Business Associations - Corporations

Question 1

Three Types of Corporate Formation?

Answer 1

1. De Jure - file articles of incorporation (“I-SCAN”)
2. De Facto - good faith but unsuccessive attempt w/ actual use of corporate power
3. Corporation by Estoppel - for those who believed entity was corporation but later want to deny

Question 2

Articles of Incorporation Requirements?

Answer 2

I-SCAN
1. Initial Agent’s Name
2. Street Address for corporate office
3. Corporation’s Name
4. Authorized number of shares
5. Name and address of incorporators

Question 3

Four Piercing the Corporate Veil Factors?

Answer 3

1. Alter Ego - no formalities, comingling
2. Undercapitalization - not enough for foreseeable liabilities
3. Fraud - to commit or to hide behind to avoid existing obligations
4. Estoppel - when shareholder represents that he will be personally liable for corp debts

Question 4

Ultra Vires Acts?

Answer 4

Actions outside of stated business purpose, if any; otherwise presumed for any lawful business.

Question 5

Pre-Incorporation Liability?

Answer 5

1. Promoter is personally liable unless novation or agreement
2. Corporation not liable unless adopts contract or accepts benefit.

Question 6

Board of Directors’ Meeting Requirements?

Answer 6

1. Quorum - majority of directors present at time of vote (unless otherwise provided and never less than 1/3)
2. Withdrawal can break quorom
3. Dissent/absention requires objection upon arrival, recording in minutes, or written notice.

Question 7

Three Corporate Officer/Director Duties?

Answer 7

1. Duty of Care
2. Duty of Loyalty
3. Duty to Disclose

Question 8

Officer/Director Duty of Care?

Answer 8

Act in:
1. Good faith
2. As a reasonably prudent person
3. In manner he reasonably believes is in the best interest of corporation.

Business Judgment Rule (BJR) applies to business judgments and presumes good aith and actions in best interest of corporation unless action is unreasonable.

Question 9

Officer/Director Duty of Loyalty?

Answer 9

Must put the interests of the corporation above his own. Prohibits:
1. Conflicts of Interest/Self-Dealing unless authorized/approved after material disclsoure and fair;
2. Usurping Corporate Opportunity unless full disclosure and good fath rejection; and
3. Unfair Competition with corporation

Question 10

Officer/Director Duty to Disclose?

Answer 10

Must disclose material information relevant to corporation to board members.

Question 11

Three Rights of Officers/Directors?

Answer 11

1. Compensation - must be fair
2. Indemnification - mandatory and discretionary (mandatory if on behalf of corporation or successful in adverse proceeding; discretionary if unsuccessful but acted in good faith)
3. Inspection of corporate records and facilities

Question 12

Liability of Officers and Directors?

Answer 12

Generally, no personal liability.

Question 13

Four Rights of Shareholders?

Answer 13

1. Attend Meetings
2. Voting to elect/remove board members or approve fundamantal changes
3. Inspection of corporate books (aritcles, resolutions, minutes, etc.) with proper purpose and five days notice.
4. Dividends (if any)

Question 14

Shareholder Voting Quorum Requirements?

Answer 14

1. Majority of outstanding shares represented.
2. Majority of votes cases sufficient except if fundamental change, which requires majority of all outstanding shares.

Question 15

Two Types of Shareholder Lawsuits?

Answer 15

1. Direct Suit - breach of fiduciary duty owed to shareholder
2. Derivative Suit - on behalf of corporation for harm done to corporation; shareholder must own stock when claim arose, adequately represent corporation, and make demand on directors before suit (unless futile)

Question 16

Duties of Shareholders?

Answer 16

General Rule: No fiduciary duty
Modern Trend: Controlling shareholder (a shareholder with enough voting power to have substantial impact on corporation) owes duty of care and duty of loyalty

Sale of controlling shares at a premium allowed if in good faith & fair.

Question 17

Shareholder Liability?

Answer 17

General Rule: No personal liablity except for professional corporations (i.e., lawyers, doctors, etc.)

Question 18

Section16(b) Violation?

Answer 18

Prohibits short-swing profits (within six months) by corporate insider; profits must be disgorged to corporation.

Requires:
1. Corporation listed on national exchange or $10 million assets & 2,000 shareholders;
2. Corporate Insider (officer/director or over10% shareholders);
3. Trading within six months; and
4. Disgorgment of profits to corporation.

Question 19

Section 10b-5 Violation and Prima Facie Elements?

Answer 19

Prohibits insider trading by anyone who employs fraud/deception in connection with the purchase/sale of any security by means of any instrumentality of interest commerce.

Prima Facie Case:
1. Intent (can be recklessness) to defaud/decive;
2. Material misrepresentation or ommission of insider information
3. Reliance
4. Purchase/sale of security
5. Interstate Commerce

Question 20

Four Types of Section 10b-5 Insiders?

Answer 20

1. Insider Direct Trading
2. Tipper: gives information
3. Tipee: receives information
4. Misappropriator

Question 21

Two Main Points of Sarbanes-Oxley?

Answer 21

1. Enhanced corporate reporting requirements (audit board, senior execs sign off on reporting)
2. Increased criminal penalties

Question 22

Six Types of Fundamental Corporate Changes?

Answer 22

1. Merger (might not be fundamental for both if not significant for one and not needed for short form merger where 90% owned subsidary is merged into owner)
2. Share exchange where one corporation buys all shares of another (only fundamental for the corporation being bought)
3. Asset sale where corporation sells all or substantially all assets (only fundamental for corporation selling assets)
4. Converison of corporate form (i.e., from corporation to LLC)
5. Amend bylaws or articles of incorporation
6. Dissolution and winding up

Question 23

Four-Step Procedure for Approving Fundamental Corporate Changes?

Answer 23

1. Board adopts resolution (remember quorom rules about majority, withdrawal, and dissent/abstention)
2. Written Notice to Shareholders
3. Shareholders Approve (majority of all outstanding shares - not just those present)
4. Update Articles/file with State

Question 24

Dissenter Appraisal Rights?

Answer 24

Shareholder who dissents from proposed fundamental change may have right to have corporation purchase her shares for fair market value and interest.

Requires:
1. Written notice of objection and intent to demand payment before vote;
2. Cannot vote in favor of proposal;
3. Must demand payment in writing after vote.

Not availble to shareholders of public companies or companies with at least **2,000 shareholders and at least $20 million **market value.