California Corporations

Question 1

Are promoters agents of the to-be corporation?

Answer 1

No, they do not have power to bind the corporation.

BUT, there is mutual agency between multiple promoters.

Question 2

General rule for promoter personal liability for pre-incorporation agreements

Answer 2

In general, promoters are personally liable for pre-incorporation agreements

Question 3

What are the exceptions to promoters’ personal liability for pre-incorporation agreements?

Answer 3

1) the contract specifically disclaims personal liability

2) other circumstances indicate the other party looked to the corporation for performance

Question 4

Are corporations liable for pre-incorporation agreements?

Answer 4

In general, no. Unless the corporation assumes the contracts after incorporation

Question 5

What are the ways corporations can assume a pre-incorporation agreement after incorporation?

Answer 5

1) Adoption (express or implied). Promoters remain liable for the K but entitled to indemnification from the corp.
2) Novation – the three parties agree to substitution of corporation as a party. Releases promoters from personal liability

Question 6

What are the requirements for incorporation?

Answer 6

Properly executed articles of incorporation + filing fee

Question 7

What do properly executed articles of incorporation include?

Answer 7

Signature, name of corporation, purpose of corporation, agent name/address, corporate address, number/types of shares

Question 8

What constitutes proper organization (post-filing formalities) of a corporation?

Answer 8

1) name or elect directors*
2) appoint officers
3) adopt bylaws
* when initial directors not named in articles, the incorporators must hold a meeting to elect them

Question 9

What is the corporation by estoppel doctrine?

Answer 9

If there’s a dispute between a third party and a corporation, EITHER:

1) a court may estop the 3d party from alleging that the corporation is defectively incorporated if that would unjustly expose corporate principals to liability; OR
2) a court may estop the business entity from alleging it’s not a corporation if that would unjustly deprive the third party
* note: this isn’t a defense to a tort claim because the third party has presumably never dealt with the corporation before

Question 10

What is required for an act of the board?

Answer 10

Participation of a quorum.

Question 11

Is a meeting necessary for an act of the board?

Answer 11

No, a meeting is not necessary as long as ALL the directors sign their consent

Question 12

What constitutes a quorum for a board meeting?

Answer 12

A majority of authorized directors, unless the articles/bylaws provide otherwise. In any case, no fewer than 1/3 or 2 directors.

Question 13

If a quorum of directors is present, what required for board action?

Answer 13

a majority vote of the directors present

Question 14

What is the ultra vires doctrine?

Answer 14

the ultra vires doctrine protects the corporation from directors/officers acting beyond their authorized duties

Question 15

What rules delineate the powers and authority of a corporate officer?

Answer 15

an officer has the power to take actions which were expressly authorized by the articles/bylaws, or actions that are an implicit extension of those powers

Question 16

What is the business judgment rule and when does it apply?

Answer 16

Applicable on a duty of care issue.

Under the BJR, there is a rebuttable presumption that actions taken by the directors or officers of a corporation were 1) taken in an informed manner, 2) done in good faith, 3) reasonably believed to be in the best interests of the corp.

Question 17

What is a limit on how the ultra vires doctrine can be used?

Answer 17

A corporation can’t use the UV doctrine as a defense to escape an obligation like a K. But shareholders can bring a derivative suit against the board or officers for violating their duties.

Question 18

What are the circumstances in which the limits of a corporation’s authority can be asserted?

Answer 18

1) A proceeding by a shareholder to enjoin the doing of biz not authorized by the articles; OR
2) a derivative lawsuit – a proceeding by the corporation/Shareholders brought against directors/officers for violation of their authority

Question 19

What is required for removal of board members?

Answer 19

Majority vote of shareholders

OR

By board if unsound mind/felony conviction

OR

Where the director acted fraudulently, dishonestly, or there was a gross abuse of discretion, by superior court judgment, by suit of shareholders holding at least 10% of voting stock

Question 20

What are the two main fiduciary duties of directors and officers?

Answer 20

Duty of care

Duty of loyalty

Question 21

What is the duty of care for corporate Ds/Os?

Answer 21

Ds/Os must discharge duties

(1) in good faith
(2) w/ care of a reasonable person in a like position
(3) in a manner they reasonably believe to be in the best interests of the corporation

Question 22

What does the duty of loyalty entail?

Answer 22

Directors, Officers, and employees must be loyal and not promote self interest in a way that is injurious to the corporation.

Question 23

What are some situations in which conflicts of interest usually arise?

Answer 23

When Ds or Os

1) transact biz w/ the corporation
2) usurp a corporate opportunity (XC: if they gave the corporation the first chance and a reasonable opportunity to take the opportunity)
3) directly compete with the corp

Question 24

What must Ds or Os do when involved in a conflict of interest?

Answer 24

Notify other Ds, Os, or SHs of all material facts w/rt the conflict.

A “conflict of interest transaction” is of no effect unless: upon full disclosure, the non-interested Ds or SHs vote to approve. In other words, voidable unless approved

Question 25

What is the extent of directors’ and officers’ liability?

Answer 25

Ds and Os are liable to the corporation for damages arising from violation of fiduciary duties or unauthorized transactions

Question 26

What are the key characteristics of a corporation?

Answer 26

• perpetual or continuous existence; it survives the death or replacement of its owners (shareholders);
• centralized management of its assets and business;
• limited liability for its owners (shareholders), who are generally shielded from personal liability for the corporation’s debts and obligations; and
• free transferability of ownership interest (shares).

Question 27

What powers do shareholders have?

Answer 27

• elect/remove directors (with or w/o cause)
• amend bylaws
• approve fundamental changes (articles, merger, dissolution, sale of substantially all assets)

Question 28

What is required for a shareholder meeting?

Answer 28

Proper notice

and

Quorum

Question 29

What is a quorum for a shareholder meeting?

Answer 29

majority of shares entitled to vote, unless otherwise provided

Question 30

Are proxy votes permitted?

Answer 30

Yes, shareholders are entitled to vote by proxy

Question 31

What are the requirements for proxy agreements?

Answer 31

In general, for a proxy agreement to be valid, the shareholder must provide the proxy holder with a written signed authorization or an electronically-transmitted authorization.

No proxy is valid after 11 months unless otherwise provided

Question 32

What is a derivative suit?

Answer 32

An equitable action brought by shareholders on behalf of the corporation and for the corporation’s benefit.

Question 33

What must a shareholder do before bringing a derivative suit?

Answer 33

Make a written demand of the directors to enforce the rights of the corporation, unless the SH can show it would be futile

Question 34

What is a shareholder’s liability?

Answer 34

A shareholder is not personally liable for the debts of the corporation in which they hold stock

Question 35

When can courts pierce the corporate veil (and hold a SH liable)?

Answer 35

When necessary to avoid grave injustice

Question 36

What factors do courts consider in determining whether to pierce the corporate veil?

Answer 36

1) the extent to which the corporation is undercapitalized
2) the extent to which corporate formalities have not been honored/observed
3) the extent to which corporate and personal funds have been commingled
4) the extent to which corporation is just an alter ego for its shareholders

Question 37

What does Rule 10B-5 cover?

Answer 37

It prohibits any act or omission resulting in fraud or deceit in connection with the purchase or sale of any security.

Question 38

What are the elements of a 10b-5 fraud action?

Answer 38

• untrue statement/omission
• materiality (probability & magnitude)
• scienter (intent to deceive, manipulate, defraud. Negligence is not sufficient)
• reliance (for omission, reliance is presumed but rebuttable)
• misstatement/omission must have caused the loss
• damages

Question 39

Who is an insider for the purposes of an insider trading action?

Answer 39

anyone who learns of material, non-public information;

OR

anyone who has a fiduciary relationship to the corporation (can be a temporary insider)

Question 40

When are tippers liable for insider trading under 10b-5?

Answer 40

When a tipper discloses material non-pulbic info to others AND that disclosure is made in breach of a fiduciary duty

Question 41

When are tippees liable for insider trading under 10b-5?

Answer 41

Tippees are liable when they receive material non-public info

AND

knew/should’ve known that the insider was breaching a duty;

AND

trade on the info for their benefit

Question 42

What is the applicability of Section 16(b)?

Answer 42

Applies to Os, Ds, >10% SHs. If they buy/sell stock in a six-month period and make money, they have to give the profit back. Need only have been in office at time of purchase or sale

Question 43

What is the Unocal Rule and when does it apply?

Answer 43

It only applies to outside directors.

If board takes a defensive measure in response to a hostile takeover, the BOARD MUST SHOW that it acted in GF and, after reasonable investigation, concluded that a danger existed to corporate policy and effectiveness AND that the axn the board took was reasonable in relation to threat posed.

Question 44

What is the Revlon Rule and when does it apply?

Answer 44

Once the board of an acquisition target is aware that a break-up is imminent, Unocal Rule no longer applies. Now, board’s sole responsibility = maximize value for SHs