Corporations

  1. Formation Requirements
    • One or more incorporators
    • articles of incorporation (K b/w corp & SH, corp & state)
    • filing
  2. Legal Significance
    • Internal Affairs Doctrine: internal affairs of corp are governed by the law of the state of incorp
    • Limited Liability: D&Os not personally liable for acts of corp; SH not PL for debts
  3. De Facto Corp
    • parties make good faith, colorable attempt to compy with relevant incorp statute 
    • and some exercise of corp privileges-treated as a corp (SH not PL) even if fail to achieve de jure corp status.

    Treat as corp for all purposes except in an action by state for exceedings its powers (action “quo warranto”)
  4. Corp by Estoppel
    one dealing with business as a corp and treating it as such may be estopped from denying the business’ corp status. 

    • (1) invoked against those who dealt directly with business as a corp;
    • (2) prevent comp from avoiding an obligation by asserting its own lack of valid formation.  Based on course of dealing = not tort creditor
  5. Promoter Transactions
    • Participates in the formation of the corp by securing initial capital
    • arranging compliance with the legal information requirements
    • &entering into necessary contracts on Behlf of the Corp before it is formed
  6. Pre-incorporation Agreement
    • Corp not automatically bound by promoters pre-incorporation contracts upon formation
    • BOD has right to weigh merits in deciding whether to approve K.
  7. Pre-incorporation agreement with 3rd party
    • Agreements where the contract expressly provides for the promoters liability leave the promoter primarily liable even through K is for the benefit of the Corp. 
    • *after incorporation promoter remains primarily liable
    • **where K is silent to liability, promoter remains primariliy liable
  8. Secret Profit Rule
    Promoter cannot make a secret profit on his dealing with the corp.  NOT liable if not secret—i.e. full and adequate disclosure of all  material facts

    Sale to corp of prop he acquired before becoming a promoter: Profit = Price paid by corp minus FMV

    Sale to corp of prop he acquired after becoming a promoter: Profit = Price paid by corp mins price paid by promoter
  9. Liability on Pre-Incorporation Contracts
    • Corp not liable until adopts
    • (1) express (BoD) or
    • (2) implied (knowing use or receipt of benefits).  Promoter liable unless K clearly provides otherwise until novation (adoption makes corp liable too, but doesn’t relieve promoter)
  10. Foreign Corps
    • one incorporated outside this state.  Foreign corps can’t transact business in this state without qualifying. 
    • “Transacting business” = regular course of intrastate (not interstate) business activity. 
    • Qualify by getting a “certificate of authority” from Sec of State, pay fees, and appoint registered agent
  11. Issuance of Stock (Form)
    • Consideration (Amount+Form)
    • Form: split of auth
    • (1) Trad’l: money | (in)tangible prop | services already performed | NO future services or PN. 
    • (2) Modern: any (in)tangible prop or benefit to the corp (including PN and future services)
  12. Issuance of Stock (amount)
    • Consideration (Amount+Form)
    • Amount: Par = min issuance price.  Corp must get par value.  No par then BoD sets price. 
    • Treasury stock (reacquired stock): no min!  treat selling out of treasury as no par!
  13. Consequences of issuing par stock for < par value
    (“watered stock”): Ds liable if knowingly authorized issuance.  Purchaser of watered stock liable for the water—must pay par value for the shares.  BUT if purchaser transfers stock to 3rd party, he is not liable if acted in good faith (didn’t know watered)
  14. Preemptive Rights
    Right of an existing SH to maintain her $ of ownership by buying stock whenever issuance of new stock for money (cash or equivalent).  Some states exclude sale of treasury stock and originally authorized but previously unissued shares.

    Trad’l: exist unless articles provide otherwise.  Modern: don’t exist unless articles provide for
  15. Directors Statutory Requirements
    1+ adult natural persons.  Elected by SH.  SH can remove before terms expire w/ or w/o cause (req maj of shares entitled to vote).
  16. Board Action (Directors)
    • only TWO ways the BoD can take valid act
    • (1) unanimous written consent to act without a meeting, OR
    • (2) a meeting that satisfies quorum and voting reqs.  If neither, then act is void unless later ratified by a valid corp act.

    Quorum: maj of all Ds to do business (unless diff % in bylaws) if quorum present, passing a resolution requires only a maj of votes present.  Quorum broken if Ds leave!
  17. Directors Role
    BoD manages business of corp (big picture stuff).  Can delegate substantial management functions to a committee, but it can’t amend bylaws/declare dividends/recommend fundamental corp change to SH
  18. Directors Duty of Care
    • Standard: D owes the corp a duty of care as a matter of law. Diligence, Care and Skill which the ordinary prudent person would exercise in the management of his own affairs. 
    • Nonfeasance: D does nothing then liable only his breach causes harm to the company (causation!)
    • Misfeasance: BoD does something that hurts corpàNOT liable is meets BJR
  19. Business Judgment Rule
    • Directors are not liable for losses flowing from their business decisions if they were the result of:
    • well informed
    • independent
    • good faith decisions
  20. Duty of Loyalty Standard
    D owes the corp a duty of loyalty.  He must act in good faith and with a reasonable belief that what he does is in the corp’s best interest.
  21. Duty of Loyalty: Interested Director Transaction
    • Will be set aside UNLESS D shows: 
    • 1) deal was fair to the corp when entered or
    • 2) his interest and the relevant facts were disclosed or known + deal was approved by either a maj of disinterested D's or maj of disinterested shares. 
    • Fair when made PR disclosure +approval.
  22. Duty of Loyalty: Competing Ventures
    • D must act in the best interest of corp = can. NOT compete directly with her corp. 
    • Remedy: constructive trust on profits and possibly damages for harm to corp
  23. Duty of Loyalty: Corp Opportunity (expectancy)
    • D cannot usurp a corporate opportunity = D can’t take it until he
    • (1) tells the BoD—disclosure + (2) waits for BoD to reject the opp. 
    • Remedy: D has it, must sell it to corp at his cost.  If sold it at profit, corp gets profit (constructive trust).
    • Corp opp = anything the company could reasonably be expected to be interested in
  24. Ultra Vires Doctrine
    • Transactions that exceed beyond purpose & powers of corporation. 
    • CL: defense to corp obligtion
    • ML: no defense available

    Officers and directors can be held personally liable.
  25. Improper Loans
    • No clear maj view then
    • (1) loan must be approved by majority of shares. 
    • (2) clear modern trend—loans OK if BoD finds that it’s reasonably expected to benefit the corp
  26. Sarbanes-Oxley
    prohibits most loans to execs  in registered, publicly traded corps
  27. Which Ds are Liable
    • D is presumed to have concurred with BoD action unless her dissent/abstention is noted in writing in corp records
    • (1) in the minutes;
    • (2) in writing to corp secretary at mtg; or
    • (3) registered letter to corp secretary immediately after mtg. 
    • Oral dissent is NOT enough!!!
  28. Which Ds are Liable-Exceptions
    • (1) absent directors not liable (some states require dissent in writing after learning of BoD action);
    • (2) good faith reliance on book value of assets prepared by CFO | opinion of competent EE/officer/prof/ comm.. of which relying D not member | financial stmts by auditors.  Reasonable belief in competence of persons providing such info!!!
  29. Offices Status
    • agents of corp = can bind the corp by acts for which they have authority to bind it
    • Actual authority: given in artices, bylaws, or BoD act
    • Apparent authority: corp holds officer out as having authority to bind it, so 3rd parties rely
    • Inherent/Implied authority: by virtue of the office held (prez has inherent auth to enter Ks binding on corp)
  30. Officers Selection and Removal
    • by BoD, not SH.  Directors also set officer comp.
    • BoD can remove officer if lose faith in his ability to run corp, but will have to cut a check (typically sue for enforcement of employ’t agmt)
  31. Indemnification
    persons sued in capacity as D or O has incurred costs/attys fees/fines/judgment/settlement, and seeks reimbursement from the corp.  Sued in representative capacity as D/O then reimbursement claim
  32. No indemnification
    corp barred from indemnifying when D/O is (1) held liable to the corp, or (2) held to have received an improper personal benefit.  MUST have finding of liability!  Against public policy to reimburse
  33. Mandatory indemnification
    • corp required to indemnify:
    • Some states: if D was “wholly successful” (on the merits or otherwise) in defending an action
    • Others: to the extent D was successful
  34. Permissive indemnification
    • corp permitted to indemnify:
    • (1) anything not satisfying bar or requirement of indemnification (i.e. settlements!!!);
    • (2) eligibility standards determined by disinterested Ds or disinterested shares or independent legal counsel (D must show acted in GF + w/ reas belief that actinos were in corp’s best interests)
  35. Alter Ego (identity of interests)
    commingling of funds or failure to observe corporate formalities (SH treats corp as his alter ego by treating the corp and his personal assets as interchangeable).  Failure to respect the separateness of the corp.  Must be SERIOUS failure, not just sloppy admin
  36. Undercapitalization
    • SH fail to invest enough to cover prospective liabilities = undercapitalized when formed           
    • Courts are generally more willing to PCV for a tort victim than for a K claimant
  37. Related Corp Situation
    parent corp forms sub to avoid obligations then creditor of parent not getting paid.  Court will PCV to get to sub’s assets.
  38. Pierce the Corporate Veil
    • Gen, shareholder is not liable for the acts or debts of the corporation, but the court will pierce the corp veil and hold the shareholder personally liable to avoid fraud or injustice. 
    • Look for alter ego, undercapitalized at formation, parent company forms sub for purpose of avoiding debts.
  39. Closed Corp
    • few SH + shares not publicly traded:
    • SH can manage a corp directly here-must be a unanimous SH agmt that provides for SH management. 
    • In some states: statement in articles to that effect.  This means corp need not have a BoD.  Managing SH owe duties of care and loyalty. 
    • Clear trend: SH in a close corp owe each other fiduciary duties (watch for controlling SH oppressing)
  40. Professional Corp
    SH must be licensed profs and generally it may practice only one profession.  Remain personally liable for their own malpractice/misconduct, BUT generally not liable for each other’s
  41. Derivative suit
    • SH suing to enforce the corp’s claim, not his own personal direct claim.  ASK: could the corp have brought this suit? 
    • Consequences of success: recovery in derivative suit goes to corp.  SH may receive costs and atty’s fees, usually from the corp (conferred benefit to it)
    • Exception: sometimes ct may allow SH to recover directly if a recovery by corp would simply return $ to the bad guys
    • Consequences of failure: SH canNOT recover costs and attys fees.  SH LIABLE to D for its costs and attys fees IF SH sued without reasonable cause
  42. Requirements for Derivative Suit
    • Demand on Directors
    • Demand on Shareholders
    • Contemporaneous Ownership
    • Security for Expenses
  43. Derivative Suit: Demand
    must make a written demand on Ds that the corp bring suit UNLESS demand would be futile
  44. Derivative Suit: Contemporaneous Stock Ownership
    SH must have owned stock at the time the claim arose OR have gotten it by operation of law (inheritance/divorce decree) from someone who did own stock when claim arose.  MUST own the stock throughout the litigation.
  45. Derivative Suit: Security for Expenses
    Post security bond for cost: (some states) to avoid strike suits
  46. Federal Rule 10b-5
    illegal to use any fraudulent scheme in connection with the purchase or sale of any security using an instrumentality of interstate commerce

    Elements: Jurisdiction/Omission/Material/Scienter/Standing/Reliance/Privity/Remedies
  47. 10b-5: Jurisdiction
    transaction must employ an Instrumentality of Interstate Commerce (phone, mail, national exchange)
  48. 10b-5:Omission
    Failure to disclose or misstatement to public (omission to public)
  49. 10b-5: Material
    misrep or omission must concern a “material” fact = one that a reasonable investor would consider important in making an investment decision
  50. 10b-5: Scienter
    D must have an intent to deceive | manipulate | defraud. Recklessness may suffice but not negligence!
  51. 10b-5: standing
    • Broad definition of purchaser/seller
    • *including SEC, corp-issuer
    • *SEC may sue
  52. 10b-5: Privity
    SEC no longer requires that one must prove privily in order to sue.
  53. 10b-5: Reliance
    separate element in fraud cases BUT presumed if material, in cases of nondisclosure and open market public misrep!
  54. Tipper
    • Corp insider
    • Exploiting info for personal gain (direct/indirect benefit
    • Was tip made for improper purpose

    IF NO TIPPER, NO TIPPEE!!! “casual eavesdropper”
  55. Tippee
    traded on tip + knew/should’ve known info was improperly passed

    IF NO TIPPER, NO TIPPEE!!! “casual eavesdropper”
  56. Federal Rule 16b
    • Profits realized in connection w/purchase&sales within 6 months
    • *of equity securities listed on National Stock Exchange
    • *by an officer/director/ or holder of more than 10% of stock
    • *
    • are recoverable by the corp. 

    Elements: Jurisdiction/insider/short swing profit/purchase/sale/*recover
  57. 16B-Jurisdiction
    reporting corp” = (1) listed on national exchange OR (ii) at least 500 SH + 10mil in assets
  58. 16B-Insider
    • D&O (either when bought or sold), OR SH with more than 10% (above 10% mark both when bought and sold)
    • 10% SH: to determine if he is above 10%, take snapshot of ownership level immediately BEFORE the event!  SH at 17% sells all then sale covered cuz immediately before event he was above 10%!
  59. 16B-short swing trading
    • buying and selling stock within a single six-month period. 
    • Calculation: match lowest purchase price minus highest sale price time # of shares
    • *($25lowest-$50 highest)x1000 shares=$25k short swing profit. 

    • Fraud not required.  No req of inside info
    • Defendant must have bought and sold equity sec (stock)
  60. 16B Recovery
    The corporation may recover all profits (match the highest sales price against the lowest purchase price during any 6-month period).
  61. Revocation of Subscriptions
    Pre-incorporation, a subscription is irrevocable for six months unless provided otherwise.  Post-incporation, a subscription is freely revocable until acceptance
  62. Dividends
    The board of directors has sole discretion to declare dividends.  To force dividends the shareholder must make a very strong showing of abuse of discretion.

    Payable out of earned surplus, capital surplus, but never stated capital (par value).
Author
jasonfreise
ID
337890
Card Set
Corporations
Description
Corps short
Updated