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Bar Prep Questions + Rule of Law > Business Topics > Flashcards

Business Topics Flashcards

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1
Q

a corporation is owned by its….

A

shareholders

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2
Q

the group in charge of management is…

A

board of directors

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3
Q

members of the board of directors are elected by the….

A

shareholdeers

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4
Q

the board appoints people to carry out its policy– who are they?

A

officers

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5
Q

what do we need to form a corporation?

A

a person
paper
act

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6
Q

who is the person needed to form a corporation?

A

incorporator

must have one or more

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7
Q

what does an incorporator do?

A

executes the articles and delivers to the secretary of state

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8
Q

does an incorporator have to be a citizen of the state of incorporation?

A

No

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9
Q

what paper is needed to form a corporation?

A

articles of incorporation

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10
Q

what needs to be in an article of incorporation?

A

name

name and address of each incorporator

registered agent and street address of the registered office (in this state)

information regarding the stock

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11
Q

are there any name restrictions for a corporation?

A

NEED:

corporation
company
incorporated
limited

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12
Q

who is the registered agent?

A

the company’s legal representative so they can receive service of process for the corporation

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13
Q

what information regarding stock is on the article of incorporation?

A

authorized stock

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14
Q

what is authorized stock?

A

the max # of shares the corp can issue (issue- can sell)

must be in the article

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15
Q

what happens if the company has different classes of stock?

A

many states require that the articles state the number of shares per class

and

voting rights

and

preferences of each class of stock

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16
Q

what is the act required to create a corporation?

A

incorporators have notarized articles delivered to the secretary of state and pay the required fees.

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17
Q

what happens if the secretary of state accepts the articles for filing?

A

it forms the corporation

establishes a de jure corporation

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18
Q

what is the organizational meeting?

A

if the initial directors were named in the articles, the directors hold the organizational meeting.

if they were not incorporators hold the organizational meeting, where they elect the initial directors (who then take over management)

at the meeting the board of directors must complete the organization of the corporation

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19
Q

what does “complete the organization of the corporation” mean?

A

appoint officers and adopt initial bylaws

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20
Q

what are bylaws?

A

ann internal document

comprise an operating manual
- includes: setting record dates and methods of giving notice

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21
Q

are the bylaws filed with the state?

A

No they are internal

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22
Q

if the buyers and articles conflict, what governs?

A

articles

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23
Q

who can amend or repeal the bylaws or adopt new ones?

A

the shareholders
OR
the board

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24
Q

internal affairs rule

what law governs the internal affairs of the corporation?

A

the law of the state of incorporation governs internal affairs

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25
Q

entity status

a corporation is…

A

a legal person

can sue and be sued, hold property, be a partner in a partnership, invest in other companies or commodities.

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26
Q

benefit corporation

A

is one formed for profit and also to pursue some benefit to a broader social-policy cause.

articles must say is a “benefit corporation”

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27
Q

how is a corporation and its shareholder’s taxed?

A

corporation is taxed on its profits

shareholders are taxed on their distributions

IDEA: double taxation

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28
Q

how is an s-corp taxed?

A

the corporation is not taxed at the corporate level

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29
Q

what are the qualifications of an S-corp?

A

no more than 100 shareholders

shareholders are human, US citizewns, or residents

has one class of stock and it is not publicly traded

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30
Q

if the corporation incurs a debt, commits a tort or breaches a contract are the shareholders personally liable for that debt?

A

No

This is limited liability

shareholders are only liable to pay for their stock, not for corporate debts

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31
Q

are directors or officers vicariously liable for corporate debts?

A

No

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32
Q

who is liable for the corporate debts?

A

the corporation itself!!!

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33
Q

defective corporation

A

the proprietors thought they formed a corporation but they failed to do so.

making them personally liable for business debts

they have formed a partnership and partners are liable for business debts

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34
Q

what two doctrines allow the proprietors to escape liability?

A

ANYONE asserting either doctrine myst be unaware of failure to form de jure corporation

de facto corporation

corporation by estoppel

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35
Q

de factor corporation requirements

A

there is a relevant incorporation statute

the parties made a good faith colorable attempt to comply with it

and

there has been some exercise of corporate privileges
- they are acting as though they thought it was a corporation

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36
Q

if de factor corporation applies…

A

the business is treated as a corporation for all purposes except in an action by the state.

this would be quo warrantp

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37
Q

when does a de factor corporation take place?

A

when incorporators put together the proper documents and mail them to the secretary of state.

unknown to them the documents are lost in the mail.

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38
Q

if a company is a de facto corporation and in the meantime the business is being operated as a corporation, and enters a contract are the shareholders personally liable on the contract?

A

yes, unless the court applies De factor corporation.

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39
Q

corporation by estoppel

A

someone who treats a business as a corporation may be estopped from denying that it is a corporation.

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40
Q

can a corporation by estoppel avoid liability?

A

No, they can not prevent liability by saying it was not properly formed.

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41
Q

corporation by estoppel applies only in what kind of cases?

A

contract NOT tort

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42
Q

a promoter is…..

A

a person acting on behalf of a corporation not yet formed. they might enter a contract on behalf of a corporation not yet formed.

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43
Q

is the corporation liable on contracts pre-incorporation contracts?

A

the corporation is liable on a pre-incorporation contract ONLY if it adopts the contract

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44
Q

implied adoption arises when?

A

the corporation accepts a benefit of the contract

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45
Q

is the promoter liable on these contracts?

A

unless the contract clearly says otherwise, the promoter is liable on pre-incorporation contracts until there is novation

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46
Q

foreign corporations transacting business in the state….

A

must qualify and pay prescribed fees.

REMEMBER: foreign can even be a state B corp transacting busness in State A

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47
Q

transacting business means…

A

the regularcourse of intrastate ( not intersatate) business activity.

this does not include occasional or sporadic activity in this state and not simply owning property there.

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48
Q

how does foreign corporation qualify to transact business in the state?

A

by getting a certificate of authority from the secretary of state

it gives information from its articles and proves good standing in its home state

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49
Q

does a foreign corporation have a registered agent?

A

Yes, they must appoint a registered agent and maintain a registered office in that state.

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50
Q

what happens if a foreign corporation conducts business without qualifying?

A

civil fine

the corp does not assert a claim in the state

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51
Q

can the foreign corporation be sued and defended in that state?

A

yes

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52
Q

what is needed to start and operate a corporation?

A

capital

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53
Q

what are ways the corporation can gain capital?

A

borrow or raise it by selling stock

or both

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54
Q

security

A

investment

investment = debt

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55
Q

debt securities

A

the corporation borrows money from X and agrees to repay with interest

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56
Q

debt securities are usually called

A

bonds

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57
Q

the person holding a bond is a

A

creditor not an owner of the corporation

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58
Q

equity securities

A

the corporation sells an ownerhsip interest to X

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59
Q

equaity securities are called

A

stock

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60
Q

the person holding is called…

A

a shareholder or stockholder

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61
Q

a stockeholder or shareholder is an…

A

owner not a creditor of the corporation

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62
Q

what is an issuance of stock

A

when corp sells its own stock

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63
Q

what are subscriptions?

A

written offers to buy stock from a corporation

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64
Q

revocation of pre-incorporation subscriptions are irrevocable for how long?

A

6 months

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65
Q

is post-incorporation subscription revocable?

A

yes until accepted by the corporation

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66
Q

at what point are the corporation and the subscriber obligated under a subscription agreement?

A

when the board accepts the offer

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67
Q

stock (or an option to buy stock) may be issued for…

A

any tangible or intangible property or benefit to the corporation

includes: money, property, services already performed for the corporation, and discharge of a debt, promissory notes, future services to the corporation

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68
Q

can a corporation give employees options to buy stock as payment for services?

A

yes because for future services

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69
Q

what does par mean?

A

minimum issuance price

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70
Q

what does no par mean?

A

no minimum issuance price

the bard can have the stock issued for any price that it sets

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71
Q

treasury stock

A

stock the company issued and then reacquired

it is considered authorized and the corporation can then resell it.

if it does, the board sets any issuance price it wants.

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72
Q

is the board’s valuation of the stock conclusive?

A

yes, if made in good faith

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73
Q

watered stock

C corp issues 10K shares of $3 par to X for $22K. the corporation wants to recover the $8K of “water” who is liable?

A

the directors if they knowingly authorized the issuance

X (purchaser of the stock)- he has no defense as he was charged with notice of the par value

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74
Q

watered stock

C corp issues 10K shares of $3 par to X for $22K. the corporation wants to recover the $8K of “water”.

what if X transfers the stock to third party. is the TP liable?

A

tp is not liable if she acted in good faith.

she did not know about the water

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75
Q

preemptive right

A

right of an existing shareholder of common stock to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock for money

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76
Q

if the articles are silent, do we have pre-emptive rights?

A

no

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77
Q

Are there statutory requirements for the amount of directors?

A

1 or more

the number can be set in the articles or bylaws

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78
Q

directors of the corporation

A

initial directors may be named in the articles

if not they are elected by the incorporators at the organizational meeting.

if there is an election then the shareholders are the ones that vote

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79
Q

when is there a board election?

A

each year unless there is a “staggered” board.

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80
Q

what is a staggered board?

A

divided into half or 3rds with 1/2 or 1/3 elected each year.

this is usually set in the articles

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81
Q

can shareholders remove directors before their term expires?

A

Yes!

can be done with or without cause!

if the board is staggered then shareholders can only remove a director if for cause

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82
Q

if theres a vacancy on the board, who selects the person who will serve as director for the rest of the term?

A

board or shareholders

BUT if the shareholders created the vacancy by removing a director, the shareholders generally must select the replacement.

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83
Q

must the board of directors act as a group?

A

Yes

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84
Q

is an individual director an agent of the corporation

A

no

individual directors have no authority to speak for or bind the corporation.

the directors must act as a group

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85
Q

how do directors act as a group?

A

unanimous agreement in writing

  • email is okay
  • seperate documents are okay

at a meeting

  • must satisfy the quorum and voting requirements
  • a conference call qualifies as a meeting
  • if individual conversations, then void unless valid act
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86
Q

if there is a board meting, do the board members need notice?

A

Yes

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87
Q

is notice required for regular meetings?

A

No

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88
Q

is notice required for special meetings?

A

yes unless the bylaws say otherwise, the corporation must give at least 2 days notice of:
date
time
place

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89
Q

what happens if proper notice is not given?

A

then whatever happened at the meeting is voidable unless the directors not notified waive the notice defect.

they can do this in:
writing anytime
OR
by attending the meeting without objecting at the outset of the meeting

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90
Q

can directors give proxies or enter voting agreements for how they will vote as directors?

A

No

these efforts are void because directors owe the corporation non-delegatable fiduciary duties

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91
Q

can shareholders vote by proxy and etner into voting agreements?

A

Yes

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92
Q

quorum for meetings of the board

A

for any meeting of the board, we must have a quorum.

unless the buylaws say othewise– a quorum is a majority of the directors

without a quorum the board cannot act.

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93
Q

if a quorum is present at a meeting, passing a resolution requires….

A

only a majority vote of all directors that are present

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94
Q

can a quorum be broken?

A

Yes, it can be “lost” if people leave.

once it is no longer present, board cannot take an act at that meeting

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95
Q

what is the role of the board of directors?

A

manages the corporation

sets policy 
supervises officers
declares distributions 
determines when stock ill be issued 
recommends fundamental corporate changes to shareholders
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96
Q

can a board delegate to a committee?

A

yes, to a committee of one or more directors

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97
Q

what can a committee not do?

A

declare contributions
fill a board vacantcy
recommend a fundamental change to shareholders

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98
Q

can a committee recommend such things to the full board of its action?

A

yes

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99
Q

what tare the fiduciary duties owed to the corporation?

A

duty of care

duty of loyalty

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100
Q

what is the standard of fiduciary duties owed?

A

a director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation

she must also use the care that a prudent person in the position would reasonably believe appropriate under the circumstances.

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101
Q

duty of care

A

burden is on the plaintiff

nonfeasance– when a director does nothing
- he is liable if this breach caused a lose to the corporation

misfeasance- the board makes a decision that hurts the business
- if did appropriate homework then not liable

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102
Q

what is the business judgment rule

A

presumption that when the board took the act it did appropriate homework

burden is on the plaintiff to show that the board either did not do appropriate homework or did something bad.

the court will not second guess a business decision if it was made in good faith, was informed and had a rational basis.

103
Q

duty of loyalty

THINK: conflict of interest

A

burden is on the defendant

self-dealing (interested director transaction)

competing ventures

corporate opportunity

104
Q

does the BJR apply to duty of loyalty?

A

No because it can never apply when the fiduciary has a conflict of interest

105
Q

duty of loyalty

self-dealing (interested director transaction)

A

any deal between the corporation and one of its directors or another business of the directors.

the deal was fair to the corporation when entered
OR
her interest and the relevant facts were disclosed or known and the dal was approved by either:
- majority OR at least 2 of the disinterested directors
- majority of the disinterested shares

106
Q

duty of loyalty

self-dealing (interested director transaction)

can directors set their own compensation as directors or officers?

A

yes but it must be reasonable and in good faith.

if it is excessive, they are wasting corporate assets and breaching the duty of loyalty

107
Q

duty of loyalty

competing ventures

A

director cannot compete directly with her corporation

typical remedy: company gets a constructive trust on profits the director made from the competing venture

108
Q

duty of loyalty

corporate opportunity (expectancy)

A

something the company had an interest or expectancy in or something defendant found on company time or with company resources

the company’s financial inability is NOT defense

109
Q

can a corporation make a loan to a director?

A

yes if it is reasonably expected to benefit the corporation

110
Q

when can a director be held liable?

A 
for: 
improper distributions
improper loans 
ultra vires acts 
breaches of fiduciary duties
111
Q

a director is presumed o concur with board action unless….

A

her dissent or abstention is noted in writing in corporate records

112
Q

what does in writing mean?

A

in the minutes
delivered in writing to the presiding officer a the meeting
written dissent to the corporation immediately after the meeting

113
Q

is an oral dissent effective?

A

not by itself

114
Q

when can a director not dissent?

A

if they voted for the resolution at the meeting

115
Q

when is a director not liable?

A

if they were absent from the meeting

good faith reliance on info presented by an officer, employee, or committee or professional reasonably believed competent. reliance must be in good faith

116
Q

what is an officer?

A

an agent of the corporation

corporation is the principal; officer is an agent

whether the officer has agency authority to do so can bind the corporation

117
Q

what officers are required to have?

A

president
secretary
treasurer

it can have others

118
Q

can one person be multiple officers?

A

Yes

119
Q

how are officers selected and removed?

A

by the board

the board also sets officer compensation

120
Q

can shareholders fire or hire officers?

A

no only the board

121
Q

what is it called when:

someone has been sued on behalf of the corporation in her capacity as an officer or director.

they have incurred costs, attorney’s fees, maybe even fine, a judgment or settlement in that litigation.

now the director is seeking….

A

indemnification (reimbursement) from the corporation

122
Q

when can a corporation not indemnify a director or officer?

A

one was held liable to the corporation or to have received an improper benefit.

123
Q

when must a corporation indemnify a director or officer ?

A

when they prevail in the case on the merit or otherwise.

some states:
they must win the entire case

in others:
they are entitled to indemnification “to the extent”
that she wins the case

124
Q

when may a corporation indemnify a director or officer her litigation expenses?

A

if she shows she acted in good faith with the reasonable belief that she acted in the company’s best interest.

must show that she met the duty of loyalty

125
Q

indemnification of directors and officers

who determines the director or officers eligibility for permissive indemnification?

A

disinterested directors
disinterested shares
OR
independent legal counsel

126
Q

can a court order a director or officer who was sued order reimbursement if it is justified in view of all circumstances?

A

YES!

if she was held liable to the corporation, this is limited to costs and attorneys fees

this cannot include judgment

127
Q

can the articles eliminate director liability to the corporation for damages?

A

yes

BUT not for intentional misconduct, usurping corporate opportunities, unlawful distributions or improper personal benefit.

can eliminate liability only for duty of care

128
Q

do shareholders get to manage the corporation?

A

No because the board managers

129
Q

who runs the corporation in a close corporation?

A

close corporation

REMEMBER ON THE BAR– MOST CORPORATIONS WILL BE CLOSE!

130
Q

what are the characteristics of a close corporation?

A

few shareholders

stock not publicly traded

131
Q

in a close management how can management be set up?

A

with a board of directors, and run it like a regular corporation

OR

eliminate the board and have shareholders run he business

OR appoint a manager

132
Q

what is a shareholder management agreement (SMA)

A

alternative management for the close corporation

can be done:
in the articles and approved by all shareholders
OR
by unanimous written shareholder agreement

the agreement should be conspicuously noted on the front and back of the stock certificates
- failure to do so does not affect validity

133
Q

close corporation

if the shareholders set up management by shareholders or by a manager, who owes the duties of care and loyalty to the corporation?

A

who ever manages

134
Q

what are the special fiduciary duty in close corporations?

A

whoever manages the corporation owes the duties of care and loyalty to the corporation.

some states: courts impose a fiduciary duty on shareholders owed to other shareholders

135
Q

close corporation
what does a corporation look like?

what do those partners owe each other?

A

partnership

fiduciary duty of utmost good faith

136
Q

close corporation

what if there is oppression of minority shareholders what can they do?

A

they can sue the controlling shareholders who oppress them for breach of this fiduciary duty

examples:
the controlling shareholders might deny the minority any voice in corporate affairs
fire them from employment 
refuse to declare dividends 
AND 
refuse to buy the minority's stock 
- no return on investment
137
Q

close corporation

why do the courts let the minority shareholders sue alleging oppression of minority shareholders?

A

bc this oppression thorts their legitimate goals for investing
AND
she has no way out (cannot sell stock)

138
Q

what is a professional corporation
OR
professional association?

A

when licensed professionals, including lawyers, medical professionals, and CPAs incorporate their business.

139
Q

how do you know if an entity is a professional corporation OR professional association?

A

the name has phases like “P.C.” or “P.A.”

140
Q

professional corporation or professional association:

directors, officers, and shareholders usually must be…

A

licensed professionals

141
Q

professional corporation or professional association:

can they hire non professionals?

A

Yes because not practicing the profession.

142
Q

professional corporation or professional association:

are the professionals liable for their malpractice?

A

Yes

143
Q

professional corporation or professional association:

are shareholders liable for corporate obligations or for other professionals malpractice?

A

No

144
Q

what rules apply to governing PC?

A

the same rules that govern regular corporations

145
Q

can shareholders be held liable for corporate debts?

A

No because the corp is liable for what it does.

146
Q

when can a shareholder be held liable for corporate actions?

A

if the court “pierces the corporate veil”

147
Q

what corporations can the court pierce the corporate veil?

A

close corporations

148
Q

to pierce the corporate veil and hold the shareholders personally liable what must happen?

A

they must have abused the privilege of incorporating and fairness must require holding them liable

courts may pierce the corporate veil to avoid fraud or unfairness by shareholders in a close corporation

149
Q

what is not enough to pierce the corporate veil?

A

sloppy administration is not enough

150
Q

what is the alter ego (identity of interests)?

A

when shareholders of a close corp co-mingle personal and corporate funds and close corp fails to pay the bill

151
Q

can a creditor of a corporation who has been unable to collect its claim from the corporation collect from the shareholders?

A

if the court pierces the corporate veil, the shareholder who co-mingled funds would be held liable.

152
Q

undercapitalization

if S is a shareholder of Glowco (close corporation) that hausl and disposes of nuclear waste.

glowco does not carry insurance.

glowco has an initial capitalization of $1K.

V is injured when one of Glowco’s trucks melts down.

Can V sue S?

A

shareholders not liable for corporate obligations

pierce corporate veil

the court might PCV because the corporation was undercapitalized when formed

because the shareholder failed to invest enough to cover prospective liabilities

courts may be more willing to PCV for a tort victim than for a contract claimant

153
Q

can a shareholder be another corporation?

A

Yes!

example: parent corporation forms a subsidiary to avoid its own obligations

the court might PCV and hold the parent corporation liable just as it could if the shareholder were a human.

154
Q

derivative suits

A

a shareholder is suing to enforce the corporations claim not her own personal claim

when the corporation is not pursuing its own claim, so a shareholder steps in to prosecute it for the corporation

ASK: could the corporation have brought the suit?

155
Q

derivative suits

if the shareholder wins the derivative suit who gets the money from the judgment?

A

the corporation

156
Q

derivative suits

what does the shareholder recover?

A

costs and attorney fees usually from the judgment won for the corporation

157
Q

derivative suits

if the shareholder losses the suit can they still recover?

A

No

158
Q

derivative suits

is the shareholder then held liable for the defendant’s attorney’s fees?

A

yes, if sued without reasonable cause

159
Q

derivative suits

if the shareholder sues, loses, can other shareholders then later sue the same defendant’s on the same transaction?

A

No

160
Q

what are the requirements for bringing a shareholder derivative suit?

A

stock ownership when the claim arose and throughout the suit

plaintiff must provide adequate representation of the corporation’s interest

plaintiff must make written demand on corporation (usually that means the board) that the corporation bring the suit.
- cannot sue until 90 days after making the demand

the corporation is joined as a defendant.

161
Q

can parties settle or dismiss a derivative suit?

A

yes only with court approval

the court may give notice to shareholders and get their input on whether to settle or dismiss

162
Q

derivative suits

after the derivative suit is filed the corporation may…..

A

move to dismiss

this is based on an independent investigation that concluded that suit is not in the corporation’s best interest

163
Q

derivative suits

who must make the independent investigation to determine if the corporation should dismiss the case?

A

independent directors
OR
appointed panel of 1 or more independent persons

usually a special litigation committee of independent directors

164
Q

derivative suits

in ruling on the corporations’s motion to dismiss, what is the court looking for?

A

those recommending dismissal were truly independent
AND
they made a reasonable investigation

165
Q

outstanding stock

A

shares the company issued and has not reacquired

166
Q

who is the record shareholder?

A

the person shown as the owner in the corporate records.

167
Q

what is the record date

A

voter eligibility cut-off

168
Q

C-corp sets annual meeting for July 7 and record date for June 8. S sells B her c corp stock on June 25. who is entitled to vote the shares at the meeting?

S or B?

A

S because she owned it on June 8

169
Q

what are the exceptions to the general rule that record order on record date votes?

A

the corporation re-acquires stock before the record date, so it is the owner of its “treasury stock” as of the record date.
- will not vote bc is outstanding on the record date.

death of a shareholder
- after the record date, S’s executor can vote even if not the executor on the date

voting by proxy

170
Q

what is a proxy?

A

writing (fax or email = ok)

signed by record shareholder (email okay to ID)

directed to secretary of corporation

authorizing another to vote the shares

171
Q

how can shareholder revoke proxy?

A

in writing to corp secretary
OR
by attending meeting and voting

172
Q

can a shareholder revoke their proxy even if states irrevocable?

A

Yes

173
Q

to have a irrevocable proxy it must be:

A

proxy coupled with an interest

requires:
the proxy says its irrevocable
AND
the proxy-holder has some interest in the shares other than voting

interest: beyond the simple interest in voting the shares

174
Q

shareholder voting trusts requirements:

A

written trust agreement, controlling how the shares will be voted

copy to the corporation

transfer legal title to the voting trustee

original shareholders receive trust certificates and retain all shareholder rights except for voting

175
Q

requirements for voting (pooling) agreement

A

shareholders can enter into

must be in writing and signed

they are enforceable

176
Q

in states that will grant specific performance of the voting agreement what happens to the voting trust?

A

there is no need to use the voting trust

177
Q

where do shareholder’s vote?

A

usually take actin at a meeting

they can act by unanimous written consent signed by holders of all voting shares

178
Q

if there is a meeting must be held in the state of incorporation?

A

No

179
Q

what are the different kinds of shareholder meetings?

A

annual meeting

special meeting

180
Q

what happens if there is no annual meeting?

A

if no annual meeting is held within 15 months, a shareholder can petition the court to order one

its required

181
Q

what do shareholders do at the annual meeting?

A

elect directors

182
Q

who can call a special meeting?

A 
the board 
the president 
the holders of at least 10 percent of the outstanding shares 
OR 
anyone else authorized in the bylaws
183
Q

notice of shareholder meeting requirements

A

must give written notice (fax or email is okay) to every shareholder entitled to vote

deliver it between 10-60 days before the meeting

184
Q

what must the notice of the shareholder meeting state

A

date
time
place of meeting

for special meeting:
purpose of the meeting

185
Q

what the are consequences of failure to give proper notice to all shareholders?

A

whatever action that was taken at the meeting is voidable

UNLESS those not sent a notice waive the notice defect

186
Q

how can the shareholders not given notice waive?

A

express- in writing and a signed anytime

implied- attend thee meeting without objecting at the outset

187
Q

what do shareholders get to vote on?

A

to elect directors
to remove directors
on fundamental corporate changes

they may also vote on other things if the board asks for their vote

188
Q

every time the shareholders vote we must have…

A

a quorum represented

quorum is determined on the number of shares represented NOT the number of the shareholders

requires a majority of outstanding shares

189
Q

can a shareholder quorum be lost if people leave the meeting?

A

No

190
Q

if the quorum requirement is met, the shareholders vote

what vote is required:
to elector a director?

A

plurality

the person who gets more votes for that seat on the board than anyone else

191
Q

if the quorum requirement is met, the shareholders vote

what vote is required:
to approve a fundamental corporate change

A

majority of the shares

192
Q

if the quorum requirement is met, the shareholders vote

what vote is required:
to remove a director

A

traditionally needed majority of the shares entitled to vote

treat this as “other matters”

193
Q

if the quorum requirement is met, the shareholders vote

what vote is required:
other matters

A

majority of the shares that actually vote on the issue

194
Q

cumulative voting

A

usually only in close corporations

gives smaller shareholders a better chance of electing someone to the board of directors

195
Q

when is cumulative voting allowed?

A

ONLY when shareholders elect directors

196
Q

difference between straight voting and cumulative voting for directors?

A

straight voting- vote for each director individually

cumulative- have one large election
-the top two finishers are elected to the board

197
Q

how do you determine voting power when cumulative voting exists:

A

multiply the number of shares times number of directors to be elected

198
Q

if the articles are silent cumulative voting, is it applicable?

A

No

199
Q

are stock transfer restrictions okay?

A

Yes if they are reasonable

meaning: they are not an undue restriction on alienation

200
Q

if a stock restriction is valid, can it be enforced against the transferee?

A

Yes if:
the restriction is conspicuously noted on the stock certificate
OR
the transferee had actual knowledge of the restriction

201
Q

does a shareholder have a right to inspect the books and records of the corporation?

A

yes, any shareholder does!

202
Q

shareholder have a right to inspect the books and records of the corporation

procedure for non-controversial things

A

shareholder makes a written demand at least 5 business days in advance

no need to state a proper purpose

include: articles, bylaws, minutes of shareholder’s. meetings for past 3 years, names and addresses of current directors and officers most recent annual report of corporation

203
Q

shareholder have a right to inspect the books and records of the corporation

procedure for controversial things

A

shareholder makes a written demand at least 5 business days in advance

need to state a proper purpose

proper purpose: related tot your interest as a shareholder

204
Q

shareholder have a right to inspect the books and records of the corporation

what are more controversial things?

A

excerpts of minutes of board meetings
accounting records
record of shareholders

205
Q

shareholder have a right to inspect the books and records of the corporation

what happens if the corporation fails to allow proper inspection?

A

shareholder seeks a court order

if she wins she can recover costs and attorney’s fees incurred in making the motion

206
Q

do directors have to go through this procedure to get access to corporate books and records?

A

no they have unfettered access

207
Q

what are distributions?

A

payments by the corporation to shareholders

208
Q

what are types of distributions?

A 
dividends 
OR 
repurchase shareholders stock 
OR 
redemption 
(a forced sale to corporation at price set in articles)
209
Q

who determines the distributions to shareholders?

A

board

210
Q

at what point does a shareholder have a “right” to a dividend or other distribution?

A

when the board declares it

211
Q

is a suit to compel the declaration of a distribution direct or derived?

A

direct because the harm is to the shareholders not to the corporation

212
Q

for any distribution (dividend, repurchase, redemption)
which funds can be used?

traditional view

A

earned surplus
stated capital
capital surplus

213
Q

what is earned surplus?

A

generated by business activity

consists of:
all earnings
- all losses
- distributions previously paid

this is a proper fund for paying distributions

214
Q

what is stated capital?

A

generated by issuing stock

so when the corporation issues stock, it allocates the proceeds between stated capital and capital surplus

215
Q

can stated capital be used for distributions?

A

no

216
Q

which shareholder get dividends?
board of directors declares dividends totaling $400K

who dividends if the outstanding stock is:

100K shares of common stock

A

4 per share

217
Q

which shareholder get dividends?
board of directors declares dividends totaling $400K

who dividends if the outstanding stock is:

100K shares of common and 20K shares of preferred with $2 preference

A

preferred means pay first

20K preferred shares multiplied by $2 preference equals a total preference of $40K. that is to be paid first.

that leaves 360K which goes to the common shares

bc there are 100K of those each common share gets $3.60.

REMEMBER: preferred means pay 1st

218
Q

which shareholder get dividends?
board of directors declares dividends totaling $400K

who dividends if the outstanding stock is:

100K shares of common and 20K shares of $2 prefered that is cumulative (and no dividends have been paid in the 3 prior years).

A

the corporation owes the cumulative holders for the 3 prior years plus this year

meaning: the corporation owes them four years worth of a $2 preference.

4 years multiplied by $2 equals $8 per share

so the corporation owes $8 tp each cumulative preferred share.

there are 20K such shares

20K x $8= 160K pay it first (bc it is preferred)
THEN LEAVES
240K and goes to common shares $2.4 for common shares

219
Q

what does cumulative means when determining what shareholders get what?

A

cumulative means add them up

a cumulative dividend accrues year-to-year

220
Q

what is “ on a par issuance”?

A

the par value goes to state capital

221
Q

what is “ on a par issuance”?

hypo: c corp issues 10K shares of $2 par stock for $50K. of that how much is stated capital and how much is capital surplus?

A

$20K bc issued 10K shares of $2 par value

and any excess over par goes to capital surplus

30K bc its excess overpar

222
Q

what is “on a no-par issuance”?

A

the board allocates the consideration between stated capital and capital surplus

223
Q

capital surplus

A

generated by issuing stock

it is computed by payments in excess of pay plus amounts allocated in a no-par issuance

224
Q

can capital surplus be used for distributions?

A

yes if we inform the shareholders

225
Q

what is the modern view for any distribution which funds can be used?

A

a corporation cannot make a distribution if it is insolvent or if the distribution would render it insolvent.

226
Q

what is the modern view for any distribution which funds can be used?

what does insolvent mean?

A

the corporation is unable to pay its debts as they come due

OR

total assets are less than total liabilities

liabilities include preferential liquidation rights

227
Q

who is liable for improper distributions?

A

directors are jointly and severally liable

REMEMBER: the directors good faith reliance defense

shareholders are personally liable only if they knew the distribution was improper when they received it

228
Q

what are the fundamental corporate changes

A

amend the articles
merge or consolidate into another company
transfer substantially all assets (or having stock acquired in “share exchange”)
convert to another form of business
dissolve

229
Q

in order complete a fundamental corporate change we need:

A

board action adopting a resolution of fundamental change

board submits proposal to shareholders with written notice

shareholder approval
- need majority of shares entitled to vote

deliver a document to secretary of state

230
Q

what is the dissenting shareholder right of appraisal?

A

the right force the corporation to buy your stock for fair value

231
Q

what changes trigger the right of appraisal?

A

merging or consolidating

transferring substantially all assets

stock being acquired in a share exchange
OR
conversion to another form of business

232
Q

when will a right of appraisal NOT happen even if the proper change that would trigger the right of appraisal takes place?

A

if the company’s stock is listed on a national exchange
OR
if the company has 2K or more shareholders

233
Q

where does the right of appraisal exist?

A

close corporation

234
Q

how do you perfect your right of appraisal?

A

before the shareholders vote, file with the corporation a written notice of objection and intent to demand payment

at the shareholder vote, abstain or vote agaisnt the proposed change

AND

after the vote within time set by corporation, make written a demand to be bought out and deposit stock with the corporation

235
Q

right of appraisal

what happens if the shareholder and the corporation cannot agree on a fair value of the shares?

A

the corporation sues and the court may appoint an appraiser

236
Q

right of appraisal

is the right of appraisal the shareholder’s exclusive remedy if she does not like a fundamental change?

A

Yes absent fraud

237
Q

amendment of the articles

whats needed:

A

board of director action and notice to shareholders

shareholder approval (need a majority)

if approved, deliver amended articles to the sectary of state

238
Q

amendment of the articles

are there dissenting shareholder rights of appraisal?

A

No

239
Q

mergers OR consolidations

whats needed?

A

board of director action and notice to shareholders

shareholder approval (generally both corporations)

no shareholder approval required if a 90% or more owned subsidiary is merged into a parent

if approved- surviving corporation delivers articles of merger or consolidation to secretary of state

REMEMBER: right of appraisal

240
Q

short-form merger

A

a 90% or more owned subsidiary is merged into a parent corporation

241
Q

what is the effect of merger or consolidation?

A

surviving corporation succeeds to all rights and liabilities of the constitutents.

THINK: because the constituent corporation disappeared so a creditor of that corporation can sue the survivor– successor liability

242
Q

transfer of all or substantially all of the assets not in the ordinary course of business or a share exchange
(one company acquires all the stock of another)

what constitutes a substantially all of the assets?

A

varies from state to state

it requires transfer of at least 75 percent of the assets

243
Q

transfer of all or substantially all of the assets not in the ordinary course of business or a share exchange
(one company acquires all the stock of another)

this is a fundamental corporate change for which corporation?

A

the selling corporation ONLY not the buyer

244
Q

transfer of all or substantially all of the assets not in the ordinary course of business or a share exchange
(one company acquires all the stock of another)

what do you need?

A

board action (both corporations) and notice to selling company’s shareholders

approval by the selling corporation’s shareholders

  • need majority of share approval of selling company
  • do not need any votes for buying company

deliver to secretary of state articles of exchange in share exchange
- no filing in a transfer of assets

245
Q

transfer of all or substantially all of the assets not in the ordinary course of business or a share exchange
(one company acquires all the stock of another)

is there successor liability?

A

the company that buys the stock is not liable for the debts of the company that sold the assets

EXCEPTION: if the buyer is a mere continuation of the seller- has the same manangment, shareholders, etc.

if a court concludes that the deal was really a disguised (De factor) merger

246
Q

conversion

A

business converts to another form (corporation converts to LLC)

board approval 
notice to shareholders 
shareholder approval 
deliver document to secretary of state 
dissenting shareholders right of appraisal
247
Q

what types of dissolution exist?

A

voluntary

involuntary

248
Q

what is voluntary dissolution?

A

board of directors action and shareholder approval

file notice of intent to dissolve with secretary of state

corporation stays in existence to wind up.

notify creditors so they can make claims

249
Q

what is involuntary dissolution?

A

by court order

250
Q

what is an alternative to the court ordering involuntary dissolution?

A

might order buy-out o the objecting shareholder

this is likely in a close corporation

251
Q

hwo can petition an involunatry dissolution?

A

a shareholder can petition because of:

director abuse, waste of assets, misconduct
director deadlock that harms the corporation
OR
shareholders fail at consecutive annual meetings to fill a board vacancy

a creditor can petition because corporation is insolvent and :
he has an unsatisfied judgment
OR
the corporation admits the debt in writing

252
Q

is dissolution the end of the corporation?

A

no it is the beginning of a process that will end the corporate existence

the corporation continues to exist, so it can sue and be sued

it cannot start a new business but must wind up (liquidate)

253
Q

what are the steps taken to wind up?

A

give written notice to known creditors and publish notice of dissolution in a newspaper in the county of its principal place of business

gather all assets

convert assets to case

pay creditors
and
distribute any remaining sums to shareholders, pro-rata by share unless there is a liquidation preference

254
Q

what is a liquidation preference

A

“pay first” so it works like a dividend preference

comes up at dissolution
works the same as a dividend preference

Bar Prep Questions + Rule of Law (15 decks)

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