Definitions Flashcards
(35 cards)
De Jure Corporation
Full or substantial compliance with all of the mandatory conditions precedent to incorporation.
De Facto Corporation (Colorable Compliance Defense)
A good faith compliance with all of the mandatory conditions precedent to incorporation but with some defect (i.e. Article were not accepted by Secretary of State). At a minimum, the incorporators must not know of the defect.
Corporation by Estoppel
A corporation where the defect in the incorporation process was serious enough so that it would not qualify as De Jure or De Facto. However, a person who dealt with the corporation may be estopped from denying corporate validity. Corporation by Estoppel is only good for the contractual obligation in question and may not be applicable to other transactions.
Piercing the Corporate Veil
Shareholders may be subject to unlimited liability where the corporate entity is cast aside by a court of equity even if the corporation is validly formed.
Piercing the Corporate Veil
Shareholders may be subject to unlimited liability where the corporate entity is cast aside by a court of equity even if the corporation is validly formed.
Six Factors that will be considered in attempting to pierce the corporate veil
Contract creditors need to show violation of 2 whereas tort creditors only need to show violation of 1 of the following.
- Basic corporate formalities not followed
- Corporation undercapitalized
- Commingling of corporate assets and shareholder’s personal assets
- Corporation dominated/controlled by an individual or another corporation.
- Alter Ego Theory
- Corporate form was used to commit fraud.
Promoter
One who participates in the formation of a corporation by securing the initial capital, arranging compliance with the legal formation requirements, and entering into necessary contracts on behalf of the corporation before it is formed.
Promoters Duties to Other Promoters
- Duty not to make a profit at the expense of the other promoter.
- Duty of full disclosure and fair dealings
- Duty not to engage in secret dealings
Liabilities of Promoter
Promoter is primary liable for contracts both prior to incorporation and after corporation has been formed, even if the contract is silent, unless there is a novation, either express or implied.
Ultra Vires Transactions
Transactions that exceed or are beyond the purposes and powers of the corporation. However, shareholders can ratify.
Doctrine of Waste
All executive compensation is subject to the test of waste even where board approved. Where it is held to be unreasonable or excessive, it cannot be enforced against the corporation and can be enjoined.
Two Methods of Shareholder Voting
Straight Voting or Cumulative Voting
Straight Voting vs. Cumulative Voting
Straight: A shareholder is entitled to one vote for each share held.
Cumulative: Shareholder is given one vote for each share held times the each director to be elected.
Proxy
A power of attorney given by a shareholder in writing to someone else to exercise the voting rights attached to his shares. The corporation must have notice. A writing is required and the proxy is only good for 11 months.
Preemptive Rights
Allows shareholders to keep their proportionate interests in the corporation through the right to subscribe to that amount of new shares in a new issuance which will preserve that existing proportionate interest in shares held by them.
Direct Action by Shareholder
A shareholder is enforcing his own personal rights for injury to his interest as a shareholder against the corporation.
Derivative Action by Shareholder
If management or a third party has abridged a legal duty owed to the corporation and the corporation fails to enforce its cause of action, a shareholder may bring the cause of action in the name of the corporation asserting the right of the corporation against the defendant.
Duties Owed by Director’s/Officers
Duty of Due Care and Loyalty
Duty of Due Care
Officers/Directors owe a fiduciary duty to the corporation and must discharge their duties with the same degree of diligence, care and skill, which the ordinary prudent person would exercise in the management of his own affairs.
Four Defenses to Breach of Duty of Due Care
- Business Judgement Rule
- Reasonable reliance on expert advice
- Good faith reliance on management
- Absence from meeting at which misconduct occurred.
Business Judgment Rule
Directors are not liable for losses flowing from their business decisions provided that decisions were the result of a well-informed, independent, good faith decision.
Duty of Loyalty
Officers and directors are held to a fiduciary duty of loyalty in all of their dealings with the corporation without regard for personal gain.
Interested Director Transaction
Occurs where a director sells or buys property or services to or from the corporation. Under majority rule, the transaction is not voidable if the director’s interest was disclosed, the transaction was approved by a majority of the disinterested directors and shareholders OR the transaction is fair to the corporation (no fraud or bad faith)
10b-5 Rule
It is unlawful for any person, directly or indirectly, by use of any means or instrumentality of interstate commerce or the mails, to employ any fraudulent or manipulative devices in connection with the purchase or sale of any securities.
