Major characteristics of corporation
- (1) freely transferable shares
- (2) continuous existence
- (3) limited liability to SH
- (4) centralized management
What is a de jure corporation?
one orgainzed in compliance with statute
What is a de facto corporation?
statutory compliance was insufficient yet there was (1) GF, colorable attempt to comply and (2) corporate principals acted in GF as if they were a corp
What is corporation by estoppel?
where creditor has acted with principals as if they were a corp or partners have held themselves out as corp then can't later avoid liability by claiming not legal entity
In NC, may the validity of corporate action be challenged on the ground that the corp lacks or lacked power to act?
What are the 3 main factors for piercing the corporate veil?
- (1) alter ego
- (2) inadequate capitalization
- (3) failure to comply with corporate formalities
What are the 3 elements for the "instrumentality rule" in NC regarding piercing the corporate veil?
- (1) complete domination; no separate mind, will, or existence
- (2) commit fraud or wrong
- (3) proximately cause injury or unjust loss
If the corporate veil is pierced, how is liability distributed?
on SH active in management
What do promoters do?
- (1) manage initial financing
- (2) arrange investor meetings
- (3) negotiate and prepare pre-inc agreements
- (4) lease office/factory space
- (5) K for initial needs of business
Promoters stand in fiduciary relationship with corp meaning they have a duty to what?
avoid self-dealing concerning any assets they sell to the corp
What is the promoter's duty to disclose?
fully all material facts concerning any assets they sell to the corp including whether are making a profit on the sale
If a promoter has fully disclosed his financial interest to an indpt BoD and the BoD approves the transaction, has the he breached his fiduciary duty?
no and he may keep any profit made on the sale
If the promoters are the only SH, is failure to disclose their financial interest a violation of fiduciary duty?
If additional SH are contemplated, the corp has an action for breach of fiduciary duty against a promoter who fails to fully disclose unless he makes a full disclosure to either whom?
- (1) original subscribers
- (2) SH of established corp and they ratify the X
What are the possible remedies for a promoter's breach of fiduciary duty?
- (1) avoid the X
- (2) hold promoter liable for secret profits
What is the relationship b/t promoters when there is more than one?
- joint venturers owing a fiduciary duty to each other
- full disclosure
- mutual agency
Are promoters liable for the K entered into on behalf of corp not formed?
- yes unless the K specifically disclaims personal liability for promoter
- other party looked only to the corp for performance
Personal liability of promoter will continue even after the corp is formed on K entered into before formation unless what?
When does a novation occur in a promoter K?
corp adopts the K and all parties agree to substitution of corp as party to K in place of promoter
What is the promoter's liability if he signs a K as an agent?
personally liable b/c can't be an agent for a non-existent principal
Are promoters entitled to indemnification?
yes if the promoter undertook the K in GF, at least to the extent the corp benefited from the K
Are corporations liable on any preincorporation agreements its promoters entered into on its behalf?
not unless it assumes liability
How may a new corp assume liability of promoter preincorporation agreements?
- made for corp benefit
- corp could legally K
- full disclosure to indpt board
What is the resulting promoter liability if corp adopts the K of promoter?
may remain liable to 3P but entitled to indemnification
Will corp become bound to fulfill a K made in its name and on its behalf in anticipation of its existence if it later accepts the benefits of the K?
yes at least to extent of the fair value of the goods/services rendered
What is the liability of 3P to promoter K?
liable from K inception
How does a person become a SH?
by agreeing to purchase shares pursuant to a subscription for shares either before or after incorporation - stock subscription agreement
How long is a subscription for shares entered into before incorporation irrevocable?
Who determines the payment terms of subscriptions entered into before incorporation?
What rights do SH usually have?
- voting rights
- dividend rights
- liquidation rights
Once issued, shares are considered what until they are reacquired, redeemed, converted, or canceled?
If a corporation acquires its own shares, how are those shares described?
authorized but unissued
What characteristics are common to perferred stock?
- preferred as to stated amount of dividends both limited and cumulative
- liquidation rights
What is considered valid consideration for shares?
- K for services
- other securities
What information must be contained on all share certificates?
- name of issuing corp
- name of person issued to
- number/class of shares and designation of series
What are the preemptive rights of the SH?
right to acquire unissued shares in the corp in proportion to their holdings to prevent dilution of voting interest
Do SH have preemptive rights in NC?
not unless provided for in the articles
What are SH rights regarding violation of preemptive rights?
- enjoin the sale and recover shares bought in knowing violation
- cancel issuance
- purchase the shares on open market and recover the difference
If there are no preemptive rights, a SH equity suit may do what?
block issuance of stock which would unfairly dilute or transfer control under breach of fiduciary duty theory
What is required to make a share transfer restriction enforceable?
- not unconscionable
- conspicuously on front/back of cert or contained in info statement
Against whom is a share transfer restriction enforceable?
a person who receives actual, written notice of it
Share transfer restrictions are authorized if what?
- maintain corp status;
- perserve exemptions; or
- reasonable purpose
What are the different types of share transfer restrictions?
- first option/right of first refusal
- buy-sell agreement
- consent restriction
In what forms may a dividend be distributed?
- declaration or payment of dividend
- purchase, redemption, or other acquisition of shares
- distribution of indebtedness
When may a board not declare a dividend?
- not be able to pay its debts
- total assets would be less than (1) sum of its total liabilities plus (2) amount to satisfy the preferential rights
Who owns the corporation?
Who manages the corp?
Who elects the officers of the corp?
Who elects the directors?
What are SH rights?
- elect and remove directors
- amend bylaws
- approve fundamental changes
Must a corp hold annual SH meetings?
yes and any matter relating to the corp affairs is a proper subject at that meeting
What can be discussed at special SH meetings?
only business w/in the purpose described in the notice of the meeting
When must notice of SH meetings be made?
no fewer than 10 days and not more than 60 days before the meeting
Who is required to receive notice of SH meeting?
SH entitled to vote
How may a SH waive notice of meeting?
in writing, signed by SH, delivered to corp for inclusion in minutes or filing with corp records
A SH attendance at meeting waives objection to what?
- lack of notice or defective notice
- consideration of particular matter no w/in the purpose described in notice
What is the record date?
- date by which it is determined which SH are entitled to notice, to demand a special meeting, or to take any other action
- either fixed by bylaws or BoD
A record date may not be more than how many days before the meeting or action?
If the record date isn't otherwise fixed, when is it?
the close of business on the day before the first notice is delivered
An adjournment of a meeting for more than how many days requires a new record date to be fixed?
After the record date is fixed, what must the corporation prepare?
list of its SH entitled to notice
What is a voting group?
consists of all the shares of one or more classes of shares that are entitled to vote together on a given matter
What is a quorum?
a majority of the votes entitled to be cast
Once a quorum exists, what is required to approve an action?
majority of votes from the voting group
An action may be taken w/o a meeting and w/o prior written notice if what?
- taken by all SH entitled to vote
- by SH having at least the min number of votes nec if articles so provide
What actions require unanimuous consent of SH?
- election of directors at annual meeting if no cumulative voting
- election and removal of directors if cumulative voting
What is a proxy?
- grant of authority by SH to another person to vote the SH stock
- instrument granting such authority
- agent to whom authority is granted
What must the proxy appointment be?
a signed appointment form
How long is a proxy appointment valid?
An appointment of proxy is revocable unless what?
- appointment form conspicuously states irrevocable
- coupled with interest
A proxy is deemed to be coupled with an interest if the proxy holder is what?
- person who purchased/agreed to purchase the shares
- creditor who extended credit under terms requiring appointment
- EE whose employment K requires appointment
- party to a voting agreement
What disclosures to SH in connection with proxy solicitations are required under fed regulation?
- conflicts of interest
- management remuneration
- details of major corporate changes that are to be voted on
What is a voting agreement?
written agreement of 2 or more SH stating that their shares will be voted as provided in the agreement, as the parties agree, or as determined in accordance with a procedure
Voting agreements are designed to ensure what?
SH will vote in concert
Does a voting agreement involve transfer of legal title?
no it merely binds the SH to vote according to its terms
How long is a voting agreement valid?
10 years unless extended for an additional term of not more than 10 years
What is a voting trust?
agreement signed by SH, setting out provisions of the trust, and transferring SH shares to trustee who will then have the right to vote
In a voting trust, who is the legal owner and equitable owner of the shares?
- legal owner - trust
- equitable owner - SH
How long is a voting trust valid?
not more than 10 years after effective date unless extended for not more than additional 10 years
How many directors are required under NC law?
What are the requirements for directors?
- those prescribed in articles or bylaws
- need not be resident of NC or a SH unless required by articles or bylaws
Who fixes the compensation of the directors?
When are the election of directors held?
first annual SH meeting and at each annual meeting thereafter
What does straight voting with respect to directors mean?
each share has one vote for each director
What is cumulative voting?
grants each share as many votes are there are directors to be elected and allows SH to allocate his votes as he chooses
Is there a right to cumulative voting in NC?
not unless provided for in AoI or bylaws
A vacancy on BoD will be filled by whom?
A shareholder may remove how many directors and for what reasons?
- one or more
- w/ or w/o cause
If cumulative voting is authorized, unless the entire BoD is removed, a director may not be removed if the number of votes sufficient to elect him under cumulative voting do what?
vote against his removal
If there is no cumulative voting, how many votes required to remove a director?
votes cast to remove exceed those cast not to remove
How many votes are required to remove the entire BoD?
Do regular BoD meetings require notice?
When must notice of special BoD meetings be delivered?
at least 5 days before
Must the notice of special BoD meeting specify the purpose of the meeting?
Can a director vote by proxy?
no b/c BoD meetings should be collective, deliberative proceeding
Can the action that may be taken at BoD meeting be taken w/o a meeting?
yes if unanimous and all directors sign written consents before or after the action
Does NC require the appointment of officers?
- no but there must be an officer who has the responsibility and authority to maintain and authenticate records
- same person may simultaneously hold more than one office but no person may act in more than one capacity if action of 2 or more officers is required
Where may the express actual authority of officers originate from?
resolution at BoD meeting, statutes, bylaws
Corporate officers have implied authority to do what?
enter into X reasonably related to performing the duties
When will a corporate officer have apparent authority?
corp manifests authority to 3P in such a way that 3P has reasonable belief that the officer or A had actual authority
What are the duties & liabilities of officers?
- same fiduciary duties as directors
- personal liability is same as that of an agent
Who fixes the compensation of officers?
How will officer vacancies be filled?
in manner prescribed in bylaws or by BoD
When, by whom, and for what may an officer be removed?
- at any time
- by BoD
- w or w/o cause
Does removal from office impair the ex-officer's K rights?
no and can still sue corp for breach of K
Directors may be held liable for breach of a general duty involved in management which includes what?
- duty of care
- duty of loyalty
- duties imposed by statute
- violations of federal securities law
What is the standard of care for directors and officers in discharge of duties?
- care of an ordinarily prudent person
- manner they reasonably believe to be in the best interest
What is the business judgment rule?
- shields directors from liability
- creates rebuttable presumption that directors are honest and well meaning and acting thru decisions that are informed and rationally undertaken in GF
When does business judgment rule not apply?
- inexcusable lack of attention, diligence, or GF
- decision was illegal, egregious, or fraudulent
In discharging his duties, a director/officer is entitled to rely on info, opinions, reports, or statements prepared or presented by whom?
- officers or EE of corp with reasonable belief of reliablility and competence
- legal counsel or public accountants reasonably believed competent
- committe of BoD that he isn't member of and reasonable belief merits confidence
What is the duty of loyalty associated with directors/officers?
to be loyal to the corp and not promote their own interests
A conflict of interest constituting a breach of duty of loyalty may arise where the individual:
- has business dealings with corp; OR
- takes advantage of corp opportunity; OR
- enters into competition with corp
What is a conflict of interest X?
one in which director has direct or indirect interest
Fiduciary duty of loyalty prohibits directors/officers from usurping any business opportunity which properly belongs to the corp unless what?
- corp first given chance to pursue the opportunity
- corp couldn't have taken advantage of the opportunity
Factors for usurping corp oppotunity
- ability of corp to take advantage
- corp engaged in prior negotiations
- made aware of opp by virtue of his fiduciary position
- disclosed to corp
- corp rejected opp
- corporate facilities used to acquire
What is the key to determining whether director/officer has usurped a corp opportunity?
whether the opportunity is functionally related to the corp's business and whether corp has an interest or expectancy in the opp
What is the remedy for usurping corp interest?
- constructive trustee - convey any property, income, profits
- assess any damages suffered by corp
Bad faith competition with the corp can take the form of what?
- unfair competition
- luring away EE or customers
- working in competing business while being paid by corp
- divulging corp info
What is remedy for competing with corp?
- profits earned in competition
- constructive trust
What is the rule regarding liability for unlawful dividends?
- director who votes for or assents to an unlawful distribution is personally liable for amount in excess
- UNLESS does so in GF in accordance with his duty of care
When is indemnification of director/officer permissible?
- reasonably believed was in the corp best interest or at least not opposed to it
- criminal - no reasonable cause to believe his conduct was unlawful
When is indemnification of director/officer impermissible?
- judged liable to corp
- judged to be liable on basis that he received an improper personal benefit
When is indemnification of director/officer mandatory?
wholly successful, on the merits or otherwise, in the defense of any proceeding in which he was party b/c he was a director
May a corp purchase and maintain insurance even if the corp wouldn't have the power to indemnify that individual against the same liability?
What duty do the majority SH owe?
fiduciary duty and obligation of GF to minority SH
Who may enforce the majority SH fiduciary duty?
- corp via derivative action
- individual SH action for breach
What is a freeze out merger?
minority SH is forced by majority to sell their shares
What is the definition of close corp?
- small number SH
- no ready market for corporate stock
- substantial majority SH participation in management, direction, and operations of corp
What are the common characteristics of close corp?
- active in management
- SH repurchase agreement
- disagreement in decision making entitles SH to sell stock
- EE SH who sells stock may lose job
What is a derivative suit?
- SH sues on behalf of corp to redress wrong to it when corp fails to enforce its right
- damages to corp
What is a direct suit?
- SH sues on his own behalf to redress injury to his interest as SH
- damages to SH
What must a SH allege in the complaint in a derivative suit?
was SH at time of the act or omission complained of OR became SH by operation of law from person who was
In NC, a SH may not commence a derivative proceeding until they have done what?
- written demand
- 90 days have expired from date demand was made UNLESS rejected the demand or irreparable injury
Must a demand be made on SH before commencing a derivative suit?
no...demand on directors sufficient
When may a corp voluntarily dissolve?
- decision by BoD
- recommendation of BoD to SH that is thereafter approved by SH
With whom must the article of dissolution be filed?
What is the effect of dissolution?
corp continues to exist but may not carry on any business except that appropriate to wind up and liquidate
What acts are appropriate to wind up and liquidate a corp?
- collecting assets
- disposing of property
- discharging liabilities
- distributing remaining property among SH
- every other act nec
What must a dissolved corp do with respect to known creditors?
notify them in writing of dissolution
What must dissolved corp with respect to unknown creditors?
publish notice of dissolution and request that persons with claims against corp present them to corp
What are the 3 ways a corporation can be dissolved?
- administrative (SoS)
When may a court dissolve a corp?
- directors or those in control are deadlocked
- reasonably nec to protect rights/interests of complaining SH
- SH are deadlocked - at least 2 consecutive annual meeting dates
- corp assets being misapplied or wasted
- written agreement entitles complaining SH to liquidation or dissolution at will or upon occurrence of some event which has happend
When may SoS dissolve corp?
- doesn't pay w/in 60 days any penalities, fees, or other payments due
- delinquent in delivering annual report
- w/o registered agent/office
- period of duration stated in AoI expires
- knowingly fails/refuses to answer truthfully and fully any interrogatories by SoS
What is an LLC?
entity having one or more members and is organized and operated pursuant to NC LLC statute
What are the purpose and characteristics of LLC?
- engaging in any lawful business
- taxed like partnerships unless elect to be taxed like corp
How is LLC formed?
- one or more persons deliver signed articles of organization to SoS
- one or more initial members
- operating agreement
What must the articles of organization of LLC set forth?
- name of LLC
- latest date on which LLC is to dissolve
- name and address of each person executing in capactiy of a member or organizer
- address of registered office and name of registered agent
- address prinicpal office
- statement that members won't be managers (unless they will be)
Who are the owners of an LLC?
Is a membership interest in an LLC assignable?
yes but doesn't entitle the assignee to become or exercise any rights of a member only to receive distributions/allocations
Who manages an LLC?
managers - by default all members are managers
All managers have equal rights and authority to do what?
participate in the management of LLC
Management decisions requires the approval of whom in an LLC?
majority of managers
Managers are agents of the LLC and the act of every manager for apparently carrying on in the usual way the business does what?
binds the LLC unless manager lacked authority and the person he dealt with knew this
What is the standard of care for managers in LLC?
- GF with care of an oridnary prudent person in like position under similar circumstances
- in manner reasonably believes to be in best interest of LLC
What is the liability of managers or members of LLC?
- no personal liability solely b/c of status or participation in management
- personally liable by reason of his own conduct and wrongful distribution
When does a person cease to be a member of LLC?
- voluntary w/drawl
- death or incompetency
- making assignment
- termination of trust
- distribution of estate
Does w/drawl of member dissolve LLC?
not as long as at least one other member remains
Is a former member released from liability to LLC for wrongful distribution or contribution?
When may a LLC be dissolved and wound up?
- time specified
- happening of an event specified
- written consent all members
- ceases to have any members
- judicial dissolution
What is a profeesional corp?
engaged in rendering professional services that require obtaining a license
How are professional services formed?
like corp except AoI designate the professional service to be rendered and that all shares of corp are owned and held by licensees
How many incorporators, directors, and officers must be licensees in a professional corp?
at least 1
How many SH must be licensees in prof corp?
all of them
Through whom may a professional corp render services?
officers, EEs, and agents who are licensed
May a professional corp hire unlicensed EE?
What is the liability of SH, directors, and officers of prof corps?
personal liability for own errors, omissions, negligence, malpractice, incompetence, and malfeasance committed while rendering prof services but not for those committed by others