Corporations

Question 1

When is a corporation created?

Answer 1

Generally, a corporation is formed when the articles of incorporation are filed with the secretary of state (unless the articles specify a delayed effective date).

Question 2

When is an LLC created?

Answer 2

When the certificate of formation is filed with the secretary of state.

Question 3

What must a certificate of formation include?

Answer 3

1. The name and purpose for which the LLC is organized;
2. The address of the principal place of business;
3. The name and address of the registered agent in the state;
4. The initial capital contributions agreed to be made by all members; AND
5. The number of persons, or classes of members, who will manage the LLC and the names and addresses of the persons or members who will serve as managers

Question 4

Are shareholders of a corporation personally liable for the debts of the corporation?

Answer 4

No

Generally, shareholders of a corporation are NOT personally liable for the debts of the corporation. An exception is available through piercing the corporate veil.

Question 5

^Define

Piercing the Corporate Veil

Answer 5

Courts will allow a creditor to pierce the corporate veil and hold a shareholder personally liable for the debts of a corporation.

Question 6

When is piercing the corporate veil a viable remedy for creditors?

Answer 6

When:

1. The shareholder has dominated the corporation to the extent that the corporation may be considered the shareholder’s alter ego;
2. The shareholder failed to follow corporate formalities;
3. The corporation was undercapitalized;
4. There is fraud or illegality present.

Question 7

^Define

Alter Ego

Answer 7

A shareholder utilizes the corporate form for personal reasons

Question 8

^Define

Undercapitalization

Answer 8

Inadequately funded at its inception to cover debts and prospective liabilities

Question 9

What is Passive Investor Liability?

Answer 9

Once the corporate veil has been pierced, courts generally hold ALL the shareholders liable. However, some courts do not extend liability to passive investors.

Question 10

What are the fiduciary duties of directors and officers of a corporation?

Answer 10

1. Duty of Care
   
   1. Business Judgement Rule
2. Duty of Loyalty
   
   1. Corporate Opportunities Doctrine

Question 11

What do directors and officers owe a corporation under their duty of care?

Answer 11

1. The duty to take reasonable steps to monitor the corporation’s management;
2. The duty to be satisfied that proposals are in the corporation’s best interest;
3. The duty to disclose material information to the board; AND
4. The duty to make reasonably informed decisions.
   
   1. In making such decisions, directors and officers may rely on information from others whom they reasonably believe are reliable.

Question 12

What is the Business Judgment Rule?

Answer 12

In suits alleging that a director or officer violated his duty of care owed to the corporation, courts will apply the business judgment rule where a court will NOT second guess the decisions of a director/officer.

Question 13

Elements of the Business Judgment Rule?

Answer 13

Director/officer’s decisions are made:

1. In good faith;
2. With the care an ordinarily prudent person in a like position would exercise under similar circumstances; AND
3. In a manner, the director/officer reasonably believes to be in the best interests of the corporation.

Question 14

What remedy is available if a director/officer breaches their duty of care?

Answer 14

He may be held personally liable for damages.

Note: A corporation’s article of incorporation may reasonably limit the liability of directors and officers for bad judgment but NOT for bad faith misconduct.

Question 15

What is a director/officer’s duty of loyalty?

Answer 15

The duty to avoid implicating their personal conflicting interests in making business decisions for the corporation.

Question 16

What constitutes a “conflicting interest”?

Answer 16

A director/officer has a conflicting interest in a transaction when the director/officer or a family member either:

1. Is a party to the transaction; OR
2. Has a beneficial financial interest in the transaction of such significance to the director/officer that the interest would reasonably be expected to exert an influence on the director/officer’s judgment if called upon to vote on the transaction.

Question 17

What is a safe harbor for directors/officers for liability of conflicting interests?

Answer 17

They are protected if:

1. Disinterested shareholders approve the conflicting interest transaction;
2. The non-interested members of the board authorize the conflicting interest transaction; OR
3. The transaction, judged according to the circumstances at the time of commitment, is established to have been fair to the corporation.

Question 18

What is the Corporate Opportunities Doctrine?

Answer 18

The Corporate Opportunity Doctrine prohibits directors and officers from usurping business opportunities that rightfully belong to the corporation for their own benefit.

Question 19

What is a derivative claim?

Answer 19

A derivative claim is a lawsuit brought by a shareholder on behalf of the corporation.

Shareholder (Representative of Corp.) v. Director/Officer

Question 20

What is the purpose of a derivative suit?

Answer 20

The shareholder is suing to enforce the corporation’s rights when the corporation has a valid cause of action but has failed to pursue it.

This often happens when the defendant in the suit is someone close to the corporation (e.g., a director or officer).

Question 21

How is a derivative claim initiated?

Answer 21

Generally, a shareholder must make a written demand on the board before commencing a derivative action.

After submitting the written demand, the shareholder must wait 90 days to file the derivative action, UNLESS the board rejects the demand during the 90-day period.

Question 22

What’s the exception to the written demand rule?

Answer 22

Under common law, and in some jurisdictions today, the plaintiff shareholder does NOT have to make a demand on the board if it would be futile to do so (e.g., the board is interested in the transaction being challenged).

Question 23

What is the remedy of a derivative suit?

Answer 23

If a derivative claim is successful, the proceeds go to the corporation, not the shareholder who brought the action.

However, if the award to the corporation benefits the defendants, the court may order that damages be paid directly to the shareholder.

Question 24

What is a direct claim?

Answer 24

• A direct claim is a lawsuit brought by a shareholder to enforce his OWN rights.
• The shareholder must prove actual injury that is NOT solely the result of an injury suffered by the corporation.
• If a direct claim is successful, the proceeds go to the shareholder.

Shareholder X v. Corporation

Question 25

What is a promoter?

Answer 25

A person who procures commitments for capital and instrumentalities on behalf of a corporation that ***will be formed in the future***.

Question 26

When are promoters liable?

Answer 26

As a general rule, promoters are personally liable on **all such contracts** they enter into on behalf of the corporation to be formed.

Question 27

When does promoter liability stop?

Answer 27

Only by **novation** or if the agreement by the parties **expressly indicates** that the promoter is not to be bound. Otherwise, a promotor's liability continues even **after** the corporation is formed, and even if the corporation also becomes liable on the contract by adopting it.

Question 28

Can an individual be an *agent* of a non-existent principal?

Answer 28

No But they could possibly be a *promoter* for a non-existent corporation

Question 29

Are corporations liable for the contracts their promoters enter into?

Answer 29

No

Question 30

How do corporations become liable for contracts their promoters entered into?

Answer 30

If the corporation adopts the contract through either **express** or **implied** conduct

Question 31

What is required for **express** adoption?

Answer 31

**Express,** official action to adopt the contract with **knowledge** of the material facts, such as a resolution by the board of directors

Question 32

What is an **implied adoption**?

Answer 32

Implied adoption requires someone **in authority to accept** the benefits of the contract **with knowledge** of material facts (*e.g.*, by acquiescence or conduct normally constituting estoppel)

Question 33

How do you amend the Articles of Incorporation?

Answer 33

The articles may be amended if there is a **majority** **vote** from the **directors and shareholders**. Note: Minor amendments may be made by the board of directors without shareholder approval.

Question 34

In there is a conflict between the Articles of Incorporation and the Bylaws, who prevails?

Answer 34

Articles of Incorporation govern

Question 35

When is a quorum present?

Answer 35

Unless otherwise set forth in the articles, a quorum exists when at least a majority of the shares **entitled to vote** are present.

Question 36

What is required in order to sell corporate assets?

Answer 36

**Shareholder approval** is required for the corporation to sell, lease, exchange, or otherwise dispose of all, or substantially all, of its property if the disposal is not in the corporation’s usual and regular course of business.

Question 37

What is a *de jure* corporation?

Answer 37

A corporation that has been made in accordance with appropriate laws

Question 38

What is required for the Articles of Incorporation?

Answer 38

A PAIN 1. Authorized number of shares the corporation has to use 2. Purpose and duration 3. Agent (name and address) 4. Incorporators (name and address) 5. Name of the Corporation

Question 39

What are two ways a corporation can still be noticed even though it is not legally recognized?

Answer 39

1. De Facto Incorporation 2. Corporation by Estoppel

Question 40

What is the RMBCA?

Answer 40

The Revised Model Business Corporation Act The majority rule for corporations

Question 41

What's required for a *de facto* corporation?

Answer 41

1. **Colorable, good faith** compliance with most statutory requirements 2. Shareholder/member does not have knowledge that there is a **lack** of incorporation

Question 42

What is required for corporation by estoppel?

Answer 42

A **contractual** situation where parties have acted as if there were a corporation

Question 43

Does a director/officer have the power to bind a corporation in a contract?

Answer 43

Only if they have **actual authority**

Question 44

How does a director/officer have actual authority?

Answer 44

If: 1. Proper notice was given for a directors' **meeting**, a **quorum** was present, **and** a **majority** of the directors approved the action; **or** 2. There was unanimous **written** consent of the directors.

Question 45

What **_must_** happen if a director will benefit from a transaction her corporation is about to enter into?

Answer 45

1. She **must** disclose that information to the board (or to the shareholders) 2. The **disinterested** directors (or the shareholders) must then approve the transaction.

Question 46

What happens if a director does not disclose that they would receive benefits from a transaction?

Answer 46

The transaction can be set aside **unless it is fair** to the corporation. Alternatively, the corporation can recover damages equal to the director's profit

Question 47

What triggers a Corporate Opportunity Doctrine issue?

Answer 47

A director **learns** of a business opportunity that the corporation may be interested in

Question 48

Can a corporation use *ultra vires* as a defense?

Answer 48

No ## Footnote Under modern statutes, the ultra vires defense is very limited and should usually not allow a corporation to get out of a contract merely because the contract is outside the scope of the corporation's stated purposes

Question 49

Under the RMBCA, what is acceptable consideration for a share?

Answer 49

**Any tangible or intangible property** or benefit to the corporation. The RMBCA will also allow **a promise** to convey property in the future

Question 50

Under the RMBCA, what happens if a director sells a stock for under par value?

Answer 50

The shares will probably be treated as validly issued, but the director who authorized the issuance can be held liable for **breach of their fiduciary duty**

Question 51

Do shareholders have the power to run the day-to-day operations of corporations?

Answer 51

No, unless the articles say otherwise