Corporations

Question 1

Corporate Formation

Answer 1

A corporation is a legal entity that exists separate from its owners, thus shielding owners and managers from liability.

Incorporators must file articles of incorporation with the state Secretary of State.

Question 2

Piercing The Corporate Veil

Answer 2

Courts will hold shareholders personally liable and pierce the corporate veil if:
(1) shareholders treat the corporation as an alter-ego (ignoring corporate formalities like holding meetings, commingling funds, etc.)
(2) Fraud
(3) Undercapitalization
(4) Estoppel

Question 3

Derivative Lawsuits

Answer 3

A shareholder may bring a derivative lawsuit on behalf of the corporation for harm done to the corporation.

The shareholder must:
(1) own stock throughout the litigation
(2) adequately represent the corporation
(3) first demand that directors fix the problem (may be disregarded if can demonstrate it is futile)

Question 4

Duties Owed By Directors

Answer 4

(1) Duty of Care
(2) Duty of Loyalty

Question 5

Duty of Care

Answer 5

A director owes a duty of care to act as a reasonably prudent person would under the circumstances.

Question 6

Shareholder Direct Suit

Answer 6

A shareholder may bring a lawsuit against the company for harm the shareholder has suffered.

Question 7

Duty of Loyalty

Answer 7

A director owes the corporation a duty of loyalty and must not:
(1) self-deal or have conflicts of interest
(2) usurp corporate opportunities
(3) unfairly compete with the corporation

Question 8

Duty of Controlling Shareholders

Answer 8

A controlling shareholder has a fiduciary duty - cannot use the position to gain a personal benefit at the expense of the other shareholders.

Question 9

Deep Rock Doctrine - Creditor Repayment

Answer 9

When a corporation is insolvent, a third-party creditors may be paid off before shareholder creditors, thus subordinating the shareholder claims.

Question 10

Defenses to Breach of Duty Actions

Answer 10

1. Approval By Board
2. Substantive Fairness to the Corporation

Question 11

Business Judgment Rule

Answer 11

The Business Judgment rule protects directors that manange the corporation in good faith and make decisions in the best interest of the corporation and shareholders.

Question 12

Dividend Rights

Answer 12

The power to authorize a dividend rests with the Board, and a shareholder generally cannot compel the Board to issue a dividend absent a showing that (1) there are funds available to pay the dividend and (2) the Board acted in bad faith in refusing to pay.

Question 13

Right To Inspect

Answer 13

A shareholder has the right to inspect the corporate records, including minutes upon a showing of a proper purpose with five days written notice

Question 14

Valid Board Action

Answer 14

For a Board’s acts to be valid, a quorom of directors must be present at the meeting. Generally, the assent of a majority of directors present at the time the vote takes place is sufficient for approval of an action.

Question 15

Quorom

Answer 15

A quorom is a majority of the Board of Directors. Quorom must be present at the time a vote takes place for the Board’s actions to be valid.

Question 16

Types of Corporation

Answer 16

**De Jure Corporation: **A de jure corporation meets all of the mandatory statutory requirements including that the incorporators (need at least one incorporator) sign and file an articles of incorporation with the SOS

**De Facto Corporation: ** A de facto corporation exists where there is actual use of corporate power and a good faith, but unsuccessful, attempt to incorporate under a valid incorporation statute.

Corporation By Estoppel: A person who deals with a business entity believing it is a corporation, or one who incorrectly holds the business out as a corporation, may be estopped from denying corporation status.

Question 17

**Employer Liability **

Answer 17

**Vicarious Liability: **An employer may be strictly liable for the torts of another under a theory of vicarious liability. It arises when a person has the right or duty to control the activities of another.

**Respondeat Superior: **When an employee commits a tort during the court and scope of his employment, his employer will be jointly liable with the employee.

**Employee Liability: **Although an employer is liable to a third party, under RS, the employee remains jointly liable for the injury causes.

Question 18

Promoter Liability

Answer 18

A promoter is one who enters into contracts, prior to incorporation, for the benefit of the to-be corporation.

Promoters are personally liable for pre-incorporation contracts until there has been a novation replacing the promoter’s liability with the corporations or the parties have expressly agreements the promoter is not liable.