Formation
Mandatory Requirements in the Articles of Incorporation
1. Name and address of Corp
2. Name and address of Incorporators
3. Address and name of Registered Agent
4. Number of Authorized Shares
Bylaws
The bylaws contain rules for internal governance. They can contain any provision for managing the business and regulating the affairs of the corporation that are not inconsistent with the law or AOI.
Issuance, Issued Shares, & Outstanding Shares
Issuance: When the corporation sells its own shares.
Issued Shares: Shares that the corporation actually sells.
Outstanding Shares: Issued shares that the corporation has not reacquired - they remain in the hands of Shareholders
Statutory Requirements for Directors
1. One or more directors, fixed by the AOI or bylaws. A natural person, 18 years or older.
2. Shareholders elect directors at the annual meeting.
3. Can be removed at any time with or without cause. If elected by a class of stock, only that class can remove. Majority vote to remove is sufficient unless the AOI or bylaws say otherwise.
Corporate Officers - Defined, Required Number of Officers, & Agency Rules
Corporate officers are agents with fiduciary duties, rights, and liabilities similar to those of directors.
They have actual and apparent authority to bind the corporation.
Number: There is no required number but must have the officers described in bylaws or appointed be board. One person can hold two or more officers.
Who can vote?
Record owner on the record date - The record date can not be more than 70 days before the meeting. If not record date, it is close of business the day before the first notice of meeting is given to shareholders. The person who owned the shares on the record date has voting rights. Exception: Death + Proxies
Stock Transfer Restriction
Restrictions on the transfer of stock are common in close corporations. They are enforced if reasonable and cannot operate as a restraint on alienation.
Certificates must summarize on their face any restrictions pertaining to their transfer or state that the corporation will furnish a full statement thereof.
Appraisal Rights -- Dissenting Shareholders
SHs dissatisfied with terms of fundamental change can compel corporation to buy their shares at fair value after statutory procedure. Generally, the exclusive remedy for completed corporate action.
Winding Up & Filing
When the corporation is dissolved, the corporation converts assets to cash, pays creditors and distributes pro rata shares.
Corporation files an Articles of Dissolution with the Department of State.
After Dissolution: Claims may be entered to the extent of undistributed assets. if assets have been distributed in liquidation, a claim can be entered against a shareholder to the extent of the shareholder's pro rata share of the claim or the corporate assets distributed to the shareholder in liquidation, whichever is less.
Incorporator: One or more natural person or entity. There are no age, residency, or citizenship requirements.
Incorporators submit the Articles of Incorporation to the Department of State. The corporation begins to exist with the articles are filed.
Adopting & Amending Bylaws, & Conflicts with the AOI
Adopting: The incorporators or the directors may adopt the initial bylaws, unless the AOI reserves the power to the shareholders.
Amending: Directors or shareholders may amend the bylaws, unless the power is reserved to the shareholders in the articles or by the shareholders themselves in amending a particular bylaw.
Conflict: If the bylaws conflict with the AOI, the AOI controls.
Common v. Preferred Stock
Common Stock - There must be at least one class of common stock (voting or non-voting), representing the residual ownership and claim to assets on liquidation.
Preferred Stock - There may be several different kinds, but the nature and terms of preference must be (1) in the AOI, and (2) set forth on or summarized on the stock certificates. (voting or non-voting). Generally are paid first.
Vacancies in Board of Directors
Filled by remaining directors or shareholders unless the AOI says otherwise, until the next annual election. An increase in the number of directors is deemed to create vacancies for this purpose.
Officer Selection & Removal
Removal: Board has removal power even if it breaches the officer's contract with the corporation (officer can sue for breach).
Proxy Voting
can authorize another person to act on their behalf by sending the secretary of the corporation a signed written authorization. It is valid for the term stated, and if not stated, for 11 months. They are revocable, but can become irrevocably elf the proxy holder has an interest in the shares.
Shareholders Right to Inspect Records
Any shareholder can inspect books and records. There are no minimum stake or holding period requirements.
They can inspect - meeting minutes of board, records of action taken without meeting, financial and accounting statements, record of shareholders, other books and records.
1. Demand in good faith for proper purpose
2. Describe the purpose and records desired
3. Direct connection between records and purpose
4. Demand made five days before date to inspect
Shareholder Appraisal Rights
Following shareholders have appraisal rights:
1. Merger or conversion, or SH of subsidiary in short form merger
2. Acquired in a share exchange
3. SH entitled to vote on disposition of all or substantially all the corporation's property outside the usual and regular course of business is entitled to dissent.
4. SH who's voting or distribution rights will be adversely affected.
Resolution of Unknown Claims
To limit liability for unknown claims:
1. file notice of dissolution and request that those with claims present themselves
2. Public notice of corporate dissolution within 10 days after adopting Articles of Dissolution once a week for two consecutive weeks.
3. Claim will be barred unless a proceeding is commenced within four years.
If assets already distributed, claimants can only recover what they got in liquidation.
2. Par Value of stock
3. Imposition of personal liability of shareholders on specified conditions
4. Initial purposes - any lawful business purpose is sufficient
5. Any other provisions not inconsistent with law regarding management, or defining powers
Pre-Incorporation Contracts: Corporation & Promoter Liability
An agreement in contract (SOF) under which the the subscriber agrees to purchase a certain number of shares of stock at a specified price.
Executed before incorporation: Irrevocable for six months unless the agreement provides otherwise, or all subscribers consent to revocation.
Executed after incorporation: Revocable until accepted by the Board. Once accepted, the corporation can sell to someone else or sue the subscriber if payment is not made within 20 days of a demand.
Board of Director Meetings, Notice, Quorum & Voting
Required to meet and act unless all (unanimous) directors submit their consent to act in writing. Regular and special meetings may be held.
Notice - Only required for special meetings and given two days in advance. Purpose need not be specified. Regular meetings do not require notice.
Quorum - A majority of all directors on the board, unless the bylaws or AOI say otherwise - Never less than majority. Quorum must be present at the time of the vote.
Voting - A majority vote is required unless AOI or bylaws say otherwise. If no meeting, vote can be done by unanimous consent of directors in writing. Proxy voting is acceptable.
Prohibited, Mandatory, and Permissive Indemnification
Prohibited: Against liability incurred if the director or officer was held liable to the corporation, received an improper benefit or violated criminal law.
Mandatory: Director or officer who is wholly successful in a suit against the corporation on the merits, or otherwise, must indemnify.
Permissive: Covers every expense incurred by an officer or director that is not in the mandatory or prohibited categories, including settlements. Requires showing the director acted in good faith in the corporations best interest. determined by disinterested shareholders, directors, committee or legal counsel.
Voting Trust & Agreement
Trust: Irrevocable conferring of right to vote shares to a trustee by shareholders. A written document and transfer of legal title to the trustee is required and must be deposited with the corporation and subject to inspection by shareholders. Transferee is bound by the agreement.
Agreement: Shareholders agree to vote their shares in a certain way. In writing and signed. Specific performance is an available remedy.
Distributions
Subject to special test to protect creditors
1. Insolvency - If corporation can pay its debts as they become due after the distribution.
2. Bankruptcy - Limited to the amount by which total assets exceed the sum of total liability and the dissolution preference of preferred shares.
Preserving Appraisal Rights
1. Notice of meeting stating whether shareholders can assert appraisal rights.
2. SH notice of intent to demand payment and not vote in favor - before vote is taken and then cannot vote in favor at the meeting.
3. Corporation gives dissenters notice in 10 days of vote of holders who filed intent to demand
4. SH sends demand for payment
5. Corporation pays estimate fair value in 90 days.
If disputed, an action must be filed in court within 60 days after receiving the SH demand, requesting court to determine value.
Non Profit Corporation
One that does not distribute income to its members, directors, or officers. It may pay reasonable salaries, rent, and so on. Governing provisions are similar to for profit corporations.
Purpose: Any lawful purpose other than pecuniary gain -it must be formed for the public benefit. The purpose must be set forth in the AOI
De Jure Corporation v. De Facto Corporation v. Corporation by Estoppel
De Jure: Legal requirements are met (filing), and filing is conclusive proof of a duly formed corporation. A duly formed corporation is a de jure corporation. De Facto
De Facto: Failure to meet legal requirements but the courts will treat as having been formed in order to prevent injustice. If someone is acting or purporting to act on behalf of a corporation that they know was not incorporated, they are personally and severally liable for all liabilities creating in doing so.
Estoppel: When one deals with a defectively formed corporation as if it were legal, they may later be estopped from arguing that later arguing that the business is not a corporation. The person is estopped from avoiding obligations or contracts with the corporation. (Contract Claims)
Promoter Duties
Promoter has a fiduciary duty to act in good faith and in teh best interest of all investors. A promoter who profits from a sale to the corporation may be liable for the profits or forced to rescind unless there was disclosure and approval by the directors or shareholders.
Any tangible or intangible property or benefit to the corporation, which can include services in the past, or promises to perform services in the future under a written contract.
Role of Directors - Management, Delegation
Management: Powers necessary to manage, elect and remove officers, declare dividends.
Fundamental changes can be initiated but require shareholder approval.
Delegation: Directors can delegate powers to committees, but committees can not amend bylaws, fill vacancies, or authorize reacquisition of shares.
Derivative Suit Dismissal
The court may dismiss on corporation's (defendant) motion if it finds that one of the following groups has made a good faith determination after investigation that the suit is not in the best interest of the corporation: (1) majority of qualified directors with quorum, (2) majority of committee consisting of tow or more qualified directors, or (3) panel of one or more disinterested and independent individual persons appointed by court.
Plaintiff can be required to reimburse defendants fore expenses if it was commenced without reasonable cause.
Dismissal and settlement can only occur with court approval.
Shareholder Vote Procedures (With and Without Meeting)
Annual meeting: Held for election of directors and other business. If not held in a 15 month period, any shareholder can apply to the court for an order requiring one.
Special meeting: Called at any time for any purpose by the BOD, holders of at least 1/10 interest in outstanding voting shares, or authorized by the AOI and bylaws.
Notice: 10 days notice for shareholder meetings with the location and time, and the purpose for the meeting.
Dividends
The most common type of distributions. They include repurchase and redemption.
They are discretionary - the shareholders can not compel distribution. Directors have discretion as to when a distribution will be made.
Amendment of Articles
Can amend at any time. Amendment first filed and adopted by board. Then recommended to the SHs.
Unless AOI or bylaws say otherwise, amendment is approved by (1) majority of total shares entitled to vote not just those present at the meeting for quorum, (2) and if proposed amendment would adversely affect a particular class of shareholders, an absolute majority of that class.
Non-Profit Bylaws and Members
Bylaws adopted by the board and the power to amend is vested in the board unless otherwise provided in the AOI or bylaws.
Members: Need not have members. No voting rights or other rights except those provided in the AOI or bylaws. No personal liability. No payment of the income.
Annual Reports
Requirement for corporations to file annual reports with the department of state. Includes:
1. Corporation's name
2. Date of Incorporation
3. Address of Principal Office
4. Federal EIN
Foreign Corporations Conducting Business in Florida
A foreign corporation is one organized under the laws of any jurisdiction other than the state of Florida. A foreign corporation transacting business in Florida must qualify by filing for a certificate of authority with the Department of State. They must maintain an office in the state and appoint a registered agent, and file annual reports.
Foreign corporations transacting business in Florida without a certificate of authority are not permitted to sue in Florida courts, though they may be sued and defend.
Stock Amount - Par Value, and Watered Stock
Florida eliminated mandatory par value but a corporation may elect to have par value - which is its minimum issuance price, not the fair market value. Par value only applies to the first issuance of stock - not subsequent resale.
If paid with property, the amount and adequacy of consideration is determined the board. Judgment of the directors is conclusive. They need not assign a dollar value - just determine that it is adequate.
Watered Stock: When someone pays less than par value for stock.
Power to Bind
Shareholder Derivative Suits & Standing
A suit by shareholders to enforce a corporation's cause of actions when the BOD has not sought to enforce those rights. Shareholders themselves sue the corporation and recovery goes to the corporation.
Owned shares at the time that the claim arose or acquired it from someone who did, and is a shareholder at the time suit is commenced.
Demand must be made to the directors unless futile,
Shareholder Quorum & Required Votes for Action
A quorum of majority outstanding shares entitled to vote must be present. Quorum is determined at the start of the meeting, not when the vote is taken. Quorum can be changed in the AOI but it can't ever be less than 1/3 of entitled voting shares.
A majority of votes cast is required to act.
Which shareholders get dividends
1. Preferred: Paid their stated preference before dividends can be paid to other shareholders. They do not share distribution beyond preference unless participating.
2. Participating: Paid their preference and then share in the other distributions as well.
3. Cumulative: Preferred shareholders have no right to a dividend in any particular year, and preference is lost for that year unless the preferred share states it is cumulative in which case the preference carries forward to the next year.
Merger & Short Form Merger
One corporation remains in being and absorbs another. One corporation acquires all outstanding share of one or more classes or series of another corporation. Any legally recognized business entity can merge into another business. The surviving company succeeds to all rights and liabilities of both corporations.
BOD of both corporations develop plan, and both boards approve by an absolute majority of the shares of both corporations. Approval is effective when articles of merger or share exchanges are filed with the Department of State.
Short Form: Involves merging of an 80% or more owned subsidiary into a parent or another subsidiary owned by the parent. Do not require board or shareholder approval of the subsidiary.
Non-Profit Directors
Needs at least three directors with the number specified or set forth in the AOI or bylaws. Members can remove directors.
Can dissolve by majority vote, and members if entitled to vote.
De Jure Corporation v. De Facto Corporation v. Corporation by Estoppel
De Jure: Legal requirements are met (filing), and filing is conclusive proof of a duly formed corporation. A duly formed corporation is a de jure corporation. De Facto
De Facto: Failure to meet legal requirements but the courts will treat as having been formed in order to prevent injustice. If someone is acting or purporting to act on behalf of a corporation that they know was not incorporated, they are personally and severally liable for all liabilities creating in doing so.
Estoppel: When one deals with a defectively formed corporation as if it were legal, they may later be estopped from arguing that later arguing that the business is not a corporation. The person is estopped from avoiding obligations or contracts with the corporation. (Contract Claims)
Corporate Powers and Liability - Default Rules
- Perpetual duration
- Can sue, be sued, enter contracts, hold property, etc.
- Act to achieve any lawful purpose
Treasury Shares
Shares of stock reacquired by the corporation. They may be cancelled or resold for any value, and par value rules do not apply.
Fiduciary Duties
Duty of Care and Loyalty
Business Judgment Rule - Courts will not question business judgment of the directors, so long as those directors took sufficient steps to be informed about the decisions being made.
Care: Breach with misfeasance or nonfeasance.
Loyalty: Breach with interested transactions, competing opportunities, and usurping corporation opportunities. *Safe Harbor for full disclosure to the corporation and approved by a majority of disinterested directors or shareholders.
Piercing Corporate Veil
Shareholders have limited liability personally unless the court disregards corporate structure and pierces the view. This can occur where the corporation appear sot be an alter ego for the shareholders personal affairs, gross undercapitalization for business, and capital contributions that are denominated as loans by shareholders may be subordinated to outside debts.
Subsidiary Corps: A parent can be liable for the subsidiary where inadequately capitalized, intermingled with the parent, or otherwise not a truly distinct entity.
Can be straight or cumulative voting.
A plurality is required unless the AOI call for cumulative voting.
Directors - Unlawful distribution liability
Directors who willfully or negligently vote to declare dividends are liable to the corporation for amount improperly paid. Directors maintain defense of good reliance.
Sale of Substantially All Assets
Sale of all or substantially all assets outside usual course of business - a fundamental corporate change requiring approval of both the board of directors and majority of the selling corporation's shares.
Shareholders of the selling corporation have appraisal rights.
Social Purpose Corporation & Benefit Corporation
These are hybrid entities designed to benefit society and generate profit for the owners. Their profit making ability distinguishes these entities from not for profit corporations.
Special Purpose: A specific social purpose designated in advance.
Benefit Purpose: Must pursue a general public benefit, but may pursue a specific public benefit.
Failure to File Annual Report
A corporation in non-compliance may not bring an action in Florida until the report has been filed and the penalties paid. The corporation may still defend itself in suits brought against the corporation.
Ultra Vires Acts
aka beyond the corporations purposes or powers.
Where a corporation has a narrow purpose and acts outside of that purpose. They are valid, but (1) shareholders can seek injunction, and (2) officers and directors are personally liable in a direct or derivative action by the corporation for any ultra vires acts they cause.
Pre-Emptive Rights
Entitlement to purchase shares of new stock being issued to maintain current ownership percentage in the corporation when being issued for money.
There are no preemptive rights unless the right is granted by the Articles of Incorporation.
Director who votes or assents to improper distribution is liable to the corporation for the amount of the distribution in excess of the legally available amount. It is a defense for good faith reliance on financial statements or accountants.
Shareholders & Management
Shareholders normally have no power to control day to day operations but may be given management powers in the Articles of Incorporation. They exercise indirect management by electing directors, amending articles or bylaws, or approving fundamental corporate changes.
Cumulative Voting v. Straight Voting for Election of Directors
Each shareholder gets a number of votes equal to the number of his voting shares, multiple by the number of directors to be elected, and cast all votes for any one candidate or divide them amongst any combination of candidates.
Straight Voting: A shareholder may vote the number of shares he owns for each of as many directors are there are to be elected, but you can not add votes together amongst the directors.
Shareholder - unlawful distribution liability
Shareholders are liable to the corporation and corporation's creditors for the amount of dividends received whether or to they knew the corporation was insolvent.
Legal termination of the corporate entity. Liquidation is the process of marshaling a corporation's assets, paying all its debts, and distributing the residual property or proceeds, if any, to the shareholders.
Voluntary: (1) Absolute majority of shares and board approval, or (2) written consent of absolute majority of shares. Articles are files when the liquidation is complete.
Involuntary: Shareholder can petition if (1) deadlock of directors such that business can't be conducted and threat of irreparable injury, (2) SH deadlock in voting and unable to elect board, (3) waste or misappropriation of assets, (4) directors or those involved in the control of the corporation are acting, will act or have acted illegally or fraudulently.
Creditor Petition: If corporation is insolvent and has judgment, or corporation admits debt in writing.
Administrative: State dissolution for fraud, illegality, abuse of corporate power, failure to file an annual report, or appoint a registered agent.
Social Purpose and Benefit Corporations - Formations
AOI: Must include a statement that the corporation is a benefit corporation or a social purpose corporation.
Min Status Vote: Decision to cease being a social purpose or benefit corporation must be approved by 2/3 of each class of shares, as a separate group, even if a class does not ordinarily have voting rights.
Annual Benefit Report: Board or benefit director/officer must prepare comprehensive, transparent, report assessing societal environmental performance.
Conduct: Directors are not liable for money damages to the corporation for failure to create pursue a public benefit.