Ch 18 - Corporations

Question 1

Corporation

Answer 1

Legal entity created and recognized by state laws that enjoys the same rights and privileges as natural person (constitutional rights, access to courts)

Question 2

Responsibility for management of company rests with

Answer 2

Board of directors

Question 3

What do board of directors do?

Answer 3

Make policy decisions, hire officers to run corp

Question 4

Shareholders

Answer 4

When individual purchases a share of stock in a corp and becomes an owner

Question 5

Are shareholders generally personally liable for corporate acts?

Answer 5

No

Question 6

Corporations use double tax

Answer 6

Taxed first to corp then to shareholders via dividends

Question 7

Doctrine of respondeat superior

Answer 7

Corp may be held liable by torts/crimes committed by agents (CEO, CFO, etc.)

Question 8

Responsible officers doctrine

Answer 8

Corporate officers are held to strict liability, may go to prison

Question 9

Promoter’s Liability

Answer 9

Promoter is personally liable for pre-incorporation contracts on behalf of the corp unless third party agrees to hold future corp liable

Question 10

De Jure Corporations

Answer 10

If certain substantial statutory requirements are met when starting a corp, the corp is deemed to exist and cannot be attacked by third parties (MINOR DEFECTS)

Question 11

De Facto Corporation

Answer 11

If certain major requirements are not met when starting a corp, but good faith is used, some states will limit individual libaility (but not NC)

Question 12

Ultra Vires

Answer 12

When corp acts beyond expressed or implied powers of corp, shareholders can seek injunction to stop them/sue

Question 13

Courts may pierce the veil and hold shareholders liable if:

Answer 13

Corp never makes a profit and uses under-capitalization for fraud, set up to evade legal obligation, commingling of personal and corporate interests

Question 14

Alter-ego theory

Answer 14

Personally liable if it’s impossible to distinguish between funds of you and the corporation

Question 15

Quorum

Answer 15

Stated minimum number of members that must be present to conduct official corporate business

Question 16

Rights of directors

Answer 16

May participate in corp decisions and be notified of meetings, right of inspection to books and records, corp must reimburse to protect the board from personal liability

Question 17

Care: Duty to Make Informed Decisions

Answer 17

Directors and officers are fully informed on corporate matters

Question 18

Care: Duty of Exercise Reasonable Supervision

Answer 18

Supervise officers when work is delegated

Question 19

Care: Document Dissenting Directors

Answer 19

If director votes against corp action and corp is later sued for action, that director is not individually liable

Question 20

Business Judgement Rule

Answer 20

Immunizes a director or officer from liability from bad decisions made from honest mistakes in judgement (officer took reasonable steps to get informed, had rational basis for decision, acted in best interest of corp)

Question 21

Duty of Loyalty

Answer 21

Putting corp interests over your own (no competition with corp, no insider trading, no conflicts of interest, etc.)

Question 22

Shareholders Powers

Answer 22

• Must approve all fundamental changes to corp
• Vote to amend articles or bylaws
• Vote to approve mergers or acquisitions
• Approve sale of corp assets on dissolution
• Shareholders elect and remove board of directors

Question 23

Shareholder Quorum Requirements

Answer 23

Shareholders representing more than 50% of the issued SHARES must be present to conduct business

Question 24

Shareholder Preemptive Rights

Answer 24

Allows them to buy newly issued stock as soon as it’s issued

Question 25

Stock Warrant

Answer 25

Right to buy stock at stated price

Question 26

Dividends

Answer 26

Distribution of corporate profits or income ordered by the board

Question 27

Shareholder’s Derivative Suit

Answer 27

Lawsuit brought by shareholders against third party (May be board members) that has harmed company

Question 28

Shareholder’s Derivative Suit (con’t):

Answer 28

Directors refuse or fail to correct a wrong
Make written demand to board
Rare because any damages normally go back to company, not you

Question 29

Who has ultimate responsibility for corporate affairs?

Answer 29

Board of directors

Question 30

Vacancies on Board

Answer 30

If director dies, the articles will outline election process

Question 31

Corporations can be ____ for criminal acts, but can only be ______

Answer 31

Liable, fined

Question 32

Inside director

Answer 32

Also an officer and is paid by the corp

Question 33

Outside director

Answer 33

Doesn’t hold management position, generally not paid by corp