Corporations

Question 1

Directors

Answer 1

Directors sit on the board of directors and are responsible for governing the corporation

Question 2

Officers

Answer 2

Officers serve as agents of the corporation and are responsible for managing the day-to-day matters of the corporation.

Question 3

Shareholders

Answer 3

Shareholders own the corporation and generally do not have conrol over management

Question 4

Liability of Promoters

Answer 4

• Promoters act on behalf of the unformed corporation.
• Promoters are personally liable on pre-incorporation contracts entered into for the benefit of the corporation unless:
  
  • the contract specifically disclaims the personal liability of the promoter; or
  • circumstances demonstrate the other party agreed to look only to the corporation for performance

Question 5

Liability of the corporation after formation

Answer 5

• The corporation is not liable on a pre-incorporation contract unless, after formation, the corporation assumes liability through adoption or novation.
• If the corp. adopts the contract, the promoter remains liable on the contract but is entitled to indemnification from the corp.
  • Express adoption: Board passes a resolution adopting the contract.
  • Implied adoption: occurs when the corporation accepts or acknowledges the benefits of the contract.
• A novation releases the promoter from liability on the pre-incorporation contract.
  
  • The corporation is substituted for the promoter on the original contract.

Question 6

What is required for Incorporation of a corporation?

Answer 6

Incorporation occurs upon the execution and filing of the articles of incorporation.

Proper execution requires the incorporators to prepare and sign the Articles and include the:

• name and address of each incorporator
• address of the initial registered office and name of initial registered agent
• number of shares authorized to issue; and
• name of the corporation.

Proper filing requires an incorporator to file the Articles at the secretary of state’s office and pay the filing fee.

• The date of incorporation is the date of filing unless the Articles delay the date of effectiveness (can delay up to 90 days from the date of filing).

Question 7

Post-incorporation organization

Answer 7

• After incorporation, a corporation must be properly organized at an organizational meeting called by the incorporators and/or the inidial directors named in the Articles.
• At the organizational meeting, they must:
  
  • name or elect directors
  • appoint officers
  • adopt corporate bylaws.

Question 8

Corporation by estoppel

Answer 8

• In a contract dispute between a third party and an unformed corporation believed to be properly formed, a court may:
  
  • estop the third party from alleging defective incorporation if that would unjustly expose the corporation’s principals to liability, or
  • estop the corporation from arguing it isn’t liable due to defective incorporation if it would unjustly deprive the third party of relief.
• Can’t use this doctrine as a defense to a tort claim

Question 9

Powers of a Director

Answer 9

• The board must act collectively and individual directors don’t have the power to act for the corporation (unless otherwise provided in the Articles or Bylaws).
• The board has the sole power to declare dividends (unless otherwise provided in Articles or bylaws)

Question 10

What constitutes a quorum of directors?

Answer 10

A Quorum is the minimum number of directors requred for board action to occur.

• A majority of directors constitutes a quorum (unless otherwise provided in the articles or bylaws).
• Board action occurs upon the affirmitive vote of a majority of the directors present at the meeting.

Question 11

Can a board act without calling a meeting?

Answer 11

Yes, if every director gives signed, written consent (unless otherwise provided in the Articles or bylaws).

Question 12

What kind of notice is required for regular board meetings?

Answer 12

No notice is needed for regular meetings (unless otherwise noted in Articles or Bylaws)

Question 13

What kind of notices is required for special meetings?

Answer 13

• At least two days’ notice of the date, time and place of the special meeting (unless otherwise provided in the articles or bylaws).
  
  • Need not give the purpose of the meeting except for meetings at which the removal of a director is to be considered.

Question 14

Can a director waive the right to notice?

Answer 14

Yes, with a signed writing.

The director also waives notice by attending or participating in the meeting and not promptly objecting to the meeting.

• Even if the director promptly objects, a director waives notice by voting and assenting to the action taken at the meeting.

Question 15

Corporate Officers

Answer 15

• Officers are agents of the corporation and may enter into any transaction that is expressly or implicitly authorized.
• Officers have the implied authority to enter contracts that are reasonably related to performing their duties.

Question 16

Duty of care

Answer 16

Directors and officers must act:

• in good faith
• with the care an ordinarily prudent person would exercise in similar circumstances, and
• in a manner reasonably believed to be in the best interest of the corporation.
  
  • Directors and officers may rely on information, reports, recordings, and financial data prepared by someone reliable and competent in the matter.

Question 17

Business Judgment Rule

Answer 17

This is a rebuttable presumption the court will apply, and assumes that directors and officers acted on an informed basis, in good faith, and in an honest belief that the decision was in the corporation’s best interest.

Question 18

Duty of Loyalty

Answer 18

• Directors, officers, and employees must act loyal to the corporation, and not promote their own interest in a way that harms the corporation
• Conflicts of interests typically occur when:
  
  • transacting business with the corp. (i.e. self-dealing)
  • usurping a corporate opportunity, or
  • directly competing with the corporation.
• Afer full disclosure, the non-interested directors may authorize the conflict-of-interest transaction by a majority vote.
  
  • The director or officer involved must disclose all material facts of the transaction.

Question 19

What is self-dealing?

Answer 19

Self-dealing occurs when a director, officer, or employee transacts business with the corporation on behalf of him or herself.

Question 20

what constitutes usurping a corporate opportunity?

Answer 20

Factors to determing “corporate opportunity”–whether the:

• opportunity was discovered while acting in capacity as director/officer;
• the business is closely related to that of the corporation;
• board expressed interest in acquiring such a business;
• opportunity is in the corporation’s line of business;
• opportunity was developed or discovered using corporate funds or faciliities

Question 21

How do shareholders participate in corporate management

Answer 21

Shareholders

• attend shareholder meetings
• elect and remove directors (with or without cause)
• amend the bylaws, and
• approve fundamental changes.

Question 22

Notice of shareholder meetings

Answer 22

Written notice of each annual and special meeting is required to be given at some point between 10 and 60 days before the meeting.

Question 23

What constitutes a quorum of shareholders?

Answer 23

A quorum = majority of shares entitled to vote (unless the Articles or bylaws provide otherwise)

Question 24

What constitutes “fundamental changes” to the corporation?

Answer 24

• Amendments to articles
  
  • notice must include a copy of the amendment and indicate one purpose of the meting is to consider the amendment
• Merger or Dissolution
  
  • notice must include a copy of the plan and indicate one purpose of the meeting is to consider merger/dissolution
• Sale of substantially all Corporate Assets
  
  • shareholder approval is required for such a sale that occurs outside the usual and regular course of business if it would leave the corporation without significant continuing business activity

Question 25

Is shareholder approval required for a short form merger?

Answer 25

No, shareholder approval is not required for a short form merger, which is where a parent corporation owning at least 90% of the outstanding shares of each class of its subsidiary may merge the subsidiary into itself without the approval of shareholders of either the parent or the subsidiary.

Question 26

Shareholder voting

Answer 26

Each share gets one vote, unless provided otehrwise by statute or the Articles. Only shareholders of record on the record date may vote.

Question 27

Proxy voting

Answer 27

• A proxy is a valid agreement if it is in writing and signed by the shareholder (or an electronically transmitted authorization).
  
  • Proxy agreements are not valid for longer than 11 months, unless a longer time is provided in the agreement.
• Generally proxies are freely revocable, unless it says “irrevocable” in the agreement and is coupled with an interest by:
  
  • a writing delivered to the corporation
  • a subsequently executed proxy presented at the shareholder meeting, or
  • a shareholder appearing in person and voting at the meeting

Question 28

consolidated voting power

Answer 28

A contract between shareholders agreeing to vote their shares together.

This is valid absent fraud or other illegal objective

Question 29

Shareholder right to information and inspection

Answer 29

• Shareholders have an unqualified right to examine the Articles, bylaws, minutes of shareholder meetings, and a list of shareholders of record.
• Shareholders have a qualified right to inspect and make copies of accounting books and the records and minutes of direector meetings.
  
  • Requries a good-faith demand made for a proper purpose and with specificity of that prupose and the items sought for inspection.

Question 30

Appraisal rights of dissenting shareholders

Answer 30

• If a fundamental change was approved by shareholders, dissenting shraeholders (ie shareholders who voted against the action) have the right to sell their shares for fair market value.
  
  • For a merger, this right can be exercised by any shareholder of a corproation that is a party of the merger
    
    • Not exercisable by shareholders of a subsidiary corporation whose parent corproation owns at least 90% of each class of stock).
  • For a share exchange, this right can be exercised only by shareholders who own shraes of the class/series that aer to be acquired or exchanged.

Question 31

Direct Suits

Answer 31

• Used when the wrong or harm is caused directly to the shareholders.
• To compel payment of dividends, a shareholder must prove the Directors’ refusal amounted to fraud, bad faith or an abuse of discretion.
• Factors to determine bad faith:
  
  • intense hostility by controling shareholders against minority shareholders
  • excluding minority shareholders from employment by the corporation
  • high salaries, bonuses, or corporate loans made to the controllig officers
  • if the majoirty shareholders may be subject to high personal-income taxes if substantial dividends are paid, and
  • whether controlling directors desire to buy the minority stock interests for as little as possible.

Question 32

Derivative suits

Answer 32

• Equitable action brought by shareholders on behalf of the corporation and for the corporation’sbenefit (the damates are paid to the corporation, not to the shareholders bringing the suit).
• Before bringing suit, the shareholder must make a written damand of the directors to enforce the rights of the corporation unless demand would be futile.

Question 33

Good faith duty for controlling shareholders

Answer 33

controlling shareholders must refrain from exercising control in a way that disproprotionately benefits them over minority shareholders

Question 34

Shareholders’ exposure to liability

Answer 34

Generally, shareholders are not personally liable for debts of the corporation.

Question 35

Peircing the corporate veil

Answer 35

Usually in closely held corporations (because only a few shareholders) if there has been serious wrongdoing courts will pierce the corporate veil and make the shareholders personally liable.

Factors include:

• corporation is undercapitalized
• corporate formalities have not been followed,
• commingling of corporate and personal funds,
• corporation is the alter ego of its shareholders.