**What are the formation requirements for a corporation?
PEOPLE, PAPER, & ACT.
FORMATION REQUIREMENTS: people
ORGANIZERS - must have AT LEAST 1. they execute the certificate & deliver it to the sec. of state. It can be either a person or an entity like a corp & does not have to be a TX resident.
FORMATION REQUIREMENTS: paper
CERTIFICATE OF FORMATION (AKA articles of incorporation). it is BOTH a k b/w the corporation & the SHAREHOLDERS & a k b/w the corp. & the STATE.
what information must be in the certificate of formation?
names & addresses of each organizer; # of initial directors; name & address of initial directors. must name the CORPORATE AGENT; must also provide a statement of purpose, although this can be very generic (even just stating for all lawful activity). must also provide CAPITAL STRUCTURE.
magic words that must be in the corporate name to have a corporation
corporation, company, or incorporated
if no time period for duration is stated in the certificate of formation, how long does it last for?
the corp. will have perpetual existence if no timeframe is given
what happens if you exceed the scope of the statement of purpose?
it is ultra vires. (1) ultra vires contracts are valid. (2) shareholders can seek an injunction. (3) responsible managers are liable to the corp for ultra vires losses
maxium shares the corp can sell
shares the corp actually sells
shares the corp has issued & not reacquired
shares the corp has issued & not reacquired
types of stock that must be included in the cert of formation
(1) authorized stock; (2) # of shares per class & (3) info on par value, voting rights, & preferences of each class
after the organizes sign & deliver the certificate of formation to the TX Sec of state & pay the required fee, what does the sec of state do to accept it?
must file it & send acknowledgement of filing to the corp
what is the effect of the sec of state's filing the certificate of formation?
this forms a DE JURE CORP--that is a legal corp is formed
After a de jure corp exists b/c of acceptance of the certificate of formation by the sec of state, the board
will hold an ORGANIZATIONAL MEETING.
what happens at an organizational meeting?
directors (1) select officers; (2) adopt any bylaws; & (3) transact other company business. must give notice of 3 DAYS re: the meeting. this meeting does not have to be held in TX.
INTERNAL AFFAIRS DOCTRINE
this states that TX corps are governed by TX law--this is the case even if the corp only does business out of state. so long as it is a TX corp, TX law applies
a corporation is a legal person, thus it can
sue, be sued, hold property, pay taxes, be a partner in a partnership, &c.
A corp is a legal person & thus pays income tax. This leads to a DOUBLE TAXATION problem. How do you avoid this double taxation problem by not paying income tax at the corporate level?
form an S CORPORATION. these have less than 100 shareholders, all are US citizens, one class of stock, not publicly traded.
Generally, if a corp breaches a k, commits a tort, or incurs a debt, will the directors, officers, or shareholders be liable?
who will be liable for the actions of the corp?
the corp itself only. this is LIMITED LIABILITY.
to assert the doctrines of de facto corporation or corporation by estoppel, you must
be unaware of the failure to form de jure corporation
**what are the requirements for a de facto corporation?
(1) relevant incorporation statute (there is one, the TBOC); (2) the parties made a GOOD FAITH, COLORABLE attempt to comply w/ the TBOC; & (3) some exercise of corporate privileges (i.e., you were acting like you had a corp).
if de facto corporation doctrine applies, the business is treated as a corporation for all purposes EXCEPT
in an action by the state.
what is the status of the de facto corporations doctrine in TX?
it is unclear, but it MAY be abolished.
corporation by estoppel
one who treats a business as a corp may be estopped from denying that the business is in fact a corp. this is a narrower exception than the de facto corporation.
corporation by estoppel generally applies only in
k cases--not tort.
what is the status of the corporation by estoppel doctrine in TX?
it MAY be abolished, it is unclear.
a corporation must have bylaws except for
***pre-incorporation contracts: what is a promoter?
this is a person who is acting on behalf of a corp that has not yet been formed.
***pre-incorporation contracts: what is the liability of the corporation for these Ks?
corp is NOT liable on pre-incorporation Ks until it ADOPTS the K
***pre-incorporation contracts: will the corp be liable?
can be liable if either express (board action) or implied (if teh corp accepts a benefit of the K)
***pre-incorporation contracts: what is the liability of the PROMOTER?
the promotion will be liable until there is a NOVATION (that is, there is an agreement where the corp replaces the promoter in the k). Thus if the corp is never formed, the promoter will be liable. will even be liable if the corp adopts but there is no novation--that would make the corp liable as well, but it would not relieve the P.
foreign corporations in TX
all foreign companies TRANSACTING BUSINESS in TX must QUALIFY & pay prescribed FEES.
what constitutes a foreign corp?
anything that is formed outside of TX
what constitutes "transacting business"?
intrastate transactions on a recurring basis. that means the regular course of business in TX & not sporadic activity.
how does a foreign corp "qualify"?
must get a certificate of authority from TX sec. of state. you get this cert by giving information from cert & proving that you have good standing in your home state
what happens if a foreign corp does business in TX w/o QUALIFYING first?
(1) civil fine; (2) corp cannot sue in TX on a claim ARISING from business in TX--although you can sue & defend. However, once you pay the fees & fines, the corp can assert a claim in TX
what is an issuance?
where the corp sells its own stock
what is a subcription?
it is a written, signed offer to buy stock from a corporation
ISSUANCE: revocation of pre-incorporation subscriptions
a pre-incorporation subscription is irrevocable for 6 MONTHS
ISSUANCE: post-incorporation subscriptions--are they revocable?
yes until accepted by the corp
ISSUANCE: when isthe corp & the subscripter obligated under a subscription agreement?
when th eboard acceptsthe offer & the corp notifies the subscriber in writing
ISSUANCE: at what point does a subscriber become a shareholder?
after acceptance, must PAY for the stock first. then will be shareholder.
ISSUANCE: what forms can consideration taken?
any tangible or intangible benefit to the corp, including money, dischard of debt, services already rendered for the corp notes & contracts for future services. everything else will be prohibited consideration.
what is "par"?
minimum issuance price
what does "no par" mean?
it means that there is no minimum issuance price & the board can set any price they want.
**what is treasury stock?
stock that had been previously issued & was reacquired by the corp. it is authorized & issued, but not outstanding.
what is the consequences of issuing par stock for less than par value? (this is referred to as watered stock)
directors will be liable if they KNOWINGLY authorized the issuance below par. The person who bought the watered stock will be liable as well, regardless of whether he knew that he was buying below par. a third party will not be liable if they did not know that they were buying watered stock.
what is a pre-emptive right?
right of an already existing shareholder of COMMON stock to maintain his percentage of ownership of the corporation by having the option to buy stock when there is a NEW ISSUANCE of stock *FOR MONEY.
do you have pre-emptive rights if the cert of formation is silent on the issue?
NO. it has to be explicitly stated.
*If the certificate of formation provides that you have pre-emptive rights & there is an issuance of new stock in exchange for property, do you have a right to purchase more stock?
No. An issuance for property is not an issuance for PROPERTY. Your pre-emptive rights only apply for issuances for MONEY.
how many directors are required
at least 1 ADULT NATURAL PERSON.
Election of directors
elected at the ANNUAL MEETING. however, the bylaws can create a CLASSIFIED BOARD, in which the board is divided & elections are staggered w/ only a portion being elected each yr.
removal of directors before the expiration of their term
this is done by the SHAREHOLDERS. can do this by a vote of the MAJORITY of the SHARES ENTITLED TO VOTE. they can remove W/ OR W/O CAUSE.
if there is a vacancy on the board, who is going to select the person to fill it?
it is usually the board or the shareholders.
There are two ways for a board of directors to take an act
(1) unanimous written consent or (2) a meeting that meets the quorum & voting requirements.
*can directors agree to act through informal individual conversations?
No. the act will be void UNLESS ratified by a valid act. there are only 2 ways to perform a valid act. a conference call is fine though--don't have to be in the same room.
notice of board meetings
you don't have to provide notice for a regular meeting. however, if it is a SPECIAL meeting, you do have to provide notice. you must state WHEN & WHERE the meeting is going to happen (although you don't have to state the purpose of the meeting). It does not have to be located in TX. The method for providing notice can be provided in the bylaws
can directors name proxies tov ote for them at board meetings?
NO. DIRECTORS cannot (although SHAREHOLDERS can).
are voting agreements for DIRECTORS OK?
NO. DIRECTORS cannot (although SHAREHOLDERS can).
what is a quorum?
a quorum is the majority of all directors (unless stated otherwise in cert/bylaws). To do business at a meeting, you need a quorum.
how many directors are needed to pass a resolution?
if you have a quorum, then you need only a majority of directors PRESENT to vote for an act.
if you had a quorum, but then some of the directors leave & there is no longer a quorum, can you still act?
it is unclear here, just say it's uncertain.
what is the role of the directors?
they manage the business of the corp. set policies, supervise the OFFICERS, &c.
***duty of care standard for the directors
directors owe the corporation a duty of care/fiduciary duty. they must act in good faith & exercise ORDINARY CARE & PRUDENCE (what an ordinary person would do in similar circumstances.
claim of nonfeasance
this is saying that the director did not act. it is a claim for omission. will be liable ONLY IF this breach CAUSED a LOSS to the corp. not enough to merely establish breach--must also show CAUSATION.
claim of misfeasance
this is where the boards ACTIONS cause harm to the corp--causation is not an issue here. will not be liable for MISFEASANCE if the director meets the BUSINESS JUDGMENT RULE
what is the business judgment rule
it basically just means that prudent people do appropriate homework before making a big business decision. Ask yourself: did they analyze/deliberate before making this decision? A ct won't second guess a director who mmade an informed & rational decision in good faith. directors don't guarantee success
for duty of care, the burden is on
for duty of loyalty, the burden is on
***duty of loyalty standard
director owes corp a duty of loyalty; that is, a director must act in GOOD faith & w/ a RZNABLE BELIEF that his actions are in the corp's best interest
interested director transaction
this involves a deal b/w the corp & one of its directors
an interested director transaction will be set aside UNLESS
there is a showing that (1) the deal was FAIR to the corp when approved; OR (2) the director's interest & the material facts were disclosed/known & the deal was approved in GOOD FAITH by either A. the shareholders or B. a majority of disinterested directors. interested directors will count towards the QUORUM, but their vote won't count.
interested director transaction does not apply to
the board setting its own compensation--just have to berznable. if it is excessive, then it will be considered a waste of corp assets & it is thus a breach of the duty of loyalty.
duty of loyalty: COMPETING VENTURES
a director cannot compete w/ the corp w/o APPROVAL from a DISINTERESTED majority of directors
what is the remedy for a competing venture in violation of the duty of loyalty?
constructive trust on profits
**duty of loyalty: corporate opportunity
director cannot USURP A CORPORATE OPPORTUNITY. this means that a director cannot take a corporate opportunity w/o (1) TELLING the board & (2) waiting for the board to REJECT the opportunity.
what is a corporate opportunity?
this is anything that the director has RZN TO KNOW that the could would be INTERESTED in.
*which directors will be liable if there is an improper board action?
directors will be presumed to have concurred w/ a board action UNLESS hdissent/absention is noted IN WRITING in corporate records. this is done by putting it in minutes; sending a note to the corp secretary at the meeting; OR sending a registered letter to the corp secretary immediately after the meeting. an oral dissent is NOT effective by itself. Also--can't dissent if you voted FOR the action at the meeting. ABSENT directors will not be liable. *Furthermore, GOOD FAITH RELIANCE on FINANCIAL STATEMENTS & other information represented by a COMPETENT PROFESSIONAL will not result in liability.
officers are AGENTS of the corp. they can bind the corp. by acts that within their authority.
OFFICERS: who are required?
at least a president & a secretary. one person can hold multiple offices. Officers do not have to be directors as well, BUT they CAN be
OFFICERS: selection & removal
selected & removed by the board, which also sets their compensation.
OFFICERS: if an officer is fired, can he get his job back?
NO--although he might be able to get k damages for breach of k.
indemnification of directors & officers: when is it prohibited?
if a director/officer is HELD LIABLE for INTENTIONAL MISCONDUCT then they will not be entitled to reimbursement.
indemnification of directors & officers: when is it required?
if the director/officer wins a judgment on the ENTIRE case. otherwise reimbursement is merely PERMITTED (unless falling under the prohibited category)--for example, settlements. for it to be permissible, must show that the director/officer acted w/ good faith w/ the rznable belief that the actions were in the corps best interest. this eligibility will be determined based on a maj vote of the disinterested directors or by ind legal counsel. however, a ct can orer reimbursement if it finds that it is justified.
a certificate can eliminate director/officer liability for damages but never for
willful or intentional misconduct
do shareholders get to manage corp?
NO. board manages
*what is a close corp?
it has FEW shareholders & the stock is not publicly traded.
*how do you form a close corp?
the same as w/ an ordinary corp but you add a sentence in the cert that says that it is a close corp.
**close corporation, management can be different from ordinary corp. how?
a close corp can have a board of directors BUT there does not need to be a board of directors. this can be abolished & the shareholders can take over management or it can be vested in a particular person.
how do you change the management structure in a close corp?
have to have a SHAREHOLDERS' AGREEMENT authorizing the change.
absolute requirement for a shareholders' agreement
must be in WRITING & agreed to by ALL SHAREHOLDERS in existence at the time. could be in the cert or in a separate doc
Does failure to note on the stock certificate that the corp is a close corp affect this status?
statement of operation
must be filed w/ the sec. of state once the corp starts operating under the shareholder agreement--this makes things a matter of public record. it will be binding on all sharehoders & transferees as they have constructive notice based on this filing.
who owes duties of care/loyalty to the corp in a close corp?
the managing shareholders
do shareholders owe each other fid duty?
no, as a matter of law in TX. ct may find a fid duty depending on the facts of a given case, however--so you will still have to argue for a duty. look for CONTROLLING SHAREHOLDER OPPRESSING A MINORITY SHAREHOLDER by taking actions such as freezing out minority shareholders, selling control to one who loots the corp or selling corp assets.
are shareholders liable for the acts/debts of the corp?
GENERALLY no b/c the corp is liable for what it does alone
*even though shareholder is generally not laible for what a corp is done, when CAN they be held liable & what is it called?
a ct can PIERCE THE CORPORATE VEIL & thus hold the shareholders liable IF (1) shareholders have ABUSED the privilege of incorporating; Or (2) tif the ct determines that limited liability would be UNFAIR.
situations where a court might pierce the corporate veil woudl be
to prevent fraud or to achieve equity. this is a very open ended standard. it is never automatic, however, & thus you will have to argue for it
what is the only type of corp where you can pierce the corp veil?
in CLOSE CORP never in a PUBLICLY traded corp
common PCV situation: ALTER EGO THEORY
this is where the shareholder/director/whoever is treating corp assets as there own & there really is no separate corporate entitty
common PCV situation: UNDERCAPITALIZATION THEORY
this is where shareholders failed to invest enough assets to cover prospective liability. for example, if it is a dangerous business, no insurance, etc. it is more likely in tort cases than in k, b/c in k you know what you're getting into.
**shareholder derivative suits
this is where a shareholder is suing to enforce the CORPORATION'S claim--not her own personal claim as a result of the fact that the corporation did not sue.
when analyzing a potential shareholder derivative action, always ask
if the corp could have brought the suit themself--if the corp could have brought the claim, it is likely a derivative suit.
who gets the money from a shareholder derivative action?
the corp, as it is their claim. However, the shareholders brought the claim, so they will receive their COSTS & ATTY FEES from the corp--not from the judgment. if the shareholder loses though they will not be reimbursed
will a shareholder be liable to the defendant for the D's atty fees?
yes if the ct finds that the shareholder sued w/o RZNABLE CAUSE or for an IMPROPER PURPOSE
can shareholders sue the same defendant on the same transaction after another shareholder has already brought a derivative action suit?
no--res judicata will apply as the claim has already been asserted.
**requirements for bring a shareholder derivative suit
(1) must OWN STOCK when the claim arose or have gotten it by operation of law from someone that did. (2) must have FAIRLY & ADEQUATELY REPRESENT the corp's interest. (3) must also make a WRITTEN DEMAND on the directors that the corp brings suit (cannot file until 90 DAYS after the demand unless the demand was rejected before then or if not doing so would result in irreparable damages to the corp)
is the DEMAND LETTER ever excused?
NO. & the demand must set forth the claim w/ PARTICULARITY
must you join the corp as a defendant?
yes, even though you are suing on their behalf.
can only settle or dismiss a derivative suit
w/ ct approval. furthermore, if it would SUBSTANTIALLY AFFECT SHAREHOLDERS, then the ct MAY require NOTICE to those shareholders
corp may move to dismiss a shareholder derivative action in what situation?
upon a determination by independent & disinterested directors (of a committee of 2+ directors) that it is not in the BEST INTEREST of the corp to go through w/ the action. the ct must dismiss if it finds that the determination was made in good faith by independent & disinterested directors.
in a close corp of 35 OR FEWER SHAREHOLDERS, a ct may treat a derivative suit as
a direct action--thus some requirements don't have to be met & the recovery would go to the P not the corp.
*general rule re: shareholder voting
the RECORD SHAREHOLDER as of the RECORD DATE has the right to vote
*who is the record shareholder?
the person shown as the owner in the corp record. even though a corp reacquires treasury stock & is thus the record owner, it will not vote
*what is the record date?
this is a voter eligibility cut off that is set NO MORE THAN 60 DAYS BEFORE a meeting
death of a shareholder after the record date
executor can still vote even though they are not the record owner
are proxies allowed for shareholders?
yes. must be writing, signed, directed to sec of corp, authorize another to vote
how long is a proxy good for?
it's good for 11 months unless it says otherwise.
can a proxy that states that it is irrevocable be revoked?**
yes. the only way that a proxy can be irrevocable is if it is a PROXY COUPLED W/ AN INTEREST. ths requires that the proxy (1) say that it's irrevocable & (2) proxy must have some interest in the shares aside from the voting itself.
requirements for a voting trust
(1) written trust agreement that controls how the shares will be voted; (2) must give copy to corp; (3) must actually TRANSFER legal title of shares to voting trust; (4) original shareholders will receive TRUST CERTIFICATES & retain all shareholder rights other than voting
can shareholders have a voting agreement?
requirements for voting agreement (i.e., pooling agreement)
writing & a copy to the corp
can shareholders agree on what they would do if they were to become directors?
no--this is void b/c there can be no agreement re: agreements for director voting
are voting agreements specifically enforceable against transferees?
Yes if the affected stock certificates CONSPICUOUSLY NOTE the agreement
there are 2 ways that shareholders can take a valid corp act
(1) UNANIMOUS consent in writing & signed by holders of ALL voting shares; (2) a meeting that satisfies QUORUM & voting rules. These are the same as the board.
Two kinds of shareholder meetings
(1) annual meeting: this must be held every 13 months (or no unanimous consent instead of meeting)--shareholder can petition for one if this doesn't happen. (2) SPECIAL MEETING can be called by (1) the board; (2) the president; (3) the holders of at least 10% of the shares entitled to vote; or (4) anyone else permitted by the certificate.
notice requirement for meetings
must given written notice to every shareholder entitled to vote for every meeting b/w 10-60 days before the meeting (21-60 days if the meeting is to consider a fundamental change). notice must state, when where, WHY.
can you do anything not in the stated purpose of the shareholder meeting?
what are the consequences of not giving proper notice to the shareholders that are entitled to vote?
the meeting is void UNLESS those that did get notice WAIVE the defect. can be express or implied waiver.
determination of a quorum for a shareholder meeting
looking at the number of SHARES present--NOT the nuber of shareHOLDERS. once a quorum is established, it is not destroyed if people leave the meeting early (this is less clear w/r/t directors).
f a quorum is met for a shareholder meeting, all that is required is a
majority of all VOTES CAST to bind
where can you put stock transfer restrictions?
in the certificate, bylaws, or by agreement
when will stock transfer restrictions be upheld?
they will be upheld if they are RZNABLE UNDER THE CIRCUMSTANCES. This means they are not an UNDUE RESTRAINT ON ALIENTATION. *right of FIRST REFUSAL OK, assuming the corp offers a rznable price. whether it will be enforceable against a transferee will depend on whether the transferee has knowledge or notice (like it was in the cert/stock)
what shareholders are eligible to inspect & copy books/records of corp (personally or by agent)?
any shareholder who owned stock for at least 6 months OR owes at least 5% of outstanding shares. other shareholders could only inspect w/ a ct order.
shareholders that need a ct order to inspect can procure one upon a written demand stating a PROPER PURPOSE--but what is a proper purpose?
one related to your role as a shareholder
what are distributions?
payments to shareholders. can come in various forms: (1) divident; (2) repurchase shares; (3) redeem shares (i.e., forced sale at price in cert). distributions are at boards discretion--no right w/o board saying so.
which funds can be used for any distribution?
how is surplus computed?
how is stated capital computed?
this is the par value of the issuance. excess over par goes into surplus.
*can a corp make a distribution in excess of surplus or if it is insolvent?
directors are j&s liable to the corp for unlawful distribution. who can they get contribution from?
any other director that approved it. also from shareholder that knew it was improper when they received it. can try a good faith reliance defense here though
what is the process for making a FUNDAMENTAL CORP CHANGE?
(1) board must first adopt a resolution of a fund corp change.(2) board must submit the proposal to the shareholders w/ written notice. (3) must be approved by the shareholders. this must be approved by a SUPERMAJORITY 2/3 of the shareholders ENTITLED TO VOTE. (4) doc delivered to sec of state.
what is the DISSENTING SHAREHOLDER RIGHT OF APPRAISAL?
right to force the corp to buy your stock at FMV
when are you likely to see the right of appraisal?
close corp. otherwise you could just sell it on the market. will see if mergers, transfers of substantially all assets, conversion, &c.
actions required by shareholders to perfect the right of appraisal
(1) before vote, file w/ corp written notice of objection & intent to demand payment; (2) abstain from vote; (3) within 20 days of notification & after the vote, you make a written demand to be bought out.
the corp must notify the shareholder of the intent to reject the right of appraisal within 20 days. if it is rejected, the shareholder can
sue to determine the price
how do you amend the cert of formation?
board of direct action AND shareholder approval--need 2/3 of ALL voters.
who must approve a merger?
board of director action is required from both corps AND at least shareholder approval from the disappearing corp--surviving corp just if fund corp change probably
no shareholder approval is required if the disappearing company is a 90%+ owned subsidiary of the merged parent corp. this is called a
short form merger
what is the effect of a merger?
the surviving entity succeeds in all rights & liability of the constituent corps
requires board action & approval by 2/3 of shares entitled to vote. deliver cert of conversion to sec of state. dissenting shareholders can demand appraisal rights.
transfer of all or substantially all assets in the ordinary course of business
this won't have occurred if the corp continues to engage in same business afterwards. fundamental corp change is for the selling corp only. requiremes board of director action & approval of 2/3 of shareholders that are entitled to vote of the selling corp.
termination of the corp
need (1) written consent by ALL shareholders (not board) or (2) board of director actoin & approval by 2/3 shareholders ENTITLED TO VOTE; (3) if either of the first two are met, send notice to creditors; (4) liquidation process; (5) ct can revoke if fraud
can creditors seek termination of corp?
yes. if based on irreparable harm to unsec creditors. can also seek appointment of a receiver b/c corp is insolvement.
can a shareholder be a receiver?
yes. for waste of assets, director deadlock causing irreparable harm to company, or ILLEGAL, OPPRESSIVE OR FRAUDULENT ACTS BY DIRECTOR*
how long does a receiver serve?
12 mo. ct can order termination if things aren't fixed after that
TX sec of state can terminate for failure to pay fees, maintain agent, file report. no ct action required here. 90 days necessary. D&O will be liable after the termination for any debts.
gather assets; convert to cash; pay creditors; pay out shareholders pro rata
when does corp existence end?
when the cert of termination is filed by sec of state.
how late can claims be brought against corp if they existed before?