Corporations

Question 1

De Jure Corporation

Answer 1

A de jure corporation is one formed in accordance with the law.

To be valid, the AOI must be filed with the appropriate state office, which is usually the secretary of state.

Question 2

Effect on SH Liability upon creation of a de jure corporation.

Answer 2

A de jure corporation is one that meet meets all the statutory requirements for incorporation, the effect of which will shield SH from personal liability.

Question 3

Corporation by estoppel

Answer 3

If an individual acts as though it is acting on behalf of the corporation, the individual cannot deny the validity of its organization against a TP seeking to hold the corporation responsible.

Further, the TP cannot try to sue the individual personally since the TP believed it was interacting with a corporation.

Question 4

De facto corporation.

Answer 4

There must be:
(i) incorporation status
(ii) the owners made a good faith effort to comply with the incorporation requirements
(iii) the owners must operate the business as a corporation w/o knowing that these requirements have not been met.

Question 5

De facto corporation: effect on SH liability

Answer 5

A de facto corporation is one that failed to become a de jure corporation due to an unsuccessful effort to comply w/ the incorporation requirements but has the rights and powers of a de jure corproation, thereby shielding SH from personal liability.

Question 6

Piercing the corporate veil

Answer 6

The benefit of forming a de jure corporation means that SH are protected from being held PL for the corporation’s acts.

However, under certain circumstances a court will allow a P to “pierce the corporate veil” if fairness demands it.

The plaintiff will have to show one of the following:

(i) Alter ego: occurs when SH do not act under the required formalities of the AIC. This can be evidenced by commingling of funds.

(ii) Under-capitalization: occurs when SH fail to advance funds enough to cover foreseeable liabilities

(iii) The corporation has been used to commit a fraud.

Question 7

Effective action by BOD

Answer 7

For a BOD acts to be valid, there must be a quorum (majority) of directors at the meeting at the time of the vote.

For an act to be validly voted for, the act must have a majority vote.

Question 8

Duty of care (duties of directors)

Answer 8

Directors have a duty to act with care of an ordinary prudent person in a like position and similar circumstances and to act in good faith. In deciding how to act, the director is required to use any additional knowledge or skills he posesses.

Question 9

Business Judgment Rule (duties of directors)

Answer 9

The BJR acts as a safe harbor for directors. Under this rule, courts will not second guess a business judgment if it was made reasonably and in good faith.

However, the BJR is a rebuttable presumption that insulates directors from liability for their decisions that directors made in good faith and in the best interests of the corporation.

A director who breaches a DOC will not be protected by the BJR. The exercise of managerial powers by a director is generally subject to the BJR.

Question 10

Duty of Loyalty (duties of directors)

Answer 10

A director must act in good faith and w/ the reasonable belief that what he does is in the corporation’s best interest. The BJR presumption does not apply to a DOL.

Question 11

3 ways in which a DOL can come up

Answer 11

(i) interested director
A transaction where a director is on both sides of the contract. It means that the D has a material financial interest in the contract, as well as knowledge of that interest.

(ii) competes with corporation
D must not engage in a competing business w/ own corporation.

(iii) corporate opportunity
D must not benefit from any business opportunity that could benefit the corporation.

Question 12

Safe Harbor Rules for DOL violation

Answer 12

A director who engages in self-dealing may nonetheless avoid liability under the “S H” rules.

Director COI transaction may enjoy protection if:
- director provided full disclosure of all material facts and approved by either a majority of disinterested SHs or directors or
- The director can show the transaction was substantively and procedurally fair to to the corporation .

Question 13

Dissolution / Distribution corporation

Answer 13

The directors are responsible for distribution of the assets and may be liable for improper distributions.

Such assets must be distributed in following order:
- creditors of the corporation
- SH stock w/ preferences in liquidation
- SH of other stock

Question 14

Definition of a pre-incorporation contract

Answer 14

A pre-incorporation contract is one that is entered into on the corporation’s behalf before the corporation was formed. The person who enters such agreement is called a promoter

Question 15

Liability of a corporation in pre-incorporation agreements

Answer 15

A corporation will not be held liable for a pre-incorporation agreement.

Exception: The corporation is held liable if it ratifies the contract. This can be through express adoption by the BOD or implied adoption.

Question 16

Liability of promoter

Answer 16

Unless a contrary intent is manifested, a promoter will be held PL for a contract that it enters into on behalf of a to-be formed corporation. Subsequent adoption of the contract by the corporation does not relieve the promoter of liability.

The promoter’s liability only ends if there is a novation or a release.

Question 17

Duty of a controlling SH

Answer 17

Anyone controlling 50 percent of a corporation’s share, plus one is automatically a controlling SH.

Although SHs do not owe fiduciary duties to the corporation or to each other, a FD to the minority SH may arise if the controlling SH is (i) selling that interest to an outsider (ii) seeking to eliminate other SH from the corporation or (iii) receiving a distribution denied to other SHs.

A controlling SH also has a duty to disclose to the minority SH any information that it knew or should have known if it is information that a reasonable person would consider important in deciding how to vote on a transaction.

Question 18

Direct Suit

Answer 18

In a direct suit to enforce a shareholder’s rights, the SH sues the corporation for a breach of fiduciary duty owed to the SH by a director or officer. Any recovery goes to the SH.

Question 19

Dividend Rights (Direct Suit SH)

Answer 19

The power to authorize a dividend rests with the BOD. A SH cannot compel the BOD to authorize a dividend because that decision is usually discretionary.

To prevail in a suit to compel a dividend, the SH must prove the existence of (i) funds legally available for the payment of dividends and (ii) bad faith on the part of the directors refusal to pay.

Question 20

Derivative Suit - what is it? and what are the requirements needed for it to be brought?

Answer 20

In a derivative action, the SH sues on behalf of the corporation for a harm suffered by the corporation, and any recovery generally goes to the corporation. Standing requires the plaintiff to be a SH at the time the action is filed. The plaintiff must make a written demand upon the BOD 90 days before filing unless it would be futile.

Standing.
To have standing a SH must have been a SH at the time of wrong and at the time the action is filed and he must continue to be a SH throughout the litigation;

Demand upon the board.
The plaintiff in a derivative action must have made a written demand upon the BOD in order to take action unless she can prove it would be futile to do so. A derivative action may not commence until 90 days have passed from the date of demand

Question 21

SH right to Inspect

Answer 21

A shareholder has a right to inspect and copy corporate records upon 5 days’ written notice. Although a SH may generally inspect the main records of the corporation (bylaws, articles), the SH must demonstrate a proper purpose before inspecting certain records such as the financial statements of the corporation, the accounting records of the corporation and excerpts from minutes of any meeting of the BOD.

Question 22

Articles of Incorporation improperly filed?

Answer 22

Articles of the incorporation need to be filed to incorporate. However, if there is a good faith attempt to incorporate under state law, two doctrines can be used to shield a corporation’s SH from personal liability
(1) de facto incorporation
(2) corporation by estoppel.

Question 23

Definition of a

Question 24

Are officers agents of a corporation?

Answer 24

Officers have actual or at least apparent authority to bind the corporation in many instances.

For example, a president has actual implied authority to enter into a contract in the ordinary course of business.

Question 25

Futility exceptions (SH derivative suits)

Answer 25

Demand is excused because of futility if (1) a majority of BOD is interest in the challenged transaction (2) the BOD did not fully inform themselves about the transaction to the extent reasonably necessary under the circumstances or (3) transaction was not a product of a valid business judgment.

Question 26

What are the special requirements for fundamental changes?

Answer 26

Fundamental changes include:
- dissolution of the corporation
- amendment of an article
- merger
- selling substantial assets

Board approval and SH approval by an absolute majority of shares entitled to vote is needed for a fundamental change.

Question 27

SH right to vote:

Answer 27

A SH may vote in person or by proxy. A proxy vote must be executed in writing and delivered to the corporation or its agent.

In order for a proxy to be valid: the proxy holder has a (i) property right in the share or (ii) security interest given to him to protect him for nay obligations he incurred or money advanced.

A proxy is valid for 11 months unless otherwise provided. A proxy is revocable unless it expressly provides that it is irrevocable.

Question 28

What is a security?

Answer 28

Investment where there is an expectation of profits primarily from the efforts of others.

Question 29

Insider?

Answer 29

Anyone who learns of material nonpublic information as a consequence of his corporate position or has a fiduciary relationship to the corporation.

Question 30

What is the insider’s obligation?

Answer 30

An insider has an obligation not to make a secret dealing by trading stock before public disclosure.

Question 31

What is rule 10b-5?

Answer 31

Prohibits anyone from using interstate commerce to defraud or make an untrue statement of
- a material fact in connection with purchase or sale of a security.

Question 32

What must a private plaintiff show under rule 10b5?

Answer 32

(1) fraudulent conduct: mistatement, misrep or omission that breaches a fiduciary duty.

(2) causation: P actually bought or sold the security from any source.

(3) reliance: P relied on D’s statement.

(4) damages

Question 33

How does an insider breach 10b5

Answer 33

By trading on insider info and breaching a duty of trust and confidence owed to issuer, SH issuer.

Question 34

Shareholder agreement?

Answer 34

SHs may enter into a binding voting agreement, also known as a voting pool which provides for the manner in which they will vote their shares.

Under such an agreement – SH retain ownership of their stock and the contract may be specifically enforced. It does need to be filed with the corporation and there is no time limit.

Question 35

Agreement btw directors on how to vote?

Answer 35

Generally, unenforceable. Each director is expected to exercise independent judgment.