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Corporations Cheat Sheet by

corps

Introd­uction

Definition
a distinct legal entity that can conduct business in its own right by buying, selling, and holding property or by suing or being sued, and by lasting forever
Why form a corpor­ation
Limited liability and promoting investment
Corporate Law
set of state laws governing structure of corpor­ations and the rights and respon­sib­ilities of partic­ipants in corpor­ations

People Involved in Corpor­ation

Shareh­olders
Investors, ultimate owners of a residuary interest in a corpor­ation
Directors/ Board
Elected by shareh­olders, respon­sible for major corporate decisions, appoint officers
Officers
Run the corpor­ation on a daily basis

Pre-In­cor­por­ation Transa­ctions

Promoters
Try to find investors, enter into contracts on behalf of corpor­ation, fiduciary of corpor­ation
Liability
Corpor­ation not liable but promoters personally liable
Novation
Special agreement that alters the default rule; it shifts liability from the promoter to the corpor­ation; An agreement between the promoter, the corpor­ation, and the third party

Incorp­oration

Incorp­orators
must sign and file the articles of incorp­ora­tion, pay fee; not liable for contracts formed by promoters
Articles of Incorp­oration
Must include name, agent, incorp­orator, duration, purpose, and authorized shares
Ultra vires
Acts beyond the powers of the corpor­ation; corpor­ation acts outside of its stated purpose, the acts will be held unenfo­rce­able. Shareh­olders can sue to enjoin; corpor­ations can take action against directors or officers; states can initiate procee­dings to enjoin such actions

Timing of Incorp­oration

Moment of incorp­oration
Liability begins
 
Corpor­ation existence begins when the Secretary of State accepts the fee and files the articles

Bylaws

File?
No obligation to file
Why not in articles
easier to amend; Board can change (on shareh­olders can amend articles)
article conflict
articles of incorp­oration always win
de jure corpor­ation
When all of the statutory requir­ements for incorp­oration have been satisfied

De Facto Corpor­ation

Issue
What if the corpor­ation is not properly formed, but nevert­heless enters into obliga­tions after it was supposedly formed
Rule
Corpor­ation will still be treated as a corpor­ation, with limited liability, if the organizers made a good faith effort to comply with the incorp­oration process and have no actual knowledge of defect in corporate status
 

Investing in the Corpor­ation

Stock
ownership is repres­ented in shares of stock
Creditors
hold debt of corpor­ation; entitled ONLY to repayment of their loan plus interest
Stockh­olders
Equity holders; entitled to ALL the value that remains in a corpor­ation after the debts have been paid
Preferred Stock
Preference over common stock with respect to dividends and liquid­ation
Classes of stock
Can have as many as they choose with different voting and economic rights- most corpor­ations have one stock
Partic­ipating Preferred Shares
Collect as preferred share and then again with common shares
Cumulative Preferred Shares
Accumu­lates if no dividend paid the year before

Issuance of Stock

Authorized shares
Maximum number of shares that the directors of a corpor­ation can sell; set in articles of incopo­ration
Issue shares
Number of shares from the authorized pool that the directors have actually sold
Outsta­nding Shares
Shares that were once issued to shareh­olders and still remain in the possession of the shareh­olders
Treasury shares
Stock previously issued to shareh­olders, but then reacquired by the corpor­ation
Par Value Stock
A corpor­ation may, but is not required to, issue stock at a par value. Typically not required
Valuation of Consid­eration
Corpor­ation can receive any valid consid­eration that the board of directors deems adequate
Watered Stock
The corpor­ation sets a par value amount and sells the stock for less than the stated amount; shareh­olders who bought below par are liable to the creditors
Stock Subscr­iptions
Ask people to agree in advance to buy stock before the corpor­ation is formed; agreements are irrevo­cable for up to 6 months before incorp­oration
Preemptive Rights
Right to acquire stock to maintain the percentage of ownership any time new shares are issued; Default: do NOT have preemptive rights

Distri­bution

Two ways
Board can declare a dividend or buy back shares of corpor­ation
Authority and Liability
Board has power to authorize dividends, shareh­olders have NO rights to dividends, directors who vote to authorize unlawful dividends are personally liable to the corpor­ation
Unlawful dividends
corpor­ation is insolvent or issuing dividend would make corpor­ation insolvent

Potential Illega­lities with Sale of Securities

Closely Held Corpor­ations- Private Restri­ction on the Sale
prevents outsiders from becoming involved, initial shareh­olders retain control
Restri­ction must be
conspi­cuously noted, enforc­eable (must have knowledge of it)
Types of Restri­ctions
Outright prohib­ition on transfer, require company consent, company has option to buy company has right of first refusal
Challenge to Restri­ctions
Usually made on the basis of restraint on aliena­tion, test is one of reason­ability
Who is bound
Anyone who agrees: Almost any shareh­older in a closely held corpor­ation agrees to these restri­ctions.

Federal Causes of Action

Rule 10b-5
Fraudulent purchase or sale of stock or other securitie
For private person to pursue 10b-5
Plaintiff has to have purchased or sold the security, transa­ction involves interstate commerce, defendant engaged in fraudulent or deceptive conduct, conduct related to material inform­ation, defendant acted with scienter (inten­tio­nally or reckle­ssly)
Section 16(B)- Insider Trading
A corporate insider can be forced to return short-­swing profits to the corpor­ation;
Applicable Company
Corpor­ations with securities traded on national securities exchange or corpor­ation with assets of more then $10 million and more than 500 shareh­olders
Corporate Insiders
Directors, officers, or shareh­olders who hold more than 10% of any class of stock
Transa­ctions
made before someone becomes a corporate insider are generally not subject to short-­swing issues; transa­ctions made after a corporate insider leaves office may be
Short-­swing profits
six months after corporate insider transa­ctions
Reporting
Corporate insiders must report changes in stock ownership to the SEC

Veil Piercing

Rule
Shareh­olders are NOT personally liable for the debts of a corpor­ation, but only liable for the amount invested into the corpor­ation, except a court may “pierce the veil” of limited liability to avoid fraud or unfairness
Three factors
Alter ego, under capita­liz­ation, fraud
Alter ego
The investor or shareh­older has failed to observe any corporate formal­ities between the person and the corpor­ati­on—­treated the company just like itself
Under capita­liz­ation
Failure to maintain funds sufficient to cover forese­eable liabil­ities
Fraud
The parties engaged in fraud or fraud-like behavior.
When is piercing more likely
torts>­con­tracts; small closely held corpor­ations
 

Shareh­older Meetings

Most important duty
elect board of directors, Vote on major decisions that affect fundam­ental changes in the corpor­ation
Annual meeting
Mandatory- elect directors and conduct other shareh­older business
Special Meeting
Vote upon fundam­ental change
Notice
No fewer than 10 days but no more than 60 days before the meeting. Must include time, date, location, and purpose for special meeting. Notice can be waived by attending meeting
Record Date
Used to determine which shareh­olders are eligible to vote; no more than 70 days before the meeting.
Meeting altern­atives
Proxy- Authorizes others to vote shares in accordance with the wishes of the shareh­older
Proxy requir­ements
be in writing, signed by the shareh­older as of record date, be sent to secretary of corpor­ation, state that it authorizes another to vote shareh­older's shares and cannot be valid for more than 11 months unless specified

Voting

Shareh­olders typically vote on
election of directors, mergers, share exchanges, amendments to the articles of incorp­ora­tion, sales of all or substa­ntially all of its assets, or dissol­ution
Quorums
majority of the corpor­ation's outsta­nding shares repres­ented at the start of the meeting
Necessary Vote
If quorum is present, shareh­older vote is effective if the vote cast in favor of the proposal exceed the votes cast against the proposal
Cumulative Voting
Applies only to the election of directors, votes equal the number of shares multiplied by the number of director positions being voted on
Shareh­older inspection rights
A shareh­older may inspect the corpor­ation’s records in person or through an agent as long as the shareh­older states a proper purpose

Shareh­older Litigation

Direct Lawsuit
Shareh­older is suing in the shareh­older’s own name for damages and the damages go directly to the shareh­older. Interf­erence in voting rights or dividends, misinf­orm­ation about important issues, and tort injury.
Derivative Lawsuit
Shareh­older is suing on behalf of the corpor­ation- claim made in corpor­ations name and recovery belongs to corpor­ation
Derivative Lawsuit Elements
standing (stock owners­hip), demand requir­ement (unless futile), recovery (if substa­ntial benefit, corpor­ation pays attorneys fees)

Shareh­older's Duties to Other Shareh­olders

generally
Shareh­olders do NOT owe a duty to fellow shareh­olders in the corpor­ation
Contro­lling shareh­olders duty to minority
sale of stock to an outsider/ looter; Contro­lling Shareh­older Transacts with the Corpor­ation
Who is a contro­lling shareh­older
case—those who own 50% plus one, or more OR Less than 50% plus one—look to the nature of the ownership of the c

Board of Directors

Generally
The board of directors manages and directs the management of a corpor­ation’s business and affairs; usually receive compen­sation
Number and Qualif­ica­tions
at least one director, must be a natural person
Term and Selection
Elected by shareh­olders for limited term (usually one year)
Removal and Replac­ement
Shareh­olders may remove directors with or without cause unless Staggered Board
Staggered Board
Classes of directors are elected at different times—­e.g., nine directors: Three elected in year one, three elected in year two, and three elected in year three. May only be removed for cause, only if the articles provide
Vacancy or size of the board has increased
chosen by shareh­olders at special meeting OR by the board

Board Meetings

Boards
relatively small and meet regularly
Notice
only required for special meetings. Attendance waives notice unless director promptly objects at the meeting.
Voting
CANNOT vote by proxy. Need quorum, affirm­ative vote of those present OR unanimous written consent
Dissent
If disagrees with board decision: enter dissent in meeting minutes, file written dissent before meeting is adjourned, provide written dissent by certified or registered mail to the corpor­ation's secretary immedi­ately following adjour­nment of meeting

Officers

Officers
Selected by the board, run corpor­ation on daily basis
Duties
duty of loyalty and care
Duty of Care
Business Judgment Rule, reasonable standard of care, reliance defense
Business Judgment Rule
in the absence of fraud, illega­lity, or self-d­ealing, courts will not disturb a good-faith business decision
Standard of Care
Act with the care that a person in a like position would reasonably believe approp­riate under similar circum­stances
Reliance Defense
A director or officer is entitled to rely on the expertise of officers and other employees, outside experts, and committees of the board
Duty of Loyalty
May not receive an unfair benefit to the detriment of the corpor­ation without effective disclosure or ratifi­cation
Self-D­ealing Transa­ctions
A transa­ction in which the director, officer, or their relative receives a substa­ntial benefit directly from the corpor­ation
Corporate Opport­unity Doctrine
Usurping or stealing a corporate opport­unity
Insulation from Liability/ Ratifi­cation
A self-i­nte­rested transa­ction may be upheld if it is disclosed and ratified by majority of disint­erested directors or a majority of disint­erested shareh­olders
Fairness
If a director or officer can demons­trate that the transa­ction was fair, then they will win.

Indemn­ifi­cation

Indemn­ifi­cation
The practice of corpor­ations paying for the costs of a director’s or officer’s defense in litiga­tion, usually by purchasing insurance
Required/ Mandatory
The corpor­ation is ALWAYS required to pay the costs of defense if the director or officer succes­sfully defends the case
Prohibited
The corpor­ation CANNOT indemnify a director or officer who is liable for receiving an improper benefit from the corpor­ation or otherwise loses a lawsuit
Permissive
The corpor­ation may, but is NOT required, to indemnify a director or officer for the costs of a suit if the director or officer acted in good faith or had no reasonable cause to believe the conduct was illegal

Fundam­ental Changes to a Corpor­ation

Required approval
BOTH the shareh­olders and directors must approve fundam­ental changes.
Merger
The combin­ation of two or more corpor­ations where one corpor­ation survives and assumes the assets and the liabil­ities of the other corpor­ation
Consol­idation
The combin­ation in which neither of the two corpor­ations survives. New entity is created- assumes the assets and liabil­ities of both corpor­ations
Dissol­ution
The existence of a corpor­ation is exting­uished either volunt­arily by the shareh­olders and the directors or involu­ntarily by disgru­ntled parties.
Involu­ntary Dissol­ution
A corpor­ation may be dissolved involu­ntarily by creditors if the creditors show the corpor­ation is not paying its debts.
Shareh­older dissol­ution
corporate assets are being waster, directors are acting fraudu­lently, or directors and shareh­olders are deadlocked
Process of Changing
The board must adopt a resolution proposing the change; notice sent to shareh­olders of special meeting; majority of shareh­olders casting a vote must vote in favor of the fundam­ental change

Dissen­ters' Rights (in merger)

Generally
Entitled to have their shares purchased from them by the corpor­ation at a fair market value determined by the court
Procedural Requir­ements
Send written notice of intent to dissent, abstai­n/d­issent at meeting, make prompt written demand for fair market value
Fair Market Value Determ­ination
Court can appoint expert appraiser to issue binding appraisal

Close Corpor­ation

Closely Held
Corpor­ation with a few shareh­olders
Charac­ter­istics
Shareh­olders are often also directors and officers, Typically NOT publicly traded, Relaxation of rigid rules for corpor­ations
Voting Agreements
CAN form voting agreements (unlike corpor­ation)
Preemptive Rights
The default rule prohib­iting preemptive rights may be relaxed

S Corpor­ation

S Corp
a corpor­ation for state corporate law purposes, but it gets special treatment for tax purposes
Taxation
only taxed once, like a partne­rship; not taxed at entity level; allows "pass throug­h" taxation
Limitation
Limited in the number of shareh­olders it may have

Limited Liability Corpor­ation

Generally
LLC combines the limited liability of corpor­ations with the tax treatment of a partne­rship; no limitation on number of shareh­olders; no residency requir­ement; no natural persons requir­ement
Key Charac­ter­istics
LLC files articles of organi­zation and an operating agreement with the state; owners are called members not shareh­olders; LLC is presumed to be managed by ALL of its members
Comparison to Corpor­ations
difference in termin­ology and taxing features, but otherwise, analyze LLCs under general corporate law principles

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