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Corporations, Liquidation Order, Liability (Quick Reference) - Coggle…

- - - - A limited liability company (LLC) enjoys the pass-through tax advantage of a partnership but also the limited liability of a corporation. An LLC also provides flexibility in managing the entity.
        
        Limited Liability
        
        the LLC legally exists as a separate entity from its owners. Therefore, owners cannot typically be held personally responsible for the business debts and liabilities.
        
        Pass through tax (flow through entity)
        
        The owners avoid double taxation– Income "flows through" the corporation to investors or owners. The income is taxed only at the owner's individual tax rate for ordinary income: The business itself pays no corporate tax.
    - - (1) the Articles of Organization (a.k.a. Certificate of Formation) is properly filed with the Secretary of State
        
        Note that this document is different from articles of incorporation, a document that has a substantially greater power to affect the rules for the corporate entity and its owners.
      - AND (2) the company has at least one member.
- - - - :forbidden: personal liability for corp's debts
        
        UNLESS the plaintiff can pierce the corporate veil, then the corp's existence is ignored and the shareholders of the corp are held personally liable :warning:
      - Personally liable for any tort they commit
    - - Annual Mtg
        
        Requires notice
        
        (min 10 days/max 60 days)
      - Special Mtg
        
        Requires notice
        
        (min 10 days/max 60 days)
    - - Quorum Requirement
        
        For a decision made at a shareholders’ meeting to be valid, there must be a quorum of the shares eligible to vote present at the meeting. Usually, the required quorum is a majority of votes entitled to be cast on a matter.
      - Majority for approval
        
        The requisite level of shareholder approval is a majority, but approval by a plurality may be permissible, especially if the issue is the election of directors.
      - Voting Agreements
        
        Contracts that ensure shareholders will vote in concert w regard to issues designated by agreement
      - Valid Proxy
        
        A shareholder may vote her shares at a shareholders meeting without physically attending the meeting through the use of a proxy.
        
        A valid proxy must be signed on: (a) an appointment form; OR (b) an electronic transmission.
        
        An oral proxy appointment is invalid.
        
        A proxy MUST be accepted if on its face there are no reasonable grounds to deny its genuineness and authenticity.
        
        Proxy agreements are freely revocable by the shareholder, even if the proxy states that it is irrevocable
        
        One exception to this rule is a proxy coupled with an interest or legal right, which is irrevocable if the proxy expressly states as such.
    - - A shareholder may bring a direct or a derivative action against the corporation in which the shareholder owns stock. How the action is characterized will affect the requirements for bringing suit and to whom any recovery is paid.
        
        Direct Actions
        
        (i) an action to enforce shareholder rights
        
        A shareholder may sue the corporation for breach of a fiduciary duty owed to the shareholder by a director or an officer
        
        (ii) a non-shareholder action
        
        A shareholder may sue the corporation on grounds that do not arise from the shareholder’s status as a shareholder.
        
        Recovery goes to the shareholder
        
        Derivative Actions
        
        This is when a shareholder is suing on behalf of the corporation for a harm suffered by the corporation.
        
        Recovery generally goes to the corp, even if the shareholder also suffered injury
  - - - Manages & directs the corporation
      - Authorizes the officers and other corporate employees to exercise the powers possessed by the corporation
    - - Quorum Requirement
        
        For the board of directors’ acts at a meeting to be valid, a quorum of directors must be present at the meeting.
        
        a quorum = majority
        
        Unlike a shareholder, a director must be present at the time that the vote is taken in order to be counted for quorum purposes. Presence includes appearances made using communications equipment that allows all persons participating in the meeting to hear and speak to one another.
      - Majority for approval
        
        the assent of a majority of the directors present at the time the vote takes place is necessary for board approval.
      - Voting Agreements
        
        unenforceable
    - - Duty of Care
        
        Duty of care & conflicts pf interest
        
        Business Judgement Rule
        
        Conflicts of Interest
        
        A director is not protected by the business judgment rule if he has a personal interest in the outcome of a corporate action.
        
        The action is voidable by the corp UNLESS
        
        2 more items...
        
        A rebuttable presumption that a director reasonably believed that his actions were in the best interests of the corporation. The exercise of managerial powers by a director is generally subject to the business judgment rule.
        
        If this 3-part test is satisfied, then a Director will NOT be liable for corporate decisions that resulted in adverse consequences to the corporation. (Under the common law, the above test was known as the Business Judgment Rule)
        A director must discharge their duties:
        
        1) In good faith
        
        2) in a manner the director reasonably believes to be in the best interests of the corporation
        
        3) with the care that a person in a like position would reasonably believe appropriate under similar circumstances (prudent person)
      - Duty of Loyalty
        
        A Director owes the corporation a fiduciary duty of loyalty, which means that the Director, in his dealings with the corporation, must act in the best interests of the corporation and without personal conflict.
        
        Duty of loyalty prevents a director from:
        
        1) entering into conflicting interest transactions
        
        A conflict of interest occurs when the director/officer or a family member either:
        
        is a party to the transaction
        
        has a beneficial interest in the transaction or is so closely linked to it that the director’s judgment may reasonably be affected
        
        is involved with another entity (director, employee, owner, etc.) that is conducting business with the corporation and that transaction would normally be brought before the Board of Directors because of its importance to the corporation.
        
        A conflicting interest transaction with the corporation is a breach of the duty of loyalty UNLESS the Director shows that:
        
        (a) it was approved by a majority of disinterested Directors after full disclosure of all relevant material
        facts;
        
        (b) it was approved by a majority of disinterested Shareholders after full disclosure of all relevant material facts;
        
        OR (c) the transaction as a whole was fair to the corporation at the time it was entered into.
        
        2) usurping
        a corporate opportunity;
        
        3) competing with the corporation
        
        4) trading on inside information.
    - - Special Mtg: Director is entitled to 2 days’ notice of a special meeting, although the purpose is not required. A
        Regular Mtg: May be held without notice of the date, time, place, or purpose of the meeting.
    - - When a director is involved in a legal action as a consequence of her role as director, she may seek indemnification for expenses incurred as well as for any judgment or award declared against her
  - - - Same as directors
  - - - However, courts may disregard the corporate form and pierce the corporate veil and hold the shareholders personally liable in the following situations:
        
        1) The corporation is being used as a “façade” for a dominant shareholder’s personal dealings (i.e., whether the corporation is an “alter ego” of the shareholder).
        
        The shareholders failed to follow corporate formalities.
        
        The corporation was inadequately capitalized at its inception to cover debts and prospective liabilities.
        
        To prevent fraud.
        
        Passive Investors
        
        Normally, passive investors who do not participate in the business will NOT be held liable, even if the court pierces the veil.
        
        A court is more likely to pierce the corporate veil for tort actions rather than contract disputes. :warning:
- - - - (1) adoption by the Board of Directors
      - (2) notice to each shareholder (whether or not entitled to vote)
      - (3) adoption by the shareholders by a majority vote (unless a greater number is required in the Articles of Incorporation or state law).
      - Exceptions
        
        Directors can make MINOR amendments w/o Board approval and may adopt any amendment to the Articles of Incorporation without shareholder approval if a corporation has not yet issued shares.
  - - - (1) approval by the Board of Directors of both
        corporations;
      - AND (2) shareholder approval of both corporations by a majority of votes entitled to be cast on the plan (unless a greater number is required by state law or the Articles of Incorporation).
        
        Quite a few exceptions
    - - (1) approval by the Board of Directors of both corporations;
      - AND (2) shareholder approval of the acquired corporation by a
        majority vote (unless a greater number is required by state law or the Articles of Incorporation). Shareholder approval is NOT required for the acquiring corporation.
  - - - Requires
        
        (1) adoption by the Board of Directors
        
        (2) notice to each shareholder (whether or not entitled to vote) of a meeting to vote on the proposal – the notice must state the purpose of the meeting;
        
        (3) adoption by the shareholders by a majority vote (unless a greater number is required in the Articles of Incorporation or state law).
        
        Dissenter's Appraisal Rights
        
        A dissenting shareholder is entitled to appraisal rights, and to obtain payment of the fair market value of his shares, for the following fundamental changes when:
        
        Appraisal rights are NOT available to shareholders of publicly traded companies.
        
        Certain conditions here!!
        
        Shareholders who DO NOT consent to a fundamental corporate change may force the corporation to purchase their shares (under certain circumstances)
- - - - Procuring capital
      - Enters into contracts
    - - Promoters are liable to third parties for pre-incorporation agreements even after incorporation, unless:
        
        1) A novation occurs
        
        2) The promoter has no actual knowledge that the corp's charter hasn't been issued yet
        
        3) The contracting party knows that a corp has not yet been formed and agrees to look only to the corp for performance
  - - - To form a corporation, a document, referred to as the “articles of incorporation” or “charter,” must be filed with the state.
        
        Corporate name
        
        Corporate purpose
        
        Ultra Vires Act :!:
        
        When a corporation that has stated a narrow business purpose in its articles of incorporation subsequently engages in activities outside that stated purpose, the corporation has engaged in an ultra vires act
        
        Ultra vires act can be challenged in only the following 3 situations:
        
        A shareholder can file suit to enjoin the corporation’s ultra vires action
        
        The corporation can take action against a director, an officer, or an employee of the corporation who engages in such action; or
        
        The state can initiate a proceeding against the corporation to enjoin its ultra vires action.
        
        When a 3rd party enters into a transaction with the corporation that constitutes an ultra vires act for the corporation, the third party generally cannot assert that the corporation has acted outside those powers in order to escape liability. :warning:
        
        Corporate powers
        
        Corporate duration
        
        Corp has perpetual existence unless articles stipulate otherwise
    - - When all of the statutory requirements for incorporation have been satisfied, a de jure corporation is created.
        
        This means the corporation, rather than persons associated with the corporation (i.e., shareholders, directors, officers, and other employees), is liable for activities undertaken by the corporation.
    - - Lack of good-faith effort to incorporate
        
        When a person conducts business as a corporation without attempting to comply with the statutory incorporation requirements, that person is liable for any obligations incurred in the name of the nonexistent corporation.
      - Good-faith effort to incorporate
        
        When a person makes an unsuccessful but good-faithed effort to comply with the incorporation requirements, that person may be able to escape personal liability under either:
        
        1) De facto corporation
        
        The owner must (1) make a good-faith effort to comply with the incorporation requirements and (2) must operate the business as a corporation without knowing that these requirements have not been met.
        
        If the owner has done so, then the business entity is treated as a de facto corporation, and the owner, as a de facto shareholder, is not personally liable for obligations incurred in the purported corporation’s name.
        
        2) Corporation by estoppel
        
        A person who has dealt with an entity as if it were a corporation is estopped from denying its existence and is thereby prevented from seeking the personal liability of the business owner.
        
        This doctrine is limited to contractual agreements.
        
        The owner must (1) make a good-faith effort to comply with the incorporation requirements and (2) must operate the business as a corporation without knowing that these requirements have not been met.
- - - - Every corporation is required to have common stock. :warning:
        
        Stock that is entitled to vote on matters of corporate governance & stock that represents the basic ownership interest in a corporation (aka carries ownership)
      - Preferred stock
        
        Preferred stock gives no voting rights to shareholders while common stock does. Preferred shareholders have priority over a company's income, meaning they are paid dividends before common shareholders.
      - Stock distributions
        
        The power to authorize a distribution rests with the board of directors.
        
        Only the Board of Directors have the power to issue dividends (an Officer cannot).
      - Authorized Shares
        
        Authorized shares are the maximum number of shares
        a corporation may issue, as set forth in the Articles of Incorporation. A corporation is NOT allowed to issue more shares than authorized.
      - Preemptive Rights
        
        a right of existing shareholders in a corporation to purchase newly issued stock before it is offered to others
        
        NOT automatic– must be explicitly granted in the bylaws