Using corp property as personal property
- Using corp funds for personal purchases

Undercapitalization
- SH purposefully didn’t invest enough in the corp to cover its liabilities to run a business

37

SH DERIVATIVE SUITS

Requirements for bringing suit:

Requirements for bringing suit:
(1) SH
- “contemporaneous owner” = owned shares when the challenged ACT occurred—OR received by operation of law (inheritance, divorce, etc.) from someone else who owned them at the time of the act

(2) Can adequately rep corp interests
- E.g. will be a SH throughout the lit

(3) Written DEMAND that the BOD authorize a corp suit
- Can’t bring suit until 90 days after demand UNLESS waiting would cause irreparable harm to the corp
- Even if demand would be futile
- Set for the nature of the claim in particularity

(4) Join the corporation as a DEFENDANT (even though you’re suing on their behalf)

38

SH DERIVATIVE SUITS

When can the corp move to dismiss?

Does the court HAVE TO dismiss?

Corp can move to DISMISS as not in corp best interests
- Court MUST DISMISS IF:
- Majority of disinterested DR’s determine in good faith that it’s not in corp’s interest

39

SH VOTING

Can only vote __________ SHARES

SH VOTING

Can only vote OUTSTANDING SHARES (as of the RECORD DATE)—corp can’t vote its own treasury shares

40

SH VOTING

Proxies

SH VOTING

Proxies
- Writing
- Delivered to corp SECRETARY
- Authorizes a TP to vote the shares
- Revocable—EVEN IF it says it’s “irrevocable”—unless coupled with an interest
**Only good for 11 MONTHS

41

SH VOTING

Voting trust

SH VOTING

Voting trust
- Indefinite
- Writing
- File copy with the corp
- Transfers legal title to vote the shares
- Original SHs:
- Get a voting trust certificate
- Retain all the other benefits of stock ownership

42

SH VOTING

Voting (pooling) agreement

Voting (pooling) agreement
- Writing
- File copy with the corp
- BINDS TP’s if conspicuously noted on the stock certificate

43

SHAREHOLDER MEETINGS

SHs can act through:

SHAREHOLDER MEETINGS

SHs can act through:
- Unanimous written CONSENT
- By vote at a SH meeting

44

SHAREHOLDER MEETINGS

SPECIAL MEETINGS
- Can be called by:

SHAREHOLDER MEETINGS

SPECIAL MEETINGS
- Can be called by:
- BOD
- President
- 10% of the shares entitled to vote
- Anyone else permitted in the COF

45

SH MEETINGS

NOTICE
- Who's entitled to notice?
- Applies to which meetings?
- How many days' notice?
- Methods of delivery:
- Contents:
- Waiver:

- Written notice to EVERY SH entitled to vote
- Applies to ANNUAL and SPECIAL meetings
- Between 10 and 60 days before
- 21 to 60 if FUNDAMENTAL CHANGE
- Method of delivery
- Mail
- Personally
- Email—IF SH consents
- Contents
- When
- Where
- Why (purpose of the meeting)
- Meeting CANNOT EXCEED THE SCOPE OF THE NOTICE
- *Compare with BOD special meetings—don’t need purpose
- Waiver
- Written, or
- Attend without objection

46

SH MEETINGS

Quorum and voting

- Quorum =
* Can quorum be BROKEN?

- How any SHs required to approve...?:
- General matters
- Elect DR
- Remove DR
- Fund corp change

Quorum and voting
- Quorum = majority of outstanding SHARES (not human SH’s)
- Quorum CANNOT be broken
- Voting numbers:
- Generally—majority of shares entitled to vote
- Elect DR—plurality winner for each vacant position
- Remove DR—majority of shares entitled to vote
- Fund corp change—2/3 of shares entitled to vote

47

SH MEETINGS

Cumulative voting

Cumulative voting
- COF must OPT IN
- E.g. 3 vacancies, SHs can vote 1,000 each—cumulative means a SH can combine all 3,000 to vote for ONE DR vacancy.

48

STOCK TXR RESTRICTIONS

Created in:

STOCK TXR RESTRICTIONS

Created in:
- COF
- Bylaws
- SH agreement
* Then must be CONSPICUOUSLY NOTED on the stock certificate

49

STOCK TXR RESTRICTIONS

Are they valid?

STOCK TXR RESTRICTIONS

Transfer restrictions
- Valid unless an UNDUE RESTRAINT on alienation

50

STOCK TXR RESTRICTIONS
]
Corp right of first refusal valid?

STOCK TXR RESTRICTIONS

Corp right of first refusal
- Valid as long as corp offers a reasonable price

51

STOCK TXR RESTRICTIONS

Enforceable against a subsequent transferee?

STOCK TXR RESTRICTIONS

Enforceable against a subsequent transferee
- ONLY if NOTICE of the restriction

52

DISTRIBUTIONS

Types of distributions:

DISTRIBUTIONS

Types of distributions:
- Dividend
- Repurchase shares
- Redeem shares (forced re-purchase at price set in COF)

53

DISTRIBUTIONS

Who declares distributions?

BOD

54

DISTRIBUTIONS

When can a SH FORCE a distribution?

DISTRIBUTIONS

SH force distribution
- Only if CLEAR abuse of discretion by the BOD
- E.g. sky high profits and refusing to authorize a dist. while paying themselves really high bonuses

55

DISTRIBUTIONS

Funds for paying distribution

DISTRIBUTIONS

Funds for paying distribution
- Surplus
- Assets - liabilities - stated capital = Surplus
- NOT stated capital
- Stated capital = the par value of the issuance
- E.g. 100 shares with PV of $1 sold for $200. The first $100 is stated capital, the rest is surplus.

56

DISTRIBUTIONS

CANNOT auth distribution IF:

CANNOT auth distribution IF:
- Corp is insolvent
- Distribution would render corp insolvent
- Distribution would exceed surplus (dip into stated capital)

57

FUNDAMENTAL CORP CHANGE

Procedure:

FUNDAMENTAL CORP CHANGE

BOD alone cannot do this

Procedure:
1) BOD adopts resolution
2) Submit proposal to SHs
3) Approval by SHs
- 2/3 of shares entitled to vote
4) Submit doc to SOS

58

FUNDAMENTAL CORP CHANGE

SH right of appraisal
- What is it?

- How to exercise the right:

FUNDAMENTAL CORP CHANGE

SH right of appraisal
- SH doesn’t like the change
- Can force corp to buy out their shares (at PAR VALUE)
- ONLY if shares are not sold on a public exchange (if that were the case, SH could just sell his shares)
- How to exercise the right:
- File written notice and demand
- Abstain or vote against the proposal
- Within 20 days of the vote, make another demand
- Corp must respond within 20 days of the demand
- Corp pays within 90 days (accepts SH’s valuation or, if the parties can’t agree, can file suit to have court determine)

59

FUNDAMENTAL CORP CHANGE

Procedure for each:

Amending the COF

Converting to a diff corp form

Mergers

Amending the COF
- BOD resolution
- SH approval — 2/3 of shares entitled to vote

Converting to a diff corp form
- BOD resolution
- SH approval — 2/3 of shares entitled to vote

Selling all or substantially all corp assets
- BOD resolution
- SH approval — 2/3 of shares entitled to vote

Mergers
- BOD of both corp’s
- SH approval of the disappearing corp

60

TERMINATION / LIQUIDATION

Administrative termination

TERMINATION / LIQUIDATION

Administrative termination
- Failure to pay fees
- Failure to maintain reg agent
- Failure to file required reports
- Corp gets 90 days notice
- DR’s are PERSONALLY LIABLE for debts incurred after termination/forfeiture

61

TERMINATION / LIQUIDATION

Liquidation:

*After liquidation, all claims against the corp must be brought WITHIN ___ YEARS

TERMINATION / LIQUIDATION

Liquidation
- Gather assets
- Convert to CASH
- Pay creditors
- Distribute remainder to SHs (some shares might have a “liquidation preference” to get paid first)
- THEN FILE a certificate of termination with SOS

*After liquidation, all claims against the corp must be brought WITHIN 3 YEARS

62

DIRECTOR LIABILITY

Limitations on liability

Limitations on liability — COF
- Can generally limit liability
- CANNOT limit liability for:
- Duty of loyalty
- Bad faith, intentional, illegal misconduct
- DR received an improper benefit

63

DIRECTOR INDEMNIFICATION

Indemnity
- Corp can indemnify a DR who is found liable, settles, is found guilty, or pleads no contest to a suit for corporate conduct.
- ONLY IF DR reasonably believed in good faith that her conduct would benefit the corp, and promises to pay back if it turns out she did not.

64

TERMINATION / LIQUIDATION

SH consent

Corp action

SH consent
- Consent of ALL SHs required

Corp action
- Need BOD AND SH approval

65

SH AGREEMENTS

3 kinds:

Governance:

Rescission:

SH AGREEMENTS

3 kinds:
- Governance
- Voting ("pooling") agreements
- Stock transfer restrictions

Governance
- Must be approved by ALL SH's
- Must be noted in EITHER:
- A written agreement, and made known to the corp, OR
- The COF or bylaws
- Valid for 10 YEARS, unless declared otherwise

Rescission
- SH agreements are binding on transferees IF NOTICE
- IF close corp, deemed notice that stock might be subject to SH agreement
- If no notice, transferee is entitled to rescission
- Must bring suit within 90 DAYS