Term
| Promoters - when does corporation become liable on a promoter's preincorporation contract? |
|
Definition
| The corporation becomes liable on a promoter's pre-incorporation contract when the corporation ADOPTS the contract by:
1) express board of director's resolution
2) implied adoption through knowledge of contract and acceptance of its benefits |
|
|
Term
| Promoters - when do they have liability under the pre-incorporation contract? |
|
Definition
| They remain liable until there has been a novation, which is an agreement between the promoter, the corporation, and the other contracting party that the corporation will replace the promoter under the contract) |
|
|
Term
| Promoter - who is liable on the contract if the corporation is never formed? |
|
Definition
| If the corporation is never formed, the promoter alone is liable on the contract |
|
|
Term
| Promoter - who is liable if a promoter enters a pre-incorporation contract, and the corporation is formed, but merely adopts the contract? |
|
Definition
| Both the promoter and the corporation are liable on the contract |
|
|
Term
| Promoters - duties as fiduciaries |
|
Definition
| Promoters are fiduciaries of each other and the corporation. therefore, promoters cannot make a secret profit on their dealings with the corporation. |
|
|
Term
| Promoter - sale to corporation of property acquired by promoter before becoming a promoter, after becoming a promoter |
|
Definition
Sale to corp of property acquired BEFORE: profit recoverable by corp only if sold for more than FMV
Sale to corp of property acquired by promoter AFTER: any profit recoverable |
|
|
Term
|
Definition
| Persons acting on behalf of a corporation not yet formed |
|
|
Term
|
Definition
| Persons or entities who make written offers to buy stock from a corporation not yet formed. |
|
|
Term
| Subscribers - preincorporation offer to buy stock - revokable? |
|
Definition
| A preincorporation offer to buy to stock is irrevocable for a 6 month period. |
|
|
Term
| De Jure corp - Incorporators - duties |
|
Definition
| They merely sign and file articles of incorporation with the state |
|
|
Term
| De Jure corp - Articles of incorporation - requirements |
|
Definition
APAIN
Authorized shares - max # auth to sell
Purpose
Agent (and address of registered office)
Incorporators - names and address
Name of Corporation - some indication of corporate status |
|
|
Term
| De Jure corp - articles of incorporation - when no specific purpose stated |
|
Definition
Absent a statement of a specific purpose, the RMCBA presumes
1) that a corporation has a general purpose to conduct lawful business and is allowed to undertake any act necessary or convenient for carrying on business purpose, and
2) the corp has a perpetual duration. |
|
|
Term
| De Jure corp - articles of incorporation - narrow purpose and ultra vires activity |
|
Definition
| If articles state a narrow purpose, activities beyond that purpose are ultra vires. Ultra vires acts are generally enforceable, BUT
1) The State can enjoin the ultra vires activity
2) the corporation can sue its own directors and officers for losses caused by ultra vires activity
3) a shareholder may sue the corp to enjoin the act |
|
|
Term
| De jure corp - need to adopy by-laws, board powers regarding bylaws |
|
Definition
| A corporation need not adopt by-laws. The board has the power to adopt and amend the by-laws, unless the articles give the power to the shareholders |
|
|
Term
| De facto corp - definition |
|
Definition
A business that fails to achieve de jure corporate status is treated as a corporation IF the organizers
1) have made a good faith, colorable attempt to comply with corporate formalities and
2) have no knowledge of the lack of corporate status |
|
|
Term
| Corporation by estoppel - formation, effect on liability |
|
Definition
Formation - parties act as if there is a corporation, no requirement of following statutory provisions
Effect on liability - insulates against personal liability in K, but not in tort |
|
|
Term
| Corporation - legal significance |
|
Definition
1) corp is separate legal person
2) limited liability - shareholders are not personally liable for debts of corporation |
|
|
Term
| What are the 3 situations in which the corporate veil can be pierced (shareholder can be liable for corporate obligations) |
|
Definition
1) alter ego - failure to observe sufficient corporate formalities
2) undercapitalization - failure to maintain sufficient funds to cover foreseable liabilities (failure to not get insurance)
3) avoidance of existing obligations, fraud, or evasion of statutory provisions (but mere fact that that individual chooses corporate form to avoid future obligations is not reason itself to pierce veil) |
|
|
Term
| General essay statement about corporate veil piercing |
|
Definition
| In general a court will pierce the corporate veil to prevent fraud or unfairness. Here, [CORP] is [undercapitalized / failed to observe formalities / was doing something fraudulent] |
|
|
Term
| Piercing the corporate veil - alter ego - where arises |
|
Definition
| The shareholders treat the assets of the corporation as their own and/or failed to observe corporate formalities. Sloppy administration NOT enough |
|
|
Term
| Piercing the corporate veil - inadequate capitalization |
|
Definition
| Corporation is inadequately capitalized so that AT THE TIME OF FORMATION there is not enough unencumbered capital to reasonably cover prospective liabilities |
|
|
Term
| Piercing the corporate veil - who is liable, type of liability |
|
Definition
liability is joint and several for those shareholders active in operation of the business
veil pierced more easily in tort than in contract cases where chance to examine corp stability, usually by creditors instead of courts |
|
|
Term
| Issuance of stock - par value, no par value |
|
Definition
par value - the minimum issuance price
no par value - no minimum issuance price, which means that ANY valid consideration can be received and deemed adequate by the board |
|
|
Term
| Issuance of stock - what is valid consideration |
|
Definition
| Under the RMBCA, shares may be paid with any tangible or intangible property or benefit to the corporation |
|
|
Term
| Issuance of stock - RMCBA effect on par value |
|
Definition
The RMBCA has generally eliminated the concept of par and allows corportions to issue shares for whatever consideration the directors deem appropriate.
However, if articles of incorporation define par value, if directors sell stock for less than par they will be liable for breach of fiduciary duty. |
|
|
Term
| Issuance of Stock - Definition of treasury stock |
|
Definition
| Treasury stock is stock that was previously issued and had been reacquired by the corporation, Treasury stock is deemed to be no par stock. |
|
|
Term
| Issuance of stock - when par stock is issued for less than par value, who is liable? |
|
Definition
| The directors and the shareholders are liable to pay full consideration for below par value price. You may elect who to sue. |
|
|
Term
| Issuance of stock - preemptive right |
|
Definition
The right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new isusance of stock for cash.
The right must be expressly granted in corporate articles |
|
|
Term
| Directors - shareholders power to elect and remove |
|
Definition
| Shareholders elect directors, and can remove directors (even before their term expires) without without cause |
|
|
Term
| Directors meeting - type of meetings, notice required |
|
Definition
Regular meetings - may be held without notice
Special meetings - require 2 days' written notice of date, time, and place |
|
|
Term
| Board meeting - What is required for a vote to pass a resolution at a shareholder meeting? How many votes wil pass a resolution? |
|
Definition
A quorum - a majority of all directors are needed to take action (unless a different percentage is required by the bylaws)
To pass a resolution, all that is required is a majority of the votes present |
|
|
Term
| Directors duties - Business Judgment Rule |
|
Definition
The BJR is a presumption that the directors manage the corporation in good faith and in the best interests of the corporation and its shareholders.
As such, directors will not be liable for innocent mistakes of business judgment. |
|
|
Term
| Statement of directors' Duty of Care |
|
Definition
Directors must act with the care that an ordinarily prudent person would use with regard to her own business
unless the articles have limited director liability for breach of the duty of care |
|
|
Term
| Directors duties - duty of care - reliance on reports or other information |
|
Definition
| A director is entitled to rely on information, opinions, reports, or statements if prepared and presented by 1) corporate officers or employees whom the directors believes to be RELIABLE and COMPETANT, 2) legal counsel or accountants as to matters within their COMPETANCE, and 3) a committee of the board of which the director is not a member, and the committee merits CONFIDENCE |
|
|
Term
What are the 2 major (and 1 minor) duties of directors
|
|
Definition
Duty of Care
Duty of Loyalty
Duty to manage (but can delegate) |
|
|
Term
| General structure of answer to director duties question |
|
Definition
1) directors have a duty to manage
2) they are protected from liability by the BJR
3) directors have a duty of care and duty of loyalty - [they must act with the care a reasonably prudent person would in managing their own business (unless articles have limited liability)], [they may not receive an unfair beenfit unless there has been disclosure and independent ratification]
4) here, duty of care [breached / not breached]. [BJR defense] |
|
|
Term
| Statement of the duty of loyalty |
|
Definition
| A director may not receive an unfair benefit to the detriment of the corporation or its shareholders, unless there has been material disclosure and independent ratification |
|
|
Term
| 2 types of unfair benefits that cause breach of duty of loyalty |
|
Definition
Self-dealing - director receives an unfair benefit to herself (or relative) in a transaction with her own corporation
Usurping corporate opportunities - director receives an unfair benefit by usurping for herself an opportunity which the corporation would have pursued |
|
|
Term
| Directors duties - duty to manage |
|
Definition
| Directors have a duty to manage the corporation. They may delegate management functions to a committee of one or more directors that recommends actions to the board |
|
|
Term
| Directors duties - business judgment rule - full statement |
|
Definition
Directors must discharge their duties
1) in good faith
2) with the care that an ordinarily prudent person in a like position would exercise under similar circumstances
3) in the manner the directors reasonably believe to be in the best interests in the corporation |
|
|
Term
| Directors duties - duty of loyalty - conflicting interest transaction |
|
Definition
A director has a conflicting interest with respect to a transaction if she or related person
1) is a party to the transaction
2) has a closely linked interest in the transaction that would influence her judgment if she were to vote on the transaction, OR
3) is a director, partner, agent, or employee of another entity and the transaction would be brought before the board of that entity |
|
|
Term
| Directors duties - duty of loyalty - how to uphold conflicting transaction |
|
Definition
IF all material facts have been disclosed:
1) transaction can be approved by a majority of at least 2 directors who do NOT have a conflicting interest, OR
2) transaction can be approved by a majority of votes entitled to be cast by shareholders who do NOT have a conflicting interest
OR IF no disclosure:
transaction was fair to the corporation |
|
|
Term
| Directors duties - duty of loyalty - conflicting interest - damages |
|
Definition
| Enjoining the transaction, setting the transaction aside, damages |
|
|
Term
| Directors duties - duty of loyalty - usurping corporate opportunity - elements |
|
Definition
1) Corporation would have an interest or expectancy in opportunity (is opportunity close to corporate line of business)?
2) If so, opportunity must be presented to the board. Lack of financial ability is NOT a defense
3) Lack of financial ability to pursue opportunity not a defense |
|
|
Term
| Directors duties - duty to disclose |
|
Definition
| Directors have a duty to disclose material corporate information to other members of the board |
|
|
Term
| Officers - responsibilities, powers, duties of conduct, removal |
|
Definition
Responsibilities are determined in bylaws
Powers are determined by agency rules
Duties of conduct are same as directors
Can be removed at any time without cause |
|
|
Term
| Indemnification - a corporation may never indemnify a director who... |
|
Definition
| loses a lawsuit to their own corporation (liable to corporation, or improper benefit) |
|
|
Term
| Indemnification - mandatory |
|
Definition
| A corporation must indemnify a director or officer who prevailed in defending a proceeding brought by a party |
|
|
Term
| Indemnification - rule for discretionary indemnification |
|
Definition
A corporation may indemnify a director for expenditures for corporate purposes if:
1) director acted in good faith
2) believed that their conduct was within best interests of corp, or not unlawful |
|
|
Term
| shareholder derivative suit - definition |
|
Definition
Shareholder is suing to enforce the CORPORATION'S cause of action
Ask: could corporation have brought this suit? |
|
|
Term
| Shareholder derivative suit - requirements |
|
Definition
1) contemporaneous stock ownership at time claim arose (standing)
1) must generally make a demand on directors that they cause their own corporation to bring the suit (demand must be made and rejected or at least 90 days must have passed since the demand was made) |
|
|
Term
| shareholder vote - who has right to vote when voting occurs? |
|
Definition
| Shareholders on the record date that is set by the board (date cannot be more than 70 days before meeting) |
|
|
Term
| shareholder vote - meeting types |
|
Definition
Annual meeting - at least once a year where director position is open. Notice of time and place if required
Special meeting - meeting of shareholders to vote on proposals or fundamental corporate changes. Notice must contain special purpose of meeting |
|
|
Term
| Shareholder vote - cumulative voting - definition |
|
Definition
| Under cumulative voting, you multiply the number of shares by number of directors to be elected |
|
|
Term
| Shareholder vote - proxy - elements, length |
|
Definition
writing
signed by record shareholder
directed to secretary of corp
authorizing another to vote the shares
valid for only 11 months |
|
|
Term
| Shareholder vote - proxy - how revokable |
|
Definition
Proxies can be revoked unless they are
1) labelled as irrevocable, AND
2) they are coupled with an interest |
|
|
Term
| Shareholder vote - quorum, how vote evaluated |
|
Definition
A quorum is a majority of outstanding shares (NOT shareholders) represented when the meeting begins, unless otherwise provided in the articles.
If a quorum is present, action is approved if the votes cast in favor exceed the votes cast against. |
|
|
Term
| Shareholder vote - Definition of voting trust |
|
Definition
| A formal written agreement delegating voting power to a trustee which is valid for no more than 10 years (helps shareholders who vote alike to increase their interest). Legal ownership transferred to trustee, but shareholders retain beneficial ownership. |
|
|
Term
| Shareholder vote - Definition of shareholder voting agreement |
|
Definition
| An agreement in writing to vote shares a certain way. It can be perpetual, and shareholders retain legal and beneficial ownership. |
|
|
Term
| Shareholder vote - cumulative voting - when does right exist? |
|
Definition
| The right to engage in cumulative voting does NOT exist UNLESS it is expressly granted in the articles of incorporation |
|
|
Term
| Shareholder inspection rights |
|
Definition
| Shareholder has right to inspect books and records of corporation upon 5 days written notice stating a proper purpose (i.e., relates to their interest as a shareholder) |
|
|
Term
| Stock dividends - when declared |
|
Definition
| Dividends are declared at the board's discretion unless the corporation is insolvent or would be rendered insolvent by the dividend. |
|
|
Term
| Stock dividends - definition of insolvency |
|
Definition
A corp is insolvent if it
1) not able to pay debts as they are due
2) total assets less than sum of total liabilities and dissolution costs |
|
|
Term
| Stock dividends - priority of distribution |
|
Definition
Preferred - gets paid first
Preferred Participating - gets paid twice
Preferred Cumulative - get past unpaid dividends AND current dividends |
|
|
Term
| Stock dividends - board liability |
|
Definition
| Board members are personally liable for unlawful distributions, BUT they may have a defense of good faith reliance on a financial officer's representations regarding solvency. |
|
|
Term
| Closely held corporations - requirement for agreement to eliminate informalities, consequences |
|
Definition
1) unanimous shareholder election evidenced in the articles
2) some reasonable share transfer restriction (e.g., no public trading)
Consequences:
1) no piercing even if you fail to meet formalities
2) possible sub-chapter S-corp status if you have no more than 100 shareholders |
|
|
Term
What are the 3 requirements of a professional corporation?
What are the 2 major consequences? |
|
Definition
1) organizers file articles with name that has "PC" or "Professional Corporation" in it
2) shareholders must be licensed professionals
3) corporation may practice only 1 designated profession
1) Professionals are personally liable for their own malpractice, BUT 2) not liable personally for each other's malpractice or the obligations of the corporation itself |
|
|
Term
| Fundamental corporate changes - types |
|
Definition
1) merger, consolidation, or dissolution, or
2) FUNDAMENTAL amendment of the articles, or
3) Sale (not purchase) of substantially all of the corporate assets (but NOT short form merger where parent corp that owns 90% or more of the stock in its subsidiary merges w/ the sub) |
|
|
Term
| Fundamental corporate changes - What are the procedural steps to approve a fundamental corporate change? |
|
Definition
1) board adopts a resolution
2) written notice given to shareholders
3) APPROVAL by majority of all shares entitled to vote, and a majority of each voting group that is adversely effected by the change
(4) possible shareholder right of appraisal
(5) file changes in articles with the state
NOTE: not required for short form merger |
|
|
Term
| Fundamental changes to articles - shareholder right of appraisal - who has right |
|
Definition
1) shareholders entitled to vote on merger
2) shareholders of corporation being acquired in share exchange
3) shareholders entitled to vote on disposition of corp property
4) shareholder whose right will be adversely affected by amendment of corporate articles |
|
|
Term
| Fundamental corporate changes - How does a dissenting shareholder perfect his right to sue? |
|
Definition
1) before shareholder vote, shareholder must give notice of intent to demand payment
2) shareholder must NOT vote for change
3) make prompt written demand to be bought out
4) corporation pays estimate of value, and shareholder sends own estimate if unsatisfied
5) shareholder files action in court demanding payment if not paid |
|
|
Term
| Securities laws - elements of action for misrepresentation / omission under 10b-5 |
|
Definition
1) A material misstatement or omission of material fact.
a) Statement or omission is material if there is a substantial likelihood a reasonable investor would consider it important in making an investment decision
2) recklessness OR intent to deceive, manipulate, or defraud
3) in connection with the purchase or sale of a security by plaintiff
4) reliance on statement or omission
5) fraud caused damages |
|
|
Term
| Violation of 10-b-5 for insider trading |
|
Definition
A breach of a duty of trust and confidence owed to
1) the issuer,
2) shareholders of the issuer, or
3) in the case of misappropriators, another person who is the source of the material nonpublic information |
|
|
Term
|
Definition
| Insider gives a tip of inside information to someone else who trades on that information tipper can be liable if tip was made for improper purpose (kickbacks, other benefits) |
|
|
Term
|
Definition
1) tipper breached a duty, AND
2) tippee knew that the tipper was breacing the duty |
|
|
Term
|
Definition
government can prosecute a person under 10-b-5 for trading
on market information (ie information about stock)
in breach of duty of trust and confidence owed to the source of the information.
NOTE: duty need not be owed to issuer or shareholders (could be law firm, etc) |
|
|
Term
| What is the prohibition on short swing trading profits (short swing profit rule) |
|
Definition
16(b)
A. applies for a reporting corporation 1) listed on national exchange or 2) at least 500 shareholders and $10 mil assets
B. When a officer, director, or > 10% shareholder
C. Buys / sells stock within single 6 month period
|
|
|
Term
| Remedies for short swing rofits? |
|
Definition
| Corporation can recover them |
|
|
Term
| Foreign corporation - formation |
|
Definition
| A corporation incorporated outside the state that wishes to engage in regular intrastate business must file a Certificate of Authority with the Secretary of State that includes the same information as regular corporate articles of formation |
|
|
Term
| Shareholder liability - general rule, exception |
|
Definition
Shareholders are not liable for corporate obligations, EXCEPT
1) piercing the corporate veil to render a shareholder liable (only those active in operation of business)
2) controlling shareholders
a) owe a fiduciary duty to minority shareholders
b) are liable for selling the corporation to a party who loots the corporation, unless reasonable measures were taken to investigate the buyer's reputation and plans for the corp |
|
|
