Corporations

Question 1

A corporation is

Answer 1

a legal entity, created under state law. It is separate and distinct from its owners (the shareholders). It has its own rights and obligations.

Question 2

A corporation has four basic characteristics:

Answer 2

a. perpetual or continuous existence
b. free transferability
c. limited liability for its owners
d. centralized management

Question 3

In general, a corporation’s profits are subject to double taxation:

Answer 3

a. First, the corporation is taxed as a separate, taxable entity.
b. Second, when corporate profits are distributed to shareholders, the distributions are treated as part of the taxable income of each shareholder.

Question 4

C Corporation

Answer 4

This is the default. Unless a business entity qualifies and elects to be an S Corporation, a corporation will be taxed pursuant to subchapter C of the Internal Revenue Code. Its profits will be subject to double taxation as described above.

Question 5

S Corporation

Answer 5

If a business qualifies, it may elect to be taxed under subchapter S of the Internal Revenue Code, and it will be treated as a “flow-through” entity. In other words, like partnerships, S corporations pay no tax on its profits.

Instead, only the shareholders will be taxed on its profits, in proportion to the number of shares they own. This is true whether or not the profits are distributed out to the shareholders.

Question 6

To qualify to elect status as a subchapter S corporation, the corporation must:

Answer 6

(a) be closely held (that is, not publicly held);
(b) have no shareholders who are not non-resident aliens; and
(c) have issued no more than one class of stock.

Question 7

A domestic corporation is

Answer 7

a corporation incorporated under the laws of Florida, while a foreign corporation is a corporation incorporated under the laws of another state or of another country.

Question 8

Foreign corporations

Answer 8

can transact business in Florida but must obtain a “certificate of authority” from the Department of State and must continuously maintain a registered office and agent in Florida.

A foreign corporation with a valid certificate of authority has the same rights and privileges as, and is subject to the same duties, restrictions, penalties, and liabilities now or later imposed on, a domestic corporation.

Question 9

The certificate application must state:

Answer 9

1) the name of the foreign corporation;
2) the state where it was incorporated and the date of its incorporation;
3) the address of its principal office;
4) the address of its registered office in Florida and the name of its registered agent at this office; and
5) the names and usual business addresses of its current directors and officers.

Question 10

Exception to certificate requirement

Answer 10

Short term or inconsequential business in Florida doesn’t trigger the registration requirement.

Question 11

“Internal affairs rule”

Answer 11

The internal affairs of a corporation are governed by the law of the state of incorporation.

Question 12

If a foreign corporation transacting business in Florida lacks a certificate of authority, it will NOT be:

Answer 12

Able to maintain a court proceeding in any Florida court until it obtains a certificate of authority.

Failure to obtain a COA does not impair the validity of any of its contracts, deeds, mortgages, security interests, or corporate acts or prevent it from defending a lawsuit here.

Question 13

“Not-for-Profit” Corporations [501(c)(3) Corporations]

Answer 13

a. “Not-for-profit” corporations may actually earn profits; however, the profits are not taxed or distributed as they would be in a for-profit corporation.
b. “Not-for-profit” corporations do not have shareholders; instead, they have members.
c. The profits of a “not-for-profit” are not distributed to its members, and if SEC regulations are observed, the profits are not taxed.

Question 14

Unless the articles of incorporation provide otherwise, what are 11 things a corporation can do:

Answer 14

a. sue and be sued;
b. purchase, own, lease, mortgage, and sell real or personal property or any interest therein;
c. lend money or use their credit;
d. purchase and sell any interest or obligations in any other entity;
e. enter into contracts and guarantees, incur liability, borrow money, and issue notes, bonds, and other obligations;
f. conduct business and locate offices within or outside of Florida;
g. make charitable donations;
h. start other entities;
i. provide life insurance for directors, officers, employees, or shareholders;
j. elect directors and appoint officers, employees, and agents of the corporation and define their duties, fix their compensation, and lend them money; and
k. make and amend bylaws for management of the business in a manner consistent with the articles of incorporation and Florida law.

Question 15

Ultra Vires Acts

Answer 15

An act that goes beyond the corporation’s authority or beyond the limits of its powers as set forth in its articles of incorporation and bylaws.

Question 16

Limitations to Ultra Vires Challenges

Answer 16

Florida statute limits challenges to the following proceedings:

(1) In a proceeding by a shareholder against the corporation to enjoin the act;
(2)  In a proceeding by the corporation, directly, derivatively, or through a receiver, trustee, or other legal representative, or through shareholders in a representative suit, against an incumbent or former officer, employee, or agent of the corporation; or
(3) in a proceeding by the government to dissolve the corporation or to enjoin the corporation from the transaction of unauthorized business.

Question 17

Who Are Promoters?

Answer 17

Promoters take the necessary preliminary steps for creating a corporation; these steps often involve contracts that the promoters enter into for the benefit of the not-yet-formed corporation.

Question 18

Are Promoters agents of the corporation?

Answer 18

Promoters are not agents of the contemplated corporation.

a. Because the corporation is not yet in existence, it cannot be a principal to any agency relationship with a promoter.
b. Consequently, promoters have no power to bind the not-yet-formed corporation.

Question 19

Legal Status of Pre-Incorporation Transactions

Answer 19

A corporation is not liable for pre-incorporation contracts made for its benefit by promoters unless the corporation expressly or impliedly adopt the contract after formation

a. Express adoption generally occurs when the board of directors passes a resolution to this effect.
b. Implied adoption occurs when the corporation: the corporation accepts or acknowledges the benefits of the contract in some manner

Question 20

A corporation is unable to ratify a pre-incorporation transaction because for ratification to occur…

Answer 20

there must be a principal that would have been lawfully able to authorize the transaction at the time it was entered into. However, the corporation does not yet exist when the pre-incorporation transaction occurs. This means that it cannot later ratify the transaction as if it had been a principal and the promoter or promoters were its agents.

Question 21

What about liability for promoters on pre-incorporation contracts?

Answer 21

Any person purporting to act on behalf of a corporation and having actual knowledge that the corporation is not yet effectively incorporated will generally be jointly and severally liable for all liabilities while so acting

Question 22

What about liability for promoters on pre-incorporation contracts?

Exceptions

Answer 22

(1) Promoters will NOT be liable to any person who has actual knowledge that the business has not been incorporated
(2) Promoters will not be liable if a novation occurs, so that the third party releases the promoters from all personal liability on the pre-incorporation contract.

Question 23

A novation occurs when

Answer 23

three parties—the promoter, the second party to the original contract, and the duly incorporated corporation—agree to substitution of the corporation as a party to the contract in place of the promoter.

Question 24

Incorporation Requirements

Answer 24

There must be properly executed articles of incorporation.
The articles of incorporation must be properly filed.
In general, corporate existence begins on the date the articles of incorporation are filed.

Question 25

Articles of incorporation are to be prepared by

Answer 25

an incorporator or incorporators, who are responsible for executing and filing the articles.

Question 26

To be properly executed, the articles must include:

Answer 26

(1) the corporation’s name;
(2) the corporation’s street and mailing address;
(3) the number of shares the corporation is authorized to issue, or authorized shares;
(4) the name and address of each incorporator;
(5) any preemptive rights granted to shareholders (Preemptive rights are rights to buy additional shares to maintain their percentage of ownership in the corporation); and
(6) the street address of the corporation’s initial registered office and the name of its initial registered agent.

Question 27

With respect to the naming requirement, a corporation’s name must:

Answer 27

(1) be unique;
(2) must contain the word “corporation,” “company,” or “incorporated” or its abbreviation;
(3) it must NOT imply any connection with any state or federal government agency.

Question 28

With respect to the requirement concerning authorized shares, the articles must:

Answer 28

(1) prescribe the classes of shares; the number of shares of each class that the corporation is authorized to issue; and it must prescribe the preferences, limitations, and relative rights of each class of shares, AND
(2) the articles must: designate one or more classes that together have unlimited voting rights and designate one or more classes that together are entitled to receive the corporations net assets upon dissolution

Question 29

In the articles, a statement of the corporation’s purpose is

Answer 29

NOT required.

Nevertheless, the articles may include a statement of purpose, as well provisions regarding most any aspect of its internal governance and the management of its business.

Question 30

If initial directors are NOT named in the articles of incorporation, the incorporators must

Answer 30

hold an organizational meeting to elect the directors. After that: either the incorporators or directors must complete the organization of the incorporation by appointing officers and adopting bylaws

Question 31

Bylaws vs. Constitution

Answer 31

The articles of incorporation are like the corporation’s constitution and the bylaws are like the corporation’s statutes. Therefore, bylaws must be consistent with the articles. To the extent there is any inconsistency, the articles will trump the bylaws.

Question 32

De Facto Corporations

Answer 32

A good faith attempt to comply with the statutory requisites for formation; AND

Some actual use of the purported corporate existence, such as carrying on business openly as a corporation.

If a de facto corporation is deemed to exist, this will protect shareholders from personal liability for corporate obligations. However, the state may still challenge its right to engage in business as a corporation.

Question 33

Corporation by Estoppel

Answer 33

Persons acting on behalf of a business entity under the mistaken belief that the entity is properly incorporated have no personal liability. But the people have to reasonably believe that a corporation has been formed correctly.

However, a person acting on behalf of a business entity that is not properly incorporated will incur liability to third parties if: there is actual knowledge that there is no incorporation

Question 34

Where a third party believed that he was dealing with a corporation, then for purposes of that transaction…

Answer 34

the third party is estopped from denying the existence of the purported corporate entity. So the owners of the purported corporation will not be personally liable, even though there has not been proper incorporation.

Question 35

De Jure Corporation

Answer 35

Substantial but not complete complaiance with statutory requisites for formation

Question 36

Difference between De Jure and De Facto

Answer 36

A key distinction between a de jure and de facto corporation involves the articles of incorporation. If articles were filed but filed improperly, the corporation is most likely a de jure corporation.

Question 37

Debt Securities

Answer 37

Corporations issue debt securities to creditors who loan them money. In effect, each security acts as an IOU, representing the corporation’s promise to repay the loan principal plus interest at a specified time, although some debt securities allow the corporation to prepay the debt without a penalty.

Debt security holders typically do not have any voting rights in the corporation.

Question 38

While many different types of debt securities exist, three are the most common:

Answer 38

a. Debentures, which are unsecured debt instruments that aren’t backed with any collateral.
b. Bonds, which are often secured with the company’s physical assets. This makes their holders secured creditors with priority interests.
c. Notes, which are debt securities that may be secured or unsecured and are generally not traded.

Question 39

Upon liquidation of the corporation, debt security holders will have:

Answer 39

Priority of repayment over holders of equity securities. Secured debt holders have first priority.

Question 40

Equity Securities

Answer 40

Corporations may raise capital by issuing shares of stock representing ownership interests in the corporation. That is, the corporation may sell equity in the company. The buyers of the shares are called “shareholders” or “stockholders.”

As owners, shareholders have financial rights to dividends when and as declared by the board of directors.

To protect their interests, shareholders have voting rights to elect directors and to approve major corporate transactions, such as mergers and increases in the number of authorized shares.

Question 41

Upon liquidation of the corporation, shareholders are paid only:

Answer 41

After all the creditors have been paid

Question 42

Common stock carries

Answer 42

Ownership rights, but no fixed obligations.

While common stock carries the highest risk, it also enjoys the greatest possibility of gain if the business is successful.

Question 43

Preferred Stock

Answer 43

Preferred stock is characterized by a “preference” that gives holders of this class of stock rights to distributions of dividends or assets that are preferential to those assigned to common shares

Typically, preferred shares do not carry voting rights – the preference refers to money, not to a voice in the corporation’s operation

Question 44

Straight preferred stock

Answer 44

The owners of such stock must receive a dividend of a specified dollar amount before any dividend can be offered to the holders of common stock.

Question 45

Participating preferred stock

Answer 45

The preference includes that for straight preferred stock, plus an additional amount equal to the dividend paid to common stockholders.

Question 46

Cumulative preferred stock

Answer 46

The preference includes not only that for straight preferred stock, but also an amount equal to any dividend potentially collectable in a prior year or years for which the corporation did not issue a dividend at all.

Question 47

Convertible preferred stock

Answer 47

At the option of the holder, these are convertible to common stock or bonds of the corporation.

Question 48

Redeemable preferred stock.

Answer 48

These may be cashed in at a predetermined amount and time at the option, as set forth in the articles, of the corporation or preferred stockholder.

Question 49

Share Prices and Consideration

Par value is

Answer 49

an amount that can be included in the articles that is the minimum (floor) price for which shares can be sold.

In Florida, there is no requirement that shares have a par value. The corporation can choose to have a par value, but it doesn’t have to.

If no-par shares are issued, the board may issue the shares for whatever consideration the board of directors deems adequate provided that the determination is made in good faith

Question 50

In Florida, consideration for shares may take many forms, including:

Answer 50

(1) Money paid
(2) Labor already done
(3) Promissory notes

Question 51

Additionally, Florida permits shares to be issued to directors, officers, or employees in consideration for:

Answer 51

services to be rendered in the future if there is a binding contract for the parties to actually perform the agreed-to services

Under these circumstances, however, the shares are not considered fully paid until the services have actually been rendered.

Question 52

Watered Stock

Answer 52

This is stock that has been designated as fully paid even though it was issued for less than par value or, in the case of no-par stock, less than the agreed-upon fair market value.

Question 53

Repurchase of Stock

Answer 53

Shares repurchased by the corporation may either be: Cancelled (cannot be re-issued), or held as treasury stock (can be resold)

Until treasury stock is resold, treasury stock is not entitled to voting rights or dividends.

Question 54

In general, management of a corporation’s assets and business is vested:

Answer 54

In its board of directors

Typically, the board will delegate responsibility for the day-to-day operations of the corporation to corporate officers.

Question 55

Typically, with respect to fundamental changes such as the sale of all or substantially all of the corporate assets, mergers, dissolution, and amendments of the articles of incorporation or bylaws:

Answer 55

The board proposes and recommends a course of action that is subject to shareholder approval

Question 56

In Florida, a closely held corporation, also called a close corporation, is

Answer 56

A corporation with 100 or fewer shareholders at the time of the shareholder agreement, substantial participation of shareholders in management, and no easy market for the corporation’s shares.

Question 57

The original board of directors is usually chosen by

Answer 57

the incorporators at the initial organizational meeting.

Question 58

The number of directors is prescribed by

Answer 58

the articles of incorporation or bylaws. After that, directors are elected by the shareholders at their annual meeting.

Unless the articles of incorporation provide otherwise, directors are elected: By a plurality of the votes cast

Question 59

In Florida, directors must be

Answer 59

natural persons who are over the age of 18.

Question 60

Tenure of Directors:

Directors usually hold their positions for…

Answer 60

for one year and are elected at annual meetings of the shareholders.

A corporation’s articles of incorporation or bylaws may provide for: Staggered terms for directors – only part of the board is up for election every year

Suppose that a director dies, resigns, or is removed. The articles of incorporation or bylaws often permit the board to appoint an interim director to serve until the next shareholders’ meeting is held.

Question 61

Unless the articles require removal for cause only, the shareholders may remove one or more directors

Answer 61

with or without cause.

Question 62

If removal of a director is to be considered and voted upon at a meeting of the shareholders…

Answer 62

Notice of the meeting must state that the purpose of the meeting is removal of the director

Question 63

Grounds for a director’s removal for cause include:

Answer 63

dishonesty, gross incompetence, or breach of duty of loyalty to the corporation

If a director’s removal for cause is sought, the director is entitled to notice of the reasons for removal as well as time to answer the charges.

Question 64

In a cumulative voting system…

Answer 64

A minority of voters may be able to elect a director. So the rules make it so that a minority of voters can veto the removal of the director. So, in a cumulative voting system, even if most votes are in favor of removal, this may not be sufficient to preclude the minority of shareholders who elected the director from vetoing the removal.

Question 65

Removal under Straight Voting

Answer 65

If cumulative voting is NOT authorized by the articles of incorporation, a director is removed ONLY IF the number of votes cast in favor in removal exceed the number of votes cast against removal

Question 66

Removal under Cumulative Voting

Answer 66

If cumulative voting is authorized by the articles of incorporation, a director may NOT be removed if: the number of votes sufficient to elect the director under cumulative voting is voted against the directors removal

Question 67

“Quorum” refers to

Answer 67

the minimal portion of the members of the board that must be present at a meeting of the board in order for valid board action to occur.

Question 68

Unless otherwise provided in the articles of incorporation, a quorum consists of:

Answer 68

majority of the directors

Question 69

A change in the quorum rule that is provided in the articles is effective so long as:

Answer 69

the required portion of the required directors is not less than one third

Question 70

If the director is not present at the meeting, can he/she vote?

Answer 70

A director cannot delegate voting authority to a representative. If the director is not present at the meeting, he or she can’t vote.

Question 71

Notice Requirement for Meetings

For regular meetings of the board, unless the articles of incorporation or bylaws provide otherwise, the meeting may:

Answer 71

be held without notice of the date, time, place, or purpose of the meeting

Question 72

Notice Requirement for Meetings
For special meetings of the board, unless the articles of incorporation or bylaws provide for a longer or shorter period, the meeting must:

Answer 72

be preceded by at least 2 days notice of the date, time, and place of the meeting – still doesn’t have to specify the purpose unless required by the articles of incorporation

The notice need not describe the purpose of the special meeting unless required by the articles of incorporation or bylaws.

Question 73

A director is deemed “present” at a meeting of the board if

Answer 73

the director participates in the meeting through a means of communication that permits all directors participating to simultaneously hear each other. That is, directors can participate through a conference call.

Question 74

Board Action

If a quorum is present at a duly held meeting of the board, an act of the board requires the affirmative vote of:

Answer 74

majority of the directors unless the articles or bylaws require a greater proportion

Question 75

Board Action

Absent a board meeting, valid board action can still occur but only if the action is evidenced by:

Answer 75

one or more written consents that describe the action taken and that are signed by each director

So if there’s not a board meeting, the directors can take action only by unanimous agreement.

Question 76

Voting Agreements

Ordinarily, proxies or agreements among directors to vote in a particular way with respect to prospective determinations are…

Answer 76

Void.

Question 77

Voting Agreements

Exception?

Answer 77

However, in closed corporations where the directors constitute all of the shareholders, voting agreements are permitted.

Question 78

Delegation of Authority

Can the board delegate critical management decisions?

Answer 78

No. Critical management decisions must be made by the board and cannot be delegated.

However, the board of directors may appoint committees to act for it within ordinary and specified areas.

Even so, the recommendations or decisions of these subcommittees may be overridden by the full board before they have been put into action.

Question 79

Delegation of Authority

Can the board delegate day to day management decisions?

Answer 79

Yes. The day-to-day operations of the corporate business may be delegated to corporate officers and agents.

Question 80

Corporate Officers

Appointment and Removal?

Answer 80

The corporation’s president, vice presidents, secretary, and treasurer are all corporate officers appointed by the board of directors.

Additional, or minor, officers are ordinarily appointed by the corporation’s president.

Ordinarily, corporate officers may be dismissed, without cause, by the board of directors.

Question 81

Job Descriptions

The president is charged with…

Answer 81

managing the corporation’s day-to-day affairs

Question 82

Job Descriptions

The vice president…

Answer 82

ordinarily performs the functions of the president when the latter is unavailable.

Question 83

Job Descriptions

The secretary is charged with…

Answer 83

taking minutes at director and shareholder meetings, as well as maintaining the corporation’s books and records.

Question 84

Job Descriptions

The treasurer is charged with…

Answer 84

receiving, depositing, and retaining receipts for corporate income and expenditures.

Question 85

In general, decisions of the board to make charitable donations are upheld as long as:

Answer 85

plausible argument for long-term benefit to the corporation can be made

Question 86

Ordinarily, decisions of the board that would bind the corporation to contracts extending beyond the terms of its current members are upheld unless:

Answer 86

contract extends for an unreasonably long period of time

Question 87

In general, decisions about the distribution of dividends is within the discretion of the board; however, the board is not authorized to make distributions if, after doing so:

Answer 87

(1) the corporation could no longer pay off its debts as they become due in the ordinary course of business
(2) assets will be less than its liabilities

Question 88

Corporate officers have the implied authority to enter into transactions that are:

Answer 88

reasonably related to perform the duties to which they are expressly responsible

Question 89

In general, the implied authority of an officer does not extend to:

Answer 89

signing contracts that are for an overly long term without board approval

The board can ratify actions that, when performed, were outside an officer’s actual authority. Doing so renders the action retroactively authorized and binding on the corporation.

Question 90

Duty of Care

Directors and officers of the corporation must act:

Answer 90

a. in good faith

b. with the same degree of care and skill as an: as an ordinarily prudent and
diligent person would act under similar circumstances; and

c. in a manner reasonably believed to be: to be in the best interests of the corporation.

Question 91

To satisfy the requisite “degree of care and skill” required by the duty of care, management must:

Answer 91

act with reasonable care and skill and make a reasonable effort to apprise themselves with the facts necessary to make a proper decision

Reports furnished by corporate officers or agents may ordinarily be relied upon by directors in making their decisions.

Question 92

The Business Judgment Rule

Answer 92

The business judgment rule is a rebuttable presumption that directors and officers have acted in a non-negligent way, as long as they were adequately informed.

EXAM TIP: This is an important rule. It effectively makes it difficult to win a lawsuit against a director for violating the duty of care.

Question 93

Sarbanes-Oxley requires principal executives and financial officers to certify:

Answer 93

a. that they have reviewed the corporation’s financial reports;
b. that the reports do not contain any untrue statements or material omissions;
c. that the financial statements accurately portray the corporation’s financial condition; and
d. that they are responsible for implementing and evaluating the company’s internal controls and have evaluated these controls within the last 90 days.

Question 94

Three Main Duties of Loyalty:

Answer 94

• No Usurpation of a Corporate Opportunity;
• Don’t Self-Deal (Don’t engage in “conflict of interest transactions”)
• Don’t Engage in Direct Competition

Question 95

In determining whether an “opportunity” belongs to the corporation, Florida courts have considered:

Answer 95

(1) whether the business opportunity is closely related to the company’s line of business and
(2) whether the board expressed an interest in or expectancy of acquiring such a business opportunity.

Question 96

Even if the “opportunity” is determined to belong to the corporation, no usurpation will be found if:

Answer 96

corporation was -after full disclosure- given the opportunity first to pursue it and declined or was otherwise unable to take advantage of the opportunity

Question 97

An officer or director can transact business with the corporation if two conditions are met.

Answer 97

(1) First, there must be: notify the other directors of all material facts regarding the conflict
(2) Second, a majority of the non interested directors or non interested shareholders must vote to approve the transaction

Question 98

Remedies if officer or director breaches one of the duties…

Answer 98

1. If feasible, the corporation may rescind the transactions that have been determined to be not entirely fair
2. Suppose that an officer or director improperly takes a corporate opportunity. Then a court may impose a constructive trust to pass profits back to the company that should have received them.
3. Directors (and officers) can also be liable for damages caused by their breach of duties or violations of law.

Question 99

Defenses to Breach

Answer 99

1. Dissent or Non-Participation
2. Disclosure and Ratification
3. Finally, there will be no liability if it can be shown that the transaction was “fair and reasonable.”

Question 100

Shareholders in their collective capacity have the power to:

Answer 100

elect/remove directors (with or without cause), amend bylaws and approved fundamental changes in the corporation

Question 101

“Fundamental changes” refers to such things as

Answer 101

amendments to the articles, merger, dissolution, and the sale of substantially all corporate assets.

Question 102

Annual meetings are

Answer 102

prescribed in the bylaws. At annual meetings, directors are elected and any other proper business can be transacted.

Question 103

Special meetings are called for a specific purpose; they may be called by:

Answer 103

(a) the board of directors,
(b) other persons authorized to do so in the articles or bylaws, or
(c) by the holders of not less than 10 percent of the votes entitled to be cast on the issue to be considered at the meeting.

Question 104

Notice requirements

Each shareholder of record must be provided with:

Answer 104

timely written notice of each annual or special shareholder meeting no fewer than 10 and no more than 60 days before the meeting date

Question 105

Notice requirements

For an annual meeting, proper notice will state…

Answer 105

the date, time, and place of the shareholder meeting.

NOTE: The purpose or purposes of an annual meeting need not be included in the notice unless the articles of incorporation require otherwise.

Question 106

Notice requirements

For special meetings, proper notice will state…

Answer 106

the place, date, hour, and purpose of the shareholder meeting.

Question 107

Notice requirements

Waiver…

Answer 107

For any meeting, a shareholder may waive the notice requirement and can do so before or after the date of the meeting so long as it is communicated in a signed writing delivered to the corporation for inclusion in the minutes or filing in the corporate records

Question 108

Valid shareholder action at a meeting requires…

Answer 108

The presence of a quorum at the meeting is a prerequisite for valid shareholder action.

Question 109

What constitutes a quorum?

Answer 109

It is a majority of the votes of each class of stock entitled to be cast on a matter, unless the articles provide for a different proportion as long as it is at least one third of the share entitled to vote

If a quorum is present at the meeting, shareholder action requires the affirmative vote of a majority of the votes cast, unless the articles requires a greater proportion

In Florida, once a quorum is present, it does not cease to exist because persons holding the necessary shares or proxies leave the meeting.

Question 110

Shareholder action without a meeting

As provided by the Florida statute, shareholder action can be effectively undertaken without a meeting if the action is:

Answer 110

(1) taken by at least the number of votes minimally required to authorize an action at a meeting where all voting groups and shares entitled to vote were present and voted; and
(2) evidenced by written consent describing the action dated and signed by the approving shareholders and delivered to the corporation

Question 111

Usually, only common stock is entitled to vote. However, preferred shareholders are entitled to vote on a…

Answer 111

proposal that would create a class of stock that would have rights that are superior to the rights of the preferred shares.

Question 112

Unless the articles of incorporation authorize so-called cumulative voting, elections for directors are conducted according to

Answer 112

so-called straight voting procedures.

Question 113

In both straight voting and cumulative voting, the total number of votes a shareholder may cast in an election is…

Answer 113

the number of shares owned multiplied by the number of directors to be elected.

Question 114

In a straight voting system, the total votes that a shareholder is entitled to cast must be…

Answer 114

divided up, with no one candidate able to receive more votes from a shareholder, in an election for a given board seat, than the number of shares owned by that shareholder.

Question 115

In a cumulative voting system, the total votes that a shareholder is entitled to cast may be…

Answer 115

bundled or packaged in any manner desired by the shareholder.

Question 116

Cumulative Voting vs. Straight Voting

Answer 116

Cumulative voting offers minority shareholders a greater likelihood of representation on the board of directors than would be possible under straight voting. In straight voting, majority shareholders can determine the election of all directors. In cumulative voting, minority shareholders can determine the election of at least some (but never most) of the directors.

Question 117

A shareholder may vote in person or by proxy. A proxy is

Answer 117

a person who votes on behalf of the shareholder.

In Florida, a proxy may be appointed by signing an appointment form or by electronic transmission, and it becomes effective when received by the secretary or other officer authorized to tabulate votes.

Question 118

An appointment of a proxy is valid for…

Answer 118

up to 11 months unless: a longer period is expressly provided in the appointment

Question 119

A proxy is not revoked by the death or incapacity of the shareholder who had granted it unless:

Answer 119

notice of the death or incapacity is received by the secretary before the proxy is exercised

Question 120

A proxy is irrevocable only if the proxy instrument:

Answer 120

conspicuously states that it is irrevocable and the appointment is coupled with an interest

Question 121

“Coupled with an interest” means that

Answer 121

the proxy benefits not just the shareholder, but also benefits the proxy-holder. An example would be where a shareholder pledges his shares as collateral to a bank, and the bank insists on a proxy to vote the shares.

Question 122

If the proxy is revocable, the shareholder can revoke it by:

Answer 122

(1) delivery to the corporate secretary of a writing revoking the proxy;
(2) subsequently giving a proxy to another person; or
(3) personally voting at the shareholders’ meeting.

Question 123

Under a pooling agreement,

Answer 123

two or more shareholders enter into a binding contract whereby they agree to vote their shares as all (or a majority) of them decide.

Question 124

Under a voting trust,

Answer 124

shareholders assign their legal interest in the shares to a trustee, for which the shareholders receive a trust certificate as evidence of the interest assigned.

Question 125

Shareholder Preemptive Rights

Answer 125

As provided by Florida statute, the shareholders of a corporation do NOT have preemptive rights to acquire newly issued (or re-issued) shares unless the articles of incorporation so provide.

Question 126

If preemptive rights are provided by the articles, shareholders are entitled to a fair and reasonable opportunity to acquire:

Answer 126

proportional amounts of the corporations unissued shares and treasury shares on the decision of the board to issue them

Question 127

A shareholder may waive his or her preemptive right; if

Answer 127

waiver is evidenced by a writing, it is irrevocable.

Question 128

Preemptive rights do not apply to shares that are:

Answer 128

a. authorized in the articles of incorporation and then issued within 6 months of incorporation;
b. issued pursuant to a plan of reorganization;
c. issued to the corporations directors, officers, agents or employees; or
d. issued for consideration other than money

Question 129

Even where preemptive rights are not recognized or are not applicable, many courts will disallow the issuance of new shares, or permit “quasi” preemptive rights, where directors or majority shareholders are seeking to:

Answer 129

a. dilute the interest of earlier shareholders or

b. take unfair advantage of minority shareholders

Question 130

Right to Transfer Shares

Answer 130

A shareholder may generally freely transfer his stock. But the corporation may impose reasonable restrictions upon alienability; these restrictions may be found in the articles of incorporation, bylaws, or in shareholder agreements.

If the restriction is contained in a shareholder agreement, to be enforceable there must be: a conspicuous reference to the restriction printed or otherwise included on the shares themselves

Question 131

Reasonable restrictions on transfer include:

Answer 131

a. giving the corporation a right of first refusal;
b. compelling the sale of shares for a predetermined amount (even if lower than the market or book value) upon the shareholder’s death or termination of employment with the corporation;
c. prohibiting sales to particular types of persons such as competitors; and
d. sales to foreigners under an S-Corporation.

Question 132

If a shareholder wrongfully transfers stock to a bona fide purchaser, the corporation can obtain:

Answer 132

damages from the selling shareholder but not from the purchaser

Question 133

Right to Inspection of Corporate Books and Records

Answer 133

Shareholders are entitled to inspect and copy the corporation’s books and records during normal business hours, provided that shareholders demand is made in good faith and for a proper purpose

Question 134

Proper purposes for shareholder inspection of corporate books and records include:

Answer 134

a. obtaining stockholder names and addresses to solicit proxies, where the shareholder believes in good faith that the policies of the present board are ineffective; and
b. investigating possible mismanagement where evidence justifies concern.

Question 135

Shareholder’s Right to Sue

Answer 135

There are two ways that a shareholder can sue a corporation. They are a direct suit and a derivative suit.

Question 136

In a direct action,

Answer 136

the shareholders may sue either as individuals or as part of a class action. The recovery in a direct action goes to the suing shareholders.

Question 137

In a derivative action,

Answer 137

the shareholder sues on behalf of the corporation to enforce a corporate right.

Question 138

Requirements and prerequisites to filing a derivative action

Answer 138

(1) Shareholder must have been a shareholder when the transaction complained of occurred
(2) Shareholder must demand that the board of directors commence an action to redress the alleged wrongs.
(3) In general, the complaint filed in a derivative suit must allege with particularity the demand made of the board and allege that: the board refused or ignored the demand for a period of at least 90 days

Question 139

Dismissal or Settlement

The court may dismiss a derivative proceeding upon motion by the corporation if the court finds that there was:

Answer 139

A determination made in good faith and after conducting a reasonable investigation that the maintenance of the derivative suit is not in the best interest of the corporation

Once commenced, a derivative action cannot be discontinued or settled unless: court approval is obtained

Question 140

Recovery in a Derivative Suit

Answer 140

If successful, the plaintiff is entitled to reimbursement from the corporation for his reasonable attorneys’ fees and litigation expenses.

The recovery is remitted directly to the corporation.

Exception: Recovery would benefit shareholders who should not be permitted to share in the recovery—for example, if the defendants in the action are also shareholders.

Question 141

Indemnification of Directors and Officers in a Derivative Action

Answer 141

Florida corporations may indemnify successful directors and officers for attorneys’ fees and litigation expenses incurred in defending against a derivative action.

Question 142

Appraisal Rights

Answer 142

In the event of a fundamental change to the corporation, a shareholder may be entitled to appraisal rights and to have her shares purchased by the corporation for fair value

Question 143

Fundamental changes that can trigger appraisal rights involve…

Answer 143

Changes that are subject to shareholder approval, such as conversions, mergers, share exchanges, and disposition of substantially all assets.

Shareholders of a publicly traded company generally do not have appraisal rights.

The articles of incorporation may limit or eliminate the appraisal rights of holders of preferred stock

Question 144

Duties of Shareholders

Answer 144

Majority or controlling shareholders of a corporation have a fiduciary duty to refrain from exercising their position in a manner that: takes undue advantage or oppresses the minority shareholders

Question 145

Examples of improper conduct include:

Answer 145

Causing the board of directors to:

(1) guarantee loans made to, or to enter into loans with, a majority shareholder;
(2) issue additional stock for the purpose of diluting the minority’s interest;
(3) enter into contracts with the majority shareholder (or an entity affiliated with him) on unusually favorable terms;
(4) dissolve the corporation, or sell its assets, for the purpose of excluding the minority shareholders from participation in a profitable business (a “freeze out”); or
(5) selling a majority or controlling portion of a corporation’s stock when the seller knows or has reason to believe that the transfer will result in prejudice to the minority shareholders.

Question 146

Conduct not violative of a fiduciary duty includes:

Answer 146

(1) selling a majority or controlling portion of a corporation’s stock for a premium;
(2) arranging for the resignation of directors or the appointment of directors upon acquisition of a controlling interest in the corporation.

Question 147

Close Corporation - Shareholder Duties

Answer 147

All shareholders owe each other: an even stricter duty than that which is owed by controlling shareholders in a public corporation

Question 148

Potential Liability of Shareholders

Answer 148

The corporate form provides shareholders with protection from personal liability for the corporation’s debts and obligations.

Question 149

The Exception: Piercing the Corporate Veil

Answer 149

On rare occasions, courts will disregard the corporate entity (“pierce the corporate veil”) and hold the individual shareholders personally liable for corporate obligations if it is necessary to prevent fraud or injustice

Question 150

To convince a court to “pierce the corporate veil,” a third party must convince the court that:

Answer 150

(1) Corporation’s independent existence was in fact a façade, and the shareholder was in fact the alter ego of the corporation;
(2) corporate form has been used fraudulently or for an improper purpose
(3) fraudulent or improper use of the corporate form caused injury to the plaintiff

Question 151

Factors that courts consider

Answer 151

(1) Capitalization - Inadequate Assets
(2) One individual controls policy and/or business decisions?
(3) Commingled corporate and personal assets, siphoned off corporate funds, or used corporate assets as if they were their own personal property?
(4) Observance of corporate formalities

Question 152

Subsidiary - Parent PCV

Answer 152

Parent corporation dominating its subsidiary corporation that the subsidiary is a mere shell or façade and that the two entities essentially act as one.

Businesses, records, and finances of the parent and subsidiary are insufficiently segregated.

Question 153

Rule 10b-5 and Insider Trading

Answer 153

A claim for insider trading under Rule 10b-5 must allege reliance upon a misrepresentation or omission of a material fact where the material fact is misrepresented or omitted with knowledge or reckless disregard.

Question 154

A 10b-5 action can be brought by

Answer 154

the SEC or by a private party, if that private party purchased, sold, issued or received the securities in question.

Question 155

Insider Trading

Answer 155

Prevent fiduciaries with non-public knowledge from exploiting their corporate position for personal gain, and to enable shareholders who lose value due to market manipulations to recover their losses.

Question 156

An “insider” is anyone who:

Answer 156

a. learns of material, non-public information as a consequence of his corporate position; OR
b. had a fiduciary relationship to the corporation or the plaintiff.

Question 157

Those who transmit non-public information (“tippers”) may be liable if

Answer 157

their purpose in transmitting the information is to realize directly or indirectly some type of personal benefit or gain

Question 158

Those who receive non-public information (“tippees”) may be liable if they:

Answer 158

should’ve been aware that the information was transferred from the tipper for personal gain

Question 159

Rule 16(b)

Answer 159

Under Rule 16(b), a director, officer, or ten-percent shareholder of a corporation is strictly liable to that entity for profits derived from any “short-swing” transaction—that is, a sale and purchase of corporate securities within any six-month period.

Question 160

Registration and Review of Securities Offerings

Answer 160

Both federal and state laws require that the issuer of any security register the offering of that security with the appropriate government agency, unless an exemption to the registration requirements is available.

Question 161

The essential element of the registration statement is

Answer 161

the prospectus, which is disclosure document that presents facts about the issuer and the offered securities and must be delivered to all offerees

Question 162

Exempt transactions include, among others,

Answer 162

intrastate offerings, and offerings made only to wealthy and knowledgeable investors, also known as accredited investors.

Question 163

Under Florida Law (“Blue Sky Laws”)

Answer 163

Regardless of what the issuer discloses, if the Florida securities administrator thinks that the offering is unfair to potential investors, the state can prevent the offer (even if approved under federal law).

Question 164

Article 8 Warranties

Direct vs. Indirect Holders

Answer 164

Direct holders are holders who have purchased their shares directly from the issuer (generally, the corporation).

Indirect holders are holders who have purchased their shares from a broker or other intermediary.

Question 165

Article 8 Warranties

Answer 165

Warranties to direct holders include:

(1) the certificate is genuine and has not been materially altered;
(2) there is no known fact that might impair the validity of the security;
(3) there is no adverse claim to the security;
(4) the transfer does not violate any restriction on transfer; and
(5) the indorsement, if any, is made by an appropriate person or by an agent who has actual authority to act on behalf of the appropriate person.

Question 166

The primary warranty for indirect holders is

Answer 166

that there is no adverse claim to the security entitlement.

Question 167

Under the U.C.C., a contract for the sale or purchase of a security is

Answer 167

enforceable whether or not it is in writing and signed, even if it is for a term of more than one year. That is, the Statute of Frauds is inapplicable.

Question 168

Under the U.C.C., all restrictions on transfers must be

Answer 168

noted conspicuously on the security certificate; if the certificate fails to note the restriction, the restriction will be: ineffective unless the registered owner was notified of the restriction

Question 169

A tender offer is

Answer 169

an offer of cash or securities directly to the shareholders of a corporation in exchange for their shares at a premium over the market price.

Tender offers—even hostile tender offers—are NOT subject to approval by the board or majority of shareholder – not a corporate transaction, but the transaction of individual shareholders

Question 170

While a board of directors cannot refuse or reject a tender offer, a board facing a hostile tender offer, or concerned about the possibility of one, may

Answer 170

implement a number of defensive mechanisms designed to thwart the tender offer. Examples are “poison pills,” leveraged buyouts, recapitalizations.

Question 171

Federal Regulation of Tender Offers

The Williams Act requires:

Answer 171

(1) the bidder to disclose, at the commencement of the offer, its tender offer, financial information, and plans for the company;
(2) a party acquiring more than 5% ownership of a corporation to disclose its identity, the number of shares held; the source and amount of funds for making the purchase; any arrangements made with others in the acquisition of these shares, its purposes in acquiring these shares; and its plans for the company; and
(3) the buyer to make the same price offer to everyone and take the shares pro rata if there are too many sellers.

Question 172

Amending the Articles of Incorporation

Answer 172

A corporation’s board of directors may propose one or more amendments to the corporation’s articles of incorporation

The adoption of a proposed amendment requires approval by a majority of the shareholders unless otherwise provided by the articles

Board can make minor changes unless prohibited by articles

Question 173

Amending the Articles of Incorporation

Close Corp -

Answer 173

Unless otherwise provided by the articles of incorporation, the shareholders of a a close corporation may amend the articles of incorporation without an act of the directors at a meeting for which notice of the changes to be made has been given.

Question 174

Selling or Transferring the Corporation’s Assets -

Transfers in the Ordinary Course of Business

Answer 174

Leasing, exchanging, or otherwise disposing of all or substantially all of a corporation’s property in the regular course of business is not considered a fundamental corporate change that requires shareholder approval.

However, doing so is normally not considered to be in the ordinary course of business.

Question 175

Selling or Transferring the Corporation’s Assets -

Transfers Not in the Ordinary Course of Business

Answer 175

Where a corporation sells all or substantially all of its assets NOT in the ordinary course of business, the transaction must be approved by the board of directors and the shareholders

Question 176

Rights of the Corporation’s Creditors

Answer 176

By disposing its assets, the corporation does NOT escape liability to its creditors for any outstanding obligations.

Question 177

However, a purchaser of corporate assets is ordinarily NOT liable to the corporation’s creditors. The only exceptions are when:

Answer 177

(1) there is a de facto merger;
(2) the transfer is a fraudulent conveyance, made at less than fair market value or with the intent of defrauding the corporation’s creditors; or
(3) the purchaser assumed the corporation’s liabilities.

Question 178

A merger occurs when

Answer 178

one corporation is absorbed into another (“surviving”) corporation; the shareholders of the absorbed corporation exchange their shares either for cash or for stock in the surviving corporation.

Question 179

A consolidation occurs when

Answer 179

two or more corporations combine into a new corporation; the consolidated corporations cease to exist, a new legal entity is created, and all shareholders of the consolidated corporations exchange their stock for shares in the new corporation.

Question 180

Dissolution

Answer 180

Decision by a corporation to cease carrying on its regular business operations.

A dissolved corporation continues its corporate existence, but only for purposes of winding up and liquidating its business affairs.

Question 181

Winding Up and Liquidation

Answer 181

This refers to the process initiated by dissolution.

In winding up and liquidating its business affairs, the corporation pays off its debts and distributes any remaining assets to the shareholders.

Question 182

Termination

Answer 182

This refers to a corporation that has completed the process of winding up and liquidating its business affairs.

Upon termination, the corporation ceases to exist.

Question 183

If a corporation has not yet issued shares or commenced its business, a majority of its incorporators or a majority of its directors can dissolve the corporation by:

Answer 183

filing articles of dissolution with department of state

Question 184

Dissolution by the Directors and Shareholders

Answer 184

Directors may propose dissolution and submit their proposal to shareholders for their approval.

Unless the articles of incorporation or the board of directors provide otherwise, the proposal is adopted upon a majority of all the votes entitled to be cast

Question 185

The shareholder vote must take place at a duly noticed shareholder meeting; in addition to the ordinary notice requirements, the notice must:

Answer 185

(1) be given each shareholder of record whether or not entitled to vote and
(2) include an indication of its purpose or purposes.

Question 186

Dissolution by the Shareholders

Answer 186

A shareholder action to dissolve the corporation is effective, even without action of the board and even absent a meeting of the shareholders, if it is taken by written consent of the shareholders.

Question 187

The written consent must:

Answer 187

(1) describe the action taken;
(2) be dated;
(3) be signed by approving shareholders having the requisite number of votes of each voting group entitled to vote thereon; AND
(4) delivered to the corporation.

Question 188

The requisite minimal number of approving shareholders for any action taken by written consent is:

Answer 188

The minimum number of votes with respect to each voting group that would be necessary to authorize an action taken at a meeting, if all groups and shares entitled to vote on the action were present at the meeting and voted on the matter.

Question 189

Administrative Dissolution

The Department of State may administratively dissolve a corporation upon the following grounds:

Answer 189

(1) the corporation failed to timely file its annual report and timely pay the filing fee;
(2) the corporation has been without a registered agent or registered office for at least 30 days;
(3) the corporation has failed to truthfully and fully respond to interrogatories propounded by the Department of State; OR
(4) the corporation’s period of duration, as stated in its articles, has expired.

Question 190

Sixty days after serving notice on a corporation of the grounds for administrative dissolution…

Answer 190

The Department of State can issue a certificate of dissolution if the corporation has not demonstrated a to the reasonable satisfaction to the department that the grounds never existed or have been corrected

Question 191

Judicial Dissolution

Answer 191

A Florida circuit court may dissolve a corporation in a proceeding that is brought by:

(1) the Department of Legal Affairs,
(2) a shareholder or shareholders, OR
(3) a creditor.

Question 192

In a proceeding by the Department of Legal Affairs, the court may dissolve a corporation if it is established that:

Answer 192

the corporation obtained its articles of incorporation through fraud or has continued to abuse or exceed the authority inferred on it

Question 193

In a proceeding by a shareholder, there can be dissolution by the court if it is established that:

Answer 193

(1) a deadlock among the directors exists that threatens or has caused irreparable injury to the corporation; OR
(2) a deadlock among the shareholders exists and are unable to elect successors to the board of directors.

Question 194

In a proceeding by a shareholder or group of shareholders in a corporation having fewer than 35 shareholders (a close corporation), there can be dissolution by a court if it is established that:

Answer 194

(1) corporation is suffering material injury because its assets are being misapplied or wasted
(2) those in control of the corporation have acted, are acting, or are reasonably expected to act in a manner that is illegal or fraudulent.

Question 195

In a proceeding by a creditor of the corporation, there can be dissolution by a court if it is established that:

Answer 195

(1) corporation is insolvent and
(2) either the corporation has admitted in writing that the creditor’s claim is due or the creditor’s claim has been reduced to judgment and remains unsatisfied.

Question 196

Winding Up and Liquidation

Answer 196

After dissolution, a corporation remains liable for its debts and must wind up all corporate business within a reasonable time.

Question 197

To liquidate, the corporation must:

Answer 197

a. collect its assets;
b. dispose of its properties that will not be distributed in kind to its shareholders; and
c. pay its liabilities to creditors, or make provisions for discharging its liabilities.

Question 198

Once its debts have been paid off, the corporation must:

Answer 198

distribute its remaining assets among shareholders according to their interest

Question 199

Upon the distribution of its remaining assets to shareholders, the winding up process is completed, the corporation is terminated, and its corporate existence…

Answer 199

comes to an end.