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MEE COPY (use this one!) > Corporations > Flashcards

Corporations Flashcards

1
Q

Who is liable for pre-incorporation transactions?

A

Promoters (they are fiduciaries) unless a later novation.

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2
Q

The articles of incorporation must include

A
  1. the name
  2. the agents
  3. names and addresses of incorporates
  4. duration
  5. the purpose (usually any lawful activity), &
  6. authorized shares
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3
Q

When is the corporation incorporated?

A

When the secretary of state accepts the fee and files the articles

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4
Q

If by laws and articles of incorporation conflict, which wins?

A

Articles

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5
Q

What is the de facto corporation rule?

A

When a corporation isnt properly formed but acts as a corp, it will be treated as a corp if there was a good faith attempt to incorporate and there was no actual knowledge of the faulty corporate status.

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6
Q

What are the three factors to pierce the veil?

A
  1. Alter ego
  2. undercapitilization
  3. fraud
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7
Q

What are issued shares?

A

Number of authorized shares actually sold

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8
Q

What are outstanding shares?

A

Shares that were once issued and remain in the possession of shareholders

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9
Q

What are treasury shares?

A

Shares one issued but subsequently reacquired by the corporation

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10
Q

Par value is?

A

The minimum value to sell a share at (it is not required)

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11
Q

Watered stock is?

A

Stock sold for less than the par value. Shareholders who buy watered stock are liable to creditors of the corp.

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12
Q

How long is a stock subscription irrevocable for pre incorporation?

A

six months

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13
Q

Preemptive rights allow what

A

The person to maintain their percentage of ownership when new shares issue

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14
Q

Who can authorize dividends?

A

Directors unless would cause insolvency

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15
Q

Must every corp hold an annual meeting?

A

Yes.

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16
Q

Special meetings are for?

A

Voting on fundamental changes

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17
Q

Notice for meetings must occur?

A

no fewer than 10 days and no more than 60 days before the meeting

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18
Q

Directors must set a record date when?

A

no fewer than 10 days before the meeting and no more than 70 days before the meeting

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19
Q

A proxy must be?

A

In writing, signed by the shareholder as of the record date, sent to the secretary, state that it authorizes another to vote, and cannot be valid for more than 11 mos

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20
Q

Quorum of shareholders is?

A

A majority of the outstanding shares, not shareholders

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21
Q

Necessary vote of shareholders is?

A

When more of the votes of a shareholder quorum for the proposal exceed the votes against

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22
Q

Shareholders can inspect corp records so long as they?

A

State a proper purpose

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23
Q

Shareholders can sue

A

Directly or derivatively (on behalf of the corp)

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24
Q

A shareholder may not commence or maintain a derivative suit unless . . .

A

3 requirements are met:

  1. Standing
    • -> SH was SH of corp at time of act/omission complained of (OR received it by operation of law - by inheritance or divorce - by someone who was SH at that time) + SH continues to be SH to the time of judgment
  2. Adequacy
    • -> SH adequately represents the interest of the corp in enforcing the rights of the SH
  3. Demand
    • -> SH files a written demand that has been made upon the corp (on BOD) to take suitable action
    • -> most states: SH must wait 90 days after making demand, unless:
      (i) demand was rejected
      (ii) irreparable injury to corp would result by waiting 90 days, or
      (iii) it would be futile (e.g. the directors will be the defendants - no independent directors to consider demand)
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25
Q

A controlling shareholder may owe a duty to a minority shareholder if

A

There is sale of stock to an outsider or lotter, the shareholder is transacting with the corporation

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26
Q

For directors, a quorum is

A

A majority of the total number of directors

27
Q

Directors may dissent and avoid liability by

A

Entering dissent in minutes of the meeting, filing a written dissent before the meeting adjourns, or provide a written dissent to the secretary

28
Q

Directors and officers owe what to the corporation?

A

A fiduciary duty of care (duty of care and duty of loyalty)

29
Q

The business judgment rule is?

A

Absent fraud, illegality or self dealing, courts will not disturb good-faith business decisions

30
Q

A self-interested transaction may be upheld if?

A

It is ratified by a majority of disinterested directors or shareholders.

31
Q

Fundamental changes require approval of?

A

Both shareholders and directors

32
Q

Merger is

A

when two or more corps combine and one survives assuming the assets and liabilities of the others

33
Q

Consolidation is

A

the combination of two or more corps when neither survives and a new one is created assuming the assets and liabilities

34
Q

Involuntary dissolution can occur by?

A

Creditors showing a corp is not paying its debts, shareholders show the corp is wasting assets, the directors are committing fraud, or the directors and shareholders deadlock.

35
Q

Appraisal rights are?

A

When a shareholder dissents from a fundamental change he can demand his shares to be purchased by the corp for FMV.

36
Q

LLCs require filing ___ and its owners are called ____ instead of shareholders?

A

An operating agreement; Members.

37
Q

when should a derivative suit be brought?

A

when the injury is caused to the corporation & a SH is trying to enforce those rights
–> also applies to LLCs

38
Q

the recovery from a derivative suit goes to . . .

A

the corporation

39
Q

settlement of derivative suit

A

parties can settle with court approval

40
Q

dismissal of derivative suit

A

a derivative proceeding shall be dismissed with court approval IF one of the following groups decide it is not in the best interest of the corp to continue:

  1. a panel of disinterested persons appointed by the court
  2. a majority vote of independent directors, if they constitute a quorum, or
  3. a majority vote of a committee of 2 or more independent directors appointed by a majority vote of independent directors present at a meeting (even if committee is not a quorum)
41
Q

Shareholder’s right to inspect corporate books & records

A

A SH has a right to inspect corporate books & records as long as his demand is made in good faith + for a proper purpose
–> SH seeking inspection must offer credible evidence that there was mismanagement/other improper conduct

42
Q

proper purpose (re: SH right to inspect)

A

a purpose reasonably related to a person’s interest as a SH

  • -> includes a desire to determine if improper transactions have occurred
  • -> request must be granted if purpose is to address economic risks to corp
43
Q

limitation on SH’s right to inspect (under MBCA)

A
  • -> MBCA allows SH to inspect only relevant excerpts of board minutes directly connected with SH’s purpose
  • -> MBCA: corp could refuse to allow inspection of non-financial documents related to purpose
44
Q

when does a proper purpose NOT need to be shown for SH inspection? (MCBA)

A

for the inspection of minutes of shareholders’ meetings

board meetings require proper purpose!

45
Q

are a shareholder’s rights to inspect terminated after SH files a derivative suit?

A

no

46
Q

what can a shareholder do if he is denied inspection of corp records?

A

MCBA: SHs who have been denied inspection may apply for a court order permitting inspection (for ct to decide “on expedited basis”)

47
Q

requirements for dismissal of derivative suit by majority of disinterested directors

A

MBCA: board can seek dismissal of derivative suit if a majority of the board’s qualified directors (i.e. directors who do not have material interest in the derivative action) determine in good faith, after conducting a reasonable inquiry upon which its conclusions are based, that continuance would be contrary to the corp’s best interests

  • -> full-blown board investigation not necessary, but request for dismissal should have some support in the findings of the inquiry
  • -> failure to investigate credible allegations of corporate illegality constitute lack of good faith
48
Q

rule: director duty of good faith

A

a director is liable to the corp for the director’s decisions or failures to take action that were “not in good faith”

  • -> knowingly illegal activity is not in good faith (even if belief of in corp’s best interest)
  • -> duty requires corp directors to establish procedures to ensure the corp’s compliance with legal norms
  • -> good faith standard requires that directors not approve/condone wrongful or illegal activity - EVEN IF it might result in net financial benefit to corp
49
Q

business judgment rule

A

there is a presumption that in making a business decision the directors acted:

  1. on an informed basis
  2. in good faith, &
  3. with the honest belief that the action taken was in the best interest of the company

–> applies to duty of care (NOT duty of loyalty)

50
Q

duties of directors/members of LLC - general rule

A

directors of a corporation & members of an LLC have a duty of loyalty + a duty of care

51
Q

duty of loyalty

A

a director must act in good faith + with a reasonable belief that what he does is in the corporation’s best interest

–> BJR does NOT apply

52
Q

3 situations where duty of loyalty breach occurs

A
  1. Self-dealing - director is on both sides of a transaction
  2. director competes with corporation
  3. director usurps a corporate opportunity
53
Q

self-dealing transaction (duty of loyalty) - definition

A

a transaction where a director is on both sides of the K

–> director has a material financial interest in a K, as well as knowledge of that interest

54
Q

director competing with corporation (duty of loyalty) - rule

A

a director is not allowed to compete with her own corporation

55
Q

usurping corporate opportunity (duty of loyalty)

A

a corp officer has a fiduciary obligation to not usurp a corporate business opportunity for her own personal benefit

  • -> ok with consent of board
  • -> make sure corp could actually fulful opportunity
56
Q

defenses to liability for breach of duty of loyalty

A

RMBCA - 3 safe harbors that may protect director who breaches duty of loyalty:

  1. approval by disinterested directors
    • -> disinterested directors approve of transaction AFTER interested director:
      (i) discloses his interest
      (ii) plays no part in deliberations or voting, &
      (iii) discloses all information that an “ordinarily prudent person would believe to be material to a judgment about whether or not to proceed with the transaction”
  2. approval by disinterested shareholders
  3. transaction is established to have been fair to the corp
    • -> judged according to circumstances at time of commitment
57
Q

piercing the corporate veil occurs when . . .

A

a court disregards the limited liability corporate form & holds a shareholder personally liable for corporate debt

58
Q

piercing the corp veil is only allowed in . . .

A

close corporations

–> or LLCs

59
Q

piercing the corp veil requires analyzing whether the shareholders of a corp have . . .

A

treated the corp as a separate entity or whether it has instead become the alter ego of the SHs (or members of LLC)

60
Q

factors considered in piercing corp veil

A
  1. undercapitalization
  2. disregard of corporate formalities
  3. using corp’s assets as SH’s own assets
  4. self-dealing with corp
  5. siphoning of corp’s funds
  6. using corp form to avoid statutory requirements
  7. SH’s dominion over corp
  8. fraudulent dealings with a corp creditor
61
Q

controlling SH

A

a SH who holds a high enough percentage of ownership in a company to enact changes at the highest level
–> a SH owning 50% plus one of a corp’s shares is automatically a controlling SH

62
Q

when does a duty arise between a controlling SH & a minority SH?

A

duty arises if controlling SH is:

  1. selling interest to an outsider
  2. seeking to eliminate other SHs from the corp, or
  3. receiving a distribution denied to other SHs

–> also arises for parent company (as controlling SH) duty to subsidiaries (as minority SHs)

63
Q

2 duties owed by controlling SH to minority SH

A
  1. duty to disclose information that a reasonable person would consider important in deciding how to vote on a transaction
  2. duty of fair dealing when purchasing a minority SHs interest

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