Corporations - Texas

Question 1

Texas Corporations will usually have fact patterns on the bar exam.

Answer 1

1. Organization of Corporation
2. Issuance of stock
   3, Directors and officers
3. Shareholders
4. Fundamental corporate changes

Question 2

All Texas corporations are governed by:

Answer 2

Texas Business Organizations Code (TBOC).

Question 3

Formation of a corporation requires:

Answer 3

People, paper and Act.

Question 4

The first step in the formation of a corporation is:

Answer 4

Execution of the certificate and filing the certificate of formation with the Secretary of State, signed by the organizers.

(People)

Question 5

The certificate of formation must state eight things:

Answer 5

• – the name of the corporation;
• – the purpose for which the corporation is formed, which can be stated to be any lawful purpose;
• – the period of duration, if any (the corporation’s existence is perpetual if no provision is provided);
• – the address of the initial registered office and name of the initial registered agent;
• – the name and address of each organizer;
• – relevant information about stock;
• – if the corporation is to be managed by directors, the number of directors constituting the initial board of directors and the name and address of each person who will serve as a director until the first annual meeting and until a successor is elected; and
• – if the corporation is to be managed pursuant to a shareholders’ agreement other than by a board of directors, the name and address of each person who will perform the functions of directors.

(Paper)

Question 6

The certificate of formation must be submitted to the Secretary of State. The acceptance of the filing of the certificate of formation by the Secretary of State is:

Answer 6

Conclusive evidence of the formation and existence and that all conditions precedent to formation have been satisfied. Upon issuance of the certificate of formation, corporate existence is deemed to have begun.

(Act)

Question 7

Note when a de jure corporation exists.

Answer 7

A corporation organized in compliance with the statute is a de jure corporation. In general, corporate existence begins when the certificate of formation become effective; a certified statement of the fact of incorporation by the state is generally considered evidence of de jure status.

Question 8

What law governs the internal affairs of the corporation:

Answer 8

Texas law governs the internal affairs of a corporation in Texas.

Question 9

A corporation:

Answer 9

Is a separate legal person that can be sued, hold property, serve as a partner in a partnership, etc.

Question 10

Generally, if the corporation incurs a debt, breaches a contract or commits a tort:

Answer 10

The directors, or officers, or the shareholders are not liable but the corporation itself is.

Question 11

State the de facto corporation doctrine.

Answer 11

The de facto corporation doctrine, when met, effectuates corporation formation in spite of statutory noncompliance, rarely applies today because the state must accept the certificate of formation, and such acceptance is conclusive evidence of incorporation.

Question 12

Absent de jure or de facto status, a corporation may still exist by:

Answer 12

Corporation by Estoppel.

Question 13

After the filing of the certificate of formation, the initial board of directors, by a call of a majority of those initial directors, must:

Answer 13

Hold an organization meeting for the purpose of adopting bylaws, electing officers, and transacting other business that comes before the board.

Question 14

State the amount of notice of the meeting that must be sent to each director.

Answer 14

At least three days’ notice of the time and place of the meeting must be sent to each director.

Question 15

Anyone asserting either the doctrine of de facto corporation or the corporation by estoppel must:

Answer 15

Be unaware of failure to form de jure corporation.

Question 16

A de facto corporation (DFC) requires:

Answer 16

1. There is a relevant incorporation statute,
2. The parties made a good faith, colorable attempt to comply with it, AND ,
3. Some exercise of corporate privileges.

Question 17

A corporation by estoppel is:

Answer 17

One who treats a business as corporation may be estopped from denying that it is a corporation. Generally applies in contract cases. May be abolished in Texas.

Question 18

Define Bylaws.

Answer 18

Bylaws are internal rules and regulations enacted by the corporation to govern its actions and its relation to its shareholders, directors, and officers. Must be present except in a close corporation.

Question 19

If the bylaws conflict with the certificate of formation then:

Answer 19

The certificate would take precedent over the bylaws but the bylaws can set the number of directors.

Question 20

Define Piercing the Corporate Veil.

Answer 20

As a general rule, a corporation will be looked upon as a separate and legal entity. However, if the entity is used to commit fraud or to achieve inequitable results, a court may disregard the corporation’s separate entity and hold shareholders or affiliated corporations liable on corporate obligations. This is known as piercing the corporation veil.

Question 21

State the alter ego doctrine.

Answer 21

Under the alter ego doctrine, the corporate entity will be disregarded where a corporation is organized and operated as a mere tool or business conduit of another.

Question 22

Although adequacy of capitalization is a factor considered by the courts, inadequate capitalization alone will not ordinarily lead to disregard of the corporate entity. Adequate capital is not precisely defined, but generally must be:

Answer 22

Sufficient for the corporation’s prospective needs and meeting corporate debts as they become due.

Question 23

A promoter is:

Answer 23

A person acting on behalf of a corporation not yet formed who might contract with a third-party on behalf of a corporation that is not yet formed.

Question 24

As a general rule, a corporation is not liable on any pre-incorporation agreements its promoters entered into on its behalf, unless:

Answer 24

It assumes liability by its own act after it comes into existence. (ex. Express adoption)

Question 25

Two ways a corporation is a liable under a pre-incorporation contract if:

Answer 25

Expressly done through board action; OR can be implied when corporation accepts a benefit of the contract.

Question 26

The promoter is liable on pre-incorporation contracts until:

Answer 26

There is novation - an agreement of the promoter, the corporation, and the other contracting party that the corporation replaces the promoter under the contract.

Question 27

Even if the promoter is held liable on the contract, she may be entitled to reimbursement by the corporation if:

Answer 27

She undertook the contract in good faith, at least to the extent that the corporation benefited from the contract.

Question 28

Note when liability of a promoter will end.

Answer 28

Personal liability will continue even after the corporation is formed, unless there is a novation or an agreement to release liability. If the corporation merely adopts the contract of the promoter, the promoter may remain liable on the contract with the third party, but will be entitled to indemnification from the newly created corporation.

Question 29

What is a foreign corporation transacting business in Texas?

Answer 29

A foreign corporation is any corporation outside of Texas making transactions in Texas on a recurring basis in the their regular course of business.

Question 30

What if a foreign corporation transacts business in Texas without qualifying?

Answer 30

A foreign corporation must qualify by filing and getting a certificate of authority and paying a fee. If the corporation does not do that - there will be a civil fine and the corporation cannot sue in Texas on claims from business in Texas (but corporation can be sued).

Question 31

What is an issuance (stock)?

Answer 31

Where a corporation sells its own stock (to raise capital).

Question 32

What is a subscription?

Answer 32

A written, signed offer to buy stock from a corporation.

Question 33

Can you revoke a pre-incorporation or a post-incorporation subscription?

And when is a subscription accepted and when does a subscriber become a shareholder?

Answer 33

Pre-Incorporation:
— irrevocable for 6 months unless the subscription says otherwise or all subscribers agree to let you revoke

Post-Incorporation:
— revocable until it is accepted by the corporation

A subscription is accepted and the subscriber is obligated when:

• – board accepts the offer; AND
• – corporation notifies subscriber in writing; AND a subscriber is a shareholder when he pays for the stock

Question 34

What sort of consideration is allowed in a stock purchase?

Answer 34

Any tangible/intangible benefit to the corporation.

Question 35

Par Value of Stock.

Answer 35

Par value stock means minimum issuance price.

Question 36

Treasury Stock.

Answer 36

Stock that previously issued and has been reacquired by the corporation that is considered authorized and issued but not outstanding.

Always treat treasury stock as no par stock.

Question 37

Consequences of issuing stock less than par value.

Answer 37

Issuing par value stock for less than par value is called watered stock and the directors are liable if they knowingly authorized the issuance.

A purchaser is liable b/c he is charged with notice of the par value stock.

Question 38

Pre-emptive (Stock) Rights.

Answer 38

Right of existing shareholder of common stock to maintain his percentage ownership by buying stock whenever there is a new issuance of stock FOR MONEY.

Question 39

Are there pre-emptive rights if the certificate of formation is silent?

Answer 39

No, the certificate of formation must say there are pre-emptive rights.

Question 40

Note who may serve on the board of directors and how this is determined.

Answer 40

The board of directors may consist of one or more directors. The number of directors may be set by the certificate of formation or bylaws. A director need not be a resident of Texas or a shareholder of the corporation, unless required by the certificate of formation or bylaws.

Question 41

Define Straight Voting.

Answer 41

In straight voting, each share has one vote for each director; thus, a majority shareholder can elect the entire board of directors. In Texas, unless otherwise provided in the certificate of formation or bylaws, directors are elected by a plurality of the votes cast by the holders of shares entitled to vote in the election of directors.

Question 42

Define Cumulative Voting.

Answer 42

Representation of minority shareholders can be made more likely by cumulative voting, which grants each share as many votes as there are directors to be elected and allows the shareholder to allocate his votes as he chooses. Thus, the number of votes will be the number of shares multiplied by the number of directors to be elected.

Question 43

The formula for calculating cumulation is:

Answer 43

(Shares Voting/(Directors to Be Elected + 1)) + 1

Question 44

Note when shareholders will be allowed to vote cumulatively.

Answer 44

In order to vote cumulatively, shareholders must provide written notice of their intention to do so to the secretary of the corporation on or before the day preceding the date of the election. If a shareholder gives such notes, all shareholders entitled to vote cumulatively may do so.

Question 45

Note how the board of directors or an individual director may be removed.

Answer 45

The entire board of directors or any individual directors can be removed, with or without cause, at a meeting called for that purpose, by a majority of the shares entitled to vote in the election of such directors, unless otherwise provided in the certificate of formation or bylaws.

Question 46

However, a director elected by a particular class or series of shares may be removed only by:

Answer 46

A majority of the shares entitled to vote in the class or series that elected him.

Question 47

The powers of a corporate officer are, like the powers of an agent, either actual or apparent. Actual authority may be either implied or expressly delegated. Express actual authority of an officer may originate in:

Answer 47

Board approval of actions by resolution at a board meeting or in the TBOC, the certificate of formation, or the bylaws.

Question 48

Corporate officers have the implied authority to:

Answer 48

Enter into transactions that are reasonably related to performing the duties for which they are responsible.

Question 49

Where a corporation should have recognized that a third party would be likely to view the officer or agent in question as possessing the authority to bind the corporation to the agreement in question:

Answer 49

It cannot avoid the transaction based on the concept of apparent authority.

Question 50

Acts of a corporate officer or agent that have not been properly authorized may be:

Answer 50

Ratified by the board. Ratification may be explicit or implied.

Question 51

Officers are subject to the same fiduciary duties as directors. Note when the corporation will be liable for an officer’s actions.

Answer 51

The corporation will be liable in respondeat superior for an officer’s actions within the scope of his authority, even if not authorized by the corporation. The officer will also be liable for his own torts and crimes.

Question 52

In general, directors, officers, and incorporators of a corporation are fiduciaries who must perform their duties:

Answer 52

In good faith and in a manner reasonably believed to be in the best interests of the corporation.

Question 53

Due care is generally defined as:

Answer 53

That degree of care that an ordinarily prudent person in a like position would use under similar circumstances.

Question 54

State the business judgment rule and its effect.

Answer 54

The business judgment rule shields directors from liability and insulates board decisions from review. The business judgment rule creates a rebuttable presumption that directors are honest and well-meaning and acting through decisions that are informed and rationally undertaken in good faith.

Question 55

The fiduciary duty of officers, directors, and employees requires that:

Answer 55

They be loyal to the corporation and not promote their own interests in a manner injurious to it.

Question 56

A breach of duty of loyalty may arise where:

Answer 56

The individual has business dealings with the corporation, takes advantage of a corporate opportunity, or enters into competition with the corporation.

Question 57

A transaction that presents a conflict of interest is valid if:

Answer 57

The material facts of the relationship or interest are disclosed or known by the board or a committee of the board and the board or committee in good faith authorizes the contract or transaction by the approval of the majority of disinterested directors or committee members; or the shareholders entitled to vote on the authorization of the contract or transaction and it is specifically approved in good faith by a vote of the shareholders; or the contract or transaction is fair to the corporation when the contract or transaction is authorized.

Question 58

It is often difficult to determine what is in fact a corporate opportunity. However, the focus is on the fairness in particular circumstances of taking advantage of an opportunity for personal profit when the interests of the corporation justly call for protection. Four factors considered are:

Answer 58

• – Whether the business constituting the opportunity is closely related to that of the corporation;
• – Whether the board had expressed an interest in acquiring that type of business;
• – Whether the individual became aware of the opportunity while acting in his capacity as a director or officer; and
• – Whether he used any corporate funds or facilities in discovering or developing the opportunity.

Question 59

Majority or controlling shareholders of a corporation have a fiduciary duty to:

Answer 59

Refrain from exercising their control to obtain a benefit from the corporation not shared proportionately with the minority shareholders.

Question 60

Shareholders have the right to do three things:

Answer 60

• – Elect and remove directors;
• – Amend the bylaws; and
• – Approve fundamental changes in the corporation, such as amendment of the certificate of formation, merger, sale of substantially all assets, or dissolution.

Question 61

Shareholder action is usually taken at a meeting. A meeting of shareholders is to be held:

Answer 61

Annually for the election of directors and the transaction of any other business.

Question 62

Note when and where the annual shareholders meeting is held.

Answer 62

The annual meeting will be held at a time that is stated in the bylaws. The location of the meeting will be as provided in the certificate of formation or bylaws.

Question 63

State when written notice of a shareholders’ meeting must be given to shareholders entitled to vote at the meeting.

Answer 63

Written notice of a shareholders’ meeting must be given to shareholders entitled to vote at the meeting not less than 10 days or more than 60 days before the date of the meeting.

Question 64

Shares entitled to vote may take action on a matter at a meeting only if a quorum of those shares exists with respect to the matter. State what constitutes a quorum.

Answer 64

Unless the certificate of formation or the bylaws provide otherwise, a majority of the shares entitled to vote at a meeting constitutes a quorum.

Question 65

Note whether a shareholder may vote by proxy.

Answer 65

Every shareholder who is entitled to vote may do so by proxy, executed in writing.

Question 66

Shareholders of the corporation may enter into an agreement (shareholder agreement) that does certain things:

Answer 66

• – Abolishing the board; or

- – Making management much less formal (etc.)

Question 67

A corporation comes into existence when:

Answer 67

A charter is obtained from the state.

Question 68

Characteristics of the corporate form.

Answer 68

(i) shareholders, the owners, have limited personal liability for corporate debts and obligations, and are ordinarily subject to lose only their investment in shares; (ii) shareholders may, in general, freely transfer their ownership rights to others; (iii) the corporation may have perpetual life, and (iv) the corporation has a regular form of management decisionmaking established by statute.

Question 69

Notice of regular director board meetings is not required unless required by the bylaws however:

Answer 69

Notice of special meeting is required.

Question 70

Failure to give proper notice of a special board meeting:

Answer 70

Voids whatever was done at the meeting unless the defect is waived by the person not notified - either in writing anytime or by attending without objection.