Business Associations: Corporations

Question 1

pre-incorporation:
promoters:
-definition; corporation liability; promoter liability;

Answer 1

-definition: persons acting on behalf of an unformed corporation.
-corporation liability for promoter’s contracts: when the corporation adopts by express adoption by BOD resolution or implied adoption (knowledge & accepts benefits)
-until novation; solely liable if corporation is never formed

Question 2

pre-incorporation: promoters
-duties

Answer 2

-promoters: duties: promoter is a fiduciary, no secret profits.
-If property is acquired before formation & sold to the corporation: then profit is recoverable if sold for more than fair market value
-if property is acquired after & sold to the corporation: then any profit is recoverable

Question 3

pre-incorporation: subscribers
-definition; limitation

Answer 3

-subscribers: a written agreement to buy stock from an unformed corporation
-limitation: subscription agreement is irrevocable for 6 months

Question 4

formation requirements: De Jure (A PAIN)

Answer 4

-Authorized shares: number, classes, and series
-Purpose: general purpose with perpetual duration valid and presumed, unless specific statement of purpose or limited duration is expressed.
—-if a specific purpose, activities that are beyond the scope are Ultra Vires activities. Ultra Vires contracts are valid. Shareholders can seek an injunction. The corporation can sue the responsible directors and officers for losses bc of Ultra Vires acts.
-Agent: and address of registered office
-Incorporators: incorporators names and addresses
-Name: name of the corporation, with some indicia of corporation’s status (inc. or corp.)

Question 5

de facto corporation: definition

Answer 5

de facto corporation is a business that doesn’t fulfill the filing formalities but may nonetheless be treated as a corporation if the organizers have made a good faith, colorable attempt to comply with the corporate formalities and have no knowledge of the lack of corporation status.

Question 6

legal significance of a corporation

Answer 6

the corporation is a separate legal person; Shareholders are not liable for debts of the corporation bc of limited liability. Shareholders are only liable for the price of their stock

Question 7

piercing the corporate veil: definition; requirements; who is liable

Answer 7

-piecing the corporate veil: to avoid fraud or unfairness and to render Shareholders liable to 3rd party victim.
-requirements: Shareholders treat the corporation as their alter ego by failing to observe sufficient corporation formalities OR the corporation is undercapitalized (fails to maintain sufficient funds for foreseeable liabilities)
-who is liable: Shareholders who are active in the operation of the corporation, or the Directors and Officers. The Courts are more willing to pierce for a tort victim than a contract claimant.

Question 8

foreign corporations

Answer 8

a corporation which is incorporated outside of the state engage in intrastate business must file certificate of authority, including all A PAIN info.

Question 9

Issuance of Stock:
Consideration: types

Answer 9

money, binding obligation to perform future services with an agreed value, tangible/intangible peroperty; services already performed.

Question 10

Par Value

Answer 10

the minimum issuance price. No par value means any valid consideration BOD deems adequate

Question 11

Treasury Stock

Answer 11

stock that was previously issued and reacquired and re-sold as no par.

Question 12

Acquiring property with par value stock

Answer 12

ok if the BOD values the property in good faith as at least par value

Question 13

Consequences

Answer 13

if less than par value, Directors are liable for signing off on below par issuance and Purchaser bc Shareholders must pay full consideration for shares.

Question 14

issuance of stock: preemptive rights

Answer 14

right to maintain % of ownership each time new issuance is release. Must be expressly granted in articles

Question 15

Action and Liability of Directors and Officers:
Statutory Requirements

Answer 15

BOD must have 1 member; Shareholders elect Directors; Shareholders can remove Director for any reason.

Question 16

Valid meeting required for BOD Actions

Answer 16

unless unanimous Director consent in writing to act w/o a meeting. Notice can be set in bylaws.
-No proxies or voting agreements.

Question 17

quorum: definition

Answer 17

majority. Vote: majority of the votes are present. Each Director is presumed to concur with the BOD action unless dissent/abstention in writing.

Question 18

Liability of Directors to Corporation and Shareholders:

Answer 18

Directors have the duty to manage the corporation, but are protected by the Business Judgment Rule.
-But, they are fiduciaries who owe a duty of care and loyalty

Question 19

The Business Judgment Rule

Answer 19

a presumption that the Directors manage the corporation in good faith and in the best interest of the coporation

Question 20

Duty of Care

Answer 20

the Director must act with the care a prudent person would use with respect to her own business, unless articles have limited Director liability for breach

Question 21

Duty of Loyalty

Answer 21

Director may not recieve an *unfair) benefit to the detriment of the corporation or Shareholders, unless there has been a material disclosure and independent ratification.

Question 22

Duty of Loyalty:
-self dealing
-usurping corporate opportunities

Answer 22

-Director receives unfair benefit in a transaction with the corporation
-Director recieves an unfair benefit by usurping an opportunity that the corporation would have pursued.

Question 23

Duty of Loyalty:
-self dealing
-usurping corporate opportunities

Answer 23

-Director receives unfair benefit in a transaction with the corporation
-Director receives an unfair benefit by usurping an opportunity that the corporation would have pursued.

Question 24

ratification: defend a claim by (a) (b) (c)

Answer 24

defend a claim by (a) majority vote of independent directors; (b) a majority vote of a committee of at least 2 independent Directors; (c) majority vote of shares held by independent Shareholders.

Question 25

ratification: Interested Director Doctrine

Answer 25

-Common law: the transaction with the interested Director is voidable at the corporation’s option
-Modern: the contract is invalid unless, BOD approves the transaction after disclosure and Director doesn’t vote; Shareholders approve the contract after disclosure; or the contract is fair

Question 26

Officers: duties; agency; required positions; selection and removal

Answer 26

-duty of care and loyalty
-Officers are agents of the corporation and bind the corporation by authorized acts
-requirements: president, secretary, and treasury
-selected and removed by Directors

Question 27

indemnification: definition; never indem; always indem; may indem
-who decides?

Answer 27

-indemnification for costs, attorney fees, fines, judgment or settlement in the course of corporation’s business.
-never: indem when Director and Officers lose the suit
-always: indem if Director and Officers win the suit
-may: indem if liability to 3rd parties or settlement with corporation; Directors and Officers shows the action was in good faith and conduct is in the corporation’s best interest

-who decides?: majority of independent Directors; Majority of committee of independent Directors; Majority of shares of independent Shareholders; Board pursuant to independent Legal Counsel’s recommendation

Question 28

Rights of Shareholders:
-direct action

Answer 28

direct action: the Directors breached a fiduciary duty owed to individual as Shareholder

Question 29

derivative suits: definition; requirements

Answer 29

-Shareholder suing to enforce the corporation’s own cause of action
-requirements: contemporaneous stock ownership when claim arose and throughout litigation adn demand on BOD that they cause corporation to bring suit

Question 29

derivative suits: definition; requirements

Answer 29

-Shareholder suing to enforce the corporation’s own cause of action
-requirements: contemporaneous stock ownership when claim arose and throughout litigation adn demand on BOD that they cause corporation to bring suit
—Demand must be rejected or lapse 90 days

Question 30

Voting: who can vote and when

Answer 30

any owner on record date as determined by BOD, up to 70 days before the meeting date

Question 31

proxy voting: (i) (ii) (iii) (iv) (v)
-revocability

Answer 31

(i) a writing; (ii) signed by record shareholder; (iii) directed to the corporation’s secretary; (iv) authorize another to vote their shares; (v) valid for 11 months.
-revocable unless proxy says irrevocable and Shareholder passed some interest

Question 32

Shareholders Meeting

Answer 32

-an annual meeting, 1 Director slot must be elected OR specially noticed special meeting called by BOD, President, or 10% of voting shares re: fundamental corporate change or proposal
-special meeting is limited to stated purpose

Question 33

Quorum

Answer 33

majority of outstanding shares at meeting’s start
-quorum vote: the votes in favor are more than the votes against

Question 34

pooled or block voting trust: definition; requirements

Answer 34

formal delegation of voting power to voting trustee which is enforceable for 10 years.
-requires: written trust agreement; filed with the corporation; transfers shares to voting trustee; Shareholder gets the trust certificates; and the Shareholder retains all rights but voting

Question 35

Shareholder Voting Agreement

Answer 35

-a written agreement to vote shares as required in agreement
-it is binding and enforceable; no time limit or filing

Question 36

cumulative voting

Answer 36

must be expressly granted in Articles. Only available when voting for Directors

Question 37

Other Shareholder Rights/Issues:
Shareholder action for involuntary dissolution

Answer 37

ask the court for liquidation if Directors are deadlocked & corporation is threatened with irreparable injury, or oppression, or waste is occurring

Question 38

record books

Answer 38

demand upon notice/proper time

Question 39

dividends: declaration and personal liability

Answer 39

-declared solely at BOD discretion, limited only if corporation is insolvent.
-BOD is personally liable for unlawful distributions, unless good faith reliance on financial officer’s report re: solvency

Question 40

dividends: priority

Answer 40

*preferred share ($ dividend preference) payable at $ amount stated;
-participating preferred: paid as preferred and common share
-cumulative preferred: paid at rate of preferred each year
-common: paid last and equally

Question 41

dividends: paid out

Answer 41

of earned surplus, not stated capital

Question 42

repurchased and redemptions: definition; CL; and Modern

Answer 42

decision lies solely with BOD. Shareholders can’t force corporation to repurchase
-Common Law: only from earned surplus/retained earnings
-Modern: not allowed if corporation is insolvent

Question 43

closely held corporations: definition; requirements; result

Answer 43

-agreement amongst the Shareholders to eliminate corporate formalities
-requirements: unanimous Shareholder agreement in Articles, By-Laws, or filed, written agreement. Must be reasonable share transfer restriction
-result: no piercing. May be S-Corp: P tax treatment if less than 100 Shareholders who are individual, U.S. residents and only one class of stock

Question 44

processional corporations: definition; requirements

Answer 44

-licensed professionals
-requirements: organizers file with name as a Professional Corporation; Shareholders must be licensed professionals; only practice one designated profession; Pro liable personally for own malpractice, but not for other malpractice or obligations

Question 45

Duty to other Shareholders

Answer 45

-generally none
-Controlling Shareholders: duty not to unfairly prejudice the minority. If selling to looter, the corporation will be liable for damages unless reasonable measures are taken to investigate the buyer. Liability also for selling shares at premium in exchange for corporate office.

Question 46

Fundamental Corporate Changes:
-Types

Answer 46

-types: Merger; consolidation; dissolution; Fundamental Amendments to Articles; sale of substantially all corporation assets

Question 47

steps

Answer 47

BOD resolution; notice of special meeting of Shareholders; approval by majority of all shares entitled to vote and by a majority of any voting group adversely effected; file a notice with State, eg. Art of Merger.
-EXCEPT: no Shareholder approval for short form merger (where the parent corporation owns 90% of the sub)

Question 48

appraisal rights: definition and requirements

Answer 48

-dissenting Shareholders can force the corporation to buy shares at fair value.
-requirements: before vote, file a written notice of objection and intent to demand payment; vote objecting to the change; prompt written demand to be bought out
-the court will appoint an expert appraiser to value

Question 49

sale of assets

Answer 49

may be considered de facto merger and trigger recession and appraisal rights. Procedural steps must be followed.

Question 50

dissolution/liquidation

Answer 50

approval by a majority of Directors and shares entitled to vote

Question 51

Federal Securities Laws:
-Anti-Fraud (Rule 10(B)(5)): elements

Answer 51

-elements:
-Interstate Commerce / Use of the National Exchange;
-Scienter (intent to decieve);
-Deception (material misrepresentation or misappropriation of material non-public info;
-In connection with actual purchase or sale of securities

Question 52

insider trading: Tipper; Tippee; misappropriation

Answer 52

Tipper: improper purpose + benefit
Tippee: tipper breach and tipee knew
Misappropriation: government prosecution for trading on market info in breach of duty of trust/confidence owed to the source of the info

Question 53

section 16(B): short swing trading profits: requirements and effect

Answer 53

-requirements: reporting corporation: listed on the national exchange or more than 500 Shareholders and $10mil in assets.
—Defendant must be Director and Officer or more than 10% Shareholders
—they may not buy then sell stock within a single 6 month period. In 6 months, look at the highest sell and lowest buy price
-effect: profits are recoverable

Question 54

Sarbanes Oxley

Answer 54

CEO/CFO of reporting corporations must certify that filing doesn’t contain material misrepresentations or ommissions & fairly presents the financial position
-willfully certify a false report: $5mil fine and 20 years
-If false report is restated, the corporation may recover CEO/CFO profits from trading within 12 months after filing + incentive based compensation
-recovery also from trades during “black out” of at least 3 days when 50% of employees are prohibited from trading in retirement plans