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Business Associations/Corporations
South Texas College of Law Houston
Ricks, Val D.

Ricks Summer 2013
Chapter 1 Formation of Corporations
A.            Statutes and questions: see note cards
1.      Codes – we use TX because we are in TX but its about learning how to address the issues
                              i.      Delaware code – over half of public corporations are formed in Delaware
                            ii.      Most local business are formed under their local codes
                          iii.      Texas Code: patterned after the revised model business code
2.      What is a corporation – Legal fiction we use for arguments, conclusions, etc
                              i.      No real existence, but the law acts as if they do
                            ii.      Just as in creation of K, we do the same with corporations
                          iii.      Unicorn – its not real, remember this or you will be disadvantaged
                          iv.      If you could string away everything, what is really at issue is a dispute between two people over money (or some other resource)
3.      Board and officers are agents of “somebody” – maybe investors
                              i.      The relationship these people have are described in terms of an entity and their relationship to the entity
4.      Nomenclature (board, directors, etc) is a way to identify and legally categorize
5.      Classification scheme is what we want to focus on
B.            The Corporate Form
1.      Basic Characteristics of the Corporate Form offset the weakness of a partnership (which requires not filing to be formed)
                              i.      Legal personality
                            ii.      Limited liability for investors
                          iii.      Free transferability of share interests
                          iv.      Appointment by equity investors
2.     Partnerships
                              i.      Partners are each labile for the business liabilities (both n K and Tort)
                            ii.      Lasts only as long as the partners are co-owners of the business
a.       Agencies end at will
                          iii.      Partners have the legal right to withdraw their capital at any time; each can quit. If a partner quits, the partner may cease to exist
                          iv.      Partners, as owners, each have a right to manage
3.     Basic Corporate Structure
                              i.      SH – Board of Directors – CEO
4.      Citizens United v. Federal Election
                              i.      Kennedy – The government may regulate corporate political speech through disclaimer and disclosure requirements, as long as it does not suppress that speech altogether. Prior decisions in Austin and portions of McConnel, in which it was held that political speech may be banned based on the speakers corporate identity are overruled.
a.       Ricks agrees more with Scalia who says its not about the speaker it’s the speech
i.         Foreign corporations – noncitizen not having rights under the 5th amendment
ii.       Rational that Ricks thinks that is irrefutable: a corporation is not a member of society
5.      In re Estate of Hausman
                              i.      Divided estate between 4 children; one child appointed executor and was to create an LLC, then transfer rental property to the LLC
a.       Cleaners and some other businesses, apartments, etc., on other floors and taking rent
                            ii.      No entity had officially been formed
                          iii.      De facto entity – as a matter of fact not by function of law (de jure)
a.       So why do we have De facto Formation?
i.         Exists a law under which to organize the corp.
ii.       Attempt to organize corp
iii.     Existence of corp powers thereafter
b.      Applicable to LLCs
c.       Need a ceremony of some sort that signals formation – this is a state official stamping something “filed”
d.      Code 3.001(d) creates a de facto entity (the formation section is in C)
                          iv.      See hypo #2 on page 11 – Was Louise acting in good faith? Yes because she was told by the company’s lawyer that the company had been formed.
a.       This would be an application of the “good faith de facto formation”
6.     “Formation by Estoppel”
                              i.      “Equitable Estoppel”
a.       A person makes a statement to another and the statement must be that a corporation has formed
b.      The other relies on that statement
c.       Reasonable
d.      To the other’s detriment
                            ii.      The effect is that the statement cannot be denied in court. So its  a formation in fact ( de facto) in court
                          iii.      Hypo #1 on page 11 – Bobs argument would not work because he has conveyed that EyeGlass Inc has formed when he “sold the shares” and signed an agreement. His action amounts to a statement that a corporation has formed and it was relied upon reasonably when they paid Bob.
Chapter 2 Governing Documents
A.            Statutes and Questions
B.            Certificate Formation (or “cert” or “charter” or “articles of Incorporation”)
1.      Takes effect on filing
2.      Must NOT contain: any provision contrary to law
3.      May Contain: customized feature of corp; any special purpose; any governance oddity
                                             i.      Google example: “Don’t do evil”
                                           ii.      May also establish size of the board and include other governance terms
a.       Ex: whether directors shall have concurrent 1 yr terms or staggered 3 year terms
C.            Certificate MUST contain:
1.      Name
2.      Type of filing entity
3.      Signature by someone who can act on behalf of entity
4.      Purpose: broad as possible – ex: “To engage in lawful business”
5.      Duration: IF not indefinite
6.      Registered agent’s name and street address à so that anyone can make service of process
7.      Name and address of each
                                             i.      Organizer for the filing entity, unless the entity is formed under a plan of conversion or merger;
a.       Organizer: Any person having capacity to contract for the person or for another may be an organizer of the filing entity
                                           ii.      General Partner, if the filing entity is a limited partnership
8.     Capitalization: For-profit corporations must state
                                             i.      Initial Board: IF the corporation is to be managed by a board of directors
a.       Name and address on initial board
b.      Name and address of each person who will serve as an initial director
c.       NOTE: initial BoD serves until first annual SH meeting or until a successor us elected
                                           ii.      Shareholders agreement: IF the corporation is to be managed pursuant to a SH’s agreement in a manner other than a board of Directors
a.       Name and address of each person who will perform the functions
                                         iii.      Number of shares: The corporation is authorized to issue à Even if the corporation does not plan to actually issue that many
                                         iv.      IF corporation issues one class of shares only
a.       The par value of each share OR
b.      A statement that each share us without par value
                                           v.      If Corp. Issues more than One Class: with respect to each class:
a.       Designation of the class;
b.      Aggregate number of shares in the class
c.       Par value of each share or statement that each share is without par value,
d.      Preferences, limitations and relative rights of the shares; and
e.       If the share in a class consist of more than one series, the following with respect to each series
i.         The designation of the series
ii.       The aggregate number of shares on the series
iii.     Any preferences, limitations, and relative rights of the shares to the extent provided in the certificate of formation and
iv.     Any authority vested in the board of directors to establish the series and set and determine the preferences, limitations and relative rights of the series
                                         vi.      Preemptive Right – SHs of corp do not have unless it is in the certificate of formation
a.       To acquire proportional unissued treasury shares when corp issues the treasury shares
                                       vii.      Cumulative Voting Rights: SHs of corp do not have unless it is in the certificate of  formation
a.       When electing directors, cumulate SH votes by giving one candidate as many votes as the total of the number of director seats open
D.            Amendments to the Certificate
1.      Limits to Amending: Provision cannot be added/eliminated from certificate of formation if that addition/deletion would not have been allowed for a new certificate of formation being filed
2.      Voting rights: Any class of SHs who would be adversely affected by amendment must approve it by the majority vote
                                             i.      Ex: a particular amendment would eliminate the accrued dividends owed to preferred stockholders à which would help the common SHs at the preferred SHs expense
E.            Signed: must be signed by officer
F.            Effect: an amendment to a CoF take effect when the filing of the certificate amendment takes effect
G.            Fees: For Profit à $150; Non-Profit à $125
H.            Voting and Approval of Amendment
1.      A “fundamental action”
2.      The board of directors MAY amend WITHOUT SH approval
                                             i.      If a corp does not have any issued and outstanding shares; OR
                                           ii.      If expressly authorized by the COF
                                         iii.      In all other instances, SH approval is required
3.      Requires: An affirmative vote of the holders of at least 2/3 of the outstanding shares entitle to vote on the fundamental action
4.      Class and Series: If a class/series if shares is entitled to vote as a class/series
                                             i.      Requires affirmative vote of holders of at least 2/3 of the outstanding shares in each class/series
                                           ii.      And at least 2/3 of the outstanding shares otherwise entitled to vote on the action
                                         iii.      But, shares entitled to vote as a class/series shall be entitled to vote only as a class/series
a.       UNLESS otherwise entitled to vote on each matter submitted to the SH generally or otherwise p

  Become “beneficial/equitable owners” of the shares
c.       Receive a voting trust certificate representing their equitable interest
d.      Receive dividends/proceeds of any sale of corporate assets
                                         iii.      Effect: SHs no longer have voting power à votes are cast by the trustees in accordance with the instructions in the voting agreement
                                         iv.      Written Agreement: MUST be in writing
a.       A copy deposited with the corp. at the principal executive office or registered office
                                           v.      Subject to Examination by:
a.       Owner: in the same manner as the owner is entitled to examine the books and records of the domestic entity
b.      Holder of a beneficial interest in the voting trust: At any reasonable time for any proper purpose
c.       Important so that SH can exercise the right to persuade other SHs in voting
i.         Which is a derivative right, derived from the list of shareholders and right to examine the voting trust document
2.     Voting Agreement
                                             i.      WHO: SHs agree to vote together as a unit on certain or all matters
                                           ii.      WHAT: can specify exactly how the votes will be casts OR merely commit parties to vote together without specifying which way the votes is to go
                                         iii.      IN WRITING: required, also that a copy deposited at the principal executive office or registered office
a.       But is not part of the governing documents of the domestic entity
                                         iv.      SUBJECT TO EXAMINATION by: Owner whether in person or by the owner’s agent attorney
                                           v.      ENFORCEMENT: not self-enforcing so problems emerge
a.       Specifically enforceable against holder and any successor/transferee of holder’s interest OF
i.         Noted on certificate or notice sent to SH representing the ownership interest; OR
ii.       NOTE: of there is no notation and no statute enforcing the agreement, would probably fall into K law
b.      A transferee for value who did not have actual knowledge of the agreement at time of transfer
i.         Not enforceable
                                         vi.      Ringling Brothers
a.       ** Know that the majority of votes elects the director à default rule is one vote per share
b.      Agreement – 2 (1&2)parties are SH. Signed voting agreement in which they agree to consult and confer and vote shares together on any issue put to a SH vote. They agreed if they cant agree then their lawyer will act as arbitrator
c.       The parties did disagree, went to arbitrator (A), 2 refused to vote with A. Chairman rules A can cast 2’s vote. Suit is brought
d.      A’s role is limited by the agreement. Parties sought to bind each other not empower A
e.       Agreement also did not create power to vote each others shares
f.        This is an agreement (not a voting trust) – the ownership of voting stock imposes no legal duty to vote at all.
g.       Ct. Held agreement was enforceable even though did not include all SH
h.      Result was election was valid, but 2’s vote doesn’t count
3.     Shareholder Agreement
                                             i.      Contained in:
a.       Certificate of Formation or Bylaws if approved by all of the SHs at the time of the agreement; or
b.      A written agreement that is
i.         Signed by all of the shareholders at the time of the agreement and
ii.       Made known to the corporation
                                           ii.      Amending: Only by all of the SHs at the time of amendment, unless the agreement provides otherwise
                                         iii.      Validity: SHs agreement under this subchapter is valid for 10 years, unless the agreement provides otherwise
                                         iv.      Agreement itself: can do a lot, many opportunities for SH to have more control
a.       Restrict or eliminate the power of the BOD
b.      Govern the exercise of corporate powers, the management of the business and affairs of the corporation, or the relationship among the SH, the directors and the corporation as if the corporation were a partnership