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Requirements of Formation
- People -- organizer who executes and files certificate with SoS
- Paper -- certificate of formation
- Acts -- filing with SoS and organizational meeting
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Organizer
- must be at least one to form corporation; executes and delivers certificate to SoS
- can be an entity or an individual (at least 18)
- need not be domiciliary or resident of Texas
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Certificate of Formation
- name of the corporation (with corp., inc., or co.)
- name and address of each organizer
- number of and name and address of each initial director
- name and address of registered agent
- purpose of the corp. (to engage in all lawful activity)
- duration (if not perpetual)
- capital stock structure (authorized stock; class information with # of shares, par value, and rights/preferences of each class)
- anything else not inconsistent with the law
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Filing & Meeting
- File Certificate of Formation with the SoS and pay fee
- SoS sends acknowledgment -- de jure corporation at moment of filing
- Organization Meeting -- elect directors; adopt bylaws; conduct other business (requries majority of initial directors by 3 days notice)
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Piercing the Corporate Veil
- courts may pierce when: (1) the corporate privilege has been abused; and (2) piercing is necessary to prevent fraud or achieve equity
- commonly occurs if: (1) corp. used as alter ego; (2) corp. is undercapitalized; (3) corp. formed to avoid existing obligations or perpetrate a fraud
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S Corp.
- avoids double taxation
- requirements: (1) 100 or fewer shareholders; (2) all of whom are U.S. citizens or residents; (3) only one class of stock; and (4) not publicly traded
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Limited Liability w/out De Jure Status
- De Facto corp: (1) law under which business could operate (TBOC); (2) a good faith colorable attempt to incorporate; and (3) some exercise of corporate privileges (acting as if corp. existed)
- Corp. by Estoppel: (1) pary who treats a corporation as if it existed is estopped from claiming it doesn't; (2) typically only K and not tort
- Both doctrines may be abolished in Texas; we don't know
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Pre-Incorporation Ks
- Corporation: not liable unless adoption (by vote or accepting benefits)
- Promoter: remains liable until a novation
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Ultra Vires Activity
- ultra vires contracts are valid
- shareholders may sue to enjoin ultra vires activity or to recoup losses from the board/officers resulting from ultra vires acts
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Subscriptions
- Written signed offers to buy stock
- pre-incorporation: irrevocable for 6 months unless otherwise agreed
- post-incorporation: revocable until accepted by corp.
- subscriber is not a shareholder until stock paid for
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Consideration for Stock
- any form is acceptable; even past consideration
- board's determination as to value is conclusive absent fraud
- par stock: corp. must receive at least par value (set in certificate) or stock is watered
- board and purchasers are liable to corp. for amount of watered stock (consideration below par not paid)
- bona fide transferees of watered stock are not liable
- treasury stock is no par
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Pre-Emptive Rights
- right of existing shareholders to retain their percentage of ownership upon a new issuance of stock for money
- must be provided for in the certificate to exist
- do not exist in the first 6 months of existence
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Statutory Director Rules
- must be at least one natural person
- elected by shareholders at annual meeting by plurality vote
- can be removed with or without cause by a majority of shares
- cannot give proxies for voting
- cannot enter into voting agreements
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Requirements for Board Action
- unanimous written consent; or
- in a proper meeting
- notice: only required for special meetings; email sufficient if authorized
- quorum: majority of all directors
- voting: majority of directors present
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Director/Officer Duty of Care
- burden on plaintiff
- a director/officer must act: (1) in good faith; and (2) with the same degree of care and prudence that a person in a like position under similar circumstances would use
- Business Judment Rule: no liability if: (1) good faith; (2) informed (did homework); and (3) a rational basis exists for the decision
- nonfeasance/inaction -- requires a showing of causation for loss to the corp.
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Director/Officer Duty of Loyalty
- burden on defendant
- director/officer must act: (1) in good faith; and (2) with a resonable belief that his actions were in the best interests of the corporation
- business judgment rule does not apply
- common scenarios: (1) interested director transaction; (2) usurpation of corporate opportunity; and (3) competing ventures
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Interested Director Transactions
- a deal betwen the director (or another business of the director) and the corporation
- transaction will be set aside unless: (1) the deal was fair to the corp. when approved; or (2) (a) both his interest and all material facts were disclosed at the time of approval; and (b) the deal was approved in good faith by the shareholders or a majority of disinterested directors
- interested directors may still count towards a quorum
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Usurpation of Corporate Opportunities
- A director/officer may not usurp an opportunity in which he has reason to believe the corporation might be interested
- he cannot take action until: (1) he informs the corp.; and (2) the corp. rejects the opportunity
- remedy -- convey property to corp. at price he paid for it; or if already sold to BFP then constructive trust imposed on profits
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Competing Ventures
- Director/officer may not compete with the corporation without their approval
- remedy -- constructive trust on profits
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Determining Which Directors are Liable
- All present directors are presumed liable unless dissent or abstention is noted in the corporate records
- dissent or abstention can be by: (1) placing it in the minutes; (2) giving note to corp. secretary at meeting; or (3) sending registered letter to corp. secretary immediately after the meeting
- good faith reliance on financial statements or other information provided by professionals can shield director from liability
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Officer Issues
- selected by the board (not the shareholders)
- only President and Secretary required
- agents of corp. (President has inherent authority to bind corp in the ordinary course of business but not to convey real property)
- one person can hold multiple offices
- owe the same duties of care and loyalty as directors
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Indemnification of Directors / Officers
- prohibited if held liable (in court holding or judgment) for willful or intentional misconduct
- required if wins at judgment on entire case
- permitted in all other situations if compliance with the duty of loyalty is found by a vote of disinterested directors, shareholders, or independent counsel
- if found to have received an improper personal benefit, reimbursement is limited to costs and attorney's fee (not the judgment)
- court may also order reimbursement
- litigation expenses may be advanced if: (1) submits an affidavit of good faith belief of eligibility for reimbursement; and (2) promises to repay if not found eligible
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