Corporations

Question 1

Liability for Promoters

Answer 1

Generally, promoters are personally liable for pre-incorporations Ks.

UNLESS, novation: agreement between promoter, third party, and corporation that relieves promoter and substitutes corporation

OR Corporation adopts by accepting benefits of contract

Question 2

When does corporation come into existence?

Answer 2

When secretary of state accepts the fee and files the articles

Question 3

Defective Corporations

Answer 3

De facto: if (1) good faith effort to incorporate, and (2) no actual knowledge that efforts were defective, then:
corporation still treated as a corporation

Corporation by estoppel: third party enters into K thinking its a corporation, then estopped from saying its not

Question 4

Factors for piercing the veil

Answer 4

1 - alter-ego: no compliance with corporate formalities , treated the corporation just like the person itself

2 - under-capitalization

3 - fraud or fraud-like behavior

More likely in torts than Ks

Question 5

What type of stock is most important when determining voting?

Answer 5

Outstanding - held by shareholders other than corporation

Question 6

Par value and watered stock

Answer 6

If stock is sold for less than par value by corporation, purchasing shareholder is personally liable to corporation creditors

Question 7

Stock subscriptions

Answer 7

Pre-incorporation promises to buy stock are irrevocable for up to 6 months

Question 8

Preemptive rights for shareholders

Answer 8

Generally, do not have, but may have in closely held corporations.

Shareholder has right to maintain share of company upon issuance of more shares

Question 9

Who and when can a dividend be declared?

Answer 9

Board of directors has sole authority

Can only be distributes when (1) corporation is not insolvent, or (2) making the dividend distribution would not make the corporation insolvent.

BUT, not liable if relied in good faith on financial advice

Question 10

“Participating” Shares and “Cumulative” Shares

Answer 10

participating - they are treated as preferred, and they are also included in common stock

cumulative - entitled to distribution each year, so if dividends are paid and there was no dividend issued last year, then they can get last years too

Question 11

Private restrictions on transfer of shares in closely held corporations

Answer 11

Valid if it is conspicuously noted, typically on stock certificate

Subject to an attack on the reasonableness of the restraint on alienation

Question 12

Rule 10b-5

Answer 12

1 - plaintiff bought security
2- involves interstate commerce
3- defendant engaged in fraudulent or deceptive conduct
4 - conduct related to material information
5 - defendant acted with scienter
6 - Plaintiff relied on defendant’s conduct
7 - Plaintiff suffered harm

P can recover difference between value of stock and price paid. No punitives

Question 13

Short swing profits

Answer 13

If corporate insider both buys and sells stock within 6 month period, will be liable to corporation for any profits made.

Corporate insider: director, officer, or shareholder (must own 10%+ of shares)

Only applicable to publicly traded or 10 mill and 500+ shareholders

Question 14

Notice of shareholder meeting

Answer 14

Must be given notice (for either annual or special meeting) no fewer than 10 days and no more than 60.

time, date, location. For special meeting, must include purpose

Cannot attack validity of notice if you attend

Question 15

Record date for shareholder meeting

Answer 15

Fixed by board of directors

Only those who are shareholders on record date are entitled to vote

No more than 70 days before meeting

Question 16

Shareholder consent instead of meeting

Answer 16

Must be unanimous and written

Question 17

Shareholder Proxy

Answer 17

Authorizes a proxy to vote shares at meeting in accordance with wishes of shareholder

To be valid, must:
1 - be in writing
2 - signed by shareholder as of record date
3 - sent to secretary of corp
4 - contain authority to vote shares
5 - cannot be valid for more than 11 months

Question 18

Shareholder Quorum and Necessary Vote requirements

Answer 18

Quorum - a majority of outstanding shares

Necessary vote to pass: more votes for than against

Question 19

Shareholder cumulative voting

Answer 19

Applies only to election of directors when permitted in the articles

Multiply number of shares by number of directors slots up for election.

Question 20

Shareholder inspection rights

Answer 20

Shareholder has right to inspect records as long as it is for a proper purpose

Must give five days notice and it is only during normal business hours

Question 21

Shareholder derivative suit

Answer 21

Standing - shareholder must maintain contemporaneous stock ownership

Demand requirement: Board must act within 90 days
N/A if demand would be futile

Recovery: goes to corporation, but attorneys fees are rewarded if there is a substantial benefit to the corporation.

Question 22

Fiduciary duties of shareholders

Answer 22

Generally, shareholders do not owe duties to each other.

Exception: controlling shareholder owes duties to minority shareholders if (1) sells stock to a looter, or (2) transacts with the corporation.

Question 23

Removal of directors

Answer 23

shareholder can remove directors with or without cause,

UNLESS, there is a staggered board, then can only be removed for cause

Question 24

Vacancy on board of directors

Answer 24

Can be filled by shareholders at a special meeting or by the board itself

Question 25

Board meeting Quorum and Necessary Vote

Answer 25

Quorum: majority of the total number of directors

Necessary vote: Majority vote of those present (can be through phone)

OR unanimous written consent

Question 26

Business Judgment Rule

Answer 26

In the absence of fraud, illegality, or self-dealing, courts will not interfere with the good faith business decisions of directors and officers.

Protects from duty of care violations.

Not applicable if not in good faith

Question 27

Duty of Loyalty in Corporations

Answer 27

Directors and Officers cannot engage in self-dealing or usurping corporate opportunity.

BUT, if majority of disinteresed shareholders or directors approve the transaction after full disclosure, then the burden shifts to the challenger to prove that it was not fair.

Question 28

Indemnification of officers and directors

Answer 28

Mandatory - if they win

Prohibited - if they lose because they obtained an improper benefit

Permissive - if they lose, but they (1) acted in good faith, and (2) has no reason to believe it was illegal

Question 29

Fundamental changes that require both director and shareholder approval

Answer 29

Merger and Consolidation

Dissolution

Board adopts a resolution proposing the change, sends to shareholders to hold a special meeting

Question 30

Dissenter’s appraisal rights

Answer 30

If shareholder doesn’t want to participate in fundamental change, then shareholder is entitled to have their shares purchased by the corporation at their fair market value.

Must:
1 - send notice of intent to dissent prior to meeting
2 - abstain or vote no
3 - must make prompt written demand for value after meeting

Question 31

Can corporate board of directors enter into voting agreements?

Answer 31

Generally, no, but closely held corporations may

Contrast: shareholders can enter into such agreements

Question 32

Tests for usurping corporate opportunity

Answer 32

Expectancy -

Line of business -

Question 33

Shareholders power re bylaws

Answer 33

Can amend bylaws
Can pass new bylaws
Can restrict Board of Director’s ability to change the bylaws

Question 34

Can shareholder bring suit to compel dividend?

Answer 34

Only if she can prove that funds were available and Board acted in bad faith by not issuing dividend.