corporation flashcards - Sheet1

Question 1

Directors & Officers - Duty of Care

Answer 1

Directors & officers must perform their duties in good faith, with such care as an ordinarily prudent person in a like position would use in similar circumstances, in a manner reasonably believed to be in the best interests of the corporation. This concerns the director’s decision-making process. A business judgment is presumed to be informed. Rebutted if uninformed without substantial research in gross negligence or in bad faith, illegal, fraudulent, or conflict of interest.

Question 2

Director’s & Officers - Duty of Loyalty Competing with Corp

Answer 2

D must not engage in a competing corporation with own corporation.

Question 3

Directors & Officers - Duty of Loyalty - Usurption

Answer 3

D must not benefit from any business opportunity that could benefit the corporation. Usrurpation if opportunity within corps line of business, corp has interest in opp, and corp is financially able to take opp.

Question 4

Directors & Officers - Duty of Loyalty - Conflicting Interest Transaction

Answer 4

D/O has a duty to be loyal to a corporation, which means no conflict of interest. Conflicts of interest arise when a director is a party to the transaction when the transaction is reasonably expected to influence the vote, or has a partner, agent, or employee of another entity the corp is transacting with.

UNLESS disclose all material facts AND majority of disinterested directors or s/h vote in favor. Disinterested are those with no conflicting interest in the transaction or their relationship with the convicted party influences their vote OR transaction is fair and reasonable.

Question 5

Shareholder Rights - Derivative Actions

Answer 5

A s/h holder may bring a derivative action on behalf of corp to enforce a corporate right (loyalty, care, usurption) that directors failed to assert.

Must be brought by the contemporaneous stock owners who owned at least one share when the claim arose and throughout the litigation. Must first make a demand and wait 90 days. UNELSS corp rejects or causes irreparable injury to corp resulting by waiting 90 days.
DEMAND NOT NEEDED if majority of BOD is interested in challenged transx OR BOD failed duty of care

Question 6

Shareholder Rights - Direct

Answer 6

Direct Actions: S/H may sue corporation for direct damages, meaning they were directly harmed by the corporation such as not being allowed to vote, fraud, access to books.

Question 7

Corporations - Personal Liability & Piercing the Veil

Answer 7

Creditors may disregard corp protection and hold shareholders jointly and severably liable for corporate obligations based on Unity of Interest + Injustice or fraud
Unity of Interest occurs when corporation is the alter ego of person & is shown where s/h commingles funds, or fails to observe corporation formalities, or inadequate capital at time of formation to cover forseeable liabilities.
Fraud: piercing necessary to prevent fraud or avoiding personal responsibilities.

Question 8

Shareholder Rights - Shareholder’s Right to Inspect Books and Records

Answer 8

A Shareholder has a unqualified right to inspect and copy corporations records. A shareholder has right to inspect and copy certain accounting records if inspection made during regular business hours, 5 day notice, demand is made in good faith for a proper purpose that is described with particularity, and directly connected with the purpose. A proper purpose is reasonably relevant to shareholder’s interest as shareholder.

Question 9

Fundamental Corporate Changes - Dissenter’s Appraisal Rights for Fundamental Changes

Answer 9

A dissenting s/h is entitled to appraisal rights and FMV of shares for certain fundamental changes concluding right to vote on mergers. Appraisal rights are not available to s/h of publicly traded companies.
S/h who do not consent to fundamental change may force corp to purchase their shares if notice is given before the vote, the change happens, and s/h did not vote in favor of the change.

Question 10

Corporations - Liability of Promoter for Pre-Incorporation Contracts

Answer 10

A promoter acts on behalf of a corp not yet formed. They are jointly and severally liable for obligations under pre-incorporation K, even after corp is formed. Remain liable as fiduciaries until notation. However, corp. may become bound by express or implied adoption of promoter’s K.

Question 11

Corporate finance - Dividends & Distributions to Shareholders

Answer 11

BoD decides to declare dividends. Once declared s/h has right. S/h has no right to force dividends unless granted by articles. Court may order dividends if bad faith (hostility, exclusions, high salaries) AND funds are available for the dividend.

Question 12

Directors & Officers - Board of Directors Meeting: Quorum

Answer 12

A corporation can only act if a meeting is called with a quorum (majority of all d) and a majority vote of quorum.

Question 13

Authority - Authority of Officers

Answer 13

BoD elects officers to manage company’s day to day business. An officer has actual authority provided by bylaws or via BoD. Apparant authority as well.
The president has authority to bind for ordinary business (normal & necessary like lawsuits), but not extraordinary busines. Secretary has authority to maintain and authenticate corporation’s records.

Question 14

Authority of Members and Managers of an LLC

Answer 14

Each member or manager is an agent for the LLC and has authority to bind company if within ordinary course of business (normal and necesasry– reasonable person standard)

Express authority through operating agreement or via other members. Implied A is what is reasonably necessary to fulfill duties.

Differences for actions within ordinary course of business decided by majority. Extraordinary acts must be unanimous.

Question 15

Fiduciary duties - Fiduciary Duties Owed by Members/Managers of an LLC

Answer 15

Duty of Care: Act with reasonable care like a person in similar position in similar circumstances. Act in the best interests of the company. Be reasonably informed and rely in good faith on competent and reliable sources

Question 16

Dissolution & Dissociation - Dissolution & Winding Up of an LLC

Answer 16

An LLC is dissolved upon:

The occurrence of an event in the Operating Agreement causing dissolution. The consent of all members.The passage of 90 consecutive days without any members OR
Judicial dissolution, which is granted when Managers or controlling members act in an illegal or fraudulent manner. Managers or controlling members act oppressively and harmfully to the member.
The LLC’s activities are substantially unlawful. It is not reasonably practicable to continue the LLC’s activities per the Certificate of Organization and Operating Agreement.

Dissolution requires notice to creditors which outlines steps creditors must take to enforce their claims. If not followed, creditors can enforce claims against members personally up to the value of assets they recieved.

Question 17

Formation - Bylaws

Answer 17

The Bylaws are rules and regulations adopted by the Board of Directors to govern the internal operations and management of a corporation, including the roles and duties of directors and officers. The Bylaws may contain any provision that is not inconsistent with the Articles of Incorporation or the law of the jurisdiction.

If there is a conflict between the Articles of Incorporation and the Bylaws, the Articles control.

Question 18

Powers of a Corporation

Answer 18

Under the RMBCA (and most states), a corporation has the power to do all things necessary or convenient to carry out its business and affairs, including:

To sue and be sued.
To own, lease, or convey real or personal property.
To make contracts, incur liabilities, borrow money, and issue notes or bonds.
To lend money and make investments.
To own or be involved with another business entity.
To fix the compensation of directors, officers, and employees.
To lend money to directors, officers, and employees.
To make charitable donations.
To make payments or donations that further the business and affairs of the corporation.
To pay or engage in lobbying to aid governmental policy.

Question 19

Liability of Corporation for Pre-Incorporation Contracts

Answer 19

A corporation is not liable on pre-incorporation contracts entered into by a promoter unless the corporation expressly or impliedly adopts the contract post-incorporation.

Express Adoption: The corporation adopts the contract through Board of Director action or by reference in the corporation’s formation documents.

Implied Adoption: The corporation knows or has reason to know the material terms of the contract and accepts some benefit from the contract.

Question 20

Authorized, Outstanding, & Reacquired Shares

Answer 20

Authorized Shares:
Authorized shares are the maximum number of shares a corporation may issue, as set forth in the Articles of Incorporation. A corporation cannot issue more shares than authorized. To increase the number of shares allowed to be issued:

The Articles of Incorporation must be amended.
The changes must be adopted by the Board of Directors.
The changes must be approved by a majority vote of the shareholders.

Outstanding Shares:
Outstanding shares are the total number of shares issued by the corporation and held by the shareholders. Under the RMBCA, each outstanding share is entitled to one vote, unless otherwise provided in the Articles of Incorporation.

Reacquired Shares:
Reacquired shares (also called treasury shares) are considered authorized shares but are not outstanding shares. These reacquired shares cannot be voted at a shareholders meeting.

Question 21

Shareholder Meetings: Right to Vote & Record Date

Answer 21

Only shareholders registered on the record date are entitled to vote at a shareholders meeting. The owner of shares on the record date can vote those shares at the upcoming meeting, even if the shares are sold before the meeting (the transferee cannot vote). However, if the shareholder executed an irrevocable proxy in favor of the buyer, then the buyer can vote the shares at the meeting.

Under the RMBCA, the Bylaws may fix or provide the method for fixing the record date, but it cannot be more than 70 days before the shareholder meeting. If not fixed, the record date is the day before the first notice is delivered to shareholders.

Question 22

Shareholder Meetings: Quorum & Voting

Answer 22

A quorum must be present for shareholders to take action at a meeting. A quorum exists when a majority of the shares entitled to vote are present, unless the Articles of Incorporation specify a greater number.

If a quorum exists, action on a matter (other than the election of directors) is approved by a majority of votes cast, unless the Articles of Incorporation require a greater number. Each outstanding share is entitled to one vote on every matter at a shareholders meeting, unless otherwise provided in the Articles of Incorporation.

Question 23

Board of Directors Shall Exercise All Corporate Powers

Answer 23

Board of Directors’ Authority:

A corporation’s Board of Directors generally makes decisions for the corporation. All corporate powers shall be exercised by the Board of Directors unless:

The Shareholders’ Agreement provides otherwise, and/or
Such powers are limited by the Articles of Incorporation.

Question 24

Board of Directors Meeting: Voting & Objection to Actions

Answer 24

Board of Directors Meeting: Voting & Objection to Actions

If a quorum of the Board of Directors is present when a vote is taken at a meeting, an act is approved by the affirmative vote of a majority of directors present unless the Articles of Incorporation or bylaws require a greater number.

A director present at a meeting where corporate action is taken is deemed to have assented to the action unless:

The director objects at the beginning of the meeting (or upon arrival) to holding it or transacting business.
The director’s dissent or abstention is entered into the meeting minutes.
The director delivers written notice of dissent or abstention to the presiding officer before adjournment or to the corporation immediately after adjournment.
The right of dissent or abstention is not available to a director who votes in favor of the action.

Question 25

Board of Directors Meeting: Notice & Waiver

Answer 25

Under the RMBCA, the Board of Directors may hold regular or special meetings. Unless the Articles of Incorporation provide otherwise, regular meetings may be held without notice, whereas special meetings require at least two days’ notice. The notice must provide the date, time, and place of the special meeting (the purpose of the meeting is not required).

A Director may waive notice in a signed writing. Waiver also occurs if the Director attends the meeting unless the Director:

Objects at the beginning of the meeting (or promptly upon arrival), and
Does not vote at the meeting.

Question 26

Management of an LLC

Answer 26

An LLC is presumed to be member-managed unless the Operating Agreement states otherwise (RULLCA).

A manager-managed LLC is run by elected managers, similar to a board of directors. The Operating Agreement must explicitly state that the LLC is manager-managed.

In a member-managed LLC, each member has equal rights to manage and bind the LLC for ordinary business contracts. In a manager-managed LLC, each manager has equal rights to manage and bind the LLC for ordinary business contracts.

Question 27

Fiduciary Duties of Shareholders

Answer 27

Fiduciary Duties of Shareholders

Generally, shareholders do not owe fiduciary duties to fellow shareholders and can act in their own self-interest. However, exceptions exist:

Close-Corporation Exception:

Controlling shareholders in close-corporations owe fiduciary duties of loyalty, good faith, and fair dealing to minority shareholders.
This includes an obligation to disclose all material information.
A close-corporation is one whose shares are not publicly traded and has a small number of shareholders.
Controlling Shareholders Exception:

Controlling shareholders (including parent corporations) owe fiduciary duties to other shareholders and partially owned subsidiaries.
They cannot use their power to benefit themselves at the expense of minority shareholders or the subsidiary.
Transactions involving self-dealing are examined using a fairness test.
Transactions not involving self-dealing (e.g., dividends to all shareholders) use the “business judgment” standard.
Note: The MBCA does not specify duties of controlling shareholders.
If these duties are breached, the controlling shareholder may be held liable to the minority shareholders for any losses caused by the breach.

Question 28

Amending the Articles of Incorporation

Answer 28

Under the RMBCA, the Articles of Incorporation may be amended at any time if the following procedures are followed:

Adoption by the Board of Directors.
Notice to each shareholder (whether or not entitled to vote) of a meeting to vote on the amendment. The notice must:
State that the purpose of the meeting is to consider the amendment.
Provide a copy of the proposed amendment.
Adoption by the shareholders by a majority vote, unless a greater number is required in the Articles of Incorporation or state law.

Exceptions: The Board of Directors can make general minor amendments without shareholder approval. The Board of Directors (or incorporators if no board exists) can adopt any amendment without shareholder approval if the corporation has not yet issued shares.

Class Voting:
Class voting is required if the amendment affects shares of the class, including changes to the number of shares of the same class.

Question 29

Fundemental Corporate Changes - Mergers

Answer 29

Directors and majority of s/h of both corporations must approve the merger. Parent owning 90% of corporation does not need approval.

Question 30

Judicial Dissolution of a Corporation

Answer 30

Under the RMBCA, a shareholder may petition the court to dissolve the corporation if they can show:

A deadlock of the Directors in managing corporate affairs and irreparable injury to the corporation.
The Directors have acted in a manner that is illegal, oppressive, or fraudulent.
The shareholders are deadlocked in voting power and have failed to elect Directors for at least two consecutive annual meetings.
The corporate assets have been wasted or misapplied.
Oppressive Conduct:

Includes violating a shareholder’s reasonable expectations or preventing minority shareholders from having equal rights and opportunities.
Failure to provide properly requested corporate information (e.g., accounting records) to minority shareholders may be grounds for judicial dissolution.
Share Purchase Election:

In a judicial dissolution proceeding, the corporation or shareholders may elect to purchase all shares owned by the petitioning shareholder at fair value. This election is generally irrevocable.

Question 31

Voluntary Dissolution of a Corporation

Answer 31

Under the RMBCA, a corporation’s Board of Directors may propose dissolution to the shareholders. The following procedure must be followed:

Adoption by the Board of Directors.
Notice to each shareholder (whether or not entitled to vote) of a meeting to vote on the proposal. The notice must state the purpose of the meeting.
Adoption by the shareholders by a majority vote, unless a greater amount is required in the Articles of Incorporation or state law.
A corporation may also be dissolved by a majority of the incorporators or initial directors if:

The corporation has not issued shares or commenced business.
Articles of Dissolution are filed with the Secretary of State.

Question 32

Dissociation of a Member from an LLC

Answer 32

Under RULLCA, a person has the power to dissociate as a member of the LLC at any time, rightfully or wrongfully.

A member becomes dissociated from the LLC upon:

Notice of the member’s express will to withdraw.
Occurrence of an agreed-upon event in the Operating Agreement.
Expulsion pursuant to the Operating Agreement.
Expulsion by the unanimous vote of the other members if:
It’s unlawful to carry on the LLC business with that member, or
There has been a transfer of all or substantially all of that member’s transferable interest in the LLC (other than a transfer for security purposes).
Expulsion by judicial order for misconduct.
Bankruptcy.
Incapacity or death.
Appointment of a personal representative or receiver.
Termination of the entity member (who is not an individual, partnership, LLC, corporation, trust, or estate).
Upon dissociation, the member loses the right to participate in the management of the LLC. However, the dissociated member will have the right to receive distributions from the LLC if issued. The dissociated member has no right to payment for their LLC interest unless the Operating Agreement provides otherwise.

A person’s dissociation is deemed wrongful when it:

Breaches the Operating Agreement, or
Occurs before the termination of the LLC and:
The person withdraws as a member by express will.
The person is expelled as a member by judicial order.
The person becomes a debtor in bankruptcy.
The person is expelled.
The member entity is willfully dissolved or terminated.
A person who wrongfully dissociates is liable to the LLC and other members for damages caused by the dissociation.

Under RULLCA, dissociation of a member does not result in dissolution of the LLC.

Question 33

Formation of a corporation

Answer 33

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.
Required Contents of Articles of Incorporation:

Corporate name. Number of shares the corporation is authorized to issue. Address of the corporation’s initial registered office and the name of its initial registered agent. Name and address of each incorporator.

A legally formed corporation is called a de jure corporation