Corporations

Question 1

Corp: Definition

Answer 1

A corporation is a legal entity that is separate from its shareholder (owners), therefore, a corporation’s board, officers, and shareholders are generally shielded from liability for the corporation’s obligations.

Question 2

Corp: De Jure Corporation

Answer 2

A de jure corporation exists when there is one or more incorporator, that properly files proper articles of incoporation (corp stock info, name address of corporation, incorporator, and registered agent ).

Question 3

Corp: Ultra Vires Activity

Answer 3

Generally, a corporation may state a general purpose of the business in the article of incorporation. However, if a corporation states a specific purpose it may not deviate from the purpose.

At common law, ultra vires contracts with third parties were unenforceable. Modernly, third party contract are enforceable. The sole remedies are

• a shareholder may seek an injunction to prohibit the ultra vires action
• the corporation may seek damages for the ultra vires action
• the state may bring action to dissolve the corporation.

Question 4

Corp: De Facto Corporation

Answer 4

If a corporation was unaware that they failed to properly incorporate, it will be held out as a corporation if there is a relevant incorporation statute, the incorporators made a good faith attempt to comply with the statute, and they exercised some corporate privilege.

Abolished in many states.

Question 5

Corp: Corporation by Estoppel

Answer 5

If a corporation was unaware that they failed to form a de jure corporation, and a third party dealt with the business as if it was a corporation in entering a contract, the third party will be estopped from denying the business is a corporation.

Question 6

Corp: Pre-Incorporation Contracts

Answer 6

Generally, a corporation will not be held liable for contracts entered into before formation, unless the corporation expressly or implicitly adopts the contract

A promotor will be personally liable for a contract entered into before the formation of the corporation, even if the corporation adopts the contract, unless there is an express or implied novation.

Question 7

Corp: Foreign Corp.

Answer 7

A corporation is foreign if it is incorporated outside of the state. A foreign corp. but register and pay fee if transacting intrastate business in a state.

Question 8

Corp: Stock Consideration

Answer 8

Stock must be supported by per value consideration. Consideration can be money, property, or services already performed.

States are divided whether promissory notes and future services are adequate consideration.

Stock is watered stock when it was issued for less than its par value.

Question 9

Corp: Stock Subscriptions

Answer 9

A subscription is a written offer to buy stock from a corp

A pre-incorporation subscription is irrevocable for 6 months unless the subscription says otherwise

A post-incorporation subscription is revocable until it is accepted by the Board.

Question 10

Corp: Preemptive Rights

Answer 10

An existing shareholder may have a right to maintain % of ownership by buying stock if there is new issuance of stock for money but not if the shares are issued within 6 months of incorporation.

Question 11

Corp: Director Roles

Answer 11

Directors manage the business and may delegate committees with powers to act but committees may not fill vacancies or declare distributions/dividends.

Question 12

Corps: Director Requirements

Answer 12

Directors must be natural adult.

Shareholders elect directors @ annual meetings. Vacancies may be filed by Directors.

May be removed with or without cause by majority vote of shareholders.

Question 13

Corp: Directors Meetings

Answer 13

• not required if unanimous written consent
• conference calls count as meeting
• notice (none for regular, yes for special meetings)
• quorum met when majority of directors present (may be lost if people leave)
• voting (requires approval of majority present @ meeting; no proxy vote)

Question 14

Corp: Director Fiduciary Duty of Care

Answer 14

Directors owe the corporation a duty to manage the corporation to the best of their ability in good faith and with the care that person in like position would exercise under the same circumstances.

Consider: Business Judgment Rule

Question 15

Corp: Business Judgment Rule

Answer 15

A director will not be held liable for a decision if it was informed, made in good faith, without a conflict of interest, and if the director relied on a rational basis.

Question 16

Corp: Duty of Loyalty Self Dealing

Answer 16

A director/officer owes a corporation a duty to act in good faith and with reasonable belief that actions are in a corporation’s best interest. A transaction between a corporation and a director will be set aside unless

1) its fair to the corporation
2) the director disclose all material facts and the transaction was approved by disinterested directors or shareholders.

Question 17

Corp: Duty of Loyalty- Competing Ventures

Answer 17

A director/officer owes a corporation a duty to act in good faith and with reasonable belief that actions are in a corporation’s best interest. A director should not engage in direct competition with the corporation.

Question 18

Corp: Duty of Loyalty- Corporate Opportunity

Answer 18

A director/officer owes a corporation a duty to act in good faith and with reasonable belief that actions are in a corporation’s best interest. A director may not divert to himself a business opportunity within the corporation’s line of business without first communicating it to the corporation and waiting for the board to reject the opportunity.

Question 19

Corp: Duty of Loyalty Loan

Answer 19

A corporation can make a loan to Director if reasonably expected to benefit the corporation.

Question 20

Corp: Director Liability Defense

Answer 20

A director is presumed to concur with Board action unless dissent or abstention is noted in writing in corp records.

Question 21

Corp: Officers

Answer 21

Officers are agents of the corporation and manage the day to day of a corporation. Officers are appointed by the Board.

Question 22

Corp: Liability and Indemnification

Answer 22

If a director/officer get sued as part of their role in the corporation they:

1. must be indemnified if they are successful in defending the merits and may be indemnified
2. may be indemnified if the director/officer is unsuccessful in defending the corporation and the complied with Business Judgment Rule

Question 23

Corp: Shareholder Role

Answer 23

Owners of the corporation but, generally, do not manage the corp. unless closely held corp (small # of shareholder are not public trading).

shareholders owe other shareholders same fiduciary duties.

Question 24

clCorp: Piercing the Corporate Veil

Answer 24

Generally, shareholders cannot be held liable for corporate obligations. However, shareholders might be liable if the court pierces the corporate veil in three common scenarios:

1) Alter-ego doctrine (not treating corporation as a separate entity, commingling, ignoring corporate formalities)
2) Undercapitalization at inception
3) Perpetrating Fraud (cannot be formed to avoid existing obligations)

Question 25

Corp: Shareholder Derivative Suit

Answer 25

A derivative suit is to enforce a right belonging to the corporation.

1) must have owned shares at the time of wrong
2) must maintain ownership throughout suit
3) must demand board to bring suit (unless futile in some states) and might need to wait 90 days to file suit

If a majority of direction without personal interest determine in good faith that the suit is not in the best interest of the corporation it may be dismissed.

Question 26

Corp. Shareholder Voting Right

Answer 26

A record shareholder as of record date gets to vote except

• treasury stock (no one votes)
• death of shareholder (executor votes)
• voting by proxy in writing signed by shareholder (good for 11 months, unless revoked)
  - proxy irrevocable if stated and proxy voter has an interest in share

Question 27

Corp: Block Voting

Answer 27

Shareholder can agree to vote alike by:

1. Voting Trust
   
   • 10 year max
   • written agreement
   • copy of agreement filed with Corp
   • transfers legal title of share to voting trustee, (shareholder retains all rights but voting)
2. Voting Agreement
   
   • shareholder retains legal and beneficial ownership

Question 28

Corp: Shareholder Meetings

Answer 28

• not required if unanimous written consent
• notice (within 60 to 10 days before meetings)
• quorum (majority of voting shares, quorum is not lost)
• voting (votes in favor must exceed votes against)

Question 29

Corp: Stock Transfer Restrictions

Answer 29

Generally, a stock holder can transfer interest unilaterally. Restriction are proper if reasonably and not an undue/absolute restraint on alienation.

Question 30

Corp: Shareholder Inspection Rights

Answer 30

A shareholder has right to access book and record within five day days of written notice and proper purpose (purpose related to shareholders right.

Question 31

Corp: Distributions

Answer 31

A shareholder does not have a right to receive dividends unless/until declared by board.

Question 32

Corp: Distribution Preferences

Answer 32

common (pro rata)

preferred (paid first)

participating (received state preference and a share of the distribution made to common)

cumulative (preference accumulates only if profits for year were sufficient to pay for preference, adds # of years)

Question 33

Corp: Improper Distribution Liability

Answer 33

Directors who vote for an unlawful distribution is personally liable for the excess but may rely on Business Judgment Rule.

Shareholder will be liable if they knew that the distribution was improper (i.e corp is insolvent)

Question 34

Corp: Fundamental Changes

Answer 34

Amendments to articles, mergers, consolidation, share exchanges, disputation of substantially all assets (75%) outside of the regular course of business require approval by Board and shareholders.

Procedure

1. Board Resolution
2. Notice to Shareholders
3. Shareholder Approval
4. Articles of the Change Filed with State

Question 35

Corp: Dissenting Shareholder Right of Appraisal

Answer 35

A shareholder in a close corporation may force corp to buy back shares for value if there is a fundamental change in the corporation.

Shareholder must file with corp intent to demand payments, abstain or vote against, and make a written demand for buyout.

Question 36

Corp: Dissolution

Answer 36

If shares has not been issued or business has not commenced, a majority of initial incorporator may dissolve corp, if not must follow fundamental change procedures.

Upon dissolution

1) corp. continue to exist
2) corp. not allowed to carry on business other than windup
3) claim can be asserted against corp at any time until windup is complete.

Question 37

Corp: Judicial Dissolution

Answer 37

Shareholder can seek to dissolve corporation because of director abuse, asset waste, misconduct, deadlock, or failure to file vacant board for two years

Creditors may seek dissolution if corp is insolvent and creditors claim has been reduced to a judgment

Atty General can seek dissolution if articles fraudulently obtained.

Question 38

Corp: Rule 10(b)(5)

Answer 38

Under SEC, it is illegal for any person to use any means or instrumentality of interstate commerce in connection with the purchase or sale of any security to employ any scheme to deard, make an untrue statement of material fact, or engage in any practice that operates as fraud.

1. Interstate Commerce
2. Type of Transaction (misreport of material info, insider trading, misappropriation, tippers/tipee)
3. Material (if substantial likelihood that a reasonable investor would consider it important in making investment decision)
4. Scienter
5. Reliance
6. Damages

Question 39

Corp: Rule 16(b)

Answer 39

A corporation may recover all profits realized by any director, officer, or 10% or more shareholder from the purchase and sale or sale and purchase of any security within a 6 month period.