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corporations
| Term | Definition |
|---|---|
| revised model business corporation act (RMBCA) | apply the RMBCA unless directed; most states follow a version of the RMBCA |
| de jure formation of a coporation | valid formation of a corporation where the owners are not personally liable |
| promoter liability | before formation, a promoter is one who works on behalf of the corporation to create and fund the entity, with knowledge the entity is not yet formed |
| promoter liability to third parties | A promoter is personally liable for a breach of contract, even after the corporation (C) is formed, unless there is a novation or the third party (3P) knew of the pre-formation status and agreed to look only to the C for performance. |
| promoter liability to the corporation | A promoter owes a fiduciary duty to the corporation even before it is formed. A secret profit (e.g., undisclosed commission) on a pre-incorporation transaction is a breach. |
| corporate liability | The corporation is not liable for pre-formation transactions unless there is a novation or an express (by the board) or implied (accepts benefits) adoption of the contract. |
| incorporation---procedure | incorporator signs and files the articles of incorporation with the state and pays the filing fee |
| articles of incorporation requirements | (1) name (must include corporation, company, limited), (2) name & address of local agent for service of process, (3) names and addresses of incorporators, (4) # of authorized shares in each class of stock, (5) RMBCA presumes "any lawful business" purpose |
| ulta vires actions | corporate acts that are beyond what is permitted in the articles; void at CL, but enforceable under the RMBCA; shareholders or the state can enjoin acts if equitable; the C can sue directors/off. who committed the acts |
| incorporation---timing | impacts when the limited liability of the C begins; if the state accepts the articles, the entity is formed on the date when the articles are filed, or a later date set out in the articles; filing by the state is conclusive proof the entity is formed. |
| defective incorporation | failed to form a de jure corporation |
| de facto incorporation doctrine--defense to personal liability | not recognized by RMBCA; corporation not formed in spite of good faith effort to comply and acted without knowledge of defects |
| corporation by estoppel---defense to personal liability | person who deals with an entity as if it were a corporation is estopped from denying its existence and is thereby prevented from seeking the personal liability of the business owner. This doctrine is limited to contractual agreements |
| bylaws | after filing, directors adopt bylaws (day-to-day rules), that can be amended or repealed by the SH or directors; in the event of a conflict with the articles, the articles control |
| piercing the corporation veil (PCV) definition | A P can PCV of limited liability to recover directly from the investor/shareholder on the basis of fraud/unfairness. Commonly sought in a contract dispute, but more likely to be granted in tort case. |
| PCV grounds | Alter ego—failed to observe corporate formalities; C is just the SH’s alter ego Undercapitalization—failure to maintain sufficient funds to cover liabilities Fraud—the parties engaged in fraud or fraud-like behavior |
| types of stock | common stock or preferred stock |
| common stock | a corporation must issue stock that is entitled to vote and stock that represents ownership in the corporation |
| preferred stock | stock given priority with dividends and during liquidation |
| authorization of issuance of stock | must be authorized in the articles and by the board of directors; SH approval required to sell more than the authorized maximum |
| consideration | (RMBCA) can be money, tangible/intangible property or future services so long as the value is determined as adequate by the board acting in good faith |
| par value stock | a stock with an assigned value (usually a nominal amount) |
| watered stock (not recognized by RMBCA) | stock sold for under par value; SH will be liable for the amount over par value (the “water”) |
| stock subscriptions | agreement to buy stock before formation, irrevocable for 6 months |
| Stock Rights, Options, Warrants | BOD of C has authority to issue and dictate the terms |
| Preemptive Rights | if the board issues new shares, the rights of shareholders to purchase additional shares to maintain proportional ownership; must be authorized in the articles |
| distributions---method | a corporation can declare a cash dividend or buy back shares; a stock dividend or split is not considered a distribution |
| distributions---authorization | in its discretion, the board may authorize payment of a dividend; a SH cannot compel the board to authorize a distribution unless it acts in bad faith and abuses its discretion |
| distributions---insolvency | a corporation may not make a distribution if it is insolvent or would cause such, determined under either the equity test or balance sheet test at the time a dividend is declared |
| distributions---liability | directors personally liable to the C for unlawful distribution beyond lawful amount |
| distributions---priorities | in paying distributions to SH: preferred, preferred participating, cumulative, common |
| shareholder duties | elect the board of directors and vote on fundamental changes |
| shareholder meetings | annual (mandatory to elect board) and special (to approve fundamental change) |
| shareholder meetings---notice | required no fewer than 10 days and no more than 60 days before the meeting; Content of the notice must include where/ when; Special meeting notice must include the purpose; Failure to provide proper notice allows SH to challenge actions, absent a waiver |
| shareholder meetings---waiver | SH will be held to waive defects in notice by a signed writing or by attending the meeting without objecting to the defective notice |
| shareholder meetings---unanimous consent | unanimous consent of SH to act without a meeting is allowed if it is in writing |
| failure to hold a SH meeting | will not invalidate the entity or its business |
| SH voting | only a SH who own shares on the record date is entitled to vote |
| SH voting---record date | fixed by directors and can be no more than 70 days before the meeting; a SH who acquires after the record date cannot vote without a proxy from the record owner |
| SH voting---proxy | A 3rd party may be appointed to vote if in a signed writing sent to the C; Valid for 11 months unless otherwise stated; Revocable unless otherwise specified and is coupled with an interest |
| SH voting---quorum | To hold a vote requires a quorum of the eligible shares to be present at the meeting; A quorum is a majority of votes representing the eligible outstanding shares |
| SH voting---number required | if a quorum is present, a vote will be approved if votes in favor exceed votes against (majority), unless the articles provide for a greater amount (e.g., plurality) |
| SH voting---cumulative voting | (an exception to the “one share = one vote” default)—articles may give SH a number of votes equal to the number of shares multiplied by number of directors |
| SH voting---class voting | the articles can create classes of stock that have greater voting power (e.g., one share = five votes) or no power (e.g., nonvoting stock) |
| SH voting---voting agreements | SH can enter a contractual agreement to vote their shares a specific way; agreements are subject to contract law (e.g., SOF applies) and enforceable through specific performance, but need not be filed with the corporation and have no duration limit |
| SH rights---to inspect records | SH may inspect and copy records with five days’ notice stating a proper purpose (related to financial interest of SH and not to harass or acquire corporate secrets) |
| SH rights---to sue the corporation | SH may bring a direct or derivative action against the corporation |
| SH direct action to sue corporation | can recover damages for a breach of duty to SH individually, causing direct harm |
| SH derivative action to sue corporation | SH sues on behalf of the C to vindicate rights of the C |
| SH standing to sue corporation | must be a SH at the time of the wrong (or acquire shares from SH who was) and maintain ownership throughout litigation; SH must fairly and adequately represent the interests of the corporation |
| SH demand to sue corporation | must make written demand to the board, and wait 90 days before commencing action unless board rejects it earlier (tested against business judgment rule) or waiting would cause irreparable injury; some states excuse if demand futile |
| SH recovery when sue corporation | any recovery goes to the corporation; SH can seek reimbursement for attorney’s fees if the action produced a substantial benefit to the corporation |
| SH liabilities | Shareholders do not owe a duty to each other or to the corporation, but can be liable to a 3P (if PCV) or if a controlling SH in a close corporation. |
| controlling SH | owns >50%/enough of the shares to enact major changes; can't use position to cause C to take action that prejudices minority; |
| controlling SH --fiduciary duty | May owe a fid. duty to minority SH for selling stock to a looter w/o reasonable investigation, seeking to eliminate other SH, receiving a distrib. denied others, or failing to disclose material info |
| board of directors | manage and direct the management of the C's business; the board must consist of at least one director who typically serves for a one year term |
| board of directors---election | SH elect the directors at the annual meeting |
| board of directors---removal | SH can remove a director (D) with or without cause, unless the articles provide otherwise |
| board of directors---action | the board takes action through a meeting or with unanimous written consent |
| board of directors---meetings | two days’ notice is required for a special meeting unless waived in writing or by D attending; no notice is required for a regular meeting; directors cannot vote by proxy |
| board of directors---voting requirements | quorum (maj. of Ds); presence (D can attend remotely if can hear/speak); required number (maj. present); no voting agreements allowed |
| board of directors---dissenting | a D may dissent to board action to avoid being liable for its conduct; just voting against doesn't shield D from liability; D must object to the meeting, ensure dissent is in the minutes or file a written dissent during or immediately after the meeting |
| board of directors---committees | the board may act through a committee; the Sarbanes-Oxley act requires a publicly traded corporation to have an independent audit committee |
| board of directors---compensation | board may set its own compensation; an excess may be a waste of assets |
| officers | run the daily business and are elected and removed by the Board of Directors with or without cause; officers owe a fiduciary duty of care and loyalty to the corporation |
| board of directors---duty of care | must act as a prudent person in like circumstances; must use any special skills; Business Judgment Rule: In the absence of fraud, illegality, or self-dealing, the good faith actions of a director or officer will not be disturbed. |
| board of directors---duty of loyalty | A director/officer must act in good faith and in the best interest of the corporation. |
| board of directors---conflict of interest (self-dealing) | transaction between the corporation and a director (or her relatives) or a business in which the director has an interest that would normally require approval of the board (eg salary) is a breach of duty of loyalty unless ratification or transaction fair |
| board of directors---ratification | disclosure of material facts and approval by either a majority of all disinterested directors or majority of all disinterested SH |
| board of directors---fairness of transaction | transaction was fair to the corporation at the time of the transaction; Some states treat as a partial defense and shift burden to plaintiff to prove unfair |
| board of directors---remedy for conflict of interest | damages to C; transaction may be subject to injunctive relief or rescission |
| board of directors---corporate opportunity | A director/officer cannot usurp a corporate opportunity unless she first notifies the board and waits for the board to accept or reject before seizing the opportunity; measured by “interest or expectancy” or “line of business” test |
| board of directors---remedy for corporate opportunity | damages, constructive trust or corporation gets the opportunity at cost |
| board of directors---competing venture | A director/officer that engages in a business that competes with the C is in breach of his duty of loyalty. |
| board of directors---remedy for competing venture | constructive trust on the profits or injunctive relief |
| board of directors---right of indemnification | a D may seek indemnification for expenses resulting from litigation; may be mandatory, prohibited or permissive |
| board of directors---mandatory indemnification | required if D successfully defends an action against him for his role as a D |
| board of directors---prohibited indemnification | cannot indemnify if D is liable for receiving an improper personal benefit |
| board of directors---permissive indemnification | can indemnify if the D acted in good faith or had no cause to know his acts were unlawful |
| closely held corporations---sale of securities | Reasonable restrictions on selling stock are allowed but not enforceable against a transferee unless the stock certificate includes a conspicuous statement/transferee has actual knowledge; controlling SH has a fiduciary duty when selling to outsiders. |
| federal rule 10b-5---sale of securities | a buyer or seller using interstate commerce may allege a violation against a defendant who intentionally engaged in fraud or deception causing plaintiff to suffer harm |
| federal rule section 16(b) | a corporate insider can be forced to return short-swing profits to the C |
| approval of fundamental changes | must be approved by the majority of the board of directors and a majority of shareholders entitled to vote. |
| merger | a merger is the combination of two or more corporations when one survives; a consolidation is when two combine and neither survive but a new entity is created; merger with a corporation in another jx must be permitted by the law of that other jx |
| sale of assets | a fundamental change when it is a sale or other transfer of substantially all of the corporation’s assets outside the regular course of business; approval required by transferor C |
| stock acquisition | to gain control of another corporation without a merger, the C may acquire its stock with cash or through a share exchange (RMBCA views it the same as a merger) |
| amending the articles | once stock has been issued, the articles may only be amended with approval by the majority of the shareholders entitled to vote |
| voluntary dissolution | corporate entity dissolved by approval of the directors and shareholders |
| involuntary dissolution | corporate entity dissolved by the court upon petition by creditors or SH |
| involuntary dissolution by creditors | allowed only if the corporation is insolvent |
| involuntary dissolution by shareholders | allowed if 1 of the grounds is shown: Waste of corporate assets; Illegal, oppressive or fraudulent conduct; Director deadlock and irreparable injury to C is likely; Shareholder deadlock over election of new directors |
| distribution upon dissolution | the directors must distribute the assets to creditors, and then to SH with preference during liquidation and finally to SH of other stock |
| dissenter's rights of appraisal | forces the C to buy his stock at a fair (appraised) value within 30 days of the demand for payment |
| dissenter's rights of appraisal---qualifying SH | must be a SH that is entitled to vote on a fundamental change |
| dissenter's rights of appraisal---trigger | there must be a merger, acquisition, sale of assets or amendment of the articles |
| dissenter's rights of appraisal---procedure | notice (written & delivered before SH vote on action); disapproval (cannot vote in favor, but can abstain); demand (written demand for payment); payment (C pays FMV or court can appoint appraiser) |
| close corporations | has few SHs; not publicly traded; SH often serve as both directors & officers and can enter into voting agreements; formalities relaxed in many states but controlling SHs have special obligations |
| LLC | A limited liability company (LLC) provides its investors (called members) with limited liability (like a corporation) yet flexible management and pass-through taxation (like a partnership). |
| LLC---creation | by filing articles of organization with the state; the name must include “LLC” or words "limited liability company” |
| LLC---adding a new member | to join an LLC, all members must consent; all states permit one-member LLC/s |
| LLC---management | presumed by all members but can be centralized in one or more managers (who need not be members); LLC can adopt an operating agreement that will control over statutory provisions |
| member-managed LLC | members have broad authority to bind the LLC |
| manager-managed LLC | members do not have authority to bind the LLC |
| LLC---fiduciary duties | owed by members to each other (as in a partnership) and to the entity itself (as in a corporation) |
| LLC---transferability | transfer of a membership includes right to profit/loss but not right to manage |
| LLC---profits and losses | presumed to be allocated according a member's contribution unless the operating agreement indicates otherwise |
| LLC---termination of membership | withdrawal by one member does not terminate the LLC and the LLC may elect to liquidate the member’s interest and pay fair market value |
| LLC---dissolution | requires consent of all members or can occur for lack of any members or the grounds for involuntary dissolution; upon dissolution and winding up, the creditors must be notified and instructed how to resolve any outstanding claims |
| noncompliance | When a person conducts business as a corporation without attempting to comply with the statutory incorporation requirements, that person is liable for any obligations incurred in the name of the nonexistent corporation. |
| when a corporation has not been created | the entity may be treated as a general partnership (GP). A partnership is an association of 2 or more persons to carry on a for-profit business as co-owners. In a GP each partner is jointly and severally liable for all partnership obligations. |
| Business dealings between a controlling shareholder and the controlled corporation | those that do not involve self-dealing are analyzed using the business judgment standard |
| if a parent corporation causes its subsidiary to participate in a business transaction that prefers the parent at the expense of the subsidiary, | it can involve self-dealing and a breach of loyalty. |
| interest or expectancy test | key is whether the corporation has an existing interest or an expectancy arising from an existing right in the opportunity. An expectancy can also exist when the corporation is actively seeking a similar opportunity. |
| line of business test | key is whether the opportunity is within the corporation’s current or prospective line of business; Whether an opportunity satisfies this test frequently turns on how expansively the corporation’s line of business is characterized |
Created by:
mrynna