Home > Preview
The flashcards below were created by user
on FreezingBlue Flashcards.
- A promoter is the person who persuades others to invest in a corporation that the promoter intends to form.
- The promoter has no agency relationship, but a promoter is a fiduciary to the investors.
- The promoter is not entitled to pay and is liable for contracts before the corporation exists and after the corporation.
A corporation becomes liable for the promoters debts when the corporation adopts/accepts under the contract or a third party agrees to look to the corporation for liability.
Corporate Liability for Pre-Incorporation Debts
- The corporation is generally not liable for pre-incorporation transactions except where:
- (1) it expressly adopts a pre-incorporation contract or
- (2) accepts the benefits of a pre-incorporation contract.
- The person who signs and files the articles of incorporation.
- She is not liable for actions as an incorporator.
- First, file the articles of incorporation (the charter).
- Must include incorporators name, address, and statement; corporations name and address, including magic words of corporation, limited, company and abbreviations; corporate purpose (can be broad); name and address of resident agent a person in MD who is authorized to accept service on corporations behalf; number of shares corporation is authorized to issue and description of the classes of share; names and number of directors.
Ultra Vires Acts
If a corporation acts outside of its purpose, the act can be challenged by stockholders, the company itself or the state.
Changes to Articles of Incorporation.
- Articles of correction is a filing to correct mistakes in the charter.
- Articles of amendment to make changes in the charter.
- Prior to issuance of stock, the board may amend the charter, but once the company has issued stock, only stockholders can amend the charter.
Effect of Incorporation
- Once all statutory requirements are met, a de jure corporation is created.
- If statutory requirements are not met, a good-faith promoter can rely on two doctrines to avoid liability. De facto corporation and corporation by estoppel.
De facto corporation.
- Requires (1) law authorizing a corporation, (2) owner made a good faith effort to incorporate, (3) corporation has exercised its powers and (4) owner did not realize incorporation was defective.
- Disfavored in MD.
- A defense to contracts and torts.
Corporation by Estoppel
- Occurs when (1) 3rd party deals with corporation as if it was a valid corporation, (2) owner made a good faith effort to incorporate, and (3) the incorporator lacks knowledge that the efforts failed.
- Only a defense in contract law not torts.
Governance Documents - Articles of Incorporation
The Constitution of the corporation.
- The organizational governing document which focuses on the day to day operations of the company.
- Bylaws are usually adopted at the initial organization.
- Stockholders may amend the bylaws, and the board of directors may amend if the charter or bylaws allow.
Types of Stock
- Common Stock
- Preferred Stock
- An ownership interest in the company (stock).
- Has unlimited upside in terms of profit, while the stockholder bears the burden of the corporations loss
- An obligation the corporation owes and must repay to a third party.
- Debt has limited upside (principal + interest), but debtholders have preference over equity holders in liquidation.
The standard type of stock issued.
An ownership interest treated better than common stock, where the preferred stockholder has preference in dividend payments and liquidation (paid after debtors but before common stockholders).
Authorization of Stock
- The charter must include the number of shares that the corporation is authorized to issue.
- The board of directors must authorize issuance of stock.
- Stock is authorized and not sold or bought back is authorized but unissued.
- Stock authorized and sold is called authorized, issued and outstanding.
Consideration for Stock
- Can be anything that the Board has authorized.
- Charter may set Par Value - a minimum value specified in the charter.
- An agreement to buy stock of a yet-to-formed or already formed corporation.
- Such agreements are irrevocable for three months pre-incorporation, or freely revocable until accepted by the board post-incorporation.
Stock rights, options, warrants
Board can issue rights, options or warrants to buy back the corporations stock.
Stockholders preemptive rights
When expressly granted in the charter, existing stockholders are allowed to maintain their percentage of ownership when new shares are issued.
- A cash dividend paid to stockholders. Generally permissible, but forbidden in certain cases.
- 1. Corporation cannot make a distribution if the distribution is insolvent or it will render the corporation insolvent. Two tests: Equity Insolvency and Balance Sheet Insolvency.
Equity Insolvency Test
Corporation cannot pay its debts as they come due.
Balance Sheet Insolvency Test
A corporations liabilities exceed the value of its assets.
A director is liable for breach of duty of care or loyalty when she grants an unlawful distribution.
Buying back stock
Not a distribution when the corporation issues more stock.
Issuance of Stock: Public v. Private
- When issuing stock, public companies must comply with federal law.
- For private placements, the issuance is exempted from federal law due to the institutional nature or sophisticated nature of the investors.
Sale of Stock
- Generally, a stockholder can sell her stock at any time.
- There may be statutory or consensual restrictions on the sale of stock which are enforceable when not an unreasonable restraint on alienation.
- Directors and officers can be subject to misdemeanor sanctions if they authorize an unauthorized sale of stock.
- Applicable to both private and public companies.
- To obtain jurisdiction, plaintiff must purchase or sell a security in interstate commerce.
- Elements: (1) fraud or deceptive conduct, (2) conduct relates to material information, (3) defendant must act with intent or recklessness, (4) the plaintiff must have relied on defendants conduct, and (5) harm or injury to plaintiff.
Section 16 (b)
- Applicable only to public companies.
- Punishes insider trading the buy or sale of stock - within a six month period.
Stockholder: Meeting Requirements
- Annual Meeting: stockholders typically exercise their voting rights at this meeting. Required to be held once a year, and stockholders can bring an action to compel. Primary purpose is to elect the board of directors. Notice of annual meeting required no less than 10 days and no more than 90 days before the meeting is scheduled. Waiver can be done in writing, or by showing up at the meeting.
- Special Meeting: Can be called between annual meetings by the board of directors or holders of more than 25% of the stock.
- Unanimous Consent: In place of a meeting, stockholders can agree in writing and unanimously approve the board of directors. Writings must be filed within the corporations records.
Voting Requirements - Eligibility to vote
- There are two types of owners.
- Record owners are those whose name is registered with the company as owner of stock.
- Beneficial owners own the stock, but another entity's name is registered with the company.
- Record owners possess voting rights if he is the record owner on the record date.
- The record date is typically set by the board of directors.
- Default rule record owner 10 days before a vote.
What issues a Stockholder may vote on
Stockholders can vote on directors or fundamental changes.
What issues a Board Member may vote on
Board can vote on mergers/acquisitions and changes to the charter.
Stockholder: Quorum Requirements.
Generally, a majority of all votes entitled to be cast at the meeting must be voted, although the charter can change this requirement.
Stockholder: Level of Acceptance Requirement.
Generally, a majority of votes cast are required to succeed, except for merger (supermajority) and election of directors by plurality.
Voting methodology for stockholers
- Straight election (standard) allows each stockholder to have one vote per stock which is voted.
- Cumulative voting, if in charter, can protect a minority stockholders by allowing a stockholder to combine all stock voting rights for one candidate.
Stockholder: Staggered Board of Directors.
- Allows the company to divide the board of directors so that only a few seats come up for election each year.
- At least one class of directors must come up for reelection each year.
Stockholder: Proxy Requirements
Proxy is an agent that a stockholder allows to vote on her behalf. Proxy agreement must be signed and delivered to the corporation.
Stockholder: Voting Agreements
- Voting pools: stockholders agree on how they will vote on certain matters.
- Voting trust: a trustee is responsible to vote stock.
- Stockholders may agree to alter the way the corporation is managed by (1) unanimous agreement (2) with no harm to the creditors.
- Stockholders have the right to inspect the corporations books, records and ledge of stockholders.
- The purpose must relate to the stockholders interest as a stockholder.
Stockholder suits: Direct Actions
- The stockholder is the plaintiff suing for damages to himself.
- Damages go to the stockholder.
Stockholder suits: Derivative Actions
- The stockholder sues on behalf of the corporation for harm that is suffered due to the acts of its directors or officers.
- Damages go to the corporation, but the stockholder is generally reimbursed for attorneys fees.
Derivative Suits: Standing
Stockholder (1) must own stock at the time of the alleged wrong and at time of filing, and (2) fairly and adequately represent corporations interests.
Derivative Suits:Demand Requirement
- A writing that must (1) identify alleged defendants, (2) allege wrongdoings, and (3) ask the company to do something. Stockholder must serve letter and what to see what the board does.
- If the directors reject the demand, the stockholder can file a complaint for wrongful refusal this is governed by the business judgment rule.
Derivative Suits: Futility
- There is no demand requirement when demand would be futile.
- Futility is proven when (1) demand or delay in awaiting a response would cause irreparable harm to the corporation, or (2) a majority of directors are so personally and directly conflicted or biased that they could not reasonably be expected to respond to a demand in good faith and within the scope of the business judgment rule.
- To sidestep the rule, the Board can form an independent committee to get an unbiased decision.
Stockholder Liability - Piercing the Corporate Veil
Creditors, including judgment creditors, can hold stockholders responsible for debts of the corporation when it is necessary to (1) prevent fraud or (2) uphold paramount equity. Typically requires questionable and unfair behavior and commingling of funds.
Stockholder Liability -Controlling Stockholders Fiduciary Obligations
A stockholder who owns a controlling share of stock, influences corporate affairs because of a blocking position of stock, or appoints a majority of directors may have a fiduciary duty to minority stockholders if he seeks to sell stock, eliminate other stockholders or receive a benefit denied to other stockholders.
Board of Directors' Authority
- The stockholders vest authority in the board of directors to manage the business of the corporation.
- The board further delegates authority of day-to-day operation to corporate officers.
- Members must be natural people.
Board Composition Requirements
- Minimum one director is required.
- The number and names are listed in the charter.
Selection of Directors
- Initial directors are named in the charter.
- Subsequent directors are elected by stockholders.
Term of Directors
- Default is a one year term.
- May serve for up to five years if provided in the charter.
- Must have a director up for reelection each year.
Removal for cause
- A director can be removed with or without cause, except when:
- Directors on a staggered board (for cause only)
- Directors elected by a class of stock may only be removed by that class.
- Directors elected by cumulative voting scheme cannot be removed if sufficient votes to elect the director are cast against removal.
Board Meeting Requirements
- Directors may hold a regular or special meeting, and stockholders are entitled to notice.
- Directors can act through unanimous consent which must be written and filed in corporations records.
- Directors must be present and cannot vote by proxy.
- MD allows meetings to be attended by conference call or other electronic means.
- The important requirement is that the directors can hear one another.
- Default is a majority of the directors in office.
- This number can be change in the charter or the bylaws.
- Quorum cannot be lowered below 1/3 of directors in office.
- A majority of directors present must approve any action.
- A director cannot enter into an agreement governing how she will vote.
- Directors can delegate their responsibilities to a committee if the majority of directors vote to establish the committee and place certain directors on the committee.
- Generally permissible except for when committee is formed to (1) issue stock, (2) recommend actions to stockholders which require stockholder approval, (3) amend by-laws, (4) approve mergers or share exchanges which do not require stockholder approval.
Federal laws re: Committees
- Sarbanes-Oxley requires public companies to have an audit committee, a compensation committee and a nomination committee.
- Dodd-Frank requires a say on pay, which gives stockholders the ability to vote on compensation scheme for the directors.
Business Judgment Rule:
When a director acts on (1) an informed basis (2) in good faith and (3) in the best interests of the company, there is a rebuttable presumption that the director has not acted negligently. Often considered gross negligence.
BJR Rebuttable when:
- (1) director did not act in good faith
- (2) director was not informed to the extent the director reasonably believed was necessary before making a decision
- (3) director did not show objectivity in her related to/control by another who had a material interest in the transaction
- (4) sustained failure by the director to devote attention to an ongoing oversight
- (5) director failed to timely investigate a matter of significant material concern after being alerted to its existence
- (6) director received a financial benefit to which she was not entitled
- (7) any other breach of duty
Duty of Care
- A director has a duty to act the way an ordinary prudent person would act under similar circumstances.
- Directors may rely on well-founded reports from (1) officers/other employees, (2) outside experts who were diligently hired, and (3) committees of the board when the director was not a member.
Duty of Loyalty - Self-dealing
A director breaches the duty of loyalty when the director or directors relative has financial self-interest or a conflict of interest in the transaction. Generally, the director is liable for any breach of the duty of loyalty unless he is in a safe harbor (director bears burden of proof).
Disinterested director approval
- (1) director with conflict wholly discloses all material information about the transaction, and (2) the transaction is approved by a majority of the disinterested members of the board.
- Then BJR.
Disinterested stockholder approval.
(1) Director with conflict wholly discloses all material information about the transaction, and (2) the transaction is approved by a majority of disinterested stockholders.
Entire Fairness Standard.
Despite the COI, the transaction was entirely fair to the corporation.
Duty of Loyalty - Usurpation of Corporate Opportunity.
- Director breaches duty of loyalty by taking something that would have otherwise gone to the corporation.
- Looks to the (1) interest in the opportunity (some legal right, like an option to purchase) and (2) expectation of the opportunity that was taken by the director.
- To sanitize, interested director must fully disclose and obtain consent of disinterested member of the board/stockholders.
Duty of Loyalty - Competition with the Corporation.
A director breaches his duty of loyalty when he engages in business that competes with the corporation.
Indemnification of Directors.
Indemnification is the corporations promise to pay costs of a directors defense of litigation.
If a director is successful in the litigation when sued in her official capacity just win, baby.
- (1) When a director acted in good faith with the reasonable belief that his conduct was in/not opposed to the best interest of the corporation.
- (2) In a criminal proceeding, when a director did not have reasonable cause to believe her conduct was unlawful.
- Can indemnify for liability when direct action is brought by a third party, but not by derivative action.
- Not required, but must be approved by the board.
If a defendant director is liable for receipt of an improper receipt of an improper personal benefit.
Insurance covers the expenses and liability that directors and officer may incur in service to the corporation. Available in situations that cannot be indemnified or in the event that the corporation is bankrupt.
Officers and Other Employees.
- A board of directors typically appoints officers.
- A corporation in MD must have a president, a secretary and a treasurer.
- Officers are generally subject to the same duties and protections as directors.
- Authority of officers is either direct or apparent (customary and reasonably).
- Officers do not have the same fiduciary duties as board members.
Mergers and Acquisitions: Definitions
- A merger is a combination of two corporations, with only one corporation surviving.
- A consolidation is a coming together of two companies to create a new corporation.
- The surviving company is responsible for all prior obligations.
Procedure for merger.
- Boards of directors for both companies must approve by a supermajority.
- Stockholders for both companies must approve by a supermajority.
- Must file a plan of merger and amended articles of incorporation with the state.
- A special type of merger without stockholder approval.
- A parent company that owns 90%+ of a subsidiarys stock can merge the subsidiary into the parent corporation.
- A parent can merge two subsidiaries together when it owns 90%+ of both companies.
Dissenters Appraisal Rights.
Generally, a corporation is required to buy dissenting stockholders stock in the event of a freeze out merger, or when the corporation seeks to amend the articles of incorporation.
Procedure for Appraisal Rights.
- 1. Stockholder must dissent from the transaction.
- 2. Then, the stockholder must file notice of the dissent prior to or immediately after the vote (in case of short form merger, 30 days).
- 3. Company must offer fair value for the stock.
- 4. If the parties cannot agree, a court will determine fair value.
- Generally, a company can sell its assets without stockholder approval within the ordinary course of business.
- A corporation must obtain approval by both the board and stockholders before selling all/substantially all of its assets. Consider Bulk Transfers in Article 6 UCC.
Termination of Corporate Status
- Voluntary dissolution can be achieved by 2/3 vote of stock in favor of dissolution.
- Corporation can be dissolved involuntarily by the creditors if the corporation does not pay its debts as they come due.
- General stockholders may dissolve the corporation involuntarily if (1) corporation is insolvent, (2) there is oppression or mistreatment, or (3) the corporation is at an impass, where the corporation has been unable to elect directors and corporation is not moving in a direction that stockholders feel appropriate.
- Stockholders who own at least 25% of stock may dissolve if (1) directors are deadlocked in management of affairs, or (2) stockholder are divided such that directors cannot be elected.
- MD can forfeit a corporations corporate status for failure to pay taxes.
Closely Held Corporations
Generally private corporations which only have a few stockholders. Not a term of art in MD.
Are a business entity that you can elect into to do away with corporate formalities like (1) eliminating the board of directors and (2) stockholders can run the corporation.
- A corporation incorporated under the laws of another state.
- This corporation must register with the state.
- Failure to register means that the corporation cannot file suit but may still be sued in the state.
- An entity built around a core group of professional whose purpose is limited to rendering a professional service.
- Members must be of the professional to which the corporation is dedicated.
- A type of corporation which elects pass-through tax treatment where the taxes are paid by the stockholders instead of the corporation.
- Cannot have more than 100 stockholders, and may only have common stock.
- An unincorporated business, trust or association which can carry on business much like a regular corporation.
- May issue shares, authorizing corporate guidelines for governance, buying and selling property, suing and being sued, and otherwise providing for powers and rights of trustees.
- A business trust may not, however, engage in the business of insurance or banking.
- As a general matter, a business trust is formed for a special purpose and property is held and managed by a trustee.
- on the occurrence of named events
Upon dissolution of a corporation, officers/trustees...
- Become trustees of the former corporation for the purpose of wrapping up the corporation.
- Because they are trustees, they may be sued on behalf of the corporation.