CORPORATIONS MINI REVIEW
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FORMATION
I. PROMOTER’S PRE-INCORPORATION CONTRACTS
 Promoter: Person action on behalf of a corporation NOT YET FORMED - FIDUCIARY of each other and the corp
 B/c fiduciary they owe a duty of loyalty and can NOT make a secret profit
 Liability:
 Corporation  NOT liable until ACCEPT (express resolution OR implied through knowledge + accept benefits)
 Promoter  LIABLE until NOVATION (agreement b/w promoter corp, and 3P that corp will replace promoter)
 Accept Only: If corp merely accepts the promoter is still liable along w/ corp
 Corp Never Formed: If corp is never formed, promoter will be liable b/c never novate
II. WAYS TO FORM A CORPORATION:
1. De Jure Corporation: This is the normal way and only get to other 2 if this way fails
 Incorporator: natural person + 18 + merely signs/files articles w/ state
 Articles of Incorporation: Must include (A PAIN)
 Authorized Shares  Max # that can be issued (can’t issue more w/o amending, can issue less)
 Purpose & Duration  Must contain purpose and duration clause
 General Statement: permissible
 Specific Statement: If do an ultra vires act (act outside stated purpose) then state can enjoin
+ corp can sue own directors and officers for losses caused by the UV activity
 Agent  Name + address of agent (official legal rep of corp) who can receive service of process
 Incorporator  Name + address of each incorporator
 Name of corporation  Must include word “corp” “co” “inc” or “limited” to show corporation
 BYLAWS NOT REQUIRED (shareholders can adopt UNLESS articles gave power to board)
2. De Facto Corp  good faith, colorable attempt to comply w/ formalities + NO knowledge of lack of corporate status
3. Corp By Estoppel  those who’ve dealt directly with business as a corp are estopped from denying corp status
(works both directions = corp and 3rd party both can’t argue not a corporation)
 Effect of Formation: By De Jure, De Facto, or by Estoppel (all 3 treated the same)
 Separate Legal Entity: Corporation is a separate legal entity
 Limited Liability: See below
III. LIMITED LIABILITY & PIERCING THE CORPORATE VEIL
 General Rule: As a rule shareholders are not personally liable for corporate obligations (only liable for price of stock)
 Exception: Courts will PIERCE THE CORPORATE VEIL to avoid FRAUD OR UNFAIRNESS (and allow creditors of corp
to go after shareholders personally)
 2 Reasons to Pierce:
1. Alter Ego  A controlling shareholder fails to observe sufficient corporate formalities (commingling funds)
2. Undercapitalization  Failure to maintain sufficient money (capital) to cover FORESEEABLE liabilities
ISSUANCE OF STOCK: Corp Selling its OWN Shares
I. SUBSCRIPTIONS: Written offer to buy stock from a corp NOT YET FORMED
 Revocation: Revocable until ACCEPTED (express board resolution OR implied through knowledge + accept benefits)
II. CONSIDERATION – VERY IMPORTANT
 3 Kinds of Stock:
 Par Value  MINIMUM issuance price that corporation MUST receive (can NEVER receive less than par)
 No Par  NO minimum issuance price
 Treasury Stock  Stock that was previously issued and has been REACQUIRED by corp  can be resold and is
deemed just like NO PAR stock
 Acquiring Property w/ Par Value Stock: If corp buys property by issuing stock board must receive goods worth par
(what board values property as worth)
 Consequences of Issuing for Less than Par:
 Director  PERSONALLY liable for difference b/w sale price and par value
 Buyer Shareholder  Liable to pay full consideration (at least par) for their shares
III. PREEMPTIVE RIGHTS: Right of EXISTING shareholder to MAINTAIN THEIR % OWNERSHIP if issuing stock for cash
 Presumed: If articles are silent then presumed UNLESS articles explicitly take them away
 Must be for Cash: Does NOT apply if corp issuing stock to acquire goods/property b/c not issuing stocks for cash
CORPORATIONS MINI REVIEW
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DIRECTORS & OFFICERS
I. BASICS
 Board: MO corps MUST have a BOARD with 1 or more members - If less than 3, number must be in articles
 Shareholder Interaction: Elect directors + May remove them with or without cause
 Meetings:
 Required  A meeting is required UNLESS all directors consent in writing to act w/o a meeting
 Notice Notice is ALWAYS required
 Quorum & Voting:
 Quorum  Must have a MAJORITY of ALL directors (quorum) to do business
 Voting  To pass a resolution only need a MAJORITY vote of those PRESENT
 Proxies  NOT allowed to vote for directors
 Voting Agreements  NOT allowed
II. LIABILITY OF DIRECTORS/OFFICERS TO SHAREHOLDERS: Duty to Manage + BJR + Fiduciary (care & loyalty)
 Duty to Manage: Directors have a duty to manage
 Business Judgment Rule: In managing the corp, the directors are protected from liability by the BJR.
 BJR  A very strong presumption that directors manage in GOOD FAIHT and in corp’s BEST INTERESTS
 Fiduciaries: Directors, are FIDUCIARIES who owe the corp and SH duties of CARE and LOYALTY
 Care  Director must act w/ the care that a PRUDENT PERSON would use w/ regard to own business
 Nonfeasance: Failure to act (don’t go to board meetings) ALWAYS liable
 Misfeasance: Making a mistake  NEVER liable so long as innocent
 Loyalty  Director may NOT receive an UNFAIR BENEFIT to the DETRIMENT of the corp or its SH
 Interested Director Transaction  A deal b/w corp and one of its directors (or relative etc) – director can
NOT get a financial benefit (can’t sell for more than FMV)
 Corporate Opportunity  Usurping (taking away) an opportunity that corp could have had is breach of
duty of loyalty (UNLESS disclose and get some form of independent ratification)
III. INDEMNIFICATION
 Director Lost to Own Corp  Corp can NEVER indemnify
 Director Won against ANY Party  Corp MUST ALWAYS indemnify
 Permissive Indemnification  Corp MAY indemnify IF show acted in GOOD FAITH + REASONABLE BELIEF that act
was in corp’s best interest
 Who Determines Eligibility: Only need 1 of 4 - 1) Majority of independent directors approval 2) Committee of at
least 2 independent directors approve 3) Majority of shares held by independent shareholders 4) Special legal
council’s recommendation
RIGHTS OF SHAREHOLDERS
I. DERIVATIVE SUIT: Sue to enforce CORPORATIONS’S cause of action
 Requirements: contemporaneous stock ownership + demand on board rejected/futile
II. VOTING:
 Who Votes: ONLY the RECORD SHAREHOLDER as of the RECORD DATE has the right to vote
 Record Shareholder = Person shown as the owner on the corporate records
 Record Date = Voter eligibility cut-off date set by board (no more than 70 days before meeting)
 Proxies: Shareholders CAN vote by proxies (note directors can not)
 Elements: written + signed by record SH + sent to sect of corp + authorizing another to vote + valid 11 mo
 Revocation: ARE revocable UNLSES labeled irrevocable + Coupled w/ an interest
 Meetings: 2 Kinds
 Annual Meeting: Every corp MUST have at least an annual meeting at which AT LEAST 1 DIRECTOR POSITION
IS OPEN for election
 Special Meeting: Meeting of shareholders to vote upon a proposal OR a fundamental corporate change
 Notice: MUST give WRITTEN notice to EVERY SH ENTITLED TO VOTE for every meeting
 Contents  date/place + special purpose for a special meeting (nothing can take place that is not in the notice)
 Failure  if corp fails to give adequate notice any action taken at meeting is VOID UNLESS those not receiving
notice WAIVE the notice defect (in writing or by attending)
 How do SH Vote:
 Quorum  Must be a quorum represented at the meeting (majority of outstanding SHARES not shareholders)
 Vote  If quorum present, action is approved if a majority of shares REPRESENTED AT THE MEETING approve
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 Pooled & Block Voting Methods:
 Voting Trust  written trust agreement + filed with corp + controls how shares voted (legal title to vote to
trustee)
 Voting Agreement  written agreement that is binding on all who sign it (do NOT give up legal title to vote)
 Cumulative Voting: Multiply # of shares * # of open directors positions and top vote getter(s) gets position(s)
 Presumed UNLESS articles direct otherwise
III. RIGHT TO EXAMINE THE BOOKS/RECORDS OF CORP: All SH have right to examine at proper times
IV. DIVIDENDS
 Rule: Declared at BOARD’S DISCRETION – shareholders have NO RIGHT to dividends
 Priority of Distribution:
 Common Stock  Get paid LAST and EQUALLY
 Preferred Stock  Get paid FIRST and amt of preference
 Preferred that is Participating  Get paid FIRST as preferred and AGAIN as if common shares
 Preferred that is Cumulative  Have right to receive amt that wasn’t paid in prior yrs AND current yr payment
 Corp Lost $: Corporation CAN award dividends even though lost $ that year but NOT if insolvent or render insolvent
 Unlawful Dividends: Directors are PERSONALLY LIABLE for unlawful dividends  Do have possible defense of good
faith reliance on financial officer’s representations
LIMITED LIABILITY COMPANIES (LLCs)
I.
REQUIREMENTS
 Filings: organizers file Articles of Organization (same as articles of incorp for corps just different name) AND Operating Agreement
 Liabilities:

Members (LLC) = Shareholders (Corp)

Managers (LLC) = Directors (Corp)

Each have same rights and liabilities
 Must Have: LIMITED LIABILITY AND (2 of the following 3)

Limited Life – art of org must specify some event of dissolution

Limited Liquidity – Interest can NOT be transferred UNLESS there is unanimous consent of members

Members Retain Management Power
FUNDAMENTAL CORPORATE CHANGES
I.
II.
KINDS: Merger, consolidation, dissolution, non-ministerial amendment of articles, SALE of substantially all assets (not purchase)
STEPS
1. Resolution by board at VALID meeting recommending the change
2. Notice of special meeting (w/ special notice)
3. Approval

By 2/3 of ALL SHARES entitled to vote AND

By 2/3 of each CLASS of shares adversely affected by the change
4. Dissenter’s Rights  can force corp to buy their shares at fair market value

When: Merger, consolidation, SALE of substantially all assets

What Have to Do: Before Vote = written objection + intent to demand pmt; During Vote = abstain/vote against AND
After Vote = written demand w/in 20 days of vote
5. File Notice w/ the State (i.e. Articles of Merger)
FEDERAL SECURITIES LAW
I.
II.
III.
ANTI-FRAUD (SEA 10b): Prohibits fraud w/ buying and selling securities
 Elements: Scienter (intent to deceive) + deception (material misrepresentation/misappropriation of material NON-PUBLIC
information) + in connection w/ ACTUAL purchase/sale
SHORT SWING TRADING PROFITS (SEA 16b)
 Who: Applies only to Big Corps and Big Shot D (officer, director, more than 10% shareholder)
 Prohibited: Can NEVER buy AND sell stock w/in a single 6 month period and make a profit

Fraud is NOT required; No requirement of inside information
SARBANES-OXLEY: No knowingly false filings + NO profits during false filing or blackout periods (period of 3 days when at least
50% employees can’t trade in retirement pension securities)