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Flashcards in Corporations Deck (54):

Requirements for Formation of Corporations

People: Incorporators (must have more than one)
Paper: Articles of Incorporation
Act: Must have notarized articles delivered to the Secretary of State & Pay required fees



Sign the articles and deliver them to the secretary of state. Can be an individual or a business entity.


Articles of Incorporation

1. The articles are a contract between the corporation and the shareholders.
2. And also a contract between the corporation and the state.


Information in Articles of Incorporation

1. Corporate Name
2. Name and Address of Each Incorporator
3. Name and Address of Each Initial Director.
4. Name of Registered Agent and address of registered office.
5. Statement of Purpose


Ultra Vires Activity

When a corporation acts outside its business purpose.


DeFacto Corporation Requirements

1. The is a relevant incorporation statute (there is, every state has one)
2. the parties made a good faith, colorable attempt to comply with the statute. and
3. Some exercise of corporate privileges (acting like we have a corporation).

**if doctrine applies, the business is treated as a corporation for all purposes except in an action by the state.


Corporation by Estoppel

One who treats a business as a corporation may be estopped from denying that it is a corporation.



A person acting on behalf of a corporation not yet formed. She might enter into a contract on behalf of a corporation not yet formed.


Express Adoption of Contract

Board takes an action adopting the contract


Implied Adoption of Contract

a corporation accepts the benefits of the contract.


Liability of the Promoter

Unless the contract clearly provides otherwise, the promoter is liable on pre-incorporation contracts until there is a novation.


Novation (Corporations)

An agreement of the promoter, the corporation, and the other contracting party that the corporation will replace the promoter under the contract.



When the corporation sells its own stock



minimum issuance price


Treasury Stock

This is stock the company issued and then reacquired. It is considered authorized but unissued, and the corporation can then resell it. if it does, the board sets any issuance price it wants.


De Jure Corporation

A corporation formed in accordance with the law


Piercing the Corporate Veil

the courts will disregard a corporate entity and hold individuals liable for corporate obligations


Elements Justifying Piercing

1. Alter Ego
2. Inadequate Capitalization of Time of Formation
3. Avoidance of Existing Obligations, Fraud or Evasion of Statutory provisions.


Alter Ego

Where the corporation ignores corporate formalities such that it may be considered the alter ego of the shareholders or another corporation. (Situations may arise where shareholders treat corporate assets as their own, fail to observe corporate formalities etc.)


Inadequate Capitalization of Time of Formation

At the time of formation there is not enough unencumbered capital to reasonably cover prospective liabilities.


Avoidance of Existing Obligations, Fraud, or Evasion of Statutory Provisions

The corporate veil mau be pierced where necessary to prevent fraud or to prevent an individual shareholder form using the entity to avoid his existing personal obligations.


Debt Securities

Arise where a corporation has borrowed funds from outside investors and promises to repay them.


Equity Securities

Give their holders an ownership interest in the issuing corporation.


Stock Subscriptions

Promises from subscribers to buy stock in the corporation.



usually a majority of outstanding shares entitled to vote, unless articles or bylaws require a greater number. Once a quorum is present, it cannot be broken by withdrawal of shares from the meeting.


Voting Trust

A written agreement of shareholders under which all of the shares owned by the parties to the agreement are transferred to a trustee, who votes the shares and distributes the dividends in accordance with the provisions of the voting trust agreement.


Derivative Suit

The shareholder is asserting the corporation's right rather than her own rights. Recovery in a derivative action generally goes to the corporation rather than to the shareholder bringing the action.


Liabilities of Shareholders

Shareholders have no fiduciary duties. Shareholder liability is generally limited to the liabilities for unpaid stock, a pierced corporate veil or absence of de facto corporation.


Business Judgment Rule

In discharging her duties, a director is entitled to rely on information, opinions, reports or statements if prepared or presented by: 1. corporate officers or employees whom the director reasonably believes to be reliable and competent, 2. legal counsel, accountants, or other persons at the to the matters the director reasonably believes are within such person's professional competence; or 3. a committee of the board of which the director is not a member, if the director reasonably believes the committee merits confidence.


conflicting Interest Transactions

A director or officer has a conflict of interest when he or a corporation he owns or has a relationship with, or a family member enters into a contract with the corporation or has a beneficial financial interest in a contract.


Corporate Opportunity Doctrine

The directors' fiduciary duties prohibit them from diverting a business opportunity form their corporation to themselves without first giving their corporation an opportunity to act.


General Procedure for Fundamental Changes

1. the board adopts a resolution;
2. written notice is given to shareholders;
3. shareholders approve changes by majority of the votes entitled to be cast; and
4. the changes in the forum of articles are filed with the state.



Involves the blending of one or more corporations into another corporation, and the latter corporation survives while the merging corporations cease to exist following the merger.


Share Exchange

Involves one corporation purchasing all of the outstanding shares of one or more classes or series of another corporation.



involves one business entity changing tis form to another business entity, such as a corporation converting itself into an LLC.


Right of Appraisal or Dissenter's Rights

Shareholder's who dissent from the change may have the right to have the corporation purchase their shares.


Rule 10b-5

disallows insider trading and trading securities based on nonpublic corporate information


Elements for a Rule 10b-5 Cause of Action

1. Fraudulent Conduct
2. in connection with the purchaser or sale of a security by plaintiff
3. in interstate commerce
4. Reliance
5. Damages


Insider Trading

A person violates rule 10b-5 if by trading he breaches a duty of trust and confidence owed to: 1. the issuer,
2. the shareholders of the issuer, or
3. in the case of misappropriations, another person who is the source of the material nonpublic information.


Possible Defendants in Insider Trading Lawsuits

1. Company that issues a misleading press release.
2. Buyer or Seller of securities who misrepresents material information
3. Buyer or seller of securities who trades on material inside information


Tipper Liability Test

1. she passed along material inside information in breach of duty to Company and 2. She benefited.


Tipee Liability Test

1. Traded on a tip and 2. Knew or should have known that the information was improperly passed.


Section 16(b)

requires surrender to the corporation of any profit realized by any director, officer, or shareholder owning more than 10% of a class of corporation's stock from the purchase and sale, or sale an purchase, of any equity security within a six month period.


Elements of Cause of Action for Violation of Section 16(b)

1. Purchase and Sale or Sale and Purchase within 6 months.
2. Equity Security
3. Officer, Director, or more than 10% shareholder


Type Transactions for Rule 10b-5

1. Misrepresentation of material information
2. Insider Trading
3. Tipping.


Deep Rock Doctrine

When a corporation is insolvent, third party creditors may be paid off before shareholder creditors.


Promoter Duties

A promoter has a fiduciary relationship with the proposed corporation requiring good faith. (cannot make secret profit on their dealings)


Removal of a Director

Can be done with or without cause upon a majority shareholder vote


Duties of Directors

1. Duty of Care
2. Duty of Loyalty
3. Duty of Disclosure


Rights of Directors and Officers

1. Compensation
2. Indemnification
3. Inspection


Rights of Shareholders

1. Meetings
2. Voting
3. Inspection
4. Dividends


Direct Suit

A shareholder may bring suit for breach of fiduciary duty owed to the shareholder


Corporation Requirements for Section 16(b) Action

1. Listed on the national exchange or
2. Have $10 million or more in assets and at least 500 shareholders


Corporate Insiders

Officers, directors, and shareholders that own 10% or more equity stock in the corporation