Corporations

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Corporations
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2012-07-05 12:43:47
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  1. What is the role of incorporators?
    Execute the Articles of Incorporation, deliver them to the Secretary of State, and pay requires fees.
  2. Articles of Incorporation
    A contract between the corporation and shareholders AND between the corporation and the state.
  3. What information must be included in the Articles of Incorporation?
    • Corporate name (must include "corporation," "company," "incorporated," or "limited")
    • Name and address of each incorporator
    • Name and adress of each initial director
    • Name of registered agent and address of the registered office (the Secretary of State)
    • Statement of purpose -- can be really vague
    • Capital structure (authorized stock, issued stock, outstanding stock)
  4. What must a corporate name include?
    • Corporation
    • Company
    • Incorporated, or
    • Limited
  5. What is required for the Statement of Purpose in a corporation's Articles of Incorporation?
    Can be really vague.

    In some states, general purpose is presumed and articles don't need to say anything.

    • Ultra vires rules -- ultra vires means outside the scope of the business purpose.
    • --Ultra vires contracts are valid
    • --Shareholders can seek an injunction
    • --Responsibile managers are liable to corporation for ultra vires losses
  6. Ultra vires
    Outside the scope of the business purpose.

    Ultra vires contracts are valid.

    Shareholders can seek an injunction.

    Responsible managers are liable to corporation for ultra vires losses.
  7. Can shareholders seek an injunction to block managers from ultra vires activites?
    Yes.  Responsible managers are liable to corporation for ultra vires losses.
  8. Who is liable to the corporation for ultra vires losses?
    Responsible officers and directors.
  9. Authorized stock
    Maximum number of shares the corporation can sell.
  10. Issued stock
    Number of shares the corporation actually sells.
  11. Outstanding stock
    Shares that have been issued and not reacquired.
  12. What satisfies the act of incorporation?
    Incorporators deliver notarized Articles of Incorporaiton to Secretary of State and pay requires fees.

    De jure corporation -- Secretary of State accepts the articles for filing.
  13. De jure corporation
    A corporation that has fulfilled its requirements for formation according to the regulations for earning a state charter (i.e., once Secretary of State accepts the articles for filing).
  14. What happens after the incorporators deliver the Articles to the Secretary of State?
    The Board of Directors hold an organizational meeting where it selects officers and adopts any bylaws and conducts other appropriate business.
  15. What happens if you fail to form the corporation?
    • De facto corporation
    • Corporation by estoppel
    • Note: These doctrines have been abolished in many states
  16. De facto corporation
    • Ther eis a relevant incorporation statute
    • The parties made a good faith, colorable attempt to comply with it, and
    • Some exercise of corporate privileges
  17. Corporation by estoppel
    One who treats a business as a corporation may be estopped from denying that it is one.  (Only contract cases, not tort cases).
  18. Does corporation by estoppel apply in contract cases?
    Yes.
  19. Does corporation by estoppel apply in tort cases?
    No.
  20. What is the legal significance of incorporation?
    • Corporation is only legal person
    • Corporation is governed by laws of state where incorporated
    • Limited liability
  21. Bylaws
    • Deal with internal governance
    • Not required
  22. Are corporate bylaws required?
    No.
  23. Promoter
    Person acting on behalf of a corporation not yet formed.  He might enter a contract on behalf of a corporation not-yet-formed.
  24. Can a promoter enter a contract on behalf of a corporation not-yet-formed?
    Yes.  Unless the contract clearly provides otherwise, the promoter is liable on pre-incorporation contracts unless there is a novation.
  25. Is a corporation liable for contracts entered into by a promoter on behalf of a corporation not-yet-formed?
    No, unless it adopts the contract.

    • Express adoption - board takes an action adopting the contract
    • Implied adoption - arises when corporation accepts a benefit of the contract
  26. Express adoption (promoter liability)
    Board takes an action adopting the contract.
  27. Implied adoption
    Arises when corporation accepts a benefit of the contract (promoter liability).
  28. When is a promoter liable on pre-incorporation contracts?
    Unless the contract clearly provides otherwise, a promoter is liable until there is a novation.
  29. Novation
    Agreement of the promoter, the corporation, and other contracting party that the corporation replaces the promoter under the contract.
  30. Foreign corporation
    A corporation incorporated outside the state but transacting business within the state.

    Transacting business = the regular course of intrastate business activity, NOT occasional or sporadic activity.

    Need certificate of authority from Secretary of the State.
  31. Transacting business (foreign corporation)
    The regular course of intrastate business activity, not occasional or sporadic activity.
  32. What does a foreign corporation need to transact business in a state?
    Certificate of authority from Secretary of State.
  33. For how long is a pre-incorporation subscription to buy stock irrevocable?
    Six months.
  34. For how long is a post-incorporation subscription to buy stock revocable?
    Revocable until accepted by the corporation.
  35. What is satisfactory consideration for issuance of stock?
    • Money
    • Tangible or intangible property
    • Services already performed for the corpoation
    • Promissory notes (some states OK, some states prohibited)
    • Future services (some states OK, some states prohibited)
  36. Par stock
    Minimum issuance price.
  37. Watered stock
    Stock sold for less than par value.
  38. Who is liable for selling watered stock?
    • Directors if they knowingly authorized the issuance
    • The buyer
    • Third party buyer -- but not if they did not know about the water
  39. No par stock
    No minimum price, Board of Directors sets a price.
  40. Treasury Stock
    Stock the company issued and then reacquired.  It is considered authorized but unissued and the corporation cna resell it.
  41. Pre-emptive rights
    The right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock for money.
  42. Does "new issuance" include Treasury Stock (pre-emptive rights)?
    Courts are split.
  43. What is the majority rule for whether there are pre-emptive rights?
    If articles are silent, there are no pre-emptive rights.
  44. How are directors appointed?
    Initial directors named in articles, afterwards shareholders elect.
  45. Staggered board
    The Board of Directors is typically divided into halves or thirds, with one-half or one-third elected each year.
  46. How are directors removed?
    • Removal requires the vote of the majority of the shares entitled to vote
    • Generally, if there is removal by shareholders, then shareholders select the replacement
  47. What is required for board action?
    Unanimous agreement in writing or majority agreement at a meeting.
  48. Is notice required for board meetings?
    • Regular meetings - not required
    • Special meetings - yes, must state when or where
    • Failure to give required notice voids whatever happened at the meeting
  49. What is the consequence of failure to give required notice of a special meeting?
    Voids whatever happened at the meeting.
  50. Quorum
    • Must have a majority of all directors to do business
    • Once you have a quorum, only a majority of present members is needed to pass a resolution
    • Quorum can be lost if people leave
  51. What does the Board of Directors do?
    • Manages the business of the corporation
    • Sets policy
    • Supervises officers
    • Declares distributions
    • Determines when stock will be issued
    • Recommends fundamental corporate changes to shareholders
    • Can delegate to committee of one or more directors (but not to set director compensation or declare distribution)
  52. Can a Board of Directors delegate to a commitee of one or more directors?
    Yes, but not to set director compensation or to declare a distribution.
  53. What are the (fiduciary) duties of directors?
    • Duty of care
    • Duty of loyalty
  54. Duty of care
    A director owes the corporation a duty of care; he must act in good faith and do what a prudent person would do with regard to his own business.
  55. Who has the burden to establish a breach of the duty of care?
    The plaintiff.
  56. Nonfeasance
    The director does nothing -- breach of the duty of care
  57. Misfeasance
    Th director does something that hurts the corporation -- breach of the duty of care
  58. Business judgment rule
    A court will not second-guess a business decision if it was made in good faith, was informed and had a rational basis.

    A director is not a gurantor of success.
  59. Duty of loyalty
    A director owes the corporation a duty of loyalty; he must act in good faith and with a reasonable belief that what she does is in the corporation's best interest.
  60. Who has the burden to establish a breach of the duty of loyalty?
    The defendant.
  61. What actions give rise to a breach of the duty of loyalty?
    • Interested director transaction
    • Competing ventures
    • Corporate opportunity
    • Ultra vires act
    • Improper loans
  62. Interested director transaction
    Any deal between the corporation and one of its directors or another business of the director's.
  63. What does the defendant need to show in order to prove that an intereted director transaction did not violate the duty of loyalty?
    Either the deal was fair to the corporation when entered, OR

    The director's interest and the relevant facts were disclosed or know and the deal was approved by either

    • A) The majority of the disinterested directors
    •       i) Interested diretors will count toward a quorum
    •      ii) NOTE: Some courts also require a showing of fairness

    B) The majority of disinterested shares
  64. Can a director engage in ventures that compete with the corporation?
    No, competing ventures violate the duty of loyalty.

    REMEDY: Constructive trust on profits.
  65. What is the remedy if a director engages in competing ventures in violation of his duty of loyalty?
    Constructive trust on profits.
  66. Can a director usurp a corporate opportunity (duty of loyalty)?
    No.
  67. What is a corporate opportunity (duty of loyalty)?
    • Something the company has an interest or expectancy in
    • Something the director found on company time with company resources
  68. What does a diretor need to do before taking a corporate opportunity that the corporation rejected (duty of loyalty)?
    • Tell the board about it, and
    • Wait for the board to reject the opportunity
    • Generally, the company's financial inability to pay is not a defense
  69. Does a director breach his duty of loyalty if he takes a corporate opportunity without telling the board about it or waiting for them to reject the opportunity, even if the company would not have been able to pay for the opportunity?
    Yes.  Generally, the company's financial inability to pay is not a defense to usurpation of corporate opportunity in breach of the duty of loyalty.
  70. What is the remedy if a director usurps a corporate opportunity in violation of his duty of loyalty?
    • Sell the opportunity to the corporation at cost
    • Constructive trust on profits
  71. When can the corporation give a loan to a board member?
    The corporation can only loan to board member if reasonably expected to benefit the corporation.

    Otherwise, it is a breach of the duty of loyalty.
  72. Individual director liability
    • A director is presumed to concur with the board action unless his dissent or abstention is noted in writing in corporate records
    • A) In the minutes or
    • B) Delivered in writing to the presiding officer at the meeting or
    • C) Written dissent to the corporation immediately after the meeting

    • Exceptions:
    • 1) An absent director is not liable for anything done at the meeting she missed
    • 2) Good faith reliance on information presented by an officer, employee, committee, or professional reasonably believed competent
  73. What must a director do in order to avoid individual liability for board action?
    • His dissent or abstention must be noted in writing in corporate records
    • A) In the minutes or
    • B) Delivered in writing to the presind officer at the meeting or
    • C) Written dissent to the corporaiton immediately after the meeting

    • Exceptions:
    • 1) An absent director is not liable for anything done at the meeting she missed
    • 2) Good faith reliance on information presented by an officer, employee, committee, or professional reasonably believed competent
  74. Officers
    • Agents of the corporation
    • Selected by and removed by the board
  75. When is indemnification of directors and officers not allowed?
    The director or officer was held liable to the corporation or to have received an improper personal benefit.
  76. When is indemnification mandatory?
    The director/officer is successful in defending on the merits or otherwise.
  77. When is indemnificaiton permissive?
    • Director/officer acted in good faith, and
    • With the reasonable belief that her actions were in the company's best interests
  78. Can articles eliminate director liability?
    • For duty of care issues
    • Not for duty of loyalty issues
  79. Can shareholders be managers?
    Shareholders are generally not managers unless it is a closely held corporation.
  80. Do shareholders owe each other fiduciary duties?
    Shareholders may owe each other fiduciary duties in close corporation.
  81. What are special rules for professional corporations/personal associations?
    • P.A. or P.C. must be in the name
    • Directors, officers and shareholders must be licensed professionals
    • Shareholders are generally not liable for corporate obligations or for other shareholders' malpractice
  82. When can you pierce the corporate veil?
    • Shareholders have abused the privilege of incorporating (undercapitalization/alter ego)
    • And fairness must require holding them liable
  83. Shareholder derivative suit
    The shareholder is suing to enforce the corporation's claim, not her own personal claim.
  84. What are the requirements to be plaintiff in a shareholder derivative suit?
    • Stock ownership when the claim arose and throughout the suit
    • Adequate representation of the corporation's interest
    • Written demand on the corporation - tellin gthe directors to bring suit
    • EXCEPTION: In many states you don't need to make demand if it would be futile.
  85. Does the corporation need to be joined in a shareholder derivative suit?
    Yes, as a defendant.
  86. What is the special requirement for settlement in a shareholder derivative suit?
    Settlement requires court approval.
  87. On what grounds can the corporation move to dismiss a shareholder derivative suit?
    Upon showing that independent investigation showed the suit was not in the corporation's best interest.
  88. Which shareholders have the right to vote?
    The shareholder as of the record date has the right to vote.

    • EXCEPTIONS:
    • 1) Corporation re-acquires stock before the record date
    • 2) Death of a shareholder (the new shareholder can vote)
  89. What are exceptions to the rule that the shareholder as of the record date has the right to vote?
    • Corporation re-acquires stock before the record date
    • Death of a shareholder (the new shareholder can vote)
  90. Proxy
    • A writing
    • Signed by record shareholder
    • Directed to secretary of corporation
    • Authorizing another to vote his shares
    • Good for 11 months unless it says otherwise
    • Revocable unless proxy coupled with an interest (the proxy says it's irrevocable AND the proxyholder has some interest in the shares other than voting)
  91. How long is a proxy good for?
    11 months unless it says otherwise.
  92. Is a proxy revocable?
    Yes, unless it is coupled with an interest: 1) the proxy says it's irrevocable; and 2) the proxyholder has some interest in the shares other than voting.
  93. Voting trust
    • Written trust, controlling how the shares will be voted
    • Copy to the corporation
    • Transfer legal title to the voting trustee
    • Original shareholders receive trust certificates and retain all shareholder rights except for voting
    • 10 year max
  94. How long does a voting trust last?
    10 years max.
  95. Voting agreement
    • In writing and
    • Signed
    • Enforceable? Courts are split
  96. Are voting agreements enforceable?
    Courts are split.
  97. Where do shareholders vote?
    Usually at a meeting: annual or special
  98. What is the purpose of an annual meeting?
    To elect directors.
  99. Who can call a special meeting?
    • The board
    • The president
    • The holders of at least 10 percent of the voting shares
    • Anyone else authorized in the bylaws
  100. What is the notice requirement for special (not annual) meetings?
    • 10-60 days before the meeting
    • When
    • Where
    • Why
  101. What are the consequences of failure to give notice of a speical meeting?
    Action taken at the meeting is void unless notice is waived.

    • How is notice waived?
    • --Express: in writing and signed anytime
    • --Implied: attend the meeting without objection
  102. Express waiver of notice
    In writing and signed anytime
  103. Implied waiver of notice
    Attend the meeting without objection
  104. How do shareholders vote?
    • Need a quorum (not lost if people leave)
    • Majority of those present
    • Cumulative voting -- when shareholders elect directors
  105. Stock transfer restrictions
    Must be reasonable and not an undue restraint on alienation.

    • Enforceability against transferee, only if
    • 1) It is conspicuously noted on the stock certificate, or
    • 2) The transferee had actual knowledge of the restriction
  106. When are stock transfer restrictions enforceable against the transferee?
    • Reasonable; AND
    • Not an undue restraint on alienation; AND
    • Conspicuously noted on the stock certificate, OR
    • The transferee had actual knowledge of the restriction
  107. What must shareholders do in order to invoke their right to inspect books and records?
    Make a written demand stating the documents desired and a proper purpose for the inspection.

    Proper purpose: relates to intrest as a shareholder.

    If corporation refuses, can get a court order.
  108. Is there a shareholder right to a distribution?
    Not until one is declared.  It is at the Board's discretion.
  109. Dividend preference
    Preference paid first.
  110. Preferred participating stock
    Preference paid first and then preferred stock gets part of the rest.
  111. Cumulative dividend
    Accrues year to year.
  112. Can corporations repurchase shareholder's stock?
    Yes.
  113. Redemption
    Instead of distirbuting a dividend, the corporation redeems the stock for its value.
  114. Where are dividends paid out of?
    • Earned surplus -- all earnings minus all losses minus distributions previously paid
    • Capital surplus -- generated by issuing stock, in excess of par
    • NEVER stated capital -- par value of stock on issuance, if no par value than the board allocates the consideration between stated capital and capital surplus
  115. What is required for a fundamental corporate change?
    • Board action adopting a resolution of fundamental change
    • Board submits proposal to shareholders with written notice
    • Must get sharheolder approval (majority of shareholders entitled to vote)
    • Dissenting shareholder right of apraisal (maybe)
    • Usually need to deliver a document to the Secretary of State
  116. Dissenting shareholder right of appraisal
    The right to force the corporation to buy your stock for fair value.

    • Triggered by:
    • 1) Merger or consolidation
    • 2) Transfer of substantially all assets not in the ordinary course of business
    • 3) Transfer of shares in share exchange

    NOT available for stock on a national exchange.

    • Shareholder needs to:
    • 1) Before shareholder vote, file with the corporation written notie of objection and intent to demand payment
    • 2) Abstain or vote against the proposed change, and
    • 3) After the vote, within time set by corporation, make written demand to be bought out and deposit stock with the corporation
  117. What fundamental corporate changes trigger a dissenting shareholder right of appraisal?
    • Merger or consolidation
    • Transfer of substantially all assets not in the ordinary course of business
    • Transfer of shares in share exchange
    • NOTE: Not available for stock on a national exchange
  118. What does a shareholder need to do in order to trigger his right of appraisal?
    • Before shareholder vote, file with the corporation written notice of objection and intent to demand payment
    • Abstain or vote against the proposed change
    • After the vote, within time set by corporation, make written demand to be bought out and deposit stock with the corporation
  119. What action is required to amend the Articles of Incorporation?
    • Board of Director action and notice to shareholders
    • Shareholder approval -- majority of shareholders entitled to vote
    • Deliver amended articles to Secretary of State
    • No dissenting shareholder rights of appraisal
  120. What action is required for a merger?
    • Board of director action and notice ot shareholders
    • Shareholder approval (unless 90% or more owned subsidiary is merged into parent corporation)
    • Surviving entity delivers articles of merger or consolidation to Secretary of State
    • There are dissenting shareholder rights of appraisal
  121. What action is required in order to transfer all or substantially all of the assets not in the ordinary course of business?
    • Board of Director action and notice to selling corporation's shareholders
    • Approval by transferring corporation shareholders -- a majority of shares entitled to vote
    • There are dissenting shareholders rights of appraisal
    • Deliver to Secretary of State
    • NO successor liability
  122. What action is required for voluntary dissolution?
    • Board approval and approval by majority of shareholders entitled to vote
    • Notice of intent to dissolve
    • Winding up
    • Notify creditors so that they can make claims
  123. Under what circumstances can a corporation be dissolved through involuntary dissolution?
    A shareholder can petition because of

    • 1) Director abuse, waste of assets, misconduct
    • 2) Director deadlock that harms the corporation
    • 3) Shareholders have failed at two consecutive annual meetings to fill a vacant board position

    4) Court ordered -- especially likely in close corporation

    5) Creditor petition because corporation is insolvent AND he has an unsatisfied judgment AND the corporation admits the debt in writing
  124. Is dissolution the end of the corporation?
    No, only the beginning of the "winding up" process.
  125. Winding up
    • Gathering all assets
    • Converting to cash
    • Paying creditors, and
    • Distributing remainder to shareholders, pro-rata by share unless there is a liquidation preference
  126. 10b-5
    Prohibits fraud or misrepresentation in connection with the purchase or sale of any security.

    The deal must use an "instrumentality of interstate commerce."
  127. What actions are regulated under 10b-5?
    • Misrepresentation of material information
    • Insider trading
  128. Insider trading
    Trading securities on the basis of material inside information.

    Only for someone high enough in the business hierarchy that he has a duty to abstain or disclose.  Duty arises from relationship of trust and confidence with shareholders.

    Tipping -- an insider passes along material information for a wrongful purpose.

    • You need:
    • 1) Materiality
    • 2) Scienter
    • 3) Reliance
  129. Tipping (insider trading)
    An insider passes along material information for a wrongful purpose.
  130. What does the plaintiff need to show under 10b-5?
    • Materiality
    • Scienter
    • Reliance
  131. Materiality (10b-5)
    Misrepresentations or omissions must concern a "material" fact.
  132. Scienter (10b-5)
    Defendant must have an intent to deceive, manipulate, or defraud.
  133. Reliance (10b-5)
    The plaintiff must have reasonably relied on the material misrepresentation.

    Presumed in public misrepresentation and nondisclosure cases.
  134. Who are the possible plaintiffs in a 10b-5 case?
    • SEC
    • Private actions for damages by buyer or seller of securities
  135. Who are the possible defendants in a 10b-5 case?
    • Company that issues a misleading press release
    • Buyer or seller of securities who misrepresents material information
    • Buyer or seller of securities who trades on material inside information
  136. Section 16b
    Recover by the corporation of "profits" gained by certain insiders from buying and selling the company's stock. 

    Must be a reporting corporation (listed on a national exchange OR at least 500 shareholders and $10,000,000 in assets).

    Must buy and sell stock within a single six-month period.
  137. Reporting corporation (section 16b)
    • Listed on a national exchange; or
    • At least 500 shareholders and $10,000,000 in assets
  138. Who are the possible defendants in a 16b case?
    • Director (either when she bought or sold) or
    • Officer (either when she bought or sold) or
    • Shareholders who owns more than 10 percent (both when she bought and sold)
  139. What is the remedy for a 16b violation?
    All profits are recoverable by the corporation if, within six months before or after any sale, there was a purchase at a lower price, and there is a profit.

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