Corporations

Question 1

Corporate Liability for Preincorporation Contract

Answer 1

1) Corporations are legal entities SEPARATE and apart from their SHAREHOLDERS
2) Corporations are NOT LIABLE for contracts made PRIOR to incorporation
3) Only the PROMOTERS are liable on preincorporation contracts
4) Adoption may be explicit (by resolution of board of directors; or
5) Adoption may be implicit (by accepting the benefits of the contract)

Question 2

Shareholders of Corporation as Creditors

Answer 2

Shareholders may become creditors of the corporation by lending the corporation money

Question 3

Equitable subordination / Deep Rock Doctrine

Answer 3

1) Shareholders who are UNSECURED creditors are NOT SUBORDINATE to outside unsecured creditors
2) Deep Rock Doctrine - a court may subordinate a shareholders claims if any kind of WRONGDOING is attributable to them

Question 4

Promoter Liability

Answer 4

1) A promoter is a person who UNDERTAKES to PROCURE COMMITMENTS for a corporation BEFORE it is formed
2) a promoter who entered into a CONTRACT, KNOWING that there has been no VALID INCORPORATION is personally liable on the contract
3) This is true, even if the THIRD PARTY with whom the promoter dealt, KNEW that the corporation had not yet formed
4) Generally, promoters are jointly and severally liable for preincorporation contracts

Question 5

Promoter Liability Exceptions

Answer 5

4) A promoter is liable on reincorporation contracts unless
a) the contract EXPRESSLY INDICATES that the promoter IS NOT TO BE BOUND, in which case the agreement is construed as a REVOCABLE OFFER to the proposed corporation; or
b) all parties have agreed to a NOVATION (an agreement among the parties releasing the promoter and subsituting the corporation)

Question 6

Shareholder liability

Answer 6

1) Generally, shareholders in a properly formed corporation are not personally liable for the obligations of their corporation
2) unless the corporate veil is pierced to hold shareholders personally liable for the corporation’s obligations
3) At the time a corporation is formed, the shareholders must put at RISK UNENCUMBERED CAPITAL reasonably adequate for the corporation’s PROSPECTIVE liabilities

Question 7

Piercing the veil

Answer 7

The corporate veil usually will not be pierced unless one of the following is present:

1) Alter Ego - corporate FORMALITIES have been IGNORED and INJUSTICE has resulted
2) the corporate form is being USED to PERPETRATE a FRAUD (misstatement of fact)
3) the corporation was INADEQUATELY CAPITALIZED at the time of FORMATION

Question 8

Limited Purpose Provision

Answer 8

1) . a corporation has the power to engage in any lawful business
2) a corporation may limit the business in which it may engage by having a narrow purpose provision in its articles of incorporation
3) a corporation may not carry on business outside the scope of its state purpose
4) business outside the scope of the state purpose is said to be ultra vires

Question 9

Ultra Vires

Answer 9

under COMMON law, An ultra vires contract is ILLEGAL and UNENFORCEABLE

An ultra vires may be raised by

a) a SHAREHOLDERR seeking to ENJOIN a proposed ultra vires action
b) the CORPORATION seeking DAMAGES again the officers or directors who authorized the ultra vires act
c) the STATE seeking to DISSOLVE the corporation for engaging in ultra vires act

Question 10

Ultra Vires - Injunction

Answer 10

a SHAREHOLDER seeking to ENJOIN a proposed ultra vires action

1) Injunctions are equitable actions and a COURT will not enjoin an action that would harm an INNOCENT THIRD PARTY
2) such as if the third part was unknowing about the contract

Question 11

Ultra Vires - Damages

Answer 11

A shareholder can bring an ACTION against DIRECTORS for breach of DUTY OF CARE for authorizing an ultra vires act.

Directors are FIDUCIARIES and owe the corporation the duty to act with the care that an ordinary person would exercise in his own affairs.

Taking business outside the scope of the corporation’s stated purposes violates this duty

Damages would be the result of the suit

Question 12

Ultra Vires - Dissolution

Answer 12

Usually the STATE will seek DISSOLUTION of a corporation for an ultra vires act only when the act VIOLATES REGULATORY law

Question 13

Corporate Opportunity

Answer 13

a director owes his corporation a DUTY OF LOYALTY which prohibits the director from COMPETING with his corporation and BARS the director for USURPING CORPORATE OPPORTUNITIES

1. A director cannot take for himself a business opportunity in which the corporation might have an INTEREST unless he first OFFERS the opportunity to the corporation and the corporation REJECTS the opportunity.
2. A corporation’s interest does NOT EXTEND TO EVERY business opportunity. The CLOSER the opportunity is to the CORPORATION’S LINE OF BUSINESS, the more likely the court will find it to be a corporate opportunity.
3. The corporation’s LACK OF FINANCIAL ABILITY to take advantage of the opportunity is not a defense.
4. The director should still present the opportunity to the corporation and allow the corporation to DECIDE whether it can take advantage of the opportunity.
5. If a director DOES NOT give the corporation an opportunity to act but rather USURPS the opportunity, the corporation can RECOVER
   - the PROFITS the director made from the transaction; or
   - FORCE the director to CONVEY the opportunity to the corporation, under a CONSTRUCTIVE TRUST theory, for whatever consideration the director purchased the opportunity

Question 14

Defenses to Corporate Opportunity

Answer 14

Financial Ability - not viable

Corporation would not have an interest

Question 15

Power to Remove Directors

Answer 15

1) Directors have no power to remove FELLOW directors unless the corporation’s articles or bylaws provide otherwise.
2) Shareholders have the power to REMOVE DIRECTORS WITH OR WITHOUT CAUSE
a) The directors can call a SPECIAL shareholder meeting for the shareholders to VOTE on the matter
b) the meeting must be on at least 10 but no more than 60 DAYS NOTICE to Sis
c) and must specify the TIME, PLACE, and PURPOSE of the meeting
d) a director may be removed if a QUORUM of SHARES is present at the meeting and
e) the votes CAST IN FAVOR EXCEED THE VOTES CAST AGAINST REMOVAL

Question 16

Securities Exchange Act of 1934 16(b)

Answer 16

1) any profit realized by a SH owning MORE THAN 10% of the outstanding shares of the corporation
2) from ANY PURCHASE and SALE, or sale and purpose of ANY EQUITY SECURITY of his corporation
3) within a period of LESS THAN 6 MONTHS, must be RETURNED to the corporation
* STRICT LIABILITY is imposed for covered transactions whether or not there is any MATERIAL FACT that should or could have been disclosed.

Question 17

SEA 16(b) 10% owner definition

Answer 17

The SH must have owned 10% of the corporation’s stock IMMEDIATELY BEFORE BOTH THE PURCHASE AND SALE of the stock.

Purchases that bring a SH over the 10% threshold are not within the scope of 16(b)

Question 18

SEA 16(b) Subject Corporations

Answer 18

applies to

1) PUBLICLY HELD corporations,
2) whose shares are traded on a NATIONAL EXCHANGE or have

a) at least 2,000 SH
b) 500 non accredited SHs
c) more than $10M in assets

Question 19

SEA 10 (b) - 5 Rule

Answer 19

Prohibits fraud or misrepresentation in connection with the purchase or sale any any debt or equity security.

Question 20

SEA 10 (b) - 5 Elements

Answer 20

A prima facie case for breach of the rule requires proof of

1) INTERSTATE COMMERCE fraudulent conduct involves some means of interstate commerce such as a national exchange, mail or telephone

2) TRANSACTION
- Misrepresentation of material information

• Insider trading
• misappropriation (someone who owes a duty to the source of the information breaches the duty)
• tippers and tepees (material inside information passed for an improper purpose such as kickback or just because theyre a relative, tip liable if know tipper was breaching duty)
  3) MATERIALITY material fact that a reasonable investor would consider important in making an investment decision

4) PLAINTIFFS
- SEC, buyer or seller of secutireis but not potential buyers/sellers

5) DEFENDANTS
- any person who misrepresents to press or others, or trades on the information

6) SCIENTER - intent to deceived, manipulate, or defraud

7) RELIANCE
P relied on D’s information

8) DAMAGES limited to difference between price pay and the avg share price in the 90 day period after corrective information is disseminated

Question 21

SH direct action

Answer 21

• brought when a SH believes the corporation has been HARMED, but the corporation DOES NOTHING to
• Seek to redress injuries to the personal rights of the plaintiff

-remedies inure to the SH directly

Question 22

SH derivative action

Answer 22

• seek to redress injuries to the corporation

- remedies inure to the benefit of the corporation

Question 23

Director Duty of Care

Answer 23

1) act in GOOD FAITH
2) in the BEST INTERESTS of the corporation
3) using care that would be exercised by an ORDINARY reasonable person in a like position
- Under the BJR, directors who meet this standard are protected against lawsuits challenging their decisions
- in making decisions, directors are entitled to rely on opinions and reports of other directors, corporate officers, corporate employees, and outside experts if the reports are within their competence.

Question 24

Corporate Tort Liability

Answer 24

1) a corporation is liable for its OWN actions and the acts of its EMPLOYEES under the doctrine of respondent superior
2) under respondent superior, an employer is liable for the TORTS of an EMPLOYEE committed within the SCOPE of employment
3) typically, an employer will NOT be held LIABLE for INTENTIONAL torts of the EMPLOYEE = a person is liable for his OWN TORT, even if acting through the corporation
4) An exception applies when the INTENTIONAL tort occurs as a NATURAL INCIDENT of carrying out the business of the employer or the BENEFIT runs to the employer from the conduct