Corporations (DONE) Flashcards
What governs Texas corporations?
All Texas corporations are governed by the Texas Business Organizations Code (TBOC).
What is required for the organization of a corporation?
A “person, paper, and act”.
What is the “person” requirement for organization of a corporation, and what must they do?
The person is the organizer, and he executes the certificate and delivers it to the Secretary of State.
A person or entity can serve as the organizer, and they need not be a Texas resident.
What information is required in the Certificate of Formation? (“paper”)
1) Names and addresses
2) Need not state the company’s duration (silence indicates perpetual existence)
3) Must include a statement of purpose
4) Capital structure (stock)
What names and addresses are required in the CoF?
1) Name of the corporation
- – must include corporation, company, incorporated, etc.
- – can be reserved for 120 days
- – assumed names allowed, but cannot sue in Texas until filed
2) Names and addresses of each organizer
3) Number of initial directors
4) Name and address of each initial director
5) Name of the corporate agent and post office address
What is the statement of purpose in the CoF?
The primary business the company will be engaged in.
Can be as general as “all lawful activity”
Doing business outside the scope of the statement of purpose is an ULTRA VIRES ACTIVITY.
What is the effect of conducting an ultra vires activity?
Conducting an activity beyond the scope of the certificate.
1) Ultra Vires contracts are valid
2) Shareholders can sue for an injunction
3) The responsible managers are liable to the corporation for UV lawsuits)
What information regarding stock must the CoF contain?
1) Authorized stock: maximum number of shares the corporation can sell, and
2) Number of shares per class, and
3) Info on par value, voting rights and preferences of each class
What is the “act” required in the process of incorporation?
Organizer signs the certificate, delivers it to the Texas Secretary of State, and pays the required fee.
What does the Secretary of State do after the certificate is delivered?
Files the certificate, and sends acknowledgement of filing to the corp.
When does the corporation’s existence officially begin?
When the Secretary files the certificate.
What is the organizational meeting required to organize the corporation?
Held by the BoD. Here, the board:
1) Selects officers;
2) Adopts the initial bylaws
3) and may transact other company business
Should give three days notice of the meeting.
Does not have to be held in Texas.
What are bylaws?
Bylaws are an internal document. They comprise an operating manual, with things like setting record dates and methods of giving notice, etc.
Corporations are REQUIRED to have bylaws.
Who can repeal the bylaws and adopt new ones?
The Board of Directors
If bylaws conflict with the certificate, which is controlling?
The Certificate, but bylaws set the number of directors.
What law governs a corp. formed in Texas but does all business in another state?
Texas law, even if no business is done in Texas.
What is a public-benefit corporation?
“B Corp”
One formed for profit and also to pursue some benefit to a broader social-policy cause.
Certificate must say it’s a “benefit corporation”.
Files an annual benefit report
What type of taxation is a C Corp subject to?
A C Corp pays income tax on its profits. In addition, shareholders pay tax on dividends paid.
This is “double taxation”, and is a disadvantage.
What corporation can legally avoid paying income tax?
An “S” corporation.
What is an “S” Corporation?
S Corps have 100 or fewer shareholders, all of whom are human US citizens or residents. There is only one class of stock, which is not publicly traded.
What is limited liability for a corporation?
If the corporation incurs a debt or breaches a contract or commits a tort, the shareholders are not personally liable.
Shareholders are liable only to pay for their stock, not for the business’s obligations.
What is a defective corporation?
Where the corporation was not properly established, but if certain requirements are met, it will still be treated as a corporation for the purpose of liability.
1) De Facto corporations
2) Corporation by estoppel
If neither of these two apply, then the organizer is personally liable for the business debts.
What is required to form a “de facto” corporation?
1) There is a relevant incorporation statute (TBOC in Texas)
2) The parties made a good faith, colorable attempt to comply with it, and
3) Some exercise of corporate privileges (acting like they have a corporation)
If these apply, the business is treated as a corporation for all purposes except in an action by the state.
What is corporation by estoppel?
One who treats a business as a corporation may be estopped from denying that it’s a corporation.
Generally applies only to Contract law.
What is a promoter?
A person acting on behalf of a corporation not yet formed.
Might form contracts with a third-party on behalf of this corporation not yet formed.
When is a corporation liable for pre-incorporation contracts?
A corporation is not liable on these contracts until it ADOPTS the contract.
Adoption can be express (board taking action) or implied (corp. accepting a benefit of the K)
Adoption makes the corp liable, but does not relieve the promoter of liability.
When is the promoter liable for pre-incorporation contracts?
Promoter is liable until there is a novation on the contract.
Novation occurs when there’s an agreement of the promoter, the corp, and the other contracting party that the corp replaces the promoter under the contract.
What constitutes a “foreign” corporation?
Any corporation formed outside of Texas is foreign.
How does a foreign corporation transact business in Texas?
By filing an application for registration with the Tex Sec.
The application must provide basic information from the company’s certificate and the company must be in good standing in its home state.
What happens if a foreign corporation transacts business in Texas without registering?
1) Civil penalties
2) It cannot sue in Texas on a claim arising from business in Texas (although it can be sued and defend.)
Once the corporation registers and pays the penalty and back fees and fines, it can then assert a claim in Texas.
How does a corporation obtain capital to start and operate?
By issuing a security (investment) to a person in exchange for capital.
1) Debt security
2) Equity security
What is a debt security?
When a corporation borrows money from X and agrees to repay them with interest.
These are usually called “bonds”, and the person holding a bond is the creditor.
What is an equity security?
When a corporation sells an ownership to X.
Equity security is called STOCK.
The person holding stock (shareholder/stockholder) is an OWNER, not a creditor.
What is a subscription?
A written, signed offer to buy stock from a corporation.
How long is a pre-incorporatin subscription offer irrevocable?
A subscription is irrevocable for 6 months.
Unless it says otherwise or all subscribers agree to let you revoke.
Are post-incorporation subscriptions revocable?
YES, until accepted by the corporation.
At what point are the corporation and the subscriber obligated under a subscription agreement?
When the board accepts the offer, and the corp notifies the subscriber in writing.
At what point does a subscriber whose subscription is accepted become a shareholder?
When they pay for the stock.
What must the corporation receive when it issues stock?
Consideration
What forms of consideration are acceptable in exchange for issued stock?
Any tangible or intangible benefit to the corporation is sufficient consideration.
What is par stock?
Stock issued for the minimum issuance price.
Par stock is not required, and if we have it, it is set in the certificate.
Par stock can be issued for more than the minimum, as long as it’s actually more.
What is “no par” stock?
This means that there is no minimum price. The Board can set any price.
What is treasury stock?
This is stock that was previously issued and has be reacquired by the corporation.
Treasury stock is ISSUED and AUTHORIZED, but NOT OUTSTANDING.
Treasury stock is “NO PAR” stock, so there is no minimum price and can be resold.
Is the Board’s valuation of stock conclusive?
Yes, so long as there’s no fraud.
What is watered stock?
Par stock that is issued for less than the minimum.
Who is liable for watered stock?
1) Directors? - Yes, if they knowingly authorized the issuance.
2) Person who bought the watered stock? - YES, always.
Is there a defense for the buyer of watered stock?
NO, because he’s charged with notice of the par value at all times.
If the buyer of watered stock transfers the stock to a third party, is that third party liable?
Not if the third party acted in good faith. This means that they did not know about the water.
What is the preemptive right an existing shareholder?
This is the right of an existing shareholder of common stock to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock FOR MONEY.
Does a new issuance of stock include the issuance of treasury stock?
YES. If we sell treasury stock, it’s reacquired stock that is subject to preemptive rights.
If the certificate of formation is silent, do we have preemptive rights?
NO. The corporation is gonna have to tell us that we have preemptive rights.
Does the issuance of stock in exchange for property trigger preemptive rights?
NO. Preemptive rights only attach if the new issuance is for money.
Are there preemptive rights if the issuance of new stock is within six months of formation of the corporation?
NO, unless the CoF says otherwise.
Where is the number of directors initially set?
Initially set and named in the certificate.
Later directors are elected by the shareholder in an annual meeting.
How is the entire board of directors elected?
Each year at the annual shareholders meeting, unless the bylaws provide for a “classified board”.
What is a classified board?
A board divided in halves or thirds, which different portions elected each year.
What is required for shareholders to remove directors before their term expires?
It requires a majority of the shares entitled to vote.
On what basis can the shareholders remove a director?
With or without cause.
If it’s a classified board, only with cause.
If there’s a vacancy on the board, who selects the person to serve the remainder of that term?
The Board or the shareholders.
In what ways can a board take an action?
1) Unanimous written consent to do something
2) A meeting that satisfies the quorum and voting requirements.
When is notice required for board meetings?
1) Regular meetings: Notice not required
2) Special meetings: Notice required, and it must state the date, time, and place (need not state purpose)
What is the effect of a failure to give proper notice?
Whatever happened at the meeting is voidable, unless the directors not notified waived the notice defect.
How can a director waive the notice defect?
1) In writing at any time, or
2) By attending the meeting without objecting at the outset of the meeting.
Is email notice of meetings sufficient?
Yes, if the Director authorizes it.
Can directors give proxies for how they will vote as directors or enter into voting agreements for how they will vote as directors?
No, this is against public policy.
Directors owe the corporation NON-DELEGABLE fiduciary duties.
Can shareholders vote by proxy?
Yes
What is a quorum, and when is it required?
A quorum is a majority of all directors, unless the certificate or bylaws say otherwise.
required when holding any meeting of the board.
What is the effect of a quorum when passing a resolution?
If there’s a quorum when passing a resolution, only a majority vote of those who are present is required.
What is the role of the Board of Directors?
1) Sets policy
2) Supervises officers
3) Declares distributions
4) Decides when the corporation should issue stock
5) Recommends fundamental corporate changes to shareholders, etc.
How is a committee created, and what does it do?
If the CoF or bylaws allow, the board can appoint a committee, to which it can delegate management power.
What can a committee NOT do?
A committee cannot:
1) Amend bylaws
2) Select officers
3) Recommend a fundamental change to shareholders
What is the duty of care for a director?
A director owes a duty of care to the corporation.
Must act in good faith and exercise ordinary care and prudence. She must do what a prudent person would do in similar circumstances.
***This is a NON-DELEGABLE fiduciary duty.
Who has the burden to establish a breach of duty of care?
The burden if on the PLAINTIFF
What is nonfeasance?
INACTION by the director that results in a loss to the company, such as:
1) Failing to attend meetings
2) Failing to keep abreast of corporate affairs, etc.
What is the required to show that there was nonfeasance?
Must show that the company lost money because of the breach of duty through inaction.
What is misfeasance?
ACTION by the board or director that does something to hurt the corporation.
Causation is clear here, so easy to prove.
What is the business judgment rule (BJR)?
A presumption that when the board acted, it did the appropriate homework in making its decision.
The court will not second guess a decision if it was:
1) Made in good faith,
2) Was informed
3) And has a rational basis
Policy rationale: Directors are not guarantors of success
What is the duty of loyalty?
A director owes the corporation a duty of loyalty.
They must act in good faith and with a reasonable belief that her act is in the corporation’s best interest.
Generally applies to conflict of interest cases.
Why does the BJR not apply to duty of loyalty cases?
Because it NEVER APPLIES if the fiduciary has a conflict of interest.
What is an “interested director transaction”?
Self-dealing
Any between between the corporation and one of its directors.
How can self-dealing be defended against?
If the director shows:
1) The deal was fair to the corporation when approved, OR
2) Her interest in the material facts were disclosed or known and the deal was approved in good faith by either of two groups: a) shareholders, or b) majority of disinterested directors, even if less than a quorum.
Can a director start a competing venture?
State the duty of loyalty standard: They must act in good faith and with a reasonable belief that her act is in the corporation’s best interest.
Director cannot compete without approval of a disinterested majority of directors.
What is the remedy for a competing venture in violation of the duty of loyalty?
Constructive trust on profits.
Director would have to give the profits to her corporation if the competing venture made a profit.
What is a corporate opportunity?
Anything the fiduciary has reason to know the Company would be interested in.
Can a director appropriate a corporate opportunity for themselves?
State the duty of loyalty standard:They must act in good faith and with a reasonable belief that her act is in the corporation’s best interest.
A director cannot USURP a corporate opportunity, but can have it if he:
1) Tells the board, and
2) Waits for the board to reject the opportunity.
What is the remedy if a director is found to have appropriated a corporate opportunity the company wants?
He must sell the land or entity to the corporation at his cost. If the director has sold it at a profit, the corporation gets the profit.
This forms a constructive trust.
