Corporations

Question 1

Piercing the Corporate Veil Examples

Answer 1

In extreme cases courts may pierce the corporate vale and hold some or all shareholders personally liable for the corporations debts.

1)
- Torts v. Contracts
- Fraud
- Inadequate Capitalization
- Zero Capital - Shareholder invests no money in Corp
- Siphoning - Initial funding is siphoned out as earned.

2)
Failure of Formalities: More likely to pierce the veil if shareholders have failed to follow corporate formalities.

Question 2

Shareholder Liability (Intro)

Answer 2

Under the principal of limited liability, shareholders are generally not personally liable for the debts of the corporation. However, there are three circumstances where one may pierce the corporate veil and find shareholder liability. (Alter Ego, Undercapitalization, Avoidance of Existing Obligations)

Question 3

Piercing the Corporate Veil

Answer 3

One may pierce the corporate veil to avoid fraud or unfairness. The three ways to expose shareholders to liability are: (1) Alter Ego; (2) Undercapitalization; (3) Avoidance of existing obligations.

Question 4

Alter Ego

Answer 4

Alter ego exists where there is a shareholder who has failed to observe sufficient corporate formalities.

Question 5

Undercapitalization

Answer 5

Shareholders who fail to maintain sufficient funds to cover foreseeable liabilities may be liable for undercapitalization.

Question 6

Avoidance of Existing Obligations

Answer 6

The corporate veil may be pierced where it is necessary to prevent fraud or to prevent an individual shareholder from using the entity to avoid its existing personal obligations.

Question 7

Directors and Officers: Duty of Care

Answer 7

A director/officer owes the corporation a duty of care, which is a fiduciary duty that requires a director to manage the corporation to the best of their ability. Thus, a director must act with (1) good faith; (2) As an ordinary prudent person would in the same or similar circumstances; (3) for the best interests of the corporation.

Question 8

Directors and Officers: Duty to Manage

Answer 8

Directors have the duty to manage the corporation. Directors may delegate management functions to a committee of one or more directors that recommends action to the Board of Directors.

Question 9

Business Judgment Rule

Answer 9

The Business Judgment Rule is a presumption that the directors manage the corporation in good faith and in the best interests of the corporation and its shareholders. As such, directors will not be liable for innocent mistakes of business judgment.

Question 10

Directors and Officers: Duty to Disclose

Answer 10

Directors have a duty to disclose material corporate information to other members of the Board of Directors.

Question 11

Directors and Officers: Doctrine of Waste

Answer 11

Directors have a duty not to waste corporate assets by overpaying for property or employment services.

Question 12

Directors and Officers: Duty of Loyalty

Answer 12

A director owed the corporation a duty of loyalty. A director may not receive an unfair benefit to the detriment of the corporation or its shareholders. There are three different types of breaches to the duty of loyalty: 1) Usuring corporate opportunities; 2) Interested director transactions; 3) Competing ventures.

Question 13

Usurping corporate opportunities

Answer 13

A corporate opportunity is usurped when a director receives an unfair benefit by usurping for himself an opportunity which the corporation would have pursued.

Question 14

Interested Director Transaction

Answer 14

An interested director transaction occurs when a director has a personal interest in a transaction in which the corporation is also a party.

Question 15

Exception to Interested Director Transaction

Answer 15

Interested director transaction will be upheld if 1) a majority of disinterested directors approve the transaction; 2) a majority of disinterested shareholders with voting power approve the transaction; and 3) the transaction was reasonably fair to the corporation.

Question 16

Competing Ventures

Answer 16

Under the duty of loyalty, directors are not permitted to engage in any personal business that is in direct conflict with the corporation.

Question 17

Promoter

Answer 17

Promoters are persons acting on behalf of a corporation not yet formed

Question 18

Promoter Liability

Answer 18

Promoter: A person who acts on behalf of corp knowing that it is not yet formed is jointly and severally liable for obligations incurred. This ends upon a valid novation.

Corporation: Corporation becomes liable when the corporation adopts the promoter’s pre-incorp contract through express adoption or implied adoption.

Question 19

Corporation Formation

Answer 19

To create a de jure corporation, the incorporators must comply with all applicable statutory requirements. Including the filing of an Articles of Incorporation.

Question 20

Articles of Incorporation Requirements

Answer 20

Must be Filed.
Must contain:
- Name of Corp
- Name and Addresses of Agents
- Number of Authorized Shares
- Statement of Purpose

Question 21

Ultra Vires Activity

Answer 21

If the Articles of Incorporation state a specific purpose and a director or officers depart from the purpose, the State and SH can sue corporation to enjoin the activity.

Question 22

Subscribers

Answer 22

Subscribers are persons or entities that make written offers to buy stock (“Subscription”) from a corporation that has not yet been formed.

Revocation: Under K law, offers to purchase pre-incorporation stock are revocable until acceptance. Under Corp law, offers are irrevocable for 6 months.

Question 23

Par Value of Stock

Answer 23

The value assigned to shares of stock, representing the minimum amount for which each share may be sold. A corporation may receive more than this value, but never less. Directors a liable for stock issued below par.

Question 24

Quorum for SH Voting

Answer 24

For an action to pass there must be a quorum, which is a majority of outstanding shares represented. Quorum is based on majority of shares, not shareholders.

If a quorum is present, a majority of votes cast validates the proposed SH action. Exception: fundamental change requires a majority votes of all shares.

Source: CA Blue Book

Question 25

Indemnification of Directors and Officers

Answer 25

A corporation may indemnify a director/officer for reasonable expenses incurred in unsuccessfully defending a suit.

Exception:
- Director is held liable for receiving improper benefit

Corporation must always indemnify director/officer for successful suit

Question 26

SH Proxy Requirements

Answer 26

A signed writing authorizing another to cast vote on behalf of a SH

1. Writing
2. Signed by record owner SH
3. Directing to secretary or corporation
4. Authorizing another to vote the shares, and
5. Valid for 11 months

Proxies are revocable unless labeled otherwise

Question 27

Direct Suit by SH

Answer 27

A suit by a SH to redress any injury sustained directly by them for which they are entitled to relief. (ie: right to inspect corporate books and records in good faith at reasonable times)

Question 28

Derivative Suit by SH

Answer 28

SH us suing to enforce the corporations own cause of action. Corporation is named as a defendant, but Corporation is entitled to recovery. (Can the corporation itself have brought this suit? If yes- derivative)

SH must have been stockholder at time claim arose.

Question 29

SH Demand for Derivative Suit

Answer 29

SH Demand made,
Reject by the board
90 days must pass since denial
Suit is in corporations best interest

Question 30

Voluntary Dissolution (Corp)

Answer 30

Corporation chooses to take action to dissolve by majority vote by directors and SH. Directors must file an articles of dissolution with state.

Question 31

Involuntary Dissolution

Answer 31

Judicial Dissolution based on fraud, ultra vires action, or a defective corporation

Administrative Dissolution based on fraud or abuse of authority.

Question 32

Federal Securities Law: 10(b)(5)

Answer 32

This rule prevents any person from using fraud or deception in the purchase or sale of any security by means of any instrumentality in interstate commerce.

Elements:
1. Fraudulent Conduct
2. In connection with purchase or sale of a security by P in interstate commerce
3. Use of a means of interstate commerce
4. Reliance
5. Damages

Question 33

Section 16(b) Short Swing Trading Profits

Answer 33

A director, officer, or SH owning more than 10% of a corporation must surrender any profit realized to the corporation from the re-sale or re-purchase of equity securities within a 6-month period when the corporation is (1) publicly traded on a national stock exchange or (2) has more than $10m in assets and at lease 2,000 SH

Question 34

Theories of Liability Under 10(b)(5)

Answer 34

Traditional Theory: Liability attaches to any person who discloses the material, non-public information or refrains from trading. These insiders have a fiduciary duty to abstain or disclose

Misappropriation Theory: Applies to outsiders (eavesdroppers/lawyers). This theory applies when the outsider breaches a Duty of Trust or Confidence owed to the source of the information and trades on the market.

Tipper/Tippee Theory: Applies to any individual who acquires material insider information as a result of an insider’s Breach of Duty, and this will be considered Insider Trading.

Question 35

Pooled or Block Voting

Answer 35

Shareholders can increase their influence by agreeing to vote alike. There are two ways to do this, voting trust or a shareholder agreement.

Question 36

Corporate Fundamental Changes- Procedure

Answer 36

Fundamental Changes to the corporate business or structure must be approved by a majority shareholder vote. Typical procedure to make a fundamental change:
1) Board adopts a resolution
2) Written notice is given to shareholders (10-60 days before next shareholder mtg)
3) Shareholders approve the change by majority vote.
4) Change is updated in the articles filed with the state.

Question 37

Types of Fundamental Changes

Answer 37

1) Merger
2) Share exchange between corporations
3) Asset sales of a substantial amount
4) Conversion from corporation to another form
5) Dissolution / Winding Up

Question 38

Shareholder Agreement

Answer 38

SH Agreements allow SH to vote their shares together. Historically, these were not permitted and voting trusts were required. They are governed by modern contract principles.

Question 39

Voting Trust

Answer 39

A voting trust is a formal delegation of voting power to a voting trustee for ten years and thus requires: 1) a written trust agreement, 2) transfer of shares to voting trustee, 3) shareholders get trust certificates, 4) shareholders retain all rights except for voting.

Question 40

Quorum for BOD

Answer 40

A majority of directors must be present at time vote is taken for board action to be valid unless bylaws or articles allow otherwise.