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f property acquired AFTER becoming promoter, any profit recoverable by corporation) SUBSCRIBERS: (1) Persons or entities who make written offers to buy stock from a corporation not yet formed; (2) Pre-incorporation offer to buy shares is irrevocable for 6 months
-------------------------------------------------------------------------FORMATION REQUIREMENTS: DE JURE STATUS
INCORPORATORS: Merely sign and file the articles of incorporation w/the state ARTICLES MUST INCLUDE: (“A PAIN”) (1) Authorized shares; (2) Purpose (Usually general purpose; A specific purpose is known as ULTRA VIRES; if a corporate engages in ultra vires activity, a state can enjoin and the corporation may recover any losses from the ultra vires activity from its own directors and officers; (3) Agent (Name and address); (4) Incorporators; (5) Name of Corporation (Must contain some indicia of corporate status, i.e. “inc.”); BYLAWS NOT REQUIRED
-------------------------------------------------------------------------DEFACTO CORPORATION DOCTRINE
RULE: A business failing to achieve de jure corporate status nonetheless is treated as a corporation, if the organizers have made a good faith, colorable attempt to comply w/corporate
formalities and have no knowledge of the lack of corporate status.
-------------------------------------------------------------------------PIERCING THE CORPORATE VEIL
RULE: Exception to rule about limited liability for SH; Court wants to avoid fraud or unfairness, so it will pierce the corporate veil and allowing person liability in two instances: (1) ALTER
EGO (failure to observe sufficient corporate formalities) and (2) UNDERCAPITALIZATION (failure to maintain sufficient funds to cover foreseeable liabilities); More willing to PCV for tort victim than contract claimant
-------------------------------------------------------------------------FOREIGN CORPORATION
RULE: A corporation incorporated outside the state that wishes to engage in regular intrastate business must qualify by filing a certificate of authority w/the secretary of state that includes
all the info required in the articles of incorporation (NOTE: a foreign corporation is not one that is international; it is one incorporated in another state of the USA)
-----------------------------------------------------------------------------ISSUANCE OF STOCK CONSIDERATION
PAR VALUE: (1) Corp MUST receive par value (minimum issuance price) UNLESS the stock is NO PAR (more modern approach); (2) Property can be acquired with PAR VALUE stock as long as BOD values property in good faith to be worth the number of shares paid; (3) If stock is issued for LESS THAN PAR VALUE, directors are personally liable AND the purchasing SH is liable to pay full consideration for shares TREASURY STOCK: Stock previously issued and had been re-acquired by corp; It can then be re-sold PREEMPTIVE RIGHTS: Right of an existing SH to maintain her % of ownership by buying stock whenever there is a new issuance of stock for cash; No preemptive rights exist unless expressly authorized in articlestock previously issued and had been re-acquired by corp; It can then be re-sold
-----------------------------------------------------------------------------DIRECTORS & OFFICERS DIRECTORS
REQUIREMENTS: (1) Corp MUST have BOD with at least one member; (2) Directors elected by SH, who can remove director before term expires with our without cause; (3) receive par
value (minimum issuance price) UNLESS the stock is NO PAR (more modern approach); (2) Property can be acquired with PAR VALUE stock as long as BOD values property in good faith to be worth the number of shares paid; (3) If stock is issued for LESS THAN PAR VALUE, directors are personally liable AND the purchasing SH is liable to pay full consideration for shares
VALID MEETINGS: (1) Board action requires meeting unless all directors consent in writing to act without a meeting; (2) Notice can be set in bylaws; (3) PROXIES NOT ALLOWED (also no voting agreements; conference calls now generally valid); (4) QUORUM of majority of all directors required to take action; (5) VOTE: to pass resolution, just need majority of those present; (6) Each director is assumed to have concurred in board action unless dissent or abstention is recorded in writing (in minutes or letter to secretary) DUTIES & LIABILITIES: (“COC FILM”)
DUTY TO MANAGE BUSINESS OF CORP: (1) Sets policy, supervises officers, recommends fundamental corp changes to shareholders; (2) may delegate management functions to committee of one or more directors that recommend action to BOD; (3) Directors protected from liability by the BUSINESS JUDGMENT RULE: Presumption that directors manage corp in good faith and in the best interest of the corp and its SHs and as such, will not be liable for innocent mistakes of business judgment DUTY OF CARE: A director must act with the care that a prudent person would use with regard to her own business; ex: missing all director meetings (Burden on P) FIDUCIARY DUTY: Ties in with duty of care; directors are fiduciaries (Burden on P) DUTY OF LOYALTY: A director may not receive an unfair benefit to the detriment of the corp or its SHs, unless there has been material disclosure and independent ratification; NO SELF DEALING (deal benefit director, her family, or another of her businesses); BJR does not apply; Burden on D; DUTY NOT TO USURP CORPORATE OPPORTUNITY: A director cannot receive an unfair benefit by usurping for herself an opportunity which the corp would have pursued, unless she gets ratification by one of following: (1) majority vote of disinterested directors; OR (2) majority vote of committee of a least two disinterested directors; OR (3) majority vote of shares held by disinterested SHs) DUTY NOT TO ENGAGE IN INSIDER TRADING DUTY NOT TO COMPETE WITH CORP: Part of duty of loyalty; D cannot compete directly with her corp; Remedy: Liable for damages and profits may be put in constructive trust
-------------------------------------------------------------------------OFFICERS
Directors
SAME DUTIES AS DIRECTORS: Officers are agents of corp and bind corp by their authorized activities; Must have President, Secretary, and Treasurer; Selected and removed by
-------------------------------------------------------------------------INDEMNIFICATION OF DIRECTORS & OFFICERS
DEFINE: Director or officer has incurred costs, attorney’s fees, fines, a judgment or settlement in the course of corporate business; she seeks reimbursement from corp
indemnify in one of following: (a) liability to 3rd parties or settlement w/the corporation; (b) director/officer shows that she acted in good faith and that she believed her conduct was in corporation’s best interest; (c) four alternative routes to get permissive indemnification (majority of independent directors approves it OR committee of 2 or more independent directors approves it OR majority of shares held by independent shareholders can approve indemnity, OR special legal counsel’s opinion to recommend it)
RULE: (1) Corp may NEVER indemnify if director/officer held liable for their own corp; (2) Corp MUST ALWAYS indemnify if director/officer has won lawsuit against any party; (3) Corp MAY
------------------------------------------------------------------------------
RIGHTS OF SHAREHOLDERS DERIVATIVE SUITS
RULE: (1) SH is suing to enforce corp’s cause of action (ASK: could corp have brought suit itself?); (2) SH must own at least one share of stock when claim arose and throughout entire
litigation; (3) SH must have made demand on BOD to bring suit and BOD rejected or 90 days past since demand made
-------------------------------------------------------------------------VOTING
PROCEDURE: (1) Only owner of shares on record date has right to vote; (2) SH can vote by proxy (writing signed by record shareholder sent to secretary of corp authorizing another to vote their shares and is valid for only 11 months; free revocable unless coupled with some interest); (3) Properly noticed meeting (every corp must have annual meeting where one director slot open for election; Annual meeting is different from special meeting which are called by the board, the president or the holders of 10% voting shares to vote on a proposal or fundamental corporate changes; Special meetings require special notice that contains time, place, and special purpose and nothing else can be discussed except that purpose); (4) Quorum (must be quorum present at meeting of majority of outstanding shares); (5) Vote (votes cast in favor must exceed votes cast against by 1 share) VOTING METHODS: (1) Voting Trusts (Pooled/Block voting method: Formal and enforceable up to 10 years; written trust agreement filed with corp to transfer shares to voting trustee; SH will get a certificate; SH retains all other rights except voting); (2) Shareholder Voting Agreements (Pooled/Block voting method: Written agreement to vote shares as required by agreement; binding and enforceable on all who sign; no time limit or filing requirement); (3) Cumulative Voting for Directors (Right has to be explicit in articles; SH multiplies number of shares by number of directors to be elected)
-------------------------------------------------------------------------INSPECTION RIGHTS
RULE: SHs have right to examine the books and records of corp upon notice and proper purpose
-------------------------------------------------------------------------DIVIDENDS
RULE: Dividends are to be declared at BOD discretion unless corp is insolvent or would be rendered insolvent by the dividend; BOD liable personally for unlawful distributions, but have
defense of good faith reliance on financial officer’s representation regarding solvency
PRIORITY OF DISTRIBUTION: (1) Preferred shares get paid first; (2) Participating shares have right to get paid first as preferred and then paid again as if they were common; paid
twice; (3) Cumulative shares (paid for previous years as well if no dividend); (4) Common shares paid last and equally
-------------------------------------------------------------------------SH AGREEMENTS TO ELIMINATE CORP FORMALITIES
RULE: (1) SH agreements to eliminate corp formalities (becoming closely held corp) must be unanimously agreed upon in writing by SHs; (2) must be a reasonable SH transfer restriction, such as no public trading; (3) Eliminates formalities without PCV;
-------------------------------------------------------------------------PROFESSIONAL CORPORATIONS
REQUIREMENTS: Licensed professionals may incorporate as PC IF: (1) name designed Professional Corporation or PC; (2) SH must be licensed professionals; (3) Corp may practice only
one designated profession; (4) SH personally liable for own malpractice
-----------------------------------------------------------------------------FUNDAMENTAL CORPORATE CHANGES 5 TYPES
MERGER: A becomes B CONSOLIDATION: A and B become C DISSOLUTION: A dissolves FUNDAMENTAL (NOT MINISTERIAL) AMENDMENTS TO ARTICLES SALES (NOT PURCHASE) OF SUBSTANTIALLY ALL CORP ASSETS
-------------------------------------------------------------------------5 PROCEDURAL STEPS
RESOLUTION BY BOARD AT VALID MEETING NOTICE OF SPECIAL MEETING VOTE: Approval by quorum of all SH entitled to vote AND by majority of any voting group adversely affected by change (EXCEPTION: no SH approval required for “short form” merger where parent corporation that owns 90% or more of stock in its subsidiary merges with subsidiary) RIGHT OF APPRAISAL: SH who does not vote in favor of change has right to force corp to buy her shares at fair value; Requirements: (1) File written notice of objection and intent to demand payment before SH vote; (2) do not vote in favor of the proposed change, AND (3) make prompt written demand to be bought out
-----------------------------------------------------------------------------FEDERAL SECURITY LAW CONSIDERATION SECTION 10B
REQUIREMENTS FOR VIOLATION: (1) Intent to deceive; (2) Actual deception (material misrepresentation or misappropriation of material nonpublic info); (3) In connection with the
actual purchase or sale of securities
FILE ARTICLES OF NOTICE: State wants to know when corp makes fundamental changes
-------------------------------------------------------------------------SECTION 16B: SHORT SWING TRADING PROFITS
REQUIREMENTS: (1) Big corps (National exchange OR at least 500 SH and $10 million in assets; (2) Big shot defendant (Director/Officer/or more than 10% SH); (3) Transaction includes
the buying and selling of stock within singe 6 month period (short swing trading); (4) Fraud not required; (5) No requirement of inside info; (6) REMEDIES: profits go to corp
-------------------------------------------------------------------------SARBANES-OXLEY ACT OF 2002
REQUIREMENTS: (1) Applies to reporting corps; (2) CEO and CFO must certify based on their knowledge that the reports filed with SEC do not contain material misrepresentations or
omissions AND fairly present the financial position of the company; (3) REMEMBER: No knowingly false filings AND no benefits during falsehoods or black out periods