Corporations

Question 2

What must the articles of incorporation include?

Answer 2

The corporation name, corporate purpose, the agent of the corporation, duration, and the number of authorized shares.

Question 3

Who can amend the Articles of Incorporation?

Answer 3

Only the shareholders.

Question 4

What is an Ultra Vires action?

Answer 4

An act beyond the purpose of the corporation.

Question 5

What is the difference between De Jure and De Facto corporations?

Answer 5

De Jure: All statutory requirements satisfied; De Facto: Good faith effort to comply, without knowledge of defects.

Question 6

What is Corporation by Estoppel?

Answer 6

A person doing business as a corporation cannot deny its existence and cannot seek personal liability if they made a good faith effort to comply with formalities.

Question 7

What do bylaws identify?

Answer 7

The day-to-day rules of the corporation.

Question 8

How can bylaws be amended?

Answer 8

By the board of directors.

Question 9

What powers does a corporation have?

Answer 9

Power to buy and sell property, sue and be sued.

Question 10

What is a foreign corporation?

Answer 10

A corporation incorporated in a different state.

Question 11

What is required to form an LLC?

Answer 11

Filing articles of organization and an operating agreement with the state.

Question 12

Who is liable for pre-incorporation contracts?

Answer 12

The promoter is liable unless the corporation adopts the liability through novation.

Question 13

What is the general liability of a corporation for pre-incorporation contracts?

Answer 13

Generally, not liable unless liability is assumed through novation or adoption.

Question 14

What does piercing the corporate veil involve?

Answer 14

Removing the shield of liability for corporate conduct in cases of fraud or unfairness.

Question 15

What are the three main factors for piercing the corporate veil?

Answer 15

• Under capitalization of the corporation
• Disregard of corporate formalities
• Fraud

Question 16

What is common stock?

Answer 16

Has the right to vote on matters of corporate governance and represents basic ownership interest.

Question 17

What is preferred stock?

Answer 17

Has preference over common stock with respect to dividends and liquidation.

Question 18

What does authorized shares refer to?

Answer 18

The maximum number of shares the directors can sell, set in the Articles of Incorporation.

Question 19

What is watered stock?

Answer 19

Stock sold for less than its worth, making the shareholder liable for the difference.

Question 20

Who has the power to authorize dividends?

Answer 20

The Board of Directors.

Question 21

Under what conditions may dividends not be declared?

Answer 21

If the corporation is insolvent or if issuing dividends would make the corporation insolvent.

Question 22

What is the record date in shareholder meetings?

Answer 22

The date set by directors to determine which shareholders are entitled to vote.

Question 23

What is a proxy in the context of shareholder meetings?

Answer 23

An authorization for someone else to vote shares on behalf of a shareholder.

Question 24

What is the notice requirement for annual and special meetings?

Answer 24

Notice must be given no fewer than 10 days and no more than 60 days before the meeting.

Question 25

What constitutes a quorum in shareholder meetings?

Answer 25

A majority of the corporation's outstanding shares represented at the start of the meeting.

Question 26

How are directors elected in shareholder meetings?

Answer 26

Directors are selected by shareholders at the annual meeting through straight or cumulative voting.

Question 27

What is a voting trust?

Answer 27

An arrangement where shareholders transfer legal ownership of their stock to a trustee who votes on their behalf.

Question 28

What is the role of the Board of Directors?

Answer 28

Manages and directs the corporation's businesses and affairs, appoints officers, and makes high-level decisions.

Question 29

What is required for board actions to be valid?

Answer 29

A quorum of directors must be present.

Question 30

How can directors dissent from board actions?

Answer 30

By entering their dissent in the meeting minutes, filing a written dissent, or sending written dissent by mail.

Question 31

What notice is required for special board meetings?

Answer 31

Directors must receive two days' notice regarding the date, time, and place of the meeting.

Question 32

How can directors act without a meeting?

Answer 32

By unanimous written consent.

Question 33

What is the default management structure of an LLC?

Answer 33

Member-managed.

Question 34

What is the authority of members in a member-managed LLC?

Answer 34

Members have broad authority to bind the LLC.

Question 35

What are preemptive rights?

Answer 35

Rights that allow shareholders to maintain their proportional ownership share when new shares are issued.

Question 36

What must restrictions on share transfers be?

Answer 36

Conspicuously noted to be enforceable.

Question 37

What is the duty of care for directors?

Answer 37

Directors must act with the care that a prudent person would exercise in similar circumstances.

Question 38

What are the safe harbor rules for conflicting interest transactions?

Answer 38

* Disclosure to and approval by disinterested directors * Disclosure to and approval by disinterested shareholders * Fairness of the transaction to the corporation.

Question 39

What is the duty of loyalty regarding usurping corporate opportunities?

Answer 39

A director may not take advantage of an opportunity themselves without offering it to the corporation.

Question 40

When may a controlling shareholder owe fiduciary duties?

Answer 40

In cases such as selling to an outsider or forcing out other shareholders.

Question 41

What must a controlling shareholder prove when buying out minority shareholders?

Answer 41

That both the process and price were fair.

Question 42

What are the circumstances under which fiduciary duties may be restricted or eliminated?

Answer 42

If not a breach of loyalty, not acting in good faith, or involving transactions with improper personal benefit.

Question 43

What is a breach of fiduciary duty?

Answer 43

Loss or prevents legal remedy

Question 44

In buyouts, what must a controlling shareholder prove?

Answer 44

Both the process and price were fair

Question 45

What do courts generally avoid getting involved in regarding fiduciary duties?

Answer 45

Unless it involves self-dealing, due to the Business Judgment Rule (BJR)

Question 46

What are the two main fiduciary duties owed by members/managers of an LLC?

Answer 46

* Duty of Loyalty * Duty of Care

Question 47

What does the Duty of Loyalty entail for LLC members?

Answer 47

* Account for personal benefits * Refrain from dealing with adverse parties * Refrain from competing

Question 48

What is the standard for fiduciary waivers in an LLC?

Answer 48

More likely to be recognized if not manifestly unreasonable

Question 49

What is a direct action in corporations?

Answer 49

Shareholder sues for their own rights, not the corporation's

Question 50

What must a shareholder do before filing a derivative action?

Answer 50

Ask the board to take action and wait 90 days unless serious harm or futile

Question 51

What happens if a derivative lawsuit is frivolous?

Answer 51

Shareholder may have to pay fees

Question 52

What is required for a member to sue in a direct action in an LLC?

Answer 52

Must show a direct injury, not just harm to the LLC

Question 53

What must a member do before suing on behalf of the LLC?

Answer 53

Ask the manager or other members to take action unless pointless

Question 54

How is dismissal of derivative actions judged by the board of directors?

Answer 54

Under the Business Judgment Rule (BJR) unless bad faith is shown

Question 55

What does Rule 10b-5 prohibit?

Answer 55

Fraud in buying or selling securities

Question 56

What is the process for amending the Articles of Incorporation if stock has been issued?

Answer 56

* Board must adopt the amendment * Shareholders must approve the amendment

Question 57

What is a merger?

Answer 57

Combination of two or more corporations for one corporation to survive

Question 58

What is a consolidation?

Answer 58

Combination of corporations in which neither survives

Question 59

Who votes on the sale of all or substantially all corporate assets?

Answer 59

Shareholders

Question 60

What are dissenter's appraisal rights?

Answer 60

Rights for shareholders who do not want to participate in certain corporate actions

Question 61

What must a dissenter do to invoke their rights?

Answer 61

* Send written notice before the vote * Abstain or vote NO * Make prompt written demand for fair market value

Question 62

What is judicial dissolution of a corporation?

Answer 62

Legal process where a court orders the termination of a corporation

Question 63

What are the grounds for judicial dissolution?

Answer 63

* Shareholder deadlock * Fraud, mismanagement, or abuse * Failure to meet corporate requirements * Insolvency * Shareholder petition in closely held corporations

Question 64

What are the methods for voluntary dissolution of a corporation?

Answer 64

* Consent of all members * Passage of 90 days without members * Court order * Event outlined in the operating agreement

Question 65

What happens when a member dissociates from an LLC?

Answer 65

Member can leave anytime but retains interests and liabilities

Question 66

What must happen during the winding up of an LLC?

Answer 66

* Discharge debts, obligations, or liabilities * Settle and close the company's activities