Corporations and LLCs

Question 1

When does a corporation’s existence begin?

Answer 1

The date the Articles of Incorporation are filed

Question 2

What must the Articles of Incorporation contain?

Answer 2

1) Corporate name
2) number of shares the corporation is authorized to issue
3) address of the corproration’s initial registered office and name of its initial registered agent AND
4) the name and address of each incorporator

Question 3

What are Bylaws, and what may they contain?

Answer 3

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

1) articles of incorporation OR
2) laws of the jurisdiction

Question 4

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

Answer 4

When

A) The Articles of Incorporation exclusively reserve the power to the shareholders OR

B) The shareholders, in amending/adopting/repealing a bylaw, expressly provide that the Board of Directors cannot amend/repeal/reinstate that bylaw.

Question 5

What does the Operating Agreement of an LLC govern?

Answer 5

1) relationship between the members and the LLC
2) the rights and duties of managers
3) the activities and affairs of the company AND
4) any means and conditions for amending the agreement

Question 6

What is a promoter?

Answer 6

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

Question 7

When is a promotor personally liable for his conduct?

Answer 7

When

1) he purports to act as or on behalf of the corporation

2) Knowing that no corporation was formed

He remains personally liable for pre-incorproation contracts EVEN IF the corporation adopts the contract (both corp and promoter are liable) – UNLESS there’s a novation

Question 8

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

Answer 8

If

a) there is a subsequent novation OR

b) The contract explicitly provides that the promoter has no personal liability on the contract

Question 9

When is a corporaton liable on pre-incorporation contracts entered into by a promotor?

Answer 9

When the corporation expressly or impliedly adopts the contract post incorproation

Question 10

When is there implied adoption of a corporation?

Answer 10

Implied adoption occurs when the corporation

1) has reason to know or knows the material terms of the contract AND

2) Accepts some benefit from the contract

Question 11

If corporate formation is defective, who is liable for contracts and obligations?

Answer 11

The owners may be personally liable for contracts and obligations if there’s a defective formation

Question 12

What doctrines limit owners’ personal liability for contracts arising from a defective corporation formation?

Answer 12

RMBCA

De Facto Corporation

Incorporation by Estoppel

Question 13

RMBCA and Owner Personal Liability

Answer 13

Only held personally liable when

1) purports to act as or on behalf of the corporation AND

2) knowing that no corporation was formed

Good faith belief that the corporation was formed WILL NOT subject an owner to liability

Question 14

De Facto Corporation

Answer 14

Owners enjoyed limited liaiblity when

1) good faith attempt to incorporate
2) business was eligible to incorporate AND
3) took action that is considered itself a corp

Question 15

Incorporation by Estoppel

Answer 15

Person or entity that treated business as a corp is estopped from denying that business is a corp

Question 16

What does it mean to pierce the corporate veil?

Answer 16

To hold shareholders personally liable

Question 17

When will a court pierce a corporate veil?

Answer 17

1) the corporation is acting as an alter ego of the shareholders (little or no separation between the shareholders and the corp)

2) shareholders failed to follow corporate formalities

3) the corporation was inadequately capitalized at its inception to cover debts/liabilities

4) prevent fraud

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

Question 18

Common shares v. preferred shares

Answer 18

Common shares: provide shareholders with voting rights BUT they are last in priority to be entitled to a distribution

Preferred shares: entitled to company assets upon dissolution before common shares BUT NO VOTING RIGHTS

Question 19

Authorized v. Outstanding v. Reaquired Shares

Answer 19

Authorized: maximum number of shares the corp can issue per the Articles of Incorp

Outstanding: how many issued shares are held by shareholders and each gets one vote

Reacquired: how many issue shares are owed by corp. and not allowed to vote

Question 20

Can a shareholder compel a corp to make a distribution?

Answer 20

No, shareholders do not have the right to compel a corp distribution

Question 21

How can a court interfere with a board’s discretion to make a distribution?

Answer 21

Courts will interfere and order a distribution if you show

1) Bad faith or dishonest purpose AND

2) that funds were available for the dividend/distribution

Question 22

Who can vote at shareholder meetings?

Answer 22

Only shareholders that are registered shareholders on the record date are entitled to vote, which cannot be more than 70 days prior to the meeting.

If not said otherwise, the record date is the day before the first notice is delivered to the shareholders

Question 23

Can a shareholder vote with a proxy?

Answer 23

A shareholder may vote shares at a meeting without attending through a proxy

Question 24

What is required for a valid proxy

Answer 24

It must be signed on

1) appointment form OR
2) electronic transmission

Oral proxies are invalid

Question 25

Are corps obligated to accept a proxy?

Answer 25

Proxy must be accepted by the corp on its face if there are no reasonable grounds to deny its genuineness and authenticity

Question 26

Are proxy agreements freely revocable by the shareholder?

Answer 26

Yes, even if the proxy states that it is irrevocable with the one exception of proxies coupled with an interest or legal right, which is irrevocable if the proxy states as much

Question 27

What notice is required for a shareholder regular meeting v. a special meeting?

Answer 27

Regular meeting: No notice

Special meeting: proper notice of at least 10 days in advance but not more than 60 days

Include the purpose of the meeting

Time, date, and place

Question 28

Can notice be waived by a shareholder?

Answer 28

Yes, by

1) delivering a signed writing to the corp.

2) attending and not objecting at the beginning of the meeting

Question 29

When does a quorum exist?

Answer 29

When a majority of shares entitled to vote are present

This is required to take action at a meeting

Question 30

When is an action by the shareholders approved?

Answer 30

A majority of votes are cast in favor of it

Question 31

What is cumulative voting?

Answer 31

Each shareholder has a number of votes equal to the shares owned, multiipeld by then umber of director spots open for election

100 shares x 3 spots = 300 votes for example

Question 32

When may a shareholder inspect the following corporate books and records? (certain accounting records, excepts of board meeting minutes, and record of shareholders)

Answer 32

1) regular business at hours at reasonable location
2) when they provide 5 day written notice
3) good faith and proper purpose
4) purpose described with particularity AND
5) records directly connected with the purpose

Question 33

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 33

1) director objects at the beginning of the meeting to holding or transacting business at meeting

2) dissent or abstention from the action is entered into meeting minutes

3) director gives written notice of dissent/abstension to presiding officer before adjourment

Can’t dissent or abstain if you vote in favor of the action taken

Question 34

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

Answer 34

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

Question 35

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

Answer 35

If

1) each director signs a consent describing the action to be taken AND
2) Delivers it to the corporation

Consent may be withdrawn by a signed revocation

Question 36

How may a director be removed by shareholders?

Answer 36

Only at

1) A director called for the purpose of removing the director; AND

2) The meeting notice must state the purpose of the meeting (to remove a director)

RMBCA – with/without cause

Common law – removal ONLY by cause

Question 37

What is an officer’s actual or apparent authority?

Answer 37

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

Question 38

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

Answer 38

He has the 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 forextraordinary acts

Question 39

How may an Officer be removed?

Answer 39

At any time with or without cause by

1) the board of directors
2) the officer who appointed such officer, unless the Bylaws or the Board of Directors provide otherwise; OR
3) Any other officer, if authorized by the Bylaws or Board of Directors

The officer’s removal DOES NOT affect the officer’s contract rights with the corporation

Question 40

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

Answer 40

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 LLCfor all acts apparently conducted within the ordinary course of business (an act normal and necessary for managing the business)

Question 41

What are preemptive rights?

Answer 41

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, a shareholders DO NOT enjoy preemptive rights unless granted in the Articles of Incorporation

Question 42

When do preemptive rights NOT apply?

Answer 42

a) shares issues as compensation

b) shares issued to satisfy conversion or option rights (created to provide compensation)

c) shares authorized in the Articles of Incorporation that are issued within 6 months of incorporation

d) shares issued for consideration other than money OR

e) Shares issued without general voting rights, but with preferential rights to distributions

Question 43

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

Answer 43

For

a) Any reasonable purpose
b) to preserve exemptions under federal/state securities laws; OR
c) To maintain the corproation’s status when it is dependent on the number/identity of its shareholders

Absolute restrain on transfer of shares is invalid

Question 44

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

Answer 44

1) right to first refusal

2) obligation of the corporation or other persons to acquire shares

3) to require the corporation or certain shareholders to approve the transfer of shares (if not manifestly unreasonable); and

4) prohibiting the transfer to designated persons or classes of persons (if not manifestly unreasonable)

Question 45

Directors owe a duty of care to the corporation. How must they discharge this duty?

Answer 45

1) good faith
2) manner the director reasonably believes to be in the best interests of the corporation AND
3) with the care that a person in a like position would reasonably believe appropriate under similar circumstances

If this is met, then no liability for the director even if there was bad results

Question 46

May a director rely on the reasonable advice of advisors?

Answer 46

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

Question 47

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

Answer 47

When directors

1) are financially interested in a transaction (conflict of interest)

2) are not acting in good faith OR

3) engaged in fraud or illegality

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

Question 48

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

Answer 48

A director is forbidden from

a) entering into conflicting interest transactions

b) usurping a corporate opportunity

c) competing with the corporation; and

d) trading on inside information

Question 49

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

Answer 49

If

1) approved by majority of disintersted directors, after full disclosure of relevant material facts

2) approved by a majority of disinterested shareholders OR

3) the transaction as a whole was fair to the corporation at the time it was entered into

Question 50

When does a director have a conflict of interest?

Answer 50

When the director or family member either

1) is a party to the transaction

2) has a beneficial interest in the transaction or is so closely linked to it that the director’s judgment may be affected OR

3) is involved with another entity that is conducting business with the corporation and the transaction would normally be brought before the board because of its importance

Question 51

What is a corporate opportunity

Answer 51

Any opportunity that:

a) the corp. has an interest/expectancy in; OR
b) is the corp’s line of business

Question 52

When may a director/officer puruse a corporate opportunity?

Answer 52

If she

1) first presents it to the corporation’s board of directors; AND

2) The Board decides not to pursue the opportunity

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

Question 53

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

Answer 53

When

a) finanical benefits are improperly received

b) there is intentional infliction of harm on the corporation or its shareholders

c) there are unlawful corporate distributions; OR

d) 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

Question 54

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

Answer 54

The duty of care to act:

1) with the care that a person in a like position would reasonably exercise under similar circumstances; AND

2) 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

Question 55

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

Answer 55

The duty to:

1) account for any property, profit, or benefit the member derived from the LLC’s activities or property

2) Refrain from dealing with the LLC when an adverse interest to the LLC exists; and

3) 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

Question 56

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

Answer 56

1) Duties only apply to managers and NOT the members

2) Only the members may authorize an act that would otherwise violate the duty of loyalty; AND

3) A manager must refrain from competing with the LLC until winding up is completed

Question 57

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

Answer 57

It may:

1) restrict or eliminate the duty of loyalty
2) identify activities that do not violate the duty of loyalty
3) alter the duty of care
4) alter or eliminate any other fiduciary duty AND
5) prescribe the standards by which to measure the performance of good faith and fair dealing

Question 58

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

Answer 58

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

Question 59

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

Answer 59

He must

1) be a shareholder at the time of the act/omission OR became a shareholder by operation of law from such a shareholder

2) be a shareholder though entry of judgment

3) fairly and adequately represent the interest of the corporation; AND

4) Make a written demand upon the corporation to take suitable action

Question 60

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

Answer 60

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

1) the action may be brought within a reasonable time after the demand; AND

2) the demand requirements may be waived if the demand is deemed futile

Question 61

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

Answer 61

When:

1) a majority of the Board’s qualified Directors

2) Have determined in good faith

3) after conducting a reasonable inquiry AND

4) that the derivative proceeding is not in the best interests of the corporation

Question 62

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

Answer 62

That the defendant engaged in a fraudulent scheme or device that was relied on in connection with the purchase or sale of secuirites acted with scienter used some means of interestate commerce AND caused damages

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

Question 63

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

Answer 63

Only if the following procedures are followed:

1) Adoption by the Board of Directors;

2) Notice to each shareholder stating the purpose is to voteon the amendment (and a copy of the amendment is provided); AND

3) 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.

Question 64

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

Answer 64

1) Approval by the Board of Directors of both corporations;
AND

2) 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.

Question 65

What is a Short Form Merger?

Answer 65

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.

Question 66

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

Answer 66

1) Approval by the Board of Directors of both corporations;
AND

2) Shareholder approval of the acquired corporation by a majority vote.

*Shareholder approval is NOT required for the acquiring corporation.

Question 67

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

Answer 67

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

Question 68

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

Answer 68

a) When he has the right to vote on a merger plan;

b) 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;

c) When he has the right to vote on the distribution of all or mostly all of the corporate assets; OR

d) When an amendment to the Articles of Incorp. materially and adversely affects his rights.

Question 69

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

Answer 69

If:

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

Question 70

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

Answer 70

a) A deadlock of the Directors in the management of the corporate affairs and irreparable injury to the corporation;

b) That the Directors have acted in a manner that is illegal, oppressive, or fraudulent;

c) The shareholders are deadlocked in voting power and have failed to elect Directors for a least 2 consecutive annual meetings; OR

d) The corporate assets have been wasted or misapplied

Question 71

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

Answer 71

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

Question 72

When does a member become dissociated from an LLC?

Answer 72

a) Notice of the member’s express will to withdraw;

b) Occurrence of an agreed upon event in the operating agreement;

c) Expulsion pursuant to the operating agreement;

d) Expulsion by the unanimous vote of the other members;

e) By judicial order for misconduct;

f) Bankruptcy, incapacity, or death;

g) Appointment of a personal representative/receiver; OR

h) Termination of the entity member.

Question 73

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

Answer 73

a) The occurrence of an event in the Operating agreement causing dissolution;

b) The consent of all the members;

c) The passage of 90 consecutive days during which the LLC has no members; OR

d) Judicial dissolution.

Question 74

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

Answer 74

a) The managers/controlling members are acting in an illegal or fraudulent manner OR a manner which is oppressive and directly harmful to another member;

b) The conduct of all or mostly all of the LLC’s activities are unlawful; OR

c) It’s not reasonably practicable to carry on the LLC’s activities in conformance with the Operating agreement.

Question 75

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

Answer 75

1) The dissolved LLC; AND

2) 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).