Corporations

Question 1

Promoter

Answer 1

a person who acts on behalf of corporation prior to formation.

Question 2

Promoters are personally liable for pre-incorporation contracts unless

Answer 2

1) there is a subsequent novation, or 2) the contract explicitly provides there is no promoter liability.

Question 3

Corporate liability of pre- incorporation contracts

Answer 3

A corporation is not liable for a pre-incorporation contract unless the corporation knows the material terms and accepts the benefits of the contract. If the corporation accepts the benefits of the contract, it may be adopted, and while it doesn’t relieve the promotor of liability, it offers the creditor an alternative avenue to seek reimbursement.

Question 4

Corporation

Answer 4

A corporation is a legal entity that exists separate from its owners, thus shielding the owners and managers from liability.

Question 5

Formation

Answer 5

• A corporation’s existence begins on the date the Articles of Incorporation are filed with the Secretary of State, unless a delayed effective date is specified.

Question 6

Shareholder agreement

Answer 6

Shareholder may enter into agreements concerning the management of a corporation as long as the agreement is set forth in the AOI, bylaws or some written agreement signed by all shareholders, and made known to the corporation

Question 7

A shareholder may vote shares

Answer 7

in person or by proxy

Question 8

Prepetual proxies

Answer 8

proxy is an agreement between shareholders to have one vote on their behalf

Question 9

An appointment of a proxy is effective when

Answer 9

he inspector of election, or the officer or agent of the corporation authorized to tabulate votes, receives a signed appointment form.

Question 10

irrevocable proxy

Answer 10

requires that the proxy be labeled irrevocable and must be coupled with an interest and include the appointment of a party to a voting agreement

Question 11

Duty of care

Answer 11

Under the business judgement rule, D& O must preform their duties in good faith with such care as a reasonably prudent person in like position would use under similar circumstances in a manner reasonably believed to be in the best interests of the corporation.

Question 12

BJR

Answer 12

rebuttable presumption that a director reasonably believed their actions were in the best interest of the corporation

Question 13

Duty of loyalty - Fiducary duty owed

Answer 13

A director must act with the corporations best interest and without personal conflict.

Question 14

Duty of loyalty - Fiducary duty owed forbids the following actions

Answer 14

entering into conflict interest transcation

ursuping a corporate opportunity

competing with the corporation

trading on inside information

Question 15

Duty of loyalty - Conflicts of Interests

Answer 15

A conflict of interest is a breach of the duty of loyalty unless the director shows that 1) it was approved by a majority of disinterested directors after full disclosure; 2) it was approved by a majority of disinterested shareholders after full disclosure of all relevant material facts; or 3) the transaction as a whole was fair to the corporation. The director who has a conflict of interest is not allowed to vote.

Question 16

Usurpation of a corpoate opportunity

Answer 16

A corporate opportunity exists if the corporation has an interest in opportunity, or the opportunity is in the corporation’s line of business. A director may only pursue a corporate opportunity if they first presents it to the corporation and the board decides not to pursue the opportunity.

Question 17

Board meetings - the board can only act if a

Answer 17

quorum is present

Question 18

How do you form a quorum

Answer 18

A majority of the Board is necessary to form a quorum, unless the AoI state a higher or lower number. At least 1/3 of directors are required to form a quorum, and you need a quorum to secure a valid vote

Question 19

Quorum

Answer 19

For the BOD acts at a meeting to be valid, a quorum of directors must be present. A majority of all directors consitute a quorum, unless a higher or a lower number is required by the AIC or Bylaws.

Question 20

To be counted for quorum purposes, a director must be present at the time that the vote is taken. Presence includes

Answer 20

appearances made using communications equipment that allows all persons participating in the meeting to hear and speak to one another.

Question 21

Board action

Answer 21

once a quorum is present, a vote of majoirty of the firectors present consitutes a board action unless the AIC or bylaws require a higher number

Question 22

Dividends

Answer 22

The power to authorize a dividend rests with the BOD. In general, a shareholder cannot compel the BOD to authorize a dividend because that decision is usually discretionary. When a board acts in bad faith and abuses its discretion by refusing to declare a dividend, however, a court may order the board to authorize a dividend.

Question 23

To prevail in a suit to compel a diviend a shareholder must prove the existence of

Answer 23

(i) funds legally available for the payment of a dividend and (ii) bad faith on the part of the directors in their refusal to pay.

Question 24

Removal of directors

Answer 24

Director may be removed from the board of directors by court order for fraud or gross abuse of authority, or by a vote of the majority of shareholders for any reason.

Question 25

10b5

Answer 25

Trading on insider information. 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.

Question 26

16b rule

Answer 26

• A director, officer, or shareholder 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: (a) is publicly traded on a national stock exchange; or (b) has more than $10 million in assets and at least 2,000 shareholders.

Question 27

Voluntary dissolution distribution- in the case of a voluntary dissolution, a corporation’s assets are distributed to

Answer 27

1) creditors of the corporation to pay debts and other obligations, 2) preferred stock, 3) common stock.

Question 28

Articles of incorporation

Answer 28

The AoI must contain: 1) corporate name; 2) number of shares the corporation is authorized to issue; 3) the address of the corporation’s initial registered office and the name of its initial registered agent at that office; and 4) the name and address of each incorporator.

Question 29

Fundamental changes requires

Answer 29

– These require a special meeting and majority of all votes, not just those at the quorum.

Question 30

Fundamental changes include

Answer 30

merger, consolidation, changes to the AoI, sale of all or substantial assets and dissolution.

Question 31

De Jure Corporation

Answer 31

a legally formed corporation. A corporation is legally formed when the AoI are filed with the Secretary of State. If the corporation is not legally formed, it cannot enter into contractual obligations. In such instance, personal liability of the owners/promotors will result unless either an exception for De Facto Corporations or Corporation by Estoppel applies.

Question 32

De facto corporation

Answer 32

benefits and powers of a properly formed corporation, but through some error, it is not legally incorporated.

Question 33

A DFC Exists where the entity

Answer 33

1) made a good faith attempt to incorporate; 2) is otherwise eligible to incorporate; and 3) took some action indicating that it considered itself a corporation. However, only a person who was unaware that the corporation was not properly formed may assert the de facto corporation defense

Question 34

Corporation by Estoppel

Answer 34

Any person or entity that treated a business as a corporation may be later estopped from denying that the business is a corporation, even if a valid corporation was not formed.

Question 35

Ultra VIres Acts (UVA)

Answer 35

When a corporation’s activities are outside the scope of their AoI, such activities are deemed UVAs.

Question 36

Under common law UVAs are void and uneforceable but under the Revised Model Business Corporaiton act

Answer 36

UVAs are generally enforceable if they benefit the corporation. However, individual directors and officers who approved these UVAs can be held personally liable.

Question 37

When are UVA claims raised

Answer 37

when 1) a shareholder sues to enjoin the UVA; 2) the corporation sues an officer; or 3) a state brings action to dissolve the corporation based on UVA.

Question 38

Piercing the veil

Answer 38

Generally, shareholders, directors, and officers are not personally liable for the liabilities of the corporation. However, a court will pierce the corporate veil and hold shareholders personally liable when: 1) the corporation is acting as the alter ego of shareholders; 2) where shareholders fail to follow corporate formalities; 3) the corporation was inadequately capitalized at formation or 4) to prevent fraud.

Question 39

Majority shareholders duty

Answer 39

have a duty to act in the best interest of the corporation and to not engage in behavior that could result in harming the majority shareholders

Question 40

Shareholder inspection rights

Answer 40

A shareholder has a 1) right to inspect and copy corporate records 2) upon five days’ written notice 3) stating a proper purpose.

Question 41

Proper purpose

Answer 41

one that relates to the shareholder’s interest in the corporation

Question 42

lthough a shareholder may generally inspect the main records of the corporation, such as the bylaws and articles and the minutes of shareholder meetings, the shareholder must demonstrate a proper purpose before inspecting certain records, such as

Answer 42

he financial statements of the corporation, the accounting records of the corporation, and excerpts from minutes of any meeting of the BOD.

Question 43

Direct action

Answer 43

a shareholder may pursue a direct action to enforce shareholder rights. A shareholder may sue the corporation for the breach of a fiduciary duty owed to the shareholder by a director or an officer. Any recovery goes to the shareholder

Question 44

Derivative action

Answer 44

In a derivative action 1) a shareholder with standing 2) after a board demand 3) sues on the corporation’s behalf to recover for harm to the corporation and litigation expenses.

Question 45

Standing for a derivative action

Answer 45

Standing to bring the suit requires that the plaintiff be a shareholder at the time the action is filed and when the act or omission occurred that caused the harm. The plaintiff must make a written demand upon the BOD 90 days before filing unless it would be futile.

Question 46

Reliance protections

Answer 46

A director is entitled to rely on the performance of as well as information, reports and opinions supplied by the following persons if the director reasonably believes them to be reliable and competent 1)officers and employees of corporations 2) outside attorneys, accountants or other skilled or expert individuals retained by the corporation 3) committee of the board of which the director is a not a member