Characteristics and Formation of Corporation

Question 1

S Corp

Answer 1

• taxed like partnerships (not subject to double taxation) but retain advantages of corporate form
• stock can be held by no more than 100 persons
• can only be one class of stock

Question 2

A corporation formed in accordance with law is a ________ corporation.

Answer 2

de jure

Question 3

To create a de jure corporation, the incorporators must

Answer 3

file articles of incorporation with the secretary of state

Question 4

The articles of incorporation must contain

Answer 4

the name of the corporation
the number of shares the corporation is authorized to issue
the name and address of the corporation’s registered agent
the name address of each incorporator

Question 5

bylaws

Answer 5

• may contain any provision for managing the corporation that is not inconsistent with the articles or law
• adopted by directors, but can be modified or repealed by a majority vote of either directors or shareholders

Question 6

de facto corporation

Answer 6

business that doesn’t fulfill filing formalities may nonetheless be treated as a corporation if organizers have made a good faith, colorable attempt to comply with the corporate formalities and have no knowledge of the lack of corporate status

Question 7

piercing the corporate vail

Answer 7

• courts will disregard a corporate entity and hold individuals personally liable for corporate obligations
• occurs when SHs treat corporate assets as their own and fail to observe corporate formalities (alter ego)
• and at the time of formation there is not enough capital for foreseeable liabilities
• court more likely to pierce for tort victims than contracts

Question 8

share options

Answer 8

right to purchase shares in the future under terms predetermined by the BOD

Question 9

stock subscriptions

Answer 9

promises from subscribers to buy stock in the corporation

Question 10

Preincorporation subscriptions are irrevocable for

Answer 10

six months.

Question 11

notice for shareholders meetings

Answer 11

• not less than 10 or more than 60 days before mtg
• date, time, and place required; for special meetings, need purpose
• notice may be waived in writing or by attendance

Question 12

Proxies are valid for ________ unless they provide otherwise.

Answer 12

11 months

Question 13

A proxy will be irrevocable only if

Answer 13

it states that it is irrevocable and is coupled with an interest

Question 14

quorum at shareholders’ meeting

Answer 14

a majority of outstanding shares entitled to vote

Question 15

Directors are elected by a __________.

Answer 15

plurality of the votes cast

Question 16

cumulative voting

Answer 16

each shareholder is entitled to a number of votes equal to the number of his voting shares multiplied by the number of directors to be elected

Question 17

If a quorum is present, shareholders will be deemed to have approved a matter if

Answer 17

the votes cast in favor of the matter exceed the votes cast against the matter.

Question 18

voting trust

Answer 18

a written agreement of shareholders under which all of the shares owned by the parties to the agreement are transferred to a trustee, who votes the shares and distributes the dividends in accordance with the provisions of the voting trust agreement

Question 19

voting agreement

Answer 19

shareholders may enter into a written and signed agreement providing for the manner in which they will vote their shares

Question 20

A shareholder may inspect the corporation’s books, papers, accounting records, shareholder records, etc. upon

Answer 20

5 days written notice stating a proper purpose for the inspection

Question 21

To commence and maintain a derivative proceeding, a shareholder must have

Answer 21

been a shareholder at the time of the act or omission complained of or must have become a shareholder through transfer by operation of law from one who was a shareholder at that time.

Question 22

board of directors

Answer 22

responsible for the management of the business and affairs of the corporation

Question 23

Directors may be removed by the shareholders _______________.

Answer 23

with or without cause

Question 24

notice for regular directors’ meetings

Answer 24

no notice required

Question 25

notice for special directors’ meetings

Answer 25

at least 2 days written notice of time, date, and place of meeting

Question 26

quorum at directors’ meeting

Answer 26

majority of board of directors (but can be no fewer than one-third of the board members)

Question 27

___________ can break a quorum by withdrawing from a meeting; ___________ cannot.

Answer 27

directors; shareholders

Question 28

approval of action at directors’ meeting

Answer 28

approved by a majority of directors present

Question 29

Directors have a duty to manage to the best of their ability. They must discharge their duties:

Answer 29

(i) In good faith;
(ii) With the care that an ordinarily prudent person in a like position would exercise under similar circumstances; and
(iii) In a manner the directors reasonably believe to be in the best interests of the corporation.

Question 30

usurpation of a corporate opportunity

Answer 30

director must disclose business opportunity to corporation and give corporation a chance to accept or decline the opportunity before taking advantage of the opportunity for herself

Question 31

The following procedure applies to fundamental changes:

Answer 31

(i) the board adopts a resolution;
(ii) written notice is given to the shareholders;
(iii) the shareholders approve the changes; and
(iv) the changes in the form of articles are filed with the state.

Question 32

A sale, lease, exchange, or other disposition of _________________________ of a corporation’s property outside the usual course of business is a fundamental change (and therefore, must follow the fundamental change procedure).

Answer 32

all or substantially all (more than 75%)

Question 33

The decision whether to declare a dividend is up to the sound discretion of the _________.

Answer 33

board

Question 34

A controlling shareholder must refrain from using his control to obtain a special advantage or to cause the corporation to take action that

Answer 34

unfairly prejudices the minority shareholders.

Question 35

In making business judgments, directors are generally entitled to rely on

Answer 35

the reports of professional persons within their areas of expertise and corporate officers and employees whom the director reasonably believes to be reliable and competent.

Question 36

A director will be considered present at a meeting if

Answer 36

the director attends in person or through a remote communication device that allows each participant to simultaneously hear the other participants.

Question 37

par value

Answer 37

minimum issuance price

Question 38

treasury stock

Answer 38

stock previously issued and reacquired

Question 39

A valid meetings is required for board of directors action unless

Answer 39

there is unanimous director consent in writing to act without meeting.

Question 40

self dealing

Answer 40

director receives unfair benefit in transaction with corporation

Question 41

usurping corporate opportunities

Answer 41

director receives unfair benefit by usurping an opportunity corporation would have pursued

Question 42

A conflicting interest transaction will not be enjoined or give rise to an award of damages due to the director’s interest in the transaction if:

Answer 42

(i) The transaction was approved by a majority of the directors (but at least 2) without a conflicting interest after all material facts have been disclosed to the board;
(ii) The transaction was approved by a majority of the votes entitled to be cast by shareholders without a conflicting interest in the transaction after all material facts have been disclosed to the shareholders (notice of the meeting must describe the conflicting interest transaction); or
(iii) The transaction, judged according to circumstances at the time of commitment, was fair to the corporation.

Question 43

Unless limited by the articles, a corporation must indemnify a director or officer who

Answer 43

prevailed in defending a proceeding against the officer or director for reasonable expenses, including attorneys’ fees, incurred in connection with the proceeding.

Question 44

A corporation may indemnify a director or officer who was unsuccessful in defending a suit if

Answer 44

director or officer shows action in good faith and conduct was in corporation’s best interest.

Question 45

A corporation cannot indemnify a director of officer who is unsuccessful in defending

Answer 45

(i) a direct or derivative action in which the director is found liable to the corporation or (ii) an action charging that the director received an improper benefit.

Question 46

appraisal rights

Answer 46

dissenting shareholder to a fundamental corporate change can force corporation to buy shares at fair value