Corporations

Question 1

Five fact patterns that arise on the MEE

Answer 1

1. Organization of a corporation
2. Issuance of stock
3. Directors and officers
4. Shareholders
5. Fundamental corporate changes

Question 2

Requirements to forming a de jure corporation (in accordance with law)

Answer 2

1. Incorporator: one or more persons or an entity appointed to execute and deliver articles of incorporation to secretary of state
2. Articles of incorporation: must include (1) name of corporation (with appropriate abbreviation), (2) name and address of each incorporator, (3) registered agent and street address of registered agent (for service of process), and (4) information regarding corporation’s stock (maximum # of authorized stock and other classes of stock)
3. Delivery of articles: incorporators must deliver notarized articles to secretary of state and pay any required fees

Question 3

Organizational meeting

Answer 3

After secretary of state accepts documents, initial directors (if named in the articles) or incorpoators (if initial directors were not named) hold organizational meeting

Purpose of the meeting:
* Adopt initial bylaws
* Appoint officers

Question 4

If the articles of incorporation and bylaws conflict, which one governs?

Answer 4

Bylaws

Question 5

Internal affairs doctrine

Answer 5

Internal affairs of a corporation are governed by the law of the state of incorporation

Question 6

B. corporations

Answer 6

Corporation for profit that pursues some benefit to a broader social policy cause
* Articles must state it’s a “benefit corporation”
* B. corporation must file annual benefit report assessing how it has pursued its stated social mission
* Managers are not liable for failing to maximize profits only b/c company has a broader purpose

Question 7

S. corporations

Answer 7

Where corporations usually pay a double tax (entity level and shareholder level on dividends), s. corporations do not pay taxes at the entity level

Question 8

Limited liability in corporations

Answer 8

Neither shareholders, directors, nor officers are held liable for corporation’s debts
* Exception: shareholders can be when piercing the corporate veil

Question 9

Defective incorporation

Answer 9

If the incorporators thought they had formed a corporation, but failed, they are personally liable for business debts as a partnership unless they can prove that they either (1) formed a de facto corporation or (2) are a corporation by estoppel

Question 10

De facto corporation

Answer 10

Only if they were unaware of their failure to form a de jure corporation, incorporators may nonetheless be held as a corporation if they can prove:
* Relevant incorporation statute exists (does in every state)
* Parties made good faith, colorable attempt to comply w/ the statute (tried and came close)
* Has been some exercise of corporate privileges (acting as though they were corporation)

*Abolished in most states, but on the MEE, say “assuming it applies in the relevant state”

Question 11

Corporation by estoppel

Answer 11

Applies only in contracts cases

If a third party treats the corporation as a corporation and the corporation treats themselves as a corporation while unaware of their failure to form a de jure corporation, the third party cannot then sue the incorporators in an attempt to hold them personally liable for their breach of contract

*Abolished in most states, but on the MEE, say “assuming it applies in the relevant state”

Question 12

Liability for pre-incorporation contracts

Answer 12

Promoter: person acting on behalf of a corporation that is not yet formed

If all parties entering into a contract knew that the corporation did not exist at the time, the corporation is only held liable if it subsequently adopts the contract when formed
* Express adoption: board takes an action adopting the contract
* Implied adoption: corporation accepts a benefit of the contract

Unless the contract clearly states otherwise, the promoter can be held personally liable on the pre-incorporation contract until there is a novation
* Novation: agreement among the promoter, corporation, and third party to release the promoter from liability and substitute the corporation in for the promoter’s place in the contract

Question 13

Foreign corporations

Answer 13

If a corporation is incorporated in another state or country, the corporation must also register and pay fees in the state in order to transact business in the state
* Transacting business means the regular course of intrastate business activity (not occassional or sporadic activity or simply owning property in the state)

Question 14

Securities

Answer 14

To start and operate a corporation, the corporation can either borrow money or raise money by issuing investments (“securities”) to an investor.

Debt securities (bonds): corporation borrows money and agrees to pay it back with interest to the creditor

Equity securities (stock): corporation sells interest in the corporation to someone, who becomes an owner of the corporation (called an “issuance of stock”)

Question 15

Subscriptions

Answer 15

Written offers to buy stock from a corporation

Pre-incorporation subscriptions: irrevocable for six months unless
* Otherwise provided in the terms of the offer
* All subscribers consent to revocation

Post-incorporation subscriptions: revocable until accepted by the board of the corporation

Question 16

Types of consideration allowed in issuing stock

Answer 16

Stock may be issued for any tangible or intangible property or benefit to the corporation (very broad)
* Money
* Property
* Services already performed for corproation
* Discharge of debt
* Future services to corporation

Question 17

Amount of consideration required when issuing stock

Answer 17

Traditional view: par
* Par is the minimum issuance price
* Corporations cannot issue stock for less than its stated par value (“watered stock” when it does)
* If no par is stated, the board can issue stock for any price it sets

MBCA view: board determines value
* Only when corporation is issuing stock in exchange for something other than cash
* Board determines value of the property or services being exchanged for stock and valuation must be made in good faith

Question 18

Price of stock when shareholders sell their stock

Answer 18

Issuance rules do not apply to shareholders’ sale of their own stock (only applies to corporation issuing stock)

Question 19

Liability for watered stock

Answer 19

If a corportation issues stock below par, the following are liable:
* Buyer: always liable (assume had notice)
* Directors: only if knowingly authorized issuance
* If buyer sells stock to third party: third party is only liable if knew about the water

Question 20

Treasury stock

Answer 20

Stock corporation issued and then reclaimed back
* Corporation can then resell the stock at any issuance price set by the board

Question 21

Preemptive rights

Answer 21

Existing shareholders have the right to maintain their percentage of ownership when the corporation is issuing additional shares, where sharehodlers have are given the right to buy shares first

Only applies when:
* Issuing shares for money
* Articles includes preemptive rights

Question 22

MODULE 5

Answer 22

HERE

Question 23

Liability of Promoters

Answer 23

• Promoters act on behalf of the unformed corporation.
• Promoters are personally liable on pre-incorporation contracts entered into for the benefit of the corporation unless:
  
  • the contract specifically disclaims the personal liability of the promoter; or
  • circumstances demonstrate the other party agreed to look only to the corporation for performance

Question 24

Liability of the corporation after formation

Answer 24

• The corporation is not liable on a pre-incorporation contract unless, after formation, the corporation assumes liability through adoption or novation.
• If the corp. adopts the contract, the promoter remains liable on the contract but is entitled to indemnification from the corp.
  • Express adoption: Board passes a resolution adopting the contract.
  • Implied adoption: occurs when the corporation accepts or acknowledges the benefits of the contract.
• A novation releases the promoter from liability on the pre-incorporation contract.
  
  • The corporation is substituted for the promoter on the original contract.

Question 25

What is required for Incorporation of a corporation?

Answer 25

Incorporation occurs upon the execution and filing of the articles of incorporation.

Proper execution requires the incorporators to prepare and sign the Articles and include the:

• name and address of each incorporator
• address of the initial registered office and name of initial registered agent
• number of shares authorized to issue; and
• name of the corporation.

Proper filing requires an incorporator to file the Articles at the secretary of state’s office and pay the filing fee.

• The date of incorporation is the date of filing unless the Articles delay the date of effectiveness (can delay up to 90 days from the date of filing).

Question 26

Post-incorporation organization

Answer 26

• After incorporation, a corporation must be properly organized at an organizational meeting called by the incorporators and/or the inidial directors named in the Articles.
• At the organizational meeting, they must:
  
  • name or elect directors
  • appoint officers
  • adopt corporate bylaws.

Question 27

Corporation by estoppel

Answer 27

• In a contract dispute between a third party and an unformed corporation believed to be properly formed, a court may:
  
  • estop the third party from alleging defective incorporation if that would unjustly expose the corporation’s principals to liability, or
  • estop the corporation from arguing it isn’t liable due to defective incorporation if it would unjustly deprive the third party of relief.
• Can’t use this doctrine as a defense to a tort claim

Question 28

Powers of a Director

Answer 28

• The board must act collectively and individual directors don’t have the power to act for the corporation (unless otherwise provided in the Articles or Bylaws).
• The board has the sole power to declare dividends (unless otherwise provided in Articles or bylaws)

Question 29

What constitutes a quorum of directors?

Answer 29

A Quorum is the minimum number of directors requred for board action to occur.

• A majority of directors constitutes a quorum (unless otherwise provided in the articles or bylaws).
• Board action occurs upon the affirmitive vote of a majority of the directors present at the meeting.

Question 30

Can a board act without calling a meeting?

Answer 30

Yes, if every director gives signed, written consent (unless otherwise provided in the Articles or bylaws).

Question 31

What kind of notice is required for regular board meetings?

Answer 31

No notice is needed for regular meetings (unless otherwise noted in Articles or Bylaws)

Question 32

What kind of notices is required for special meetings?

Answer 32

• At least two days’ notice of the date, time and place of the special meeting (unless otherwise provided in the articles or bylaws).
  
  • Need not give the purpose of the meeting except for meetings at which the removal of a director is to be considered.

Question 33

Can a director waive the right to notice?

Answer 33

Yes, with a signed writing.

The director also waives notice by attending or participating in the meeting and not promptly objecting to the meeting.

• Even if the director promptly objects, a director waives notice by voting and assenting to the action taken at the meeting.

Question 34

Corporate Officers

Answer 34

• Officers are agents of the corporation and may enter into any transaction that is expressly or implicitly authorized.
• Officers have the implied authority to enter contracts that are reasonably related to performing their duties.

Question 35

Duty of care

Answer 35

Directors and officers must act:

• in good faith
• with the care an ordinarily prudent person would exercise in similar circumstances, and
• in a manner reasonably believed to be in the best interest of the corporation.
  
  • Directors and officers may rely on information, reports, recordings, and financial data prepared by someone reliable and competent in the matter.

Question 36

Business Judgment Rule

Answer 36

This is a rebuttable presumption the court will apply, and assumes that directors and officers acted on an informed basis, in good faith, and in an honest belief that the decision was in the corporation’s best interest.

Question 37

Duty of Loyalty

Answer 37

• Directors, officers, and employees must act loyal to the corporation, and not promote their own interest in a way that harms the corporation
• Conflicts of interests typically occur when:
  
  • transacting business with the corp. (i.e. self-dealing)
  • usurping a corporate opportunity, or
  • directly competing with the corporation.
• Afer full disclosure, the non-interested directors may authorize the conflict-of-interest transaction by a majority vote.
  
  • The director or officer involved must disclose all material facts of the transaction.

Question 38

What is self-dealing?

Answer 38

Self-dealing occurs when a director, officer, or employee transacts business with the corporation on behalf of him or herself.

Question 39

what constitutes usurping a corporate opportunity?

Answer 39

Factors to determing “corporate opportunity”–whether the:

• opportunity was discovered while acting in capacity as director/officer;
• the business is closely related to that of the corporation;
• board expressed interest in acquiring such a business;
• opportunity is in the corporation’s line of business;
• opportunity was developed or discovered using corporate funds or faciliities

Question 40

How do shareholders participate in corporate management

Answer 40

Shareholders

• attend shareholder meetings
• elect and remove directors (with or without cause)
• amend the bylaws, and
• approve fundamental changes.

Question 41

Notice of shareholder meetings

Answer 41

Written notice of each annual and special meeting is required to be given at some point between 10 and 60 days before the meeting.

Question 42

What constitutes a quorum of shareholders?

Answer 42

A quorum = majority of shares entitled to vote (unless the Articles or bylaws provide otherwise)

Question 43

What constitutes “fundamental changes” to the corporation?

Answer 43

• Amendments to articles
  
  • notice must include a copy of the amendment and indicate one purpose of the meting is to consider the amendment
• Merger or Dissolution
  
  • notice must include a copy of the plan and indicate one purpose of the meeting is to consider merger/dissolution
• Sale of substantially all Corporate Assets
  
  • shareholder approval is required for such a sale that occurs outside the usual and regular course of business if it would leave the corporation without significant continuing business activity

Question 44

Is shareholder approval required for a short form merger?

Answer 44

No, shareholder approval is not required for a short form merger, which is where a parent corporation owning at least 90% of the outstanding shares of each class of its subsidiary may merge the subsidiary into itself without the approval of shareholders of either the parent or the subsidiary.

Question 45

Shareholder voting

Answer 45

Each share gets one vote, unless provided otehrwise by statute or the Articles. Only shareholders of record on the record date may vote.

Question 46

Proxy voting

Answer 46

• A proxy is a valid agreement if it is in writing and signed by the shareholder (or an electronically transmitted authorization).
  
  • Proxy agreements are not valid for longer than 11 months, unless a longer time is provided in the agreement.
• Generally proxies are freely revocable, unless it says “irrevocable” in the agreement and is coupled with an interest by:
  
  • a writing delivered to the corporation
  • a subsequently executed proxy presented at the shareholder meeting, or
  • a shareholder appearing in person and voting at the meeting

Question 47

consolidated voting power

Answer 47

A contract between shareholders agreeing to vote their shares together.

This is valid absent fraud or other illegal objective

Question 48

Shareholder right to information and inspection

Answer 48

• Shareholders have an unqualified right to examine the Articles, bylaws, minutes of shareholder meetings, and a list of shareholders of record.
• Shareholders have a qualified right to inspect and make copies of accounting books and the records and minutes of direector meetings.
  
  • Requries a good-faith demand made for a proper purpose and with specificity of that prupose and the items sought for inspection.

Question 49

Appraisal rights of dissenting shareholders

Answer 49

• If a fundamental change was approved by shareholders, dissenting shraeholders (ie shareholders who voted against the action) have the right to sell their shares for fair market value.
  
  • For a merger, this right can be exercised by any shareholder of a corproation that is a party of the merger
    
    • Not exercisable by shareholders of a subsidiary corporation whose parent corproation owns at least 90% of each class of stock).
  • For a share exchange, this right can be exercised only by shareholders who own shraes of the class/series that aer to be acquired or exchanged.

Question 50

Direct Suits

Answer 50

• Used when the wrong or harm is caused directly to the shareholders.
• To compel payment of dividends, a shareholder must prove the Directors’ refusal amounted to fraud, bad faith or an abuse of discretion.
• Factors to determine bad faith:
  
  • intense hostility by controling shareholders against minority shareholders
  • excluding minority shareholders from employment by the corporation
  • high salaries, bonuses, or corporate loans made to the controllig officers
  • if the majoirty shareholders may be subject to high personal-income taxes if substantial dividends are paid, and
  • whether controlling directors desire to buy the minority stock interests for as little as possible.

Question 51

Derivative suits

Answer 51

• Equitable action brought by shareholders on behalf of the corporation and for the corporation’sbenefit (the damates are paid to the corporation, not to the shareholders bringing the suit).
• Before bringing suit, the shareholder must make a written damand of the directors to enforce the rights of the corporation unless demand would be futile.

Question 52

Good faith duty for controlling shareholders

Answer 52

controlling shareholders must refrain from exercising control in a way that disproprotionately benefits them over minority shareholders

Question 53

Shareholders’ exposure to liability

Answer 53

Generally, shareholders are not personally liable for debts of the corporation.

Question 54

Peircing the corporate veil

Answer 54

Usually in closely held corporations (because only a few shareholders) if there has been serious wrongdoing courts will pierce the corporate veil and make the shareholders personally liable.

Factors include:

• corporation is undercapitalized
• corporate formalities have not been followed,
• commingling of corporate and personal funds,
• corporation is the alter ego of its shareholders.