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Flashcards in corporations Deck (44)
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1

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

2

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


3

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

4

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

5

De jure corporation

statutory requirements of incorporation are met

6

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)

7

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

8

Issuance of Stock

issued by board of directors

Board of directors must determine whether the value paid for the stock is adequate

9

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

10

shareholders

Shareholders are only owners and don't manage the corporation. Shareholders are investors

Have annual meetings
notice 10-60 days in advance

11

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

12

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

13

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

14

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)

15

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.

16

Fiduciary Duties

Duty of care and loyalty

17

Right to sue corporation:
2 avenues

Direct action and derivative action

18

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

19

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

20

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)

2. 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.

21

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.

1. alter ego
2. undercapitalization of corporation @ time of formation
3. self-dealing with corporation (comingling of funds)

4. Use of corporate assets as a shareholder’s own assets

22

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

23

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

24

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

25

Damages for Breached duty of loyalty by director

Transaction can be enjoined or rescinded and the corporation can seek
damages from the interested director

26

Board of Directors:
Duty of Loyalty

Must act in the best interest of the corporation

Violated if the director engages in:
• Self-dealing; or
• Usurping a corporate opportunity

27

Self-Dealing

Engaging in a transaction with the corporation that benefits the director or a close
family member

• Includes transactions with another business entity that the director is associated
with

Remedy: safe Harbor rules

28

Usurping a Corporate Opportunity

Taking an opportunity that the corporation would be interested in without offering
it to the corporation first

• Director must present the opportunity to the corporation first

If the corporation declines the opportunity, the director may take it without
violating the duty of loyalty.

29

Officers

Elected by the board of directors to run day-to-day operations

• Typical officers—president, secretary, and treasurer
• Act as agents of the corporation
duty of loyalty and care

30

Powers of Officers

• An officer can act with actual express authority, actual implied authority, and apparent
authority.

31

Amending Corp's Articles of Incoporation

Can be amended/changed @ any time


An amendment requires a majority vote from the directors and
shareholder


Board of Directors have the authority to make general minor
amendments to the Articles without shareholder approval.

32

Dissolution of Corporation

A corporation may voluntarily terminate its status.

• Winding Up—corporation exists for the limited purpose of winding up its affairs and liquidating its business

• Order of distribution:
1) Creditors of the corporation
2) Shareholders of stock with preferences in liquidation
3) Other remaining shareholders of stock

33

LLC formation - Limited Liability companies

Formation—requires filing articles of organization
• Members can be individuals or corporations

34

LLC liability

Members are generally not liable for LLC obligations
o Piercing the veil—members can be liable for LLC obligations

35

LLC Fiduciary duties

Members owe fiduciary duties to each other and to the LLC



36

Duty of loyalty

Must account to the LLC for any profit or benefit
 Must refrain from dealing with the LLC on behalf of an adverse interest
 Must refrain from competing with the LLC

37

Members Action (suits)

Direct Action
May bring suit against LLC or other members to enforce the member’s rights

b. Derivative Action
May bring a derivative action on behalf of the LLC against other members (or even against
themselves)

38

LLC Member dissolution

A member can withdraw at any time and for any reason
o Must provide notice (not necessarily written)

39

LLC dissolution of LLC

o Can occur if all members agree, if there are not enough members remaining, or any other
reason stated in the operating agreement

o Involuntary dissolution—a member can ask for a court order to dissolve the LLC

 Must show that a controlling member has acted oppressively and harmed the member
seeking dissolution

o Winding up—must pay off debts to creditors before distributing assets to members

40

Members of LLC authority

Authority—members of a member-managed LLC have authority to bind the LLC

41


Preemptive Rights

A preemptive right is the right of an existing shareholder to maintain her percentage of ownership in the corporation by being
offered the opportunity to purchase shares of the corporation issued for cash before outsiders are permitted to purchase. Under
the RMBCA, shareholders do not enjoy preemptive rights unless such rights are explicitly granted in the corporation's Articles of
Incorporation.

42

directors voting

Presence—can include phone call so long as the director can hear each other and participate

43

Board of Directors:
action without a meeting

The board of directors may act without holding a meeting by unanimous written consent to the action.

44

Shareholders:
Special Meeting

purpose of which must be specified in the notice of the meeting

Share holders can waive notice 1) attending 2) in writing