Forming a Corporation
- People
- One or more incorporators who execute and sign the Articles of Incorporation
- Paper: Articles of Incorporation
- Includes:
- name of corp (must include Corp, Comany, Incorporated or Limited)
- name/adress of incorporators, and
- registered agent/office
- Stock Information: max number of shares of stock stock, i.e., the authorized stock
- Includes:
- Act: Have the articles notarized and delivered to the Sec. of State
This forms a De Jure (legal) Corporation
Bylaws (of a Corporation)
An internal operating guide (optional)
- adopted at the orginazational meeting
- can be amended by shareholders or the board
- articles control over bylaws
De Facto Corp and Corp by Estoppel
- De Facto Corp: protects shareholders who fail to create a de jure corp
- Relevant incorporation statute;
- Parties make a good faith, colorable attempt to comply, but fail (and unaware of failure); and
- Some exercise of corporate priveleges
- Corp by Estoppel: one who treats a business like a corp may be estopped from denying that it is a corp
These doctrince are abolished in many states
Pre-Incorporation Contracts
Contracts forme by a promoter on behalf o corporation not yet formed
- Corp liable if it adopts
- Express or
- Implied (accepts a benefit)
- Promotor liable until there is a novation
Foreign Corporation
Foreign corporations transacting business in a state outside it’s state of incorporation must qualify and pay fees
- intrastate business
- Get a certificate of Authority of Sec. of State
Failure to Comply:
- Civil Fine
- Cannot assert a claim in the state (but it can be sued and defend)
Issuance of Stock
When a corp sells its own stock
- Subscriptions (written offers to buy stock):
- pre-incorp: irrevocable for 6 mos
- post-incorp: revocable until acceptance by board
- Consideration: Required
- Money
- Property
- Services (already performed or future)
- Par value: minimum issuance price; if no par then board of directors sets the price
- Watered stock: stock sold for less than par (water is the amount below par)
- Directors can be liable for water if they knowingly authorized the issuance
- The purchaser is also liable (charged with notice)
Pre-Emptive Rights (Corporate Stock)
The right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuance _for money_
- This right generally only exists where it is explicitly created in the Articles of Incorporation
Board of Directors (Corp)
Manage the business of the corporation
Elected by shareholders at the annual meeting; can be removed by majority vote of shareholders (with or without cause; if staggered board, can only be removed for cause)
- Board of directors act by unanimous agreement in writing or at a meeting (meeting requires a quorum (majority of all board members) and then passing a resolution requires a majority of those present)
- Regular meetings: no notice required
- Special meetings: 2-days notice required (must state time and place, but not the purpose)
- No proxy voting for directors
Duties of Board of Directors (of Corp)
Standard: A director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation. She must also use the care that a person in like position would reasonably believe appropriate under the circumstances.
- Duty of Care: must act in good faith and as reasonable person
- breached by nonfeasance: failure to act, if it causes a loss; or misfeasance: action that causes harm
- Business Judgment Rule: director not liable if business judgment turns out badly: if it (1) was informed; (2) made in good faith; (3) made without conflict of interest; (4) had a rational basis.
- Duty of Loyalty
- Avoid self-dealing
- Interested transaction will be set aside (or director liable for damges) unless,
- deal fair to corp when entered, or
- approved by a majority of disinterested directors or shares
- Interested transaction will be set aside (or director liable for damges) unless,
- Avoid Competing Ventures
- Remedy: constructive trust on profits
- Avoid Usurping Corp. Opportunity
- cannot act until (1) board notified of and (2) board rejects/passes on opportunity
- Avoid self-dealing
Liability of Directors
Director liable for board action unless her dissent is noted in writing in the corporate records, meaning:
- in the minutes
- delivered in writing to presiding officer at meeting, or
- written dissent to corp immediately after meeting.
Exceptions:
- Absent director
- Good Faith Reliance
Duties and Liabilities of Officers
Officers are Agents of the Corp, and have the same duties as the directors.
Indemnification of Directors and Officers
- Corp cannot indemnify a director or officer who was held liable to corp or received an improper benefit
- Corp must indemnify a director or officer who is is successful defending on merits or otherwise
- Corp may indeminify a director or officer who acted in good faith and with reasonable belief actions were in best interest of corp (i.e., satisifed duty of loyalty)
Close Corporation
A corporation with few share holders and stock is not publicly traded – can be managed by the shareholders
In close corp, shareholders owe duties to corp and to each other
Piercing the Corporate Veil
In close corp, court may PCV to hold shareholders personally liable for corporation obligations
Standard: to avoid fraud or unfairness:
- Alter Ego: corp abused to pay for personal things and avoid liability
- Undercaptalization: must invest sufficient to cover reasonably foreseeable liabilities
Shareholder Derivative Suits
A suit by a shareholder to enforce a corporation’s claim, not her own personal claim (ask, could the corp have brought this suit?; who was harmed?)
- Ex: Suit against board for breaching duty of loyalty
- Requirements:
- Stock ownership at time claim arose
- Adequate representation of Corp’s interest
- Written demand to corp to bring the suit (corp has 90 days to do so), this is omitted in many states if it would be futile
- Corp is joined as defendant
- Settle only with court approval
Shareholder Voting
Generally all outstanding shares get 1 vote (outstanding shares = issued shares - reaquired shares)
Record shareholders as of the record date have the right to vote
- Proxies allowed (in writing, signed by shareholder)
- Voting Trust (10-year max)
- Pooling Agreement
- In writing and signed
- Increasingly specifically enforeceable
- Shareholder’s act:
- At a meeting:
- Annual - to elect directors
- by plurality
- Cummulative voting (if in articles)
- Special meeting (requires notice of purpose, called by 10% of shares)
- Majority of shares must be present and then
- to approve a fundamental corporate change (majority of shares entitled to vote)
- to remove director (traditionally majority of shares entitled to vote)
- Other matters (majority of shares that vote)
- Majority of shares must be present and then
- Annual - to elect directors
- Or by written unanimous consent of all voting shares
- At a meeting:
Right of Shareholder to Inspect and Copy Books and Records of Corp
- For non-controversial things, must make a written demand at least five days in advance, need not state a special purpose
- For more controversial things, same as above but must state a proper purpose
- e.g., excerpts of board meetings, accounting records, record of shareholders
- If corp fails to allow inspection, shareholder can seek a court order, and if she previails can recover costs and attorneys fees
Dividends
Payments to shareholders at the discretion of the board
- Payement: Preferred (pay first), cumulative (accrues year to year), common
- Traditional view, can be payed from:
- Earned Surplus or Addtional Paid in Capital/Capital surplus; not stated capital
- Modern view, Corp can pay a dividend if not insolvent:
- ability to pay debts as they come due
- balance sheet (liabilities exceed assets)
Fundamental Corporate Changes
Board cannot make them alone, needs to get (majority of) shareholder approval
- Amendment of the Articles
- board of director action and notice to shareholders
- majority of shares entitled to vote
- Mergers of Consolidations
- board of director action and notice to shareholders (both corps)
- majority of shares entitled to vote (both corps)
- Creates successor liability
- Transfer of All or Substantially All Corp Assets
- board of director action (both corps) and notice to shareholders (selling corp)
- majority of shares entitled to vote (selling vote)
- Dissolution
- Dissenting Shareholder Right of Appraisal:
- right of shareholder to force corp to buy her stock for fair value triggered by merger or consolidation or transfer of substantially all assets
- but no right if listed on national exchange
