Corporations Flashcards
(40 cards)
Formation – Pre-Incorporation Transactions
- Promoter liability
• Pre-incorporation: promoters liable for pre-incorporation ks, C not liable even after incorporated unless novation or 3rd p relied on C to fulfill
• Promoters have fiduciary duties to C
• Compensation—a promoter can request compensation from C but not entitled - C’s liability
• General rule—C is not liable for pre-incorporation transactions, even those for the
benefit of C
• Adoption—C is liable if it expressly or impliedly adopts a contract by accepting the
benefits of the transaction, or gives an express acceptance of liability for the debt
Formation – Incorporation
- Articles of incorporation
• Must include the corporate name and a statement of C’s legal purpose, and be filed with the state
• May enumerate powers that C possesses, or limit its duration
• Corporate comes into existence upon filing unless otherwise noted. - Ultra vires actions– C acted outside of its business/stated purpose
• SH can sue to stop C; C can take axn against D/O/Ee to stop; State can stop - “De jure” C—when all statutory requirements for incorporation are satisfied, C is legally a C and liable
- Defective incorporation
• Lack of good faith—when person conducts business as C without good faith or fulfilling reqmts, personally liable
• Good-faith effort—two ways to escape personal liability:
o De facto C—the owner makes good faith effort to comply with C reqmts and believes it’s a C
o Corporation by estoppel—when non-C deals with 3rd ps as a C, can’t deny that it’s a C to avoid liability
Stock and Other Corporate Securities – Types
- Common stock—a basic ownership interest, gives owner right to vote on C matters.
- Preferred stock—has preference over other stock with regards to distributions
Stock and Other Corporate Securities – Issuance of Stock
- Issuance authorized by BD and/or SH
- Given stock for adequate consideration (can be anything)
- Stock subscriptions—a pre-incorporation subscription is irrevocable for six months from the date of subscription (unless all subscribers agree to a revocation)
- Stock rights, options, and warrants—can also be issued by BD
- SH’s preemptive rights—the right of a SH to maintain % of shares whenever stock issued (first option)
- Securities registration—have to file registration with SEC before publicly offering stock (and give buyer prospectus)
Stock and Other Corporate Securities – Distributions
- BD is authorized to make distributions, usually cash
- Limitations—C cant distribute if C is insolvent or distribution would cause insolvency
- D’s liability for unlawful distributions in violation of duties of care/loyalty—D is personally liable to C for the amount in excess of a lawful amount
- SH suit to compel distribution—SH can sue to enforce his individual right by funds legally available for distribution and D’s refusal is bad faith
Stock and Other Corporate Securities – Sale of Securities
Private Restrictions
- Private restrictions on sale
• Enforceability—the security must be certified, the restriction must be conspicuously noted on the security certificate, and the person must have knowledge of the
restriction
• Challenge to restriction: was restriction rsbl?
Governance – Instruments
- Articles of incorporation—BD can amend. If stock’s been issued, then amendments have to be approved by maj of SH.
- Can have bylaws, not necc
- Articles win over bylaws
Governance – Organizational Meeting
for appointment of Os, adoption of bylaws, and approval of contracts
Shareholders – Meeting Requirements
failure to hold meetings does not affect C’s existence or invalidate C’s business
- Annual—primary purpose is to elect Ds
- Special—may be called by BD or SHs who own at least 10% of voting shares
- Notice—voting SHs must be notified of time/date/place in a timely manner betwen 10-60 days before meeting; If no notice, SH may waive notice either in writing or by attending the meeting
- Unanimous written consent—SHs can take any action that could have been taken at a meeting by unanimous written consent
Shareholders – Voting Requirements
- Eligibility—generally, only official stockholders are permitted to vote; Have to be stockholder by record date to vote at next meeting
- Quorum requirements—Need a maj of shares at meeting (quorum), then need maj of quorum to make decisions
- SH can cumulate votes (based on shares) to vote for Ds
- SHs can vote by proxy if written notice given to C
- Voting with other SHs
• Voting pool—a binding voting agreement under which SHs retain legal ownership;
does not need to be filed with the C; no time limit
• Voting trust—a trust to which legal ownership of SH’s stock is transferred; the trustee
votes the shares and distributes the dividends in accord with trust; must be in writing,
limited to 10 years, and filed with the C
• Management agreement—allows SHs to alter the way the C is managed even if the
agreement is inconsistent with statutory provisions
Shareholders – Inspection of Records
SH can inspect and copy C records with 5 days notice
Shareholders – Shareholder Suits
- Direct actions—SH directly sues for breach of fiduciary duty by D or O, or an action based on grounds unrelated to SH’s status
- Derivative actions—SH sues on behalf of C to enforce C rights
- Standing—SH/plaintiff must have been SH at time of injury and still SH
- SH must first make written demand to BD re issue unless futile
- Litigation expenses—the plaintiff can seek reimbursement from the C for reasonable litigation expenses
Shareholders – Liability
- Piercing the corporate veil
• Totality of circumstances
o Courts look to whether C is being used as a façade or alter ego for a dominant SH’s
personal dealings, and whether there is unity of interest and ownership between the
C and its members
o The plaintiff must prove that the incorporation was just a formality and that C
neglected corporate formalities and protocols
• Factors considered—undercapitalization, disregard of corporate formalities, using C’s
assets as SH’s own assets, self-dealing with C, siphoning of C’s funds, using corporate
form to avoid statutory requirements, SH’s domination over C, and fraudulent dealings
with a corporate creditor - Controlling SH’s fiduciary duty to minority SHs
• A controlling SH is a SH (or a group of SHs acting in concert) who holds a high enough
percentage of ownership in a company to enact changes at the highest level; a SH
owning 50% plus one of a C’s shares is automatically a controlling SH
• The duty arises if the controlling SH is selling interest to an outsider, seeking to
eliminate other SHs from the C, or receiving a distribution denied to other SHs
• Duty to disclose information that a reasonable person would consider important in
deciding how to vote on a transaction, and a duty of fair dealing when purchasing a
minority SH’s interest
Board of Directors – Composition Requirements
can have as few as one; D must be a natural person and not a C; Ds are selected at the annual SH meeting
Board of Directors – Term, Compensation
typically one year, but may serve longer if terms are staggered; Ds can be removed by SHs with or without cause unless the articles provide otherwise; D may resign at any time with written notice to the BD, its chair, or C
Compensation is permitted
Board of Directors – Meeting Requirements
Ds only entitled to notice of special meetings; BD can act by unanimous written consent without holding a meeting
Board of Directors – Voting Requirements
- The assent of a majority of Ds present is necessary for board approval (generally)
• To be a valid act, a quorum must have been present
• A majority of all Ds in office constitutes a quorum - Agreements between Ds as to how to vote (pooling agreements) are generally
unenforceable - Ds may not vote by proxy
Board of Directors – Committees
may generally exercise whatever powers are granted to them by the BD, articles, or bylaws
Board of Directors – Duty of Care
• Prudent person—a D has a duty to act with the care that a person in a like position would reasonably believe appropriate under similar circumstances (objective standard), and is required to use any additional knowledge and special skills he possesses when deciding how to act
• Reliance protection—a D can rely on information and opinions of Os, employees,
outside experts (e.g., attorneys, accountants), or committees, if D reasonably believes
them to be reliable and competent
• Business judgment rule (BJR)
o Rule—a rebuttable presumption that D reasonably believed his actions were in the
best interest of C; does not apply when D engages in a conflict-of-interest
transaction with C
o Overcoming the rule—it must be shown that: D did not act in good faith; D was not
informed to the extent he reasonably believed was necessary; D had material
interests in challenged conduct and was not objective; D failed to devote attention
to C’s affairs; D failed to timely investigate matters of material concern; or D received financial benefits to which he was not entitled
Board of Directors – Inspection Rights
D has a right to inspect and copy C’s books and records
Board of Directors – Duty of Loyalty
requires D to act in a manner that D reasonably believes is in the best interest of C
• Self-dealing (conflict-of-interest transaction)
o Rule—a D who engages in a conflict-of-interest transaction with his own C violates
the duty of loyalty unless the transaction is protected under the safe-harbor rules; D
cannot profit at C’s expense
o Type of transaction—one that would normally require approval of BD and is of
such financial significance to D that it would reasonably be expected to influence D’s
vote on the transaction (also includes dealings with persons related to D)
o Safe harbors—disclosure of all material facts and majority approval by BD or SHs
without a conflicting interest; fairness (comparable exchange in value) of the
transaction to C at the time of commencement
• Usurpation of corporate opportunity
o Interest or expectancy test—does C have an existing interest or an expectancy
arising from an existing right in the opportunity
o Line-of-business test—is the opportunity within the C’s current or prospective
line of business, and how expansive is C’s line of business
o Other factors—relationship of the third party to D and of D to C; how and when D
acquired knowledge of the opportunity
• Competition with C—a D who engages in a business venture that competes with C
has breached the duty
Board of Directors – Duty of Care – Indemnity/Insurance
C is required to indemnify D for any reasonable expense incurred in the successful
defense of a proceeding against the D
• C is prohibited from indemnifying D against liability due to the receipt of an improper
personal benefit
• C may indemnify in an unsuccessful defense if D acted in good faith with a reasonable
belief that the conduct was in C’s best interest and D did not have reasonable cause to
believe the conduct was unlawful
Officers and Other Employees – Selection, Authority
Selection – elected by BD
Authority
- Actual—as defined by the corporate bylaws or BD
- Implied—to perform those tasks necessary to carry out O’s duties by virtue of her status
or position, so long as the matter is within the scope of ordinary business (i.e., not
“extraordinary” transactions) - Apparent—if C holds O out has having the authority to bind C to third parties
Officers and Other Employees – Duties, Liability
Duties—same as D’s duties (see above); the CEO and CFO of a publicly traded C are subject to the Sarbanes-Oxley Act, and must certify the accuracy of C’s financial reports to the SEC
Liability—an O is liable to a third party if O has acted in O’s personal capacity or has engaged in purposeful tortious behavior; (O is not liable merely for the performance of O’s duties to C)
