Corporations

Question 1

Articles of incorporation

Answer 1

organization and formation of corp

1. name of corp must be included; cannot be similar to existing names
2. number of authorized shares must be included
3. must include name and address of incorporators and resident agent
4. watch for clause limiting corps purpose - activities beyond scope of purpose are ultra vires and may be enjoined or directors held liable for auth such acts

Question 2

when does corporate existence begin

Answer 2

1. when articles filed by state
2. promoters generally liable for pre incorporation contracts
   - liability continues even after corporation formed absent a novation
   - corporation does not become liable unless it adopts

Question 3

what if there are defects in formation

Answer 3

1. a person who purports to act on behalf of a corp knowing there was no valid incorporation is personally liable
2. no liability if de facto corporation
3. no liability if corporation by estoppel - people treating business as valid corp are estopped from denying corp’s existence
4. some states do not recognize de facto and estoppel doctrines
5. where no corp recognized - only those who acted on behalf of the biz will be held liable; passive investors not liable

Question 4

pierce corp veil - alter ego doctrine

Answer 4

1. grounds - harm caused to third party because:
   - owners do not treat corp as a separate entity
   - commingle personal and corp funds
   - use corp assets for personal purposes
   - owners do not hold meetings
2. parent/subsidiary corps or affiliated corps can be held liable for this

Question 5

pierce corp veil - capitalization at inception

Answer 5

must start corp with sufficient encumbered capital to meet its prospective liabilities

Question 6

pierce corp veil - perpetrating fraud

Answer 6

• cannot be formed to avoid existing liabilities

- can be formed to limit future liabilities

Question 7

if court pierces veil then

Answer 7

1. generally only active shareholders liable

2. generally liable for tort obligations

Question 8

capital structure of corporation

Answer 8

1. debt securities (bonds) create debtor-creditor relationship
2. equity securities (stocks) create ownership interest

Question 9

shareholders

Answer 9

1. generally do not run corp on day to day basis
   - indirectly control by electing directors, amending bylaws, and approving fundamental changes
2. record shareholders
   - right to vote at annual meeting elect directors and regarding fundamental changes
3. notice of meetings must be given to shareholders
   - annual meeting = date/time/location
   - special meeting = date/time/location/purpose
   - improper notice = action taken at meeting can be nullified and can be waived by attending w/o complaint
4. proxies
   - writtenproxies valid for 11 mo
   - generally revocable unless specifically provide otherwise and are coupled w/ interest
   - may be revoked by attendance or later appointment
5. quorum
   - generally a majority of the outstanding voting shares must be present for valid vote
   - once quorum reached, shareholder leaving does not invalidate voting
6. approval
   - MBCA = if quorum present, action approved if votes cast in favor exceed votes cast against
   - some states require greater vote for fundamental corp change

Question 10

shareholder agreements

Answer 10

1. voting trusts
   - shareholders transfer share ownership to a trustee who votes shares as agreed
   - valid in most states for up to 10 yrs but renewable
2. shareholder management agreements
   - used in small corporations
   - shareholders may agree to run the corporation in any way
   - can even dispense w/ board
3. share transfer restrictions

Question 11

inspection rights of shareholders

Answer 11

1. limited - books, papers, accounting records, etc.
   - 5 day written notice
   - proper purpose = related to shareholders rights
2. unqualified right (regardless of purpose) - articles and bylaws, minutes of shareholder meeting, names and addresses of current directors, and recent annual reports

Question 12

preemptive rights of shareholders

Answer 12

1. right to purchase shares to maintain proportionate ownership interest
2. under MCBA exists only if provided for
3. where provided for, does not apply to:
   - shares issued as compensation
   - shares issued within 6mo of incorporation
   - shares issued for consideration other than money
   - nonvoting shares with a distribution preference

Question 13

shareholder suits

Answer 13

1. direct v. derivative
   - direct suit is to enforce right of shareholder
   - derivative suit is to enforce a right belonging to corp
   - must have owned shares at time of wrong
   - must maintain ownership throughout suit
   - demand board to being suit
2. dismissal - if a majority of directors w/ no personal interest determine in good faith that suit is not in best interest of corp
3. recovery
   - direct suit = goes to shareholder
   - derivative suit = usually goes corporation

Question 14

shareholder distributions

Answer 14

1. generally in the form of dividends or of assets after dissolution
2. no right to receive unless/until declared by board

Question 15

shareholder liabilites

Answer 15

1. shareholders not fiduciaries - may act in self-interest
2. exception - controlling shareholder cannot use control to obtain a special advantage at the expense of the minority shareholders

Question 16

directors voting

Answer 16

1. meeting
   - directors must attend in person (no proxies) or through telecommunication equipment if all participating directors can simultaneously hear each other
   - no particular notice required for regular meetings
   - special meetings typically require 2 day notice of date./time/place
   - quorum of directors must be present at time vote is taken
   - approval of action requires affirmative vote of a majority of the directors present
2. delegation to executive committees - may exercise authority given to them by board
   - comprised of 2 or more directors
   - exceptions; in most states committees may not declare distributions, fill board vacancies, or amend bylaws

Question 17

directors liabilities

Answer 17

1. business judgment rule generally protects directors from personal liability to corp/shareholder
   - director must act in good faith
   - with the care that a person in a like position would exercise, and
   - in a manner reasonably believed to be in the best interest of the corp
2. articles may further limit or eliminate director personal liability except for;
   - director received improper benefit
   - liability for unlawful distributions
   - intentionally inflicted harms or criminal violation of law
3. reasonable reliance defense - directors may defend suit with a claim of reasonable reliance on opinions, reports, etc prepared by experts or reliable employees
4. waste - a director has a duty to prevent corp waste
5. no self-dealing w/o disclosure and approval - duty of loyalty
6. corporate opportunity doctrine - must corp first opp to act before taking opp himself, corp can recover director;s profits from the missed opp

Question 18

directors indemnification

Answer 18

1. successful defense = if director is sued as a director and successfully defends, corporation must indemnify for expenses
2. unsuccessful - of director is unsuccessful in defending, corporation has discretion to indemnify if the director complied w/ business judgment rule standards except when director is found liable to the corp or received an improper benefit
3. corps may purchase liability insurance to cover directors even if they would not be entitled to indemnification under the circumstances

Question 19

required officers

Answer 19

1. MBCA does not require any particular officers but rather allows corps to have officers described in bylaws or appointed by directors
2. some states require at least two officers - a president and secretary
3. generally a person may hold more than one office - some states prohibit president and secretary from being same person

Question 20

appointment and removal of officers

Answer 20

1. officers are appointed by board of directors
2. officers may be removed by board of directors
3. if removal is in breach - officer entitled to damages

Question 21

officers authority

Answer 21

1. officers have actual auth given by the board, articles and bylaws
2. officers have apparent auth to do whatever someone in their position would normally have auth to do

Question 22

liability and indemnification of officers

Answer 22

1. officers owe corp duties similar to those owed by directors
2. officers have right to indemnification similar to directors

Question 23

types of fundamental corp changes

Answer 23

amendments to articles
mergers
consolidations
share exchanges
dispositions of substantially all assets outside the regular course of business

Question 24

fundamental corp changes general procedure

Answer 24

1. board resolution
2. notice to shareholders
3. shareholder approval
4. articles of the change filed w/ state

Question 25

merger of corporations

Answer 25

1. generally must be approved by directors and shareholder of both corps
2. exception; parent-subsidiary merger or when rights of survivor shareholder not significantly affected

Question 26

dissenter’s appraisal remedy

Answer 26

shareholders who do not like a fundamental corp change may force the corp to purchase their shares at a fair price if they

1. give corp notice of intent to demand appraisal rights before vote is taken
2. do not vote in favor of the change
3. demand payment after change is approved

Question 27

voluntary dissolution

Answer 27

1. if shares have not yet been issued or business has not yet commenced, a majority of the incorporators or initial directors may dissolve corp by delivering articles of dissolution to the state
2. after shares have been issued, corp may dissolve by a corp act approved under the fundamental change procedure

Question 28

effect of dissolution

Answer 28

1. corp existence continues
2. corp not allowed to carry on any business appropriate to winding up and liquidating its affairs
3. a claim can be asserted against a dissolved corp, even if it does not arise until after dissolution, to the extent of the corps undistributed assets

Question 29

administrative dissolution

Answer 29

the state a bring an action to administratively dissolve corp for reasons such as the failure to pay fees or penalties, failure to file an annual report, and failure to maintain a registered agent in the state

Question 30

judicial dissolution

Answer 30

1. attorney general may seek judicial dissolution on the ground that the corp fraudulently obtained its articles of incorp or that the corp is exceeding or abusing its auth
2. shareholders may seek judicial dissolution of the following grounds
   - directors are deadlocked in management
   - directors have acted or will act in a manner that is illegal, oppressive, or fraudulent
   - shareholders are deadlocked in voting power
   - corporate assets are being wasted, misapplied, or diverted for noncorp purpose

Question 31

creditors may seek dissolution if

Answer 31

1. corp has admitted in writing that the creditor claim is due and owing and the corp is insolvent
2. creditor claim has been reduced to judgment, execution of the judgment ha been returned unsatisfied and corp is insolvent