Corporations- McDonald

Question 1

What are the characteristics of a corporation?

Answer 1

Creature of statute
Separate legal entity
Perpetual Existence
Owners have limited liability
Freely transfers ownership interests
Easy to raise capital

Question 2

What are the disadvantages of a corporation?

Answer 2

Double taxation

Compliance with multiple statutory requirements.

Question 3

De Jure vs. De Facto

Answer 3

De Jure: lawfully formed
De Facto: minor defect during formation, good faith attempt to comply with statute, conducts business as a corporation, personal liability for persons acting on behalf of the corporation, who knew the corporation did not really exist.

Question 4

C corp vs. S corp

Answer 4

C corp is a typical corporation
S corp: 100 or fewer shareholders
no double taxation
generally, one class of stock
shareholders must be individuals, estates, or certain types of trusts
no foreign ownership

Question 5

What must be included in Articles of Incorporation (charter)?

Answer 5

(1) the corporation’s name,
(2) the number of authorized shares,
(3) the street address of the initial registered office,
(4) the name of the registered agent at that office, and
(5) the name and address of each incorporator.
Nature and purpose of the corporation’s business MAY be included, but is NOT required.

Question 6

Financial Structure: What are equity securities?

Answer 6

Stock: preferred stock, common stock, treasury stock, cumulative stock.
Options, warrants, and preemptive rights.

Question 7

General characteristics of equity securities?

Answer 7

Participate in management, usually through voting
Participate in corporate earnings
Proportionate share of assets upon liquidation.

Question 8

What kind of stock gets dividends first?

Answer 8

Preferred stocks.

Question 9

What are debt securities and name a few?

Answer 9

Debt securities are bonds.
Debenture bonds: unsecured bonds
Mortgage bonds: secured bonds
Convertible Bonds: like convertible stock, can be exchanged for other securities of the corp.

Question 10

What are dividends?

Answer 10

a distribution out of current or past earnings.

Question 11

What can a distribution consist of?

Answer 11

Cash
Property
Stock: not a distribution
Liquidating: distribution of the capital assets.

Question 12

Do shareholders have rights to a dividend?

Answer 12

no right for shareholders to a dividend.

Question 13

What is the general rule to pay out a dividend?

Answer 13

Is that corporations are free to pay dividends unless such payment would reduce total assets below total liabilities.

Question 14

What happens if illegal dividends are distributed?

Answer 14

Illegal dividends must be repaid.

Question 15

How often are shareholder meetings required?

Answer 15

Annual shareholder meetings required.

Question 16

Generally shareholders are not personally liable for corporate debts, but there is one exception, what is it?

Answer 16

Unless the corporate veil can be pierced.

Question 17

How can the corporate veil become pierced?

Answer 17

Must act as a corporation and and hold separate corporate books and not commingle personal and corporate assets together.
Also the use of the corporate entity to promote wrongdoing or fraud will lead courts to pierce the veil.
When a corporation is undercapitalized.

Question 18

What are bylaws?

Answer 18

Similar to a partnership agreement, contains provisions for managing and running a corporation.

Question 19

Does a shareholder have fiduciary relationship to the corporation?

Answer 19

No fiduciary relationship with corporation.

Majority or controlling shareholder are a possible exception.

Question 20

What can the shareholders allowed to vote on?

Answer 20

Vote to:
Elect directors.
Amend Articles of Incorporation
Fundamental changes: sale of virtually all or all corporate assets. Mergers or consolidations. Dissolution.
Voting agreements and voting trusts: agreements among shareholders to vote together on various corporate issues.
Proxy

Question 21

Are shareholders allowed to inspect the corporate books?

Answer 21

Shareholders can inspect the corporate books, but must have a proper purpose and advance notice required.

Question 22

Directors are elected by?

Answer 22

Elected by the shareholders.

Question 23

What affairs are managed by directors?

Answer 23

Makes major policy decisions
Selects officers
Declares dividends
Changes bylaws

Question 24

Do directors have a right to a salary?

Answer 24

No right to a salary.

Question 25

Officers are selected by?

Answer 25

Board of Directors

Question 26

What are officer’s duties?

Answer 26

Run day to day affairs of the corporation

Question 27

Are officers considered agents of the corporation?

Answer 27

Yes, they owe fiduciary duties.

Question 28

Can officers be indemnified for expenses incurred in defending lawsuits?

Answer 28

May be indemnified for expenses incurred in defending lawsuits while representing the corporation unless officer has engaged in misconduct.

Question 29

What are the fiduciary duties of directors and officers?

Answer 29

Duty of care/diligence
Duty of loyalty: must put the interests of the corporation first.
Duty of odebience

Question 30

What is the process for fundamental changes?

Answer 30

Board of directors adopts a resolution setting forth the transaction
Put to a shareholder vote
Majority rules unless greater %age required by AofI

Question 31

What are Mergers?

Answer 31

When one corporation acquires all aspects of another corporation.

Question 32

Is shareholder approval needed to merge?

Answer 32

Do not need shareholder approval to merge with a subsidiary if the parent corporation controls 90% or more of the stock.
Creditors of acquired firm are now creditors of merged corporation.

Question 33

What is a stock purchase and is shareholder approval required?

Answer 33

when one company acquires all of a controlling interest of another company’s stock.
No shareholder approval required
No appraisal remedy

Question 34

What is a dissolution?

Answer 34

The termination of the corporation.

Question 35

If dissolution is voluntary who needs to vote?

Answer 35

Board proposal, shareholder vote.

Question 36

If dissolution is involuntary what happens?

Answer 36

State revokes charter
Judicial decree:usually because the corp can no longer function.
Creditors may sue to dissolve

Question 37

In corporations, is the ownership interest freely transferable?

Answer 37

Yes, simply acquiring a corporation’s stock gives an individual an ownership interest. Shares can be freely bought and sold, usually without any restriction.

Question 38

In the course of exercising good business judgment and reasonable care, a director is entitled to rely on information provided by:

Answer 38

In the course of exercising good business judgment and reasonable care, a director is entitled to rely on information provided by an officer (or professional specialist) if the director reasonably believes the officer has competence in the relevant area.

Question 39

A corporation formed by a political unit to achieve a governmental purpose is best described as

Answer 39

Public. A public corporation is formed and funded by a local, state, or federal political unit to achieve a governmental purpose. Examples are incorporated cities, school districts, water districts, and state universities.

Question 40

Are officers considered agents and fiduciaries of the corporation?
What kind of authority do they have to manage the business?

Answer 40

Officers are agents and fiduciaries of the corporation, having actual and apparent authority to manage the business.

Question 41

Under the RMBCA, when a merger becomes effective what happens?

Answer 41

(1) the entity designated in the plan of merger as the survivor comes into existence
(2) every entity merged ceases to exist separately
(3) the property and contract rights of the merged entities are vested in the survivor
(4) the liabilities of the merged entities also are vested in the survivor.

Question 42

Does a corporation have perpetual existence?

What are the exceptions?

Answer 42

A corporation has perpetual existence unless it is given a shorter life under the articles of incorporation or is dissolved by the state.

Question 43

Can an individual serve as all three? shareholder, director and officer?

Answer 43

YES

Question 44

What is the doctrine under which a corporation is made liable for the torts of its employees, committed within the scope of their employment?

Answer 44

Respondeat superior, or “let the master answer”

Question 45

When a corporation is incorporated in one state and is doing business in that state and another state is considered what kind of state?
What must it obtain in order to be able to do business there?

Answer 45

A corporation doing business but not incorporated in that state is considered a foreign corporation and must obtain a certificate of authority to transact business there.