Corporations

Question 1

Corporation Formation

Answer 1

Formed by filing articles with the secretary of state. Presumably formed for lawful purpose, any business outside of stated purpose is ultra vires.

Question 2

De Facto Corporation

Answer 2

(1) an available statute for valid incorporation,
(2) a colorable compliance in good faith
(3) the corporation must act like a corporation

Question 3

Corporation by Estoppel

Answer 3

Persons who treat an entity like a corporation are estopped from later claiming it was not

Question 4

Alter Ego Piercing Theory

Answer 4

Requires:
(1) failure to observe corporate formalities (keeping adequate minutes, books, and records), and
(2) a basic injustice so that equity would require that shareholders be liable for the damages caused.

Question 5

Inadequate Capitalization Piercing Theory

Answer 5

Inadequate capitalization at the time of incorporation

Question 6

Avoidance of Obligations Piercing Theory

Answer 6

Avoidance of existing obligations at the time of incorporation, or fraud on creditors or other third parties.

Question 7

Deep Rock - Equitable Sub

Answer 7

Where the corporation is insolvent and a shareholder is the owner of a debt, a judge in their discretion may subordinate the shareholder’s debt to all other debtholders (even unsecured).

Question 8

Shareholder Powers

Answer 8

(1) Elect directors annually
(2) Amend articles and bylaws
(3) Vote on fundamental corporate changes

Question 9

Shareholder Voting

Answer 9

(1) Requires Quorum
(2) In person or by proxy
(3) May enter into SH agreements - must be in bylaws.
(4) Can restrict transfer of shares by adding ROFR, buy back, transfer approval, prohibition of transfer to particular group.

Question 10

Distributions to Shareholders

Answer 10

(1) dividends to shareholders,
(2) redemption or repurchase of outstanding shares, or
(3) liquidating distributions after dissolution.

Question 11

Right of Inspection

Answer 11

Shareholders have right to inspect corporate books and records for a proper purpose reasonably related to their interest as a shareholder:
(1) investigating director/officer misconduct,
(2) waging a proxy battle, or
(3) seeking support for a shareholder initiative.

Question 12

Shareholder Direct Suits

Answer 12

For breach of duty directly owed to the shareholder by an officer or director, or by the majority shareholders (such as failure to declare a dividend).

Question 13

Majority SH Duties to Minority

Answer 13

(1) Majority/controlling shareholders have a fiduciary duty to minority shareholders to not act oppressively, illegally, or with fraud.
(2) Duty to not sell to looters
(3) Duty to not sell corporate offices over market for private gain

Question 14

SH Derivative Suits

Answer 14

Suits on behalf of corporation for harm to corporation; recovery goes to corporation.

Question 15

Derivative Suit Requirements

Answer 15

(1) standing (ownership of the stock at the time of the wrong or by operation of law from someone who owned it at the time of the wrong), and

(2) written demand and inaction for 90 days, unless demand would be futile (because all or majority of board was in breach).

Question 16

Director Voting

Answer 16

(1) Requires quorum - valid vote needs majority of disinterested directors

Question 17

Duty of Care

Answer 17

Requires directors act:
(1) in good faith,
(2) with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, and
(3) in a manner the director reasonably believes to be in the best interest of the corporation.

BJR applies

Question 18

Duty of Loyalty - Conflict of Interest

Answer 18

Director has a conflict of interest if
(1) director or related person
(a) is a party to the transaction,
(b) has the beneficial interest in the transaction, or
(c) is the employee of entity with whom corporation is transacting business; and
(2) the transaction is of such importance it would normally need board approval.

Question 19

Conflict of Interest Defense

Answer 19

A transaction with a potential conflict of interest will not be enjoined or result in damages if:
(1) approved by a majority of disinterested directors;
(2) approved by a majority of disinterested shareholders; or
(3) at the time, it was FAIR to the corporation.

Question 20

Usurpation of Corporate Opportunities

Answer 20

If the corporation has an interest or expectancy in the business opportunity, a director or officer cannot take that opportunity for himself.

Question 21

Common Law Insider Trading

Answer 21

Director has common law duty of loyalty to SHs not to engage in insider trading – purchasing or selling stock with undisclosed knowledge of a special circumstance significantly impacting the value of the stock.
Disclose or Abstain

Question 22

Indemnification of Directors/Officers

Answer 22

Director wins.
If director prevails, director is entitled to indemnification from corporation for expenses in defending a lawsuit.

Director loses.
If the director does not prevail, indemnification depends on the nature of the lawsuit in some states, but generally, there is no indemnification permitted.

Question 23

Corporate Dissolution Ways

Answer 23

(1) Voluntary
(2) Administrative
(3) Judicial

Question 24

Administrative Dissolution

Answer 24

Failure to:
(1) pay corporate fees or penalties for 60 days after the due date;
(2) failure to deliver the annual statement;
(3) failure to maintain an agent for service of process;
(4) failure to notify the state of a change in the agent for service of process for 60 days.

Question 25

Judicial Dissolution by Shareholders

Answer 25

Shareholders may ask for judicial dissolution for following grounds:
(1) deadlocked directors and threatened irreparable harm [to corporation];
(2) directors acting fraudulently, illegally, or oppressively;
(3) deadlocked shareholders and failure to elect directors for two meetings; or
(4) waste of corporate assets.