Term
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Definition
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Term
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Definition
| One or more incorporation signing articles and deliver them to SoS |
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Term
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Definition
Articles of Incorporation
- Contract between the corporation and the shareholders.
- Contract between the corporation and the state
Contents: Name, incorporator, director, registered agent, duration, purpose, and capital structure |
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Term
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Definition
Incorporators have notarized articles delivered to the Secretary of State and pay required fees. SoS accepts, it is conclusive proof of valid formation.
Have de jure corporation |
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Term
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Definition
| Presume perpetual existence. Corporations can last forever, unless the Articles state that it will have a shorter term. |
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Term
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Definition
General purpose presumed; any lawful purpose permitted
If specific purpose listed, then activities beyond scope are ULTRA VIRES
Common Law:
K could be voided as beyond company's capacity
Modern:
- K valid as to third parties
- Shareholders can seek an injunction to stop an ultra vires act
- Corporation itself can sue responsible managers for ultra vires losses |
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Term
| Capital Structure (Formation) |
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Definition
Articles must include:
- authorized stock,
- number of shares per class, and
- information on voting rights and preferences of each class |
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Term
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Definition
Authorized stock – maximum number of shares the corporation can sell.
Issued stock – number of shares the corporation actually sells.
Outstanding stock – shares that have been issued and not reacquired. |
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Term
| Legal significance of formation |
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Definition
- Internal affairs of a corporation (e.g., roles and duties of directors, officers, and shareholders) are governed by law of the state in which the corporation is formed.
- A corporation is a separate legal person.
- Taxed on its profits; in addition, shareholders are taxed on distributions.
- Limited liability. Shareholders generally can only lose the amount that they invested in the company |
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Definition
| Has no more than 100 shareholders, all of whom are human and U.S. citizens or residents. There is only one class of stock and it is not publicly traded. |
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Term
| Failure to form de jure corporation results in |
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Definition
- De Facto Corporation
- Corporation by estoppel |
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Term
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Definition
- There is a relevant incorporation statute..
- The parties made a good faith, colorable attempt to comply with the statute. AND
- Some exercise of corporate privileges (acting like we have a corporation).
If the doctrine applies, the business is treated as a corporation for all purposes except in an action by the state. |
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Term
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Definition
One who treats a business as a corporation may be estopped from denying that it is a corporation.
Contract cases only - NOT tort cases because the premise of estoppel is that you assumed the risk of limited liability, but actually need conscious decision made like made through contract |
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Term
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Definition
- Not required and not filed with state
- Used for internal governance, e.g., responsibilities of officers, times and places for regular meetings of the board, methods of giving notice, etc.
- Adopted by Board at org meeting
- Amend or repeal by shareholders
- Articles control if conflict |
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Term
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Definition
| A person acting on behalf of a corporation not yet formed. She might enter into a contract on behalf of a corporation not yet formed. |
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Term
| Liability of the promoter |
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Definition
Unless the contract clearly provides otherwise, the promoter is liable on pre-incorporation contracts until there is a novation.
A novation is an agreement of the promoter, the corporation, and the other contracting party that the corporation will replace the promoter under the contract. Need to be explicit. |
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Term
| Liability of Corporation (pre-incorporation) |
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Definition
The corporation is not liable on pre-incorporation contracts until it adopts the contract.
- Express - board takes an action adopting the contract
- Implied - corporation accepts the benefits of the contract
Functionally equivalent of ratification
NOTE: Adoption is NOT same as novation. Promoter still liable until relieved. |
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Term
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Definition
A foreign corporation is one incorporated outside this state.
Foreign corporations transacting business in this state must QUALIFY and pay prescribed fees.
- Transacting business means the regular course of intrastate (not interstate) business activity.
- Qualify by getting ltr of good standing from home state SoS, have registered agent in state, pay fees
Failure to QUALIFY
- Civil fine
- Cannot sue in state (but can be sued and defend) |
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Term
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Definition
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Term
| Subscription (Stock issuance) |
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Definition
Written offers to buy stock from corporation
Pre-incorp subscription - Not revocable for six months
Post-incorp subscription - revocable until acceptance |
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Term
| Consideration (Stock issuance) |
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Definition
Form:
- money (cash or check)
- tangible or intangible property
- services already performed for the corporation
- promissory notes (not all jdx)
- future services (not all jdx)
Amount:
- par: minimum issuance price
- no par: no minimum issuance price; Board sets |
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Term
| Treasury stock (Stock issuance) |
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Definition
| This is stock the company issued and then reacquired. It is considered authorized but unissued, and the corporation can then resell it. If it does, the board sets any issuance price it wants. |
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Term
| Pre-emptive rights(Stock issuance) |
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Definition
A pre-emptive 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 money (cash or its equivalent, like a check).
Must be explicit in articles. |
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Term
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Definition
Adult
Number: One or more
Election: initial directors names in articles; thereafter, elected by shareholders at annual meeting
Term: entire board elected each year unless staggered board
Removal: Vote of a majority of shares entitled to vote (with or without cause)
Vacancy: Appointed by board or shareholders; unless crated by shareholders, then shareholders select replacement |
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Term
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Definition
| Unanimous agreement in WRITING or MEETING |
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Term
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Definition
Notice: NO for regular meetings; YES for special meeting
- Failure to give notice voids whatever happens at meeting, unless the directors not notified waive notice defect.
Proxy: NO for directors; YES for shareholders
Quorum: Majority of ALL directors to do biz (unless bylaws say different); can be lost if people leave
Voting: Majority of those PRESENT |
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Term
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Definition
Manages the business of a corporation. So it sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corporate changes to shareholders, etc.
- c.f. general partnership where each partner manages; here the owners (shareholders) do not manage - it's the board instead.
Can delegate to cmte, but cmte cannot fill vacancies or declare dividens |
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Term
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Definition
A director owes the corporation a duty of care. She must act in good faith and do what a prudent person would do with regard to her own business.
Burden on Pl |
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Term
| Nonfesance (Breach of Duty of Care) |
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Definition
Director does nothing.
ANALYSIS
- DoC standard
- Apply to facts
- Liable only if his breach caused a loss to the corporation |
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Term
| Misfeasance (Breach of Duty of Care) |
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Definition
Board does something that hurts the corporation – so causation in these cases is clear.
ANALYSIS
- DoC standard
- Apply to facts
- Liable only if the directors' action caused loss and was arguably imprudent
- Not liable if meet BJR |
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Term
| Business Judgment Rule (Breach of Duty of Care) |
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Definition
A court will not second-guess a business decision if it
(1) was informed,
(2) was made in good faith,
(3) was made without conflicts of interest, and
(4) had a rational basis.
Allows directors to take risk to ensure appropriate return |
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Term
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Definition
A director owes the corporation a duty of loyalty. She must act in good faith and with a reasonable belief that what she does is in the corporation’s best interest.
Burden on the defendant
BJR DOES NOT apply |
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Term
| Interested director transaction (Duty of Loyalty) |
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Definition
This is any deal between the corporation (on the one hand) and one of its directors, or a close relative of a director, or another business of the director (on the other hand).
**Transaction per se invalid**
ANALYSIS
- DoL std
- Transaction will be set aside unless
(1) fair to the corporation when entered, OR
(2) interest and the relevant facts were disclosed or known AND approved by either of these: majority of disinterested directors OR majority of disinterested shares |
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Term
| Competing ventures (Duty of Loyalty) |
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Definition
ANALYSIS
- DoL std
- A direct cannot compete with her corporation. A director is a fiduciary
Remedy: Constructive trust on profits |
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Term
| Corporate Opportunity Definition (Duty of Loyalty) |
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Definition
Something the company has an interest or expectancy in
OR
Something the director found on company time or company resources |
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Term
| Corporate Opportunity (Duty of Loyalty) |
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Definition
ANALYSIS
- DoL std
- Director cannot usurp a corporate opportunity. Director cannot take it until he
(1) tells the board about it and
(2) waits for the board to reject the opportunity
**Company financial inability not a defense**
Remedy: Corp gets profits via constructive trust |
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Term
| Bases for Director Liablity |
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Definition
- Duty of Care
- Duty of Loyalty
- Ultra vires acts
- Improper distribution
- Improper loans |
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Term
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Definition
Sarbanes-Oxley generally forbids loans to executives in large, publicly traded corp.
Loans ok if rsnbly expected to benefit corporation; purely personal loans are problematic |
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Term
| Actions giving rise to director liablity |
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Definition
A director is presumed to concur with board action unless her dissent or abstention is noted in writing in corporate records.
Writing (oral not enough)
- minutes
- delivered in writing to the presiding officer at the meeting or
- written dissent delivered to the corporation immediately after the meeting.
-- Cannot dissent if you voted for the resolution at the meeting. |
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Term
| Exceptions/defense to director liablity |
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Definition
Absent director is not liable for stuff done at the meeting she missed
A director is entitled to rely in good faith on information (including financial information) presented by an officer, employee, or committee (of which the relying director was not a member), or professional reasonably believed competent. This is a defense to liability. |
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Term
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Definition
Status: Agents of corp
Holder: One person can hold multiple
Selection and removal: Board, which also sets compensation
Note: SHAREHOLDERS hire and fire directors, but the BOARD hires and fires officers. Shareholders do NOT hire and fire officers. |
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Term
| Indemnification of Board and Officers |
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Definition
Not allowed: If director held liable to corporation or was held to have received an improper personal benefit
Mandatory: If director is successful in defending, on the merits or otherwise.
Permissive: If director acted in GOOD FAITH and acted with reasonable belief that her actions were in the company's best interests. |
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Term
| Court ordered indemnification of Board and Officers |
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Definition
| If it is justified in view of all the circumstances. Limited to costs and attorneys' fees (cannot include judgment). |
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Term
| Eliminating director liability in articles |
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Definition
Articles can eliminate director liability to the corporation for damages, but not for intentional misconduct, usurping corporate opportunities, unlawful distributions, or improper personal benefit.
**Can't eliminate liability for duty of loyalty breaches** |
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Term
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Definition
(1) Close corporation
(2) Stock not traded on national exchange and
- In the articles or bylaws and approved by all shareholders OR
- By unanimous written shareholder agreement
(3) Professional corporation
- Articles must state purpose of practice
- Directors, officers, and shareholders are licensed professional
- Not liable for corp obligations or other professional's malprac
Fiduciary duties: Managing shareholder owe duties of care and loyalty
- May also owe a duty not to oppress other managing shareholder |
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Term
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Definition
Std: Shareholders have limited liability, but can be liable if the court pierces the corporate veil (PCV)(close corporations only)
Occurs when
- Corp formalities have been ignored, treat asets as own and injustice results (alter go)
- Corp inadequately capitalized (under capitalization)
- Necessary to prevent fraud |
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Term
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Definition
ANALYSIS
- PCV std
- X's failure to respect the separate corp entity harmed creditors
(1) Harmed the corp by treating corp assets like they were his own
(2) Unfair if creditors not getting paid (if corp can pay, no PCV)
**Only wrongdoing shareholder liable** |
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Term
| Undercapitalization (PCV) |
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Definition
ANALYSIS
- PCV std
- Corporation was undercap when formed (Shareholder fails to invest enough to cover company's rnsbl foreseeable liability)
**Courts may be more willing to PCV for a tort victim than for a contract claimant**
- K claimants assume the risk of limited liability - they make a conscious decision. |
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Term
| Derivative suit generally |
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Definition
Shareholder is suing to enforce the corporation's claim, not her own personal claim. It’s a case in which the corporation is not pursuing its own claim, so a shareholder steps in to prosecute it for the corporation.
**Occurs if corporation could have brought suit** |
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Term
| Requirements for derivative suit |
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Definition
- Stock ownership when the claim arose and throughout the suit
- Adequate representation of the corporation’s interest.
- Must make a written demand on the corporation that the corporation bring the suit. And cannot sue until 90 days after making the demand.
(some jdx don't req demand if it would be futile, e.g. majority of the directors will be a defendant in the suit)
- The corporation must be joined – but as a defendant.
- Settle or dismiss a derivative suit only with court approval. |
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Term
| Results of derivative suit |
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Definition
Shareholder WINS: money judgment goes to corp and shareholder gets costs and attorneys' fees
Shareholder LOSES: NO cost recovery and liable for defendant's costs and attorney's fees |
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Term
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Definition
The “record shareholder” as of the “record date” has the right to vote.
Quorum: Requires a majority of outstanding voting SHARES
- Not lost if people leave mtg
Voting: An action will be deemed approved if votes cast in favor of action exceed the votes cast against the action
Cumulative voting - only for electing directors; gives small SH a better chance of electing someone to board; must be in articles |
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Term
| Shareholder Meeting and Notice |
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Definition
Meetings:
- Annual meeting: to elect directors
- Special meeting can be called by (1) the board or
(2) the president, or
(3) the holders of at least 10 percent of the voting shares, or
(4) anyone else authorized in the bylaws.
Notice:
- Written notice to every shareholder entitled to vote between 10-60 days before the meeting.
- Contents: time and place of the meeting; For special meetings, must also state the purpose of the meeting. (Note: Cannot do anything not stated in the notice)
- Failure to give proper notice to all shareholders: action taken at the meeting is void unless those not sent notice waive the notice defect |
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Term
| Exceptions to shareholder voting general rule |
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Definition
- Treasury stock - The corporation re-acquires stock before the record date, so it is the owner of this “treasury stock” as of the record date.
- Death of shareholder.
- Proxy |
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Term
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Definition
A proxy is a
(i) writing,
(ii) signed by record shareholder,
(iii) directed to secretary of corporation,
(iv) authorizing another to vote the shares.
**Revocable unless it is coupled with an interest**
- Proxy says it is irrevocable
- PX holder has some interest in share other than voting |
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Term
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Definition
- 10-year maximum
- Written trust, controlling how the shares will be voted;
- Copy to the corporation;
-Transfer legal title to the shares to the voting trustee;
- Original shareholders receive trust certificates and retain all shareholder rights except for voting. |
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Term
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Definition
- In writing
- Signed by shareholders who participate
**Specifically enforceable in some states, but not all** |
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Term
| Stock transfer restrictions |
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Definition
Stock transfer restrictions will be upheld provided they are reasonable under the circumstances. There cannot be an absolute prohibition on transferability.
Unenforceable against transferee unless
- conspicuously noted on the stock certificate OR
- the transferee had actual knowledge of the restriction |
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Term
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Definition
Standing: Any SH
Procedure: Written demand stating the doc and proper purpose
SH can seek court order if corp fail to allow inspect |
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Term
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Definition
Payments by corp to SH made at the board's discretion
Types
- Dividends: When corporation distributes its profits to its owners
- Repurchase: A voluntary sale of a shareholder's stock to the corporation
- Redemption: A forced sale of a shareholder’s stock to the corporation at a price set in the articles |
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Term
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Definition
Tradition View
- Earned surplus - generated by biz activity
- Stated capital - generated by issuing stock
- Capital surplus - generated by issuing stock (pmt in excess of par plus amt allocated in no-par issuance)
Modern View
Corporations cannot make distribution if insolvent or if distribution would render it insolvent
- unable to pay debts
- assets are less than total liabilities |
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Term
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Definition
- common stock
- Preferred: pay first
- Preferred participating: pay again
- Preferred that is cumulative: add them up |
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Term
| Fundamental corp changes require |
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Definition
- Board action adopting a resolution of fundamental change.
- Board submits proposal to shareholders with written notice.
- SH approval (majority of all shares entitled to vote)
- Deliver a document to the Secretary of State. |
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Term
| Dissenting SH rt of appraisal |
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Definition
Right to force corp to buy your stock at FMV triggered when
- Merger or consolidation
- Transfer of substantially all assets not in the ordinary course of business
- Transfer of shares in a share exchange
**Only for close corp; NOT avail to stocks listed on national exchange or have more than 2K SH** |
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Term
| Right of appraisal process |
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Definition
- Before shareholder vote, file with the corporation written notice of objection and intent to demand payment
- Abstain or vote against the proposed change
- After the vote, within time set by corporation, make written demand to be bought out and deposit stock with the corporation.
**court may appoint an appraiser if can't agree on value**
** only remedy for these fundamental changes absent fraud** |
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Term
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Definition
- Board of director action and notice to shareholders.
- Shareholder approval.
- Deliver amended articles to the Secretary of State.
**NO SH rights of appraisal** |
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Term
| Mergers or Consolidations |
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Definition
- Board of director action (both corporations), and notice to shareholders.
- Shareholder approval (generally both corporations).
- No shareholder approval required for short form merger. Shareholders of the subsidiary don't vote here.
- Surviving corporation delivers articles of merger or consolidation to the Secretary of State. |
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Term
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Definition
| No shareholder approval required if a 90 percent-or-more owned subsidiary is merged into a parent corporation. Shareholders of the subsidiary don't vote here. |
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Term
| Effect of merger or consolidation: Successor liability |
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Definition
Surviving corporation succeeds to all rights and liabilities of the constituents.
This makes sense because the constituent corporation disappeared.
Thus, a creditor of that corporation can sue the survivor. |
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Term
| Transferring all or substantially all assets not in ordinary course of biz |
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Definition
- Requires transfer of at least 75 percent of the assets.
Actions of selling corporation
- Board action and notice to SH
- Majority of SH entitled to vote must approve
- Right of appraisal for selling corp dissenting SH
**No successor liability because selling corp still exists** |
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Term
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Definition
Board of directors action and approval by a majority of the shares entitled to vote.
File notice of intent to dissolve with the Secretary of State.
Corporation stays in existence to wind up.
Notify creditors so they can make claims. |
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Term
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Definition
By court order.
(1) SH can petition because of:
- Director abuse, waste of assets, misconduct
- Director misbehavior
- Director deadlock that harms the corporation;
- Shareholders have failed at two consecutive annual meetings to fill a vacant board position.
(2) A creditor can petition because corporation is insolvent and
- he has an unsatisfied judgment OR
- the corporation admits the debt in writing |
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Term
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Definition
Triggered by dissolution
Winding up consists of
- gathering all assets
- converting to cash
- paying creditors
- distributing remainder to shareholders, pro-rata by share unless there is a liquidation preference
Liquidation preference - pay first |
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Term
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Definition
The investor lends capital to the corporation, to be repaid (usually with interest) as specified in the agreement.
Investor = creditor
Bond = Loan secured by corporate assets
Debenture = unsecured |
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Term
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Definition
Investor buys stock from the corporation, which generates capital for the business.
Investor = owner |
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Term
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Definition
| Makes it illegal for any person to use an instrumentality of interstate commerce to defraud, make untrue stmt of material fact, or engage in any practice that operates as a fraud in connection with the purchase or sale of any security. |
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Term
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Definition
(1) Fraudulent conduct - Misrep or omission concern a material fact
- Misrep of material info
- Insider trading/Tipping
(2) In connection with purchase or sale of security by Pl
(3) Use of instrumentality of interstate commerce
(4) Scienter - Def intent to deceive, manipulate, or defraud
(5) Reliance - Presumed in public misrep and nondisclosure cases |
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Term
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Definition
Trading securities on the basis of material inside information.
Breaches 10b-5 if by trading he breaches duty of trust and confidence owed to issuer, SH of issuer, or person who is source of material nonpub info
Who liable
- Insiders - anyone who breaches a duty not to use inside info for personal benefit
- Tippers - pass along material inside info AND benefited
- Tippee - traded on tip AND knew that the tipper breach duty and improperly passed info |
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Term
| 10b-5 Possible Pl and Def |
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Definition
Pl: SEC, buyer and seller of securities
Def: Company that issued misleading PR, buyer or seller of security who misrep or traded on inside info |
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Term
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Definition
Provides for recovery by the corporation of “profits” gained by certain insiders from buying and selling the company’s stock.
STRICT LIABILITY
The theory is that it is bad for market confidence to have these insiders buying and selling their own company’s stock. |
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Term
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Definition
“Reporting” corporation– a company that is
- (1) listed on a national exchange or
- (2) at least 2,000 shareholders (or 500 non-accredited shareholders) and $10,000,000 in assets.
Types of defendants:
- Director (either when she bought or sold) or
- Officer (either when she bought or sold) or
- Shareholder who owns more than 10 percent (both when she bought and sold)
Type of transaction:
Buying and selling stock within a single six-month period (short-swing trading). No fraud or inside information is needed.
Remedy: All “profits” from such “short-swing trading” are recoverable by the corporation. |
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