Corporations and LLCs

Question 1

A corporation’s existence begins on the date the Articles of Incorporation are properly filed.

What must the Articles contain?

Answer 1

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.

Priority: Medium

Question 2

What are Bylaws, and what may they contain?

Answer 2

The bylaws are the rules and regulations adopted by the Board of Directors that govern the internal operations and management of a corporation, including the role and duties of directors and officers.

They may contain any provision that is NOT inconsistent with:

The Articles of Incorporation; OR
The laws of the jurisdiction.

Priority: Medium

Question 3

When may the Board of Directors NOT amend or repeal the bylaws?

Answer 3

When:

The Articles of Incorporation exclusively reserve the power to the shareholders; OR
The shareholders, in amending/adopting/repealing a bylaw, expressly provide that the Board of Directors cannot/amend/repeal/reinstate that bylaw.

Priority: Low

Question 4

What does the Operating Agreement of an LLC govern?

Answer 4

The relations between the members and the LLC;
The rights and duties of the managers;
The activities and affairs of the company; AND
Any means and conditions for amending the Operating Agreement.

*Under RULLCA, an LLC is presumed to be member-managed UNLESS the operating agreement provides otherwise.

Priority: Low

Question 5

What is a promoter, and when is he personally liable for his conduct?

Answer 5

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

He will be held personally liable when:

He purports to act as or on behalf of the corporation;
Knowing that no corporation was formed.
*A promoter remains personally liable for pre-incorporation contracts EVEN IF the corporation adopts the contract (both the corporation and promoter are liable) – UNLESS there is a novation.

Priority: Medium

Question 6

When will a promoter NOT be held liable for his conduct?

Answer 6

If:

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

Priority: Medium

Question 7

When is a corporation liable on pre-incorporation contracts entered into by a promoter?

Answer 7

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

Implied adoption occurs when the corporation:

Has reason to know or knows the material terms of the contract; AND
Accepts some benefit from the contract.

Priority: Medium

Question 8

If corporate formation is defective, the owners may be personally liable for contracts / obligations.

What doctrines limit their personal liability?

Answer 8

RMBCA: Only held personally liable when (1) purports to act as or on behalf of the corporation; AND (2) knowing that no corporation was formed.

*A good faith belief that corp. was formed WILL NOT subject a person to liability.

De Facto Corporation: Owners enjoy limited liability when (1) good faith attempt to incorporate; (2) business was eligible to incorporate; AND (3) took action that it considered itself a corp.

Incorporation by Estoppel: Person or entity that treated business as a corp. is estopped from denying that business is a corp.

Priority: Low

Question 9

A court will pierce the corporate veil, and hold the shareholders personally liable in what situations?

Answer 9

The corporation is acting as the alter ego of the shareholders (little or no separation between the shareholder and corporation);
Where the shareholders failed to follow corporate formalities;
The corporation was inadequately capitalized at its inception to cover debts/liabilities; OR
To prevent fraud.

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

Priority: HIGH

Question 10

Common Shares

vs.

Preferred Shares

Answer 10

Common Shares: provide shareholders with voting rights, BUT they are last in priority to be entitled to a distribution of company assets.

Preferred Shares: are entitled to company assets upon dissolution before common shares, BUT they do not carry voting rights.

Priority: Low

Question 11

Authorized Shares

vs.

Outstanding Shares

vs.

Reacquired Shares

Answer 11

Authorized: the maximum number of shares a corporation may issue (not allowed to issue more than authorized).

Outstanding: total number of shares issued by the corporation and held by the shareholders (each share is entitled to one vote).

Reacquired: (treasury shares) authorized shares owned by the corp. that are NOT outstanding shares – they are not allowed to be voted at a shareholder meeting.

Priority: Medium

Question 12

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

Answer 12

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

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

Priority: Medium

Question 13

Who may vote at a shareholder meeting?

Answer 13

Only shareholders that are registered shareholders on the record date are entitled to vote.

The record date cannot be more than 70 days prior to the meeting. If not otherwise fixed, the record date is the day before the first notice is delivered to the shareholders.

Priority: Medium

Question 14

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

What is required for a valid proxy?

Answer 14

It must be signed on:

An appointment form; OR
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.

Priority: HIGH

Question 15

Are proxy agreements freely revocable by the shareholder?

Answer 15

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.

Priority: HIGH

Question 16

A special meeting requires proper notice to the shareholders entitled to vote.

What is proper notice, and how may it be waived?

Answer 16

Notice must:

Be given at least 10 days in advance of the meeting (but not more than 60 days);
Include a full description of the purpose of the meeting; AND
Include the date, time, and place.
Notice may be waived by:

Delivering a signed writing to the corporation; OR
Attending the meeting and not objecting at the beginning of the meeting.

Priority: Low

Question 17

When does a quorum exist?

When is an action by the shareholders approved?

Answer 17

A quorum exists when a majority of the shares entitled to vote are present. A quorum is required in order for the shareholders to take action at a meeting.

Action on a matter is approved if a MAJORITY of votes are cast in favor of it.

Priority: Medium

Question 18

What is cumulative voting?

Answer 18

When:

Each shareholder has a number of votes that is equal to the shares owned, multiplied by the number of director spots open for election (i.e. 100 shares owned x 3 nominees = 300 votes).

Priority: Low

Question 19

When MAY a shareholder inspect the following corporate books and records?

(Certain Accounting Records, Excerpts of Board Meeting Minutes, & Record of Shareholders)

Answer 19

When:

The inspection is made during regular business hours at a reasonable location specified by the corporation;
Shareholder provides 5-days written notice;
The demand is made in good faith and for a proper purpose;
The purpose is described with particularity; AND
The records are directly connected with the purpose.

Priority: Medium

Question 20

A director who is present at a meeting of directors when corporate action is taken is deemed to have assented to the action, unless what occurs?

Answer 20

A director objects at the beginning of the meeting to holding or transacting business at the meeting;
The dissent or abstention from the action taken is entered into the meeting minutes; OR
The director delivers written notice of his dissent/abstention to the presiding officer before its adjournment.

*The right of dissent or abstention is NOT available to a director who votes in favor of the action taken.

Priority: Low

Question 21

How may regular and special director meetings be held, and how may a director waive notice?

Answer 21

Regular meetings may be held without notice, whereas special meetings require at least two days’ notice (date, time, and place is required – but the purpose is not).

A director may waive notice in a signed writing or by attending the meeting.

Priority: Medium

Question 22

How may action be taken by the Board of Directors without a meeting?

Answer 22

If:

Each director signs a consent describing the action to be taken; AND
Delivers it to the corporation.

*Consent may be withdrawn by a signed revocation.

Priority: Low

Question 23

How may a director be removed by the shareholders?

Answer 23

Only at:

A meeting called for the purpose of removing the director; AND
The meeting notice must state the purpose of the meeting (to remove a director).
*RMBCA – with/without cause

*Common law – removal ONLY by cause.

Priority: Low

Question 24

What is an officer’s actual or apparent authority?

Answer 24

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.

Priority: Medium

Question 25

What does a President of a corporation have implied authority to do?

Answer 25

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.

Priority: Medium

Question 26

How may an Officer be removed?

Answer 26

They may be removed at any time with or without cause by:

The Board of Directors;
The officer who appointed such officer, unless the Bylaws or the Board of Directors provide otherwise; OR
Any other officer, if authorized by the Bylaws or Board of Directors.

*An officer’s removal DOES NOT affect the officer’s contract rights with the corporation.

Priority: Low

Question 27

What type of authority does a member/manager of an LLC have?

Answer 27

Express Actual Authority: to bind the LLC (upon receiving said authority from the operating agreement).

Implied Actual Authority: to take actions that are reasonably incidental or necessary to achieve their authorized duties.

Apparent Authority: to bind the LLC for all acts apparently conducted within the ordinary course of business (an act normal and necessary for managing the business).

Priority: Medium

Question 28

What are preemptive rights?

Answer 28

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 them.

*Under RMBCA, shareholders DO NOT enjoy preemptive rights unless granted in the Articles of Incorporation.

Priority: Low

Question 29

When do preemptive rights NOT apply?

Answer 29

Shares issued as compensation;
Shares issued to satisfy conversion or option rights (created to provide compensation);
Shares authorized in the Articles of Incorporation that are issued within 6 months of incorporation;
Shares issued for consideration other than money; OR
Shares issued without general voting rights, but with preferential rights to distributions.

Priority: Low

Question 30

Under the RMBCA, when may the Articles of Incorporation, bylaws, and other agreements impose restrictions on the transfer of shares of a corporation?

Answer 30

For:

Any reasonable purpose;
To preserve exemptions under federal/state securities laws; OR
To maintain the corporation’s status when it is dependent on the number/identity of its shareholders.

*An absolute restraint on the transfer of shares is invalid.

Priority: Low

Question 31

Under the RMBCA, what restrictions on the transfer of shares are expressly allowed?

Answer 31

A right of first refusal;
The obligation of the corporation or other persons to acquire shares;
To require the corporation or certain shareholders to approve the transfer of shares (if not manifestly unreasonable); and
To prohibit the transfer to designated persons or classes of persons (if not manifestly unreasonable).

Priority: Low

Question 32

Directors owe a duty of care to the corporation.

How must they discharge this duty?

Answer 32

In good faith;
In a manner the director reasonably believes to be in the best interests of the corporation; AND
With the care that a person in a like position would reasonably believe appropriate under similar circumstances.

*If this 3-part test is satisfied, then a director will NOT be liable for corporate decisions that resulted in adverse consequences.

Priority: HIGH

Question 33

May a director rely on the reasonable advice of advisors?

Answer 33

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

Priority: HIGH

Question 34

When does the Business Judgment Rule NOT apply to protect directors?

Answer 34

When directors:

Are financially interested in a transaction (conflict of interest);
Are not acting in good faith; OR
Who engaged in fraud or illegality.

*If a director breaches his duty of care, he may be held personally liable to the corporation for any losses suffered as a result.

Priority: HIGH

Question 35

What does the fiduciary duty of loyalty forbid a director from doing?

Answer 35

A director is forbidden from:

Entering into conflicting interest transactions;
Usurping a corporate opportunity;
Competing with the corporation; and
Trading on inside information.

Priority: HIGH

Question 36

When is a conflicting business transaction NOT a breach of the duty of loyalty?

Answer 36

If:

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

Priority: HIGH

Question 37

When does a director have a conflict of interest?

Answer 37

When the director or family member either:

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

Priority: HIGH

Question 38

What is a Corporate Opportunity?

Answer 38

Any opportunity that:

The corp. has an interest / expectancy in; OR
Is in the corp.’s line of business.

Priority: Low

Question 39

When may a director/officer pursue a Corporate Opportunity?

Answer 39

If she:

First presents it to the corporation’s Board of Directors; AND
The Board decides not to pursue the opportunity.

*It’s NOT a defense that the corp. was not financially able to take the opportunity.

Priority: Low

Question 40

Under the RMBCA, when will the Articles of Incorporation NOT limit the personal liability of a director?

Answer 40

When:

Financial benefits are improperly received;
There is intentional infliction of harm on the corporation or its shareholders;
There are unlawful corporate distributions; OR
An intentional violation of criminal law occurs.

*The Articles may provide for indemnification of a director for personal liability except in the four instances above.

Priority: Low

Question 41

What Duty of Care does a member of a member-managed LLC owe to the company and its members?

Answer 41

The duty of care to act:

With the care that a person in a like position would reasonably exercise under similar circumstances; AND
In a manner the member reasonably believes to be in the best interests of the company.

*If a member meets the above, they CANNOT be held personally liable under the Business Judgment Rule.

Priority: Medium

Question 42

What Duty of Loyalty does a member of a member-managed LLC owe to the company and its members?

Answer 42

The duty to:

Account for any property, profit, or benefit the member derived from the LLC’s activities or property;
Refrain from dealing with the LLC when an adverse interest to the LLC exists; and
Refrain from competing with the LLC before dissolution.

*After full disclosure of all material facts, all members may authorize an act that would otherwise violate this duty.

Priority: Medium

Question 43

How are the duties of care and loyalty different in a manager-managed LLC?

Answer 43

The duties ONLY apply to managers and NOT the members.
Only the members may authorize an act that would otherwise violate the duty of loyalty; AND
A manager must refrain from competing with the LLC until winding up is completed.

Priority: Medium

Question 44

Under RULLCA, what may the Operating Agreement dictate for fiduciary duties owed?

Answer 44

It may:

Restrict or eliminate the duty of loyalty;
Identify activities that do not violate the duty of loyalty;
Alter the duty of care;
Alter or eliminate any other fiduciary duty; AND
Prescribe the standards by which to measure the performance of good faith and fair dealing.

Priority: Low

Question 45

What must a shareholder prove when bringing a direct action against a director or officer?

Answer 45

They must prove an actual injury that is NOT solely the result of an injury suffered by the corporation.

*A direct action involves injury or breach of a duty owed to a shareholder.

Priority: HIGH

Question 46

Under the RMBCA, what requirements must a plaintiff-shareholder meet to commence a derivative suit on behalf of a corporation?

Answer 46

He must:

Be a shareholder at the time of the act/omission OR became a shareholder by operation of law from such a shareholder;
Be a shareholder through entry of judgment;
Fairly and adequately represent the interests of the corporation; AND
Make a written demand upon the corporation to take suitable action.

Priority: HIGH

Question 47

How is bringing a derivative action on behalf of an LLC different than that of a corporation?

Answer 47

All elements are the same as those for a corporation EXCEPT:

The action may be brought within a reasonable time after the demand; AND
The demand requirements may be waived if the demand is deemed futile.

Priority: HIGH

Question 48

Under the RMBCA, when MUST a derivative action be dismissed by the court on motion by the corporation?

Answer 48

When:

A majority of the Board’s qualified Directors,
Have determined in good faith,
After conducting a reasonable inquiry, and
That the derivative proceeding is not in the best interests of the corporation.

Priority: Low

Question 49

What must a plaintiff show to prevail for a Rule 10b-5 claim?

Answer 49

That the defendant:

Engaged in a fraudulent scheme or device which was;
Relied upon;
In connection with the purchase/sale of securities;
Acted with scienter;
Used some means of interstate commerce; AND
Caused damages.

Priority: Low

Question 50

Under the RMBCA, how may the Articles of Incorporation be amended?

Answer 50

Only if the following procedures are followed:

Adoption by the Board of Directors;
Notice to each shareholder stating the purpose is to vote on the amendment (and a copy of the amendment is provided); AND
Adoption by the shareholders by a majority vote.

*Exception: The BoD has authority to make minor amendments without shareholder approval if the corp. has not issued shares yet.

Priority: Medium

Question 51

Under the RMBCA, what does approval for a Merger require?

Answer 51

Approval by the Board of Directors of both corporations; AND
Shareholder approval of both corporations by a majority vote.

*Shareholder approval by the surviving corporation is NOT required for a merger if:

(1) the Articles of Incorporation or number of outstanding shares would not be changed; AND
(2) the voting power of any shares issued is 20% or less of the voting power of the surviving corporation.

Priority: Medium

Question 52

What is a Short Form Merger?

Answer 52

When a parent corporation owns at least 90% of a subsidiary’s outstanding (voting) shares, then ONLY the Board of Directors of the parent corporation must approve the merger.

Priority: Medium

Question 53

Under the RMBCA, what does approval for a Share Exchange require?

Answer 53

Approval by the Board of Directors of both corporations; AND
Shareholder approval of the acquired corporation by a majority vote.

*Shareholder approval is NOT required for the acquiring corporation.

Priority: Medium

Question 54

Under the RMBCA, what procedures MUST be followed by a corporation to enact a fundamental change?

Answer 54

Adoption by the Board of Directors;
Notice to every shareholder of a meeting and the purpose of the meeting; AND
Adoption by the shareholders by a majority vote.

Priority: Medium

Question 55

When is a dissenting shareholder entitled to appraisal rights (to obtain payment for the value of his shares)?

Answer 55

When he has the right to vote on a merger plan;
When is he is a shareholder of the subsidiary in a short form merger or of a corporation whose shares are being acquired in a share exchange;
When he has the right to vote on the distribution of all or mostly all of the corporate assets; OR
When an amendment to the Articles of Incorp. materially and adversely affects his rights.

Priority: HIGH

Question 56

How may a shareholder (that DOES NOT consent to a fundamental change) force the corporation to purchase his shares?

Answer 56

If:

The shareholder gave notice to the corporation of his intent to demand payment if the change was approved;
The notice was given before the vote was taken;
The fundamental change is effectuated; AND
The shareholder DID NOT vote in favor of the change.

Priority: HIGH

Question 57

Under the RMBCA, when may a court dissolve a corporation (upon petition by a shareholder)?

Answer 57

A deadlock of the Directors in the management of the corporate affairs and irreparable injury to the corporation;
That the Directors have acted in a manner that is illegal, oppressive, or fraudulent;
The shareholders are deadlocked in voting power and have failed to elect Directors for a least 2 consecutive annual meetings; OR
The corporate assets have been wasted or misapplied.

Priority: Low

Question 58

What procedure must be followed by the corporation for a proposal of Dissolution to be adopted?

Answer 58

Adoption by the Board of Directors;
Notice to each shareholder; AND
Adoption by the shareholders by a majority vote.

Priority: Medium

Question 59

When does a member become dissociated from an LLC?

Answer 59

Notice of the member’s express will to withdraw;
Occurrence of an agreed upon event in the operating agreement;
pursuant to the operating agreement;
Expulsion by the unanimous vote of the other members;
By judicial order for misconduct;
Bankruptcy, incapacity, or death;
Appointment of a personal representative/receiver; OR
Termination of the entity member.

Priority: Medium

Question 60

Under RULLCA, what events trigger the dissolution of an LLC?

Answer 60

The occurrence of an event in the Operating agreement causing dissolution;
The consent of all the members;
The passage of 90 consecutive days during which the LLC has no members; OR
Judicial dissolution.

Priority: Medium

Question 61

A court may grant judicial dissolution of an LLC (upon an application by a member) on what grounds?

Answer 61

The managers/controlling members are acting in an illegal or fraudulent manner OR a manner which is oppressive and directly harmful to another member;
The conduct of all or mostly all of the LLC’s activities are unlawful; OR
It’s not reasonably practicable to carry on the LLC’s activities in conformance with the Operating agreement.

Priority: Medium

Question 62

Whom may a creditor’s claim be enforced against if proper dissolution and winding up procedures are NOT followed by an LLC?

Answer 62

The dissolved LLC; AND
The members personally if the assets of the company have been distributed after dissolution (but that member is liable only up to the amount of assets received upon dissolution).

Priority: Medium