CORPORATIONS

Question 1

What is a Corporation

Answer 1

A corporation is a legal entity separate from its owners, thus shielding the owners and managers from personal liability for the actions of the corporation.

Question 2

What is “de jure Corporation”

Answer 2

A corporation that meets all the mandatory statutory requirements, including having at least one incorporator who signs and the articles of incorporation with the secretary of state

Question 3

What do the articles of Incorporation MUST include?

Answer 3

I nitial Agent’s name for the corporation.
S treet Address - for the corporation’s registered office
Corporation’s Name
Authorized number of shares
N ame and address of each incorporator

Question 4

What is “A de facto Corporation” ?

Answer 4

Exists when there is actual use of corporation power and a good faith, but there is a unsuccessful attempt to incorporate under a valid incorporation statute.

Question 5

What is a Corporation by Stoppel?

Answer 5

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. This applies on a case by case basis and only in contracts, NOT torts.

Question 6

What is “Piercing the Corporate Veil” ?

Answer 6

Even if a corporation is properly formed, the court may still hold the shareholders, officers and managers personally liable for the actions of the corporation because the corporation is abusing its legislative privilege of conducting business in the corporate form.

Question 7

Under what circumstances, can the corporate veil be pierced?

Answer 7

Alter ego: Where the shareholders fail to treat the corporation as a separate entity, but more like an alter ego where corporate formalities are ignored and/or personal funds are commingled.

Undercapitalization: Where the shareholders’ monetary investment at the time of formation is insufficient to cover foreseeable liabilities; some courts in close corporations look at future debts if foreseeable.

Fraud: Where a corporation is formed to commit fraud or as a mechanism for the shareholders to hide behind to avoid existing obligations.

Estoppel: Where a shareholder represents that he will be personally liable for corporate debts.

Question 8

What is the Effect of piercing the corporate veil?

Answer 8

Active shareholders
will have personal joint and several liability.

Question 9

What is the Deep Rock Doctrine?

Answer 9

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

Question 10

What is the purpose of a corporation ?

Answer 10

It is presumed that a corporation is formed for any LAWFUL BUSINESS PURPOSE unless the articles defined a limited, specific purpose.

Question 11

Define Ultra Vires Acts

Answer 11

When a corporation acts outside of the stated business purpose, it is acting ultra vires.

Question 12

What is the difference between Debt and Equity securities?

Answer 12

Debt Securities: A debt security represents a creditor-debtor relationship with the corporation, whereby the corporation has borrowed funds from an “outside creditor” and promises to repay the creditor. A debt security holder has no ownership interest in the corporation. Lenders do not acquire an ownership interest in the corporation. Debts may be secured (a bond) or unsecured (a debenture).

Equity Securities: An equity security is an instrument representing an investment in the corporation whereby its holder becomes a part owner of the business. Equity securities are shares of the corporation, and the investor is called a shareholder.

Question 13

What is a stock subscription agreement?

Answer 13

A contract where a subscriber makes a written promise agreeing to buy a specified number of shares of stock.

Question 14

What authorizes the quantity of shares to be sold?

Answer 14

The articles of incorporation authorize the number of shares available to be sold. Shares that are sold are issued and outstanding. Shares that have yet to be sold are authorized but unissued.

Question 15

What is a promoter and what are their liabilities?

Answer 15

A promoter is an individual that acts on behalf of the corporation that is not yet formed. A promoter usually enters into contracts with 3rd parties, thus a promoter is personally liable for all pre-incorporation contracts until there is a novation replacing the promoter’s liability with that of the corporation or there is an agreement between the parties that expressly states the promoter is not liable.

Question 16

Are corporations liable or bounded to pre-incorporation contracts?

Answer 16

Corporations are generally not liable for pre-incorporation contracts EXCEPT when the corporation expressly adopts the contract or accepts the benefits of the contracts (note that the promoter is also still liable unless there has been a novation).

Question 17

What are the duties of the promoters?

Answer 17

Promoters owe fiduciaries duties to the corporation and those investing in it. Promotes duties are of fair disclosure and good faith. Promotes are not allowed to keep secret profit from transactions entered on behalf of the corporation. Promotes’ liabilities will rise under the following circumstances, i) breach of fiduciary duty, ii) fraud of misrepresentation, or iii) obtaining unpaid stock.

Question 18

What do the Directors do, and when do they get elected?

Answer 18

All corporations must have at least one director, or more if they wish. The board of directors are in charge of the management of the business related to the financial and business dealings of the corporation.

The first board of directors is elected at the first anual meeting, and each year thereafter unless terms staggered.

Question 19

What are the bylaws and who adopt them?

Answer 19

The bylaws are adopted by the board of directors and contain provisions for the management of the corporation in accordance with the articles of incorporation and the law. They may be modified by either the board of directors of the shareholders.

Question 20

How are officers and committees appointed and what are their duties?

Answer 20

Officers and committees are appointed by the board of directors to implement the board decisions, and carry out operations.

They have the authority to act on behalf of the corporation based on agency law principles.

Question 21

Can officers and committees be removed?

Answer 21

A director can be removed with or without cause by a majority shareholder vote unless the articles state that removal is only with cause is permitted.

An officer can be removed with or without cause.

Question 22

Do directors’ meetings require notice?

Answer 22

Directors must hold meetings, which can be regular meetings without notice, or unless the articles of incorporation provide otherwise, special meetings with at least 2 days notice of the time and place of the meeting.

Question 23

What is a Quorum for directors and what constitutes presence during a Quorum?

Answer 23

A majority of the board of directors constitute a quorum for a meeting, unless the articles of incorporation provide higher or lower numbers, but not less than one-third of the board members. The board of directors must be PRESENT during the vote for an action to be valid, which means they should be able to heard each other and communicate with one another.

Question 24

Can actions be taken without a meeting?

Answer 24

Yes. An action can be taken without a meeting if ALL directors sign a written consent describing the action taken and include that in the minutes or file it with corporate records.

Question 25

What are the fiduciary duties that apply to DIRECTORS & OFFICERS?

Answer 25

Corporate law imposes fiduciary duties on directors and officers which are the duty of care and duty of loyalty.

Question 26

Define Duty of Care

Answer 26

Directors and Officers must act in good faith, as a reasonably prudent person, in a manner he reasonably believes is in the best interest of the company.

Question 27

What is the business judgment Rule? (BJR) and it is the reliance on others related to it?

Answer 27

Is a presumption that directors and officers act in good faith, in the best interest of the corporation, and in a manner that is not unreasonable under similar circumstances.

The reliance on others rule states that is not unreasonable for a director to rely on information, opinions, or reports prepared or presented by officers, committees, legal counsel. Thus a directors would not violate the BJR under this rule.

Question 28

What is the exculpation Provision

Answer 28

Allows a corporation to include a provision in the charter that eliminates or limits the liability of a director to the corporation or its shareholders for money damages.

Question 29

What is the Duty of Loyalty and under what circumstances does it arise?

Answer 29

For a director to comply with the duty of loyalty, A director must put the interest of the Corporation above his own interest. An issue with the duty of loyalty can arise in 3 ways,

i) Conflict of Interest/ Self dealing
ii) Usurping a Corporate Opportunity
iii) Unfair Competition

Question 30

When does conflict of Interest arises and how can it be protected?

Answer 30

A director or officer has a conflict of interest when he, a corporation he owns, or a family members enters into a contract with the corporation or has a beneficial financial interest in a contract.

Self-dealing contracts are presumed unfair and voidable. A conflicting interest transaction does not breach the duty of loyalty if:

i) The transaction is Authorized by disinterested board members after material disclosure; or

ii) The transaction is Approved by majority of disinterested shareholders after all material facts are disclosed to them; and

iii) The transaction is fair to the corporation.

Fairness factors: Adequacy of the consideration, corporate need to enter into the transaction, financial position of the corporation, and available alternatives.

Question 31

Define Usurping a corporate opportunity

Answer 31

A director or officer may not act or take on a business opportunity without first offering it to the corporation where the corporation would have expected to be presented the opportunity.

The director or officer may take the opportunity only after good faith rejection of the opportunity by the corporation if there was full disclosure of all material facts to a disinterested board majority.

Remedy: If the director or officer usurps a corporate opportunity, then the corporation may compel the director/officer to turn over the opportunity or disgorge profits (constructive trust equitable restitution theory).

Question 32

When can a director or officer receive indemnification?

Answer 32

Mandatory: A director or officer is entitled to indemnification for expenses incurred on behalf of the corporation, and for expenses incurred if he prevails in a proceeding brought against him by the corporation.

Discretionary: The corporation may indemnify directors or officers for unsuccessful proceedings against them if the directors or officers acted in good faith and they believed their actions were in the best interest of the corporation, unless the directors or officers are liable due to an improper financial benefit.

Inspection: A director or officer has a right to a reasonable inspection of corporate records or facilities.

Question 33

What type of control do shareholders have in a corporation?

Answer 33

Shareholders have no right to directly control the management of their corporation. Instead, the right to manage is vested in the board of directors, who usually delegate their day-to-day management duties to officers. However, shareholders have indirect control over their corporation through their power to elect directors, amend the bylaws, and approve fundamental changes to the corporation such as:

1. Election and removal of directors
2. Amendments to the corporation charter.
3. Shareholder as oppose to board initiated amendments to the corporation’s bylaws.
4. Dissolution of the corporation,
5. A merger of the corporation,

and

6. A sale of all of the corporation’s assets.

Question 34

Shareholders Meetings

Answer 34

Meetings are typically where shareholders convene and vote on corporate management issues. There are general and special meetings - in both kinds, shareholders must receive notice of 10-60 days prior to the meeting, describing the time, place, and business to be discussed.

Question 35

What matters can the shareholders vote on?

Answer 35

Shareholders have only indirect corporate power through the right to vote to elect or remove members of the board and approve fundamental changes in the corporate structure, such as mergers, dissolutions, etc.

SHAREHOLDERS CAN VOTE IN THE FOLLOWING MATTERS ONLY:

1. Election and removal of directors
2. Amendments to the corporation charter.
3. Shareholder as oppose to board initiated amendments to the corporation’s bylaws.
4. Dissolution of the corporation,
5. A merger of the corporation,

and

6. A sale of all of the corporation’s assets.

Question 36

What gives shareholders the right to vote?

Answer 36

Right to vote: The right to vote attaches to the type of stock held by the shareholder. A corporation can have two types of stock: common and preferred. If the articles do not specify voting rights, both classes of stock may vote. Usually each outstanding share is entitled to one vote.

Question 37

How can shareholders vote by proxy?

Answer 37

A shareholder may vote in person or by proxy. A proxy is a signed writing (can be electronic) authorizing another to cast a vote on behalf of the shareholder.

Duration of Proxy An appointment is valid for only 11 months unless it provides otherwise. [MBCA §7.22(c)]

Question 38

How does a Quorum work for shareholders’ votes?

Answer 38

For an action to pass there must be a quorum, which is a majority of outstanding shares represented (in person or by proxy) at the meeting. Quorum is based on the number of shares, not shareholders.

Majority vote: If a quorum is present, a majority of votes cast validates the proposed shareholder action.

Except votes regarding a fundamental change require a majority vote of all outstanding shares to validate the proposed action. (A higher standard.)

Question 39

What is a veto right for shareholders?

Answer 39

Give the shareholders the right to prevent a corporation from taking a specific action. Veto rights can be implicit or explicit.

Question 40

How are shareholders votes calculated?

Answer 40

There are two methods:

Straight Voting: One vote per share - Each shareholder casts one vote per share held. Therefore, a shareholder with more than 50% of the shares controls the vote.

Cumulative Voting: Allows a shareholder to multiply the number of shares held by the number of directors to be elected and then cast all votes for one or more directors.

Question 41

Shareholders Unanimous written consent

Answer 41

Shareholders may take action with unanimous written consent of all shareholders

Question 42

What are dividends?

Answer 42

Dividends are the distribution of cash, property or stock that shareholders may receive from the corporation.

Question 43

What are the types of shareholder suits?

Answer 43

Direct suit: A shareholder may bring a suit for breach of fiduciary duty owed to a particular shareholder (not the corporation itself but the shareholder). The recovery goes to the shareholder.

Derivative suit: A shareholder may bring a derivative suit owed to the corporation for harm done to the corporation. The corporation receives the recovery, if any, and the shareholder is entitled to reimbursement for the expenses of litigation. The shareholder bringing the suit must:

i) Own stock at the time the claim arose.
ii) Adequately represent the corporation.
iii) Make a demand on directors to bring suit or redress the injury and the demand is rejected (corporation has 90 days to respond unless waiting that long would cause irreparable injury). The demand requirement used to be excused if doing so would be futile, but it is required modernly.

Question 44

Do Shareholders have duties?

Answer 44

Generally, shareholders do not owe a fiduciary duty to the corporation or other shareholders. However, CONTROLLING SHAREHOLDERS OWE A FIDUCIARY DUTY of duty of care and loyalty to the corporation and minority shareholders.

A controlling shareholder is one with enough voting strength to have substantial impact on the corporation.

Sale of controlling shares to a looter: Controlling shareholders cannot sell control of the corporation to a looter if they know, or have reason to know, that the buyer intends to harm the company.

Sale of controlling shares at a premium may be allowed where the transaction is made in good faith and is fair. However, a controlling shareholder may not sell her controlling shares and receive a personal benefit for the sale of a corporate asset or corporate office.

Question 45

Are shareholders personally liable for the actions of the corporation?

Answer 45

Shareholders are not personally liable for the actions of the corporation