Legal Environment of Business- Test 3 (Part 2)
piercing the corporate veil- factors considered
-3rd party tricked into dealing with a corporation rather than the individual. -Corporation is set up never to make a profit or remain insolvent or is under capitalized. -Statutory formalities are not followed.
dividends
-Distribution of corporate profits or income. -Only as ordered by the Board. -Can be stock, cash, property, stock of other corporations. -State laws control the sources of revenues for dividends, which may be paid from retained earnings, net profits and surplus
business judgment rule
-Immunizes a director or officer from liability from consequences of a business decision that turned sour. -Court will not require directors or officers to manage "in hindsight." -As long as decision was reasonable, informed, made in good faith and in the best interests of the corporation, BJR will apply.
remedies for ultra vires act
-Shareholders can bring action for corporation. -Corporation can recover damages from its officers and directors. -Attorney general of state may bring action to dissolve corporation for ultra vires acts.
shareholders derivative suit
-Shareholders can sue a 3rd party on behalf of the corporation if the Directors fail or refuse to correct the wrong or injury. -Directors may refuse to take action because they might personally be liable. -Any damages recovered go to corporation's treasury.
rights on dissolution
-Shareholders have right to pro-rata share of assets upon liquidation. -Shareholder may petition the court for dissolution of the corporation for following reasons: -Board mishandling corporate assets. -Board deadlocked and irreparable injury will result. -Acts of directors are illegal, oppressive, or fraudulent. -Shareholders are deadlocked for two meetings and can't elect directors.
transfer of shares
-Shares are freely transferable unless restricted by articles and noted on the stock certificate. -Closely held corporations may have "right of first refusal" or preemptive rights. -Transfer accomplished by delivery or endorsement to corporate secretary. -New shareholder must be recorded on corporate books.
Preliminary and Promotional Activities; and The Legal Process of Incorporation
2 steps to corporate formation
Promoter
A ________ (or corporation) can create a prospectus required by federal and state securities laws to inform and protect investors. They are also personally liable for pre-incorporation contracts on behalf of the corporation, unless 3rd party agrees to hold future corporation liable.
Model Business Corporation Act (MBCA)
A corporation is a creature of statute, an artificial "person." Most states follow the _________ or the RMBCA, that are model corporation laws
Respondeat Superior
A corporation is liable for the torts committed by its agents or officers within the course and scope of their employment under the doctrine of ___________.
Corporate Powers
A corporation may act and enter into contracts as any natural person, except as limited by: -U.S. Constitution. -State constitutions. -State statutes. -Its own articles of incorporation. -Its own corporate bylaws. -Resolutions by its own board
"novation"
After corporate formation, corporation can adopt the pre-incorporation contract and release the promoter by creating a _____________.
loans to the corporation
Arms-length loans are permissible, officer loans in exchange for stock are carefully scrutinized.
"S" corporations
Avoids the federal "double taxation" of regular corporations at the corporate level. Only dividends are taxed to the shareholders as personal income. IRS requirements: Corporation is domestic, fewer than 75 shareholders, only one class of stock, no shareholder can be a non-resident alien.
promoters
Before corporation is formed, ________ are the persons who take the preliminary steps of organizing the venture and attracting investors via subscription agreements.
stock certificates
Certificate which evidences ownership in a certain number of shares in the corporation given to person of record (regardless of who has certificate) gets notices, dividends & reports. Corporate ownership is intangible personal property. Some states allow uncertificated stock -- no tangible certificate.
Preemptive rights
Common law concept which is a preference to existing shareholders to purchase a pro-rated share of newly-issued stock within a certain period of time. Provided for in the articles of incorporation. Significant in a close corporation to prevent dilution and loss of control.
one
Common shareholder entitled to ______ vote per share. -Articles and by-laws can exclude or limit voting rights of certain classes of stock. -Quorum must be present -- shareholders representing more than 50% of outstanding shares must be present
Ultra Vires Doctrine
Corporate acts are beyond the express or implied powers of the corporation as stated in state statute or the corporation's own articles of incorporations and are considered to be __________ (beyond the powers).
commingled
Corporation is "alter ego" of majority shareholder and personal and corporate interest are ____________ such that the corporation has no separate identity
duty of care
Directors/officers are expected to act in good faith and the best interests of the corporation. Failure to exercise due care may subject individual directors or officers personally liable: -Make informed and reasonable decisions; -Rely on competent consultants and experts; and Exercise reasonable supervision.
incorporation procedures
Errors in _____________ when a 3rd party seeks to bring an action against a corporation that may not have complied perfectly with every incorporation law. Problematic for shareholders who may be personally liable. In addition, entity may not be able to enforce contracts.
Super-agent
Every corporation is governed by a board of directors that are elected by the shareholders. Individual directors are not agents of corporation, only the board itself can act as a ___________ and bind the corporation. A director can also be a shareholder, especially in closely-held corporations
Corporate Personnel
Individual shareholders own corporation, Shareholders elect board of directors to manage corporation, Board of directors hires officers to run corporation on a daily basis
QUORUM
Meetings require _________(minimum number of directors to conduct official corporate business, usually majority). Each director generally has one vote
incorporation process
Promotion>name search>subscribers>file articles of incorporation>state charter>1st organizational meeting
derivative action
Shareholder can sue corporation and be sued by corporation and bring suit for corporation in some instances
inspection rights
Shareholders can inspect books for a proper purpose. -But corporation can protect trade secrets, other confidential information. -Shareholder must have held a minimum number of shares for a minimum amount of time. -All shareholders can see list of other shareholders of record
shareholder/stockholder
The shares of a corporation are owned by at least one __________
shareholder's rights
To vote. To have a stock certificate. To purchase newly issued stock. To dividends, when declared by board. To inspect corporate records. To transfer shares, with some exceptions. To a proportionate share of corporate assets on dissolution. To file suit on behalf of corporation
stock warrants
Transferable options to purchase newly-issued stock at a stated price. Warrants are publicly traded. Called "rights" when option is for a short period of time.
shareholders
_______ may vote on resolutions: -Need majority present for most resolutions. -Need a "super majority" (e.g., 67%) for important matters: sale of assets, etc.. -Voting lists by corporate secretary contains record of stock ownership. [Cut off date 70 days ahead of action (notice, dividends, etc..)]
Corporate by-laws
________ may also grant or limit a corporation's express powers.
De jure
________: substantial statutory requirements are met; cannot be attacked by state or 3rd parties
domestic: foreign: alien
_________ corporation does business in its state of incorporation. ___________ corporation from X state doing business in Z state. _____________: formed in another country doing business in United States
Directors
_________ have general responsibility for all management decisions: -All major corporate policies. -Appointment and removal of all corporate officers and their compensation. -Financial decisions, including dividends and retained earnings.
shareholder powers
_________ include approving all fundamental changes to the corporation: Amending articles of incorporation or bylaws. Approval of mergers or acquisition. Sale of all corporate assets or dissolution. Shareholders also elect and remove the board of directors.
shareholder's meetings
__________ must occur at least annually. Voting requirements and procedures are: -Quorum of shareholders owning more than 50% of shares must be present to conduct business; -Shareholders may appoint a proxy or enter into a voting trust agreement.
internal
__________ organization: usually included in the bylaws
de facto
__________: statutory requirements not met, but promoters made good faith effort to comply with corporate law; corporate status can only be attacked by state.
corporate articles of incorporations
________________ now adopt very broad purposes to prevent lawsuits against the corporation.
chartered
after the corporation is _________, it can do business
cumulative voting
allows minority shareholders to get a board member elected. x # to be elected x shareholders # of shares = shareholder can cast them all for one board nominee.
Subscribers and Subscription Agreements
continuing contracts to purchase stock. Generally, subscribers become stockholders upon corporate formation
contract; employment
corporate officers and executives' employment relationships are generally governed by __________ law and _________ law.
retained; dividends
corporate profits can either be kept as _______ earnings or passed on to the shareholders as _______
implied powers
corporation has _______ powers to: perform all acts reasonably necessary to accomplish its corporate purposes, e.g.,: Borrow and lend money. Extend credit. Make charitable contributions. A corporate officer can bind corporation in contract in matters connected with the ordinary business affairs of the enterprise.
par-value shares
corporation must have a value equal to the total value of the shares.
Close Corporations
corporations can be public, private, nonprofit, or ________, in which there are few shareholders, more informal management similar to a partnership, and restriction on transfer of shares.
methods to increase minority shareholder power within the corporation
cumulative voting, shareholder voting agreements, and voting trusts are all ____________
Negligent acts
directors and officers may be liable for ___________ that breach the standard of due care: Crimes and torts committed by individually and/or those committed by employees under their supervision.
participate, inspect, compensation (usually a nominal sum), and indemnification.
directors have the right to.... (4)
committees of the board of directors
executive, audit, nominating, compensation, litigation
No conflicts of interest
full disclosure of any potential conflicts of interest and abstain from voting on any transaction that may benefit the director/officer personally. If transaction was fair, it will not be voidable if approved by majority of disinterested directors
indemnification
if a director is sued for acts a s director, the corporation should guarantee reimbursement, __________, or purchase liability insurance to protect the board from personal liability.
by estoppel
if it acts like a corporation, cannot avoid liability by claiming that no corporation exists.
corporate veil
in limited situations, third parties can pierce the ________ of limited liability to sue shareholders personally.
fiduciary
majority shareholders owe a ______________ duty to corporation and the minority shareholders and creditors when they sell their shares because of the possibility of transfer of the control.
de facto
majority shareholders own enough shares to exercise _________ (actual) control over the corporation.
"piercing the corporate veil"
occurs when a court, in the interest of justice or fairness," holds shareholders personally liable for corporate acts. Court concludes that shareholders used corporation as a "shield" from illegal activity.
fiduciary, loyalty
officers are employees of the corporation and have ________ and _______ duties.
articles of incorporation
primary enabling document filed with the Secretary of State that includes basic information about the corporation. Person(s) who execute the articles are the incorporators.
dissenting director
rarely held liable for mismanagement of corporation. Dissent must be registered with the corporate secretary and posted in the minutes of the meetings.
"C"
regular _____ corporations are taxed twice: at the corporate level and at the shareholder level
registered office and agent
specific person that will receive any legal notice and documents from state and/or 3rd parties.
duty of loyalty
subordination of personal interests to the welfare of the corporation. No competition with Corporation. No "corporate opportunity." No conflict of interests. No insider trading. No transaction that is detrimental to minority shareholders..
shareholder derivative
suits where shareholders sue directors on behalf of corporation
Express Powers
the _________ powers of a corporation are found in the corporation's articles of incorporation, the laws of the state of incorporation, and in the state and federal corporations.
articles of incorporation
the number of directors is set forth by the ____________: -Directors appointed at the first organizational meeting. -In closely held companies, directors are generally the incorporators and/or the shareholders. -Term of office is generally for one year. -Director can be removed for cause (for failing to perform a required duty). Compensation of Directors. -Inside vs. Outside director.
voting trusts
trustee votes the shares
incorporators
usually the promoter: at least one with name and address
watered stock
worth less than FMV of stock. Shareholder is personally liable for difference.
stock subscriptions
written irrevocable contracts to purchase capital stock of a corporation prior to incorporation. Failure to sell or buy shares is a breach of contract.
