Corporations Outline

Corporations Outline
7 Test Areas:
1. Corporate Formation
2. Issuance of Stock
3. Action by and Liability of Directors and Officers
4. Rights of Shareholders
5. Alternative Business Organizations
6. Fundamental Corporate Changes
7. Federal Securities Laws
I. Corporate Formation
A. Pre-Incorporation Contracts- Promoters and Subscribers
Promoters: persons acting on behalf of a corporation not yet formed.

 Who is liable when a promoter enters into a K not yet formed? The promoter. Promoter still liable
even if the corp is NEVER formed.
o The corporation becomes liable on a promoters pre-incorporation contract when the
corp adopts the K by either: 1) express adoption or 2) implied adoption
 Promoter remains liable on pre-incorporation contracts until there has been a novation : an
agreement between the promoter, the corp, and the other contracting party stating that the
corporation will replace the promoter under the Contract.
o If the corp merely adopts the K but does not novate it: then the corp as well as the
promoter are liable
 Promoters are fiduciaries of each other and the corp. Promoters cannot make a secret profit on
their dealings with the corp.
o If a promoter acquires property BEFORE becoming a promoter and resells it to the corp:
the profit is recoverable by the corp only if sold for >FMV.
o If after, any profit is recoverable by the corp.
Subscribers: persons/entities who make written offers to buy stock from a corp not yet formed.
 Can revoke a pre-incorp subscription agreement until it is accepted by the formed corporation
B. Formation Requirements- De Jure Corporate Status

Incorporators: the persons who undertake to form a corp. They sign and file the articles of incorp.
The Articles of Incorporation: A.P.A.I.N. (what the Articles need to state)

 A- Authorized Shares: max # of shares corp can issue, and rights and preferences assigned to
each class of shares
 P- Purpose
o General Purpose and perpetual duration are presumed unless stated otherwise
o Specific Purpose
 if the corp then does something else- it’s an ultra vires activity and as a result:
 OH can enjoin the ultra vires activity
 the D & O’s are liable for losses incurred bc of the ultra vires activity
 A- Agent and address of principal office in OH (the corp’s legal representative authorized to
accept process)
 I- Incorporators
 N- Name of Corporation. MUST contain some indication of corporate status (i.e. Inc, LLC, etc)
Regulations/By Laws
 Not required in the Articles of Incorp. Can adopt/amend them within 90 days.
De Facto Corp
 A business that fails to achieve de jure corp status nonetheless is treated as a corp if the
organizers have made a good faith, colorable attempt to comply with corporate formalities,
and have no knowledge of the lack of corporate status
Corporation by Estoppel
 One who enters a K with the business as if it were a corp is estopped from later arguing its
not a corp
Legal Significance of Formation of Corporation

 Generally shareholders are not liable for the corp’s debts bc it is a separate legal person.
 BUT, can pierce the corporate veil if:
o Alter ego—failure to observe sufficient corporate formalities
o Undercapitalization- failure to maintain sufficient funds to cover foreseeable
liabilities
Foreign Corps (Outside of OH)

 Incorporated outside of OH that wish to engage in regular intrastate biz here, must get a license
from the secretary of state
 If not, they can be fined and Cannot issue a lawsuit in OH state ct
II. Issuance of Stock- When a Corp Sells its own stock
Consideration- what must the corp receive when it issues its own stock?
 Par value= minimum issue price. C Corp sells 10,000 shares of $3 par stock. It must receive at
least $30,000.
o If the stock is sold for less than par value, corp can recover from Directors for authorizing
an unlawful issuance of stock AND from the buyer, who is liable to pay full
consideration for the shares
 Corps can issue par stock to acquire property. In fact, any valid consideration is fine as long as
the Board in good faith values it at at least par value
 No Par=no minimum issuance price. So long as Board approves, anything goes
 Treasury Stock=stock previously issued and then reacquired by the corp. Can then be re-sold. It’s
deemed to be no par stock.
Pre-Emptive Rights
 Preemptive right= the right of an existing shareholder to maintain her percentage of ownership
by buying stock whenever there is a new issuance of stock for cash
 Presumption is that they do NOT exist unless specifically provided for in the Articles of Incorp.
III. Directors and Officers
Statutory Requirements—Directors
 Corps must have a Board with at least 1 natural person 18+
 Directors are elected at the annual meeting by the shareholders
 Director terms can vary, but cannot be greater than 3 yrs.
 Shareholders can remove by majority vote with/without cause UNLESS staggered (classified)
Board, then cause must be shown
 Vacancies may be filled by shareholder vote or a majority of remaining directors- But directors
removed by shareholders must be replaced by shareholder vote
Valid Meeting
o Unless all Directors consent in writing to act without a meeting, a meeting is required
o Notice of directors’ meeting at least 2 days before
o Proxies are not allowed. Also no voting agreements. Conferencing is now generally OK.
o Quorum- must have a majority of all directors when the vote is taken unless Bylaws say
otherwise. So if there’s 9 directors, there must be at least 5 at the meeting to constitute a
quorum.
o Vote- only a majority of those present is necessary to pass something. So if 5 attend, at
least 3 needed.
Liability of Directors to their Own Corporation and Shareholders

o Directors owe Duty of Care and Duty of Loyalty and Duty to Manage
o Duty of Care: Must act with the care that a prudent person would use in like
circumstances.
o Duty of Loyalty: D must not receive an unfair benefit in a transaction with her corp.
 A claim can be ratified by (i) a majority vote of ind’p shareholders or ind’p
directors
o Business Judgment Rule
o Presumption that the Directors manage the corp in good faith and in the best interests of
the corp and its shareholders. As such directors will not be liable for the innocent
mistakes of business judgment
Officers
o Must have a President, Secretary, and Treasurer
o Owe same duties of care and loyalty as Directors
o Are agents of the corp and bind the corp by their authorized activities
o D’s have unlimited power and can remove them from office at any time—but may be liable for
breach of K damages
Indemnification of Ds and Os
o Corp may NEVER indemnify a D or O who is held liable to the corp
o Corp MUST ALWAYS indemnify a D or O if they win a lawsuit against any party
o Corp MAY indemnify if:
o Liability to 3P or settlement with the corp
o D or O shows she acted in good faith and believed conduct was in best interest
o Who decides whether to grant permissive indemnity:
 Maj vote of ind’p directors
 Maj vote of shares held by indp shareholders or
 Special independent counsel
 Court has discretion
IV. Rights of Shareholders
Shareholder Derivative Suits

o Shareholder tries to enforce the corp’s cause of action. Key Question: Could the corporation
have brought this suit? If so, it is a derivative suit, and not a direct action brought by the
shareholder to enforce her own rights.
o Requirements to bring shareholder deriv suit:
o Contemporaneous stock ownership: must own at least 1 share of stock when claim arose
and retain it throughout entire suit
o Adequacy: shareholder bringing the suit must fairly and adequately represent the corp’s
own interest
o Demand on Directors: that they cause their own corp to bring suit. Unless shareholder
shows with particularity that demand would be futile
Voting
o Who has the Right to Vote at an upcoming meeting where voting occurs?
 Only the record date owner votes. Record date= voter eligibility cutoff date set by Board
set within any 60day period before the meeting
o Shareholder voting by proxies 5 requirements:
 A proxy is a (i) writing (ii) signed by record shareholder (iii) sent to secretary of
corporation, (iv) authorizing another to vote the shares (v) valid for only 11 months.
 Proxies are freely revocable unless: (i) conspicuously labelled irrevocable, and (ii)
coupled with some other interest
o Where do shareholders vote?
 Properly noticed annual meeting
 Every corp must have an annual meeting, at which at least 1 director spot is open
for election
 Notice must include time+place of annual meeting
 Specially noticed special meeting
 Meeting of shareholders to vote on proposals or fundamental corporate changes
 Must be delivered between 7-60 days before special meeting and include purpose
of the meeting bc nothing else can take place that is not in the notice
o Quorum:
 Must be a quorum represented at the meeting.
 A quorum is whoever is represented in person or by proxy at the meeting unless the
articles/regs provide otherwise. Even if just 3 people show with 1 share each.
 Majority of quorum needed to pass a resolution

 Pooled/Block Voting
 Shareholders with little influence can pool votes by doing a voting trust (10 years
enforceable) or voting agreement
REGULAR VS CUMULATIVE VOTING

 I have 1000 shares and 9 directorships are open. I want A to be a director.
Regular: I can vote all 1000 for A, in each of 9 separate elections in which the top voter wins.
Cumulative: I can multiple my 1000 by the 9 spots open= 9000 to vote in 1 election in which top 9 vote
getters win.
 Cum voting is presumed unless Articles say otherwise.
o Any Shareholder has right to examine books and records of the corp upon written demand, stating
proper purpose
Dividends and Distributions

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Corporations Outline

A. Pre-Incorporation Contracts- Promoters and Subscribers

Promoters: persons acting on behalf of a corporation not yet formed.

B. Formation Requirements- De Jure Corporate Status

The Articles of Incorporation: A.P.A.I.N. (what the Articles need to state)

Legal Significance of Formation of Corporation

Foreign Corps (Outside of OH)

II. Issuance of Stock- When a Corp Sells its own stock

III. Directors and Officers

Liability of Directors to their Own Corporation and Shareholders

Shareholder Derivative Suits

 Majority of quorum needed to pass a resolution

REGULAR VS CUMULATIVE VOTING

Dividends and Distributions

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