Corporations and LLCs - MEE

Question 1

What is the business judgment rule?

Answer 1

Directors of a corporation are generally not held personally liable for decisions they make on behalf of the corporation and courts will not second-guess them if the 3 following prerequisites are met:

(1) the director acted with a reasonable belief that the decision was in the best interest of the corporation.

(2) the director acted in good faith

(3) the director acted as a reasonably prudent person would under similar circumstances.

Question 2

What are the 3 prerequisites for the business judgment rule to protect a director?

Answer 2

(1) the director acted with a reasonable belief that the decision was in the best interest of the corporation.

(2) the director acted in GOOD FAITH (Honesty in Fact)

(3) the director acted as a reasonably prudent person (RPP) would under similar circumstances.

Question 3

When will board approval relieve a director’s personal liability for engaging in personal transactions with the company for which they are a director?

Answer 3

(1) the director discloses all material facts of the transaction (and the board approves)

OR

(2) the transaction is fair to the corporation and shareholders

Question 4

What is an exculpatory clause?

Answer 4

Exculpatory clauses in the articles of incorporation or bylaws relieve directors of personal liability to the corporation and or shareholders.

Question 5

When will an exculpatory clause NOT relieve a director of personal liability?

Answer 5

(1) when the act of the director was illegal

(2) when the director acts to intentionally injure the corporation or its interests

(3) when the act results in illegal distributions

(4) the director improperly benefits from their own actions

Question 6

What is the name for shares repurchased by the corporation?

Answer 6

Treasury Shares

Question 7

Are treasury shares entitled to vote at shareholder meetings?

Answer 7

No.

Question 8

What type of shares are generally entitled to vote at shareholder meetings?

Answer 8

Outstanding shares.

Question 9

Are voting proxies allowed?

Answer 9

Yes, unless the proxy is irrevocable and given with a property interest or consideration.

Question 10

How can voting proxies be revoked?

Answer 10

(1) any written instrument / notice

(2) the shareholder can also simply attend the shareholder meeting and vote their shares

Question 11

What are the requirements for a valid proxy vote?

Answer 11

(1) authorized in writing

(2) signed by the shareholder (or a person who received the share by operation of law)

(3) proxy writing is sent to the secretary of record for the corporation

(4) the writing articulates the authorization to vote the share

Question 12

What instruments define what percentage of votes is needed to pass a resolution at a shareholder meeting?

Answer 12

(1) articles of incorporation

Or

(2) the bylaws

Question 13

Which document wins (prevails) if the articles of incorporation and the bylaws conflict?

Answer 13

The articles of incorporation.

Question 14

What is the primary limitation on the corporate president’s power to act and authority?
.

Answer 14

The board of directors discretion.

A corporate president may enter into ordinary contracts.

A corporate president may not enter into extraordinary contracts (beyond the scope of normal business) without the consent of the board of directors

Question 15

What powers is the board of directors unable to bestow on the president of the corporation?

Answer 15

The board of directors may not give the president powers which the board itself does not have.

Question 16

When is a proxy authorization irrevocable?

Answer 16

(1) when the proxy writing states it is irrevocable

AND

(2) the authorization is given in exchange for consideration, as a surety, or the proxy holder has an interest in the authorization.

Question 17

What body of law governs the relationship between the president and the corporation?

Answer 17

Agency law.

Question 18

What general powers is the president trusted with?

Answer 18

(1) the power to act as an agent for the corporation

(2) in additional capacities authorized by the board of directors

Question 19

What contracts may the president enter into on behalf of the corporation without board approval?

Answer 19

Ordinary contracts (contracts within the scope of normal business practices - ORDINARY COURSE OF BUSINESS).

Question 20

What document authorizes the scope of acts that the board of directors may take?

Answer 20

The articles of incorporation.

Question 21

If the articles of incorporation are silent, how many directors and what percentage of those directors must vote to pass a resolution?

Answer 21

(1) a meeting and decision are valid if a quorum of the directors are present (usually a majority)

(2) a resolution will pass if a majority (of the quorum) votes in favor

Question 22

What is required for a fundamental change to the corporation?
Fundamental change is only valid if . . .

Answer 22

(1) the board passes a resolution in favor of the fundamental changed (with quorum present)

And then

(2) a majority of shareholders approve

Question 23

What remaining option is available to shareholders when there is a fundamental change to the corporation that they disagree with, BUT, they don’t have enough votes to prevent it?

Answer 23

Appraisal. Shareholders opposing a fundamental corporate change may force the corporation to buy back their shares.

Question 24

What is the procedure for appraisal?

Answer 24

The shareholders must

(1) object to the fundamental change

(2) not vote in favor of the fundamental change

(3) demand in writing that the corporation given them market value for their shares.

Question 25

What is a promoter in corporation law?

Answer 25

A person who organizes for a corporation which is not yet formed and obtains equipment, funding, land, capital. They also may enter into contracts.

Question 26

Are promoters personally liable for contracts made on behalf of a corporation before it exists?

Answer 26

Yes.

Question 27

Are promoters still liable for contracts adopted by the formed corporation?

Answer 27

Yes.

Question 28

How may contracts be adopted?

Answer 28

(1) Express Or (2) Implied

Question 29

When will a promoter not be liable NOT be personally liable for contracts made on behalf of the to-be corporation?

Answer 29

The contract expressly and definitively states that the promoter will not be personally liable.

Question 30

Are corporations generally liable for the contracts entered into by promotes?

Answer 30

Generally no. The corporation is only bound if the contract is expressly or impliedly adopted by the corporation.

Question 31

What is express adoption (or RATIFICATION)?

Answer 31

Written consent acknowledging that the corporation is liable for the contract.

Question 32

What is implied adoption (or RATIFICATION)?

Answer 32

The corporation acts and accepts value from or the benefit of the contract with knowledge of the circumstances.

Question 33

What is a shareholder derivative lawsuit?

Answer 33

A shareholder (or several) sues on behalf of a corporation against: (1) 3rd party actors (2) officers of the corporation, OR (3) a member or members of the board of directors for breaching duties owed to the corporation.

Question 34

Who receives damages that are awarded as a result of a shareholder derivative suit?

Answer 34

The corporation itself.

Question 35

What obligations does a shareholder have when bringing a shareholder derivative lawsuit?

Answer 35

(1) to fairly and adequately represent the interest of the corporation (2) to demand in writing that the corporation cure the problem (unless the shareholder knows the demand is useless)

Question 36

Who is permitted to bring a shareholder derivative lawsuit?

Answer 36

(1) one who owned shares at the time of that the transaction or occurrence occurred (2) one who receives shares by operation of law from an owner who owned the shares at the time of transaction or occurrence.

Question 37

What are the primary responsibilities of the board of directors?

Answer 37

(1) Appoint / hire officers (2) manage the high-level affairs of the corporation

Question 38

What are the 3 main duties of directors?

Answer 38

(1) to act in good faith (2) to act in the best interest of the corporation (3) to act with the care of a reasonably prudent person under similar circumstances.

Question 39

Under the business decision rule, what is the legal presumption when a person alleges that a director violated their duties?

Answer 39

(1) the director was acting in the best interest of the corporation (2) the decision was made in good faith I.e., the accusers have the burden of proof.

Question 40

What information may directors properly rely on when making a decision?

Answer 40

(1) Information provided from outside the corporation that one would reasonably believe to be competent. (2) Information from corporate officers and employees that one would reasonably believe to be competent.

Question 41

What duty is breached if a director deals personally with a corporation and improperly profits from the transaction?

Answer 41

The duty of loyalty.

Question 42

When may a director properly have personal dealings with a corporation?

Answer 42

(1) all material aspects and facts of the transaction are disclosed (2) the transaction is approved by a majority of either (a) disinterested board members or (b) shareholders (3) the transaction is fair

Question 43

For the purposes of approval, is dissolution a fundamental change of the corporation?

Answer 43

Yes!

Question 44

What is the notice requirement for a shareholder meeting in which there will

Answer 44

be a vote on a fundamental change? Minimum 10 days notice.

Question 45

What must be contained within the notice of a vote for fundamental change?

Answer 45

(1) Place (2) When (3) Description and purpose of the fundamental change

Question 46

Can a defective notice of a meeting be waived by shareholders?

Answer 46

Yes, by going to the meeting and voting.

Question 47

What is the effect of a defective notice that is not waived for a meeting in which a fundamental change is voted?

Answer 47

Any adopted resolution is considered voidable.

Question 48

Who may void a resolution based on deficient notice?

Answer 48

Any shareholder (or anyone with the right to vote) who did not receive proper notice.