TEXAS A&M UNIVERSITY SCHOOL OF LAW - Amazon S3s3.amazonaws.com/mythm-vids-prod/TX.Newman.Corp… · · 2016-03-12o Certificate of Formation (COF) – brings the corporation into

TEXAS CORPORATIONS PROFESSOR NEAL NEWMAN

TEXAS A&M UNIVERSITY SCHOOL OF LAW

1. Introduction & Formation

2. Shareholders Part 1

3. Shareholders Part 2

4. Piercing the Corporate Veil

5. Board of Directors

6. Director Fiduciary Duties

7. Officers and Other Employees

8. Stocks and Other Corporate Securities

9. Mergers and Other Fundamental Corporate Changes

10. Special Types of Business Entities

11. Texas Franchise Tax

CHAPTER 1: INTRODUCTION & FORMATION

CORPORATIONS – What is it all about?

Directors

Officers Shareholders

CORPORATION

(large publicly held)

(small closely held)

Third Parties

2 | © 2016 Themis Bar Review, LLC | TX Corporations

Corporations - Deals with the rights, duties, and obligations that the parties have with each other, the corporation, and third parties. All corporate matters will deal with some dynamic of the above chart.

A. Formation

1. Pre-Incorporation Transactions:

o Generally: Sometimes persons will act on behalf of a corporation before the corporation is formed. Who is liable then?

_______________________________ – Are liable for pre-incorporation transactions (as there is no corporation yet formed)

____________________________________ - Is _____________ liable for pre-incorporation transactions until the corporation _____________________ the contract

• Corporate adoption:

o Passing a board resolution to adopt the contract; or o Accepting the benefits under the contract

Note 1: The promoter remains ______________________ and _________________________________ liable on the contract along with the corporation until a ______________________________ is executed; an agreement executed by the corporation, the promoter, and the third party agreeing to release the promoter as a party to the contract.

2. Incorporation

How is a corporation formed?

An intangible person

o Certificate of Formation (COF) – brings the corporation into existence

Filed with the Secretary of State

• The COF is prepared by an ___________________________________ (can be any person 18 or older; person need not be a Texas resident).

• Is a contract between the corporation, its shareholders, and the State

CORPORATION

Can sue

Can be sued

Can sell goods

Can perform services

Must pay taxes

TX Corporations | © 2016 Themis Bar Review, LLC | 3

• COF Formalities – The COF must have certain basic information. These are ________________________________________ provisions.

i) Name – The corporation’s name must have any of the following after it – “_____________________________________”, “Incorporated” “Company” or “Limited” – OR an abbreviation of these words ("Corp.", "Inc.", "Co." or "Ltd.").

(a) May not have a name or phrase that indicates corporation is engaged in a business that corporation is not authorized to engage in

Example 1: The “Texas Lotto Corporation”

(b) “Lotto” or “Lottery” prohibited

(c) Cannot imply that corporation is created to benefit war veterans unless approved to do so

(d) Cannot be deceptively similar to other corporations doing business in Texas

Example 2: “Cuzin’s B-B-Que” would be deceptively similar to “Cousins’ Barbeque” and would therefore be prohibited.

(e) Corporate names can be reserved for _____________ days or until the application is withdrawn.

ii) Purpose – Certificate must state a purpose. A broad statement will suffice.

Example 3: “The purpose for which this corporation is formed is for the transaction of any and all lawful business for which a for-profit corporation may be organized under the Texas Business Organizations Code.”

Note 2: The TBOC provides that a for-profit corporation may not engage in a combination of the following activities:

The business of raising ___________________________________________

The business of operating ________________________________________

The business of slaughtering, canning, or packing meat

iii) Authorized shares – The Certificate of Formation _____________ set forth:

(a) The number of shares the corporation is __________________________________ to issue.

(b) The shares’ ______________ value – (the minimum price for which shares can be issued)

(c) If the shares do not have a par value, the certificate must so state.

iv) If the corporation is to have more than one class of stock, the Certificate of Formation must set forth:


(a) Each class and series designation – (i.e., Series A preferred – Series B preferred)

(b) The aggregate number of authorized shares for each class

(c) The par value for each class or series

(d) The rights, preferences, and privileges for each class of stock

v) Duration – By default, the corporation’s existence is ______________________________. If corporation wants to form for a specific period of time, that time must be stated in the Certificate of Formation.

vi) Name and address of corporate agent – Must be specified in the ______________ (this is the person or place to whom service of process is sent)

vii) The organizers name and address – The COF must have the organizer’s name so that the secretary has a contact person in the event there is some type of defect in the COF.

viii) Directors – The COF must set out the number of directors constituting the initial board of directors along with their names and addresses.

ix) Corporate existence – Corporation comes into existence once the Secretary of State _________________________ the COF. The approved COF is then issued to the corporation. The corporation comes into existence at this point.

x) Board organizational meeting – Initial board required to call an organizational meeting for initial corporate housekeeping matters

(a) Adopt bylaws;

(b) Elect officers; and

(c) Transact the company business.

xi) Other Provisions – Texas law allows a corporation to prepare “Supplemental Provisions” or “Supplemental Information” – Optional provisions that can be added to customize their corporate governance structure.

o Ultra vires actions – Latin meaning “beyond the scope” – Corporations can state an express purpose for which the corporation is formed. If a corporation engages in activities beyond this scope they are deemed to be _____________________________ acts.

o Generally: Corporate actions that are ultra vires cannot be invalidated. BUT challenges to ultra vires acts can occur in the following situations:

A pending contract has not commenced or been executed yet. –A shareholder can file suit to enjoin the corporation from executing the ultra vires action. The court will grant the injunction only if all parties are present and granting the injunction would be


equitable. The court will grant damage awards caused by the injunction, but ___________ for loss of anticipated profits

Example 4: Newton Inc.’s Certificate of Formation indicates that its purpose is to sale running shoes and running apparel only. The corporation considers branching out into selling road bikes as well and signs a contract with a local road bike manufacturer. The selling of the road bikes is an ultra vires act (beyond the corporation’s scope of stated purpose). What result?

A shareholder can sue to seek an injunction of the ultra vires activity.

Responsible managers can be held liable to corporation for any losses from ultra vires activities.

The road bike manufacturer would likely be entitled to costs such as any road bikes that were built for Newton but never sold.

But the bike manufacturer could not sue for the profit it would have made on the contract (anticipated profits).

Corporation can file an action against a director, officer, or employee who engages in ultra vires action.

3. Issues Relating to Deficiencies in the Formation Process

Exam Tip 1: Because it is not clear whether Texas follows these doctrines, when discussing them, start with “assuming the doctrine has not been abolished”, and discuss the descriptions, below.

o De jure corporation – COF accepted by the secretary of state creates a

________________________ corporation: Now the corporation (instead of the promoter) can incur liability.

o De facto corporation – Context for “de facto” and “estoppel” doctrines: A corporation, for whatever reason, fails to complete the statutory protocols to receive the legal designation of a corporation. But, the agents for the unformed entity incur liability on what they think is the corporation’s behalf. Who is liable to whom for what in these situations? You make the “_______________________________ Corporation” argument.

To successfully assert that a de facto corporation existed, defendant must prove the following:

• There is _______________________________________________ for the formation of the corporation;

• There was a ___________________________________________ attempt to comply with that law; and

• The owners and directors were ___________________________________ under the corporate name


Example 5: Joe Organizer prepares a proper Certificate of Formation to form Newton, Inc. Organizer gives the Certificate to his lawyer to file. Unbeknownst to Organizer, the lawyer fails to file the certificate and the owners commence operation unaware of this failure.

Are the shareholders personally liable due to the corporation not yet being formed?

Answer: Yes - Unless the court applies the de facto Corporation doctrine

Applying the Elements

Texas has a corporate formation statute – (the TBOC).

The organizers made a ______________________________________ effort to comply by giving the certificate to their attorney to file and acting under the understanding and belief that he did in fact file.

The shareholders commenced operation under what they thought was Newton, Inc.

o Corporation by estoppel – When third party has dealt with corporation believing it to be a corporation, the third party is ______________________________ from later claiming that the corporation did not exist (usually limited to contract cases, not tort cases).

Example 6: Quick Buck Realty has been leasing office space to what it believed to be the Newton Corporation. The lease is in year 5 of a 10 year lease. Newton Corporation just learned recently that its Certificate of Formation had never been filed by the attorney delegated this task. Quick Buck, upon learning this information, wants to void the lease because Quick Buck has a potential tenant willing to pay more for the office space.

Here: Quick Buck would mostly likely be estopped from voiding the lease because Quick Buck has dealt with Newton as if it were a corporation for the past 5 years.


4. Governance – (The documents by which the corporation is governed)

Instruments

Certificate of Formation – (filed with secretary of state)

• Corporate Name • Authorized Shares • Shareholder rights, preferences & Privilege

Contract between state, shareholders, and corporation

The Bylaws –

• Internal Operating Document

• Officer Duties and Positions

• Meeting Procedures

• Where meetings held and when

If terms contradict, the Certificate of Formation prevails


Persons

Note 3: Actual roles and responsibilities s of the three factions (shareholders, officers, and directors) is context driven.

Roles vary between large publicly held corporations and small closely held corporations.

B. Key Things to Remember

• How corporation is formed • Mandatory provisions in COF • Liability for pre-incorporation transactions • The doctrines when there is a defective incorporation • Relationship between the bylaws and the COF • The relationship between shareholders, directors

Shareholders

• Elect Directors

• Vote on Fundamental Corporate Changes –[BIG THINGS]

• Vote to amend COF

Directors – Oversight – Supervision – Strategic Direction and Planning-Hire/fires CEO

Officers – CEO, CFO, Treasurer – manage the day to day operation of the business – answer to the Directors

CORPORATION

Third Parties


CHAPTER 2: SHAREHOLDERS – PART 1

In General – The shareholders are the presumptive owners of a corporation. They exercise their ownership rights through voting. In addition to voting rights on certain matters, there are also certain types of rights that come with share ownership.

Objectives: At the end of this segment you should know:

Part 1

• Where shareholder votes are exercised (annual or special meetings) • Which shareholders are eligible to vote (shareholders of record as of the ___________________

date) • On what matters shareholders vote (elect or remove directors, amend by laws or amend

certificate of formation, approve fundamental corporate changes i.e., BIG THINGS) • How many shareholders are needed to pass a corporate action (generally majority vote where

quorum is assembled either in person or by proxy) • What is ___________________________________ voting and how does it work (allows a

shareholder to cumulate their votes for one or more shareholders)

Part 2

• The ________________________________________ process (process where shareholder authorizes someone else to vote on shareholder’s behalf as directed by the shareholder)

CORPORATION



Shareholders Officers

Third Parties

Directors


• _________________________ shareholder voting agreements (i.e., voting pools or voting trusts)

• _____________________________________ rights • What types of lawsuits a shareholder may bring and be able to distinguish the characteristics of

each (i.e., _________________________ suits vs. derivative suits)

A. Where Shareholder Votes are Exercised

Generally: To properly allow shareholders to express their desires through voting, formal mechanisms need to be in place so that this can happen. These formal mechanisms or venues are the ______________________ and _______________________________ meetings.

1. Annual meeting-

o Required by law to be held _____________________________________ o Time and Place specified in _______________________________ o General purposes are to (1) ___________________________ directors; (2)

_____________________________ proposed amendments to the COF; (3) _________________________ on shareholder proposals; and (4) consider any other business subject to shareholder consideration.

2. Special meeting – These meetings are called when something significant has transpired between annual meetings and shareholder consideration is required.

o Approve a ____________________________ or consolidation o Approve a sale of ___________ or substantially all of the corporation’s assets o Approve a _____________________________________ or termination of the business

3. Notice requirements

o Proper notice must be given for ___________________ the annual and special meetings. o The notice must include the matters to be addressed and must be sent to

________________ shareholder, regardless of whether they can vote. o Timing - Notice must be given at least ___________ days prior to the meeting but no earlier

than 60 days prior to the meeting. If a ____________________________ or other fundamental (BIG) business transaction is being considered, corporation must give at least _________ days notice.

o Content of notice – Place, day, and meeting time of meeting

Notices for a special meeting must also state purpose of meeting For meeting through remote communication – instruction for access must be included If merger, conversion, or interest exchange is subject – include copy or summary of the

merger, conversion, or interest exchange plan

o Method of notice – First-class mail, personal notice, or electronic transmission (if shareholder ______________________________)


B. Which Shareholders are Eligible to Vote?

• Shareholders of record as of the ___________________________________ are eligible to vote at an annual or special meeting

• Generally: Appreciate that share ownership can change hands prior to either an annual or special meeting. Accordingly the corporation must have a “cut-off” date to say, “Okay, these are the shareholders who are eligible to vote at the next meeting.”

• Shareholders of ____________________ as of the ___________________ date are eligible to vote at the annual or special meeting. The record date may not be more than _________ days prior to an annual or special meeting.

Example 7: Newton, Inc’s annual meeting is scheduled for April 1, 2010. Newton can set its record date no earlier than February 1, 2010 (60 days prior to the meeting)

C. On What Matters do Shareholders Vote?

Date of

Annual or

Special meeting

Record Date

Owners of record are eligible to vote

The record date can be no earlier than 60 days prior to meeting

Voting List – 11 days prior to meeting, officer must make alphabetical listing of eligible voters; list must be kept on file at the registered office. This is prima facie evidence of entitled voters.

• Elect or remove Directors

• Approve Shareholder Proposals

Approve Fundamental Corporate changes

• Mergers • Consolidations • Substantial

Asset Sales • Dissolutions

• Amend Certificate of Formation or

• Amend By-laws

Cumulative Voting

(to elect or remove directors)

SHAREHOLDER

VOTING


D. How many Shareholders are Needed to Pass a Corporate Action

Generally: Actions needing shareholder approval are done when a ___________________________ (whether in person or by proxy) is present and the action is approved by a _________________________________ (greater than half) of those shareholders ___________________________ at the meeting. A majority of the shares entitled to vote constitutes a quorum.

Example 8: Newton, Inc. has 200 shares outstanding. A quorum would require shareholders representing at least 101 of those outstanding shares to be present at the meeting.

To pass an action at that meeting would require the affirmative vote representing at least 51 of those shares 101 shares represented at the meeting.

1. Quorum (special considerations)

o A corporation may adjust quorum requirements up or down. If quorum requirements are adjusted down, they cannot be lower than ______________ of the eligible voters.

o Quorum requirements can be noted either in the Certificate of Formation or the _________________________.

2. Voting (special considerations)

o Some matters are required by law to have greater voting requirements. Also, a corporation may require ____________________________ voting requirements for specific matters.

o If a corporation elects to have higher voting requirements on specific matters they must be specified either in the Certificate of Formation or the _________________________.

E. What is Cumulative Voting and how does it Work?

1. What is it? –

Cumulative voting is a voting method that allows shareholders to cumulate all the votes they are entitled to cast and _____________________________ them in a manner they see fit.

2. How Does it Work?

Example 9: A owns 30 shares of X, Inc. B owns the remaining 70 shares. X, Inc. has 3 directors. A and B each have 3 nominees they would like to elect to the board. Absent the use of cumulative voting, A would not be able to elect any directors. B would simply cast all 70 votes for each of his nominees. A’s 30 votes would never exceed B’s 70 and none of A’s nominees would get elected.

With cumulative voting, however, A can elect at least one director by cumulating his votes (i.e., 30 votes per director * 3 directors) and casting them all for one director which would give that one director 90 votes.


3. When is Cumulative Voting Available to a Corporation?

o For corporations formed __________________ September 1, 2003 cumulative voting is an opt-in provision. Corporation must make a specific election in its Certificate of Formation to provide for cumulative voting.

o Corporations formed before September 1, 2003 cumulative voting is an _________________________ election; the corporation is entitled to cumulative voting unless the corporation makes a specific election not to have cumulative voting.

4. Things that may Hinder the Effectiveness of Cumulative Voting

o ______________________________ terms – When a corporation has staggered terms, that will hinder the effective use of cumulative voting because it will then require more votes to elect each director.

o _____________________________ a director – When a corporation utilizes cumulative voting, a director may not be removed if the votes cast against the director’s removal would be sufficient to elect the director in a general election when cumulative voting was utilized.

CHAPTER 3: SHAREHOLDERS – PART 2

Part 2

• The ________________________ voting process (shareholder authorizes someone else to vote on shareholder’s behalf as directed by the shareholder)

• ________________________________ shareholder voting agreements (i.e., voting pools or voting trusts)

• _______________________________________ rights • Lawsuits a shareholder may bring and the characteristics of each (i.e., direct suits vs. derivative

suits)

A. Proxy Voting Process

1. Proxy – Shareholder authorizes someone else to vote on shareholder’s behalf

o A process used to facilitate the voting process where shareholders voting in person would not be feasible or practical – (consider most publicly held corporations and the number of shareholders entitled to vote).

2. Revoking Proxies

o Shareholders can revoke a proxy, UNLESS the proxy states that it is irrevocable AND is coupled with an interest.

Example 10: Creditor extends the corporation credit and one of the credit terms is a requirement that the lender be apportioned a proxy right for a set number of shares. In this instance the proxy would be


___________________________________________ because creditor gave consideration for the proxy rights.

B. Pooled Shareholder Voting Arrangements

Context: At times shareholders or a faction of shareholders will want to vote as a group to maximize their collective voting power. This exercise can be formalized and made into a legal arrangement through the use of mechanisms such as voting _________________________ or voting _____________________.

1. Voting pool

o A _________________________________ agreement between a group of shareholders regarding how they will collectively vote their shares. Voting decisions are based on the desired vote of the _______________________________ of the voting pool participants. Voting pool agreements are ________________________________ enforceable.

o The pooling agreement must be deposited with the corporation at is principal officer or registered office.

2. Voting trusts

o A _____________________________ legal entity to which the shareholder’s stock is transferred

o The trust, through its trustee, votes in a collective block. The trustee votes in accordance with the terms set forth in the trust.

o Trust agreements must be filed with the corporation as well.

C. Inspection Rights

1. Right to inspect

o Commensurate with share ownership is the right to inspect the corporation’s books and records as long as the reason for inspection is proper.

o To qualify for inspection rights, the shareholder must have been a shareholder for at least 6 months, or own at least _______ % of the outstanding shares.

D. Shareholder Suits

• Share ownership also gives the shareholder the right to sue in his ______________________________ as a shareholder. There are two types of suits that a shareholder may bring: a ___________________ suit or a ______________________________ suit.

1. Direct suits

o A shareholder may bring a direct suit to address a situation in which the shareholder is being deprived of a legal right commensurate with share ownership.


o The key is direct suits are suits in which the shareholder is addressing harm suffered by the _____________________________________.

Example 11: Joe Shareholder sues Newton, Inc. because the corporation failed to allow him access to inspect Newton’s corporate books and records. Joe’s suit would be a direct suit because he is suing to address a matter related to his share ownership.

2. Derivative suits

o An action brought by a shareholder but ___________________________ from some type of harm being exacted upon the corporation

o The most common types of derivative suits are ones being brought against corporate directors for fiduciary duty breaches.

Example 12: Joe Shareholder sues the Newton Corporation directors for agreeing to purchase another company for a price far in excess of that company’s fair market value. This is a derivative suit because this suit is addressing a harm being exacted upon the corporation.

o Damages from a successful derivative suit will go to the corporation – (since the corporation is the one being harmed).

o Procedural requirements: The key with derivative suits is to insure that the statutory protocols have been met for bringing the suit in the first place.

Standing – A shareholder must have been a shareholder at the time the alleged conduct occurred.

Board demand – A shareholder must make _______________________________ demand on the corporation prior to filing a derivative suit (to give the company the opportunity to address the situation first). The shareholder must give company 90 days to decide what action, if any, it will take. Shareholder may file suit sooner but must plead in complaint why waiting the 90 days would cause ________________________________ harm.

Example 13: The Denial Corporation has recently borrowed $1,000,000 to build a new facility but the contractor is substandard and wholly unqualified. If the deal is approved, the project will commence within the next 30 days in which case a large portion of the money will be spent and a shoddy building will be the end result, which will require additional millions to fix. Here: A shareholder of Denial Corporation would be required to make written demand on the corporation before filing his derivative suit. BUT – He should file suit immediately after making written demand and place in his complaint that he should not be required to wait 90 days as the money will be all used up leaving a shoddy facility in its place that would cost millions to fix (i.e., would do irreparable harm)


Demand rejected – If Board rejects demand then Shareholder’s suit, if filed, must contain a statement demonstrating that the board’s rejection of the suit was not proper due to the decision not being made by the requisite number of disinterested directors.

Board dismissal – Board can have suit ___________________________ if Board follows proper protocol.

• The decision to dismiss must be made by __________________________________ vote of disinterested directors at a meeting comprising a __________________________ of disinterested directors.

• A court ____________________ dismiss a derivative proceeding on a motion by the corporation if the corporation (meaning a properly convened group of directors) determines in ___________________________________, after conducting a reasonable inquiry and based on factors the person or group considers appropriate under the circumstances, that continuation of the derivative proceeding is not in the corporation’s _________________________________________.

• To summarize:

o Shareholders vote at annual and special meetings. o Eligible voters are shareholders of record as of the record date. o Shareholders generally vote to elect or remove directors, amend by-laws or the Certificate

of Formation, and approve fundamental corporate changes. o To pass a shareholder action, you generally need a quorum present (more than half) and a

majority of those present must vote affirmatively to pass the action. o Cumulative voting – A method by which shareholders can cumulate their votes and allocate

them to one or more directors o The proxy voting process – authorizes someone else to vote on the shareholder’s behalf. o Pooled shareholder voting agreements - A subset of shareholders contractually agree to

vote as a collective body. o Inspection rights –shareholders have the right to inspect corporate books and records. o Shareholders can bring either direct suits or derivative suits.

CHAPTER 4: PIERCING THE CORPORATE VEIL (PCV)

General Rule: Shareholders are NOT personally liable for obligations the corporation incurs. BUT THERE ARE EXCEPTIONS.

Piercing the Corporate Veil - A common law doctrine that allows third party tort victims or third party contract claimants to pierce the corporation’s protective veil and hold offending shareholder(s) personally liable for contract or tort claims that the corporation incurs.


The typical scenario

A. The Factors

The following are factors – (not elements) – Each case is decided on a ___________________________________ subjective analysis.

• ________________________________________________ – When forming the corporation, did the shareholder(s) infuse enough capital into the corporation to cover reasonably foreseeable obligations? ($______________ minimum required by law but this is only the minimum).

• ____________________________ of corporate formalities – Failure to issue stock, hold board meetings, and keep separate books and records. The idea here is if you want to be treated like a corporation you have to ACT like a corporation.

• ____________________________________________ of corporate assets with personal assets – A corporation is supposed to be a separate “person” or separate legal entity – Personal and corporate assets should not be commingled.

• ____________________________________________ with the corporation – transactions with corporation should be “arms-length” transactions.

• ______________ siphoning – i.e., the shareholders draw money out of the corporation that should go to paying pre-existing obligations.

Example 14: Dewitt, the sole shareholder of D Corporation acted as a middle man between fruit growers and fruit buyers. Dewitt would have the fruit delivered for the growers and would be paid by the buyers, taking a commission for himself and remitting the rest to the growers. But instead – Dewitt would pocket the fruit grower’s money for himself. This is an example of funds siphoning.

CORPORATION

Shareholder(s)

3RD Party Creditor 3RD Party tort victim

Corporation can’t honor obligation

3rd Parties go after shareholder(s)' personal assets to settle


• Use of corporate form to avoid legal obligations

Example 15: Harry signed a non-compete clause with his former employer that prohibits Harry from engaging in any business that directly competes with his former employer’s business. Harry then would not be able to form a corporation that directly competes with his former employer.

• Shareholder’s ______________________________________________ control or domination over the corporation – i.e., shareholders with equal ownership but one shareholder controls, runs, and dominates the operation sometimes to the other’s detriment.

• Wrongful, misleading, or fraudulent dealings with a corporate creditor – In other words, the presence of some untoward behavior that strikes as fundamentally unfair or not right

Exam Tip 2: PCV questions are rarely clear cut -- make the argument in light of the facts.

Exam Tip 3: ALSO – It is astute to distinguish what type of plaintiff you are dealing with; a ___________ claimant or a ______________________ claimant. The argument for piercing in the instance of tort claimants should be stronger since their involvement with the corporation was not voluntary.

Example 16: (Tort Claimant): The driver of the “Messy Movers Corporation” veers off the road and runs over Patty’s petunias. Messy Movers does not have adequate assets to cover the claim. Here – Because Patty’s involvement with Messy Movers was involuntary the argument for piercing is stronger because Patty did not choose to have her Petunias run over by Messy Movers.

Example 17: (Contract Claimant): Cyrus trucking company agrees to lease a fleet of trucks to the “Messy Movers” Corporation agreeing to take payment 1 year after Messy Movers takes possession of the trucks. 1 year into the lease, Messy Movers claims insufficient funds to pay. Here – The argument against piercing is stronger because Cyrus Trucking had the opportunity to assess Messy Mover’s financial situation prior to doing business with them.

B. Which Shareholders are Liable?

• Generally those shareholders that _____________________________ participated in the conduct that incurred the obligation are liable. Passive investors who acted in good faith will not be vulnerable to a veil piercing case.

• Liability is ______________________ and ___________________________________ for those shareholders who actively participated in the offending conduct.

C. Key Things to Remember

• PCV Analysis = factors, not elements • Discuss each factor in light of the facts • Distinguish between tort claimants and contract claimants


CHAPTER 5: BOARD OF DIRECTORS

Generally: The board of directors oversees ___________________ level corporate activities; sets policy; hires and fires the corporation’s CEO; sets compensation levels for executive officers, etc.

This section deals with the mechanical aspects of board selection, composition, and board decision making.

A. Director Number and Makeup

• A corporation can have as few as _________________ director; actual number must be specified either in the corporation’s ____________________________ or its Certificate of Formation.

• Directors are not required to be shareholders or Texas residents.

B. Director Selection

• Directors elected at the ______________________ or ________________________________ meeting by plurality (as opposed to majority) of votes cast.

• Director removal – May be removed at _____________ time with or without cause - Unless the COF or bylaws provide otherwise.

• Director replacement – When vacancy, either directors or shareholders may fill vacancy. The director’s vacancy can be filled by ___________________________________ vote of the remaining directors regardless of whether they constitute a quorum, OR the director’s vacancy

CORPORATION




Directors

Third Parties


can be filled by ____________________________________ shareholder vote at the annual meeting or at a special meeting called for the specific purpose of replacing the director.

C. Meeting Requirements

• Meeting types – May hold _________________________ or _____________________________ meetings as needed to conduct corporate business.

• Presence at meetings – Physical presence _______________ required – conference call – video conferencing – internet – e-mail – As long as members can communicate with each other during the meeting. If directors are voting, voters must be properly identified and there must be and the directors must make an appropriate record of the vote.

• Board action without meeting – Board may act without holding a meeting. Board may take action by _________________________________ consent. If action done by written consent, action must be unanimous – unless ___________________ or COF express otherwise.

D. Voting Requirements

• Quorum rules – Board action requires the presence of a _________________________. Generally a ______________________ unless the COF or bylaws express a different quorum requirement. Quorum requirements can never be less than one third of the members.

Note 4: Director voting by proxy is ______________ allowed in Texas.

• Director dissent – Directors can incur liability for their board decisions. To avoid potential liability, the director(s) must have their dissent ___________________________________. When a director is not in agreement with a particular board action, that disagreement must be properly ____________________________ for the record. Therefore, director must:

o Promptly object to the holding of the meeting; o Ensure that director’s dissent or objection is noted in meeting minutes; OR o Not vote in favor of the action and deliver written notice of dissent to the presiding officer

before meeting adjourns OR to the corporation immediately after the meeting adjourns.

E. Committees

• Board may take action through one or more committees. • Board authority may be exercised through committees, ________________________________

for those actions that by law require that the action be taken by the board as a whole. • The board as a whole may be held liable for committee level board decisions.


CHAPTER 6: DIRECTOR FIDUCIARY DUTIES

Generally: Two basic duties – the duty of _________________________ and the duty of ____________________________

A. Duty of Care

• When carrying out directors’ duties, each director must carry out such duties in good faith and in a manner that an ordinarily prudent person would in similar circumstances.

• Board actions are viewed through a deferential lens known as the _________________________________________________________________ RULE (BJR) – which presumes that board actions are carried out in good faith, after reasonable ______________________________ and for acceptable reasons. There is a high bar to clear to overcome the BJR.

• Duty of Care Violations – (types)

a. Oversight failure

Board has a duty to oversee/monitor those aspects of the corporation that would be expected of an ordinarily ______________________________ person under similar circumstances.

Basis for liability – Plaintiff must prove two elements:

• That director failed to carry out his oversight/monitoring duties using the requisite standard of care AND

Duty of Care

• Board oversight/supervision

• Board Decision Making

Duty of Loyalty

• Conflicting interest transactions

• Usurpation of Corporate Opportunity

• Competing with the Corporation

• Director’s Salaries

DIRECTOR'S FIDUCIARY DUTIES


• That such failure was the _____________________________________ cause of the harm suffered

Example 18: Dell, a self- made millionaire and entrepreneur bequeathed his successful business to his wife and two sons upon his death. The two sons and the wife held the company’s three board positions. After the father’s death, the sons systematically raided the corporate coffers and drained the corporation of every penny. Mother, although having the best intentions, was not very interested in the business matters. As such she failed to review any of the corporate records or financial statements, which would have alerted her to her sons’ nefarious activities. HERE: Mother would be deemed to have breached her fiduciary duty of care.

Duty of Care breach - A strong argument exists that an ordinarily prudent person would at least have looked at the financial statements from time to time.

Proximate Cause - Also, Mother’s failure to perform such acts can be directly linked to the corporate coffers being drained as her discovery of her sons’ behavior would have given her the opportunity to stop it.

b. Decision making failure

Context: Occurs when the board as a whole considers a corporate action and the decision turns out to be a bad one. Board will be held liable if the decision making process did not meet the requisite fiduciary duty standard of care. i.e., Directors will not be held liable if they acted in ____________________ faith, after ___________________________________ investigation and there was a __________________________ basis for the decision.

Also: In carrying out their board duties, directors can rely on others (such as company employees, consultants, lawyers, executive officers) as long as that reliance is warranted.

Example 19: The Directors of X Corporation vote to expand their business and commence manufacturing bicycles equipped with GPS trackers and onboard computers. The idea turns out to be a disaster and X Corporation loses money as a result of this decision. Have the directors breached their fiduciary duty of care?

APPROACH: First – State the standard – “When carrying out directors duties, each director must carry out such duties in good faith and in a manner that an ordinarily prudent person would in similar circumstances.” Here – clear that board’s action caused harm – BUT – Board will not be held liable if the facts bear out that the board acted in:


Good faith-(i.e., was it their pure intent to try and better the company’s fortunes?)

Reasonable Investigation –Did they do reasonable market research? Were the reports reasonably analyzed? Did they discuss and document their findings and basis for decision?

Recall – The board’s actions will be judged against the Business Judgment Rule, which is a deferential standard. Absent a showing that the board’s actions were not in good faith, Boards have to fall very short in their decision making process to be found liable.

B. Duty of Loyalty

Generally: The duty of loyalty requires that the director place the corporation’s financial interests ahead of their own. Courts are less deferential in duty of loyalty cases because of the conflicting interest nature of the transactions.

Duty of Care

• Board Oversight/Supervision

• Board Decision Making

Duty of Loyalty

• Conflicting interest transactions

• Usurpation of Corporate Opportunity

• Competing with the Corporation

• Director’s Salaries

DIRECTOR FIDUCIARY DUTIES


1. Conflicting interest transactions -

o Any transaction between the corporation and a director

Example 20: Doug is a Director at Corporation A. Doug is also the president and sole shareholder of Company B. Company A is contemplating a lucrative deal with Company B in which A will buy a significant amount of product from company B.

Answer: This transaction constitutes a conflicting interest transaction because Director Doug has interests on both sides of the transaction. And it is reasonable to expect that his being the sole shareholder of Company B will affect his objectivity.

o Statutory protocol

Doug must disclose the _________________ and _______________________________ of his conflict to the other board members (but director is not required to disclose confidential information).

The Board members that aren’t conflicted must consider and decide through ________________________________ vote whether to go ahead with the transaction.

If these steps are followed, the transaction is ___________________ harbored from challenge.

o Fairness test – (the fall back position) – (the Hail Mary play) - Invoked when corporation fails to follow statutory protocols and the transaction is challenged. If transaction is challenged, the court will make an assessment as to whether the transaction was _________________ to the corporation.

2. Usurpation of corporate opportunity

Example 21: Doug is a Director at Corporation A. Corporation A is a land developer in the state of Texas. Doug is contacted in his capacity as a director of Corporation A and presented with a business opportunity for Corporation A for a land development project. It just so happens that Doug is a land developer as well and this particular opportunity would be perfect for Doug’s personal business.

Question: As a Director of Corporation A, what are Doug’s obligations?

Here – Doug must 1) _____________________________ this opportunity to the Corporation A directors; and 2) Give the Board the opportunity to _____________________ or _______________________ the opportunity.

If Doug fails to do so he may be required to sell the opportunity to the corporation for what he paid for it.


Or, if Doug has already commenced the project, he may have to remit that profit over to the corporation.

3. Competing with the corporation

o Directors have a general obligation ________________ to engage in activities that directly compete with the corporation.

o Directors may be held liable to the extent their competing actions have damaged the company’s profits.

4. Salaries – Directors and officers

o Directors – No salary but are paid for their service as directors o Officers – Salary amounts will be upheld UNLESS, they are so large as to constitute a waste

of corporate assets.

C. Indemnification

Context: Being sued as a director costs money to defend. If directors (especially innocent ones) have to bear this cost burden in every circumstance, many directors would not serve. Thus, the law allows (and even requires in some cases) directors to be reimbursed for these costs.

1. Mandatory indemnification

Corporation is required to indemnify director in a completely successful defense (i.e., successful on all issues).

2. Prohibited indemnification

Corporation prohibited from indemnifying against liability when the director received an ________________________________ financial benefit.

3. Permissive indemnification

Corporation may (but is not required to) indemnify director when director acted in _______________________ faith with a reasonable belief that conduct was in the corporation’s best interest.

D. Key Things to Remember

• Be able to properly identify the type of fiduciary duty breach • Duty of care vs. duty of loyalty and the sub-categories of each • Have in mind what type of analysis is involved for each situation and the legal standard to be

applied • Remember the Business Judgment Rule


CHAPTER 7: OFFICERS AND OTHER EMPLOYEES

Generally: Executive officers oversee the corporation’s day to day operations. (Chief Executive Officer, Chief Financial Officer and Treasurer. There can be many others depending on the corporation’s dynamics and its corporate governance structure.) Generally each position will be set forth either in the company’s COF or its Bylaws.

A. Types

Texas Law requires corporations to have at least a secretary and president. Positions are filled by board election as set forth in the bylaws.

B. Authority

The Executive officers are ______________________ for the corporation. They are the ones to incur liability on the corporation’s behalf.

1. Express Authority

o Defined by corporate bylaws or set by board of directors. o Additionally officers have ___________________________ authority to perform those tasks

that are necessary to carry out the officers’ expressly assigned tasks.

2. Apparent Authority

o Derived from ____________________________________________ between the third party and the corporation

CORPORATION




Directors

Third Parties


o If the corporation’s manifestations to the third party were such that third party would reasonably believe that officer had the authority to so act, _____________________________ authority will be present.

Example 22: Ted, the Vice President of Sales and Marketing for ABC, Inc. had been purchasing advertising from AD Advertising for some 5 years. Just recently, Ted received a demotion and was stripped of his advertising responsibilities. But AD Advertising was never informed of Ted’s demotion. The following month, Ted made his usual advertising purchase from AD Advertising in spite of his lack of actual authority.

Question: Is ABC, Inc. liable for Ted’s Purchase?

Answer: Yes – On the basis of apparent authority because A, Inc. held Ted out as having the authority to so act due to prior dealings with AD Advertising.

C. Fiduciary Duties - Care and Loyalty

1. Generally

o Officers have the same duties of care and loyalty as directors. o Additionally their specific duties will be outlined in the bylaws or set by the board of

directors. The officer can adhere to his duty of care while relying on others as long as that reliance is warranted.

2. Also

o Officers of publicly held companies are governed by provisions of the Sarbanes Oxley Act of 2002 (SOX). Under SOX, the CEO and CFO must certify as to the accuracy of their corporation’s financial reports.

D. Liability

• Agents generally not liable to third parties merely for performing corporate duties. • Liability will attach to the agent personally when agent is engaging in some act BEYOND the

scope of his agency or employment and there is no argument for ________________________________ authority.

Example 23: Chris is hired as a cook for Bubba’s Burrito’s, Inc. One day Chris calls the Fort Worth Star-Telegram and purchases some advertising for Bubba’s Burritos.

Is Bubba’s Burritos Liable?

No – Because Chris was acting outside the scope of his agency. Purchasing advertising is not related to cooking responsibilities.


Note: No argument for apparent authority here because there was no prior course of dealing (i.e., no prior advertising purchases by Chris that were honored by Bubba’s Burritos).

E. Indemnification and Insurance

• Officer entitled to and subject to the same insurance rules as directors.

F. Officer Removal

• Officers serve at the board’s pleasure and may be removed at any time with or without cause. • Officers under contract – Generally does not prevent removal but may provide remedies to the

officer as set forth in the contract.

G. Key Things to Remember

• Watch for apparent authority issues • Look for manifestations from principal to the third party

CHAPTER 8: STOCKS AND OTHER CORPORATE SECURITIES

Stock represents ownership in a corporation. Parameters of the ownership depend on the rights, preferences, privileges, and limitations ascribed to a class or share of stock. Those rights, preferences, privileges, and limitations are set forth in the corporation’s Certificate of Formation.

A. Types

At the very least, every corporation is required to have one class of stock that is entitled to vote on matters of corporate governance and is entitled to the net assets upon dissolution. Typically ___________________________ stock has these characteristics.

Equity

Common Stock

Preferred Stock

Debt

Bonds

Loan Obligations

INFUSING CAPITAL INTO

YOUR CORPORATION


B. Stock Issuance

• Authorization – The Board authorizes the issuance of stock. • Consideration

o Valid Consideration = Anything that confers a benefit to the corporation – (whether tangible or intangible)

Example 24: Cash, promissory notes, services performed or to be performed, property, shares of stock in other corporations, goods of any kind, etc.

o Valuation – The Board sets price for which shares will be issued.

Par value = The ______________________________________ price for which a corporation can issue its shares. Note: Corporation not required to designate a par value. But if it does, shares cannot be issued for less than the par value.

Watered stock = Occurs when corporation receives consideration that is worth _____________ than par value. Shareholder is liable for the difference.

No par stock = Stock that does not have a par value. Therefore no ________________________________ price for which stock can be issued.

Treasury stock = Previously-issued stock that the corporation ____________________________________ is said to be held in the corporation’s treasury.

o Payment of consideration

Shareholder’s payment of full amount due for shares discharges shareholder’s liability. Shareholder’s liability limited to share ownership But shareholder subject to piercing the corporate veil actions discussed earlier

o Stock subscriptions (the corporation is lining up shareholders prior to incorporation)

A person’s _____________________________ to purchase shares once corporation comes into existence

The stock subscription is merely an ___________________ subject to revocation at any time prior to acceptance

The promise becomes an enforceable contract once corporation is formed and is ___________________________________ by the corporation.

o Pre-emptive rights

Gives current shareholders the ________________________ to purchase any additional shares the corporation issues

Shareholder may waive this right if he chooses. Purpose: To allow existing shareholders the right to maintain their percentage of

ownership in the corporation.


Example 25: A and B are the two sole shareholders of Corporation X. Each owns 50 shares in X Corporation. X’s board of directors authorizes the issuance of another 50 shares of stock.

The pre-emptive right entitles A and B to purchase 25 shares each of the 50 additional shares thereby allowing them to retain their 50% respective ownership in the corporation.

• WATCH FOR: Situations when pre-emptive rights do not apply

o Stock issued for __________________________________ or _____________________________________

o Stock sold or granted as a form of _______________________________________ – (i.e., to directors, officers, employees, etc.)

o Shares issued within ______________ months of formation o When _______________________________ shares or

_________________________________ shares are issued o Shares with preemptive rights not acquired within the first year of their offering

Note 5: In these instances, current shareholders do ________________ have pre-emptive rights UNLESS the Certificate of Formation states otherwise.

C. Distributions

A transfer of cash to current shareholders, usually in the form of dividends

1. Authorized by the board

Generally distributions are at the board’s discretion as to when and amount.

2. Distribution prohibited

When corporation is ______________________________________; or paying the distribution would cause corporation to __________________________ insolvent.

3. Director liability for unlawful distributions

o Directors involved in approving an unlawful distribution are liable for the portion that exceeds the lawful amount.

o All culpable directors have _______________ and __________________________ liability. o Paying directors have a right of contribution from other culpable directors. o The director is not liable for an unlawful distribution if the director exercised ordinary care

and made a good faith reliance on financial reports and records used to determine the company’s net worth.

4. Stock purchases (redemptions)

Gives shareholder the right to have corporation __________________________ (redeem) his shares. The triggering event for the distribution will be specified in the Certificate of Formation.


Example 26: A provision in the COF reads “Holders of the Class A Preferred shares shall have the right to have the corporation buy back its shares three years after such shares have been issued. The purchase price for those shares will be $20 per share.”

This provision is a type of redemption right.

5. Debt distributions

Are subject to the same insolvency restrictions that pertain to dividend payments

6. Stock dividends

Corporation may issue additional shares of stock to existing shareholders = stock dividend or stock _________________. No additional cash outlay here, therefore not considered a distribution.

D. Sale of Securities – (stock sales by existing shareholders)

• Generally – Share ownership in a corporation is freely exchanged. Any willing seller can consummate the sale of his shares with any willing buyer. But there are situations when free share exchanges may not be the case.

• Closely Held Corporations – Because of the more intimate nature, shareholders in closely held corporations will be more selective in who they allow to become fellow shareholders. As a result, they may invoke restrictions on the sale of their shares such as:

o Buy-sell agreements – Agreement when shareholder agrees to offer his shares either to the corporation, other shareholders, or a specified third party

o Right of first _____________________________ – Current shareholders have the right to decide if they want to buy shares at the same price as negotiated with a 3rd party

o Shareholder or corporate _____________________ required– Shareholder required to get corporation’s consent prior to sale; valid if consent requirement is there to prevent violating state or federal law

o Third party _______________________________ required – A sale that requires third-party approval prior to consummation

o Restrictions as to whom shares can be ____________________________________ – Are okay as long as those restrictions are reasonable –(such as a restriction on selling shares to one of the corporation’s competitors)

o Restrictions requiring _______________________________________ of close corporation or subchapter S status – Corporation can stipulate that the buying shareholders _____________________________ the corporation’s status -- such as its status as a _____________________ held corporation or as a Subchapter __________ corporation


CHAPTER 9: MERGERS AND OTHER FUNDAMENTAL CORPORATE CHANGES

A. MERGERS

1. Definition

Before merger

After merger

Company A merges with Company B (target company). Company B is merged with and into company A and is merged out of existence.

2. Procedure

[next step]

[next step]

[next step]

Company A

merge Company A

Purchaser

Company B

Target

Company B

(merged with and into Company A)

SHAREHOLDER APPROVAL- (for each corporation)

Written notice of meeting which must include a summary of the proposed plan (at least 21 days prior). Required

vote = _________ of shares entitled to vote (unless otherwise specified in the COF)

Certificate of Merger

Filed with the state

Board of Directors (for each corp.) must adopt resolution


B. Other Merger - Like Transactions

1. Conversions – i.e., converting from an LLC to a corporation

Procedure - Board resolution + ___________ thirds of shares __________________________ to vote

2. Interest Exchanges – One corporation purchases all the outstanding shares of another corporation resulting in a wholly owned subsidiary

Procedure - Board resolution + ___________ thirds of shares ___________________________ to vote

3. Asset Sales – Corporation A purchases _________________________________ all the assets of corporation B

Procedure – __________________________ resolution + ___________ thirds of shares entitled to vote from _________________________ company only

C. Capital Reductions

• Process by which corporation reduces capital by repurchasing shares that have been outstanding and then cancelling those shares

o Procedure for Par Value Shares – Board ___________________________________ o Procedure for No Par Value Shares – Board _______________________________________

+ _________________________ shareholder vote of shares entitled to vote

Note 6: Corporations may not engage in capital reductions if the capital reduction renders the corporation unable to meet its payment obligations to preferred shareholders in the event the corporation is dissolved.

D. Dissenting Shareholders' Right of Appraisal

1. Generally:

o Dissenter’s rights give the dissenting shareholder the right to have the corporation purchase the shareholder’s shares at __________________ value as determined by the company and assessing the value of the shareholder’s shares.

o Generally granted to the selling company, not the company that is acquiring o Context: Appraisal rights are triggered when a corporation is considering

__________________________________, selling substantially all of its assets, or consolidating with another company and a minority shareholder group objects to the terms of the fundamental change.

2. Exceptions

o There are situations when the shareholder may not invoke their dissenter’s rights.

Market-out exception – Shareholders do not get appraisal rights when the shares are listed on a national securities exchange, or held by more than 2,000 shareholders.


Rationale – Appraisal or dissenter’s rights are not necessary since there already exists a forum where the shareholder can sell his shares.

90% Ownership exception – No appraisal rights where surviving corporation already owns 90% of the target corporation.

3. “De facto” Mergers

Texas courts will grant appraisal rights if the transaction’s substance is that of a merger or a consolidation.

4. Procedural Requirements

1) Shareholders must be notified of appraisal rights – Any corporation considering a fundamental corporate change that gives rise to appraisal rights must notify the affected shareholders of their appraisal rights.

2) No favorable vote - The dissenting shareholder may not vote in favor of the proposed action.

3) Demand for payment – After merger approved, the shareholder must make written demand to the corporation for payment. The demand must:

a) Be addressed to the corporation’s _________________________________ and _______________________________

b) Order that payment be made for the share’s _________________ value

c) Include a return address so that the corporation can send the dissenting shareholder instructions outlining the dissenting and appraisal procedures.

d) State the _________________________ of shares and the stock class that the shareholder owns along with a _________________ value estimate of those shares.

e) Be delivered to the corporation at its principal executive offices no later than 20 days after receiving notice that the action was approved.

f) Finally, the shareholder must relinquish his share certificates within 20 days after making the demand. At that point the person is no longer a shareholder.

4) Price for shares – The corporation and the shareholder must come to an agreement on the share’s fair market value.

a) Corporation can agree to shareholder’s __________________ value assessment and send payment. The corporation has 90 days from the approval date to make payment.


b) The corporation may counter with its own _________________ value assessment. The two sides will work to come to an agreement. The corporation then has ____________ days after the two parties have agreed to a price in which to make payment.

c) If the corporation and the shareholder can’t come to an agreement, the price may be determined by court action.

E. Termination of Corporation Status

• Generally: Two options for termination – _______________________________________ or ______________________________________ termination.

1. Voluntary Termination

Either (1) written consent from _________________ shareholders; or (2) Board ___________________________ resolution and resolution is passed by ________________ of all outstanding shares entitled to vote

2. Involuntary Termination

o Creditor’s grounds – Creditor may seek an involuntary dissolution when corporation is insolvent - Immediate IF creditor establishes that _________________________________ damage will ensue to the corporation’s unsecured creditors.

o Shareholders’ grounds (shareholders aren’t getting along) – Grounds for involuntary termination when:

The directors are _________________________________, the deadlock can’t be resolved, and the corporation is suffering or is threatened with irreparable injury from the deadlock;

There is a deadlock in shareholder voting power, which hasn’t been broken in ______________ consecutive annual meetings.

The directors actions (or those in control) are illegal, oppressive, or _______________________________________; or

The corporate assets are being wasted or misapplied. The shareholders are deadlocked in voting powers and have failed the previous two

years to elect successors to directors whose terms have expired.

o State agency –

Mandatory dissolution: The Texas Attorney General _____________ dissolve a corporation if:

• The Secretary of State has sent notice to the corporation instituting termination proceedings and the corporation has not cured those problems within 31 days of receiving notice OR


• The Attorney General has independently determined that cause exists for termination.

Discretionary dissolution: The Texas Attorney General ___________ institute a dissolution proceeding if:

• Corporation failed to comply with any condition precedent to forming corporation. • The corporation has procured its COF by fraud • The corporation is transacting business _________________________ the scope of

its certificate of formation • The corporation has _____________________________________ misrepresented

any matter in any required report, affidavit, application, etc.; or • If public interest requires winding up the corporation because the corporation or its

high ranking officer has been convicted of a felony, the felonious actions are persistent, and terminating is necessary to prevent future felonious actions.

CHAPTER 10: SPECIAL TYPES OF BUSINESS ENTITIES

A. Closely Held Corporation

• Characterized by

o A ____________________ number of shareholders o Shares ___________ publicly traded o Frequent _____________________________ for officers and directors –(i.e., they are the

same people) o A relaxed or ____________________________________ corporate governance structure o ________________________________________ on the sale or transfer of shares o Requires a ____________________________ notation in the COF

• Closely Held Corporation requirements

o COF must expressly state “This corporation is a close corporation” o No minimum or maximum share requirements for closely held corporations

• Management –

o Liberal management structure – (i) Board of Directors; (ii) some modified management structure as specified in the COF or by a properly adopted ____________________________________ agreement

• Shareholder’s agreements – (a customized management structure)

o An agreement entered into by ALL the corporation’s shareholders when a modified or customized corporate governance structure is adopted


Example 27: (i) Confer all management power to the shareholder and eliminate the Board of directors; (ii) How profits and losses will be allocated; (iii) How and on what matters shareholders will vote; (iv) Pre-specified voting power

o Binding and enforceable against all shareholders regardless of the manner in which the shares were acquired

o Are binding on the shareholders regardless of whether the shareholder was aware of the shareholder’s agreement

o Are binding on the shareholder even if the shares were acquired through transfer or assignment

B. Foreign Corporation

• A corporation incorporated in another ________________________ – (not another country) • Special requirements for foreign corporations to do business in the state of Texas

o Must file an "Application of Registration" with Texas Secretary of State o If foreign corporation fails to file this application they are precluded from

__________________________________ as a result of any business transacted in Texas o However, they are still subject to being sued for liabilities incurred in Texas.

C. Professional Corporation

• A corporation with a stated purpose that legally limits its function to rendering _________________________________ services such as medical services provided by a doctor, or legal services provided by a lawyer.

• Shareholders must be a ____________________________ of the profession. • Shareholders in a professional corporation are ___________ shielded from liability arising out of

malpractice for instance.

D. S Corporation

• A special election that a corporation makes under Subchapter S of the Internal Revenue Code. • Puts a regular corporation into a special category that confers different tax treatment than a

regular C corporation. • S Corporations are afforded “pass-through” tax treatment of its income. Meaning the

Corporation is not taxed as a separate standalone entity. • To qualify for S Corporation treatment, the corporation must:

o Have _______ class of stock o Have no more than ______________ shareholders o All shareholders must be __________________ residents.


CHAPTER 11: TEXAS FRANCHISE TAX

A. Introduction

• Texas Franchise Tax = “Privilege Tax” or “_________________________ Tax” or “Revised Franchise Tax”

• Tax is based on taxpayer’s __________________________ - Calculated by subtracting the _____________________________________ of three proposed deductions from total revenue.

o Cost of goods sold o Wages and benefits o 30% of revenue

B. Business Entities Subject to the Tax

• Entities chartered, organized, or doing business in Texas are subject to this tax.

o S- Corporations o C- Corporations o Partnerships o LLP’s o LLC’s o Professional Associations o Professional Corporations o Business Trusts o Joint Ventures o Holding Companies

• Entities NOT subject to the tax

o Sole Proprietorships o General Partnerships o Passive entities as defined under Texas law o Grantor trusts

C. Calculating the tax

• The tax = 1% of the _________________________________ margin • The taxable margin is figured by taking revenue minus [Costs of Goods Sold] or [Wages &

Benefits] or [30% of Revenue] – Whichever deduction figure is greatest.

SOME EXAMPLES TO ILLUSTRATE

Option A - COGS

Revenue $1,000,000 Revenue determined by using specific lines on the federal income tax forms.


Certain items can be excluded from the revenue calculation. No tax is due if total revenue after exclusions is less than $300,000

<Cost of Goods Sold> <500,000> app. 40 specific rules – broken out into allowable costs (i.e., the cost of acquiring or producing goods) and disallowed costs, (generally things not directly related to producing the goods such as renting a warehouse to store the goods – or costs associated with transporting the goods, etc.)

Taxable Margin $500,000

========

Tax (1%) $5,000

OR

Option B – Wages & Benefits

Revenue $1,000,000

<Wages & Benefits> <600,000> Capped at $300,000 per individual

But benefits not capped.

Stock awards, stock options can be included in the compensation figures.


========

Tax (1%) $4,000

OR

Option C – 30 % of Revenue

Revenue $1,000,000

<30% of Revenue> <300,000>



========

Tax (1%) $7,000

• The GREATEST of the three deduction figures is what is used as a basis for the tax. • HERE – Option B – Would be used for calculating the __________________________________

margin because _______________________ and benefits is the highest of the three ($600,000) – Resulting tax = $4,000

D. Apportionment

If Texas entity is doing business in other states, revenues are apportioned. The Texas corporation is taxed on only the portion that was derived from doing business in Texas.

E. Bar Exam Tips

• Preparing for the Bar Exam • PRACTICE QUESTIONS • PRACTICE QUESTIONS • PRACTICE QUESTIONS • Need to get used to seeing these issues in factual situations • The more questions you do – The more familiar you will be with what the examiner tests and

HOW the examiner tests it. • 20% (or less) of your time should be spent watching me and my colleagues give these lectures • 80% (or more) – of your time should be spent learning to apply these principles to factual

situations. • You’ve prepared diligently. • Be confident in what you know. • Now go out and get it done!!

[END OF HANDOUT]

Documents

TEXAS A&M UNIVERSITY SCHOOL OF LAW - Amazon S3s3.amazonaws.com/mythm-vids-prod/TX.Newman.Corp… · · 2016-03-12o Certificate of Formation (COF) – brings the corporation into