Corporations

Question 1

Who is liable for pre-incorporation transactions?

Answer 1

Promoters (they are fiduciaries) unless a later novation.

Question 2

The articles of incorporation must include

Answer 2

• Names, agents, addresses, purpose, shares

the name, the agents, names and addresses of incorporates, duration, the purpose (usually any lawful activity) and authorized shares

Question 3

When is the corporation incorporated?

Answer 3

When the secretary of state accepts the fee and files the articles

Question 4

If by laws and articles of incorporation conflict, which wins?

Answer 4

Articles
* the articles are the constitution of the corporation

Question 5

What is the de facto corporation rule and corporation by estoppel?

Answer 5

1. When a corporation isn’t properly formed but acts as a corp, it will be treated as a corp if there was a good faith attempt to incorporate and there was no actual knowledge of the faulty corporate status.
   
   1. If a 3rd party enters into a contract with corporation it can’t later get out of the K by asserting the corporation failed to form (estoppel).

Question 6

What are the three factors to pierce the corporate veil, and what is meant by the term?

Answer 6

Generally, shareholders are not personally liable for corporate acts. However, a court may pierce the veil and reach shareholder assets if the corporate form is being misused (usually to avoid liabilities). The courts consider a totality of circumstances, including:

Alter ego (self-dealing or disregard of formalities) , undercapitilization, fraud… other shady jazz.

* look for only a few shareholders, and a general failure to respect or treat the corporate form as separate (fail to keep minutes, intermingling funds, etc). It’s harder to pull this off in a diffuse SH situation. Usually only a few SH.

Question 7

What are issued shares?

Answer 7

Number of authorized shares actually sold

Question 8

What are outstanding shares?

Answer 8

Shares that were once issued and remain in the possession of shareholders

Question 9

What are treasury shares?

Answer 9

Shares one issued but subsequently reacquired by the corporation

Question 10

Par value is?

Answer 10

The minimum value to sell a share at (it is not required)
* think golf. Except, in this case, it’s bad to go “under par.”

Question 11

Watered stock is?

Answer 11

Stock sold for less than the par value. Shareholders who buy watered stock are liable to creditors of the corp.

Question 12

How long is a stock subscription irrevocable for pre-incorporation?

Answer 12

six months— we don’t want people withdrawing their investments at the last minute. Need to line up investors.

Question 13

Preemptive rights allow what

Answer 13

The person to maintain their percentage of ownership when new shares issue

Question 14

Who can authorize dividends?

Answer 14

Directors unless would cause insolvency

* note that this is not a SH right so can’t be demanded by SH

Question 15

Must every corp hold an annual meeting?

Answer 15

Yes.

And adequate notice must be given to SHs

Question 16

Special meetings are for?

Answer 16

Voting on fundamental changes

Question 17

Notice for meetings must occur?

Answer 17

no fewer than 10 days and no more than 60 days before the meeting

10-60 days before the meeting. Sufficient notice to warn, but not so much that everyone forgets about it.

Question 18

Directors must set a record date when?

Answer 18

no fewer than 10 days before the meeting and no more than 70 days before the meeting

10–70 days before

Question 19

A proxy must be?

Answer 19

In writing, signed by the shareholder as of the record date, sent to the secretary, state that it authorizes another to vote, and cannot be valid for more than 11 mos

Question 20

Quorum of shareholders is?

Answer 20

A majority of the outstanding shares, not shareholders

Question 21

Necessary vote of shareholders is?

Answer 21

A majority vote of those shareholders present (assuming a quorum was obtained)

Question 22

Shareholders can inspect corp records so long as they?

Answer 22

State a proper purpose

* can’t be arbitrary or meant to harass.

Question 23

Shareholders can sue

Answer 23

Directly or derivatively (on behalf of the corp)

Question 24

Derivative lawsuits require

Answer 24

Claim made in corp name, stock ownership at time of suit, was a shareholder at time of harm, fairly represents interests of the corp, and made a demand to board unless it would have been futile

* these are lawsuits on behalf of the corporation.

Question 25

A controlling shareholder may owe a duty to a minority shareholder if

Answer 25

controlling SHs (50+% or disproportionate owners of stock) have a duty to minority shareholders **not to abuse their power** or disadvantage minority SHs. 
\* this is a quasi fiduciary duty--- look for dealing with outsiders, selling their stock for cheap, etc.

Question 26

For directors, a quorum is

Answer 26

A majority of the total number of directors

Ex: 4 of 7 total is sufficient. Only 3 of 4 would need to approve.

Question 27

Directors may dissent and avoid liability by

Answer 27

Entering dissent in minutes of the meeting, filing a written dissent before the meeting adjourns, or provide a written dissent to the secretary

Question 28

Directors and officers owe what to the corporation?

Answer 28

Fiduciary duties of care and loyalty.

Care/Prudence: Directors must act as an ordinarily prudent person, but may rely on outside reports and experts. This requires a duty to investigate before making important decisions. Must also apply any special skills or knowledge that they possess (legal/financial, etc).

Loyalty: Directors must act in the best interets of the corporation, and must avoid self-dealing. This means avoiding self-dealing and not usurping business opportunities.

* Safe Harbor : A transaction that might otherwise const. self dealing can be protected if: all material facts are disclosed (to disinterested sh

Question 29

The business judgment rule is?

Answer 29

Absent fraud, illegality or self dealing, courts will not disturb good-faith business decisions

* this is a rebuttable presumption that the director reasonably believed his actions were in the best interests of the corporation. However, this presumption may be overcome if director: (1) was not acting in good faith; (2) was not reasonably informed; (3) acted out of self-interest (lacked objectivity); (4) failed to timely investigate; (5) other failures of prudence.

Question 30

A self-interested transaction may be upheld if?

Answer 30

It is ratified by a majority of disinterested directors or shareholders.

Question 31

Fundamental changes require approval of?

Answer 31

Both shareholders and directors

Question 32

Merger is

Answer 32

when two or more corps combine and one survives assuming the assets and liabilities of the others

Question 33

Consolidation is

Answer 33

the combination of two or more corps when neither survives and a new one is created assuming the assets and liabilities

Question 34

Involuntary dissolution can occur by?

Answer 34

Creditors showing a corp is not paying its debts, shareholders show the corp is wasting assets, the directors are committing fraud, or the directors and shareholders deadlock

• failure to pay debts, or breach of fiduciary duty, or waste

Question 35

Appraisal rights are?

Answer 35

When a shareholder dissents from a fundamental change he can demand his shares to be purchased by the corp for FAIR MARKET VALUE

Question 36

LLCs require filing ___ and its owners are called ____ instead of shareholders?

Answer 36

An operating agreement; Members.

Question 37

Discuss liability of LLCs

Answer 37

In order to be an LLC, articles of organization must be filed. . Generally, members are not liable for LLC obligations, but there is a possibility that the corporate veil will be pierced.
* don’t forget that in all partnerships, including LLCs members owe fiduciary duties of care and loyalty.
** can’t compete, usurp, and must act reasonably⇢subject to the business judgment rule

Question 38

what are the 3 safe harbor defenses for breach of fiduciary duty

Answer 38

1-2: approval by disinterested shareholders or directors; “fairness” (3)