Corporations (DONE) Flashcards
(216 cards)
1
Q
What governs Texas corporations?
A
All Texas corporations are governed by the Texas Business Organizations Code (TBOC).
2
Q
What is required for the organization of a corporation?
A
A “person, paper, and act”.
3
Q
What is the “person” requirement for organization of a corporation, and what must they do?
A
The person is the organizer, and he executes the certificate and delivers it to the Secretary of State.
A person or entity can serve as the organizer, and they need not be a Texas resident.
4
Q
What information is required in the Certificate of Formation? (“paper”)
A
1) Names and addresses
2) Need not state the company’s duration (silence indicates perpetual existence)
3) Must include a statement of purpose
4) Capital structure (stock)
5
Q
What names and addresses are required in the CoF?
A
1) Name of the corporation
- – must include corporation, company, incorporated, etc.
- – can be reserved for 120 days
- – assumed names allowed, but cannot sue in Texas until filed
2) Names and addresses of each organizer
3) Number of initial directors
4) Name and address of each initial director
5) Name of the corporate agent and post office address
6
Q
What is the statement of purpose in the CoF?
A
The primary business the company will be engaged in.
Can be as general as “all lawful activity”
Doing business outside the scope of the statement of purpose is an ULTRA VIRES ACTIVITY.
7
Q
What is the effect of conducting an ultra vires activity?
A
Conducting an activity beyond the scope of the certificate.
1) Ultra Vires contracts are valid
2) Shareholders can sue for an injunction
3) The responsible managers are liable to the corporation for UV lawsuits)
8
Q
What information regarding stock must the CoF contain?
A
1) Authorized stock: maximum number of shares the corporation can sell, and
2) Number of shares per class, and
3) Info on par value, voting rights and preferences of each class
9
Q
What is the “act” required in the process of incorporation?
A
Organizer signs the certificate, delivers it to the Texas Secretary of State, and pays the required fee.
10
Q
What does the Secretary of State do after the certificate is delivered?
A
Files the certificate, and sends acknowledgement of filing to the corp.
11
Q
When does the corporation’s existence officially begin?
A
When the Secretary files the certificate.
12
Q
What is the organizational meeting required to organize the corporation?
A
Held by the BoD. Here, the board:
1) Selects officers;
2) Adopts the initial bylaws
3) and may transact other company business
Should give three days notice of the meeting.
Does not have to be held in Texas.
13
Q
What are bylaws?
A
Bylaws are an internal document. They comprise an operating manual, with things like setting record dates and methods of giving notice, etc.
Corporations are REQUIRED to have bylaws.
14
Q
Who can repeal the bylaws and adopt new ones?
A
The Board of Directors
15
Q
If bylaws conflict with the certificate, which is controlling?
A
The Certificate, but bylaws set the number of directors.
16
Q
What law governs a corp. formed in Texas but does all business in another state?
A
Texas law, even if no business is done in Texas.
17
Q
What is a public-benefit corporation?
A
“B Corp”
One formed for profit and also to pursue some benefit to a broader social-policy cause.
Certificate must say it’s a “benefit corporation”.
Files an annual benefit report
18
Q
What type of taxation is a C Corp subject to?
A
A C Corp pays income tax on its profits. In addition, shareholders pay tax on dividends paid.
This is “double taxation”, and is a disadvantage.
19
Q
What corporation can legally avoid paying income tax?
A
An “S” corporation.
20
Q
What is an “S” Corporation?
A
S Corps have 100 or fewer shareholders, all of whom are human US citizens or residents. There is only one class of stock, which is not publicly traded.
21
Q
What is limited liability for a corporation?
A
If the corporation incurs a debt or breaches a contract or commits a tort, the shareholders are not personally liable.
Shareholders are liable only to pay for their stock, not for the business’s obligations.
22
Q
What is a defective corporation?
A
Where the corporation was not properly established, but if certain requirements are met, it will still be treated as a corporation for the purpose of liability.
1) De Facto corporations
2) Corporation by estoppel
If neither of these two apply, then the organizer is personally liable for the business debts.
23
Q
What is required to form a “de facto” corporation?
A
1) There is a relevant incorporation statute (TBOC in Texas)
2) The parties made a good faith, colorable attempt to comply with it, and
3) Some exercise of corporate privileges (acting like they have a corporation)
If these apply, the business is treated as a corporation for all purposes except in an action by the state.
24
Q
What is corporation by estoppel?
A
One who treats a business as a corporation may be estopped from denying that it’s a corporation.
Generally applies only to Contract law.
25
What is a promoter?
A person acting on behalf of a corporation not yet formed.
Might form contracts with a third-party on behalf of this corporation not yet formed.
26
When is a corporation liable for pre-incorporation contracts?
A corporation is not liable on these contracts until it ADOPTS the contract.
Adoption can be express (board taking action) or implied (corp. accepting a benefit of the K)
Adoption makes the corp liable, but does not relieve the promoter of liability.
27
When is the promoter liable for pre-incorporation contracts?
Promoter is liable until there is a novation on the contract.
Novation occurs when there's an agreement of the promoter, the corp, and the other contracting party that the corp replaces the promoter under the contract.
28
What constitutes a "foreign" corporation?
Any corporation formed outside of Texas is foreign.
29
How does a foreign corporation transact business in Texas?
By filing an application for registration with the Tex Sec.
The application must provide basic information from the company's certificate and the company must be in good standing in its home state.
30
What happens if a foreign corporation transacts business in Texas without registering?
1) Civil penalties
2) It cannot sue in Texas on a claim arising from business in Texas (although it can be sued and defend.)
Once the corporation registers and pays the penalty and back fees and fines, it can then assert a claim in Texas.
31
How does a corporation obtain capital to start and operate?
By issuing a security (investment) to a person in exchange for capital.
1) Debt security
2) Equity security
32
What is a debt security?
When a corporation borrows money from X and agrees to repay them with interest.
These are usually called "bonds", and the person holding a bond is the creditor.
33
What is an equity security?
When a corporation sells an ownership to X.
Equity security is called STOCK.
The person holding stock (shareholder/stockholder) is an OWNER, not a creditor.
34
What is a subscription?
A written, signed offer to buy stock from a corporation.
35
How long is a pre-incorporatin subscription offer irrevocable?
A subscription is irrevocable for 6 months.
Unless it says otherwise or all subscribers agree to let you revoke.
36
Are post-incorporation subscriptions revocable?
YES, until accepted by the corporation.
37
At what point are the corporation and the subscriber obligated under a subscription agreement?
When the board accepts the offer, and the corp notifies the subscriber in writing.
38
At what point does a subscriber whose subscription is accepted become a shareholder?
When they pay for the stock.
39
What must the corporation receive when it issues stock?
Consideration
40
What forms of consideration are acceptable in exchange for issued stock?
Any tangible or intangible benefit to the corporation is sufficient consideration.
41
What is par stock?
Stock issued for the minimum issuance price.
Par stock is not required, and if we have it, it is set in the certificate.
Par stock can be issued for more than the minimum, as long as it's actually more.
42
What is "no par" stock?
This means that there is no minimum price. The Board can set any price.
43
What is treasury stock?
This is stock that was previously issued and has be reacquired by the corporation.
Treasury stock is ISSUED and AUTHORIZED, but NOT OUTSTANDING.
Treasury stock is "NO PAR" stock, so there is no minimum price and can be resold.
44
Is the Board's valuation of stock conclusive?
Yes, so long as there's no fraud.
45
What is watered stock?
Par stock that is issued for less than the minimum.
46
Who is liable for watered stock?
1) Directors? - Yes, if they knowingly authorized the issuance.
2) Person who bought the watered stock? - YES, always.
47
Is there a defense for the buyer of watered stock?
NO, because he's charged with notice of the par value at all times.
48
If the buyer of watered stock transfers the stock to a third party, is that third party liable?
Not if the third party acted in good faith. This means that they did not know about the water.
49
What is the preemptive right an existing shareholder?
This is the right of an existing shareholder of common stock to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock FOR MONEY.
50
Does a new issuance of stock include the issuance of treasury stock?
YES. If we sell treasury stock, it's reacquired stock that is subject to preemptive rights.
51
If the certificate of formation is silent, do we have preemptive rights?
NO. The corporation is gonna have to tell us that we have preemptive rights.
52
Does the issuance of stock in exchange for property trigger preemptive rights?
NO. Preemptive rights only attach if the new issuance is for money.
53
Are there preemptive rights if the issuance of new stock is within six months of formation of the corporation?
NO, unless the CoF says otherwise.
54
Where is the number of directors initially set?
Initially set and named in the certificate.
Later directors are elected by the shareholder in an annual meeting.
55
How is the entire board of directors elected?
Each year at the annual shareholders meeting, unless the bylaws provide for a "classified board".
56
What is a classified board?
A board divided in halves or thirds, which different portions elected each year.
57
What is required for shareholders to remove directors before their term expires?
It requires a majority of the shares entitled to vote.
58
On what basis can the shareholders remove a director?
With or without cause.
If it's a classified board, only with cause.
59
If there's a vacancy on the board, who selects the person to serve the remainder of that term?
The Board or the shareholders.
60
In what ways can a board take an action?
1) Unanimous written consent to do something
| 2) A meeting that satisfies the quorum and voting requirements.
61
When is notice required for board meetings?
1) Regular meetings: Notice not required
| 2) Special meetings: Notice required, and it must state the date, time, and place (need not state purpose)
62
What is the effect of a failure to give proper notice?
Whatever happened at the meeting is voidable, unless the directors not notified waived the notice defect.
63
How can a director waive the notice defect?
1) In writing at any time, or
| 2) By attending the meeting without objecting at the outset of the meeting.
64
Is email notice of meetings sufficient?
Yes, if the Director authorizes it.
65
Can directors give proxies for how they will vote as directors or enter into voting agreements for how they will vote as directors?
No, this is against public policy.
Directors owe the corporation NON-DELEGABLE fiduciary duties.
66
Can shareholders vote by proxy?
Yes
67
What is a quorum, and when is it required?
A quorum is a majority of all directors, unless the certificate or bylaws say otherwise.
required when holding any meeting of the board.
68
What is the effect of a quorum when passing a resolution?
If there's a quorum when passing a resolution, only a majority vote of those who are present is required.
69
What is the role of the Board of Directors?
1) Sets policy
2) Supervises officers
3) Declares distributions
4) Decides when the corporation should issue stock
5) Recommends fundamental corporate changes to shareholders, etc.
70
How is a committee created, and what does it do?
If the CoF or bylaws allow, the board can appoint a committee, to which it can delegate management power.
71
What can a committee NOT do?
A committee cannot:
1) Amend bylaws
2) Select officers
3) Recommend a fundamental change to shareholders
72
What is the duty of care for a director?
A director owes a duty of care to the corporation.
Must act in good faith and exercise ordinary care and prudence. She must do what a prudent person would do in similar circumstances.
***This is a NON-DELEGABLE fiduciary duty.
73
Who has the burden to establish a breach of duty of care?
The burden if on the PLAINTIFF
74
What is nonfeasance?
INACTION by the director that results in a loss to the company, such as:
1) Failing to attend meetings
2) Failing to keep abreast of corporate affairs, etc.
75
What is the required to show that there was nonfeasance?
Must show that the company lost money because of the breach of duty through inaction.
76
What is misfeasance?
ACTION by the board or director that does something to hurt the corporation.
Causation is clear here, so easy to prove.
77
What is the business judgment rule (BJR)?
A presumption that when the board acted, it did the appropriate homework in making its decision.
The court will not second guess a decision if it was:
1) Made in good faith,
2) Was informed
3) And has a rational basis
Policy rationale: Directors are not guarantors of success
78
What is the duty of loyalty?
A director owes the corporation a duty of loyalty.
They must act in good faith and with a reasonable belief that her act is in the corporation's best interest.
Generally applies to conflict of interest cases.
79
Why does the BJR not apply to duty of loyalty cases?
Because it NEVER APPLIES if the fiduciary has a conflict of interest.
80
What is an "interested director transaction"?
Self-dealing
Any between between the corporation and one of its directors.
81
How can self-dealing be defended against?
If the director shows:
1) The deal was fair to the corporation when approved, OR
2) Her interest in the material facts were disclosed or known and the deal was approved in good faith by either of two groups: a) shareholders, or b) majority of disinterested directors, even if less than a quorum.
82
Can a director start a competing venture?
State the duty of loyalty standard: They must act in good faith and with a reasonable belief that her act is in the corporation's best interest.
Director cannot compete without approval of a disinterested majority of directors.
83
What is the remedy for a competing venture in violation of the duty of loyalty?
Constructive trust on profits.
Director would have to give the profits to her corporation if the competing venture made a profit.
84
What is a corporate opportunity?
Anything the fiduciary has reason to know the Company would be interested in.
85
Can a director appropriate a corporate opportunity for themselves?
State the duty of loyalty standard:They must act in good faith and with a reasonable belief that her act is in the corporation's best interest.
A director cannot USURP a corporate opportunity, but can have it if he:
1) Tells the board, and
2) Waits for the board to reject the opportunity.
86
What is the remedy if a director is found to have appropriated a corporate opportunity the company wants?
He must sell the land or entity to the corporation at his cost. If the director has sold it at a profit, the corporation gets the profit.
This forms a constructive trust.
87
What are other bases for director liability?
Improper distributions, Improper loans, "ultra vires" acts, and breaches of fiduciary duties.
88
Which directors are considered liable for board actions?
A director is presumed to have concurred with board action UNLESS her dissent or abstention is noted in writing in corporate records.
89
How is dissent to a board action to put in WRITING?
1) Having it put in the minutes, or
2) Sending a note to the corporate secretary at the meeting, or
3) Sending a registered letter to the corporate secretary immediately after the meeting.
ORAL DISSENT IS NOT EFFECTIVE BY ITSELF.
90
What are the defenses to liability for board actions?
1) Absentia
2) Good faith reliance on information represented as correct by an officer or provided by a competent profession, or by an employee, or by a committee of which the director relying was not a member.
The second defense is no good if it was known the person giving info was an idiot.
91
What are officers of a corporation?
Agents of the corporation that can bind the corporation by acts within their authority.
92
When does the president of a corporation have the inherent authority to convey real property?
Only if the board gives them such authority.
Outside that, they might have inherent authority to bind the corporation to a contract entered in the ordinary course of business.
93
Can one person hold multiple offices at the same time?
Yes
94
Do officers have to be directors too?
No
95
Who selects and removes officers?
The board
96
Who sets officer compensation?
The board
97
If the board fires a president in breach of his employment contract, what are his remedies?
He can sue for damages, but he can't get his job back.
98
Can shareholders hire and fire officers?
NO, only the board can.
Shareholders can hire and fire directors, but that's it.
99
When is reimbursement PROHIBITED for a D sued in their capacity as a director or officer?
(indemnification)
If the director or officer is held liable for willful or intentional misconduct in performing a duty to the corporation.
This is a NARROW rule. The only time the corp is prohibited is if she's held LIABLE for INTENTIONAL misconduct.
100
When is reimbursement REQUIRED for a D sued in their capacity as a director or officer?
(indemnification)
If she wins a JUDGMENT on the entire case. Judgment can be based on anything (merits, technicality, etc.)
101
When is reimbursement PERMITTED for a D sued in their capacity as a director or officer?
(indemnification)
If D was held liable to the corporation or received an improper personal benefit, she can get only expenses and attorney's fees (not the judgment).
Eligibility standards: D/O must show that she acted in GOOD FATH and with the REASONABLE BELIEF that her actions were in the corporation's best interests. (DUTY OF LOYALTY STANDARD)
102
Who determines eligibility of a D to receive permissive indemnification?
1) Majority vote of the disinterested directors or of a disinterested committee or of disinterested shares, or
2) Independent legal counsel
103
Can a court order a D/O to be reimbursed?
Yes, if it finds it justified on the facts.
This is subject to the limitation that, if D was held liable to the corporation or received an improper personal benefit, she can only get expenses and attorney's fees (not the judgment).
104
Can a certificate limit D/O liability?
Only for DAMAGES, but never for willful or intentional conduct.
The certificate can exculpate for breach of duty of care.
105
What is a close corporation?
1) Few shareholders (generally fewer than 35)
| 2) Stock is not publicly traded
106
What is the of nature management in a close corporation?
They can have BoD's, but there need not be one.
Instead, shareholders can take over management, or management can be vested in a single manager.
107
How do you form a close corporation?
The certificate says "this is a close corporation".
108
What are shareholder management agreements? (SMA)
| close corporations
This sets up alternative management in close corporations.
How entered?
1) In the certification or the bylaws, and approved by ALL shareholders
2) Written agreement of ALL shareholders.
109
Are stock certificates required to indicate close corporation status?
Yes, but failure to do so does not affect close corporation status.
110
Are corporations required to delivery to each shareholder a copy of the SMA?
It should, but failure to do so does not affect its validity.
111
When does an SMA become binding, and on whom?
When the SMA is filed with the Secretary of State and becomes part of the public record.
Binding on all shareholders, and even transferees.
This is true even if a transferee does not have knowledge of the agreement, since it's a matter of public record and a notice to all.
112
Whenever the close corporation is managed by someone other than a board of directors, who owes the duties of care and loyalty?
Under an SMA, whoever manages the corporation.
113
In Texas, do shareholders owe each other a fiduciary duties?
No.
But a court may find fiduciary duty depending on the facts of a given case, so be prepared to argue for a duty here.
114
What is required to pierce the corporate veil?
To hold shareholders personally liable, these two things must be true:
1) Shareholder abused the privilege of incorporating, and
2) Limited liability would be unfair.
A court might PCV to prevent FRAUD and achieve EQUITY.
115
What type of corporation is PCV limited to?
You can only pierce the veil of a CLOSE CORPORATION.
It cannot happen in a big publicly traded corporation.
116
What is the standard PCV analysis?
1) Generally - Shareholders are not liable for acts or debts of corporations
2) BUT, did a shareholder abuse the corporation?
3) Would limited liability in this case be unfair?
If so, then piercing the corporate veil is likely appropriate, depending on the court's decision.
117
What is the alter ego theory for piercing the corporate veil?
When shareholders commingle personal and corporate funds (e.g., using the corporate credit card for personal uses), and the corporation fails to pay bills, the Creditor can come after the shareholders responsible to collect its claim, since the shareholders abused the corporation and limited liability would be unfair.
118
What is the undercapitalization theory for piercing the corporate veil?
When a corporation is undercapitalized because shareholders failed to invest enough to cover prospective liabilities, then the shareholders both abused the corporation and limited liability would be unfair, meeting the PCV requirements.
119
In what kinds of cases is PCV most likely?
TORT cases, but contract cases sometimes happen.
120
What is required for PCV for a contract claim for fraud?
We cannot PCV for a contract claim based on fraud unless the shareholder made the corporation commit fraud for his own personal benefit.
121
When might PCV apply liability to another corporation?
When that corporation is a shareholder of the corporation in question.
e.g., A parent corporation forms a subsidiary to avoid its obligations. The court might pierce through the sub and hold the parent liable just as it could if the shareholder were a human.
122
What is a derivative suit?
A shareholder is suing to enforce the corporation's claim, because the corporation did not sue.
ASK: Could the corporation have brought this suit? If so, then it's a derivative suit.
123
Who gets the money from a derivative suit judgment?
The corporation, not the shareholder.
The shareholder only gets costs and attorneys fees as reimbursement from the corporation.
124
If the shareholder loses the derivative suit, can she recover costs and attorney's fees?
NO.
125
When is the shareholder liable to the attorney's fees and costs for the defendant of a derivative suit?
When the court finds that Shareholder sued without reasonable cause or for an important purpose.
126
What are the requirements for a shareholder to bring a derivative suit?
1) Stock ownership
2) Must fairly and adequately represent the corporation's interest (must own stock throughout the litigation)
3) Must first make a written demand to directors that the corporation bring suit
4) Corporation must be joined as a defendant, because it did not sue on its own
127
What is the stock ownership requirement for a shareholder to bring a derivative suit?
To bring a derivative suit, one must have owned stock when the claim arose or have gotten it by "operation of law" from someone who did. (inheritance, divorce decree, etc)
128
What is the demand requirement for a shareholder to bring a derivative suit?
Shareholder cannot file a derivative suit until 90 days after demand unless demand is rejected before that or waiting 90 days would cause irreparable damage to the corporation.
The demand must set forth the nature of the claim with PARTICULARITY.
129
Can the parties settle or dismiss a derivative suit?
Only with court approval.
If the proposed settlement or dismissal may substantially affect shareholders, the court may require notice to those shareholders.
130
When may the corporation move to dismiss a derivative suit against it?
The corporation may move to dismiss based upon a determination by independent and disinterested directors.
The basis for this motion would be that the suit it NOT in the company's best interest. The board must determine this.
131
What is the standard for a court to grant a motion to dismiss the derivative suit?
The court must dismiss if it finds the determination was:
1) Made in good faith, and
2) By independent disinterested directors that the suit is not in the company's best interest.
132
What is the effect of a derivative suit against a closely held corporation?
The court might treat a derivative suit against a director, officer, or shareholder as a DIRECT ACTION so the various requirements don't have to be met.
WATCH OUT: If the corporation has less than 35 shareholders, it's NOT a derivative suit.
133
What shareholders get to vote?
General rule: Shareholders vote if they are the record shareholder as of the record date.
The record shareholder is the person shown as the owner in the corporate records. The record date is a voter eligibility cut-off set no more than 60 days before the meeting.
134
What are the exceptions to the general rule that the record owner on the record date votes?
1) Stock that is reacquired by the corporation and no longer outstanding provides no votes.
2) Death of a shareholder - executor of the shareholder's estate can vote the deceased's shares
3) Proxies
135
What is a proxy, and what is required to make one?
A proxy is a:
1) Writing (fax and email ok)
2) Signed by record shareholder
3) Directed to secretary of corporation
4) Authorizing another to vote the shares
Creates agency between shareholder and proxy.
136
How long does proxy authorization last?
11 months unless it says otherwise.
137
How can a proxy be revoked?
1) In writing to the corporate secretary, OR
| 2) By attending the meeting and voting
138
What creates an irrevocable proxy?
Proxies are always revocable, UNLESS it's a "proxy coupled with an interest".
This requires:
1) The proxy says irrevocable, and
2) The proxy holder has some interest in the shares other than voting (e.g., option to buy stock)
139
How can shareholders with relatively few shares pool their voting power?
1) Voting trusts
| 2) Voting/pooling agreements
140
What is required for a voting trust?
(No time limit imposed by corporate law)
1) Written trust agreement controlling how the shares will be voted.
2) File a copy with the corporation
3) Transfer legal title of shares to voting trustee.
4) Original shareholders receive trust certificates and retain all shareholder rights other than voting,
141
What is required for a voting/pooling agreement?
(No time limit imposed by corporate law)
1) Shareholder enter into agreement
2) In writing
3) Specifically enforceable against transferees if they have notice or actual knowledge of the agreement at or before the transfer
(Notice is presumed if the agreement is conspicuously noted on the stock certificate)
142
Are voting agreement possible for shareholders to agree on how to act one they become directors?
No, voting agreements for director actions are not allowed.
143
How can shareholders take a valid corporate act?
1) Unanimous consent in writing and signed or by electronic transmission of holder of all voting shares, or
2) A meeting that satisfies the quorum and voting rules
(These are the same rules as with the BoD)
144
What are the two types of shareholder meetings?
1) Annual meetings
| 2) Special meetings
145
What is required of an annual meeting of the shareholders?
They must be held, and if not held within 13 months, a shareholder can petition the court to order one.
Shareholders elect directors at annual meetings.
146
What is required of a special meeting?
Special meetings can be called by:
1) The Board,
2) The president,
3) The holders of at least 10% of the shares entitled to vote, or
4) Anyone else permitted in the certificate.
147
Can shareholders call a special meeting to remove officers?
NO, this is not a proper purpose, because shareholder cannot remove officers.
If the purpose of the meeting was to remove a director, though, then it would be proper.
148
What is the notice requirement for every meeting?
Must give written notice to every shareholder entitled to vote, for every meeting, between 10 and 60 days before the meeting (21 to 60 days if the meeting is to consider a fundamental change).
149
What is required of the notice contents for every meeting?
The notice must always state:
1) Date
2) Time
3) Place
4) Purpose (if special meeting)
150
What can shareholders vote on?
1) Electing directors
2) Removing diretor
3) Fundamental corporate changes
4) Amending bylaws, etc.
151
What is required for the quorum of a shareholder meeting?
There must be a quorum represented at the meeting.
Quorum focuses on the NUMBER OF SHARES, not the number of shareholders.
General rule: A quorum requires the majority of outstanding shares.
152
Once a shareholder quorum is established, can it be lost if people leave the meeting?
NO (this is different from directors, which can be lost)
153
If the quorum requirement is met, what shareholder vote is required to ELECT A DIRECTOR?
Plurality (the person who gets more votes for that seat than anyone else.
154
If the quorum requirement is met, what shareholder vote is required to REMOVE A DIRECTOR?
Majority of the shareholders entitled to vote.
155
If the quorum requirement is met, what shareholder vote is required to TO APPROVE A FUNDAMENTAL CHANGE?
2/3 of the shares entitled to vote. (super majority)
156
If the quorum requirement is met, what shareholder vote is required to for miscellaneous matters?
A majority of the shares that actually vote on the issue.
157
What is straight voting?
Separate election for each seat on the board.
Each outstanding share gets one vote for each seat. The candidate who gets more votes than any other is elected to that seat.
158
What is cumulative voting?
Only available in electing directors. It's a device that gives small shareholders a better chance at electing someone to the board.
We don't vote for each seat individually. There is an "at-large" election. The top finishers are elected to the board.
159
What determines voting power in cumulative voting?
Multiply the number of shares times the number of directors to be elected.
The shareholders can allocate their votes however they want.
160
If the certificate says nothing about cumulative voting, does it exist?
NO
161
What is required for a shareholder to engage in cumulative voting, if the CoF allows?
Must give written notice to the corporate secretary of their intent to cumulate.
If notice is given no later than one day before the meeting, all shareholders can vote cumulatively.
162
Can there be restrictions on stock transfers?
Yes, if laid out in the certificate, bylaws, or by agreement.
Valid if they are not an undue restraint on alienation.
163
What is the right of a shareholder to inspect the book and records of the corporation?
Under the TBOC, any shareholder can inspect the books if:
1) They have owned stock for more than 6 months, OR
2) They own at least 5 percent of the outstanding shares.
164
If a shareholder not meeting the TBOC requirements wants to inspect the books, what can they do?
They can inspect only with a court order.
165
What is the remedy for a shareholder when the corporation refuses to allow the inspection of the books?
The shareholder can get a court order and recover expenses and attorney's fees.
If there is litigation, the corporation has the burden of showing that the shareholder's purpose was improper.
166
What is required of the purpose for a shareholder inspecting the books?
They must show they have proper purpose related to their interest as a shareholder.
167
Must directors display the same requirements to inspect the books as a shareholder?
No, directors have unfettered access, because they are managers that must have access to perform their duties.
168
What is considered a "distribution"?
Payments from the corporation to the shareholders. Can be:
1) A dividend
2) Repurchasing of shares
3) A redemption of shares (forced sale to corporation at price set in certificate)
169
Who has the discretion to declare distributions?
The Board
170
When do shareholders have a right to distributions?
When the Board declares it. Shareholders have no right to distribution until then.
171
What is required for the shareholders to force the declaration of a distribution?
Requires a strong showing but he sharehodlers of abuse of discretion by the Board.
e.g., If the corporation consistently makes profits and the Board refuses to declare a divided while paying itself a bonus.
172
What is preferred stock?
Stock that is paid out first before the rest.
Doesn't mean pay more, just pay first.
173
If a corporation has both common and preferred stock, then how is it paid out?
Preferred is paid out first, then the remaining money goes to the common stock
174
From what source of money are distributions paid?
Distributions are always paid out of the corporation's SURPLUS, never from the "stated capital".
175
How is a corporation's surplus calculated?
ASSETS - LIABILITIES - STATED CAPITAL
176
How is stated capital calculated?
The value of PAR STOCK is the stated capital.
e.g., Issuing 10,000 shares of $2 par stock for $50,000 grants $20,000 stated capital and $30,000 surplus.
177
What does "insolvent" mean?
The company is unable to pay its debts as it comes due.
178
When can a company never make distributions?
If the company is INSOLVENT or if doing so would make the company insolvent.
Or if the distribution would exceed the surplus.
179
Who in the company is liable for the unlawful distributions made?
Directors are jointly and severally liable for any unlawful distributions.
180
If a director is held liable for unlawful distributions, how can they seek contribution for the judgment?
The liable director can seek contribution from other directors who approved the distributions, and from shareholders who knew it was improper when they received it.
181
What is a defense for a director in trouble for an unlawful distribution?
They can have a defense of "good faith reliance" on what the financial experts told them.
182
What is a fundamental corporate change?
Extraordinary occurrences like selling off assets or merging,
183
What steps are taken to make a fundamental corporate change?
1) The board takes an action adopting a resolution fo a fundamental corporate change,
2) The board must submit the proposal to the shareholders with written notice.
3) The fundamental change must be approved by the shareholders. (requires 2/3 super majority vote)
4) A document is delivered to the Secretary of State for filing.
184
What is a shareholder's "right of appraisal"?
The right of a shareholder to force the corporation to buy her shares for fair value.
185
What triggers the right of appraisal?
1) Merger
2) Sale of shares in a share exchange
3) Transfer of substantially all assets, or
4) Conversion
186
In what kind of corporation does the right of appraisal exist?
ONLY in close corporations. (fewer than 35 shareholders)
Policy rationale: In a close corporation, you cannot sell your stock publicly because it's not public traded. So this right allows you to force the corporation to buy your stock.
187
What actions should be taken by shareholders in a close corporation to perfect the right of appraisal?
1) Before shareholder vote, file with the corporation written notice of objection and of intent to demand payment
2) Abstain or vote against the proposed change, AND
3) After the vote, within 20 days of notification by the corporation, make a written demand to be bought out.
188
When must the corporation accept or reject a shareholder's right of appraisal?
Within 20 days of the shareholder's demand.
If it rejects the demand, it must counter with its estimate of fair value.
If fair value is in dispute, the shareholder can sue to determine the value.
189
Is the right of appraisal the exclusive remedy for a shareholder who does not like the fundamental change?
Yes, unless there was fraud.
190
How can the Certificate of Formation be amended?
1) BoD action AND written notice to the shareholders.
2) Shareholder approval (2/3 super majority of share entitled to vote)
3) If approved, deliver the amended certificate to the Sec. of State for filing.
191
What is required to perform a merger?
1) BoD action (of both corporations) AND written notice to shareholders
2) Shareholder approval (always required from shareholders of disappearing company)
3) No shareholder approval required if a 90%-or-more owned subsidiary is merged into a parent corporation ("short-form merger")
4) If approved, deliver certificate of merger to the Sec. of State for filing.
5) Consider right of appraisal for dissenting shareholders (only for disappearing company or of the subsidiary of a short-form merger)
192
What is the effect of a merger?
The surviving company succeeds to all rights and liability of the disappearing company.
Creates successor liability in the surviving company.
193
What is conversion?
A corporation can convert to another form of business organization.
194
What is required for conversion?
1) Board action and notice to shareholders.
2) Approval by 2/3 of the shares entitled to vote.
3) Delivery of the certificate of conversion to the Sec. of State.
4) Dissenting shareholders can demand appraisal rights.
195
What is a transfer?
A sale, lease, or exchange of all or substantially all of the assets not in the ordinary court of business.
NOTE: A transfer will NOT be "of substantially all: assets if the corporation dominates to engage in the same business after the transfer.
196
What is share exchange?
Where one company acquires all the stock of another.
197
For what corporation is a transfer considered a "fundamental corporate change"?
For the seller only, not for the buyer.
198
What is required for a transfer between a buying corporation and a selling corporation?
For A to sell all of its assets to B, there must be:
1) BoD action for both corporations, AND written notice to shareholders of the SELLING corporation.
2) Approval by the selling corporation's shareholders (2/3 of the share entitled to vote...buying corp doesn't need approval)
3) Consider rights of appraisal for the selling corporation only.
199
Is there successor liability when there's a transfer of all assets from a buying corporation to a selling corporation?
NO, the selling company still exists, so creditors can sue it. Nobody disappeared, so successor liability does not apply.
200
What is required for voluntary termination of a corporation?
1) Written consent of all shareholders, OR
2) BoD action and approval of 2/3 shares entitled to vote.
3) After either of these are met, send notice of intent to "wind up" to creditors.
4) Follow liquidation process
5) Consider whether the termination was fraudulent, since the court can revoke fraudulent terminations
6) A corporation can revoke its voluntary termination at any time before its corporate existences ceases.
201
What is required for a Texas Attorney General to commence involuntary termination?
The Texas Attorney General can institute a proceeding for involuntary termination and winding up for:
1) Fraudulent procurement of certificate
2) Ultra vires activities
3) Misrepresentation in required reports
4) Public interest requires it
202
When can a creditor seek involuntary termination of a corporation?
When there's a determination based on irreparable harm to unsecured creditors.
203
What is the procedure for a creditor after seeking involuntary termination of a corporation?
Creditors can seek appointment of a receiver because the corporation is insolvent and the creditor either has an unsatisfied judgment or the company admits in writing that the amount is due.
204
When can a shareholder seek appointment of a receiver for insolvency?
1) Waste of assets
2) Director deadlock causing irreparable harm to the company
3) Shareholders deadlocked and have failed to fill a vacant board position for two annual meetings, or
4) Illegal, oppressive, or fraudulent acts by directors.
205
How long does a receiver serve? And what if things aren't fixed at the end of that time?
12 months.
Court can order termination of the company if things are not resolved by then.
206
In a close corporation, what can be done if management is so divided that action cannot be taken?
A court may avoid dissolution by appointing a "provisional director" to break tie votes.
207
What is administrative termination?
The TX Sec. of State may issue a certificate of termination for corporation's failure to pay fees or failure to maintain registered agent or to file required report.
208
Does administrative termination require court action?
No, the TSOS issues the certificate of termination.
209
How much notice must the close corporation be given for administrative termination?
90 days' notice.
210
Why does administrative termination required by close corporations make directors and officers nervous?
Because they are personally liable for the debts incurred after termination, until reinstatement is allowed.
211
What happens if a corporation terminated involuntarily is not reinstated?
It is treated as a voluntary termination, and proceeds to liquidation.
212
Does termination end the existence of a corporation right then?
No, it triggers the liquidation process ("winding up")
213
What are the steps in the liquidation process?
1) Give notice to creditors
2) Gather all assets
3) Convert to cash
4) Pay creditors, and
5) Distribute remainder (if any) to shareholders.
6) Deliver a certificate of termination to the SoS.
214
What is the distribution to shareholders during the liquidation process?
Pro-rata by share, unless the certificate provides for a liquidation preference (gets paid first).
215
Who manages the winding-up process?
The BoD, unless the court decides to do so.
216
How late can a claim against the corporation that arose before termination be asserted?
Within three years after termination.
