Corporations

Question 1

Structure of a Corporation

Answer 1

(1) Directors -sit on the Board of Directors; responsible for governing
(2) Officers - agents; responsible for day-to-day
(3) Shareholders - own the corporation; no control over management

Question 2

Promoters

Answer 2

Act on behalf of an unformed corporation.

Question 3

Promoters - Liability

Answer 3

PERSONALLY liable for pre-incorporation Ks entered into for the benefit of the unformed corporation unless

(1) K specifically disclaims the personal liability of the promoter; OR
(2) circumstances show that the other party agreed to look only to the corporation for performance

Question 4

After formation - liability of the corporation for the pre-incorporation Ks

Answer 4

Not liable unless after formation, corporation assumes liability through adoption or novation

Question 5

Adoption of a K

Answer 5

Adoption = Promoter remains personally liable but is entitled to indemnification from the corporation

Express adoption = Board passes resolution adoption the k

Implied adoption = Corp. accepts or acknowledges the K’s benefits

Question 6

Novation

Answer 6

Releases promoter from liability

all (promoter, second party to the original K, and Corporation) agree to substitute the corporation in place of the promoter

Question 7

When does incorporation occur?

Answer 7

Upon execution and filing of the articles of incorporation.

Question 8

Articles of Incorporation - Proper Execution

Answer 8

Requires incorporators to prepare and SIGN the Articles.

Articles must include:

(1) Name and address of each incorporator
(2) Address of initial registered office and name of initial registered agent
(3) number of shares authorized to issue
(4) Name of the corporation

Question 9

Articles of Incorporation - Proper filing

Answer 9

Requires incorporator to file the Articles in the Secretary of State’s office and pay the filing fee

Question 10

Date of incorporation?

Answer 10

Date of filing unless the Articles delay the date of effectiveness (up to 90 days from date of filing)

Question 11

What happens after incorporation?

Answer 11

Organizational meeting called by the incorporation or initial directors (if named in the articles)

AT organization meeting –

(1) name/elect directors
(2) appoint officers
(3) adopt corporate bylaws

Question 12

Corporation by Estoppel

Answer 12

K dispute between a third party and an unformed corporation believed to be properly formed –> The court may

(1) estop the third party from alleging defective incorporation if that would unjustly expose the corporation’s principals to liability
(2) Estop the corporation from arguing it isn’t liable because of the defective incorporation if it would unjustly deprive the third party of relief

NOTE: CANNOT use this as a defense to a tort claim

Question 13

Board of Directors

Answer 13

Power only as a collective. Individual directors don’t have the power to act for the corporation unless provided in the Articles/Bylaws

Question 14

How many Board of Directors count as a quorum?

Answer 14

Majority (unless otherwise provided in Articles or bylaws)

Affirmative majority vote = board action

Question 15

Can a board act without calling a meeting?

Answer 15

Yes - if every director gives signed, written consent (unless otherwise provided by articles or bylaws)

Question 16

Board has the sole power to . . .

Answer 16

Declare dividends

unless otherwise provided by articles or bylaws

Question 17

Regular Meetings - Notice Required

Answer 17

No notice required

unless otherwise provided by articles or bylaws

Question 18

Special Meetings - Notice Required

Answer 18

At least 2-days notice of the date, time and place of the special meeting

(unless otherwise provided)

No purpose needed unless the meeting is going to consider removal of a director

Question 19

Waiving Notice

Answer 19

Director can waive notice in a signed writing

OR

Attending/participating in the meeting and not promptly objecting to the meeting.

(even if promptly objects, director waives notice by voting and assenting to the action taken at the meeting)

Question 20

Corporate Officers

Answer 20

Agents of the corporation and can enter into an transaction that is expressly or implicitly authorized.

Have implied authority to enter into Ks that are reasonably related to performing their duties.

Question 21

Fiduciary Duties of Directors and Officers

Answer 21

(1) Duty of Care

(2) Duty of Loyalty

Question 22

Duty of Care

Answer 22

Directors and Officers must act

(1) in good faith
(2) With the care an ordinary prudent person would exercise in similar circumstances; AND
(3) in a manner reasonably believed to be in the corp’s best interest

(Directors/officers can rely on information prepared by someone reliable and competent in the matter)

Question 23

Business Judgment Rule

Answer 23

Rebuttable presumption that directors/officers acted;

(1) on an informed bases;
(2) in good faith;
(3) and in an honest belief that decision was in the corporation’s best interest

Question 24

Duty of Loyalty

Answer 24

Directors/officers/employees must act loyal to the corporation and NOT promote their own interests in a way that harms the corporation.

After full disclosure, the non-interested directors may authorize conflict-of-interest transactions by a majority vote.

NOTE: Director/officer must disclose all material facts to the transaction

Question 25

Conflict of Interests - Opportunities

Answer 25

Create duty of loyalty concerns.

Occurs when:

(1) transaction business with the corporation (self-dealing)
(2) Usurping a corporate opportunity; OR
(3) Directly competing with the corporation

Question 26

When is something a corporate opportunity?

Answer 26

Relevant factors:

(1) Opportunity was discovered while acting in capacity as the director/officer
(2) Business is closely related to the corporation
(3) Board expressed interest in acquiring such a business
(4) Opportunity is in the corporation’s line of business
(5) Opportunity was developed or discovered using corporate funds or facilities

Question 27

Shareholders - Meetings

Answer 27

Notice - written notice of each annual and special meeting required. between 10 - 60 days before the meeting

SH elect and remove directors (with or without cause), amend the bylaws, and approve fundamental changes

Question 28

Fundamental Changes that Shareholders approve

Answer 28

(1) Amendments to Articles
(2) Merger or Dissolution
(3) Sale of all or substantially all corporate assets

Question 29

Amending Articles - SH

Answer 29

Notice of the meeting must include a copy of the amendment and indicate that one purpose of the meeting is to consider the amendment

Question 30

Merger/Dissolution - SH

Answer 30

Notice must include a copy of the plan & indicate one purpose of the meeting is to consider the merger/dissolution

Question 31

Short-Form Merger

Answer 31

SH approval is not required.

A parent corp. owning at least 90% of the outstanding shares of each class of its subsidiary may merge the subsidiary into itself without approval of shareholders of either parent or subsidiary company.

Question 32

Sale of All or substantially All of Corporate Assets

Answer 32

SH approval required because

The sale occurs outside the usual and regular course of business

Since it would leave the corporation without a significant continuing business activity

Question 33

Shareholder Rights

Answer 33

(1) Vote - 1 vote/share unless otherwise provided
(2) Right to information and inspection
(3) Appraisal rights of dissenting shareholders
(4) Right to bring suit

Question 34

Shareholder Voting Rights

Answer 34

1 vote per share (unless otherwise provided for)

Only shareholders of record on the “record date” may vote

Question 35

Shareholders - Proxy Voting

Answer 35

Proxy agreement is valid if it is in writing and signed by the shareholder (or an electronically transmitted authorization)

Valid for max 11 months, unless agreement states otherwise.

Question 36

Revoking Proxies

Answer 36

Proxies are freely revocable (unless it says it’s irrevocable and is coupled with an interest) by:

(1) writing delivered to the corp;
(2) subsequently executed proxy presented at the SH meeting Or
(3) SH appearing in person and voting at the meeting

Question 37

Consolidating Voting Power

Answer 37

A contract between shareholders agreeing to vote their shares together —> Valid absent fraud or other illegal objective

Question 38

SH right to information and inspection

Answer 38

Unqualified right to examine the articles, bylaws, minutes of SH meetings, and a list of SHs of record

Qualified right to inspect (and make copies of) accounting books and records/minutes of director meetings

For the latter –> requires good-faith demand made for proper purposes and with specificity of that purpose and items sought for inspection

Question 39

Appraisal Rights of dissenting SH

Answer 39

If fundamental change was approved by SH, dissenting SH have right to sell their shares for the fair market value.

Merger –> Can be exercised by any SH of a corporation that is party to the merger EXCEPT if SH of subsidiary corp. in a short-form merger

Share exchange –> Only by SH who own shares of the class/series that are to be acquired/exchanged

Question 40

Right to bring suits - Direct suits

Answer 40

Used when wrong/harm is caused directly to shareholders

To compel payment of dividends, SH must prove director’s refusal amounted to fraud, bad faith, or an abuse of discretion.

Question 41

Direct Suits - Factors to determine bad faith

Answer 41

(1) Intense hostility by controlling SH against minority SH
(2) excluding minority SH from employment by the corp.
(3) High salaries, bonuses, or corporate loans made to controlling officers
(4) If majority SH may be subject to high personal-income taxes if substantial dividends are paid
(5) Whether controlling directors desire to buy the minority stock interests for as little as possible

Question 42

Derivative Suits

Answer 42

Equitable action brought by SH on behalf of the corporation and for the corporation’s benefit

Before bringing suit, SH must make a written demand of the directors to enforce the rights of a corporation unless demand would be futile

Question 43

Controlling SH - Duty of Good Faith

Answer 43

Controlling shareholders must refrain from exercising control in a way that disproportionately benefits them over the minority SHs

Question 44

SH’s exposure to liability

Answer 44

NOT personally liable for the debts of the corporation EXCEPT if the corporate veil has been pierced.

FACTORS:

(1) corporation is undercapitalized
(2) Corporate formalities have not been followed
(3) Commingling of corporate and personal funds
(4) Corporation is an alter ego of its SHs