Bar Exam-Corporations and LLCs

Corporation Characteristics

1. Centralized Management

2. Limited Liability

3. Transferability of Ownership

4. Continuity

5. Personhood

Centralized Management

management rights are centralized in a board of directors (BoD) who delegate day-to-day management to corporate officers

Unlike partnerships, management is generally not spread among owners

Limited Liability

only the corp itself can be liable for its obligations

Shareholders, board members, and officers are generally not liable for corp's obligations, although there are exceptions

Transferability of Ownership

shareholders can freely transfer their ownership interests unless prohibited by articles or bylaws

Continuity

corps can exist in perpetuity; changes in ownership do not affect the corp's existence

Personhood

corps are considered people for most intents and purposes and are entitled to certain constitutional protections

e.g., corps are entitled to due process and equal protection `

Formation of Corporation

formed when articles of incorporation are filed with the state

Corp is formed in accordance with applicable laws = de jure

Articles of Incorporation must Include

1. corp name

2. max number of shares the corp. is authorized to issue

3. names and addresses of each incorporator

4. name and address of initial registered agent

Articles of Incorporation Optional Provisions

articles can include any other provisions regarding management, as long as they are legal

Statement of Purpose

some states require a statement regarding the corp's purpose; most corps use boilerplate language allowing it to take any action necessary to carry out its business or affairs

a corp that includes a narrow purpose cannot take action unrelated to that purpose

Bylaws

written rules for managing the corp, which provide for ordinary business conduct

Must be adopted by incorporators or BoD

Can contain any provision for managing and regulating the corp's affairs as long as it is legal

Conflicts with Articles and Bylaws

articles control

Promoter

acts on behalf of a not-yet formed corp to get capital commitments (i.e., funding) usually by forming Ks with parties interested in becoming shareholders upon corp. formation

Promoters may also work on corp planning and formation and usually become incorporators

Promoter Liability

promoter is personally liable for Ks he enters into on behalf of the corp and remains liable after formation

Exceptions to Promoter Liability

1. Novation-agreement between parties releasing promoter and substituting the corp; or

2. Indemnification-promoter may be indemnified by the corp if he is held liable on the K after formation

Corp Liability

corp generally has no liability based on pre-incorporation Ks entered into by promoters unless corp adopts K

Subscription Agreement

agreement whereby one agrees to buy a specified number of shares from a corp at a given price

Ultra Vires Acts

where a corp acts outside of its stated purpose (as stated in articles of incorporation); it takes ultra vires acts

Consequences of Ultra Vires Acts

1. Shareholder suit

2. Corp. Suit against officer or director

3. State Action

De Facto Corp.

where a corp's formation fails to adhere to proper formalities but it carries itself on as a corp; it may still be treated as a properly formed corp.

De Facto Corp Requirements

1. a law exists under which the entity could have become legally incorporated

2. the entity made a good faith effort to comply with the state's incorporation laws

3. the entity acted like a corp

Corp. by estoppel

persons who treat an entity as a corp are estopped from denying the entity is a corp, particularly in order to avoid liability

Piercing the Corporate Veil

Generally shareholders, directors, and officers are not personally liable for corp. obligations, but they can be held liable under the doctrine of piercing the corp veil

Consequence of Piercing the Veil

when the corp. veil is pierced, the corp entity is disregarded in order to hold shareholders, officers, directors, etc. liable

Acts justifying piercing the veil

1. ignoring corp. formalities

2. inadequate capitalization

3. fraud or illegality

Ignoring Corp. Formalities

where a shareholder dominates the corp to the extent that the corp is not being treated as a separate entity

i.e., the corp entity is being used as an alter ego or "mere instrumentality" of the shareholders, resulting in some basic injustice

Inadequate Capitalization

corp was undercapitalized at the time of incorporation

Not established by virtue of insolvency alone, but insolvency that occurs shortly after formation is a prime indicator of inadequate capitalization

Fraud or Illegality

corp entity may be disregarded if there is fraud or other illegality, to prevent fraud or other illegality, or to prevent a shareholder from using the corp or avoid existing personal liabilities

Liability

once the corp veil is pierced, all persons composing the corp may be held personally liable, but usually only those involved in active management will be held liable

Corporate Securities and Classes of Shares

corps get funding through issuing securities, of which there are two main types: debt and equity

Debt Securities (bonds)

corp borrows funds from an outside creditor and promises to repay creditor

Holders of debt securities have no ownership interest

Equity Shares (stocks)

instrument that represents investment in the corp; holders (i.e., shareholders) become part owners of hte corp

Authorized Shares

max number of shares the corp may issue, as prescribed in the articles of incorporation

Issued/Outstanding Shares

shares taht have been sold to investors

Reaquired Shares

(i.e., shares that corp buys back) revert from being issued/outstanding to authorized

Classes of Shares

corps may choose to issue different classes of stock shares; each class of shares can have different series within a class

Articles must authorize each class of shares and set forth

1. number of shares of each class

2. name or distinguishing designation for each class; and

3. describe the rights, preferences, and/or limits afforded to each class of shares

Varying rights in shares and consideration for shares

shares authorized by a corp can have different rights, preferences, and limits depending on the class of shares

Articles can define almost any kind of differentiation between share classes

Differences in Share Classes Involve

1. Rights to distributions and/or dividends

2. Nature of Voting Rights

3. Preference with regard to distributions

Distribution Rights

corp can distribute assets in the form of dividends, redemption of shares, or liquidating distributions upon dissolution

at least one class of shares must be entitled to receive the corp's net assets upon dissolution

Board Discretion

decision as to whether or not to declare a distribution is within the BoD's sole discretion, even where the articles authorize distributions

shareholders have no general right to demand a distribution

Consideration for Shares

shares can be issued by the corp in exchange for any tangible or intangible property or benefit to the corp

i.e., corp can issue shares in exchange for anything of value, whether payment or services

Shareholder Authority

shareholders exert control over the corp through their power to elect directors, amend bylaws, and approve fundamental changes

Shareholder Authority re: Directors

shareholders can remove and elect directors

Shareholder Authority re: Bylaws

shareholders can adopt, amend, or repeal bylaws

Shareholder Authority re: Fundamental Changes

shareholders must approve of fundamental changes to corp. Structure

Fundamental Changes

1. mergers

2. sale of assets outside ordinary business

3. Dissolution

Inspection Rights

shareholders may inspect the corp's books and records for any proper purpose upon written notice

Inspection Proper Purpose

purpose is proper if reasonably related to a person's interest as a shareholder

Inspection Notice

five days' written notice must be provided to the corp

Notice must state proper purpose

Inspection without proper purpose

1. articles and bylaws

2. annual reports and meeting minutes

3. BoD resolutions regarding share classifications

4. corp communications to shareholders

Shareholder Meetings

annual and special meetings

Annual Meeting

corp must hold annual meetings for electing directors and other special matters

Special Meeting

may be called to conduct business requiring shareholder approval

Meeting Notice REquired

notice of a meeting must be sent to shareholders eligible to vote

Shareholder Voting

unless the articles provide otherwise, each issued share is entitled one vote

Quorum Required

quorum must be present for a vote to be cast

Majority rule

actions are approved by a majority vote unless teh articles provide otherwise

BoD Elections

directors are elected by a plurality; cumulative voting may be used if allowed by the articles

Cumulative Voting

each share can cast as many votes as there are BoD vacancies and multiple votes can be cast for one seat

(i.e., if five vacancies exist, each share gets five votes)

Proxies

shareholders can vote their shares via proxy executed in writing

Revoking Proxy

appointment of a proxy is generally revocable unless it is could with an interest and clearly states it is irrevocable

Shareholder Direct Suit

rare, but can occur where a corp, its officer, or director caused harm to, or breached a duty owed to, a particular shareholder

If the duty breached is owed to the corp, as opposed to an individual shareholder, the proper avenue is a derivative suit

Recovery is for the benefit of the SH or SH class

Shareholder Derivative Suit

shareholder sues to enforce the corp's rights when the corp has a cause of action but fails to pursue

Often arises where a director of officer breaches a duty owed to corp, but corp has not taken action

Derivative Suit Standing

shareholders bringing suit must have been shareholders at the time of the alleged wrong

Derivative Suit recovery

goes to corp, but SH may recoup legal expenses

Derivative Suit Written Demand Required

shareholder must make a written demand on the corp and wait 90 days before filing suit unless:

1. corp has already rejected SH demand; or

2. irreparable injury to corp will result by waiting full 90 days

BoD Characteristics

Number of Directors provided for in bylaws or articles; can be a variable range, but here must be at least one

Elected at annual shareholder meeting

may be removed with or without cause by SH unless articles provide for removal only with cause

BoD Meetings

Board may hold regular or special meetings

Can be in person or through any means by which ALL participating directors can simultaneously hear one another (e.g., videoconference)

BoD Meeting Notice

regular meetings may be held without notice; but special meetings require 2-day notice

BoD Meeting Quorum

set by articles, but must be at least 1/3 of all directors

BoD Action w/o meeting

BoD can take action without a meeting if all directors provide written consent describing the action taken

Delegating Authority

BoD does not run the day-to-day of the corp, but rather delegates management to the officers and execs

Committees

BoD may create committees, each comprised of one or more BoD members, with power to oversee corp affairs

cannot make major corp decisions requiring full BoD consent

Duty of Care

Directors and officers owe the corp a fiduciary duty of care; in determining whether that duty was breached, courts apply the BJR

i.e., a director/officer act that fails to pass scrutiny under BJR will be deemed in breach of the duty of care

Business Judgment Rule (BJR)

courts will not second guess a poor or erroneous decision made by a director or officer if the decision was made in:

1. good faith

2. with the care that an ordinarily prudent person in a like position would exercise under similar circumstances; and

3. in a manner the director/officer reasonably believed to be in the bests interests of the corp

Director Liability for Breach of Duty of Care

if a director/officer breaches their duty of care, they can be held personally liable for damages

Articles can limit directors/officers personal liability

Exceptions to Limiting Director/Officer Liability in Articles

1. intentional violations of law

2. unlawful corp distributions

3. receiving unentitled financial benefits; or

4. intentionally inflicted harm on the corp or its shareholders

Duty of Loyalty

Directors and officers owe a duty of loyalty to the corp, which prohibits them from profiting at the expense of the corp

arises with conflicts of interest or usurpation of a corp opportunity

Conflicts of Interest

officer/director has a personal interest in some transaction in which the corp is a party

Conflicts of Interest Occurance

officer/director knows that the and/or a family member is:

1. a party to the transaction

2. has a beneficial financial interest or is closely linked to the transaction such that it could reasonably be expected to influence how the director/officer votes on the transaction, or;

3. is affiliated with another entity that is party to the transaction

(e.g., is an agent, employee, etc. of the entity)

Duty of Loyalty Safe Harbors

officer/director with a potential conflict of interest in a transaction will not be personally liable if the transaction is either:

1. fair to the corp given circumstances existing at the time; or

2. approved, after material facts have been disclosed, by either: (a) disinterested shareholders; or (b) a majority of disinterested board members

Corporate Opportunities

fiduciary duties prevent officers/directors from diverting a business opportunity to themselves where:

1. corp would have an interest or expectancy in the opportunity; and

2. officer/director does not give corp an opportunity to act first

Mergers

a merger occurs where two or more corps blend into a new corp; often arises where on corp absorbs another

Merger Requirements for Approval

mergers are considered fundamental corp changes, and, as such, generally require each corp to get approval of:

1. board-majority approval required

2. Shareholders-majority approval required

Merger Approval Exceptions

no significant change to surviving corp

Surviving corp's shareholders need not approve of a merger where the surviving corp has no significant changes (e.g., articles do not differ post-merger, SH's shares and rights do not change)

Effect of Merger

surviving corp owns all property and assumes all obligations of prior separate entities

Short-Form Merger

where a parent corp owns at least 90% stock of a subsidiary, the subsidiary can be merged into the parent corp w/o approval of either corp's SH

Dissenters' rights

dissenting SH can challenge the merger or demand payment for their shares at a fair market value

Mutual Notice Required

before a vote is taken on the merger, corp must give SH notice and SH must give notice of their intent to demand payment

If approved, corp must pay dissenters fair market value for their shares

Dissolution

termination of the corp's existence

Effect of Dissolution

corp continues to exist while it winds up and liquidates its affairs, but no other business may be carried out

Voluntary Dissolution

considered a fundamental change and requires both board and SH approval

Administrative Dissolution

action brought by state to dissolve corp

Usually occurs due to failure to adhere to statutory requirements or formalities, but can be remedied by corp

Judicial Dissolution by Attorney General

can act to dissolve a corp on the ground that it abused its authority, committed fraud, etc.

Judicial Dissolution by SH

can seek judicial dissolution where:

1. deadlock among BoD or SH threatens irreparable injury to corp,

2. corp has abandoned its business and failed to dissolve, or

3. corp's assets are wasted/misused for non-corp purposes

Disposition of Property

where corp sells, leases, or otherwise disposes all or substantially all property outside the regular course of business

Deemed a fundamental change requiring SH/board approval

"substantially all" property

sale or disposition leaves corp without significant continuing business acttivities

"outside regular course of biz"

disposition is not considered a normal business activity for corp

Limited Liability Company (LLC)

an LLC is an entity that allows for taxation for its owners like a partnership, but has limited liability similar to a corp

owners are considered members and/or managers