Corporations Flashcards
What is the primary purpose of forming a corporation?
To protect its owners from personal liability and to promote investment
Who is personally liable for pre-incorporation conduct?
Promoter is always liable unless there is a novation
What is De Jure Formation?
A validly formed corporation
What are the exceptions to limited liability in a corporation?
Piercing the Corporate Veil due to fraud, undercapitalization, or alter ego
Define promoter in the context of corporate formation.
A promoter is one who works on behalf of the corporation to create and fund the entity
What must be included in the Articles of Incorporation?
Name of the corporation, local agent for service, names of incorporators, and number of authorized shares
True or False: Ultra vires acts were void at common law but are enforceable under the RMBCA.
True
What is a De Facto Corporation?
A corporation not formed despite a good faith effort to comply and acted without knowledge of defects
What is the purpose of bylaws?
Bylaws are day-to-day rules adopted by directors after filing
What does ‘piercing the corporate veil’ allow a plaintiff to do?
Recover directly from the investor or shareholder on the basis of fraud or unfairness
What types of stock must a corporation issue?
Common stock and preferred stock
What is required for the issuance of stock?
Authorization in the articles and by the board of directors
Fill in the blank: A corporation may not make a distribution if it is _______.
insolvent
What is the quorum requirement for a shareholder meeting?
A majority of votes representing the eligible outstanding shares
What rights do shareholders have regarding records?
Shareholders may inspect and copy records with five days’ notice stating a proper purpose
What is the difference between a direct and derivative action?
Direct action recovers damages for breach of duty to shareholders individually; derivative action vindicates rights of the corporation
What must a shareholder do before commencing a derivative action?
Make written demand to the board and wait 90 days unless excused
What is the standard of care for directors?
Must act as a prudent person in like circumstances
What is the Business Judgment Rule?
Good faith actions of a director or officer will not be disturbed in absence of fraud, illegality, or self-dealing
What constitutes a conflict of interest for a director?
A transaction between the corporation and a director that normally requires board approval
What is the remedy for usurping a corporate opportunity?
Damages, constructive trust, or the corporation gets the opportunity at cost
What is required for a fundamental change in a corporation?
Approval by a majority of the board and a majority of shareholders entitled to vote
What is Rule 10b-5?
A rule against fraud or deception in the sale of securities
What is the main liability of directors for unlawful distribution?
Directors are personally liable to the corporation for unlawful distribution beyond lawful amount
What must shareholders do to waive defects in notice?
Sign a writing or attend the meeting without objecting to the defective notice
What is the maximum duration for a proxy?
Valid for 11 months unless otherwise stated
What is the purpose of cumulative voting?
To give shareholders a number of votes equal to the number of shares multiplied by the number of directors
What is required for a corporation to authorize payment of a dividend?
It is at the discretion of the board
What is a controlling shareholder?
Someone who owns greater than 50% of the shares or enough to enact major changes
What happens if the bylaws and articles conflict?
The articles control
What is the requirement for director meetings?
Two days’ notice is required for special meetings unless waived
What is Rule 10b-5?
A buyer or seller using interstate commerce may allege a violation against a defendant who intentionally engaged in fraud or deception causing plaintiff to suffer harm.
What does Section 16(b) entail?
A corporate insider can be forced to return short-swing profits to the corporation.
What is required for any fundamental change to a corporation?
Approval by the majority of the board of directors and a majority of shareholders entitled to vote.
Define merger in corporate terms.
A merger is the combination of two or more corporations when one survives.
What is a consolidation?
A consolidation is when two corporations combine and neither survive, resulting in a new entity.
What is required for a merger with a corporation in another jurisdiction?
The merger must be permitted by the law of that other jurisdiction.
What constitutes a sale of assets as a fundamental change?
A sale or other transfer of substantially all of the corporation’s assets outside the regular course of business.
How can a corporation gain control of another corporation without a merger?
By acquiring its stock with cash or through a share exchange.
What is required to amend the articles after stock has been issued?
Approval by the majority of the shareholders entitled to vote.
What are the two types of dissolution?
- Voluntary
- Involuntary
What is required for voluntary dissolution?
Approval of the directors and shareholders.
Under what condition can a corporate entity be dissolved by creditors?
Only if the corporation is insolvent.
What are some grounds for shareholders to petition for involuntary dissolution?
- Waste of corporate assets
- Illegal, oppressive or fraudulent conduct
- Director deadlock and irreparable injury
- Shareholder deadlock over election of new directors
What must directors do upon dissolution of a corporation?
Distribute the assets to creditors, then to shareholders with preference during liquidation.
What are Dissenters’ Rights of Appraisal?
Forces the corporation to buy stock at a fair (appraised) value within a certain number of days of the demand for payment.
Who qualifies as a qualifying shareholder?
A shareholder entitled to vote on a fundamental change.
What triggers Dissenters’ Rights of Appraisal?
A merger, acquisition, sale of assets or amendment of the articles.
What is required for notice in Dissenters’ Rights of Appraisal?
Written notice delivered before the shareholder vote on the action.
How must shareholders respond to trigger Dissenters’ Rights?
They must abstain or vote against the action.
What is a closely held corporation?
One with few shareholders that is not publicly traded.
What are the typical characteristics of a closely held corporation?
- Shareholders often serve as directors and officers
- Can enter into voting agreements
- Formalities are usually relaxed
What is a limited liability company (LLC)?
An entity that provides limited liability to its investors while allowing flexible management and pass-through taxation.
What is needed to create an LLC?
Filing articles of organization with the state.
What is required for adding a new member to an LLC?
All members must consent.
What distinguishes a member-managed LLC from a manager-managed LLC?
In a member-managed LLC, members have authority to bind the LLC; in a manager-managed LLC, they do not.
What fiduciary duties are owed in an LLC?
Duties owed by members to each other and to the entity itself.
What does the transferability of membership in an LLC include?
Transfer of profit/loss rights but not the right to manage.
How are profits and losses allocated in an LLC?
Presumed to be allocated according to a member’s contribution unless the operating agreement indicates otherwise.
What happens if a member withdraws from an LLC?
The LLC does not terminate; it may elect to liquidate the member’s interest and pay fair market value.
What are the grounds for dissolution of an LLC?
Consent of all members or lack of any members.
