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MEE Subjects > Corporations > Flashcards

Corporations Flashcards

1
Q

Define shareholders

A

The owners of the corporation (aka stockholders)

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2
Q

Define board of directors

A

The group in charge of management of the corporation

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3
Q

Define officers

A

Agents of the corporation appointed to carry out the corporation’s policy

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4
Q

What do you need to create a corporations?

A
  • A person
  • A paper
  • An act
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5
Q

Who forms the corporation?

A

The incorporator(s)

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6
Q

What document is necessary to form a corporation?

A

The articles of incorporation

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7
Q

What must the articles of incorporation include

A
  • The name of the corporation (must include corporation, company, incorporated, or limited)
  • The name and address of each incorporator
  • A registered agent and the street address of the registered office
  • Information on the corporation’s stock

Note- it may include other provisions so long as they are not inconsistent with the law

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8
Q

What act is required to form a corporation?

A

The incorporators must file the notarized articles with the secretary of state. The filing of these articles marks the beginning of the corporation’s existence

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9
Q

What is the purpose of an organizational meeting?

A

To complete the organization of the corporation by adopting initial bylaws and appointing officers

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10
Q

Who holds the organizational meeting?

A

If the board of directors were named in the articles of incorporation, they hold the meeting.

If the board was not named in the articles of incorporation, the incorporators hold the meeting.

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11
Q

What are bylaws?

A

The internal document that serves as the corporation’s operating manual

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12
Q

Are bylaws filed with the state?

A

No

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13
Q

If the bylaws and articles of incorporation compete, which governs?

A

The articles

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14
Q

Internal Affairs Doctrine

A

The internal affairs of a corporation are governed by the law of the state of incorporation

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15
Q

Do corporations have limited liability?

A

Yes

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16
Q

What does limited liability entail?

A

Generally, shareholders are liable to pay only for their stock, not for corporate debts

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17
Q

If you think you formed a corporation, are you liable? Exceptions?

A

If you think you formed a corporation but didn’t, you’re still personally liable.

Exceptions: De facto corporation, corporation by estoppel

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18
Q

What is a requirement of asserting the doctrines of de facto corporation and corporation by estoppel?

A

The person asserting either doctrine must have been unaware of the failure to form a de jure corporation

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19
Q

What are the requirements to form a de facto corporation?

A
  • There must be a relevant corporation statute (there is one in every state)
  • The parties made a good faith, colorable attempt to comply with the statute (they tried and came close
  • There has been some exercise of corporate privileges (the parties were acting like they thought they were a corporation)

Note- abolished in most states

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20
Q

Corporation by estoppel

A

People who have dealt with the entity as if it were a corporation will be estopped from denying the corporation’s existence

Note- Applies only in contract cases

Note- abolished in most states

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21
Q

Define promoter

A

A person acting on behalf of a corporation that has not yet been formed

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22
Q

If a promoter enters into contracts on behalf of a corporation not yet formed, is the corporation bound by those contracts?

A

No! Only bound if the corporation expressly/impliedly adopts the promoter’s contract

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23
Q

Who is liable for a contract entered into by a promoter?

A

The promoter is personally liable. This liability continues even after the corporation is formed unless/until there is a novation

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24
Q

What must foreign corporations transacting business in a state do?

A

Register and pay fees

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25
Q

What is a bond?

A

A debt security

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26
Q

Is the holder of a debt security an owner of the corporation?

A

No but they are a creditor

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27
Q

What is stock?

A

An ownership interest in the corporation

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28
Q

Is the shareholder a creditor of the corporation?

A

No- they are an owner

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29
Q

What is an issuance of stock?

A

When the corporation is selling its own shares in the stock

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30
Q

What are subscriptions?

A

Written offers to buy stock from a corporation

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31
Q

Are preincorporation subscriptions revocable?

A

No, they are irrevocable for six months

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32
Q

Are post incorporation subscriptions revocable?

A

Yes until they are accepted by the corporation

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33
Q

Define par

A

The minimum issuance price of stock

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34
Q

What is watered stock?

A

Occurs when par value stock is issued for less than its par value

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35
Q

What is a preemptive right?

A

The right of an existing shareholder of common stock to maintain her percentage of ownership in the company by buying stock whenever there is a new issuance of stock for money

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36
Q

When are there preemptive rights?

A

Only if they are put forward in the articles of incorporation

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37
Q

How many directors are required?

A

One or more

38
Q

What is a staggered board?

A

When all of the board members are not elected at once (think congressional terms)

39
Q

For what reasons can shareholders remove directors?

A

With or without cause

(In some states if the board is staggered, the directors can only be removed with cause)

40
Q

How may the board act?

A
  • Unanimous agreement in writing
  • At a meeting which must satisfy the quorum and voting requirements
41
Q

What kind of notice is required for board meetings?

A

For regular meetings, notice is not required

For special meetings, at least two days’ written notice of date, time, and place is required. The notice need NOT state the purpose of the meeting

42
Q

What happens if there is failure to give notice of a board meeting?

A

The results of the meeting are voidable unless the directors who were not notified waive the notice defect by writing or by showing up to the meeting without objecting re notice at the outset of the meeting

43
Q

Can directors send a proxy or enter voting agreements?

A

No

44
Q

What type of attendance is required for any meeting of the board?

A

Quorum- a majority of all directors (unless the bylaws say otherwise, but never fewer than ⅓ of board members)

45
Q

What percent of the vote is required to pass a resolution?

A

If a quorum is present at the meeting, passing a resolution requires only a majority vote of those present

46
Q

If people leave a board meeting, what happens to quorum?

A

It is broken

47
Q

What are the duties of a director?

A

Duty of loyalty- A director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation

Duty of care- The director must use the care that a person in like position would reasonably believe appropriate under the circumstances

48
Q

Who has the burden of proof on the board member’s duty of care?

A

The person challenging the directors’ action

49
Q

When is a director liable in a nonfeasance case?

A

When a director basically does nothing, they’re only liable if the breach causes a loss to the corporation

50
Q

When is a director liable in a misfeasance case?

A

Based on the business judgment rule

51
Q

Business judgment rule

A

A presumption that a director’s decision may not be challenged if the director acted in good faith, with the care that an ordinarily prudent person would exercise in a like position, and in a manner that the director reasonably believed to be in the best interest of the corporation

52
Q

Who has the burden of proof in a duty of loyalty case?

A

The defendant

53
Q

When will a conflicting interest transaction be upheld?

A
  • If it was approved by a majority of the disinterested directors and the board knew all material facts OR
  • It was approved by a majority of the votes entitled to be cast by disinterested shareholders and the board knew all material facts OR
  • Judged by the circumstances at the time the corporation entered into the transaction, it was fair to the corporation

Say this- even if the deal is approved, some courts also require a showing of fairness!

54
Q

When can a corporation make loans to a director?

A

When it is reasonably expected to benefit the corporation

55
Q

When are directors liable?

A

A director is presumed to concur with board action unless her dissent or abstention is noted in writing in the corporate records

Directors are not liable if they are absent

56
Q

Three categories of indemnification

A
  • A corporation cannot indemnify a director who is held liable to the corporation or held to have received an improper benefit
  • A corporation must indemnify a director or officer who was successful in defending a proceeding on the merits or otherwise against the officer or director for reasonable expenses, including attorneys’ fees, incurred in connection with the proceeding
  • A corporation may indemnify a director for reasonable litigation expenses incurred in unsuccessfully defending a suit brought against the director on account of the director’s position if the director acted in good faith and believed that her conduct was in the best interests of the corporation
57
Q

What are the characteristics of a close corporation?

A
  • Few shareholders
  • The stock is not publicly traded
58
Q

What kind of document sets up alternative management for a close corporation?

A

Shareholder management agreements

59
Q

What are the two ways to set up a shareholder management agreement?

A
  • In the articles and approved by all shareholders OR
  • By unanimous written shareholder agreement
60
Q

When can shareholders directly run the corpoation?

A

When it is a close corporation

61
Q

What are the duties of shareholders in a close corporation?

A
  • Duty of care to corporation
  • Duty of loyalty to corporation
  • A fiduciary duty on shareholders owed to other shareholders
62
Q

Can shareholders be held liable for corporate debts?

A

Generally no

BUT a court may pierce the corporate veil in a close corporation

63
Q

When can a court pierce the corporate veil and hold shareholders personally liable?

A
  • The shareholders must have abused the privilege of incorporating AND
  • Fairness must require holding them liable
64
Q

What are the three main scenarios where courts might pierce the corporate veil?

A
  • Alter ego (need an injustice to result)
  • Undercapitalization- when the corporation is undercapitalized at the time of formation
  • Fraud, avoidance of existing obligations, or evasion of statutory provisions
65
Q

What is a derivative suit?

A

The shareholder is suing to enforce the corporation’s claim

66
Q

What is a direct action?

A

When the shareholder is suing to enforce her own claim

67
Q

Who gets the money in a derivative suit?

A

The corporation

68
Q

What are the requirements to file a derivative suit?

A
  • Stock ownership at the time of wrong
  • Adequate representation
  • The shareholder must make a written demand on the corporation to take suitable action
69
Q

What is required to dismiss or settle a derivative suit?

A

Court approval

70
Q

How do you calculate outstanding stock?

A

Outstanding stock = Issued stock - Reacquired stock

71
Q

Who can vote at shareholder meetings?

A

Shareholders on the record as of the record date.

The record date is fixed by the board of directors but cannot be more than 70 days before the meeting

72
Q

How does a shareholder vote by proxy?

A
  1. A writing
  2. signed by the record shareholder is
  3. directed to the secretary of the corporation and
  4. authorizes another to vote the shares.
73
Q

What notice is required for shareholder meetings?

A

Shareholders must be notified in writing between 10 and 60 days before the meeting.

Notice must state the date, time, place of the meeting, AND the purpose of the meeting.

74
Q

What do shareholders vote on?

A
  • To elect directors
  • To remove directors
  • On fundamental corporate changes
75
Q

How do you determine quorum for shareholder meetings?

A

Based on the number of shares represented, not the number of shareholders

76
Q

Will a shareholder quorum be lost if people leave the meeting?

A

No

77
Q

To elect a director, what percent of the vote is required

A

A plurality

78
Q

To elect approve a fundamental corporate change, what percent of the vote is required

A

A majority of the shares entitled to vote

79
Q

To remove a director, what percent of the vote is required

A

A majority of the shares entitled to vote

80
Q

For “other matters,” what percent of the vote is required

A

A majority of the shares that actually vote on the issue

81
Q

What is cumulative voting?

A

You don’t vote for each seat individually- the top two finishers are elected to the board.

Multiply the shareholder’s number of voting shares times the number of directors to be elected

82
Q

To inspect basic records, the shareholder must make a written demand when?

A

Five business days in advance

83
Q

To inspect more controversial records, what must the shareholder state

A

A proper purpose for the demand

84
Q

Are distributions discretionary?

A

Yes

85
Q

What is required to make a fundamental corporate change?

A
  • Board action adopting a resolution of fundamental change
  • The board submits the proposal to the shareholders with written notice
  • Shareholder approval
86
Q

What percentage of votes are required to approve a fundamental corporate change?

A

A majority of shareholders entitled to vote

87
Q

What is the right of appraisal?

A

The right of a shareholder to force the corporation to buy their stock for fair value

88
Q

When does the right of appraisal exist?

A

Only in close corporations

89
Q

What is a merger?

A

A takes in B

90
Q

What is a consolidation?

A

A and B make C Corp.

91
Q

Which corporation must properly follow the fundamental change procedure?

A

The selling corporation only

92
Q

When can shareholders petition for involuntary dissolution?

A
  • Director abuse, waste of assets, or misconduct
  • The directors are deadlocked and irreparable injury to the corporation is threatened
  • Shareholders are dead locked in voting power and have failed to elect one or more directors for a period that includes at least two consecutive annual meeting dates
  • The corporation has abandoned its business

MEE Subjects (8 decks)

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