Corporations and LLCs

Question 1

Three requirements for articles of incorporation

Answer 1

1. name of corporation
2. names and addresses of incorporators, resident agent name and address,
3. authorized state, number of shares per class, and any voting rights or preferences

Question 2

Director limiting liability in articles?

Answer 2

May limit liability of directors in articles, unless
A. Intentionally inflicts harm on corporation,
B. intentionally violates criminal law
C. receives a financial benefit he was not entitled to

Question 3

Effects of incorporation?

Answer 3

1. Corporation is liable for corporate acts rather than owners, and
2. It is doubly taxed (unless S corp formed)

Question 4

What about failure to incorporate properly? good faith and bad faith attempt

Answer 4

1. Bad faith attempt. joint and severally liability for person if
   a. person actually knew articles had not been filed, and
   b. person participated on corps behalf.

good faith. if no corp formed by law
A. de facto incorporation - individuals acting on behalf are not liable if there was good faith attempt to comply with statutory requirements,
b. corporation by estoppel - a third party who believes it was contracting with corp cannot later deny validity of crop.

Question 5

Liability for preincorporation contract, ratification:

Answer 5

not liable unless
A. board of directors expressly adopts,
B. knowing acceptance or retention of contracts benefits

Question 6

Liability of promoter?

Answer 6

Promoter is personally liable on contracts entered into on behalf of soon to be corp, even if corp ratifies, unless there is:
1. release by corp,
2. novation by all three parties.

Question 7

Role of directors?

Answer 7

management of corp, ie
a. supervision, hiring, firing of officers
b. when to make distribtuions.
majority vote of board needed for most general decisions.

Question 8

Voting requirements for board meeting?

Answer 8

A. Board can only act with a quorum.
B. unless by laws or articles say otherwise, majority vote of quorum needed to pass resolution.
C. board may act with unanimous written consent.

Question 9

Notice requirements for board meeting?

Answer 9

notice of meeting generally not required. when it is:
special meeting - 2 days notice, with location, time, and date
if directors attend and vote at a special meeting, they waive any defect in the notice

Question 10

What are the duties of directors of corps and members of LLC?

Answer 10

A. Duty of loyalty (business judgment rule)
B. Duty of care

Question 11

What is the business judgment rule? (duty of care)

Answer 11

Director presumed to have acted in good faith, on an informed basis, with honest belief that action was in companys best interest.
party claiming breach of duty of care has burden of proof.

Question 12

What is the duty of loyalty? <corp></corp>

Answer 12

Director must act in good faith, with a reasonable belief that what he does is in corps best interest.
business judgment does not apply to duty of loyalty. comes up in three ways
A. director is on both sides of transaction
B. competes with corp.
3. usurps corporate opportunity

Question 13

What is a directors defenses to breach of duty of loyalty?

Answer 13

A. disinterested directors approve transaction
B. dirinterested shareholders approve it.
C. transaction established to have been fair to a corp according to circumstances at time.

Question 14

a corporation is insolvent when (and no distributions allowed)?

Answer 14

corporation is not able to pay its debts as they become due in course of business (equity solvency test), or
corporations total assets are less than teh sum of its total liabilities (balance sheet test)

Question 15

Shareholder removal of directors?

Answer 15

A. removal by vote - shareholder vote removes if # of votes for removal greater than number of votes against (unless cumulative voting, if directors gets enough votes that would have elected him), or
b. judicial removal: for fraud with respect to corp or shareholders, abuse of position, intentionally inflicting harm on corp, removal in corp best interests

Question 16

When can you indemnify a director or officer in a suit?

Answer 16

A. prohibited - director liable for breach of loyalty, received a financial benefit not entitled to, liable to corp.
B. required - director successful on the merits
C. permitted - settlement, as long as director acted in good faith with a reasonable belief that operating on Comp best interest

Question 17

Officer description (5 things)

Answer 17

A. directors hire and fire officers in their discretion (even if K says otherwise)
B. officer may hold more than one office
C. Powers generally given by bylaws
D. Agent of corp, with actual or at least apparent authority to bind
E. same fiduciary duty as directors (loyalty, care)

Question 18

3 duty of majority shareholders

Answer 18

1. disclose any known, material information if nondisclosure causes material loss to minority shareholders,
2. deal fairly when purchasing minority shareholder interest
3. burden of proof on fairness of process it employed and price it selected on purchasing majority shareholder

Question 19

requirements of written notice of shareholder meetings

Answer 19

1. more than 10 and less than 60 days before meeting
2. time place and purpose of meeting.

object for defect notice at beginning, object for other matters when presented
shareholder can vote w/o meeting by unanimous written consent

Question 19

Who can vote on a shareholder resolution?

Answer 19

A. record owner on record date
Deceased shareholders executor
shareolders valid proxy

Question 19

What is required for shareholder resolution to pass?

Answer 19

A. a quorum present, AND
B. more votes for the resolution, and again.
Quorum is present is majority of outstanding shares are present.

Question 20

Shareholder voting by proxy:

Answer 20

Shareholders may vote by proxy
Proxxies are appointed by signing an appointment form or making a verifiable electornic transmission.
it is revocable unless it explicitly states it is irrevocable and is coupled with an interest

Question 21

Piercing the corporate veil

Answer 21

P must show:
A. Shareholders abused privilege of incorporating
B. fairness requires holding them liable
ALMOST ALWAYS ONLY FOR CLOSE CORPS

Question 22

Shareholder lawsuits? 2

Answer 22

1. direct - breach of duty injured shareholder personally
2. derivative - injury caused to corp and shareholder trying to enforce rights

Question 23

Derivative lawsuit standing and prior action

Answer 23

Derivative standing:
A. shareholder at time of omission,
B. Adequately represents corps interests,
C. Filed a written demand.

Must wait 90 days after making demand, unless:
A. Demand rejected
B. irreparable injury will happen in that period,
C. Waiting is pointless (directors are defendants)

Question 24

3 groups that can dismiss derivative lawsuit

Answer 24

A. court appointed panel of disinterested persons
B. majority vote of independent directors constituting a quorum
C. majority vote of committed of at least two indepdneent directors appointed by a majority of indpednent directors present at a meeting

Question 25

Shareholders demand to inspect records

Answer 25

Shareholder must state with reasonable particularity:
A. purpose,
B. records desired,
C. direct connection between the two

Question 26

What are the four fundamental changes and their voting requirements?

Answer 26

A. Amendment of articles, Merger, selling all assets, dissolution of corp, dissolution for oppression in close cases.

shareholders entitled to vote receive notice, absolute majority of shares entitled to vote approve, amended articles delivered to SoS

Question 27

Merger requirements

Answer 27

Agreement of board and shareholders of both corps, unless subsidiary merges with parent corp that owns more than 90% of it

Question 28

3 dissenters rights?

Answer 28

A. file notice with company and demand payment
2. do not vot eon proposed change
3. make a demand

Question 29

LLC member liability

Answer 29

members are not liable unless,
A. court pierces LLC veil
B. creditors do not receive notice of windup

Question 30

Dissolution of LLC

Answer 30

dissociation does not automatically trigger windup and dissolution.

All members must agree to disollution.
disassociated members have rights in distributions but lose management rights

Question 31

Requirements of a stock subscription agreement

Answer 31

A. signed writing
B. Definite number of shares
C. Must state a price

Question 32

Issuance of a dividend requirements

Answer 32

A. board may issue dividends whenever it wants unless corp is insolvent.

Question 33

Federal security law what must be proven for a 10b-5 claim? (Security fraud)

Answer 33

A. manipulation or deception. Materiality. in connection with the transaction, intent, instrumentality.
Private plaintiffs must show standing, reliance, and damages.

Question 34

What can a corp recover from officer/director/larger shareholder in a 16b claim?

Answer 34

a corp may recover:
A. a profit made,
B. by an officer, director, or lagrge shareholder,
C. from buying and selling stock,
D. within a 6 month period.