Chapter 19

Ultra Vires Doctrine

"beyond the power" shareholders can seek an injunction from a court to prevent the corporation from engaging in ultra vires acts. The attorney general in the state of incorporation can also bring an action to obtain an injunction against ultra vires transactions or to institute dissolution proceedings against the corporation on the basis of ultra vires acts.

Potential Problem for closely held corporations

-potential for corporate assets to be used for personal benefits. In such a situation, the seperate status of the corporate entity and the sole shareholder must be carefully preserved

Roles of Directors

-responsibilty for all policymaking decisions necessary to management of all corporate affairs. -must act as a body in carrying out routine corporate business. -selects and removes corporate officers -determines capital structure of the corporation -declares dividends -decisions on issuance of authorized shares and bonds NOT AGENTS NOT TRUSTEES Few qualifications are required

Implied Powers

A corporation has the implied power to borrow funds within certain limits, lend funds, and extend credit to those with whom it has a legal contractual relationship A corporate officer does not have the authority to bind the corporation to an action that will greatly affect the corporate purpose or undertaking, such as the sale of substantial corporate assets

Torts and Criminal Acts

A corporation is liable for the torts committed by its agents or officers within the course and scope of their employment. Corporations cannot be imprisoned but they can be fined.

Domestic, Foreign, and Alien Corporations

A corporation is referred to as a domestic corporation by its home state. A corporation formed in one state but doing business in another is a foreign corporation A corporation formed in another country, but doing business in the US is an alien corporation A corporation does not have an automatic right to do business in a state other than its state of incorporation. In some cases, it must obtain a certificate of authority in any state in which it plans to do business. Some activities that are not considered "doing business" are participating in lawsuits and holding meetings. A foreign corporation can normally conduct isolated business transactions within a state without obtaining a certificate of authority to do business there

Limited Liability of Shareholders

A key advantage is the limited liability of its owners. In certain limited situations, a court can pierce the corporate veil and impose liability on shareholders for the corporation's obligations. Creditors often will not extend credit to small companies unless the shareholders assume personal liability, as guarantors, for corporate obligations

Public and Private Corporations

A public corporation is formed by the government to meet some political or governmental purpose. This is not the same as a publicly held corporation. A publicly held corporation is any corporation whose shares are publicly traded in a securities market, such as the New York Stock Exchange, or NASDAQ Private Corporations are created either whilly or in part for private benefit. Most corporations are private

Corporate Earnings and Taxation

Can either distribute its profits in the form of dividends or retain the profits. Retained earnings will yield higher corporate profits in the future and thus cause the price of the company's stock to rise. Corporate Taxation; -all profits are subject to income tax by various levels of government. Can also be subject to double taxation. -the company pays tax on its profits>profits passed to shareholders as dividends>shareholders pay income tax (unless the dividends represent distributions of capital) Holding Companies; -a holding company is a company whose business activity consists of holding shares in another company. The company is established in a low-tax offshore jurisdiction. -generally, any profits received by the holding company on these investments are taxed at the rate of the offshore jurisdiction where the company is registered

Express Corporate Powers

Corporations are allowed to; issue stocks and bonds, execute contracts and negotiable instruments, buy and sell property, pay employee benefits, make charitable contributions. The following order of priority is used if a conflict among various documents arises; 1. US Constitution 2. State constitutions 3. state statutes 4. articles of incorporation 5. bylaws 6. resolutions of the board of directors

Improper Incorporation

De Jure Corporations; -a corporation that has substantially complied with all conditions precedent to incorporation, it has De Jure existence. If the defect is minor, most courts will overlook the defect and find that the De Jure corporation exists. If defect is substantial, such a corporation's failure to hold an organization meeting to adopt bylaws, the outcome will vary depending on the court. De Facto Corporations; -the following three requirements must be met 1.) a state statute exists under which the corporation can be validly incorporated 2.) the parties have made a good faith attempt to comply with the statute 3. the parites have already undertaken to do business as a corporation many states have abolished this common law doctrine of de facto corporations Corporation by Estoppel; If a business holds itself out to others as being a corporation but has made no attempt to incorporate, the firm may be estopped from denying corporate status in a lawsuit by a third party. Most commonly applied when a third party contracts with an entity that claims to be a corporation but has not filed articles of incorporation

Duties of Directors and Officers

Duty of Care: required to act in good faith, to exercise thae care that an ordinary careful person would exercise in similar circumstances, and to do what he or she believes is in the best interest of the corporation. Failure to exercise will lead to being held liable for negligence Duty to make informed decisions: directors are expected to exercise a reasonable amount of supervision when they delegate work to corporate officers and employees. Dissenting Directors: directors are expected to attend board of directors' meetings, and their votes should be entered in the minutes. Duty of Loyalty: faithfulness to one's obligations and duties. requires directors and officers to subordinate their personal interests to the welfare of the corporation. Cases dealing with this duty typically involve; 1.) competing with the corporation 2.) usurping a corporate opportunity 3.) having an interest that conflicts with that of the corporation 4.) using information that is not available to the public to make a profit tradicing securities 5.) authorizing a corporate transaction that is detrimental to minority shareholders 6.) selling control over the corporation Disclosure of potential conflicts of interest: director or officer must make a full disclosure of the nature of the conflicting interest and all facts pertinent to the transaction. Must abstain from voting on the proposed transaction

Corporate Personnel

Entrusted to a board of directors, whose members are elected by the shareholders. B.O.D. makes the policy decisions and hires corporate officers and other employees to run the daily business operations. Under certain circumstances a shareholder can sue on behalf of a corporation, as will be discussed later in this chapter.

Nonprofit Corporations

I.E., private hospitals, educational institutions, charities, and religious organizations, etc. Allows various groups to own property and to form contracts without exposing the individual members to personal liability

Closely held corporations

One whose shares are not publicly traded. Shares are often held by family members or by a relatively small group of persons. Sometimes referred to as privately held corporations. -management of closely held corporations: has a single shareholder ro a tight knit group of shareholders, who usually hold the positions of directors and officers. Resembles that of a sole proprietorship or a partnership. -to prevent a majority shareholder from dominating a closely held corporation, the company may require that more than a simple majority of the directors approve any action taken by the board -transfer of shares in closely held corporations; Corporations can restrict the transferability of shares to outside persons. Shareholders could be required to offer their shares to the closely held corporation or other shareholders before selling them to an outside purchaser. Control of a closely held corporation can also be stabalized through the use of a shareholder agreement -misappropriation of funds; in the event this occurs, the normal remedy for the injured minority shareholders is to have their shares appraised and to be paid the fair market value

Rights of Shareholders

Stock Certificates: stock is intangible personal property, and the ownership right has always existed independently of any stock certificate. Preemptive Rights: a shareholder receives a preference over all other purchasers to subscribe to or purchase a prorated share of a new issue of stock. The shareholder can purchase a percentage of the new shares that is equal to his or her current percentage of ownership in the corporation. these are most important in closely held corporations because each shareholder owns a relatively small number of shares but controls a substantial interest in the corporation. Stock Warrants: rights to buy stock at a stated price by a specified date that are given by the company. Often traded on securities exchanges. Dividends Inspection Rights: both common law and statutory inspection rights. Entitled to examine specified corporate records, including voting lists. Limited to the inspection and copying of corporate books and records for a proper purpose, and the request to inspect must be made in advance. A shareholder can be denied access to corporate records to prevent harassment or to protect trade secrets or other confidential corporate information. Transfer of Shares: the right of an owner to transfer property to another person unless there are valid restrictions on its transferability Rights on Dissolution: remaining assets are distributed to the shareholders in proportion to the percentage of shares owned by each shareholder Derivative Suit: Can be used after the directors do not take action 90 days after the shareholders have requested. A court will dismiss a derivative suit if a majority of the directors or an independent panel determines in good faith that the lawsuit is not in the best interests of the corporation

Business Judgement Rule

a corporate director of officer will not be liable to the corporation or to its shareholders for honest mistakes of judgement and bad business decisions. The rule will apply as long as the following occur; 1. the director or officer took reasonable steps to become informed about the matter 2. he or she had a rational basis for the decision 3. there was non conflict of interest between the director ro officer's personal interest and that of the corporation

Rights of Directors

right to participation: directors are entitled to participate in all board of directors' meetings and have a right to be notified of these meetings right of inspection: each director can access the corporation's books and records, facilities, and premises. right to indemnification: reimbursement for legal costs, fees, and damges incurred when a director becomes involved in litigation by virtue of his or her position or actions

Shareholders' Powers

shareholders must approve fundamental changes affecting the corporation before the changes can be implemented. Shareholder approval is required to amend the articles of incorporation or bylaws, to conduct a merger or dissolve the corporation, and to sell all or substantially all of the corporations' assets. have the power to vote to elect or remove members of the board of directors. shareholders have inherent power to remove a director from office for cause by majority vote.

Proxies

the law allows stockholders to appoint another person as their agent to vote their shares at the meeting. Can be signed or an electronic transmission. Management often solicits prizes, but any person can do so to concentrate voting power. Proxies normally are revocable, unless they are specifically designated as irrevocable and coupled with an interest. Proxies are valid for 11 months, unless the proxy agreement mandates a longer period

Alter-Ego Theory

this is the theory that the corporation was not operated as a seperate entity, but was just another side of the individual or group who actually controlled the corporation. When the seperate identies of the person and the corporation are no longer distinct.

Piercing the Corporate Veil

to expose the shareholders to personal liability. when corporate privelege is abused the courts will require the owners to assume personal liability to creditors for the corporation's debts. Factors that lead to piercing the corporate veil; 1. a party is tricked or misled into dealing with the corporation rather than the individual 2. the corp. is set up to make a profit or always be insolvent, or it is too "thinly" capitalized. Insufficient capital at the time is formed to meet its prospective debts or potential liabilities 3. the corporation is formed to evade an existing legal obligation 4. statutory corporate formalities, such as holding required corporation meetings, are not followed 5. Personal and corporate interests are mixed together, or commingled, to the extent that the corporation has no seperate identity