Essay issues Flashcards
(33 cards)
Pre-incorporation transactions:
What is a promoter and when are they liable.
Promoter—enters into contracts securing capital to bring the corporation into existence.
Personally liable for a contract entered into pre-incorporation, even after the corporation comes into existence
Exceptions:
a) Novation—the corporation and the third party contract agree to substitute the corporation for the promoter
Adoption—the corporation takes the benefits of the contract
How does incorporation occur.
Must file articles of incorporation with the state.
The articles must include certain basic information, including the number of shares the corporation is authorized to issue. Unless a delayed date is specified in the articles, the corporate existence begins when the articles are filed by the secretary of state’s office.
what is an ultra vires act
—occurs when a corporation has a narrow purpose and acts outside the scope of that purpose in the article of incorporation.
A shareholder can file a suit to enjoin the action or take action against the officer, director, or employee who engaged in the act.
Not seen much today because most list they are for any legal purpose or something else very broad.
What is a De jure corporation and de facto corporation
exists when the statutory requirements for incorporation are met
o A good faith attempt to incorporate can still invoke corporate protections if:
1) De Facto Corporation—attempted to incorporate and ran business believing it was incorporated
2) 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
Example 1: Based on a past bar essay: L and M improperly file articles of incorporation. They acted in good faith and they are now operating “Data, Inc.” as a business, believing it is incorporated. L and M obtain a business loan from Big Bank who looks at the Data, Inc.’s business records prior to issuing the loan. L and M’s business eventually fails and is unable to repay the loan. Big Bank will be estopped from arguing that Data, Inc. is not a corporation because it dealt with Data, Inc. as if it were a corporation and had an opportunity to discover that is was not actually incorporated. Big Bank will not be able to recover from L and M as individuals.
Also note that de facto corporation can be used as a defense but what actually forms when two or more people come together and inadvertently fail to create a corporation is a GP. If they acted in good faith a GP is formed but the partners can void liability by invoking the de facto corporation defense. An actual corporation won’t be formed until they fix whatever prevented the corporation from forming when the articles were sent to the state.
Who must authorize the issuance of stock
The board of directors
What is the Par Value of Stock
Board of directors must determine whether the value paid for the stock is adequate
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
Federal Causes of action for improper Sale of securities
o Rule 10b-5 (fraudulent sale of stock);
i) The plaintiff purchased or sold a security;
ii) The transaction involved the use of interstate commerce;
iii) The defendant engaged in fraudulent or deceptive conduct;
iv) The conduct related to material information;
v) The defendant acted with scienter, i.e., with intent or recklessness;
vi) The plaintiff relied on the defendant’s conduct; and
vii) The plaintiff suffered harm because of the defendant’s conduct.
and
o Section 16(b) (Insider trading)
applies to (i) corporations that have securities traded on a national securities exchange or (ii) corporations that have assets of more than $10 million and more than 500 shareholders of any class of stock or other equity security.
During any six-month period, a corporate insider who both buys and sells his corporation’s stock is liable to the corporation for any profits made.
Only corporate directors, officers (e.g., president, vice president, secretary, treasurer, or comptroller), and shareholders who hold more than 10 percent of any class of stock are subject to a Section 16(b) action.
Not frequently tested.
Shareholders meetings
Required to hold an annual meeting and this is to elect the directors. A corporation may also hold a special meeting, the purpose of which must be specified in the notice of the meeting. Generally, a special meeting may be called by the board of directors or shareholders who own at least 10 percent of the shares entitled to vote at the meeting.
Shareholders must be given notice of either type of meeting. To properly call a meeting, the corporation must notify all shareholders entitled to a vote at the special meeting in a timely manner. A shareholder may waive notice either in writing or by attending the meeting. Usually, notice must be given no less than 10 days and no more than 60 days before the meeting date. The notice must include the time, date, and place of the meeting.
Cans shareholders inspect corporate records
o Restricted to normal business hours
o Requires five days’ notice
o Must state a proper purpose
When do shareholders have to vote
o To select the board of directors
o To approve fundamental corporate changes (e.g., merger, sale of corporation)
When stock is sold or otherwise transferred, an issue may arise as to whether the transferor or the transferee of the stock is entitled to vote at a subsequent shareholders’ meeting. Typically, the record date is fixed by the board of directors, although the date can be set by reference to the articles of incorporation or the corporate bylaws and, failing corporate guidance, by statute. The record date can be no more than 70 days prior to the meeting. The owner of the stock at the close of business on the record date has the right to vote the stock at the upcoming meeting, even though the owner subsequently transfers the stock to another person.
The transferee of shares after the record date may vote those shares at a scheduled shareholder meeting by obtaining a proxy to vote the shares from his transferor.
What is proxy voting
Proxy Voting
Proxy—written agreement to allow a person to vote on behalf of the shareholder
Revocable unless otherwise stated (irrevocable proxy is allowed)
Can shareholders amend bylaws
o Can amend or repeal existing bylaws
o Can pass new bylaws
o Can limit the board of director’s ability to change the bylaws
What is a shareholder voting agreement
May enter into an agreement to vote their shares together and govern how they are voted.
How can a shareholder sue the corporation
a. 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.
Can also sue in a derivative action
What does a shareholder derivative suit entail?
Suing on behalf of the corporation
Usually against a director or officer
Any recovery goes to the corporation
Standing—any person who is a shareholder at the time of the bad act or omission (and at the time the action is filed)
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
Example 2: If the shareholder is accusing the board of directors of wrongdoing, it would be futile to demand that the board bring a suit against itself.
Board dismissal—can bring motion if the action is not in the corporation’s best interest
* Can be challenged if board was not disinterested or not acting in good faith
What is needed for shareholder liability
Piercing of the corporate veil
o Generally, not personally liable for corporate acts
o Court may “pierce the veil” and hold shareholders personally liable
o Based on totality of circumstances, including the following factors:
Undercapitalization of the corporation at the time of formation
Disregard of corporate formalities (not holding annual meetings or holding votes)
Use of corporate assets as a shareholder’s own assets
Self-dealing with the corporation
Siphoning corporate funds or stripping assets
: On the exam, discuss each fact that supports or negates the
contention that the shareholder is abusing the protections of the corporation.
Shareholders’ Fiduciary Duty
o “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 is always controlling or otherwise
controls voting power because they own a large amount of shares
Removing board of directors
o Shareholders may remove for breach of fiduciary duty (common law); or
o Without cause (modern trend)
Board of Directors
- Manage and direct the corporation’s business and affairs
- Selected by the shareholders at the annual shareholder’s meeting
Board of directors voting
Must have a quorum of directors present to hold a vote (generally a majority)
Example 3: If there are 10 directors on the board, must have 6 directors present to have a valid vote
o Presence—can include phone call so long as the director can hear and participate.
Once there is a quorum, a majority of those present is needed for approval typically unless bylaws state otherwise
Board of directors special meetings
o Requires notice at least two days before meeting
o Notice must include the date, time, and place of meeting
o A director who did not receive proper notice can object
But, if the director attends the meeting and fails to object to lack of notice, the objection is waived
Fiduciary Duties of Board of directors Duty of Care
a. Duty of Care
Must act as an ordinarily prudent person
Includes the duty to investigate and ask questions
Can rely on reports and outside experts
1) 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
* To overcome the presumption, one of the following must be shown:
o The director did not act in good faith;
o The director was not informed to the extent reasonably necessary;
o The director did not show objectivity and had a material interest in the decision;
o The director failed to timely investigate after being alerted to a significant matter; or
o Any other failure to act as a reasonable director.
Fiduciary Duties of 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
Duty of loyalty Self Dealing
1) 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
a) 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; OR
o The interested director discloses all material facts to shareholders and receivesapproval by a majority of disinterested shareholders; or
o The transaction is fair to the corporation substantively and procedurally
b) Remedies—Transaction can be enjoined or rescinded and the corporation can seek damages from the interested director
