Corporations - Basics

Question 1

Summary of Issues Tested

Answer 1

1. Formation
   1a. Pre-incorporation contracts
   1b. Corporation formation
2. Securities
3. Shareholders
4. Board of Directors
5. Officers

Question 2

Formation - Pre-Incorporation, Promoter

Answer 2

A person who - prior to formation of a corporation - procures capital and enters into contract to bring the corporation into existence

Question 3

Formation - Pre-Incorporation, Liability for pre-incorporation agreements

Answer 3

Promoters are personally liable for contracts being entered into pre-incorporation, even after the corporation comes into existence unless
a. Novation - the corporation and other party agree to substitute the corporation for the promoter
b. Adoption - The corporation adopts the contract expressly or by using benefits of the contract, and agrees to accept sole liability on the contract thereby releasing the promoter

Question 4

Formation - Pre-Incorporation, Corporation’s liability

Answer 4

A corporation is not liable for pre-incorporation contracts entered by promoters barring novation or adoption.

Question 5

Incorporation - Components

Answer 5

1. Procedure
2. Ultra Vires
3. De Jure
4. Failure to Meet Requirements

Question 6

Incorporation - Procedure

Answer 6

Corporations are formed when articles of incorporation are filed with the state. The articles must include a statement of the corporation’s purposes (broad is okay).

*Common to test by improperly filed articles of incorporation, necessitating de facto or corporation by estoppel analysis

Question 7

Incorporation - Ultra Vires

Answer 7

Corporations act ‘ultra vires’ when they engage in activity outside the narrow business purpose laid out in its articles of incorporation. Ultra vires acts allow shareholders to file suit to enjoin action or take action against the director/officer/employee at responsible.

Question 8

Incorporation - De Jure Corporation

Answer 8

A ‘De Jure’ corporation exists when the statutory requirements for incorporation have been satisfied - beginning the corporation’s potential liability for activities

Question 9

Incorporation - Failure to meet Requirements

Answer 9

When a person makes a good faith effort to incorporate but comes up short, they may still escape personal liability.
If the owner made a good faith effort to incorporate and operates the business without knowing they lacked certain requirements, the court treats the entity as a ‘de facto’ corporation and the owner escapes individual liability.
Similarly, a party dealing with an entity as if it were incorporated is estopped from denying its existence and thereby prevented from seeking personal liability against its owner (limited to contract agreements). Same good faith requirement applies for the owner.

Question 10

Securities - Components

Answer 10

Generally, issuance of stock must be authorized by the board of directors.
1. Valuation
2. Federal Causes for Action of Improper sale

Question 11

Securities - Valuation

Answer 11

The board of directors must determine that consideration paid for the stock is adequate, either at or below par value.

Question 12

Securities - Valuation, Par Value Stock

Answer 12

A corporation may issue par value stock when incorporating, where the corporation is required to receive at least the value assigned to the stock (which has no relation to FMV and can be nominal).

Question 13

Securities - Valuation, Sale of Stock Below Par Value

Answer 13

When the board of directors issues par value stock below par value, the board is liable to the corporation for the difference. A shareholder that knowingly received par stock below par value is also liable to the corporation.

Question 14

Securities - Federal Causes of Action for Improper Sale of Securities

Answer 14

Federal causes of action for violation of Rule 10(b)(5) and Section 16(b) are based on the purchase and sale of stock.
NOT FREQUENTLY TESTED.

Question 15

Shareholders - Components

Answer 15

1. Meetings
2. Voting
3. Proxy Voting
4. Shareholder Agreements
5. Shareholder Derivative Action
6. Liability
7. Controlling Shareholders’ Fiduciary Duties
8. Fiduciary Duty

Question 16

Shareholders - Meetings

Answer 16

Corporations are required to hold annual shareholder meetings, which primarily are used to elect directors

Question 17

Shareholders - Voting

Answer 17

Shareholders primarily vote on the selection of the board of directors. Shareholder approval is also required for fundamental corporate changes like sale or merger

*frequently tested

Question 18

Shareholders - Proxy Voting

Answer 18

A proxy is a written agreement by a shareholder to allow a person (can be another shareholder or representative) to vote for them.
The proxy is valid for 11 months unless otherwise stated and generally revocable. Can become irrevocable when the writing says so and the shareholder receives something of value.

Question 19

Shareholders - Shareholder Agreements

Answer 19

Shareholders may enter into a binding voting agreement which governs how they vote. Can be enforced as contract, no time limit

Question 20

Shareholder Derivative Action

Answer 20

In derivative action, the shareholder is suing a director or officer on behalf of the corporation for harm suffered by the corporation. Recovery goes to the corporation.