Texas Bar-Corporations

Oversight failures

Board has a duty to oversee/monitor those aspects of the corporation that would be expected of an ordinarily prudent person under similar circumstances.

Safe harbor provision

Doug must disclose the nature and existence of his conflict to the other board members (but director is not required to disclose confidential information). The Board members that aren't conflicted must consider and decide through majority vote whether to go ahead with the transaction. If these steps are followed, the transaction is safe harbored from challenge

Pre-emptive rights

Gives current shareholders the right to purchase any additional shares in the corporation issues Shareholder may waive this right if he chooses. Purpose: To allow existing shareholders the right to maintain their percentage of ownership in the corporation.

Exception to dissenters rights?

Market-out exception - Shareholders do not get appraisal rights when the shares are listed on a national securities exchange, or held by more than 2,000 shareholders. Rationale - Appraisal or dissenter's rights are not necessary since there already exists a forum where the shareholder can sell his shares. 90% Ownership exception - No appraisal rights where surviving corporation already owns 90% of the target corporation.

What are the shareholder's grounds for dissolution?

The directors are deadlocked, the deadlock can't be resolved, and the corporation is suffering or is threatened with irreparable injury from the deadlock; There is a deadlock in shareholder voting power, which hasn't been broken in two consecutive annual meetings. The directors actions (or those in control) are illegal, oppressive, or fraudulent; or The corporate assets are being wasted or misapplied. The shareholders are deadlocked in voting powers and have failed the previous two years to elect successors to directors whose terms have expired.

Texas Franchise Tax+

"Privilege Tax" or "marge Tax" or "Revised Franchise Tax"

Stock subscriptions?

(the corporation is lining up shareholders prior to incorporation) A person's promise to purchase shares once corporation comes into existence The stock subscription is merely an offer subject to revocation at any time prior to acceptance The promise becomes an enforceable contract once corporation is formed and is accepted by the corporation

What situations are there where the exchange of stocks may not be freely allowed?

-Closely held corporations -Buy-sell agreements-Agreement when shareholder agrees to offer his shares either to the corporation, other shareholders, or a specified third party -Right of first refusal -Shareholder or corporate consent required -Third party approval required -Restrictions as to whom shares can be transferred

What is the standard for duty of care?

-Director must carry out such duties in good faith -Board are viewed through a deferential lens known as the business judgment rule, which presumes board reasons are carried out in good faith after reasonable justification and for acceptable reasons.

What might hinder the effectiveness of cumulative voting?

-Staggered terms- in which only a fraction (often one third) of the members of the board of directors is elected each time instead of en masse. When a corporation has staggered terms, that will hinder the effective use of cumulative voting because it will then require more votes to elect each director. -Removing a director-When a corporation utilizes cumulative voting, a director may not be removed if the votes cast against the director's removal would be sufficient to elect the director in a general election when cumulative voting was utilized.

What situations does pre-emptive rights not apply?

-Stock issued for service or property -Stock sold or granted as form of compensation - (i.d., to directors, officers, employees, etc.). -Shares issued within 6 months of formation -When preferred shares or non-voting shares are issued -Shares with pre-emptive rights not acquired within the first year of their offering

What notice is sufficient?

-The notice must state the date, time, and location of the meeting, but there is not a requirement that notice specify the purpose of the meeting, unlike the notice requirement for a special shareholders' meeting. -Can be sent electronically, but only if the director consents to such type of communication before hand.

What is the procedural requirements for dissenting shareholders rights?

1) Shareholders must be notified of appraisal rights - Any corporation considering a fundamental corporate change that gives rise to appraisal rights must notify the affected shareholders of their appraisal rights. 2) No favorable vote - The dissenting shareholder may not vote in favor of the proposed action. 3) Demand for payment - After merger approved, the shareholder must make written demand to the corporation for payment. 4) Price per shares

What are the element for proving a violation of oversight duty?

1) That director failed to carry out his oversight/monitoring duties using the requisite standard of care AND 2) That such failure was the proximate cause of the harm suffered

What are the directors fiduciary duties?

1) the Duty of Care 2) the Duty of Loyalty

Procedure of mergers?

1. Board of directors must adopt resolution 2. Shareholder approval-Written notice of meeting which must include a summary of the proposed plan. Required vote-2/3rd of shares entitled to vote (unless otherwise specified in the COF). 3. certificate of merger filed with the state.

Piercing the Corporate Veil

A common law doctrine that allows third party tort victims or third party contract claimants to pierce the corporation's protective veil and hold offending shareholder(s) personally liable for contract or tort claims that the corporation incurs.

What constitutes a quorum?

A majority of the shares entitled to vote constitutes a quorum.

When do challenges to ultra vires actions occur?

A pending contract has not commenced or been executed yet. -A shareholder can file suit to enjoin the corporation from executing the ultra vires action. The court will grant the injunction only if all parties are present and granting the injunction would be equitable.

S Corporation

A special election that a corporation makes under Subchapter S of the Internal Revenue Code. • Puts a regular corporation into a special category that confers different tax treatment than a regular C corporation. • S Corporations are afforded "pass-through" tax treatment of its income. Meaning the Corporation is not taxed as a separate standalone entity.

distributions

A transfer of cash to current shareholders, usually in the form of dividends -Authorized by the board.

How many shareholders are needed to pass a corporate action?

Actions needing shareholder approval are done when a quorum (whether in person or by proxy) is present and the action is approved by a majority (greater than half) of those shareholders present at the meeting.

What venues can shareholders vote at?

Annual and the special meetings

Conflicting interest transactions

Any transaction between the corporation and a director

What are the quorum rules for board of directors meeting?

Board action requires the presence of a quorum. Generally a majority unless the COF or bylaws express a different quorum requirement. Quorum requirements can never be less than one third of the members. Note 4: Director voting by proxy is not allowed in Texas.

How can the board act without a meeting?

Board may take action by written consent. If action done by written consent, action must be unanimous - unless by laws or COF express otherwise.

What are the formalities of duration?

By default, the corporation's existence is perpetual. If corporation wants to form for a specific period of time, that time must be stated in the Certificate of Formation.

How is it calculated?

Calculated by subtracting the greatest of three proposed deductions from total revenue, and take 1% of that. o Cost of goods sold o Wages and benefits o 30% of revenue

Officers duties?

Care and loyalty (same as for directors)

What are the formalities of the purpose

Certificate must state a purpose. A broad statement will suffice (like "all legal purposes). -The TBOC provides that a for-profit corporation may not engage in a combination of the following activities: -The business of raising cattle -The business of operating stock yards -The business of slaughtering, canning, or packing meat

De Facto Corporation

Context for "de facto" and "estoppel" doctrines: A corporation, for whatever reason, fails to complete the statutory protocols to receive the legal designation of a corporation. But, the agents for the unformed entity incur liability on what they think is the corporation's behalf. Who is liable to whom for what in these situations? You make the "de facto Corporation" argument.

Coversions

Converting from an LLC to a corporation -Procedure - Board resolution + 2/3rd thirds of shares entitled to vote

Asset Sales

Corporation A purchases substantially all the assets of corporation B -Procedure-Board resolution+2/3thirds of shares entitled to vote from selling company only.

Restrictions requiring maintenance of close corporation or subchapter S status

Corporation can stipulate that the buying shareholders mainting the corporation's status

What are the formalities of corporate existence?

Corporation comes into existence once the Secretary of State approves the COF. The approved COF is then issued to the corporation. The corporation comes into existence at this point.

Mandatory indemnification

Corporation is required to indemnify director in a completely successful defense (i.e., successful on all issues).

Permissive indemnification

Corporation may (but is not required to) indemnify director when director acted in good faith with a reasonable belief that conduct was in the corporation's best interest.

Prohibited indemnification

Corporation prohibited from indemnifying against liability when the director received an improper financial benefit.

Ultra vires actions

Corporations can state an express purpose for which the corporations is formed. If a corporation engages in activities beyond this scope they are deemed to be ultra vires acts.

What are the creditor's ground for dissolution?

Creditor may seek an involuntary dissolution when corporation is insolvent - Immediate IF creditor establishes that irreparable damage will ensue to the corporation's unsecured creditors.

What is cumulative voting?

Cumulative voting is a voting method that allows shareholders to cumulate all the votes they are entitled to cast and allocate them in a manner they see fit.

Where do damages for a derivative suit go?

Damages from a successful derivative suit will go to the corporation - (since the corporation is the one being harmed).

De Jure Corporation

De factor corporation after the secretary of state accepts COF-Now the corporation (instead of the promoter) can incur liability.

Voluntary termination

Either (1) written consent from all shareholders; or (2) board adopts resolution and resolution is passed by 2/3rds of all outstanding shares entitled to vote.

What is the exception?

For those actions that by law require that the action be taken by the board as a whole.

What shareholders are liable when piercing the corporate veil?

Generally those shareholders that actually participated in the conduct that incurred the obligation are liable. Passive investors who acted in good faith will not be vulnerable to a veil piercing case.

Stock purchases (redemptions)

Gives shareholder the right to have corporation buy back (redeem) his shares. The triggering event for the distribution will be specified in the COF.

What happens if a board rejects the demand?

If Board rejects demand then Shareholder's suit, if filed, must contain a statement demonstrating that the board's rejection of the suit was not proper due to the decision not being made by the requisite number of disinterested directors.

Apportionment

If Texas entity is doing business in other states, revenues are apportioned. The Texas corporation is taxed on only the portion that was derived from doing business in Texas.

What are the formalities of the class of stock description?

If the corporation is to have more than one class of stock, the Certificate of Formation must set forth: (a) Each class and series designation - (i.e., Series A preferred - Series B preferred) (b) The aggregate number of authorized shares for each class (c) The par value for each class or series (d) The rights, preferences, and privileges for each class of stock

What happens if safe harbor isn't taken advantage, and the transaction is challenged?

If transaction is challenged, the court will make an assessment as to whether the transaction was fair to the corporation.

What are the formalities of specifying board organizational meetings?

Initial board required to call an organizational meeting for initial corporate housekeeping matters (a) Adopt bylaws; (b) Elect officers; and (c) Transact the company business.

What is the COF?

Is a contract between the corporation, its shareholders, and the State

What are the types of directors meetings?

May hold special or regular meetings as needed to conduct corporate business.

What are the particularities of the name?

Name - The corporation's name must have any of the following after it - "Corporation", "Incorporated" "Company" or "Limited" - OR an abbreviation of these words ("Corp.", "Inc.", "Co." or "Ltd."). (a) May not have a name or phrase that indicates corporation is engaged in a business that corporation is not authorized to engage in. (b) "Lotto" or "Lottery" prohibited (c) Cannot imply that corporation is created to benefit war veterans unless approved to do so (d) Cannot be deceptively similar to other corporations doing business in Texas (e) Corporate names can be reserved for 120 days or until the application is withdrawn.

What must be done before a board meeting?

Notice must be provided to the other directors

Watered Stock

Occurs when corporation receives consideration that is worth less than par value. Shareholder is liable for the difference.

Decision making failure

Occurs when the board as a whole considers a corporate action and the decision turns out to be a bad one. Board will be held liable if the decision making process did not meet the requisite fiduciary duty standard of care. i.e., Directors will not be held liable if they acted in good faith, after reasonable investigation and there was a rational basis for the decision.

Interest exchanges

One corporation purchases all the outstanding shares of another -corporation resulting in a wholly owned subsidiary Procedure - Board resolution + two thirds of shares holders to vote

Liability for agents

Only personally liable when doing something outside the scope of their duties.

Presence at meetings

Physical presence is not required - conference call - video conferencing - internet - e-mail - As long as members can communicate with each other during the meeting. If directors are voting, voters must be properly identified and there must be and the directors must make an appropriate record of the vote.

How much do pre-emptive rights allow the shareholders to buy?

Preemptive rights allow a shareholder to purchase stock in proportion to the shareholder's current ownership in the company.

What business are liable for the franchise tax?

Pretty much anything that you file paper work to form (even LLP's, LLC's, and Partnerships).

Treasury Stock

Previously-issued stock that the corporation repurchases is said to be held in the corporation's treaury.

Capital reductions

Process by which corporation reduces capital by repurchasing shares that have been outstanding and then cancelling those shares o Procedure for Par Value Shares - Board resolution o Procedure for No Par Value Shares - Board resolution + majority shareholder vote of shares entitled to vote

Who is liable prior to the formation of the corporation?

Promoters are liable for pre-incorporation transactions (as there is no corporation yet formed). -Corporation is not liable for pre-incorporation transactions until the corporation adopts the contract.

What must be given before the shareholder meetings?

Proper notice

What is the annual meeting?

Required by law to be held every year o Time and Place specified in by-laws o General purposes are to (1) elect directors; (2) approve proposed amendments to the COF; (3) vote on shareholder proposals; and (4) consider any other bussiness subject to shareholder consideration.

Proxy

Shareholder authorizes someone else to vote on shareholder's behalf; a process used to facilitate the voting process where shareholders voting in person would not be feasible or practical

Which shareholders are eligible to vote?

Shareholders of record as of the record date are eligible to vote at an annual or special meeting.

What are the procedural requirements of a derivative suits?

Standing - A shareholder must have been a shareholder at the time the alleged conduct occurred. -Or, a person could have standing when they inherit stock, and they person they inherited it from had standing. Board demand - A shareholder must make written demand on the corporation prior to filing a derivative suit (to give the company the opportunity to address the situation first). The shareholder must give company 90 days to decide what action, if any, it will take. Shareholder may file suit sooner but must plead in complaint why waiting the 90 days would cause irreparable harm.

What is a sale of securities?

Stock sales by existing shareholders • Generally - Share ownership in a corporation is freely exchanged. Any willing seller can consummate the sale of his shares with any willing buyer. But there are situations when free share exchanges may not be the case.

debt distributions

Subject to the same insolvency restirictions that pertain to dividend payments

De Facto Merger

Texas courts will grant appraisal rights if the transaction's substance is that of a merger or a consolidation.

Other Provisions

Texas law allows a corporation to prepare "Supplemental Provisions" or "Supplemental Information" - Optional provisions that can be added to customize their corporate governance structure.

What are the formalities of director specifications?

The COF must set out the number of directors constituting the initial board of directors along with their names and addresses.

What are the pacticularities of the authorized shares provision?

The Certificate of Formation must set forth: (a) The number of shares the corporation is authorized to issue. (b) The shares' par value - (the minimum price for which shares can be issued) (c) If the shares do no have a par value, the certificate must so state.

how does state agency discretionary dissolution work?

The Texas Attorney General may institute a dissolution proceeding if: • Corporation failed to comply with any condition precedent to forming corporation. • The corporation has procured its COF by fraud • The corporation is transacting business beyond the scope of its certificate of formation • The corporation has intentionally misrepresented any matter in any required report, affidavit, application, etc.; or • If public interest requires winding up the corporation because the corporation or its high ranking officer has been convicted of a felony, the felonious actions are persistent, and terminating is necessary to prevent future felonious actions.

What are the grounds for mandatory dissolution by the state government?

The Texas Attorney General must dissolve a corporation if: • The Secretary of State has sent notice to the corporation instituting termination proceedings and the corporation has not cured those problems within 31 days of receiving notice OR • The Attorney General has independently determined that cause exists for termination.

Who authorizes issuance of stock?

The board

What brings the corporation into existence?

The certificate of formation

What is the record date?

The cutoff to determine who a record shareholder is. It may not be more than 60 days prior to an annual or special meeting.

Duty of loyalty

The duty of loyalty requires that the director place the corporation's financial interests ahead of their own. Courts are less deferential in duty of loyalty cases because of the conflicting interest nature of the transactions. -Conflicting interest transactions -Usurpation of corporate opportunity

What can be done if blocks want to vote together?

This exercise can be formalized and made into a legal arrangement through the use of mechanisms such as voting pools or voting trusts.

How can liability be avoided for board decisions?

To avoid potential liability, the director(s) must have their dissent memoralized. When a director is not in agreement with a particular board action, that disagreement must be properly recorded for the record. Therefore, director must: o Promptly object to the holding of the meeting; o Ensure that director's dissent or objection is noted in meeting minutes; OR o Not vote in favor of the action and deliver written notice of dissent to the presiding officer before meeting adjourns OR to the corporation immediately after the meeting adjourns.

Merger

Two companies are merged together

When can a proxy not be revoked?

UNLESS the proxy states that it is irrevocable AND is coupled with an interest.

How long does the promoter remain jointly and severally liable on the contract along the corporation?

Until a novation is executed; an agreement executed by the corporation, the promoter, and the third party agreeing to release the promoter as a party to the contract.

Termination of corporation status

Voluntary or involuntary termination of the corporate status.

When is a distribution prohibited

When corporation is insolvent; or paying the distribution would cause corporation to become insolvent.

Corporation by estoppel

When third party has dealt with corporation believing it to be a corporation, the third party is estopped from later claiming that the corporation did not exist (usually limited to contract cases, not tort cases).

Officer removal?

Without cause is fine. Officers under contract - Generally does not prevent removal but may provide remedies to the officer as set forth in the contract.

In carrying out board duties, can directors rely on others?

Yes, (such as company employees, consultants, lawyers, executive officers) as long as that reliance is warranted.

May a corporation adjust quorum requirements?

Yes, If quorum requirement are adjusted down, they cannot be lower than 1/3rd of the eligible voters.

Can quorum be broken?

Yes, if share holders storm out, then quorum may be broken. (It's unclear if this is true under Texas law, so make sure you point out it's just a possibility, and analyze it like that).

What must the demand for repayment include?

a) Be addressed to the corporation's president and sharehold b) Order that payment be made for the share's fair value c) Include a return address so that the corporation can send the dissenting shareholder instructions outlining the dissenting and appraisal procedures. d) State the number of shares and the stock class that the shareholder owns along with a fair estimate value estimate of those shares. e) Be delivered to the corporation at its principal executive offices no later than 20 days after receiving notice that the action was approved. f) Finally, the shareholder must relinquish his share certificates within 20 days after making the demand. At that point the person is no longer a shareholder.

What the formalities of including the price per shares?

a) Corporation can agree to shareholder's fair value assessment and send payment. The corporation has 90 days from the approval date to make payment. b) The corporation may counter with its own fair value assessment. The two sides will work to come to an agreement. The corporation then has 120 days after the two parties have agreed to a price in which to make payment. c) If the corporation and the shareholder can't come to an agreement, the price may be determined by court action.

What are the types of duty to care violations?

a. Oversight failures b. Decision making failures

Boards may take action through one or more ______

committees.

Stock dividends

corporation may issue additional shares of stock to existing shareholders=stock dividend or stock split. No additional cash outlay here, therefore not considered a distribution.

What must the COF include?

i). Name ii) Purpose iii) Authorized Shares iv) If the corporation is to have more than one class of stock, the Certificate of Formation must set forth more specifics about stock. v) Duration vi) Name and address of corporate agent vii) The organizers name and address viii) Directors ix) corporate existence x) Board organizational meeting xi) Supplemental provisions.

Voting pool

o A contractual agreement between a group of shareholders regarding how they will collectively vote their shares. Voting decisions are based on the desired vote of the majority of the voting pool participants. Voting pool agreements are specifically enforceable. o The pooling agreement must be deposited with the corporation at is principal officer or registered office.

Voting Trusts

o A separate legal entity to which the shareholder's stock is transferred o The trust, through its trustee, votes in a collective block. The trustee votes in accordance with the terms set forth in the trust. o Trust agreements must be filed with the corporation as well.

Direct suits

o A shareholder may bring a direct suit to address a situation in which the shareholder is being deprived of a legal right commensurate with share ownership. o The key is direct suits are suits in which the shareholder is addressing harm suffered by the shareholder.

Derivative suits

o An action brought by a shareholder but derivative from some type of harm being exacted upon the corporation o The most common types of derivative suits are ones being brought against corporate directors for fiduciary duty breaches.

Right to inspect

o Commensurate with share ownership is the right to inspect the corporation's books and records as long as the reason for inspection is proper. o To qualify for inspection rights, the shareholder must have been a shareholder for at least 6 months, or own at least 5 % of the outstanding shares.

Involuntary termination

o Creditor's grounds -Shareholders grounds State agency

express authority

o Defined by corporate bylaws or set by board of directors. o Additionally officers have applied authority to perform those tasks that are necessary to carry out the officers' expressly assigned tasks.

Apparent Authority

o Derived from manifestations between the third party and the corporation o If the corporation's manifestations to the third party were such that third party would reasonably believe that officer had the authority to so act, apparent authority will be present.

Salaries - Directors and officers

o Directors - No salary but are paid for their service as directors o Officers - Salary amounts will be upheld UNLESS, they are so large as to constitute a waste of corporate assets.

Competing with the corporation

o Directors have a general obligation not to engage in activities that directly compete with the corporation. o Directors may be held liable to the extent their competing actions have damaged the company's profits.

Director liability for unlawful distributions

o Directors involved in approving an unlawful distribution are liable for the portion that exceeds the lawful amount. o All culpable directors have joint and several liability. o Paying directors have a right of contribution from other culpable directors. o The director is not liable for an unlawful distribution if the director exercised ordinary care and made a good faith reliance on financial reports and records used to determine the company's net worth.

Dissenting shareholders right of appraisal

o Dissenter's rights give the dissenting shareholder the right to have the corporation purchase the shareholder's shares at fair value as determined by the company and assessing the value of the shareholder's shares.

When is cumulative voting available for a corporation?

o For corporations formed after September 1, 2003 cumulative voting is an opt-in provision. Corporation must make a specific election in its Certificate of Formation to provide for cumulative voting. o Corporations formed before September 1, 2003 cumulative voting is an opt-out election; the corporation is entitled to cumulative voting unless the corporation makes a specific election not to have cumulative voting.

How does a corporation qualify to be an S corporation?

o Have 1 class of stock o Have no more than 100 shareholders o All shareholders must be US residents.

What are the requirements for a foreign corporation to do business in Texas

o Must file an "Application of Registration" with Texas Secretary of State o If foreign corporation fails to file this application they are precluded from filing suit as a result of any business transacted in Texas o However, they are still subject to being sued for liabilities incurred in Texas.

Corporate adoption

o Passing a board resolution to adopt the contract; or o Accepting the benefits under the contract

What must the notice include?

o The notice must include the matters to be addressed and must be sent to each shareholder, regardless of whether they can vote. o Content of notice - Place, day, and meeting time of meeting

What are the timing requirements for notice?

o Timing - Notice must be given at least 10 days prior to the meeting but no earlier than 60 days prior to the meeting. If a merger or other fundamental (BIG) business transaction is being considered, corporation must give at least 21days notice.

Consideration

o Valid Consideration = Anything that confers a benefit to the corporation - (whether tangible or intangible)

What is the job of the board of directors?

oversees high level corporate activities; sets policy; hires and fires the corporation's CEO; sets compensation levels for executive officers, etc.

Stock

represents ownership in a corporation

Indemnification and insurance for officer?

same as for directors.

Whose liable for committee decisions?

the board as a whole can be.

Usurpation of corporate opportunity

when taken an opportunity for yourself instead of the corporation. In such a situation the director must 1) disclose this opportunity to the Corporations other directors; and 2) give the board the opportunity to accept or reject the opportunity.

How many directors are there?

• A corporation can have as few as one director; actual number must be specified either in the corporation's by laws or its Certificate of Formation. • Directors are not required to be shareholders or Texas residents.

Foreign Corporation

• A corporation incorporated in another state- (not another country)

Professional Corporation

• A corporation with a stated purpose that legally limits its function to rendering professional services such as medical services provided by a doctor, or legal services provided by a lawyer. • Shareholders must be a worker of the profession. • Shareholders in a professional corporation are not shielded from liability arising out of malpractice for instance.

Closely held corporation

• Characterized by o A small number of shareholders o Shares are not publicly traded o Frequent overlap for officers and directors -(i.e., they are the same people) o A relaxed or modified corporate governance structure. o restrictions on the sale or transfer of shares o Requires a special notation in the COF • Closely Held Corporation requirements o COF must expressly state "This corporation is a close corporation" o No minimum or maximum share requirements for closely held corporations • Management - o Liberal management structure - (i) Board of Directors; (ii) some modified management structure as specified in the COF or by a properly adopted shareholders agreement • Shareholder's agreements - Binding on shareholders

How are directors selected?

• Directors elected at the annual or special meeting by plurality (as opposed to majority) of votes cast. • Director removal - May be removed at any time with or without cause - Unless the COF or bylaws provide otherwise. • Director replacement - When vacancy, either directors or shareholders may fill vacancy. The director's vacancy can be filled by majority vote of the remaining directors regardless of whether they constitute a quorum, OR the director's vacancy can be filled by majority shareholder shareholder vote at the annual meeting or at a special meeting called for the specific purpose of replacing the director.

What is the liability for shareholders who participated?

• Liability is joint and several for those shareholders who actively participated in the offending conduct.

What are the procedural requirements of a decision to dismiss?

• The decision to dismiss must be made by majority vote vote of disinterested directors at a meeting comprising a quorom vote of disinterested directors. • A court shall dismiss a derivative proceeding on a motion by the corporation if the corporation (meaning a properly convened group of directors) determines in good faith, after conducting a reasonable inquiry and based on factors the person or group considers appropriate under the circumstances, that continuation of the derivative proceeding is not in the corporation's best interest.

What are the factors (not elements) that are considered

• under capitazlization- When forming the corporation, did the shareholder(s) infuse enough capital into the corporation to cover reasonably foreseeable obligations? ($1,000 minimum required by law but this is only the minimum). • disregard of corporate formalities - Failure to issue stock, hold board meetings, and keep separate books and records. The idea here is if you want to be treated like a corporation you have to ACT like a corporation. • comingling of corporate assets with personal assets - A corporation is supposed to be a separate "person" or separate legal entity - Personal and corporate assets should not be commingled. • self-dealing with the corporation - transactions with corporation should be "arms-length" transactions. • fund siphoning - i.e., the shareholders draw money out of the corporation that should go to paying pre-existing obligations. • Use of corporate form to avoid legal obligations • Shareholder's impermissible control or domination over the corporation - i.e., shareholders with equal ownership but one shareholder controls, runs, and dominates the operation sometimes to the other's detriment. • Wrongful, misleading, or fraudulent dealings with a corporate creditor - In other words, the presence of some untoward behavior that strikes as fundamentally unfair or not right -The argument for piercing in the instance of tort claimants should be stronger since their involvement with the corporation was not voluntary.

The Executive officers are _______ for the corporation. They are the ones to incur liability on the corporation's behalf.

Agents

What are the two types of suits a shareholder can bring?

Direct suit or a derivative suit

No par stock

Stock that does not have a par value. Therefore no minimum issuance price for which stock can be issue.

Par value

The minimum price for which a corporation can issue its shares. Note: Corporation not required to designate a par value.

Who prepares the COF?

The organizer, can be any person 18 or older.

Special meetings

These meetings are called when something significant has transpired between annual meetings and shareholder consideration is required. o Approve a merger or consolidation o Approve a sale of all or substantially all of the corporation's assets o Approve a _____________________________________ or termination of the business

What must be proven to win a claim of de facto corporation?

• There is statutory law for the formation of the corporation; • There was a good faith attempt to comply with that law; and • The owners and directors were operating under the corporate name