Corporations

Question 1

What is the business judgment rule?

Answer 1

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

Corporate law allows directors to rely on the opinions of experts and corporate insiders generally.

Question 2

Does the BJR protect a director with a personal interest in the transaction?

Answer 2

Not if the director sells to the Corp. at inflated prices. The business judgment rule requires a director to act in a manner the director believes to be in the best interest of the corporation.

Question 3

Is a personal interest in a transaction protected from personal liability when the board approves the transaction, but the director fails to disclose all of the material facts of the transaction to the board?

Answer 3

A transaction cannot be set aside merely because a director had a personal interest in the transaction if (i) the director disclosed the material facts of the transaction to disinterested members of the board [or the shareholders], who approved the transaction, or (ii) the transaction was fair to the corporation

Question 4

A corporation’s articles of incorporation may _____ or _____ directors’ personal liability for money damages to the ______ or ______ for actions taken

Answer 4

A corporation’s articles of incorporation may limit or eliminate directors’ personal liability for money damages to the shareholders or corporation for actions taken.

Question 5

When may an exculpatory provision not eliminate a director’s personal liability?

Answer 5

Liability cannot be eliminated to the extent that the director (i) received a benefit to which he was not entitled, (ii) intentionally inflicted harm on the corporation or its shareholders, (iii) approved unlawful distributions, or (iv) intentionally committed a crime

Question 6

Do voting provisions in the articles of incorporation or bylaws control when they conflict?

Answer 6

Articles. The vote required at a meeting can be set in the articles or bylaws. When the articles and bylaws conflict, the articles control.

Question 7

Only _____ _ ____ on the ____ ____ may vote at a shareholders’ meeting.

Answer 7

Only shareholders of record on the record date may vote at a shareholders’ meeting.

A shareholder may attend a shareholders’ meeting and vote his shares personally.

Question 8

Shareholders may give another a written and signed ______ giving the other the right to vote the shares

Answer 8

Shareholders may give another a written and signed proxy giving the other the right to vote the shares

Question 9

Are proxies revocable?

Answer 9

Proxies generally are revocable unless they say that they are irrevocable and are coupled with an interest.

Proxies may be revoked by a subsequent instrument or by the shareholder of record showing up to vote in person.

Question 10

When are proxies coupled with an interest?

Answer 10

Proxies are coupled with an interest if the proxy holder essentially pays for the right to be a proxy, such as where the proxy holder has purchased the underlying shares from the owner of record.

Question 11

Which shares may be voted?

Answer 11

Only outstanding shares may be voted.

Question 12

Are repurchased shared outstanding?

Answer 12

No. Shares that were issued and outstanding, but that have been repurchased (called “treasury shares” in some jurisdictions) are not outstanding.

Therefore, they are not counted in determining the number of votes needed to approve a proposal and cannot be voted.

Question 13

A corporate president’s authority is governed by ____ law

Answer 13

A corporate president’s authority is governed by agency law.

Question 14

Corporate presidents’ authority

Answer 14

A corporate president is an agent of the corporation and has whatever power (actual authority) the corporation grants him. As a general rule, unless specifically excluded by the corporation, a president will have the power/authority to enter into ordinary contracts involving the day-to-day operation of the corporation

Question 15

Board-authorized authority to enter into extraordinary transactions.

Answer 15

A corporate president can have power/authority to enter into extraordinary transactions if authorized by the board. The board cannot give the president power that the board itself does not have.

Whether a board’s grant of authority is sufficient depends on: (i) whether the board’s meeting and vote were proper and (ii) whether the board could delegate such authority

Question 16

If the articles are silent, a _____ can take place if there is a quorum consisting of a ________ of the directors

Answer 16

If the articles are silent, as they are here, a meeting can take place if there is a quorum consisting of a majority of the directors

Question 17

Resolutions can be passed at the meeting by the vote of the _______ of the quorum

Answer 17

Resolutions can be passed at the meeting by the vote of the majority of the quorum.

Question 18

A board does not have the power to authorize _______ _____ changes without shareholder approval. Such a change can be implemented only if what happens?

Answer 18

The board does not have the power to authorize fundamental corporate changes without shareholder approval. Such a change can be implemented only if (i) the directors first pass a resolution to implement the plan and (ii) the plan is then approved by the shareholders.

Question 19

Appraisal remedy

Answer 19

Shareholders who dissent from a fundamental corporate change can force the corporation to purchase their shares at a fair price

Question 20

How may shareholders exercise the appraisal remedy?

Answer 20

To use the appraisal remedy, the shareholders must (i) file an objection to the transfer before or at the shareholders’ meeting at which the vote is taken; (ii) not vote in favor of the plan; and (iii) send the corporation a written demand for the fair value of their shares.

The shareholder must also deposit his shares with the corporation as directed. If the corporation does not want to pay what the shareholders demanded, the corporation must file a suit to have the court determine fair value

Question 21

A ______ is a person who procures commitments for capital and instrumentalities on behalf of a corporation that will be formed in the future

Answer 21

Promoter

Question 22

Are promoters are personally liable on all such contracts they enter into on behalf of the corporation to be formed?

Answer 22

Yes. As a general rule, promoters are personally liable on all such contracts they enter into on behalf of the corporation to be formed.

Question 23

When does promoter liability continue?

Answer 23

Promoter liability continues even after the corporation is formed and even if the corporation also becomes liable on the contract by adopting it.

Question 24

Exception to promoter’s liability

Answer 24

A promoter will not be liable on a preincorporation contract if the agreement between the parties expressly indicates that the promoter is not to be bound. In such a case, the “contract” is considered to be an offer to the proposed corporation.

Question 25

Is a corporation liable on a contract entered into by a promoter?

Answer 25

No. As a general rule, a corporation is not liable on a contract entered into by a promoter.

Question 26

A corporation can become liable on a promoter’s contract if it _____ the contract

Answer 26

Adopts

Question 27

Adoption can be ____ or _____

Answer 27

Adoption can be express or implied.

Express adoption requires express official action to adopt the contract with knowledge of the material facts, such as a resolution by the board of directors.

Implied adoption requires someone in authority to accept the benefits of the contract with knowledge of the material facts.

Question 28

When may a shareholder bring a derivative action?

Answer 28

To bring a derivative action, a shareholder must have been a shareholder at the time of the act or omission complained of or must have become a shareholder through operation of law.

The shareholder must also fairly and adequately represent the interests of the corporation and must make written demand on the corporation that it take suitable action. Some courts will excuse the demand if futile.

Question 29

Directors’ duty of care

Answer 29

If directors (i) manage the corporation to the best of their ability in good faith, (ii) with the care that an ordinarily prudent person in a like position would exercise, and (iii) in a manner that they reasonably believe is in the best interests of the corporation, (iv) a court will not second-guess their decisions.

Question 30

Under the business judgment rule, there is a presumption that directors’ decisions are what?

Answer 30

Under the business judgment rule, there is a presumption that directors’ decisions are: (i) made in good faith, and (ii) in the best interests of the corporation. A person challenging director action has the burden of proving that the standard was not met.

Question 31

What may a director rely upon in discharging his duties?

Answer 31

In discharging his duties, a director is allowed to rely on reports from (i) corporate officers whom the director reasonably believes to be reliable and competent, and (ii) corporate outsiders as to matters that the director reasonably believes to be within the outsider’s professional competence

Question 32

What powers are directors generally vested? How may they act on this power? Directors may act on this power by a ______ vote at a meeting at which a ______ of directors are present.

Answer 32

Directors generally are vested with the power to manage the business and affairs of the corporation. Directors may act on this power by a majority vote at a meeting at which a quorum of directors are present.

Question 33

When is a Director’s reliance unreasonable?

Answer 33

If officer is interested. But an independent opinion saying the same thing is reasonable to rely upon. Also helps if decision is not involving a major change.

Question 34

____ __ ______ prohibits directors from profiting at the expense of a corporation

Answer 34

Duty of loyalty

Question 35

How may a shareholder meeting be conducted when the articles and bylaws are silent as to the quorum required?

Answer 35

To validly conduct a shareholders’ meeting, a quorum must be present. If the articles and bylaws are silent, a quorum requires the presence, in person or by proxy, of a majority of the outstanding shares entitled to vote at the meeting

Question 36

Unless the articles or bylaws provide otherwise, directors are elected by a ________ of the votes cast.

Answer 36

Unless the articles or bylaws provide otherwise, directors are elected by a plurality of the votes cast (or the directors receiving the most votes win), even if they do not receive a majority.

Question 37

Does a shareholder have a right to inspect corporate records?

Answer 37

Shareholders generally have a right to inspect their corporation’s books and records for a proper purpose. A proper purpose is a purpose related to the shareholder’s status as a shareholder.

Bonus: The shareholder must give five days written notice. The notice must state the reason for inspecting the records. The shareholder may bring an attorney, accountant, or other agent to inspect.

Question 38

Is an action to compel the payment of a dividend is seeking to enforce a corporate right or a personal right?

Answer 38

A suit to compel a dividend seeks to enforce a right that the individual shareholders have against the corporation and so is a direct action. The shareholder need not make a demand first.

Question 39

A __(1)__ action seeks to vindicate wrongs done to the corporation. Before bringing a \_(1)\_ action, a shareholder must first make a demand on the board to act on the corporation’s behalf.

Answer 39

derivative

Question 40

A _____ action seeks to enforce duties that a corporation owes to the shareholder

Answer 40

direct

Question 41

Right to a dividend

Answer 41

As a general rule, a shareholder has no right to receive a dividend until it is declared by the board of directors. The decision whether to declare a dividend is left to the sound discretion of the board.

If the directors decide in good faith not to declare a dividend, the courts will not disturb that decision. The shareholder has the burden of proving bad faith.