Corporations

Question 1

when does a Corp come into existence?

Answer 1

In order to form a corporation, articles of incorporation and fee must be filed and accepted by the Secretary of state. When all statutory requirements are satisifed, a de jure corporation is created.

Question 2

What is required in the articles of incorp?

Answer 2

This can vary by state statute. But generally, the articles must include certain basic information including:

-name of corporation (with Inc., ltd, corp, etc)
-the name and address of the agent of the corporation
-Name and address of incorporator (s)
-Duration of corp if applicable, most are perpetutal
-Purpose - most say engage in any lawful activity
-the number of shares the corporation is authorized to issue,

Unless a delayed date is specified in the articles, the corporate existence begins when the articles are filed.

Question 3

when a person conducts biz as a corp but has not attempted to substantially comply with process of incorporation?

Answer 3

When a person conducts business as a corporation without attempting to comply with the statutory incorporation requirements, that person is liable for any obligations incurred in the name of the nonexistent corporation. In this case, the woman is not likely to be liable under this provision because she made a good-faith attempt to comply with the statutory requirements for incorporation.

Question 4

What is liability implication when a corporation has not actually been created? i.e. general partnership?

Answer 4

When a corporation has not been created, the entity may be treated as a general partnership. A partnership is an association of two or more persons to carry on a for-profit business as co-owners. In a general partnership, each partner is jointly and severally liable for all partnership obligations.

HOWEVER, subject to defenses. see de fact and corporation by estoppel

Question 5

What defenses does a person have when they unsuccessfully attempted to incorporate?

Answer 5

When a person makes an unsuccessful effort to comply with the incorporation requirements, that person may be able to escape personal liability under either the de facto corporation doctrine or the corporation by estoppel doctrine.

Question 6

Requirements for De Facto Corp

Answer 6

1. The owner must make a good-faith effort to comply with the incorporation requirements
2. Must operate the business as a corporation without knowing that the requirements have not been met.

If the owner has done so, then the business entity is treated as a de facto corporation, and the owner, as a de facto shareholder, is not personally liable for obligations incurred in the purported corporation’s name.

**Note, however, that the RMBCA has abolished the de facto corporation, as have many jurisdictions that have adopted the RMBCA.

Question 7

Requirements for Corporation by Estoppel

Answer 7

Similar reqs to De Facto:

1. The owner must make a good-faith effort to comply with the incorporation requirements and
2. Must operate the business as a corporation without knowing that the requirements have not been met

and

A person who deals with an entity as if it were a corporation is estopped from denying its existence and is thereby prevented from seeking the personal liability of the business owner.
**This doctrine is limited to contractual agreements.

Question 8

Duties that controlling shareholder owes to minority

Answer 8

A controlling shareholder, such as a parent corporation, generally does not owe fiduciary duties to the corporation or other shareholders.

However, decisions by a majority shareholder or control group may be reviewable by a court for good faith and fair dealing toward the minority shareholders under the court’s inherent equity power.

Question 8

How are decisions by a majority shareholder that are not self-dealing reviewed?

Answer 8

Business dealings between a controlling shareholder and the controlled corporation that do not involve self-dealing are analyzed using the business judgment standard.

Question 9

What is the business judgment rule?

Answer 9

The business judgment rule is a rebuttable presumption that the controlling shareholder/director/officer reasonably believed that their actions were in the best interests of the corporation.

Really only applies to duty of care issues. Not duty of loyalty.

Question 10

What are duties of care?

Answer 10

Fiduciary duty owed by the director and officers. BJR applies.

Standard of care: Must act in good faith with care that an ordinary person in a like position would reasonably believe appropriate under similar circumstances.

This includes the duty to be reasonably informed before making business decisions.

Question 11

How are directors and officers protected by BJR?

Answer 11

Directors are protected by the business judgment rule which presumes that in making a business decision, the directors of a corporation acted in the best interests of the corporation.

In absences of fraud, illegality, or self-dealing, courts will not disturb good faith business decisions.

The party attacking a board decision must rebut the presumption that its business judgment was an informed decision.

Question 12

When corp. formation is defective, what happens and what is owners liability, generally speaking?

Answer 12

If corporate formation is defective, the entity is treated as a general partnership. And the owners will be personally liable for all obligations of the patnership.

(A partnership is an association of two or more persons to carry on a for-profit business as co-owners)

BUT de facto or corp by estoppel may apply…

Question 13

What’s the duty of loyalty?

Answer 13

Duty of loyalty is owed by directors and officers.

They cannot receive unfair benefits to the detriment of the corporation unless they effectively disclose and obtain ratification.

Two types: self-dealing/conflict of interest and usurping corporate opportunity.

Question 14

What is a self-dealing/conflict of interest transaction?

Answer 14

Involves engaging in a transaction with the corporation that benefits the director, officer or a close
family member

Includes transactions with another business entity that the director is associated
with.

However, officer/director may be protected if a safe harbor rule applies…

Question 15

What are the safe harbor rules that protect an officer/director from a self-dealing transaction?

Answer 15

The interested director discloses all material facts to the board of directors and
receives approval by a majority of disinterested board of directors OR majority of disinterested shareholders.

OR

The transaction is fair to the corporation substantively and procedurally

Question 16

What is usurping a corporate opportunity?

Answer 16

Taking an opportunity that the corporation would be interested in without offering
it to the corporation first.

If the corporation declines the opportunity, the director may take it without
violating the duty of loyalty.

Question 17

How to determine if something is a corporate opportunity?

Answer 17

In determining whether the opportunity is one that must first be offered to the corporation, courts have applied the “interest or expectancy” test or the “line of business” test.

Under the “interest or expectancy” test, the key is whether the corporation has an existing interest or an expectancy arising from an existing right in the opportunity. An expectancy can also exist when the corporation is actively seeking a similar opportunity.

Under the broader “line of business” test, the key is whether the opportunity is within the corporation’s current or prospective line of business.

Question 18

What is “fairness” under safe harbor rule?

Answer 18

With regard to self-dealing safe harbor, the main concern under the fairness test is whether the benefit is comparable to what might have been obtained in an arm’s length transaction.

Question 19

What is minimum number of Directors that is required?

Answer 19

Must have atleast one. Must be natural persons.

Question 20

Directors serve a limited term

Answer 20

Usually one year. They are often re-elected though.

Question 21

Shareholders can remove directors

Answer 21

with or without cause. except situation involving staggered board…

Question 22

Board Meeting Notice

Answer 22

There must be notice for special meetings, but not regular ones.

Question 23

Notice requirements for special board meeting?

Answer 23

Unless the articles of incorporation or bylaws provide otherwise, notice must be provided at least two days prior to the meeting and should state the date, time, and place of the meeting. The notice need not describe the purpose of the special meeting.

Question 24

Waiver of notice at board mtg.

Answer 24

Directors are entitled to notice of a special meeting, but a director’s attendance waives notice of that meeting unless the director promptly objects to lack of notice and does not vote

Question 25

Quorum Requirement at Board Meeting

Answer 25

For the board of directors’ acts at a meeting to be valid, a quorum of directors must be present at the meeting. A majority of all directors in office constitutes a quorum, unless the articles of incorporation or bylaws require a higher or lower number.

A director must be present at the time that the vote is taken in order to be counted for quorum purposes, but presence includes appearances made through communications equipment that allows all persons participating in the meeting to hear and speak to one another.

Question 26

Requirements to pass a resolution/approve something at Board meeting

Answer 26

Typically, the assent of a majority of the directors present at the time the vote takes place is necessary for board approval. However, the articles of incorporation or bylaws may specify a higher level of approval

Question 27

Promoter

Answer 27

Prior to incorporation. Engages in activities, such as procuring capital and entering into contracts, to bring the corporation into existence as a business entity.

They are fiduciaries - cannot make secret profits

Question 28

Liability for Promoter’s Ks?

Answer 28

Generally, promoter is liable, not Corp.

Exceptions:
-But, Corp is liable if they expressly (though BoD resolution) or impliedly adopted the K
-novation
–agreement between Prom, Corp, and 3rd party

Question 29

Rule Statement for Liability for Pre-Incorp Agreements of

Answer 29

Promoters are liable to third parties for pre-incorporation agreements even after incorporation, unless a novation occurs, the promoter has no actual knowledge that the corporation’s charter has not yet been issued, or the contracting party knows that a corporation has not yet been formed and agrees to look only to the corporation for performance.

Question 30

Ultra Vires Actions

Answer 30

When Corp acts outside of narrow purposes listed in aritcles of incorp. Kinda outdated Doctrine.

Can only bring ultra vires challenge in some situations:

i) A shareholder can file suit to enjoin the corporation’s ultra vires action;

ii) The corporation can take action against a director, an officer, or an employee of the corporation who engages in such action; or

iii) The state can initiate a proceeding against the corporation to enjoin its ultra vires action.

Question 31

Defective Incorp

Answer 31

If the person made an unsuccessful but good faith effort to comply with reqs, they may be able to escape liability under either de facto or corporation by estoppel (estoppel is Ks only)

they cant have known of the defect in status

Question 32

Corp Bylaws

Answer 32

Most corps have them, but not required.

By-laws set forth day to day rules re the operation and management of the corp. Could put the info in articles but Bylaws are easier to change.

Bylaws can be changed by Board tpyically
Articles changed only amended by sharehodlers

Question 33

Two general types of securities that corp issues

Answer 33

Stocks
Debt securities

Question 34

Stocks generally

Answer 34

Equity. Way of financing the corp.
carry ownership and control interest
Carries voting attributes and economic rights

Stockholders are equity holders, entitled to all value that remains after debts have been paid

Question 35

Creditors of a corp are entitled to

Answer 35

Only the repayment of debt plus interest

Question 36

Two main classes of stock

Answer 36

Preferred and Common

altho many corps only have one class

having classes of stock with different boting and economic rights is way to retain control

Question 37

Common stock

Answer 37

Holders of common stock exercise control by electing a board of directors and voting on
corporate policy. Common stockholders have the lowest priority in the ownership
structure

(i.e., in the event of liquidation, common stockholders have rights to company
assets only AFTER bond holders, preferred stockholders, and other debt holders have
been paid in full.

Question 38

Preferred Stock

Answer 38

Preference over common stock. Does not always have voting rights.

Has preference over CS to
1. receive payment of dividends and
2. distributions in event of liquidation

Question 39

Sale of stock/issuance of stock - 4 terms

Answer 39

Authorized shares - max # of shares that Directors can sell (set in articles, need SH approval for more)

Issued Shares - # of share from authorized pool that have actually been sold

Treasury Shares - stock previously issued that corp has reacquired

Outstanding shares - shares that were once issued and still remain in possession of shareholders –> Issued - Treasury = outstanding

Usually ONLY outstanding shares vote

Question 40

Watered stock

Answer 40

when corp sets a par value (floor/minimum) for stock and sells stock for less than that amount.

If this happens, the shareholders who bought the watered stock are liable to creditors. Directors might

Question 41

Shareholder Preemptive Rights

Answer 41

A preemptive right is a right of a current shareholder to purchase additional shares in
the corporation before outsiders are permitted to do so in order to maintain their
percentage of ownership in the corporation.

-These rightd were automatic at CL
-NOT so under RMBCA –> Must be in articles

Question 42

Controlling Shareholders

Answer 42

Could be those who own atleast 50% plus one (might be one SH or a group)

Or can be less than 50% plus one depending on ownership structure of corp. - think widely held corp where shares are widely dispersed

Question 43

Duties owed by Controlling Shareholders

Answer 43

Generally, shareholderes do not owe a duty to fellow shareholders or to corporation.

However, Controlling shareholder MAY owe a fiduciary duty to minority shareholders in these circumstances

1.Sale of stock to an outsider/looter

2. seeking to eliminate other shareholders
   think of stuff that would cause loss to minority

^^these decisions will be reviewable by a court for good faith and fair dealing toward the minority shareholder

3. Controlling shareholder transacts with the controlled corporation - BJR will apply unless self-dealing

Question 44

When controlling shareholder transacts with the controlled corporation, will BJR apply?Ye

Answer 44

Yes, but only if NO self-dealing !!

Question 45

Is the decision to declare a dividend or the amount of dividend protected by BJR?

Answer 45

Yes, as long as no self-dealing

Question 46

Other controlling shareholder scenario

Answer 46

When controlling shareholder is a parent corporation, parent corporation causes its subsidiary to participate in a business transaction that prefers the parent at the expense of the subsidiary, it can involve self-dealing and a breach of loyalty.

then the normal duty of loyalty rules woudl apply

Question 47

Board cannot declare divides when

Answer 47

1. Corporation is insolvent or
2. if by issuing the divided, the corp would become insolvent

Director who votes ot authorize an unlawful divided is personally liable, jointly and sefverally, to corp for amount in excess of teh lawful amt.

–> but Dir will not be liable if he relied in goof faith on financial statements

Question 48

Restrictions on sale of stock

Answer 48

Generally, shareholders can sell shares to anyone at any time for any price. TWO major exceptions:
Closely held corp and Federal Securities Law

Question 49

Shareholder Liability Generally

Question 50

LLC Formation

Answer 50

An LLC is formed when the:

1) Articles of Organization (a.k.a. Certificate of
Formation) is properly filed with the Secretary of
State; AND

2) LLC has at least one member

Question 51

LLC Operating Agreement

Answer 51

Governs: (1) the relations between the members and LLC; (2) the rights/duties of managers; (3) activities and affairs of the LLC; and (4) any means and conditions for amending the Operating Agreement.

Question 52

Can SHs compel Directors to make a distribution of dividends?

Answer 52

In general, a shareholder cannot compel the board of directors to authorize a distribution, because that decision is usually discretionary. When a board acts in bad faith and abuses its discretion by refusing to declare a distribution, however, a court may order the board to authorize a distribution. D

Question 53

Shareholder suit to compel dividend distribution

Answer 53

Often not gonna be a strong case. b/c directors protectd by BJR

To prevail in a suit to compel a dividend distribution, a shareholder must prove the existence of (i) funds legally available for the payment of a dividend and (ii) bad faith on the part of the directors in their refusal to pay.

Question 54

LLC - Operating Agreement v. Statute

Answer 54

While an operating agreement by an LLC is generally not required, many LLCs adopt an operating agreement that governs any and all aspects of the entity’s affairs. The operating agreement generally takes precedence over contrary statutory provisions.

Question 55

Private Restrictions on the Sale of Securites

Answer 55

Often employed by closely held corps to maintain control.

Restrictions on transferability must be conspicuously noted - either in stock cert or available upon request

A restriction on the transfer of a security, even if otherwise lawful, may be ineffective against a person who has no knowledge of the restriction.

Question 56

Types of Private Restrictions on Sale of Securities

Answer 56

1. Outright prohibition on transfers - most susceptible to challenge as unreasonable
2. requiring company’s consent for transfer
3. company has option to buy stock from SH
4. Right of first refusal
5. right to buy back

Question 57

Challenge to Private Restrictions on Sale of Stock

Answer 57

Usually made on basis of unreasonable restraints on alienation.

Test is one of reasonableness.

For ex, it is reasonable to want to restrict to maintain legal statues - S. corp for ex.

Also, bc these are contractual arrangements, subj to K defense.

Question 58

Federal Cause of Action: 10b-5

Answer 58

Fraudulent purchase or sale of security.

For a private person to pursue a Rule 10b-5 action, each of the following requirements must be met:

i) The plaintiff purchased or sold a security;

ii) The transaction involved the use of interstate commerce;

iii) The defendant engaged in fraudulent or deceptive conduct; opinions nad preditions dont count

iv) The conduct related to material information;

v) The defendant acted with scienter, i.e., with intent or recklessness;

vi) The plaintiff justifiably relied on the defendant’s conduct; and

vii) The plaintiff suffered harm because of the defendant’s conduct

No punitive damages.

damages = price plf paid - stocks val

Question 59

Sect. 16b - Insider Trading

Answer 59

Corporate inside can be forced to return short-swing profit to corp

Nec. elements

o Publicly traded Cs—must have securities traded on a national securities exchange or
have assets of more than $10 million and more than 500 SHs

o Corporate insiders—Ds, Os, or SHs with more than 10% of stock

o Short-swing profits—a corporate insider both bought and sold C’s stock during any
six-month period

o SEC report of change in stock ownership

Question 60

Shareholder Liability

Answer 60

Generally, shareholders of a corporation are NOT personally liable for the
debts of the corporation. However, the major exception to this rule is the doctrine of
piercing the corporate veil.

Question 61

Piercing the Corporate Veil

Answer 61

This means removal of the shield that protects a shareholder from personal liability for corporate conduct.

Courts reluctant to do this. Courts will look to totality of the circumstances in deciding whether to do this.

look to whether:
1. C is being used as a façade for a
dominant SH’s personal dealings (i.e., whether C is “alter ego” or “mere
instrumentality” of SH)
2. and whether there is unity of interest and ownership between
the C and its members

Other Factors considered—undercapitalization,
disregard of corporate formalities,
using C’s assets as SH’s own assets,
self-dealing with C,
siphoning of C’s funds,
using corporate
form to avoid statutory requirements,
SH’s domination over C, and
fraudulent dealings
with a corporate creditor

Question 62

Shareholders Annual Meetings

Answer 62

Annual Meetings:
Gotta hold them. Notice required.

Generally, the time and place of the meeting are specified in the corporate bylaws. The primary purpose of the annual meeting is to elect directors, but any business that is subject to shareholder control may be addressed.

Question 63

SH Special Meetings

Answer 63

A corporation may also hold a special meeting, the purpose of which must be specified in the notice of the meeting. Generally, a special meeting may be called by the board of directors or shareholders who own at least 10 percent of the shares entitled to vote at the meeting.

Notice required

Question 64

Notice for SH Meetings

Answer 64

Must be given to all SH’s entitled to vote AND requires:

1) At least 10 days advance notice of the meeting (but not more than 60 days);

2) The meeting’s date, time, and place; AND

3) A description of the meeting’s purpose (for
special meetings only).

*If the meeting involves a fundamental change, ALL shareholders (whether or not entitled to vote) are entitled to notice.

Question 65

SH Waiver of Meeting Notice

Answer 65

a SH may waive notice:

a) in a signed writing; OR

b) by attending the meeting and not objecting at
the beginning of it (or not objecting to a matter not described in the notice).

Question 65

Fiduciary duties of member in LLC

Answer 65

Members of member-managed LLC and managers of manager-managed LLC owe
duties of loyalty and care to the LLC and members.

The duty of loyalty includes the duties to refrain from dealing with the company on behalf of one with an adverse interest in the company, and to refrain from competing with the company. The operating agreement may amend this duty so long as the amendment is not manifestly unreasonable.

BJR applies for duty of care

Question 66

Winding Up an entity

Answer 66

When members agree to voluntarily dissolve an entity, the entity must wind up its affairs and liquidate its business. Only after the entity’s debts and obligations to creditors have been paid may the members receive a portion of the liquidated value of the LLC. Those responsible for winding up can be liable for improper distributions.

Question 66

Piercing the LLC Veil

Answer 66

A member of an LLC is generally not liable personally for the LLC’s obligations. If a plaintiff can pierce the veil, however, the members of the LLC may be held personally liable. There must exist some circumstances that would justify piercing the veil on equitable grounds, such as undercapitalization of the business, commingling of assets, confusion of business affairs, or deception of creditors.

Courts will look at two tests
1. mere instrumentality test
2. unity of interest and ownership test

Question 67

If SH receives insufficient notice of special meeting, what can they do?

Answer 67

challenge any actions taken at the meeting

*unless they waived, ofc

Question 68

Piercing The Veil Theory - mere instrumentality

Answer 68

Mere instrumentality test
1. (i) members/SH dominated the entity such that it had no will of its own,
(ii) members used that domination to commit a fraud or
wrong, and
(iii) the control and wrongful action proximately caused an injury

Question 69

Unity of Interest theory

Answer 69

Theory for piercing the veil

Org did not have an existence
independent of the members because there was such a unity of interest and
ownership between the entity and the members that the failure to pierce the veil
would be unjust or inequitable

Question 70

Management arrangements of LLCs

Answer 70

An LLC can be member-managed (direct management of the LLC by its members) or manager-managed (centralized management of the LLC by one or more managers who need not be members).

Unless the operating agreement or certificate of incorporation provide otherwise, the default is a member-management.

Question 71

Which shareholders are eligible to vote for directors?

Answer 71

Will be based on record date, which is fixed by the directors. Must be no more than 70 days before meeting.

Only SH who actually own shares on the record date are entitled to vote.

If not indicated in AoI OR Bylaws, can be determined by sdtatute

Question 72

Quorum Reqs for Shareholders mtg

Answer 72

For a decision made at a shareholders’ meeting to be valid, there must be a quorum of the shares eligible to vote present at the meeting.

Usually, the required quorum is a majority of votes entitled to be cast on a matter. A share that is present for any purpose at a meeting is deemed present for quorum purposes.

Question 73

Cumulative Voting

Answer 73

Shareholders elect directors either directly (each share equals one
vote) or cumulatively.

In cumulative voting, voters cast as many votes as there are seats, but voters are not limited to giving only one vote to a candidate. Instead, they can put multiple votes on one or more candidates.

Cumulative voting is usually a more favorable method to
represent the interests of minority shareholders.