Corporations

Question 1

Who are the individuals involved in corporate formation?

Answer 1

1. Promoters: Persons acting on behalf of unformed corporation.
2. Subscribers: Individuals with written agreement to buy stock from unformed corp.

Question 2

Who is a promoter and what does a promoter do?

Answer 2

A promoter is a person acting on behalf of an unformed corp.

A promoter is liable for all contracts entered prior to formation, or until novation.

A promoter is soely liably if a corpo is never formed.

Question 3

What is a promoter’s duty?

Answer 3

A promoter has a fiduciary duty to corporation. Cannot obtain a secret profit.

If property is acquired before formation and sold to the corporation, a profit is recoverable if sold for more than fair market value

If property is acquired after formation and sold to corp, any profit is recoverable by promoter.

Question 4

Define

De Jure Corporation

Answer 4

A de jure corporation is a validly formed corporation with general purpose for perpetual duration.

Question 5

What is required to submit within the articles of incorporation for a de jure formation?

Answer 5

Articles of incorpoation include:
1. Authorized shares
2. Purpose of corp
3. Agent name & address
4. Incorporators names & addresses
5. Name of Corporation

Must be filed with the secretary of State in state of formation and valid corporations shield shareholders from liability.

Question 6

Define

Ultra Vires Activity

Answer 6

An Ultra vires activty is if the de jure corporation states a specific purpose and the activities of the corporation exceed the scope of purpose.

Normally ultra vires activieis are valid, however, shareholders may seek:
1. Injunction
2. sue for losses based on ultra vires acts

Question 7

De Facto Corporation

Answer 7

A de facto corporation is a business that does not fufill filing formatlities but may be treated as corporation if organizers have:
1. good faith attempt to comply with corporate formalitites
2. no knowlege of lack of corporation status.

Question 8

Corporation by Estoppel

Answer 8

Corporation by estoppel will be deemed valid if:
1. A de facto corporation is formed
2. a 3rd party treated corp like de jure corp
3. 3rd party does not claim that there was not a corporation formed.

Question 9

Piercing the Corporate Veil

Answer 9

A shareholder may be liable for personal bad acts if they:
1. Disregarding Corp formalities: think no shareholder meetings, not treating corp correctly.
2. Under capitalization: Corp fails to maintain adequate funds to cover potential liability.
3. Prevent fraud.
4. Alter ego: Cannot mix personal with business.

Mnemonic: DUPA (Dua Lipa - DU PA)

Question 10

Define

Par Value Stock

Answer 10

Par value stock requires a minimum issuance price.

no par value means any valid consideration the BOD deems adequate.

Question 11

Treasury Stock

Answer 11

Treasury stock is stock previously issued and reacquired, re-sold as no par

Question 12

Acquiring property with par value stock

Answer 12

Acquiring property with par value stock is ok if the BOD values property in good faith as at least par value.

Question 13

Consequences of Less than Par Value

Answer 13

If the stock is less than par value, the directors are liable for signing off on the issuance and the purchaser must pay full consideration for shares.

Question 14

What are the statutory board requirement for a valid corporation

Answer 14

A board of directors (BOD) must have one member.

Shareholders may elect directors and may remove directors for any reason

Question 15

Define

Quorum

Answer 15

A quorum is a majority vote of votes present at BOD meeting.

Each director is presumed to concur with BOD action unless dessent/abstention in writting.

Question 16

Watered Stock

Answer 16

Watered Stock is when the sale is for less than the Par.

Required:
1. Is there Par Value
2. What compensation did the company receive for the Shares
3. is it under Par value.

Remedies
- Directors and purchasers may both be liable for the difference between purchase price and Par value if they were aware of Par value at the time of the purchase of stock.

Question 17

What are the duties a director owes to the corporation

Answer 17

1. Duty to manage the corporation
2. Duty of loyalty
3. Duty of Care

Directors are shielded from liablity by the Business Judgement Rule

Question 18

Define

Business Judgement Rule

Answer 18

The BJR is a presumption that Directors manage the corproation in good faith and in the best interest of the corporation

Question 19

Define

Duty of Care

Answer 19

A director must act with the care of a prudent person when conducting business, unless artiles have limited director liability for breach

Question 20

Define

Duty of Loyalty

Answer 20

A director may not recieve and unfair benefit to detiriment of the corproation or shareholders, unless there has been material disclosure and independent ratification

Question 21

Duty of Loyalty

Self-Dealing

Answer 21

A director recives unfair benefit in transaction with corporation.

Question 22

Duty of Loyalty

Usurping Corporate Opportunities

Answer 22

A director receives unfair benefit by usurping an opportunity that the corporation may have pursued.

Question 23

How may a director engage in independent ratification?

Answer 23

A director may defend a claim of breach of loyalty by:
1. A majority vote of independent directors
2. A majority vote of a committee with at least 2 independent directors
3. A majority vote of shareholders.

Question 24

Define

Interested Director Doctrine

Answer 24

A contract entered into by a directros is invalid unless:
1. the BOD approves the transaction after disclosure
2. Director does not vote on transaction
3. Shareholders approve the K after disclosure or
4. K is fair

Question 25

What are the duties of Officers?

Answer 25

Officers owe a
1. duty of care
2. Duty of loyalty

Question 26

What types of lawsuits may a shareholder bring against a corporation?

Answer 26

1. Direct Action Suits
2. Derivative Suits

Question 27

Define

Direct Action Suit

Answer 27

A direct action suit may be brought when a director breached their fiduciary duty owed to the individual shareholder.

Question 28

Define

Derivative Suit

Answer 28

A derivative suit is when a shareholder is suing to enforce the corporations own cause of action.
Requires:
1. Contemporanious stock ownership when claim arrose and throughtout litigation
2. Demand on BOD that they cause corproation to bring suit
3. Demand must be rejected or lapse in 90 days.

Question 29

How may a shareholder engage in proxy voting

Answer 29

A shareholder may engage in proxy voting
1. in writing
2. signed by record SH
3. directed to the corproations secretary
4. Authorizing another to vote their shares
5. valid for 11 months
6. revocable unless proxy says irrevocable and SH passed some interest

Question 30

Requirements for shareholder meetings

Answer 30

Must have an annual meeting.
A special meeting is limited to stated purpose.

Question 31

Cumulative Voting

Answer 31

Cumulative voting must be expressly granted in AOI and only is available when voting for directors.

Question 32

Pooled or Block Voting

Answer 32

Pooled or block voting requires
1. written agreement
2. filed with corproation
3.transferes shares to voting trustee
4. SH gets the certification
5. Sharholder retains all rights but voting

Question 33

In what priority are shareholders paid out?

Answer 33

1. Preferred share (money dividned preference payable at amount stated
2. **Participating Preferred **(paid as preferred and common share)
3. Cumulative Preferred (paid at rate of preferred each year)
4. **Common stock **(Paid last and equally)

Question 34

Closely Held Corporation

Answer 34

A closly held corproation requires an agreement among shareholders to eliminate corporate fomalities.

Requies:
1. unamiomous SH agreement in AOI, By-laws, or filed.
2. May not be pierced

Question 35

Requirements for a Professional Corporation

Answer 35

A professional corporation is made up of licensed professionals.

Requires:
1. Organizers file as Prof. Corp
2. SH must be licensed professionals and only practice one designated profession;
3. Professional liablity for own malpractice, but not for other malpractice or obligations.

Question 36

Name types of

Fundamental Corporate Changes

Answer 36

• Merger
• Consolidation
• dissolution

Requires:
1. fundamental amenments to articles
2. Sale of substantially all corporate assets

Question 37

Steps required for fundamental corporate change

Answer 37

1. BOD resolution
2. Notice of special meeting of SH’s
3. Approval by majority of all shareholders entitlted to vote and
4. majorty of any voting group adversly affected
5. Notice with the state

Question 38

Dissolution and Liqudation

Answer 38

Dissolution and liquidation requires approval by a majority of the directors and SH’s entitled to vote.

Question 39

Insider Trading

Answer 39

Insider trading is illigal.

It requires that there is an improper purpse and benefit.