corporations

Question 1

Incorporation

Answer 1

Must file articles of incorporation with the state

name, number o shares authorized to share, address of corporation registered office, name/address of each incorportor

Question 2

Pre-Incorporation Liability

Answer 2

Corporation is generally NOT liable for pre-incorporation

Promoter is

Exception: novation where corporation substitutes promoter in the k

Adoption: corporation takes on benefits of k

Question 3

Promoter

Answer 3

Enter into contracts securing capital to bring corporation into existence

-Personally liable for k entered into pre-incorporation EVEN AFTER corporation comes into existence

Question 4

Purpose listed in Articles of Incorp.

Ultra Vires Act—

Answer 4

—occurs when a corporation has a narrow purpose and acts outside the
scope of that purpose

Shareholder can file suit and take action against office/employee/director who did the act

Question 5

De jure corporation

Answer 5

statutory requirements of incorporation are met

Question 6

Corporation by Estoppel

Answer 6

Corporation by Estoppel—a third party entered into a contract with the corporation as though it was properly incorporated; the third party is estopped from asserting that the corporation was not formed appropriately

(a party would do this so they could get past the limited liability of the corporation and go after ppl personally)

Question 7

De Facto Corporation

Answer 7

Good faith attempt to incorporate but fail 
to incorporate (e.g. improperly filing articles of incorporation) 

De Facto Corporation—attempted to incorporate and ran business believing it was incorporated

Question 8

Issuance of Stock

Answer 8

issued by board of directors

Board of directors must determine whether the value paid for the stock is adequate

Question 9

Par Value Stock

Answer 9

—corporation assigns a minimum value to its stock

 If sold for less than the par value, the board is liable

 Shareholder may also be liable if had knowledge of par value

Question 10

shareholders

Answer 10

Shareholders are only owners and don’t manage the corporation. Shareholders are investors

Have annual meetings
notice 10-60 days in advance

Question 11

Shareholder meetings

Answer 11

• Generally required annually
• primary purpose to elect directors
• also approve fundamental corporate changes (merger, sale of corporation)
• require a quorum; quorum exists when a majority of the shares entitled to vote are present

Question 12

Proxy Voting

Answer 12

written agreement to allow a person to vote on behalf of the shareholder (valid 11 months)

Proxy agreements are freely revocable by the shareholder, even if
the proxy states that it is irrevocable. One exception to this rule is
a proxy coupled with an interest or legal right, which is irrevocable if the proxy expressly states as such

Question 13

Bylaws

Answer 13

Rules and regulations adopted by Board of Directors that govern internal operations of corporation.

Shareholders have power to 1) amend/appeal existing bylaws, 2) create new bylaws, 3) limit board of direct’s ability to change bylaws

Question 14

Directors Responsibilities

Answer 14

1) manage corporation business and affairs and 2) act as a body by voting (can’t proxy vote or vote by agreement block/group)
- need a quorum of directors to vote

Shareholder hire/ fire directors.
w/o cause (modern trend)
with cause – breach of fiduciary duty (common law)

Question 15

Directors Meetings: notice

Answer 15

Notice required ONLY for special meetings

-@ least 2 days before

must include date, time, place (does NOT have to list purpose)

Director who didn’t receive proper notice: director’s attendance waives notice of that meeting unless the director promptly objects to lack of notice.

Question 16

Fiduciary Duties

Answer 16

Duty of care and loyalty

Question 17

Right to sue corporation:

2 avenues

Answer 17

Direct action and derivative action

Question 18

Duty of Care Best Judgment

Answer 18

Business Judgment Rule

A rebuttable presumption that a director reasonably believed his actions were in the best interest of the corporation.

• Protects a director from liability for breaching the duty of care if he acted in good faith

-party claiming breach of duty has burden to show business judg. rule doesn’t apply

Question 19

Right to sue corporation: Direct Action

Answer 19

Suing the corporation for their own benefit (i.e., to remedy a wrong personal to the shareholder)

 Usually arises when the shareholder is denied voting rights, the board failed to declare a dividend, or the board failed to approve or deny a merger

Question 20

Right to sue corporation: Derivative Action

Answer 20

Suing on behalf of the corporation
 Usually against a director or officer

 Any recovery goes to the corporation

Must have:
1. Standing—any person who is a shareholder at the time of the bad act or omission (and at the time the action is filed)

2. Demand upon the board—required to demand action by the board

• Board has 90 days to act before filing derivative action (unless demand is rejected,
or irreparable harm would occur)
• Futility exception—no demand is required if it would be futile

-plaintiff-shareholder may be reimbursed by the corporation if a substantial benefit to the corporation resulted from the litigation.

Question 21

Piercing the Corporate Veil

Answer 21

Shareholders

A shareholder is not personally liable for the liabilities and obligations of a corporation. However, courts may disregard the corporate form and hold individual corporate shareholders, directors, and officers personally liable for actions taken on behalf
of the corporate entity.

1. alter ego
2. undercapitalization of corporation @ time of formation
3. self-dealing with corporation (comingling of funds)
4. Use of corporate assets as a shareholder’s own assets

Question 22

Shareholders’ Fiduciary Duty

Answer 22

“Controlling” shareholders have a duty to not abuse their power to disadvantage minority
shareholders.

o Controlling shareholder—someone who owns more than 50% of a corporation or otherwise
controls voting power

Question 23

Board of Directors:

Duty of Care

Answer 23

Must act as an ordinarily prudent person

a. Includes the duty to investigate and ask questions
b. Can rely on reports and outside experts

Question 24

Board of Directors:
Duty of Loyalty

Safe Harbor Rules

Answer 24

Transaction can be protected if:

o The interested director discloses all material facts to the board of directors and
receives approval by a majority of disinterested board of directors;

o The interested director discloses all material facts to shareholders and receives
approval by a majority of disinterested shareholders; or

o The transaction is fair to the corporation substantively and procedurally

Question 25

Damages for Breached duty of loyalty by director

Answer 25

Transaction can be enjoined or rescinded and the corporation can seek
damages from the interested director

Question 26

Board of Directors:

Duty of Loyalty

Answer 26

Must act in the best interest of the corporation

Violated if the director engages in:
• Self-dealing; or
• Usurping a corporate opportunity

Question 27

Self-Dealing

Answer 27

Engaging in a transaction with the corporation that benefits the director or a close
family member

• Includes transactions with another business entity that the director is associated
with

Remedy: safe Harbor rules

Question 28

Usurping a Corporate Opportunity

Answer 28

Taking an opportunity that the corporation would be interested in without offering
it to the corporation first

• Director must present the opportunity to the corporation first

If the corporation declines the opportunity, the director may take it without
violating the duty of loyalty.

Question 29

Officers

Answer 29

Elected by the board of directors to run day-to-day operations

• Typical officers—president, secretary, and treasurer
• Act as agents of the corporation
duty of loyalty and care

Question 30

Powers of Officers

Answer 30

• An officer can act with actual express authority, actual implied authority, and apparent
authority.

Question 31

Amending Corp’s Articles of Incoporation

Answer 31

Can be amended/changed @ any time

An amendment requires a majority vote from the directors and
shareholder

Board of Directors have the authority to make general minor
amendments to the Articles without shareholder approval.

Question 32

Dissolution of Corporation

Answer 32

A corporation may voluntarily terminate its status.

• Winding Up—corporation exists for the limited purpose of winding up its affairs and liquidating its business
• Order of distribution:

1) Creditors of the corporation
2) Shareholders of stock with preferences in liquidation
3) Other remaining shareholders of stock

Question 33

LLC formation - Limited Liability companies

Answer 33

Formation—requires filing articles of organization

• Members can be individuals or corporations

Question 34

LLC liability

Answer 34

Members are generally not liable for LLC obligations

o Piercing the veil—members can be liable for LLC obligations

Question 35

LLC Fiduciary duties

Answer 35

Members owe fiduciary duties to each other and to the LLC

Question 36

Duty of loyalty

Answer 36

Must account to the LLC for any profit or benefit
 Must refrain from dealing with the LLC on behalf of an adverse interest
 Must refrain from competing with the LLC

Question 37

Members Action (suits)

Answer 37

Direct Action
May bring suit against LLC or other members to enforce the member’s rights

b. Derivative Action
May bring a derivative action on behalf of the LLC against other members (or even against
themselves)

Question 38

LLC Member dissolution

Answer 38

A member can withdraw at any time and for any reason

o Must provide notice (not necessarily written)

Question 39

LLC dissolution of LLC

Answer 39

o Can occur if all members agree, if there are not enough members remaining, or any other
reason stated in the operating agreement

o Involuntary dissolution—a member can ask for a court order to dissolve the LLC

 Must show that a controlling member has acted oppressively and harmed the member
seeking dissolution

o Winding up—must pay off debts to creditors before distributing assets to members

Question 40

Members of LLC authority

Answer 40

Authority—members of a member-managed LLC have authority to bind the LLC

Question 41

Preemptive Rights

Answer 41

A preemptive right is the right of an existing shareholder to maintain her percentage of ownership in the corporation by being
offered the opportunity to purchase shares of the corporation issued for cash before outsiders are permitted to purchase. Under
the RMBCA, shareholders do not enjoy preemptive rights unless such rights are explicitly granted in the corporation’s Articles of
Incorporation.

Question 42

directors voting

Answer 42

Presence—can include phone call so long as the director can hear each other and participate

Question 43

Board of Directors:

action without a meeting

Answer 43

The board of directors may act without holding a meeting by unanimous written consent to the action.

Question 44

Shareholders:

Special Meeting

Answer 44

purpose of which must be specified in the notice of the meeting

Share holders can waive notice 1) attending 2) in writing