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Five fact patterns
- 1. corporate formation
- 2. issuance of stock
- 3. action by and liability of directors and officers
- 4. rights of shareholders
- 5. fundamental corporate changes
Preincorporation Contracts - Promoter
- Promoters: persons acting on behalf of a corporation not yet formed
- The corporation becomes liable on a promoter's princorporation contract when the corporation accepts the K by either:
- 1. express board of directors resolution; or
- 2. implied acceptance through knowledge of the K and acceptance of its benefits
- Promoter remains liable on pre-incorporation Ks until there has been a novation,an agreement b/t the promoter, the corproation, and the other contracting party that the corporation will replace the promoter under the K (if corp never formed then promoter still liable; if corp accepts K but no novation, then both corp and promoter are liable)
- Promoters are fiduciaries of each other and the corp. Cannot make a secret profit on their dealing w/ the corp.
- Property before promoter: if promoter acquires property before becoming a promoter and sells to corp at a profit: profit recoverable only if sold for more than FMV
- Property after promoter: If promoter acquires property after becoming a promoter and sells to a corp at a profit: any profit recoverable even if resold at FMV.
Preincorporation Contracts - Subscribers
- Subscriber: person or entity who makes written offers to buy stock from a corp not yet formed
- A preincorporation offer to buy stock is irrevocable for six months
Absolute Formation Requirements
- Incorporator: person who merely signs and files the articles of incorporation w/ the State Corporation Commission
- Must include:
- 1. Authorized shares - the maximum number of shares corp is authorized to issue (the ceiling, not a floor) (can only go above by amending articles of corp)
- 2. Preferences - must describe the preferences (rights and priorities assigned to each different class of stock)
- 3. Agent - and address of registered office (registered agent is the corp's official legal rep)
- 4. Incorporators (names and addresses)
- 5. Name of Corporation - must contain some indicia of corporate status
- Red-herring of by-laws: need not be in Articles of Incorporation. But the corp. must adopt By-laws.
Legal Significance of Formation of Corporation
- Illegal to do business as a corp unless properly formed
- A corp is a separate legal person
- SHs are not personally liable for debts of corporation (only liable for the price of stock)
Piercing the Corporate Veil
- The court will pierce the corporate veil to avoid fraud or unfairness and to render a SH liable to 3d party for corp obligation
- alter ego: SHs have failed to observe sufficient corp formalities
- undercapitalization: corp has failed to maintain sufficient capital to satisfy foreseeable liabilities
- courts are generally more willing to PCV for a tort victim than for a K claimant (EQUITY)
- Foreign corps transacting business in Va must qualify
- 1. a foreign corp is one incorporated outside VA
- 2. Transacting business means regular course of intrastate (not interstate) business activity
- 3. qualify by getting a Certificate of Authority from SCC that includes the same information required in the Articles
- 4. Consequences of foreign corp transacting business w/out qualifying - a) modest fine levied b) may not initiate a lawsuit in VA state court
ISSUANCE OF STOCK: WHEN A CORP SELLS ITS OWN STOCK
- par value means minimum issuance price (can never receive less than par value)
- acquiring property with par value stock (any valide consideration can be rec'd if the board values the consideration to be worth at least par value)
- no par means "no minimum issuance price" and therefore any valid consideration may be rec'd if the board deems the consideration to be adequatetreasury stock (stock that was previously issued and had been reacquired by the corp; can be re-sold; deemed to be no par stock)
- consequences of issuing par stock for less than par value (directors are liable personally for authorizing below par issuance; purchasing SH is liable to pay full considreation for its shares; must make a choice b/t directors and SH)
- Preemptrive right is the right of an exiting SH to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock for cashpreemptive rights do not exist unless expressly granted in the Articles
- VA Corporations must have a Board with at least 1 member
- Election: SHs elect directors
- SHs can remove a director before her term expires w/ or w/out cause
- 1. Unless all directors consent in writing to act w/out a meeting, a meeting is rewquired
- 2. Notice of directors' meeting can be set in bylaws
- 3. Proxies are not allowed. Also, no voting agreements
- 4. Quorum - must have a majority of all directors to do business (unless another percent set in Articles, but not less than 1/3); to pass a resolution, however, all that is req'd is a majority vote of those present.
Liability of Directors to their Own Corp and SHs
- 1. Directors have a duty to manage the corp
- 2. In managing the corp, the directors are protected from liability by the business judgment rule (presumption that the directors manage the corp in good faith and in the best interests of the corp and its SHs)
- 3. But directors are fiduciaries who owe the corp duties of care and loyalty
Duty of Care
- director owes the corp a duty of care. Must act w/ the care that a prudent person would use w/ regard to her own business, unless the Articles have limited liability for breach of duty of care
Duty of Loyalty
- director may not receive an unfair benefit to the detriment of the corp or its SHs unless there is material disclosure and independent ratification
- Self-Dealing: director who receives an unfair benefit to herself (or relative or another one of her businesses) in a transaction w/ her own corp (an interested director transaction)
- Usurping Corporate Opportunities: director receives an unfair benefit by usurping for herself an opportunity which the corp would have pursued
- Ratification: may avoid liability by obtaining independent ratification through a majority vote of independent direcotrs, or a majority of shares held by independent SHs
Indemnification of Directors and Officers
- person sued in capacity as officer or director has incurred costs, attorneys fees, fines, a judgment or settlement; she seeks reimbursement from the corp.
- 1. The corp may NEVER indemnify a director who has lost a lawsuit to own corp.
- 2. The corp may ALWAYS indemnify if director wins lawsuit against any party
- 3. The corp MAY indemnify if
- a) liability to 3d parties or settlement with the corp
- b) director or officers shows she acted in good faith and with the reasonable belief that her conduct was in the corp's best interestc) who may determine permissive indemnity? 1) majority of ind. directors, 2) a committee of at least 2 ind. directors, 3) a majority of shares of ind SHs, or 4) special lawyer's opinion recommending
Shareholder Derivate Suits
- SH is suing to enforce the corp's coa (could corp bring?)
- Requirements: 1) contemporaneous stock ownership (at time of claim and throughout litigation), 2) must make demand on directors that the corp. bring suit (in writing, rejected or 90 days pass from demand, if rejected must allege w/ particularity failure to review thoroughly) (and committee of 2 or more ind. directors can investigate and move for dismissal)
- Consequences: recovery goes only to the corp, get fees and costs, greater of $100k and last year's comp if against director
- 1. only the record SH as of record date has the right to vote; record owner is the owner on corporate records; record date is set by board no more than 70 days before the meeting
- 2. A record SH can vote by proxy if he sends his proxy in writing or electronically to the corp's secretary authorizing (signed) another to vote his hares w/in 11 months
- proxies are revocable, unless they're labeled irrevocable and the underlying interest is transferred as well
- 3. SHs meet at annual meetings (at least one director position must be open) and special meetings (to vote on a proposal or fundamental corp change)
- 4. notice to every SH entitled to vote for annual (where and when) and special (where, when, meeting's special purpose); timing of notice (10-60 days and 25-60 for fundamental change); failure to notice = void unless those w/out notice give written waiver or attend the meeting
- 5. Quorum requires a majority of shares be present
- at the meeting.
- 6. For a vote to be valid, the votes cast in favor must exceed those against. All attendees need not vote
- 7. SHs can form voting trusts by formally delegating their voting power in writing to a voting trustee for up to 10 years. SHs can form voting agreements by
- agreeing in writing that they will vote according to a majority of the signers
- 8. The default voting mechanism is straight voting: each share votes for each seat once. Cumulative voting is allowed only if the AoI expressly authorize it. In that regime, a SH can put all his votes on one seat (shares x seats).
Right of SH to Examine the Books and Records of Corp
- Standing: 1) record holder for 6 months, or 2) 5% SH, or 3) court approval
- Good faith written demand stating a proper purpose
Dividends (in Board's discretion)
- The board has discretion to declare dividends if it won’t make the corporation insolvent. Can't if already insolvent.
- Priority: preferred is paid first, participating preferred get paid twice, cumulative get paid for multiple years but just once (4 years), and common gets paid last.
- Directors are personally liable for unlawful dividends or distributions, BUT defense of good faith reliance on financial officer's reps and right of contribution from co-directors and SHs receiving unlawful dividends
SH Agreements Eliminating Formalities
If SHs of a closely held, private corporation agree unanimously to waive corporate formalities, the court won’t pierce the corporate veil to render them liable under the alter-ego theory, and they may qualify for S-Corp status if they have fewer than 100 SHs and only one class of stock, making them taxed like a partnership.
Limited Liability Companies
- has limited liability of a corp and beneficial tax status of a partnership
- formation requirements: the organizers file Articles of Organization and adopt an Operating Agreement
- Control: members can delegate control to managers
- Limited Life: Articles must set out some event that terminates the LLC
- Limited liquidity: Interests are transferrable only with written consent of a member majority
Virginia Business Trust
- To form a Va Business Trust, the organizers file the Articles of trust with the State Corp Comm’n setting forth the trustee and beneficial owners.
- The beneficial owners manage the trust without personal liability (limited limited liability).
- The trust has an unlimited life and can operate any lawful business.
FUNDAMENTAL CORPORATE CHANGES
Characteristics of Fundamental Corporate Change
- Merger (A becomes B); Consolidation (A and B become C); Share Exchange (A and B exchange shares); Dissolution (A dissolves
- Fundamental Amendment of the Articles; Sale (not purchase) of substantially all of the assets
- 1. Resolution by board at a valid meeting
- 2. Notice of Sepcial meeting (25-60 days)
- 3. Approval by more than 2/3 of all ahres entitled to vote. The Articles may provide for different percentage, but not less than a majority.
- 4. Possibility of dissenting SH right of appraisal, for merger, consolidation, share exchange and selling substantially all assets
- a. dissenting SH right of appraisal is right to force corp to buy shares at fair value
- b. SH perfects by 1) before vote, file written notice 2) abstain or vote no 3) after vote, make timely written demand to be bought out
- c. court has power to appoint expert appraiser to give binding appraisal of value
- 5. File notice of change with SCC
Amendment of the Articles
- Ministerial Amendments can be made by board (eg, agents' address)
- Fundamental Amendments must be voted by 2/3 of shares
SALE OF ALL OR SUBSTANTIALLY ALL OF THE ASSETS NOT IN THE ORDINARY COURSE OF BUSINESS
- a fundamental corp change for the selling corp only
- 2/3 votes needed from selling corp
- no votes needed from buying corp