Corporations

Question 1

Who is liable for pre-incorporation transactions?

Answer 1

Promoters (they are fiduciaries) are personally liable, even if the corporation adopts the contract once formed, unless the three parties execute a novation.

Question 2

The articles of incorporation must include

Answer 2

the name, the agents, names and addresses of incorporates, duration, the purpose (usually any lawful activity) and authorized shares

Question 3

When is the corporation incorporated?

Answer 3

When the secretary of state accepts the fee and files the articles

Question 4

If by laws and articles of incorporation conflict, which wins?

Answer 4

Articles

Question 5

What is the de facto corporation rule?

Answer 5

When a corporation isn’t properly formed but exercises corporate privileges, it will be treated as a corp if there was a good faith attempt to incorporate and there was no actual knowledge of the faulty corporate status.

Question 6

When can a court pierce the veil?

Answer 6

SHs have abused privilege of incorporating and fairness must require holding them liable.

Three common situations where courts pierce the veil: Alter ego (SHs ignore corporate formalities and treat corp as alter ego or mere instrumentality), undercapitilization (at the time of formation & insufficient to reasonably cover prospective liabilities), and fraud (e.g., where SH uses entity to avoid existing personal obligations).

More commonly done in tort cases.

Question 7

What are issued shares?

Answer 7

Number of authorized shares actually sold

Question 8

What are outstanding shares?

Answer 8

Shares that were once issued and remain in the possession of shareholders

Question 9

What are treasury shares?

Answer 9

Shares one issued but subsequently reacquired by the corporation

Question 10

Par value is?

Answer 10

The minimum value to sell a share at (it is not required)

Question 11

Watered stock is?

Answer 11

Stock sold for less than the par value. Shareholders who buy watered stock are liable to creditors of the corp.

Question 12

How long is a stock subscription irrevocable for when made pre-incorporation?

Answer 12

Six months

Question 13

Preemptive rights allow what

Answer 13

The person to maintain their percentage of ownership when new shares issue. Must be stated in articles of incorporation.

Question 14

Who can authorize distributions?

Answer 14

Directors unless would cause insolvency

Question 15

Must every corp hold an annual shareholder meeting?

Answer 15

Yes.

Question 16

Special shareholder meetings are for?

Answer 16

Voting on fundamental changes. Purpose of meeting must be stated in notice.

Can be called by BOD, president, holders of at least 10% of shares, or anything else authorized to do so under articles or bylaws. Must be for proper SH purpose.

Question 17

Notice for shareholder meetings must occur?

Answer 17

No fewer than 10 days and no more than 60 days before the meeting. Notice for special meetings must include purpose. Meeting without notice is void or voidable unless notice defect was expressly waived in writing & signed or implied by attendance and lack of objection.

Question 18

Directors must set a record date when?

Answer 18

no fewer than 10 days before the meeting and no more than 70 days before the meeting

Question 19

A proxy must be?

Answer 19

In writing, signed by the shareholder as of the record date, sent to the secretary, state that it authorizes another to vote, and cannot be valid for more than 11 mos. Revocable unless expressly stated and coupled with an interest given to proxy.

Question 20

Quorum of shareholders is?

Answer 20

A majority of the outstanding shares, not shareholders

Question 21

Necessary vote of shareholders is?

Answer 21

If not at meeting, require unanimous written consent.

At meetings:
Election of director: Plurality
Fundamental corporate change/removal of director: Some require majority of all shares entitled to vote. Some require only majority of shares that actually vote, as long as quorum is present.
Other matters: When more of the votes of a shareholder quorum for the proposal exceed the votes against.

Question 22

Shareholders can inspect corp records so long as they?

Answer 22

Make a written demand at least 5 business days in advance. Unqualified right, regardless of purpose, for articles and bylaws, board resolution, SH meeting minutes, SH communications, list of current directors and officers, most recent annual report.

Qualified right, requiring proper purpose, for more controversial things, e.g., board meeting minutes, corp accounting records, SH records.

Question 23

Shareholders can sue

Answer 23

Directly or derivatively (on behalf of the corp)

Question 24

Derivative law suits require

Answer 24

Claim made in corp name, contemporaneous stock ownership, was a shareholder at time of harm, fairly represents interests of the corp, and made a demand to board 90 days before bringing suit unless it would have been futile. Corp must be joined as defendant.

Corporation gets money judgment and may indemnify SH for attorneys’ fees and costs if they won.

Corp can move to dismiss on grounds that the suit is not in corp’s best interest (based on independent investigation).

Question 25

Controlling shareholder duty to a minority shareholder

Answer 25

Controlling shareholders cannot use their power to benefit at the expense of minority shareholders in a closely held corp. If there is oppression of minority SHs, they can sue the controlling SHs for breach of fiduciary duty (because oppression thwarts legitimate investing goals and they have no way out).

Question 26

For directors, a quorum is

Answer 26

A majority of the total number of directors. Quorum is lost if directors leave during the meeting.

Question 27

Directors may avoid liability by

Answer 27

Dissenting or abstaining in writing, e.g., entering dissent in minutes of the meeting, filing a written dissent before the meeting adjourns, or provide a written dissent to the secretary. Cannot dissent if they voted for the resolution at the meeting. If there is no dissent or abstention, the director is presumed to concur with board actions.

Question 28

Directors and officers owe what to the corporation?

Answer 28

A fiduciary duty (duty of care and duty of loyalty). And a duty to disclose material corporate information to other members of the board.

Duty of care: director must use the care that a person in like position would reasonably believe appropriate under the circumstances.

Duty of loyalty: A director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation.

Question 29

The business judgment rule is?

Answer 29

Absent fraud, illegality or self dealing, courts will not disturb good-faith business decisions.

Does not apply to duty of loyalty cases.

A director may rely on corporate officers or employees that they reasonably believe are reliable & competent, legal counsel, accountants, or other persons as to matters the director reasonably believes are within the person’s professional competence, or a committee of the board of which the director is not a member and reasonably believes that the committee merits confidence.

Question 30

A self-interested transaction may be upheld if?

Answer 30

It is ratified by a majority of disinterested directors or shareholders, and the director disclosed all material facts to the board/shareholders, OR it was fair to the corporation in the circumstances at the time of the transaction.

Question 31

Fundamental changes require approval of?

Answer 31

Both shareholders and directors. And must deliver document to Secretary of State for most of the changes.

Question 32

Merger is

Answer 32

when two or more corps combine and one survives assuming the assets and liabilities of the others

Question 33

Consolidation is

Answer 33

the combination of two or more corps when neither survives and a new one is created assuming the assets and liabilities

Question 34

Involuntary dissolution can occur by?

Answer 34

Action by AG on ground that corp fraudulently obtained articles or is exceeding or abusing authority;

OR action by SHs showing that: corp is wasting assets, director abuse, misconduct, or fraud, director deadlock threatening irreparable injury to corp, shareholder deadlock and fail to elect one or more directors for period including 2 annual meetings, or corp has abandoned business and failed to dissolve within reasonable time;

OR action by creditors showing a corp is not paying its debts.

Question 35

Appraisal rights are?

Answer 35

When a shareholder dissents from a fundamental change he can demand his shares to be purchased by the corp for FMV. Only triggered in close corps when merging or consolidating, transferring substantially all assets, stock being acquired in share exchange, or converting to another form of business. SH must perfect right of appraisal by filing written notice of objection and intent to demand payment before the SH vote, voting against or abstaining at the meeting, and make written demand within time set by corp after the vote if approved.

Question 36

LLCs require filing ___ and its owners are called ____ instead of shareholders?

Answer 36

An operating agreement; Members.

Question 37

How do you create a corporation?

Answer 37

To create a de jure corporation, you need a person (incorporator), paper (articles of incorporation), and act (file articles with secretary of state). If the articles don’t name the initial directors, the incorporators must hold an organizational meeting to adopt bylaws and appoint officers.

Question 38

What is a benefit corporation?

Answer 38

A corporation formed for profit and to pursue some benefit to a broader social policy cause. Decisionmakers have to consider impact on shareholders and on community/environment.

Question 39

What is a benefit corporation?

Answer 39

A corporation formed for profit and to pursue some benefit to a broader social policy cause. Decisionmakers have to consider impact on shareholders and on community/environment.

Question 40

What is corporation by estoppel?

Answer 40

Persons who have contracted with an entity and acted as if it were a corporation will be estopped from denying the corporation’s existence. Insulates against personal liability in contract.

Question 41

What is the effect of the creation of a corporation on liability?

Answer 41

Shareholders are only liable to pay for their stock, not for corporate debts. Directors and officers are also not liable for corporate debts.

Question 42

How long is a stock subscription irrevocable for when made post-incorporation?

Answer 42

Revocable until accepted by the corporation.

Question 43

How long is a stock subscription irrevocable for when made post-incorporation?

Answer 43

Revocable until accepted by the corporation.

Question 44

Who elects and removes directors?

Answer 44

Shareholders.

Question 45

Who appoints and removes officers?

Answer 45

Directors.

Question 46

What is required for a Board of Directors to act?

Answer 46

Unanimous agreement in writing or majority of the quorum at a meeting.

Question 47

What is required for a Board of Directors to act?

Answer 47

Unanimous agreement in writing or majority of the quorum at a meeting.

Question 48

What is required for Board of Directors meetings?

Answer 48

No notice for regular meetings; at least two days written notice of date, time, and place for special meetings. Failure to give notice makes any decision at the special meeting void or voidable unless lack of notice is waived in writing or by attending the meeting and not objecting.

Question 49

What is required for Board of Directors meetings?

Answer 49

No notice for regular meetings; at least two days written notice of date, time, and place for special meetings.

Question 50

Can personal liability of directors be limited by the articles?

Answer 50

Yes, the articles may eliminate or limit directors’ personal liability for money damages to corp or SHs for actions taken or for failure to take action. But they cannot limit or eliminate liability for financial benefits received by the director to which she is not entitled, an intentionally inflicted harm on the corp or SHs, unlawful corporate distributions, or an intentional violation of criminal law.

Question 51

Can personal liability of directors be limited by the articles?

Answer 51

Yes, the articles may eliminate or limit directors’ personal liability for money damages to corp or SHs for actions taken or for failure to take action. But they cannot limit or eliminate liability for financial benefits received by the director to which she is not entitled, an intentionally inflicted harm on the corp or SHs, unlawful corporate distributions, or an intentional violation of criminal law.

Question 52

When must the corporation indemnify a director?

Answer 52

When the director or officer was successful in defending a proceeding on the merits or otherwise. Must indemnify reasonable expenses, including attorneys’ fees.

Question 53

When can a corporation NOT indemnify a director?

Answer 53

When they were held liable to the corporation or held to have received an improper benefit.

Question 54

When may a corporation indemnify a director?

Answer 54

For reasonable litigation expenses incurred in unsuccessfully defending a suit brought against a director on account of the director’s position if the director acted in good faith and believed their conduct to be in the best interests of the corporation. Determination made by a disinterested majority of the board.

Question 55

What is a close corporation?

Answer 55

Few shareholders, stock not publicly traded, can be managed by the shareholders, directors, or managers. SHs owe a fiduciary duty to other SHs. Courts can only pierce the corporate veil of close corporations.

Question 56

What is a professional corporation?

Answer 56

A corporation that exclusively has SHs, directors, and officers that are licensed professionals.

Question 57

What is a professional corporation?

Answer 57

A corporation that exclusively has SHs, directors, and officers that are licensed professionals.

Question 58

Voting Trust

Answer 58

Written trust agreement controlling how shares will be voted, copy of agreement given to corporation, legal title of shares is transferred to trustee, and original shareholders receive trust certificates and retain all other SH rights. Trustee votes the shares and distributes dividends. Generally 15-year max, but renewable.

Question 59

Voting agreement

Answer 59

Agreement in writing and signed, providing for how the SHs will vote their shares. Generally 15-year max, but renewable.

Question 60

Can a corporation restrict stock transfer?

Answer 60

Restrictions are valid If they are not an undue restraint on alienation. Rights of first refusal (requiring SH to offer the stock to corp first before selling) are valid. Valid restriction can be enforced against 3rd party purchaser if the restriction was conspicuously noted on stock certificate or they had actual knowledge of the restriction at the time of purchase.

Question 61

Can a corporation restrict stock transfer?

Answer 61

Restrictions are valid If they are not an undue restraint on alienation. Rights of first refusal (requiring SH to offer the stock to corp first before selling) are valid. Valid restriction can be enforced against 3rd party purchaser if the restriction was conspicuously noted on stock certificate or they had actual knowledge of the restriction at the time of purchase.

Question 62

What are fundamental corporate changes?

Answer 62

Amending articles (unless merely housekeeping), merging/consolidating into another company (unless articles won’t change, number of shares won’t change, voting power of newly issued shared won’t be more than 20% of pre-merger voting power of shares; OR in short form merger where parent corp owned at least 90% of outstanding shares), transferring substantially all assets (rule of thumb is 75%; fundamental change is for selling corp only), converting to another form of business, and dissolving.

Question 63

Voluntary dissolution

Answer 63

If shares have not been issued or business not commenced –> by majority of incorporators or directors

Corporate act w/ board & SH approval

May be revoked by same procedure used to approve dissolution.

Must file notice of intent to dissolve with Secretary of State.

Must notify creditors.

Question 64

Administrative dissolution

Answer 64

Action brought by state to dissolve corp for failure to pay fees or penalties, file annual report, or maintain registered agent in the state.

Question 65

Steps for winding up

Answer 65

Written notice to creditors and publication of notice of dissolution in newspaper in county of PPOB, gather all assets, convert assets to cash, pay creditors, and distribute any remaining sums to shareholders (pro rata by shares unless there is a liquidation preference).