Corporations

Question 1

What document is required to form a corporation?

Answer 1

Articles of Incorporation

The articles of incorporation must be filed with the secretary of state.

Question 2

What must the Articles of Incorporation include?

Answer 2

• The name of the corporation
• The maximum number of shares authorized for issuance
• The names and addresses of the first board of directors, incorporators, and initial registered agent

Question 3

True or False: Minor amendments to the Articles of Incorporation can be made without shareholder approval.

Answer 3

True

Minor amendments may be made by the board of directors.

Question 4

What are corporate bylaws?

Answer 4

Written rules of conduct for the corporation

Bylaws provide for the ordinary business conduct of the corporation.

Question 5

If there is a conflict between bylaws and articles of incorporation, which governs?

Answer 5

Articles of Incorporation

Question 6

Who is personally liable for contracts entered into on behalf of a corporation that has not yet been formed?

Answer 6

Promoter

Question 7

What is a novation in the context of promoter liability?

Answer 7

An agreement to release the promoter from liability in favor of the corporation

Question 8

What is the general rule regarding shareholder liability for corporate debts?

Answer 8

Shareholders are NOT personally liable for the debts of the corporation

Question 9

Under what conditions can a court allow a creditor to pierce the corporate veil?

Answer 9

• Shareholder dominates the corporation
• Failure to follow corporate formalities
• Undercapitalization
• Presence of fraud or illegality

Question 10

What is common stock?

Answer 10

A security that represents ownership in a corporation with voting rights

Question 11

What distinguishes preferred stock from common stock?

Answer 11

• Does not always have voting rights
• Entitled to dividends before common stockholders
• Entitled to payments before common stockholders in liquidation

Question 12

What are authorized shares?

Answer 12

The maximum number of shares a corporation is legally permitted to issue

Question 13

Fill in the blank: Outstanding shares are the total number of shares _______.

Answer 13

[issued by the corporation and held by shareholders]

Question 14

What is treasury stock?

Answer 14

Shares that a company issued and subsequently reacquired

Question 15

What must be present for shareholders to take action at a meeting?

Answer 15

A quorum

Question 16

True or False: A shareholder can vote by proxy.

Answer 16

True

A valid proxy must be in the form of a verifiable electronic transmission or signed written appointment form.

Question 17

What is the duty of care owed by directors and officers?

Answer 17

• Monitor management
• Ensure proposals are in the corporation’s best interests
• Disclose material information
• Make informed decisions

Question 18

What does the business judgment rule entail?

Answer 18

Courts will not second guess decisions made in good faith, with care, and in the corporation’s best interests

Question 19

What is a conflicting interest transaction?

Answer 19

A transaction where a director or officer has a personal interest that may influence their judgment

Question 20

What is the corporate opportunity doctrine?

Answer 20

Prohibits directors and officers from usurping business opportunities belonging to the corporation

Question 21

What is a merger?

Answer 21

When one corporation is absorbed by another

Question 22

What is required for a merger or consolidation to take place?

Answer 22

• Recommendation of an absolute majority of the board
• Agreement of each corporation by an absolute majority of shareholders

Question 23

What are dissenters’ rights?

Answer 23

Rights of shareholders to challenge a merger or receive fair market value for their shares

Question 24

What is required for a corporation to sell substantially all its assets?

Answer 24

Shareholder approval if not in the usual course of business

Question 25

What is a derivative claim?

Answer 25

A lawsuit brought by a shareholder on behalf of the corporation

Question 26

What is a derivative claim?

Answer 26

A lawsuit brought by a shareholder on behalf of the corporation to enforce the corporation’s rights when it has a valid cause of action but has failed to pursue it. ## Footnote This often occurs when the defendant is someone close to the corporation, like a director or officer.

Question 27

What is required before a shareholder can file a derivative action?

Answer 27

The shareholder must make a written demand on the board and wait 90 days to file the derivative action, unless the board rejects the demand during that period. ## Footnote Under common law, a demand may be unnecessary if it would be futile.

Question 28

What happens to the proceeds if a derivative claim is successful?

Answer 28

The proceeds go to the corporation, not the shareholder who brought the action. ## Footnote However, if the award benefits the defendants, the court may order damages to be paid directly to the shareholder.

Question 29

What is a direct claim?

Answer 29

A lawsuit brought by a shareholder to enforce his own rights, proving actual injury not solely from an injury suffered by the corporation. ## Footnote If successful, the proceeds go to the shareholder.

Question 30

What is required for the formation of an LLC?

Answer 30

A certificate of formation must be filed with the secretary of state. ## Footnote This is analogous to a corporation’s articles of incorporation.

Question 31

What information must be included in the certificate of formation for an LLC?

Answer 31

It must provide: * Name and purpose of the LLC * Address of the principal place of business * Name and address of the registered agent * Initial capital contributions by members * Number and details of persons managing the LLC ## Footnote This ensures compliance with state requirements.

Question 32

What is the purpose of an operating agreement in an LLC?

Answer 32

It governs the relations between the members and the LLC, rights and duties of managers, activities of the LLC, and conditions for amending the agreement. ## Footnote It is analogous to a corporation’s bylaws.

Question 33

How is management structured in an LLC?

Answer 33

An LLC is presumed to be member-managed unless the operating agreement states otherwise. ## Footnote If manager-managed, an elected group of managers runs the business similarly to a board of directors.

Question 34

True or False: Shareholder approval is required for the disposal of assets if it is in the corporation's usual course of business.

Answer 34

False ## Footnote Shareholder approval is not required unless specified in the articles of incorporation.