Wednesday, April 20, 2011

April 20, 2011 - Chapter 7 Buying an Existing Business Instructor Notes

Checklist for buying or starting a business (per Chapter 7):

1. Filing Requirement: Requires filing Articles of Incorporation with the Secretary of State, Copies of the Articles, Agent’s consent to act and paying the filing fee.
• The Secretary of State’s filing is conclusive evidence that all conditions precedent to the filing are complete.
• The Corporation’s existence usually begins at the close of the business day on the day of proper filing.
• If anyone commits a tort or enter into contract prior to incorporation, no corporate liability, but individuals will be personally liable.

2. The Articles of Incorporation: must contain (1) the incorporators’ names and addresses, (2) Corporation name (including Corp. or Inc.), (3) classes and number of authorized shares, and (4) Name and street address of registered agent.

3. Promoter Liability: (Agency Law Applies). Promoters acting on behalf of a corporation, knowing it does not yet exist, are liable unless 3rd party also knew the corporation did not exist. Promoter owes fiduciary duties to each other, investors, and to the corporation. Duties are: full disclosure, promote corporations interest (no self-dealing), and duty of good faith.

1. Organizational Meeting - Must take place within 120 days of incorporation.
a. The meeting can be held upon call of the incorporators or initial directors if named in the Articles.
b. By the end of the meeting the corporation must have directors, officers, and bylaws.
c. After the meeting, an initial report must be sent to the Secretary of State.
2. Maintain Required Records: Principal Office Records – Must maintain at Principal Office – Current Articles and Bylaws,
Shareholder Actions, financial statements (3 years worth), General Written communications to shareholders and Annual
Report). Records Corp. should generally keep – All meetings and actions taken, action outside of meetings including board
Committee actions, appropriate accounting records and shareholder names and addresses.
3. Prepare: Annual Balance Sheet and Income Statement; File Annual Report and Pay License Fees; Hold Annual Meeting at
time and place specified in bylaws.
4. Hold Annual Meeting at time and Place specified in bylaws: Annual Meeting. Written notice required to shareholders of
Record within statutory period (not less than 10 (20 if fundamental matter) nor more than 60 days before meeting) Notice
must include time place and date.

Shareholder Rights and Actions
1. Voting: Shareholders vote on director election, amendments to Articles, fundamental changes, director indemnity, and approving conflicting transactions. (Watch for directors giving self a benefit from corporation.)

2. Special Meetings: Special meetings may be called by shareholder(s) of 10% or more of the corporation’s shares.
• Notice Required: Notice of a special meeting must be given 10 - 60 days prior to the meeting, and must include time, date, place and purpose. (20-60 days if fundamental changes – see below.)
• Quorum Required: The shareholders may usually act by a majority of shares eligible if a quorum is present. A quorum is a majority of the shares. Shareholders may vote actually or by proxy.

3. Inspection Rights: A shareholder of a newly formed corporation may inspect and copy, upon five days notice, the articles, bylaws, minutes of and actions taken at shareholder meetings, financial statements, written communications to shareholders generally, list of current officers and directors, and the initial report to the Secretary of State. A proper purpose requirement must be met. If trying to take over corporation, still within proper purpose requirement.

4. Transfer of Stock: Shares of stock are freely alienable unless a valid restriction is in place.

5. Preemptive Rights: If not precluded by the Articles, shareholders have a right to purchase stock made available by the corporation for purchase on a pro rata share of their current interest.

6. Ability to Remove Directors: Shareholders may remove directors with or without cause unless Articles say for cause only. Court action is also available if directors breach duties (below).

7. Derivative Actions: If the board takes no action for a wrong done to the corporation, a shareholder may bring a derivative action. (This may be against a wrongdoing director, officer, or third party.)

8. Action for Ultra Vires Activity: If the corporation is outside of its authorized activity, shareholders can seek to enjoin the activity or get damages resulting if activity is complete.

9. Exercise Dissenter’s Rights: This is the right of shareholder to not vote in an issue and claim their stock value plus interest. (Unless not allowed by Articles.) Such rights are allowed in all fundamental changes except dissolution and some asset sales.

Board Rights and Actions
1. Authority and Form
• Corporate Power: All corporate power is vested in the board of directors. Directors are not agents of the Corp.
• Directors: No. of directors is set by the Articles or Bylaws. The board may consist of one or more natural persons.
• Officers: Specific officers are not necessary. There must be at least one officer responsible for preparing minutes and authenticating records. One or more offices may be held by the same person.
2. Meetings and Resolutions
• The board acts collectively and each director, no matter his shareholdings, has one vote.
• Directors may act by unanimous written consent or at meetings.
• Quorum Required: In a meeting, the board acts by a majority of directors present if quorum is present. A quorum is a majority of the number of directors.
3. Director Duties
a. Fiduciary Duties: Directors have fiduciary duties to the corporation to act in good faith, with reasonable care, and in the corporation’s best interest. Under the Business Judgement Rule, it is presumed directors act in conformity with their fiduciary duties. [Breach of duties = director liability to the corporation for damages].
b. Business Opportunities: A director that personally takes a business opportunity that came to him in his official corporate capacity and is in the corporation’s line of business may have taken it in trust for the corporation.

Relation with Stockholders - Stock
1. Issuance: A corporation cannot issue more shares than the number authorized in the Articles. Board of Directors must authorize the issuance (sale) of shares by board resolution; sales of unauthorized shares are void.
2. Consideration for Shares: Shares must be issued for sufficient consideration which the board determines conclusively, provided it acts in good faith. Shares of stock may be exchanged for tangible or intangible property, cash, promissory notes, services performed, future services, or other securities.
3. Stock Purchased by Parties at Same Time: Shareholders purchasing shares at the same time must pay the same price. If the board, in good faith, determines the consideration govern for stock is adequate, no one may attack the sale due to inadequate consideration. [Shareholders may have preemptive rights regarding new sales of stock].
4. Subscription Agreements: A written subscription agreement is valid for six months unless a different time is specified.
5. Reacquisition of Stock: Corporations can reacquire stock and hold it for sale. (WA does not have treasury stock.)
6. Dividends: The board has power to issue dividends so long as the corporation can pay their bills when they come due and assets are greater than liabilities.
• Directors are personally liable if dividends are issued wrongfully.
• Dividends must be paid to each share equally.

Relations with Directors and Officers
1. Breach of Duties by Directors: (See duties above): Corporation can bring action or mitigate director damages. (Note: If corporation does not bring action, shareholders can bring derivative action.) Mitigation Methods include as provided in the Articles of Incorporation, Insurance, Indemnification if director wins, or possible if settlement occurs; Agency law applies to officers or Approval of director conflicting interest transaction.
2. Liability for Officers and Agents: A corporation is liable for the acts of its agents in the scope of their agency.
• An individual taking on behalf of a corporation should make it clear it is the corporation taking action and he is acting as an agent for the corporation. The best method is by signing ABC Corp. by Fred Smith, its president.
• A corporation may adopt or ratify actions done on its behalf, but this does not necessarily relieve the agent’s liability.

Relation with Third Parties (Agency rules apply).
1. Corporate Powers: A corporation may engage in any lawful activity unless a narrower purpose is stated in the Articles.
2. Ultra Vires Activity: If the corporation is outside of its authorized activity, third parties can seek to enjoin the activity or get damages resulting if activity is complete.
3. Piercing the Corporate Veil: A third party may bring an action against the shareholders if: (1) the corporation does not comply with formalities, or (2) the corporation is undercapitalized at the onset and fraud was present in the interaction. (Piercing the veil does not result in dissolution, nor necessarily apply or affect other plaintiffs.)

• Always requires 2/3 approval of all shares.
• 2 - 60 days notice required. For Directors and Officers can call meeting with only 2 days written or oral notice.

1. Amendment of Articles of Incorporation

2. Merger -A merger must be proposed by the board and approved by 2/3 of the shares entitled to vote. Shareholders are prior notice of the meeting, a copy of the plan of sale, and notice that the transaction triggers dissenter’s rights. If merger approved, Board and shareholders of both merged and surviving company must vote to approve. If Share exchange, both boards will vote, but only the merged (disappearing) company’s shareholders get to vote.

3. Sale of Substantially All Corporate Assets: A sale or transfer of all or substantially all of the corporation’s assets other than in the regular course of business must be proposed by the board and approved by 2/3 of the shares entitled to vote. Shareholders are prior notice of the meeting, a copy of the plan of sale, and notice that the transaction triggers dissenter’s rights.

4. Dissolution
a. Administrative Dissolution: The Secretary of State may dissolve, with notice, a corporation for failing to comply with payment of the annual fee or filing annual reports.
• The corporation may be reinstated within 5 years by curing the cause of dissolution. Reinstatement relates back to the date of dissolution.
• Also the state must give the corporation 60 days to cure if fail to pay fees or deliver reports when due.
b. Corporate Dissolution: Dissolution must be recommended to the board and approved by 2/3 of the shares. Upon approval, the assets are used to satisfy creditors, and then distributed to shareholders accordingly.
c. Effect of Dissolution: A dissolved corporation continues in existence but may not take any action except winding up its affairs.
d. Completion of Dissolution: Upon proper filing of Articles of Dissolution to the Secretary of State.

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