Corporations

Question 1

Characteristics of Corps between Pships

Answer 1

1) Shareholders have limited liabiliy
2) ownership interests are freely transferable for the most part
3) corporation has an independent perpetual existence so no fixed date of dissolution
4) Corporation is managed by the board of directors.
5) created for ANY LAWFUL purpose

Question 2

Promoter

Answer 2

Person who, prior to formation, enters into Ks in preparation of the corporation commencing business.

Fiduciary duty to act on behalf of the investor. Full disclosure & no self dealing.

Question 3

Pre-incorporation debts

Answer 3

1) Promoters have person al liability on pre-incorporation debts UNLESS
a: they get a novation from corporation and the creditor. Once corporation is formed, corp may adopt K - then corp SHARES liability.
b. the K expressly disclaims personal liability for the promoter.

Promoters not agent.

Question 4

Promoter K with 3rd Parties

Answer 4

1) Subscription agreemens enforceable against subscribers.
2) Once corp is formed, it can either adopt or reject any pre-incorporation K. Either through:
a) express
b) implicit - conduct consistent with honoring the pre-incorporation K.

Question 5

Formation of a Corporation

Answer 5

1) Filing Articles of Incorporation w/secretary of state.

Includes:

1) incorporators name and address
2) name of corporation
3) name and address of initial registered agent
4) number of shares corporation is authorized to issue
5) certificate by SC lawyer certifying requirements have been met.

Once Sec signs, corp begins. Amendment of articles only by 2/3 of the shares

Question 6

Meeting upon formal organization

Answer 6

Formal meeting of the incorporator must be held after formal organization. it must

1) adopt bylaws
2) elect the directors
3) conduct other necessary business

Question 7

Bylaws

Answer 7

Internal rules and regulations to govern corp’s actions and relation to its shareholders, directors, and officers. like

1) notice of shareholder meetings
2) rights and powers of shareholders, directors, officers.

Unless articles of incorp provide, power to alter/repeal/add is vested in BOARD OF DIRECTORS.

Question 8

Widely Held Corporation

Answer 8

Have a public market for shares. Often traded on major stock exchange.

Question 9

Closely Held Corporation

Answer 9

Defined as

1) small number of shareholders AND
2) no ready market for corporate stock, AND
3) substantial majority shareholder participation in management, operation, and direction of corporation.

often small businesses whose owners want to keep ownership and control in a few hands.

Question 10

Satutory Close Corporations

Answer 10

Governed by SC code. Articles of Incorp MUST state it is a statutory close corp. Can amend articles to be this. Characteristics:

1) less formal governance and more flexibility
2) bylaws are not required and are often replaced by shareholder agreements
3) failure to follow corporate formalities is not a ground for piercing the corporate veil.

Benefits: shareholders do not have to file for dissolution to get relief from oppression and remedies include payment of damages, purcahse of shares, and removal of officers.

Question 11

Piercing the Corporate Veil

Answer 11

Equitable remedy - disregards corporate form and holds individual shareholders personally liabile for corporate oblgiations to prevent fraud or injustice.

Courts look at whether corp is alter ego of shareholders, agent of shareholders, or as a mere instrumentality. See if shareholders used corp for their own personal benefit.

No separate corporate existence: unity of interest between shareholder and corporation.

Question 12

Factors to Pierce the Veil

Answer 12

1) whether formalities were not observed
2) thin capitalization
3) if shareholders siphoned off corporate funds
4) whether shareholders comingled personal and corporate funds
5) whether the company lacks independence from the interest of its owners.

Question 13

Equity Securities

Answer 13

Equity Securities: Equity = stock. Stock creates an ownership interest in the corporation. Every corporation must have at least one class of common voting stock.

This represent the capital of the corporation that is at risk in the business. No right to repayment of the amount invested, or to a return of the investment.

Typically have

1) dividend rights 2) liquidation rights 3) voting rights

Question 14

Debt Securities

Answer 14

Represent money loaned to the corporation, and a person holding debt securities is a creditor of the corporation.

Rights fixed by the instrument. Holders have priority over equity security holders (stock) upon liquidation of corporation, but no voting rights.

Question 15

Three types of Debt Securities

Answer 15

Bonds - borrower/corporation pledges specific assets to support corporation’s promise to pay money back.

Debentures - long-term debts that are generally unsecured. No assets pledge to support promise to pay back.

Notes - short term debt security with a duration of less than 5 years. typically institutional lenders.

Question 16

Common Stock

Answer 16

1) every corporation must have at least one class of voting stock
2) no rights to dividend, they are payable at discretion of board of directors
3) usually have a residuary interest - they get whatever’s left when creditors & preferred stockholders are paid

Question 17

Preferred Stock

Answer 17

1) corporation can issue classes of preferred stock so long as each class is authorized in its Articles
2) Articles may specify the rights of each series of preferred stock, or may give board of directors power to create classes of preferred stock with any set of rights
3) preferred shareholders generally entitled to receive fixed dividends before any are paid to common shareholders

Question 18

Issuance of Shares

Answer 18

Only able to issue number of shares authorized by its Articles. Not have to issue all.

Par Value - minimum amount that must be paid for shares to be considered fully paid and non-assessable. Each stock is divided into “par value” and “capital surplus.”

Stated capital - amount of capital traced to par value. Can’t be used for dividends, stock repurchases - never be spent.

Everything else can - capital suprlus.

“No par shares” - have no minmum amount to be paid, but board of directors will determine the stated capital.

Question 19

Dividends

Answer 19

Normal dividends - Payments made to shareholders in proportion to their ownership. Board of Directors decide who much and if to pay at all. Only paid out of surplus: difference between net assets & stated capital

Stock dividends - dividends paid to shareholders by issuing additional shares of stock in the corporation.

Stock splits - corporation turns each share of stock into more than one stock.

Reverse stock split - the corporation turns each share into something LESS than one share.

Question 20

Shareholder Meetings

Answer 20

Timings - either set in bylaws or Articles.

What - elects board of directors

Notice - written notice w/date, hour and purpose. No less tha 10, not more than 60 days. Can be waived before or after.

Requires a Quorum - see quorum card. Very important.

Question 21

Quorum

Answer 21

Defined: the minimum number of shares necessary to have a valid meeting. NOT SHAREHOLDERS

Generally a quorum wil be a majority of the shares

Qurum requirement can be changed in bylaws

Question 22

Shareholder Voting

Answer 22

RIGHT TO vote on: election of directors, amendment to articles OR bylaws, major transactions

Qualification - 1 vote per share

Votes Required - default rule: majority of shares in attendance at a meeting of the quorum will bind the corporation.

Question 23

Shareholder Proxies

Answer 23

Defined - shareholder giving someone else right to vote their shares.

Appointment - in writing/electronic transmission, excuted by shareholder or their agent.

Validity - 11 months

Revocable - any time.

Question 24

Irrevocable Proxy

Answer 24

It requires the proxy be coupled with an interest and expressly state that it is irrevocable.

Proxy MUST have some property interest in the shares or some other direct economic interest in how vote is cast.

Question 25

Inspection of Books / Records

Answer 25

Shareholder has right to inspect them for a proper purpose.

Obtaining info to solicit a proxy, or to determine price per share.

Question 26

Board of Directors

Answer 26

They manage the business of the corporation. Acts collectively. Not Officers or Employees with no individual power to bind, and not an agent.

Can ratify actions of officers.

BUT sales of all of corporate assets, mergers, liquidations, dissolutions, and changes in certificate of incorporations require shareholder approval.

Shareholders choose board. board chooses officers.

Question 27

Board of Directors - Standards

Answer 27

Qualifications - directors generally need not own shares in corporation, live in SC, or be of any minimum age unless laws require.

Duration - 1 year, or staggered board, making it harder to control the board.

Removal - can be removed for with or without cause by shareholders. Breach of duty. Only at special meeting for purpose to remove.

Question 28

Board of Directors - Meetings

Answer 28

Notice - set by bylaws or reasonable notice

Quurum - default is half, can’t be changed below 1/3

Action without meeting - okay if all directors agree in writing

Any defects may be ratified in post meeting ratification.

Question 29

Corporate Officers - Generally

Answer 29

Have authority to delegate day-to-day management of the corporation to its officers.

The authority of an officer may be express, implied, or apparent.

Have statutory duties, and fiduciary duties

Question 30

Statutory Liabilities of Officers AND Directors

Answer 30

Personally liable for improper declaration of dividends, improper repurchases of shares by corporation, improper loans.

To avoid liability, director must dissent to the decision. Must dissent at meeting in which the bad act was authorized or if absent, after a reasonable time of learning the action.

Question 31

Fiduciary Duties - Overview

Answer 31

Duty of Care & business judgment rule

Duty of Loyalty & corporate opportunity doctrine

Question 32

Officer / Director Duty of care

Answer 32

Must act in good faith AND with the degree of care an ordinary prudent person in a like position would use under similar circumstances. Must only look to interest of shareholders.

Business Judgment Rule: a rebuttable presumption that the board of directors didn’t violate their fiduciary duty of loyalty or care and they acted in good faith.

Director can rely on info, opinions, reports, other financial data prepared under authority delegated by the board.

Question 33

Officers / Directors Duty of Loyalty

Answer 33

Rule: directors need to put the interest of the corporation ahead of their own.

Cannot compete with the corporation. But corporation can consent.

Corporate Opportunity Doctrine - rules under which opportunity must be presented to corporation before taking advantage of it.

Question 34

Corporate Opportunity Doctrine

Answer 34

Duty of loyalty prohibits directors and officers from taking for their own beneficiary business opportunity that properly belongs to the corporation unless:

1) the opportunity is fully disclosed to the corporation
2) the corp is first given a chance to pursue the opportunity AND
3) the corporation decides NOT pursue.

Factors:

1) whether business opportunity is closely related to corp
2) whether board has expressed an interest in acquiring that type of business
3) whether individual becomes aware while acting in capacity of officer/director
4) whether the person used corporate funds or facilities in discovering/developing the opportunity.

Question 35

Indemnification of Directors/Officers

Answer 35

SC can indemnify a director in a proceeding if:

1) he conducted himself in good faith and reasonably believed (best interest in corp, or not opposed to best interest)
2) he engaged in conduct for which broader indemnification is otherwise permitted or required according to the Articles.

No indemnification for breach of loyalty.

Question 36

When Fiduciary Obligations AND conflicts of Majority/Controlling Shareholders Arise

Answer 36

Applies to shareholders owning 51% or more of voting shares (de jure control) or publicly held corp with smaller than 51% (de facto control)

Conflict of interest issues arise where a controlling shareholders 1) engages in business with the company OR 2) is in control of another company which engages in business with the company.

Controlling shareholder shouldn’t be an officer or director of either corporation.

Question 37

Sale of Controlling Shares

Buyout of Minority shares

Answer 37

Controlling interest more value because ability to pick Board.

Could breach duty of loyalty because of unfair prejudice to minority shareholders or harm to the corporation.

Feeze-out occurs when a controlling shareholders eliminates minority shareholders. Look at whether transaction involved

1) fair dealing in transaction towards the minority shareholders AND 2) a fair price offered for the minority shareholder’s stock

Question 38

Derivative Actions

Answer 38

Proper where the harm complained of was primarily done to the corporation and therefore the corp should have the relief sought. Harm is derivative, as a result of their position as shareholder. Standing Requirements (contemporaneous ownership rule):

1) must have been a shareholder when alleged harm occured OR
2) got his shares of corporation by operation of law from a person who was a shareholder at time of harm.

Question 39

Derivative Suits - Shareholder Demand

Answer 39

Before can bring derivative suit, shareholder must make a demand on board of directors informing them of proposed litigation. Persuade them to enforce corporation’s rights. Demand is waived when demand would be fuitle:

1) majority of board is in the transaction OR
2) the directors failed to inform themselves of the transaction OR
3) directires failed to exercise their business judgment in approving the transaction

If demand refused, must demonstrate such refusal violates Business Judgment Rule

Question 40

Closely Held Corps - Voting

Answer 40

Traditionally: straight voting - every director seat is a separate election.

Cumulative voting - shareholder combines their voting power. Seats elected together in a runoff.

Formula: ((#of shares voting) X (# of directors you want to elect) / (# of electors to be elcted +1)) + 1

Class Voting - each class of stock can be authorized to elect one or more directors.

Question 41

Voting - Pooling Agreements

Answer 41

Shareholders may contract to vote their shares together. Remedy for a violation is specific performance. Alternative remedy is to swap proxies to vote each other’s shares for the same purpose.

Term Limit - no statuory limit, exists for the term specified.

Revocation - unanimous consent of shareholder participants.

Question 42

Voting - Voting Trusts

Answer 42

Under a voting trust, shareholders assign their legal interestin the shares to a trustee, and the trustee votes the shares on behalf of the trust. Shareholders not just contracted to vote a certain way, they relinquish their right to vote.

Duration - up to 10 years.

Revocation - Requires unanimous consent of shareholder participants.

Question 43

Agreements of Voting On the Board

Answer 43

Reluctant to enforce agreements between board members because they take away from the board’s power.

Shareholder agreement that binds the board of directors may be permitted by courts where it is agreed to by ALL shareholders and can’t overly impinge on power of the board.

Question 44

Restriction of Transfer of Shares - Closely held

Answer 44

In closely held corp: Participants may agree to restrict transfer OR limit who can be shareholders in the future. can restrict own right to restrict others.

Restrictions must be reasonable. Must be found in Articles or separate shareholder agreement. MUST be conspicuous reference on shares themselves.

Right to first option

Right to first refusal

Permission requirements to sell shares

Question 45

Preemptive Rights

Answer 45

Gives shareholders right of first refusal on issuance of additional shares on their class of stock. Allows shareholders the option to maintain their proportionate interest inthe corporation. Prevents dilution in their voting interest.

Question 46

Voluntary Dissolution of Corporation

Answer 46

1) generally requires majority vote of both board and shareholders
2) Articles may provide for higher % of shares for dissolution

Question 47

Judicial Dissolution

Answer 47

Dissolution can be ordered by a court, it’s rare.

Attorney general brings action for dissolution based on:

1) fraud or concealment
2) the corporation has exceeded or abused authority conferred upon it by law.

Also, board can seek judicial dissolution if assets are insufficient to meet liabilities.

Question 48

Results of Dissolution

Answer 48

1) Liquidate assets, pay creditors, distribute excess/surpluss.

Distrbution: shareholders receive pro rata share of any assets that remain. Classes of stock may change that

Question 49

“Foreign” Corporations

Answer 49

This is a corporation is incorporated in another state but authorized to do business in SC. Therefore, it must make a filing - an application of authority w/sec of state.

Question 50

“Professional Corporations”

Answer 50

Organizations organized solely by professionals who are licensed individuals. Must have end in words referring to professionals or PC or PA. Can also be a statutory close corp.

Articles must include that 1) it is a professional corporation and 2) its purpose is to render the specified professinoal services.

Purpose: to practice a single specified profession.

Requirment: All shareholders, at least 1/2 directors, and ALL officers must be licensed professionals in that profession.

Liabilities - shareholders liable only for own actions. Other shareholders not laible for wrongful acts of another.

Question 51

Non-Profit Corporations

Answer 51

No shareholders or equity owners. Interest holders are colled members.

Members not personally liable for non-profits obligations.

Three types: religious, mutual benefit, public benefit.

Question 52

LLC - Overview

Answer 52

Combines the limited liability of corporations with partnership treatment for federal income tax purposes.

An LLC is a legal entity distinct from its members. (exception: single-member LLC). Also:

1) prohibition against the transfer of managment or membership right without unanimous or majority approval of remaining members; AND
2) dissolution upon death, retirement, etc occurs unless remaining members elect to continue the LLC

Question 53

LLC Decisions at Filing

Answer 53

Two elections at time of filing:

1) whether the company is organized for a specified term or perpetual duration
2) whether it will be member-managed or manager-managed

Question 54

Member v. Manager Managed

Answer 54

Member managed is default.

Member managed - every member has apparent authority to bind the company in the ordinary course of its business.

In member-managed, only managers have apparent authority to bind LLC.

Question 55

Formation of LLC

Answer 55

One or more persons may organize LLC, by signing and filing Articles. Includes:

1) name of company with LLC or other indicator
2) name and addy of entity’s initial agent for Service of P
3) name & addy of each organizer
4) whether the company is to be a specific term, and if so, that term
5) whether company is manager-M, and if so, the name and addy of each initial manager

Question 56

Authority to bind LLC

Answer 56

Each member of a member-M is an agent of the firm for the purpose of its business and has the apparent authority to bind the company unless:

1) the member had no authority to act for the company in that particular matter AND

2) the person with whom the member was dealing knew, or had notice, that member lacked authority.
a) members of Manger-m are not agents, and do not have apparent authority soely by reason of being members

Scope: acts to carry out ordinary business. Can extend if authorized.

Question 57

LLC - Respondeat Superior & Liability

Answer 57

LLC is liable for losses incurred by member or manager acting in ordinary coruse of business or with authority of the company.

Members of manager-M do not impute unelss acting under actual or apparent authority created by circumstances other than membership status.

Member or manager not personally liable for debt, liability solely by being or acting as manager or member.

Question 58

Member-Managed

Answer 58

Each member has equal rights (votes) in management & conduct of company’s business unless otherwise provided for the operating agreement.

Majority rules unless it’s a matter requiring unanimous approval.

Question 59

Manager-Managed

Answer 59

1) Managers must be designated, appointed, elected, removed, or replaced by a majority of the members.
2) managers dont need to be members
3) Managers hold office until successor has been elected & qualified, or resigns or removed.
4) Each manager has equal rights; and if more than 1, majority rules

Question 60

LLC - Duty of Loyalty

Answer 60

Member-M: limited to
1) account for any profit made in ordinary course or by using company property

2) refrain from dealing with or acting with party with interest adverse to company
3) refrain from competing.

Manager-M:

managers have same duty. Members don’t.

NON-WAIVABLE

Question 61

LLC - Duty of care

Answer 61

Member-M:

limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or knowing violatin of the law. Not normal negligence.

Manger-M- manager has same duty. Member doesnt.

NON-WAIVABLE

Question 62

Shareholder Oppression

Answer 62

In a closely held copration, shareholders owe each other a duty of utmost good faith and loaylty.

Must show decisions serve legitimate business interest. If exists, minority must show it could have been achieved through less disruptive means.

Failure to pay dividends, employment termination, no meetings, being voted off, or anything in the fact pattern.