Corporations and LLCs

Question 1

Formation of the Corporation

Answer 1

Generally, a corporation is formed when articles of incorporation are filed with the secretary of state. Must set forth the following:
(1) The name of the corporation;
(2) The maximum number of shares the corporation is authorized to issue; AND
(3) The names and addresses of:
(a) the first board of directors;
(b) The incorporators executing the articles of incorporation;
(c) The initial registered agent

Articles may be amdended by a majority vote of directors and shareholders.

Minor amendments can be made by board without approval.

Question 2

Bylaws

Answer 2

May contain any provision for managing the business and regulating the affairs of the corporation to the extent that it is consistent with the laws and articles of incorporation.

Conflicts: any conflict the articles will control.

Amendments: may be amended or repealed by the corporations shareholders. Board can also amend or repeal unless the shareholders expressly specific otherwise.

Question 3

Promoter Liability

Answer 3

A promoter acts on behalf of a corporation that is yet formed. A promoter is personally liable for any contract entered into on behalf of the corporation so long as both parties to the transaction know that the corporation has not been formed yet.

Will NOT be personally liable if:
(1) There is a novation where the parties release the promoters liability;
(2) The promoter is able to obtain indemnity from the corporation (usually requires that the promoter did not violate any fiduciary duty)

Question 4

Corporation liability

Answer 4

a corporation is not bound by any pre-incorporation contracts that were entered into by promoters UNLESS the corporation adopts such contracts. An adoption can be express or implied from the actions of a corporation or it’s agent.

Question 5

Shareholder liability

Answer 5

Generally, shareholders of a corporation are NOT personally liable for debts of the corporation.

Question 6

Piercing the Corporate Veil

Answer 6

Courts will allow a creditor to pierce the corporate veil and hold shareholders personally liable for debts when:
(1) The shareholder has dominated the corporation to an extent the corporation can be considered the shareholder’s alter ego;
(2) The shareholder failed to follow corporate formalities;
(3) The corporation was undercapitalized at its inception;
(4) There is fraud or illegality present.

Passive investor liability: Once the corporate veil has been pierced, courts generally hold ALL the shareholders liable. Some courts do not extend liability to passive investors.

Question 7

Common Stock

Answer 7

Lowest priority in the ownership structure, have rights to property only AFTER bond holders, preferred stockholders, and debt holders have been paid in full.

Question 8

Preferred Stock

Answer 8

Represents ownership in a corporation. Does not ALWAYS have voting rights. Preferred if shareholders:
(1) Entitled to receive payment of dividends BEFORE any payment of dividends to another class of shareholders; OR
(2) Entitled, in the event of dissolution or liquidation to recieive any payments BEFORE another class of stockholders.

Question 9

Authorized Shares

Answer 9

Maximum number of share a corporation can issue under AOI. In order to increase amount, AOI must be amended by majority vote from shareholders and BOD.

Question 10

Shareholder Meetings

Answer 10

Annual and Special Meetings: A corporation must hold an annual meeting of shareholders at a time that is stated or fixed in accordance with the bylaws.

Special Meetings can be called by:
(1) Persons authorized under the articles of incorporation;
(2) A demand from shareholders that accounts for atleast 10% of the votes entitled to be cast at the meetings; OR
(3) The board of directors for limited purposes (i.e, dissolution)

Question 11

Notice of Meetings

Answer 11

Generally, notice must be given of all general and special meetings. For special meetings, the notice must:
(1) State the purpose of the meeting; AND
(2) Be provided 10-60 days before the meeting commences

Quorum: A majority of the shares entitled to vote are present.

Question 12

Voting Rights

Answer 12

All classes of shareholder’s votes, unless otherwise provided by law or the AOI, are counted equally.

Non-voting shares are allowed if in AOI, but the holders still must get notice of the meeting.

A shareholder is only entitled to vote if they acquired shares before a designated record date. A record date may be deisgnated in the bylaws no more than 70 days prior to the shareholder meeting.

**Cumulative Voting: **Shareholders elect directors either directly or cumulative. In cumulative, voters are not limited to one vote to a candidate, multiple votes on one or more candidates allowed.

Question 13

Vote by Proxy and Revocation

Answer 13

A vote by proxy allows a shareholder to vote without physiscally attending the shareholder’s meeting to vote on their behalf.

Freely recovable by the shareholder unless the proxy has an economic interest in the shares.

Question 14

Inspection of books and records

Answer 14

A shareholder has the right to inspect books and records so long as the purpose of the inspection is proper.

Purpose must be reasonably related to person’s interest as a shareholder.

Generally, must make a written demand to inspect and allow a reasonable amount of time (usually 5 days); AND
Conduct the inspection during regular business hours.

Question 15

Authority of Directors

Answer 15

Board of directors in quorom has full control over the corporation subject to law and AOI.

Minor decisions do not require a quorom as long as unanimous decision.

Directors must be given 2 days notice of special meetings

Question 16

Authority of Officers

Answer 16

Board generally delegates day-to-day management to officers and may remove at any time with or without cause.

Question 17

Duty of Care

Answer 17

Directors and Officers owe fiduciary duties.
Fiduciary Duty of care includes:
1. Duty to take reasonable steps to monitor the corporation’s best interests;
2. Duty to be satisfied that proposals are in the corporations best interest;
3. Duty to disclose material information to the board;
4. The duty to make reasonably informed decisions.
(a) may rely on information from others they reasonably beleive are reliable.

Question 18

Business Judgment Rule

Answer 18

In suits alleging that a director or officer violated his duty of care to the corporation, courts will apply the business judgment rule. Under this rule, the court will NOT second guess the decisions of a director or officer so long as the decision was:
(1) In Good Faith;
(2) With the care of an ordinarily prudent person in a like position would exercise in their position;
(3) The duty to make reasonably informed decisions

Question 19

Conflicting Interest Transactions

Answer 19

Directors and Officers have a duty to avoid implicating their personal conflicting interests in making business transactions. When the director/officer or a family member is:
1. 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 20

Safe Harbors

Answer 20

A director officer who entered into a conflicting interest transaction may be protected from liability if:
1. Disinterested shareholders approve the conflicting interest transaction;
2. The non-interested members of the board authorize the conflicitng interest transaction; OR
3. The transaction judged according to the circumstances at the time of the commitment, is established to have been fair to the corporation

Question 21

Corporation Opportunities

Answer 21

The corporate opportunities doctrine prohibits directors and officers from usurping business opportunities for their own benefit.

Question 22

Merger

Answer 22

Merger: When one of two existing corporations is absorbed by the other corporation. A **consolidation **occurs when two existing corporations combine into one new corporation. Requires:
(1) The recommendation of an absolute majority of the board of directors; AND
(2) The agreement of each corporation by an absolute majority of shareholders.

Short form mergers: If a parent company owns 90% or more of the stock of a subsidiary may be merged into the parent without approval from the shareholders of either corporation.

Question 23

Dissenter’s Rights

Answer 23

After a merger or consolidation takes place, dissenting shareholders opposed to the action may either:
(1) Challenge the action; OR
(2) Receive payment determined at the fair market value of their shares immediately before the merger/consolidation took place.

Question 24

Sales of Substantially All Corporate Assets

Answer 24

**Shareholder approval is **required for the corporation to sell etc., if the disposal is not in the corporations normal and regular course of business; not required conversely.

Question 25

Derivitive Claims

Answer 25

A lawsuit brought by a shareholder on behalf of the corporation when the corporation has a valid cause of action but failed to pursue it.
Often occurs when the defendant is someone close ot the corporation.
Demand: Shareholder must make a written demand on the board before commencing a derivitive. Must wait 90 days after making demand UNLESS the baord rejects the demand during the 90-day period.

Damages: If a derivitive claim is succesful, the proceeds go to the corporation, not the shareholder who brought the action.

Court can rule damages be paid directly to the shareholder if the award to the corporation benefits the defendants.

Question 26

Direct Claims

Answer 26

A lawsuit brought by a shareholder to enforce his OWN rights. Must prove actual injury NOT solely the result of an injury suffered by the corporation.