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Corporations Flashcards

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1
Q

What are the 4 key characteristics of a corporation?

A
  1. Perpetual existence
  2. Centralized management
  3. Limited liability for owners/shareholder
  4. Free transferability of ownership interests/shares
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2
Q

Who are corporate directors?

A

Sit on the board, responsible for governing the corporation.

Elected by shareholders, appoint officers.

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3
Q

Who are corporate officers?

A

Delegated responsibility for managing conduct of business by the directors/board.

Serve as agents of the corporation.

Appointed by the directors/board

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4
Q

Who are corporate shareholders?

A

Owners of the corporation, generally do not exercise control over management.

Elect the board of directors.

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5
Q

Who are promoters of a corportation?

A

People who take the necessary preliminary steps for creating a corporation. Enter into contracts for the benefit of the corporation.

Not agents of the corporation, cannot bind the corporation.

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6
Q

Who is liable for contracts entered into for the benefit of a not-yet-formed corporation?

A

Promoters are personally liable.

Unless:
- contract specifically disclaims personal liability
- circumstances demonstrate the other party intended to look only to the corporation for performance

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7
Q

When is a corporation liable for pre-incorporation agreements made by promoters?

A

When it assumes liability through:
- adoption - promoter remains liable, but entitled to indemnification from corporation
- novation - promoter released from liability

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8
Q

How can a corporation adopt a pre-incorporation contract?

A
  • express - board passes a resolution formally adopting
  • implied - accepts or acknowledges the benefits of the contract
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9
Q

How can a corporation accept liability for pre-incorporation contracts through novation?

A

The three parties - promoter, contractor, and corporation - all agree to substitute the corporation as a party to the contract instead of the promoter.

Released promoter from all personal liability of the contract.

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10
Q

How is a corporation incorporated?

A

Executing and filing articles of incorporation

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11
Q

How are articles of incorporation executed?

A

Prepared and signed by incorporator(s)
Must include:
- name and address of incorporator(s)
- address of corporations initial registered office and agent
- number of shares authorized to issue
- corporate name
-> must include corp or equivalent and be distinguishable from other corporate names in the state

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12
Q

What are the filing requirements for articles of incorporation?

A

Delivered to sec of state office with fee

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13
Q

What is the effective date of incorporation?

A

The date of filing, unless the articles set forth a delayed effective date - can’t be longer than 90 days after filing

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14
Q

What is required to complete the organization of a corporation?

A
  • naming or election of directors
  • appointing of officers
  • adopting of bylaws
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15
Q

What do bylaws include?

A

Any provision for the regulation and management of the corp not inconsistent with law or the articles of incorporation.

Often includes:
- time and place for annual shareholder meeting
- record date for determining shareholder’s votes/dividends
- number of shareholders necessary for quorum
- percentage of votes necessary to authorize action
- any restrictions on the transferability of shares

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16
Q

What is conclusive evidence of a corporation?

A

The Secretary of State filing the articles of incorporation

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17
Q

What is a corporation by estoppel?

A

When a contract issue arises between a 3rd party and an entity believed to be a corporation, can use this doctrine as either a sword or shield, to avoid unfairness.

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18
Q

What constitutes an act of the corporate board of directors?

A

Must be collective - requires participation of a quorum of the board - a majority.

Can be majority vote at board meeting, or written consent signed by all members of the board.

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19
Q

What is required for a regular meeting of the corporate board?

A

Under the articles or bylaws, can be held without notice of date, time, or purpose.

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20
Q

What is required of a special meeting of the board?

A

At least two days notice of date, time, and place.

Notice of purpose must be given if removal of a director is being considered.

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21
Q

What powers do corporate officers have?

A

The powers of an agent.

Can enter into any transaction with express authority.

Have implied authority to enter into transactions that are reasonably related to performing the duties for which they are responsible.

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22
Q

Who has discretion to declare a dividend?

A

The board can decide whether and when to declare a dividend.

To object, shareholders must show fraud, bad faith, or abuse of discretion.

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23
Q

What is the ultra vires doctrine for corporations?

A

A corporation cannot be obliged to undertake a contract or activity that is beyond the scope of its power, as described in the bylaws or articles of incorporation.

24
Q

When can the limits of corporate authority be challenged?

A
  1. Proceedings by a shareholder to enjoin the act
  2. Proceedings by the corporation against a current or former director, officer, employee, or agent.
  3. Proceedings by the attorney general based on grounds that
    - the corporation obtained its articles through fraud
    - the corporation has continued to exceed or abuse the authority conferred upon it by law
25
Q

What are the fiduciary duties of corporate directors and officers?

A
  1. Duty of care
  2. Duty of loyalty
26
Q

What does the duty of care require of corporate directors and officers?

A

Discharge their duties:
- in good faith
- with the care that an ordinarily prudent person would exercise under similar circumstances
- in a manner they reasonably believe to be in the best interests of the corporation

27
Q

What is the business judgement rule?

A

Creates a rebuttable presumption that, when making business decisions, directors and officers have acted:
- on an informed basis
- in good faith
- with honest belief that their decision was in the corporations best interest

28
Q

What does the duty of loyalty include?

A

Cannot promote their own interests in a manner injurious to the corporation.

Cannot:
- self deal
- usurp a corporate opportunity
- directly compete with the corporation

29
Q

When are directors and officers personally liable for the corporation?

A

Not for debts and obligations of the corporation.

But liable to the corporation for damages resulting from violation of duties or unauthorized actions

30
Q

What are the collective powers of shareholders?

A

Participation in corporate management.

  1. Elect officer
  2. Remove directors with or without cause
  3. Amend the bylaws
  4. Approve fundamental changes in the corporation
31
Q

What notice must shareholders have for shareholder meetings?

A

10 to 60 days prior.

Place, date, and hour for annual meetings.

Include purpose for special meetings.

32
Q

What are shareholder resolutions?

A

A recommendation or request that the corporation or board take a specified action. Cannot mandate or bind the corporation or board.

33
Q

What is straight or statutory shareholder voting?

A

Shareholders may not give more than one vote per share to any single nominee.

34
Q

What is cumulative shareholder voting?

A

Shareholders may allocate all of their votes to any candidate when there are multiple openings on the board. Strengthens the ability of the minority shareholders to elect a director.

35
Q

When can a director be removed?

A
  • straight voting - without without case by a majority of the voting shares.
  • cumulative voting - no director can be removed if the votes against removal would be enough to elect him under cumulative voting rules.
36
Q

What is the process for amendments to the articles of incorporation?

A

Proposed by the board and submitted to the shareholders for approval.

37
Q

What is the process for a merger or share exchange?

A

Must be adopted by the board and then submitted to the shareholders for approval.

38
Q

When is approval by the shareholders not required for a merger plan?

A
  1. All of the following:
    • the corporation survives the merger or is the acquiring corporation
    • the articles of incorporation don’t change
    • the merger or share exchange will not change the number of outstanding shares or affect the relative rights of those shares
    • issuance of shares as part of the merger or share exchange doesn’t otherwise require shareholder approval
  2. If the merger is between a parent corporation and its subsidiary, and parent corporation owns at least 90% of the voting power.
39
Q

When does disposition of substantially all of the corporation assets require shareholder approval?

A

When it’s outside the regular course of business and leaves the corporation without a significant continuing business activity.

40
Q

What information do shareholders have a right to access?

A
  • information important to voting and investing decisions
  • articles, bylaws, minutes of shareholder meetings, list of shareholders on record
  • qualified right to accounting books and records and minutes of director meetings
41
Q

When can shareholders bring a direct suit?

A

When the wrong or harm is direct to the shareholder, like refusal to pay out a dividend

42
Q

What must shareholders prove to compel payment of dividends?

A

Fraud, bad faith, or abuse of discretion

43
Q

What is a derivative suit?

A

An equitable action brought by a shareholder on behalf of the corporation or for the corporation’s benefit.

Typically for an alleged breach of fiduciary duty by officers or directors

44
Q

What must a shareholder do before bringing a derivative suit?

A
  • must have been a shareholder when the transaction complained of occurred
  • make writing demand at least 90 days before bringing suit, unless irreparable injury
45
Q

When can a board of directors seek dismissal of a derivative suit?

A

A majority of directors who do not have a material interest in the derivative action determine, in good faith and after conducting a reasonable inquiry, that continuance of the suit is not in the best interest of the corporation

46
Q

When are corporate shareholders liable for the debts of the corporation?

A

Not usually, only when piercing the corporate veil

47
Q

When will a court pierce the corporate veil?

A

Necessary to prevent or avoid grave injustice

Must prove:
- shareholder control that effectively renders the corporation a facade (shareholder was the alter ego of the corporation)
- use of the corporate form to obtain an improper or fraudulent purpose
- injury or unjust loss resulting from this wrongful use of the corporate form

Look for:
- corporate formalities not observed, corporate and personal funds commingled
- insufficient segregation of parent corporation and subsidiary

48
Q

What is a limited liability company?

A

An unincorporated association having one of more members organized and operated pursuant to an LLC statute.

Treated like a corporation for liability purposes, but like a partnership for tax purposes.

49
Q

How is an LLC created?

A
  • filing articles of incorporation with the Secretary of State
  • must include
    - statement that LLC
    - name of LLC with LLC or equivalent
    - address of LLC’s registered office and agent
50
Q

How is an LLC managed?

A

Pursuant to the operating agreement. Control lies with the members.

51
Q

Are LLC members liable for losses of the LLC?

A

Only up to the amount which a member contributed to the LLC

52
Q

What duties are owed to the LLC by members and managers?

A

Duty of loyalty and care

Managers may not engage in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.

53
Q

How are derivative suits brought against and LLC?

A

Same as corporation, but must have demand futility - a member must make a demand on the other member-managed LLC asking that they bring an action, unless futile.

54
Q

When is an LLC dissolved?

A
  • the occurrence of an event in the operating agreement
  • the consent of all members
  • the passage of 90 consecutive days where the LLC has no members
  • upon application of a member to the court
  • a statement of administrative dissolution by the Secretary of State
55
Q

What are the grounds for a court order dissolving an LLC?

A
  • the conduct of the company is unlawful
  • it is not reasonably practicable to carry on the company’s activities in conformity with the articles of organization or operating agreement
  • the managers or members in control of the LLC have acted or will act in a manner that is illegal or fraudulent
  • managers or members in control have acted in a manner that is oppressive or is directly harmful to the applicant
56
Q

When is self-dealing by corporate directors or officers cured?

A
  1. material disclosure to board, and approval by a majority of disinterested directors
  2. material disclosure to shareholders, and approval by a majority of disinterested shareholders
    or
  3. a court determines the transaction was fair and reasonable to the corporation
57
Q

When is usurpation of a corporate opportunity cured?

A
  1. the opportunity is fully disclosed to the corporation, the corporation is given an chance to pursue the opportunity and choses not to
    or
  2. the corporation could not have taken the opportunity

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