corporations

Question 1

formation of corporation

Answer 1

de jure corporatoin = properly formed corporation
requires
filing articles of incorporation that contains corp name, number of shares, address and name of initial registered agent and name and address of each incorporator, and properly filing it in the state

articles of incorporation control where conflict with bylaws

corporation begins on date it is properly filed unless delayed effective date is specified (RMBCA doesnt allow delayed start date)

Question 2

bylaws

Answer 2

rules and regulations adopted by BOD that govern internal operations of corp

RMBCA –> bylaws may contain provision not inconsistent with the articles or law of jxn

Question 3

amending bylaws

Answer 3

shareholders - may amend or repeal

BOD - may amend or repeal unless

1. articles exclusively reserve power to SH or
2. SH (in amending bylaw) expressly provides that BOD cannot amend or reinstate that specific by law

if the bylaw deals with director nomination procedures the BOD retains the power to safeguard the voting process, but cannot repeal shareholder-approved bylaw

Question 4

powers of a corporation

Answer 4

a corp has the power to do all things necessary or convenient to carry out its business and affairs

includes –> lawsuits, own or lease property, incur liabilities, make investments, fix compensation/salaries, charitable donations, pay/engage in lobbies

Question 5

foreign corporation

Answer 5

a corporation in another state or jxn

foreign registration statement – must be filed with the secretary of state to do business in another state

governing law – law where corp is formed governs both internal affairs of corp and interest liability of SH

Question 6

formation of an LLC

Answer 6

articles of incorporation - an LLC is formed when the articles are properly filed with state and LLC has at least one member

operating agreement - governs the relations b/t members and LLC, rights/duties of managers, activities & affairs of the LLC and any means and conditions for amending the operating agreement

Question 7

liability of promoter

Answer 7

promoter acts on behalf of a corp that has not yet been formed

a promoter is personally liable when

1. he purports to act as or on behalf of a corp and
2. knows no corp was formed

a promoter remains personally liable for a pre-corp k even if the corp subsequently adopts the k
- both corp and promoter will be liable if k is adopted

the promoter is not liable if

1. there is a subsequent novation or
2. the k explicitly provides that the promoter has no personal liability

Question 8

liability of corporation for k made by promoter

Answer 8

a corp is NOT liable on k made by promoter unless the corp expressly or impliedly adopts the k post incorporation

express adoption - BOD action or reference in corp formation doc
implied adoption - corp knows/has reason to know that material terms of the k AND accepts some benefit of it

Question 9

defenses to owner liability for acts made during defective incorporation

Answer 9

if corp formation is defective, the owners may be personally liable for corp k and obligations

exceptions:
1. RMBCA - prevents personal liability unless the person purports to act as or on behalf of corp knowing that no corp was formed

2. de facto incorporation - exists when the entity made a good faith attempt to incorporate, is eligible to incorporate, and took action that it considered itself a corporation
   * this doctrine only prevents personal liability of a person unaware that a corp wasn’t properly formed
3. incorporation by estoppel - a person/entity may be estopped from denying that a business is a corp when it treated the business as such *does not apply to torts

Question 10

SH/officer/director personal liability

Answer 10

generally, SH are not personally liable for corp liabilities and obligations but a court may pierce veil to impose personal liability in certain situations

courts may pierce the veil and hold individual shareholders, officers, or directors personally liable for actions taken on behalf of corp when

1. corp is acting as alter ego of the shareholder (when she/he utilizes the corp veil for personal reasons)
2. there is failure to follow corp formalities
3. corp is inadequately capitalized at its inception or
4. to prevent fraud
   * courts are more likely to do so in tort actions

Question 11

piercing corp veil for LLC

Answer 11

generally same factors as for corp but failure to follow formalities is not a ground to pierce LLC

Question 12

common vs. preferred shares

Answer 12

common = provide SH with voting rights 
preferred = do not have voting rights 

generally, preferred provides a SH the preferred right to an asset distribution before SH with common shares

if only one class of shares –> all shares will have both the power to vote and the power to receive the net assets upon dissolution

if more than one class of shares is authorized –> the classes must be described in the articles. all shares within a class must have the same rights, privileges, and restrictions but RMBCA allows variations within a class/series if expressly set forth in articles

Question 13

authorized shares

Answer 13

maximum number of shares a corp can issue

Question 14

outstanding shares

Answer 14

total number of shares issued by the corp and held by SH

each share is entitled to one vote unless otherwise specified

Question 15

reacquired shares aka treasury shares

Answer 15

considered authorized, but are not outstanding (b/c corp owns them, not SH)
reacquired shares are not allowed to be voted

Question 16

consideration for shares

Answer 16

RMBCA allows shares to be issued for any type of consideration

BOD determines the value of non-monetary consideration. absent fraud or bad faith their determination is conclusive

Question 17

dividend distribution to shareholders

Answer 17

distributions are declared at the discretion of the BOD (protected via BJR)

once a dividend is declared, the SH has a legal right to distribution

SH do not have the right to compel a distribution, unless such a right is expressly granted in articles
- but a court will interfere and compel a distribution upon a showing of bad faith or dishonest dispute and that funds were available

Question 18

SH meetings - right to vote and record date

Answer 18

only registered shareholders on the record date are entitled to vote at the shareholders meeting (even if a SH sells the shares before the meeting - unless a proxy is given to the buyer)
- record date cannot be more than 70 days prior to the SH meeting

Question 19

proxy voting

Answer 19

a proxy grants the proxy holder the ability to vote shares as the proxy holder deems appropriate

must be signed on either an appointment form or electronic transmission

only valid for 11 months

Question 20

proxy agreements

Answer 20

freely revocable by the SH, even if the proxy states that its irrevocable

may be revoked expressly or by showing up and voting

exception: not revocable if proxy is coupled with an interest or legal right and states that it is irrevocable

Question 21

annual meetings

Answer 21

corp must hold annual meeting of SH at date/time stated in bylaws

directors are usually elected at the annual meeting

Question 22

special meetings

Answer 22

may be called by BOD, persons authorized under articles or SH holding at least 10% of all votes entitled to be cast at meeting

notice must be given to all SH entitled to vote AND requires

• at least 10 days but not more than 60 days notice
• meeting date, time, place AND
• meeting purpose

if meeting involves a fundamental change, all SH (regardless of voting ability) are entitled to notice

Question 23

waiver of notice

Answer 23

a SH may waive notice in signed writing or by attending the meeting and not objecting at beginning (or not objecting in clear manner)

Question 24

quorum

Answer 24

needed for shareholders to take action at meeting

requires majority of shares entitled to vote

Question 25

voting w/ quorum on matter

Answer 25

if quorum exists, then action on a matter (other than election of directors) is approved by majority of votes cast in favor unless articles require greater number

• each outstanding share gets one vote unless article says otherwise

Question 26

election of directors

Answer 26

plurality voting - candidates who recieve the most votes elected to BOD, as long as there is quorum shareholders present
– majority of vote is not necessary to be elected (in most states)

cumulative voting - articles or bylaws may provide for cumulative to elect BOD. under this, SH total number of votes = shares owned x director spots open
– example: 100 shares owned x 3 BOD = 300 votes
SH may cast all votes for one director nominee (i.e., 300 votes) rather than being limited to max number for each nominee
under cumulative voting, a director can be removed only if the number of votes for removal are greater than those needed to elect him

Question 27

SH right to inspect books

Answer 27

RMBCA – SH has right to inspect and copy corp accounting records, excepts of BOD meetings, and the record of SH if:

1. made during reg business hours at reasonable location (spec by corp)
2. with 5 days written notice
3. made in good faith and for proper purpose
4. described in the purpose with particularity
5. the requested records are directly connected with the purpose

SH may inspect the following without proper purpose

1. articles
2. bylaws
3. BOD resolutions on classification of shares
4. minutes of SH meetings for past 3 years
5. name and business address of current BOD and officers and
6. most recent annual report

Question 28

SH voting agreement

Answer 28

RMBCA - SH may sign agreement providing how they will vote their shares
it is specifically enforceable and claim for breach of k may be brought to enforce

Question 29

SH right of expression and proposed resolutions

Answer 29

submitting a proposed resolution at SH meeting is generally accepted but a corp may exclude improper proposals

• • non-binding/precatory proposals = proper
• • binding proposals = not proper unless for corporate action by amending bylaws

Question 30

BOD meetings

Answer 30

can only act if a quorum is present at time vote is taken

quorum = majority of directors unless a higher or lower number is required by articles (articles cannot lower less than 1/3 of BOD)

BOD may permit participation of a director by any means of communication but all directors must be able to simultaneously hear each other

Question 31

BOD voting

Answer 31

if quorum is present, then act is approved by affirmative vote of majority of directors present at meeting unless greater number is required by the articles or bylaws

Question 32

BOD notice and waiver of meetings

Answer 32

regular meeting – may be held without notice
special meeting – requires 2 days notice of date, time, place of meeting

waiver - director may waive notice in signed writing or if director attends meeting (unless he objects at beginning of meeting upon arrival and does not vote)

Question 33

BOD action without meeting

Answer 33

BOD may take action without meeting if all directors sign a consent describing action and deliver it to corp

Question 34

removal of director

Answer 34

RMBCA - SH may remove director with or without cause UNLESS articles require cause

common law - only remove director for cause

Question 35

authority of officers

Answer 35

actual - officers have authority to act consistently with their duties as outlined in bylaws or as provided by the BOD

apparent authority - officers may bind the corp when a third party reasonably believes the person has authority and that belief is traceable to corp manifestations (holding officer out as having authority)

Question 36

president and secretary authority

Answer 36

president –> authority for matters within ordinary course of business but not extraordinary acts

secretary –> authority to maintain and authenticate records of company

Question 37

removal of officers

Answer 37

officers may be removed at any time with or without cause by

• BOD
• Officer who appointed such officer, unless bylaws or articles provide otherwise
• any other officer, if authorized by BOD or bylaws

Question 38

management of LLC

Answer 38

member-managed = LLC is presumed to be member-managed

manager-managed = to be manager managed, the operating agreement must state that LLC is so – it is run by an elected group of managers (similar to BOD)

Question 39

authority of member/managers in LLC

Answer 39

under RULLCA and general agency principles, each member has authority to bind LLC for business purposes

express actual authority - members receive such authority from operating agreement or from managing members/managers

• • differences among members for acts within ordinary course of business –> only need to be approved by majority of members
• • acts outside ordinary course of business –> may be undertaken only with consent of ALL members

implied actual authority - have authority to take actions that are reasonably incidental or necessary for the person authorized duties

apparent authority - each member of an LLC can bind the LLC if the action is made in the ordinary course of business unless the member lacked authority and the other party had notice of lack of authority

managers in manager-managed LLC have similar authority

Question 40

preemptive rights

Answer 40

allows existing SH to maintain her % of ownership by being offered the opportunity to purchase shares issued for cash before outsiders are permitted to purchase

RMBCA –> SH do not enjoy preemptive rights unless explicitly granted in articles

preemptive rights do not apply to shares issued as compensation, to satisfy conversion/option rights create to provide compensation, within 6 months of incorporation, for consideration other than cash, or without general voting rights, but with preferential rights to distributions

SH common stock do not have preemptive rights with respect to preferred shares unless the shares are convertible into common shares

Question 41

restrictions on share transfers

Answer 41

articles, bylaw, and/or shareholder agreements may imposed restrictions on transfer of shares for any reasonable purpose, to preserve exemptions under federal/state securities law, or to maintain status when dependent on number or identity of SH
*absolute restraint is invalid

reasonable restrictions may be imposed against transferor but they cannot be enforced against transferee unless the restriction was conspicuously noted on the stock certificate or the transferee had actual knowledge of the restriction

Question 42

BJR

Answer 42

a court will not disturb decisions subject to the BJR standard if a rational business purpose exists. directors must be reasonably informed on the decisions they make. they may rely on the reasonable advice of advisors if the reliance was reasonable and the advisor or committee was qualified

Question 43

director duty of care

Answer 43

use care that a prudent person in like position would reasonably believe approrpate under the circumstances

burden is on P

duty of care is breached by:

1. nonfeasance: director does nothing where he is expected to act –> only breached if P can show causation/harm to company
2. misfeasance: board makes decision that is harmful to corp. –> no causation issue, but there is no breach if director meets BJR

BJR directors must discharge their duties in good faith, with reasonable belief that they are acting in best interest of corp, and with the care that a person in a like position would reasonably believe appropriate under like circumstances
*if the 3-part test above is met, then a director is NOT liable (BJR)

if director breaches the duty of care, he may be personally liable to the corp for any losses that result

Question 44

duty of loyalty directors

Answer 44

directors must act in the best inerests of the corp and without personal conflict

burden is on D

forbids a director from:

1. entering into conflicting interest transactions: interested director transaction will be set aside unless director can show it was fair when entered into or relevant facts were disclose and approved by majority of disinterested directors (at least 2) or disinterested SH
2. usurping a corporate opportunity
3. competing with the corporation or
4. trading on inside information

Question 45

conflicting interest transactions

Answer 45

is a breach of the duty of loyalty unless

1. approved by a majority of disinterested directors after full disclosure of all relevant material facts
2. approved by a majority of disinterested shareholders or
3. the transaction as a whole was fair to the corp at the time it was entered into (fair price + beneficial to corp + fair dealing)
   * BJR does not apply/protect directors financially interested in a transaction or who engaged in fraud/illegality

a conflict occurs when a director/officer (or their family member):
1. is a party to the transaction
2. has a beneficial interest in the transaction or is so closely linked to it that the director’s judgment may reasonable be affected or
is involved with another entity that is conducting business with the corp and that transaction would normally be brought before the BOD

Question 46

loan to director

Answer 46

can be done if reasonably expected to benefit the corp

i.e., money to director to pay for additional school

Question 47

usurping a corporate opportunity

Answer 47

is a breach of the duty of loyalty unless:

1. first presents opportunity to the corps BOD and
2. BOD decides not to pursue the opportunity
   * showing that the corp was not financially able to take the opportunity is not a defense

a corporate opportunity is any opportunity that a corp has an interest/expectancy in or is in the corp line of business
*a parent corp has some freedom in allocating an opportunity within a corporate group

Question 48

fiduciary duties of shareholders

Answer 48

SH generally do not owe fid duties to fellow SH

• • close corporation exception –> SH in a close-corporation owe the fid duties of loyalty and good faith & fair dealing to minority SH (like a partnership)
• • controlling SH exception –> controlling SH owe fid duties to other SH and the corp partially owned subsidiaries

Question 49

restricting fid duties - corporations

Answer 49

RMBCA –> articles may eliminate or limit the personal liability of a director for actions taken or not taken
but, the following cannot be limited: financial benefits improperly received, intentional infliction of harm to corp or SH, unlawful dividends or an intentional violation of criminal law

Question 50

fiduciary duties owed by LLC members/managers

Answer 50

member-managed –> members owe the duty of care and loyalty to both the company and other members

duty of care –> member must act

1. with the care that a person in a like position would reasonably exercise under circumstances and
2. with a reasonable belief to be in the best interests of the company

duty of loyalty –> includes duty to

1. account for any property, profit, or benefits derived from LLC business or property
2. refrain from having an adverse interest when dealing with the LLC (unless the transaction was fair) and
3. refrain from competing with the LLC (before dissolution)
   * *exception –> all members authorize an act/transaction after receiving full disclosure

manager-managed LLC –> the managers owe fid duties, not the members

the duties are the same as a member-managed LLC
BUT two notable difference for the duty of loyalty: only the members (not managers) may authorize an act/transaction that would otherwise violate the duty of loyalty; managers must refrain from competing with the LLC until winding up is completed (the duty does not end upon dissolution)

Question 51

restricting fid duties – LLC

Answer 51

RULLCA –> the operating agreement may do the following so long as its not manifestly unreasonable:

1. restrict/eliminate the duty of loyalty
2. set forth activities that do not violate the duty of loyalty
3. alter the duty of care (but it cannot authorize intentional misconduct or a knowing violation of law)
4. alter/eliminate any other fid duties and
5. set forth standards to measure the duty of good faith & fair dealing

Question 52

direct action – SH

Answer 52

may be brought when there is a breach of duty owed to a shareholder of a corp. the injury cannot be solely the result of an injury suffered by the corp
– similarly, a member of an LLC may bring an action against a member, manager, or the LLC (same standard for showing of injury)

**damages awarded will go to the SH or member

Question 53

derivative action – SH

Answer 53

when a SH is suing to enforce the corp claim

the RMBCA requires the SH to

1. own the corp stock at the time the claim arose or became a SH by operation of law from such a SH
2. be a SH through entry of judgment
3. fairly and adequately represent the corp interests and
4. make a written demand to the corp to take suitable action

a derivative suit cannot be commenced until 90-days after the demand, unless the corp
A. rejects the demand or
B. will suffer irreparable harm if forced to wait

for an LLC, all elements are the same except

1. the action may be brought within a reasonable time after the demand and
2. the demand requirement may be waived if futile

damage award –> is paid directly to corp/LLC, but the SH/member may recover reasonable costs of the litigation

Question 54

dismissal of derivative action by BOD

Answer 54

a derivative action must be dismissed on motion by the corp if

1. majority of the BOD qualified directors
2. have determined in good faith
3. after conducting a reasonable inquiry and
4. that the action is not in the best interest of the corp

Question 55

federal securities law - rule 10b-5

Answer 55

P must show that

1. D engaged in a fraud scheme or device
2. which was relied upon by P
3. in connection with the purchase or sale of securities
4. D acted with scienter
5. D used some means of interstate commerce and
6. P suffered damages

fraudulent scheme includes: misrepresentation of material fact or disseminating such information, insider trading, or tipping (trading on material info received from an insider)

P must be either the SEC or connected to purchase or sale of the securities at issue

Question 56

amending articles of incorporation

Answer 56

may be amended at any time by

1. adoption by BOD
2. notice to all SH of a meeting to vote on the amendment and
3. adoption by the SH by majority vote - unless the greater number is required under state law or articles

exception:
1. BOD has authority to make general minor changes without SH approval
2. BOD or incorporators may adopt any amendment if the corp has not issued shares yet

Question 57

merger

Answer 57

the BOD of both corporations must first approve merger with majority vote, then SH of both must approve by majority vote

SH approval is not required if

1. articles will not be changed
2. outstanding shares will not change AND
3. voting power of any shares issued as result of merger is 20% or less of surviving corp

Question 58

short form merger

Answer 58

occurs when parent corp merges with subsidiary, and the parent corp owns at least 90% of subsidiary outstanding shares. in such case, only BOD of parent corp has to approve merger

Question 59

share exchange

Answer 59

the BOD of both corp must first approve, then SH of acquired corp must approve with majority vote
SH approval of the acquiring corp is NOT required

Question 60

sale of all or substantially all of corp assets

Answer 60

deemed a funamental change if the same is NOT in usual and regular course of business

Question 61

making fundamental changes to corp

Answer 61

requires

1. adoption by BOD
2. notice to all SH - must state purpose of meeting
3. adoption by SH by majority vote - unless greater number required under state law or in articles

majority vote of SH is not required if sale of assets/fund change is in usual and regular course of business

Question 62

SH dissenter of fundamental change to corp appraisal rights

Answer 62

a dissenting SH is entited to apprasial rights (to obtain payment for FMV of shares) for any of the following fundamental changes

1. SH has the right to vote on merger plan
2. SH of subsidiary in a short form merger
3. SH shares are being acquired in a share exchange
4. SH has right to vote on the distribution of all or substantially all assets
5. if an amendment of articles materially and adversely affects the SH rights

Question 63

procedure to enforce SH appraisal rights

Answer 63

dissenting SH may force corp to purchase shares if

1. he gives notice to corp of his intent to assert appraisal rights before the vote
2. fundamental change is effectuated and
3. the SH did not vote in favor of the change
   * *Appraisal rights are not available to SH of publicly traded companies

Question 64

judicial dissolution of corp

Answer 64

SH may petiton court to dissolve corp if

1. deadlock of directors and irreparable injury to corp
2. directors acted in manner that is illegal, oppressive, or fraudulent (violating SH reasonable expectation or preventing minority SH from having equal rights/opp)
3. SH are deadlocked in voting power and have failed to elect directors for at least 2 consecutive annual meetings OR
4. corp assets have been wasted or misplaced

Question 65

election to purchase shares in lieu of dissolution

Answer 65

corp or SH may elect to purchase all shares owned by SH petition for dissolution at FMV

this election is generally irrevocable

Question 66

voluntary dissolution of corp

Answer 66

corp will be voluntarily dissolved if

1. BOD adops a proposal to dissolve
2. notice to all SH - must state purpose of meeting and
3. adoption by SH by majority vote - unless greater number required under state law or articles

early dissolution - a corp may be dissolved by majority of incorproators or initial directors if

1. corp has not issued shares or commenced business and
2. articles of dissolution are filed with secertary of state

Question 67

dissociation of a member from an LLC

Answer 67

member has right to dissociate, rightfully or wrongfully, at any time, and occurs when LLC has notice of persons express will to withdraw

dissociating member loses the right to participate in management of LLC but he still has right to receive distributions

RULLCA –> dissociation does not result in dissolution of LLC

Question 68

dissolution of LLC

Answer 68

dissolution events under RULLCA - dissolution upon

1. occurrence of dissolution event in operating agreement
2. consent of all members
3. passage of 90 consecutive days where the LLC has no members or
4. judicial dissolution

judicial dissolution - court may grant this upon showing of any of the following:

1. managers or controlling members acted in illegal/fraudulent manner
2. managers or controlling members acting in an oppressive and directly harmful manner to member
3. the conduct of all or nearly all of LLC activities is unlawful or
4. it is not reasonably practicable to carry on the business

Question 69

indemnification

Answer 69

corp must indeminify: successful defense - if director/officer is successful on merits or otherwise, corp must indemnify for expenses

corp may indemnify: unsuccessful - if director/officer is unsuccessful in defending, corp may indemnify if director/officer complied with BJR – this is a catch all - i.e., if d/o settled or otherwise dismissed case but was not on merits, corp may indemnify

corp cannot indemnify: where d/o is found liable to corp or received improper benefits
–> determined by disinterested directors or outside counsel

Question 70

creditors seeking dissolution

Answer 70

o A corporation has admitted in writing that creditors’ claim is due and owing and the corporation is insolvent or
o The creditors claim has been reduced to judgment, execution of judgment has been returned unsatisfied, and corporation is insolvent