| Term | Definition |
|---|
| Pre-Incorporation Contracts- Promoters and Subscribers: (2 pre-incorporation characters) | promoters AND Subscribers |
| Promoters: | promoters are persons acting on behalf of a corp not yet formed. who is liable on pre-incorp K entered into by promoter? When does corp become liable? |
| The corporation becomes liable? | on a promoters preincorporation contract accepts the contract by: 1) EXPRESS BoD resolution OR 2) IMPLIED acceptance through knowledge of the K PLUS acceptance of its benefits. (just like ratification) |
| promoter liability. | *promoter still liable until you see something else: The promoter remains liable on pre-incorp Ks until there has been a novation, i.e. a BRAND NEW agreement btwn the promoter, the corp, and the other contracting party that the corp will replace the promoter under the K |
| If promoter enters a K, and the corp is never formed? | Cannot ACCEPT K and therefore promoter alone liable on this K |
| If the promoter enters a pre-incorp K, and the corp merely accepts the K? (nuanced part) | Corp become liable upon ACCEPTANCE also know that promoter retains liability until novation. Answer: BOTH corp and promoter liable on this K 3rd party can sue EITHER but **cannot recover twice** |
| Promoters are fiduciaries of? | each other and the corp (they are forming). Therefore, promoters cannot make secret profit on their dealings w/ the corp (i.e. sale to corp of promoter's own property at profit w/o disclosure to the corp) *watch out for secret profit |
| Subscribers: | persons or entities who make written offers to buy stock from a corp not yet formed |
| Subscriber Ex: On Jan 10, S signs a preincorp subscription agreement, offering to buy 100 shares of C Corp, a corp not yet formed. 1 week later, S changes her mind. Can S revoke? | Offer can be revoked until acceptance NOT TRUE UNDER CORP law. Rule: Pre-incorp offer to buy stock in corp not yet formed is irrevocable for 6 mos. Must be held open, CANNOT BE REVOKED for 6 mos. |
| Formation Requirements- De Jure Corporate Status: | incorporators AND articles |
| Incorporators: | merely signs and files the Articles of Incorporation with the state |
| The articles must include: (A PAIN) | 1) authorized shares. 2) Purpose. 3) Agent. 4) Incorporators. 5) Name of corp |
| Authorized Shares: # | of authorized shares. term of art. means the MAX number of shares the corp is authorized to issue. Can sell LESS, but NOT MORE w/o 1st amending articles to increase # of authorized shares 2) Purpose |
| purpose | general purpose- presumed. Can the articles of B's biscuits, Inc. indicate that the corp's purpose is to "engage in all lawful activity" YES, a general purpose is valid and will be presumed in the absence of a specific purpose clause |
| Specific stmt of purpose and ultra vires rules (beyond the prupose) | What if articles of B's Biscuits, Inc.indicate that the corps purpose is to "sell Southern style sausage biscuits" and the corp later sells t-shirts as well as biscuits? Selling tshirts is an ultra vires activity. 2 consequences: 1) state can ENJOIN the ultra vires activity. 2) Corp may sue its OWN directors and officers for losses caused by the ultra vires activity (Ds & Os become personally liable) |
| Agent- | and address of registered office (registered agent is corps official legal rep) authorized to accept process on its behalf in state so name and address better be in there |
| Incorporators: | those people that have just signed and filed articles |
| Name of Corp | Can I form a corp with the name of Bubba's Bountiful Biscuits? NO. Name must contain some INDICIA of corporate status |
| By-laws: | the corp NEED NOT adopt by-laws. The board has the power to adopt and amend the by-layws, unless the Articles give the power to the shareholders *Classic bar exam red herring* NEED NOT be in articles AT ALL |
| De Facto Corporation Doctrine: *fallback plan* | A business failing to achieve de jure corp status nonetheless is treated as a corp, if the organizers have made a good faith, colorable attempt to comply w/ corp formalities and have no knowledge of the lack of corp status |
| Legal Significance of Formation of Corp. | corp is a separate legal person. generally, SHs are NOT personally liable for debts of corp. |
| Corp is a separate legal person | (commits own torts, own debt, own obligation, NOT the owners-SHs or controllers- directors and officers) **Remember NOT a person for Priv & Imm purposes |
| Generally, SHs are NOT personally liable for debts of corp. | This is the principle of limited liability, which means that the SH is liable only for price of her stock |
| Piercing the Corporate Veil: (doctrine in equity) | General rule: a SH is NOT laible for debts of Corp EXCEPT: "piercing the corporate veil" to avoid fraud or unfairness. TO render owner of stock liable to 3rd party victim. |
| When should ct pierce veil? | 1) Alter ego: failure to observe sufficient corp formalities OR 2) Undercapitalization: failure to maintain sufficient funds to cover foreseeable liabilities |
| Ex PCV: X is the SH and CEO of Glowco, Inc., a corp that hauls and disposes of nuclear waste. Glowco does not carry insurance. Glowco has an initial capitalization of $1000. X commingles personal and corp funds. V is injured when one of glowco's trucks melts down. Can V sue X? | As a rule, SHs like X are NOT liable for corporate obligations. EXCEPT courts will pierce the corporate veil to avoid fraud or unfairness. In this case, X has failed to observe sufficient corp formalities by commingling funds. Moreover, Glowco is also undercapitalized b/c it operates in a dangerous business, has no insurance and minimal capitalization. THEREFORE, cts will pierce veil to render X liable to V. |
| 2 things to remember about PCV | *Remember: cts are generally more willing to PCV for tort V than for a contract claimant. D will be contolling, dominating, evildoer. PCV against them! |
| Issuance of stock. | *only occurs when corp about to issue OWN stock, NOT when 3rd parties about to sell own shares. |
| Consideration: | what must the corp receive when it issues stock? Depends. par value, no par, treasury stock, acquiring property |
| Par value | means the MINIMUM issuance price. Price which at a minimum corp must receive. can NEVER receive less than par value. C.Corp is selling 10,000 shares of $3 par stock. It must receive at least $30,000 |
| No par | means "no minimum issuance price" Valid, often used. THEREFORE, any valid consideration may be received IF the board deems the consideration to be adequate. |
| Treasury stock | Treasury stock is stock that was previously issued and has been reacquired by the corp. It can then be re-sold. deemed to be non-par stock. C.Corp is selling $3par treasury stock. It must receive at least any valid consideration deemed adequate by the board |
| Acquiring Property w/ par value stock | (issuing par value shares not in return for cash) Can C Corp. issue 5,000 shares of $3 par stock to acquire Green Acres? ANY valid consideration can be received IF the board values it in good faith to be worth at least par value |
| consequences of issuing par stock for less than par value. C Corp issues 10,000 shares of $3 par to X for $22,000. Can C Corp. recover $8,000 from directors? YES Directors are liable for authorizing a below par issuance. Ds have NO AUTHORITY to authorize below par issuance. Become liable personally for unauthorized activity | YES Directors are liable for authorizing a below par issuance. Ds have NO AUTHORITY to authorize below par issuance. Become liable personally for unauthorized activity |
| consequences of issuing par stock for less than par value. C Corp issues 10,000 shares of $3 par to X for $22,000. Can C Corp. recover $8,000 from X? | YES, buyer is also liable for below par amount. SH is liable for one thing only. To pay FULL CONSIDERATION for their shares **C corp can CHOOSE to sue own directors OR buyer. CANNOT recover twice. |
| What are preemptive rights? | Preemptive right is the right of an existing SH to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock for cash. S owns 1,000 shares of C Corp. There are 5,000 shares outstanding. C Corp is planning to issue an add'l 3,000 shares for cash. If S has preemptive rights, then S has the right to: MAINTAIN her existing 20% ownership interest by BUYING up to 20% of those newly issued 3,000 shares for cash. 600 shares!! |
| What if articles of incorp are silent or bar exam ? does not indicate whether articles of C Corp provide for preemptive rights? | NO preemptive rights UNLESS granted in the articles |
| Statutory Requirements- Directors: | 1) Corp must have a Bd w/ at least 1 member (must have board!) board is centralized management team. 2) SHs ELECT directors (retaining indirect control). 3) SHs can REMOVE a director before her term expires. On what basis? WITH or EVEN WITHOUT CAUSE. 4) Valid meeting |
| Valid Meeting | Unless all Ds consent in writing to act w/o a meeting, meeting is rqrd. NOTICE of D's meeting can be set in bylaws. PROXIES are not allowed. Also, no voting agreements!!!! (not true for owners of stock, this is rule for board). Quorom: must have a majority of ALL directors to do business (unless a different % rqrd in bylaws) (STEP 1). Vote: to pass a resolution, however, all that is rqrd is a majority vote of those present (STEP 2) SO, if there are 9 directors, at least 5 Ds msut attend the meeting to constitute a quorum, If 5 Ds attend, at least 3 must vote for a resolution in order of it to pass |
| Liability of Ds to their own Corp and SHs: (*answer should always begin with following 3 rules*) | 1) Ds have a duty to manage the corp. 2) In managing the corp, the Ds are protected form liability by the business judgment rule. The business judgment rule is a presumption that the Ds manage the corp in good faith and in the best interests of the corp and its SHs. As such, directors will not be liable for INNOCENT (even colossal) mistakes of business judgment. *VERY STRONG PRESUMPTION* 3) Directors, however are fiduciaries who owe the corp duties of care and loyalty. Will get either care or loyalty ? |
| Duty of care: | a D owes the corp a duty of care. She must act w/ the care of a prudent person would use w/ regard to her own business |
| Duty of care example: H, a director of H's Hot Tubs, Inc., after studying the issue thoroughly, votes to hire a religious singing ensemble to promote the company's line of hot tubs w/ built-in wine coolers and video cameras. The idea is a disaster. Has H breached his duty of care? | NO, Ds have a duty to manage (start here always for points). They are protected by the BJR. Directors however are fiduciaries who owed duties of CARE and LOYALTY. D must act w/ care that a prudent person would use in managing own business. IN THIS CASE, our D after studying the matter thoroughly made an INNOCENT mistake of business judgment and therefore will NOT be liable for breach of duty of care (even colossal mistakes!). By contrast, if D fails to attend bd meetings, sleep through meetings, doesn't ask ?s: blow-off D liable |
| Duty of loyalty: | A D owes the corp a duty of loyalty. A D may NOT receive an unfair benefit to the detriment of the corp or its SHs, UNLESS there has been a material disclosure and independent ratification |
| 2 violations of duty of loyalty | 1) Self dealing: D who receives an unfair benefit to herself (or her relative, or another one of her businesses) in a transaction w/ her own corp. *ok if fair to corp* 2) Usurping corp opps: D receives an unfair benefit by usurping for herself an opp which the corp would have pursued. |
| Ratification: | Ds may defend a claim by obtaining an independent ratification though: a) a majority of independent Ds b) majority vote of a committee of at least 2 independent Ds or c) majority vote of shares held by independent SHs |
| Ex of duty of loaylty: A, one of 10 Ds of Diamond Merchants, Inc, spots choice diamonds and buys them for herself for $1mil. A then resells those diamonds to her corp for $2mil. A, however, disclosed her conduct to the Bd, and at a Bd meeting attended by the other 9 bd members, 5 of the members voted to ratify her transaction. What liabilities if any does A have? | NONE. Ds have a duty to MANAGE (start here!) They are protected by the BJR, but they are fiduciaries who owe duties of care and loyalty. Ds may NOT receive an unfair benefit to the detriment of their corporation UNLESS disclosure PLUS independent ratification. In this case, A did receive an unfair benefit by profiting in a self-dealing transaction w/ her own corp. Moreover, A also received an unfair benefit by USURPING the corps opp to buy the diamonds. NONETHELESS, A will NOT be liable b/c she DISCLOSED her conduct and received INDEPENDENT ratification through a majority vote of the 9 independent bd members. Therefore, NOT liable |
| Indemnification of Directors and Officers: | D or O has incurred costs, attorney's fees, fines, judgment or settlement in the course of corp business; she seeks reimbursement from the corp |
| Corp may NEVER indemnify a D who: | is held liable to own corp |
| Corp MUST ALWAYS indemnify if: | he wins a lawsuit agst ANY party |
| Corp MAY indemnify if: | 1) Liability to 3rd parties or settlement w/ corp. 2) D or O shows that she acted in good faith and that she believed her conduct was in corps best interest |
| who may determine whether to grant permissive indemnity? (4 ways) | 1) majority of INDEPENDENT Ds approves it. 2) committee of at least 2 INDEPENDENT Ds approves it. 3) majority of shares held by INDEPENDENT SHs could vote for it 4) special legal counsel's opinion could RECOMMEND it |
| SH Derivative Suits: | In a derivative suit, a SH is suing to enforce the corps OWN CoA (derives from corps own CoA) ALWAYS ASK: could the corp have brought this suit? If so, it's a derivative suit. ex: agst own Ds&Os. forcing board to cause corp to bring lawsuit agst themselves |
| What are the rqrmts for bringing a SH derivative suit? | (2 standing rqrmts) 1) contemporaneous stock ownership: own at least 1 share of stock when the claim arose and throughout the entire litigation. if #2 also complied with: 2) must generally make demand on Ds they they cause their own corp to bring suit. still honor boards power. Therefore, owner must demand board to do the right thing. Demand is nuanced b/c MUST be made AND REJECTED by board OR at least 90 days must have passed since demand was made |
| Who has the right to vote at an upcoming meeting where voting occurs? | ONLY the record date owner votes. What does this mean? record date is a voter eligibility cut off date set by the board up to 70 days before the meeting date Have right to vote if own on record date EVEN IF after record date you have sold. Don't care who owns on actual meeting date |
| SH voting by proxies (Directors can't do this) | a proxy is a i) writing ii) signed by record SH, iii) directed to secretary of corp, (iv) authorizing another to vote the shares, (v) valid for only 11 mos |
| Ex: SH voting on June 2, S, who is record owner on record date, sends a signed letter to secretary of C corp, authorizing GP to vote her shares. Can GP vots S's shares at the annual meeting in July? | YES, this is valid b/c 1) in writing. 2) signed by record owner. 3) sent to secretary. 4) authorizes another. 5) w/in 11 mos |
| Ex SH voting: what if, prior to the meeting, S writes to the secretary of C Corp that she now wants EH to vote her shares at that meeting | S can change mind: proxies ARE revocable UNLESS 2 things are both true..Must SAY IRREVOCABLE on them AND must be coupled w/ an interest |
| Ex SH voting: | Can S revoke her proxy even though it states that it is irrevocable? YES, merely saying irrevocable does not yet make it so. Watch out for this trap. 2 things make it so: must say AND be coupled w/ interest. For example.... |
| Ex SH voting: S (record owner) sells B her shares after the record date but before the annual meeting. S gives B an irrevocable proxy to vote the shares at the annual meeting. Can S revoke this proxy? | NO, this proxy cannot be revoked b/c it BOTH 1) says irrevocable and 2) is coupled w/ an interest in the shares themselves |
| Where do SHs vote? | 1) properly noticed annual meeting: every corp MUST HAVE an annual meeting of the SHs in which at least 1 D position is open for election notice requires TIME and PLACE 2) specially noticed special meeting: not annual, for special purposes. Meeting to vote upon a proposal or more likely a fundamental corporate change what makes notice special? notice must contain its special purpose! **NOTHING ELSE can take place at that meeting. |
| Quorom: | there must be a quorum represented at the meeting. Determination of a quorum focuse on the number of shares represented, not the # of SHs. A quorum requires a majority of outstanding shares, unless otherwise provided in Articles |
| Ex quorom: X corp has 120,000 shares outstanding. X corp has 700 SHs. What or who constitutes a quorum? | Quorom is a majority of all shares must be represented at the meetings start. 60,001 shares in this case- must be represented at meetings start. Classic redherring is when they tell you how many SHs there are Assuming quorum, step 2 is VOTE... |
| Vote: | if quorum is present, action is approved if votes case in favor of proposal exceed votes cast agst the proposal |
| Ex SH vote X Corp has 120,000 shares outstanding. 80,000 shares are represented at meeting, but only 50,000 shares vote on particular proposal. How many shares must VOTE FOR the proposal in order for it to be accepted by SHs | For vote: votes cast in favor must EXCEED votes cast against. 25,001 shares must vote for for proposal to pass |
| Pooled or Block voting methods: | SHs who own relatively few voting shares decide that they can increase their influence by agreeing to vote alike. How can they do so? 2 ways in which A and B can engage in pooled or block voting. 1) voting trust. 2) SH voting agreements |
| FIRST, voting trust: | formal delegation of voting power to trustee for up to 10 yrs written trust agreement. filed w/ corp. transfer shares to voting trustee. SHs get trust certificates AND. SHs retain all other rights except for voting. Duration- generally 10 yrs, unless extended by agreement |
| SECOND, shareholder voting agreements. | Agreement in writing to vote shares as required by that agreement. Only nuance: valid and enforceable on ALL signers |
| Cumulative voting for Directors | Multiply # of shares times # of Ds to be elected ex: you own 1000 shares of stock in CCorp C has 9 directorships open for election. You believe that MS should be director of C corp. Under cumulative voting, how many votes can you cast for Martha. straight voting: 1000 shares. cumulative voting: multiple shares by # of open slots = 9000 votes. Odds good for your candidate. |
| Articles of CCorp are silent as to whether SHs can vote cumulatively. Can C's SHs still vote cumulatively? | Right to engage in cumulative voting does NOT exist UNLESS granted in the articles |
| Right of SH to Examine the Books and Records of the Corp: | ANY SH shall have access at proper times |
| Dividends: | (to be declared in Bds discretion unless the corp is insolvent or would be rendered insolvent by the dividend) |
| Priority of Distribution of dividends: bd of Ds of C Corp decides to declare dividends totaling $400,000. Who receives dividends if the outstanding stock is: 100,000 shares of common stock: | common shares get paid last and get paid equally. $4 each |
| 100,000 shares of common and 20,000 shares of preferred w/ $2 dividend pref | preferred ALWAYS get paid 1st before common get ANYTHING. pay $2/each to preferred = $40,000 paid first. What then is left over for common? $360,000 left, each common gets $3.60 |
| 100,000 shares of common and 20,000 shares of $2 preferred that is participating | what does participating mean in this context? These shares are actually 2 shares in 1. preferred AND participate as if common shares. Get paid twice: once as preferred, once as common. Get paid as preferred FIRST. $40K FIRST to the 20K shares at $2 each. NEXT, common: $360K divided between 120K participating shares, each gets $3/share |
| 100,000 shares of common and 20,000 shares of $2 preferred that is cumulative (and no dividends in the 3 prior yrs) | Cumulative: have right to receive 3 prior unpaid years. Also right to receive current years worth of dividend payments. These shares get paid first at 160K. $8/share. THEN, always go on to common- whatever is left over. This time, only have $240K left for common, each common gets $2.40/ common share |
| Shareholder Agreements to eliminate corp formalities: | Closely held corporation! agreement to eliminate formalities. How do you do this? 2 requirements: 1) unanimous SH election evidenced in the articles or bylaws or filed written agreement. 2) reasonable share transfer restriction |
| 2 upsides aside from limited liability | 1) NO piercing the corporate veil EVEN IF you failed to observe formalities. 22) Taxation: can take advantage of subchapter S corporation. Can then be taxed as if you are a partnership and not a corporation. how can you take advantage of s corp status? To be an S corp: can have no more than 100 SHs who are individuals and American residents and only 1 class of stock. |
| Limited Liability Companies: Original purpose: | the lmtd liability of a corp and the tax status of a partnership |
| Requirements: | 1) Organizers file: Articles of ORGANIZATION (not of incorp). 2) Change the labels too!! Members = SHs; Mgrs = Directors. 3) Company generally has lmtd liability of corp and 2 of following partnership characteristics: a) Limited duration: LLC must specify some events of dissolution. b) Limited liquidity: LLC must have some limit on transferability. Full membership interest may not be transferred w/o unanimous consent of members. c) Members may retain mgmt power or: Members who are owners of LLC retain power to manage may and often do delegate that power to managers. Therefore, LLC's = limited liability PLUS limited life PLUS limited liquidity PLUS limited tax |
| Recognized Fundamental Corporate Changes: | Merger; Consolidation; Dissolution; Fundamental (not ministerial, like deleting names of original Ds) Amendment of the Articles; Sale (not purchase) of substantially all of the corps assets |
| Procedural Steps for fundamental corporate change: (5 steps) | 1) Resolution by bd at a valid meeting 2) notice of special meeting. 3) Approval by A MAJORITY of all shares (supermajority) entitled to vote AND by a majority of each voting group adversely affected by the change. 4) Possibility of dissenting SH right of appraisa 5) File notice w/ the state. |
| Possibility of dissenting SH right of appraisal | A SH who does not vote in favor of a fundamental change has the right to force the corp to buy her shares at fair value actions by SH to perfect the right before SH vote, file written notice of objection and intent to demand payment do not vote in favor of the proposed change Make prompt written demand to be bought out what happens if the SH and the corp cannot agree on fair value? ct has power to appoint expert appraiser to value the shares. Appraisal binding on parties |
| Anti-Fraud: Section 10(b) of the Securities Exchange Act of 1934: | (fraud provision) 1) Scienter- intent to deceive. 2)Deception: material misrep or misappropriation of material nonpublic info. 3) IN connection w/ the actual purchase or sale of securities |
| ex 10(b) Ronco Corp intentionally issues a misleading press release that P has expressed an interest in acquiring a major block of its stock. the release fails to indicate that it is SP and not BP who is interested. b/c of press release, C does not sell his Ronco stock. Does C have a 10(b) CoA? | NO, although there is scienter and intent to deceive. NONETHELESS, no liability b/c victim (C) did not actually purchase or sell securities. |
| Section 16(b)- | short swing trading profits: |
| When does 16(b) apply? | Big corps: reporting corp 1) listed on nat'l exchange or 2) at least 500 SHs and $10m in assets. Big shot D: officer, director, more than 10% SH. Type of transaction: buying asn selling stock w/in a single 6 mo period (short-swing trading). Fraud NOT required. No rqrmt of inside info |
| What happens when 16(b) applies? | All profits from such short-swing trading are recoverable by corp. IF, w/in 6 mos before or after any sale, there was a purchase at a lower price then the sale price, there is a profit |
| Sarbanes-Oxley Act of 2002: | applies to Reporting corps. CEO and CFO must CERTIFY that based on officer's knowledge, reports filed w/ the SEC: do not retain material misreps or omissions, and fairly present the financial position of the company. Willfully certifying a false report could bring $5m find and 20 yrs. IF false reports have to be restated, the corp (directly or derivatively) may recover officer's profits made from trading the co's securities w/in 12 mos after false reports were filed, and may recover incentive-based compensation received during that period. Corps (directly or derivatively) may also recover any profits made by officers from trading corp's stock during "black out" periods of at least 3 days when at least 50% of the employees are prohibited from trading in their retirement plan's securities |
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