Corporations

Question 1

A corporation is a legal entity distinct from its owners, the shareholders.
2. A corporation has four key characteristics:

Answer 1

● continuous existence; it survives the death or replacement of its owners (shareholders);

● centralized management of its assets and business through a board of directors;

● limited liability for its owners (shareholders), who are generally shielded from personal liability for the corporation’s debts and obligations; and

● free transferability of ownership interest (shares).

Question 2

promoters liability in general

Answer 2

Promoters are personally liable for the contracts they entered into for the benefit of a not yet existent corporation.

Question 3

Promoters are not liable on pre-incorporation contracts if:

Answer 3

the pre-incorporation contract specifically disclaims the personal liability of the promoter or circumstanc-es demonstrate that the other party agreed to look only to the corporation for per-formance.

Question 4

If the pre-incorporation contract does not specifically disclaim the promoter’s personal liability, a court may still determine that the intent of the parties was to hold only the corporation, once formed, liable on the contract. What would a court consider in its determination.

Answer 4

considers whether the third-party knew and believed the corpora-tion would be formed

and thereafter adopted the contract in question.

Question 5

A corporation is not liable on any pre-incorporation agreements its promoters entered into on its behalf unless,

Answer 5

after it comes into existence, the corporation assumes liability by its own act through adoption or novation.

Question 6

If a corporation adopts the contract of a promoter, will the promoters remain liable? If so are they entitled to indemnification?

What is the effect of a novation on a promoter K?

When does a novation occur?

Answer 6

If a corporation adopts the contract of a promoter, the promoters will: remain liable on the contract to the third party but will be entitled to indemnification from the newly created corporation.

If a novation occurs, the promoters are: released from all personal liability on the pre-incorporation contract.

A novation occurs when three parties—the promoter, the second party to the original contract, and the corporation—agree to substitution of the corporation as a party to the contract in place of the promoter.

Question 7

Can a corporation ratify a pre-incorporation transaction? why or why not

Answer 7

Because the corporation does not yet exist when a pre-incorporation contract is signed, the corporation cannot later ratify a contract.

A corporation is unable to ratify a pre-incorporation transaction because ratification requires that the principal would have been lawfully able to authorize the unauthorized act when it was done. It can, however, adopt the contract.

Question 8

Adoption can be express or implied. Express adoption generally occurs when the board pass-es a resolution. Implied adoption occurs when

Answer 8

when the corporation accepts or acknowledges the benefits of the contract in some manner

exam tip: If adoption of a pre-incorporation contract is at issue, your analysis should explicitly consider both of these possibilities.

Question 9

What are the requirements for incorporation?

Answer 9

Incorporation requires:

the proper execution and filing of articles of incorporation. To be properly filed, the articles of incorporation must be delivered by an incorporator to the secretary of state’s office for filing; and its delivery should be accompanied by payment of the appropriate filing fee.
b. To be properly executed, the articles of incorporation must be prepared and signed by an incorporator (or incorporators) and set forth the
○ the name and address of each incorporator;
○ the address of the corporation’s initial registered office and name of its initial registered agent at this office;
○ the number of shares the corporation is authorized to issue; and
○ a corporate name.

The corporate name set forth in the articles must contain the word “corporation,” “incorporated,” “company,” or “limited,” or the abbreviation “corp.,” “inc.,” “co.,” or “ltd.” Furthermore, the corporate name must generally be distinguishable from other corporate names

Question 10

The effective date of incorporation is the date of filing unless the articles set forth a delayed effective date that is not more than ___ days after the date of filing.

When does corporate existence begin?

What does the corporation’s filed articles incorporation be used to prove?

Answer 10

90 days

Corporate existence begins at the moment of incorporation,

the secretary of state’s filing of the articles is generally conclusive proof that all conditions precedent to incorporation have been satisfied.

Question 11

After incorporation, a corporation must be properly organized in accordance with statutory formalities. (post filing formalities)
Failure to do so may expose shareholders to?
The organization of a corporation is completed at an organizational meeting that is called by the incorporators or, if initial directors are named in the articles, by either the incorporators or the initial directors.
Completing the organization of a corporation requires?

Answer 11

personal liability for corporate debt and obligations.

(1) the naming or election of directors, (2) the appointing of officers, and (3) the adopting of by-laws.

Question 12

Corporation by estoppel: third party

Corporation by estoppel: business entity

hint double edged sword

Answer 12

a court may estop the third party from alleging that: the corp is defectively incorporated if that would unjustly expose the corporate principals to liability.

a court may estop the business entity from alleging that: It is not legally a corporation liable on the contract as a corporation if that would unjustly deprive the third party of relief from injury.

Question 13

T or F The corporation by estoppel doctrine is not a defense to a tort claim, as the claimant has not previously dealt with the principals as if they were a corporation.

How is it applicable in contract claims?

Answer 13

True.

However, in contract claims, where the parties necessarily had a prior business relationship, the doctrine becomes relevant and potentially applicable.

Question 14

Subject to any limitation set forth in the articles of incorporation, the manage-ment of the corporation’s business and the exercise of corporate power must:
be by or under the direction of the corporation’s?

What don’t they have the power to do?

Answer 14

board of directors. In other words, the board acts collectively.

Unless otherwise authorized by the articles or prior board decisions, individual directors do not have the power: to set corporate policy or act as its agent while entering into contracts.

Question 15

The board acts in its collective capacity. Therefore, the prerequisite of all board action is that it requires the participation of a quorum of the board. A quorum refers to?

Answer 15

the minimal portion of the authorized number of directors required to be present for board action to occur.

Question 16

Unless otherwise restricted by the articles or bylaws, the board can transact business in the absence of a meeting so long as: there is

Answer 16

written consent to an action that is signed by all members of the board.

NOTE: Because this rule requires the unanimous consent of all directors, it necessarily satisfies the quorum requirement

Question 17

At a meeting of the board of directors duly held, legally competent board ac-tion requires the presence of a quorum. Unless provided otherwise by the articles or the bylaws: a majority of the fixed or prescribed directors constitutes a quorum.

Assuming a quorum is present at a duly held meeting of the board, an act of the board occurs upon:

Answer 17

the affirmative vote of the majority of the directors pre-sent unless a greater number is required by articles or bylaws.

Question 18

T or F A director’s presence at a director’s meeting does not require that the director be physically present; unless the articles or bylaws require otherwise, it requires only presence by means of communication that allow all participants in the meeting to hear each other during the meeting.

Answer 18

True

Question 19

T or F Unless the articles or bylaws provide otherwise, regular meetings may: be held without notice of date, time, place or purpose of the meeting.

Answer 19

True

Question 20

(1) Special meetings of the board require at least:

for a special meeting must the notice requirements include a notice of the meeting’s purpose?

Answer 20

two days notice of the date, time, place of the meeting unless a longer or shorter period is required by the articles or bylaws.

NO, The statutorily required notice for a special meeting need NOT include: notice of its purpose.

Question 21

T or F For any meeting at which the removal of a director is to be considered, notice of this purpose must be given even if notice would not otherwise be required.

Answer 21

True

Question 22

Waiver of notice can occur before or after the date and time stated in the no-tice by means of:

Waiver can also be effected by?

Answer 22

a signed writing by a director entitled to the notice.

a director’s attendance or participation in a meeting when: the director makes no prompt objection to the meeting or the transaction of business at the meeting.

NOTE: Even if timely objection is made at the beginning of a directors’ meeting, if the objecting director thereafter votes and assents to action taken at the meeting, the notice requirement will be deemed to have been waived.

Question 23

A corporate officer or agent may enter into any transaction for which?

Corporate officers have implied authority to?

Answer 23

: she has been expressly or implicitly authorized under the articles of incorporation, the bylaws, employment contract or a board resolution

enter into transactions that are reasonably related to performing the duties for which they are responsible.

Question 24

Who has the power to declare a dividend?

Answer 24

Subject to restrictions in the articles, the power to declare a dividend is: reserved for the corporation’s board and is exercised at its discretion

Question 25

Explain the doctrine of ultr vires

In what ways can the limits of a corporation’s authority can be asserted? Actions

Answer 25

Ult vires- beyond the powers or an act outside the scope of authority.

NOTE: the limits of authority cannot be asserted against the corporation by third parties.

1. enjoin- in a proceeding by a shareholder to enjoin the doing of business not authorized by the articles
2. derivative suit-in the proceeding by the corporation or a shareholder bringing a derivative suit that is brought against directors or officers for violation of their authority.

Question 26

Duty of Care

Directors and officers must discharge their duties:

Answer 26

Directors and officers must discharge their duties: in good faith,

with the care that an ordinarily prudent person in like position would exercise under similar circum-stances, and

in a manner that they reasonably believe to be in the best interests of the corporation

Question 27

T or F Under the Model Act, directors and officers are entitled to rely on information, reports, records, and financial data prepared under authority delegated by the board by those deemed reliable and competent in the matter.

Answer 27

True

Question 28

According to the business judgment rule, there is: a rebuttal presumption that when making a business decision that directors and officers have acted

Answer 28

1. on an informed basis,
2. in good faith and
3. with the honest belief that their decision was in the best interests of the corporation.

NOTE: Directors generally rely on opinions, reports, and statements of corporate officers for information.

Question 29

Fiduciary duties of officers, directors, and employees requires that they be loyal to the corporation and not promote their own interests in a manner injurious to it

Conflicts of interest typically arise when directors or officers:

Answer 29

• transact business with the corporation (eg. self dealing)
• usurp a business opportunity; or
• directly compete with the corporation

Question 30

When a director or officer is involved in a “conflict of interest transaction,” the duty of loyalty requires the director or officer to:

A “conflict of interest transaction” is of no effect unless: after full disclosure a majority of a non-interested directors or shareholders?

Answer 30

notify the other directors, officers, or shareholders of all the material facts regarding the conflict.

vote to authorize or approve the transaction. Note: These are voidable contractions

Question 31

In determining whether an opportunity belongs to the corporation, courts will consider the following:

Answer 31

1. when the opportunity was discovered. Was the person was acting in his capacity as a director or officer when he discovered the opportunity?
2. whether corporate funds or facilities were used in discovering or developing the opportunity.
3. whether the board had expressed any interest in acquiring that type of business;
4. whether the business opportunity is closely related to that of the corporation;
5. whether the opportunity is in the corporation’s line of business; and

Question 32

Even if an “opportunity” is determined to belong to the corporation, there is no usurpation of a corporate opportunity if: after full disclosure the corporation was

Answer 32

given the opportunity to first pursue it and declined to do so or was other-wise unable to take advantage of the opportunity.

Question 33

In general, directors and officers are not personally liable for the debts and obligations of the corporation but are both:
liable to the corporation for the damages arising from

Answer 33

violation of fiduciary duty or unauthorized actions, whether their action is ultr vires or otherwise outside the scope of their authority. (eg. action with apparent authority not actual authority)

Question 34

If a corporate opportunity has been usurped by a director or officer, a court may award damages or, alternatively, order the director or officer to

Answer 34

convey to the corporation the profit, property or income derived from the misappropriation.

Question 35

T or F The articles of incorporation may include provisions that, in some cases, place significant limits on the personal liability of a person in a corporate management role who is in violation of his fiduciary duties. Most states do not allow the complete elimination of duties, especially loyalty.

Answer 35

True

Question 36

• While the day-to-day management of a corporation is reserved for the directors and officers, shareholders in their collective capacity have to power to:

Answer 36

elect directors, remove directors with or without cause,

amend the bylaws, and

approve fundamental changes in the corporation.

Question 37

“Fundamental changes” refers to such things as

Answer 37

amendments to the articles, merger, dissolution, and the sale of substantially all corporate assets.

Question 38

To ensure that the collective power of shareholders is not interfered with, watered down or otherwise manipulated, each shareholder of record must be provided with:
timely written notice of each annual and special shareholder meeting no fewer than ____ and no more than ____ days prior to the meeting date.

Answer 38

10 days

60 days

Question 39

For annual meetings, proper notice will state the place, date, and hour of the shareholder meeting.
○ For special meetings, proper notice will state the

Answer 39

place, date, hour, and purpose of the shareholder meeting

Question 40

A majority of the shares entitled to vote constitutes a quorum, unless the articles provide otherwise.
○ Assuming a quorum, shareholder action requires

Answer 40

the affirmative vote of a majority of shares present at the meeting: unless the articles provide for a greater proportion.

Question 41

In ________ ________ shareholders may allocate all of their votes to any candidate to elect that candidate to the board of directors.

Answer 41

cumulative voting,

Question 42

If a corporation has straight voting, and unless otherwise provided in the articles of incorporation, the entire board of directors, or any individual directors, can be removed, with or without cause, by

Answer 42

a majority of the shares entitled to vote in the election of such directors.

Question 43

If the corporation has cumulative voting and less than the entire board is to be removed, no director can be removed if:

Answer 43

the votes against removal would be sufficient to elect him under cumulative voting rules.
NOTE: pay attention to any question telling you that a certain number of votes is required to elect a director-might be cluing you in about what is needed to remove under cumulative voting. You would need to know this to determine how many votes would be needed for a removal.

Question 44

In general, amendments to the articles are proposed by the board and submitted to the shareholders for approval.
○ Notice for a shareholder meeting at which an amendment to the articles is to be considered must include
○ The quorum requirement for a meeting to consider an amendment to the articles must be at least a majority

Answer 44

a copy of the amendment and indicate that one of the purposes of the meeting is to consider the amendment.

of the votes entitled to vote on the amendment.

Question 45

In general, a plan for merger or share exchange must be adopted by the board and then submitted to the shareholders for approval.
What are the notice requirements for a shareholder meeting regarding a plan for a merger?

○

Answer 45

○ Notice for a shareholder meeting must indicate that one of the purposes of the meeting is to consider the plan for merger and,

if the corporation is not planned to be a surviving entity, a copy or summary of the articles of the surviving or new entity must also be included as part of the meeting’s notice.

Question 46

The quorum requirement for a meeting to consider a merger must be at least a majority of the votes entitled to vote on the merger.

Exceptions
Approval of such a plan is NOT required of a corporation’s shareholders if each of the following holds true:

Answer 46

▪ the merger or share exchange will not affect a change in the number of outstanding shares held by the corporation’s shareholders or affect a change to the preferences, limitations, or relative rights of those shares; and

the issuance of shares as part of the merger or share exchange does not otherwise require shareholder approval.

Question 47

In the case of a parent corporation and its subsidiary, approval of a merger plan involving a subsidiary corporation does NOT require approval of the subsidiary’s board or shareholders if the parent corporation owns at least

Answer 47

90% of the voting power of each class and series of outstanding shares of the subsidiary that has voting power. (short form merger)

Question 48

While the disposition of substantially all of a corporation’s assets does NOT require shareholder approval when the disposition occurs in the usual and regular course of the corporation’s business, disposition of a corporation’s assets: outside the regular course of its business does requires shareholder approval if?:

Answer 48

if it would leave the corporation “ without a significant continuing business activity.”

Question 49

A corporation will be conclusively held to have retained a significant continuing business activity if its activity

Answer 49

represents at least 25% of its assets at the end of the most recent fiscal year and

25% of either its income or revenue from that year.

Question 50

What are the shareholder’s voting rights in general unless otherwise provided by the articles?

Answer 50

Unless provided otherwise by statute or by the articles, each share = one vote.
○ Only shareholders of record on the “record date” are eligible to vote.
○ Shareholders are entitled to vote by proxy.

Question 51

In general, for a proxy agreement to be valid, the shareholder must provide the proxy holder with: either

Answer 51

a written signed or authorization or electronically transmit-ted authorization (no oral authorization allowed)

Question 52

No proxy shall be valid after the expiration of ___ months unless otherwise provid-ed in the proxy agreement itself.

Answer 52

11 months

Question 53

IN general proxies are freely revocable

Revocation may be effected by:

Answer 53

a writing delivered to the corporation;
a subsequently executed proxy at the shareholder meeting; or an in-person appearance and vote at the shareholder meeting by the party who executed or given the proxy.

Question 54

How can a proxy be made irrevocable?

Answer 54

To be irrevocable during its term, the proxy agreement must explicitly provide that it is “irrevo-cable” and the proxy must be coupled with an interest (e.g., a loan or a sale of stock in the company).

Question 55

Shareholders can arrange to vote their shares in concert with another by means of a voting agreement or voting trust.
○ Voting trusts involve a transfer of?

○ Voting agreements are contracts where shareholders

Answer 55

a transfer of legal title of their shares and are more strictly regulated than voting agreements.

shareholders bind each other to vote a certain way on particular issues.

Question 56

T or F Absent fraud or other illegal objective, voting agreements are valid among shareholders even if, under some circumstances such as when all of the shareholders agree, they run counter to the discretion of the board.

Answer 56

True

Question 57

What are the shareholder’s rights with respect to the right to information and inspection?

Answer 57

Shareholders have a right to information, such as annual financial statements, that are important to a shareholder’s voting and investing decisions.

b. Shareholders have an unqualified right to examine the articles, bylaws, minutes of a shareholders’ meeting, and list of shareholders of record.
c. Shareholders also have a qualified right to inspect (and make copies of) accounting books and the records and minutes of director meetings

Question 58

The qualified right to inspect and make copies is exercisable upon?

Answer 58

This right is exercisable upon a good faith demand made for a proper purpose and with specificity as to that purpose and the items sought to be inspected.

Question 59

In general, where a fundamental change has been put to a vote of the shareholders, dissenting shareholders have: the right to obtain

Answer 59

obtain payment of the fair value of the shareholder’s shares

Question 60

In the context of a merger, this right belongs to any shareholder of a corporation that is a party to the merger except for shareholders of a subsidiary corporation whose parent owns shares representing at least ____ of the voting power of each class and series of outstanding shares.

Answer 60

90%

Question 61

In the context of a share exchange, this right belongs only to those shareholders who

Answer 61

own shares of a class or series of shares that are to be acquired or exchanged

Question 62

Direct suits are brought when the wrong or harm is direct to the shareholder. For example, a shareholder can bring a suit against the corporation to compel the payment of dividends.
▪ While shareholders have a right to share in the net profits of the corporation, the power to declare dividends resides with?
▪ To compel payment of dividends, a shareholder needs to prove that: the director’s refusal to declare a dividend amounted to?

Answer 62

with the board

the directors refusal to declare a dividend amounted to fraud, bad faith or abuse of discretion.

Question 63

In making a determination on whether a board acted in bad faith when refusing to declare a dividend, a court will look to see if any of the following were the motivating causes of its decision:

Answer 63

1) intense hostility of the controlling faction against the minority;
2) exclusion of the minority from employment by the corporation;
3) high salaries, bonuses, or corporate loans made to the officers in control;
4) the fact that the majority group may be subject to high personal income taxes if substantial dividends are paid; and
5) the existence of a desire by the controlling directors to acquire the minority stock interests as cheaply as possible.

Question 64

Members of an LLC may bring an action against the LLC if

Answer 64

injured personally by the actions or decisions of its managing members or managers.

Question 65

What is a derivative suit?

Answer 65

A derivative suit is an equitable action brought by a shareholder on behalf of the corporation and for the corporation’s benefit.

Question 66

What does a derivative suit typically involve?

Answer 66

Typically, an alleged breach of fiduciary duty by officers and/or directors,

and a request that the court enforce this duty owed to the corporation or redress the injury suffered by the corporation.

So to the extent the shareholder is harmed, that harm is derivative of the harm done to the corporation.

Question 67

As a prerequisite to bringing a derivative action, the shareholder must

Answer 67

make a written demand of the directors to enforce the rights of a corporation, unless the shareholder can demonstrate that such demand would be futile.

NOTE: Like shareholders of a corporation, members of an LLC have a right to bring a derivative action on behalf of the LLC alleging mismanagement of the LLC by managing members or managers.

Question 68

Controlling shareholders have a duty of good faith whereby they must:

Answer 68

refrain from exercising control so as to obtain a benefit from the corp. not shared proportionally with minority shareholders.

NOTE: look for a fact pattern look for something that the controlling shareholders get that the minority shareholders don’t.

Question 69

Shareholder “oppression” most commonly occurs in a close corporation, where the lack of a public market for the corporation’s shares puts minority shareholders in a potentially vulnerable position since they cannot readily exit and escape mistreatment through the selling of their shares.

Examples of improper conduct by a controlling shareholder include:

Answer 69

○ Causing the board to enter into:

1. or guarantee a loan made by or with a majority shareholder;
2. a contract on unfair terms with a majority shareholder or an entity affiliated with a majority shareholder;
3. to issue additional stock to a majority shareholder at less than fair market value for the purpose of diluting the interest of minority shareholders;
4. approve a structural change (dissolution, merger, or sale of substantially all of its assets) for the purpose of excluding minority shareholders from participation in a profitable business;
5. causing the improper or baseless termination of employment of a minority shareholder; and
6. institute a “no dividend” policy while increasing the salary of certain shareholder-employees.

Question 70

What is the general rule regarding shareholder liability?

Answer 70

1. In general, shareholders are not personally liable for the debts of the corporation in which they hold stock.
2. a corporate entity is distinct from its shareholders

Question 71

(Although a rare occurrence,) Courts may hold shareholders liable on corporate obligations when necessary to prevent or avoid a grave injustice.

Factors that go into a “piercing the corporate veil” determination include:

Answer 71

• the extent to which the corporation is undercapitalized (insufficient capital to conduct business)
• the extent to which corporate formalities have not been honored or observed
• the extent to which corporate and personal funds have been commingled; and
• the extent to which the corporate entity is no more than the alter ego of its shareholders. (no respect of difference of shareholders and the corporation as separate entities)

Question 72

A plaintiff seeking to pierce the corporate veil must prove:

Answer 72

(1) shareholder “control” that effectively renders the corporate form a façade,
(2) use of the corporate form to obtain an improper or fraudulent purpose, and
(3) injury or unjust loss resulting from this wrongful use of the corporate form.

Question 73

On the bar exam, a “piercing the corporate veil” analysis is typically triggered by one of two fact patterns:

Answer 73

(1) a close corporation in which corporate formalities are not observed and corporate and personal funds are commingled, and
(2) a parent corporation and its subsidiary when there is insufficient segregation of their respective businesses, records, and finances.

Question 74

T or F Since LLCs are subject to fewer formalities than a corporation, an LLC’s failure to comply with these formalities is not likely a ground for imposing personal liability on LLC members.

Answer 74

True

Question 75

NOTE: In an action claiming a violation of a duty of loyalty, the business judgment rule is inapplicable; if the “conflict of interest” transaction has not been duly authorized by a vote of disinterested directors or shareholders, then the transaction is not insulated from judicial scrutiny.
Who bears the burden of proving that the transaction was fair to the corporation?

Answer 75

the allegedly disloyal director or officer carries the burden of proving that the transaction was in fact fair to the corporation.

Question 76

The articles of incorporation may contain provisions eliminating or limiting the liability of a director to the corporation or its shareholders for money damages for any action or failure to act as a director, other than liability for:

Answer 76

(a) the amount of a financial benefit received by the director to which he is not entitled;
(b) an intentional infliction of harm on the corporation or shareholders;
(c) authorizing an unlawful distribution; or
(d) intentional violations of criminal law

Question 77

When a director stands on both sides of a transaction, the business judgment rule does not apply. the director has the burden of to prove

Answer 77

the fairness in the transaction.