| Term | Definition |
|---|
| Formation Requirements | People, papers, act |
| People to form a corporation | incorporators execute the articles and deliver articles and supplemental form to the sec'y of state. might hold organizational meeting; can be an entity. |
| Papers to form a corporation | Requires two documents. 1. Articles of Organization 2. Supplemental Form. \ |
| Act to form a corporation | 1. Deliver articles and supplemental form to state secretary, who files (conclusive proof of valid formation de jure corporation) 2. Board holds organizational meeting, OR the incorporators can hold teh organizational meeting to elect directors, adopt bylaws and select the president, treasurer, and secretary. |
| Lawful Purposes of a corporation | presume all lawful activity; BUT if specified, anything outside is ultra vires act |
| Consequences of an ultra vires K | The contract is valid; shareholders can seek injunction; responsible managers liable to corp for losses |
| Organizational Meeting | adopt bylaws, select officers, transact other company business |
| Corporate liability | corporation is fully liable (shareholder only to extent paid for stock); if no corp, treat like partners |
| De Facto Corporation | person must be unaware of failure to form de jure corporation. Must have a relevant incorporation statute (Mass BCA satisifies). 2. good faith/colorable attempt to comply with the statute. 3. some exercise of corporate privilege. If elements met, then treat as a corporation for all purposes except in an action by the state = quo warranto |
| Corporation by Estoppel | person must be unaware of failure to form de jure corporation - one dealing with business as corporation may be estopped from denying status (BUT limited to K, not tort). |
| Bylaws | Adoption not a condition precedent to formation of a corporation. Initially adopted by the Board or the Incorporators. Repealed by shareholders; subordinate to articles |
| Pre-Incorporation Contracts | corporation not liable UNTIL it adopts the contract via express or implied (knowingly accept benefit) - promoter remains liable until novation (may have right of indemnity from corporation) |
| Secret Profit Rule | promoter cannot make a SECRET profit (these ok if not secret) - sale to corp of property acquired before promoter then profit=price paid by corp minus FMV - sale to corp of property acquired after promoter the profit = price paid by corp minus price paid by promoter |
| Foreign Corporations | Any corporation formed outside of Massachusetts. If doing business (regular course of intrastate business like construction or any activity requiring the performance of labor NOT meetings) in MA must qualify. |
| qualification of a foreign corporation | deliver certificate with articles info and certificate of good standing; pay fees; registered office/agent; annual report of condition |
| Consequences of failure to qualify a foreign corporation | civil fine; late fees/interest/penalties; and can't sue in state (but can be sued) |
| Requirements for Articles of Incorporation | 1. corporate name - must have magic words. 2. name/addy of each incorporator 3. stock info, including # of shares authorized to be issued, number of shares, voting rights, and preferences of each class (or series) of stock. |
| Requirements for Supplemental Form | 1. Name of initial registered agent and addy of registered office. 2. Name/addy of initial directors, president, treasurer, and secretary. 3. Dates of the initial fiscal year. No need for statement of corporation duration -assume perpetual duration. |
| Registered Agent | The legal representative of the corporation. Receives service of process. Can be an individual, a Mass corp, or a foreign corp qualified to do business in Mass. |
| Debt: | investor lends capital to be repaid, usually with interest, as specified in the agreement. Can be made convertible or redeemable in instrument. |
| Investor debt secured by corp assets: | bond |
| Investor debt unsecured by corporate assets: | debenture |
| Equity: | investor buys stock and has ownership interest. Status carries various rights like the right to inspect records and bring derivative suits. Equity can be made convertible or redeemable in articles. |
| Authorized stock: | Maximum number of shares the corporation can sell. put in the articles. |
| Issued stock: | Shares the corporation has actually sold. |
| Outstanding stock: | Shares that have been sold and not reacquired by the Corporation. |
| Issuance | Corporation sells or trades its own stock. A way to raise capital for the corporation. |
| Subscription: | offer to buy stock from corporation |
| Revocation of pre-incorporation subscriptions: | Not before six months unless all subscribers agree. Pre-incorporation subscriptions are irrevocable for 6 months unless all subscribers agree |
| Revocation of post-incorporation subscriptions: | Freely revocable until the Board accepts the offer. Call for payment must be uniform w/i each class/series. |
| Consideration: | Form "any tangible or intangible benefit to corporation." Amount - in Massachusetts, the Board may determine what amount of consideration is adequate. The Board's determination is conclusive regarding the validity of the issuance, even if consideration less than par. |
| Par: = | minimum issuance price (but in MA, Board can determine what amt consideration "Adequate" and this can be below par). |
| No par: | No minimum issuance price. Board of directors sets a price. |
| Reacquired stock: | Stock previously issued and has been reacquired by the corporation, and which the corporation can resell. Sale is treated as a no par sale. |
| Liability for issuance of stock for no consideration: | Directors liable if issuance knowingly authorized. (But in Mass, Board valuation conclusive re: adequacy and validity of issuance unless the Articles say they cannot sell for less than par, e.g.). Receiver of issuance also liable. Later transferee not liable if the stock the transferee acted in good faith (didn't know about the problem). |
| Preemptive Rights: | Right of existing shareholder to maintain % ownership when new issuance. right not to be diluted. Preemptive rights not automatic, they exist only if the articles provide. |
| Directors | Number required - One or more adult natural persons. Number set by articles or bylaws. If neither sets the number then - 1 per shareholder up to 3. If a variable sized board set by articles or by laws, then the shareholders or the board sets the number within the range. |
| Staggering of the board | Articles can stagger the board by dividing the board by half or in thirds. A publicly-traded corp must stagger w/ 3 classes (Board or 2/3 SH can vote otherwise) |
| Election of directors | By shareholders at the annual meeting. |
| Removal of directors | w/ or w/o cause by a majority of shares. Can remove prior to expiration of term. BUT public corp, fire only for cause. A majority of directors required can remove another director for cause. Board or shareholders will fill the vacancy. |
| Board Action | Two options. 1. unanimous written consent (no indiv convo)to act without a meeting OR 2. meeting that satisfies quorum and voting requirements (conference call ok if all participants can hear at the same time). Any act in violation of either one or two is void unless ratified by a valid act. |
| Notice of meetings of directors | Typically set out in the bylaws, but no notice required for regular meeting; 2 days for special meetings (when and where only)unless bylaws say otherwise. Notice should be in writing; oral if reasonable in circumstances. Failure to give required notice to each director renders acts taken at the meeting void, unless the not notified director waives the defect. |
| Waiver of notice for meeting | in writing signed and filed w/ minutes OR attending meeting w/o objection |
| Proxies for director voting | Not allowed. Proxies and voting agreements void. |
| Quorum for directors meeting | majority (Unless otherwise in Articles, but never less than 1/3); only a majority vote of those present to pass a resolution. Quorum broken if someone leaves. |
| Role of directors | Manage business; may delegate substantial management functions to a committee BUT committee can't change bylaws, declare distributions, change the size of the board, amend bylaws, declare or recommend a fundamental corporate change to shareholders or fill a board vacancy. |
| Duty of Directors | The standard - the director is a fiduciary and MUST act (1) in good faith, (2) with care that person in like position would reasonably believe appropriate, and (3) w/ reasonable belief that it is in corporation's best interest. Plaintiff bears the burden to demonstrate the duty of care was met. |
| Director/board nonfeasance | Director does nothing in breach of the duty of care. liable only if caused loss to the corporation. (ex/ fail to supervise officers in small corp) |
| Director/board Misfeasance | Business judgment rule (good faith; informed; rational basis); look at facts; no waste |
| Duty of Loyalty | Burden on D. Can consider interest of group, economy, community, national concerns. |
| Interested Director Transaction | any deal b/w corp and one of directors. An interested director transaction will be set aside unless the director shows that (1) the deal fair to corp when entered; OR (2) director's interest and material facts were disclosed AND the deal was approved by either a majority of disinterested directors OR a majority disinterested shares. Approval means only that the transaction is not automatically voidable and ct may require showing fairness. |
| Director participation in Competing Ventures | Director cancan't compete directly until resigns; remedy = constructive trust on profits |
| Corporate Opportunity (Expectancy) Rule | A director cannot USURP a corporate opportunity. A director can't take advantage of the opportunity until she tells the Board AND waits for Board to reject opp. Remedy for violation is that the corporation may buy from the director at the director's cost or, if director has already sold at a profit, the corporation gets a constructive trust for the profit. |
| Def'n Corp Opp | In Mass, a corporate opportunity exists when it was unfair to the corporation that Director took it. (ability to pay no defense) |
| Liability for Improper Loans | Loan to director ONLY if majority of disinterested shares approve OR Board determines will benefit corp and specifically approves. Not that Sarbanes-Oxley prohibits most loans to executives in registered corporations. |
| Which Directors if Directors liable? | Director presumed to concur with Board action UNLESS dissent/abstention noted in writing in corp records. Means in the minutes OR in writing to corp secretary at meeting OR in writing to corp sec immediately after adjournment. Oral dissent is not valid. A director cannot dissent if he voted for the resolution at the meeting. |
| Defenses to director liability | Absent directors not liable; good faith reliance on info prepared by corp officer/employee, professionals, or committee he's not on, but must have reasonable belief in competence of provider |
| Officers. Duties. | agents of the corporation; same duties of care/loyalty. Can bind the corporation by acts for which they have authority to bind the corporation. |
| Required corporate officers | president, secretary, treasurer (can be the same person)- can have others. |
| Signatures necessary to bind a deed | only binding if signed by prez or VP AND treasurer |
| Massachusetts Inherent authority of president | VERY limited (usually needs Board authority to bind. Does not bind corporation to contracts she signs unless the board authorizes it. |
| Selection and removal of officers | By directors, who also set compensation. |
| Indemnification | Person sued in capacity as officer or director incurs costs, atty's fees, fines, judgment or settlement seeking reimbursement from the corporation. Ct can order indemnification if fair and reasonable. Articles can limit liability of director (NOT officer in Mass) except for breach of duty of loyalty, intentional misconduct, improper personal benefit, or approving improper distribution. Can purchase insurance for D&O liability. |
| Mandatory Indemnification | IF wholly successful in defending. |
| Prohibited Indemnification | if suit lost for breach of duty of loyalty, intentional misconduct, improper personal benefit, or approving improper distribution. |
| Permissive indemnification | anything else not prohibited IF she acted in good faith and w/ reasonable belief act in corp's interest. Determined by disinterested directors, disinterested shares or independent legal counsel. |
| Shareholder management of a corporation | Generally, shareholders CANNOT manage the corporation (job of directors. BUT, shareholders can manage in a close corporation. |
| Characteristics of a close Corporation | 1. few shareholders, 2. stock not publicly traded, 3. substantial shareholder involvement in management. |
| Requirements for shareholder elimination of the Board | In a close corporation, in Articles/bylaws approved by all SH OR unanimous written agreement (10 yr max). |
| Duty owed by shareholders to each other in a close corp? | SH owe duty of utmost good faith and loyalty to each other sh (same duty as partners). Controlling shareholders may not pursue a course of conduct when an alternative exists that would be less harmful to the minority shareholders. Watch for oppression by controlling stockholders. Seller of control must investigate character and reputation of buyer (otherwise breach fiduciary duty). Equal Access Rule. No freeze-out. |
| Equal Access Rule | corp may not purchase shares from a majority/controlling shareholder without making the same pro-rata offer to minority shareholders. |
| "Freeze out" | Cause close corporation to merge into another corporation leaving minority shareholder without ownership. Not permitted if a less harmful corporate alternative exists. |
| Professional Corporation | licensed professionals; name must have P.C.; SH, directors, officers must be licensed. |
| Malpractice liability in a professional corporation | Liability for the person committing it AND P.C; NOT for other SHs though. |
| Pierce Corporate Veil | Generally, stockholders are not liable for the acts or debts of a corporation. A court can reach stockholders for acts or debts of a corporation only if they 1) abused privilege of incorporating; AND 2) fairness requires. In Mass, courts MAY pierce to avoid fraud or unfairness. |
| CEO/shareholder comingles personal and corporate funds, uses corporate card to pay for personal purchases, etc. Corp creditor unable to collect wants to reach the shareholder. | Alter Ego Theory or Identity of interests. Generally, stockholders are not liable for the acts or debts of a corporation. However, a court may pierce the corporate veil if the shareholder's failure to respect the separate corporate entity harmed creditors. Sloppy administration generally is not enough to PCV, but here the SH treated the corporation as his alter ego by treating the corporation and personal assets as interchangeable. Only the wrongdoing shareholder will be held liable. |
| S is a shareholder of Glowco, Inc., a corporation that hauls and disposes of nuclear waste. The corporation does not carry insurance and has an initial capitalization of $1,000. V is injured when one of the corporation's trucks melts down. Can V sue S? | Generally, stockholders are not liable for the acts or debts of a corporation. However, a court may pierce the corporate veil because the shareholders failed to invest enough to cover prospective liabilities. A court is more likely to pierce the corporate veil for a tort claimant rather than a contract claimant. Undercapitalization Theory (more likely in tort than contract) |
| SH Derivative Suit | Shareholder suing to enforce corporation's claim (could corp have brought this suit?) Note that suing the board for oppression in a close corporation is not a derivative suit but rather the shareholders direct claim to vindicate a breach of a duty owed to the shareholder. |
| Consequences | Generally recovery goes to the corporation. payment to corp, sh gets costs/atty fees if successful. No costs and atty's fees if no success, unless the suit brought substantial benefit to the corporation, which is unlikely in a losing situation. Shareholder/plaintiff will be liable to defendant if a judge finds that shareholder sued without reasonable cause. Res judicata applies - other shareholders cannot later sue on the same transaction. |
| Requirements for bringing a shareholder derivative suit | 1. Plaintiff must have owned stock when the claim arose (or take by operation of law from one who did) and own through litigation 2. fairly and adequately represent interests of corp 3. written demand on directors that corp bring suit (never excused) 4. sue 90 days after demand UNLESS corp rejects before OR irreparable injury to wait 5. Corp may move to dismiss IF the majority of disinterested shares or directors found in good faith, after reasonable inquiry, that suit not in the best interest of the corp. If a majority of the Board is tainted, then corp must show reasonable inquiry; otherwise burden on P. 6. Corporation must be joined (it did not assert the claim). Joined as a D initially. |
| Dismissal or settlement of a derivative suit | Requires court approval. Court can give notice to those who would be affected, and get their input on whether dismissal or settlement should be approved. |
| Voting Rights. | At least one class of stock must have unlimited voting rights. General rule is that the record stockholder votes (even if stock sold after record date). EXCEPT - corp doesn't vote reacquired stock; executor can vote dead sh stock; proxies for sh |
| Record date | Date for voter eligibility cut-off, can't be more than 70 days pre-meeting. |
| Proxy | writing, signed by record SH, directed to secr, authorizing another to vote (good for 11 mo). Revocable UNLESS says conspicuously it's not AND proxyholder has interest in the shares. |
| Voting Trust | written, filed w/ corp, transfer legal title to trustee, all other SH rights retained |
| Voting Agreement | Shareholders only (no directors), in writing and signed, specifically enforceable |
| Valid Corporate Act by Shareholders | unanimous written consent of all holders of all voting shares OR meeting satisfying quorum and voting rules. |
| Shareholder Meetings | Can be held anywhere; remote communication ok in non-public corp. |
| Annual shareholder mtg | to elect directors; w/i 15 months (or 6 mo of end of fiscal year). If not held, shareholder can petition the court to order. |
| Who may call a special shareholder mtg? | Can be called by Board or the holders of at least 10% voting shares (40% in pub co), OR someone else provided for in articles or bylaws. |
| Notice req'ts for shareholder meetings | Written notice required for every meeting - special and regular. Must be to every shareholder entitled to vote, 7-60 days before the meeting and include the when, where, why - statement of purpose. No business may be conducted at the meeting unless it is in the statement of purpose. Actions taken in violation of notice requirements void unless those not notified properly waive the defect. |
| Shareholder Waiver of notice requirements | express (writing and signed anytime and filed w/ minutes. Email/fax ok. ) OR implied (attend w/o objecting at outset). |
| Shareholder vote requirements | 1. quorum (majority of shares entitled to vote) (not lost if people leave); articles can require more 2. majority of those actually voting to pass (not maj of those there) 3. Cumulative Voting only in voting for directors and only if permitted by articles. |
| Cumulative voting | Only used in voting for directors if permitted by articles. Multiply the number of shares held by a shareholder by the number of directors open for election to determine number of votes that may be cast in any way for the director(s) of choice. Each candidate requires one more share than (# of vacancies +1)% of the vote to be elected. |
| Stock Transfer Restrictions | Upheld if reasonable under the circumstances (no undue restraint on alienation). The right of first refusal is ok so long as the corporation offers a reasonable price. Restrictions can be placed via the articles, bylaws, or by agreement. Action generally lies against the transferor - Cannot invoke against the transferee UNLESS the restriction is conspicuously noted on front and back of the certificate OR actual knowledge. |
| Right of director to Inspect and Copy the books and records of the corp | No need to making showing/written demand as would a SH. Director has a right of access for the performance of director's duties. |
| Right of shareholder to Inspect and Copy the books and records of the corp | Any shareholder with 5 day written demand stating which documents with particularity. If corporation does not allow inspect, the SH may move for a court order. If motion successful, SH will generally also recover costs and fees incurred in making the motion. |
| Shareholder right to inspect and copy routine documents | Unqualified right to inspect w/ 5 day written demand. Need not include purpose. Includes articles, bylaws, annual report, communications to shareholders, lists of directors and officers, and minutes of shareholder meetings. |
| Shareholder right to inspect and copy other corporate documents | Includes accounting, minutes of board meetings, record of SH. Requires written demand stating proper purpose (relating to role as SH, may be hostile to the board but not ok for removing an officer). |
| Distributions | Payments to shareholders in Board's discretion. Action to compel only a VERY strong showing of abuse of discretion. |
| Unlawful distribution | Corporation may make a distribution if it lost money last year, but it cannot make a distribution if it is insolvent OR distribution would render corporation insolvent. Insolvent = unable to pay debts as they come due OR assets less than liabilities (including liquidation preferences). |
| Liability for unlawful distribution | Directors personally liable for unlawful distributions as are SH who knew the distribution was unlawful when it was received. Strict liability for those directors assenting (remember dissent must be in writing), but consider the defense of good faith reliance. |
| Types of distributions | 1. Dividends, 2. repurchase of shareholder stock, 3. redeem stock. |
| Redeem stock | Forced sale to corporation at price set in articles. |
| Payment of dividends (types of shares and how they are allocated the dividends). | Preferred (pay first), participating (pay again), cumulative (add up), common. |
| Board of directors of corporation decides to declare dividends totaling $400,000. What dividend for 100,000 shares of outstanding common stock? | $4/share. |
| Board of directors of corporation decides to declare dividends totaling $400,000. What dividend for 100,000 shares of outstanding common stock and 20,000 shares of outstanding preferred stock with a $2 dividend preference? | $2/share of preferred stock ($40,000 total). $3.60/share of common stock ($360,000 total). |
| Board of directors of corporation decides to declare dividends totaling $400,000. What dividend for 100,000 shares of outstanding common stock and 20,000 shares of outstanding $2 preferred stock that is participating? | $5/share for preferred participating; $3/share for common stock. $40,000 set aside for the $2 preferred; but then those 20,000 shares get to participate as common, too - so from the $360,000 left, divide by 120,000 = $3/share of common. The participating preferred shares get divided of common plus divided of preferred. |
| Board of directors of corporation decides to declare dividends totaling $400,000. What dividend for 100,000 shares of outstanding common stock and 20,000 shares of $2 preferred that is cumulative and no dividends paid for three years? | $8 for preferred cumulative (4 years x $2 preference = $8). $8/share x 20,000 = $160,000 paid. $400,000 minus 160,000 = $240,000 to divide among common shares. $240,000/100,000 common shares = $2.40/common share. |
| Fundamental Corporate Changes | 1. Amendment of the articles 2. Mergers 3. Disposition of all or substantially all of the assets not in the ordinary course of business or share exchange. 4. Conversion (from one form to another). 5. Dissolution. |
| Requirements for Fundamental Corporate Changes | Board action AND notice of all SH (regardless of right to vote) AND approval by 2/3 shares entitled to vote. Dissenting shareholders may have right of appraisal. |
| Right of Appraisal | Right of a shareholder to force corp to buy shares at fair value IF - Merger, transfer substantially all assets, share exchange, some article amendments (those materially and adversely affecting SH's stock), conversion. BUT no right of appraisal IF listed on national exchange AND 1,000 or more shareholders. |
| REQUIREMENTS to perfect right of appraisal | Before the shareholder vote, file written notice of objection and intent to demand payment with the corporation. Then abstain or vote against AND make written demand after vote to be bought out. |
| Amendment of Articles | Board action and notice to all SH, SH approval by 2/3 of shares entitled to vote (not just 2/3 of those voting). BUT only need majority to change corporate name or change the number of authorized shares. Amended articles must be delivered to state secretary. |
| Mergers | Board action and notice to all SH of disappearing corp. 2/3 shares of Disappearing corp approve. Shareholder approval not required in a short-form merger (where 90% or more owned subsidiary merged into parents). Surviving company succeeds to all rights/liabilities. |
| Disposition of all/substantially all assets not in the ordinary course of business or share exchange | This is a fundamental change for seller (not for the buyer). Requires board action and notice to all of seller's SH, 2/3 of seller shares must approve. Document of share exchange must be filed with the state secretary BUT no filing req't for the sale of assets. Acquiring company not typically liable for debts unless express assumption or the purchasing corp is a mere continuation of the selling corporation (b/c the selling corp typically still exists). |
| Conversion | convert from one form of business to another. Req's board action and 2/3 approval of shares entitled to vote. Deliver articles of conversion to the state secretary. |
| Voluntary Dissolution | Req's board action and approval by 2/3 SH entitled to vote. Deliver articles of dissolution to state secretary. |
| Involuntary Dissolution | On court order following petition of 40% voting shares because of director deadlock threatening irreparable harm OR shareholder deadlock and failure for at least 2 annual meetings to fill vacant board spot. In the alternative, Court may just order buyout of petitioning shares (especially in close corp). |
| Creditor petition for corporate dissolution | If corp insolvent AND EITHER has unsatisfied judgment OR admits debt in writing. |
| Administrative (NOT judicial) Dissolution | Secretary state effects dissolution for failure to file reports OR pay taxes for 2 yrs OR corporation inactive OR for the public interest. Secretary must give notice and 90 days to fix the problem. |
| Winding up | After articles of dissolution are filed, or after court order of involuntary dissolution, corporation stays in existence to wind up or "liquidate." Four steps - 1. gather assets, 2. convert to cash, 3. pay creditors, 4. distribute remainder to shareholders pro-rata by share unless there is a dissolution or liquidation preference. Corporation cannot distribute to shareholders until it makes adequate provision for foreseeable liabilities. |
| Liquidation Preference | Pay-first BUT you still pay creditors first. |
| MA Uniform Securities Act (antifraud provision) | Prohibits in connection w/ offer, sale, purchase of security any of the following - (1) Device/scheme to defraud; (2) material misstatements of fact; (3) omission of fact necessary to make statements that were made not misleading; (4) any act or practice operating as fraud. Plaintiff must prove fraud (here, that D knowingly engaged - negligence never enough.) |
| MA Consumer Protection Act (93A) | prohibits unfair or deceptive practices and unfair methods of competition in any business or trade, including material misleading information in the sale of securities. |
| Material misleading information | something buyer would consider important in making decision. Company's worth, e.g. |
| Remedies for willful violation of 93A | Double or treble damages plus attorneys fees for typical WILLFUL violation, BUT in sale of securities, only actual damages plus attny fees. |
| Req'ts for filing under 93A | P must give demand letters 30 days before suit. If D replies within 30 days with a reasonable settlement offer, plaintiff cannot recover more than the offer. |
| 93A SOL | 4 yrs from when reasonable person would have learned of deceptive conduct |
| Sale of Controlling Interest | Controlling shareholder is one w/ a majority of shares or a minority of shares in a situation that gives her working control over the corp. B/c of control, shareholder can sell at a premium over value - "control premium." In Mass, the controlling shareholder has a fiduciary duty when selling control - even in a public corp - to conduct a reasonable investigation into the character and reputation of the buyer. Controlling shareholder can't sell board seats |
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