Corporations

Question 1

promoter

Answer 1

fiduciary who finds investors for corporation before it is a corporation; personally liable for his acts

Question 2

exceptions to promoter liability

Answer 2

• novation
• adoption by corporation accepting benefits of promoter’s contract
• promoter doesn’t know corporation hasn’t been formed yet

Question 3

articles of incorporation must include…

Answer 3

• name of corporation with suffix
• agent of corp
• names and addresses of incorporators
• duration
• purpose
• authorized shares

Question 4

corporation’s liability begins when…

Answer 4

articles are filed with state and state accepts filing fee

Question 5

amendment of bylaws vs. articles

Answer 5

bylaws: Board can amend
articles: amendment requires vote of shareholders

Question 6

corporation by estoppel

Answer 6

third party is estopped from claiming corporation isn’t a corporation if:
- organizers made good-faith effort to comply
- organizers didn’t know about defect

Question 7

authorized shares

Answer 7

maximum number of shares the Board can sell to shareholders

Question 8

issued shares

Answer 8

number of shares that have once been in the hands of shareholders

Question 9

outstanding shares

Answer 9

number of shares that are currently in the hands of shareholders; the voting group

Question 10

treasury shares

Answer 10

number of shares that were sold to shareholders and bought back by the corporation

Question 11

stock subscription

Answer 11

purchase of stock before corporation is formed; irrevocable for six months

Question 12

preemptive rights

Answer 12

empowers shareholder to get more stocks so their ownership percentage is not diluted by more shares being sold to others; by default, no preemptive rights

Question 13

limitations on Board’s power to declare dividends

Answer 13

• company is insolvent
• issuing the dividends would make the company insolvent

Question 14

participating stock

Answer 14

collects as preferred and common stock

Question 15

cumulative stock

Answer 15

right to receive dividends rolls over between years if company doesn’t pay them one year

Question 16

exceptions to the alienability of stock

Answer 16

closely held corporations may impose restrictions on the transfer of stock as long as it is conspicuously noted and the shareholder agrees

Question 17

Rule 10b-5 violation

Answer 17

• transaction involved interstate commerce
• defendant engaged in fraudulent or deceptive conduct
• related to material information
• intentionally or recklessly
• plaintiff relied on the conduct
• plaintiff purchased or sold stock
• and suffered harm because of it

Question 18

Section 16(b) violation

Answer 18

for corporations traded on national stock exchange or with assets greater than $10M and more than 500 shareholders, no corporate insider may profit from buying and selling corporate stock in any six-month period

Question 19

corporate insider

Answer 19

directors, officers, and shareholders who hold more than 10% stock

Question 20

annual shareholder meeting

Answer 20

to vote on new directors

Question 21

special shareholder meeting

Answer 21

to vote on fundamental changes to corporation

Question 22

fundamental change to corporation

Answer 22

merger, consolidation, dissolution; must be approved by shareholders and directors

Question 23

involuntary corporate dissolution

Answer 23

by disgruntled parties
- creditors if not paying debts
- shareholders if assets being wasted or directors are fraudulent or deadlocked with shareholders

Question 24

shareholder’s appraisal rights

Answer 24

to dissent, a shareholder must do all of the following:
- send written notice of intent to dissent before meeting
- vote no or abstain during meeting
- make prompt written demand of market value for shares after meeting

Because the decision was Stupid, Vain, And Dumb.

Question 25

proxy agreement

Answer 25

- signed by shareholder as of the record date - sent to secretary of corporation - states that shareholder permits person to vote by proxy

Question 26

record date

Answer 26

date on which a person must own stock to be eligible to vote at meeting; must be set by corporation no earlier than 70 days ahead of meeting

Question 27

quorum for shareholder meeting

Answer 27

majority of eligible-to-vote shares present at beginning of meeting

Question 28

quorum for Board meeting

Answer 28

majority of total directors present at time of vote

Question 29

presence of a Board director at a meeting

Answer 29

cannot be by proxy; can be by communications equipment that enables director to hear and be heard by all others present

Question 30

cumulative voting

Answer 30

for elections of the Board of Directors, allows minority shareholders to multiply their shares by the number of open director positions to vote with

Question 31

shareholder's inspection rights

Answer 31

the right to inspect the books and records of the corporation in person or through an agent during regular business hours with five days' notice and a proper purpose

Question 32

controlling shareholder

Answer 32

shareholder who owns more than 50% or an otherwise large enough share such that they exert some control over corporation

Question 33

duties of controlling shareholder

Answer 33

- to corporation: subject to business judgment rule - to minority shareholders: good faith and fair dealing examples: disclose necessary information for a vote; don't sell stock to a looter; don't receive dividend that others don't analyzed under business judgment rule

Question 34

standing requirements for derivative lawsuit

Answer 34

- owned share at time of offense - owns share now - continues to own share during lawsuit - fairly and adequately represents corporation's interests

Question 35

derivative lawsuit

Answer 35

lawsuit brought by a shareholder on behalf of corporation after shareholder first makes a demand on the Board to bring the suit themselves; damages go to corporation

Question 36

shareholder liability

Answer 36

shareholders are not personally liable for the obligations of the corporation unless a court chooses to pierce the veil

Question 37

pierce the veil

Answer 37

more likely for torts and for small companies - alter ego: shareholder treats corporation as itself - undercapitalization - fraud

Question 38

notice for Board meetings

Answer 38

special meeting: directors must have two days' notice, need not say purpose regular meeting: no notice needed

Question 39

notice for shareholder meetings

Answer 39

10-60 days before meeting regular: date, time, location special: date, time, location, purpose

Question 40

director's dissent

Answer 40

director dissents by one of the following: - Entering dissent in meeting minutes - before meeting is adjourned, Filing written dissent - after meeting, immediately Sending written dissent to secretary Director EFS the Board

Question 41

director's duty of care

Answer 41

duty to act as a reasonably prudent person in similar circumstances would, including - duty to investigate - duty to use special skills if you have them permits reliance on other officers, committee, or outside experts

Question 42

business judgment rule

Answer 42

rebuttable presumption that a director reasonably believed he acted in the best interests of the corporation; even a violation of the duty of care will not create liability unless not in good faith; does not apply to transactions with self-dealing, fraud, or illegality

Question 43

director's duty of loyalty

Answer 43

may not receive an unfair benefit to the detriment of the corporation without disclosure and ratification, including - duty not to usurp corporate opportunity (must first offer it to the corporation) - duty not to advance interests adverse - duty not to self-deal

Question 44

self-dealing

Answer 44

any transaction in which the director has a financial and material interest of such financial significance to the director that it would reasonably be expected to influence the director’s vote on the transaction

Question 45

interest or expectancy test

Answer 45

whether the corporation had an existing interest in it or an expectancy arising from an existing right

Question 46

line-of-business test

Answer 46

broader; whether the opportunity is within the corporation's current or prospective line of business

Question 47

safe harbors for self-dealing

Answer 47

- disclosure to all disinterested directors and they approve - disclosure to all shareholders and they approve - procedural and substantive fairness to corporation

Question 48

limited liability corporation (LLC)

Answer 48

must file signed articles of organization and operating agreement; members owe fiduciary duties to each other and the LLC; members are not personally liable but receive tax treatment of partnership