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What does it take to form a corporation? People, Paper, Act
People Incorporators. Must have one or more. (can be physical person or entity)
what does an incorporator do? Execute the Articles and deliver them to the Secretary of St.
Paper Articles of Incorporation.
Articles A K between corporation and shareholders; also a K between corporation and state.
Information in Articles 1) Corporate name, 2) Name and address of each incorporator, 3) Name and address of each initial director, 4) Name of registered agent and address of the registered office.
Corporate Name Must include "Corporation", "Company", "Incorporated", "Limited" (or abbreviation)
Registered Agent Company's legal representative, so can receive service of process for the corporation.
Statement of Purpose Generally, must have. EXCEPT: In some Sts, gen purpose is presumed and articles need NOT say anything about the corp's purpose.
Specific Statement of Purpose and Ultra Vires Rules. At COMMON LAW, any ultra vires contract could be voided as beyond the co's capacity. TODAY, 1) ultra vires Ks are valid, 2) shareholders can seek an injunction, 3) responsible managers are liable to the corp for ultra vires losses.
Capital Structure (stock) Articles MUST include a) authorized stock, b) number of shares per class, and c) info on voting rts and preferences of each class.
Authorized Stock max number of shares the corp can sell.
Issued Stock number of shares the corp actually sells.
Outstanding Stock shares that have been issued and not reacquired.
Act When Incorporators have Articles notarized, deliver them to Secretary of St and pay required fees, and Secretary of St's office accepts the Articles for filing, then have conclusive proof of valid formation. (de jure corporation)
Organizational Meeting Where board of directors selects officers and adopts any bylaws and conducts other appropriate business.
Internal Affairs Doctrine Internal affairs of a corp (e.g. roles and duties of directors, officers, and shareholders) are gvn'd by law of St in which corp is formed, regardless of where co does business.
Double Taxation Corp is a separate legal person. It can sue and be sued, hold property, be a partner, make charitable contributions, etc. It is taxed on its profits; in addition, shareholders are taxed on distributions.
S Corporation Has no more than 100 shareholders, all of whom are human and US citizens/residents. There is one class of stock and it is not publicly traded.
Are directors/officers liable for what entity does? No.
Are the shareholders (owners) liable for what the entity does? No.
Limited Liability in re Shareholders Shareholders generally are liable ONLY for the price of their stock.
Failure to form De Jure Corporation Proprietors will be personally liable for what the business does (b/c it's just a partnership). Anyone asserting doctrines, under which they will be treated like a corporation, must be unaware of failure to form de jure corp.
De Facto Corporation If doctrine applies, business is treated as a corp for ALL purposes EXCEPT in an action by the St (quo warranto).
De Facto Corporation requirements 1) There is a relevant incorporation statute, 2) The parties made a good faith, colorable attempt to comply with it, AND 3) Some exercise of corporate privileges (acting like have a corp).
Corporation by Estoppel One who treats a business as a corporation may be estopped from denying that it is a corporation. Can also prevent improperly-formed "corp" fr avoiding liability by saying not properly formed. (only applies to Ks)
What is the status of the two doctrines under which one can be treated like a corporation? Abolished in many Sts.
Promoter Person acting on behalf of a corp not yet formed.
Liability of Corp to Pre-Incorporation Ks Corp is NOT liable on pre-incorporation Ks until it ADOPTS the K.
How can a Corp Adopt a Pre-Incorporatin K? Express, board takes an action adopting the K. Implied, if corp accepts a benefit of the K, it is implied.
Act by Board of Directors. 1) Unanimous agreement in writing, OR 2) Meeting (which satisfies the quorum and voting requirements).
Liability of Promoter to Pre-Incorporation Ks Unless K clearly says otherwise, the Promoter is liable on pre-incorporation Ks UNTIL there is a NOVATION.
Novation An agreement of the promoter, the corp, and the other K'ing party that the corp replaces the promoter under the K.
Issuance When Corp sells its OWN stock.
Subscription Written offers to buy stock from corporation.
Revocation of PRE-incorporation subscriptions Irrevocable for 6 months.
Form of Consideration In every St, 1) money (cash/check), 2) tangible or intangible property, and 3) services already perf'd for corp. Split in re Promissory Notes and Future Services.
Par min issuance price
No Par No min issuance price. Board of directors sets a price.
Treasury Stock Stock the Co ISSUED and then REACQUIRED. Considered authorized but unissued, and Corp can then resell it. If it does, board sets any issuance price it wants.
Watered Stock Shares of stock of a corp that have been issued at a price far greater than true value.
Pre-emptive Right Right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock FOR MONEY.
On what bases can shareholders remove a director? W/ or W/o cause. If staggered board, for cause only.
Staggered Board Board is divided into half or thirds, w/ one-half or one-third elected each year.
Special Meeting (Board of Directors) Notice required. Must state time and place. No need to state purpose.
How does a director waive notice defect for special meeting? In writing anytime OR by attending meeting w/o objecting.
Can directors give proxies or enter voting agreements for how they will vote as directors? No. Void b/c against public policy.
Quorum for Meetings of the Board Must have a majority of all directors to do business. If quorum present, passing resolution req's only majority vote of those present. Quorum of Board can be broken if people leave.
Role of Directors Generally, managing the business of corp. Board can delegate to a committee of one or more directors.
What can committees NOT do? 1) declare dividends, 2) set director compensation, 3) fill a board vacancy.
Duty of Care standard (memorize) Director owes the corp a duty of care. Director must act in good faith and do what a prudent person would do w/ regard to her own business. (burden on plaintiff)
Breaches of Duty of Care 1) Nonfeasance, 2) Misfeasance
Business Judgment Rule A presumption that a director's decision may not be challenged if the director acted in GOOD FAITH, with the care that an ORDINARILY PRUDENT PERSON would exercise in a like position, and in a manner director REASONABLY BELIEVED to be in best interest of c
Duty of Loyalty standard (memorize) A director owes the corp a duty of loyalty. She must act in good faith and with a reasonable belief that what she does is in the corp's best interest. (burden on defendant)
Interested Director Transaction Any deal between corp and one of its directors (or a close relative of a director) or another business of the director's.
Liability of Director under Interested Director Transaction Transaction will be set aside or director liable, UNLESS director shows 1) deal was fair to corp, OR disclosed/known and deal was approved by either 1) majority of disinterested directors, or 2) majority of disinterested shares
Special Quorum Rule In many sts, interested directors count toward a quorum. Some cts will still req a showing of fairness.
Corporate Opportunity (Expectancy) Director cannot USURP a corp opportunity. That means director cannot take it until 1) tells board about it AND 2) waits for the board to reject the opportunity.
What is Corporate Opportunity? Some say its something in the corp's business line. Other tests: Something Co has an interest in or expectancy in. Found on Co time or w/ Co's resources.
Director Liability Ultra Vires Acts, Improper distributions, Improper Loans
Sarbanes-Oxley Act Requires board of large corp to establish an audit committee and oversee work of reg'd public accounting firm. Chief executive and financial officers must certify accuracy and completeness of financial reports.
When is a director liable for board action? A director is presumed to concur w/ board action unless dissent/abstention is noted IN WRITING in corporate records.
Sufficient writing. 1) in the minutes OR 2) delivered in writing to presiding officer at meeting OR 3) written dissent to corp immediately a/f meeting.
Exceptions to liability of director for board action. 1) Absent director is not liable for stuff done at meeting she missed. 2) Good faith reliance on info presented by office, EE, or committee, or professional reasonably believed competent.
Officers Agents of Corp. They can bind the Corp by acts for which they have authority to bind it. Owe same duties of care and loyalty as directors.
Selection and Removal of Officers Selected and removed by Board, which also sets officer compensation. (Shareholders hire and fire directors, but board hires and fires officers)
When is corp barred fr indemnifying? If officer/director was held liable to Corp, OR to have received an improper personal benefit.
Mandatory indemnification by Corp. If director/officer is successful in defending, on the merits or otherwise.
Permissive indemnification by Corp. Any other situation other than where barred or mandatory. (e.g. case settled against director/officer)
Eligibility of Director/Officer in re Permissive Indemnification by Corp. Must show director/officer acted in good faith and with the reasonable belief that actions were in co's best interests. (same as Duty of Loyalty)
Do shareholders get to manage the corp? Generally, No. EXCEPT shareholders can run corp directly in a close corp.
Close Corporation. 1) few shareholders and 2) stock is NOT publicly traded.
If Corp NOT traded on a national exchange… Shareholders can eliminate board and run corp directly. But corp can be operated just like ordinary corp, w/ a board.
How can board be eliminated and corp shareholder managed? a) In the articles AND approved by ALL shareholders, OR b) by unanimous written shareholder agreement.
Can shareholders be held liable for acts or debts of corp? Generally, No. EXCEPT shareholder might be personally liable for what corp did if ct PIERCES THE CORPORATE VEIL (close corps only).
To Pierce the Corporate Veil and hold shareholders personally liable… 1) shareholders must have abused the privilege of incorporating AND 2) fairness must require holding them liable.
Derivative Suit A shareholder is suing to enforce the corp's claim, not own personal claim. It's a case in which the corp is not pursuing its own claim, so shareholder steps in to prosecute it for the corp.
Requirements for bringing a shareholder derivative suit? Stock ownership (at time of claim or by operation of law fr someone who owns), Adequate representation, Written Demand (can't sue till 90 days after demand, unless futile), Corp joined as D.
Can parties settle/dismiss derivative suit? Only w/ ct approval. Ct may give notice to shareholders and get their input on whether to settle or dismiss.
Can corp move to dismiss derivative suit? Yes, upon showing that independent investigation showed suit was not in corp's best interest (e.g. low chance of success or expense of case would exceed recovery)
Who must have made independent investigation? Independent director OR a ct appt'd panel of one or more independent persons.
In ruling on the motion to dismiss… Ct will ensure that those recommending dismissal are truly independent and that they made a reas investigation. If so, ct will dismiss. (In some sts, ct will also make an independent assessment of whether dismissal is in co's best interest.)
Record Shareholder Person shown as the owner in the corporate records. The record date is a voter eligibility cut-off.
Exceptions to general rule that record owner on record date votes. a) Corp re-acquires stock b/f record date, so it is owner of this "treasury stock" as of the record date. b) Death of shareholder. c) Proxies.
A Proxy A 1) writing, 2) signed by record shareholder, 3) directed to secretary of corp, 4) authorizing another to vote the shares.
Only way to have irrevocable proxy Proxy coupled w/ an interests. This req's 1) proxy says it's irrevocable AND 2) proxy-holder has some interest in the shares other than voting. (Agency Law)
Requirements for Voting Trust (10 yr max) 1) Written Trust, controlling how shares will be voted, 2) Copy to Corp, 3) Transfer legal title to the voting Trustee, 4) Original shareholders receive trust certificates and retain all shareholder ts except for voting.
Requirements for Voting ("pooling") Agreement 1) In writing, AND 2) signed.
Two kinds of shareholder Meetings 1) Annual meeting, and 2) Special Meeting
Annual Meeting To elect directors. If none held in 15 months, a shareholder can petition the court to order one. (required)
Who can call a Special Meeting Can be called by 1) board, or 2) president, or 3) holders of at least 10% of voting shares, or 4) anyone else authorized in bylaws.
Notice Requirement for Shareholder Meeting Must give written notice to every shareholder entitled to vote. Deliver it between 10-60 days b/f the meeting.
Contents of Notice Must state time and place of meeting. For special meetings, must also state the purpose of meeting.
How do Shareholders vote? Must be a quorum rep'd at meeting. Determination of quorum focuses on number of shares rep'd, NOT number of shareholders. GENERALLY, quorum req's majority of outstanding shares.
Stock Transfer Restrictions Ok, if they are reasonable (i.e. Not an undue restraint on alienation). Restriction must be conspicuously noted on stock certificate OR transferee must have had actual knowledge of restriction.
Right of shareholder to inspect books and records of the Corp. GENERALLY, any shareholder on 5 days written notice can demand access. Written demand must state docs desired AND proper purpose for inspection (e.g. related to interest as shareholder).
Type of Distributions Payments by corp to shareholders. 1) Dividends, 2) repurchase of shareholder's stock, or 3) Redemption (forced sale to corp at price set in Articles).
Decision to declare a Distribution. In Board's discretion. No rt to a distribution until it is declared. An action to compel declaration of a distribution is direct (not derivative). To win, must make a very strong showing of abuse of discretion.
Earned Surplus Generated by business activity. Consists of all earnings minus all losses minus distributions previously paid. (This fund can be sued for distributions).
Stated Capital Generated by issuing stock. When corp issues stock, it allocates the proceeds between stated capital and capital surplus. (CANNOT be used for distributions)
On a par Issuance Par value goes to stated capital.
On a No-Par Issuance Board allocates the consideration between stated capital nad capital surplus.
Capital Surplus Generated by issuing stock. Payments in excess of par plus amounts allocated in a no-par issuance. (may be used for distributions, IF shareholders informed)
Modern view in re Distributions Does NOT look at the funds. Corp CANNOT make a distribution if it is insolvent OR if the distribution would render it insolvent.
Insolvent a) Corp is unable to pay its debts as they come due, OR 2) Total assets are less than total liabilities (liabilities include preferential liquidation rts).
Improper distributions Directors are jointly and severally liable. (but have good faith reliance defense)
Procedure for Fundamental Corporate Change (board cannot do them alone) 1) Board action adopting a resolution of fundamental change, 2) Board submits proposal to shareholders w/ written notice, 3) Must get shareholder approval, 4) Deliver a doc to Secretary of St.
What shareholder vote is req'd in re Fundamental Corp Change? Majority of Shares ENTITLED to vote (diff from other votes).
Dissenting Shareholder Right of Appraisal Right to force Corp to buy shareholder's stock at fair value.
When will a shareholder have the rt of appraisal? If Co is 1) Merging/consolidating, 2) Transferring substantially all assets not in the ordinary course of business, OR 3) Transferring its stock in a share exchange.
Exception to to Rt of Appraisal. If Co is doing one of the three things, there is no appraisal if stock is listed on national exchange OR Co has 2k or more shareholders (i.e. no rt of appraisal in Close Corps).
What does shareholder do to perfect right of appraisal? 1) B/f shareholder vote, file w/ corp written notice of objection and intent to demand payment, 2) Abstain or vote against proposed change, AND 3) A/f vote, w/in time set by corp, make written demand to be bought out and deposit stock w/ corp.
Is the rt of appraisal the shareholder's exclusive remedy for these fundamental changes? Yes, absent fraud.
Amendment of the Articles 1) Board Action and Notice to Shareholders. 2) Shareholder approval (majority of shares entitled to vote). 3) Delivery of amended Articles to Sec. of St. (no Shareholder rt of appraisal)
Mergers (B into A) or Consolidations (A and B form C) 1) Board Action and Notice to Shareholders. 2) Shareholder approval (both corps; majority of shares entitled to vote). 3) If approved, surviving corp delivers articles of merger/consolidation to Sec. of St. (Rt of Appraisal)
Mergers/Consolidations in re Subsidiary of Parent Corp No shareholder approval req'd if a 90% or more owned subsidiary is merged into parent corp. (short-form merger)
Effect of merger/consolidation Surviving corp succeeds to all rts and liabilities of the constituents. Creditor of that corp can sue the survivor (Successor Liability).
What constitutes substantially all of the assets. Usually, at least 75%.
Transfer of All or Substantially All of the Assets not in the Ordinary Course of Business (Fundamental Corp change for Seller ONLY) 1) Board Action (both corps) and Notice to Selling Co's shareholders. 2) Approval by selling corp's shareholders (majority of shares entitled to vote. 3) Delivery to Sec of St. (Rt of Appraisal in re Selling Corp)
Share Exchange One Co acquires all the stock of another.
Is their successor liability in the sale of substantially all assets? No. Selling Corp still exists. Creditors can sue it.
Voluntary Dissolution Board Action and Approval by majority of shares entitled to vote. File notice of intent to dissolve w/ sec of st. Corp stays in existence to wind up. Notify Creditors so they can make claims.
Involuntary (by ct order) Dissolution Shareholder petition b/c a) director abuse, waste of assets, misconduct, b) director deadlock that harms corp, or c) shareholders have failed at consecutive annual meetings to fill board vacancy.
Winding Up A) gathering all assets, B) converting to cash, C) paying creditors, and D) distributing remainder to shareholders, pro-rata by share unless there is a liquidation preference.
Liquidation Preference "pay first" (must be in Articles)
Debt Securities Investor lends capital to the corp, to be repaid (usually w/ interest) as specified in the agreement. (Debt holder is a creditor, not owner of the corp)
Debt Securities Secured by corporate assets Bond
Unsecured Debt Securities Debenture
Equity SEcurities Investor buys stock fr the corp, which generates capital for the business. (Equity holder is Owner of corp, not creditor)
Rule 10b-5 Fed law that prohibits fraud or misrep (or nondisclosure) in connection w/ purchase/sale of any security (debt/equity).
Elements of Rule 10b-5 1) Instrumentality of Interstate Commerce. 2) Transaction. 3) Materiality. 4) Scienter. 5) Reliance.
Instrumentality of Interstate Commerce Mail, Telephone, or Trade on a National Exchange
Type of Transactions (10b-5) Misrep of material info. Insider Trading. Tipping.
Insider Trading Trading securities on basis of material inside info. Insider is one w/ a relationship of Trust and Confidence w/ shareholder.
Tipping An insider passes along material inside information for a wrongful purpose.
Material Fact One reasonable investor would consider important in making an investment decision.
Possible Plaintiffs in Rule 10b-5 1) Securities and Exchange Commission. 2) Private action for dmgs by Buyer or Seller of securities.
Possible Defendants in Rule 10b-5 Any person including entities.
Tipper One who 1)passes along material inside info in breach of duty to Co, AND 2) benefited.
Tippee One who 1) trades on the tip AND 2) knew/should have known the info was improperly passed.
Scienter (Rule 10b-5) D must have an intent to deceive, manipulate, or defraud. Recklessness may suffice.
Presumption in re Reliance (Rule 10b-5) Presumed in public misrep and nondisclosure cases.
Section 16B (strict liability) Federal law providing for recovery by corp of profits gained by certain insiders fr buying and selling co's stock. (derivitive suit)
When does 16b apply? 1) Reporting corp–1) listed on a national exchange OR 2) at least 500 shareholders and $10 million in assets (only big corps)
Types of Ds in 16b Director (wither when bought/sold), Officer (when bought/sold), or Shareholder who owns more than 10% (both when bought AND sold)
Type of transaction (16b) Buying and selling stock w/in single 6 month period. No fraud or inside info needed.
What happens when 16n applies? All profits fr such short-swing trading are recoverable by corp. If, w/in 6 months b/f or a/f any sale, there was a purchase at a lower price, there is a profit.
Created by: Sarah_Shore



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