Corporations Rules

Question 1

Corporate Entity

Answer 1

A corporation is established to raise capital and to protect investors from liability. A corporation is a legal entity that exists separately from its owners, thus shielding the owners and managers from liability.

Question 2

Pre-Incorporation Promoter Liability

Answer 2

A Promoter is a person who works to establish a corporation prior to formal inception. They are personally liable for pre-incorporation Ks unless post-formation novation relieves the promoter of that obligation. (Look for a person who forms a corporation, then seeks to pass bills and other liabilities to the corporation after formation. These liabilities can be accepted upon vote of the Board)

Question 3

Formation

Answer 3

A corporation is formed when their AoI are filed with the Secretary of State. (Look for this where typically some attorney will fail to file, somebody will know about it, and somebody will treat the organization as if it were a corporation)

Question 4

Articles of Incorporation (AoI)

Answer 4

The AoI must contain the name of the corporation, the number of shares the corporation will issue, the address of the corporation’s initial office, the name of its initial agent, and the name and address of each incorporator.

Question 5

Election of Directors

Answer 5

Shareholders elect directors, and may remove them for any reason, upon vote. The Board of Directors acts to assign the officers of the corporation, as well as the terms of their employment.

Question 6

Quorum

Answer 6

In order for the BoD to act, they must have a quorum to vote on such matters. A quorum requires that a majority of the Board members present to vote.

Question 7

De Jure Corporation (DJC)

Answer 7

A DJC is a legally formed corporation. A DJC enjoys the protections and benefits of the Corporate Entity, including protection of the personal assets of shareholders.

Question 8

De Facto Corporation (DFC)

Answer 8

A DFC is a corporation that failed to be properly established. Persons or companies conducting business with a DFC that know that the DFC is improperly formed will be unable to later make claims as if the DFC were a proper corporation. Anyone dealing with a DFC. that does not know the corporation was properly formed will be able to treat the corporation as a DJC.

Question 9

Corporation by Estoppel

Answer 9

If a person treats a business as if it were a corporation, they are unable to later claim that was not a corporation.

Question 10

Ultra Vires Acts (UVA)

Answer 10

When a corporation’s activities are outside the scope of their AoI, such activities are deemed UVAs.

Question 11

Piercing the Veil

Answer 11

The corporate entity provides that shareholders and directors are typically not personally liable for the debts and liabilities of the corporation. However, certain actions by the company officers may warrant piercing of the corporate veil. This allows creditors to attack shareholders’ alter ego when they fail to follow corporate formalities, if the corporation was inadequately capitalized at formation or to prevent fraud.

Question 12

Business Judgment Rule (BJR)

Answer 12

The BJR is a rebuttable presumption that a director is acting in good faith and that they reasonably believed their actions were in the best interest of the corporation. This rule provides a measure of comfort to Directors and Officers of corporations, where they will not have their personal assets attacked as long as their actions were reasonably shown to be in the best interests of the corporation.

Question 13

Duty of Care

Answer 13

Directors have a duty to act in good faith and in the best interests of the corporation, and with the care of a similarly situated person. They are required to be reasonably informed.

Question 14

Duty of Loyalty

Answer 14

A Director must not engage in a conflict of interest. This duty is established to prevent a director from entering a conflicting transaction, usurping a corporate opportunity for their own benefit, or competing with the corporation.

Question 15

Duty of Loyalty Avoidance

Answer 15

When a Director is faced with a conflicting transaction, the director is not in violation of this duty if they fully disclose the details of the transaction to the board, if it was approved by a majority of disinterested directors or if the director can show that the business transaction was fair to the corporation.

Question 16

Usurpation of Corporate Opportunity

Answer 16

A corporate opportunity exits if the corporation has an interest in the opportunity or the opportunity is similar to what the business would typically pursue. A director may only personally engage in this opportunity if the board declines to pursue the opportunity, after receiving a full briefing of the opportunity and a vote to decline acceptance.

Question 17

Board Meetings

Answer 17

Board action requires a quorum to be present at each vote. A majority of the Board is necessary to form a quorum, unless the AoI states a higher or lower number.

Question 18

Removal of Directors

Answer 18

A Director may be removed from the Board by court order for fraud or gross abuse of authority, or by a vote of the majority of shareholders for any reason.

Question 19

Shareholder Meetings

Answer 19

Shareholder meetings are required to take place annually. At these meetings, Shareholders will elect Board Members, and may vote on the business of the day. this voting can be done by proxy (through the mail or online) and individual votes can be grouped with other votes by Shareholder agreement, thereby leveraging additional voting power.

Question 20

Dividends

Answer 20

A dividend is the portion of profit paid to shareholders, typically quarterly. A dividend is not a shareholder right, but instead, the Board will vote to pay a dividend or not. In the case that a dividend is not paid, the profit will be classified as retained earnings, and typically used to expand the company.

Question 21

10(b)(5)

Answer 21

Committing fraud in the purchase or sale of securities. Usually, this involves trading on insider information. This situation typically arises when company insiders use that information as a basis for the purchase or sale of securities.

Question 22

16(b) Rule

Answer 22

The Short Swing Profit Rule. This rule is established as a safeguard against persons with large corporate ownership stakes from acting on timely insider information. It requires that any director, officer, or shareholder who owns more Thant 10% of. corporation surrender any profit earned from the sale or purchase of equity securities within a 6-month period. To be subject to this rule, the corporation must be publicly traded, or the corporation must have more than $10m in assets and at least 2k shareholders.

Question 23

Derivative Suits

Answer 23

A shareholder may file a derivative suit against a corporation in order to prevent the corporation from harming share value. In order to file a derivative suit, a person must be a shareholder, must have made a written demand upon the corporation, allowed the corporation 90 days to respond to the demand, and they must be filing suit in the best interests of the corporation itself.

Question 24

Voluntary Dissolution Distribution

Answer 24

In the case of a voluntary dissolution, a corporation’s assets are distributed to 1) creditors of the corporation to pay debts and other obligations, 2) preferred stock, 3) common stock.

Question 25

Deeprock Doctrine

Answer 25

A stockholder who makes a loan to the corporation will have their loan subordinated to the claims of outside creditors if the firm is shown to be mismanaged or undercapitalized.