What is a corporation?
A legal entity apart from its owners (the shareholders)
Only the corporation is generally liable for its obligations
What document must be filed to form a corporation?
Articles of incorporation
This document sets out certain information required by the state
What rights do shareholders have?
- To receive distributions when declared
- To vote on corporate matters
Shareholders elect directors to oversee the corporation
What is the duty of directors and officers to the corporation?
To act as similarly situated persons and cannot ‘self-deal’ for their own benefit
They have a fiduciary duty to the corporation
What must happen before a fundamental change is made to a corporation?
Shareholders must be informed and given an opportunity to vote
Fundamental changes include amendments to articles, mergers, and share exchanges
What must be included in the articles of incorporation?
- Name of the corporation
- Number of authorized shares
- Name and address of incorporators and registered agent
The name cannot be similar to existing names
When does corporate existence begin?
When articles are filed by the state
Promoters are generally liable for preincorporation contracts
What is a de facto corporation?
A corporation that has colorable compliance with the incorporation statute and exercises corporate privileges
It protects individuals from personal liability
What is the alter ego doctrine?
A legal theory used to pierce the corporate veil when owners do not treat the corporation as a separate entity
It can result in personal liability for owners
What types of securities can a corporation issue?
- Debt securities (bonds)
- Equity securities (stocks)
Debt creates a debtor-creditor relationship, while equity creates ownership interest
What is cumulative voting?
A voting system allowing shareholders to allocate votes among candidates for directors
It is automatic in some states and can be provided for in the articles
What is the purpose of a voting trust?
To transfer share ownership to a trustee who votes shares as agreed
Valid in most states for up to 10 years but renewable
What are inspection rights for shareholders?
- Limited rights for books and records with notice
- Unqualified rights for articles, bylaws, and minutes
Limited rights require a proper purpose related to shareholder rights
What is the preemptive right?
The right to purchase shares to maintain proportionate ownership interest
Under MBCA, it exists only if provided for
What is the difference between a direct suit and a derivative suit?
- Direct suit: To enforce a right of shareholder
- Derivative suit: To enforce a right belonging to the corporation
Derivative suits require ownership at the time of the wrong
What limitations exist for distributions?
- No distribution unless declared by the board
- Insolvency limits
Distributions can be in the form of dividends or assets after dissolution
What is the business judgment rule?
A rule that protects directors from personal liability if they act in good faith and in the best interests of the corporation
Directors must also exercise care similar to that of a reasonable person
What are the required officers in a corporation?
At least a president and a secretary in some states
MBCA allows flexibility, but some states require specific officers
What is the general procedure for fundamental corporate changes?
- Board resolution
- Notice to shareholders
- Shareholder approval
- Articles filed with the state
This applies to mergers, consolidations, and amendments
What is the dissenters’ appraisal remedy?
The right of shareholders to force the corporation to purchase their shares at a fair price if they do not agree with a fundamental change
They must notify the corporation and not vote in favor of the change
What is a tender offer?
A public offering to purchase a substantial percentage of a target’s shares
Regulated under federal Williams Act
What is Schedule 14D?
A document that contains extensive disclosure regarding the bidder’s identity, source of funds, past dealings with the target, and plans concerning the target.
How long must an offer be open according to the regulations?
At least 20 days.
What must shareholders be allowed to do while the offer remains open?
Withdraw tendered shares.
