Corporations Outline
Corporations Outline
Corporations Outline
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CORPORATIONS
I.
CORPORATE FORMATION
a. Pre-incorporation Ks Promoters and Subscribers
i. Promoters
1. Promoters are persons acting on behalf of a corp not yet formed.
a. The corp becomes liable on a promoters preincorporation K when the
corp adopts the K by
i. Express board of directors resolution;
ii. Implied option through knowledge of the K and acceptance of its
benefits.
b. The promoter remains liable on preincorporation Ks until there has been a
novation, i.e., an agreement between the promoter, the corp, and the other
contracting party that the corp will replace the promoter under the K.
i. If a promoter enters a K and the corp is never formed?
1. The promoter alone is liable on this K.
ii. If the promoter enters a pre-incorp K, and the corp merely
adopts the K?
1. Both the promoter and the corp are liable on this K.
2. Can sue either one; can only recover once.
c. Promoters are fiduciaries of each other and the corp. Therefore, promoters
cannot make a secret profit on their dealings with the corp.
i. Sale to corp of property acquired by promoter before
becoming a promoter: profit recoverable by corp only if sold
for more than FMV.
ii. Sale to corp of property acquired by promoter after becoming
a promoter: any profit recoverable by the corp.
1. On Jan 10, Paula begins working as a promoter for the
Vegan Deli. On March 10, Paula buys a ton of vegan
corned beef for 10k. On April 3, Paula sells the vegan beef
to the corp for 20k. May the corp sue Paula?
a. Yes. Paula sold her own property which she
acquired after becoming a promoter for a profit.
Corp may recover that profit on the resale even if
the property was sold to the corp at its FMV.
ii. Subscribers
1. Persons or entities who make written offers to buy stock from a corp not yet
formed.
a. 1/10, S signs a preincorporation subscription agreement, offering to buy
100 shares of C corp, a corp not yet formed. One week later, S changes her
mind. Can S revoke?
b. No, such an offer is irrevocable for 6 months.
b. Formation requirements de jure corporate status
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i. Incorporators
1. Incorporators merely sign and file the articles of incorp with the state.
ii. The articles MUST include (A PAIN):
1. Authorized shares
a. This is the maximum number of shares the corp is authorized to issue.
b. The corp may never issue or sell more than the authorized number of
shares, not before amending the articles to increase the number of
authorized shares.
2. Purpose
a. General purpose and perpetual duration presumed
i. Can the articles of Bubbas Bountiful Biscuits, Inc. indicate that
the corps purpose is to engage in all lawful activity in perpetuity?
ii. Yes. A general purpose and a perpetual duration are valid and
will be presumed unless there is a specific purpose or limited
duration stated.
b. Specific statement of purpose and ultra vires rules
i. What if the articles of Bubbas Biscuits indicate that the corps
purpose is to sell Southern-style sausage biscuits and the corp later
sells T-shirts as well as the biscuits? Selling T-shirts is an ultra
vires activity.
ii. Ultra vires beyond the purpose/specific statement of
purpose of the corp.
1. 2 consequences:
a. The state can enjoin the ultra vires activity.
b. The corp may sue its own directors and officers for
losses caused by the ultra vires activity.
3. Agent and address of registered office
a. Registered agent is corps official legal representative
4. Incorporators
5. Name of corporation
a. Can I form a corp with the name Bubbas Bountiful Biscuits?
i. No, the name of a corp must contain some indicia of corp status.
iii. By-laws the corp need not adopt by-laws. The board has the power to adopt by-laws.
The board has the power to adopt and amend the by-laws unless the articles give the
power to the SH.
c. De facto corp doctrine
i. A business failing to achieve de jure corp status nevertheless is treated as a corp if the
organizers have made a good faith colorable attempt to comply with corp formalities and
have no knowledge of the lack of corp status.
d. Corporation by estoppel
i. Under the common law doctrine of corp by estoppel, persons who have dealt with the
entity as if it were a corp will be estopped from denying the corps existence. The
doctrine applies in K to prevent the corp entity, and parties who have dealt with the entity
as if it were a corp, from backing out of their Ks. However, it does not apply to tort
victims.
e. Legal significance of formation of corp
i. A corp is a separate legal person
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ii. Generally, SH are not personally liable for debts of corp. This is the principle of limited
liability, which means that the SH is liable only for the price of her stock.
f. Piercing the corp veil
i. GR: a SH is not liable for the debts of a corp
ii. Except: piercing the corp veil to avoid fraud or unfairness
1. Alter-ego failure to observe sufficient corp formalities, OR
2. Undercapitalization failure to maintain sufficient funds to cover foreseeable
liabilities
iii. X is the SH and CEO of Glowco, Inc., a corp that hauls and disposes of nuclear waste.
Glowco does not carry insurance. Glowco has an initial capitalization of 1k. X
commingles personal and corp funds. V is injured when one of Glowcos trucks melts
down. Can V sue X?
1. As a rule, SH are not liable for corp obligations. But courts will pierce the corp
veil to avoid fraud or unfairness. In this case, X has failed to observe sufficient
corp formalities by commingling funds. Moreover, Glowco is also
undercapitalized because it operates in a dangerous business, has no insurance,
and minimal capitalization of $1,000. Therefore, the ct will pierce the corp veil to
render X liable to V.
iv. Remember, courts are generally more willing to pierce corp veil for a tort victim than for
a K victim.
g. Shareholders liabilities
i. Generally, SH may act in their own personal interest and have no fiduciary duty to the
corp or its SH.
ii. Controlling SH
1. Modern law imposes a duty on a controlling SH to refrain from using her control
to obtain a special advantage or to cause the corp to take action that unfairly
prejudices the minority SH.
2. Sale to looters
a. Controlling SH may be held liable for the sale of shares at a premium
where the premium was really paid to sell a corp office for private gain.
b. Controlling SH who sell the controlling interest to individuals who
subsequently loot the company to the detriment of the minority SH will be
liable for damages unless reasonable measures were taken to investigate
the character and reputation of the buyer.
i. The sellers duty of investigation depends on whether she has
notice of the possibility of looting by the purchasers.
3. Sale at a premium
a. Some cts have held that controlling SH are liable for the sale of their
shares at a premium where the premium was really paid to illegally sell
the corp assets for their own benefit.
b. Ct have held that officers and directors are fiduciaries and may not sell
their offices for private gain.
h. Foreign corps
i. A corp incorp outside the state that wishes to engage in regular intrastate business must
qualify by filing a certificate of authority with the secretary of state that includes all of
the information required in the articles.
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II.
III.
RIGHTS OF SHAREHOLDERS
a. Shareholder derivative suits
i. In a derivative suit, a SH is suing to enforce the corps cause of action.
1. Always ask: could the corp have brought this suit? If so, its a derivative suit.
ii. Requirements for bringing a SH derivative suit:
1. Contemporaneous stock ownership
a. You must own at least 1 share of stock when the claim arose and
throughout the entire litigation.
2. Must generally make demand on directors that they cause their own corp to
bring suit
a. Demand must be made and rejected by the board; OR
b. At least 90 days have passed since demand was made.
3. Note in a derivative suit, any recovery of losses goes to the corp, except that
the SH may recover reasonable expenses of litigation.
b. Voting
i. Who has the right to vote at an upcoming meeting where voting occurs?
1. ONLY the record date owner votes owner on the record date, which is the
voter eligibility cut-off date set by the board up to 70 days before the meeting
date.
ii. SH voting by proxies
1. A proxy is a
a. Writing
b. Signed by record SH
c. Directed to secretary of corp
d. Authorizing another to vote the shares
e. Valid for only 11 months.
2. On June 2, S, who is the record owner on the record date, sends a signed letter to
secretary of C corp authorizing Ari Gold to vote her shares. Can Ari vote Ss
shares at the annual meeting in July?
a. Yes, its valid because:
i. Its in writing
ii. Its signed by record owner
iii. It is sent to the corps secretary
iv. It authorizes another
v. Within 11 months.
b. What if, prior to the meeting, S writes to the secretary of C corp, that she
now wants Turtle to vote her shares at that meeting? Turtle can vote.
i. Proxies are freely revocable unless 2 things are both true:
1. They must say on them irrevocable; AND
2. Must be coupled with an interest.
3. Can S revoke her proxy even though it states that it is irrevocable?
a. Yes, this proxy is still revocable because it is not also coupled with an
interest.
4. S (the record owner) sells B her shares after the record date but before the annual
meeting. S gives B an irrevocable proxy to vote the shares at the annual meeting.
Can S revoke this proxy?
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c.
d.
e.
f.
1. You own 1,000 shares of stock in C corp. C corp has 9 directorships open for
election. You believe that Martha Stewart should be director of C corp. Under
traditional, straight voting, how many votes can you cast for Martha?
a. 1,000 shares. We have 9 separate elections.
2. Under cumulative voting, you may multiply the number of shares times the
number of directors to be elected.
a. 9,000 votes to cast behind Martha. We have just 1 big election.
3. The articles of C corp are silent as to whether SH can vote cumulatively. Can Cs
SH still vote cumulatively?
a. There is no right to cumulative voting UNLESS the right is granted in the
articles.
Right of SH to examine the books and records of the corp
i. Any SH shall have access upon notice and at proper times
Dividends
i. To be declared in boards discretion unless the corp is insolvent or would be rendered
insolvent by the dividend.
ii. Board members are liable personally for unlawful distributions, but have a defense of
good faith reliance on financial officers representations regarding solvency.
iii. Directors who authorize a dividend that will declare corp insolvent unlawful, liable
personally for unauthorized illegal dividends.
iv. Priority of distribution
1. The board of directors of C corp decides to declare dividends totaling 400k. Who
receives dividends if the outstanding stock is:
a. 100,000 shares of common stock
i. Common stock means pay them last and pay them equally.
b. 100,000 shares of common and 20,000 shares of preferred with $2
dividend preference
i. Preferred stock means pay them first $2 each.
ii. 400k 40k (20,000 x 2) = 360k
c. 100,000 shares of common and 20,000 shares of $2 preferred that are
participating
i. These shares effectively get paid twice first as preferred and
again as if they were also common shares.
ii. Pay preferred stock first 40,000 (400k 40k = 360k)
iii. 360,000/120,000 = $3.00 per share for common stock.
d. 100,000 shares of common and 20,000 shares of $2 preferred that are
cumulative (and no dividends in the 3 prior years)
i. Cumulative means that these shares have the right to receive
those 3 prior unpaid years plus the current years worth of
dividends.
ii. $2 x 20,000 x 4 years = 160k to the preferred SH
iii. 240,000 left over/100,000 = $2.40 per common share
SH agreements to eliminate corporate formalities (closely-held corps)
i. Unanimous SH election in the articles, the bylaws, or in a filed written agreement
ii. There must be a reasonable share transfer restriction.
iii. No piercing the corp veil even if you fail to maintain formalities.
iv. Possible subchapter S corp status (therefore, treated as a partnership for tax purposes).
1. S corp status if no more than 100 SH who are individuals and American residents
and no more than 1 class of stock.
Professional corps
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VI.
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reports were filed, and may recover incentive-based compensation received during that
period.
v. Corps (directly or derivatively) may also recover any profits made by officers from
trading corps stock during black-out periods of at least 3 days when at least 50% of the
employees are prohibited from trading in their retirement plans securities.
MINI REVIEW
I.
II.
III.
IV.
FORMATION
a. Promoters are liable until novation
b. Subscribers are irrevocable for 6 months
c. Articles = PAIN
i. Authorized shares
ii. Purpose
iii. Agent
iv. Incorporators
v. Name
d. SH not liable, unless pierce veil.
ISSUANCE
a. Par of value = minimum issuance price
b. Preemptive rights = maintain ownership percentage
DIR/OFF/LIABILITY
a. Duty to manage
b. Business judgment rule
c. Fiduciaries care (prudence, unless limited in articles) and loyalty (no unfair benefits unless
disclosure plus independent ratification)
SH RIGHTS
a. Derivative suits
i. Contemporaneous ownership
ii. Demand
b. Voting
i. Only record date owner votes
c. Proxies
i. Proxies are revocable unless they say irrevocable plus coupled with an interest.
d. Quorum
i. Majority of all shares
e. Vote
i. Votes in favor exceed votes against
f. Cumulative voting
i. Shares x slots
g. Dividends
i. Discretionary unless insolvency
1. Common pay last
2. Preferred pay first
3. Participant pay again
4. Cumulative add up
h. Eliminating formalities (closely-held)
i. Unanimous election
ii. Share transfer restriction = no piercing plus S corp status
i. PC
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V.
VI.
i. Designated profession
ii. Limited liability
FUNDAMENTAL CHANGES
a. Board resolves
b. Special notice
c. Majority of all shares
d. Dissenters rights
e. Notice to stay
FEDERAL SECURITIES LAWS
a. 10(b)
i. Scienter
ii. Deception
iii. Actual purchase or sale
b. 16(b)
i. No trading profits within 6 months.
c. SOA
i. No knowingly false filings
ii. No benefits during falsehood or black-out periods
1. Authority which an agent reasonably believes the principal has given because:
a. Necessity
i. There is implied authority to do all tasks which are necessary to
accomplish an expressly authorized task.
b. Custom
i. There is implied authority to do all tasks which are customarily
performed by persons with the agents title or position.
c. Prior dealings between principal and agent
i. There is implied authority to do all tasks which the agent believes
to have been authorized to do from prior acquiescence by the
principal.
iii. Apparent authority
1. Two-part test:
a. Principal cloaked agent with the appearance of authority; and
b. Third-party reasonably relies on appearance of authority.
2. Secret limiting instruction
a. Agent has actual authority, but principal has secretly limited that authority.
Agent acts beyond the scope of the limitation.
i. Charles owns an antique store. A shipment of antique clocks
arrives from London. Charles tells his employee Doofus not to sell
a special grandfather clock. Charles goes to lunch and D sells the
clock. Is C bound by contract?
1. Principal will be liable on its authorized Ks. In this case,
there is no actual express or implied authority to sell the
clock. Nonetheless, there was apparent authority
because Charles did cloak Doofus with the appearance
of authority and third party buyers may reasonably rely
on the appearance on authority.
3. Lingering authority
a. Actual authority has been terminated. Afterwards, agent continues to act
on principals behalf.
i. For many years, Agnes has sold goods as Priscillas agent. Priscilla
finds out, however, that Agnes has been stealing money from her.
Priscilla terminates Agnes. Agnes continues selling to customers
and runs away with the money. Is Priscilla bound?
1. Principal will be liable on its authorized Ks. In this case,
actual and implied authority has been terminated by
the principal. Nonetheless, there was apparent authority
because Priscilla has cloaked Agnes with the lingering
appearance of authority and customers may continue to
rely reasonably on the appearance of authority until
they receive notice of termination.
iv. Ratification
1. Authority can be granted after the K has been entered if:
a. Principal has knowledge of all material facts regarding the K, and
b. Principal accepts its benefits.
2. Except
a. Ratification cannot alter the terms of the K.
c. The rules of liability on the K
i. General rules
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I.
II.
ii. Paula convinced Peter to start a sailing school, and agreed to lend Peter money to
purchase a boat for that purpose. At a party, Paula told a wealthy friend: my friend Peter
and I are starting a sailing school and we need a boat. The wealthy friend offered to sell
Paula and Peter a boat, and agreed to allow Peter to take it for a test ride the next day.
Later that night, however, Peter and Paula fight and decide to drop the sailing school
idea. The next day Peter takes the boat for a ride and destroys the boat. May wealthy
friend sue Paula for the loss of the boat?
1. As a rule, general partners are personally liable for all partnership
obligations including co-partners torts. In this case, however, Paula and
Peter never formed a partnership because theirs was just a lending
arrangement not based on sharing profits. Nonetheless, under partnership by
estoppel, Paula will be liable because she has represented to that 3rd party
that she is a partner of Peters and will be liable as if she were.
d. Contrast formation and liability within other unincorporated business organizations
i. Limited partnerships
1. Definition
a. A partnership in which there is at least 1 general partner and at least 1
limited partner.
2. Formation
a. Must file a limited partnership certificate that includes the names of all
general partners.
3. Liability and control
a. General partners are still liable personally for all limited partnership
obligations.
b. Limited partners are not liable for obligations of the limited partnership
itself; limited liability AND limited control.
ii. Registered limited liability partnership
1. Formation
a. Must register by filing a statement of qualification plus annual reports.
2. Liabilities
a. No partner is liable for the obligations of the partnership itself, not even
generals.
b. But you can always sue them individually for their own torts.
iii. Limited liability companies
1. Original purpose
a. To give its owners (members) the same limited liability of shareholders in
a corp and also the benefits of a partnership tax treatment.
2. Formation
a. File the articles of organization and an operating agreement.
3. Liabilities
a. The members are not liable for the debts and obligations of the company
itself.
4. Partnership characteristics
a. Members control, but Articles may delegate control to managers.
b. Limited liquidity member interests are not freely transferable.
c. Limited life events of dissolution
d. Therefore, LLC = limited liability + limited liquidity + limited life +
limited tax.
III.
DISSOLUTION
a. Dissolution
i. First, in a partnership at will, where there is no agreement, dissolution occurs
automatically upon notice of express will of any single general partner to dissociate.
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b.
c.
d.
e.
ii. Secondly, in a partnership not at will, where there is an agreement, dissolution occurs
upon the happening of an event specified in the agreement OR upon the majority vote of
the partners to dissolve within 90 days of the dissociation of any single partner.
Termination
i. Real end
Winding up
i. Period between dissolution and termination, in which remaining partners must liquidate
partnerships assets to satisfy partnerships creditors.
Compensation and liability for winding up
i. Compensation for winding up
1. They get this.
ii. Partnerships liability for winding up
1. Old business?
a. The partnership and its individual general partners retain liability on all
transactions entered into to wind up all business with existing creditors.
2. New business?
a. The partnership and its individual general partners still retain liability on
brand new transactions until actual notice of dissolution is given to
creditors or until 90 days after filing a statement of dissolution with the
state.
Priority of distribution
i. Each level of priority must be fully satisfied before beginning the next level in this
order:
1. First, creditors must be paid.
a. All outside non-partner classic trade creditors must be paid and inside
partners who have loaned money to the partnership.
2. Second, capital contributions by partners must be paid.
a. Partnership is liable to repay its own partners for their capital
contributions.
3. Profits and surplus, if any
a. Profits, if any, are shared equally without an agreement.
ii. Rule: each partner must be repaid his or her loans and capital contributions, plus
the partners share of the profits or minus that partners share of the losses.
iii. A and B dissolve their partnership. In winding up, they liquidate the partnership assets
and have a total of 1M to distribute. How should that amount be distributed if (1) the
partnership owes 600k to trade creditors, (2) A loaned the partnership 100k, (3) B made
capital contributions of 200k?
1. First, all outside and inside creditors must be paid (700k).
2. Secondly, partnership now must also repay B the 200k for its capital contribution.
3. The remaining 100k: without an agreement, equal share of 50k to A and B.
iv. Suppose now that the partnership only has 700k to distribute?
1. First, partnership still owes 700k to all outside and inside creditors and they must
be paid first.
2. Secondly, the partnership is still liable to B for its 200k capital contribution.
Missing amount = loss.
3. Individual general partners are still liable.
4. Without an agreement, A and B will share equally in the 200k loss.
MINI-REVIEW
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I.
AGENCY
a. Principals liability for agents torts
i. Assent, benefit, control and scope
ii. No VL for independent contractors torts
iii. Intentional torts generally outside the scope
b. Principals liability for agents Ks
i. Express authority oral, except for equal dignities, revocable unless durable power of
attorney
ii. Implied authority necessity, custom, or prior dealings
iii. Apparent authority = principal cloaks, 3rd party relies
iv. Ratification = knowledge + acceptance of benefits
v. Authorized agents are not liable unless undisclosed principal
c. Duties agent owes principal
i. Duty of care
ii. Obedience
iii. Loyalty
II.
PARTNERSHIP
a. Formation
i. No general partnership formalities
ii. Association of 2 or more persons carrying on as co-owners of business for profit
b. Liabilities to third parties
i. General partners are liable for all partnership obligations
ii. Estoppel representers are liable as if general partners
iii. Limited partners + registered limited liability partners + LLC members have limited
liability
c. Relations between partners
i. Fiduciaries accounting for profits
ii. Only share of profits is liquid transferable personal property
iii. Without an agreement, equal control, no salary, equal profits and losses like profits.
d. Dissolution
i. Definitions
1. Without agreement, dissolution = notice of express will of any single partner to
dissociate
ii. Priority
1. All outside and inside creditors
2. All capital contributions
3. Profits, if any, share equally without an agreement
iii. Distribution rule
1. Each partner must be repaid their loans and capital contributions plus their share
of profits, but minus their share of losses.
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