What is a promoter's liability with regard to a pre-incorporation contract on behalf of the corporation?
Generally personally liable, unless there is a subsequent novation
___________________ manage and direct the management of the corporation’s business and affairs and are responsible for major corporate decisions.
Stock that has been issued by a corporation and then reacquired by the corporation is called ____________________ stock.
What is the Business Judgment Rule?
In the absence of fraud, illegality, or self-dealing, a court will not disturb the good-faith judgment of the directors or officers.
There are several requirements that are necessary for a proxy to be used. A proxy must be:
- o In writing;
- o Signed by the shareholder;
- o Sent to the secretary of the corporation;
- o An authorization by the shareholder to vote the shares; and
- o Valid for no more than 11 months, unless otherwise specified.
To determine which shareholders are eligible to vote, the directors fix a record date no more than __________ days and no fewer than __________ days before the meeting.
A corporation is a
a distinct legal entity that can conduct business in its own right by buying, selling, and holding property or by suing or being sued, and by lasting forever.
____________: investors, ultimate owners of aresiduary interest in a corporation
_______________: elected by shareholders,responsible for major corporate decisions, appoint officers
________________: run the corporation on a daily basis.
What are the duties and responsibilities of promoters?
- Try to find investors who are willing to invest in the corporation
- Enter into contracts on behalf of the corporation (even before it exists)
- Promoters are fiduciaries of the corporation - cannot make secret profits.
As a general rule, Corporation is __________ for pre-incorporation agreements made by promoters.
Promoters are __________________________ for any contracts entered into before the corporation exists. Unless a ___________ occurs.
personally liable; novation
What are the duties and responsibilities of "incorporators?"
- Must sign and file the articles of incorporation, pay a fee
- Incorporators are not liable for contracts formed by promoters.
What must be included in articles of incorporation?
- The name of the corp, which must include: “Corporation,” “Company,” “Incorporated,” “Limited”, or an abbreviation of these words;
- The agents of the corp (name and address within the state of incorporation);
- The names and addresses of the incorporator(s);
- The duration of the corp (most are perpetual);
- The purpose of the corp; and
- Authorized shares (Must state the maximum number of shares of each class of stock that the corp is authorized to issue)
What is an "ultra vires" and what are the remedies available is one occurs?
- An ultra vires is an act outside the powers or purpose of the corp.
- A shareholder can sue to enjoin an ultra vires action.
- The corp can take action against ultra vires directors or officers.
- The state can initiate proceedings to enjoin such actions.
A corp is legally formed when:
the Secretary of State accepts the fee and files the articles.
What if the corporation is not properly formed, but nevertheless enters into obligations after it was supposedly formed?
Corp will still be treated as a corp, with limited liability, if the organizers made a good faith effort to comply with the incorporation process; and have no actual knowledge of a defect in the corp status. (De Facto Corporation)
What three factors are considered when making a determination to "pierce the veil?"
- Alter Ego: the investor or shareholder has failed to observe any corporate formalities between the person and the corporation - treated the company just like itself;
- Under Capitalization: failure to maintain funds sufficient to cover foreseeable liabilities; and
- Fraud: the parties engaged in fraud or fraud-like behavior.
Shareholders are NOT personally liable for the debts of a corporation, but only liable for the amount invested into the corporation, except a court may ______________ of limited liability to avoid fraud or unfairness.
"pierce the veil"
What are the characteristics and benefits of corporate stock?
- Ownership is represented by shares of stock.
- Carries voting attributes and economic rights
- Traditionally ownership was demonstrated by stock certificates
- Today ownership is generally demonstrated electronically
________________ - hold the debt of a corporation. Entitled ONLY to repayment of their loan plus interest
____________________ (equity holders) - entitled to ALL the value that remains in a corporation after the debts have been paid.
What are the characteristics of preferred stock?
Has preference over common stock with respect to dividends (payments to shareholders) and liquidation.
What are the four types of stock SHARES:
- Authorized Shares: Maximum number of shares that the directors of a corp can sell. Set in the articles of incorporation and need shareholder approval to sell more.
- Issued Shares: Number of shares from the authorized pool that the directors have actually sold.
- Outstanding Shares: Shares that were once issued to shareholders and still remain in the possession of the shareholders. NOT reacquired by corp.
- Treasury Shares: Stock previously issued to shareholders, but then reacquired by the corp.
What is "watered stock?"
The corporation sets a par value amount and sells the stock for less than the stated amount.
What is "stock subscription?"
Ask people to agree in advance to buy stock - before the corporation is formed.
Prior to incorporation - subscription agreements are irrevocable for____________________.
What are preemptive rights?
Right to acquire stock to maintain the percentage of ownership any time new shares are issued. Default rule in most jurisdictions: shareholders do not have preemptive rights, unless negotiated or included in articles.
Board CANNOT declare dividends under two circumstances:
If the corporation is insolvent or if, by issuing the dividend, the corporation would become insolvent. Directors who vote to authorize an unlawful dividend are personally liable, jointly and severally,to the corporation for the amount in excess of the lawful amount. A director will NOT be liable if he relied in good faith on financial statements.
What are the duties of a corp's shareholders?
- Most important duty - elect the directors
- Vote on major decisions that affect fundamental changes in the corporation
Every corporation must hold an ___________ to elect directors and conduct other shareholder business.
For fundamental changes (e.g. dissolution, merger), a corp can call a ____________________ .
Special meeting. State laws typically specify who may call special meetings (e.g., board of directors, senior officer, a certain percentage of shareholders or shares, etc.).
Shareholders must be given notice of either a annual or a special meeting no fewer than ___________ days, but no more than ___________ days,before the meeting.
No fewer than 10 days, but no more than 60 days before the meeting.
A notice for a meeting to shareholders must include:
The date, time, location and purpose of the meeting (in the case of a special meeting). Insufficient notice can allow a shareholder to challenge actions taken at the meeting.
What is the "record date?"
Used to determine which shareholders are eligible to vote. The directors must fix a record date. Must be no fewer than 10 days before the meeting and no more than 70 days before the meeting. ONLY shareholders who actually own shares on the record date are entitled to vote.
All shareholders may take any action without a meeting by unanimous ________________ .
To be legally effective, a proxy must be:
- In writing;
- Signed by the shareholder as of the record date;
- Sent to the secretary of the corporation;
- State that it authorizes another to vote the shareholder’s shares; and
- Cannot be valid for more than 11 months, unless otherwise specified.
Shareholders typically vote on:
- Election of directors;
- Share exchanges;
- Amendments to the articles of incorporation;
- Sales of all or substantially all of its assets; or
What is quorum, and what is needed to have one?
- For a vote to be effective, a quorum of the corp’s shares (NOT shareholders) must be represented at the meeting, in person or via proxy.
- A quorum is a majority of the corp’s outstanding shares represented at the start of the meeting.
If a quorum is present, what is the necessary vote to pass a proposal?
If a quorum is present, a shareholder vote is effective if the votes cast in favor of the proposal exceed the votes cast against the proposal.
What is "cumulative voting" and what is it's purpose?
- Applies only to the election of directors
- Protects shareholders' right to elect directors
- Corps can choose to permit cumulative voting in the articles.
- Shareholders are given a number of votes that is equal to the number of shares they hold, multiplied by the number of director positions being voted on.
- Votes can be spread around or put on one director.