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The person who persuades others to invest in a corporation that the promoter intends to form.
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.
Filing the articles of incorporation
- 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.
Articles of correction
A filing to correct mistakes in the charter.
Articles of amendment
Filing to make changes in the charter.
Who can amend the charter?
- Prior to issuance of stock, the board
- Once the company has issued stock, only stockholders
Effect of Incorporation
Once all statutory requirements are met, a de jure corporation is created.
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.
- 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.
Preferred stockholder has preference in dividend payments and liquidation.
Authorization & Issuance Stock
- The charter must include the number of shares
- The board of directors must authorize issuance
Stock is authorized and not sold or bought back
Authorized but unissued.
Stock authorized and sold
Authorized, issued and outstanding.
Consideration for Stock
Can be anything that the Board has authorized.
A minimum value specified in the charter.
- An agreement to buy stock of a yet-to-formed or already formed corporation.
- Irrevocable for three months pre-incorporation
- Freely revocable until accepted by the board post-incorporation.
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.
Corporation cannot make a distribution if the distribution is insolvent or it will render the corporation insolvent.
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
Sale of Stock
- Generally, a stockholder can sell her stock at any time.
- Statutory or consensual restrictions on the sale of stock which are enforceable when not an unreasonable restraint on alienation.
Unauthorized sale of stock
Directors and officers can be subject to misdemeanor sanctions if they authorize
- 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.
Called between annual meetings by the board of directors or holders of more than 25% of the stock.
- 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.
- Record owners
- Someone whose name is registered with the company as owner of stock.
- Record owners possess voting rights
Owner the stock with another entity's name is registered with the company.
- Set by board
- Default rule - 10 days before a vote.
What issues a Stockholder may vote on
- Vote on directors
- Fundamental changes.
What issues a Board Member may vote on
- Changes to the charter.
Stockholder: Quorum Requirements.
- A majority of all votes entitled to be cast
- Charter can change this requirement.
Stockholder: Level of Acceptance Requirement.
- Simple majority
- Merger requires supermajority (2/3)
- Straight election
- Each stockholder to have one vote per stock per position
- Cumulative voting
- Must be in charter
- One vote per stock
- Stockholder may combine all stock voting rights for one candidate.
Stockholder: Staggered Board of Directors.
- Only a few seats come up for election each year.
- At least one class of directors must come up for reelection each year.
- An agent that a stockholder allows to vote on her behalf.
- Signed by stockholder
- Delivered to the corporation.
- Stockholders have the right to inspect the corporations books, records and ledge of stockholders.
- 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
- 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
- (1) must own stock at the time of the alleged wrong and at time of filing, and
- (2) fairly and adequately represent corporations interests.
- 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 rejected, stockholder files for wrongful refusal. BJR.
Derivative Suits: Futility
- No demand requirement 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.
Defeating futility claim
Form an independent committee to get an unbiased decision.
Piercing the Corporate Veil
- When it is necessary to:
- (1) prevent fraud or
- (2) uphold paramount equity.
- Typically requires questionable and unfair behavior and commingling of funds.
Controlling Stockholders Fiduciary Obligations
When he seeks to (1) sell stock, (2) eliminate other stockholders or (3) 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 of directors
A director can be removed with or without cause.
For cause removal only when:
- Directors on a staggered board (for cause only)
- Directors elected by a class of stock may only be removed by that class.
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.
Board Voting Requirements
- Must be present and cannot vote by proxy.
- Conference call or other electronic means.
What matters for attendance of board meetings
Directors can hear one another.
- Default is a majority of the directors in office.
- Can be changed in charter but cannot be lowered below 1/3 of directors in office.
Board voting requirements to act
A majority of directors present must approve any action.
Board agreements to vote
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.
- Audit committee
- Compensation committee
- Nomination committee.
- 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
Director's Duty of Care
- Duty to act the way an ordinary prudent person would act under similar circumstances.
- 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.
- May sanitize through safe harbor.
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.
If a director is successful in the litigation when sued in her official capacity just win, baby.
Permissive indemnification - civil
- 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.
- Must be approved by the board
Permissive indemnification - criminal
- When a director did not have reasonable cause to believe her conduct was unlawful.
- Must be approved by the board
Indemnity for liability for derivative action
- Direct action - yes
- Derivative action - no
- 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.
Officers of the Corporation - Must have
A president, a secretary and a treasurer.
Duties of Officers
- Subject to the same duties and protections as directors.
- Lack the same fiduciary duties as board members.
A merger is a combination of two corporations, with only one corporation surviving.
- 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 parent company that owns 90%+ of a subsidiarys stock can merge the subsidiary into the parent corporation --- without stockholder vote.
- A parent can merge two subsidiaries together when it owns 90%+ of both companies.
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.
Sale of all/substantially all assets
Approval required by both the board and stockholders before selling all/substantially all of its assets.
Voluntary dissolution of corporation
2/3 vote of stock in favor of dissolution.
Involuntary dissolution of corporation by creditors
When the corporation does not pay its debts as they come due.
Involuntary dissolution of corporation by general stockholders
- (1) corporation is insolvent,
- (2) there is oppression or mistreatment, or
- (3) the corporation is at an impasse
Involuntary dissolution of corporation by stockholders who own at least 25% of stock
- (1) directors are deadlocked in management of affairs, or
- (2) stockholder are divided such that directors cannot be elected.
Involuntary dissolution of corporation by MD
Failure to pay taxes.
- May elect into
- Does 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.
- Unincorporated business, trust or association
- Carries 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.
Upon dissolution of a corporation, officers...
- 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 "deceased" corporation.