Corporations

Question 1

record date

Answer 1

o Used to determine which shareholders are eligible to vote
o The directors must fix a record date.
o Must be no fewer than 10 days before the meeting and no more than 70 days before the meeting
o ONLY shareholders who actually own shares on the record date are entitled to vote.

Question 2

What changes require approval of both shareholders and BoD?

Answer 2

Fundamental Changes:

• merger and consolidation
• dissolution (voluntary)

Question 3

Reqs for derivative suit

Answer 3

1. standing: must maintain contemporaneous stock ownership (starting at the time of the harm)
2. Demand: first demand that the board of directors bring the lawsuit in the corporation’s name before the shareholder can bring the suit UNLESS DEMAND FUTILITY (directors named as ∆s)

Question 4

dissenter’s rights

Answer 4

If a shareholder does not wish to participate in a duly authorized merger, asset sale, share exchange, or amendment of the articles, the shareholder is entitled to dissenters’ or appraisal rights.

Entitled to have their shares purchased from them by the corporation at a fair value determined by the court.

Procedural Requirements: To invoke dissenters’ rights..

(a) The shareholder must send written notice to the corporation prior to the vote of her intent to dissent;
(b) At the meeting, the shareholder must abstain or vote no (dissent) at the meeting; and
(c) The shareholder must make prompt written demand for fair market value after the action has been approved.

Fair Market Value Determination: If the shareholder and the corporation disagree as to fair market value, a court can appoint an expert appraiser to issue a binding appraisal of the value.

Question 5

A self-interested transaction may be upheld if it is disclosed and ratified by:

Answer 5

1. A majority of disinterested directors; or

2. A majority of disinterested shareholders.

Question 6

process for fundamental changes

Answer 6

• The board must adopt a resolution proposing the change;
• written notice must be sent to the shareholders of the special meeting; and
• A majority of the shareholders casting a vote
must vote in favor of the fundamental change.

Question 7

LLC characteristics

Answer 7

o The LLC combines the limited liability of corporations with the tax treatment of a partnership.
o Generally no limitations on the number of shareholders, no residency requirements, and no natural person requirements (more flexible than an S Corp).
o An LLC files articles of organization and an operating agreement with the state.
o The owners are called members, rather
than shareholders.
o An LLC is presumed to be managed by ALL of its members.

Question 8

Factors in deciding whether to pierce the veil

Answer 8

1. alter ego: the investor or shareholder has failed to observe any corporate formalities between the person and the corporation - treated the company just like itself;
2. undercapitalization: failure to maintain funds sufficient to cover foreseeable liabilities
3. fraud: the parties engaged in fraud or fraud-like behavior.

Question 9

Who is liable for pre-incorporation agreements?

Answer 9

not corporation, generally.

Promotors generally liable

exception: novation

Question 10

S Corporation

Answer 10

• An S Corp is really just a corporation for state corporate law purposes, but it gets special treatment for tax purposes.
• Only taxed once, like a partnership
• NOT taxed at entity level - allows “pass-through” taxation
• S Corp is limited in the number of shareholders they may have.

Question 11

Who is a Controlling Shareholder?

Answer 11

o Easy case - those who own 50% plus one, or more

o Less than 50% plus one - look to the nature of the ownership of the company

Question 12

de facto corporation

Answer 12

Rule-Corporation will still be treated as a corporation, w/ limited liability if the organizers:

1. Made a good faith effort to comply with the incorporation process; and
2. have no actual knowledge of a defect in the corporate status

Question 13

To be legally effective, a proxy must be:

Answer 13

1. In writing;
2. Signed by the shareholder as of the record date
3. Sent to the secretary of the corporation;
4. State that it authorizes another to vote the shareholder’s shares; and
5. Cannot be valid for more than 11 months, unless otherwise specified.

Question 14

Indemnification

Answer 14

The practice of corporations paying for the costs of a director’s or officer’s defense in litigation, usually by purchasing insurance.

Required or Mandatory Indemnification
The corporation is ALWAYS required to pay the costs of defense if the director or officer successfully defends the case.

Prohibited Indemnification
The corporation CANNOT indemnify a director or officer who is liable for receiving an improper benefit from the corporation or otherwise loses a lawsuit.

Permissive Indemnification
The corporation may, but is NOT required, to indemnify a director or officer for the costs of a suit if the director or officer:
(a) Acted in good faith with no intent to harm the corporation; or
(b) Had no reasonable cause to believe the conduct was illegal.

Question 15

removal/replacement of directors

Answer 15

o Shareholders may remove directors with or without cause.
o There is an important exception: Staggered Board:
• May only be removed for cause, only if the articles provide; and
• Different classes of shareholders may elect different directors—only directors elected by a particular class may be removed by that class.

Question 16

Types of Shares

Answer 16

1. authorized shares (total # allowed)
2. issued shares (# that have actually been sold)
3. outstanding shares (still remain in possession of shareholders)
4. treasury shares (Stock previously issued to shareholders, but then reacquired by the corporation.)

outstanding + treasury = issued

Question 17

timing of incorporation

Answer 17

o Moment of incorporation is when limited liability begins.

o Rule: When the Secretary of State accepts your fee and files the articles, the corporate existence begins.

Question 18

who may appoint a director in the event of a vacancy or the size of the board has increased?

Answer 18

shareholders at special meeting or BoD

Question 19

what must the articles of incorporation include?

Answer 19

1. The name of the corporation, which must include: “Corporation,” “Company,” “Incorporated,” “Limited”, or an abbreviation of these words;
2. The agent of the corporation (name and address within the state of incorporation);
3. The names and addresses of the incorporators;
4. The duration of the corporation (most are
   perpetual) ;
5. The purpose of the corporation (usually stated as “to engage in any lawful activity.”); and
6. Authorized shares

Question 20

general rule for duty of loyalty

Answer 20

May not receive an unfair benefit to the detriment of the corporation without effective disclosure and ratification

Question 21

meetings (special and annual) notice reqs

Answer 21

Shareholders must be given notice of either type of meeting (annual or special) no fewer than 10 days, but no more than 60 days, before the meeting.

Must include the time, date, and location of the meeting.

Special meetings must include the purpose of the meeting

Insufficient notice can allow a shareholder to challenge actions taken at the meeting.

Waiver of notice: notice can be waived by
attending the meeting

Question 22

Board CANNOT declare dividends under what circumstances?

Answer 22

1. If the corporation is insolvent (owes more than it has); or
2. If, by issuing the dividend, the corporation would become insolvent.

Question 23

watered stock

Answer 23

The corporation sets a par value amount and sells the stock for less than the stated amount.

shareholders who bought the below par value stock (watered stock) are liable to the creditors of the corporation.

Question 24

Differences of a close corp (compared to normal corp)

Answer 24

o Shareholders are often also directors and officers.
o Typically NOT publicly traded
o Relaxation of rigid rules for corporations - hard to get out due to a lack of market to sell the
shares.
o Can form voting agreements

Question 25

one way action be taken w/o a meeting

Answer 25

All shareholders may take any action without a meeting by unanimous written consent.

Question 26

voting reqs at BoD meeting

Answer 26

1. Quorum
   A majority of the total number of the directors, unless the bylaws specify a higher or lower number.
2. Affirmative Vote
   As long as a quorum is present, a resolution of the board will pass upon a majority vote of those who were present.
3. Unanimous Written Consent
   The board may approve a proposal and avoid a meeting if agreed upon by unanimous written consent.

Question 27

ways to violate duty of loyalty

Answer 27

self-dealing transactions

Corporate Opportunity Doctrine

Question 28

acts beyond the powers (purpose) of the corporation

Answer 28

ultra vires

unenforceable

shareholder or state can sue to enjoin an ultra vires action.

Question 29

To avoid potential liability for a board decision with which a director disagreed, the director must dissent by:

Answer 29

o Entering dissent in the minutes of th emeeting;
o File written dissent before the meeting is adjourned; or
o Provide written dissent by certified or registered mail to the corporation’s secretary immediately following the adjournment of the meeting.

Question 30

stock subscriptions

Answer 30

Ask people to agree in advance to buy stock - before the corporation is formed.

prior to incorporation, subscriptions are irrevocable for 6 months

Question 31

Cumulative Voting

Answer 31

o Applies only to the election of directors
o Protects shareholders’ right to elect directors
o Corporations can choose to permit cumulative voting in the articles.
o Shareholders are given a number of votes that is equal to the number of shares they have, multiplied by the number of director positions being voted on.
o Votes can be spread around or put on one director.

Question 32

what happens if BoD authorizes an unlawful dividend

Answer 32

Directors who vote to authorize an unlawful dividend are personally liable jointly and severally, to the corporation for the amount in excess of the lawful amount.

Question 33

shareholder inspection rights

Answer 33

Must be a shareholder and have a proper purpose - related to the shareholder’s financial interest in the corporation (not to harass)

Question 34

When might a majority shareholder owe a duty to other shareholders

Answer 34

1. Sale of Stock to an Outsider/Looter: may be liable for damages caused to other shareholders when the controlling shareholder sells stock to an outsider if the stock was sold to an outsider intent on looting or destroying the company.
2. Controlling Shareholder Transacts with the Corporation: A controlling shareholder who receives a special distribution or otherwise conducts major business transactions to his own benefit owes a duty of loyalty.

Question 35

What is needed for a vote to be effective

Answer 35

quorum (majority of the outstanding shares) of the corporation’s shares (not shareholders) must be represented at the START of the meeting

if a quorum is present, vote is effective if the votes for exceed the votes against