Corporations

Question 1

In general, what is a corporation?

Answer 1

A corporation is a legal entity distinct from its owners and may be created only by filing certain documents within the state

Question 2

What are shareholders?

Answer 2

aka stockholders = the owners of the corporation

Question 3

What is the board of directors?

Answer 3

the group in charge of management of the corporation

Question 4

What are officers?

Answer 4

the agents of the corporation appointed to carry out the corporation’s policy

Question 5

Generally, are the shareholders, officers, or directors personally liable for the obligations of the corporation?

Answer 5

Generally no, only the corporation itself can be held liable for corporate obligations

Owners risk only the investment that they make in the business to purchase their ownership interests (shares)

Question 6

Is ownership of a corporation freely transferable?

Answer 6

Generally yes, shareholders are free to sell their shares to others unless it is provided otherwise

Question 7

What is a C Corporation?

Answer 7

Generally, a corporation is taxed as an entity distinct from its owners - has its profits and losses stay in the business

corporate tax rate generally is lower than the personal tax rate, so this arrangement can be advantageous to pesrons who want to delay the realization of income

However, this advantage comes at a price - double taxation - bc when the corp does make distributions to shareholders, the distributions are treated as taxable income to the shareholders, even though the corp has already paid taxes on its profits

Question 8

What is an S Corporation?

Answer 8

Tax laws permit certain corporations to elect to be taxed like partnerships and yet retain the other advantages of the corporate form

No income tax is paid at corporate level; profits/losses of the business are instead “passed-through” to the business and reported on the owners’ personal tax returns. Any tax due is paid at the individual level by the owners.

Partnerships and S corps are not subject to double taxation - profits and losses flow through the entity to the owners

Number of restrictions on S corps (stock can be held by no more than 100 people, shareholders must be individuals, and there can be only one class of stock)

Question 9

How are corporations created under statute?

Answer 9

Corps are created by complying w state corporate law, which is often based on the Revised Model Business Corporation Act (MBCA)

Question 10

What is it called if a corporation has or hasn’t complied with all laws?

Answer 10

A corp formed in accordance with law is a de jure corporation

If all corporate laws haven’t been followed, a de facto corporation might result or a corporation might be recognzied through estoppel

Question 11

To create a de jure corporation, what are the three things we need?

Answer 11

A person, a paper, and an act

Question 12

Who is the person we need to create a de jure corporation?

Answer 12

We need an incorporator

Incorporator can be a person or an entity

Do not need to be a citizen of the state of incorporation

The incorporators must comply with all applicable statory requirements to form the corporation

Must execute and deliver the articles of incorporation to the secretary of state

Question 13

What is the paper we need to form a corporation?

Answer 13

The articles of incorporation

Must include: (1) the name of the corporation (including the word/abbreviation corporation, company, incorporated, or limited); (2) the name and address of each incorporator; (3) a registered agent and the street address of the registered agent (agent’s office must be in the state; legal representative); and (4) information regarding the corporation’s stock (info about the authorized stock which is the max number of shares the corp can sell; state the number of shares per class; describe voting rights, etc.)

Articles may also include any other provision that’s not inconsistent with the law

Often include a statement of business purposes - absent a statement, MBCA presumes that a corporation is formed to conduct any lawful business and is allowed to undertake any act that is necessary or convenient for carrying on their business purpose

Thus, unless an exam question restricts a corporation’s purposes, you should usually find corporate acts to be within the corporation’s powers

If corp does include a narrow business purpose in its articles, it may not undertake activities unrelated to achieving the stated business purpose

Activities beyond the scope = ultra vires

Under MBCA, ultra vires acts are generally enforceable, and the ultra vires nature of an act ca nbe raised in only three situations:

(1) a shareholder may sue the corporation to enjoin a proposed ultra vires act;

(2) the corporation may sue an officer or director for damages for approving an ultra vires act; and

(3) the state may bring an action to dissolve a corporation for committing an ultra vires act

Very limited defense - so I shouldn’t allow a corporation to get out of a contract merely because the contract is outside the scope of the corporation’s stated purpose

Question 14

What must the articles of incorporation include?

Answer 14

In short: name of corp including abbrevation, name/address of incorporator; name/address of registered agent; info about stock

Must include:

(1) the name of the corporation (including the word/abbreviation corporation, company, incorporated, or limited);

(2) the name and address of each incorporator;

(3) a registered agent and the street address of the registered agent (agent’s office must be in the state; legal representative); and

(4) information regarding the corporation’s stock (info about the authorized stock which is the max number of shares the corp can sell; state the number of shares per class; describe voting rights, etc.)

Question 15

Absent a narrow business statement in the articles of incorporation, what is presumed about a business’s purposes?

Answer 15

absent a statement, MBCA presumes that a corporation is formed to conduct any lawful business and is allowed to undertake any act that is necessary or convenient for carrying on their business purpose

Thus, unless an exam question restricts a corporation’s purposes, you should usually find corporate acts to be within the corporation’s powers

Question 16

When a company does have a narrow business purpose and they do something outside that purpose, what are the only three situations where they’ll really be held liable?

Answer 16

In short: usually still enforceable; except with: shareholders wanting to stop the act; corporation suing for damages for approving act; and state dissolving corp for doing act

Under MBCA, ultra vires acts are generally enforceable, and the ultra vires nature of an act can be raised in only three situations:

(1) a shareholder may sue the corporation to enjoin a proposed ultra vires act;

(2) the corporation may sue an officer or director for damages for approving an ultra vires act; and

(3) the state may bring an action to dissolve a corporation for committing an ultra vires act

Very limited defense - so I shouldn’t allow a corporation to get out of a contract merely because the contract is outside the scope of the corporation’s stated purpose

Question 17

When does corporate existence begin (the act)?

Answer 17

To complete formation of the corp, the incorporators will have notarized articles delivered to the secretary of state and pay any required fees

Corporate existence begins upon this filing by the state

Filing is conclusive proof of corporate existence

Question 18

What is the organizational meeting step of incorporation?

Answer 18

After filing, you’ll hold an organizational meeting

If initial directors were named in articles, the board of directors hold the org meeting

If they weren’t named, the incorporators hold meeting

Purpose of meeting is to complete the organization of the corporation, which means (1) adopt initial bylaws and (2) appoint officers

Question 19

What are bylaws?

Answer 19

Bylaws are an internal document

Like an operating manual

May contain any provision for managing the corp that is not inconsistent with the articles or law

Question 20

Are the bylaws filed with the state?

Answer 20

No, only the articles are (that’s what starts the corporation)

Question 21

If a corporation’s bylaws and articles conflict, which governs?

Answer 21

The articles

the bylaws need to not be in conflict with either the articles or the law

Question 22

Who can amend or repeal the bylaws or adopt new ones?

Answer 22

The board of directors or shareholders

Question 23

The internal affairs of a corporation are governed by what state?

Answer 23

Under internal affairs doctrine, internal affairs of the corporation are governed by the law of the state of incorporation

Even if they do business only in another state, they’re still governed by the law of the state of incorporation

so the roles and duties of directors, officers, and shareholders are governed by the state of incorporation

Question 24

What does entity status mean?

Answer 24

Upon formation, a corporation has entity status, meaning it’s a legal person

Corp can sue and be sued, hold property, be a partner in a partnership, invest in other companies or commodities, donate to charity, etc.

Question 25

What generally is limited liability?

Answer 25

It’s one of the most important consequences of forming a corp - they get limited liability

Generally, shareholders are liable only to pay for their stock, not for corporate debts

so if corporation gets debts, commits a tort, etc., the shareholders are not personally liable

Directors and officers are also not vicariously liable for corporate debts - just the corporation is liable for its debts

Question 26

Normally, if incorporators thought they formed a corporation but failed to do so, they’d be personally liable for business debts as partners. But what two doctrines may still allow the incorporators to escape liability?

Answer 26

(1) de facto corporation and (2) corporation by estoppel

But note: anyone asserting either doctrine must be unaware of the failure to form a de jure corporation

AND NOTE: these have been abolished in many states - so on exam, raise the possibility of de facto or estoppel but then note caveat that doctrine likely doesn’t apply, but if it does, here’s how

Question 27

what are the requirements for a de facto corporation to exist?

Answer 27

In short: incorporation statute; good faith, colorable attempt; exercise of corporate privileges

(1) must be a relevant incorporation statute (on exam, can address this quickly because there’s always a statute in every state)

(2) parties made a good faith, colorable attempt to comply with the statute; meaning they tried and came close

(3) there has been some exercise of corporate privileges, meaning parties were acting as though they thought there was a corporation

If they meet these rquirements, the de facto corporation doctrine applies, and the business is treated as a corporation for all purposes except in an action by the state

Question 28

What is corporation by estoppel?

Answer 28

Under CL doctrine of corporation by estoppel, persons who have dealt w the entity as if it were a corporation will be estopped from denying the corporation’s existence

Can’t back out of contracts

And will also prevent improperly formed “corporation” from avoiding liability by saying it was not properly formed

ONLY applies in contract cases

Question 29

What is a promoter?

Answer 29

A person acting on behalf of a corporation not yet formed

Before a corporation is formed, promoters procure commitments for capital that will be used when it is formed

Question 30

What are promoter’s relationships with each other?

Answer 30

Promoters are joint venturers (partners) who have a fiduciary relationship with each other

Will breach duty if they secretly pursue personal gain at the expense of their fellow promoters

Question 31

What is a promoter’s relationship with the corporation?

Answer 31

Fiduciary duty is one of fair disclosure and good faith

Promoter who profits by selling property to the corp may be liable for his profit unless all material facts of the transaction were disclosed

If transaction is disclosed to an independent board of directors and approved, promoter has met his duty and will not be liable for his profits

If the board is not completely independent, the promoter still will not be liable for his profits if the subscribers knew of the transaction at the time they subscribed or unanimously ratified the transaction after full disclosure

Disclosure must be to all who are contemplated to be part of the initial financing scheme

If the promoters purchase all the stock and subsequently sell their individual shares to outsiders, the promoters cannot be held liable for the profits from the sale of property to the corporation

Promoters may always be liable if Ps can show that they were damaged by the promoters’ fraudulent misrepresentations or fraudulent failure to disclose all material facts

Question 32

What is a promoter’s relationship with third parties?

Answer 32

A promoter may enter into contracts on behalf of a corporation not yet formed

Since the corporate entity doesn’t exist prior to incorporation, it is not bound on contracts entered into by the promoter in the corporate name prior to incorporation

Corporation may become liable only if it expressly or impliedly adopts the promoter’s contract

Question 33

On January 10, P, acting as a promoter for a corporation not yet formed, leases a building from Don Draper and signs the lease, “Oscar de la Rental Cars, Inc.” On February 20, Oscar de la Rental Cars, Inc. is formed. Is the corporation liable on the contract?

Answer 33

Yes, if it adopted the contract

Express adoption: board takes an action adopting the contract

Implied adoption: corporation accepts a benefit of the contract

Question 34

How can adoption happen (like when a promoter makes a contract on behalf of a not yet incorporated corporation)?

Answer 34

Express adoption: board takes an action adopting the contract

Implied adoption: corporation accepts a benefit of the contract

Question 35

How can adoption happen?

Question 36

What is a promoter’s liability to third parties?

Answer 36

Anyone who acts on behalf of a corp knowing that it is not in existence is jointly and severally liable for the obligations incurred

thus, if a promoter enters into an agreement w a third party on behalf of a planned but unformed corporation, the promoter is personally liable on the contract

Promoter’s liability continues even after corporation is formed, even if the corporation adopts the contract and benefits from it

Promoter will be released from liabiltiy only if there is an express or implied novation (substituting corporation for promoter)

Question 37

On January 10, P, acting as a promoter for a corporation not yet formed, leases a building from Don Draper and signs the lease, “Oscar de la Rental Cars, Inc.” Will P be liable on the lease if Oscar de la Rental Cars, Inc. is never formed?

Answer 37

yes, he is personally liable for contracts formed when corporation is not yet formed

Question 38

On January 10, P, acting as a promoter for a corporation not yet formed, leases a building from Don Draper and signs the lease, “Oscar de la Rental Cars, Inc.” Will P be liable on the lease if Oscar de la Rental Cars, Inc. is formed and adopts the lease?

Answer 38

Yes, he remains personally liable until there’s a novation

The corporation will be on the hook too since they’ve adopted the lease, but the promoter remains liable until he’s substituted out

Question 39

How to handle promoter preincorporation liability questions?

Answer 39

If you keep in mind that promoters are forming a corporation, these questions should be fairly easy to answer.

For there to be a valid contract, someone must be bound with the third party. It can’t be the corporation since it does not exist; therefore, the promoter is liable even though she was acting on behalf of the corporation to be formed.

(If the agreement expressly relieves the promoter of liability, it will be treated as an offer to the corporation.)

Question 40

Can a promoter have a right to reimbursement on contracts?

Answer 40

Yes, a promoter who is held personally liable on a preincorporation contract may have a right to reimbursement from the corporation to the extent of any benefits received by the corporation

Question 41

What is a “foreign” corporation?

Answer 41

Anything outside of your state is foreign - doesn’t mean just outside of the country

Question 42

What must foreign corporations transacting business in a state do?

Answer 42

Register and pay fees

Must register with secretary of state in each state in which it wishes to transact business

Corp has to provide info about its articles and prove good standing in its home state

Question 43

What does “transacting business” mean in regards to foreign corporations?

Answer 43

Means the regular course of intrastate (within the state) business activity

So doesn’t include occasional or sporadic business in the state

Question 44

What does “transacting business” mean in regards to foreign corporations?

Answer 44

Means the regular course of intrastate (within the state) business activity

So doesn’t include occasional or sporadic business in the state

Question 45

What happens if a foreign corporation transacts business without registering?

Answer 45

There can be a civil fine and the corp can’t assert a claim in this state

It can defend, but can’t assert

Question 46

Once the foreign corporation registers and pays back-fees and fines, can it then assert a claim here?

Answer 46

Yes, then it can assert a claim in this state

Question 47

Once the foreign corporation registers and pays back-fees and fines, can it then assert a claim here?

Question 48

What is the exception to the general rule that a promoter will be liable on a preincorporation contract?

Answer 48

Promoter will not be liable on a preincorporation contract if the agreemetn bt the parties expressly indicates that the promoter is not to be bound. In such a case, the “contract” is considered to be an offer to the proposed corporation.

If the exception is applying, something would indicate that the third party would look to the corporation only for payment

Question 48

What is the exception to the general rule that a promoter will be liable on a preincorporation contract?

Answer 48

Promoter will not be liable on a preincorporation contract if the agreemetn bt the parties expressly indicates that the promoter is not to be bound. In such a case, the “contract” is considered to be an offer to the proposed corporation.

If the exception is applying, something would indicate that the third party would look to the corporation only for payment

Question 49

SECOND FACT PATTERN: ISSUANCE OF STOCK

Answer 49

SECOND FACT PATTERN: ISSUANCE OF STOCK

Question 50

To start and operate a corporation, we need money (capital). The corporation can either:

Answer 50

borrow the money or raise it by selling stock (or both)

Either way, the corporation will issue a security to the investor

Security is a fancy word for investment

Question 51

What does security basically mean?

Answer 51

Corporation will issue a security to an investor, whether the corp is borrowing money or raising it by selling stock

Security is basically an investment

Question 52

What are debt securities?

Answer 52

When the corporation borrows money, it issues a debt security, which is usually called a bond

Bond is a promise that the corp will repay the loan with interest

If loan is unsecured by corporate assets, it may be called a debenture

The holder of a debt securities is a creditor, but NOT an owner, of the corporation

Debt obligations may be payable to either the holder of the bond (a bearer or coupon bond) or to the owner registered on the corporation’s records (a registered bond)

May also have special features, like that it’s convertible to equity securities at the option of the holder, or that the corp may redeem the obligation at a specified price before the obligation matures

Question 53

Who may debt obligations be payable to?

Answer 53

Debt obligations may be payable to either the holder of the bond (a bearer or coupon bond) or to the owner registered on the corporation’s records (a registered bond)

Question 54

What are equity securities?

Answer 54

When the investor buys an ownership interest in the corporation, it issues equity securities, which is stock (the investor holds shares of stock)

Money invested does NOT create a debt

Shareholder is an OWNER, but NOT a creditor, of the corporation

Remember: the shares described in the corp’s articles are authorized shares

The shares that have been sold are issued and outstanding

Shares that have been reacquired by the corp through repurchase or redemption are authorized but unissued (treasury shares)

Question 55

What are the shares described in the corp’s articles?

Answer 55

the shares described in the corp’s articles are authorized shares

Question 56

What are the shares that have been sold?

Answer 56

The shares that have been sold are issued and outstanding

Question 57

What are the shares that have been reacquired by the corp through repurchase or redemption?

Answer 57

Shares that have been reacquired by the corp through repurchase or redemption are authorized but unissued (treasury shares)

Question 58

Can corporations choose to issue different classes of shares?

Answer 58

Yes, a corporation may choose to issue only one type of share, giving each shareholder an equal ownership right (shares are sometimes called common shares)

Or ownership rights may be varied if the articles provide that the corp’s stock is to be divided into classes or series within a class (if this is the case, then the articles must include info such as the number of shares in each class)

Question 59

What are share options?

Answer 59

A corporation may issue share options

An option is the right to purchase shares in the future under terms predetermined by the board of directors

Options may be offered in exchange for any type of consideration, including future services

Question 60

What is an issuance of stock?

Answer 60

An issuance of stock is when a corp sells its own stock

Rule in this fact pattern apply ONLY when there is an issuance

Question 61

What are subscriptions?

Answer 61

Subscriptions are written offers to buy stock from a corporation

One potential issue is whether they may be revoked

Question 62

Are preincorporation subscriptions revocable?

Answer 62

Under MBCA, preincorporation subscriptions are irreovcable for six months unless otherwise provided, or unless all subscribers consent to revocation

Question 63

On January 10, S signs a subscription, offering to buy 100 shares of C Corp., a corporation not yet formed. A week later, S changes his mind. Can S revoke?

Answer 63

No, irrevocable for 6 months

Question 64

When is payment due for a preincorporation subscription?

Answer 64

Unless otherwise provided, payment is due upon demand of the board

Demand may not be done in a discriminatory manner

Subscriber who fails to pay may be penalized by sale of the shares or forfeiture of the subscription and any amounts paid on the subscription, at the corporation’s option

Question 65

Are postincorporation subscriptions revocable?

Answer 65

Revocable until accepted by the corporation

The corporation and the subscriber are obligated under a subscription agreement when the board accepts the offer

Question 66

What form of consideration must the corporation receive when it issues stock?

Answer 66

Under MBCA, stock or stock options may be issued for any tangible or intangible property or benefit to the corporation

Includes money, property, services already performed for the corporation, and discharge of a debt

Also includes promissory notes to the corp and future services to the corp

Question 67

Can X Corp. give employees options to buy stock as payment for services?

Answer 67

Yes

Question 68

What is the traditional view to the amount of consideration needed (what stock can be sold for)?

Answer 68

Traditional view = par

Par = minimum issuance price

Traditionally, stock could not be issued by a corporation for less than the stock’s stated par value

And the consideration rec’d for par value stock had to be held in a certain account containing at least the aggregate par value of the outstanding par value shares

No par = no minimum issuance price = board can have the stock issued for any price it sets

Question 69

C Corp. is issuing 10,000 shares of $3 par stock. What is the minimum amount it must receive for these shares?

Could C Corp. receive more than this amount for the shares?

Answer 69

must receive at least $30,000

can receive more; par is just the minimum

Question 70

What is watered stock?

Answer 70

Watch for this on exam - occurs when par value stock is issued for less than its par value

If sold for less than what it should be, directors would be liable if they knowingly authorized; buyer would be liable no matter what; if X transfers stock to third party, third party is not liable if she acted in good faith

Question 71

C Corp. issues 10,000 shares of $3 par to X for $22,000. The corporation wants to recover the $8,000 of “water.” Who is liable?

The directors?

X (the person who bought the stock)?

What if X transfers the stock to a third party—is the third party liable?

Trick question: I own 10 shares of $3 par stock of X Corp. I sell it to you for less than $3 per share. Why is there no problem here?

Answer 71

Yes, the directors are liable if they knowingly authorized issuance

Yes X is liable no matter what

Third party is not liable if she acted in good faith, if she didn’t know

this is not an issuance; only applies when the corp is selling its own stock; doesn’t apply to you or me

Question 72

What is the MBCA view to what stock can be issued for?

Answer 72

Traditional view = par

MBCA = whatever the directors deem appropriate as long as it’s in good faith

MBCA generally has eliminated the concept of par and allows corporations to issue shares for whatever consideration the directors deem appropriate

Consideration rec’d need not be placed in any special account

Board’s valuation is conclusive if made in good faith

But watch: a corporation’s articles can still specify a par value for stock; in which case, if the directors authorize a sale of stock for less than the stated par value, the shares will probably be treated as validly issued, but the authorizing directors can be held liable for breach of their fiduciary duty

Question 73

What are preemptive rights?

Answer 73

The right of an existing shareholder of common stock to maintain her percentage of ownership in the company by buying stock whenever there is a new issuance of stock for money

Preemptive rights don’t exist unless stated in the articles

Even if they are stated in the articles, shareholders generally have no preemptive right in the shares issued:

(1) for consideration other than money,

(2) within 6 months after incorporation, or

(3) without voting rights but having a distribution preference

Question 74

S owns 1,000 shares of C Corp. There are 5,000 shares outstanding. C Corp. is planning to issue an additional 3,000 shares. If S has preemptive rights, then how many shares does S have the right to buy?

Answer 74

as many as 600 shares; doesn’t have to, but can; 20%

Question 75

Even if preemptive rights are included in the articles, when do shareholders generally not have preemptive rights?

Answer 75

Even if they are stated in the articles, shareholders generally have no preemptive right in the shares issued:

(1) for consideration other than money,

(2) within 6 months after incorporation, or

(3) without voting rights but having a distribution preference

Question 76

Suppose the C Corp. articles provide for preemptive rights. You own 20 percent of the stock of C Corp. C Corp. issues stock to Susie to purchase property from Susie (or to pay Susie for services performed for the corporation). Do you have preemptive rights?

Answer 76

no, bc this was not an issuance for money; only attaches if issuance is for money; this one isn’t for money

Question 77

FACT PATTERN THREE: DIRECTORS AND OFFICERS

Answer 77

FACT PATTERN THREE: DIRECTORS AND OFFICERS

Question 78

What are the necessary qualifications for a director?

Answer 78

Must be adult natural persons, meaning they must be human beings w legal capacity

Absent a provision to the contrary, directors need not be shareholders in the corp or residents of any particular state

Any qualifications for directors in articles or bylaws must be rsble and lawful

No qualification may limit the ability of a director to discharge her duties

Question 79

how many directors are necessary?

Answer 79

One or more

Number can be set in articles or bylaws

Question 80

How are directors elected?

Answer 80

Initial directors may be named in the articles

If not, they’re elected by the incorporator(s) at the organizational meeting

After that, sharehodlers elect the directors

Directors are elected at each annual shareholders’ meeting, subject to contrary provisions in articles

Entire board is selected each year unless there’s a staggered board

Whether there is a staggered board is usually set in the articles

Staggered board is divided into 1/2 or 1/3s, with 1/2 or 1/3 elected each year

Question 81

How can a director be removed?

Answer 81

Shareholders can remove directors before their terms expire

Shareholders may remove a director with or without cause

A director elected by cumulative voting cannot be removed if the votes cast against removal would be sufficient to elect her if cumulatively voted at an election of directors

Similarly, a director elected by a voting group of shares can be removed only by that class

Question 82

Who fills vacancies in the board of directors (like if someone resigns or is removed)?

Answer 82

Board or the shareholders fill the vacancies

But if the shareholders created the vacancy by removing a director, the shareholders generally must select the replacement

Question 83

Can board members act individually or do they have to act as a group?

Answer 83

Board of directors must act as a group

Individual directors have no authority to speak for or bind the corporation

May act in the following ways:

(1) unanimous agreement in writing (email, conference call, or separate documents, are ok); or

(2) at a meeting, which must satisfy the quorum and voting requirements discussed below

Question 84

Can the board ratify defective corporate actions (that is, actions that are void or voidable due to a failure of authorization, such as those taken in the absence of the requisite board resolution or shareholder approval)?

Answer 84

Yes, may ratify.

To ratify such an action, the board must state the action to be ratified and the nature of the failure of authorization, approve the ratification, and seek shareholder approval if necessary

Question 85

If there is a board meeting, the method for giving notice is set in…

Answer 85

the bylaws

Question 86

What kind of notice is required for regular and special meetings?

Answer 86

For regular meetings, notice is not required

For special meetings, at least two days’ written notice of date, time, and place is required - purpose need not be disclosed

Question 87

What happens if required notice was not given?

Answer 87

Means that whatever happened at the meeting is voidable - maybe even void - unless the directors who were not notified waive the notice defect

Can do this (1) in writing any time, or (2) by attending the meeting without objecting at the outset of the meeting

Question 88

Can directors give proxies or enter voting agreements for how they will vote as directors?

Answer 88

No - any efforts to do so are void

Because directors owe the corporation non-delegable fiduciary duties

Note: this is different from shareholders who can vote by proxy and enter into voting agreements

Question 89

What are the similarities and differences between shareholder and director meetings?

Answer 89

WHEN?

Shareholders:

Annual = as board of directors or president directs, but must be within 18 months of prior annual meeting

Special = as board of directors or president directs

Directors:

Regular = as board of directors or president directs

Special = as board of directors or president directs

NOTICE REQUIREMENTS

Shareholders

Annual = can be by mail bt 10 and 60 days before meeting; must include time and place

Special = can be by mail bt 10 and 60 days before meeting; must include time, place and purpose

Directors

Regular = none needed

Special = at least two days written notice; must include time and place but NOT purpose

PROXY VOTING ALLOWED?

Shareholders = yes at both annual and special

Directors = no at both regular and special

Question 90

What do we need for the board to act?

Answer 90

For any meeting of the board, we need a quorum

A majority of all directors (unless bylaws say otherwise, but can’t be fewer than 1/3 of all members)

Without quorum, board can’t act

Question 91

If quorum is present, passing a resolution requires what?

Answer 91

If quorum is present at a meeting, passing a resolution (which is how the board takes action at a meeting) requires only a majority vote of those present

So if there are 9 directors, at least 5 directors must attend the meeting to constitute a quorum. If 5 directors attend, then at least 3 must vote for a resolution for it to pass.

Question 92

What is a broken quorum?

Answer 92

A quorum of the board can be lost (broken) if people leave

Once a quorum is no longer present, the board can’t take an act at that meeting

(Different from shareholder meetings)

Question 93

If there was no meeting, how can the board act?

Answer 93

If there was unanimous written consent of the directors

Question 94

Ex: the facts tell you that a director has entered into an extraordinary contract with another entity on the corporation’s behalf, either on his own accord or with the approval of some of the directors, or with the approval of all of the directors, who were called individually.

You must recognize that a director does not have the power to bind the corporation in contract unless there is actual authority to act. Actual authority generally can arise only if:

Answer 94

(1) proper notice was given for a directors’ meeting, a quorum was present, and a majority of the directors approved the action, or

(2) there was unanimous written consent of the directors

Question 95

What is the role of the board of directors?

Answer 95

Manages corporation

Sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corporation changes to shareholders, etc.

Unless provided otherwise, board may create one or more committs, with one or more members, and appoint members of the board of directors to serve on them

Committees may act for the board, but the board remains responsible for supervision of the committees

Board may also delegate authority to officers

Question 96

While the board can delegate actions to a committee, a committee may not take the following actions:

Answer 96

(1) declare a distribution

(2) fill a board vacancy

(2) recommend a fundamental change to shareholders

However, a committee can recommend such actions to the full board for its action

Question 97

What fiduciary duties does a director owe to a corporation?

Answer 97

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

Duty of care = She must also use the care that a person in like position would rsbly believe appropriate under the circumstances - BUT only liable if his breach causes a loss to the corporation - BUT even if there is causation, look at business judgment rule

Always go into both on exam when I see a potential breach

Question 98

Who has the burden of proving that a director breached her duty of care?

Answer 98

The person challenging the directors’ action on the basis of a breach of the DOC has burden of proving that the standard was not met

Question 99

What are the two main situations for breach of duty of care?

Answer 99

Nonfeasance or misfeasance

Nonfeasance = occurs when a director basically does nothing; they are lazy

Misfeasance = occurs when the board makes a decision that hurts the business

Question 100

Doofus, a director of C Corp., fails to attend any of the board of directors’ meetings or to keep abreast of the company business in any way. Will Doofus be held liable for breach of the duty of care?

Answer 100

state the standard in full; then focus on second sentence; a person in like condition would do some work, here he did nothing; so he’s liable only if his behavior causes a loss to the corporation

Question 101

Doofus, a director of C Corp., fails to attend any of the board of directors’ meetings or to keep abreast of the company business in any way. Will Doofus be held liable for breach of the duty of care?

Answer 101

state the standard in full; then focus on second sentence; a person in like condition would do some work, here he did nothing; so he’s liable only if his behavior causes a loss to the corporation

Question 102

The directors of Hedonists’ Hot Tubs, Inc. vote to start a new line of hot tubs with built-in wine coolers and video cameras. The directors engaged consultants to consider the issue and robustly debated before making the decision. The idea turned out to be a disaster. The company lost money. Are the directors liable for a breach of the duty of care?

Answer 102

To answer this question, first state the standard in full, then focus on the duty of care portion. Here, the directors’ action caused a loss to the corporation, so causation is clear. But remember, a director is not liable if she meets the business judgment rule.

Business judgment rule = court will not second guess business decision if made in good faith, informed, and had rational basis

Question 103

What is the business judgment rule?

Answer 103

court will not second guess business decision if made in good faith, informed, and had rational basis

After I evaluate duty of care, see that there’s causation (directors made a decision that then hurt the company), then go into business judgment rule - if they made a bad decision but it was in good faith, informed, and had rational basis, the director won’t be found liable

A director is entitled to rely on info, etc. if prepared or presented by:

(1) corporate officers or employees whom the director rsbly believes to be reliable and competent;

(2) legal counsel, accountants, or other persons as to matters the director rsbly believes are within such person’s professional competence; or

(3) a committee of the board of which the director is not a member, if the director rsbly believes the committee merits confidence

Question 104

Who has the burden of proof in duty of loyalty cases?

Answer 104

Duty of loyalty cases are about conflicts of interest

Business judgment rule doesn’t apply

Burden is on the defendant to prove they were loyal and did not have or violate a conflict of interest

Question 105

What constitutes a conflicting transaction (self-dealing - duty of loyalty issue)?

Answer 105

Any transaction between the corporation and: (1) one of its directors, or (2) that director’s close relative, or (3) another business of the director’s

Ex: XYZ Corp enters into a contract with LMN Corp, which is owned or run by one of XYZ Corp’s directors - we worry that the director has divided loyalties

Question 106

A conflicting interest transaction will not be enjoined, set aside, or give rise to an award of damages because of the director’s interest (it’ll be fine) if:

Answer 106

(1) it was approved by a majority of the disinterested directors - imperative that either the director disclosed all material facts to the board or they were known when the board approved the transaction; or

(2) it was approved by a majority of votes entitled to be cast by disinterested shareholders - again, after disclosure or the facts were known - notice of the shareholders’ meeting must describe the transaction; or

(3) judged by the circum at the time the corp entered into the transaction, it was fair to the corp

Question 107

Martha is a director of XYZ, Inc. If she sells wreaths to XYZ, Inc., this is an interested transaction. How should you address it on the exam?

Answer 107

State standard in full: A director must discharge her duties in good faith and with the rsble belief that her actions are in the best interest of the corporation. She must also use the care that a person in like position would rsbly believe appropriate under the circumstances

Then focus on duty of loyalty portion.

Interested director transactions will be set aside (or the director will be liable in damages) unless the director shows that either:

(1) the deal was fair to the corporation when entered; or

(2) her interest and the relevant facts were disclosed or known, and the deal was approved by either (1) a majority of the disinterested directors or (2) a majority of the disinterested shares

AND NOTE: even if the deal is approved by an appropriate group, some courts also require a showing of fairness - in determining whether a transaction is fair, courts look to factors such as adequacy of the consideration, corporate need to enter into the transaction, financial position of the corporation, and available alternatives

Question 108

Does the interested director have to have been at the meeting where they approved the conflicting interest?

Answer 108

No, the presence of the interested director at the meeting at which the directors or shareholders voted to approve the conflicting interest transaction doesn’t affect the action

Question 109

Do some courts also require a showing of fairness even if the deal was approved by the appropriate groups?

Answer 109

Yes, even if the deal is approved by an appropriate group, some courts also require a showing of fairness

In determining whether a transaction is fair, courts look to factors such as adequacy of the consideration, corporate need to enter into the transaction, financial position of the corporation, and available alternatives

Question 110

What are the possible remedies for an improper conflicting interest transaction?

Answer 110

Enjoining the transaction, setting the transaction aside, damages, and similar remedies

Question 111

Can directors set their own compensation?

Answer 111

Yes but it must be rsble and in good faith

Otherwise, they’re wasting corporate assets and breaching duty of loyalty

Question 112

What is the corporate opportunity doctrine?

Answer 112

Directors’ fiduciary duties prohibit them from diverting a business opportunity from their corporation to themselves without first giving their corporation an opportunity to act

What counts as a business opportunity? Ex: something in business line; something the corp has an interest or expectation in; closer to the business’s line of business, more likely a court will find it to be a corp opportunity

Question 113

Cheatem is a director of C Realty Corp., which develops condo projects. Cheatem learns of land that has been zoned for condos and buys it for himself as an investment. What are C’s rights, if any, against Cheatem?

Answer 113

Start with standard in full: duty of loyalty which is director needs to discharge her duties in good faith with the rsble belief that her actions are in the best interest of the company; and she must take the care that a rsble person would believe appropriate in her position

Then focus on duty of loyalty

A director can’t usurp a coporoate oporutnity. This means a director can’t take it until he (1) tells the board about it and (2) waits for the board to reject the opp

Question 114

Is the corp’s lack of financial ability to take the corporate opportunity a defense?

Answer 114

No

Director should still present opp to corp and allow it to decide whether it can take advantage of it or not

Question 115

What are remedies for usurping a corp opp?

Answer 115

if director usurps a corp opp, the corp can sue to recover under a constructive trust theory

Can be compelled to transfer property to the corp at the price she paid

If she sold property at a profit, corp may recover that profit

Question 116

Which directors may be held liable for something (how do we know who to blame)?

Answer 116

A director is presumed to concur with a board action unless her dissent or abstention is noted in writing in the corp records

In writing means: (1) in the minutes, (2) delivered in writing to the presiding officer at the meeting, or (3) written dissent to the corporation immediately after the meeting

Exception: a director is not liable if she was absent from the board meeting

Exception: good faith reliance on someone or some information presented

Question 117

Who are officers?

Answer 117

Officers are agents of the corporation

Corporation is the principal and officers are the agents

Question 118

Can officers’ actions bind the corporation?

Answer 118

Whether officer can bind the corp is determined by whether she has agency authority to do so (actual or apparent authority)

Unauthorized actions may become binding on corp because of ratification, adoption, or estoppel

Corp is liable for actions by its officers within the scope of their authority, even if the particular act in question was not specifically authorized

Question 119

What authority does the president of a corporation have?

Answer 119

President of a corp generally has apparent authority to bind the corporation to contracts in the ordinary course of business

Question 120

Does a corporation need to have any particular officers?

Answer 120

Traditionally, had to have a president, secretary, and treasurer

Now, doesn’t need to have anything in particular and one person can serve in more than one office

Question 121

What duties do officers owe?

Answer 121

Same care and loyalty as directors

And anything determined by the bylaws or authorized by the board

Question 122

How are officers selected and removed?

Answer 122

By the board, which also sets officer compensation

Unless contrary provision, an officer has the power to resign at any time by delivering notice to the corp, and the corp has the power to remove an officer at any time, with or without cause

If resignation or removal is a breach of contract, can have damages - but mere appointment to office doesn’t in itself create a contract

Shareholders fire and hire directors

Shareholders DO NOT fire and hire officers - the board of directors does

Question 123

Let’s say someone has been sued by (or on behalf of) the corporation in her capacity as an officer or director. She has incurred costs, attor- neys’ fees, maybe even fines, and a judgment or settlement in that litigation. Now, she seeks indemnification (reimbursement) from the corporation. What are the three categories of indemnification?

Answer 123

No indemnification (I think only directors)

Mandatory indemnification

Permissive indemnification

Question 124

When can a corp NOT indemnify a director (category 1)?

Answer 124

A corp cannot indemnify (reimburse) a director who is:

(1) held liable to the corp or

(2) held to have rec’d an improper benefit

Question 125

When is indemnification of a director or officer mandatory (category 2)?

Answer 125

Unless contrary provision, a corp MUST indemnify a director or officer who was successful in defending a proceeding on the merits or otherwise for rsble expenses, including atty fees, incurred in connection with the proceeding

Question 126

When is indemnification of a director or officer permissive (category 3)?

Answer 126

A corp MAY indemnify a director or officer for rsble litigation expenses incurred in unsuccessfully defending a suit brought against the director or officer on account of the person’s position if the person:

(1) acted in good faith; and

(2) believed that her conduct was in the best interests of the corporation

That’s the duty of loyalty standard

Generally, determination whether to indemnify is to be made by a disinterested majority of the board, or if not enough people, by a majority of a disinterested committee or independent legal counsel

Shareholders may also make the determination

Question 127

Suppose D is sued for breaching duties to the corporation. She then settles that case. Does this case fall into Category 1, Category 2, or Category 3?

Answer 127

Didn’t win or lose - goes to category 3, permissive

Question 128

Can a court order indemnification?

Answer 128

Notwithstanding the above rules, a court in which a D or O was sued may order indemnification if it is justified in view of all circum

If D or O was held liable to the corp, reimbursement is limited to costs and atty’s fees

Question 129

Can the articles of incorporation eliminate director (and sometimes officer) liability to the corp for damages?

Answer 129

Can for damages but not for intentional misconduct, usurping corporate opportunities, unlawful distributions, or improper personal benefit

So can eliminate liability only for duty of care cases

Question 130

Can a corporation advance expesnes to a director defending an action?

Answer 130

Yes as long as the director furnishes the corp a statement that the director believes he met the appropriate standard of conduct and that he’ll repay the advance if he’s later found to have not met the standard

Question 131

Can a corporation purchase liability insurance to indemnify directors or officers for actions against them?

Answer 131

Yes even if the D or O would not have been entitled to indemnification in the situations above

Question 132

FACT PATTERN FOUR: SHAREHOLDERS

Answer 132

FACT PATTERN FOUR: SHAREHOLDERS

Question 133

Do shareholders generally have a duty to their corporation or fellow shareholders?

Answer 133

Generally, no fiduciary duties

They usually have no direct control in management of the corporation’s business

Can act in their own personal interests and don’t have the duty of care or loyalty

Liability is therefore usually limited to liabilities for unpaid stock, a pierced corporate veil, or the absence of a de facto corporation

Question 134

What is a close corporation?

Answer 134

Small number of shareholders

Stock not publicly traded

Shareholders can manage directly

They run the corporation - can set up a board of directors to run it like normal, or can forgo the board and run it themselves, or just appoint a manager

Question 135

What are shareholder management agreements?

Answer 135

These agreements set up alternative management for a close corporation

MBCA allows shareholders to enter into agreements to dispense w the board and vest management power in the shareholders

If the articles don’t include such a special provision, shareholders exercise only indirect control of the corporation through their voting power, by which they elect and remove directors, adopt and modify bylaws, and approve fundamental changes in the corporate structure

Two ways to set up a shareholder management agreement:

(1) in the articles and approved by all shareholders OR

(2) by unanimous written shareholder agreement

Either way, agreement should be conspicuously noted on the front and back of stock certificates

If shareholders do this and set up management by shareholder or by a manager, now the shareholders owe the duty of care and loyalty like directors normally would

Question 136

What are the two ways to set up a shareholder management agreement?

Answer 136

Two ways to set up a shareholder management agreement:

(1) in the articles and approved by all shareholders OR

(2) by unanimous written shareholder agreement

Question 137

If the examiners question you about the power of the shareholders to run the day-to-day affairs of their corporation, how should you respond?

Answer 137

unless the corporation’s articles or a shareholder agreement provides otherwise, you should generally respond that the shareholders have no such power; that power is vested in the board of directors, and the shareholders have the power to elect the board.

Question 138

Who owes the duties of care and loyalty to a corp?

Answer 138

Whoever is managing the corp

So normally it’s the board of directors

But if the shareholders are managing, they have the liabilities

Question 139

What is the special fiduciary duty in close corporations?

Answer 139

So if shareholders are managing, they’ll have duty of care and loyalty

Whether or not they’re managing, in close corporations, they’ll also have a duty to the other shareholders because this is like a partnership

So they owe a duty of utmost good faith

Question 140

What are the duties of controlling shareholders to minority shareholders?

Answer 140

Controlling shareholders can’t use their power to benefit at the expense of minority shareholders

Controlling shareholder could be a corporation

For ex: a parent corporation should not use its domination of a subsidiary corporation to receive something to the detriment of the subsidiary’s minority shareholders

Would breach the duty of not hurting the minority shareholders

Also a duty to disclose material information to the minority shareholders

Question 141

If there is oppression of minority shareholders, what can they do?

Answer 141

they can sue the controlling shareholders who oppress them for breach of this fiduciary duty

For ex: controlling S might deny the minority any voice in corp affairs, fire them from employment, refuse to declare dividends, and refuse to buy the minority’s stock (so the minority is getting no return on investment)

Why do courts let minority shareholder sue?

Because oppression thwarts their legitimate goals for investing and they have no way out

Question 142

Can shareholders generally be held liable for corporate debts?

Answer 142

No, bc the corp is liable for what it does

Question 143

Can a shareholder be personally liable for what the corp does?

Answer 143

Yes, a shareholder might be personally liable for what the corp did if the court pierces the corporate veil

Can happen in close corporations only

Question 144

What is piercing the corporate veil?

Answer 144

Doctrine that allows shareholders to be sued for debts of corp

Avail only in close corporations

To pierce the corporate veil and hold shareholders personally liable:

(1) the shareholders must have abused the privilege of incorporating; and

(2) fairness must require holding them liable

So courts may pierce corporate veil to avoid fraud or unfairness by sharheolders in a close corporation

But something like sloppy admin isn’t enough

Question 145

What are the three scenarios justifying piercing the corporate veil?

Answer 145

Alter ego (identity of interests)

Undercapitalization

Fraud, avoidance of existing obligations, or evasion of statutory provisions

Question 146

What is the alter ego situation that could justify piercing the corporate veil?

Answer 146

If the shareholders ignore corporate formalities such that the corporation may be considered the “alter ego” or a “mere instrumentality” of the shareholders or another corporation, AND some basic injustice results, a court might pierce the CV

May arise where shareholders treat corporate assets liek their own, commingle their money w corporate money, etc.

Question 147

X and Y are the only shareholders of Close Corp. X commingles personal and corporate funds, uses the corporate car as his own, and uses the corporate credit card to pay for personal purchases. Close Corp. fails to pay its bills. Can a creditor of the corporation who has been unable to collect its claim from the corporation collect from either X or Y?

Answer 147

To answer this question, we start with the general rule: shareholders are not liable for the acts or debts of the corporation.

Then, give the piercing the corporate veil standard: A court may pierce the corporate veil and hold shareholders personally liable where the shareholders have abused the privilege of incorporating and fairness requires holding them liable.

Here, a court might pierce the corporate veil. Why?

First, did a shareholder abuse the corporation? YES - abused corp by using card for its own purchases, commingling funds, using car as his own, etc.

Second, would it be unfair for X to have limited liability? YES because then creditors aren’t getting paid

If the court does pierce the corporate veil, only X would be liable. Y did nothing wrong. Only X treated corporate assets as his own.

Question 148

What is the undercapitalization situation for piercing the corporate veil?

Answer 148

corporate veil may be pierced where the corporation is inadequately capitalized, so that at the time of formation there is not enough unencumbered capital to rsbly cover prospective liabilities

Question 149

S is a shareholder of Glowco, Inc., a close corporation that hauls and disposes of nuclear waste. Glowco does not carry insurance. Glowco has an initial capitalization of $1,000. Shortly after Glowco is incorporated, V is injured when one of Glowco’s trucks melts down. Glowco does not have anywhere near enough money to compensate V. Can V sue S?

Answer 149

Start w general rule: shareholders are not liable for corporate obligations.

But a shareholder may be personally liable for corporate obligations where they abused the privilege of incorporating and fairness requires it.

Here, a court may pierce the CV because the corporation was undercapitalized when formed. The shareholders failed to invest enough to cover prosepctive liabilities.

Additionally, courts may be more willing to pierce the corporate veil for a tort victim than a contract claimant. Fairness requires holding the shareholder personally liable because otherwise the injured party won’t see justice because of the shareholders’ failings.

Question 150

What is the fraud, avoidance of existing obligations, or evasion of stat provisions sitatuation of piercing the corporate veil?

Answer 150

Corporate veil may be pierced where necesary to prevent fraud or to prevent an individual shareholder from using the entity to avoid his existing personal obligations

But mere fact that an individual chooses to adopt the corporate form of business to avoid future personal liability is not in itself a reason to pierce the CV

Question 151

Who is liable when piercing the corporate veil?

Answer 151

normally, only shareholders who are active in the operation of the business will be held liable

Liability is joint and several

Doesn’t matter if the shareholder at fault is a corporation; can hold them “personally” liable

Question 152

What are the requirements for a shareholder to bring a derivative suit on behalf of a corporation?

Answer 152

Stock ownership when claim arose

Adequate representation of corp’s interest

Written demand on corp to take action

Question 153

What is authorized, issued, and outstanding stock?

Answer 153

Authorized stock: maximum number of shares a corp can sell

Issued stock: number of shares the corp actually sells

Outstanding stock: shares issued but not reacquired

Question 154

how can a shareholder vote by proxy?

Answer 154

Can vote her shares either in person or by proxy executed in writing

A proxy is:

(1) a writing (fax and email are fine),

(2) signed by the record shareholder (email is fine if the sender can be identified),

(3) directed to the secretary of the corp,

(4) authorizing another to vote the shares

Question 155

When will a proxy be irrevocable?

Answer 155

Only if it states that it is irrevocable and is coupled with an interest or given as security

(1) the proxy says it’s irrevocable and

(2) the proxy holder has some interest in the shares other than voting

Question 156

What are the requirements for a voting trust (where you pool your shares together in a trust so the trustee votes and then distributes the dividends in accordance)?

Answer 156

(1) a written trust agreement

(2) copy of the agreement is given to corp

(3) legal title to the shares is transferred to voting trustee

(4) original shareholders receive trust certificates and retain all shareholder rights except for voting

Question 157

What are the requirements for a voting agreement (used in lieu of a trust, seems simpler)

Answer 157

the agreement has to be in writing and signed

Question 158

Unless otherwise specified, what are the specific votes needed in shareholder meetings to elect/remove directors or vote on fundamental corporate change?

Answer 158

Elect director: plurality (person gets more votes than anyone else)

Approve fundamental change: traditionally, we needed a majority of the shares entitled to vote. But now increasingly just need the majority of the shares that actually vote on the issue.

Remove a direct: Traditionally, needed a majority of the shares entitled to vote. Now, need majority of the shares that actually vote on the issue.

Other matters: majority of shares that actually vote on the issue.

Question 159

If there is a restriction on stock transfers (like a right of first refusal), and the restriction is valid, can it be enforced against the transferee, a third party purchaser?

Answer 159

Valid they are not an undue restraint on alienation

Can be enforced against third party if:

(1) the restriction is conspicuously noted on the stock certificate or is contained in the information statement required for uncertificated shares) or

(2) the transferee had actual knowledge of the restriction at the time of the purchase

Question 160

A shareholder may inspect what types of records regardless of purpose?

Answer 160

(1) the corp’s articles and bylaws

(2) board resolutions regarding classification of shares

(3) minutes of shareholders’ meetings from the past three years

(4) communications sent by the corporation to shareholders over the past three years

(5) a list of the names and business addresses of the corporation’s current directors and officers

(6) a copy of the corporation’s most recent annual report

Question 161

What are more controversial things where the shareholder has a qualified right to inspect them?

Answer 161

(1) excerpts of the minutes of the board meetings

(2) the corp’s books, papers, and accounting records

(3) shareholder records

Must state a proper purpose for demand - one that’s rsbly related to the person’s interest as a shareholder

Question 162

Generally, to do any fundamental corporate change, we need what three things?

Answer 162

(1) board action adopting a resolution of fundamental change;

(2) board submits the proposal to the shareholders w written notice; and

(3) shareholder approval (trad: majority of shares entitled to vote; modern: majority of shares that actually voted)

Most of the time, we also need to deliver a doc to the secretary of state

Question 163

What are the steps for a shareholder to perfect a right of appraisal?

Answer 163

(1) notice of shareholders’ meeting at which vote will take place must state that the shareholders will be entitled to exercise their dissenting rights

(2) before vote, shareholder must file w the corporation a written notice of objection and intent to demand payment

(3) at vote, shareholder must abstain or vote against

(4) if action is approved, corp must notify shareholders who filed an intent to demand payment - must into T and P to submit her shares - within 10 days

(5) within time set by corp, shareholder must make written demand to be bought out and deposit her stock with corp

(6) corp must pay dissenters the amount the corp estimates as the fair value of the shares plus accrued interest

Then

(7) if shareholder is dissatisfied with valuation, he has 30 days in which to send the corp her own estimate and demand payment

(8) if shareholder and corp can’t agree, corp must file action in court wihtin 60 days of receiving demand

(9) if corp doesn’t file, the corp must pay the demand

Question 164

Approval of a plan of merger by shareholders of the surviving corporation is not required if the following conditions exist:

Answer 164

(1) the articles of incorporation of the surviving corporation will not differ from the articles before the merger

(2) each shareholder of the survivor whose shares were oustanding immediately prior to the effective date of hte merger will hold the same number of shares, w identical preferences, limitations, and rights; and

(3) the voting power of the shares issued as a result of the merger will comprise no more than 20% of the voting power of the shares of the surviving corporation that were outstanding immediately prior to the merger

Question 165

What are the grounds on which the attorney general can seek dissolution of a corp?

Answer 165

Grounds that corp fraudulently obtained its articles of incorporation

or that corp is exceeding or abusing its authority

Question 166

What are the grounds on which shareholders can seek involuntary dissolution of corporation?

Answer 166

(1) director abuse, waste or assets, or misconduct

(2) directors are deadlocked in management of affairs, shareholders are unable to break deadlock, and irreparable injury to the corp is threatened

(3) shareholders are deadlocked in voting power and have failed to elect one or more directors for a period that includes at least two consecutive annual meeting dates

(4) corp has abandoned its business and failed to dissolve wihtin rsble time

Question 167

On what grounds can creditors seek involuntary dissolution of a corp?

Answer 167

(1) the creditor’s claim has been reduced to judgment, execution of the judgment has been returned unsatisfied, and the corp is insolvent; or

(2) the corp has admitted in writing that the creditor’s claim is due and owing and the corp is insolvent

Question 168

What are the steps to wind up the corporation?

Answer 168

Give written notice to creditors and publish notice of dissolution in newspaper in PPB

Gather all assets

Convert assets to cash

Pay creditors

Distribute any remaining sums to shareholders pro rata