MEE: Corporations Flashcards
(38 cards)
Articles of Incorporation
A corporation is formed when its articles of incorporation are filed with the Secretary of State. The articles must include the corporate name, the number of shares authorized to be issued, the name and address of an initial registered agent, and the names and addresses of the incorporators. Once filed, the corporation becomes a separate legal entity, capable of suing, being sued, owning property, and entering into contracts. Incorporation also triggers limited liability for shareholders. If corporate formalities are not followed or if the entity is used for improper purposes, courts may disregard the corporate form and impose personal liability.
Bylaws
Bylaws are internal rules adopted by a corporation’s board of directors to govern its operations, including director and shareholder meetings, officer duties, and voting procedures. Bylaws are subordinate to the articles of incorporation, which control in the event of a conflict. Although bylaws are not required for formation, they provide clarity and consistency in corporate governance. Bylaws can be amended by the board or shareholders unless restricted.
Articles of Organization; Certificates of Formation (LLC)
An LLC is formed when a certificate (or articles) of organization is filed with the Secretary of State. This document typically includes the LLC’s name, registered agent, and whether it is member-managed or manager-managed. Once formed, the LLC is a separate legal entity that provides limited liability to its members. Courts may disregard the LLC form only in exceptional cases—such as fraud or failure to respect separateness—though failure to follow formalities alone is usually insufficient to pierce the LLC veil.
Operating Agreements (LLC)
An operating agreement is a private contract among the LLC’s members (and managers, if applicable) that governs internal affairs, management structure, voting rights, profit allocations, and fiduciary duties. The agreement may override many default statutory rules unless the law prohibits such changes. Courts will generally enforce valid operating agreements unless the terms are manifestly unreasonable. Under the ULLCA, members and managers still owe fiduciary duties, such as the duty of care (gross negligence standard) and the duty of loyalty, unless limited in the agreement.
Promoters: Contracts and Fiduciary Duties
A promoter acts on behalf of a corporation before its formation, often entering into contracts and securing capital. A corporation is not automatically bound by pre-incorporation contracts; it must adopt them after formation either expressly (by formal approval) or impliedly (by accepting benefits). Until such adoption, the promoter remains personally liable. Even if adopted, the promoter remains liable unless there is a novation—a new agreement releasing the promoter. Promoters also owe fiduciary duties of good faith, loyalty, and full disclosure to the corporation and may not secure secret profits or engage in self-dealing.
Subscriptions for Shares
A pre-incorporation subscription is a written promise to purchase shares once the corporation is formed. Under most statutes, such subscriptions are irrevocable for six months unless otherwise agreed. Upon incorporation and acceptance, the corporation may enforce the subscription contract. If the subscriber fails to pay, the corporation may sue for the unpaid amount or resell the shares and recover damages. Subscriptions are treated as binding offers to the corporation, contingent on formation and acceptance.
Piercing the Veil
Courts will pierce the corporate veil and hold shareholders or parent corporations personally liable when the corporate form is used to commit fraud, circumvent the law, or achieve an inequitable result. Common factors include failure to observe corporate formalities, commingling of assets, undercapitalization, domination or control by a single person or entity, and treating the corporation as a mere alter ego. In parent–subsidiary contexts, veil piercing may occur if the subsidiary lacks independence and is a façade for the parent’s operations. Even without fraud, justice may require piercing if the corporation is a shell used to avoid liability. Courts are more reluctant to pierce the veil in LLCs, but will do so in similar circumstances.
Sources of Finance
Corporations finance operations through equity and debt. Equity financing involves issuing stock in exchange for capital contributions from shareholders. Debt financing involves borrowing funds through instruments like bonds, notes, or loans, with the obligation to repay the principal and interest. The board has discretion to choose between equity and debt based on the corporation’s needs. Shareholders are not personally liable for corporate debts unless veil piercing applies.
Securities Issuance and Characteristics
The articles of incorporation authorize the issuance of shares, including the number, classes, and rights of each class. Common shares typically provide voting rights and residual profits, while preferred shares may have priority in dividends or liquidation, and may or may not include voting rights. The board may issue shares for any consideration it deems adequate, and courts will not second-guess valuation if the board acted in good faith. Once issued, shares are fully paid and non-assessable.
Dividends and Distributions
Only the board of directors has authority to declare dividends. Shareholders have no right to compel dividends unless the board’s refusal constitutes a breach of fiduciary duty. Dividends may be paid in cash, property, or shares, but must comply with statutory restrictions—typically requiring that the corporation remain solvent after the distribution. A distribution is prohibited if it renders the corporation unable to pay its debts as they come due or causes its assets to fall below liabilities plus the amount needed to satisfy preferential rights of senior shareholders. Directors who approve unlawful dividends may be personally liable if they acted without due care.
Redemptions and Repurchases
A corporation may repurchase or redeem its own shares subject to the same financial restrictions as dividends—it must remain solvent after the transaction. Redemption may be mandatory or optional, depending on the terms stated in the articles or share agreements. Repurchases are discretionary and must not breach duties owed to shareholders, particularly when insiders benefit. A repurchase cannot be used to entrench management or favor controlling shareholders unfairly.
Meetings: Annual, Notice, and Quorum
Corporations must hold annual shareholder meetings to elect directors and conduct other business. Special meetings may be called as provided by statute or the bylaws. Shareholders must be given written notice stating the time, place, and purpose (for special meetings), sent between 10 and 60 days before the meeting. A quorum—typically a majority of shares entitled to vote—must be present for action to be valid. Shareholders may act without a meeting through unanimous written consent.
Voting: Eligibility, Cumulative Voting, Proxy Voting, Class Voting, Voting Trusts, and Shareholder Voting Agreements
Shareholders on the record date are entitled to vote their shares, generally one vote per share. Cumulative voting (if allowed) permits shareholders to allocate votes among candidates, enhancing minority representation. Shareholders may vote by proxy if the proxy is signed or sent by verifiable electronic means. Some actions require class voting—approval by each class of shares separately—especially when class rights are affected. Shareholders may enter into voting trusts or agreements to coordinate votes; trusts must be written and filed with the corporation, while voting agreements are enforceable as contracts.
Meetings: Quorum and Notice (Directors)
Directors must act collectively at duly noticed meetings unless action is taken by unanimous written consent. A quorum—typically a majority of the total number of directors—is required to transact business. Unless the articles or bylaws provide otherwise, notice is only required for special meetings and need not specify purpose. Directors may participate by phone or other means allowing simultaneous communication.
Action by Written Consent (Directors)
The board may act without a meeting only if all directors give written consent to the action. The writing must be signed or electronically transmitted and filed with corporate records. Partial consent is not sufficient; unanimity is required.
Action by Committee
The board may delegate certain functions to a committee composed of two or more directors. However, committees cannot authorize dividends, approve fundamental changes (like mergers), or amend the articles or bylaws unless expressly permitted. Committee actions are valid if taken under proper delegation and in accordance with procedural rules.
Director’s Objections to Actions
A director who objects to board action must dissent at the meeting and ensure their dissent is entered into the minutes. If absent, the director must promptly object in writing upon learning of the action. Failing to object may result in deemed assent and possible liability.
Authority of Officers
Officers have actual authority if granted by the bylaws, board resolutions, or corporate practices. They have implied authority to do tasks within their role’s ordinary course—e.g., a president may hire employees, sign contracts, or sue to collect debts. Officers may also have apparent authority based on their title and conduct. If acting outside authority, the corporation may not be bound unless it ratifies the act.
Officer’s Liability on Corporate Obligations
Officers are not personally liable for corporate debts entered into within the scope of authority, unless they personally guaranteed the obligation, acted without authority, or committed fraud. Liability may also attach if the officer’s name appears on the obligation as a party.
Authority of Members and Managers (LLC)
In a member-managed LLC, each member has the authority to bind the LLC in the ordinary course of business. In a manager-managed LLC, only designated managers have such authority. Acts outside the ordinary course require the approval of all members, regardless of management structure.
Liability of Members and Managers (LLC)
Members and managers are generally not personally liable for the LLC’s debts or obligations. However, personal liability may arise if the veil is pierced—for example, where the LLC is used to perpetrate fraud, formalities are ignored, or assets are commingled. Members may also be liable for personal torts or guarantees.
Powers of Members and Managers (LLC)
Members and managers have the powers granted in the operating agreement and state law. In a member-managed LLC, each member may manage the business and vote on major decisions. In a manager-managed LLC, the managers control business operations, and members retain only limited powers (e.g., voting on fundamental changes).
Fiduciary Duties of Directors, Officers, and Shareholders
Directors and officers owe the corporation two primary fiduciary duties: the duty of care and the duty of loyalty. The duty of care requires directors to act in good faith, with the care that a reasonably prudent person would use under similar circumstances, and in the best interest of the corporation. The business judgment rule protects directors from liability for decisions made in good faith, on an informed basis, and with no conflict of interest. The duty of loyalty prohibits directors from self-dealing, usurping corporate opportunities, or engaging in conflicts of interest without full disclosure and approval by disinterested directors or shareholders.
Fiduciary Duties of Managers and Members (LLC)
In a manager-managed LLC, managers owe fiduciary duties of loyalty and care to the LLC and its members. In a member-managed LLC, these duties apply to each member. The duty of loyalty prohibits self-dealing, competition with the LLC, and misuse of LLC assets. The duty of care requires members or managers to refrain from grossly negligent or reckless conduct, willful misconduct, or knowing law violations. Many states permit modification of these duties in the operating agreement, so long as the changes are not manifestly unreasonable or unlawful.
