Corporations

Question 1

Corporations: Organization of Maryland Corporation What information must be in the charter?

Answer 1

1. Names of: corporation [with one of the magic words], incorporator, resident agent 2. Address of corporation, incorporator and resident agent 3. Number of Directors and their names and adresses 4. Statement of Purpose —Engage in all lawful activity —Watch out for ultra vires actions 5. Capital structure —Must include: authorized stock, number of shares per class, and information on voting rights and preferences

Question 1

Corporations: Stockholders Who votes during SH voting?

Answer 1

The record holder (person shown in the corporate records) as of the record date (vote eligibility cut off). EXCEPTIONS: If corporation reacquires stock before the record date, this stock does not vote. Also, after death of a SH, the SH’s executor can vote her/his shares.

Question 2

Corporations: Stockholders What are Distributions?

Answer 2

Payments by the corp to shareholders. Can include dividends, repurchases of shareholder’s stock, or redemption of stock. Board decides when to make a distribution. Distributions can be made even if it lost $ last year, but cannot make distribution if insolvent or if the distribution would render it insolvent. Directors can be personally liable for unlawful distributions if made knowingly or in breach of duty.

Question 3

Corporations: Issuance of Stock

What can you use to buy stock?

Answer 3

1) Money 2) Tangible or intangible property 3) Services already performed for the corporation 4) Obligation for future payment of money (note) 5) Contract for future services

Question 3

Corporations: Directors and Officers Quorum for meetings

Answer 3

Must have a majority of all directors to do business, however passing a resolution requires only a majority vote of those PRESENT

Question 3

Corporations: Fundamental Corporate Changes Voluntary Dissolution

Answer 3

BOD action and approval by 2/3 of the shares entitled to vote. File notice of intent to dissolve w/ SDAT. Corp stays in existence to wind up. Notify creditors so they can make claims.

Question 4

Corporations: Six fact patterns

Answer 4

1. Organization of a corporation 2. Issuance of stock 3. Directors and Officers 4. Shareholders 5. Fundamental corporate changes 6. Controlling shareholder and related issues

Question 4

Corporations: Organization of Maryland Corporation First action the board must take upon becoming a de jure corporation?

Answer 4

Hold an organizational meeting, where it: (1) selects officers (2) adopts bylaws, and (3) conducts other appropriate business

Question 4

Corporations: Special Facts

Answer 4

Officers and Directors can be sued for failure to disclose “special facts” (common law insider trading)

Question 5

Corporations: Issuance of Stock What are pre-emptive rights?

Answer 5

The right of an existing stockholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock FOR MONEY MUST BE IN THE CHARTER

Question 5

Corporations: Directors and Officers Can the corp eliminate the liability of officers and directors?

Answer 5

Yes, via the charter, but only for damages.

Question 6

Corporations: Directors and Officers Who selects and removes officers?

Answer 6

The BOD. SH’s hire and fire directors, but directors hire and fire officers. WATCH FOR TRICKS HERE!

Question 6

Corporations: Stockholders How are voting trusts accomplished by SH’s?

Answer 6

1. Written trust agreements controlling how the shares will be voted; 2. Transfer of legal title of shares to voting trustee; 3. Transfer of legal title is recorded with corporation; 4. Original SH’s receive trust certificates and retain all SH rights except for voting Voting/pooling agreements may or may not be enforceable in MD. K required.

Question 7

Corporations: Directors and Officers How can the business judgment rule impact the liability of directors for malfeasance?

Answer 7

A court will not second-guess the business decision of a BOD if it was made in good faith, was informed, and had a rational basis. “Directors are not guarantors of success!”

Question 7

Corporations: Stockholders What must occur for a court to pierce the corporate veil and hold SH’s personally liable?

Answer 7

1. They must have abused the privilege of incorporating, and 2. Fairness must require holding them liable.

Question 7

Corporations: Fundamental Corporate Changes How do you perfect the shareholder right of appraisal?

Answer 7

1. Before shareholder vote, file w/ corp a written notice of objection and intent to demand payment; 2. Abstain or vote against the proposed change; AND 3. W/in 20 days after the corp files w/ SDAT, make a written demand to be bought out and deposit stock w/ the corp. If shareholder doesn’t receive payment in 50 days can sue.

Question 8

Corporations: Organization of Maryland Corporation What are the characteristics of bylaws?

Answer 8

Use them for internal governance of the corporation Initially adopted by the Board at the organizational meeting and can only amend them if the charter says they can; otherwise only the shareholders may amend them Charter always overrules the bylaws if there is a conflict

Question 9

Corporations: Stockholders How does a SH make a proxy irrevocable?

Answer 9

Proxy stating it’s irrevocable + proxyholder has some interest in the shares other than just voting.

Question 10

Corporations: Organization of Maryland Corporation What is a de facto corporation? and what are the requirements? ANYONE ASSERTING DE FACTO MUST BE UNAWARE OF FAILURE TO FORM DE JURE CORPORATION

Answer 10

1. There is a relevant incorporation statute 2. The parties made a good faith, colorable attempt to comply with it, and 3. Some exercise of corporate privileges If the doctrine applies, the business is treated as a corporation for all purposes except in an action by the state MAY BE ABOLISHED IN MD

Question 11

Corporations: Directors and Officers Characteristics of directors

Answer 11

1. Must have one or more 2. Shareholders elect the directors after the initial ones named in the charter 3. Take action in one of two waves: a) unanimous agreement in writing; or b) at a meeting satisfying the quorum and voting requirements

Question 12

Corporations: Fundamental Corporate Changes What are the characteristics of a fundamental corp change?

Answer 12

1. Board action adopting a resolution of fundamental change 2. Board submits proposal to shareholders w/ written notice 3. Must get shareholder approval from 2/3rds of shares entitled to vote 4. Deliver doc to SDAT

Question 13

Corporations: Directors and Officers How may an officer or a director who was sued in that capacity be indemnified by the corporation?

Answer 13

1. Person adjudged liable for receiving improper personal benefit or adjudged liable to the corp in a suit by/on behalf of the corp: INDEMNIFICATION PROHIBITED. 2. Person successful in defending case (even on one charge out of many): INDEMNIFICATION MANDATORY 3. Anything other than above (such as when case settles): INDEMNIFICATION DISCRETIONARY (unless it is established that person acted in bad faith)

Question 14

Corporations: Fundamental Corporate Changes What is the dissenting shareholder right of appraisal?

Answer 14

Right to force the corp to buy your stock at fair value if you disagree w/ the fundamental change, or if there is fraud or fundamental unfairness. Shareholder only has right to do this w/ a close corp and if: - Corp is making amendments to charter; - merging or consolidating - transferring substantially all assets not in the ordinary course of business; or - transferring shares in a share exchange Rights only exist for amendment if the amendment will substantially and adversely affect the stockholder’s rights.

Question 15

Corporations: Stockholders What are the requirements for bringing a shareholder’s derivative suit?

Answer 15

1. Stock ownership when the claim arose (or have gotten it by operation of law from someone who did). 2. Make written demand on the BOD that the corp bring the suit, UNLESS can show (with particularity) that the demand/delay in suing would cause irreparable harm to the corp, OR that the majority of directors has a direct personal conflict or is so committed to the action that they cannot be expected to respond to a demand in good faith.

Question 16

Corporations: Stockholders What are the types of stock?

Answer 16

Common Preferred- distributions made before common stockholders receive distributions Preferred Participating- receive distribution before the common stockholders and then again with the common stockholders Preferred cumulative- dividend accrues every year and must be paid before everyone else.

Question 17

Corporations: Fundamental Corporate Changes What is required for a merger or consolidation?

Answer 17

1. BOD action from both corps and notice to shareholders 2. Stockholder approval of disappearing Corp (need 2/3rds of shares entitled to vote) 3. No shareholder approval required where a 90% or more owned subsidiary is merged into a parent corp or vice-versa 4. File articles of merger or consolidation w/ SDAT Effect- Successor Liability: surviving co succeeds to all rights and liabilities of the constituents

Question 18

Corporations: Stockholders What is the right of shareholder to inspect the books and records of the corp?

Answer 18

Any shareholder can demand access during regular business hours to bylaws, shareholder minutes, annual reports, and voting trust agreements. If you own at least 5% of the shares and have owned them for at least 6 months you can make a written demand to see the books of account, stock ledger, statement of assets and liabilities and list of shareholders, but you might have to state a proper purpose (ie, is it related to your interest as a shareholder?)

Question 20

Corporations: Organization of Maryland Corporation What does it take to form a corporation?

Answer 20

1. People = Incorporators 2. Paper = Charter 3. Acts = File charter with SDAT

Question 21

Corporations: Stockholders What distinguishes a shareholder derivative suit?

Answer 21

In a derivative suit, the SH is suing to enforce the corp’s claims, NOT her/his own personal claim. Usually for breach of duty of loyalty/care.

Question 22

Corporations: Stockholders What is a quorum for SH purposes and what is the general rule for SH quorum?

Answer 22

Quorum is determined by # of shares represented, not # of SH’s. GENERAL RULE: Requires a majority of outstanding shares. If quorum met, a majority of the votes actually cast on a proposal constitutes approval.

Question 24

Corporations: Directors and Officers What is required in MD for officer positions?

Answer 24

Must have a president, secretary, and treasurer. If bylaws allow, may hold multiple offices, except cannot be P and VP at same time, or play more than one role on same document.

Question 25

Corporations: Stockholders Stock Transfer Restrictions

Answer 25

Actions against transferring shareholders: Must look at validity of the restriction. Restrictions are upheld if not an undue restraint on alienation. -first right of refusal is ok if the corp offers a reasonable price Actions against the transferee: Even if restriction is valid it can’t be invoked against the transferee unless either (1) it is conspicuously noted on the stock cert or (2) the transferee had actual knowledge of the restriction

Question 26

Corporations: Issuance of Stock Amount of consideration?

Answer 26

Par means “minimum issuance price” or no par means “no minimum issuance price” If par stock, watch for watered stock

Question 28

Corporations: Directors and Officers Does the BJR apply to a director’s duty of loyalty?

Answer 28

No, the BJR never applies when there is a conflict of interest.

Question 29

Corporations: Fundamental Corporate Changes Transfer of all or substantially all of the assets not in the ordinary course of business or share exchange

Answer 29

Basically same as merger or consolidation w/o successor liability: 1. BOD action and notice to selling corp’s shareholders 2. Stockholder approval of transferring Corp (need 2/3rds of shares entitled to vote) 3. File articles of transfer or exchange w/ SDAT

Question 30

Corporations: Stockholders When/how is cumulative voting used?

Answer 30

1. Available only when SH’s are electing directors (gives minority SH’s a better chance of electing someone to the BOD). No CV unless references in charter. 2. To determine CV, multiply # of shares x # of directors to be elected.

Question 31

Corporations: Fundamental Corporate Changes Winding Up

Answer 31

Consists of gathering all assets, converting them to cash, paying creditors, and distributing the remainder to shareholders, pro-rata by share unless there is a liquidation preference.

Question 33

Corporations: Stockholders Describe the notice requirements for SH meetings.

Answer 33

1. Written notice to every SH entitled to vote for every type of meeting 2. Must be mailed/delivered/electronically delivered 10-90 days before meeting 3. Notice must contain the where/when AND why (differs from BOD meetings). The “why limits the scope of business that can be conducted. NOTE: Failure to give notice may result in action taken at the meeting being void, unless those not sent notice waive the defect (may be express -written and signed- or implied -meeting attended w/out objection-).

Question 34

Corporations: Directors and Officers What is the remedy for a Director who competes with her corporation?

Answer 34

Remedy is constructive trust on the profits from the director’s competing venture.

Question 36

Corporations: Issuance of Stock Liability for watered stock?

Answer 36

Directors only if they knowingly authorized the issuance Yes for guy who bought the stock Third party is liable if she knew about the water

Question 37

Corporations: Directors and Officers How can a director escape liability for all things a director may be liable for (3 ways)?

Answer 37

1. If director not present at meeting where liability occurred. 2. If dissent or abstension is noted in writing in corporate records (must first dissent orally) 3. If director acted in good faith reliance on (a) officers/employees reasonably believed to be competent; (b) opinion of a professional reasonably believed to be acting w/in own professional capacity; (c) a committee (of which director was not a member); or (d) financial statements and data

Question 38

Corporations: Organization of Maryland Corporation Foreign Corporations characteristics? Consequences for not registering/qualifying?

Answer 38

To do business in MD, it must (a) certify to SDAT the corporation’s address and (b) the name and address of its resident agent in MD: Called qualifying or registering (1) Civil fine, and (2) cannot sue instate, but may be sued

Question 39

Corporations: Directors and Officers What is a corporate opportunity, and when may a director not be liable for this?

Answer 39

A corp opportunity is something the corp had an interest or expectancy in at the time the opportunity arises. Director cannot usurp a corp opp UNTIL s/he (1) tells the BOD and (2) waits for the BOD to reject the opportunity. REMEDY: Sell to corp at cost. If already sold for profit, constructive trust.

Question 40

Corporations: Directors and Officers What are the two main ways a director can violate the duty of care?

Answer 40

1. NONFEASANCE (the director does nothing). Only liable if the breach caused a loss to the corporation (anti-trust expert example) 2. MALFEASANCE (the BOD does something that hurts the corp).

Question 41

Corporations: Directors and Officers 1.What is the role of directors? Exceptions for needing a board

Answer 41

1. Manages the business of the corporation –Sets policy –Supervises officers –Declares distributions –Determines when stock will be issued –Recommends fundamental corporate changes to shareholders 2. Close corporations Delegate to a committee, but still requires a board action to ratify the committees recommendations

Question 42

Corporations: Directors and Officers Can a corporation make a loan to an officer?

Answer 42

Yes, but only if the BOD determines that the loan is reasonably expected to benefit the corporation (applies to officers or employees as well).

Question 43

Corporations: Issuance of Stock Subscriptions and revocation?

Answer 43

[written offers to buy stock from corporation] Pre-incorporation subscriptions are irrevocable for 3 months Post-incorporation subscriptions may be revoked until acceptance

Question 44

Corporations: Stockholders Name/discuss the 2 types of SH meetings.

Answer 44

1. Annual meeting. Directors are elected there. 2. Special meeting: Can be called by (1) the board, (2) the president, (3) anyone mentioned in the bylaws, or (4) the holders of at least 25% of the shares (25% must file a written request with corp secretary; can seek writ of mandamus if no action).

Question 46

Corporations: Stockholders Can SH’s manage the corporation?

Answer 46

No, unless close corp (charter and stock certificates must say “close corp,” and charter/unanimous SH agreement must provide that SH’s will manage the corp. Ordinarily very few SH’s and stock is not publicly traded).

Question 47

Corporations: Stockholders What is a voting proxy?

Answer 47

A writing (fax/email ok) signed by the record SH (email ok if sender can be verified), directed to the secretary of the corp authorizing another to vote the shares. Good for 11 months, unless states otherwise.

Question 49

Corporations: Issuance of Stock What is issuance?

Answer 49

Corporation sells its own stock

Question 49

Corporations: Fundamental Corporate Changes Involuntary Dissolution

Answer 49

Dissolution by court order. Any stockholder can petition because of: - Illegality or fraudulent acts by directors or - Insolvency or - Shareholder failure for at least 2 annual meetings to fill a board vacancy 25% of the shares can petition b/c of director deadlock preventing action by the board or stockholder deadlock preventing election of directors A creditor can petition if the corp in insolvent

Question 51

Corporations: Organization of Maryland Corporation What is a corporation by estoppel? ANYONE ASSERTING CORPORATION BY ESTOPPEL MUST BE UNAWARE OF FAILURE TO FORM DE JURE CORPORATION

Answer 51

There is no corporation, but you deal with the entity just as if it was a corporation Only applies in contract cases Alive in MD

Question 51

Corporations: Directors and Officers Notice for a board meeting?

Answer 51

Written notice of the time and place NEED NOT STATE THE PURPOSE

Question 52

Corporations: Controlling Shareholders

Answer 52

Generally shareholders do not owe fiduciary duties to each other or the corp, but a shareholder who occupies a control position or whose ownership gives working control over the corp owes a fiduciary duty to minority shareholders and the corp itself. Majority shareholder may be able to sell stock at a premium b/c that reflects control of the corp.

Question 54

Corporations: Fundamental Corporate Changes How do you amend a charter?

Answer 54

Requires board of director action and notice to shareholders and shareholder approval. If approved, file the amended charter w/ SDAT

Question 55

Corporations: Directors and Officers What is “the standard” for duty of care and care in MD?

Answer 55

“By statute in MD, a director must act in good faith, with the reasonable belief that her act is in the best interest of the corporation, and with the care that an ordinarily prudent person would use under similar circumstances. There is a presumption that director action complies with this action.” ADD TO ANY QUESTION RE: DIRECTOR LIABILITY!!!

Question 57

Corporations: Directors and Officers How may an officer bind the corporation?

Answer 57

Since officers are agents of the corporation, they can bind the agency by acts for which they have the authority to bind it. WATCH FOR CROSSOVERS WITH AGENCY LAW HERE!

Question 58

Corporations: Organization of Maryland Corporation What does the incorporator do?

Answer 58

1. Executes and files the charter 2. Files the resident agent’s agreement to serve with SDAT

Question 59

Corporations: Fundamental Corporate Changes Administrative Dissolution

Answer 59

SDAT can revoke charter for nonpayment of taxes or unemployment insurance or for failure to file an annual report w/ SDAT. Must give notice to corp before forfeiture of the charter. After forfeiture the corp is no longer a legal entity, so anyone doing business in it’s name can be personally liable for debts incurred. But if fixed w/in 60 days the charter can be retroactively reinstated.

Question 61

Corporations: Organization of Maryland Corporation Pre-Incorporation Contracts Liability?

Answer 61

Corporation is not liable on pre-incorporation contract until it adopts the contract The promoter is liable on pre-incorporation contracts until there has been a novation Until a novation, both the corporation and promoter are liable

Question 62

Corporations: Stockholders How can SH’s vote?

Answer 62

Usually at a meeting that satisfies quorum requirements and voting rules, but can act by unanimous written consent signed by holders of all voting shares (email ok). Don’t have to be held in MD, conference calls ok.

Question 63

Corporations: Stockholders What kind of corp can only licensed professionals form?

Answer 63

Professional service corporations (P.C., P.A., or Chtd.). Only professionals can be SH’s but members are not liable for each other’s malpractice or corp liabilities.

Question 64

Corporations: Directors and Officers What is an interested director transaction and when will the director not be liable for one?

Answer 64

This is any deal between a corp and one of its directors (or another business of the directors, or a close relative). Will be set aside unless (1) the deal was fair and reasonable to the corp when entered, OR (2) her interest and the relevant facts were disclosed/known and the deal was approved by either a majority of all disinterested directors OR disinterested shares actually voting.

Question 65

Corporations: Stockholders What are the two main fact patterns that cause the MD courts to PCV?

Answer 65

1. A SH’s failure to respect the separate corporate entity (using corporation as alter ego). 2. If corporation was undercapitalized when formed (SH’s fail to invest enough to cover prospective liabilites). Generally in MD, courts will only PVC to “avoid fraud or to enforce a paramount equity.” Sloppy administration and undercapitalization not enough- need fraud/illegality. Courts more willing to enforce for tort claim. Can pierce subsidiary to get to at liable parent corp.