Chapter Fifteen

Question 1

Dividend

Answer 1

A distribution to corporate shareholders of corporate profits or income, disbursed in proportion to the number of shares held.

Question 2

Retained Earnings

Answer 2

The portion of a corporation’s profits that has not been paid out as dividends to shareholders.

Question 3

Corporation

Answer 3

A legal entity formed in compliance with statutory requirements that is distinct

Question 4

Domestic Corporation

Answer 4

In a given state, a corporation that does business in, and is organized under the law of, that state.

Question 5

Foreign Corporation

Answer 5

In a given state, a corporation that does business in the state without being incorporate therein.

Question 6

Alien Corporation

Answer 6

A designation in the United States for a corporation formed in another country but doing business in the United States.

Question 7

Close corporation

Answer 7

A corporation whose shareholders are limited to a small group of persons, often only family members. In a close corporation, the shareholders’ rights to transfer shares to others are usually restricted.

Question 8

S Corporation

Answer 8

A close business corporation that has met certain requirements set out in the Internal Revenue Code and thus qualifies for special income tax treatment. Essentially, an S corporation is taxed the same as a partnership, but its owners enjoy the privilege of limited liability.

Question 9

Articles of Incorporation

Answer 9

The document filed with the appropriate governmental agency, usually the secretary of state, when a business is incorporated. State statute usually prescribe what kind of information must be contained in the articles of incorporation.

Question 10

Bylaws

Answer 10

A set of governing rules adopted by a corporation or other association

Question 11

Ultra Vires

Answer 11

A latin term meaning “beyond the powers”; in corporation law, acts of a corporation that are beyond its express and implied powers to undertake.

Question 12

Piercing the Corporate Veil

Answer 12

An action in which a court disregards the corporate entity and holds the shareholders personally liable for corporate debts and obligations.

Question 13

Commingle

Answer 13

To put funds or goods together into one mass so that they are mixed to such a degree that they no longer have separate identities. In corporate law, if personal and corporate interets are commingled to the extent that the corporation has no separate identity, a court may “pierce the corporate veil” and expose the shareholders to personal liabilities.

Question 14

Insider Director

Answer 14

A member of the board of directors who is also an officer of the corporation.

Question 15

Outside director

Answer 15

A member of the board of directors who does not hold a management position at the corporation.

Question 16

Quorum

Answer 16

The number of members of a decision-making body that must be present before business may be transacted.

Question 17

Business judgement rule

Answer 17

A rule that immunizes corporate management from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith and are within both the power of the corporation and the authority of management to make.

Question 18

Proxy

Answer 18

In corporation law, a written agreement between a stockholder and another party in which the stockholder authorizes the other party to vote the stockholder’s shares in a certain manner.

Question 19

Stock Certificate

Answer 19

A certificate issued by a corporation evidencing the ownership of a specified number of shares in the corporation

Question 20

Preemptive Rights

Answer 20

Rights held by shareholders that entitle them to purchase newly issued shares of a corporation’s stock, equal in percentage to shares already held, before the stock is offered ton any outside buyers. Preemptive rights enable shareholders to maintain their proportionate ownership and voice in the corporation.

Question 21

Stock Warrant

Answer 21

A certificate that grants the owner the option to buy a given number of shares of stock, usually within a set time period.

Question 22

Shareholder’s Derivative Suit

Answer 22

A suit brought by a shareholder to enforce a corporate cause of action against a third party.

Question 23

Watered Stock

Answer 23

Shares of stock issued by a corporation for which the corporation receives, as a payment, less than the stated value of the shares.

Question 24

Types of Corporations

Answer 24

• Domestic, Foreign and Alien Corporations
• Closely-held/close corporation
• Publicly-held corporation
• Professional corporation
• S Corporation

Question 25

Closely-Held/close corporation

Answer 25

Limited number of stockholders (often times family members); stock is not traded on a stock exchange

Question 26

Publicly-held corporation

Answer 26

Stock is traded on a stock exchange; is likely to have many shareholders.

Question 27

Professional Corporation

Answer 27

Created for associations of lawyers, doctors, accountants.

Question 28

S corporations

Answer 28

Created under subchapter S of the internal revenue code; limited liability of a corporation, “passthrough” status of a partnership

Question 29

S corporation details

Answer 29

Limited number (no more than 100) of shareholders and specific limitations as to who can be a shareholder- no non resident aliens (foreign investors) can invest in a S corporation.

Question 30

Duty of Loyalty

Answer 30

The duty of loyalty prohibits managers from making a decision that benefits them at the expense of the corporation or from engaging behavior that constitutes

Question 31

Self-Dealing

Answer 31

“Using corporate funds or confidential corporate information for personal advantage” is a violation of the duty of loyalty

Question 32

Corporate Opportunity

Answer 32

Mangers/Officers are in violation of the corporate opportunity doctrine if they compete against the corporation without its consent

Question 33

Corporate Opportunity Case

Answer 33

Guth v. Loft Inc.

Question 34

Business Judgement Rule

Answer 34

The board member and corporate management has a duty of loyalty and a duty of care.

Question 35

The Business Judgement rule must act

Answer 35

Must act without a conflict of interest, with the care of an ordinary prudent person and in the best interests of the company.

Question 36

The business Judgement this rule allows directos

Answer 36

This rule allows directors to do their job with out fear of excessive court intervention (and encourages people to serve as directors.)

Question 37

Duty of Care

Answer 37

The duty of care requires officers and directors “to be honest and use prudent business judgement in the conduct of corporate affairs.

Question 38

Duty of Care list

Answer 38

• Decision must have a rational business purpose
• Decision and actions are legal
• Decision must be “informed”
• Also includes a duty to exercise reasonable supervision of other officers and employees.

Question 39

Shareholders

Answer 39

The owners of a corporation are called shareholders.

Question 40

Corporations

Answer 40

Legal “entities”/Persons” (With legal rights and privileges) created by state statute.

Question 41

Corporations overall responsibility

Answer 41

The overall responsibility for managing a corporation rests with the board of directors. The board of directors is elected by shareholders. the board of directors hires managers (corporate officers like the chief executive officer) to take care of day-to-day operations of the corporation.

Question 42

Corporation v Partnership

Answer 42

A corporation, unlike a partnership, can be owned by a single person.

Question 43

Shareholders elect

Answer 43

Shareholders elect the corporation’s board of directors but generally are not involved in the day-to-day management of the business.

Question 44

Corporate officers

Answer 44

Corporate officers are appointed by the board of directors.

Question 45

The “Double Taxation” issue

Answer 45

must pay federal corporate tax on profits and shareholders must pay tax on the dividends they receive from the corporation.

Question 46

Shareholders

Answer 46

Corporate shareholders normally are not personally liable for the obligations of the corporations beyond the extent of their investments.

Question 47

Piercing the Corporate Veil

Answer 47

The usual rule is that shareholders are not held personally liable for corporation’s debts- beyond their capital contributions.

Question 48

Pierce the Corporate Veil in some cases

Answer 48

In some cases, however, courts may “pierce the corporate veil, and make the shareholders personally liable for the corporation’s debts/obligations

Question 49

Pierce the corporate veil case

Answer 49

Schultz v. General Electric healthcare Financial Services (2010)

Question 50

Piercing the corporate veil examples

Answer 50

Failing to follow corporate “formalities”, signing corporate documents as an individual, co-mingling assets, inadequate capitalization and fraud.