Business Assocations

Question 1

Who are promoters in the context of corporate formation?

Answer 1

Persons acting on behalf of unformed corporation

Promoters are responsible for taking the necessary steps to form the corporation.

Question 2

What is the liability of a corporation for a promoter’s contracts?

Answer 2

Liability arises when the corporation adopts the contract by express adoption or implied adoption

Express adoption requires a Board of Directors resolution, while implied adoption occurs when the corporation has knowledge of and accepts the benefits of the contract.

Question 3

What is the promoter’s liability if the corporation is never formed?

Answer 3

Solely liable until novation

Novation refers to the replacement of one of the parties in an agreement, requiring consent from all parties involved.

Question 4

What is the duty of a promoter?

Answer 4

Promoter is a fiduciary and cannot make secret profits

This includes a requirement to disclose any profits made from the sale of property to the corporation.

Question 5

What is a subscriber in corporate formation?

Answer 5

A person who has a written agreement to buy stock from an unformed corporation

Subscription agreements are typically irrevocable for six months.

Question 6

What are the formation requirements for a corporation?

Answer 6

1. Authorized shares (number, classes, series)
2. Purpose (general or specific)
3. Agent & address of registered office
4. Incorporators’ names & addresses
5. Name of corporation with corporate status indication

Specific purpose can lead to ultra vires activities if the corporation acts beyond that purpose.

Question 7

What is a de facto corporation?

Answer 7

A business that may be treated as a corporation despite not fulfilling filing formalities, if organizers made a good faith attempt

This typically applies when there is no knowledge of the lack of corporate status.

Question 8

What is the legal significance of a corporation?

Answer 8

It is a separate legal person; shareholders are not liable for the corporation’s debts

Shareholders are only liable for the price of their stock.

Question 9

What is ‘piercing the corporate veil’?

Answer 9

A legal concept that renders shareholders liable to third-party victims to avoid fraud or unfairness

This occurs if shareholders treat the corporation as their alter ego or if the corporation is undercapitalized.

Question 10

What must foreign corporations do to conduct intrastate business?

Answer 10

File a certificate of authority including all formation information

This ensures compliance with local laws.

Question 11

What is par value in the context of stock issuance?

Answer 11

The minimum issuance price for stock

If stock has no par value, any valid consideration deemed adequate by the Board of Directors is acceptable.

Question 12

What is treasury stock?

Answer 12

Stock that has been previously issued and reacquired by the corporation

Treasury stock does not have voting rights.

Question 13

What are preemptive rights?

Answer 13

Rights that allow shareholders to maintain their percentage of ownership during new stock issuances

These rights must be expressly granted in the corporation’s articles.

Question 14

What are the statutory requirements for a Board of Directors?

Answer 14

Must have at least one member; shareholders elect directors; shareholders can remove directors for any reason

Valid meetings are required for Board actions unless there is unanimous consent.

Question 15

What is the business judgment rule (BJR)?

Answer 15

A presumption that directors manage the corporation in good faith and in its best interest

This rule protects directors from liability for decisions made in good faith.

Question 16

What is the duty of care for directors?

Answer 16

Directors must act with the care a prudent person would use in their own business

This duty can be limited by the corporation’s articles.

Question 17

What is the duty of loyalty for directors?

Answer 17

Directors may not receive unfair benefits to the detriment of the corporation or shareholders

Exceptions exist if there is material disclosure and independent ratification.

Question 18

What constitutes self-dealing by a director?

Answer 18

A transaction where the director receives an unfair benefit from the corporation

This can occur in transactions with the corporation.

Question 19

What are considered types of consideration in corporate transactions?

Answer 19

1. Money
2. Binding obligation for future services
3. Tangible/intangible property
4. Services already performed

Consideration must have agreed value.

Question 20

What are interested transactions?

Answer 20

Transactions between the corporation and an interested director that are not voidable if certain conditions are met

Conditions include material facts disclosed and approval by a majority of shareholders or disinterested directors.

Question 21

What are the duties of corporate officers?

Answer 21

Duty of care and duty of loyalty

Officers are agents of the corporation and bind it through authorized acts.

Question 22

What does indemnification involve for directors and officers?

Answer 22

Coverage for costs, attorney fees, fines, judgments, or settlements in the course of corporate business

Indemnification is not allowed when the director or officer loses a suit, but it is mandatory if they win.

Question 23

What are the three conditions under which indemnification may occur?

Answer 23

1. Liability to 3rd parties or settlement with corporation
2. Directors and Officers show action in good faith
3. Conduct in corporation’s best interest

Question 24

How is indemnification paid?

Answer 24

Paid out of earned surplus, not stated capital

Question 25

Who decides on repurchases and redemptions?

Answer 25

Board of Directors (BOD)

Question 26

In closely held corporations, what is required for agreements among shareholders to eliminate corporate formalities?

Answer 26

Unanimous shareholder agreement in Articles, By-Laws, or written agreement

Question 27

What are the requirements for a derivative suit?

Answer 27

1. Contemporaneous stock ownership when claim arose 2. Inform corporation or BOD in writing of facts of each cause of action against defendants OR provide them with a copy of the complaint

Question 28

What is the definition of a direct action by shareholders?

Answer 28

Shareholders suing if Directors breached fiduciary duty owed to them as shareholders

Question 29

What types of fundamental corporate changes are there?

Answer 29

1. Merger 2. Consolidation 3. Dissolution 4. Fundamental amendments to Articles 5. Sale of substantially all corporate assets

Question 30

What is required for a dissenting shareholder to exercise appraisal rights?

Answer 30

1. Before vote, file written notice of objection 2. Vote objecting to change 3. Prompt written demand to be bought out

Question 31

What are the elements of the anti-fraud rule (Rule 10b-5)?

Answer 31

1. Use of element or instrument of Interstate Commerce/National Exchange 2. Scienter – intent to deceive 3. Deception – material misrepresentation or misappropriation of material non-public info 4. In connection with actual purchase or sale of securities

Question 32

What is insider trading?

Answer 32

Trading based on inside, non-public information, breaching a duty of trust and confidence

Question 33

What are the requirements for proxy voting?

Answer 33

1. A writing 2. Signed by record shareholder 3. Directed to corporation secretary 4. Authorizing another to vote their shares 5. Valid for 11 months

Question 34

What is a quorum at a shareholder meeting?

Answer 34

Majority of outstanding shares at the meeting’s start

Question 35

What is a pooled or block voting trust?

Answer 35

Formal delegation of voting power to a voting trustee enforceable for 10 years

Question 36

What is cumulative voting?

Answer 36

Voting method that must be expressly granted in Articles and is only available when voting for Directors

Question 37

What can shareholders ask for in case of involuntary dissolution?

Answer 37

Liquidation if Directors are deadlocked and corporation is threatened with irreparable injury, or oppression, or waste is occurring

Question 38

How are dividends declared?

Answer 38

Solely at the discretion of the Board of Directors and limited if the corporation is insolvent

Question 39

What is the priority order for dividend payments?

Answer 39

1. Preferred shares 2. Participating preferred 3. Cumulative preferred 4. Common shares

Question 40

What does Section 16(B) prevent?

Answer 40

Insiders from short swing trading profits ## Footnote It prohibits certain corporate insiders from buying and selling stock within a six-month period to prevent market manipulation.

Question 41

What are the requirements for Section 16(B) to apply?

Answer 41

If (i) reporting corporation is listed on a national exchange or has more than 500 shareholders and $10 million in assets; and (ii) Defendant is a D&O or owns more than 10% of shares ## Footnote D&O refers to Directors and Officers of the corporation.

Question 42

What is the effect of Section 16(B)?

Answer 42

Profits recoverable ## Footnote This means that profits made from short swing trades can be reclaimed.

Question 43

What must CEOs and CFOs certify under the Sarbanes-Oxley Act?

Answer 43

That filings do not contain material misrepresentations or omissions and fairly present financial position ## Footnote This is a requirement to ensure the accuracy and integrity of financial statements.

Question 44

What are the penalties for willfully certifying a false report under Sarbanes-Oxley?

Answer 44

$5 million fine and 20 years in prison ## Footnote This emphasizes the seriousness of financial misrepresentation.

Question 45

What can a corporation recover if a false report is restated?

Answer 45

CEO/CFO profits from trading within 12 months after filing + incentive-based compensation ## Footnote This holds executives accountable for their financial reporting.

Question 46

What is the liability of a principal for the torts of an agent?

Answer 46

Principal will be liable if (i) principal-agent relationship exists and (ii) tort was committed by agent within the scope of the relationship ## Footnote This establishes the conditions under which a principal is responsible for an agent's actions.

Question 47

What is lingering authority in agency law?

Answer 47

Actual authority terminated, but agent continues to act on principal's behalf ## Footnote The principal remains liable until the customer receives notice of termination.

Question 48

What is required for a principal-agent relationship?

Answer 48

Assent, Benefit, Control ## Footnote These elements define the relationship and the obligations involved.

Question 49

What is meant by 'frolic' vs. 'detour' in agency law?

Answer 49

Frolic: new and independent journey; Detour: mere departure from assigned task ## Footnote This distinction helps determine the scope of liability for torts.

Question 50

What are the duties an agent owes to a principal?

Answer 50

Reasonable care, obey reasonable instructions, loyalty ## Footnote Loyalty entails no self-dealing, usurpation of opportunities, or secret profits.

Question 51

What is a general partnership (GP)?

Answer 51

An association of two or more people carrying on as co-owners of business for profit ## Footnote The sharing of profits creates a presumption of a GP.

Question 52

What is the liability of a principal for contracts entered by an agent?

Answer 52

Principal is liable if authorized agent enters into a contract ## Footnote This establishes the principal's responsibility for the actions of their agents.

Question 53

What is the liability of incoming partners in a general partnership?

Answer 53

Not liable for pre-existing debt, but funds from incoming payments can be used to satisfy prior debt ## Footnote This protects incoming partners from past obligations of the partnership.

Question 54

What is a limited partnership?

Answer 54

At least 1 General Partner and 1 Limited Partner; requires LP Certificate ## Footnote The General Partner is personally liable for all LP obligations.

Question 55

What is actual express authority?

Answer 55

Principal used words to express authority to agent ## Footnote This can include oral or written communication.

Question 56

What is apparent authority?

Answer 56

Principal cloaked agent with appearance of authority, and third party reasonably relies on it ## Footnote This can bind the principal to contracts made by the agent.

Question 57

What is a Limited Liability Company (LLC)?

Answer 57

Members are owners with limited liability for debts and obligations of business and benefits of personal taxation. ## Footnote Requires Articles of Organization and Operating Agreement.

Question 58

What are the member control dynamics in an LLC?

Answer 58

Members control the LLC, but Articles can delegate to managers. ## Footnote Limited liquidity as members can’t freely transfer interests.

Question 59

What is the duty of loyalty in fiduciary relationships?

Answer 59

No self-dealing; usurping opportunities; secret profits. ## Footnote This is a fundamental principle in partner relationships.

Question 60

What is the remedy for breach of fiduciary duty?

Answer 60

Action for accounting – recover losses caused by breach AND disgorge profits. ## Footnote This helps ensure accountability among partners.

Question 61

What is the rule regarding partnership property transfer?

Answer 61

No transfer of specific partnership assets without partnership authority. ## Footnote This includes assets like land, leases, or equipment.

Question 62

Can partners transfer personal property?

Answer 62

Yes, they can transfer profits/surplus owned by individual partners to third parties. ## Footnote This differs from partnership assets.

Question 63

What rights do general partners (GPs) have in management?

Answer 63

GPs have the right to share management, but may not transfer this right. ## Footnote Each partner is entitled to equal control and vote, absent agreement.

Question 64

Do partners receive a salary?

Answer 64

Absent agreement, partners don’t get a salary unless winding up. ## Footnote Salaries are generally not standard unless specified.

Question 65

How are profits and losses shared in a partnership?

Answer 65

Absent agreement, profits are shared equally; losses are shared like profits. ## Footnote This promotes fairness among partners.

Question 66

What begins the process of partnership dissolution?

Answer 66

Dissolution begins at the end of the partnership. ## Footnote It marks the transition towards winding up the business.

Question 67

What is 'at will' dissolution?

Answer 67

Automatic upon notice of express will of any one GP to dissociate. ## Footnote This allows for flexibility in partnerships.

Question 68

What conditions lead to 'not at will' dissolution?

Answer 68

Dissociation occurs upon happening of an event specified in agreement OR majority vote of partners to dissolve within 90 days of dissociation of a single partner. ## Footnote This requires more formal agreement among partners.

Question 69

What occurs during the winding up phase?

Answer 69

Time in between dissolution and termination. ## Footnote Partners receive compensation during this phase.

Question 70

What liabilities do general partners retain during winding up?

Answer 70

GPs retain liability on transactions entered into to wind up old business with creditors. ## Footnote They also retain liability on new transactions until notice of dissociation is given.

Question 71

What is the priority of claims during winding up?

Answer 71

1. Creditors (outside non-partner trade creditors and inside partners who loaned money to partnership) 2. Capital Contributions by partners 3. Remainder – Profits shared equally absent agreement. ## Footnote Losses are shared like profits.