Corporations and LLCs

Question 1

Articles of Incorporation Required Provisions

Answer 1

(1) name of the corp; (2) maximum number of shares the corporation is authorized to issue; and (3) the names and addresses of: board of dirs, incorporators executing the articles of incorporation, and the initial registered agent

Question 2

Amend Articles?

Answer 2

Majority vote from the board of directors and shareholders.

Question 3

Corporate bylaws

Answer 3

provide for the ordinary business conduct of the corporation (meeting times and dates, elections of a board of officers, filing vacancies, notices, etc.)

Question 4

Amendment to bylaws

Answer 4

May be amended or repealed by the corporation’s shareholders. The board may also amend or repeal UNLESS the shareholders expressly state otherwise

Question 5

Bylaws and Articles conflict?

Answer 5

Articles prevail

Question 6

Promoter

Answer 6

A promoter acts on behalf of a corporation that is yet to be formed (usually assists in the planning and formation of the new business).

Question 7

Promoter liability

Answer 7

personally liable for any contracts entered into on behalf of the corporation so long as both parties to the transaction know that the corporation has not yet been formed.

Question 8

promoter not liable?

Answer 8

(1) novation where the parties agree to release the promoter from liability in favor of holding the corporation solely liable; OR (2) the promoter is able to obtain indemnity from the corporation

Question 9

Corporation liability before incorporation

Answer 9

NOT bound by 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 the corporation or its agents

Question 10

Shareholder liability

Answer 10

Shareholders are generally not liable for the debts of the corporation. Yet, piercing the corporate veil

Question 11

Piercing the corporate veil

Answer 11

Courts will allow a creditor to pierce the corporate veil and hold a shareholder personally liable for the debts of the corporation when: (1) shareholder dominated the corporation to the extent that the corporation may be considered the shareholder’s alter ego; (2) shareholder failed to follow corporate formalities; (3) corporation was undercapitalized; (4) there is fraud or illegality present

Question 12

Common stock

Answer 12

holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders have the lowest priority in the ownership structure

Question 13

Preferred stock

Answer 13

does not always have voting rights. Shares of stock are preferred if their holders are: (1) entitled to receive payment of dividends before any payment of dividends to another class of stockholders; OR (2) entitled, in the event of liquidation or dissolution, to receive any payments or distributions BEFORE another class of stockholders

Question 14

Authorized shares

Answer 14

Maximum number of shares that a corporation is legally permitted to issue under its articles.

To increase this amount, articles must be amended with a majority vote from the directors and shareholders

Question 15

Outstanding shares

Answer 15

Total number of shares issued by the corporation and held by the shareholders. Generally each outstanding share is entitled to one vote unless otherwise provided

Question 16

Treasury stock

Answer 16

shares that a company issued and subsequently reacquired. can’t vote

Question 17

Shares within the same class

Answer 17

All shares must have identical rights and preferences unless the shares within a class are divided into separate series

Question 18

Preemptive right

Answer 18

A preemptive right is a right of a current shareholder to purchase additional shares in the corporation before outsiders are permitted to do so in order to maintain their percentage of ownership in the corporation.

In most states, a corp must “opt in” to create preemptive rights by expressly including such rights in the corp’s articles of incorporation. In other states, preemptive rights are presumed to exist unless the corporation “opts out” by expressly barring such rights in the corporation’s articles of incorporation

Question 19

Preemptive rights do not exist for

Answer 19

(1) preferred shares that CANNOT be converted to common stock; (2) shares sold for a consideration other than cash; or (3) shares issued by majority shareholder vote to directors, officers, or employees

Question 20

Distribution Rights

Answer 20

(1) a shareholder does NOT have any right to receive distributions from the corp. generally paid to shareholders at the full discretion of the board of directors.

BUT if they refuse to issue in bad faith, but not necessarily in bad judgment, the shareholders may be able to compel distribution

Question 21

Annual meetings

Answer 21

Corp must hold an annual meeting of shareholders at a time that is stated or fixed in accordance with the bylaws

Question 22

Special meetings

Answer 22

Can be called by: (1) persons authorized under the articles of incorporation; (2) a demand from shareholders that accounts for at least 10% of the votes entitled to be cast at the meeting OR (3) the board of directors for limited purposes

Question 23

Notice of Meetings

Answer 23

Shareholders who are entitled to vote must be provided with notice of all annual and special meetings. The notice must: (1) state the purpose of the meeting; AND (2) be provided 10-60 days before the meeting commences (in most states)

Question 24

Quorum

Answer 24

A quorum must be present in order for the shareholders to take action at a meeting. Unless otherwise set forth in the articles of incorporation, a quorum exists when at least a majority of the shares entitled to vote are present

Question 25

Voting Rights

Answer 25

(1) non-voting shares: Articles may provide that holders of certain types of shares cannot vote unless specific conditions are satisfied. However, they must still receive notice.

(2) weight of vote: all shareholders’ votes are counted equally, regardless of class

(3) record date: a shareholder is only entitled to vote if she acquired voting shares before a designated record date. Generally, the record date may be designated in the bylaws no more than 70 days prior to the shareholder meeting

(4) cumulative voting: elect directors either directly (each share quals one vote) or cumulatively (more favorable method to represent interest of minority shareholders)

Question 26

Cumulative voting

Answer 26

voters cast as many votes as there are seats, but voters are not limited to giving only one vote to a candidate. Instead, they can put multiple votes on one or more candidates

Question 27

proxy voting

Answer 27

A vote by proxy allows a shareholder to vote without physically attending the shareholder’s meeting by authorizing another person to vote her shares on her behalf. A valid proxy must exist in the form of a verifiable electronic transmission or a signed written appointment form. Freely revocable unless the proxy recipient has an economic interest in the shares

Question 28

Inspection and proper purpose

Answer 28

A shareholder possess the right to inspect corporate books and records so long as the purpose for the inspection is proper.

Question 29

What is a proper purpose?

Answer 29

reasonably related to a person’s interest as a shareholder. but, may inspect the Articles and bylaws without providing a proper purpose

Question 30

Procedural process to see books

Answer 30

shareholder must (1) make a written demand to inspect corporate books and records and allow the corporation a reasonable amount of time to respond AND (2) conduct the inspection during regular business hours at the corporation’s principal office

Question 31

Authority of directors

Answer 31

Have full control over the affairs of the corporation

Question 32

Director quorum

Answer 32

A quorum must be present in order for the directors to take action or vote. majority of the directors present; present as long as they can hear each other, can destroy by leaving. Each D is presumed to concur with BOD action unless dissent/abstention in writing.

Question 33

Director informal action

Answer 33

Informal action by the board may be taken without a quorum present so long as the board has unanimously consented to the action in writing

Question 34

Director meeting notice

Answer 34

Presumed that directors have notice of regular meetings. However, for special meetings, directors must be given two days notice, which includes information about the time, location, and date of the meeting. such notice is NOT required to provide the purpose of the special meeting

Question 35

Officer authority

Answer 35

Board generally delegates day to day management to the officers (CEO, CFO, etc.). The board may remove officers at any time with or without cause. However, such removal may result in a breach of contract action if the board is violating an employment agreement

Question 36

Duty of care

Answer 36

Directors and officers owe corp fiduciary duty of care. Includes: (1) duty to take reasonable steps to monitor the corporation’s management; (2) duty to be satisfied that proposals are in the corporation’s best interests; (3) duty to disclose material information to the board; AND (4) the duty to make reasonable informed decisions (in making such decisions, directors and officers may rely on information from others whom they reasonably believe are reliable)

Question 37

Business judgment rule

Answer 37

A court will NOT second guess the decisions of a director/officer so long as the decisions are made: (1) in good faith; (2) with the care of an ordinarily prudent person in a like position would exercise under similar circumstances; AND (3) in a manner reasonably believed to be in the best interests of the corporation

Question 38

Liability for breach of duty of care

Answer 38

If a director or officer breaches the duty of care, he may be held personally liable for damages. A corporation’s articles may reasonably limit the liability of directors and officers for bad judgment, but NOT for bad faith misconduct

Question 39

Duty of Loyalty

Answer 39

Directors have a duty to avoid implicating their personal conflicting interests in making business decisions for the corp.

Question 40

Conflicting interest transaction:

Answer 40

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 significant to him that the interest would reasonably be expected to exert an influence on his judgment id called upon to vote on the transaction

Question 41

conflicting transaction safe harbor

Answer 41

Protected from liability if: (1) disinterested shareholders approve the conflicting interest transaction by majority; (2) the non-interest members of the board authorize the conflicting interest transaction by majority; OR (3) the transaction, judge according to the circumstances at the time of commitment, is established to have been fair to the corporation

Question 42

Corporate opportunities

Answer 42

corporate opportunity doctrine prohibits directors from usurping business opportunities that rightfully belong to the corporation for their own benefit. Have to offer it to corp first

Question 43

mergers and consolidations

Answer 43

Require (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

Question 44

Dissenters’ Rights

Answer 44

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

**a dissenting shareholder who opts to receive fair market value for their share loses the right to challenge the action absent showing of fraud

Question 45

Sales of substantially all corporate assets

Answer 45

Shareholder approval is required for the corp. 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. However, the disposal of assets is in the corporation’s usual and regular course of business, shareholder approval is NOT required

Question 46

derivative litigation

Answer 46

shareholder bringing suit on behalf of corp; generally must make written demand and wait 90 days to file unless board rejects demand during 90 day period.

(dont always have to make demand if futile) (independent committee has to find if suit is in the best interest of the corp)

Question 47

derivative damages

Answer 47

Proceeds go to the corporation, not the shareholder who brought the action.

Question 48

direct claims

Answer 48

A direct lawsuit is 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 corp. If a direct claim is successful, the proceeds go to the shareholder.

Question 49

LLC Certificate of Formation

Answer 49

(1) name and purpose (2) address and PPB (3) name and address of registered agent; (4) initial capital contributions and (5) names of managers and info relating to them

Question 50

Operating agreement

Answer 50

governs (1) relations between the members and the LLC; (2) the rights and duties of managers; (3) the activities and affairs of the LLC and (4) the conditions, if any, for amending the operating agreement.

LLCs presumed to be member managed

Question 51

De facto corp

Answer 51

Requirements for de facto corp: (1) a relevant incorporation statute; (2) parties made a good faith, colorable attempt to comply with the statute; (3) some exercise of corporate privileges, meaning the parties were acting as though they thought there was a corporation

**Insulates against personal liability of the shareholders, but corporation subject to “quo warranto” proceeding by state

Question 52

consideration for shares

Answer 52

Pretty much anything money, binding obligation to perform future services with an agreed value, intangible property, services already performed

Question 53

Proxy voting

Answer 53

(1) writing (2) signed by record shareholder (3) directed to corp secretary (4) authorize another to vote their shares (5) valid for 11 months. Revocable unless proxy says irrevocable and SH passed some interest

11 SAWS

Question 54

Pooled or block voting trust

Answer 54

Formal delegation of voting power to voting trustee enforceable for ten years. Req’s (1) written trust agreement, (2) filed with corp, (3) transfers shares to voting trustee; (4) SH gets trust certifications, (5) SH retains all rights but voting

Question 55

SH action for involuntary dissolution

Answer 55

SH may ask court for liquidation if (1) directors are deadlocked and corp is threatened with irreparable injury (2) oppression, or (3) waste is occurring

Question 56

Fundamental corporate changes

Answer 56

Merger, consolidation, dissolution. Fundamental Amendments to Articles; sale of substantially all corporate assets

Question 57

Fundamental change steps

Answer 57

(1) BOD resolution, (2) notice of special meeting to shareholders (3) approval by majority of all shares entitled to vote and by a majority of any voting group adversely effected (4) file notice with State.

**No shareholder approval for short form merger

Question 58

Appraisal rights

Answer 58

Dissenting SH can force corp to buy shares at fair value, only in close corps

Question 59

Appraisal rights requirements

Answer 59

Before vote, file written notice of objection and intent to demand payment; vote objecting to change; prompt written demand to be bought out. Court appoints expert appraiser to value

Question 60

Internal affairs doctrine

Answer 60

Internal affairs of a corporation are governed by the law of the state of incorporation

Question 61

requirements for de facto corporation

Answer 61

(1) must be a relevant incorporation statute; (2) parties made a good faith, colorable attempt to comply with the statute; (3) there has been some exercise of corporate privileges, meaning the parties were acting as though they thought there was a corp

Question 62

corporation by estoppel

Answer 62

Persons who have dealt with the entity as if it were a corporation will be estopped from denying the corporation’s existence.

Question 63

Indemnification of directors, officers, and employees

Answer 63

No indemnification: A corporation cannot indemnify a director who: (1) is liable to the corporation or (2) held to have received an improper benefit

Mandatory indemnification: A corporation MUST indemnify a director or officer who was successful in defending a proceeding on the merits or otherwise against the officer or director for reasonable expenses

Permissive indemnification: may indemnify for reasonable litigation expenses incurred in unsuccessfully defending a suit brought against the director on account of his position as the director if: (1) acted in good faith and (2) believed that conduct was in the best interest of the corp.

Question 64

merger with no change to surviving corporation

Answer 64

Approval of a plan of merger by shareholders of the surviving corporation is not required if

(1) articles of incorporation of the surviving corporation will not differ from the articles before the merger

(2) each shareholder of the survivor whose shares were outstanding immediately prior to the effective sale of the merger will hold the same number of shares, with identical preferences, limitations, and rights, and

(3) voting power of the shares issue as a result of the merger will comprise no more than 20% of the voting power of the shares of the surviving corp. that were outstanding prior to the merger

Question 65

Involuntary dissolution action by AG

Answer 65

AG may seek dissolution of a corp on the ground that it fraudulently obtained its articles of incorporation or that the corporation is exceeding or abusing its authoirty

Question 66

Involuntary dissolution action by SH

Answer 66

(1) director abuse, waste or assets, or misconduct; (2) deadlocked directors; (3) shareholders are deadlocked in voting power and have failed to elect more directors (4) corp has abandoned its business and failed to dissolve within a reasonable time

Question 67

Involuntary dissolution action by creditors

Answer 67

creditors may seek dissolution if: (1) creditor’s claim has been reduced to judgment, execution of the judgment has been returned unsatisfied, and the corp is insolvent; or (2) the corporation has admitted in writing that the creditor’s claim is due and owing and the corporation is insolvent

Question 68

Winding up steps

Answer 68

(1) give written notice to known creditors and publish notice of dissolution in a newspaper on the county of its PPB; (2) gather all assets; (3) covert assets to cash; (4) pay creditors; and (5) distribute any remaining sums to shareholders, pro rata by share, unless there is a liquidation preference

Question 69

Requirements for derivative suits

Answer 69

(1) Standing (stock ownership at time of wrong and SH must fairly and adequately represent the Co.’s interest); (2) Demand requirements; (3) Co. joined as defendant

Question 70

Dismissal of derivative suit

Answer 70

(1) dismissal or settlement requires court approval; (2) dismissed if not found in Co.’s best interests; (3) investigation must be made by independent directors or a court-approved panel of one or more independent persons

Question 71

court determination to dismiss derivative suit

Answer 71

If the court finds that (1) those recommending dismissal were truly independent and (2) they made a reasonable investigation, in most states, the court will dismiss

Question 72

Duties of controlling shareholders to minority shareholders in close corporation

Answer 72

Cannot use their powers to benefit at the expense of the minority shareholders

Question 73

Oppression of minority shareholders

Answer 73

If there is an oppression of minority shareholders, they can sue the controlling shareholders who oppress them for this breach of fiduciary duty.

Question 74

Liability when acting without Articles

Answer 74

“When a corporation’s articles of incorporation have not been filed, persons purporting to act for the corporation are personally liable for corporate debts if they knew when the debt was incurred that there was no incorporation”

Question 75

Standard sentence for fiduciary duties

Answer 75

A director must discharge duties in good faith and with the reasonable believe that her actions are in the best interest of the corporation. Must also use the care that a person in like position would reasonably believe appropriate under the circumstances

Question 76

Fundamental Corporate Changes

Answer 76

(1) Amending articles; (2) merging or consolidating into another company; (3) transferring substantially all assets; (4) converting to another form of business; (5) dissolving

Question 77

What is the right of appraisal?

Answer 77

Dissenting shareholder’s right to force the corporation to buy their stock for fair value

Question 78

What triggers right of appraisal? What types of fundamental changes?

Answer 78

Merging or consolidating, transferring substantially all assets, stock being acquired in a share exchange; converting to another form of business

Question 79

Does appraisal exist in large corporation?

Answer 79

No. Close corporation only. In a close corporation, there is no market to buy the stock, so you can force the company to buy your stock.

Question 80

Is right of appraisal an exclusive remedy?

Answer 80

Yes. Absent fraud, the right of appraisal is a shareholders’ exclusive remedy if they do not like a fundamental change.

Question 81

Dissociation of an LLC

Answer 81

If a member leaves, then it leads to a dissociation of that member, but it does not lead to winding up or dissolution unless the other members unanimously agree to dissolve the LLC

Question 82

LLC Liability

Answer 82

Generally individual members are not liable for losses. They are liable if the court decides to pierce the LLC veil or if proper procedures for dissolution and winding up had not been followed (Creditors may enforce claims against each of the LLC members. However, a member’s total liability may not exceed the total value of assets distributed to the member in dissolution).

Question 83

what does corp filing need

Answer 83

We need to S P A W N the Corporation with the Articles.

Share info (Maximum authorized)

Par value (minimum issue price. If shares drop below, company has to pay shareholders the gap).

Address info (name and address of agent and principal place of business)

Why the corporation is being formed (statement of purpose) - usually it says something like “to engage in any lawful activity”

Name of corporation, including its designation such as “Inc.”

Question 84

Determining Director Liability

Answer 84

Director is presumed to concur with board action unless her dissent or abstention is noted in writing in corporate records. This means: (1) in the minutes, (2) delivered in writing to the presiding officer, or (3) written dissent to the corp immediately after the meeting. Oral dissent by itself is not effective.