Corporations

Question 1

What does an incorporator do?

Answer 1

Executes articles of incorporation and delivers to SoS

Question 2

Can an incorporator be an entity?

Answer 2

Yes

Question 3

What information must be in the articles of incorporation?

Answer 3

1. Corporate name (must include: corp, co, inc, or ltd)
2. Name and address of each incorporator.
3. Name and address of each initial director.
4. Name of registered agent and address of the registered office

Question 4

Articles of Vance Refrigeration, Inc. say the
corporation will “manufacture refrigeration machinery” and the corporation then goes into gold mining. Company enters contracts. What happens with the contracts under both common law and today?

Answer 4

It’s ultra vires activity (beyond scope of articles).

Common law: ultra vires contracts voidable

Today: While Ks valid, shareholders can seek injunction and responsible managers are liable for ultra vires losses.

Question 5

What’s the difference between issued stock and outstanding stock?

Answer 5

Issued stock includes stock that has been repurchased by the company whereas outstanding stock only includes stock currently held by shareholders.

Question 6

What’s a de jure corporation?

Answer 6

Validly formed corporation following Incorporators notarized articles delivered to the SoS with required fees

Question 7

A corporation formed in Rhode Island only does business in Ireland. Does Ireland or Rhode Island law govern the corporation’s internal affairs?

Answer 7

Rhode Island

Question 8

What is the general rule that I need to repeat in every question implicating liability of the directors, officers, or shareholders for what the corporation has done?

Answer 8

Generally, only the corporation itself has liability for its actions.

Question 9

What are the two doctrines under which the shareholders of a corporation that has failed to form de jure will escape partnership treatment (unlimited personal liability)?

Answer 9

1. De Facto Corp. (except for actions by the state, quo warranto). Abolished in RI.
2. Corporation by estoppel.

These two doctrines have been abolished in many states.

Question 10

Incorporators put together the proper documents and mail them to the Secretary of State. Unbeknownst to them, the documents are lost in the mail. In the meantime, the business is being operated as a corporation, and enters a contract. Are the shareholders personally liable on the contract?

Answer 10

Yes, unless the court applies the De Facto Corp. doctrine: (i) where there’s a relevant incorporation statute (ii) the parties made a good faith, colorable attempt to comply with it; and (iii) there’s been some exercise of corporate privileges.

Question 11

You do business with people who hold their business out as a corporation. They think it’s a corporation. You think it’s a corporation. You write checks to the “corporation” and deal with it as a corporation. Turns out it’s not a de jure corporation. You sue the partners individually. Will you win?

Answer 11

No, under the doctrine of corporation by estoppel: in contract matters (but, unlike DFC, not torts), one who treats a business has a corporation may be estopped from denying that it is a corporation.

Here, you are estopped to deny that the business was a corporation because you have treated it as a corporation.

Question 12

When is a corporation liable on contracts entered into by a promoter?

Answer 12

The corporation is not liable on pre-incorporation contracts until (i) there’s a novation or (ii) it adopts the contract either explicitly or impliedly by accepting the benefit of the contract (ratification).

Question 13

What is the liability of the promoter on pre-incorporation contracts it enters into?

Answer 13

Unless the contract clearly says otherwise, the promoter is liable on pre-incorporation contracts until there is a novation. Adoption (ratification) makes the corporation liable too, but does not relieve promoter.

Question 14

Do the issuance of stock rules apply when there’s a sale of stock between existing shareholders?

Answer 14

No

Question 15

On January 10, S signs a subscription, offering to buy 100 shares of C Corp., a corporation not yet formed. A week later, S changes his mind. Can S revoke?

Answer 15

No, the offer is irrevocable for 6 months, unless it says otherwise or all subscribers agree to the revocation

Question 16

On January 10, S signs a subscription, offering to buy 100 shares of C Corp., a corporation formed a week earlier. S later changes his mind. Can S revoke?

Answer 16

Yes, until accepted by the corporation’s board of directors

Question 17

What forms of consideration are acceptable in exchange for an issuance of stock?

Answer 17

Every state agrees that these are permitted: (1) money (cash or check), (2) tangible or intangible property, and (3) services already performed for the corporation.

There is a split of authority over these two other forms: promissory notes and future services (in states that disallow it’s all treated as “water”). RI allows.

Question 18

C Corp. is issuing 10,000 shares of $3 par stock. Could it get more than $30,000?

Answer 18

Yes, however, it must receive at least $30,000 as par is the minimum issue price.

Question 19

When does the Board of Directors (or shareholders in RI) conclusively determine the issue price of the shares?

Answer 19

If (i) made in good faith, (ii) when the shares are issued for no-par or (iii) when issued in exchange for property or past services.

Question 20

C Corp. issues 10,000 shares of $3 par to X for $22,000. The corporation wants to recover the $8,000 of “water.” Who is liable?

Answer 20

1. The directors if they knowingly authorize the issuance

2. X who is charged with notice of the par value and any transferee of X who knew about the water.

Question 21

C Corp. articles provide for pre-emptive rights. You own 20% of the stock of C Corp. C Corp. issues stock to Peggy Olson to purchase property from Peggy. Do you have pre-emptive rights?

Answer 21

No, a preemptive right applies whenever there is a new issuance of stock for money
(cash or its equivalent, like a check). In RI, post 7/1/05, preemptive right must be in AoI.

Question 22

When can shareholders remove a director?

Answer 22

On a majority vote, with or without cause; but if board is staggered its for cause only.

Question 23

How may a Board of Directors act?

Answer 23

Either by unanimous agreement in writing or by resolution at a meeting which satisfies the notice, quorum, and voting requirements. In RI, unanimity required only for significant corporate events; all others AoI may provide from less than unanimity.

Question 24

What are the notice, quorum and voting requirements of the BOD?

Answer 24

Notice: annual meeting and special meetings require notice of time and place, regular meetings don’t; special meetings require purpose of meeting stated (meeting limited to purpose)
Quorum: Majority of all directors to do business; broken if enough leave during meeting.
Voting: majority vote of those present.
Example:, if 9 directors, at least 5 directors must attend the meeting to constitute a quorum; if 5 attend, at least 3 must vote for a
resolution for it to pass.

Question 25

What is the duty of care standard for a director, and who has the burden of proof?

Answer 25

(1) Manage to the best of their ability
(2) in good faith
(3) with the care that an ordinarily prudent person in a like position would exercise under similar circumstances
(4) in a manner that the director reasonably believes to be in the best interests of the corporation.

The burden is on the plaintiff.

Question 26

When will a director be liable for a breach of his duty of care for nonfeasance?

Answer 26

Breach must cause a loss to the corporation

Question 27

When will a director be liable for a breach of his duty of care for misfeasance?

Answer 27

Under the business judgment rule, a court will not upset the presumption that directors acted in good faith and in the best interests of the corporation and second guess directors’ decisions that in hindsight prove poor or erroneous. A director is not a guarantor of success.

Only where the business judgment of the director was not made in good faith, was not informed, or had no rational basis will a court upset the presumption.

Question 28

What is the duty of loyalty standard for a director, and who has the burden of proof?

Answer 28

These are conflict of interest cases. D must act in good faith and with reasonable belief that what D does is in the corporation’s best interest.

Director has burden of proof.

Question 29

Does the business judgment rule apply in duty of loyalty cases?

Answer 29

No, because director has alleged conflict of interest.

Question 30

Martha is a director of XYZ, Inc. She sells sporks to XYZ, Inc. Is this an interested director transaction?

Answer 30

Interested director transaction will be set aside (or the director liable in damages) UNLESS the director shows either: (1) the deal was fair to the corporation when entered, OR (2) her interest and the relevant facts were disclosed or known and the deal was approved by either of these:

(a) majority of disinterested directors
(b) majority of disinterested shares (not shareholders).

Question 31

What are the boundaries of the directors ability to set their own compensation?

Answer 31

Reasonable and in good faith. If excessive, it’s waste of corporate assets, and a breach
of the duty of loyalty.

Question 32

Sharon is a director of Ozzie’s Music Co. She can also serve on the board of directors of Home Depot because it does not compete with Ozzie’s. But can Sharon start her own music company?

Answer 32

Directors must under a duty of loyalty to act in good faith and in reasonable belief that their actions are in the corporation’s best interest. Competing directly with Ozzie’s would be a breach of that duty of loyalty. If Sharon goes into competition, a constructive trust on profits is created which is paid to Ozzie’s.

Question 33

Cheatem is a director of C Realty Corp., which develops condo projects. Cheatem learns of land that has been zoned for condos and buys it for himself as an investment. What are C’s rights, if any, against Cheatem?

Answer 33

Directors must under a duty of loyalty to act in good faith and in reasonable belief that their actions are in the corporation’s best interest. Director cannot USURP a corporate opportunity. Therefore, director cannot take it until he (1) tells the board about it and (2)
waits for the board to reject the opportunity.

Question 34

Within the context of usurping corporate opportunity against a duty of loyalty what is considered a corporate opportunity?

Answer 34

Regardless of company’s financial ability to pay for the opportunity:

1) something in the corporation’s business line
2) something company has business interest or expectancy in
3) found on company time or with company resources.

Question 35

What’s the remedy against a director for usurping a corporate opportunity?

Answer 35

A constructive trust is created to disgorge the opportunity or its value to corporation

Question 36

Can a corporation loan to a director?

Answer 36

Yes if it is reasonably expected to benefit the corporation

Question 37

All board members are responsible equally for ultra vires acts, improper distributions, and improper loans unless they do what?

Answer 37

1. Absent from the meeting in which the resolution was passed
2. dissent or abstention is noted in writing in corporate records
3. Good faith reliance on information presented by officer, employee, committee, or professional reasonably believed competent

Question 38

What duties do officers have to the corporation?

Answer 38

Same as directors: care and loyalty.

Question 39

When is the corporation barred from

indemnifying an officer or director?

Answer 39

If held liable to corporation or held to have received improper personal benefit.

Question 40

When must a corporation indemnify an officer or director?

Answer 40

If she is successful in defending, on the merits or otherwise.

Question 41

Unless indemnification is mandatory or barred from indemnification, when may a corporation exercise its permissive right to indemnify a director or officer?

Answer 41

Where director or officer acted in good faith and with the reasonable belief that her actions were in the company’s best interests (same as duty of loyalty).

Question 42

How is a close corporation created?

Answer 42

Shareholders can run the corporation without a Board provided its stock is not traded on a national exchange and there are “few shareholders” by either:
1) inclusion in the articles of incorporation approved by all shareholders or by
2) unanimous written shareholder agreement.
In either case stock certificates must contain legend of such.

Question 43

Aside from the duty of loyalty and care, shareholders in a close corporation may owe what additional duty?

Answer 43

Partners’ fiduciary duties to each other: to treat each other with utmost good faith. Minority shareholders can sue the controlling
shareholders who oppress them (deny the minority any voice in corporate affairs, fire them from employment, refuse to declare dividends, and refuse to buy the minority’s stock) for breach of this fiduciary duty.

In RI, only closely held family corps.

Question 44

What is the principle advantage of forming as a professional corporation or association?

Answer 44

Shareholders not generally liable for other professionals’ malpractice.

Question 45

X and Y are the only shareholders of C Corp. X commingles personal and corporate
funds, uses the corporate car as his own, and uses the corporate credit card to pay for
personal purchases. C Corp fails to pay its bills. Can a creditor of the corporation who has been unable to collect its claim from the
corporation collect from either X or Y?

Answer 45

Generally, shareholders are not liable for acts or debts of corporation. However, a plaintiff can pierce the corporate veil where shareholders of a close corporation abused the privilege of incorporating and fairness must require holding them liable. Here X treated corporate assets has his own and a court may find X libel (but not Y) under the theory of PCV.

Question 46

S is a shareholder of Glowco, Inc., a corporation that hauls and disposes of nuclear waste. Glowco does not carry insurance. Glowco has an initial capitalization of $1,000. V is injured when one of Glowco’s trucks melts down. Can V sue S?

Answer 46

Generally, shareholders are not liable for acts or debts of corporation. However, a plaintiff can pierce the corporate veil where shareholders of a close corporation abused the privilege of incorporating and fairness must require holding them liable. Here, abuse of corporate form may be found because corporation was undercapitalized when formed. Courts may be more willing to PCV for a tort victim than for a contract claimant. Shareholders failed to invest enough to cover perspective liabilities.

Question 47

S sues board of directors of C Corp. for issuing new stock without honoring her
preemptive rights. Is this a derivative suit?

Answer 47

No. In a derivative suit, a shareholder is suing to enforce the corporation’s claim, not her own personal claim. This is a personal claim because corporation could not have brought the suit itself, such as where there’s been a breach of duties of care or loyalty.

Question 48

What are the requirements for bringing a shareholder derivative suit?

Answer 48

1. Stock ownership (including by operation of law) when the claim arose and throughout the suit.
2. Adequate representation of corporation’s interest
3. Written demand on corporation, unless it would be futile

Question 49

C Corp. sets its annual meeting for July 7 and record date for June 8. S sells B
her C Corp. stock on June 25. Who is entitled to vote the shares at the meeting,
S or B?

Answer 49

General rule: the “record shareholder” as of the “record date” has the right to vote. S may vote because owned on June 8.

Question 50

What is a proxy?

Answer 50

(i) writing (fax and e-mail are OK),
(ii) signed by record shareholder (e-mail OK if can identify sender),
(iii) directed to secretary of corporation,
(iv) authorizing another to vote the shares.

Question 51

On February 2, 2014, S sends a letter to secretary of C Corp. authorizing Don Draper to vote her shares. Can Don vote S’s shares at the 2015 annual meeting in July 2015?

Answer 51

No, proxy good for 11 months unless stated otherwise.

Question 52

Can a proxy be revoked even though it states that it is irrevocable?

Answer 52

Yes unless it is a “proxy coupled with an interest.” This requires (1) the proxy says it’s irrevocable and (2) the proxy-holder has some interest in the shares other than voting. E.g., A gives B an option to buy A’s stock. A gives B an “irrevocable proxy”
to vote that stock at a meeting.

Question 53

What are the Requirements for voting trust?

Answer 53

(10-year maximum.)
1) Written trust, controlling how the shares will be voted;
2) Copy to the corporation;
3) Transfer legal title to the voting trustee;
4) Original shareholders receive trust certificates and retain all
shareholder rights except for voting

Question 54

What are the Requirements for voting (“pooling”) agreement?

Answer 54

In writing and signed by parties.

Question 55

What are the consequences if the notice, quorum and voting requirements of shareholder voting are not met?

Answer 55

Action taken at a meeting this void unless waves expressly or impliedly by attendance in meeting without objection.

Question 56

What are the quorum rules for shareholder votes?

Answer 56

Majority of number of shares (not shareholders); quorum not lost if shareholders leave meeting

Question 57

How many votes must be cast by shareholders to pass a resolution?

Answer 57

Majority of votes actually cast; not necessarily majority of all shares present

Question 58

You own 1,000 shares of stock in C Corp. C Corp. has three directorships open for election. You believe that Napoleon Dynamite should be director of C Corp. How many votes can you cast for Napoleon?

Answer 58

If cumulative voting provided in articles of incorporation, 3000

Question 59

Can restriction on transfer of stock be enforced against improper transferee?

Answer 59

Yes if (a) the restriction is conspicuously noted on the stock certificate or (b) the transferee had actual knowledge of the restriction.

Question 60

Which funds can be used for a distribution?

Answer 60

1. earned surplus (earnings minus all losses minus distributions previously paid)
2. if shareholders are informed, Capital surplus (excess of issuance consideration in excess of par). In RI, no portion of issuance consideration representing liquidation preference may be allocated to capital surplus.

Stated capital never can be used

Modern view: corporation cannot make
a distribution if it is insolvent or if the distribution would render it insolvent.

Question 61

What is a dissenting shareholder right of appraisal?

Answer 61

Right to force close corporation to buy stock for its value that may be asserted if corp is:

1) merging or consolidating;
2) transferring substantially all assets not in the ordinary course of business; or
3) transferring its stock in a share exchange.

Question 62

How is a dissenting shareholder right of appraisal perfected?

Answer 62

1) before shareholder vote, file with the corporation written notice of objection and intent to demand payment;
2) Abstain or vote against the proposed change; and
3) After the vote, within time set by corporation, make written demand to be bought out and deposit stock with the corporation.

Question 63

When can a shareholder can petition the court for involuntary dissolution? Creditor?

Answer 63

a. Director abuse, waste of assets, misconduct;
b. Director deadlock that harms the corporation; or
c. Shareholders have failed at consecutive annual meetings to fill a board vacancy

Insolvent and there’s unsatisfied judgment or corporation admits the debt in writing.

Question 64

What’s a liquidation preference?

Answer 64

A shareholder right memorialized in the articles held by a particular class of shares to be paid upon liquidation (like a dividend preference). In RI, no portion of issuance consideration representing liquidation preference may be allocated to capital surplus.

Question 65

What is rule 10B5 generally?

Answer 65

a federal law that prohibits fraud or misrepresentation (or nondisclosure) in connection with the purchase or sale of any security (debt or equity).

Question 66

What are the elements of a 10B5 claim?

Answer 66

1. Use of instrumentality of interstate commerce to
2. Intentionally or recklessly deceive or manipulate
3. (a) misrepresent material information (b) trade securities on the basis of inside information; or (c) pass material inside information for a wrongful purpose
4. Concerning a fact that a reasonable investor would consider important in making an investment decision (“material”)

Question 67

Corp. issues a press release that Buffett has expressed an interest in acquiring a major block of its stock. It fails to indicate that it is Jimmy Buffett and not Warren Buffett who is interested. Because of this press release, Becky does not sell her Corp. stock. Does Becky have a 10b-5 claim?

Answer 67

No, permissible plaintiffs in a 10B5 action are the SEC or between an actual buyer or seller. Here because Becky didn’t sell or buy, she’s not a permissible plaintiff

Question 68

D is a director of C Corp. While waiting for a concert to start, D tells her husband about a new, secret processing method that C Corp. has just developed. Bobbitt, who is sitting in the next row, overhears the conversation and buys C Corp. stock on a national exchange. Any violations of 10b-5?

Answer 68

NO. At worst, D was merely negligent, which is not enough for 10b-5 liability. So there is no tipper. AND IN 10B-5, WHEN THERE IS NO TIPPER, THERE CANNOT BE A TIPPEE.

Question 69

What does section 16B provide generally?

Answer 69

recovery by the corporation of “profits” gained by certain insiders from buying and selling the company’s stock.

Question 70

What are the elements of a 16 B cause of action?

Answer 70

1. A publicly traded corporation whose
2. (a) Director (either when she bought OR sold) (b) Officer (either when she bought OR sold) or (c) Shareholder who owns more than 10 percent (both when she bought AND
   sold)
3. Where the buying and selling of stock occurred within a single six-month period

***No fraud or inside info needed.

Question 71

D is a director of Acme, Inc., which is a reporting company. In 2010, D bought 700 shares of Acme stock for $10 a share. In January 2014, D sold 700 shares for $6 a share. In March 2014, D bought 200 Acme shares for $1 a share. What result?

Answer 71

$1000 “profits” recoverable by the corporation.
Focus on the sale: because six months after sale, there was a purchase at less ($1) than the $6 prior sales price, there is a “profit.” Multiply $5 profit times 200 shares because that’s the largest number of shares that both were bought and sold within six months.

Question 72

May a corporation lend money to its employees?

Answer 72

Yes, in RI.

Question 73

Concerning a fraud in issuance of stock, when must a civil suit be brought in RI?

Answer 73

Earliest of: 1 yr after actual discovery of fraud or when fraud should have been discovered AND three years after fraudulent act.

Question 74

When is the record date in RI?

Answer 74

Not more than 60 days before shareholders meeting or 20 days before meeting concerning merger or consolidation.

Question 75

When a question asks about actions of the directors what should I mention?

Answer 75

Directors are vested with the power to manage the business and affairs of the corporation.
Directors may act on this power by a majority vote at a meeting at which a quorum of directors are present.