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BAR FLASHCARDS MEE SUBJECTS > Corporations & LLC's > Flashcards

Corporations & LLC's Flashcards

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1
Q

Date of Corporation Existence

A

Corp. existence begins on the date the Articles of Incorporation are properly filed with the Secretary of State, unless a delayed effective date is specified.

  • RMBCA does not allow an earlier effective date.
  • De Jure Corporation = properly formed corp
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2
Q

Articles of Incorporation - Filed to form a corporation,
and MUST contain:

A

(1) corporate name;

(2) number of shares corp. is authorized to issue;

(3) address and name of initial registered agent; AND

(4) name and address of each incorporator

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3
Q

Amending Articles of Incorporation

A

May be amended by a majority vote of the directors AND shareholders.

The BoD has the authority to make general minor amendments without SH approval.

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4
Q

Bylaws

A
  • Rules and regulations adopted by BoD that govern the internal operations of a corp.
  • The Articles of Incorporation control if there is a conflict with the Bylaws.
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5
Q

Amending Bylaws

A
  • May be amended or repealed by SH’s.
  • May be amended or repealed by BoD UNLESS:

a) Articles of Incorporation exclusively reserve the
power to SH’s; OR

b) SH’s, in amending a bylaw, expressly provide BoD
cannot amend or reinstate a specific bylaw.

  • If a bylaw deals with a director nomination, the BoD
    retains power to safeguard the voting process, BUT cannot repeal a shareholder approved bylaw.
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6
Q

Liability of Promoter

A

A promoter acts on behalf of a corp. that has not yet been formed.

  • A promoter is personally liable when he:

1) purports to act as or on behalf of a corp.; AND

2) knows no corp. was formed.

  • A promoter remains personally liable for a pre-corp. contract even if the corp. subsequently adopts the contract (both the corp. and the promotor will be liable if adopted).
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7
Q

A promoter will NOT be liable if:

A

a) there is a subsequent novation; OR

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

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8
Q

A corp. is not liable on a contract made by a promoter UNLESS

A

the corp. expressly or impliedly adopts the contract post-incorporation.

– Express adoption = BoD action

-Implied adoption = Corp. (1) knows or has reason to know the material terms of the contract; AND (2) accepts some benefit of the contract.

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9
Q

If corp. formation is defective, owners may be personally liable for contracts and obligations. EXCEPTIONS:

A

– RMBCA: Prevents personal liability unless person (1) purports to act as or on behalf of a corp., (2) knowing that no corp. was formed.

– De Facto Incorporation: Exists when entity (1) made
good faith attempt to incorporate, (2) is eligible to
incorporate, AND (3) took action that it considered itself a corp. Doctrine only prevents personal liability of persons unaware that a corp. wasn’t properly formed.

– Incorporation by Estoppel: A person/entity may be estopped from denying that a business is a corp. when it treated the business as such.

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10
Q

SH Personal Liability:

A

Generally, SH’s are NOT personally liable for the liabilities and obligations of the corp. But, courts may pierce the corp. veil to impose liability.

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11
Q

Piercing the Corporate Veil

A

Courts may disregard the corporate form, and hold an
individual shareholder, director, or officer personally liable for actions taken on behalf of the corp. when:

a) Corp. is acting as the alter ego of the shareholder
– SH utilizes the corp. for personal reasons;

b) There is a failure to follow corporate formalities;

c) Corp. is inadequately capitalized at its inception;

OR

d) To prevent fraud

  • Courts are more likely to pierce for tort actions than contract disputes.
  • Passive investors are generally NOT liable, even if a court pierces the veil against an active SH/Member.
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12
Q

Piercing the Veil for LLC’s

A

Courts generally apply the same factors to pierce the veil
of an LLC to hold members or managers liable, BUT the failure to follow formalities is not a ground to pierce the LLC veil.

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13
Q

SH/Member Liability for Own Torts

A

Even if the court does not pierce the veil, a person is ALWAYS liable for their own torts

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14
Q

Common & Preferred Shares

A

Common shares - Provide SH’s with voting rights.

Preferred Shares -Generally provide SH’s the right to be paid out from assets upon dissolution before SH’s with common shares.

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15
Q

Outstanding Shares

A

The total number of shares issued by the corp. and held by the SH’s.

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16
Q

Authorized Shares

A

The maximum number of shares the corp. may issue.

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17
Q

Shares Reacquired by Corp. (Treasury Shares)

A
  • These shares are considered authorized, but are NOT outstanding (because no SH owns them).
  • Reacquired shares are NOT allowed to be voted.
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18
Q

Consideration in Exchange for Shares

A

Under the RMBCA, shares may be issued for almost
any type of consideration, including: money, tangible or
intangible property, past performance of services, future promises of service or payment of money/property.

  • The BoD determines the value of non-monetary
    consideration, and absent fraud or bad faith, their determination is conclusive.
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19
Q

Preemptive Rights

A

Allows an existing SH to maintain her % of ownership by being offered the opportunity to purchase shares issued for cash before outsiders are permitted to purchase.

  • Under the RMBCA, SH’s do not enjoy preemptive rights UNLESS explicitly granted in Articles of Incorporation.
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20
Q

Preemptive rights DO NOT apply to shares that are:

A

a) issued as compensation;

b) issued to satisfy conversion/option rights created to provide compensation;

c) issued within 6 months of incorporation;

d) issued for consideration other than cash; OR

e) shares issued without general voting rights but
with preferential rights to distributions.

  • SH’s of Common stock DO NOT have preemptive rights with respect to preferred shares, unless the shares are convertible into common shares.
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21
Q

Dividends

Generally, SH’s do not have the right to compel the corp. to provide a distribution, UNLESS

A

Such right is expressly granted in the Articles of incorporation.

  • Once a dividend is declared, the SH has a legal right to the distribution.
  • Distributions are declared at the discretion of BoD, and protected under Business Judgment Rule
  • A court will only interfere and compel a distribution upon showing: (a) funds were available; AND (b) bad faith or dishonest purpose.
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22
Q

Restrictions on Share Transfers

A

The Articles of Incorporation, bylaws, and/or SH Agreements may impose reasonable restrictions on the transfer of shares (but it cannot be an undue restraint on alienation).

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23
Q

Charitable Donations by a Corporation

A

A corp. may make reasonable charitable donations, even if not expressly authorized to do so.

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24
Q

Special Meetings

A

– May be called by the BoD, persons authorized under the Articles of Incorporation, OR shareholders holding at least 10% of all votes entitled to be cast at the meeting.

25
Q

Notice of a special meeting requires:

A

1) At least 10 days advance notice of the meeting (but less than 60 days); AND

2) A description of the meeting’s purpose

– If the meeting involves a fundamental change, ALL
shareholders (whether or not entitled to vote) are entitled to notice.

26
Q

Quorum (SHs)

A

Must be present for the SH’s to take action at a meeting, and requires a majority of the shares entitled to vote.

27
Q

Shareholder’s Right to Vote

A

Only shareholders that are registered shareholders on the record date are entitled to vote, even if a SH sells the shares before the meeting.

  • Record date CANNOT be more than 70 days prior to the meeting.
28
Q

Proxy

A

A proxy grants the proxy holder the ability to vote shares as the proxy holder deems appropriate.

Must be signed on either an: (a) appointment form; OR (b) electronic transmission.
- Only valid for 11 months.

29
Q

Proxy agreements (Revocation)

A

are freely revocable by the shareholder, even if the proxy states that it is irrevocable.

Exception: NOT revocable if coupled with an interest or legal right.

30
Q

SH’s Right to Inspect Books and Records

A

Under the RMBCA, a SH has the right to inspect and copy the corp.’s accounting records, excerpts of BoD meetings, and the record of shareholders if:

1) made during regular business hours at the principal office;

2) with five-days written notice;

3) made in good faith and for a proper purpose;

4) describes the purpose with particularity; AND

5) the requested records are directly connected with
the purpose.

31
Q

A SH may inspect the following records without providing a proper purpose:

A

i. Articles of Incorporation;

ii. Bylaws;

iii. BoD resolutions;

iv. Minutes of SH meetings (for past 3 years);

v. Name and business addresses of current directors and officers; and

vi. Most recent annual report.

32
Q

Shareholder Voting Agreements

A
  • Under the RMBCA, a SH may sign an agreement providing how they will vote their shares.
  • A SH agreement is specifically enforceable, and a claim for breach of contract may be brought to enforce this right
33
Q

Cumulative Voting

A
  • The Articles of Incorporation or Bylaws may provide for cumulative voting to elect Directors.
  • If cumulative voting is authorized, a SH may cast all his votes for one director nominee rather than being limited to a maximum number of votes for each nominee.
  • Under cumulative voting, a director can be removed ONLY IF the number of votes for removal are greater than
    those needed to elect him.
34
Q

Authority of Officers

A
  • BoD may elect individuals as Officers to manage the day-to-day business of the corp.
  • Officers have authority to act consistently with their duties as outlined in the Bylaws or as provided by BoD.
35
Q

Officers may be removed at any time with or without cause by:

A

a) The Board of Directors;

b) An Officer who appointed such Officer (unless the bylaws or BoD provide otherwise); OR

c) Any other Officer if authorized by BoD or Bylaws.

36
Q

Quorum (Directors)

A
  • BoD’s can act only if a quorum is present at the time when a vote is taken.
  • A majority of directors is necessary to make a quorum,
    UNLESS a higher or lower number is required by the
    Articles of Incorporation.

(If the Articles of Incorporation lowers the number,
it cannot be less than 1/3 of the directors.)

  • The BoD may permit participation of a director by any means of communication, BUT all directors must be able to simultaneously hear each other during the meeting.
37
Q

Notice of BoD Meeting

A
  • Regular meetings may be held without notice.
  • Special meetings require at least 2-days’ notice (of the date, time, and place of the meeting)
  • Waiver – A director may waive notice:
    a) In a signed writing; OR
    b) If the director attends the meeting (unless he objects at the beginning of the meeting and does not vote).
38
Q

The BoD may take action without a meeting if:

A

(1) all directors sign a consent describing the action; AND (2) deliver it to the corp.

39
Q

Election of Directors

A
  • Most states require a plurality vote (not a majority vote).
  • Some states require a majority vote.
40
Q

Removal of Directors

A
  • Under the RMBCA, SH’s may remove a director with or without cause unless the Articles of Incorporation requires cause.
  • Under the Common Law, directors could only be removed for cause.
41
Q

Duty of Care & Business Judgment Rule

A
  • Directors are fiduciaries of the corp., and as such owe a duty of care. This means they must discharge their duties:

1) in good faith;

2) with the care that a person in a like position would reasonably believe appropriate under like
circumstances; AND

3) with the reasonable belief that they are acting in the best interests of the corp.

Under the common law, the above was known as the
Business Judgment Rule.
- Directors must be reasonably informed on the decisions they make. They can rely on the reasonable advice of (qualified) professional advisors.

  • If a director breaches the duty of care, he may be
    personally liable to the corp. for any losses that result.
42
Q

Duty of Loyalty

A
  • Directors must act in the best interests of the corp., and
    without personal conflict.
  • Forbids directors from:

a) entering into conflicting interest transactions;

b) usurping a corporate opportunity;

c) trading on inside information; OR

d) competing with the corporation.

43
Q

Conflicting Interest Transactions

A

Is a breach of the duty of loyalty UNLESS:

a) approved by a majority of disinterested directors after full disclosure of all relevant material facts;

b) approved by majority of disinterested shareholders; OR

c) the transaction as a whole was fair to the corp. at the time it was entered into (the price must be comparable to an arm’s length transaction and negotiations must be fair).

44
Q

Restricting/Eliminating Fiduciary Duties

A

The Articles of Incorporation (or an Operating Agreement for an LLC) may remove or limit a person’s duty of loyalty to refrain from competing with the corp. Such provisions are valid as long as not manifestly unreasonable

  • Under the RMBCA, the following CANNOT be limited: (1) financial benefits improperly received; (2) intentional infliction of harm to the corp. or SH’s; (3) unlawful distribution of a dividend; or (4) an intentional violation of criminal law.
45
Q

Direct Suits

A
  • May be brought when there is a breach of a duty owed to a shareholder of a corp. or member of an LLC.
  • The injury CANNOT be solely the result of an injury suffered by the corp.
46
Q

Derivative Suits

A

When a SH is suing to enforce the corp.’s claim.

The RMBCA requires the SH to:
1) Own the corp.’s stock at the time the claim arose (or became a SH by operation of law from such a SH);

2) Be a SH through entry of judgment;

3) Fairly and adequately represent the corp.’s interests; AND

4) Make a written demand to the corp. to take suitable action.

  • A derivative suit CANNOT be commenced until 90-days after the demand, UNLESS
    the corp. rejects the demand or it will suffer irreparable harm if forced to wait.

Any damages awarded are paid to the corp., but the SH
may recover reasonable costs of the litigation.

47
Q

Mergers & Share Exchanges

A

BoD of both Corporations must first approve, then SH’s of both must approve with a majority vote.

  • SH approval is NOT required if:

1) Articles of Incorporation will not be changed;

2) Outstanding shares will not change; AND

3) Voting power of any shares issued as a result of the merger is 20% or less.

  • SH Approval is NOT required for a share exchange if the corp. is acquiring the other company.
48
Q

Short Form Merger

A

– Occurs when a parent corp. merges with its subsidiary, and the parent corp. owns at
least 90% of the subsidiary’s outstanding shares.
- In such a case, only the BoD of the parent corp. has to approve the merger.

49
Q

Obligations to Investors Regarding a Merger

A
  • A corp. or its agent’s CANNOT make misleading
    statements concerning the merger.
  • Misleading = (a) making a false statement of material
    fact; OR (b) failing to state a material fact necessary to ensure that other statements are not misleading.
50
Q

Sale of All or Substantially All of the Corp.’s Assets

A
  • A majority vote of BoD is required to approve the sale.
  • A majority vote of SH’s is only required if the sale is NOT in the usual and regular course of business.
51
Q

Dissenter’s Appraisal Rights

A

A dissenting SH is entitled to appraisal rights (to obtain
payment of fair market value for his shares) if any of the
following occur:

1) he has the right to vote on the merger plan;

2) he is a SH of the subsidiary in a short form merger;

3) his shares are being acquired in a share exchange;

4) he has the right to vote on the distribution of all or substantially all assets; and

5) if an amendment of the Articles of Incorporation materially and adversely affect the SH’s rights.

52
Q

SH may force the corp. to purchase his shares if:

A

1) he gives notice to the corp. of his intent to assert appraisal rights;

2) notice was given before the vote;

3) the fundamental change is effectuated; AND

4) the SH did not vote in favor of the change.

  • BUT, appraisal rights are NOT available to
    SH’s of publicly traded companies.
53
Q

Judicial Dissolution - A shareholder may petition the court if:

A

a) Deadlock of the directors + irreparable injury to corp.;

b) Directors act in a manner that is illegal, oppressive, or fraudulent (violating SH’s
reasonable expectation or preventing minority shareholders from having equal rights and opportunities);

c) SH’s are deadlocked in voting power and have failed to elect Directors for at least 2 consecutive annual meetings; OR

d) Corp. assets have been wasted or misapplied.

54
Q

An LLC is formed when:

A

1) the Articles of Organization (Certificate of Formation) is filed with the Secretary of State;

AND

2) the LLC has at least one member.

55
Q

Member-Managed vs. Manager-Managed

A
  • Under RULLCA, the LLC is presumed to be member-managed.
  • For the LLC to be manager-managed, the Operating Agreement must state that the LLC will be manager-managed.
  • A manager-managed LLC is
    run by an elected group of
    managers (similar to a BoD).
56
Q

Operating Agreement - Contains:

A

(1) the relation between the members and LLC; (2) the rights/duties of managers; (3) activities and affairs of the LLC; and (4) any means and conditions for amending the Operating Agreement.

57
Q

Authority of LLC Members

A
  • Under RULLCA, each member of an LLC can bind the LLC if the action is made in the ordinary course of business UNLESS:

1) the member lacked authority; AND

2) the other party had notice of lack of authority.
- Managers in a manager-managed LLC have similar
authority

  • Under RULLCA, acts outside the ordinary course of business may be undertaken only with the consent of ALL
    members.
58
Q

Dissociation from an LLC

A
  • Dissociation occurs when an LLC has notice of the person’s express will to withdraw.
  • A dissociating member loses the right to participate in the
    LLC, BUT he still has the right to receive distributions.
  • Under RULLCA, dissociation DOES NOT result in dissolution of the LLC.

BAR FLASHCARDS MEE SUBJECTS (5 decks)

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