Corporations Set

Question 1

When does corporate existence begin?

A When the incorporator signs the articles of incorporation.
B When the incorporator files the articles of incorporation.

C When the state files the articles of incorporation.

D When the corporation begins transacting business.

Answer 1

C

The filing of the articles by the state is conclusive proof of the beginning of the corporate existence. The incorporator will sign and submit the articles to the state along with any required filing fees. If the state finds that the articles comply with the requirements of law and that all required fees have been paid, then it will file the articles and corporate existence will begin. After that time, an organizational meeting will be held to adopt bylaws, elect officers, and transact other business.

Question 2

A corporation formed in accordance with all applicable laws is known as:

A A de facto corporation.

B A de jure corporation.

C A corporation by estoppel.

D A common law corporation.

Answer 2

B

A corporation formed in accordance with all applicable laws is a de jure corporation. Corporations are created by complying with state corporate law. In a majority of states, this is a statute based on the Revised Model Business Corporation Act (“RMBCA”). When incorporation under a state’s statute is defective in some way, the veil of corporate protection still may be available under the de facto corporation or the corporation by estoppel doctrines.

Question 3

At common law, in spite of a defective incorporation, a business entity can be recognized as a de facto corporation if:

A The incorporators realize they made a mistake in incorporation and halt all corporate business to make a good faith effort to correct it.

B The incorporators made a good faith attempt to comply with the state’s corporate law, and the entity has since exercised corporate privileges.

C The incorporators failed to follow a minor technical requirement of incorporation, but their failure is not easily apparent to any third parties dealing with the entity as a corporation.

D The incorporators knowingly failed to comply with the state’s corporate law, but nevertheless held the entity out as a corporation to innocent third parties.

Answer 3

B

The veil of protection available to a de jure corporation may be available in some circumstances even when all of the steps necessary under the incorporation statute have not been followed. A de facto corporation has all the rights and powers of a de jure corporation at common law, but it remains subject to attack by the state. The requirements for establishing a de facto corporation include: (i) there must be a corporate law under which the organization could have been legally incorporated; (ii) there must be colorable compliance (i.e., a good faith attempt to comply) with the incorporation laws; and (iii) the corporation must exercise corporate privileges. There is no requirement that the corporation halt all business when the mistake comes to light. A de facto corporation must be distinguished from a corporation by estoppel. Under that doctrine, persons who treat an entity as a corporation will be estopped from later claiming that the entity was not a corporation. The doctrine can be applied either to an outsider seeking to avoid liability on a contract with the purported corporation, or to a purported corporation seeking to avoid liability on a contract with an outsider.

Question 4

Does a promoter who signs a contract in the name of a planned, but as of yet unformed corporation, remain personally liable on the contract once the corporation is formed?

A No, once the corporation exists it will automatically take over the promoter’s rights and responsibilities in the contract from that point forward.

B No, once the corporation exists it will automatically take over the promoter’s rights and responsibilities in the contract retroactive to the date the contract was signed.

C Yes, unless the parties agree to a novation.

D Yes, unless the corporation adopts the contract.

Answer 4

C

A promoter who signs a contract in the name of a planned, but as of yet unformed corporation, remains personally liable on the contract once the corporation is formed unless the parties agree to a novation. Generally, a promoter’s liability on a pre-incorporation contract continues after the corporation is formed, even if the corporation adopts the contract and benefits from it. The promoter’s liability can be extinguished only if there is a novation—an agreement among the parties releasing the promoter and substituting the corporation.

Question 5

When is a corporation liable for a pre-incorporation contract that a promoter signed on behalf of the corporation?

A Never, a corporation cannot be held liable on a contract that was formed before its existence.

B As soon as the corporation is formed, because a promoter serves as the agent of a corporation prior to its existence.

C When the corporation expressly or impliedly adopts the contract as its own.

D Only when there is a novation formally releasing the promoter of liability and substituting the corporation.

Answer 5

C

Since the corporate entity does not exist prior to incorporation, it is not bound on contracts entered into by the promoter in the corporate name. A promoter cannot act as an agent of the corporation prior to incorporation, since an agent cannot bind a nonexistent principal. The corporation may become bound on promoter contracts by adopting them. Adoption may be express or implied. The effect of an adoption is to make the corporation a party to the contract at the time it adopts, although adoption of the contract by the corporation does not of itself relieve the promoter of his liability. A novation is required to release the promoter from liability.

Question 6

Under the default rules of the Revised Model Business Corporation Act (“RMBCA”), what does it mean for there to be a “quorum” at a shareholders’ meeting?

A That a majority of votes entitled to be cast on a matter have placed a vote either for or against the matter.

B That a majority of votes entitled to be cast on a matter have voted in favor of the matter.

C That all of the votes entitled to be cast on a matter have unanimously voted in favor of the matter.

D That a majority of votes entitled to be cast on a matter were present at the meeting before a vote on the matter took place.

Answer 6

D

A quorum must attend a shareholders’ meeting before a vote may validly be taken. Under the rules of the RMBCA, a majority of the votes entitled to be cast on the matter by a particular voting group will constitute a quorum unless the articles provide greater quorum requirements. Once a share is represented at a meeting, it is deemed present for quorum purposes for the remainder of the meeting. Thus, a shareholder cannot prevent a vote by leaving before the vote is taken. The amount of votes actually placed in favor of the matter ultimately will determine if a matter is approved, but that is a separate issue from the quorum issue.

Question 7

Under the Revised Model Business Corporation Act (“RMBCA”), which of the following people can be held personally liable for business transacted before the articles of incorporation are filed?

A A person who is charged with filing the articles, but who enters into a lease contract on behalf of the corporation the day before filing.

B A person who agrees to be a shareholder and contributes money to the yet to be formed corporation.

C A person who attends lease negotiations and encourages the third party to sign the lease, but who does not sign herself.

D A person who enters into a lease contract as an officer of the corporation but later discovers that the articles were not filed due to a clerical error.

Answer 7

A

A person who is charged with filing the articles, but who enters into a lease contract on behalf of the corporation the day before filing, can be held personally liable for business transacted before the articles of incorporation are filed. The RMBCA imposes joint and several liability for all liabilities created by persons who purport to act as or on behalf of a corporation with knowledge that no corporation exists. However, courts are prone to hold “active” associates (those participating in the particular transaction involved) personally liable, and absolve inactive associates from personal liability.

Question 8

Which of the following statements regarding shareholder lawsuits is most accurate?

A All shareholder suits against their corporation are known as derivative actions because they all derive from the shareholder’s relationship to the corporation.

B Since shareholders are technically the owners of a corporation, they cannot bring any lawsuit against the corporation because to do so would be the equivalent of suing themselves.

C Shareholders can bring direct actions against their corporation to enforce their own rights and any recovery will be for their own benefit; shareholders can sometimes bring derivative actions to enforce the rights of the corporation, but in those cases recovery generally goes to the corporation and the shareholders bringing the action can only recover their reasonable expenses.

D Shareholders have the right to bring lawsuits against their corporation at any time, but their fiduciary duty to their fellow shareholders requires that any recovery be shared by all the shareholders in proportion to the amount of shares held.

Answer 8

C

Shareholders are entitled to enforce their own claims against the corporation, officers, directors, or majority shareholders by direct action. In such a case, any recovery is for the benefit of the individual shareholder, or, if the action was a class action, for the benefit of the class. There is no fiduciary duty to share the recovery. Shareholders also may sue derivatively to enforce a corporate cause of action, as long as they meet the requirements specified by law and they have made necessary demands on the corporation or the directors to enforce the cause of action. In a derivative action, the recovery generally goes to the corporation rather than to the shareholders bringing the action, but the shareholders can recover reasonable expenses (including attorneys’ fees). In either capacity, direct or derivative action, the shareholder may sue for herself and for others similarly situated.

Question 9

Once a shareholder appoints a proxy to vote his shares, can the shareholder later revoke that proxy?

A No, the proxy takes the place of the shareholder in all voting matters until the shares are transferred to another party.

B No, a proxy is irrevocable for 11 months.

C Yes, a proxy is revocable by the shareholder at any time, unless the appointment form states that the proxy is irrevocable.

D Yes, a proxy is revocable at any time, unless the appointment form states that the proxy is irrevocable and the appointment is coupled with an interest.

Answer 9

D

A shareholder may vote his shares either in person or by proxy executed in writing by the shareholder or his attorney-in-fact. A proxy is valid for only 11 months unless it provides otherwise. During that time, the shareholder may revoke the proxy at any time. A proxy will be irrevocable only if the appointment form conspicuously states that it is irrevocable and the appointment is coupled with an interest.

Question 10

Under the Revised Model Business Corporation Act (“RMBCA”), which of the following statements regarding a shareholder’s right to notice of a shareholder meeting is true?

A A shareholder must be given personal notice of any special meetings, but personal notice is not required for annual meetings because such meetings are required by statute.

B A shareholder has a statutory right to notice of the annual shareholders’ meeting, but has no right to notice for special meetings.

C A shareholder has a right to notice of both special and annual meetings but will be deemed to have waived her right to notice to a meeting by attending that meeting and not objecting to the lack of notice.

D A shareholder has a right to notice of both special and annual meetings and this right cannot be waived.

Answer 10

C

Generally, written (or, if authorized by the shareholder, electronic) notice of the shareholders’ meetings—special or annual—must be sent to the shareholders entitled to vote at the meeting. The notice must state the date, time, and place of the meeting. For special meetings, the purpose(s) for which the meeting is called must also be stated in the notice. Action taken at a meeting can be set aside if notice was improper. However, a shareholder will be held to have waived any defects in notice if the shareholder (i) waives notice in a signed writing either before or after the meeting or (ii) attends the meeting and does not object to the lack of notice.

Question 11

How much power do shareholders generally have in determining whether or not to declare the payment of a dividend?

A As the record owners of the corporation, it is within the sole discretion of the shareholders whether the corporation will declare the payment of a dividend.

B A shareholders’ vote is necessary to declare a dividend, but the issue can only be raised for a vote by the board of directors.

C Shareholders can make a demand for a distribution at any time, which the board of directors must honor so long as the distribution would not cause the corporation to become insolvent.

D Shareholders have very little right to compel the payment of a dividend; declaration is generally solely within the board’s discretion.

Answer 11

D

The decision whether or not to declare distributions generally is solely within the directors’ discretion. The shareholders have no general right to compel a distribution; it would take a very strong case in equity to induce a court to interfere with the directors’ discretion. However, the directors’ decisions to make distributions are limited by solvency requirements.

Question 12

Which of these choices outlines the proper steps for adopting a fundamental corporate change?

A The board adopts a resolution recommending the change; a notice describing the proposed change is sent to the shareholders; after allowing time for shareholder comments, the change is approved by the board; the change is formalized in articles that are filed with the state.

B The board adopts a resolution recommending the change; a notice describing the proposed change is sent to the shareholders; the change is approved by the shareholders; the change is formalized in articles that are filed with the state.

C A formal notice describing the proposed change is filed with the state; notice is sent to the shareholders; the change is approved by the shareholders; the change is formalized in articles that are filed with the state.

D A formal notice describing the proposed change is filed with the state; notice is sent to the shareholders; after allowing time for shareholder comments, the change is approved by the board; the change is formalized in articles that are filed with the state.

Answer 12

B

The basic procedure for adopting a fundamental corporate change is the same for all fundamental changes: (i) a majority of the board of directors adopts a resolution recommending the fundamental change; (ii) notice of the proposed change is sent to all shareholders (whether or not entitled to vote); (iii) the change is approved by the shareholders; and (iv) the change is formalized in articles (e.g., articles of amendment, articles of merger, etc.), which are filed with the state.

Question 13

Under the Revised Model Business Corporation Act (“RMBCA”), a corporation’s articles of incorporation can limit or eliminate a director’s personal liability for:

A Financial benefits received by the director to which she is not entitled.

B Unlawful corporate distributions.

C Money damages for failure to take action as a director.

D Intentional violations of criminal law.

Answer 13

C

The articles of incorporation can limit or eliminate directors’ personal liability for money damages to the corporation or shareholders for action taken, or failure to take action, as a director. However, no provision can limit or eliminate liability for: (i) the amount of a financial benefit received by the director to which she is not entitled; (ii) an intentionally inflicted harm on the corporation or its shareholders; (iii) unlawful corporate distributions; or (iv) an intentional violation of criminal law.

Question 14

Under the Revised Model Business Corporation Act (“RMBCA”), which of the following would be considered a fundamental corporate change requiring a vote by the shareholders?

A Amending the articles of incorporation to substitute the word “Inc.” in place of the word “Co.” in the corporation’s name.

B Changing the preferences of one class of shares.

C Merging a subsidiary corporation into a parent corporation that owns 95% of the subsidiary’s outstanding stock.

D Mortgaging the corporation’s sole asset to raise cash for a new business venture.

Answer 14

B

An amendment to the articles changing the rights or preferences of one class of shares must be approved by shareholder votes (and also must be approved by the affected voting group). Under the RMBCA, certain housekeeping amendments, such as changing the company name by substituting a different word or abbreviation than the one currently indicating the corporation’s corporate status, can be made without shareholder approval. Although mergers normally require shareholder approval, a parent corporation owning at least 90% of the outstanding shares of each class of a subsidiary corporation may merge the subsidiary into itself without the approval of the shareholders or directors of the subsidiary. Finally, while a disposition of all, or substantially all, of a corporation’s property outside of the usual course of business would be a fundamental change for the corporation disposing of the property, a mortgage or similar security interest on that property does not require shareholder approval.

Question 15

Which of the following transactions would most likely be considered a conflicting interest transaction that could be enjoined or give rise to an award of damages?

A A corporation hires a director’s grandson to perform clerical work for the corporation at a fair wage over other equally qualified candidates.

B After just six months of service, the board of directors vote to give themselves a pay raise.

C A director places the deciding vote that a corporation will make an interest-free loan to a start-up company that the director has formed, after fully disclosing his personal connection to the company to the other voting board members.

D A director proposes that the corporation enter into a new business venture, and his wife, a fellow director, votes for the deal to show support for her husband despite her personal belief that the venture is foolish and likely to lose money for the corporation.

Answer 15

C

A director has a conflicting interest with respect to a transaction if the director knows that she or a related person: (i) is a party to the transaction; (ii) has a beneficial financial interest in, or is so closely linked to, the transaction that the interest would reasonably be expected to influence her judgment if she were to vote on the transaction; or (iii) is a director, partner, etc. of another entity with whom the corporation is transacting business and the transaction is of such importance to the corporation that it would in the normal course of business be brought before the board. Nevertheless, such a conflicting interest transaction will not be enjoined or give rise to an award of damages if: (i) the transaction was approved by a majority of the directors (but at least two) without a conflicting interest after all material facts have been disclosed to the board; (ii) the transaction was approved by a majority of the votes entitled to be cast by shareholders without a conflicting interest in the transaction after all material facts have been disclosed to the shareholders; or (iii) the transaction, judged according to circumstances at the time of commitment, was fair to the corporation. The scenario here most likely to be found to be an impermissible conflicting interest transaction is the one where the director places the deciding vote to approve an interest free loan to his start-up company. It was improper for the interested director to cast the deciding vote, and it is unlikely that an interest-free loan would be seen as fair to the corporation. While it might be a conflict of interest for a corporation to hire a director’s relative, the fact that the grandson is qualified for the job and is being paid a fair wage indicates that the transaction was fair to the corporation and thus would be permissible. Next, despite an apparent conflict of interest, unless the articles or bylaws provide otherwise, the board may set director compensation. If the compensation is unreasonable it could be seen as a breach of the directors’ fiduciary duties, but it is not classified as a conflicting interest transaction. Similarly, the wife’s decision to vote with her husband despite her belief that the transaction was not in the best interests of the corporation, could be a breach of the wife’s fiduciary duties to the corporation as a director, but it is not an example of an impermissible interested director transaction since no fact indicates that the director or his wife had a personal interest in the new business venture.

Question 16

A corporation’s bylaws fix a record date of 20 days before any shareholders’ meeting. The week before a meeting, a shareholder sold half of her shares to her aunt and executed a written proxy authorizing her uncle to vote the remainder of her shares. Assuming the sale and proxy appointment are both valid, can the aunt or the uncle vote at the meeting?

A The aunt can vote her shares because she is now the rightful owner, but the uncle cannot vote the remainder of the shares because the proxy was not executed as of the record date.

B The uncle can vote the shareholder’s shares under the proxy, but the aunt cannot vote her shares because the purchase was made after the record date.

C Both the aunt and the uncle can vote their respective shares because the shareholder owned the shares as of the record date.

D Neither the aunt nor the uncle can vote at the meeting because neither one was a party to the shares as of the record date.

Answer 16

B

A corporation’s bylaws may fix, or provide the manner of fixing, a record date to determine which shareholders are entitled to notice of a meeting, to vote, or to take any other action. Here the record date was 20 days before the meeting. Thus, only persons who were shareholders as indicated in the corporation’s records on the date 20 days before the meeting would be allowed to vote at the meeting. The aunt did not become a shareholder until the week before the meeting. Since she was not a shareholder of record on the record date she was not entitled to vote at the meeting. On the other hand, the record date requirement does not apply to proxies—as long as the shareholder who gave the proxy was a shareholder of record on the record date, and the proxy is valid, the proxy holder will be allowed to vote the shareholder’s shares and the shares are counted as being present for quorum and other voting purposes. Therefore the uncle can vote the remainder of the shares.

Question 17

Under the Revised Model Business Corporation Act (“RMBCA”), assuming that the articles of incorporation are silent on the issue and a quorum exists, what is the default standard used for determining the outcome of an ordinary shareholders’ vote?

A If the votes cast in favor of the action exceed the votes cast against the action, the action will be deemed approved.

B If a super-majority of votes cast are in favor of the action, the action will be deemed approved.

C If a majority of all votes entitled to be cast vote in favor of the action, the action will be approved.

D If two-thirds of the votes cast are in favor of the action, the action will be deemed approved.

Answer 17

A

Under the RMBCA, each outstanding share is entitled to one vote unless the articles provide otherwise. If a quorum exists, an ordinary action will be deemed approved by the shareholders if the votes cast in favor of the action exceed the votes cast against the action, unless the articles provide for a greater voting requirement.

Question 18

Under the Revised Model Business Corporation Act (“RMBCA”), a preincorporation subscription is irrevocable by the subscriber for ____________________ from the date of the subscription unless otherwise provided in the terms of the subscription, or unless all subscribers consent to revocation.

A One year.

B Nine months.

C Six months.

D Three months.

Answer 18

C

Under the RMBCA, a preincorporation subscription is irrevocable by the subscriber for six months from the date of the subscription unless otherwise provided in the terms of the subscription, or unless all subscribers consent to revocation.

Question 19

Under the Revised Model Business Corporation Act (“RMBCA”), which of the following statements regarding preemptive rights is true?

A Shareholders always have preemptive rights.

B Shareholders have preemptive rights unless the articles of incorporation provide otherwise.

C Shareholders do not have preemptive rights unless the articles of incorporation so provide.

D Preemptive rights are not permitted.

Answer 19

C

When a corporation proposes to issue additional shares of stock, the current shareholders often want to purchase some of the new shares to maintain their proportional voting strength. The common law granted shareholders such rights, known as “preemptive rights.” Under the RMBCA, a shareholder does not have any preemptive rights unless the articles of incorporation so provide.

Question 20

Under the Revised Model Business Corporation Act (“RMBCA”), which of the following could trigger preemptive rights in a corporation that provides preemptive rights?

A Shares issued in exchange for money.

B Shares issued in exchange for property.

C Shares issued in exchange for services.

D Shares issued as compensation.

Answer 20

A

Under the RMBCA, shareholders do not have any preemptive rights (i.e., rights to purchase a portion of newly issued shares to maintain their proportional voting strength) unless the articles of incorporation so provide. Even if the articles provide for preemptive rights, the rights do not apply to: (i) shares issued as compensation to directors, officers, agents, or employees of the corporation; (ii) shares authorized in the articles that are issued within six months after incorporation; (iii) shares issued for consideration other than money (i.e., shares issued in exchange for property or services); or (iv) shares without general voting rights but having a distribution preference. It follows that shares issued for monetary consideration would be subject to any applicable preemptive rights.

Question 21

When an action creating dissenters’ rights is taken, the corporation must pay the dissenters:

A The amount the corporation estimates as the fair value of the shares, and if the shareholder disagrees with that assessment, the shareholder must file a court action to recover any more.

B The amount the corporation estimates as the fair value of the shares, but if the shareholder disagrees with that assessment, the corporation must either pay the amount the shareholder demands or file a court action to determine the fair value of the shares.

C The amount the shareholder estimates as the fair value of the shares, but if the corporation disagrees with that assessment, the corporation can pay the amount it determines to be fair unless the shareholder files a court action to determine the fair value of the shares.

D The amount the shareholder estimates as the fair value of the shares, and if the corporation disagrees with that assessment, the corporation must file a court action to recover the difference.

Answer 21

B

When an action creating dissenters’ rights is taken, the corporation must pay the dissenters the amount the corporation estimates as the fair value of the shares, plus interest that accrues from the time of the corporate action until payment. If the shareholder is dissatisfied with the corporation’s determination of value, the shareholder has 30 days in which to send the corporation her own estimate of value and demand payment of that amount (or the difference between her estimate and the amount sent by the corporation). If the corporation does not want to pay what the shareholder demanded, the corporation must file an action in court within 60 days after receiving the shareholder’s demand, requesting the court to determine the fair value of the shares. If the corporation fails to file suit within 60 days, it will be required to pay the shareholder the amount the shareholder demanded.

Question 22

The directors of a corporation incorporated under the default rules of the Revised Model Business Corporation Act (“RMBCA”) want to enact a particular management rule, but they also want to maximize future flexibility on that issue. They are unsure whether the rule should be included in the articles of incorporation or the bylaws. What would you advise them?

A The rule should be placed in the articles of incorporation; it would be more difficult to change the bylaws later because normally that would require a vote of both the directors and the shareholders.

B The rule should be placed in the bylaws; it would be more difficult to change the articles of incorporation later because normally that would require a vote of both the directors and the shareholders.

C The rule must be placed in the articles of incorporation; bylaws are the sole domain of the shareholders and normally directors are not involved in changing them.

D The rule must be placed in the bylaws; the articles of incorporation are the sole domain of the shareholders and normally directors are not involved in changing them.

Answer 22

B

The best choice to maintain future flexibility would be to place the rule in the bylaws, but it is not the directors’ only option. Bylaws may contain any provision for managing the corporation that is not inconsistent with law or the articles of incorporation. Bylaws are adopted by the directors, but can usually be modified or repealed by either the directors or the shareholders. In comparison, amendment of the articles usually requires a vote of both the directors and the shareholders. Thus, it is less difficult to change a corporate rule contained in the bylaws than it is to change a rule contained in the articles. If future flexibility is desired with regard to a particular aspect of corporate management, the aspect should be addressed in the bylaws rather than the articles. It is incorrect to say that either one is the sole domain of the shareholders and that the directors are not involved in changing them.

Question 23

Which of these corporations would most likely be deemed the “alter ego” of its sole shareholder for the purposes of piercing the corporate veil and holding that shareholder personally liable for the corporation’s debts?

A A corporation in which the sole shareholder runs the corporation herself without a board of directors and without keeping any corporate records.

B A corporation in which the sole shareholder is in a better financial position than the corporation to pay the corporation’s debts.

C A corporation in which the sole shareholder uses the corporate form as a way to run a business out of her home, but to avoid any personal liability for the business.

D A corporation in which the sole shareholder uses the assets of the corporation to pay her personal bills, leaving the corporation unable to pay its own creditors.

Answer 23

D

If a corporation is the “alter ego,” “agent,” or “instrumentality” of a sole proprietor, its separate identity may be disregarded. In the case of an individual shareholder, if the shareholder treats the assets of the corporation as her own (e.g., by using corporate funds to pay her private debts), courts often find that the corporate entity is a mere alter ego of the shareholder. However, sloppy administration alone may not be sufficient to warrant piercing the corporate veil. The operation of the corporation must result in some basic injustice so that equity would require that the individual shareholder respond to the damage she has caused. In this case that would be paying her own personal bills and as a result leaving the corporation unable to pay its creditors. An individual shareholder can vest the power to run the corporation in herself, rather than in a board of directors, and doing so is not a ground for disregarding the corporate veil, even if it results in a failure to keep corporate records. The mere fact that a sole shareholder is in a better financial position than the corporation she owns is also not a justification for piercing the corporate veil. Finally, the corporate form is designed to protect a shareholder’s personal assets from the possibility of being seized to satisfy the obligations of the business; this alone is not a reason to pierce the corporate veil.

Question 24

Under the Revised Model Business Corporation Act (“RMBCA”), can duly elected directors be removed by the shareholders?

A Yes, but only with cause.

B Yes, with or without cause.

C No, directors cannot be removed during their term except by court order.

D No, directors cannot be removed during their term except by a vote of their fellow directors.

Answer 24

B

Under the RMBCA, directors may be removed with or without cause by the shareholders, unless the articles of incorporation provide that removal may be only for cause.

Question 25

If less than the entire board is to be removed, a director elected by cumulative voting may NOT be removed by a shareholders’ vote if:

A The votes cast against her removal would have been sufficient to elect her if cumulatively voted at an election of the board.

B Her removal would deny the minority shareholders any representation on the board.

C There is no cause for her removal.

D Her term has not yet expired.

Answer 25

A

If less than the entire board is to be removed, a director elected by cumulative voting may not be removed by a shareholders’ vote if the votes cast against her removal would have been sufficient to elect her if cumulatively voted at an election of the board. Directors may be removed before the expiration of their term with or without cause by the shareholders, unless the articles provide that removal may be only for cause.

Question 26

Which of the following statements is true if a share has a $5 noncumulative preference?

A The share is entitled to a $5 annual payment.

B The share is entitled to a $5 payment before a distribution can be made on account of common shares.

C The share is entitled to a $5 payment plus the distribution paid on account of a common share whenever a distribution is made on account of common shares.

D The share is entitled to a $5 payment each quarter and any missed preference payments must be paid before a distribution can be made on account of common shares.

Answer 26

B

Shares that have a specific dollar amount distribution preference must be paid their preference whenever a distribution is declared; a distribution cannot be made on account of common shares unless the preference is paid. (A) is incorrect because such a preference does not entitle a preferred shareholder to the declaration of a distribution—the preference arises only if a distribution is declared. Moreover, distributions are not limited to annual payments (e.g., many companies make quarterly distributions). (C) is incorrect because a preferred share is entitled to the distribution made on account of common shares only if the preferred share is described as “participating.” (D) is incorrect because it describes a cumulative preference, and the question asks about shares with a noncumulative preference.

Question 27

Under the Revised Model Business Corporation Act (“RMBCA”) notice of a shareholders’ meeting must be delivered:

A At least 24 hours before the meeting.

B At least 10 business days before the meeting.

C Not less than 10 days or more than 60 days before the meeting.

D Not less than 30 days or more than 90 days before the meeting.

Answer 27

C

Under the RMBCA, the notice must be delivered not less than 10 days or more than 60 days before the meeting.

Question 28

Under the Revised Model Business Corporation Act (“RMBCA”) approach, what must a majority shareholder do to inspect the corporation’s accounting records?

A He must give five days’ written notice of his request, stating a proper purpose for the inspection.

B He must give five days’ written notice of his request, but need not reveal his reasons for inspecting the records.

C Nothing, because all shareholders have an unqualified right to inspect all corporate records at any time.

D Nothing, because majority shareholders have an unqualified right to inspect all corporate records at any time.

Answer 28

A

Under the RMBCA, any shareholder (i.e., not just a majority shareholder) may inspect the corporation’s books, papers, accounting records, shareholder records, etc. To exercise this right, the shareholder must give five days’ written notice of his request, stating a proper purpose for the inspection (i.e., a purpose related to the person’s interest as a shareholder). The RMBCA includes an exception to this general rule, but a corporation’s accounting records do not fall under the exception. Under the exception, any shareholder may inspect the following records regardless of purpose: (i) the corporation’s articles and bylaws, (ii) board resolutions regarding classification of shares, (iii) minutes of shareholders’ meetings from the past three years, (iv) communications sent by the corporation to shareholders over the past three years, (v) a list of the names and business addresses of the corporation’s current directors and officers, and (vi) a copy of the corporation’s most recent annual report.

Question 29

Under the Revised Model Business Corporation Act (“RMBCA”), which of the following statements regarding meetings of the board of directors is correct?

A Both regular and special board meetings require at least two days’ notice of the date, time, and place of the meeting, and a purpose must be included in the notice for a special meeting.

B Both regular and special board meetings require at least two days’ notice of the date, time, and place of the meeting, but no purpose need be included in any notice.

C Regular board meetings may be held without notice, but special meetings require at least two days’ notice of the date, time, and place of the meeting and a purpose must be included in the notice for a special meeting.

D Regular board meetings may be held without notice, but special meetings require at least two days’ notice of the date, time, and place of the meeting, but a purpose need not be included in the notice.

Answer 29

D

Under the RMBCA, regular board meetings may be held without notice. Special meetings require at least two days’ notice of the date, time, and place of the meeting, but a purpose need not be included in the notice. (Note that this question is asking about the notice requirements for directors’ meetings. The notice requirements for shareholders’ meetings are not the same. For example, for special shareholders’ meetings, the purpose(s) for which the meeting is called must also be stated in the notice.)

Question 30

Which of the following statements regarding the president of a corporation is true?

A The president of a corporation only has the authority that is expressly granted in the corporation’s articles of incorporation.

B The president of a corporation has implied authority to enter into contracts on behalf of the corporation in the ordinary course of corporate affairs.

C The president of a corporation has no authority to bind the corporation without the express approval of the corporation’s board of directors.

D The president of a corporation has absolute authority to run the corporation in any reasonable manner she sees fit under the business judgment rule.

Answer 30

B

The president of a corporation has implied authority to enter into contracts on behalf of the corporation in the ordinary course of corporate affairs. As an officer of the corporation, the president is an agent of the corporation and receives her power to manage from the directors. The president’s authority may be actual or apparent. If authority exists, actions taken by a corporate officer (such as entering into contracts) bind the corporation. An officer’s actual authority includes not only the authority expressly granted to the officer by the directors, the bylaws, the articles, and statutes, but also any authority that may be implied by the express grant. The business judgment rule protects directors whose reasonable decisions turn out to be poor or erroneous in hindsight. It does not give authority to a corporation’s president to run the corporation in any manner she sees fit.

Question 31

Under the RMBCA, all of the following must be included in the articles of incorporation EXCEPT:

A The name of the corporation.

B The number of shares the corporation is authorized to issue.

C The name and address of each incorporator.

D The name and address of each of the corporation’s initial directors.

Answer 31

D

The articles of incorporation are required to set out certain basic information about the corporation and may contain any other provision that the incorporators deem appropriate. The name of the corporation, the number of shares the corporation is authorized to issue, and the name and address of each incorporator are all mandatory provisions. (In addition, the articles must include the street address of the corporation’s initial registered office and the name of the corporation’s initial registered agent at that office upon whom legal process may be served.)The articles may provide the names and addresses of the persons who will serve as the corporation’s initial directors until new directors are elected, but it is not a requirement.

Question 32

In which of these situations is a court least likely to pierce the corporate veil?

A When corporate formalities are ignored and injustice results.

B When the corporation was inadequately capitalized at the outset.

C When the corporation becomes insolvent due to poor management.

D When necessary to prevent fraud on creditors.

Answer 32

C

A de jure corporation will be treated as a legal entity distinct from its owners until sufficient reason to the contrary appears. Each case is different, but there are three recurring situations in which the corporate veil is often pierced: (i) when corporate formalities are ignored and injustice results; (ii) when the corporation is inadequately capitalized at the outset; and (iii) to prevent fraud. Insolvency of the corporation due to poor management generally would not be a reason to pierce the veil, although insolvency that occurs soon after incorporation might indicate that there was undercapitalization at the outset.

Question 33

Which of the following statements is true regarding a promoter’s personal liability on a preincorporation contract?

A A promoter is personally liable even if the contract expressly states that the promoter is not to be bound.

B A promoter remains liable even if the corporation is formed and adopts the contract.

C A promoter is acting as an agent for the unformed corporation and is not personally liable.

D The corporation, not the promoter, is the intended beneficiary to the contract so the promoter is not personally liable.

Answer 33

B

As a general rule, if a promoter enters into an agreement with a third party to benefit a planned, but as of yet unformed, corporation, the promoter is personally liable on the agreement, even if the corporation is formed and adopts the contract. If the document between the parties expressly indicates that the promoter is not to be bound, there is no contract, so the promoter is not bound. Such an arrangement may be construed as a revocable offer to the proposed corporation. Since the corporate entity does not exist prior to incorporation, it is not bound on contracts entered into by the promoter in the corporate name, even though the contract is intended to ultimately benefit the corporation. A promoter cannot act as an agent of the corporation prior to incorporation, since an agent cannot bind a nonexistent principal.

Question 34

Under the RMBCA, what is necessary for a shareholder to have standing to bring a derivative action?

A The shareholder must have been a shareholder at the time of the alleged wrongful act or omission, or become a shareholder through transfer by operation of law from one who was a shareholder at that time, and he must have suffered personal harm by the alleged wrongful act or omission.

B The shareholder must own a majority of the corporation’s outstanding shares, and he must have suffered personal harm by the alleged wrongful act or omission.

C The shareholder must have been a shareholder at the time of the alleged wrongful act or omission, or become a shareholder through transfer by operation of law from one who was a shareholder at that time, and he must be able to fairly and adequately represent the interests of the corporation.

D The shareholder must own a majority of the corporation’s outstanding shares, and he must be able to fairly and adequately represent the interests of the corporation.

Answer 34

C

Under the RMBCA, to commence or maintain a derivative proceeding, a shareholder must have been a shareholder of the corporation at the time of the act or omission complained of, or must have become a shareholder through transfer by operation of law from one who was a shareholder at that time. Also, the shareholder must fairly and adequately represent the interests of the corporation. There is no requirement that the shareholder own a majority of the corporation’s outstanding shares. A derivative suit is filed to enforce the rights of the corporation, not the rights of the individual shareholder. Thus the shareholder need not have suffered personal harm by the alleged wrongful act or omission. Recovery in a derivative action generally goes to the corporation rather than to the shareholder bringing the action.

Question 35

Which of the following is NOT a requirement to satisfy a director’s duty of care?

A The director must act in good faith.

B The director must act with the care that an ordinarily prudent person in a like position would exercise under similar circumstances.

C The director must act in a manner the director reasonably believes to be in the best interests of the corporation.

D The director must act in reliance on her own business judgment and not in reliance on the opinions of others.

Answer 35

D

Directors are vested with the duty to manage the corporation to the best of their ability; they are not insurers of corporate success, but rather are merely required to discharge their duties: (i) in good faith; (ii) with the care that an ordinarily prudent person in a like position would exercise under similar circumstances; and (iii) in a manner the directors reasonably believe to be in the best interests of the corporation. In discharging her duties, a director is entitled to rely on information, opinions, reports, or statements (including financial statements), if prepared or presented by any of the following: (i) corporate officers or employees whom the director reasonably believes to be reliable and competent; (ii) legal counsel, accountants, or other persons as to matters the director reasonably believes are within such person’s professional competence; or (iii) a committee of the board of which the director is not a member, if the director reasonably believes the committee merits confidence.

Question 36

Which of these alone is NOT an adequate reason for upholding a transaction in which a director has a conflicting personal interest?

A The transaction, judged according to circumstances at the time of the commitment, was fair to the corporation.

B The transaction will result in any tangible or intangible benefit to the corporation.

C The transaction was approved by a majority of the votes entitled to be cast by shareholders without a conflicting interest in the transaction after all material facts have been disclosed to the shareholders.

D The transaction was approved by a majority of the directors (but at least two) without a conflicting interest after all material facts have been disclosed to the board.

Answer 36

B

A conflicting interest transaction can be upheld if: (i) the transaction was approved by a majority of the directors (but at least two) without a conflicting interest after all material facts have been disclosed to the board; (ii) the transaction was approved by a majority of the votes entitled to be cast by shareholders without a conflicting interest in the transaction after all material facts have been disclosed to the shareholders (notice of the meeting must describe the conflicting interest transaction); or (iii) the transaction, judged according to circumstances at the time of commitment, was fair to the corporation. Under the RMBCA, any tangible or intangible property or benefit to the corporation can serve as consideration for shares, but this is not the standard that is used to judge a conflicting interest transaction. A transaction might offer some benefit to a corporation, but still be unfair at the time of the commitment.

Question 37

Under the RMBCA, when a proposed action would trigger dissenters’ rights, which of the following actions is NOT required of a shareholder to guarantee payment for his shares?

A Filing an intent to exercise his dissenters’ rights with a court within 10 days of receiving notice of the proposed action.

B Delivering a written notice to the corporation of his intent to demand payment if the action is passed before a vote is taken on the action.

C Not voting in favor of the proposed action.

D Demanding payment from the corporation after receiving a dissenter’s notice from the corporation after the action is approved.

Answer 37

A

If the shareholder will be entitled to vote and wishes to exercise his dissenting rights, he must, before a vote is taken, deliver to the corporation written notice of his intent to demand payment for his shares if the proposed action is taken. Also, he cannot vote in favor of the proposed action. If the proposed action is approved at the shareholders’ meeting, the corporation must notify, within 10 days after the vote, all shareholders who filed an intent to demand payment. A shareholder who is sent a dissenter’s notice must then demand payment in accordance with the notice given by the corporation. Failure to satisfy these requirements means that the shareholder is not entitled to payment for his shares. There is no requirement that a shareholder file an intent to demand payment with a court.

Question 38

Which of the following qualities generally is NOT considered a characteristic of the corporate form?

A Limited liability for owners.

B Centralized management.

C Flow-through taxation.

D Free transferability of ownership.

Answer 38

C

Flow-through taxation is not considered a characteristic of the corporate form. Typically, a corporation is taxed as an entity distinct from its owners; i.e., it must pay taxes on any profits that it makes, and the shareholders pay taxes on the corporation’s profits when the profits are distributed. The other answer choices are characteristics of the corporate form, and each can be seen as an advantage over some other forms of business entities. The owners of a corporation generally are not personally liable for the obligations of the corporation. The right to manage a corporation is not spread out among the shareholders, but rather is centralized in a board of directors, who usually delegate day-to-day management duties to officers. Finally, ownership of a corporation normally is freely transferable; a shareholder can sell his shares to whomever he wants, whenever he wants, at whatever price he wants in most circumstances.

Question 39

Which of the following statements regarding creditors’ claims against a dissolved corporation is false?

A There are special procedures that a corporation can follow to bar creditors’ claims sooner than they might be barred under the statute of limitations for the claims.

B A corporation can publish notice of its dissolution in a newspaper in the county where the corporation’s principal place of business is located to limit the time for unknown claims.

C Creditors can recover against a dissolved corporation for claims arising after dissolution to the extent of the corporation’s undistributed assets.

D Creditors’ claims must be brought against the shareholders personally since the corporation ceases to exist upon dissolution.

Answer 39

D

A corporation that has been dissolved continues its corporate existence, but is not allowed to carry on any business except that which is appropriate to wind up and liquidate its affairs. A claim can be asserted against a dissolved corporation—even if the claim does not arise until after dissolution—to the extent of the corporation’s undistributed assets. If the assets have been distributed to the shareholders, a claim can be asserted against each shareholder for his pro rata share of the claim, to the extent of the assets distributed to him. To provide some finality for liquidating distributions, there are special procedures that a corporation can follow to bar claims against the corporation sooner than they might be barred under the statute of limitations for the claims. To bar known claims against the corporation, the corporation must notify its known claimants in writing of the dissolution. The notice must describe the procedure for asserting a claim and set a deadline not less than 120 days from the effective date of notice by which the claim must be received. A claim is barred if a claimant who receives notice fails to deliver the claim by the deadline. To bar unknown claims, the corporation can publish notice of its dissolution in a newspaper in the county where the corporation’s principal place of business is located. The notice must describe the procedure for asserting a claim and state that a claim will be barred unless a proceeding to enforce it is commenced within the statutory time period (usually three or five years) after notice is published.

Question 40

When is a court most likely to disregard the separate identity of a subsidiary corporation and allow recovery from the parent corporation?

A When the parent corporation has greater resources than the subsidiary corporation.

B When the parent corporation essentially controls the decisionmaking of the subsidiary corporation by electing its board of directors.

C When the parent corporation owns 100% of the stock of the subsidiary corporation.

D When the parent corporation has inadequately capitalized the subsidiary without a reasonable expectation that the subsidiary will achieve financial independence.

Answer 40

D

The mere fact that a parent corporation has greater resources than a subsidiary is not a reason to disregard their separate identities. In addition, a corporation can hold 100% of the stock of a subsidiary corporation and essentially control that corporation’s decisionmaking by electing its board of directors while still maintaining its own separate corporate existence. However, a subsidiary or affiliated corporation will not be deemed to be a separate corporate entity if the formalities of separate corporate procedures for each corporation are not observed. For example, both corporations must be held out to the public as separate entities; separate meetings of directors and officers should be held; identical or substantially overlapping directors and officers should be avoided; and corporate policies should be significantly different. It is also generally accepted that shareholders will be personally liable for their corporation’s obligations if at incorporation they fail to provide adequate capitalization. In a parent-subsidiary situation, the court will consider whether the subsidiary may reasonably expect to achieve independent financial stability from its operation.