A corporation may have a stated purpose in its articles of incorporation. Under modern statutes it can do anything regardless. However, an act is considered "ultra vires" if:
A shareholder sues the corporation to enjoin a proposed ultra vires act
The corporation may sue an officer or director for damages for approvin an ultra vires act, and
The state may bring an action to dissolve a corporation for committing an ultra vires act
A corporation that was not formed in strict compliance with state statute and is thus not a de jure corporation, may be held to be a de facto corporation and thus allow its shareholders to avoid liabitlity if:
A statute exists under which the entity coudl have validy incorporated
The corporation has colorable compliance with the stattue and a good faith attempt to comply and
The conduct of business in the corporate name and the exercise of corporate privileges
***This defense to personal liability can only be raised by someone without knoweldge that the corporation was de facto.
What are the two ways that shareholders could avoid personal liability if the corporation was not formed in compliance with all statutory provisions?
De Fact Corporation
Corporation by estoppel
What are the requirement for corporation by estoppel?
Parties act as if there is a corporation.
These parties will not be able to deny later that a corporation existed.
When will the corporate viel be pierced? Three situations:
Alter ego for shareholders: they treat corporate assets as their own and fail to observe corporate formalities and some injustice results.
Inadequate capitalization at time of formation: at time of formation there is not enough capital to reasonably cover prospective liabilities.
Avoidance of existing obligations, fraud, or evasion of statutory provisions: not enough merely that the form was selected to avoid future liability.
There are two types of corporate stock structure:
Debt Securities and
Shares described in the artiles of incorporation are called authroized shares. Those shares that have been sold are issued and outstanding.
There may be various classes of stock but these must be described in the articles of incorporation.
What must the aritcles of incorporation do in regards to classes of stock (3 things)
Describe the number of shares in each class,
Prescribe the name for each class
Describe the rights preferences and limitations of each class or provide that the rights of any class or series within a class shall be determined by the board of directors prior to issuance.
Liability of Promoters and Subscribers
- Promoters remain liable until novation and are fiduciaries
- Profit made in deal with company prior to being promoter: profit recoverable only if sold > FMV
- Profit made after promoter: any profit made
- Subscribers -> irrevocable for 6 months
Promoters in general
Procure commitments for capital. Have a fiduciary duty to corporation (full disclosure and good faith, no self dealing)
Personally liable on contracts with third parties on behalf of a planned but unformed corporation. Only released once there is an express novation.
Do shareholders have control over the management of the company? What ways do they have control absent a special agreement?
No, directors control the day to day of a corporation.
Sharholders have only indirect control through the voting power which allows them to:
- 1. Elect and remove directors
- 2. Adopt and modify bylaws,
- 3. Approve fundamental changes in the corporate structure
Shareholders and directors meetings usually require notice:
Shareholders meetings whether for annual or special purposes require between 10 and 60 days of notices and must include time place and if special the purpose.
Directors meetings only require 1- days notice time and place if for special purpose.
When is proxy voiting allowed?
Only for shareholders, not for directors.
What are a directors duties to a corp?
Duty of Care
Duty to Disclose
Duty of Loyalty
Describe the duty of care
Officer has a duty to manage to the best of their ability:
- 1. Must act in good faith
- 2. With the care tha an ordinarily prudent person in a like position would exercise
- 3. IN the manner that directors reasonably believe to be in the best interests of the corporation. These three things are known as the business judgement rule.
Burden is no challenger.
Two types of indemnification of corporate officers directors or employees. What are they?
Mandatory indemnification: corp must indemnify a director or officer who prevailed in defending against the officer or director for reasonable expensse.
Discretionary Indemnification: Even if unsuccessful, corp may indemnfy if the director acted in good faith and believed her conduct was in the best interests of the corporation and not criminal activity
Describe duty of loyalty:
Director cant be a party to a transaction with a corporation if their interst would reasonably be expected to influence the director's judgment.
Is allowed if: transaction approved by the majority of the directors who do not have a conflicting interest with full knowledge
The transaction is approved bya majority of the votes entitled to be case by shareholders with out a conflicting interst after all material facts have been disclosed.
Describe userpation of corporate opportunity:
Director may not direct a corporate opptunity to himself if:
- 1. Corporation has an interest or expectancy: line of business test
- 2. Finanical abiltiy is not a defense
- 3. The board must decide
When is an action by shareholders agasint the corporation to dissolve permitted
The directors are deadlocked and irreperable injury is occuring
Directors have acted illegally or oppressively
Shareholders cannot elect a director for a period that includes two consecutive annaul meeting dates
Coproate assets are being wasted, misapplied or diverted for noncorporate purposes.
Rule 10b5 makes it illegal for a person to use any means or insturmentality of interstate commerce to employ any scheme to defraud, make an untrue statement of material fact, or engage in any practice that operates as a fraud in connection with the purchase or sale of any security. What are the elements of a cause of action:
Fraudulent Conduct (materiality and scienter)
IN connection with the pruchase or sale of a secirity by a plaintiff
Insider trading is included
Shareholder Derivative Suits
- 1. Corporation could have brought this suit
- 2. Contemporaneous stock ownership (minimum one share from claim arising to end of litigation)
- 3. Must first make demand on directors (they must reject or fail to respond in 90 days.)
- Discretionary unless insolvency
- Common -> pay last
- Preferred -> pay first
- Participating -> pay twice
- Cumulative -> add up missed + present
Fundamental Changes to Corp
- 1. Board resolves
- 2. Special Notice
- 3. Majority of shares
- "4. Dissenter's rights
- 5. Notice to state
- "Includes merger, consolidation, dissolution, substantial amendment, sale of all or substantially all assets"
Two types of corporations for tax purposes?
S Corp: Pass through entity, not subject to double taxation
C Corp : Double taxation, but corporate rate is less, so arrangement can be advantaeous to the person who wants to delay relization of income.
How is a corporation formed?
A corporation is created by complying with state corporate law. A corporation formed in accordance with state law is referred to as a de jure corporation. If all laws have not been followed a de facto corproation might result in a corporation being recognized through estoppel.