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Bar Exam > Corporations > Flashcards

Corporations Flashcards

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1
Q

What law governs the existence, structure, and internal matters of a corporation? (Including capacity, shareholder’s rights, etc.)

A

The state in which the corporation is incorporated

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2
Q

What law governs the rights and liabilities (external matters) of a corporation?

A

The state with the most significant relationship to the corporation

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3
Q

Define: Corporation

A

A corporation is a distinct legal entity that can conduct business in its own right.

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4
Q

What are the two main reason people create corporations?

A

For limited liability and to encourage investment

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5
Q

Who are the three major groups of people involved in a corporation?

A
  1. Shareholders
  2. Directors
  3. Officers
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6
Q

Define: Shareholder

A

People who invest money or labor into a corporation, and in exchange, receive equity/stock/shares in the corporation. These shares represent a residuary interest in the corporation.

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7
Q

What is a residuary interest in a corporation?

A

The idea that after all the debts are paid and the corporation is terminated, the shareholders receive what is left in the corporation.

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8
Q

Define: Director

A

A director is a member of the board of directors. They are elected by shareholders and responsible for major decisions of the corporation.

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9
Q

Define: Officers

A

The people who run the corporation on a daily basis. Appointed by directors.

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10
Q

Can you be a director, shareholder, and officer at the same time?

A

Yes, these roles are not exclusive

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11
Q

Define: Promoters

A

Individuals who enter into contracts on behalf of the corporation, even before the corporation exists. They owe fiduciary duties to the corporation, even before the corporation exists.

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12
Q

Is a corporation liable for pre-incorporation agreements?

A

No

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13
Q

What are “secret profits” and are they allowed?

A

Secret profits are profits stemming from a promoter entering a contract on behalf of the corporation, then selling what they obtained to the corporation at a mark up.

They are not allowed and are considered a breach of the promoter’s fiduciary duties.

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14
Q

Who is liable for pre-incorporation agreements?

A

Promoters, unless there is a novation.

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15
Q

What is a novation?

A

An agreement between the promoter, the corporation, and the other party on the contract, that shifts liability from the promoter to the corporation. The corporation is substituted for the promoter on the contract.

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16
Q

How do you form a corporation?

A

By filing the articles of incorporation and paying a filing fee to the state.

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17
Q

Define: Incorporators

A

The individual who signs and files the article of incorporation and pays the fee associated with it. This individual forms the corporation, but is not personally liable for contracts formed by promoters.

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18
Q

What is commonly included in the articles of incorporation?

A
  1. The name + some variation of corporation/company/etc.
  2. Agent (the person who can be sued)
  3. The incorporator’s name and address
  4. Duration of the corporation (commonly listed as perpetual)
  5. The purpose of the corp. (usually to engage in any lawful activity)
  6. Number of authorized shares
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19
Q

When does the corporation’s existence begin?

A

When Secretary of State accepts the fee and files the Articles of Incorporation.

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20
Q

What is the difference between bylaws and the articles of incorporation?

A

The bylaws usually covers the day-to-day of the business, but the articles of incorporation are the more essential rules.

The board of director can change the bylaws, but the articles can only be changed by the shareholders.

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21
Q

Who wins in a conflict between the articles and the bylaws?

A

The articles

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22
Q

What is a de facto corporation?

A

The corporation isn’t properly formed, but the business carries on anyway in the belief that it was properly formed.

23
Q

What is the rule regarding the treatment of de facto corporations?

A

The corporation will still be treated as a corporation with limited liability so long as the organizers made a good faith effort to comply with the incorporation process and they have no actual knowledge that there was a defect in the corporate status.

24
Q

What is a de jure corporation?

A

A properly formed corporation.

25
Q

What is the general rule for the liability of shareholders?

A

Shareholders are not personally liable for the debts of a corporation; they are liable only for the amount they invested into the corporation.

There is a pierce the veil exception.

26
Q

What is the exception to the general rule for liability of shareholders?

A

A court may “pierce the veil” of limited liability to avoid fraud or unfairness.

This allows the creditor to go through the corporation, take assets there, and if those assets are insufficient, go to the assets of the shareholder to satisfy a judgment.

27
Q

What are the three factors a court will consider when determining whether to pierce the veil?

A

(1) Alter Ego
(2) Undercapitalization
(3) Fraud

28
Q

What is the alter ego factor for the pierce the veil analysis?

A

The shareholder has failed to observe any of the corporate formalities between the person and the corporation. In other words, the shareholder is treating the corporation as their personal thing, like an alter ego. (Ex: Not holding meetings, not taking meeting minutes, mixing your funds with the corporate funds, being the sole member)

29
Q

What is the undercapitalization factor for the pierce the veil analysis?

A

The failure to maintain funds in the company that are sufficient to cover the business’ foreseeable liabilities.

(Ex: Not keeping enough money in the corporation’s banks accounts to pay rent, etc.)

30
Q

What is stock?

A

Stock is the representation of ownership in the company.

31
Q

What is preferred stock?

A

Preferred stock is stock that has preference over common stock in regards to being paid dividends and liquidation, after creditors get paid.

32
Q

What are authorized shares?

A

The maximum number of shares that the director of a corporation can sell or issue to the public. This number is listed in the articles of incorporation.

33
Q

What can a corporation do if it wants to issue more than the number of authorized shares listed in the articles of incorporation?

A

They have to amend the articles by getting a vote from the shareholders.

34
Q

What are the issued shares?

A

The number of authorized shares that have been given out (includes treasury shares and outstanding shares).

35
Q

What are outstanding shares?

A

Shares that were once issued to shareholders that are still in their possession. These are usually the only shares that vote.

36
Q

What are treasury shares?

A

Shares that were previously issued to shareholders, then reacquired by the corporation.

37
Q

What are par value shares?

A

The set value for shares of stock.

Corporations do not have to set par value, but if they do, they cannot sell the stocks for lower than the value of the whole group of stock.
Ex: Corp sells 10k shares of stock @ $2 par value. They don’t need to sell each share at $2, but they must sell the group for at lease $20k.

38
Q

What is watered stock?

A

If the corporation sets a par value, then sells the stock for lower than that amount, then the stock is said to be watered.

Shareholders who buy the watered stock are liable to the creditors of the corporation.

39
Q

Who is liable to creditors for watered stock?

A

Shareholders who purchased the watered stock.

40
Q

What is a stock subscription?

A

An agreement to buy the stock in advance, can occur before the corporation is formed.

41
Q

How long are stock subscriptions irrevocable?

A

For up to 6 months, meaning someone cannot “flake out” within 6 months of entering an agreement to buy stock in advance.

42
Q

What are preemptive rights?

A

The right to acquire stock that maintains the percentage of ownership anytime new shares are issued.

Ex: I own 25% of X Co.’s 2000 shares. They want to issue 8000 more shares. I can buy 25% of those shares, or 2000, to maintain my percentage ownership.

43
Q

What is the default rule regarding preemptive rights?

A

The default rule is that shareholders do not have preemptive rights, but they can negotiate for them and include them in the articles of incorporation.

44
Q

What are the two primary methods of distribution by a corporation?

A
  1. Dividends: giving cash or assets to shareholders

2. Buying back shares from shareholders and giving them money

45
Q

Who has the sole power to authorize dividends?

A

The Board of Directors

46
Q

Do shareholders have any right to dividends?

A

No

47
Q

What are the circumstances where the Board of Directors cannot authorize dividends?

A
  1. If the corporation is insolvent

2. If by issuing the dividend, the corporation would become insolvent

48
Q

Who is liable for an unlawful authorization of dividends?

A

Directors who vote to authorize an unlawful dividend are personally liable, jointly and severally, for the amount in excess of the permitted amount

49
Q

What is the sole defense for a director who authorized dividends when the corporation was insolvent or that caused the corporation to become insolvent?

A

If they relied in good faith on the financial statements (if the financial statements made it seem like the corporation was in good health)

50
Q

What is participating preferred stock?

A

Stock that receives preferred share dividends and then receives dividends again with the common stock.

51
Q

What is a cumulative preferred share?

A

Stock that receives preferred share dividends from this year and dividends for the previous year, if it wasn’t paid.

52
Q

What is the general rule for the sale of stock?

A

A shareholder in a corporation can sell their shares to anyone, at anytime, for any price they agree on.

53
Q

What is the closely held company exception to the general rule for the sale of stock?

A

Usually 50-100 shareholders or less

Corporation can put private restrictions on the ability to sell to prevent outsiders from becoming involved

Restriction must be noted conspicuously on the shares or state that there is a restriction and company can provide more details

Cannot be enforced against someone if someone didn’t know unless the restriction was certified and conspicuous on the share

54
Q

What is the test for whether a closely held business’s restriction on alienation will be upheld?

A

The test is one of reasonability: is it a reasonable restriction?

Bar Exam (13 decks)

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