Formation Requirements (TX Corp)

• Incorporators (people)
• Articles of Incorporation (paper)
• File Articles of Incorporation (act)

Incorporators

• Must have one or more
• An incorporator executes and files the articles
• An incorporator can be a person or an entity

Articles of Incorporation - Purpose

Contract between corporation and shareholders

Contract between corporation and state

Must Have: 

1. Names and addressess
2. Must make a statement of duration
3. Must make a statement of purpose
4. Information about the corporation's stock

Names and addressess…MUST have

• Corporate Name - Must include "corporation," "company," or "incorporated" (or an abbreviation of one of these)
• Name and address of each incorporator
• Number of director(s) and names and addresses of initial director(s)
• Name of registered corporate agent and address of registered office

Must make a statement of duration

Must make a statement of purpose

CAN be general --> "Purpose is to engage in all lawful activity after obtaining state agency approval."

CAN be specific --> "Purpose is to sell southern style sausage biscuits."  What if the corporation then sells T-shirts?  This is ultra vires. 

Rules regrading ultra vires:

Ultra vires contracts ARE valid

Shareholders can seek an injunction

Responsible officers and directors ARE liable to the corporation for unltra vires losses

Information about the corporation's stock

Artciles must include:

• Authorized stock
• Number of shares per class and par value
• Voting rights and preferences of each class

• Authorized stock - the maximum number of shares the corporation can sell
• Issued stock - the number of shares the corporation actually sells
• Outstanding stock - consists of shares that have been issued and NOT reacquired by the corporation

Filing the Articles

Must file to articles of incorporation with the Secretary of State

• Secretary of State is authorized to set up an electronic filing system
• Fax of signature is okay
• If the articles are in order, the SoS will issue a certificate of incorporation that will serve as conclusive proof of valid incorporation (at that point it is a de jure corporation)

The Board then holds an organizational meeting to:

• Select officers
• Adopt any bylaws, and
• Transact other company business

Legal Significance of Formation of Corporation

• Internal affairs of a Texas corporation (roles and duties of Ds, Os and SHs) are governed by Texas law
•  A corporation is a separate legal person (it is its own legal entity).  It can sue and be sued, hold property, must pay income taxes, can serve as a partner in a P/S.  Thus, officers and directors are generally NOT personally liable for what the entity does.
• Generally, SHs are NOT personally liable for debts of the corporation…SHs are generally only liable for the price of their stock
• The corporation IS liable for what the corporation does

De Facto Corporation Doctrine

• There is a relevant incoporation statute
• The parties made a good faith, colorable attempt to comply with it, and
• Some exercise of corporate privileges
• Note:  If applicable, treated as a corporation for all purposes except in an action by the state

• One dealing with a business as a corporation and treating it as a corporation, may be estopped from denying the business's corporate status
• May be invoked against those who dealt directly with the business as a corporation
• May also be used to prevent company from avoiding an obligation by asserting its own lack of valid formation (usually limited to contract, not tort, cases)

Bylaws

• Adoption of bylaws is NOT a condition precedent to formation or a corporation…but almost every corporation has them b/c they serve as a form of internal governance
• The initial bylaws are adopted by the Board of Directors
• The bylaws can be repealed or amended by the Board OR the SHs, unless the articles or other bylaws provide otherwise 
• If bylaws conflict with articles, the articles control
• Bylaws are NOT filed

Preincorporation Contracts -Liability of the Corporation

• General Rule - a corporation is NOT liable on preincorporation contracts until it adopts the contract
• Adoption can occur expressly (board of director action adopting the K) or impliedly (corporation accepts a benefit of the K)

• A promoter is a person acting on behalf of a corportion not yet formed
• Unless the contract clearly provides otherwise, the promoter reamins liable on the preincorporation contract until there has been a novation (corporation agrees to replace the promoter under the K
• An adoption makes the corporation liable too…but does NOT relieve the promoter (adoption does NOT = novation)

Secret Profit Rule

• This arises when the promoter deals with the corporation itself (rarely tested)
• General Rule - a promoter CANNOT make a secret profit on her dealings with the corporation
• If promoter acquired the property before becoming promoter:  Price paid by corporation minus fair market value (price paid by promoter is irrelevant)
• If promoter acquired property after becoming promoter:  Price paid by corporation minus price paid by promoter
• If the corporation did not know that the promoter was self-dealing, then the corporation may recover any profit made by the promoter in selling the property to the corporation…BUT if the corporation was aware of what the promoter was doing, then the corporation may not recover the profits because they are no longer considered "secret" (it all boils down to the corporation's knowlege)

Foreign Corporations (rarely tested)

Foreign corporations transacting business in Texas must qualify and pay prescribed fees

• A foreign corporation is one incorporated outside Texas
• Transacting business means intrastate transactions on a recurring basis (means the regular course of business in Texas, NOT just sporadic activity)
• Qualify by getting a certificate of authority from Texas SoS…apply by giving basic information from articles and proving good standing in home state

Consequences of foreign corporation transacting business without qualifying:

• Civil fine, and
• Corporation cannot sue in Texas on a claim arising in Texas (but can be sued)

Once a foreign corporation qualifies nad pays fees, it can sue in Texas

Def - when a Corp sells or trades its OWN stock 

• way to raise capital for the Corp.
• these rules ONLY apply to the sale of the Corp's own stock

Stock - Subscriptions

Elements: 

• Written
• Signed Offers 
• To buy stock from corporation

Revocation of PRE-incorporation subscriptions - Irrevocable for 6 months unless it says otherwise or all subscribers agree

- can revoke POST-incorporation subscriptions

Corporation and SH become obligated under a subscription agmt when the board accepts the offer

- subscriber is NOT a SH until they have paid for the stock

Stock - Consideration - what must the Corp receive when it issues stock?

Form of Consideration

- any tangible or intangible benefit to the Corp - includes money; notes; discharge of debt; property; services already rendered; Ks for future services

- Prohbited --> anything else = watered stock

Amount of Consideration

Par - minimum issuance price --> NOT required 

- consequences for issuing stock below par (watered stock) --> Directors are liable if they knowingly authorized the issuance; and purchaser is liable; transferee is NOT liable if they acted in good faith

No par - no minimum issuance price

- Treasury stock - stock the Corp issued and then reaquired - treat as NO par

Valuation of the board of property received is conclusive absent fraud

Stock - Preemptive Rights

Def - right of an existing SH of common stock to maintain his % of ownership by buying stock whenever there is a new issuance of stock FOR MONEY

• new issuance includes treasury stock as well as previously unissued stock
• do NOT ever attach when the issuance is w/in 6 months of formation, unless the articles say otherwise

TIMING - if Corp formed after September 1, 2003 preemptive rights exist ONLY if the articles provided for them

- if formed before this, had preemptive rights unless the articles provided otherwise

D & Os - Number of Directors required

One or more adult natural persons

D & Os - Election, Removal and Vacancies of Directors

SHs elect Directors at the annual meeting ---> Bylaws can provide for a classified board - divides the board into 1/2s or 1/3s with 1/2 or a 1/3 elected each year

• Removal before the end of the term - SHs can do with or without cause
• requires a vote of the majority of shares entitled to vote

Board or SH fills a vacancy

D & Os - Actions Taken by the Board

2 ways for the board to act or their acts are VOID, unless ratified by a valid corporate act:

1. Unanimous consent in lieu of meeting - must be in writing and signed (email and fax are okay)

2. A meeting that satisfies the quorum and voting rules 

- Quorum = majority of all directors, unless a different % in the bylaws

- may be able to lose a quorum - law is not clear

- Voting then requires a majority of those present 

Notice - Required for special meetings, but NOT for regular meetings as set forth in the bylaws

- email notice is okay if consent

- failure to notify can be waived in writing or by attending w/out objection

Proxies are NOT allowed

NO voting agmts b/t directors as directors

D & Os - Role of Directors

Manage the business of the Corp - sets policy; supervises officers; declares distributions; recommends fundamental Corp changes to SHs . . 

Exceptions:

• Close corporations
• SH agmt
• Committee of one or more directors if authorized in the Articles or Bylaws
• can maintain substantial mgmt power, but can't amend Bylaws, select officers or recommend fundamental corporate change
• does not relieve other members of their legal responsibilities

D & Os - Duty of Care (Burden on P)

Std - A director owes the Corp a duty of care.  He must act in good faith and exercise ordinary care and prudence.  He must do what a prudent person would do in similar circumstances.

Nonfeasance - doing nothing --> liable only if the breach caused a loss to the Corp

- very hard to show the causation

Misfeasance - board does something that hurts the Corp

- a director is NOT liable is he meets the Business Judgment Rule = decision made in good faith, informed, and a rational basis

D & Os - Duty of Loyalty (Burden on D)

Std - a director owes the Corp a duty of loyalty.  He must act in good faith and with rznble belief that what she does is I nthe company's best interest

- Business Judgment Rule does NOT apply

Interested Director Transaction - any deal b/t the Corp and one of its directors

- this transaction will be set aside UNLESS the director shows:

(1) the deal was fair to the Corp when approved OR

(2) his interest and the material facts were disclosed or know and the deal was approved in good faith by either SHs or Majority of the disinterested directors

- interested directors count toward a quorum

- board can set its own compensation as long as it is rznble 

Competing ventures - generally a director can't compete w/out the approval by disinterested directors

Corporate Opportunity Doctrine - director cannot USURP a corporate opportunity (anything the Director has reason to know the Corp would be interested in), unless:

(1) Tells the board AND

(2) Waits for the board to reject the opportunity

- Corp can renounce the opportunity in articles or by board action

D & Os - Other State Law Bases of Director Liability

• Ultra vires acts
• Improper loans - a loan to a director is OKAY if rznbly expected to benefit the corporation
• Improper Distributions

D & Os - Which Directors are Liable

General rule: a director is presumed to have concurred with Board action UNLESS his dissent or abstention is noted in WRITING in corporate records

(1) having it put in the minutes;

(2) sending a note to the corporate secretary at the meeting; or

(3) sending a registered letter to the corporate secretary immediately after the meeting

Exceptions:

- Absent directors are NOT liable

- Good faith reliance on financial stmts or other information represented as correct by an officer OR on information provided by a competent professional (i.e. - CPA), or employee, or by a committee of which the director relying was not a member

D & Os - Officers Liability

Owe the same duties of care and loyalty as directors

Status: officers are agents of the corporation - they can bind the corporation by acts WITHIN their authority

Inherent authority: 

- president has inherent authority to convey real property ONLY if the board authorizes it; 

- otherwise he might have inherent authority to bind the corporation to a K entered into in the ordinary course of business

D & Os - Officers Selection and Removal

Must have a president AND secretary - can be the same person

Selected and removed by the directors, NOT the SHs

Directors set officer compensation

  D & Os - Indemnification of Directors and Officers

NO idemnification:

Corporation is barred from indemnifying the director or officer if they are held liable for willful or intentional misconduct in performing a duty to the corporation

Mandatory idemnification:

Corporation is required to indemnify when the director is WHOLLY successful on the merits or otherwise in defending the claim

Permissive idemnification:

Anything not falling within the 2 above, but if you are held liable to the corporation or to have received an improper personal benefit, reimbursement is limited to expenses and attny fees (NOT the judgment)

- to be eligible must have acted under the duty of loyalty (good faith and with rznble belief that the actions were in the company's best interests)

- eligibility is determined by:

(a) majority vote of a disinterested board, disinterested committee, or disinterested shares

(b) independent legal counsel

The articles can limit or eliminate D&O liability for damages, but NEVER for willful or intentional conduct

The court can order reimbursement if it finds it justified

SH - SH as Defendant - Holding him liable for acts or debts of the corp

Generally - NOT liable for the debts or acts of a corporation, but a court may pierce the corporate veil if: (to prevent fraud or to achieve equity)

- SH has abused the privilege of incorporating AND

- Fairness requires it

Alter Ego Theory - is the SH treating the corporate assets as his own AND harming a 3rd party

- NEVER available for mere failure to observe corporate formalities

- only hold the SH responsible liable

- could also arise where a corporation creates a subsidiary to avoid obligations

Undercapitalization theory - failing to invest enough to cover prosepective liabilities

-TX courts are generally more willing to pierce the corporate veil for a tort victim than for a K victim

- cannot pierce the corporate veil for K claim based on fraud unless the SH made the corporation commit fraud for his own personal benefit

SH - SH Management of Corporation

Generally the BOARD manages the corporation, but the SHs can manage the corporation directly if:

• Articles provide it is a close corporation AND
• Articles or unanimous SH agmt provide for SH management 

If it is SH managed then there is no board and the SHs owe duties of care and loyalty to the corporation

Close Corporation

• Few SHs and NOT publicly traded
• SH do NOT owe each other fiduciary duties as a matter of LAW
• court may find one on the facts of a case - so be prepared to argue for such a duty when there is oppression of a minority SH

Articles, bylaws or unanimous SH agmt can govern almost any aspect of corporate powers - could put management power in the SHs

SH - SH Derivative Suits (SH as Plaintiff)

Derivative suit - SH is suing to enforce the COPORATION's claim (i.e. - director's breach of duty owed to the corporation)

1. Stock ownership when the claim arose

2. Must fairly and adequately represent the corporation's interests

3. Make a written demand on the directors to bring suit 

- must wait 90 days after demand, unless it is rejected before that or waiting would cause irreparable damages to the corporation

- demand is NEVER excused

Corporation may move to dismiss based upon a determination by independent and disinterested directors that the suit is NOT in the corporations best interest --> court WILL dismiss if they find that this determination was made in GOOD FAITH

Consequences of a successful derivative suit:

- recovery goes to the corporation and SH gets costs and attnys fees

- recovery may go the SH if it is a close corporation of < 35 SHs

Consequences of an unsuccessful derivative suit:

  - SH cannot recover fees and may be liable to the corporation for       its fees

No dismissal or settlement without court approval - court may require notice to the SHs 

SH - Who Votes as a SH

General rule - the record SH as of record date has the right to vote

- record date is b/t 10-60 days before the mtg

Exceptions:

• Corporation does NOT vote treasury stock when it was the record owner on the record date
• Death of SH - executor can vote the shares
• Proxies: - last ONLY 11 months unless it says otherwise.  Requirements:
• Writing (email and fax are okay)
• Signed by record SH
• Directed to secretary of corporation
• Authorizing another to vote the shares
• can always revoke a proxy even if it says irrevocable, EXCEPT when it says irrevocable AND it is coupled with an interest other than voting

SH - Voting Trust

Requirements for voting trust: (no time limit)

• Written trust agmt controlling how the shares will be voted
• Copy to corporation
• Transfer legal title of shares to voting trustee
• Original SHs receive trust certificates and retain all SH rights other than voting

SH - Voting Agreement

Requirements for voting agreements: (no time limit)

• Writing 
• Copy to the corporation
• enforceable against transferee if specifically noted on the stock certificate

SH - Where do SHs vote

2 ways to take valid corporation action:

• Unanimous consent in writing and signed of ALL voting shares (unless articles allow for less)
• A meeting that satisfies quorum and voting rules (mtg can be anywhere)

SH -- SH Meetings

Annual meeting - MUST have one:

- if none is held w/in 13 months or no unanimous consent in lieu of a meeting, a SH may petition the court to order one

- this is the meeting where Directors are elected

Special meeting: 

- Can be called by the Board, the president, the holders of at least 10% of shares entitled to vote, or anyone else permitted in the articles and bylaws

- still must be for a proper purpose

SH - Notice for SH meetings

NOTICE - must give written notice to every SH entitled to vote for EVERY meeting b/t 10 and 60 days before the meeting (20 to 60 if discussing a merger)

- notice may be given personally or by mail, or if the SH consents by email

- Must state: when, where AND the purpose

- can do nothing else besides what is stated as the purpose

Failure to give proper notice makes any action taken VOID, unless those not sent notice waive the notice defect by:

Express - in writing and signed OR

Implied - attend meeting w/o objection

SH - SH Voting

Must be a quorum represented at the meeting - look at SHARES represented NOT SHs

- quorom is generally a majority of SHs

- a quorum can NEVER be < 1/3 of outstanding shares entitled to vote

If quorum is met then a majority of all votes CAST acts to bind

- cast means for, against or expressly abstaining

Cumulative voting (rarely tested) - only available in voting for directors

- multiply number of shares by number of directors being elected and you can cast that many votes for one director if you want

- after September 1, 2003 you have a right to cumulative voting ONLY if the articles so provice (before that you have the right unless provided otherwise)

- one SH must give written notice of their intent to use cumulative voting at least 1 day before the meeting

SH - Stock Transfer Restrictions

Stock transfer restrictions (set up in articles, bylaws or SH agmt) will be upheld if they are rznble under the circumstances = not an undue restraint on alienation

Even if the restriction is rznble, it cannot be invoked against the transferee unless either:

• Noted conspicuously on the stock certificate OR
• The transferee had actual knowledge of the restriction

SH - Inspecting the Books

A SH may, personally or by an agent, inspect and copy the books and records of the corporation IF:

• The SH has owned stock for at least 6 months, or
• The SH owns at least 5% of the outstanding shares.

If a SH is unable to satisfy one of these requirements, she may inspect the books or records by obtaining a court order to do so

Procedure for inspecting:

• Make a written demand to inspect, and
• State a proper purpose for the inspection

-- If the corporation does not allow the inspection, the SH can get a court order and recover expenses and attorney's fees.  If there is litigation, the corporation has the burden of showing the SH's purpose was improper.

-- At least 10 days before a meeting, an officer must prepare a list of SHs entitled to vote at the meeting.  Any SH can inspect it during regular business hours (or electronically) and at the meeting.

-- Directors have unfettered access to the books and records

SH -Distributions

Distributions are made at the board of director's discretion

Preferred means "pay first"

Participating means "pay again"

Cumulative means "add them up"

Surplus

Surplus = assets - liabilities - stated capital

Surplus CAN be used for distributions if the board so decides

Stated Capital

Stated Capital = number of shares sold x stated par value

Example:  Corporation issued 10,000 shares of $2 par stock for $50,000 and 4,000 shares of no par stock for $70,000…$20,000 is stated capital

The excess (here $30,000) goes into surplus

-- Stated capital can NEVER be used for distributions

-- Within 60 days, the board may allocate any part, but NOT all, of the no par stock to surplus

• A corporation can make a distribution even though it lost money in the last year
• A corporation CANNOT make a distribution if it is insolvent or if the distribution would make it insolvent or if distribution would exceed surplus
• Insolvent means that a corporation is unable to pay its debts as they come due
• Directors are jointly and severally liable for unlawful distributions to the extent they were impermissible, but they can seek contribution from SHs who knew it was unlawful when they received the distribution

Characteristics of Fundamental Corporate Changes

-- Extraordinary occurrences that require board approval plus approval by 2/3 of the shares entitled to vote (NOT those that actually vote)

-- Possibility of dissenting shareholder right of appraisal

Dissenting SH right of appraisal - the right of a SH to force the corporation to buy her shares at fair value

-- Actions by a corporation that trigger the right to appraisal:

Merger

Sale of shares in a share exchange

Transfer of substantially all assets, OR

Conversion

This right is NOT available if the stock is listed on a national exchange or market or has 2,000 or more SHs

--Actions by SHs needed to perfect the right to appraisal:

-Before SH vote, file with the corporation written notice of objection and of intent to demand payment,

-Abstain or vote against the proposed change, AND

-After the vote, within 20 days of notification by the corporation, make written demand to be bought out

If the SH and the corporation cannot agree on a fair value, SH sues, and the court can appoint an appraiser

Amendment of the Articles

Amendment of the articles of incorporation requires

(1) board action and

(2) SH approval (2/3 of the shares entitled to vote)

If amendment approved, the amended articles need to be filed with the Secretary of State

There are NO dissenting SH rights of appraisal…BUT if the amendment affects a class, it must be approved by:

(1) 2/3 of the shares in that class, and

(2) 2/3 of all shares entitled to vote

Mergers

Merger requires:

• Board action (both corporations), and
• SH approval (2/3 of the shares entitled to vote of both corporations, usually)

-- No SH approval required for a short-form merger (where a 90% or more owned subsidiary is merged into a parent corporation)

-- If merger is approved, the articles of merger need to be filed with the Secretary of State

--Dissenting SH right of appraisal IS available (SHs in both corporations in regular merger; SHs of subsidiary in short-form merger)

--The surviving entity succeeds to all rights and liabilities of the constituent entities

Conversion

Corporation can convert to another form of business organization

Requires

(1) board action and

(2) SH approval (2/3 of the shares entitled to vote)

File articles of conversion with the Secretary of State

Dissenting SHs CAN demand appraisal rights

Transfer of All or Substantially All of the Assets

This is a fundamental corporate change for the transferring corporation only…NOT for the buying corporation

Requirements: 

(1) board action and

(2) SH approval (2/3 of the shares entitled to vote in the transferring corporation)

There are dissenting rights of appraisal for the SHs of the transferring corp.

Generally, company buying the assets does NOT succeed to the liabilities of the selling (transferring) company

Dissolution - Voluntary

• Requires written consent of all SHs OR
• Board of director action and approval by 2/3 of the shares entitled to vote

After either of these is met, send notice of intent to dissolve to creditors

In voluntary dissolution, the president or VP files articles of dissolution with the Secretary of State, including statement that debts have been paid in an equitable manner, with any remaining sums being paid to the SHs

Claims arising before dissolution can be asserted within 3 years after dissolution

Dissolution - Involuntary

• Immediate dissolution can be sought by creditors based on irreparable harm to unsecured creditors
• Appointment of a receiver can be sought by creditors because the corporation is insolvent and the creditor either has an unsatisfied judgment or the company admits in writing that the amount is due

Appointment of a receiver can be sought by a SH for:

• Insolvency
• Waste of assets
• Director deadlock causing irreparable harm to the company,
• SHs deadlocked and have failed at 2 annual meetings to fill a vacant board position,
• Illegal, oppressive, or fraudulent acts by directors

A receiver serves for 12 months…if things are bot fixed after 12 months, the court can order dissolution

Winding Up

After dissolution, the corporation still exists, but only for the purpose of winding up

Winding up consists of:

• Gathering all assets,
• Converting to cash,
• Paying creditors, and
• Distributing remainder to SHs

Abandoning a corporation without dissolving and winding up is a bad idea b/c the directors and officers of the corporation will be personally liable for debts incurred after forfeiture (including franchise taxes)