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Corporations

Terms in this set (57)

Corporations Fact Pattern Types
1. Organization of a corporation
2. Issuance of stock
3. Directors and officers
4. Shareholders
5. Fundamental corporate changes
6. Federal securities
Steps to Organize a Corporation
Incorporators
Articles of Incorporation (but not bylaws)
Act (delivery to secretary of state)
Articles of Incorporation Requirements
Name of Corp
Name of Incorporators
Name of Directors
Name of Registered Agent
Purpose--some states omit this
Corporate Structure (authorized stock, shares per class, voting rights)
Name Requirements
Must include company, corp., or ltd.
Ultra Vires Rules
If there is a specific statement of purpose in the articles of incorporation, are valid under the modern trend but shareholders can seek an injunction and managers are liable for harm to the corp.
Corporation Double Taxation
Corp pays tax and individual Distributions are taxed as income
Avoiding the Double Tax
Form an S corp instead of a C corp.
Limitations of S Corp
No more than 100 shareholders (all human and citizens)

One class of stock

Not publically traded
De Facto Corporation (abolished in many states)
Partners fail to create corporation

Shareholders unaware of the failure to create corporation

Good faith effort to comply with statute

Exercised corporate privileges
Corporation by Estoppel (abolished in many states)
Partners fail to create corporation

Shareholders unaware of the failure

Treating the business as a corporation estops the party from denying that it is a corporation
Amending or Repealing Bylaws
Vote of shareholders
In many states directors as well
Pre-incorporation Contracts Analysis
Promoter enters into an unformed corp.

Corporation is liable if it adopts the contract (express by the board or implied by accepting a benefit

Promoter is liable unless the contract states otherwise until novation
Foreign Corporations (outside the state)
Must qualify and pay the fees to do business in the state (more than sporadic or property ownership)

Certificate of authority (good standing, information on articles, registered agent)
Result of Foreign Corp Transacting without Qualifying
Civil Fine
Cannot sue
Issuing Stock Analysis
Make sure corp is selling

Consideration
Revocation of pre-incorporation subscriptions
Irrevocable for 6 months unless it states otherwise or all subscribers agree
Revocation of post-incorporation subscriptions
Revocable until accepted by corporation
Consideration for Issuing Stock
Money, tangible or intangible property, and services already performed

In some states, promissory notes and future services
Par Value
Minimum issuing price stated in articles of incorporation
Treasury Stock
Stock the company issued and reacquired (authorized and corp can resell)
Watered Stock
Stock that is sold for under par

Directors liable if knowingly sold below par

Buyer is liable (charged with notice of par value)

Third party transferees not liable if unaware of the par value
Preemptive Right
Antidilution provision that allows shareholder to buyer stock whenever there is a new issuance of stock for money to maintain percentage ownership
Election of Board of Directors
Shareholders at annual meeting

Removal with or without cause unless there is a staggered board
Board Actions
Unanimous agreement in writing

At a meeting with a quorum

Ratification of void acts
Meeting notice required
for special meetings (or actions are void unless there is waiver or attendance)
Actions committees cannot take
Declare dividends
Set director compensation
Fill board vacancy
Suing Directors
Duty of Care
Duty of Care for Directors
Burden on Plaintiff
In good faith and do what a prudent person would do if similarly situated

Can be limited by articles
Examples of Director Breaching Duty of Care
Nonfeasance (if it caused loss)
Misfeasance (if business judgment rule is overcome because the director is not a guarantor of success)
Business Judgment Rule
Made in good faith
Informed
Rational Basis

(Does not apply when there is a conflict of interest)
Duty of Loyalty
Burden on Defendant
Act in good faith with reasonable belief that the action was in the corporation's best interest.
Examples of Breach of Duty of Loyalty
Interested Director Transaction

Competition

Usurpation of corporate opportunity (inability is not a defense)

Improper Loan
Interested Director Transaction analysis
Void, unless:

(1) Fair

OR (some make this an 'and')

(2) Conflict Disclosed and ratified by Majority of Disinterested Directors or Majority of Disinterested Shares.
Waste Analysis
Same as duty of care: In good faith and do what a prudent person would do if similarly situated
Corporate Opportunity
Business Line

Interest or Expectancy in

Found on company time or with company resources
Improper Loan Test
Reasonably expected to benefit corp.
Director Liability
Director is presumed to concur in an action unless abstention is noted in writing.

Unless absent or good faith reliance on information
Indemnification Barred
Director is held liable to the corporation or to have received an improper personal benefit
Indemnification Mandatory
Successful in defending on the merits or otherwise (wins a judgment)
Indemnification Permissive
Does not fall into barred or mandatory categories (settlement)

Must show good faith and reasonable belief of best interest
Close Corporation (run by shareholders)
Few shareholders
Not publically traded
Limitations on Close Corporation with no Board
Articles must be approved by all shareholders

OR

Unanimous written agreement
Piercing the Corporate Veil
Close corporation

Abuse of privilege of incorporating

Fairness requires holding them liable
Examples of Abusing Privilege of Incorporating
Mingling funds

Using corporate funds for personal matters

Undercapitalization when formed - intentionally having little money in corp to make corp judgment proof
Shareholder Derivative Action
If the corporation could have brought the suit, then it is derivative.

Stock ownership when claim arose and throughout suit.

Exhausted non futile corporate remedies (written demand)

Join corporation as defendant

Subject to dismissal if independent investigation shows the suit is not in the corporation's best interest
Irrevocable Proxy
Coupled with an interest (e.g. an option to buy)
Voting Trust
10 yr max

Written agreement

Copy to corp

Transfer of legal title to trustee

Trust certificates retain all rights except voting
Voting Agreement
In writing and signed

(specific performance not always a remedy)
Cumulative Voting
During a director election, shareholders can use their votes for each seat on a single director.
Limitations on Distributions
Must come from earned surplus, stated capital, or capital surplus

Modern view only limits in cases of insolvency
Fundamental Changes
Amending articles, selling off assets, merging,
Fundamental Change Requirements
Board action
Board proposal to shareholder
Shareholder vote (of those entitled to vote, not just those present)

Dissenters get right of appraisal if the change qualifies unless there are more 2000 shareholders or listing on national exchange
Fundamental Changes that Trigger right of Appraisal
Merger or Consolidation

Transfer of all or substantially all assets
Involuntary Dissolution (court can opt to order buy out)
Director abuse, waste, misconduct

Director deadlock that causes harm

Shareholders fail to elect board vacancy at consecutive annual meetings
Winding Up
Gather all assets

Convert to cash

Pay creditors

Distribute remainder to shareholders according to liquidation preference.
Rule 10b-5 Against Deceit
Deal (buy or sell) uses instrumentality of interstate commerce

Prohibits misrepresentation, insider trading, and tipping

Involves a material fact

Allows suit by SEC or stock buyers or sellers
Rule 16(b) strict liability for insiders buying and selling stock
Corporation's claim

Reporting corporations (listed or 500 shareholders and $10m in assets)

Claims can be brought against directors, officers, or shareholders owning over 10% both at time of buy and sell

Profit--within 6 months there is a better price (sale price > buy price within 6 months after)

All profits are recoverable (but only of shares bought AND sold within the 6 month period)
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