Corporations Set #1

Question 1

nature of a corporation entity

Answer 1

a corp is a separate legal entity from its shareholders; it generally may exercise through its agents the same rights and privileges of a natural person.

Question 2

Subchapter S corporations

Answer 2

enables small businesses to get around double taxation; taxes corporation income directly to the shareholders in proportion to their ownership

Question 3

obligations of corporation to the state

Answer 3

file an annual report with the department of state or may be involuntarily dissolved, cannot bring or defend an action in state courts unless report is filed; must maintain a registered office and agent in the state; may be required to provide other information such as the identity of ultimate equitable owners

Question 4

corporate powers in general

Answer 4

broad statutory powers are conferred upon all corporations to allow them to carry out their purposes; powers may be expanded or limited by the articles of the corporation such as power to hold property, borrow money, lend money (except to outside directors), hold and vote securities, indemnify agents, and donate to charity

Question 5

corporations and political contributions

Answer 5

corporations may contribute to candidates within limits for state or local office; otherwise as free as individuals to expend funds to support or oppose ballots referendums or candidates for political office, as long as the spending is independent of a candidate. cannot donate to federal office candidates.

Question 6

liabilities

Answer 6

corporations are liable for contracts and for torts committed by their agents; may be liable for punitive damages if an agent engages in intentional misconduct or is grossly negligent and the corporation participates or condones or is itself grossly negligent

Question 7

ultra vires doctrine

Answer 7

acts beyond the power of the corporation conferred by law or its charter; a shareholder derivative suit may be brought to enjoin performance of a specific ultra vires executory contract; the corporation may bring suit against officers or directors to recover damages from a past ultra vires act that damaged the corporation. -at common law a corp could use an ultra vires defense to get out of a K, but because corporate powers are so broad, you should not find an ultra vires act unless the articles restrict the powers; very limited defense.

Question 8

incorporators

Answer 8

can be natural persons, corporations, partnerships, or associations

Question 9

what are the articles of incorporation?

Answer 9

they constitute the agreement among the incorporators regarding the details of the corporation’s organization

Question 10

articles of incorporation must state (7):

Answer 10

the corporations name, which must indicate the corporation status; the number of shares and distinguishing characteristics of each class of shares; whether shareholders have preemptive rights (if not stated, they have none); the address of the initial registered office; the name of the initial registered agent together with the agent’s written acceptance; the names and addresses of the incorporators; and the address of the principal office

Question 11

articles of incorporations may include:

Answer 11

the number of directors constituting the initial board, and their names and addresses; the par value of stock, or a statement that there is no par value; the imposition of personal liability on shareholders to a specific extent and on specific conditions; the initial purposes, which may include any lawful business; any other provision not inconsistent with law, regarding managing the business or powers

Question 12

corporate filing procedure

Answer 12

incorporator sends the articles to the department of the state, which files them if all legal requirements are met. Corporate existence begins upon filing.

Question 13

Who of the following is afforded the least priority following the voluntary dissolution of a corporation? A. A shareholder who owned preferred stock. B. A corporate officer who loaned money to the corporation. C. An employee who is owed wages. D. An unsecured creditor of the corporation.

Answer 13

Answer choice A is correct. Generally, shareholders of a corporation are last in line with respect to a dissolution distribution. Creditors of a dissolved corporation are entitled to have their valid claims honored before the shareholders receive a distribution. This even applies to a shareholder who holds preferred stock. The owner of preferred stock can be entitled to receive a distribution before the owner of common stock, but such preference does not apply with regard to claims of creditors of the corporation. Answer choice B is incorrect because a lender, including one who served a corporate office, has priority over a shareholder. Answer choice C is incorrect because an employee, as a creditor of the corporation for unpaid wages, has priority over any shareholder. Answer choice D is incorrect because even an unsecured creditor of a corporation has priority over a shareholder—even a shareholder who owns preferred stock—to a dissolution distribution.

Question 14

Which of the following statements regarding short-swing profits is true? A. An insider who does not possess non-public material information need not return short-swing profits. B. Only publicly traded corporations are protected by Section 16(b) actions. C. Only corporate directors and officers are subject to return short-swing profits. D. Transactions made after ceasing to be a corporate insider are not considered in determining short-swing profits.

Answer 14

Answer choice B is correct. Only publicly traded corporations that (i) have securities traded on a national securities exchange or (ii) have assets of more than $10 million and more than 500 shareholders of any class of stock or other equity security are subject to Section 16(b) provisions. Answer choice A is incorrect because an insider’s reasons for trading are immaterial; even an insider who does not possess insider information has to return short-swing profits. Answer choice C is incorrect because shareholders who hold more than 10 percent of any class of stock are also subject to Section 16(b) actions. Answer choice D is incorrect because transactions made after ceasing to be a corporate insider are considered in determining short-swing profits; transactions made before becoming a corporate insider are not generally considered.

Question 15

Which of the following statements regarding involuntary dissolution is true? A. A creditor may pursue judicial dissolution of a corporation if corporate assets are being misapplied or wasted. B. Florida statutes lay out a distribution scheme for assets of an involuntarily dissolved corporation that are different from that of a corporation that was voluntarily dissolved. C. The court must acquire a majority approval of either the shareholders or the board of directors to dissolve the corporation. D. A shareholder may pursue judicial dissolution if the directors are acting illegally, oppressively, or fraudulently.

Answer 15

Answer choice D is correct. One of the four times a shareholder may pursue the involuntary dissolution of a corporation is if the directors are acting illegally, oppressively, or fraudulently. Answer choice A is incorrect because it describes one of the other situations in which a shareholder can seek judicial dissolution of a corporation. A creditor may only seek judicial dissolution in Florida if the corporation is insolvent. Answer choice B is incorrect because distributions of the assets of a corporation that has been involuntarily dissolved are basically the same as ones that have been voluntarily dissolved, unless equity requires otherwise. Answer choice C is incorrect because neither is required; a court may dissolve the corporation upon the petitioner’s establishment of the necessary grounds.

Question 16

On June 1st, the board of directors of a corporation authorized a 2-for-1 stock split. For every share of stock currently held by a shareholder, the shareholder would receive an additional share. The board set the date for the stock split as July 1st. During the month of June, the corporation retained the ability to meet its obligations as they came due, but the value of the corporate assets fell below the total liabilities of the corporation. On July 1st, the corporation A. cannot carry out stock split because the validity of a distribution is measured on the date that the distribution is to be made. B. cannot carry out the stock split because the corporation’s liabilities exceed its assets. C. can carry out the stock split because it is not a distribution. D. can carry out the stock split because the corporation retains the ability to meet its obligations as they come due.

Answer 16

Answer choice C is correct. A stock split is not subject to the insolvency tests imposed on a distribution made by a corporation to its shareholders. A stock split does not result in the distribution of corporate assets to the shareholders. Answer choice A is incorrect because a stock split is not a distribution. The date on which a corporation is deemed to have made a distribution for purposes of apply the insolvency test is irrelevant. (Note: Typically, for a dividend, a corporation’s solvency is measured on the date the dividend is declared, and for a stock purchase, the date the purchase price is paid.) Answer choice B is incorrect because even though a corporation is prohibited from making a distribution if its liabilities exceed its assets (i.e., the balance sheet test), a stock split is not a distribution. Answer choice D is incorrect, as although the corporation can carry out the stock split, the reason is not because the corporation has the ability to meet its obligations as they come due and thereby satisfies the equity test for distributions. In making a distribution, a corporation must satisfy the balance sheet test as well as the equity test. However, a stock split is not a distribution.

Question 17

shareholder may force the corporation to buy her shares at fair market value after demanding payment?

Answer 17

A shareholder who is entitled to vote on a merger or acquisition has appraisal rights. To exercise these rights, a shareholder must send a written notice to the corporation of the shareholder’s intent before a shareholder vote, and must vote against the action. After the action has been approved, the shareholder must submit a demand for payment. The corporation must pay the shareholder fair market value for the stock.

Question 18

Which of the following is not required to be set forth in a corporation’s articles of incorporation? A. The names and addresses of each of the corporation’s incorporators B. The names and addresses of the directors constituting the corporation’s initial board of directors C. The name and address of the corporation’s registered office D. The corporation’s number of authorized shares of stock

Answer 18

Answer choice B is correct. The corporation’s articles of incorporation may, but are not required to, set forth the names and addresses of the individuals who will serve as the corporation’s initial board of directors.

Question 19

The Moneymakers Corporation enacted its bylaws, which were properly adopted by the Board of Directors in accordance with Florida law. Within the bylaws, the corporation established a committee comprised of members appointed by the board to perform a variety of tasks associated with running the corporation. Which of the following provisions are permissible to include in the bylaws? A. The committee may repeal the bylaws. B. The committee may fix the terms of a distribution. C. The committee may recommend that the corporation engage in a merger. D. The committee may fill vacancies on the board.

Answer 19

Answer choice B is correct. Once the board has authorized a distribution and set sufficient parameters, the board may delegate a committee to fix the amount and terms of the distribution. Even if the bylaws attempt to authorize such, however, the following actions may not be performed by a committee: a committee may not declare distributions, except within limits sets by the board; recommend actions that require shareholder approval; fill vacancies on the board or its committees; or adopt, amend, or repeal bylaws. Answer choice A is incorrect because a committee cannot adopt, amend, or appeal bylaws. Answer choice C is incorrect because the committee cannot recommend actions that require shareholder approval. Answer choice D is incorrect because the committee may not fill vacancies on the board.

Question 20

Plaintiff filed a suit on behalf of a corporation alleging that corporate directors have violated their duty of loyalty to the corporation. Which of the following would be grounds for dismissing this lawsuit? A. Plaintiff is a current shareholder who inherited his shares from someone who was a shareholder at the time of the wrongdoing but was not a shareholder at that time himself. B. Plaintiff is a beneficiary of a trust that has held shares in corporation since its incorporation. C. Plaintiff was a shareholder of the corporation at the time of the alleged wrongdoing but has since sold his shares. D. Plaintiff made a demand upon the board of directors to take action 100 days ago, and the board not done so.

Answer 20

Answer choice C is correct. In order to bring a derivative action on behalf of a corporation, the plaintiff must currently be a shareholder of the corporation. Having owned shares at the time of the alleged wrongdoing is not sufficient if the plaintiff is not currently a shareholder of the corporation.

Question 21

On July 1, Lola authorized Huey, by written proxy, to vote her 20 shares of KitKat, Inc. Unless otherwise provided, when will the proxy agreement expire? A. Not until Lola revokes the proxy, as proxy agreements are of unlimited duration B. On January 1 the following year C. On June 1 the following year D. 30 days after the next vote

Answer 21

Answer choice C is correct. Proxy agreements are valid for 11 months, unless otherwise specified.

Question 22

Bell Properties, LLC is a limited liability company organized under the laws of the state of Florida. Bell Properties, LLC owns a Miami apartment building. Clay owns a 25% interest in Bell Properties, LLC. Clay initiated, on behalf of the company, a derivative lawsuit on the ground that those in control of Bell had breached their fiduciary duties to Bell Properties, LLC, and had authorized leases that were below market value, but which benefited the fiduciaries personally. Bell Properties, LLC moved to have the action dismissed on the grounds that derivative lawsuits are unavailable against a limited liability company. Bell’s articles of organization are silent as to derivate lawsuits. The court should A. Grant Bell’s motion and dismiss the action, because derivative suits are not recognized under LLC law. B. Grant Bell’s motion and dismiss the action, because the articles of organization do not specifically authorize derivative lawsuits. C. Deny Bell’s motion, because the Florida Business Corporation Act specifically allows them. D. Deny Bell’s motion, because derivative lawsuits are available against limited liability companies.

Answer 22

Answer choice D is correct. Florida’s Limited Liability Act specifically allows derivative actions to be brought by members. Answer choice A is thus incorrect. Answer choice B is incorrect because it is not necessary that the remedy be specified in the articles of organization. Answer choice C is incorrect because, although the Florida Business Corporation Act does specifically allow derivative actions, limited liability companies are governed by the Florida Limited Liability Company Act.

Question 23

Which of the following statements regarding a corporation’s board of directors is true? A. The number of directors required is directly proportional to the number of shareholders of the corporation. B. Another corporation may serve as the director of a corporation. C. A director of a corporation must be a shareholder of that corporation. D. Directors are elected by shareholders.

Answer 23

Answer choice D is correct. Directors are generally elected by shareholders at the corporation’s annual shareholders’ meeting. Answer choice A is incorrect because a corporation is only required to have one director, regardless of the number of shareholders. Answer choice B is incorrect because the director of a corporation must be a natural person. Answer choice C is incorrect because, unless the articles of incorporations or bylaws require otherwise, it is not required that a director be a shareholder.

Question 24

Escolar Corp. (“Escolar”) went out of business and was dissolved for nonpayment of taxes. Two years later, after dissolution, Escolar was sued for negligence. Escolar answered the complaint and brought a third-party action against Tarpon Co. (“Tarpon”) for contribution. Tarpon moved to dismiss the third-party complaint on the ground that Escolar lacked capacity to bring suit. The court should A. Grant the motion to dismiss the complaint because a dissolved corporation has no capacity to bring a law suit. B. Grant the motion to dismiss the complaint because filing suit is not a part of winding up a corporation’s affairs. C. Deny the motion to dismiss and permit the third-party complaint because dissolution never precludes a corporation’s ability to file suit. D. Deny the motion because an action for indemnification or contribution is a part of a corporation’s winding up of business affairs.

Answer 24

Answer choice D is correct. The dissolved corporation may continue to act as the corporation for the purpose of winding up and the corporation may sue and be sued in its corporate name. Here, Escolar had the capacity to bring its third-party suit, so long as that activity was part of winding up its affairs. To wind up its affairs, Escolar had to either settle or defend the suit brought against it. To assert a third-party claim for contribution or indemnification is a normal part of defending a claim; therefore, answer choices A, B, and C are incorrect.