corporations Flashcards
(44 cards)
Incorporation
Must file articles of incorporation with the state
name, number o shares authorized to share, address of corporation registered office, name/address of each incorportor
Pre-Incorporation Liability
Corporation is generally NOT liable for pre-incorporation
Promoter is
Exception: novation where corporation substitutes promoter in the k
Adoption: corporation takes on benefits of k
Promoter
Enter into contracts securing capital to bring corporation into existence
-Personally liable for k entered into pre-incorporation EVEN AFTER corporation comes into existence
Purpose listed in Articles of Incorp.
Ultra Vires Act—
—occurs when a corporation has a narrow purpose and acts outside the
scope of that purpose
Shareholder can file suit and take action against office/employee/director who did the act
De jure corporation
statutory requirements of incorporation are met
Corporation by Estoppel
Corporation by Estoppel—a third party entered into a contract with the corporation as though it was properly incorporated; the third party is estopped from asserting that the corporation was not formed appropriately
(a party would do this so they could get past the limited liability of the corporation and go after ppl personally)
De Facto Corporation
Good faith attempt to incorporate but fail to incorporate (e.g. improperly filing articles of incorporation)
De Facto Corporation—attempted to incorporate and ran business believing it was incorporated
Issuance of Stock
issued by board of directors
Board of directors must determine whether the value paid for the stock is adequate
Par Value Stock
—corporation assigns a minimum value to its stock
If sold for less than the par value, the board is liable
Shareholder may also be liable if had knowledge of par value
shareholders
Shareholders are only owners and don’t manage the corporation. Shareholders are investors
Have annual meetings
notice 10-60 days in advance
Shareholder meetings
- Generally required annually
- primary purpose to elect directors
- also approve fundamental corporate changes (merger, sale of corporation)
- require a quorum; quorum exists when a majority of the shares entitled to vote are present
Proxy Voting
written agreement to allow a person to vote on behalf of the shareholder (valid 11 months)
Proxy agreements are freely revocable by the shareholder, even if
the proxy states that it is irrevocable. One exception to this rule is
a proxy coupled with an interest or legal right, which is irrevocable if the proxy expressly states as such
Bylaws
Rules and regulations adopted by Board of Directors that govern internal operations of corporation.
Shareholders have power to 1) amend/appeal existing bylaws, 2) create new bylaws, 3) limit board of direct’s ability to change bylaws
Directors Responsibilities
1) manage corporation business and affairs and 2) act as a body by voting (can’t proxy vote or vote by agreement block/group)
- need a quorum of directors to vote
Shareholder hire/ fire directors.
w/o cause (modern trend)
with cause – breach of fiduciary duty (common law)
Directors Meetings: notice
Notice required ONLY for special meetings
-@ least 2 days before
must include date, time, place (does NOT have to list purpose)
Director who didn’t receive proper notice: director’s attendance waives notice of that meeting unless the director promptly objects to lack of notice.
Fiduciary Duties
Duty of care and loyalty
Right to sue corporation:
2 avenues
Direct action and derivative action
Duty of Care Best Judgment
Business Judgment Rule
A rebuttable presumption that a director reasonably believed his actions were in the best interest of the corporation.
• Protects a director from liability for breaching the duty of care if he acted in good faith
-party claiming breach of duty has burden to show business judg. rule doesn’t apply
Right to sue corporation: Direct Action
Suing the corporation for their own benefit (i.e., to remedy a wrong personal to the shareholder)
Usually arises when the shareholder is denied voting rights, the board failed to declare a dividend, or the board failed to approve or deny a merger
Right to sue corporation: Derivative Action
Suing on behalf of the corporation
Usually against a director or officer
Any recovery goes to the corporation
Must have:
1. Standing—any person who is a shareholder at the time of the bad act or omission (and at the time the action is filed)
- Demand upon the board—required to demand action by the board
• Board has 90 days to act before filing derivative action (unless demand is rejected,
or irreparable harm would occur)
• Futility exception—no demand is required if it would be futile
-plaintiff-shareholder may be reimbursed by the corporation if a substantial benefit to the corporation resulted from the litigation.
Piercing the Corporate Veil
Shareholders
A shareholder is not personally liable for the liabilities and obligations of a corporation. However, courts may disregard the corporate form and hold individual corporate shareholders, directors, and officers personally liable for actions taken on behalf
of the corporate entity.
- alter ego
- undercapitalization of corporation @ time of formation
- self-dealing with corporation (comingling of funds)
- Use of corporate assets as a shareholder’s own assets
Shareholders’ Fiduciary Duty
“Controlling” shareholders have a duty to not abuse their power to disadvantage minority
shareholders.
o Controlling shareholder—someone who owns more than 50% of a corporation or otherwise
controls voting power
Board of Directors:
Duty of Care
Must act as an ordinarily prudent person
a. Includes the duty to investigate and ask questions
b. Can rely on reports and outside experts
Board of Directors:
Duty of Loyalty
Safe Harbor Rules
Transaction can be protected if:
o The interested director discloses all material facts to the board of directors and
receives approval by a majority of disinterested board of directors;
o The interested director discloses all material facts to shareholders and receives
approval by a majority of disinterested shareholders; or
o The transaction is fair to the corporation substantively and procedurally
