Corporations

What is required in the articles of incorporation?

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How can books and records be inspected?

1. ANY shareholder can, *upon 5 days written notice*, inspect and copy the corporation's articles, bylaws, minutes of shareholder's meetings. 2. A shareholder who has been a holder of *record for at least 6 months*, or who owns at least *5% of the outstanding stock* may, *upon 5 days written notice*, examine the accounting books and corporate records. Remedy = mandamus.

How does a shareholder perfect her right of appraisal?

1. Before 5 days of vote, file written notice of objection and intent to demand payment. 2. At the vote, vote against or abstain. 3. After the vote, make a timely demand in writing to be bought out.

When can the corporate veil be pierced?

1. Corporate formalities have been ignored and injustice results. (Commingling personal and corporate funds, failing to keep records, failure to hold meetings). 2. Corporation is undercapitalized. 3. Prevent fraud. Courts are less likely to pierce for a contract claim. They are more likely to pierce for a tort claim. Normally, only the shareholders who were active in management or operation will be liable.

What is the liability on pre-incorporation contracts?

1. Corporation: not liable until adoption. Can be express or implied. Act of incorporation is not enough to constitute adoption. 2. Promoter: If contract expressly provides for promoter's liability he is always liable and the corporation is NOT, even if corporation adopts. A promoter can only be relieved of liability where there is a clear novation. Contracting party must expressly release the promoter. If contract is silent as to promoter's liability, the promoter remains liable unless the third party knew that the corporation had yet to be formed.

What duties do directors owe?

1. Duty of care. 2. Duty of liability.

What are a shareholder's rights?

1. Elect and remove directors. 2. Sue derivatively. 3. Vote on amending charter/bylaws and approving fundamental change. No right to manage the business.

How may shares be voted?

1. In person. 2. By proxy. 3. If bylaws provide, electronically.

What are the benefits of incorporating>

1. Limit personal liability. 2. Facilitate transfer of ownership. 3. Centralize corporate management. 4. Guarantee continued existence past death or retirement of owners.

What is required for LLC formation?

1. Name must include limited company or limited liability company or LC, LLC. 2. Name of registered agent and registered office address. 3. Address of LLC's principal office.

Who wins a vote?

1. Ordinary matters: Action is approved if votes cast in favor outnumber the votes cast against. 2. Fundamental matter: Must be approved by MORE THAN 2/3 of all outstanding shares entitled to vote.

What are the consequences of a successful derivative suit?

1. Proceeds go directly to corporation. 2. Director only liable for $100,000 or past 1 year's cash compensation, whichever is greater.

What is required for a derivative suit?

1. Shareholder owned stock at time of the act or omission complained of. 2. Shareholder must make written demand on the corporation to take action. 3. Wait 90 days unless demand is rejected or corporation will suffer irreparable injury. 4. Shareholder must adequately represent the corporation. If directors refuse to bring suit, shareholder cannot maintain the derivative suit unless she shows that it was in bad faith or an abuse of discretion.

What is a proxy?

1. Written or electronic transmission. 2. Authorized by record shareholder. 3. Directed to secretary of corporation. 4. Authorizing another to vote the shares. 5. Valid for only 11 months.

What is the maximum term that parties may extend a voting trust agreement?

10 years. Each must sign a written consent to the extension. The original voting trust is only good for 10 years as well.

What is the max term of election for directors?

3 years.

What is the duty of loyalty?

A director may not receive an unfair benefit to the detriment of the corporation unless it was fully disclosed and ratified.

What is the duty of care?

A director must discharge his duties in accordance with good faith business judgment. Should investigate matters, rely on experts or reliable people. Protected by the business judgment rule for innocent business mistakes.

What must be present before a vote can be taken?

A quorum. Generally, a majority of outstanding shares entitled to vote. Can be less if the articles provide, but never less than 1/3. Quorum cannot be broken by leaving a meeting.

What must the articles of incorporation include?

APAIN. 1. Authorized shares - Max # of shares that can be issued. 2. Preferences - number of and rights of each class of stock. 3. Agent - and address of registered office. 4. Incorporators. 5. Name of incorporation - Must be either "corporation, company, incorporated, limited" or an abbreviation.

What happens if notice is not given?

Action is void unless those not given notice waived their right in writing or by attending the meeting.

What is a voting agreement?

Agreement among shareholders to vote their shares as the majority of them direct. No time limitation.

What is a voting trust?

Agreement where legal title is conferred to a trustee to vote the shares as the shareholders direct. Valid for up to 10 years.

What can be considered consideration for stock?

Any valid consideration can be received if the board values the consideration to be at least par value.

How many directors must each corporation have?

At least 1.

How can ministerial amendments to the articles be done?

Board has power to do these on its own.

How is an LLC managed?

Can either be by all members through majority vote. Can also be centralized by electing managers through voting. Managers govern affairs through majority vote.

Can pre-incorporation offers to buy stock be revoked?

Cannot be revoked for 6 months. Post-incorporation subscriptions are revocable at any time before acceptance. Acceptance is made by resolution of board or by actual formation.

What are the consequences for issuing stock for less than par value?

Corporation can recover the deficit from either directors or the stockholder who purchased the stock. The sole obligation of a shareholder or subscriber is to pay the full consideration for his stock.

What is a professional corporation?

Corporation for certain licensed professionals to limit liability of directors and shareholders. Each professional remains liable for their own malpractice.

Under the VA Stock Corporation Act, what must happen before settlement or discontinuance or a derivative action?

Court approval.

What happens if shareholder and corporation cannot agree on a fair value?

Court has power to appoint an appraiser.

If electing directors, what is relevant.

Cumulative or non-cumulative voting. 1. Non-cumulative (the standard): each share gets 1 vote. 2. Cumulative: multiply shares times number of directors being elected. Cumulative voting is permitted only if authorized by charter

When can a shareholder dissent?

For merger or consolidation.

What is a shareholder's right of appraisal?

Force the corporation to buy her shares at fair value.

What is the sole duty of a registered agent for a corporation?

Forward to the corporation at its last known address any process, notice, or demand that is served on the registered agent.

What is required every year?

Shareholder's meeting. Special meeting may be called. Can held anywhere. Board meetings may also be held OUTSIDE VA.

When will a transaction between the corporation and its director be valid?

If any of the following are true: 1. Material facts and director's interest disclosed and approved by vote of majority of disinterested directors. 2. Material facts and director's interest disclosed and approved by vote of majority of disinterested shares. 3. The transaction was fair to the corporation.

When can dividends not be paid?

If it would make the corporation insolvent or make its liabilites outweigh its assets.

When may a corporation permissively indemnify its director?

If majority of (1) disinterested directors, (2) disinterested committee of directors, (3) disinterested shareholders, or (4) legal counsel approve.

When must a corporation NOT indemnify its director?

If she loses in a derivative action or liable for receiving an improper personal benefit.

What do fundamental amendment changes require?

More than 2/3 of shareholder approval. No shareholder rights of appraisal - BUT: If an amendment adversely affects one class of stock, that single class of stock must ALSO approve by more than 2/3.

When must a corporation indemnify its director?

If the director entirely prevails in her defense.

What are emergency powers?

If there has been some catastrophic event, the board may: 1. Only notify those directors who are practicable to reach. 2. Officers may be counted as directors for the purpose of reaching a quorum. If actions during an emergency are taken with good faith and comply with those rules, they bind the corporation and anyone involved will not be liable.

How many dividends be paid?

In cash, property, or the corporation's shares.

What happens if a promoter makes a profit off of a sale of property to the corporation?

Liable to the corporation for the profit unless: 1. She discloses all material facts to an independent board of directors that adopts the transaction. or: 2. The transaction, if fully disclosed, is adopted by all current shareholders. or: 3. The promoter is the sole shareholder and there is no plan to sell stock to other individuals. However, if the promoter acquired the property before becoming a promoter, the corporation can only recover profits if the property was sold for more than fair market value.

What are fundamental changes?

Merger, dissolution, sale of assets, charter amendments. Must be approved by more than 2/3 of all outstanding shares. Can be less if articles provide, but never less than majority.

What is par value?

Minimum issuance price.

What must a director do before acting personally on a business opportunity?

Must give the corporation a chance to take the opportunity. Can't take the opportunity unless the corporation releases the opportunity to him. Can be made to disgorge profits and become a constructive trustee.

What if the corporation improperly issues a defective certificated security?

No defense. Valid in favor of a purchaser for value without notice of defect.

What is no par stock?

No listed par value. Any consideration is valid if deemed adequate by the board.

Do the by-laws need to be in the articles?

No, but the corporation MUST adopt bylaws.

Are ownership interests in LLCs freely transferrable?

No, not without unanimous written consent of all members.

Under the VA Stock Corporation Act, after Dec. 31, 2005, do shareholders of a corporation have preemptive rights to acquire the corporation's unissued shares?

No, unless provided for in the articles of incorporation.

Are there preemptive rights when a corporation issues shares for consideration other than money?

No.

Can a corporation prevent transfer of stock to those other than family members?

No.

Can directors vote by proxy?

No. Cannot enter into voting agreements either. Votes of interested directors are not counted.

Will recitation of Miranda warnings automatically dissipate the taint of an illegal arrest?

No. Depends upon whether Miranda warnings were given initally, the temporal proximity of the arrest and confession, presence of intervening circumstances, purpose and flagrancy of police misconduct.

Are there de facto or estoppel corporations in VA?

No. However, a corporation with an effective certificate of incorporation continues to be a de jure corporation even if there was a defect in the incorporation process. People who act on behalf of a corporation knowing that there is no corporation are jointly and severally liable for all liabilites created unless the third party also knew there was no corporation.

Does a promoter have a right against the corporation for expenses incurred prior to organization?

No. If the corporation is never formed, promoter must return all money to subscribers, regardless of good faith to complete incorporation.

Can a director bind the corporation on extraordinary contracts?

Not unless there was actual authority. Apparent authority would not exist because corporations don't cloak their directors with the ability to make extraordinary unilateral decisions. Actual authority only exists if (1) proper notice was given, (2) a quorum was present, and (3) a majority of the directors approved the action.

What is required for a director's meeting?

Notice and Quorum. (Notice not required if all directors consent).

What is required for every meeting?

Notice. 1. Can only be given between 10 and 60 days of the meeting. 2. Not less than 25 days if for a fundamental change. 3. Must give time and place. 4. If a special meeting, must state purpose.

Who may remove a director?

ONLY THE SHAREHOLDERS.

How are profits shared?

On basis of operating agreement - if nothing stated, in proportion to members' capital contributions.

Who has appraisal rights when a corporation sells all of its assets to another company?

Only the selling company.

When do shareholders have a right to receive dividends?

Only when declared by the directors. Directors cannot revoke a declared dividend - shareholders become unsecured creditors once declared and are entitled to payment even if corporation become insolvent.

What can a court do if both directors and shareholders are deadlocked and irreparable injury to the corporation is suffered or threatened?

Order judicial dissolution.

Shares that are issued are ________ until they are reacquired, redeemed, converted, or cancelled?

Outstanding.

Who is a subscriber?

Person who makes a written offer to buy stock from a corporation not yet formed.

Who is a promoter?

Person who undertakes to form a corporation. They have a fiduciary duty to the subscribers of stock, the corporation, and its shareholders.

What is treasury stock?

Previously issued stock that has been reacquired by the board. It is treated as no par stock.

How may a merger take place without any shareholder action?

Short-form merger. Happens when a VA corporation owns 90% or more of all classes of stock of another corporation.

Who is an incorporator?

Signs and files articles of incorporation with the SCC.

Who is a protected purchaser?

Someone who pays value for a security without notice of any adverse claim to it takes free of any adverse claim to it.

Which entity has administrative power to require corporations to abide by VA law?

State Corporation Commission.

What if stock is overissued (more than articles allow)?

Stock is NOT valid, but corporation must purchase identical stock to replace it or refund the purchaser.

When and how does the board act?

The board should act by formal resolution any time it wants to affect the property or business of the corporation. In a close or family corporation, board resolution is not essential and action taken in an informal manner may be binding.

What is the record date?

The date for determining eligibility to vote and receive notice of meetings. It may not be more than 70 days prior to the meeting. (This means you could technically vote even after you sold your shares).

What happens if directors declared an illegal dividend?

They are individually liable to the corporation and its creditors for the unlawful portion. Directors are entitled to contribution from shareholders receiving the unlawful distribution and from other directors who assented to the distribution. 2 year SOL.

What is every Virginia corporations purpose?

To engage in any lawful business, unless the articles restrict it.

What may substitute for voting on an action at a meeting?

Unanimous written consent of shareholders.

How can operating agreement be amended?

Unless provided otherwise, only by unanimous consent.

Can lack of genuineness be a defense of a certificated security?

Yes - it is a complete defense unless forged by person entrusted by corporation.

When does corporate existence begin?

When the certificate becomes effective.

For what reason may a director be removed?

With our without cause.

When does an LLC dissolve?

Written consent of all members, retirement, resignation, or bankruptcy of any member. AN LLC DOES NOT DISSOLVE UPON DEATH IN VA ANYMORE.

Are directors liable for unauthorized distributions?

Yes - liable for the amount that exceeds what could have been distributed. Directors are jointly and severally liable and entitled to contribution from other directors. However, if director relied in good faith on financial statements by reliable corporate employees or accountants, she will not be liable. 2 year SOL.

Can you revoke a proxy?

Yes, UNLESS: 1. It was labeled as irrevocable AND: 2. Coupled with an interest.

Can Ultra Vires be asserted?

Yes, but only through derivative suits, by the commonwealth, or shareholders. Shareholders can ratify an ultr vires act through acquiescence. However, no act will be held invalid merely because of the fact that the corporation was without capacity or power.

Can shares be issued without certification?

Yes, if a subsequent written statement is sent to the shareholder.

Can a VA corporation repurchase its own stock?

Yes, if done in good faith. Specific performance is available.

Can shareholders ever manage the corporation?

Yes, in nonpublic corporations where they have executed a shareholder's agreement to eliminate the board and give the shareholders power to run the business. Such an agreement MUST be in the articles or bylaws, must be signed by all shareholders and is valid for 10 years.\ The mere existence of this agreement does not provide a basis for piercing.

Do promoters have a duty between each other?

Yes, they are treated as joint venturers and have a duty to deal fairly with each other.

Can corporations make donations for the public welfare?

Yes, unless articles provide otherwise. The amount must be reasonable in light of corporation's assets.

Can officers be removed?

Yes, with or WITHOUT cause. They serve at the pleasure of the board. The board may remove an officer at any time, with or without warning or notice.