Term
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Definition
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Term
| General characteristics of a corporation |
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Definition
1. Limited liability for owners, directors, and officers
2. Centralized management
3. Free transferability of ownership
4. Continuity of Life
5. Entity Taxation |
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Term
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Definition
A corporation is taxed as an entity distinct from its owners, it must pay income taxes on any profits that it makes,
Shareholders do not have to pay income tax until income is distributed
Double taxation |
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Term
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Definition
Is not an entity
Does not exist apart from its owner |
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Term
| Constitutional characteristics of a corporation |
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Definition
A corporation is entitled to raise the attorney-client privilege, but cannot invoke the privilege against self incrimination
A corporation is not a citizen for purposes of the privileges and immunities clause of the Consitution. Therefore, state-imposed restrictions on a foreign corporation's activities are valid if they are reasonable. |
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Term
| Articles of Incorporation |
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Definition
Set out certain basic information about the corporation.
Mandatory provisions:
1. name of the corporation (must include corporate designation)
2. number of shares
3. street address of initial registered office and agent
4. the name and address of each incorporator (person signing) |
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Term
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Definition
| The RMBCA presumes that a corporation is formed for any lawful business purpose unless the articles provide a more restricted purpose. |
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Term
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Definition
If a corporation undertakes activities beyond the scope of its stated purpose, it is acting ultra vires.
Typically an ultra vires act is enforceable.
Shareholder may sue corporation to enjoin act, or corporation may sue director for damages, or state may bring an action against corporation. |
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Term
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Definition
Corporate existence begins on filing by the state
If the state finds that the articles comply with the requirements of law and that all required fees have been paid, articles will file.
Filing is conclusive proof of corporate existence. |
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Term
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Definition
| After the articles are filed, the initial directors will hold an organizational meeting |
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Term
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Definition
Bylaws may contain any provision for managing the corporation that is not inconsistent with law or the articles of incorporation.
Bylaws are adopted by directors can be modified or repealed by either the directors or shareholders. |
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Term
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Definition
A de facto corporation has all the rights and powers of a de jure corporation at common law, but it remains subject to direct attack in a quo warranto proceeding by the state.
Test: colorable compliance with statute for valid incorporation and exercise of corporate privileges. |
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Term
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Definition
| Persons who treat an entity as a corporation will be estopped from later claiming that the entity was not a corporation. |
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Term
| Application of de facto and estoppel doctrines |
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Definition
Easily applicable in contracts
De facto doctrine has been applied torts, but there is little room for an estoppel argument. |
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Term
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Definition
Corporation is formed but courts will hold shareholders, officers, or directors personally liable for corporate obligations.
Test: i. corporate formalities are ignored; ii. corporation is inadequately capitalized from outset; iii. prevent fraud. |
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Term
| Piercing the veil: liability |
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Definition
Can be joint and several
Courts may apply active-inactive distinction
Less likely to pierce for contracts (can research)
Almost never pierce for shareholder. |
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Term
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Definition
| When the corporation is insolvent and some of the shareholders have claims as creditors, the shareholders claims may be subordinated to those of other creditors if equity so requires. |
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Term
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Definition
Debt: corporation has borrowed funds from a creditor and promises to repay the creditor. Creditor has no ownership interest.
Equity: instrument representing an investment in the corporation whereby the holder becomes an owner of the business. |
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Term
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Definition
Authorized shares: described in corporation's articles.
Issued and outstanding: shares sold to investors.
Certificated or uncertificated |
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Term
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Definition
RMBCA allows rights to be varied, even among shareholders of the same class, as long as the variations are set forth in the articles.
Articles must prescribe i. number of shares for each class ii. distinguish between each class and iii. either describe classes or delegate to board. |
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Term
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Definition
Articles may authorize shares that have:
1. different voting rights
2. redeemed or converted
3. distribution rights
4. preference regarding distribution |
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Term
| Rights of holders of fractional shares and scrip |
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Definition
A certificate representing fractions of share entitles the holder to exercise the rights of a shareholder.
In contrast, scrip may not exercise any rights of a shareholder unless otherwise provided. |
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Term
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Definition
An offer to purchase shares from a corporation.
RMBCA: a preincorporation subscription is irrevocable by the subscriber for six months from the date of the subscription unless otherwise provided.
Board may not discriminate against shareholders when calling for payment of subscription.
Failure to pay = 20 day notice + collect debt |
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Term
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Definition
| Any tangible or intangible property or benefit to the corporation. |
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Term
| Traditional part value approach |
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Definition
Traditionally, the articles of incorporation would indicate whether the corporation's shares were to be issued with a state par value or no par value.
Par value = could not be issued for less than par.
Stated capital= money received in issuance of stock. Stated capital could not fall below aggregate par value. |
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Term
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Definition
| If par value stock was issued for less than its par value, the original purchaser and the directors who authorized the sale would be liable for the difference(water) |
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Term
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Definition
If the shareholder fails to pay the full consideration, the shares are referred to as unpaid stock.
If the corporation is insolvent, a trustee in bankruptcy can enforce the corporation's claim for unpaid stock. |
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Term
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Definition
| Procure capital and other commitments |
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Term
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Definition
| Absent an agreement to the contrary, promoters are considered to be joint venturers and they can occupy a fiduciary relationship to each other. |
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Term
| Promoters: Relationship with corporation |
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Definition
Promoters owe fiduciary duties to the corporation and to those persons investing in it.
Fair disclosure and good faith.
i. breach of duty; ii. fraud or misrepresentation; or iii. obtaining unpaid stock |
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Term
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Definition
RMBCA provides that if a person acts on behalf of a corporation, knowing that there has been no incorporation, the person is jointly and severally liable.
Liability continues after formation, absent a novation, unless agreement provides otherwise
Corporation may adopt contract |
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Term
| Shareholders: Direct control |
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Definition
At common law, shareholders have no right to directly control the day-to-day management of their corporation.
Instead, control is vested in a board of directors who delegate to officers. |
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Term
| Shareholders: Indirect control |
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Definition
Shareholders elect and remove directors, can do so without cause and at any time
Shareholders may modify bylaws
Shareholders must approve fundamental corporate changes. |
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Term
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Definition
Corporations must hold annual meeting.
May also call a special meeting.
Meeting: look to bylaws |
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Term
| Shareholder Meeting: Notice |
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Definition
Written notice
No less than 10 days or more than 60 days from meeting
State time, place, and hour of meeting
Special meetings: purpose
Notice may be waived in writing or by attendance |
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Term
| Shareholder meeting: eligibility to vote |
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Definition
Record date: determines which shareholder's vote or take action.
May not be more than 70 days before meeting.
If not set, first day notice is delivered to shareholders.
Shareholder list must be available for inspection. |
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Term
| Corporation's acceptance of vote |
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Definition
If the name signed on a vote, consent, waiver or proxy appointment corresponds to that of a shareholder, the corporation is entitled to accept the vote, consent.
Good faith, reasonable doubt THEN corporation can reject vote. |
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Term
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Definition
| A proxy is valid for only 11 months unless it provides otherwise. |
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Term
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Definition
An appointment of a proxy generally is revocable by a shareholder and may be revoked in a number of ways.
A proxy will be irrecovable only if the appointment form conspicuously states that it is irreocable. |
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Term
| Proxy: death of shareholder |
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Definition
| Death or incapacity of a shareholder appointing a proxy does not affect the right of the corporation to accept the authority of the proxy unless the corporate office authorized to tabulate votes received written notice. |
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Term
| Proxy solicitation: basic requirements |
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Definition
1. There must be full and fair disclosure of all material facts with regard to any management submitted proposal upon which the shareholders are to vote.
Material mistatements, omissions, and fraud in connection with the solicitation of proxies are prohibited.
Management must include certain shareholder proposals. |
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Term
| Shareholder Mechanics of Voting |
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Definition
A quorum must attend a meeting before a vote may validly be taken.
A majority of votes entitled to be cast on a matter is a quorum.
A shareholder cannot prevent by leaving before a vote is taken. |
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Term
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Definition
Each outstanding share is entitled to one vote unless articles provide otherwise.
Majority rules
Directors are elected by a PLURALITY |
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Term
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Definition
A device that gives minority shareholders a better chance to elect a director.
Each share may cast as many votes as there are board vacancies to be filled.
Notice is required |
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Term
| Class voting on article amendments |
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Definition
Whenever an amendment to the articles of incorporation affects only one class of shares, that class generally have right to vote on amendment, regardless of rights:
a. change in designation, preferences rights,
2. an exchange, reclassification or cancellation of shares
3. creation of a new class having superior rights |
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Term
| Shareholders Act without meeting |
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Definition
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Term
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Definition
Created a voting trust by entering into a signed agreement setting forth the trust terms; ii. transferring legal ownership of the shares to the TRUSTEE
A copy of the agreement and owners must be given to corporation.
10 year limit. |
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Term
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Definition
Shareholders may enter a written and signed manner in which they will vote on their shares.
Does not need to be filed |
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Term
| Shareholder managment agreements |
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Definition
Can agree on almost any aspect of the exercise of corporate powers (ex. no directors)
i. set forth in articles or bylaws and be approved by all shareholders at time of agreement
ii. written agreement signed by all shareholders
Lapses after ten years, or listing status |
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Term
| Transfer of Share Limitations |
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Definition
| The articles, bylaws, an agreement among shareholders, or an agreement between shareholders and the corporation may impose restrictions on the transfer of the corporation's shares for a reasonable purpose. |
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Term
| Reasonable restrictions on transfer of shares |
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Definition
Shareholder must first offer to corporation or shareholders
Obligate corporation to acquire shares
Require corporate approval
Prohibit unreasonable transfers
MUST BE NOTED CONSPICUOUSLY ON CERTIFICATE |
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Term
| Shareholder Inspection Rights: RMBCA |
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Definition
A shareholder may inspect corporation's books, papers, accounting records, shareholder records, etc.
With 5 days written notice and a proper purpose
No notice for articles, bylaws, resolutions, shareholder minutes and communications (3 years), names of directors, annual report |
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Term
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Definition
Shareholder does not have any preemptive rights unless the articles provide.
Limitations:
1. Do not apply to compensation 2. shares authorized by articles within 6 months after incorporation; 3. shares issued for consideration other than money 4. shares without voting rights but having a distribution preference |
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Term
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Definition
A breach of the fiduciary duty owed to the shareholder by an officer or director of a corporation is a proper subject of a direct action.
1. Who suffers immediate damage? 2. Whom did the defendant's duty run? |
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Term
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Definition
| Recovery in a derivative action generally goes to the corporation rather than to the shareholder bringing the action. |
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Term
| Derivative actions: standing |
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Definition
| Shareholder of corporation at time of the act or omission or must have become a shareholder through operation of law from a shareholder at time. |
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Term
| Derivative actions: demand requirement |
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Definition
Shareholder must make a written demand to the corporation to take action.
Derivative must wait 90 days unless: 1. corporation rejects demand 2. irreparable injury will result 3. futile. |
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Term
| Dismissal if not in corporation's best interest |
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Definition
If a majority of disinterested directs found in good faith AND AFTER REASONABLE INQUIRY that the suit is not in corporation's best interests, suit may be dismissed on corporation's motion
Shareholder must prove no reasonable, good faith inquiry. |
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Term
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Definition
Dividends can be paid to shareholders in the form of cash or indebtedness while the corporation is operating.
Shares can be redeemed from shareholders where there is a redemption right or repurchased |
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Term
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Definition
Articles may provide for distributions in any manner.
The decision whether or not to declare distributions generally is solely within director's discretion. |
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Term
| Distributions: Limitations |
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Definition
A distribution is not permitted if:
1. Corporation would not be able to pay its debts as they become due OR
2. total assets would be less than the sum of its total liabilities plus the amount needed to satisfy preferential rights |
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Term
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Definition
Distributions of a corporation's own shares to its shareholders are excluded from the definition of distribution under the RMBCA.
Share distributions of one class may not be issued for another class unless:
i. authorized by articles or ii. a majority approves issuance. |
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Term
| Historical note: par vale and capital accounts |
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Definition
| Dividends could not be paid out of the stated capital account which had to contain at least the aggregate par value of all outstanding par value shares. |
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Term
| Rights After A Distribution |
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Definition
Same as a general creditor. Equal priority to other unsecured creditors.
Dividends are payable to shareholders on record date. |
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Term
| Liability for Unlawful Distributions |
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Definition
A director who votes for or assents to a distribution that violates the above rules is personally liable to the corporation for the amount of the distribution that exceeds what could have been distributed.
Defense: good faith reliance on experts and financials |
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Term
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Definition
Generally no fiduciary duties
Exceptions:
shareholder agreement
close corporations
controlling shareholders |
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Term
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Definition
| Unless the articles or a shareholder agreement provides otherwise, the board of directors of the corporation is generally responsible for the management of the business and the affairs of the corporation. |
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Term
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Definition
| Set in articles or bylaws |
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Term
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Definition
Directors are elected annually.
After a term expires, she remains in office until her successor is elected and qualifies.
If there are at least 9 directors, the articles may divide the directors into two or three groups to serve two to three year terms. |
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Term
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Definition
Absent a contrary provision in the articles, a vacancy on the board may be filled by either the shareholders or the board.
Less than a majority, can fill with affirmative vote of remaining directors. |
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Term
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Definition
Directors can be removed with or without cause by shareholders.
Exceptions:
cumulative voting
director elected by voting group |
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Term
| Director meeting: initial meeting |
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Definition
After incorporation the board must hold an organizational meeting, called by a majority of directors.
Directors complete organization of corporation by appointing officers, adopting bylaws, carrying on business. |
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Term
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Definition
Regular without notice
Special meetings require at least two days notice of the date, time, and place of meeting. |
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Term
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Definition
A majority of the directors is a quorum unless the articles or bylaws provide otherwise.
A quorum can be broken by leaving meeting.
Approval of action requires majority approval unless articles provide otherwise. |
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Term
| Director meeting: right to dissent |
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Definition
A director who is present at a board meeting when corporate action is taken is deemed to have assented to the action, unless:
1. director objects at beginning of meeting
2. director's dissent or absetantion
3. director delivers written notice |
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Term
| Action may be taken without meeting |
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Definition
| unanimous writing consent |
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Term
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Definition
Two members of the board.
May not: 1. authorize distributions 2. approve something that requires shareholder approval 3. fill vacancies on board 4. amend articles of incorporation 5. adopt, amend, or repeal bylaws, 6. approve a plan or merger 7. authorization reacquisition of shares 8. authorize sale of shares |
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Term
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Definition
Directors who have not been properly elected
De facto directors bind the corporation in performance of normal director activities |
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Term
| Personal liability of directors may be limited |
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Definition
Articles may limit or eliminate directors personal liability for money damages to the corporation or shareholders.
Does not apply to improper financial benefits, or intentional acts. |
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Term
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Definition
Manage corporation to the best of their duties.
In good faith
With care that an ordinary prudent purpose in a like position
manner director reasonably believes in the best interests of the corporation |
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Term
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Definition
| Challenger has burden of proving that duty of care was not met. |
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Term
| Director defense: reliance |
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Definition
Can rely on:
i. corporate officers or employees who director reasonably believes is reliable
ii. legal counsel, accountants, or other persons within competence
iii. a committee of the board of which the director is not a member |
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Term
| Duty of loyalty: conflict of interest transaction |
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Definition
i. party to transaction
ii. has a beneficial financial interest in transaction that would reasonably be expected to influence decision
iii. employee of another entity engaged in an important transaction |
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Term
| Conflict of interest transaction: upholding |
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Definition
1. Approved my a majority of disinterest directors after disclosure of material facts
2. approved by a majority of votes entitled to be cast by shareholders without a conflict of interest after disclosure
3. transaction was fair to corporation when entered into.
Presence at meeting irrelevant |
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Term
| Factors to be considered in determining fairness |
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Definition
| Courts look to such factors as adequacy of consideration, corporate need to enter into the transaction, financial position of the coporation, available alternatives |
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Term
| Conflict of interest transactions: remedies |
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Definition
1. enjoining transaction
2. setting the transaction aside
3. damages |
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Term
| Conflict of interest transactions: corporate opportunity doctrine |
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Definition
Directors are prohibited from diverting a business opportunity from their corporation.
1. Corporation must have interest or expectancy
-look to line of business
2. lack of financial ability not a defense
3. board generally decides
4. remedies |
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Term
| Indemnifcation: mandatory |
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Definition
| Unless otherwise provided, corporation must indemnify a director or officer who prevailed in defending a proceeding |
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Term
| Indemnification discretionary |
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Definition
Issue: when director or officer loses
Rule: Okay when:
1. Director acted in good faith AND
2. believed in best interest of corporation, not opposed to corporation, or was not unlawful |
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Term
| Discretionary indemnifcation: exception |
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Definition
Cannot indemnify in
a. a direct or derivative action in which the director is found liable to the corporation or
b. an action charging that the director received an improper benefit |
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Term
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Definition
A corporation may advance expenses to a director defending an action as long as director furnishes statement that he believes he met the standard of conduct. Director pays if he does not meet standard.
Corporations can ALWAYS purchase insurance |
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Term
| Fundamental change: procedure |
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Definition
1. Board adopts a resolution
2. Written notice is given to shareholders
3. Shareholders approve changes by majority of votes cast
4. changes in the forms of articles are filed with state |
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Term
| Amendments to Articles of Incorporation |
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Definition
| Generally require shareholder approval, unless mere housekeeping measures |
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Term
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Definition
| Blending of one or more corporations into another corporation. The latter corporation survives while former ceases to exist. |
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Term
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Definition
| One corporation purchasing all of the outstanding shares of one or more classes of series of another corporation. |
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Term
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Definition
| one business entity changing its form to another business entity such as a corporation converting into a LLC. |
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Term
| Merger: no significant change to surviving corporation |
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Definition
No shareholder approval when:
i. articles of incorporation of SURVIVING corporation will be unaffected
ii. each shareholder of surviving corporation will hold same number of shares with same preferences and rights
iii. shares issued will be less than 20% |
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Term
| Merger: short form of subsidiary |
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Definition
| A parent owns 90% may merge subsidiary into itself without approval of the shareholders or directors of subsidiary. |
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Term
| Share exchange: procedure |
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Definition
Acquired corporation shareholders need to approve
Share exchange is not a fundamental change for acquiring corporation |
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Term
| Disposition of property outside the usual and regular course of business |
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Definition
All or substantially all (75%) of a corporation's property outside the usual course of a business is a fundamental corporate change for corporation disposing of property.
Must follow procedure |
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Term
| Dissenting shareholders: who may dissent |
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Definition
1. any shareholder entitled to vote in a plan of merger
2. shareholders of subsidiary in short form merger
3. shareholder entitled to vote on disposition of property
4. a shareholder whose rights will be materially and adversely affected. |
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Term
| Dissenting shareholders: procedure |
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Definition
1. Corporation gives notice
2. Shareholder gives notice of intent to demand payment before vote
3. corporation gives dissenters notice and shareholder demands payment
4. corporation must pay
5. Shareholder can demand higher value, corporation must respond |
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Term
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Definition
Controls tender offers
Offers by a bidder to purchase shares from shareholders of a target corporation |
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Term
| Williams act: Regulation of bidder |
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Definition
Must file if will obtain more than 5%
Notice:
1. bidder's identity, source of funds, plans, past dealings
2. bidder's financial statements
3. any arrangements made with persons of target |
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Term
| Williams act: regulation of the offer |
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Definition
Held open for at least 20 days and open to all members of class
Shareholders can withdraw tendered shares while offer is open
Over subscription = purchase on a pro rata basis
Higher offer price = paid to all tendering shareholders
Antifraud provisions |
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Term
| Williams act: regulation of target |
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Definition
| Management must give its shareholders a recommendation of the offer, or explain why it cannot. |
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Term
| State regulation: control share acquisition statutes |
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Definition
20%
No voting rights unless the holders of a majority of disinterested shares grant voting rights |
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Term
| Dissolution by incorporations or initial directors |
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Definition
| If shares have not yet been issued or business has not yet commenced, a majority of the incorporators or initial directors may dissolve the corporation by delivering articles of dissolution to state. |
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Term
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Definition
| Corporation may dissolve by a corporate act under fundamental change procedure |
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Term
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Definition
Entity continues, but is not allowed to carry on any business apart from winding up.
Corporations can limit time for known claims to 120 with notice or 5 years for unknown claims by publication.
Otherwise, creditors proceed against undistributed assets or pro rata against shareholders. |
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Term
| Revocation of voluntary dissolution |
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Definition
| corporation may revoke a voluntary dissolution by using the same procedure to approve dissolution. |
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Term
| Administrative dissolution |
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Definition
Failure to pay fees, fail to file an annual report, failure to maintain a registered agent.
State must serve corporation with notice and provide 60 days to correct.
A corporation that has been administratively dissolved can reapply for reinstatement within two years. |
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Term
| Judicial dissolution: attorney general |
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Definition
| Corporation fraudulently obtained its articles of incorporation or that the corporation is exceeding or abusing its authority. |
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Term
| Judicial dissolution: action by shareholders |
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Definition
Directors are deadlocked in the management of corporate affairs and irreparable injury will result
Directors are acting in a matter that is illegal, oppressive, or fraudulent
shareholders are deadlocked and have failed to elect one or more directors
corporate assets are being wasted, misapplied, or diverted for non corporate purposes. |
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Term
| Judicial dissolution: action by cteditors |
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Definition
i. creditor's claim has been reduced to judment, judgment is unsatisfied, and corporation is insolvent.
ii. corporation has admitted in writing that creditor's claim is due and corporation is insolvent. |
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Term
| Security regulation: 10b-5 |
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Definition
Fraudulent conduct
In connection with the purchase or sale of a security by plaintiff
In interstate commerce
Reliance
Damages |
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Term
| 10b-5: Fraudulent conduct |
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Definition
Making a material misstatement of making an omission of material fact.
Materiality: a statement or omission will be considered material if there is a substantial likelihood that a reasonable investor would consider it importance.
Fraud: deceive, maipulate, or defraud |
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Term
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Definition
| A person violates 10b-5 by trading on breaches of duty of trust and confidence owed to: issuer, shareholders, etc. |
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Term
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Definition
Insiders: officers, directors controlling shareholders, employees of issuer, cpas, attorneys, bankers
Tipper: liable if improper purpose.
Tippee: tippee breached a duty and tippee knew of breach. |
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Term
| Insider trading: misappropriators |
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Definition
government can prosecute a person under 10b-5 for trading on market information in breach of a duty of trust and confidence owed to the source of the information.
Duty need not be owed to issuer. |
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Term
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Definition
Officers, directors, shareholders (10%)
from the sale and purchase of a security within a six month period
reporting companies: $10 million in assets or 500 shareholders
Strict liability
Highest sales price against the lowest purchase price |
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Term
| SOx: Public company accounting oversight board |
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Definition
| establishes rules for auditing, quality control, ethics, and independence relating to preparation of audit reports. |
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Term
| SOx: Corporate responsibilities |
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Definition
1. Public company audit committees
2. Corporate responsibility for financial reports
3. Forefeiture of bonuses and profits
4. Prohibition against personal loans to executives
5. Whistleblower |
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