THINGS TO REMEMBER
I. De Facto Corporations
1) The state must have a relevant incorporation statute;
2) There must have been a good faith attempt to comply with the statute; and
3) There must have been some exercise of corporate privilege.
A de facto corporation will withstand all private attacks. However, it remains subject
to a quo warranto proceeding by the state.
II. A corporation may adopt pre-incorporation (promoter) contracts either explicitly or
implicitly. A corporation implicitly adopts a pre-incorporation contract by accepting
the benefit of the contract.
III. A promoter is liable on a pre-incorporation contract until and unless the promoter,
corporation, and third party agree to a novation. In the absence of novation, the
promoter will be held liable even if the corporation subsequently adopted the
IV. A foreign corporation must qualify by getting a Certificate of Authority from the PA
Department of State and paying annual fees. If it fails to qualify, the foreign
corporation can do business in Pennsylvania but cannot sue anyone in Pennsylvania.
Further, it will be subject to civil fines.
A foreign corporation may pay back fines and get a Certificate if it wishes to sue.
V. If the Articles don’t say anything about preemptive rights, S/H do not have
VI. The S/H may remove a director at any time, with or without cause. The Board may
remove a director at any time, but may only do so for cause.
The BoD appoints interim Directors by majority vote.
VII. The BoD can only take action in two ways:
1- by unanimously agreeing, in writing
2- by majority vote of a quorum at a regular or special meeting.
- A quorum is a majority of the BoD.
- The quorum may be disturbed by Directors leaving the meeting.
VIII. Director’s Duty of Loyalty: a Director must discharge his duties in good faith and
with the belief that they are in the corporation’s best interests.
IX. Director’s Duty of Care: a Director must use the same degree of care that a prudent
person would use with regard to his own business.
X. If the π sues a Director for violating one of his duties, the π has the burden of proof.
XI. It’s very difficult to sue a director under either the Duty of Loyalty or Duty of Care
for nonfeasance (failure to act), because it is difficult to establish that the Director’s
nonfeasance was the actual and proximate cause of harm to the corporation.
XII. Business Judgment Rule: the Court will not disturb a Director’s actions (or hold the
Director liable for them) if he can demonstrate that he performed the proper due
diligence before acting. This satisfies the Duties of Loyalty and Care.
XIII. Interested Director Rule: this problem arises when the Corporation contracts with:
1) the Director;
2) the Director’s close family; or
3) with another company owned (or primarily controlled by) the Director.
In such a case, the Director’s contract will be rescinded unless:
1) it is approved by a majority of the S/H;
2) it is approved by a majority of the disinterested directors; or
3) it was fair, when entered into.
Even if approved, the Court may inquire into fairness.
Any profits made by the Director will be put in a “constructive trust” and turned over
to the corporation.
XIV. Usurpation of a Corporate Opportunity:
A corporate opportunity is something that:
1) is necessary to the corporation;
2) the corporation has an interest or expectancy in; or
3) is in the corporation’s line of business.
A Director usurps a corporate opportunity when he takes it without first notifying the
corporation of it and waiting for the corporation’s consent. (The Corporate BoD must
reject the opportunity.)
XV. The Corporation must reimburse Directors for costs and legal fees when they
successfully defend a lawsuit brought against them for breach of a fiduciary duty.
The Corporation must not reimburse Directors for costs or legal fees when the
Directors are held liable to the Corporation.
The Corporation may reimburse Directors for costs and fees in any other situation.
In the Corporate Articles, the Corporation may indemnify the Directors for any
liability incurred in good faith (not incurred in breach of fiduciary duties). The
Corporation may also take out liability insurance to indemnify corporate officers.
XVI. Special meetings of the BoD require 5 days’ notice.
XVII. Piercing the Corporate Veil:
There are 2 elements:
1) S/H abused the privileges of incorporation; and
2) Fairness requires that the S/H be held liable.
The two most typical fact patterns are:
1) Alter-Ego (using corporate assets as though they are personal assets)
2) Undercapitalization at the Time of Incorporation.
XVIII. In a close corporation (or in a statutory close corporation) S/H owe duties to each
other. If the majority of the shareholders take action that oppresses the minority S/H,
the minority S/H may bring a claim for S/H Oppression (aka Over-reaching).
XIX. Shareholder Derivative Suits:
1) The person bringing the suit must own stock at the time the claim arose (or must
acquire it from someone who owned stock at the time the claim arose by will or
by divorce decree – by “operation of law”).
2) The representative π must fairly and adequately represent the interests of the other
3) The S/H must make a written demand on the corporation to bring suit. This will
only be excused if it would be futile to make the directors bring suit (e.g., you’re
asking the corporation to bring suit against the very directors that you would
otherwise be required to petition).
4) The S/H must plead with particularity his efforts to have the corporation bring
suit, or the reasons that such an attempt would have been futile.
5) If the S/H owns less than 5% of any class of stock, the corporation may demand
that she post security for costs (unless her stock is worth at least $200,000).
6) The Corporation must be joined as a defendant to the action.
Parties may only settle a derivative suit with court approval.
The corporation may move to dismiss the derivative suit, but only if the motion is
based on investigation conducted by disinterested directors who determine that
the suit is not in the corporation’s best interests.
XX. Shareholder Proxy
Proxies are revocable unless the shareholder unless gives his proxy some other
interest in the stock (e.g., some future interest in the voting shares).
XXI. Voting trusts are subject to the Rule Against Perpetuities.
Voting trusts are pretty useless, anyway, since in Pennsylvania a voting agreement is
subject to specific enforcement.
XXII. S/H may act in the same manner as the BoD: through either a written, unanimous
agreement or by majority vote at a meeting where a quorum is present.
XXIII. A special meeting of the S/H can be called by the BoD, the holders of at least 20% of
the voting shares, or anyone else specified in the Articles of Incorporation.
XXIV. A quorum is made up of a majority of the voting shares – not majority of S/H.
XXV. Stock restrictions will only be enforced if they are conspicuously noted on the stock
certificates and the transferee had actual knowledge of the restriction.
XXVI. FUNDAMENTAL CORPORATE CHANGES
Generally: merger, consolidation, transferring substantially all of the assets, or
making changes to the Articles of Incorporation.
1) Board action,
2) Notice to S/H,
3) And ratification by the S/H.
Note: no S/H approval required in a short-form merger, where an 80%-or-more
owned subsidiary is acquired by its parent corporation.
In PA, it is not a transfer of “substantially all of the assets” if the corporation retains
at least 25% of its assets and 25% of its revenues from continuing operations.
Generally, the company acquiring “substantially all of the assets” does not also
acquire the original company’s liabilities unless the contract of sale provides
otherwise or the new company is a continuation of the old company.
Dissenting shareholders are entitled to appraisal rights if they:
1) Before the S/H vote, file a written notice with the corporation that notes their
objection and notifies the corporation of their intent to demand payment;
2) Either abstain or vote against the proposed change; and
3) Make a written demand for buy-out within 30 days after notice that the change
Dissenting S/H are not entitled to appraisal rights in corporations that are publically
traded, or privately traded but with more than 2,000 shareholders.