Chapter 42 notes
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This 4 page Class Notes was uploaded by Mina Riazi on Wednesday March 4, 2015. The Class Notes belongs to BLAW703 at Kansas taught by Jamison Shipman in Fall. Since its upload, it has received 103 views. For similar materials see Legal Aspects of Business Orginizations in Business at Kansas.
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Date Created: 03/04/15
Chapter 42 Promoteranybody can promote of the business Promotion period 1 Corporation is only liable when the agreement or contract is adopted 2 Promoter is liable prior to the existence of the corporation a Avoid future liability i Nova on ii Stated in the contract promoter will be released upon creation of corporation Formation of Corporation 1 File with state secretary 2 Authorization of shares being issued and number of sharescommon preferred different classes of stock 3 An addition of shares issues requires an amendment to Failure of to corporate 1 Fail to le correctly or at all a Consequences i essentially a foreign corporation ii De facto corporationtreated as a real corporation so third party and corporation must keep contracts iii Liability of shareholders if you participate in the business and know of failed incorporation Nonpro t corporation formationsimilar to for pro t corporation but don39t need to give shareholder rights because they don39t exist Pgs 10601069 Incorporation of Nonpro t Corporations 1 Similar to forpro t incorporationsincorporators le with the secretary of state 2 Nonpro t must state purpose public bene t corporation mutual bene t or religious a Public bene tcreated for the bene t of the public b Mutual bene tdesigned to bene t the members 3 Nonpro ts may not have members they should specify if they do Liability for Preincorporation Transactions 1 Nonpro t status protects members and managers from personal liability 2 If the nonpro t is formed incorrectly or is not formed then the promoters and others that transact for the nonpro t are liable nonexistent principal 3 The corporation becomes liable on preincorporation contracts when its BOD adopts the contracts Financing ForPro t corporations 1 Sale of corporate securities to raise fundsshares debentures bonds and LT notes payable 2 Corporate security can be 1 a share or 2an obligation of the corporation 3 Equity securities stock a Common shares i shareholders have the right to elect the directors voting rights ii claims are subordinate to creditors and preferred shareholders claims iv shareholders have a claim to the corporation39s earnings and assets share in company growth sometimes they can be convertible to preferred stock rare b Preferred shares Liquidation preferences a stated amount that must be paid before common shares and other subordinates Dividend preferencescan be cumulative or noncumulative 1 Cumulativeif dividends aren39t paid they accumulate and must be paid before common shareholders get any dividends 2 Noncumulativepreferred shareholders in the current year must get their dividend before common shareholders Redemption or call provision allows a corporation to repurchase shares at their purchase price forcing shareholders to give up their shares Voting rights 1 Usually limited to voting on big things like a merger or the shareholder39s dividend rights 2 They don39t usually have the right to vote for directors con ict of interest 3 Some classes of preferred stock will have more voting rights than others 4 Authorized Issued and Outstanding Shares I ii iii iv V vi Authorizedshares a corporation is permitted to issue A corporation may not issue more shares than authorized Issuedshares that have been sold to shareholders Outstandingshares held by shareholders Canceleddon39t exist not authorized issued or outstanding They can39t be reissued Shares restored to unissued statusrepurchased shares can be put in unissued status and not cancelled They are still authorized and can be issued later Treasurv sharesrepurchased shares that are not canceled or unissued but still outstanding 5 Options Warrants and Rights Optionsallow holders to buy a speci ed number of shares at a given price at a certain time period Warrantsoptions evidenced by certi cates Rights transferable ST certi cated options give present shareholders the right to subscribe a proportional quantity of the same or different security 1 Preemptive rightshareholders have the opportunityright to newly issued shares in the same proportion as the shareholder39s current ownership keeps the ownership interest the same 6 Debt securities a Corporations borrow money by issuing debt securities b Corporation has to pay interest and principal c Types i DebenturesLT unsecured debt securities ii BondsLT secured debt security that usual have indentures They are usually secured by collateral iii Promissory notesshorter in duration can be secured or unsecured Consideration for Shares The board has the power to issue shares for the corporation 1 Quality of consideration for shares a Consideration must have real value b Consideration can be cash tangible or intangible property bene t to the corporation future services c Some states may have strict limits on what is permitted as consideration 2 Quantity of Consideration for shares BOD is required to issue shares for an adequate cash amount of consideration This depends on the par value of the shares a Par valueminimum amount of consideration needed to be issued an arbitrary dollar amount that the articles of incorporation assigned to the shares Doesn t re ect fair value b Fair value c Accounting for consideration receivedconsideration received by the corporation is recorded as equity or capital in the shareholder39s equity section of the 35 d Resales of shares i Par value of shares is important only when the shares are issued by the corporation ii Treasury shares are not reissued when resold iii If the purchasing shareholder knows the selling shareholder bought the shares below par then the purchasing shareholder is liable to the corporation for the share39s par value minus purchase price Share subscriptiona prospective shareholder gives a promise to buy shares with a speci c price and amount Once the subscriber has paid for the shares and the corporation accepted the subscription they become a shareholder a A subscriber can be a shareholder even before the shares have been issued b Promoters often use share subscriptions preincorporation subscriptions and they are binding once the corporation comes into existence and the BOD approves of the share subscription Issuance of shares 1 A corproration has a duty to issue only the number of shares authorized by its articles Therefore overissued shares are void a If a person is entitiled to overissued shares paid for shares already there are two remedies 1 reimbursement for value paid plus interest2 the corporation has to nd identical issued shares b Overissuance of shares may make directors liable 2 A share certi cate is evidence that a person has been issued shares owns shares and is a shareholder Not necessary for corporations Transfer of shares 1 Share certi cates are ownership evidence so a transfer of the share certi cate is evidence of a transfer of ownership 2 Shares issued a b C Registered sharestransfer happens by signature on back of share certi cate Street certi catetransfer of a share certi cate without naming the transferee Uncerti cated securities are transferred when the corporation registers the security under the new owner39s name Restrictions on transferability of shares 1 Generally there are no restrictions on transferability of shares 2 Many close corporations restrict the transferability of shares to maintain control 3 Types of restrictions a Riohts of rst refusal and ootion aoreements Right of refusal agreement gives the corporation or other shareholders the right to match the offer that a selling shareholder gets for her shares Option agreement 5 gives the corporation the option to buy the selling shareholder39s shares at a predetermined price Buvandsell agreementscompels the shareholder to sell their shares to the corporation at a predetermined price on the agreement This obligates the buyer to buy the selling shareholder39s shares at the predetermined price Consent restraints requires the seller to get consent from the corporation to sell their shares Provisions disqualifying purchasers basically unwanted purchasers are excluded by this provision Drag alongtag along 1 drag alonga majority control interest can force the minority interest to sell their shares 2 tag alonga minority interest can tag along when a majority interest is selling their shares 4 To be enforceable against a shareholder a transfer restriction must be stated in the articles of incorporation The shareholder must also agree NonPro t Corporations Memberships in a nonpublic corporation are not freely transferable Therefore no member of a public bene t corporation or religious corporation can transfer their membership or rights as a member Members of mutual bene t corporations may transfer their membership only if the articles permit it
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