Corp Master Cards Flashcards

Question 1

Q

Corp Issue Checklist

Answer

A

I. Organization and Formation of the Corporation
II. Shareholders
III. Directors
IV. Officers
V. Fundamental Corporate Changes
VI. Dissolution and Liquidation
VII. Federal Securities Laws

Question 2

Q

six key fact patterns:

Answer

A

a. Organization of a corporation
b. Issuance of stock
c. Directors and officers
d. Shareholders
e. Fundamental corporate changes
f. Federal securities

Question 3

Q

Brief

Answer

A

Corp is a legal entity distinct from its owners (the shareholders), thus shielding the owners and managers from liability. Generally, only the corporation (and not the people who own or work for the corporation) is liable for the corporation’s obligations.

A corp may be created only by filing certain docs with the state.

To qualify for this entity treatment, the corporation must be formed by filing a document with the state (in most states “the articles of incorporation”) setting out certain information

Question 4

Q

Key chacteristics of a corp - Limited Liability

Answer

A

a. Limited Liability for owners, directors, and officers: SHs not persoanlly liable for obligations of Corp; neither are corp’s directros or officers.
Only the corporation itself can be held liable for corporate obligations. The owners risk only the investment that they make in the business to purchase their ownership interests (“shares”).

Question 5

Q

Key chacteristics of a corp - management

Answer

A

b Centralized Management
Generally, the right to manage a corporation is not spread out among the shareholders, but rather is centralized in a board of directors, who usually delegate day-to-day management duties to officers.

c. Free Transferability of Ownership
Generally, ownership of a corporation is freely transferable—that is, generally shareholders are free to sell their shares to others unless it is provided otherwise.

d. Continuity of Life
A corporation may exist perpetually and generally is not affected by changes in ownership (that is, sale of shares).

e. Taxation
C Corp: Corp is taxed as an entity distinct from its owners. Double taxation - when the corporation does make distributions to shareholders, the distributions are treated as taxable income to the shareholders, even though the corporation has already paid taxes on its profits
S Corp: Election to be taxed like partnerships. Taxes pass through to owners.

Question 6

Q

Key chacteristics of a corp - taxation

Answer

A

e. Taxation
C Corp: Corp is taxed as an entity distinct from its owners. Double taxation - when the corporation does make distributions to shareholders, the distributions are treated as taxable income to the shareholders, even though the corporation has already paid taxes on its profits
S Corp: Election to be taxed like partnerships. Taxes pass through to owners.

Question 7

Q

Corporation compared to Other Business Entities

Answer

A

b. Comparison with Partnership (PARTNERSHIP)
Pship - at least 2 owners. Only need intention to carry on as co-owners as a business for profit. Pships generally are not treated as legal entities apart from their owners. Partners are personally liable for obligations of the partnership, and management rights generally are spread among the partners. Ownership interests of partners cannot be transferred without the consent of the other partners. A partner- ship generally does not continue beyond the lives of its owners. Finally, profits and losses of a partnership flow through directly to the partners unless the partners have elected to be taxed as a corporation.

c. Comparison with Limited Partnership (LIMITED PARTNERSHIP)
A limited partnership is a partnership that provides for limited liability of some investors (called “limited partners”), but otherwise is similar to other partnerships.
A limited partnership can be formed only by compliance with the limited partnership statute.
There must be at least one general partner, who has full personal liability for partner- ship debts and has most management rights.

d Comparison with Limited Liability Company (LLC)
Offers the limited liability of a corporation and the flow through tax advantages of a partnership (unless the parties elect to be taxed as a corpora- tion). Like a corporation, it may be formed only by filing appropriate documents with the state, but otherwise it is a very flexible business form: owners may choose between centralized management and owner management, free transferability of ownership or restricted transferability, etc.

e Comparison with Benefit Corporations
A benefit corporation (“B corporation”) intends to benefit the public and the environment, in addition to its shareholders. B corporations are treated the same as C corporations for tax purposes. A benefit corporation’s articles of incorporation must state that it is a benefit corporation. Directors and officers of benefit corporations operate with the same limited liability and fiduciary duties as their traditional counterparts in C corporations, but they are also required to consider the impact of their decisions on the B corporation’s employees, customers, communities, and the environment, not just its share- holders. B corporations must also prepare an annual benefit report, which is delivered to all the shareholders and posted online and/or filed with the secretary of state.

a. Comparison with Sole Proprietorship
- In a sole P, 1 person owns all assets of the biz. no business entity distinct from the owner. Owner is personally liable for biz’s obligations, and the biz entitty cannot continue beyond the life of the owner. Ownership is freely transferable, and all profits and losses from the business flow through directly to the owner.

Question 8

Q

Rules for Corporate Governance are set out where?

Answer

A

Rules for corporate governance may be set out in the articles or in bylaws adopted by the corporation.

Question 9

Q

Ownership interests in the corporation

Answer

A

Ownership interests in the corporation are then sold in the form of stock or shares which give the shareholders certain rights (e.g., to receive distributions when declared and to vote).

Question 10

Q

Running the Corp

Answer

A

Shareholders elect directors to oversee the corporation, and the directors appoint officers to run the company on a day-to-day basis.

Directors and officers owe the corporation a duty to act as similarly situated persons and cannot “self-deal” for their own benefit.

Question 11

Q

fundamental changes?

Answer

A

Before a fundamental change can be made to the corporation, shareholders must be informed and given an opportunity to vote on the change.

Question 12

Q

WHAT DOES IT TAKE TO FORM A CORPORATION?
Terminology? Exceptions?

Answer

A

(PEOPLE, PAPER, ACT)

Corporations are created by complying with state corporate law,
which in a majority of states is based on the Revised Model Business Corporation Act (“MBCA”).

A corporation formed in accordance with law is a de jure corporation.
If all corporate laws have not been followed, a de facto corporation might result or a corporation might be recognized through estoppel.

To form a corporation, we need a PERSON, a PAPER, and an ACT.

Question 13

Q

Corp formation…. termnology and exceptions

Answer

A

A corporation formed in accordance with law is a de jure corporation.
If all corporate laws have not been followed, a de facto corporation might result or a corporation might be recognized through estoppel.

Question 14

Q

Requirements to form a corporation

Answer

A

**1. PEOPLE- One or more persons who undertake to form it, knonw as INCORPORATORS. **
- They Execute (sign) the articles, delvier them to SofState.
– An incorporator can be an individual or an entity.
- They do not need to be a citizen of the state of incorporation.

PAPER - File Articles of Incorporation:
**- Corporate name (need magic word: Corporation (Corp), Company (Co), Incorproated, or Limited (Ltd)) **
- articles are a contract between the corporation and the shareholders, and also, a contract between the corporation and the state.

3. ACT: Delivered notarized articles to the Secretary of State.
To complete formation of the corporation, the incorporators will have notarized articles delivered to the secretary of state and pay required fees.
If the secretary of state’s office accepts the articles for filing = conclusive proof of valid formation.
Corporate existence begins upon this filing by the state.
At that point, we have a de jure corporation.

Then, the board of directors holds the organizational meeting, where it selects officers and adopts any bylaws and conducts other appropriate business.

Question 15

Q

LEGAL SIGNIFICANCE OF FORMATION OF CORPORATION:

A. Internal Affairs Doctrine

Answer

A

A. Internal Affairs Doctrine:
Roles and duties of directors, officers, and shareholders governed by law of state where Corp is formed.
(Governed by the law of the state OF INCORPORATION).

Question 16

Q

LEGAL SIGNIFICANCE OF FORMATION OF CORPORATION:

B. Entity Status.

Answer

A

B. Entity Status: A corp is a separate legal person. It can sue and be sued, hold property, be a partner in a partnership, make charitable contributions, etc.
It is taxed on its profits; in addition, shareholders are taxed on distributions. So, there is “double taxation,” which is a disadvantage.
*Double Taxation: Corp is taxed at the entity level (corp pays taxes on profits), AND SHs are taxed on the money again (from dividends).
TO AVOID double taxation: A Corp can Qualify as an S-CORPORATION to avoid having to pay income tax at the corporate level.

C. Limited Liability: Owners (SHs) are NOT liable for the Debts of the Corporation.
Directors, officers, and SHs are not liable for what the entity does. This is “limited liability,” which means that SHs generally can only lose the amount that they invested in the company. So, generally, who is liable for what the corporation does? The corporation itself. That’s why we incorporate—so that owners are not personally liable.

Question 17

Q

Requirements for an S-Corp

Answer

A

S Corp: Corp with pass-through (preferential) taxation. To do so, corporations must meet the following requirements:
* They must have no more than 100 shareholders, all of whom are human U.S. citizens or residents;
* They must have one class of stock; and
* The stock must not be publicly traded.

Question 18

Q

LEGAL SIGNIFICANCE OF FORMATION OF CORPORATION:
C. Limited Liability

Answer

A

C. Limited Liability: Owners (SHs) are NOT liable for the Debts of the Corporation.
Directors, officers, and SHs are not liable for what the entity does. This is “limited liability,” which means that SHs generally can only lose the amount that they invested in the company. So, generally, who is liable for what the corporation does? The corporation itself. That’s why we incorporate—so that owners are not personally liable.

Question 19

Q

If the secretary of state’s office accepts the articles…

Answer

A

If the secretary of state’s office accepts the articles for filing = conclusive proof of valid formation.

Question 20

Q

I. Organization and Formation - Filing…what do u have to file?

Answer

A

Articles of Incorporation: Name of corp, Incorproaters, authorized shares, agent, registered office.

Formation - A corporation’s existence begins on the date the Articles of Incorporation are filed with the Secretary of State, unless a delayed effective date is specified.

A. Must file Articles of Incorporation with Sec of State.

Name of corporation must be included; cannot be similar to existing names
Number of authorized shares must be included
Also must include name and address of incorporators and of registered agent

Articles of Incorporation (AoI) – The AoI must contain:
1) corporate name;
2) Authorized shares - number of shares the corporation is authorized to issue;
3) the address of the corporation’s initial registered office and the name of its initial registered agent at that office; and
4) the name and address of each incorporator.

Question 21

Q

Statement of Purpose

Answer

A

Statement of purpose: but this can be “to engage in anything that’s lawful”.

Watch for clause limiting corporation’s purpose—activities beyond scope of purpose are ultra vires and may be enjoined or directors held liable for authorizing such acts.

Absent such a statement, the MBCA presumes that a corporation is formed to conduct any lawful business (meaning, the articles need not include such a statement) and is allowed to undertake any act that is necessary or convenient for carrying on their business purpose, including making charitable donations and lending money to employees, officers, and directors.

Question 22

Q

What does corporations name need to include?

Answer

A

Corporate name (need magic word: Corporation (Corp), Company (Co), Incorproated (Inc.), or Limited (Ltd))

Question 23

Q

Articles of Incorporation (PAPER)

Answer

A

Articles of Incorporation - Required Contents:

Corpation’s name
- Corporate name (need magic word: Corporation (Corp), Company (Co), Incorproated (Inc.), or Limited (Ltd))
Name/address of each incorporator
Name/address of each initial director
Name/address of REGISTERED AGENT and St address of the REGISTERED OFFICE. (person they send stuff to).
— if u dont put duration in articles, we presume perpetual existence.
– registered office must be in the state. Registered agent is the company’s legal representative, meaning they could, for example, receive service of process for the Corp.
Statement of purpose: but this can be “to engage in anything that’s lawful”

6.Information regarding Type of stock - articles must say something about the stock.
- Voting rights and preferences of the stock.
- Authorized stock: Max # shares corp can sell
- Issued stock: # of shares corp actually sells
- Outstandingt stock: Shares issues and not reacquired.
The articles must include (1) the authorized stock; (2) if the company has different classes of stock or series within a class of stock, the number of shares per class and a distinguishing designation for each class

b. Optional Contents: The articles may also include any other provision regarding operation of the corporation that’s not inconsistent with law.

Question 24

Q

What can the articles NOT do?

Answer

A

The articles may NOT limit or eliminate liability for:
* financial benefits received by the director to which she is not entitled,
* an intentionally inflicted harm on the corporation or its shareholders,
* unlawful corporate distributions,
* or an intentional violation of criminal law.

Question 25

Q

Ultra Vires Acts (UVA) -
(Statement of Purpose)
- What if the corp states a purpose and does something else?

Answer

A

R: When a corporation’s activities are outside the scope of their AoI, such activities are deemed UVAs.
* ULTRA VIRES ACTIVITY - Corporation action beyond the scoppe of the articles.
* If a corporation includes a narrow business purpose in its articles it may not undertake activities unrelated to achieving the stated business purpose.

Under the RMBCA, UVAs are valid - generally enforceable if they benefit the corporation. Valid as to third parties.

However:
* individual directors and officers who approved these UVAs can be held personally liable.
* SHs can seek an injunction to stop a proposed UV act.
* Corp can sue responsible managers (officers or directors) for damages for approving a UVA - for UV losses; and
* The state may bring an action to dissolve a corporation for committing an ultra vires act.

NOTE: modern Corp statutes, a corp is given the power to do all things necessary or convenient to effect its purposes. Most modern statutes also provide
that a corporation may be formed for any lawful purpose. Combined, these provisions provide authority for a corporation to do almost anything that is rationally related to a business purpose.
SO: Unless statement restricts a corporation’s purposes, you should usually find corporate acts to be within the corporation’s powers.

Question 26

Q

D. Will Court Disregard Corporate Entity (Pierce the Corporate Veil)?

Answer

A

*Piercing the Veil - Generally, shareholders, directors, and officers are not personally liable for the liabilities of the corporation.
However, a court will pierce the corporate veil and hold shareholders personally liable when:
1) the corporation is acting as the alter ego of shareholders;
2) where shareholders fail to follow corporate formalities;
3) the corporation was inadequately capitalized at formation or
4) to prevent fraud.

Alter ego doctrine
a. Grounds—harm caused to third party because:
1) Owners do not treat corporation as a separate entity
2) Commingle personal and corporate funds
3) Use corporate assets for personal purposes
4) Owners do not hold meetings
b. Parent/subsidiary corporations or affiliated corporations can be held liable for this
Inadequate capitalization at inception
a. Must start corporation with sufficient unencumbered capital to meet its prospective liabilities
Perpetrating a fraud
a. Cannot be formed to avoid existing liabilities
b. Can be formed to limit future liabilities
If court pierces:
a. Generally only active shareholders liable
b. Generally liable only for tort obligations

Question 27

Q

D. Will Court Disregard Corporate Entity (Pierce the Corporate Veil)?

Answer

A

*Piercing the Veil - Generally, shareholders, directors, and officers are not personally liable for the liabilities of the corporation.
However, a court will pierce the corporate veil and hold shareholders personally liable when:
1) the corporation is acting as the alter ego of shareholders;
2) where shareholders fail to follow corporate formalities;
3) the corporation was inadequately capitalized at formation or
4) to prevent fraud.

Alter ego doctrine
a. Grounds—harm caused to third party because:
1) Owners do not treat corporation as a separate entity
2) Commingle personal and corporate funds
3) Use corporate assets for personal purposes
4) Owners do not hold meetings
b. Parent/subsidiary corporations or affiliated corporations can be held liable for this
Inadequate capitalization at inception
a. Must start corporation with sufficient unencumbered capital to meet its prospective liabilities
Perpetrating a fraud
a. Cannot be formed to avoid existing liabilities
b. Can be formed to limit future liabilities
If court pierces:
a. Generally only active shareholders liable
b. Generally liable only for tort obligations

Question 28

Q

UVA claims are raised when

Answer

A

UVA claims are raised when
1) a shareholder sues to enjoin the UVA;
2) 2) the corporation sues an officer; or
3) 3) a state brings action to dissolve the corporation based on UVA.

The ultra vires nature of an act can be raised in only three situations:
-1. **valid as to third parties. **
-2. SHs can seek an injunction to stop a UV act. A shareholder may sue the corporation to enjoin a proposed ultra vires act;
- 3. Corp can sue responsible managers for UV losses. The corporation may sue an officer or director for damag- es for approving an ultra vires act; and
- 4. The state may bring an action to dissolve a corporation for committing an ultra vires act.

Question 29

Q

LEGAL SIGNIFICANCE OF FORMATION OF CORPORATION:

A. Internal Affairs Doctrine

B. Entity Status.

C. Limited Liability

Answer

A

A. Internal Affairs Doctrine:
Roles and duties of directors, officers, and shareholders governed by law of state where Corp is formed.
(Governed by the law of the state OF INCORPORATION).

B. Entity Status: A corp is a separate legal person. It can sue and be sued, hold property, be a partner in a partnership, make charitable contributions, etc. It is taxed on its profits; in addition, shareholders are taxed on distributions. So, there is “double taxation,” which is a disadvantage.
•Double Taxation: Corp is taxed at the entity level (corp pays taxes on profits), AND SHs are taxed on the money again (from dividends).
TO AVOID double taxation: A Corp can Qualify as an S-CORPORATION to avoid having to pay income tax at the corporate level.
S Corp: Corp with pass-through (preferential) taxation. To do so, corporations must meet the following requirements:
• They must have no more than 100 shareholders, all of whom are human U.S. citizens or residents;
• They must have one class of stock; and
• The stock must not be publicly traded.

C. Limited Liability: Owners (SHs) are NOT liable for the Debts of the Corporation.
Directors, officers, and SHs are not liable for what the entity does. This is “limited liability,” which means that SHs generally can only lose the amount that they invested in the company. So, generally, who is liable for what the corporation does? The corporation itself. That’s why we incorporate—so that owners are not personally liable.

Question 30

Q

B. When Does Corporate Existence Begin?

Answer

A

When articles filed by state

Question 31

Q

Who is liable for Pre-Incorporation contracts?

Answer

A

Promoters generally liable for preincorporation contracts
a. Liability continues even after corporation formed absent a novation.
b. Corporation does not become liable unless it adopts.

Question 32

Q

Promoter

Answer

A

A Promoter is a person who acts on behalf of corporation prior to formation.

PROMOTER: Person acting on behlaf of Corp NOT YET FORMED.
A promoter is a person acting on behalf of a corporation not yet formed.

Question 33

Q

*Pre-Incorporation Promotor Liability

Answer

A

PROMOTER LIABILITY: Liability of people acting on behalf of corp for PRE-INCORPORATION Contracts.
PRE-INCORPORATION CONTRACTS: Contracts entered into on behalf of Corp BEFORE formation.

Promoters are personally liable for pre-incorporation contracts, unless…
1) there is a subsequent novation, **or **
2) the contract explicitly provides there is no promoter liability.

Before a corporation is formed, promoters procure commitments for capital and other instrumentalities that will be used by the corporation after its formation. In doing so, they may enter into a contract on behalf of the corporation not yet formed.

Under the MBCA, anyone who acts on behalf of a corporation knowing that it is not in existence is jointly and severally liable for the obligations incurred. Thus, if a promoter enters into an agreement with a third party on behalf of a planned but unformed corporation, the promoter is PERSONALLY liable on the contract.

NOVATION: (an agreement among all three parties—the promoter, the corporation, and the other contracting party—to release the promoter from liability and substitute the corporation for the promoter in the contract).

NOTE: Adoption of the K by the Corp makes the Corp liable AS WELL, but does NOT release the promoter UNLESS there is NOVATION.

Promoter’s Right to Reimbursement: A promoter who is held personally liable on a preincorporation contract may have a right to reimbursement from the corporation to the extent of any benefits received by the corporation.*

Question 34

Q

How does Adoption of the K by the Corp impact promoter liability?

Answer

A

Adoption of the K by the Corp makes the Corp liable AS WELL, but does NOT release the promoter UNLESS there is NOVATION.

Question 35

Q

If pre-incoproration Agreement Expressly Relieves Promoter of Liability

Answer

A

Exception—Agreement Expressly Relieves Promoter of Liability
If the agreement expressly relieves the promoter of liability, there is NO CONTRACT; such an arrangement may be construed as a revocable offer to the proposed corporation, and the promoter has no rights or liabilities under the agreement.
For there to be a valid contract, someone must be bound with the third party. It can’t be the corporation since it does not exist; therefore, the promoter is liable even though she was acting on behalf of the corporation to be formed. (If the agreement expressly relieves the promoter of liability, it will be treated as an offer to the corporation.)

Question 36

Q

Promoter liability for pre-incorporation Ks, but after corp is formed…

Answer

A

The promoter’s liability CONTINUES AFTER the corporation is FORMED, even if the corporation adopts the contract and benefits from it.
The promoter will be released from liability only if there is an express or implied novation

Question 37

Q

*Corporate Liability – for PRE-Incorporation Contracts

Answer

A

GENERAL RULE: Corp IS NOT liable for PRE-INCORPORATION Contracts, However…
The corporation may become liable only if it expressly or impliedly ADOPTS the promoter’s contract.

EXPRESS adoption - The board takes an action adopting the contract.
or
**IMPLIED adoption **- The Corp knows the material terms and accepts the benefits of the contract (moving into leased premises).

A corporation is not liable for a pre-incorporation contract unless the corporation knows the material terms and accepts the benefits of the contract.
If the corporation accepts the benefits of the contract, it may be adopted, and while it doesn’t relieve the promotor of liability, it offers the creditor an alternative avenue to seek reimbursement.

Question 38

Q

De Jure Corporation (DJC)

Answer

A

A DJC is a legally formed corporation.

A corporation is legally formed when the Art’ of Inc’ are filed with the Secretary of State.

If the corporation is not legally formed, it cannot enter into contractual obligations.

In such instance, personal liability of the owners/promotors will result unless either an exception for De Facto Corporations or Corporation by Estoppel applies.

Question 39

Q

C. What If There Are Defects in Formation?

Answer

A

A person who purports to act on behalf of a corporation knowing there was no valid incorporation is personally liable.

BUT, two doctrines allow incorporators to escape liability:

No liability if de facto corporation:
a. Colorable compliance with the incorporation statute, and
b. Exercise of corporate privileges
No liability if corporation by estoppel—people treating business as valid corporation are estopped from denying corporation’s existence (only in CONTRACT, not tort)

Some states do not recognize de facto and estoppel doctrines

Where no corporation recognized, only those who acted on behalf of the business will be held liable; passive investors not liable

Question 40

Q

Two doctinres if you failed to properly form a corp

Answer

A

(1) DE FACTO CORPORATION AND
(2) CORPORATION BY ESTOPPEL
*** Only if Unaware of failure!

If the incorporators thought they formed a corporation, but they failed to do so, they’d be personally liable for business debts. (Basically, the would-be incorporators have formed a partnership instead, and partners are liable for business debts.)

But two doctrines—
(1) the de facto corporation and
(2) corporation by estoppel doctrines—
may still allow incorporators to escape liability.

Under these doctrines, the business is treated as a corporation, so incorporators are not liable for what the business did.

One important characteristic of both of these doctrines is that ANYONE ASSERTING them must be UNAWARE of the FAILURE to form a de jure corporation!!!

Question 41

Q

De Facto Corporation (DFC) –

Answer

A

A DFC enjoys the benefits and powers of a properly formed corporation, but through some error, it is not legally incorporated.

A DFC exists where the entity:
1) made a good faith attempt to incorporate;
2) is otherwise eligible to incorporate; and
3) took some action indicating that it considered itself a corporation.

However, only a person who was unaware that the corporation was not properly formed may assert the de facto corporation defense.

RESULT if reqs are met: If de facto corporation doctrine applies, the business is treated as a corporation for all purposes except in an action by the state (called a “quo warranto” action).
* Owners get Limited Liability.

Question 42

Q

Requirements for a DE FACTO corporation to exist

Answer

A

For a de facto corporation to exist, must meet the following requirements:
* There must be a relevant incorporation statute (there’s an incorporation statute in every state.);
* The parties made a good faith, colorable (good faith) ATTEMPT to COMPLY with the statute, meaning the parties tried and came close to forming a corporation; and
* There has been some exercise of corporate privileges, meaning the parties were acting as though they thought there was a corporation.

AND… whoever is asserting the defense did NOT KNOW the corp was not formed.

Question 43

Q

Limitation on de facto corporation doctrine

Answer

A

b Limitation
The de facto doctrine can be raised as a defense to personal liability only by a person who is unaware that there was no valid incorporation.
Persons who act on behalf of a corporation knowing that there was no incorporation are jointly and severally liable for all liabilities created in so acting.

Question 44

Q

Corporation by Estoppel -

Answer

A

R: Any person or entity that treated a business as a corporation may be later estopped from denying that the business is a corporation (in a contract case), even if a valid corporation was not formed.

*** ONLY CONTRACT CASES, not tort cases!
Not a de jure corp, but treated that way for people who treated the business like a corp.
- Estopped from denying the existence of the corproation.

Under the common law doctrine of corporation by estoppel, persons who have dealt with the entity as if it were a corporation will be estopped from denying the corporation’s existence.

This doctrine affects BOTH the third parties and the corp:
The doctrine applies in contract to prevent the “corporate” entity, and parties who have dealt with the entity as if it were a corporation, from backing out of their contracts.
Correspondingly, it will prevent the improperly formed “corporation” from avoiding liability by saying it was not properly formed.

Note well that corporation by estoppel applies only in CONTRACT cases.
It does not apply to tort victims, because the doctrine is based on the notion that third parties accept the risk of dealing with a corporation. That is the case with contract but not tort. Bc the people who chose to contract with the corp thinking it was a corp.

EX: you do business with people who hold their business out as a Corp. They think it’s a Corp; you think it’s a Corp. You write checks to the “corporation” and deal with it as a Corp. But, as it turns out, the entity is not actually a corporation. If you try to then sue the proprietors individually in contract, under this doctrine, you won’t win. U will be estopped from denying that the business was a corporation.

Question 45

Q

Application of Doctrines
((1) DE FACTO CORPORATION AND (2) CORPORATION BY ESTOPPEL))

Answer

A

De Facto: The de facto doctrine applies equally in contract and tort situations. Generally, if a de facto corporation is found, it is treated like any other corporation for all purposes, except that the state may seek dissolution in a quo warranto proceeding.
De Facto - EFFECT ON PERSONAL LIABILITY: Insulates against personal liability of shareholders, but corporation subject to quo warranto proceeding by state

Estoppel: Estoppel generally is applied only in CONTRACT cases. Estoppel applies only on a case-by-case basis.

These doctrines are ABOLISHED in many states.
However, if one or both of the doctrines is relevant to an essay, you should still raise them in your answer with this caveat
(“the doctrine likely doesn’t apply, but if it does, here’s how it would work”).

Question 46

Q

If there is no valid incorporation and the facts do not support a de facto or estoppel argument… who is liable?

Answer

A

If there is no valid incorporation and the facts do not support a de facto or estoppel argument, generally, the courts will hold only the ACTIVE business members personally liable, and their liability is joint and several.

Question 47

Q

Corporate Status Chart KEY

Answer

A

De Jure:
Formation - Folllow ALL statutory provisions
Effect on personal liability - Insulates against personal liability of Shareholders

**De Facto: **
Formation - Colorable complaince with most statutory provisions and exercise of corp’ privileges
Effect - Insulates against personal liability of shareholders, but corporation subject to quo warranto proceeding by state

**Estoppel: **
Formation - Parties act as if there is a corporation; no requirement of following statutory provisions
Effect - Insulates against personal liability in contract, but not in tort

Question 48

Q

D. Will Court Disregard Corporate Entity (Pierce the Corporate Veil)?

Answer

A

*Piercing the Veil - Generally, shareholders, directors, and officers are not personally liable for the liabilities of the corporation.
However, a court will pierce the corporate veil and hold shareholders personally liable when:
1) the corporation is acting as the alter ego of shareholders;
2) where shareholders fail to follow corporate formalities;
3) the corporation was inadequately capitalized at formation or
4) to prevent fraud.

Question 49

Q

Piercing: Alter Ego

Answer

A

Alter ego doctrine
a. Grounds—harm caused to third party because:
1) Owners do not treat corporation as a separate entity
2) Commingle personal and corporate funds
3) Use corporate assets for personal purposes
4) Owners do not hold meetings
b. Parent/subsidiary corporations or affiliated corporations can be held liable for this

Question 50

Q

Piercing: Inadequate capitalization

Answer

A

Inadequate capitalization at inception
a. Must start corporation with sufficient unencumbered capital to meet its prospective liabilities

Question 51

Q

Piercing 3: Perpetrating a fraud

Answer

A

Perpetrating a fraud
a. Cannot be formed to avoid existing liabilities
b. Can be formed to limit future liabilities

Question 52

Q

If court pierces veil…

Answer

A

If court pierces:
a. Generally only active shareholders liable
b. Generally liable only for tort obligations

Question 53

Q

E. Capital Structure of Corporation

Answer

A

Debt securities (bonds) create debtor-creditor relationship
Equity securities (stocks) create ownership interesta. Terminology
1) Authorized but unissued shares—shares described in the articles but not currently issued
2) Issued and outstanding—shares sold to investors
3) Treasury shares—former name for shares repurchased by corporation; now called authorized but unissued sharesb. Subscription agreements—agreements to purchase shares from corporation
1) Preincorporation subscription agreements are irrevocable for six monthsc. Consideration for shares
1) Acceptable form
a) Under Revised Model Business Corporations Act (“MBCA”), any benefit to the corporation
b) Traditionally only cash, property, or services already performed.
2) amount
a) Under MBCA, amount set by directors, and their good faith valuation of the consideration received is conclusive
b) Traditionally shares often had a par value (minimum consideration) and could not be sold for less

Question 54

Q

III. SHAREHOLDRS

Answer

A

A. Voting
B. Sh Agmts
C. Inspection Rights
D. Preemptive Right
E. Sh’ suits
F. Distributions
G. Sh liabilities

Question 55

Q

DO SHAREHOLDERS GET TO MANAGE THE
CORPORATION?

Answer

A

The power to manage the corporation generally is vested in the board of directors.

Generally, the shareholders have no direct control in management of the corporation’s business.

They may act in their own personal interests and generally have no fiduciary duty to the corporation or their fellow shareholders.

Shareholder liability is thus generally limited to liabilities for unpaid stock, a pierced corporate veil, or the absence of a de facto corporation.

BUT, Close corporations!

Question 56

Q

Close Corporations

(CLosely held corp)

What is it?

Answer

A

SMall number of Shareholders
*Stock NOT publicly traded.
*Shareholders can manage directly (no board of directors). BUT ALMOST NEVER HAPPENS.

Shareholders can run the corporation directly in a close corporation.

The characteristics of a close corporation are that there are few shareholders, and the stock is not publicly traded.

In a close corporation, we can set up management with a board of directors and run it like a regular corporation. Or we can set up management differently, such as by eliminating the board and having shareholders run the business, or appointing a manager, and so on.

Question 57

Q

Shareholder Management Agreements for a close corporation.

How to set up?

Fiduciary duties?

Answer

A

Shareholder management agreements set up alternative management for a close corporation.
The MBCA allows shareholders to enter into agreements to dispense with the board and vest management power in the shareholders.
- If the articles do not include such a special provision, shareholders exercise only indirect control of the corporation through their voting power, by which they elect and remove directors, adopt and modify bylaws, and approve fundamental changes in the corporate structure.

There are TWO WAYS to set up a shareholder management agreement:
* In the articles or bylaws and approved by all shareholders
* By unanimous written shareholder agreement
Either way, the agreement should be conspicuously noted on the front and back of the stock certificates. (Failure to do so, though, does not affect validity.)

FIDUCIARY DUTIES: If the shareholders do to this and set up management by shareholder or by a manager, who owes the duties of care and loyalty to the corporation? It’s whoever manages the corporation.
Managing shareholders will thus have the liabilities that a director ordinarily would have with respect to that power.

Question 58

Q

Special Fiduciary Duty in Close Corporations

Answer

A

Whoever manages the corporation owes the duties of care and loyalty to the corporation.
In many states, courts impose a fiduciary duty on shareholders owed to other shareholders. Because a close corporation looks like a partnership (with few owners, who usually are employed by the business). (fiduciary duty of utmost good faith)

Especially, controlling shareholders should NOT OPRESS minority shareholders.
(majority treating the minority unfairly)

Question 59

Q

Special fiduciary duties in Close Corporations - Controlling shareholders to minority Sharheolders

Answer

A

a. Duties of Controlling Shareholders to Minority Shareholders
Controlling shareholders cannot use their power to benefit at the expense of minority shareholders. The controlling shareholder could be a corporation.
- For example, a parent corporation should not use its domination of a subsidiary corporation to receive something to the detriment of the subsidiary’s minority share- holders. Doing so would breach this duty.
- There is also a duty to disclose material information to the minority shareholders.

Question 60

Q

Special fiduciary duties in Close Corporations- Oppression of Minority Shareholders

Answer

A

b. Oppression of Minority Shareholders
If there is oppression of minority shareholders, they can sue the controlling shareholders who oppress them for breach of this fiduciary duty.
- For example, 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 (so the minority is getting no return on investment).
- Why do some courts let the minority shareholder sue here? Because oppression thwarts their legitimate goals for investing and they have no way out (there’s NO MARKET EXIT for the minority shareholder’s stock).

Question 61

Q

EXAM: power of the shareholders to run the day-to-day affairs of their corpora- tion?

Answer

A

unless the corporation’s articles or a shareholder agreement provides otherwise, the shareholders have no such power; that power is vested in the board of directors, and the shareholders have the power to elect the board.

Question 62

Q

A. Shareholder VOTING

Rule

Record Shs

Meetings and Notice

Proxies

Quorum

Approval

Answer

A

Generally shareholders do not run corporation on a day-to-day basis

a. Exception: Closely held corporation may dispense with board by shareholders’ agreement and run corporation through a different scheme
b. Shareholders indirectly control corporation by electing directors, amending bylaws, and approving fundamental changes

Record shareholders
a. Shareholders of record on the record date have a right to vote:
1) At the annual meeting to elect directors
2) Regarding fundamental corporate changes
Notice of meetings must be given to shareholders
a. Annual meeting—date, time, location
b. Special meeting—date, time, location, and purpose
c. Improper notice
1) Action taken at the meeting can be nullified
2) Can be waived by attending without complaint
Proxies
a. Written proxies valid for 11 months
b. Generally revocable unless they specifically provide otherwise and are coupled with an interest
c. May be revoked by attendance or later appointment
d. Federal law
1) Proxy solicitations must fully and fairly disclose all material facts
2) Prohibits material misstatements and fraud in connection with a proxy solicitation
3) Materiality—a reasonable shareholder would consider it important in deciding how to vote
Quorum
a. Generally a majority of the outstanding voting shares must be present for valid vote
b. Once quorum reached, shareholder leaving does not invalidate voting
Approval
a. MBCA—if quorum present, action approved if votes cast in favor exceed votes cast against
b. Some states require greater vote for fundamental corporate change
c. Cumulative voting for directors
1) MBCA allows articles to provide for cumulative voting
2) Cumulative voting is automatic in some states
3) Mechanics—shareholder can vote shares owned x number of directors being elected; can cast all votes for one candidate or split

Question 63

Q

Shareholder’s and Directors Meetings Chart

Answer

A

SHAREHOLDERS: Annual or special
When? Annual or special
- Annual - as Board of dir’s or president directs, BUT must be within 18 months of prior annual meeting
- Special - as board of dir’s or president directs
Where? Anywhere
Notice Requirements
Can be by mail between 10 and 60 days before meeting; must include time, place, (and if SPECIAL, is must contain purpose)
Proxy Voting Allowed? Yes.

DIRECTORS: Regular or special
When? as board of dir’s or president directs
Where? Anywehre
Notice Requirements? None for regular. Notice required for special
Proxy Voting Allowed? No.

Question 64

Q

Shareholder voting requires:

Answer

A

Every time the shareholders vote, we must have a quorum represented at the meeting.

The general rule is that a quorum is a majority of outstanding shares entitled to vote, unless the articles or bylaws require a greater number. Note that a shareholder quorum will not be lost if people leave the meeting.

If a quorum is present, generally, shareholders will be deemed to have approved a matter if the votes cast in favor of the matter exceed the votes cast against the matter, unless the articles or bylaws require a greater proportion. But exceptions for some special matters…

Answer 65

A

Voting trusts
a. Shareholders transfer share ownership to a trustee who votes shares as agreed
b. Valid in most states for up to 10 years but renewable
Shareholder management agreements
a. Used in small corporations
b. Shareholders may agree to run the corporation in any way
c. Can even dispense with board
Share transfer restrictions
a. Ownership interests (shares) generally are freely transferable
b. Shares may conspicuously provide for restriction
c. Restrictions must be reasonable

Shareholder Agreement – Shareholders may enter into agreements concerning the management of a corporation as long as the agreement it is set forth in the AoI, bylaws or some written agreement signed by all shareholders, and made known to the corporation.

Answer 66

A

Limited—books, papers, accounting records, etc.
a. With five days’ written notice, and
b. Proper purpose (purpose related to the shareholder’s rights)
Unqualified right (regardless of purpose)—articles and bylaws, minutes of share-holder meetings, names and addresses of current directors, and recent annual reports.

Answer 67

A

Right to purchase shares to maintain proportionate ownership interest
Under MBCA exists only if provided for
Where provided for, does not apply to:
a. Shares issued as compensation
b. Shares issued within six months of incorporation
c. Shares issued for consideration other than money
d. Nonvoting shares with a distribution preference

Answer 68

A

Direct vs. derivative
a. Direct suit is to enforce right of shareholder
b. Derivative suit is to enforce a right belonging to corporation
1) Must have owned shares at time of wrong
*) The shareholder must also fairly and adequately represent the corpo- ration’s interest.
2) Must maintain ownership throughout suit
3) Demand board to bring suit (unless futile in some states)
Dismissal—if a majority of directors with no personal interest determine in good faith that suit is not in best interests of corporation
Recovery
a. Direct suit—goes to shareholder
b. Derivative suit—goes corporation (usually)

Answer 69

A

Standing, and
Demand

Answer 70

A

STANDING:
1.Own srtock when claim arose and throughout suit:
a shareholder must have been a shareholder at the time the claim arose or must have become a shareholder through transfer by operation of law from someone who did own stock at the time the claim arose.
- Examples of “transfer by operation of law” include getting stock through inheritance or by divorce decree.

2.Adequately represent corp’s interest
The shareholder must also fairly and adequately represent the corpo- ration’s interest.

Answer 71

A

DEMAND:
3.Make written demand on Corp, UNLESS futile.
MBCA: the shareholder must make a written demand on the Corp (usually, that means the board) to take suitable action.
- In some states, this demand must always be made, and the SH cannot sue until 90 days after making this demand. In such states, a derivative proceeding may not be commenced until 90 days have elapsed from the date of demand, unless:
(1) the SH has earlier been notified that the corporation has rejected the demand; or
(2) irreparable injury to the corporation would result by waiting for the 90 days to pass.
(3)- In other states, shareholders are not required to make this demand if the demand would be FUTILE.

A good example of such a case is when a majority of the sitting directors would be the Ds in the suit (it’s futile to make this demand when we’re suing those very directors).

Join Corp as DEFENDANT.
The corporation must be joined to the suit as a defendant.

Answer 72

A

a. Dismissal or Settlement Requires Court Approval
The parties can settle or dismiss a derivative suit ONLY with court approval.
The court may give notice to shareholders and get their input on whether to settle or dismiss. After the derivative suit is filed, the corporation may move to dismiss.
* Dismissed If Found Not in Corporation’s Best Interests
Dismissal must be based upon an independent investigation that concluded that the suit is not in the corporation’s best interest (for example, it has a low chance of success or the expense of the case would exceed the recovery the corporation would win).
* Investigation By Independent Directors or Panel
The investigation must be made by independent directors or a court-appointed panel of one or more independent persons. (Usually, it’s a “special litigation committee” of independent directors.)
* Court Determination
In ruling on the motion to dismiss, if the court finds that (1) those recommending dismissal were truly independent and (2) they made a reasonable investigation, in most states, the court will dismiss. In some states, the court will also make an independent assessment of whether dismissal is in the corporation’s best interest.

Burden of Proof
To avoid dismissal, in most cases the shareholder bringing the suit has the burden of proving to the court that the decision was not made in good faith after reasonable inquiry. However, if a majority of the directors had a personal interest in the contro- versy, the corporation will have the burden of showing that the decision was made in good faith after reasonable inquiry.

Answer 73

A

Generally are in the form of dividends or of assets after dissolution
No right to receive unless/until declared by board

a. Insolvency limitations—no distribution if:
1) Corporation unable to pay its debts as they become due
2) Total assets are less than total liabilities

b. Preferences—shares may have a preference to distributions
1) Cumulative—if distribution not declared or paid in a certain year, it accumu- lates until paid
2) Cumulative if earned—preference accumulates only if profits for year were sufficient to pay preference
3) Participating—receive stated preference and a share of the distribution made to common shareholders

c. Director liability
1) Director who votes for an unlawful distribution is personally liable for the excess
2) Director may seek contribution from other directors who voted for distribu- tion
3) Directors may recover from a shareholder who received a distribution knowing it was unlawful
4) Good faith defense—may rely on accountants or reliable officers and employees who indicate distribution is lawful

Answer 74

A

Shareholders not fiduciaries—may act in self-interest
Exception—controlling shareholder cannot use control to obtain a special advantage at the expense of the minority shareholders

Answer 75

A

START WITH GENERAL RULE: Shareholders generally cannot be held liable for corporate debts/obligations. The corporation is liable for what it does and share-holders have limited liability.

BUT, a shareholder might be personally liable for what the corporation did if the court pierces the corporate veil. (This most commonly happens in close corporations). Doctrine that allows SHs to be sued for debts of corp.

PIERCING THE CORP VEIL: The general standard is that courts may pierce the corporate veil to avoid fraud or unfairness.
TEST: To pierce the corporate veil and hold shareholders personally liable:
• The shareholders must have abused the privilege of incorporating AND
• Fairness must require holding them liable.

First, did a shareholder abuse the corporation? sloppy administration is generally not enough to pierce the corporate veil.
Second, would it be unfair for X to have limited liability? Probably, bc creditors arent getting paid.
Result: If the court does pierce the corporate veil, only X would be liable. Y did nothing wrong. Only X treated corporate assets as his own.

NOTE: courts may be more willing to pierce the corporate veil for a TORT victim than for a CONTRACT claimant. bc a tort victim did not transact with the corp under the assumption of limited liability.

Common Scenarios—Elements Justifying Piercing
There are several classic scenarios in which the corporate veil is often pierced:

a Alter Ego (Identity of Interests)
b Undercapitalization
c. Fraud, Avoidance of Existing Obligations, or Evasion of Statutory Provisions

Answer 76

A

a Alter Ego (Identity of Interests)
If the shareholders ignore corporate formalities such that the corporation may be considered the “alter ego” or a “mere instrumentality” of the shareholders or another corporation, and some basic injustice results, a court may pierce the corporate veil.
These situations may arise where shareholders treat corporate assets as their own, commingle their money with corporate money, and so on.

Answer 77

A

b Undercapitalization
The corporate veil may be pierced where the corporation is inade- quately capitalized, so that at the time of formation there is not enough unencumbered capital to reasonably cover prospective liabilities.
- Here, a court might pierce the corporate veil because the corporation was undercapitalized when formed.
- SHs FAILED to INVEST enough or carry enough insurance to cover prospective liabilities.
- Failing to invest enough to cover prospective liabilities is what undercapitalization when formed means. That’s the ABUSe of the Corporate privilege, and it’s unfair to provide limited liability because the corporation is hurting people and not compensating them.

Answer 78

A

c. Fraud, Avoidance of Existing Obligations, or Evasion of Statutory Provisions
• The corporate veil may be pierced where necessary to prevent fraud or to prevent an individual shareholder from using the entity to avoid his existing personal obligations.
- But the mere fact that an individual chooses to adopt the corporate form of business to avoid future personal liability is not itself a reason to pierce the corporate veil.

Answer 79

A

Who Is Liable?
Normally, only SHs who are active in the operation of the business will be personally liable.
Liability is joint and several. Remember, piercing the corporate veil allows imposition of liability on shareholders for what should be a corporate debt. That shareholder might be another corporation. For example, a parent corporation could form a subsidiary to avoid its own obligations. The court might pierce the corporate veil to hold the parent corporation liable and go after the parent corporation’s assets.

Who May Pierce: Generally, creditors may be allowed to pierce the corporate veil. Courts almost never pierce the veil at the request of a shareholder.

Answer 80

A

A. Voting
B. Liabilities and Indemnififcation
Duty of CARE and DUTY OF LOYALTY

Election of Directors – Shareholders elect directors at the annual shareholder meetings. Shareholders may remove directors with or without cause. Primary Officers are appointed by the board, who determine their salary.

Answer 81

A

The directors are responsible for the management of the business and affairs of the corporation.

A. Qualifications
* Director must be ADULT natural persons, meaning they must be HUMAN beings with legal capacity.
Absent a provision otherwise in the articles or bylaws, the directors need NOT be shareholders in the corporation or residents of any particular state. Any qualifications for directors prescribed by the articles or bylaws must be reasonable and lawful; no qualification may limit the ability of a director to discharge their duties.

B. Number
We must have one or more directors. The number can be set in the articles or bylaws, which may require as many directors as desired.

C. Election
* Shareholders ELECT directors at ANNUAL meeting.
Initial directors are usually named in the articles. If not, they are elected by the incorporator(s) at the organizational meeting.
After that, the shareholders elect the directors.
The directors are elected at each annual shareholders’ meeting, subject to contrary provisions in the articles.

a. Staggered Board
The entire board is elected each year unless there is a “staggered” (or “classified”) board. Whether there is a staggered board is usually set in the articles.
A staggered board is divided into halves or thirds, with one-half or one-third elected each year.

EX, say there are nine directors. Instead of electing all nine each year, we could divide the board into three classes of three directors each, and they would serve three-year terms.

Answer 82

A

D. Removal
* Directors are removable With or WITHOUT cause.
Shareholders can remove directors before their terms expire. A director is removed if the votes cast in favor of removal exceed the votes cast against. Shareholders may remove a director with or without cause(in other words, shareholders “hire and fire” direc- tors). In some states, if there is a staggered board, shareholders can remove a director only with cause. A director elected by cumulative voting cannot be removed if the votes cast against removal would be sufficient to elect her if cumula- tively voted at an election of directors. Similarly, a director elected by a voting group of shares can be removed only by that class.

Answer 83

A

MEETINGS
a. Directors must attend in person (no proxies) or through telecommunications equipment if all participating directors can simultaneously hear each other
b. No particular notice required for regular meetings
c. Special meetings typically require two days’ notice of date, time, and place (but not purpose)
d. Quorum of directors must be present at time vote is taken
e. Approval of action requires affirmative vote of a majority of the directors present
DELEGATION to executive committees—may exercise authority given to them by board
a. Comprised of two or more directors (in most states)
b. Exceptions: In most states committees may not declare distributions, fill board vacancies, or amend the bylaws

Answer 84

A

The board can only act if a quorum is present.
A majority of the Board is necessary to form a quorum, unless the AoI state a higher or lower number.
At least 1/3 of directors are required to form a quorum, and you need a quorum to secure a valid vote – one of the board members leaves early? No voting is allowed.

Answer 85

A

If Shs created vacancy by removing the director, the SHs MUST select the replacement.

Vacancies on the board may arise, for example, when a director resigns before their term is up. In such instances, who selects the person who will serve as director for the rest of the term? Generally, the board or the shareholders will select the replacement. But if the shareholders created the vacancy by removing a director, the share- holders generally must select the replacement.

Answer 86

A

METHODs of board action: ONLY one of two ways….
• At a meeting (which must satisfy the quorum and voting re- quirements)
•With unanimous written consent (WITHOUT meeting): this is a unanimous agreement in writing. (email is OK, and separate documents are also OK);

a. Board Must Act As Group
The board of directors must act as a group. Thus, an individual director is NOT an agent of the corporation. Individual directors have no authority to speak for or bind the corporation.
The directors must act as a group (even if there is only one director).

If directors agree to have the corporation take an act by having individual conversations, without a meeting or unanimous written agreement- The act is VOID, UNLESS Validly ratified later.
Conference call counts as being present as meeting.

• Ratification of Defective Corporate Actions
Directors, incorporators, and officers may ratify defective corporate actions (that is, actions that are void or voidable due to a failure of authorization, such as those taken in the absence of the requisite board resolution or shareholder approval). To ratify such an action, the board of directors must state the action to be ratified and the nature of the failure of authorization, approve the ratification, and seek shareholder approval if necessary.
[Ex - Boafrd of directors ratifies everything they did in the past 12 months, all directors sign it = binds everything they did].

b. Board Meetings
Types of Meetings; Notice: If there is a board meeting, the method for giving notice is usually set in the bylaws.
Directors may act in regular or special meetings:
• For REGULAR meetings notice is NOT required.
• For SPECIAL meetings, at least two days’ written notice of date, time, and place is required. The notice need not state the purpose of the meeting.

Failure to Give Notice:
Failure to give required notice means that whatever happened at the meeting is voidable—maybe even void—unless the directors who were not notified waive the notice defect.
They can do this (1) in writing anytime, or (2) by attending the meeting without objecting at the outset of the meeting.

Proxies:
•Proxies and Voting agreements for Board of Director meetigns are INVALID!
Directors CANNOT give proxies or enter voting agreements for how they will vote as directors. Any efforts to do so are void (they’re against public policy).
Because directors owe the corporation non-delegable fiduciary duties. Note that this is different from shareholders, who can vote by proxy and enter into voting agreements.

Answer 87

A

Voting Requirements:
• Quorum - majority of all directors need to attend the meeting.
• Once you have a quorum, you need majority of directors present to approve the resolution.
———————————————
Quorum: Minimum number of DIRECTORS that must ATTEND the meeting for the MEETING to be VALID.
For any meeting of the board, we must have a quorum.
•A quorum is a MAJORITY of all directors, unless the bylaws say otherwise (but a quorum can be no fewer than one-third of the board members). Without a quorum, the board cannot act.

Approval of Action
If a quorum is present at a meeting, passing a resolution (which is how the board takes action at a meeting) requires only a majority vote of those present. So, if there are nine directors, at least five directors must attend the meeting to constitute a quorum. If five directors attend, at least three must vote for a resolution for it to pass.

Broken Quorum
A quorum of the board can be lost (“broken”) if people leave.
Once a quorum is no longer present, the board cannot take an act at that meeting.
Note that this rule is different for share-holder voting.

Answer 88

A

Fact Pattern: facts where there is no meeting. For example, the facts tell you that a director has entered into an extraordinary contract with another entity on the corpora- tion’s behalf, either on his own accord or with the approval of some of the directors, or with the approval of all of the directors, who were called individually.

EXAM: a director does not have the power to bind the corporation in contract unless there is actual authority to act.
Actual authority generally can arise only if:
(1) proper notice was given for a directors’ MEETING, a QUORUM was present, and a majority of the directors approved the action, OR…
(2) there was unanimous written consent of the directors.

Action by Unanimous Written Consent: Remember that any action required to be taken by the directors at a formal meeting may be taken by unanimous consent, in WRITING, without a meeting.

Remember that any action required to be taken by the directors at a formal meeting may be taken by unanimous consent, in WRITING, without a meeting. !!!!

Answer 89

A

Board of Directors manages the business.

• The board manages the business of a corporation, meaning it sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corporation changes to shareholders, and so on.
Note that directors also have a right to inspect the corporate books.

a. Board delegation - Board May Create Committees
• Besides the exceptions below, the board can validly act for the board.
Unless the articles or bylaws provide otherwise, the board may create one or more committees, with one or more members, and appoint members of the board of directors to serve on them. The committees may act for the board, but the board remains responsible for supervision of the committees. The board may also delegate authority to officers.

Committees CANNOT Take Certain Actions
While the board can delegate actions to a committee, a committee may NOT take the following actions:
• Declare a distribution
• Fill a board vacancy
• Recommend a fundamental change to shareholders
Note, however, that a committee can recommend such actions to the full board for its action.

Answer 90

A

*Duty of Care – Directors have a duty to act in good faith, in a manner in the best interests of the corporation, and with the care of a like person in similar circumstances. This requires they be reasonably informed. If they meet these elements they are generally not liable for decisions that adversely affect the corporation.

Answer 91

A

The BJR is a rebuttable presumption that a director reasonably believed their actions were in the best interest of the corporation.

Answer 92

A

*Duty of Loyalty –

Fiduciary Duty Owed – A Director must act in the corporation’s best interest and without personal conflict.
This duty forbids
1) entering conflicting interest transactions;
2) usurping a corporate opportunity;
3) competing with the corporation; and
4) trading on inside information.

Answer 93

A

A. Conflicts of Interest – A conflict of interest is a breach of the duty of loyalty unless the director shows that
1) it was approved by a majority of disinterested directors after full disclosure;
2) it was approved by a majority of disinterested shareholders after full disclosure of all relevant material facts; or
3) the transaction as a whole was fair to the corporation.

No self-dealing without disclosure and approval—duty of loyalty
1) A transaction between a corporation and a director will not be set aside for self-dealing if:
a) The director disclosed all material facts, and transaction was approved by disinterested directors or shareholders; or
b) The transaction was fair to the corporation

Answer 94

A

B. *Usurpation of Corporate Opportunity – A corporate opportunity exists if the corporation has an interest in opportunity, or the opportunity is in the corporation’s line of business. A director may only pursue a corporate opportunity if they first presents it to the corporation and the board decides not to pursue the opportunity.

Corporate opportunity doctrine
1) A director may not divert to himself a business opportunity within the corporation’s line of business without first giving the corporation an opportunity to act (a.k.a. usurpation).
2) Remedy—corporation may recover director’s profits or force director to convey the opportunity to the corporation.

Answer 95

A

a. Business judgment rule generally protects directors from personal liability to corporation/shareholder
1) Director must act in good faith
2) With the care that a person in a like position would exercise, and
3) In a manner reasonably believed to be in the best interests of the corporation

b. Articles may further limit or eliminate director personal liability to corporation or shareholders except:
1) To the extent director received improper benefit;
2) For liability for unlawful distributions; or
3) For intentionally inflicted harms or criminal violations of law

c. Reasonable reliance defense
1) Director may defend suits with a claim of reasonable reliance on opinions, reports, etc., prepared by experts or reliable employees

d. Waste—a director has a duty to prevent corporate waste

Answer 96

A

Which Directors Are Liable? How do we know exactly which directors are liable for improper actions?
• A director is presumed to concur with board action unless their dissent or abstention is noted in writing in the corporate records.
• In writing means (1) in the minutes, (2) delivered in writing to the presiding officer at the meeting, or (3) written dissent to the corporation immediately after the meeting.
• So an ORAL dissent, by itself, is NOT EFFECTIVE.
• Note also that a director cannot dissent if they voted for the resolution at the meeting.

Exceptions - A director is not liable under the rule above if:
• They were ABSENT from the board meeting (for example, they were sick that day, in which case they’re not liable for stuff that happened at the meeting they missed).
• RELIANCE on officer, employee, or professional is a DEFENSE to director liability.
- They relied in good faith on information (including financial information) presented by an officer, employee, or committee (of which the relying director was not a member), or professional they reasonably believed was competent.
Remember, the reliance must be in good faith; this exception doesn’t work if the director knew the person giving the information wasn’t reliable.

Answer 97

A

A Director may be removed from the board of directors by court order for fraud or gross abuse of authority, or by a vote of the majority of shareholders for any reason.

Answer 98

A

a. Successful defense—if director is sued as a director and successfully defends, corporation must indemnify for expenses

b. Unsuccessful—if director is unsuccessful in defending, corporation has discre- tion to indemnify if the director complied with the business judgment rule standards
1) Exceptions: Director is found liable to the corporation or received an improper benefit

c. Corporations may purchase liability insurance to cover directors even if they would not be entitled to indemnification under the circumstances.

Personal Liability of Directors May Be Limited
The articles may limit or eliminate directors’ personal liability for money damages to the corporation or shareholders for actions taken or for failure to take action. However, the articles may not limit or eliminate liability for financial benefits received by the director to which she is not entitled, an intentionally inflicted harm on the corpo- ration or its shareholders, unlawful corporate distributions, or an intentional violation of criminal law.

Answer 99

A

This rule prevents any person from using fraud or deception in the purchase or sale of any security by means of any instrumentality in interstate commerce.

Answer 100

A

16(b) Rule - A director, officer, or shareholder owning more than 10% of a corporation must surrender any profit realized to the corporation from the re-sale or re-purchase of equity securities within a 6-month period when the corporation: (a) is publicly traded on a national stock exchange; or (b) has more than $10 million in assets and at least 2,000 shareholders.

Answer 101

A

A. Requird Officers
B. Appointment and Removal
C. Authority
D. Liabilities and Indemnificiation

Answer 102

A

A. Required Officers
1. MBCA does not require any particular officers but rather allows corporations to have officers described in bylaws or appointed by directors
2. Some states require at least two officers—a president and a secretary (to certify corporate acts and records)
3. Generally, a person may hold more than one office (but some states prohibit presi- dent and secretary from being same person)

Answer 103

A

B. Appointment and Removal
1. Officers are appointed by board of directors (not by shareholders)
2. Officers may be removed by the board of directors
3. If removal is in breach of contract, officer entitled to damages

Officers are selected and removed by the board, which also sets officer compensation.
(SHs elect directors, directors appoint officers. - SHs do not hire and fire officers.).

TERMINATING OFFICER: Despite any contractual term to the contrary, an officer has the power to resign at any time by delivering notice to the corporation, and the corporation has the power to remove an officer at any time, with or without cause.
• If the resignation or removal is a breach of contract, the nonbreaching party may have a right to damages, but note that mere appointment to office itself does not create any contractual right to remain in office.

Answer 104

A

C. Authority
1. Officers have the actual authority given by the board, articles, and bylaws
2. Officers have apparent authority to do whatever someone in their position would normally have authority to do

Officers are AGENTS of the corporation, so they can bind the corp if they have authority to.
Agency law determines authority and powers of officers.
The corporation is the principal and the officer is the agent.
Whether the officer can bind the corporation is determined by whether they have agency authority to do so (as in, actual or apparent authority).

Unauthorized actions may become binding on the corporation because of ratification, adoption, or estoppel. The corporation is liable for actions by its officers within the scope of their authority, even if the particular act in question was not specifically authorized.

The president of a corporation generally has implied actual authority (and apparent authority) to bind the corporation to contracts in the ordinary course of business.

Answer 105

A

D. Liabilities and Indemnification
1. Officers owe corporation duties similar to those owed by directors
2. Officers have right to indemnification similar to directors

Answer 106

A

Director or officer gets sued as part of their role in corp and seeks REIMBURSEMENT from Corp.

THREE categories of indemnification:

A. Category 1: No Indemnification
Breach of fiducairy duty = NO INDEMNIFICIATION allowed.
A corporation cannot indemnify a director who is (1) held liable to the corporation or (2) held to have received an improper benefit.

Answer 107

A

B. Category 2: Mandatory Indemnification
Successful defense = MANDATORY indemnification.
*Unless limited by the articles, a corporation must indemnify a director or officer who was successful in defending a proceeding on the MERITS OR OTHERWISE (includes technicality) against the officer or director for reasonable expenses, including attorneys’ fees, incurred in connection with the proceeding.
In other words, if the director or officer prevailed in defending the proceeding, the corporation must pick up the tab.
In some states, the director or officer must win the entire case; in others, they are entitled to indemnification “to the extent” that they win the case.

Answer 108

A

C. Category 3: Permissive Indemnification
Other situations = permissive indemnification.
A corporation MAY indemnify a director in situations not satisfying the two categories above.
A good example of this is if the case against a director or officer SETTLED.
Another is if the director UNsuccessfully defended a suit against them.
STANDARD- The director must show:
(1) they acted in good faith; and
(2) believed that their conduct was: (a) in the best interests of the corporation (when the conduct at issue was within the director’s official capacity); (b) not opposed to the best interests of the corporation (when the conduct at issue was not within the direc- tor’s official capacity); or (c) not unlawful (in criminal proceedings).
*** This is the duty of loyalty standard. (so they have to show that they met the duty of loyalty).
Determination whether to indemnify is to be made by a disinterested majority of the board, or if there is not a disin- terested quorum, by a majority of a disinterested committee or by independent legal counsel. The shareholders may also make the determination (the shares of the director seeking indemnifi- cation are not counted).

Answer 109

A

The articles can eliminate director (and, in some states, officer) liability to the corporation for damages, BUT NOT for…
intentional misconduct, usurping corporate opportunities, unlawful distributions, or improper personal benefit.

So, these provisions can eliminate liability only for duty of care cases.
States are split as to whether these exculpatory provisions in the articles apply to officers, too.

Answer 110

A

Fundamental Changes –
These require a special meeting and majority of all votes, not just those at the quorum.
Fundamental changes include merger, consolidation, changes to the Articles of Incorporation, sale of all or substantial assets and dissolution.

A. Types
Amendments to articles, mergers, consolidations, share exchanges, dispositions of substantially all assets outside of the regular course of business

B. General Procedure
1. Board resolution
2. Notice to shareholders
3. Shareholder approval
4. Articles of the change filed with the state

C. Merger of Corporations
1. Generally must be approved by directors and shareholders of both corporations
2. Exceptions: Parent-subsidiary merger or when rights of survivor’s shareholders not significantly affected

D. Dissenters’ Appraisal Remedy
Shareholders who do not like a fundamental corporate change may force the corporation to purchase their shares at a fair price if they:
1. Give corporation notice of intent to demand appraisal rights before vote is taken
2. Do not vote in favor of the change
3. Demand payment after the change is approved.

Answer 111

A

A. Voluntary Dissolution
B. Effect of Dissolution
C. Administrative Dissolution
D. Judicial Dissolution

Answer 112

A

If shares have not yet been issued or business has not yet commenced, a majority of the incorporators or initial directors may dissolve corporation by delivering articles of dissolution to the state
After shares have been issued, corporation may dissolve by a corporate act approved under the fundamental change procedure

Answer 113

A

Corporate existence continues
Corporation not allowed to carry on any business except business appropriate to winding up and liquidating its affairs
A claim can be asserted against a dissolved corporation, even if it does not arise until after dissolution, to the extent of the corporation’s undistributed assets
a. If the assets have been distributed to the shareholders, a claim can be asserted against each shareholder for a pro rata share of the claim, to the extent of the assets distributed to the shareholder
b. A corporation can cut short the time for bringing known claims by notifying claimants of a filing deadline
c. Unknown claims can be limited to three years by publishing notice of the disso- lution in a newspaper in the county where the corporation’s known place of business is located

Voluntary Dissolution Distribution – In the case of a voluntary dissolution, a corporation’s assets are distributed to
1) creditors of the corporation to pay debts and other obligations,
2) preferred stock,
3) common stock.

Answer 114

A

C. Administrative Dissolution
The state may bring an action to administratively dissolve a corporation for reasons such as the failure to pay fees or penalties, failure to file an annual report, and failure to maintain a registered agent in the state

Answer 115

A

D. Judicial Dissolution

The attorney general may seek judicial dissolution on the ground that the corpo- ration fraudulently obtained its articles of incorporation or that the corporation is exceeding or abusing its authority
Shareholders may seek judicial dissolution on any of the following grounds:
a. The directors are deadlocked in the management of corporate affairs, the share- holders are unable to break the deadlock, and irreparable injury to the corpora- tion is threatened, or corporate affairs cannot be conducted to the advantage of the shareholders because of the deadlock;
b. The directors have acted or will act in a manner that is illegal, oppressive, or fraudulent;
c. The shareholders are deadlocked in voting power and have failed to elect one or more directors for a period that includes at least two consecutive annual meeting dates; or
d. Corporate assets are being wasted, misapplied, or diverted for noncorporate purposes
Creditors may seek judicial dissolution if:
a. The corporation has admitted in writing that the creditor’s claim is due and owing and the corporation is insolvent or
b. The creditor’s claim has been reduced to judgment, execution of the judgment has been returned unsatisfied, and the corporation is insolvent

Answer 116

A

Derivative suit: SH sues a director or officer to enforce THE CORP’S CLAIM.

In a derivative suit, a shareholder is suing to enforce the corporation’s claim, NOT their own personal claim.

In other words, if a SH believes the corporation has been wronged but the directors have not done anything to enforce its rights with respect to the wrong, the shareholder may be able to bring a shareholder deriva- tive suit to enforce the corporation’s rights.

It’s a case in which the corporation is not pursuing its own claim, so a shareholder steps in to prosecute it for the corporation.

So, you should always ask: could the corporation have brought this suit? If so, it’s probably a derivative suit.

COMPARE - SH Direct Actions/Direct suit: Lawsuit a SH brings on their own behalf.
A direct action may be brought for a breach of a fiduciary duty owed to the shareholder by an officer or director.

To distinguish breaches of duty owed to the corp and duties owed to the shareholder, ask:
(1) who suffers the most immediate and direct damage, the corporation or the shareholder; and (2) to whom did the defendant’s duty run, the corporation or the shareholder.
- If the corp could have brought a derivative suit itself, it is a proper derivative suit.

In a shareholder direct action, any recovery is for the benefit of the individual shareholder.

Answer 117

A

Recovery to Corporation
* JUdgment goes to CORP.
In a derivative action, the shareholder is asserting the corporation’s rights rather than her own rights. So if a shareholder-plaintiff wins a derivative suit, who gets the money from the judgment? The corpora- tion. Remember, it’s the corporation’s claim.
a. Court May Order Payment of Expenses
The SH-plaintiff may recover costs and attorneys’ fees, usually from the judgment won for the corporation (after all, the shareholder did a favor for the corporation by suing and winning). If the shareholder-plaintiff loses the derivative suit, they cannot recover costs and attorneys’ fees. If the court finds that the action was commenced or maintained without reasonable cause or for an improper purpose, it may order the plaintiff to pay reasonable expenses of the defendant. So the shareholder may be liable to the defendant they sued for that defendant’s attorneys’ fees if they sued without reasonable cause.

Answer 118

A

NO, CLAIM PRECLUSION APPLIES.

Answer 119

A

STANDING:
1.Own srtock when claim arose and throughout suit:
a shareholder must have been a shareholder at the time the claim arose or must have become a shareholder through transfer by operation of law from someone who did own stock at the time the claim arose.
- Examples of “transfer by operation of law” include getting stock through inheritance or by divorce decree.

2.Adequately represent corp’s interest
The shareholder must also fairly and adequately represent the corpo- ration’s interest.

DEMAND:
3.Make written demand on Corp, UNLESS futile.
MBCA: the shareholder must make a written demand on the Corp (usually, that means the board) to take suitable action.
- In some states, this demand must always be made, and the SH cannot sue until 90 days after making this demand. In such states, a derivative proceeding may not be commenced until 90 days have elapsed from the date of demand, unless:
(1) the SH has earlier been notified that the corporation has rejected the demand; or (2) irreparable injury to the corporation would result by waiting for the 90 days to pass.
- In other states, shareholders are not required to make this demand if the demand would be FUTILE. A good example of such a case is when a majority of the sitting directors would be the Ds in the suit (it’s futile to make this demand when we’re suing those very directors).

Join Corp as DEFENDANT.
The corporation must be joined to the suit as a defendant.
a. Dismissal or Settlement Requires Court Approval
The parties can settle or dismiss a derivative suit ONLY with court approval.
The court may give notice to shareholders and get their input on whether to settle or dismiss. After the derivative suit is filed, the corporation may move to dismiss.
• Dismissed If Found Not in Corporation’s Best Interests
Dismissal must be based upon an independent investigation that concluded that the suit is not in the corporation’s best interest (for example, it has a low chance of success or the expense of the case would exceed the recovery the corporation would win).
• Investigation By Independent Directors or Panel
The investigation must be made by independent directors or a court-appointed panel of one or more independent persons. (Usually, it’s a “special litigation committee” of independent directors.)
• Court Determination
In ruling on the motion to dismiss, if the court finds that (1) those recommending dismissal were truly independent and (2) they made a reasonable investigation, in most states, the court will dismiss. In some states, the court will also make an independent assessment of whether dismissal is in the corporation’s best interest.
• Burden of Proof
To avoid dismissal, in most cases the shareholder bringing the suit has the burden of proving to the court that the decision was not made in good faith after reasonable inquiry. However, if a majority of the directors had a personal interest in the contro- versy, the corporation will have the burden of showing that the decision was made in good faith after reasonable inquiry.

Answer 120

A

General rule, the “record shareholder” of as of the “record date” may vote at the meeting.
Voting shareholder = record shareholder on RECORD date
- Has the right to vote. EVEN if they no longer hold the stock on the date of the meeting, as long as they owned on the record date.

The record shareholder is the person shown as the owner in the corporate records. The record date is a voter eligibility cut-off date. It’s fixed by the board of directors but may not be more than 70 days before the meeting. If directors don’t set a record date, the record date is deemed to be the day the notice of the meeting is mailed to the shareholders. Unless the articles provide otherwise, each outstanding share is entitled to one vote.

EXCEPTIONS: to General Rule - There are a few exceptions to the general rule that the record owner on the record date is who votes:

a Treasury Stock
The corporation reacquires stock before the record date, so the corporation is the owner of this “treasury stock” as of the record date. The corporation does NOT then vote this stock. No one votes the stock, because it was outstanding on the record date.

b Death of Shareholder
Executor votes the shares

c. Voting by proxy

Answer 121

A

c. Voting by proxy
proxy = writing signed by a SH authorizing someone else to vote in SH’s vote.

A shareholder may vote their shares in person or by proxy executed in writing.

A proxy is
(1) a writing (fax and email are fine),
(2) signed by the record shareholder (email is fine if the sender can be identified),
(3) directed to the secretary of the corporation
(4) authorizing another to vote the shares.

only good for 11 months.

Answer 122

A

Revocation of Proxy: A proxy is generally revocable by the shareholder and may be revoked by the shareholder attending the meeting to vote themselves, in writing to the corporate secretary, or by subse- quent appointment of another proxy.
*IRREVOCABLE Proxy = Proxy Coupled with an INTEREST, and proxy must say its irrevocable.
A proxy will be irrevocable only if it states that it is irrevocable and is coupled with an interest or given as security. This requires (1) the proxy says it’s irrevocable and (2) the proxy holder has some interest in the shares other than voting. Any interest beyond voting with the shares.

Answer 123

A

Statutory Proxy Control: The rules governing proxy solicitation provide that (1) there must be full and fair disclosure of all material facts with regard to any management-submitted proposal upon which the shareholders are to vote; (2) material misstatements, omissions, and fraud in connection with the solicitation of proxies are prohibited; and (3) management must include certain shareholder proposals on issues other than election of directors, and allow proponents to explain their position.

Answer 124

A

Shares may increase their influence by “block voting,” meaning, voting alike. They may do so in a voting trust or a voting agreement.

A. VOTING TRUST: A voting trust is 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. The trust is not valid for more than 10 years unless it is extended by the agreement of the parties
VOTING TRUST REQS:
*10 year max
* Written trust agreement, controlling how the shares will be voted
* Copy of agreement filed with corp
* Transfer legal title of sahres to voting trustee.
* Original shareholders receive trust certificates and retain all shareholder rights except for voting.

Answer 125

A

B. VOTING AGREEMENT:
Shareholder voting agreement Wihtout a trust - just needs to be written and signed.
shareholders can enter into voting (or “pooling”) agreements providing for how they’ll vote their shares.
Requirements for Voting Agreement: The requirements are that the agreement be in writing and signed. It need not be filed with the corporation and is not subject to any time limit. States are split as to whether voting agreements are specifically enforceable. In states that will grant specific performance of a voting agreement (which, increasingly, they do), there is no need to use a voting trust.

Answer 126

A

At meeting, or
By unanimous written consent.

Convening Meetings
Shareholders usually take action at a meeting. Or, they can act by unanimous written (email is fine) consent signed by the holders of all voting shares. The meeting need not be held in the state of incorpo- ration. There are two kinds of shareholder meetings:

a. Annual Meetings: Annual meeting is REQUIRED (every 15 months).
Corporations must hold annual shareholders’ meetings. If the annual meeting is not held within the earlier of six months after the end of the corporation’s fiscal year or 15 months after its last annual meeting, a shareholder can petition the court to order one to be held. And what do shareholders do at the annual meeting? Primarily, they elect directors.

b. Special Meetings
Special meetings may be called by (1) the board of directors, (2) the president, (3) the holders of at least 10 percent of the outstanding shares, or (4) anyone else authorized to do so in the articles or bylaws.
ALSO, The meeting must be for a proper shareholder purpose.
* If the SHs do not have power to call meeting, or called for improepr purpose - then whatever they vote to do will not be binding.

Answer 127

A

Shareholder meeting Notice:
* Must be in Writing and delivered 10-60 days before meeting.
Notice must be in writing (fax or email is fine) to every shareholder entitled to vote. Notice may be waived in writing or by attendance.
a. Contents of the Notice
The notice must state the date, time, and place of the meeting.
For special meetings, the notice must also state the PURPOSE of the meeting.
Statement of purpose important bc the share- holders cannot do anything else at that meeting that is not listed in the purpose.
b. Consequences of Failure to Give Proper Notice
If proper notice is not given to all shareholders, whatever action was taken at the meeting is voidable (maybe void), unless those who were not sent notice waive the notice defect. How can such waiver occur? In either of two ways:
* Express waiver, meaning in writing and signed anytime (fax or email are fine); or
* Implied waiver, meaning the shareholder(s) attend the meet- ing without objecting at the outset

Answer 128

A

Shareholders generally get to vote on these things:
• To elect directors
• To remove directors
• On fundamental corporate changes
They may also vote on other things if the board asks for a share- holder vote on those things.

QUORUM NEEDED: Majority of Voting shares.
Every time the SHs vote, we must have a quorum represented at the meeting.
Determination of a quorum focuses on the number of shares represented, not the number of shareholders.
The general rule is that a quorum is a MAJORITY of outstanding shares entitled to vote, unless the articles or bylaws require a greater number.
• SH meeting - quorum ONLY needed at start. A shareholder quorum will not be lost if people leave the meeting (in contrast with directors’ meetings).

a. Voting—In General
If the quorum requirement is met, the shareholders vote. Absent a contrary provision in the articles, each share is entitled to one vote.
The articles may provide for weighted voting or contingent voting.
If a quorum is present, generally, shareholders will be deemed to have APPROVED a matter if the VOTES CAST IN FAVOR of the matter exceed the votes cast against the matter, unless the articles or bylaws require a greater proportion.
• Majority of the quorum! Once u have quorum, just need YES to exceed NO.

Cumulative voting: Method to give small SHs better chance of electing someone to board. this is available only when share- holders elect directors.
Number of shares * number of directors to be elected.
No cumulative voting right unless the articles provide for it.

Answer 129

A

Activities beyond scope of purpose are ultra vires and may be enjoined or directors held liable for authorizing such acts.

Answer 130

A

If a quorum is present, generally, shareholders will be deemed to have approved a matter if the votes cast in favor of the matter exceed the votes cast against the matter, unless the articles or bylaws require a greater proportion.

Answer 131

A

Unless the articles or bylaws provide otherwise, the specific votes required for certain matters are:

* To elect a director: Plurality (meaning, the person who gets more votes for the seat on the board than anyone else is elected).

* To approve a fundamental corporate change: Traditionally, we needed a majority of the shares entitled to vote. Increasingly, though, this is treated as “other matters.”

* To remove a director: Traditionally, we needed a majority of the shares entitled to vote. Increasingly, though, this is treated the same as “other matters.”

* Other matters: Majority of the shares that actually vote on the issue.

Answer 132

A

elect to be taxed like partnerships and yet retain the other advantages of the corpo- rate form.
Partnerships and S corporations are not subject to double taxation—profits and losses flow through the entity to the owner.

Brainscape's Knowledge GenomeTM

Corp Master Cards Flashcards

Brainscape's Knowledge Genome^TM