Corporations

Question 1

Things the articles of incorporation MUST include

Answer 1

Name of corporation must be included; cannot be similar to existing names

Number of authorized shares must be included

Also must include name and address of the first board of directors, incorporators executing the articles of incorporations and of registered agent

Question 2

How can changes to the articles of incorporation be made?

Answer 2

The articles of incorporation may be amended if there is a majority vote from the directors AND shareholders.

However, minor amendments may be made by the board of directors without shareholder approval.

Question 3

Corporate Bylaws

Answer 3

corporation must adopt initial bylaws

Usually the bylaws are adopted at the corporation’s first organizational meeting

Question 4

What are the two types of contract liability pre-incroporation

Answer 4

promoter liability and corporation liability

Question 5

what is a promoter and describe promoter liability

Answer 5

A promoter acts on behalf of a corporation that is yet to be formed

A promoter is personally liable for any contracts entered into on behalf of the corporation so long as both parties to the transaction know that the corporation has not yet been formed.

Question 6

a promoter will NOT be held personally liable if:

Answer 6

There is a novation where the parties agree to release the promoter from liability in favor of holding the corporation solely liable; OR

The promoter is able to obtain indemnity from the corporation (usually requires that the promoter did not violate any fiduciary duties).

Question 7

describe corporation liability

Answer 7

A corporation is NOT bound by any pre-incorporation contracts that were entered into by promoters UNLESS the corporation adopts such contracts. An adoption can be express or implied from the actions of the corporation or its agents (e.g., accepting the benefits of a known pre-incorporation contract).

Question 8

what is the general rule for shareholder liability and the main exception

Answer 8

Generally, shareholders of a corporation are NOT personally liable for the debts of the corporation. However, the major exception to this rule is the doctrine of piercing the corporate veil.

Question 9

define piercing the corporate veil

Answer 9

Courts will allow a creditor to pierce the corporate veil and hold a shareholder personally liable for the debts of a corporation when:

The shareholder has dominated the corporation to the extent that the corporation may be considered the shareholder’s alter ego

shareholder failed to follow corporate formalities

corporation was undercapitalized

fraud or illegality

Question 10

define passive investor liability in the context of piercing the corporate veil under shareholder liability

Answer 10

Once the corporate veil has been pierced, courts generally hold ALL the shareholders liable. However, some courts do not extend liability to passive investors.

Question 11

list all different classes of stock

Answer 11

Common and Preferred Stock
Authorized Shares
Outstanding Shares
Treasury Stock
Options for the Purchase of Shares

Question 12

what is common stock

Answer 12

Common stock is a security that represents ownership in a corporation.

Question 13

what are holders of common stock able to do and what priority do they have in the ownership structure

Answer 13

Holders of common stock exercise control by electing a board of directors and voting on corporate policy.

Common stockholders have the lowest priority in the ownership structure (i.e., in the event of liquidation, common stockholders have rights to company assets only AFTER bond holders, preferred stockholders, and other debt holders have been paid in full.)

Question 14

define preferred stock

Answer 14

Preferred stock is a security that represents ownership in a corporation.

Preferred stock does NOT always have voting rights. Shares of stock are preferred if their holders are: Entitled to receive payment of dividends BEFORE any payment of dividends to another class of stockholders (e.g., common stockholders); OR Entitled, in the event of liquidation or dissolution, to receive any payments or distributions BEFORE another class of stockholders (e.g., common stockholders).

Question 15

define authorized shares

how can authorized shares be increased

Answer 15

Authorized shares are the maximum number of shares that a corporation is legally permitted to issue under its articles of incorporation.

To increase the amount of authorized shares, the articles of incorporation must be amended with a majority vote from the directors and shareholders.

Question 16

define outstanding shares

Answer 16

Outstanding shares are the total number of shares issued by the corporation and held by the shareholders.

Generally, each outstanding share is entitled to one vote (regardless of class), UNLESS otherwise provided in the articles of incorporation.

Question 17

define treasury stock

Answer 17

Treasury stock consists of shares that a company issued and subsequently reacquired. Shares that the corporation reacquired are NOT considered outstanding and CANNOT be counted in a shareholder vote.

Question 18

define options for the Purchase of Shares

Answer 18

A corporation may issue options for the purchase of its shares on certain specified terms that are determined by the corporation’s board of directors (e.g., how the options are issued, the consideration required for issuance, etc.).

Question 19

what are class requirements for shares within the same class

Answer 19

ALL shares within a class of stock MUST have identical rights and preferences UNLESS the shares within a class are divided into separate series.

Question 20

define preemptive right

Answer 20

A preemptive right is a right of a current shareholder to purchase additional shares in the corporation before outsiders are permitted to do so in order to maintain their percentage of ownership in the corporation.

Question 21

how are preemptive rights created

Answer 21

In most states, a corporation must “opt in” to create preemptive rights by expressly including such rights in the corporation’s articles of incorporation.

However, in some states, preemptive rights are presumed to exist unless the corporation “opts out” by expressly barring such rights in the corporation’s articles of incorporation.

Question 22

Unless otherwise set forth in the articles, preemptive rights do NOT exist for:

Answer 22

(1) Preferred shares that CANNOT be converted to common stock;
(2) Shares sold for a consideration other than cash; OR
(3) Shares issued by majority shareholder vote to directors, officers, or employees.

Question 23

who has distribution rights? shareholder? board of directors?

Answer 23

Unless otherwise set forth in the articles of incorporation, a shareholder does NOT have any right to receive distributions (whether in the form of dividends or otherwise) from the corporation. Dividends and distributions are generally paid to shareholders at the full discretion of the board of directors.

HOWEVER, if the board of directors refuses to issue distributions in bad faith, but not necessarily in bad judgment, the shareholders may be able to compel distribution.

Question 24

consideration for shares

Answer 24

The board of directors may authorize issuance of shares for consideration of ANY tangible or intangible property or benefit to the corporation (e.g., cash, promissory notes, services performed, contracts for services performed, etc.).

Absent fraud or bad faith, the judgment of the board of directors as to the consideration received for the shares issues is conclusive

Question 25

Shareholder meetings (what are the two types and the requirements)

Answer 25

A corporation must hold an annual meeting of shareholders at a time that is stated or fixed in accordance with the bylaws.

Special meetings can generally be called by:
(1) Persons authorized under the articles of incorporation;
(2) A demand from shareholders that accounts for at least 10% of the votes entitled
to be cast at the meeting; OR
(3) The board of directors for limited purposes (e.g., dissolution of the corporation).

Question 26

notice requirements for shareholder meetings

Answer 26

Generally, shareholders who are entitled to vote must be provided with notice of all annual and special meetings. For special meetings, the notice must:

(1) State the purpose of the meeting; AND
(2) Be provided 10-60 days before the meeting commences (in most states).

Question 27

what is a quorum and what does it have to do with shareholder meetings?

Answer 27

A quorum must be present in order for the shareholders to take action at a meeting. Unless otherwise set forth in the articles of incorporation, a quorum exists when at least a majority of the shares entitled to vote are present.

Question 28

what are the voting rights and requirements of shareholders

Answer 28

articles of incorporations may require that certain shareholders may not vote, they still have to receive notice

all shareholder votes count equally, regardless of class

A shareholder is only entitled to vote if she acquired voting shares before a designated record date. Generally, the record date may be designated in the bylaws no more than 70 days prior to the shareholder meeting.

Question 29

how do shareholders elect directors (two ways, describe them)

Answer 29

Shareholders elect directors either directly (each share equals one vote) or cumulatively.

In cumulative voting, voters cast as many votes as there are seats, but voters are not limited to giving only one vote to a candidate. Instead, they can put multiple votes on one or more candidates.

Question 30

Vote by Proxy and Revocation

Answer 30

A vote by proxy allows a shareholder to vote without physically attending the shareholder’s meeting by authorizing another person to vote her shares on her behalf. A valid proxy must exist in the form of a verifiable electronic transmission or a signed written appointment form.

A proxy is freely revocable by the shareholder UNLESS the recipient of the proxy has an economic interest in the shares.

Question 31

Inspection of Books and Records by shareholders

Answer 31

shareholder possesses the right to inspect corporate books and records so long as the purpose for the inspection is proper

To be proper, the purpose for the inspection must be reasonably related to a person’s interest as a shareholder

However, a shareholder may inspect the articles of incorporation and bylaws without providing a proper purpose

Question 32

procedural requirements for shareholder inspection of books and records

Answer 32

Procedural Requirements. Generally, a shareholder must:
(1) Make a written demand to inspect corporate books and records and allow the
corporation a reasonable amount of time to respond (usually 5 days);

AND (2) Conduct the inspection during regular business hours at the corporation’s
principal office.

Question 33

authority of directors

Answer 33

Subject to any limitation imposed by law or the articles of incorporation, the board of directors has full control over the affairs of the corporation.

Question 34

director quorum requirements

Answer 34

A quorum must be present in order for the directors to take action or vote. Unless otherwise set forth in the articles of incorporation, a quorum exists when at least a majority of the directors are present.

Directors are considered present so long as all of the directors participating can simultaneously hear each other (e.g., conference calls).

Question 35

informal action by the board

Answer 35

informal action by the board may be taken without a quorum present so long as the board has unanimously consented to the action in writing.

Question 36

notice for director meetings

Answer 36

It is presumed that directors have notice of regular meetings.

However, for special meetings, directors must be given 2 days notice, which includes information about the time, location, and date of the meeting. Such notice is NOT required to provide the purpose of the special meeting.

Question 37

authority of officers

Answer 37

The board of directors generally delegates day-to-day management of the corporation’s business to officers elected by the board (CEO, CFO, president, etc.). The board may remove officers at any time with or without cause. However, such removal may result in a breach of contract action if the board is violating an employment agreement.

Question 38

duty of care

Answer 38

duty of care includes:

(1) The duty to take reasonable steps to monitor the corporation’s management;
(2) The duty to be satisfied that proposals are in the corporation’s best interests;
(3) The duty to disclose material information to the board; AND
(4) The duty to make reasonably informed decisions. - In making such decisions, directors and officers may rely on information from others whom they reasonably believe are reliable.

Question 39

In suits alleging that a director or officer violated his duty of care owed to the corporation, courts will apply the ______________

Answer 39

business judgment rule.

Question 40

define BJR

Answer 40

Under this rule, a court will NOT second guess the decisions of a director/officer so long as the decisions are made:

(1) In good faith;
(2) With the care an ordinarily prudent person in a like position would exercise
under similar circumstances; AND
(3) In a manner the director/officer reasonably believes to be in the best interests
of the corporation.

Question 41

breach of duty of care

Answer 41

If a director or officer breaches the duty of care, he may be held personally liable for damages. A corporation’s articles of incorporation may reasonably limit the liability of directors and officers for bad judgment, but NOT for bad faith misconduct.

Question 42

duty of loyalty

Answer 42

Directors and officers have a duty to avoid implicating their personal conflicting interests in making business decisions for the corporation. A director/officer has a conflicting interest in a transaction when the director/officer or a family member either:

(1) Is a party to the transaction; OR
(2) Has a beneficial financial interest in the transaction of such significance to the director/officer that the interest would reasonably be expected to exert an influence on the director/officer’s judgment if called upon to vote on the transaction.

Question 43

define safe harbor

Answer 43

director/officer that enters into a conflicting interest transaction may be protected from liability if:

(1) Disinterested shareholders approve the conflicting interest transaction;
(2) The non-interested members of the board authorize the conflicting interest
transaction; OR
(3) The transaction, judged according to the circumstances at the time of
commitment, is established to have been fair to the corporation.

Question 44

corporate opportunity doctrine

Answer 44

The corporate opportunity doctrine prohibits directors and officers from usurping business opportunities that rightfully belong to the corporation for their own benefit.

Question 45

define merger

Answer 45

A merger occurs when one of two existing corporations is absorbed by the other corporation.

Question 46

define consolidation

Answer 46

A consolidation occurs when two existing corporations combine into one new corporation.

Question 47

what do mergers and consolidation require

Answer 47

(1) The recommendation of an absolute majority of the board of directors; AND
(2) The agreement of each corporation by an absolute majority of shareholders.

Question 48

define short form mergers

Answer 48

In many states, if a parent corporation owns at least 90% of the stock of a subsidiary, the subsidiary may be merged into the parent without approval from the shareholders of either corporation.

Question 49

After a merger or consolidation takes place, dissenting shareholders opposed to the merger or consolidation may either:

Answer 49

Challenge the action; OR

Receive payment determined at the fair market value of their shares
immediately before the merger/consolidation took effect.

(a) A dissenting shareholder who opts to receive fair market value for their
shares loses the right to challenge the action absent a showing of fraud.

Question 50

what is required for Sales of Substantially All Corporate Assets

Answer 50

Shareholder approval is required for the corporation to sell, lease, exchange, or otherwise dispose of all, or substantially all, of its property if the disposal is NOT in the corporation’s usual and regular course of business.

However, if the disposal of assets is in the corporation’s usual and regular course of business, shareholder approval is NOT required (unless otherwise set forth in the articles of incorporation).

Question 51

define derivative claims

Answer 51

A derivative claim is a lawsuit brought by a shareholder on behalf of the corporation.

The shareholder is suing to enforce the corporation’s rights when the corporation has a valid cause of action, but has failed to pursue it.

Question 52

process for derivative claims

Answer 52

Generally, a shareholder must make a written demand on the board before commencing a derivative action.

After submitting the written demand, the shareholder must wait 90 days to file the derivative action, UNLESS the board rejects the demand during the 90-day period.

However, under the common law, and in some jurisdictions today, the plaintiff shareholder does NOT have to make a demand on the board if it would be futile to do so (e.g., the board is interested in the transaction being challenged).

Question 53

damages for derivative claims

Answer 53

If a derivative claim is successful, the proceeds go to the corporation, not the shareholder who brought the action.

However, if the award to the corporation benefits the defendants, the court may order that damages be paid directly to the shareholder.

Question 54

define direct claims

Answer 54

A direct claim is a lawsuit brought by a shareholder to enforce his OWN rights. The shareholder must prove actual injury that is NOT solely the result of an injury suffered by the corporation. If a direct claim is successful, the proceeds go to the shareholder.

Question 55

formation of LLCs

Answer 55

Generally, an LLC is formed when the certificate of formation is filed with the secretary of state.

Question 56

what does the certificate of formation need to include?

Answer 56

he certificate of formation is analogous to a corporation’s articles of incorporation. Commonly, the certificate of formation must provide:

name and purpose
principal place of business
The name and address of the registered agent in the state;
The initial capital contributions agreed to be made by all members; AND
The number of persons, or classes of members, who will manage the LLC, and the names and addresses of the persons or members who will serve as managers.

Question 57

define operating agreement (LLCs)

Answer 57

The operating agreement is analogous to a corporation’s bylaws. Commonly, it governs:

(1) The relations between the members and the LLC;
(2) The rights and duties of managers;
(3) The activities and affairs of the LLC; AND
(4) The conditions, if any, for amending the operating agreement.

Question 58

Generally, an LLC is presumed to be ____________ unless the ________ provides otherwise.

Answer 58

member-managed

operating agreement

f the operating agreement provides that the LLC will be manager- managed, an elected group of managers will run the business analogous to how a board of directors runs a corporation’s business.