Corporations

Question 1

When does a Corporation’s existence begin?

On the date the Articles of Incorporation areproperly filed with the Secretary of State (unless a delayed date is specified).

*An earlier date CANNOT be specified.

Answer 1

On the date the Articles of Incorporation are properly filed with the Secretary of State (unless a delayed date is specified).

*An earlier date CANNOT be specified.

Question 2

What must the Articles of Incorporation contain?

Answer 2

They must contain:

1) The corporate name;
2) The number of shares the corporation is authorized to

issue;

3) The address of the corporation’s initial registered office

and the name of its initial registered agent; AND

4) The name and address of each incorporator.

Question 3

What is a de jure corporation, and when is it formed?

Answer 3

It is a legally formed corporation, and is formed when the Articles of Incorporation are filed with the Secretary of State.

Question 4

Can a corporation that is NOT a de jure corporation enter into contracts?

Answer 4

No.

In such an instance, personal liability of the owners/promoters will result (unless De Facto Corporation or Corporation by Estoppel applies.)

Question 5

When does a de facto corporation arise?

Answer 5

When the entity:

1) Made a good faith attempt to incorporate;
2) Is otherwise eligible to incorporate; AND
3) Took some action indicating that it considered itself a

corporation.

Question 6

Who may assert the de facto corporation doctrine?

Answer 6

Only a person who was unaware that the corporation was not properly formed.

Question 7

What is the doctrine of Corporation by Estoppel, and who does it apply to?

Answer 7

When any person/entity treated a business as a corp., they may be estopped from denying that the business is a corporation (even if a valid corp. was NOT formed)

It applies to both:
a) 3rd parties that treated the business as a corp; AND

b) An entity that held itself out as a corporation and benefited from that claim.

Question 8

What is a Promoter?

Answer 8

A person who acts on behalf of a corporation that has not yet been formed.

Question 9

When does a Promoter have personal liability, and what are the TWO exceptions to this?

Answer 9

Upon entering any pre-incorporation contracts, EVEN IF the corporation subsequently adopts the contract.

Two exceptions are:

1) There is a subsequent novation; OR
2) The contract explicitly provides that the promoter has no personal liability on the contract.

Question 10

When is a Corporation liable on pre-incorporation contracts entered into by a Promoter?

Answer 10

When the corporation expressly or impliedly adopts the contract post-incorporation.

• *Expressly** = through board resolution.
• *Impliedly** = corp. knows the material terms and accepts/retains the benefits.

Question 11

When are a Corporation’s activities deemed ultra vires?

Answer 11

When a corporation’s activities are outside of the scope of the stated corporate purpose.

Question 12

Ultra Vires acts under:

Common Law

vs.

RMBCA

Answer 12

Common Law = deemed void and unenforceable.

RMBCA = generally valid and enforceable (those who approved the transaction can be held personally liable).

Question 13

A court will Pierce the Corporate Veil, and hold the shareholders personally liable in what situations?

Answer 13

1) The corporation is acting as the alter ego of the shareholders (little or no separation between the shareholder and corporation);
2) Where the shareholders failed to follow corporate formalities;
3) The corporation was inadequately capitalized at its inception

to cover debts/liabilities; OR

4) To prevent fraud.

*Even if a court doesn’t pierce the veil, a person is ALWAYS liablefor their own torts.

Question 14

What do shareholders in a Close-Corporation owe the other shareholders?

Answer 14

The duty of loyalty and good faith, and will be liable for any damages resulting from a breach of these duties.

Question 15

What is watered stock?

Answer 15

Stock that is issued at a price that is greater than its actual market value.

Question 16

Who has the power to issue dividends and make distributions in a corporation?

Answer 16

Only the Board of Directors have the power to issue dividends/distributions.

*Once declared, the SH has a legal right to that distribution.

Question 17

A shareholder DOES NOT have the right to compel a corporation to issue a distribution, but when may acourt interfere with the board’s discretion?

Answer 17

They WILL interfere and order a distribution upon a showing of:

1) Bad faith or dishonest purpose; AND
2) That funds were available for the dividend/distribution.

Question 18

A shareholder may vote shares at a meeting without physically attending through use of a proxy.

What is required for a valid proxy?

Answer 18

It must be signed on:

a) An appointment form; OR
b) An electronic transmission.

(oral proxy is invalid)

A proxy must be accepted by the corp. if on its face there are no reasonable grounds to deny its genuineness and authenticity.

Question 19

Are proxy agreements freely revocable by the shareholder?

Answer 19

YES, 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.

*A proxy is only valid for 11 months (unless it states otherwise).

Question 20

What is a Shareholder Voting Agreement?

Answer 20

An agreement (with no durational limit) providing how shareholders will vote their shares. It is specifically enforceable and must be in writing and signed by all parties.

*CANNOT remove the shareholder’s right to elect or remove directors.

Question 21

How is a voting trust different from a voting agreement?

Answer 21

A voting trust is more formal. It can only last for 10 years and requires:

1) Legal ownership of the shares to be transferred to the trust; AND
2) The shareholders provide the trust agreement to the Secretary of the corporation.

Question 22

When can the Board of Directors act or vote?

Answer 22

A quorum must be present at the time when the vote is being taken.

Quorum = a majority of the Board of Directors unless otherwise stated in the Articles of Incorporation (however at minimum one third must be present).

Question 23

The Board of Directors is allowed to determine the compensation of Directors and Officers.

What duty do they have concerning this?

Answer 23

A duty to set compensation in accordance with reasonable parameters, taking into account the needs of the corporation and ensuring they don’t waste assets.

Question 24

How may a Director be removed from the Board of Directors?

Answer 24

By a vote of the majority of shareholders for or without cause (unless stated otherwise in the Articles of Incorporation).

Question 25

When can an Officer be removed from their position in the corporation?

Answer 25

At ANY time, with or without cause, by:

a) The Board of Directors;
b) The Officer who appointed such officer; OR
c) By any other Officer (if authorized).

*Removal does NOT affect their contract rights.

Question 26

What is an Officer’s actual or apparent authority?

Answer 26

Actual authority: to act consistently with their duties as outlined by the bylaws OR as provided by the Board of Directors.

Apparent authority: to bind the corporation when a third-party reasonably believes the officer has authority to act on behalf of the corporation AND that belief is traceable to the corporation’s manifestations.

Question 27

What is the implied authority of the President of a corporation?

Answer 27

He has the implied authority to bind the corporation for matters within its ordinary course of business (normal and necessary for managing the business),

BUT does not have authority to bind the corporation for extraordinary acts.

Question 29

What is a Director’s duty of care to the corporation?

Answer 29

They must discharge their duties:

1) In good faith;
2) In a manner they reasonably believe to be in the best

interest of the corporation; AND

3) With the care that a person in a like position would

reasonably believe appropriate under similar circumstances.

*If duty is breached, they will be liable.

Question 30

May a Director rely on the advice of advisors?

Answer 30

Yes, when such reliance was reasonable AND the advisor or committee was qualified to provide such advice.

*Directors must be reasonably informed on the decisions that they make, and can be held liable for breach of this duty.

Question 31

What does the Duty of Loyalty require of a Director/Officer?

Answer 31

That in his dealings with the corporation, he must act in the best interests of the corporation AND without personal conflict.

Question 32

What does the Duty of Loyalty forbid a Director/Officer from doing?

Answer 32

A Director is forbidden from:

a) Entering into conflicting interest transactions;
b) Usurping a corporate opportunity;
c) Competing with the corporation; OR
d) Trading on inside information.

Question 33

When is a conflicting interest transaction NOT a breach of loyalty?

Answer 33

When a director shows that:

a) It was approved by a majority of disinterested directors after full disclosure of all material facts;
b) It was approved by a majority of disinterested shareholders after full disclosure of all material facts; OR
c) The transaction as a whole was fair to the corporation at the time it was entered into.

Question 34

When does a conflict of interest arise?

Answer 34

When the Director or a family member either:

a) Is a party to the transaction;
b) Has a beneficial interest in the transaction or is so closely linked to it that the director’s judgment may be affected;

OR

c) Is involved with another entity that is conducting business with the corporation and that transaction would normally be brought before the Board because of its importance.

Question 35

What is a corporate opportunity?

Answer 35

Any opportunity that the corporation has an interest/expectancy in;

OR

Any opportunity that’s in the corporation’s line of business.

Question 36

When may a Director/Officer pursue a corporate opportunity?

Answer 36

If he:

1) First presents it to the corporation’s Board of Directors;

AND

2) The Board decides NOT to pursue the opportunity.

*It is not a defense to show that the corporation would not have been able to take the opportunity.

Question 37

Direct Action

vs.

Derivative Action

Answer 37

Direct Action: Involves an injury or breach of duty owed to the shareholder of a corporation. Damages are awarded directly to the shareholder.

Derivative Action: A shareholder is suing to enforce the corporation’s claim, NOT his own personal claim. Damages awarded will be paid to the corporation.

Question 38

What are the requirements to commence a Derivative Suit?

Answer 38

The plaintiff-shareholder must:

1) Be a shareholder at the time of the act/omission OR became a shareholder by operation of law from such a shareholder;
2) Be a shareholder through entry of judgment;
3) Fairly and adequately represent the interests of the

corporation; AND

4) Make a written demand upon the corporation to take

suitable action (suit can’t commence until 90 days after).

Question 39

What is needed for a Fundamental Change to be approved?

Answer 39

It must be approved by a majority of the total votes entitled to be cast for the corporation, NOT just the majority of votes present at the meeting.

*A corp. MUST hold a special meeting when a fundamental change is proposed, with notice mailed to all shareholders.

Question 40

What does Rule 10b-5 prohibit?

Answer 40

The use of any means or instrumentality of interstate commerce in any scheme to defraud, make material misrepresentations or omissions, or in any other way use fraud in the purchase and/or sale of securities.

Question 41

What are the elements of a Rule 10b-5 claim?

Answer 41

That the defendant:

1) Engaged in a fraudulent scheme or device;
2) That was relied upon;
3) In connection with the purchase/sale of securities;
4) Acted with scienter;
5) Used some means of interstate commerce; AND
6) Caused damages.

Question 42

What does a fraudulent scheme or device include?

Answer 42

It includes:

a) Misrepresentation of material facts;
b) Insider trading; OR
c) Tipping.

Question 43

What is an “insider”?

Answer 43

A person that discloses non-public information that a reasonable trader would want to know before buying/selling stock OR abstaining from trading.

Question 44

What does Section 16(b) require of a director, shareholder, or officer?

Answer 44

That if they own more than 10% of a corporation, they must surrender any profit realized to the corporation from the sale or purchase of equity securities within a 6 month period when the corporation:

a) Is publicly traded; OR
b) Has more than 10 million in assets and at least 2,000 shareholders.

Question 45

Upon Dissolution, in what order are corporate assets distributed?

Answer 45

1) Outside creditors
2) Inside creditors
3) Shareholders

Question 46

Under the Deep Rock Doctrine, when will the claims of shareholders (who make a loan to the corporation) be subordinated to the claims of outside creditors?

Answer 46

If the corporation:

a) was undercapitalized; OR
b) the shareholder acted wrongly.