Corporations

Question 1

What may be included in a corporation’s bylaws?

Answer 1

Any information regarding the operation of a corporation not inconsistent with the articles of incorporation or the law

Question 2

What is a proxy?

Answer 2

A writing signed by the record SH, directed to the secretary of a corp. authorizing a third party to vote their shares at a shareholder meeting

Question 3

What is the business judgment rule?

Answer 3

A presumption applied by courts that whenever a Board takes action they act (1) in good faith (2) with the care of a reasonable person in like circumstances (3) in the best interests of the corporation

Question 4

When may a corporation NOT limit director liability for damages for breach of fiduciary duties?

Answer 4

When the director received a benefit to which they were not entitled, the director intentionally inflicted harm on the corporation/SH or committed a crime, or where a director approved unlawful distributions

Question 5

When may a director be relieved of liability for violating the duty of loyalty based on a self dealing transaction?

Answer 5

When the transaction was fair to the corporation or the director disclosed all material facts regarding the transaction and the transaction was approved by a majority of disinterested board members OR shareholders.

Question 6

When does an officer have actual authority?

Answer 6

Unless specifically excluded by the corporation, officer has actual authority to enter ordinary contracts involving the day to day operation of the corporation

Question 7

When does the exercise of authority by an officer require Board approval?

Answer 7

Extraordinary transactions by an officer require an express grant of authority by the Board (but the Board cannot delegate more authority than it has).

Question 8

What is required for a shareholder to exercise their dissenting right of appraisal?

Answer 8

A shareholder must (1) give written notice of their objection and intent to demand payment prior to or at SH meeting (2) abstain or vote against the proposal at the shareholder meeting (3) send the corporation a written demand for the fair value of their shares and deposit shares as directed by the corporation

Question 9

What is the duty of loyalty owed by a Director to a corporation?

Answer 9

The Director must exercise their duties in good faith, in a manner they reasonably believe is in the best interest of the corporation

Question 10

What is the duty of care owed by a Director to a corporation?

Answer 10

The Director must exercise the amount of care that a reasonable person would believe is appropriate under the circumstances.

Question 11

What is required for a SH to bring a derivate suit on behalf of a corporation?

Answer 11

1) The SH must have standing (have been a SH at the time the claim arose or received their shares by operation of law from someone who was)

2) The SH must fairly and adequately represent the corporation’s interest

3) The SH must have made a written request that the corporation take suitable action (not required in some jdx. if request would be futile)

4) The corporation must be named as a defendant in the suit

Question 12

When may a court order dismissal of a SH derivative suit upon motion by the corporation?

Answer 12

1) When an independent investigation by the corporation determined that the suit is not in the corporation’s best interest (2) the investigation was reasonable

Question 13

When does the de facto corporation doctrine shield SH from personal liability?

Answer 13

When there was a colorable, good faith attempt to comply with a relevant incorporation statute and there has been an exercise of corporate privileges (parties acting as if there is a corporation)

Does not apply in actions by the state

Question 14

When is a party estopped from denying a corporation’s existence?

Answer 14

When the party deals with an entity as if it were a corporation, as it pertains to contracts (not torts)

Question 15

What is the liability of a promoter for contracts formed prior to a corporation’s formation?

Answer 15

The promoter is personally liable on that contract even after the corporation is formed unless there is a novation

Question 16

What is the liability of a corporations for contracts formed prior to its formation?

Answer 16

The corporation is NOT liable on the contract unless they expressly (corporate act) or impliedly (accepting benefits) adopt the contract.

Question 17

Under modern statutes (MBCA), what is acceptable consideration for the issuance of stock?

Answer 17

Any tangible or intangible property or benefit to the corporation received in exchange for the issuance of stock (including work already performed and/or promise to do something in the future)

Question 18

When may a court pierce the corporate veil in a close corporation?

Answer 18

(1) A shareholder has abused the privilege of incorporation (e.g. “alter ego”, undercapitalization at time of formation)

(2) Fairness requires holding the SH personally liable

Question 19

What is the quorum required for SH meetings?

Answer 19

A majority of outstanding shares

Question 20

How does cumulative voting for Directors compare to straight voting?

Answer 20

Cumulative voting: multiply number of shares by number of Directors being elected, and divide voting power between seats in whatever manner

Straight voting: each outstanding share gets one vote for each seat

Question 21

What types of matters require a majority of shares entitled to vote to be approved (as opposed to majority of shares actually voted?)

Answer 21

Fundamental corporate changes, removal of a Director

Question 22

What are fundamental corporate changes triggering the requirement for fundamental change procedure?

Answer 22

Amending the articles of incorporation, merger/consolidation, sale of substantially all corporate assets, conversion to another form of business (e.g. LLC), dissolution of a corporation

Question 23

What is a shareholder’s preemptive right, and what are the limitations on the right under modern statutes?

Answer 23

The preemptive right gives a shareholder the right to maintain their % of ownership in the corporation anytime there is an issuance of stock for money.

Right must be mentioned in the Articles of Incorporation, and does not apply w/i six months of incorporation or if shares are issued with no voting rights.

Question 24

What is the consequence of failure to provide required notice for a Board/SH meeting?

Answer 24

The corporate act may be void unless the parties who did not receive notice waive their right to notice (1) in writing or (2) by attending the meeting (other than attendance just to object)

Question 25

Which directors may be held liable for a breach of fiduciary duties?

Answer 25

Any director who approved the breach (anyone who was present at the meeting and did not dissent or abstain in writing)

Question 26

What is the rule regarding director reliance on information from third parties?

Answer 26

The directors may rely on information from corporate officers or employees who they reasonably believe are reliable and competent, and may rely on third parties as to matters they reasonably believe are within their professional competence

Question 27

How can a proxy be revoked?

Answer 27

By a SH attending a meeting in person, in a writing to the corporate secretary, or by subsequent proxy appointment

Question 28

When is a proxy irrevocable?

Answer 28

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

Question 29

When is a corporation NOT allowed to indemnify an officer or director?

Answer 29

When the officer or director was held liable to the corporation or improperly received a benefit

Question 30

When is a corporation REQUIRED to indemnify an officer or director?

Answer 30

When the officer or director is successful in defending a suit on behalf of the corporation

Question 31

When is indemnification of an officer or director permitted?

Answer 31

When the officer or director was unsuccessful in defending a suit, but acted in good faith in a manner they reasonably believed was in the best interest of the corporation (as determined by disinterested majority of the Board)