Corporations

Execute the Articles of Incorporation, deliver them to the Secretary of State, and pay requires fees.

A contract between the corporation and shareholders AND between the corporation and the state.

• Corporate name (must include "corporation," "company," "incorporated," or "limited")
• Name and address of each incorporator
• Name and adress of each initial director
• Name of registered agent and address of the registered office (the Secretary of State)
• Statement of purpose -- can be really vague
• Capital structure (authorized stock, issued stock, outstanding stock)

• Corporation
• Company
• Incorporated, or
• Limited

Can be really vague.

In some states, general purpose is presumed and articles don't need to say anything.

• Ultra vires rules -- ultra vires means outside the scope of the business purpose.
• --Ultra vires contracts are valid
• --Shareholders can seek an injunction
• --Responsibile managers are liable to corporation for ultra vires losses

Outside the scope of the business purpose.

Ultra vires contracts are valid.

Shareholders can seek an injunction.

Responsible managers are liable to corporation for ultra vires losses.

Yes.  Responsible managers are liable to corporation for ultra vires losses.

Responsible officers and directors.

Maximum number of shares the corporation can sell.

Number of shares the corporation actually sells.

Shares that have been issued and not reacquired.

Incorporators deliver notarized Articles of Incorporaiton to Secretary of State and pay requires fees.

De jure corporation -- Secretary of State accepts the articles for filing.

A corporation that has fulfilled its requirements for formation according to the regulations for earning a state charter (i.e., once Secretary of State accepts the articles for filing).

The Board of Directors hold an organizational meeting where it selects officers and adopts any bylaws and conducts other appropriate business.

• De facto corporation
• Corporation by estoppel
• Note: These doctrines have been abolished in many states

• Ther eis a relevant incorporation statute
• The parties made a good faith, colorable attempt to comply with it, and
• Some exercise of corporate privileges

One who treats a business as a corporation may be estopped from denying that it is one.  (Only contract cases, not tort cases).

Yes.

No.

• Corporation is only legal person
• Corporation is governed by laws of state where incorporated
• Limited liability

• Deal with internal governance
• Not required

No.

Person acting on behalf of a corporation not yet formed.  He might enter a contract on behalf of a corporation not-yet-formed.

Yes.  Unless the contract clearly provides otherwise, the promoter is liable on pre-incorporation contracts unless there is a novation.

No, unless it adopts the contract.

• Express adoption - board takes an action adopting the contract
• Implied adoption - arises when corporation accepts a benefit of the contract

Board takes an action adopting the contract.

Arises when corporation accepts a benefit of the contract (promoter liability).

Unless the contract clearly provides otherwise, a promoter is liable until there is a novation.

Agreement of the promoter, the corporation, and other contracting party that the corporation replaces the promoter under the contract.

A corporation incorporated outside the state but transacting business within the state.

Transacting business = the regular course of intrastate business activity, NOT occasional or sporadic activity.

Need certificate of authority from Secretary of the State.

The regular course of intrastate business activity, not occasional or sporadic activity.

Certificate of authority from Secretary of State.

Six months.

Revocable until accepted by the corporation.

• Money
• Tangible or intangible property
• Services already performed for the corpoation
• Promissory notes (some states OK, some states prohibited)
• Future services (some states OK, some states prohibited)

Minimum issuance price.

Stock sold for less than par value.

• Directors if they knowingly authorized the issuance
• The buyer
• Third party buyer -- but not if they did not know about the water

No minimum price, Board of Directors sets a price.

Stock the company issued and then reacquired.  It is considered authorized but unissued and the corporation cna resell it.

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.

Courts are split.

If articles are silent, there are no pre-emptive rights.

Initial directors named in articles, afterwards shareholders elect.

The Board of Directors is typically divided into halves or thirds, with one-half or one-third elected each year.

• Removal requires the vote of the majority of the shares entitled to vote
• Generally, if there is removal by shareholders, then shareholders select the replacement

Unanimous agreement in writing or majority agreement at a meeting.

• Regular meetings - not required
• Special meetings - yes, must state when or where
• Failure to give required notice voids whatever happened at the meeting

Voids whatever happened at the meeting.

• Must have a majority of all directors to do business
• Once you have a quorum, only a majority of present members is needed to pass a resolution
• Quorum can be lost if people leave

• Manages the business of the corporation
• Sets policy
• Supervises officers
• Declares distributions
• Determines when stock will be issued
• Recommends fundamental corporate changes to shareholders
• Can delegate to committee of one or more directors (but not to set director compensation or declare distribution)

Yes, but not to set director compensation or to declare a distribution.

• Duty of care
• Duty of loyalty

A director owes the corporation a duty of care; he must act in good faith and do what a prudent person would do with regard to his own business.

The plaintiff.

The director does nothing -- breach of the duty of care

Th director does something that hurts the corporation -- breach of the duty of care

A court will not second-guess a business decision if it was made in good faith, was informed and had a rational basis.

A director is not a gurantor of success.

A director owes the corporation a duty of loyalty; he must act in good faith and with a reasonable belief that what she does is in the corporation's best interest.

The defendant.

• Interested director transaction
• Competing ventures
• Corporate opportunity
• Ultra vires act
• Improper loans

Any deal between the corporation and one of its directors or another business of the director's.

Either the deal was fair to the corporation when entered, OR

The director's interest and the relevant facts were disclosed or know and the deal was approved by either

• A) The majority of the disinterested directors
•       i) Interested diretors will count toward a quorum
•      ii) NOTE: Some courts also require a showing of fairness

B) The majority of disinterested shares

No, competing ventures violate the duty of loyalty.

REMEDY: Constructive trust on profits.

Constructive trust on profits.

No.

• Something the company has an interest or expectancy in
• Something the director found on company time with company resources

• Tell the board about it, and
• Wait for the board to reject the opportunity
• Generally, the company's financial inability to pay is not a defense

Yes.  Generally, the company's financial inability to pay is not a defense to usurpation of corporate opportunity in breach of the duty of loyalty.

• Sell the opportunity to the corporation at cost
• Constructive trust on profits

The corporation can only loan to board member if reasonably expected to benefit the corporation.

Otherwise, it is a breach of the duty of loyalty.

• A director is presumed to concur with the board action unless his dissent or abstention is noted in writing in corporate records
• A) In the minutes or
• B) Delivered in writing to the presiding officer at the meeting or
• C) Written dissent to the corporation immediately after the meeting

• Exceptions:
• 1) An absent director is not liable for anything done at the meeting she missed
• 2) Good faith reliance on information presented by an officer, employee, committee, or professional reasonably believed competent

• His dissent or abstention must be noted in writing in corporate records
• A) In the minutes or
• B) Delivered in writing to the presind officer at the meeting or
• C) Written dissent to the corporaiton immediately after the meeting

• Exceptions:
• 1) An absent director is not liable for anything done at the meeting she missed
• 2) Good faith reliance on information presented by an officer, employee, committee, or professional reasonably believed competent

• Agents of the corporation
• Selected by and removed by the board

The director or officer was held liable to the corporation or to have received an improper personal benefit.

The director/officer is successful in defending on the merits or otherwise.

• Director/officer acted in good faith, and
• With the reasonable belief that her actions were in the company's best interests

• For duty of care issues
• Not for duty of loyalty issues

Shareholders are generally not managers unless it is a closely held corporation.

Shareholders may owe each other fiduciary duties in close corporation.

• P.A. or P.C. must be in the name
• Directors, officers and shareholders must be licensed professionals
• Shareholders are generally not liable for corporate obligations or for other shareholders' malpractice

• Shareholders have abused the privilege of incorporating (undercapitalization/alter ego)
• And fairness must require holding them liable

The shareholder is suing to enforce the corporation's claim, not her own personal claim.

• Stock ownership when the claim arose and throughout the suit
• Adequate representation of the corporation's interest
• Written demand on the corporation - tellin gthe directors to bring suit
• EXCEPTION: In many states you don't need to make demand if it would be futile.

Yes, as a defendant.

Settlement requires court approval.

Upon showing that independent investigation showed the suit was not in the corporation's best interest.

The shareholder as of the record date has the right to vote.

• EXCEPTIONS:
• 1) Corporation re-acquires stock before the record date
• 2) Death of a shareholder (the new shareholder can vote)

• Corporation re-acquires stock before the record date
• Death of a shareholder (the new shareholder can vote)

• A writing
• Signed by record shareholder
• Directed to secretary of corporation
• Authorizing another to vote his shares
• Good for 11 months unless it says otherwise
• Revocable unless proxy coupled with an interest (the proxy says it's irrevocable AND the proxyholder has some interest in the shares other than voting)

11 months unless it says otherwise.

Yes, unless it is coupled with an interest: 1) the proxy says it's irrevocable; and 2) the proxyholder has some interest in the shares other than voting.

• Written trust, controlling how the shares will be voted
• Copy to the corporation
• Transfer legal title to the voting trustee
• Original shareholders receive trust certificates and retain all shareholder rights except for voting
• 10 year max

10 years max.

• In writing and
• Signed
• Enforceable? Courts are split

Courts are split.

Usually at a meeting: annual or special

To elect directors.

• The board
• The president
• The holders of at least 10 percent of the voting shares
• Anyone else authorized in the bylaws

• 10-60 days before the meeting
• When
• Where
• Why

Action taken at the meeting is void unless notice is waived.

• How is notice waived?
• --Express: in writing and signed anytime
• --Implied: attend the meeting without objection

In writing and signed anytime

Attend the meeting without objection

• Need a quorum (not lost if people leave)
• Majority of those present
• Cumulative voting -- when shareholders elect directors

Must be reasonable and not an undue restraint on alienation.

• Enforceability against transferee, only if
• 1) It is conspicuously noted on the stock certificate, or
• 2) The transferee had actual knowledge of the restriction

• Reasonable; AND
• Not an undue restraint on alienation; AND
• Conspicuously noted on the stock certificate, OR
• The transferee had actual knowledge of the restriction

Make a written demand stating the documents desired and a proper purpose for the inspection.

Proper purpose: relates to intrest as a shareholder.

If corporation refuses, can get a court order.

Not until one is declared.  It is at the Board's discretion.

Preference paid first.

Preference paid first and then preferred stock gets part of the rest.

Accrues year to year.

Yes.

Instead of distirbuting a dividend, the corporation redeems the stock for its value.

• Earned surplus -- all earnings minus all losses minus distributions previously paid
• Capital surplus -- generated by issuing stock, in excess of par
• NEVER stated capital -- par value of stock on issuance, if no par value than the board allocates the consideration between stated capital and capital surplus

• Board action adopting a resolution of fundamental change
• Board submits proposal to shareholders with written notice
• Must get sharheolder approval (majority of shareholders entitled to vote)
• Dissenting shareholder right of apraisal (maybe)
• Usually need to deliver a document to the Secretary of State

The right to force the corporation to buy your stock for fair value.

• Triggered by:
• 1) Merger or consolidation
• 2) Transfer of substantially all assets not in the ordinary course of business
• 3) Transfer of shares in share exchange

NOT available for stock on a national exchange.

• Shareholder needs to:
• 1) Before shareholder vote, file with the corporation written notie of objection and intent to demand payment
• 2) Abstain or vote against the proposed change, and
• 3) After the vote, within time set by corporation, make written demand to be bought out and deposit stock with the corporation

• Merger or consolidation
• Transfer of substantially all assets not in the ordinary course of business
• Transfer of shares in share exchange
• NOTE: Not available for stock on a national exchange

• 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

• Board of Director action and notice to shareholders
• Shareholder approval -- majority of shareholders entitled to vote
• Deliver amended articles to Secretary of State
• No dissenting shareholder rights of appraisal

• Board of director action and notice ot shareholders
• Shareholder approval (unless 90% or more owned subsidiary is merged into parent corporation)
• Surviving entity delivers articles of merger or consolidation to Secretary of State
• There are dissenting shareholder rights of appraisal

• Board of Director action and notice to selling corporation's shareholders
• Approval by transferring corporation shareholders -- a majority of shares entitled to vote
• There are dissenting shareholders rights of appraisal
• Deliver to Secretary of State
• NO successor liability

• Board approval and approval by majority of shareholders entitled to vote
• Notice of intent to dissolve
• Winding up
• Notify creditors so that they can make claims

A shareholder can petition because of

• 1) Director abuse, waste of assets, misconduct
• 2) Director deadlock that harms the corporation
• 3) Shareholders have failed at two consecutive annual meetings to fill a vacant board position

4) Court ordered -- especially likely in close corporation

5) Creditor petition because corporation is insolvent AND he has an unsatisfied judgment AND the corporation admits the debt in writing

No, only the beginning of the "winding up" process.

• Gathering all assets
• Converting to cash
• Paying creditors, and
• Distributing remainder to shareholders, pro-rata by share unless there is a liquidation preference

Prohibits fraud or misrepresentation in connection with the purchase or sale of any security.

The deal must use an "instrumentality of interstate commerce."

• Misrepresentation of material information
• Insider trading

Trading securities on the basis of material inside information.

Only for someone high enough in the business hierarchy that he has a duty to abstain or disclose.  Duty arises from relationship of trust and confidence with shareholders.

Tipping -- an insider passes along material information for a wrongful purpose.

• You need:
• 1) Materiality
• 2) Scienter
• 3) Reliance

An insider passes along material information for a wrongful purpose.

• Materiality
• Scienter
• Reliance

Misrepresentations or omissions must concern a "material" fact.

Defendant must have an intent to deceive, manipulate, or defraud.

The plaintiff must have reasonably relied on the material misrepresentation.

Presumed in public misrepresentation and nondisclosure cases.

• SEC
• Private actions for damages by buyer or seller of securities

• Company that issues a misleading press release
• Buyer or seller of securities who misrepresents material information
• Buyer or seller of securities who trades on material inside information

Recover by the corporation of "profits" gained by certain insiders from buying and selling the company's stock. 

Must be a reporting corporation (listed on a national exchange OR at least 500 shareholders and $10,000,000 in assets).

Must buy and sell stock within a single six-month period.

• Listed on a national exchange; or
• At least 500 shareholders and $10,000,000 in assets

• Director (either when she bought or sold) or
• Officer (either when she bought or sold) or
• Shareholders who owns more than 10 percent (both when she bought and sold)

All profits are recoverable by the corporation if, within six months before or after any sale, there was a purchase at a lower price, and there is a profit.