Term
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Definition
| A distinct limited liability legal entity that can conduct business in its own right by buying and selling property, sue or being sued etc. |
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Term
| What is a promoter of a corporation? What is a promoter's liability? |
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Definition
| A person who engages in ativities such as entering into contracts and procuring capital for the purpose of bringing the corporation into existence. A promoter is a fiduciary of the corporation and is liable for acting on behalf of the corporation before incorporation absent a novation. |
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Term
| What is required to relieve a promoter of pre-incorporation liability? |
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Definition
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Term
| How does a corporation become incorporated? |
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Definition
| Articles of incorporation must be filed and fee must be paid to secretary of state by the incorporators of the corporation. |
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Term
| Is an incorporator liable for contracts entered into by promoters? |
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Definition
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Term
| What are the mandatory items in the articles of incorporation? |
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Definition
1. Corporation name- must include the name corporation, company, limited, etc.
2. Corporation purpose- See ultra vires action, ho
3. Authorized shares- Maximum number of shares of each class of stock that the corporation is authorized to issue.
4. Corporation duration-whether it's limited or perpetual
5. Name and address for an agent of service of process
6. Name and address of incorporators |
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Term
| What is an ultra vires action and who can bring it? |
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Definition
An act which is contrary to the express purpose in the articles of incorporation. If successful, the action can be unenforceable.
1. A shareholder in the corporation
2. A person suing on behalf of the corporation against a director officer of employee
3. State can initiate proceedings |
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Term
| When does corporate existence begin? |
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Definition
| "De jure corporation" When the secretary of state accepts the fee and files the articles of incorporation. |
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Term
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Definition
| They regulate how the corporation is run day to day. They can be amended by a majority vote of the directors. |
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Term
| If the articles and the bylaws conflict, which one governs? |
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Definition
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Term
| If you don't actually comply with the corporation forming bylaws, can you nonetheless be shielded from liability? |
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Definition
| Yes, under the de facto corporation doctrine, you can be shielded if you make a good faith effort to comply with the incorporation requirements and the directors have no actual knowledge of the shortcomings. |
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Term
| When can the corporate veil be pierced? |
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Definition
To avoid fraud or unfairness. They look at three factors in determination
1. Alter Ego- A failure to observe corporate formalities (failure to take minutes or hold meetings, segregate personal funds from corporate funds)
2. Undercapitalization-Giving too many dividends so the corporation did not have enough assets to protect itself
3. Fraud-Fraud like behavior
More likely for tort victims than contracting parties. More likely for small corporations than large ones. |
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Term
| When you put your money into a corporation, what are you given and what rights does it carry? |
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Definition
| Stock. Typically you have voting and economic rights in the corporation. |
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Term
| What are the rights of creditors to a corporation? |
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Definition
Debt holders
Entitled to the repayment of the money extended to the corporation plus the interest.
The debt must be paid before the profit holders (shareholder) |
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Term
| What are the rights of stockholders? |
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Definition
| Equity holders. Once the creditors are entitled to their money, stockholders are entitled to the remainder. |
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Term
| What is the difference between common stock and preferred stock? |
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Definition
Preferred stock-Get paid first if there is a dividend. In a liquidation, preferred stockholders also get paid first. Generally have to pay more to be a preferred shareholder
A corporation may give out different classes of stock and divide voting and economic rights. |
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Term
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Definition
| The sale of stock by the corporation, not the sale of stock between shareholders. |
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Term
| What are the types of stock that can be issued? |
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Definition
1. Authorized stock- The maximum number of shares that can be issued.
2. Issued stock- Amount of the authorized stock the company sells to outsiders
3. Outstanding stock- Stock that was once issued and still remains in the hands of shareholders somewhere. (The corporation can buy stock back)
4. Treasury stock- The shares that have been bought back by the corporation. |
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Term
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Definition
| Although the company is not obligated to sell par value stock, par value stock is where the corporation is required to receive at least the value assigned to the stock. |
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Term
| Is consideration required for the sale of stock? |
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Definition
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Term
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Definition
| When the corporation does not receive adequate consideration for stock. The creditors can go after the purchasers of the watered stock. |
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Term
| What is a stock subscription? |
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Definition
| It's where the promoter goes around to various parties and asks if those parties will subscribe to a various amount of shares. An agreement for subscription is irrevocable for six months. |
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Term
| What are preemptive rights? |
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Definition
| A right of shareholders to purchase shares before any other stock is distributed to prevent your proportional owenership from being diluted. Usually it's not a right unless put into the articles |
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Term
| How are distributions made? |
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Definition
1. Dividends declared by board of directors.
UNLESS
Corporation is insolvent or would become insolvent if it issued a dividend.
2. Treasury stock |
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Term
| What happens if a director issues a dividend when the corporation is undercapitalized? |
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Definition
| The directors are personally and severally liable to the corporation unless relying in good faith on financial statements. |
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Term
| How often to directors get elected by shareholder? How often are shareholder meetings? |
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Definition
| One year at the annual meeting which is required every year. Shareholders must be given notice between 10 and 60 days before the meeting. |
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Term
| Who can call a special meeting? |
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Definition
| Board of directors, president, a specified percentage of shareholders. Shareholders must be given notice and the purpose for the meeting. If notice is not given properly, the shareholder can object. |
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Term
| To determine which shareholders are eligible to vote, those shareholders who hold an interest on ___________________ can vote. |
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Definition
| The record date which is set by the shareholders. |
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Term
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Definition
A mechanism by which the shareholder can specify how he wants to vote without showing up to the shareholder meeting.
Writing
Signed by shareholder
Sent to the secretary of the corporation
Authorizing an officer of the corporation to vote a shareholders share in accordance with his wishes
Valid for 11 months |
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Term
| What do shareholders get to vote on? |
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Definition
Voting for directors
Sales of the corporations assets
Dissolution
Mergers
Changes to the articles of incorporation |
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Term
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Definition
| For a shareholder vote to be effective, a quorum of a corporation's SHARES not shareholders must be represented in person or via proxy. (A MAJORITY OF THE CORPORATION'S OUTSTANDING SHARE) must be there at the start of the meeting. |
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Term
| How many shares on a shareholder vote will effect a vote on an issue at a meeting? |
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Definition
| If the votes cast in favor exceed the votes cast against. |
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Term
| What is cumulative voting? |
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Definition
| The shareholders are given a number of votes that are equal to the number of shares they own multiplied by the number of director positions that are being voted on. |
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Term
| Can a shareholder ask for corporate records? |
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Definition
| Yes, but you must state the purpose of the inspection. |
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Term
When can a shareholder sell his stock?
What are the restrictions? |
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Definition
Generally any time subject to two restrictions.
1. Express restrictions which the shareholders must be aware of, are generally more likely to be valid in a closely held corporation because they may want to preserve its status. The standard is whether the restriction is reasonableness.
2. 10b-5 actions: Fraudulent purchase or sale of any stock or other security
Misrepresentations or fraud:
1. Plaintiff purchased or sold a security
2. Used interstate commerce
3. Engaged in fraudulent or deceptive conduct
4. The conduct related to material information
5. The defendant acted with scienter
6. The plaintiff relied on the defendant's conduct
7. The plaintiff suffered harm because of the defendant's conduct.
Insider trading:
Trading stock or security based on insider information
There are four types of people who may be involved in insider trading:
Insiders: directors, officers etc who use insider information for personal gain.
Constructive insiders
Tippee: A person given information by an insider with the expectation that the info will be used to trade stock.
Misappropriators: Using confidential information in order to trade stock or other securities |
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Term
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Definition
A corporate insider can be forced to return short-swing profits to a corporation.
1. Only applicable to public corporations with assets of more than 10 million
Occurs where during a six month period, a corporate insider who buys and sells the corporation's stock for any profits made. |
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Term
| What type of lawsuits can shareholders bring against the directors of the corporation? |
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Definition
Direct actions:
1. An action to enforce shareholder rights: breach of fiduciary duty by an officer or director.
2. Non-shareholder action: For negligence.
Derivative suit:
Shareholder suing on behalf of the corporation against the directors for harm against the corporation:
1. Standing-must have been a shareholder at the time of the wrong or time the action is filed and must continue to be a shareholder throughout the litigation
2. Before taking derivative action, the shareholder must make written demand upon the board and give 90 days to correct unless the demand would be futile or irreparable harm is imminent. |
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Term
| What are the terms for directors: requirements, terms, compensation. |
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Definition
1. Must be a natural person
2. Typically a term is one year but can be longer.
3. Compensation is permitted |
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Term
| How can a director be removed? |
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Definition
| Must give notice and call a shareholder meeting to remove. |
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Term
| For a board of directors action to be valid, how many need to be at the meeting? How many need to vote? |
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Definition
A quorum need to be at the meeting
A majority need to vote |
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Term
| In order for a director to forestall liability from illegal or improper acts taken at a shareholder meeting, what must he do? |
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Definition
1. Promptly object to the holding of the meeting
2. Ensure that the dissent is noted in the meeting minutes.
3. Not vote for thhe action and deliver written notice of dissent before the meeting ends or shortly thereafter. |
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Term
| What fiduciary duties do directors owe to the corporation? |
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Definition
1. Duty of loyalty
2. Duty of care. |
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Term
| What is required under the duty of care for a director of a corporation? |
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Definition
Directors have a duty to act with the care of an ordinarily prudent person in the same or similar circumstances
Business judgment rule: A rebuttable presumption that a director reasonably believed his actions were in the best interest of the corporation. To overcome the presumption, it must be shown that the director did not act in good faith, didn't investigate, wasn't objective, received a financial benefit, wasn't informed. |
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Term
| What is required under the duty of loyalty regarding self-dealing? |
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Definition
Requires the director to act in a manner the director reasonably believes is in the best interest of the corporation.
Self-dealing- A director who engages in a conflict of interest trasaction with the corporation violates the duty of loyalty unless disclosed and approved by a majority of shareholders or board of directors through the safeharbor rule.
This type of transaction is one that would normally require board approval and is of financial significance that the director would reasonably be expected to influence director's vote on the transaction. |
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Term
| What is the usurpation of corporate opportunity? |
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Definition
Where a director takes an opportunity rather than letting the corporation take it.
Two tests:
1. Interest or expectancy test: Whether the corporation has an existing interest or an expectancy arising from an existing right in the opportunity.
Line of business test- Broader, asks whether the opportunity is within the corporation's current or prospective line of business |
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Term
| Does competition with the corporation violate the fiduciary duty of loyalty? |
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Definition
| Yes. However, he can engage in other non-related businesses. |
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Term
| When a director is involved in legal action as a consequence of his or her role for expenses, what must the corporation do in return? |
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Definition
Indemnify
Mandatory: In successful defense of a proceeding against the director
Permissive: Unsuccessful defense if the director acted in good faith with reasonable belief the conduct was in the corporation's best interest.
Prohibited: Director's receipt of improper benefits. |
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Term
| Talk about officers of the corporation with regard to selection, authority, duties, liability, indemnification, removal. |
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Definition
Selection of president, secretary, treasurer is done by the directors.
Authority: Actual, implied, apparent authority
Duties: Care and loyalty
Liability: Only if acting in personal capacity or tortious behavior
Indemnification: Same rule as directors.
Removal: With or without cause at any time. |
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Term
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Definition
| A combination of two or more corporations such that only one survives. Majority of the board and shareholders generally need to approve transaction. |
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Term
| What happens if a shareholder disapproves of a merger or acquisition? |
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Definition
| The shareholder may be able to force the corporation to buy his stock at fair market value if the rights are adversely affected by an amendment to the articles of incorporation. |
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Term
| What types of acquisitions are there? |
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Definition
| Asset and stock acquisition: Usually does not require majority of shareholders. Stock acquisition generally occus when exchanging its own stock for the stock of another company or by paying cash for the stock. |
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Term
| What is voluntary dissolution? |
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Definition
Voluntarily ending the corporation.
Prior to the issuance of stock, a corporation may dissolve by majority vote.
After issuance, a majority of shareholders must approve.
Winding up- The corporation can continue to exist for the limited purpose of Collecting assets, disposing of propert, discharging liability, distributing property |
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Term
| What is involuntary dissolution and who can pursue it? |
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Definition
Forced end of the corporation
Creditors can pursue involuntary dissolution for an insolvent corporation.
Shareholders can pursue if corporate assets are misapplied/wasted, illegal action, directors are deadlocked on a management issue causing irreparable injury |
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Term
| What is a closely held corporation? |
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Definition
| Corporations with only a few shareholders and a more relaxed style of governance. |
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Term
| What is a foreign, professional, and S corp |
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Definition
Foreign-A corporation incorporated in another state which must register in the state it wants to do business in.
Professional- Statutorily limited to the rendering of a professional service.
S Corp- Avoids double taxation by passing income and expenses through its shareholders who are taxed directly. |
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Term
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Definition
| A limited liability company that enjoys the pass through tax advantage of a partnership but also the limited liability of a corporation. |
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Term
| How is an LLC created, who is its membership, what is its management like? |
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Definition
1. Created by filing an articles of organization with the state
2. No restriction on membership
3. Directly managed by its members. |
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