Term
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Definition
| Promoters are persons acting on behalf of a corporation not yet formed. |
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Term
| When does the corporation become liable on a PROMOTOR's preincorporation contracts? |
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Definition
When the corporation ADOPTS the contract by:
(1) express board of directors resolution OR
(2) implied adoption through knowledge of the K and acceptance of its benefits. |
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Term
| What does the promotor's liability for pre-incorporation contracts end? |
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Definition
| The promotor remains liable on pre-incorporation contracts until there has been a NOVATION. |
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Term
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Definition
| A novation is an agreement between the promoter, the corporation, and the other contracting party that the corporation will replace (nove) the promoter under the contract. |
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Term
| Who is liable if the promoter enters a K and the corporation is never formed? |
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Definition
| The promoter is liable until novation. |
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Term
| Who is liable if the promoter enters a pre-incorporation contract, and the corporation is formed, but merely adopts the K? |
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Definition
| Both the promoter and the corporation are liable on this contract. |
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Term
Fill in the blank.
Promoters are FINDUCIARIES of each other and the corporation. Therefore, promoters cannot _________________. |
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Definition
make a secret profit on their dealings with the corporation.
(1) Sale to corporation of property acquired by promoter BEFORE becoming a promoter --> profit recoverable by corporation only if sold for more than FMV.
(2) Sale to corporation of property acquired by promoter after becoming a promoter --> any profit recoverable by the corporation. |
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Term
Answer the following:
On 1/10, Paula begins working as a promoter for the Vegan Deli, Inc. On 3/10, Paula buys a ton of vegan deli meats for $10,000. On 4/3, Paula sells the vegan deli meat to the corp for $20,000. May the corporation sue Paula? |
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Definition
| YES- Paula is liable to her own corporation for the full profit made on the resale of that property that she bought while acting as a promoter. |
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Term
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Definition
persons or entities who make written offers to buy stock from a corporation not yet formed.
Note: a preincorporation offer for a corporation not yet formed is IRREVOCABLE for 6 months. |
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Term
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Definition
| An INCORPORATOR merely signs and files the articles of incorporation with the state. |
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Term
| What are the 5 requirements that the articles of incorporation must include for formation of a DE JURE CORPORATION? |
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Definition
APAIN
(1) Authorized shares- the max # of shares the corp is authorized to issue.
(2) Purpose- the general purpose and perpetual duration are presumed; specific statement of purpose and ultra vires rules
(3) Agent- and Address of registered office (registered agent is the corporation's official legal representative)
(4) Incorporators
(5) Name of corporation (must include some indicia of corporate status (inc., corp., etc.) |
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Term
| Note: the corporation need not adopt bylaws. The board has power to adopt and amend the by-laws, unless the Articles give the power to the Shareholders. |
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Definition
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Term
| DE FACTO CORPORATION DOCTRINE |
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Definition
| A business failing to achieve de jure corporate status nonetheless is treated as a corporation if the organizers have made a good faith, colorable attempt to comply with corporate formalities and have no knowledge of the lack of corporate status. |
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Term
| What is the LEGAL significance of formation of a corporation? |
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Definition
(1) a corporation is a SEPARATE LEGAL PERSON.
(2) Generally, shareholders are not personally liable for debts of corporation. This is the principle of limited liability, which means that the shareholder is liable only for the price of her stock. |
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Term
| PIERCING THE CORPORATE VEIL |
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Definition
General Rule: a shareholder is not liable for the debts of a corporation.
Except: Courts in equity may pierce the corporate veil to avoid fraud or unfairness. |
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Term
| What are the 2 situations under which a court in equity will pierce the corporate veil? |
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Definition
(1) ALTER-EGO- failure to observe sufficient corporate formalities OR
(2) UNDERCAPITALIZATION- failure to maintain sufficient funds to cover foreseeable liabilities. |
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Term
| Assess the following: X is the shareholder and CEO of Glowco, Inc, a corporation that hauls and disposes of nuclear waste. Glowco does not carry insurance. Glowco has an initial capitalization of $1,000. X commingles personal and corporate funds. V is injured when one of Glowco's trucks melts down. Can V sue X? |
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Definition
| YES- As a rule, shareholders like X are not liable for corporate obligations. Except, the court will pierce the corporate veil to avoid fraud or unfairness. Here, Glowco is undercapitalized because it operates a dangerous business, has no insurance, and minimal capitalization. Moreover, X also has failed to observe sufficient formalities by commingling funds. The court will pierce the corporate veil to render X liable to V. |
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Term
| Remember: courts are generally more willing to pierce the corporate veil for a tort victim than for a contract claimant. |
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Definition
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Term
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Definition
| A corporation that is incorporated outside the state that wishes to engage in regular intrastate business must qualify by filing a "CERTIFICATE OF AUTHORITY" with the Secretary of State that includes the same information required in the Articles of Incorporation (APAIN). |
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Term
| The next set of cards focus on ISSUANCE OF STOCK: WHEN A CORPORATION SELLS ITS OWN STOCK |
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Definition
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Term
| Consideration--what must the corporation receive when it issues stock? (simply list the 5 issues) |
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Definition
(1) par value
(2) acquiring property with par value stock
(3) no par (means "no minimum issuance price")
(4) treasury stock
(5) consequences of issuing par stock for less than par value |
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Term
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Definition
= "the minimum issuance price"
Ex: if C corp is selling 10,000 shares of $3 par stock, it must receive at least more than the minimum issuance price, so at least $30,000 for an issuance of 10,000 $3 shares. |
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Term
| ACQUIRING PROPERTY WITH PAR VALUE STOCK |
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Definition
A corporation can issue stock at par value to acquire property.
Ex: C corp can issue 5,000 shares of $3 par stock to acquire Green Acres.
Any valud consideration can be received so long as the board values the consideration to be worth at least par value. |
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Term
| NO PAR, or "No minimum issuance price" |
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Definition
| means any valid consideration may be received if deemed adequate by the board. |
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Term
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Definition
// no par stock
Treasury stock is stock that was previously issued and had been reacquired by the corporation. It can then be re-sold. Treasury stock is deemed to be no par stock (no minimum issuance price). |
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Term
| CONSEQUENCES OF ISSUING PAR STOCK FOR LESS THAN PAR VALUE? Who is liable? |
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Definition
| The directors are liable for authorizing a below par issuance. Also, the buyers/owners of shares of stock are liable and must pay fill conisderation of shares (at least par value) and thus the corporation can recover from the buyer who buys for less than par value. |
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Term
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Definition
A preemptive right is the right of an EXISTING SHAREHOLDER to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock for cash.
Note: preemptive rights do not exist unless they are expressly granted in the Articles of Incorporation. |
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Term
| 4 Statutory Requirements of DIRECTORS |
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Definition
(1) corporations must have a board with at least 1 member.
(2) Shareholders elect directors
(3) Shareholders can remove a director before her time expires w/ or even w/o cause.
(4) Valid meeting. |
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Term
| What are the 6 VALID MEETING statutory requirements for directors? |
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Definition
1. Unless all directors consent in writing to act w/o a meeting, a meeting is required. (Every board action must take place at a valid meeting.)
2. Notice of directors' meeting can be set in the bylaws.
3. Proxies are not allowed. ALso, no voting agreements. BUT conference calls are now generally valid. (1 vote, 1 board member at a time.)
4. Quorum--must have a majority of all directors to take action (unless a different percentage is required in by laws).
5. Vote--to pass a resolution, however, all that is required is a majority vote of those present.
6. Each director is presumed to have concurred in Board action unless her dissent or abstention is recorded in writing (i.e., through minutes or letter to corporate secretary). |
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Term
| The next cards consider the LIABILITY OF DIRECTORS TO THEIR OWN CORPORATION AND SHAREHOLDERS |
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Definition
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Term
| Rule: Directors have a DUTY TO MANAGE teh corporation. Directors may delegate management functions to _________________. |
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Definition
| a committee of one or more directors that recommends action to the Board. |
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Term
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Definition
| In managing the corporation, the directors are protected from liability by the BJR. The BJR is a PRESUMPTION that the directors manage the corporation in good faith and in the best interests of the corporation and its shareholders. As such, directors will not be liable for innocent mistakes of business judgment. |
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Term
| Directors, however, are __________ who owe duties of care and loyalty. |
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Definition
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Term
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Definition
| A director owes the corporation a duty of care. She must act with the care that a prudent person would use with regard to her own business, unless the Articles have limited director liability for a breach of the duty of care. |
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Term
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Definition
| A director owes the corporation a duty of loyalty. A director may not receive an unfair benefit to the detriment of the corporation or its shareholders, unless there has been material disclosure and independent ratification. |
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Term
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Definition
| A director who receives an unfair benefit to herself (or relative, or another one of her businesses) in a transaction with her own corporation. |
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Term
| USURPING CORPORATE OPPORTUNITIES |
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Definition
| A director receives an unfair benefit by usurping for herself an opportunity which the corporation would have pursued. |
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Term
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Definition
Directors may defend a claim by obtaining independent ratification through:
(1) a majority vote of independent directors
(2) a majority vote of a committee of at least 2 independent directors, OR
(3) a majority vote of shares held by independent shareholders.
--> absolve director of liability. |
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Term
| OFFICERS--what 4 duties do officers owe the corporation? |
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Definition
(1) Officers owe the same duties of care and loyalty of directors.
(2) Officers are AGENTS of the corporation and bind the corporation by their authorized activities.
(3) Corporations must have a PREZ, SEC, and TREASURER.
(4) Directors have virtually unlimited power to select officers, and may remove them from office at any time--but the corporation will be liable for breach of contract damages (i.e., officers serve at the whim of directors, but can get K damages for termination). |
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Term
| Define INDEMNIFICATION of Directors and Officers |
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Definition
| A director or officer has incurred costs, attorney's fees, fines, a judgment or settlement in the course of corporate business; she seeks reimbursement from the corporation. |
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Term
| The corporation may never indemnify a director who _______________. |
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Definition
| is held liable to their own corporation. |
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Term
| The corporation must always indemnify if ______________. |
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Definition
| the director wins a lawsuit against any party. |
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Term
The corporation may indemnify a director if (2 things):
_______________,
_______________. |
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Definition
(1) LIability to third parties or settlement with the corporation.
(2) Director or officer shows that she acted in good faith and that she believed her conduct was in the corporation's best interest. |
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Term
| WHO may determine whether to grant permissive indemnity? |
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Definition
(1) a MAJORITY of independent directors
(2) a MAJORITY of committee of independent directors
(3) a MAJORITY of shares held by independent shareholders OR
(4) A special lawyer's opinion may recommend indemnity. |
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Term
| SHAREHOLDER DERIVATIVE SUIT |
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Definition
In a derivative suit, a shareholder is suing to enforce the corporation's cause of action.
Always ask: could the corporation have brought this suit? If YES, it is a derivative suit (i.e., derives from corporation's own cause of action). |
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Term
| What are the 2 requirements for bringing a shareholder derivative suit? |
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Definition
(1) contemporaneous stock ownership = you must own at least 1 share of stock when the claim arose and in most jdx throughout the entire litigation.
(2) must generally make demand on directors that they cause their own corporation to bring suit = demand must be made and rejected or at least 90 days must have passed since demand was made. |
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Term
| Who has the right to vote at an upcoming meeting where voting occurs? |
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Definition
| Only the owner on the record date has the right to vote the shares. Record date is the voter eligibility cut off date set by the board on any day up to 70 days before the meeting. |
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Term
Shareholder Voting by Proxies
A proxy is ________________________. |
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Definition
A writing (fax or email generally valid),
signed by record shareholder,
directed to secretary of corporation,
authorizing another to vote the shares,
valid for only 11 months. |
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Term
| Proxies ARE revocable unless: |
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Definition
(1) they must be labeled IRREVOCABLE AND
(2) must be coupled with an interest. |
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Term
| Where do shareholders vote? |
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Definition
(1) a properly noticed annual meeting oR
(2) specially noticed special meeting (called by the board, the PREZ or the holders of 10% of voting shares). |
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Term
| PROPERLY NOTICED ANNUAL MEETING |
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Definition
| every corporation must have an annual meeting at which at least 1 director position is open for election. Therefore, notice requires the time and place for annual meeting. |
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Term
| SPECIALLY NOTICED SPECIAL MEETING |
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Definition
| These meetings are meetings of the shareholders to vote on proposals or fundamental corporate changes. The notice must contain the meeting's special purpose b/c nothing else can happen at the meeting that is not in that special notice. |
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Term
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Definition
There must be a quorum represented at the meeting where voting takes place. Determination of a quorum focuses on the number of shares represented, not the number of shareholders. A quorum requires a majority of outstanding shares when the meeting begins, unless otherwise provided in the Articles.
*Shares, not shareholders.
*majority of all shares must be represented when the meeting BEGINS. |
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Term
| Rule: If a quorum is present, action is approved if the votes cast in favor of the proposal EXCEED the votes cast against the proposal. |
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Definition
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Term
| POOLED or BLOCK VOTING METHODS |
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Definition
Shareholders who own relatively few voting shares decide that they can increase their influence by agreeing to vote alike. How can they do so?
(1) VOTING TRUST = a formal, written agreement delegating voting power to a trustee which is valid for no more than 10 yrs unless extended by the agreement
(2) SHAREHOLDER VOTING AGREEMENT = a written agreement to vote shares as required by the agreement itself. Note: There is no time limit or formalities except for the writing itself. |
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Term
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Definition
Available for directors only and only available if expressly granted in the Articles of Incorporation.
Under cumulative voting, you may multiply the number of shares times the number of directors to be elected. (shares x slots) |
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Term
| TRADITIONAL, STRAIGHT VOTING?? |
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Definition
| Under traditional, straight voting, you may vote all of your shares for one director. |
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Term
| Rule: ANY shareholder shall have access upon notice and at proper times to examine the books and records of the corporation. |
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Definition
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Term
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Definition
| Dividends are to be declared in the Board's discretion unless the corporation is insolvent or would be rendered insolvent by the dividend. (Board members are liable personally for unlawful distribution, but have a defense of good faith reliance on financial officer's representations regarding solvency.) |
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Term
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Definition
(1) common stock - get paid last and paid equally from dividend amount
(2) Preferred stock with $X dividend preference - these shares have the right to be paid first $X per share
(3) Shares of $X preferred that are participating - these shares get paid TWICE: first they get $X per share, and then the equal amount to common shares in the second distribution.
(4) $X preferred that are cumulative (and no dividends in last Y years) - these shares get $X x Y years paid out first to the cumulative prefered shares. The remainder will be divided by the shares of common stock to be distributed equally to common stock shareholders. |
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Term
| CLOSELY HELD CORPORATIONS |
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Definition
| Shareholder agreements to eliminate corporate formalities. |
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Term
| What are the 2 requirements for Closely-Held Corporations? |
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Definition
(1) Unanimous shareholder election in the Articles, the Bylaws, or a filed agreement
(2) Usually a reasonable share transfer restriction |
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Term
| What are the consequences of a Closely-Held Corporation? |
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Definition
(1) No piercing the corporate veil, even if you fail to observe formalities
(2) possible subchapter S corp stats (taxed as if partnership) and avoid corporate taxation. |
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Term
| PROFESSIONAL CORPORATIONS |
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Definition
| Licensed professionals may incorporate as PCs (lawyers, accountants, medical professionals, etc.). |
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Term
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Definition
(1) Organizers must file Articles with the name designated "Professional Corporation" or "PC."
(2) The shareholders must be licensed professionals.
(3) The corporation may practice only one designated profession. |
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Term
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Definition
(1) The professionals are liable personally for their own malpractice.
(2) But, the professionals are not liable personally for each other's malpractice or the obligations of the corporation itself. |
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Term
| RULE: Shareholders are not liable for corporate obligations. List the 3 Exceptions. |
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Definition
(1) Piercing the corporate veil to render shareholder liable
(2) controlling shareholders owe a fiduciary duty to minority shareholders and
(3) controlling shareholders are liable for selling corporation to a party who loots the corporation, unless reasonable measures were taken to investigate the buyer's reputation and plans for the corporation. |
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Term
| List the 5 RECOGNIZED FUNDAMENTAL CORPORATE CHANGES |
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Definition
(1) Merger
(2) Consolidation
(3) Dissolution
(4) Fundamental Amendment of the Articles
(5) Sale of Substantially All of the Corporation's Assets |
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Term
| List the 5 Procedural Steps for Fundamental Corporate Changes |
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Definition
(1) Resolution by Board at a valid meeting
(2) Notice of Special Meeting
(3) approval by a majority of all shares entitled to vote and by a majority of each voting group that is adversely affected by the change
(4) Possibility of dissenting shareholder right of appraisal- a shareholder who does not vote in favor of a fundamental change has the right to force the corporation to buy her shares at fair value (but must take proper actions to perfect the right)
(5) File notice with the State (ex: Articles of Merger) |
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Term
| What are the actions by shareholder to perfect the RIGHT OF APPRAISAL? |
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Definition
(1) Before shareholder vote, file a written notice of objection and intent to demand payment
(2) do not vote in favor of the proposed change
(3) make prompt written demand to be bought out. |
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Term
| What happens if the shareholder and corporation cannot agree on fair value? |
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Definition
| The court now has the power to appoint an expert appraiser to evaluate the shares and the appraisal is binding on the parties. |
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Term
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Definition
Elements:
(1) SCIENTER (an intent to deceive)
(2) Deception (through material misrepresentation or insider trading)
(3) In connection with the actual purchase or sale of securities.
In addition, in a private action for damages, investors must also prove:
RELIANCE and
LOSS CAUSATION |
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Term
| SHORT-SWING TRADING PROFITS § 16(b) |
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Definition
16(b) applies to BIG CORPORATIONS, BIG SHOT Ds, and Buying and Selling of stock within a single 6 month period.
When 16(b) applies, all "profits" from such short swing trading are recoverable by the corporation. If, within 6 months before or after any sale, there was a purchase at a lower price than the sale price, there is profit. |
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Term
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Definition
| No knowingly false filings and no benefits during falsehoods or black out periods. |
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