Corporations

Question 1

Promoter Liability

Answer 1

a promoter is someone who works on behalf of the corporatioh to create and fund the entity, before the corporation exists
a promoter is personally liable for breach of contract, even after C is formed, unless there is a novation, or the 3P knew of the preformation status and agreed to only look to the C for performance
a promoter owes a fiduciary duty to the C and a secret profit is a breach
cannot compel payment since corporation did not exist

Question 2

Corporate liability for preformation contracts

Answer 2

not liable unless there is a novation or express or implied adoption of the contract

Question 3

Incorporation procedure

Answer 3

incorporator must signa nd file articles with the state and pay filing fee
articles must have name of corporation, contact info of local agent and incorporators, numbers of authroized shares

Question 4

Ultra Vires actions

Answer 4

if a corporation has a narrowly stated purpose in the articles, and acts beyond that burpose, it is an utlra vires act.
Void at common law, now enforceable
Shareholder or state can file suit to enjoin it or take action against director/officer/employee

Question 5

Timing

Answer 5

the entity is formed on the date the articles are filed as long as the state accepts it

Question 6

De Jure Corporation

Answer 6

when all statutory requirements are met, the corporation is formed and the corporation is liable for corporate activities

Question 7

De facto corporation

Answer 7

not recognized in majority
despite defective incorporation, if owner made good faith effort to comply and operated without knowing that the requirements were met, there is a de facto corporation

Question 8

Corporation by estoppel

Answer 8

a person dealing with an entity in a contractual agreement as if it were a corporation is estopped form denying its existence and seeking personal liability

Question 9

By laws

Answer 9

directors adopt bylaws, which are day to day rules
when in conflict, articles control
may be amended or repealed by majority vote of either shareholders or directors

Question 10

Piercing the Corporate Veil

Answer 10

a plaintiff can pierce the corporate veil and hold shareholders personally liable to recover on the basis of fraud or unfairness
more likely granted in tort than contracts cases
Grounds:
Alter ego: failure to observe corporate formalities, or corporation is just the shareholder’s alter ego
**Undercapitalization: **failure to maintain sufficient funds to cover liabilities
Fraud: parties engaged inf raud or fraud like behavior

Question 11

Types of stock

Answer 11

common: entiteld to vote and represents ownership
preferred: stock given priority with dividends and during liquidation

Question 12

Issuance of stock

Answer 12

Authorized by articles and board of directors
Consideration can be money, property, or services as long as value is determined in good faith by board
Par value if exists, stock must be at least that much
watered stock sold for under par value

Question 13

Stock subscriptions

Answer 13

an agreement to buy stock before formation of the company, irrevocable for 6 months

Question 14

Preemptive rights

Answer 14

must be authorized in the articles of incorporation
if the board issues new shares, shareholders with this right can purchase additional shares to maintain proportional ownership

Question 15

Distributions

Answer 15

a shareholder cannot compel a distribution unless the corporation acts in bad faith or abuses its discretion
a corporation cannot make a distribution if it is insolvent or the distribution would cause insolvency
directors are personally laible for unlawful distributions
priorities: prefrred, preferred participating, cumulative, common

Question 16

Shareholder duties

Answer 16

shareholders elect the board of directors and vote on fundamental changes

Question 17

Shareholder meetings

Answer 17

must have annual meetings to elect board
special meetings to approve fundamental changes
Notice: no less than 10 no more than 60 days, must include when and where, and purpose if for special,
failure to provide notice allows SH to challenge actions unless there is a waiver
waiver: if waive in signed writing or attends meeting without objecting

Question 18

Unanimous written consent

Answer 18

unanimous written consent is needed form all shareholders to act without a meeting

Question 19

Voting

Answer 19

only a shareholder who owns shares on the record date is entitled to vote

Question 20

Proxy

Answer 20

a third party can be appointed to vote if in a signed writing sent to the corporation
valid for 11 months unless stated
revocable unless otherwise specified and coupled with an interest

Question 21

Quorum for shareholder meeting

Answer 21

a majority of eligible shares must be present to hold a vote,
a vote will be approved if votes in favor exceed votes against unless otherwise specified in the articles

Question 22

Cumulative voting

Answer 22

articles may give a shareholder the number of votes equal to the number of shares multipled by the number of director seats.

Question 23

Voting agreements

Answer 23

a shareholder can enter a contractual agreement to vote shares in a specific way. Subject to contract law but need not be filed and have no durational limit

Question 24

Shareholder right to inspect records

Answer 24

SH may inspect and copy records with 5 days notive if theys tate a proper purpose
a proper purpose is related to a financial interest of SH And not to harass the corporation

Question 25

SH direct suit

Answer 25

a shareholder may directly sue the corporation for a breach of duty to the shareholder personall which causes the shareholder direct harm

Question 26

SH derivative suit

Answer 26

**standing:** must be shareholder at the time of the wrong and maintain ownership throughout litigation; shareholder must fairly and adequetly represent interests **demand** shareholder must make a written demand on the board and wait 90 days unless board rejects it or waiting would cause irreparable injury or demand would be futile **recovery** goes to corporaiton, but SH can seek reimbursement for atty fees if the corporation got a substantial benefit

Question 27

Shareholder liability

Answer 27

generally no duties to each other or the corporation **Controlling shareholder** has enough of the shares to enact major change, cannot use power to prejudice the minority, may owe duty for selling stock to a looter etc

Question 28

amendment of articles of incorporation

Answer 28

may be amended by board until stock issued, after that Board must adopt amendment then ask shareholders for approval

Question 29

Board of directors

Answer 29

manages and directs corporations business must have at least one director elected by shareholders can be removed with or without cause

Question 30

Director meetings

Answer 30

board takes actions through meetings or unanimous written consent no notice required for regular meeting, 2 days for special meeting no proxies allowed

Question 31

Director voting

Answer 31

quorum: requires majority of directors presence: no proxies, but can attend virtually if quorum present, majority of those present holds the vote no voting agreements allowed

Question 32

Dissenting by board member

Answer 32

a director may dissent to board action to avoid being liable voting against does not shield, requires an objection and esnuring that dissent is in the minutes or in writing

Question 33

Commitees

Answer 33

committees are allowed a publicly traded corporation is required to ahve an independent audit committee under Sarbanes Oxley

Question 34

Compsenation of board

Answer 34

board sets its own compensation, but an excess is a waste of assets

Question 35

Officers

Answer 35

run the daily business and are appointed by the board. can be removed without cause owe a fiduciary duty of care and loyalty

Question 36

Duty of Care

Answer 36

Must act as a prudent business person in like circumstances, including any special skills/expertise

Question 37

Business Judgment Rule

Answer 37

in the absence of fraud, illegality, or self-dealing, the good faith actions of a director will not be disturbed (defense to breach of duty of care)

Question 38

Duty of loyalty

Answer 38

A director must act in the best interest of the corporation **Self dealing: **a transaction between the corporation and a director (or relatives) is a breach of duty of loyalty unless **ratification** by neutral directors or shareholders or the transaction was **fair** to the corporation at the time of the transaction **Corporate Opportunity** cannot usurp corporate opportunity unless first **notifes** the board and waits til they decide, measured by **interest and expectancy** **Competing venture**cannot engage in a buisness that competes with the corporation

Question 39

Right of indemnification

Answer 39

**Mandatory: **if D sucessfully defends the action **Prohibited:** D found liable for receiving an improper personal benefit **permissive: **D acted in good faith or had no cause to know acts were unlawful

Question 40

Rule 10b-5 action

Answer 40

a buyer or seller using **interstate commerce** may allege a violation against a defendant who **intentionally** engaged in **fraud or deception,** causing the plaintiff to suffer **harm** based on **justified reliance**

Question 41

Rule 16(b)

Answer 41

a corporate insider can be forced to disgorge short swing profits **publicly traded** corporation more than **10% of stock** **6 month period**

Question 42

Fundamental Corporate changes

Answer 42

must be approved by both board of directors and shareholders mergers sale of substantially all assets amending the articles Dissolution

Question 43

Dissolution

Answer 43

**voluntary**: by approval of both shareholders and directors **involuntary**: by creditors if corporation is **insolvent** or by shareholders if **waste**, **illegality/fraud**, director **deadlock**, shareholder deadlock over director election

Question 44

Right of appraisal

Answer 44

a shareholder who is entiteld to vote on a fundamental change can force the corporation to buy the stock at a fair value Must give **notice before vote**, must have **abstained or voted against **the merger, must serve **written demand**

Question 45

Limited Liability Company (LLC)

Answer 45

provites investors (members) with limited liability (like corporation) but has pass through taxation (like a partnership) created by filing artices with the state new members must have consent of all members

Question 46

Management of LLC

Answer 46

members managed llc: members can bind the LLC manager managed LLC: members cannot bind LLC

Question 47

Fiduciary duties of members

Answer 47

owed to eachother and to the entity itself

Question 48

Profits and losses

Answer 48

presumed to be allocated according to contribution unless operating agreement says otherwise