PA: Corporations

  1. Formation
    • REQ:
    • (1) People: at least one incorporator (person OR entity) to execute and file the articles.
    • (2) Paper: Articles of Incorporation
    • >> Contract b/wn corporation and the shareholders.
    • >> Contract between corporation and the state.
    • >> Contents:
    • (i) statement that corporation is formed in accordance with PA BCL;
    • (ii) name/address of the corporation (including one "magic" word);
    • (iii) name/address of each incorporator (and directors if named);
    • (iv) name/address of the registered agent;
    • (v) authorized stock;
    • (vi) info on part value (if any par shares);
    • (vii) voting rights; AND
    • (viii) preferences of each class of stock.
    • (3) Act: Filing of the articles with PA Dept of State and pay required fee.
    • >> Acceptance = conclusive proof of valid formation (de jure corp).

    NEXT STEP: Organizational meeting -- select officers, maybe elect directors, adopt bylaws, conduct approp. biz.
  2. Incorp: Statement of corporate activity
    GEN: If no statement of corp activity, can engage in all lawful business.
  3. De Facto Corporation
    GEN: Failure to form a de jure corp. Doctrine is a defense in the face of a incorp error (ie. paperwork lost in the mail).

    • REQS:
    • (1) Relevant incorporation statute -- no problem in PA.
    • (2) Parties made a GF, colorable attempt to comply with it.
    • (3) Some exercise of corporate privilges -- acting like you have a corp.

    RESULT: If applied, biz treated as a corp for all purposes except actions by the state.
  4. Corporation by Estoppel
    GEN: One who treats a business as a corp may be estopped from denying it is a corp.
  5. Pre-Incorporation Contracts
    Promoter: person acting on behalf of a corp not yet formed.

    • Corp Liability: Corp not liable on pre-incorp contracts until it ADOPTS the contract.
    • >> Express: BoD action adopting K.
    • >> Implied: Arises if corp accepts a benefit of K.

    • Promoter Liability: Promoter remains liable on pre-incorp contracts until there has been a novation (unless K states otherwise).
    • >> Adoption of K: Corp AND promoter liable. Adoption does not relieve promoter.
    • >> Novation: agreement of the promoter, corp, and other contracting party that the corp will replace the promoter under the contract.
    • >>>> Promoter relieved of liability.
  6. Foreign Corps in PA
    • GEN: foreign corps must qualify and pay prescribed fees to transact biz in PA.
    • >> Transacting: regular course of intrastate biz activity.
    • >> Qualification: Certificate of authority from PA Dept State.
    • >>>> Must have a registered agent in PA.

    FAILURE TO QUALIFY: Civil fine and corp cannot sue in PA.
  7. Issuance of Stock
    Issuance: occurs when a corp sells/trades its own stock. Way to raise capital for the corp.

    • REQS:
    • (1) Consideration -- practically anything, BoD has full discretion over adequacy.

    • Subscription: written offers to buy stock from the corp.
    • >> Revocation: subscriptions can be revoked anytime befor eht ecorp accepts it.
    • >> Obligated: When BoD accepts the offer.

    • Preemptive Rights: only exist if PA if articles explicitly provide for them.
    • >> Exception: Statutory Close Corp -- never tested.
  8. Directors (General)
    • DUTIES: Set policy, select/monitor officers, declare dividends, ect.
    • >> Also sets its and the corp's officers compensation.
    • >>>> If not reasonable, waste of corp assets, breach of the duty of loyalty.
    • NOTE: Board can delegate substantial management functions to a committee consisting of one+ director.
    • >> BUT: Committees cannot unilaterally amend by-laws, fill a board vacancy, submit a fundamental corp change to SHs. This actions must be done by BoD.

    • REQS:
    • (1) Number: one or more natural human persons. If articles are silent, default is three.
    • (2) Selection: initial directors named by incorporators; thereafter, named by shareholders.
    • (3) Removal:
    • >> SHs: Can remove directors before their terms expire with or without cause.
    • >> Board: Can remove a director only for cause.
    • >>>> When mental capacity is at issue -- only if there is a judicial determination.
    • (4) Filling Vacancies: Majority of remaining directors fill a vacancy.
    • (5) Board Action: either through (i) unanimous agmt in writing; OR (ii) at meetings -- satisfying quorum/voting reqs.
    • >> Quorum: majority of all directors.
    • >>>> Can be broken if directors leave, paralyzing the BoD's ability to take acts.
    • >>>>>> Note: SH quorum never lost.
    • >> Voting Req: Resolutions require only a majority of those present.
    • >> Directors acting through individual conversations, or through a non-unanimous written agmt = void unless ratified by a valid act (above).
    • >> Meetings: conference call okay.
    • >> Writing: emails okay.
    • (6) Notice for Meetings:
    • >> Regular Mtgs: No notice needed.
    • >> Special Mtgs: At least 5 days written notice UNLESS bylaws state otherwise.
    • >> Waiver: waiver in writing at any time OR attendance at the mtg = waiver.
    • (7) Proxies/Voting Agmts:
    • >> Directors: No. Void.
    • >> SHs: Yes.
  9. Directors (Duty of Care)
    • STANDARD: Director must discharge duties in GF and with a reasonabl belief that what a director does is in the corp's best interest.
    • >> RPP standard of care -- ie. with regard to his own business.
    • >> NOTE: Not required to consider the interest of any particular group as controlling (ie. employees).

    • (1) Nonfeasance: director does nothing. Must explain why director's failure to act was a breach (fact analysis)
    • >> KEY: For liability to attach, must show causation of loss in non-feasance cases.
    • (2) Malfeasance: director does something that hurts the corp.
    • >> Director's decision must cause the corp to lose money/value.
    • >> Business Judgment Rule (BJR): court will not second-guess a biz decision if it was made in GF, as informed, and has a rational basis.
  10. Directors (Duty of Loyalty)
    • STANDARD: Director must discharge duties in GF and with a reasonable belief that what a director does is in the corp's best interest.
    • >> Must act with the degree of care/loyalty of a reasonable prudent person WRT one's own buainess. But, in doing so, the director is not required to consider the interest of any one particular group as controlling.

    KEY: NO Business Judgment Rule defense in DoL cases.

    • CASES:
    • (1) Interested Director Transaction: deal between the corp and one of its directors or another business of he director's.
    • >> Interested Director transaction will be set aside UNLESS: (1) deal was fair to the corp when entered into; OR (2) material facts and director's interest were known and the deal was approved in GF by either (i) a majority of disinterest directors; or (ii) the SHs.
    • >>>> Interested director can be counted for forum purposes, but vote ≠ count.
    • >> NOTE: Board approval ≠ automatic safe harbor. Court may still ask for showing that deal was fair.
    • (2) Competing Ventures: Cnnot compete unfairly with a corp.
    • >> REMEDY: Constructive trust on profits -- corp recovers any profits.
    • (3) Corporate Opportunities: Directors cannot USURP corp opportunities.
    • >> CORP OPP: Something necessary to corp OR in which it has an interest or expectancy OR is in its line of business.
    • >> Cannot take opp until director (i) tells the board; AND (ii) waits for the board to reject the opp.
    • >> REMEDY: Constructive trust on profits.
    • >> NOTE: Not valid defense to say corp lacked the financial ability to pay for the opp.
    • (4) Other Violations: Self-dealing, stealing money, withholding info of tender offer, ect.
  11. Duty of Care/Loyalty (Language)
    • STANDARD: Director must discharge duties in GF and with a reasonable belief that what a director does is in the corp's best interest.
    • >> Must act with the degree of care/loyalty of a reasonable prudent person WRT one's own buainess. But, in doing so, the director is not required to consider the interest of any one particular group as controlling.
  12. Directors (Liability)
    • LIABILITY (GEN): A director is presumed to have concurred with the Board's action UNLESS her dissent is noted in writing in corporate records.
    • >> Records: (1) in the minutes; (2) in writing to the corporate sexretary at the meeting; OR (3) in writing to the corp secretary immediately after the meeting.
    • >> Oral dissent, alone, is not effective.

    • (1) Absent directors ≠ liable.
    • (2) GF reliance on
    • >> (a) book value of assets;
    • >> (b) financial statements by auditors or president / chief accounting officer; OR
    • >> (c) opinion of an employee, officer, professional, or committee of which the relying party is not a member (if competent).

    Improper Distributions:
  13. Officers
    • GEN:
    • Status -- Officers are agents of the corp, so they can bind the corp if they have authority to do so.
    • Positions (Req) -- must have a president, secretary and treasurer, but one person can hold multiple offices.
    • Review -- BoD selects, monitors, removes and sets compensation of the officers.
    • >> NOTE: When fire officer, gone, but there may be a breach of contract.
  14. Excessive Compensation
    BoL: Waste of Corp Assets
  15. Indemnification of Directors/Officers
    • Indemnification
    • Nothing: if D convicted -- liable to corp.
    • Mandatory: to extent D wins -- on the merits or otherwise.
    • >> Need not win every claim.
    • Permissive: Settlements, but must show DoL: (i) D acted in GF and (ii) w/ reasonable belief that her actions were in the company's best interests.
    • >> Determined by disinterested direcrtos or independent legal counsel in a written opinion, or SHs.

    ARTICLES MODIFICATIONS: Can provide for limitation OR elimination of director liability for damages, but NOT for breach of DoL, reckless/intentional misconduct, or wrongful personal benefit.

    • ADVANCEMENT: Corp can (permissive) advance litigation expenses (incl. attorney's fees) to the offider or director, as long as she agrees to repay them if she is ultimately deemed ineligible for indemnification.
    • NOTE: Court of Common Pleas, regardless of corp decision, can order indemnification -- expenses and atty fees only.
  16. Shareholders (
    Close Corporations: SHs can manage close corps directly.
  17. Close Corps (**Often on Exam**)
    • GEN: 30 members (SHs) or less, and stock ≠ publicly traded.
    • >> BoD can run the company or SH can eliminate BoD (articles or bylaws, or approval by all SHs) and run it.
    • >> NOTE: Stock certificate should note such a change!

    MANAGEMENT: SHs can manage close corps directly.

    • NOTES: IN such cases, the managing SHs owe the corp the duties of care/loyalty.
    • >> Controlling SHs may be liable for oppressive acts toward minority SHs.
  18. Professional Corporations
    • GEN: Only licensed profs are SHs. Can hire non-professionals to do other services.
    • >> Professionals in PC NOT lianle for other members' malpractice.

    KEY: Better than a partnership b/c in a partnership, responsible for other partner's malpractice.
  19. Shareholders (Piercing the Corp Veil)
    • GEN: SH not liable for corporation's actions.
    • >> Strong presumption against PCV in PA. Best shot is in tort cases.

    • Piercing the Corp Veil (Only in Close Corps): court pierces the veil only if --
    • (1) SHs abused the privilege of incorporating; AND
    • (2) Faireness requires that they be held liable (ie. avoid fraud).
    • >> Focus on harm caused or potential injustice.

    • (1) Alter Ego -- treat corp assets as your own.
    • (2) Undercapitalization -- corp undercap when formed.
    • >> Failure to invest enough to cover prospective liabilities.
    • (1) Close corps
    • (2) SH activity -- failure to respect the separate corp entity
    • >> Also look for a situation where a parent corp forms a subsidiary to avoid obligations.
    • (3) Harm resulted from such activity?
    • (4) Limited liability unfair -- If no piercing, harm/injustice?
  20. Shareholders (Derivative Suits)
    • GEN: SH steps in to vindicate a corporate claim.
    • >> Corp must have been able to brough the suit.
    • >> Typical cases: Breaches to duties of loyalty/care.

    • KEY SAFEGUARD: Suit will dismiss suit IF invesitgation by disinterested directors reveals that suit ≠ in corp's best interest.
    • >> Court engages in review of DD decision.

    • SH REQS:
    • (1) Stock ownership: at time claim arose -- or have fotten it by operation of law from someone who did. Must own stock throughout the litigation.
    • >> If SH owns less than 5% of any class of stock, the corp an demand that the SH post security for costs (unless stock has FMV of $200K+).
    • (2) Fairly/adequately represent SH interests -- more than ownership.
    • (3) SH makes a written demand on directors that corp bring suit.
    • >> Excused only where futile: -- SH must show that irreparable injury to corp would result if demand made.
    • >>>> IE. directors would be defendants -- Almost always the case b/c breach of duty of loyalty.
    • (4) Plead w/ particularity.
    • (5) Corp must be joined as a defendant.

    • RESULT:
    • (1) Corp gets money from the judgment.
    • >> Settlements subject to court approval.
    • (2) SH receives costs and atty fees, usually from the corp, but only if court finds the case conferred a substantial benefit on the corp.

    BUT: If suit found to be commenced without reasonable cause, a corp -- if successful -- may be reimbursed for its expenses.

    CLAIM PRECLUSION: If one SH sues and case is decided on the merits, then another SH cannot later sue.
  21. Shareholders (Voting -- Generally)
    • GEN: Record SHs as of record date can vote.
    • >> See record date.

    • WHERE: vote by --
    • (1) File w/ corp a unanimous written consent of the holders of all voting shares to act w/o a meeting (includes emails); OR
    • (2) Meeting that satisfies quorum/voting rules.
    • >> Annual Meeting -- must be held. Set in bylaws. Elect directors.
    • >> Special Meeting -- can be called by board OR the holders of at least 20% of the voting shares (or someone else as provided in the articles).
    • (3) Notice -- written notice (when, where, purpose) to every SH entitled to vote.
    • >> If fail to give proper notice, actions taken at the mtg are VOID unles those not sent notice waive the notice defect.
    • >>>> WAIVER: express (in writing and signed any time); OR implied (attend mtg w/o objection).

    • HOW:
    • (1) Quorum -- focus on number of shares represented.
    • >> Usually a majority of outstanding shares.
    • (2) Vote -- majority of shares actually cast on the particular issue -- NOT necessarily a majority of all shares present.
    • NOTES:
    • Meetings can be over the internet (if participates can read/hear)
    • Officer must preside over the meeting.
  22. Shareholder (Voting -- Proxies)
    • PROXIES: Permitted.
    • >> Writing signed by record SH (email ok) that's directed to the secretary of the corp authorising another to vote the shards.
    • >> Good for 3 years unless proxy says otherwise.
    • >> Revocation: okay -- effective when corp secretary receives it in writing, OR upon written noice of SH death to secretary.

    IRREVOCABLE PROXIES: Only where proxy is coupled with an interest (ie. option to but the shares -- any interest beyond simple voting)
  23. Shareholders (Voting -- Block Voting)
    • (1) written trust agmt controlling how shares will be voted;
    • (2) copy to corporation;
    • (2) transfer legal title of shares to the voting trustee; AND
    • (4) original SHs receive trust certificates and retain all SH rights except voting.

    • GEN: Enforceable in PA (rare in other states); just need a contract.
  24. Shareholders (Removal Power)
    KEY: SHs can remove DIRECTORS, but NOT officers.
  25. Shareholders (Voting -- Cumulative Voting)
    • GEN: Multiply number of shares of stock in corp by the number of open directorships. Can vote that total for one or more candidate.
    • NOTE: CV is a default.
  26. Stock Transfer Restrictions
    • GEN: Okay if reasonable under the circumstances (not an undue restraint on alienation).
    • EFFECT: Does not affect transferee UNLESS (1) conspicuously marked on the stock certificate OR (2) transferee had actual knowledge of the restriction.
  27. Inspecting Books & Records
    • SH:
    • (1) SH have standing to demand access (during reg biz hours) to books and records, but must furnish a verified written demand stating a proper purpose (related to your interest as a SH).
    • >> No showing needed to inspect bylaws.

    • (1) Right to access books/records w/o making a showing.
  28. Distributions
    • GEN: Declared at BoD's discretion, unless the corp is insolvent or the distribution would render it insolvent.
    • >> Insolvent: Unable to meet debts as they come due; OR total assets are less than total liabilities.
    • >> Effect: If distribution unlawful, directors are personally liable.
  29. Fundamental Corp Changes & *Right of Appraisal*
    • GEN: Unusal occurrences requiring
    • (1) board action;
    • (2) notice to SHs; AND
    • (3) Approval by a majority of the shares actually cast on the issue.

    • Dissenting SH Right of Appraisal (Closely-held Corps -- no nat'l stock listing and less than 2,000 SHs)
    • GEN: Right of a SH to force the corp to buy the SH's shares at a fair value.
    • ARISES: Merger, consoldiation, transfer of most assets, shares acquired in a share exchange.
    • REQ:
    • (1) File w/ corp written notice of objection and intent to demand payment;
    • (2) Abstain or vote against the proposed change; AND
    • (3) W/in 30 days after notice that the change was approved, make written demand to be bought out.
    • ***MUST INCLUDE: Right of appraisal is the exclusive remedy for fundamental changes UNLESS fraud or fundamental unfairness.
  30. Amending the Articles
    • Procedure
    • BoD Action
    • Notice to SHs
    • SH approval (maj votes cast)
    • Amendments filed w/ PA Dept of State
  31. Merger
    • Procedure (BOTH CORPS)
    • BoD Action
    • Notice to SHs
    • SH approval (maj votes cast)
    • >> Short Form Merger: No SH approval required if subsidiary merging w/ parent and 80% or more owned by parent.
    • Articles of merger filed w/ PA Dept of State

    • KEY: Dissenting SH Right of Appraisal -- for both companies.
    • >>Most popular way to raise a right of appraisal.

    EFFECT: Successor Liability -- Surviving company succeeds to all rights/liabilities of the constituent companies.
  32. Transfer of All (Sub. All) Assets Not in OCOB.
    • KEY: Fundamental changes only for the SELLER, not for the buyer.
    • RESULT: Dissenting SH Right of Appraisal only available to Seller's SHs.

    • BoD Action (both corp)
    • Notice to SHs (seller corp)
    • SH approval by Seller Corp (maj votes cast)
    • Filing
    • >> If Share Exchange: Seller files articles of merger w/ PA Dept of State
    • >> If Transfer of Assets: no filing.

    LIABILITY: Buyer corp not usually liable for seller cop's liabilities UNLESS deal provides otherwise OR corp purchasing the assets is a continuous of the selling comapny (or fraud exists).
  33. Dissolution
    • Voluntary Dissolution:
    • BoD Action
    • Notice to SHs
    • SH approval by Seller Corp (maj votes cast)

    • Involuntary Dissolution: Court order --
    • SH/director petition b/c of fraud, illegal/oppressive acts, ect.
    • Creditor can petition bc corp is insolvent and the creditor has an unsatisfied judgment against corp or corp admits debt in writing.

    FINAL STEP: Post wind-up, president and secretary execute verified articles of dissolution, file with PA Dept of State.

    • EFFECT: Corp remains in existence for winding up purposes.
    • >> Gather assets, convert to cash, pay creditors, distribute remainder to SHs.
Card Set
PA: Corporations