Corporations

Question 1

Incorporation: promotors

function and duty

Answer 1

Promotors are people finding investors for corp and enters into K on behalf of the nonexistent corp.

Promotors are fiduciaries to corporation—cannot make secret profits

Question 2

Incorporation: promotors’ liability

general rule
exceptions

Answer 2

Personally liable for K entered into before incorporation

© Novation: agreement by promotor, corp, and 3rd party will shift liability to corporatio
© Adoption: if corp takes the benefits of the contract, promotor not liable

Question 3

Incorporation: Incorporation start date

Answer 3

Incorporation– begins when secretary of state accepts fee and files the articles of the incorporation.

When a corporation has not been created, the entity may be treated as a general partnership.

Question 4

Incorporation: Article of incorporation content

Answer 4

corporation name, agent info, incorporator info (and signed by incorporator)
purpose,
authorized shares.
duration.

bylaws not required

Only SH can amend

Question 5

Ultra vires

Answer 5

If the corp or director/officer/employee acts outside of the corporation’s stated purpose in the articles of incorporation, SH, corp, or state can enjoin

Question 6

Incorporation: De facto corp

Answer 6

A defective corp will be treated as a corp if organizers

(a) made a good faith effort to incorporate and
(b) have no actual knowledge of a defect in corp status

Question 7

Incorporation: Corp by estoppel

Answer 7

Third party is estopped from asserting defect if organizers (a) made good faith attempt to incorporate, and (b) the third party entered into a K as though it was properly incorporated,

Question 8

Corporate governance: director requirement

Answer 8

A corp must have at least one director, director must be a natural person.

Question 9

Corporate governance: director appointment

general appointment authority
replacement authority

Answer 9

Elected by SH, for 1 year usually © staggered.

© Director replacement/increase in #: Board or SH can choose

Question 10

Corporate governance: director removal

Answer 10

Removable by SH with or without cause © for cause if articles specify

Question 11

Board meeting: Notice requirement

Rule
Waiver rule

Answer 11

2-day notice required for special meetings but not regular meetings.

© attendance waives notice unless director attends and promptly objects

Question 12

Board meeting: voting requirement

voting requirement
voting agreement

Answer 12

Quorum and affirmative vote (majority vote of those present).

Proxy/Voting K prohibited.© close corp can have voting agreements.

Question 13

Board meeting: quorum

Answer 13

Majority of total # of directors must be present unless specified otherwise in bylaws

Question 14

Board meeting: quorum–presence requirement

Answer 14

A director must be present at the time that the vote is taken for quorum.

Presence includes video/phone call equipment only if ALL persons participating in the meeting to hear and speak to one another

Question 15

Board meeting: requirement to hold meetings

Answer 15

Board may act without a meeting if unanimous written consent.

Question 16

Board meeting: dissent is effective when

Answer 16

A director’s dissent is effective if

(1) entered dissent in the meeting minutes;
(2) filed written dissent before meeting is over; or
(3) mailed subsequent written dissent to secretary of the corp

Question 17

Directors and officers’ fiduciary duties

Answer 17

Directors and officers owe a duty of care and loyalty to the corp

Question 18

Director’s duty of care

Answer 18

Directors must act with care that a person in a like position would reasonably believe appropriate under similar circumstances. Special skills are expected to be used

Directors may rely on expertise of officers/employees, outside experts, or committees

Question 19

Directors’ duty of care: Business Judgment Rule

Definition
Rule (4 elements)

Answer 19

Definition: A rebuttable presumption that D reasonably believed his actions were in the corp’s best interest.

Rule: In the absence of (a) fraud, (b) illegality or (c) self-dealing, courts will not disturb a (d) good faith business decision

Good faith decision: no BJR for uninformed, hastily made decisions

Question 20

Director’s duty of loyalty

Definition
When is it violated

Answer 20

Directors, executives, and other insiders have duty to put corp.’s interests above own

Violated if director engages in (1) self-dealing unless safe harbor rules or
(2) usurp a corporate opportunity

Question 21

Director’s duty of loyalty: self-dealing transaction

Definition – 3 types

Answer 21

(1) FINANCIAL MATERIAL INTEREST: transaction involving Interest involved that is financial AND material (material interest is if a reasonable D would be been influenced by the financial interest when voting on the matter)
(2) RELATIVE: transaction in which director/officer/relative receives a substantial benefit directly from the corp. or
(3) ASSOCIATION: transaction with another business that director is associated with

Question 22

Director’s duty of loyalty: ratification

Answer 22

safe harbor for self-dealing

burden of proof shifts to P to prove it was unfair if (a) disclosed material facts and (b) ratified by majority of disinterested directors/shareholders.

Disinterestedness: Conflicts have to be (1) material (financial) + (2) One director’s conflict not necessarily conflict of entire board.

Question 23

Director’s duty of loyalty: fairness doctrine

Answer 23

safe harbor for self-dealing

if transaction was substantively and procedurally fair to corp

Substantive fairness: whether corp received something of comparable value in exchange for what it gave to D
Procedural fairness: if directors followed proper procedure

Question 24

Director’s duty of loyalty: corporate opportunity doctrine

Rule (3 factors determining corporate opportunity)
Exception

Answer 24

Directors and officers may not usurp a corp opportunity

Corporate opportunity exists if

(1) interest-or-expectancy or line-of-business test
(2) relationship btw offeror and D / corp and D, and
(3) how/when D obtained knowledge

© Ratification: director may take it if corp. declines the opportunity

Question 25

Director's duty of loyalty: corporate opportunity doctrine Interest or expectancy test—

Answer 25

corporation have (1) an existing interest (e.g. option to buy) or (2) an expectancy arising from an existing right in the opportunity (e.g. purchase of property currently leased, corp actively seeking similar opportunity)

Question 26

Director's duty of loyalty: corporate opportunity doctrine Line of business test—

Answer 26

is the opportunity within C’s current/prospective line of business (ask how expansive is C’s business).

Question 27

Corporate indemnification of directors and officers Definition

Answer 27

practice of corp paying for costs of director/officer’s defense in litigation

Question 28

Corporate indemnification: mandatory

Answer 28

Corp must indemnify if D successfully defends

Question 29

Corporate indemnification: prohibited indemnification

Answer 29

Corp cannot indemnify if D is liable for receiving an improper benefit

Question 30

Corporate indemnification: permissive indemnification

Answer 30

Corp may indemnify if ∑2 (a) D acted in good faith with reasonable belief that it was in corp’s best interest and (b) D had no reasonable cause to believe conduct was unlawful

Question 31

Shareholders liability, generally

Answer 31

Generally, not personally liable for corp debt, unless court pierces veil

Question 32

Piercing the veil: 4 factors in deciding whether to pierce veil

Answer 32

(1) alter ego (SH failed to observe corporate formalities); (2) undercapitalization (failure to maintain funds sufficient to cover foreseeable liabilities; (3) commingling assets/self-dealing and (4) fraudulent dealings with creditor Piercing more likely in - tort situations (not K); - in close corporations (not public)

Question 33

Shareholder meeting requirements

Answer 33

Annual meeting--Every corp must hold an annual meeting to elect directors; Special meetings to vote on fundamental changes Waive: SH can take action without meeting by unanimous written consent. Failure to hold meetings doesn’t affect or invalidate corp business

Question 34

Shareholder meeting: notice requirements annual meeting notice special meeting notice insufficient notice consequence

Answer 34

SH must be given notice for both meetings. Special meeting must state the purpose. Insufficient notice: SH can challenge any actions taken at the meeting © attendance

Question 35

Shareholder's proxy agreement is effective when ∑3 3 elements duration

Answer 35

Proxy: effective if ∑3 (a) writing signed by SH as of record date; (b) delivered to corp (c) states that it authorizes 3rd party to vote SH’s shares. Valid for 11 months

Question 36

Shareholder's voting eligibility

Answer 36

Only shareholders who own shares on the record date are eligible to vote. Record date is fixed by the board, must be no more than 70 days before meeting

Question 37

Shareholder's voting validity

Answer 37

Vote effective when there is a quorum and votes cast in favor of proposal exceeds the votes cast against the proposal

Question 38

Shareholder quorum requirement

Answer 38

Majority of the corp’s outstanding shares must be represented at the meeting. outstanding shares: number sold and still remain in possession of shareholders

Question 39

Cumulative voting:

Answer 39

only applies to election of directors. may be permitted in the articles

Question 40

Shareholder inspection rights

Answer 40

SH or agent may inspect if (a) 5 days’ notice and (b) states a proper purpose (relating to SH’s financial interest in the corp). within normal business hours

Question 41

Shareholder right to bring direct suit

Answer 41

Direct suit if SH’s right is directly harmed. (e.g. when SH is denied voting right, failed to declare a dividend, board failed to approve/deny a merger

Question 42

Shareholder right to bring derivative suit

Answer 42

Yes if standing and injury (must primarily harm corporation)

Question 43

Shareholder standing in derivative suit ∑3

Answer 43

must maintain (a) contemporaneous stock ownership (at the time of bad act/omission and throughout litigation); (b) fairly and adequately represent corp interest; and (c) first demanded the board to address the problem unless futile

Question 44

Shareholder standing in derivative suit: demand requirement Requirement Upon demand, how many days does board have to act

Answer 44

Before bringing a derivative suit, SH must make a demand to the board to address the problem unless futile. © Demand not required under RMBCA When demand is made, board has 90 days to act

Question 45

Board's dismissal of shareholder derivative suit valid if ∑3

Answer 45

Dismissal by board if (a) majority of qualified directors (b) decide in good faith, (c) after reasonable inquiry that the action is not in corp’s best interest

Question 46

Shareholder derivative suit--recovery of damages and attorneys fees

Answer 46

All recovery goes to corp. P’s atty fee may be paid by corporation if litigation produces a substantial benefit to the corporation

Question 47

Shareholders' fiduciary duties

Answer 47

Generally no duty to fellow shareholders, except a controlling SH can have duties to minority SH

Question 48

Controlling shareholder definition

Answer 48

someone with 50%+1 stock or might have a controlling vote (based on the nature of the ownership of the company

Question 49

Controlling shareholder's fiduciary duty arises when (3 situations)

Answer 49

Duty arises if controlling SH is (1) selling interest to outsider, (2) seeking to eliminate other SH from the corp, or (3) receiving special distribution

Question 50

Controlling shareholder's fiduciary duty consists of

Answer 50

duty owed to minority SHs (a) duty to disclose information that a RP would consider important in deciding how to vote on a transaction and (b) duty of fair dealing when purchasing minority SH interest Liability When a controlling SH sells stock to an outsider who was intent on looting or destroying the company, controlling SH may be liable for damages to other SH

Question 51

priority upon liquidation of the corporation (creditors and stock ownership)

Answer 51

1. Secured creditor → 2. Creditor → 3. Preferred → 4. Common Preferred stock: preference over common stock with respect to dividends and liquidation

Question 52

Issuance of stock: authorization

Answer 52

Board or SH

Question 53

Issuance of stock: adequacy of consideration

Answer 53

Any consideration that is deemed adequate by the board. © Par value: if corp assigns minimum value for stock, it must sell for at least the minimum par value. If it doesn’t, Board is liable. SH who bought below par value stock with knowledge of par value may also be liable to the creditors

Question 54

Stock subscription agreement

Answer 54

agreement to buy before corp is formed. Irrevocable for 6 months

Question 55

Shareholders' preemptive rights

Answer 55

Unless granted in the articles, SH have no right to acquire newly issued stock to maintain the percentage of ownership. © SH in close corp have these rights

Question 56

Dividend authorization exception

Answer 56

Board’s power to authorize dividend: SH have no right to dividends © SH suit to compel: must prove funds are available and D refused to pay in bad faith

Question 57

Dividends are unlawful when

Answer 57

Unlawful dividends when (1) corp is insolvent; or (2) issuing would make corp insolvent. Directors are personally jointly and severally liable, for the amount in excess of the lawful amount. © good faith reliance on financial statements

Question 58

Priority of dividend: preferred stock and participating preferred stock

Answer 58

Preferred stock gets paid first. Participating preferred stock: get paid first, then get paid again by participating with the common shares (divide leftover by combined # of common and participating stock

Question 59

Shareholders' right to sell stock Rule Exceptions

Answer 59

SH can sell shares to anyone at any price © close corp, 10b-5, 16B

Question 60

Private restrictions on sale of stock by close corporations

Answer 60

close corp’s restrictions are enforceable if restriction is conspicuously noted and reasonable © unenforceable against someone with no knowledge

Question 61

Rule 10b-5 actions: prima facie ∑7

Answer 61

A private party can pursue 10b-5 action if (a) P bought or sold securities; (b) interstate commerce; (c) D intentionally or recklessly engaged in fraudulent or deceptive conduct; (d) conduct involves material information; (e) P relied on D’s conduct; (f) P suffered harm 1. P bought securities (interstate), reliance and harm 2. D act with intent/reckless, fraud, material info

Question 62

Section 16(B) actions (insider trading)

Answer 62

Certain corporate insiders can be forced to return short-swing profits to corp. Short-swing profits: profits made from buying and selling stock during 6 month period

Question 63

Section 16(B): parties subject to rule

Answer 63

corp trading on national basis or | corp with assets with 10 mil+ and 500+ shareholders

Question 64

Corporate insiders definition

Answer 64

Corporate insider: directors, officers, or SH with more than 10% stock of any class

Question 65

Fundamental changes to corp: procedural requirement

Answer 65

Both SH and directors must approve fundamental change Majority of the SHs casting vote must vote in favor

Question 66

Corporate merger

Answer 66

2+ corp combines and one corp survives to assume assets and liabilities of the other

Question 67

Corporate consolidation

Answer 67

2+ corp combines and a new entity is formed. New entity assumes assets and liabilities of both

Question 68

Corporate involuntary dissolution by creditors

Answer 68

Creditors can compel dissolution only for insolvent C

Question 69

Corporate involuntary dissolution by minority shareholders 3 situations

Answer 69

by majority vote or by minority: There must be (1) waste of corporate assets, (2) deadlock--inability to obtain votes necessary for action, or (3) oppressive majority control

Question 70

Shareholders' right of appraisal Definition Requirements to invoke ∑3

Answer 70

If SH objects to merger or acquisition, or if rights are materially adversely affected by amendment to C’s articles, SH can force C to buy their shares at a fair value. SH must ∑3 (a) send written notice of dissent before the vote; (b) SH must vote no or abstain from the vote; and (c) after action is approved, make prompt written demand

Question 71

Dissenter's right of appraisal: "fair value"

Answer 71

Corp pays FMV determined by corp. if disagreement, court appoints expert appraiser to determine fair value

Question 72

Close corporations generally

Answer 72

More relaxed governance. Can form voting agreements May have preemptive rights

Question 73

S corp, limitation

Answer 73

limited in # of sharehodlers it can have

Question 74

LLC

Answer 74

combines the limited liability of a corporation with the tax treatment of partnership

Question 75

LLC creation LLC membership requirements

Answer 75

must file article of organization. Operating agreement is like bylaw No limitation on # of shareholders, no residency requirements Members (Owners of LLC) can be individuals or corporations

Question 76

Transferee of LLC membership interest--rights

Answer 76

Transferee of membership only gets right to share in profits/loss. No right to participate in management

Question 77

LLC management presumption

Answer 77

LLC can be member-managed or manager-managed. Unless otherwise specified, LLC is presumed to be managed by all of its members.

Question 78

LLC members' authority to bind LLC

Answer 78

Members of a member-managed LLC have broad authority to bind LLC Members of a manager-managed LLC does not have the authority

Question 79

LLC members' liability:

Answer 79

Members not liable for LLC obligations unless piercing veil

Question 80

LLC members' fiduciary duties

Answer 80

Members have fiduciary duties to other members and to LLC © Fiduciary waivers are recognized as long as not manifestly unreasonable

Question 81

Corporate governance: voting agreements

Answer 81

Directors cannot have voting agreements. Shareholders © close corp directors can have voting agreements

Question 82

Corporate governance: corporate officers' authority

Answer 82

Officers are agents of corporation. Can bind corp if they have the authority to bind.