Corporations Set #3

Question 1

What are the five advantages of the corporate form

Answer 1

1. Limited liability of shareholders for corporate obligations; 2. Centralized management; 3. Continuity of existence; 4. Ease of transferring ownership; and 5. Access to capital through the sale of share

Question 2

How does taxation of corporations work? (including small business corporations)

Answer 2

Corporate earnings paid to shareholders are said to be subject to double taxation; i.e., as income to the corporation and as income to the shareholder. Small business corporations may avoid this by electing taxation under Subchapter S of the IRC, which taxes corporate income directly to the shareholder in proportion to their ownership

Question 3

Corporations qualified to do business in Florida must file an annual report with the department of state disclosing what six things

Answer 3

(i) the corporation’s name and the state or county of incorporation; (ii) the date of incorporation, or if a foreign corporation, the date admitted to do business in this state; (iii) the address of its principal office and the mailing address of the corporation; (iv) its federal employer identification number; (v) the names and business street addresses of its principal officers and directors; and (vi) the street address of its registered office and name of its registered agent at that office

Question 4

What is the consequence if a corporation does not follow the annual report requirement? Additionally, what is the additional obligation to the state

Answer 4

A corporation not complying with the annual reports requirement may not bring or defend an action in Florida courts until the report is filed, and may be involuntarily dissolved. Corporations may be required to provide certain other information to the state upon request, including the identity of ultimate equitable owners. Additionally, each corporation must maintain a registered office and agent in the state

Question 5

Unless otherwise provided by its articles, by statute every Florida corporation has the following 18 powers

Answer 5

1. To sue and be sued in its corporate name; 2. perpetual duration and succession in its corporate name; 3. to have a corporate seal; 4. to purchase, receive, lease, or otherwise acquire, hold, own, use, and improve real and personal property, or any legal or equitable interest in property, wherever situated; 5. to sell, mortgage, convey, pledge, lease, exchange, create a security interest in, and dispose of all or any part of its property; 6. to lend money to and use its credit to assist its officers and employees when such may reasonably be expected to benefit the corporation; 7. to purchase, receive, subscribe for, or otherwise acquire, vote, own, hold, use, sell, mortgage, lend, pledge, or otherwise dispose of shares or interest in, or other obligations of, other corporations, partnerships, and governments; 8. to enter into contracts, borrow money, and guarantee debts (the last was doubtful at common law); 9. to lend, invest, and reinvest money for its corporate purpose; 10. to elect directors and appoint officers, employees, and agents and fix their compensation; 11. to adopt and amend bylaws for the administration and regulation of its affairs; 12. to make donations for the public welfare or for charitable, scientific, or educations purposes (charitable gifts were questionable at early common law); 13. to transact any lawful business in aid of governmental policy; 14. to pay pensions and establish pension and profit-sharing plans and other employee incentive plans; 15. to enter into general or limited partnerships or joint ventures (usually prohibited at common law); 16. to indemnify corporate officers, directors, agents, and employees and purchase liability insurance therefor; 17. to provide life insurance for its benefit on directors, officers, or employees, or on a shareholder for the purpose of acquiring shares of the deceased’s stock; and 18. to conducts its business, locate offices, and exercise all other powers necessary or convenient to effect its purposes, i.e., so-called implied or incidental powers

Question 6

To what extent may corporations offer political contributions

Answer 6

Corporations may contribute within limits to candidates for state or local office. They are otherwise as free as individuals to expend funds to support or oppose ballot referendums or a candidate for political office, as long as the spending is independent of a candidate

Question 7

What may a corporation be liable for

Answer 7

Corporations are liable for their contracts and for torts committed by their agents. A corporation may be held liable for punitive damages if an employee or agent engages in intentional misconduct or is grossly negligent and the corporation participates in or condones the conduct or is itself grossly negligent

Question 8

If a corporation enters into a contract that is beyond its powers to act (called an ultra vires contract under common law), that fact generally cannot be used as a defense to enforcement of the contract, except for three applications:

Answer 8

(i) in a proceeding by a shareholder to enjoin the corporation’s actions; (ii) in a direct or derivative action by the corporation against a director, officer, employee, or agent of the corporation; or (iii) in a proceedings by the Department of Legal Affairs to enjoin the corporation from unauthorized business

Question 9

What is a basic exam tip to remember about the power of corporations in FL

Answer 9

Given the broad statutory powers conferred on Florida corporations by statute, corporations generally can do anything that is rationally related to a business purpose (except donate to candidates for federal office). Thus, unless a corporation’s articles restrict its powers, you generally should not find any rational act to be beyond its “powers to act.” If you do find an act to be ultra vires, remember that ultra vires defense is very limited. Therefore, you should not allow a corporation to get our of a contract merely because the contract is outside the corporation’s powers

Question 10

What are the requirements for the incorporators upon corporation formation

Answer 10

One or more natural persons, or an entity such as a corporation, partnership, or association, may act as an incorporator. No further qualifications, such as age, residency, or citizenship are required

Question 11

What do the articles of incorporation constitute

Answer 11

The agreement among the incorporators regarding the details of the corporation’s organization

Question 12

What six things MUST the articles of incorporation state

Answer 12

(i) the corporation’s name, which must indicate the corporate status; (ii) the number of shares and the distinguishing characteristics of each class or series; (iii) the address of the initial registered office; (iv) the name of the initial registered agent together with the agent’s written acceptance; (v) the names and addresses of the incorporators; and (vi) the address of the principal office, if known, and the mailing address of the corporation

Question 13

What other five things MAY the articles of incorporation include

Answer 13

(i) the number of directors constituting the initial board, and the names and addresses of each member thereof; (ii) the par value of stock or a statement that stock shall have no par value; (iii) the imposition of personal liability on shareholders to a specific extent and on specific conditions; (iv) the initial purposes, which may include any lawful business; and (v) any other provision, not inconsistent with law, regarding managing the business or defining powers of the corporation, directors, and shareholders

Question 14

What is the procedure required to incorporate, and when does corporate existence begin

Answer 14

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

Question 15

What are the contents of the organizational meeting that directly follows incorporation

Answer 15

After incorporation, the initial directors (if named in the articles of incorporation) or the incorporators will hold an organizational meeting to complete the organization of the corporation by appointing officers, adopting bylaws, etc. The directors or incorporators calling the meeting must give at least two days’ notice to each director or incorporator, stating the time and place of the meeting. These actions can be taken without a meeting if evidenced by a written consent describing the action taken and signed by each incorporator or director

Question 16

Who adopts the initial bylaws and what is contained in them

Answer 16

The incorporators or board of directors will adopt initial bylaws for the corporation, unless that power is reserved to the shareholders by the articles of incorporation. The bylaws may contain any provision for managing the business and regulating the affairs of the corporation that is not inconsistent with law or the articles of incorporation

Question 17

How strongly are defective formations given application in Florida?

Answer 17

The common law (defective formation) concepts of de jure corporation, de facto corporation, or corporation by estoppel have limited application under Florida law, where the filing of the articles is deemed conclusive evidence of valid incorporation, except as against the state

Question 18

What is de jure corporation

Answer 18

At common law, a de jure corporation was formed upon substantial compliance with all mandatory requirements for incorporation, and its corporate status could not be challenged by anyone, including the state

Question 19

What is de facto corporation

Answer 19

A de facto corporation may exist even if there is a substantial defect in formation, provided there has been a good faith effort to incorporate, colorable compliance with the law, and actual use of corporate status. The de facto corporation doctrine is not available if the defendant knew of the lack of incorporation

Question 20

what is corporation by estoppel

Answer 20

Corporation by estoppel is an equitable doctrine that may be applied when persons have dealt with a defectively formed corporation as if it were a legal corporation. These persons may be estopped from avoiding contracts or attempting to hold shareholders personally liable on grounds of defective corporate status. The doctrine is normally not applicable in tort actions, where there has been no course of dealing.

Question 21

In Florida, when can a person be held personally liable for a defectively formed corpoation

Answer 21

Only if the person purports to act on behalf of the corporation knowing that there was no valid incorporation

Question 22

What is the liability level of corporate shareholders when the corporate veil is pierced

Answer 22

Shareholders active in the business may be held jointly and severally liable as if they were partners, but inactive shareholders are generally not held liable

Question 23

What is the alter ego doctrine

Answer 23

The court might disregard the corporate entity when the corporation appears to be the alter ego of the shareholders and used by them as a conduit for their personal affairs. Florida law requires a showing of improper conduct.

Question 24

What is the deep rock doctrine

Answer 24

In bankruptcy proceedings, capital contributions that are denominated as “loans” by shareholders of close corporations may be subordinated to debts owed to outsiders

Question 25

In what three situations may a parent corporation be liable for the debts of a subsidiary

Answer 25

When the subsidiary is inadequately capitalized, intermingled with the parent, or otherwise not a true distinct entity

Question 26

What are the two things that compose the capital structure of a corporation and what does each entitle the holder to?

Answer 26

Capital structure refers to long-term investment in the corporation, including stock (representing an ownership interest) and long-term debt such as bonds (representing a creditor interest). The structure may also be viewed in terms of senior securities generally having a fixed, priority claim to income (e.g., preferred stock and bonds), and equity securities, with a claim only to residual earnings (e.g., common stock).

Question 27

What does authorized capital refer to

Answer 27

Authorized capital refers to the number and kinds of shares provided for in the articles of incorporation, whether or not actually issued

Question 28

What are the authorized capital requirements of common stock and preferred stock

Answer 28

There must be at least one class of common stock (voting or nonvoting) representing the residual ownership of the corporation and claim to assets upon liquidation. Preferred stock (voting or nonvoting) may be of several different kinds, generally with a right to be paid a fixed dividend ahead of any dividend payments to holders of common stock. The precise nature and terms of such preferences must be: (i) stated in the articles of incorporation and (ii) either set forth or summarized on the stock certificates.

Question 29

On liquidation, what are preferred shareholders usually accorded before common shareholders

Answer 29

Preferred shareholders are usually accorded the right to receive a stated value for their shares, plus any accumulated but unpaid dividends, before the common shareholders receive anything for their shares

Question 30

What are subscription agreements, and how long does the Florida statute make preincorporation subscription agreements irrevocable for?

Answer 30

A subscription agreement is a contract under which the subscriber agrees to purchase a certain number of shares at a specified price. At common law, subscription agreements were generally revocable until adopted by the corporation unless more than one subscriber was party to the agreement, in which case some courts would hold the agreement enforceable on the theory that the mutual subscriptions provided adequate consideration. The Florida statute makes preincorporation subscription agreements irrevocable for six months unless the agreement provides otherwise, or all subscribers consent to revocation.

Question 31

In Florida, what may corporations receive as consideration for shares of stock

Answer 31

Shares may be issued for cash, other property, past services, or promises to perform services evidenced by a written contract. Florida allows payment by promissory note. The amount and adequacy of consideration is determined by the board. In Florida, the judgment of the directors as to the adequacy of consideration received for shares is conclusive

Question 32

What is the consequence to a shareholder or subscriber who pays less than the full consideration he agreed to pay

Answer 32

He may be held liable by the corporation and its successors and assigns, trustees in bankruptcy, and shareholders suing derivatively

Question 33

Is it true that under the doctrine of equitable contribution, all subscribers purchasing stock at the same time should pay the same price, and the price for new stock issues should be adequate so as not to dilute unfairly the value of existing shareholders’ stock

Answer 33

Yes

Question 34

What two types of laws must stocks and bonds issued by a corporation satisfy

Answer 34

Stocks and bonds issued by a corporation must satisfy the requirements of the federal Securities Act of 1933. For nonexempt securities, a registration statement must be filed with the SEC disclosing all material facts. Sales of securities are also regulated through state “blue sky” laws, which impose standards governing the quality of securities sold, in addition to the disclosure and antifraud provisions

Question 35

What is a shareholder’s preemptive rights, and do shareholder have preemptive rights to acquire unissued shares or treasury shares?

Answer 35

A shareholder’s preemptive rights entitle her to purchase a number of shares of new stock or treasury shares that are being issued sufficient to maintain her relative voting strength. In Florida, shareholders have no preemptive rights to acquire unissued shares or treasury shares unless granted by the articles

Question 36

When a statement is included in the articles of incorporation that “the corporation elects to have preemptive rights” (or words of similar import) it means that what two principles apply except the extent provided otherwise:

Answer 36

1) the shareholders have a preemptive right, granted on uniform terms and conditions prescribed by the board, to acquire proportional amounts of the corporation’s unissued shares and treasury shares upon the decision of the board to issue them; and 2) a shareholder may waive his preemptive right. A written waiver is irrevocable

Question 37

What is the difference between a certificated and uncertificated security

Answer 37

Florida has adopted the 1994 revision of UCC Article 8–Investment Securities. An investment security may be either certificated (represented by an instrument issued in bearer or registered form), or uncertificated (not represented by an instrument, but registered on books maintained by the issuer).

Question 38

IS a contract or modification of a contract for the purchase or sale of an investment security within the statute of frauds?

Answer 38

no

Question 39

What does a seller of a security warrant to a purchaser for value?

Answer 39

that the transfer is effective and rightful, that the security is genuine and unaltered, and that she knows of no fact impairing its validity

Question 40

What are the rights of a true owner of a wrongfully transferred security

Answer 40

the true owner of a wrongfully transferred security may reclaim it from anyone except a protected purchase; and may also go against a protected purchaser if the security was transferred because of an unauthorized indorsement, unless the protected purchaser has in good faith received a new certificate or had the transfer registered in her name.

Question 41

What are the rights of a true owner of a lost, destroyed, or wrongfully taken certificated security

Answer 41

the true owner is entitled to a replacement if she demands it before the issuer has notice that a protected purchaser holds the original, files an indemnity bond, and satisfies the issuer’s other reasonable requirements. If a protected purchaser later turns up with the original the issuer must register it, even if the issuer has also registered a replacement to the true owner. The issuer may then reclaim the replacement or sue on the indemnity bond.

Question 42

What are the rules regarding restrictions on the transfer of stock

Answer 42

Restrictions on the transfer of stock (e.g., a right of first refusal upon sale) are common in close corporations. Restrictions will be enforced if reasonable. By statute, certificates must summarize on their face any restrictions pertaining to their transfer or state that the corporation will furnish a full statement thereof. A third party who purchases stock without notice of restrictions can compel a corporation to transfer stock to him on its books even though transfer violates an existing agreement. If a third party purchases stock with notice of the restriction, he has no rights against the corporation for failure to transfer, but may recover from the seller

Question 43

Do a majority of courts today require insiders to disclose inside information to persons from whom they buy shares?

Answer 43

No, a majority of courts do not require insiders to disclose inside information to persons from whom they buy shares

Question 44

What is the exception to the general rule that a majority of courts do not require insiders to disclose inside information to persons from whom they buy shares?

Answer 44

The special facts doctrine, under which insiders dealing face to face with shareholder/sellers must disclose inside facts of an unusual nature

Question 45

Are directors and tippees liable to the corporation for personal profits realized in trading on the basis of inside information?

Answer 45

no

Question 46

Section 16(b) of the Securities Exchange Act of 1934 requires that officers, directors, and 10% shareholders do what?

Answer 46

It requires these persons return to their corporation all profits from any purchase and sale or sale and repurchase of shares within a six-month period

Question 47

Does the application of Section 16(b) of the Securities Exchange Act of 1934 require showing of bad faith or use of inside information?

Answer 47

No, bad faith or use of inside information need to be shown before Section 16(b) kicks in

Question 48

To what corporations does Section 16(b) of the Securities Exchange Act apply

Answer 48

to publicly held corporations whose shares are traded on a national exchange or that have at least 2,000 shareholders (or 500 shareholders who are not accredited investors) in any outstanding class and more than $10 million in assets. “Accredited investors” include high income or net worth individuals and officers or directors of the issuer

Question 49

What does Securities and Exchange Commision rule 10b-5 broadly prohibit?

Answer 49

broadly prohibits fraud and deceit, including omissions, of any material fact in connection with the purchase or sale of any security, subject only to a minimal nexus with interstate commerce and a showing of scienter (knowledge or intent, and probably recklessness)

Question 50

What are the Insider Trading Sanctions

Answer 50

The SEC may sue persons (including tippees) illegally trading on the basis of inside information for an amount equal to three times their profit or loss avoided. Private persons who trade contemporaneously with a securities law violator may sue for damages

Question 51

What is a tender offer

Answer 51

A tender offer is a public invitation to shareholders to sell their shares in the targeted corporation, usually at a premium over the market price. The offer is often conditioned on acceptance by the holders of a specified number of shares.

Question 52

What does the Williams Act require (relates to tender offers)

Answer 52

The Williams Act imposes antifraud and disclosure requirements on all tender offers involving more than 5% of a target’s stock.

Question 53

What is a control share acquisition statute (what does it do)

Answer 53

Enacted in some states, including Florida, control share acquisition statutes operate by disenfranchising the control shares acquired by a tender offer until the remaining shareholders approve restoration of voting rights, and provide other protections

Question 54

What is Florida’s blue sky law

Answer 54

it contains broad antifraud provisions similar to those of rule 10b-5. The state law, however, does not require scienter, and may be the only basis for civil relief if the transaction has no nexus with interstate commerce

Question 55

What does a promoter do for a corporation and what important type of person is not considered a promoter

Answer 55

A promoter undertakes to form a corporation and to procure the necessary capital and other items. Persons such as attorneys acting in a professional advisory capacity are not considered promoters.

Question 56

What does an incorporator do for the corporation?

Answer 56

An incorporator is one who signs the articles of incorporation, and may or may not be a promoter

Question 57

What is the scope of the fiduciary duty of a promoter

Answer 57

Promoters must act in good faith and in the best interest of all investors. A promoter who profits from a sale to the corporation may be liable to it for the profits or forced to rescind the sale unless there was full disclosure to and approval by the directors or shareholders.

Question 58

What are the rules surrounding promoters who contract on behalf of the corporation before the corporation is formed

Answer 58

Except as a particular contract otherwise provides, promoters remain liable on contracts they enter on behalf of the corporation, even after the corporation adopts the contract, unless the parties agree to a novation. Persons purporting to act on behalf of a corporation knowing that there was no incorporation are jointly and severally liable for all liabilities created while so acting

Question 59

To what extent does a promoter have a right of action to recover expenses or salary from a corporation

Answer 59

In general, a promoter has no right of action to recover expenses or salary from the corporation, but some courts have allowed recovery of the reasonable value of services rendered. If the corporation is never formed, the promoters must return all subscribers’ money, even if there has been no wrongdoing

Question 60

To what extent to shareholders have the power to control day-to-day management of a corporation

Answer 60

Shareholders normally do not have power to control the day-to-day management of a corporation, but may be given management powers by the articles. Shareholders exercise indirect management by electing directors, amending articles or bylaws, or approving fundamental corporate changes.

Question 61

What are the rules for annual shareholders’ meetings (when, and how often, must they be held)

Answer 61

An annual meeting must be held for the election of directors and other business. If an annual meeting is not held within any 15-month period, any shareholder may apply to the court for an order requiring the meeting

Question 62

What are the rules for special meetings (for what purpose may they be held and who may call the meeting)

Answer 62

Special meetings may be called for any appropriate purpose by the board of directors, the holders of at least one-tenth of all outstanding voting shares, or other such persons as authorized in the articles or bylaws

Question 63

Eligibility to vote is determined by stock ownership as of what date (and must that be after)

Answer 63

the record date, which may not be more than 70 days before the meeting

Question 64

What does a quorum consist of

Answer 64

A quorum consists of a majority of shares entitled to vote, unless otherwise provided

Question 65

Which shareholders have the write to authorize another to act for him by written proxy?

Answer 65

Every shareholder entitled to vote, or express consent or dissent, may authorize another person to act for him by written proxy

Question 66

How long is a proxy appointment valid?

Answer 66

For the term provided in the appointment. If no term is provided, proxies expire after 11 months unless the appointment is irrevocable.

Question 67

When are proxies revocable/irrevocable

Answer 67

Proxies are revocable at the pleasure of the shareholder unless the proxy provides it is irrevocable and the proxy holder has an interest in shares, such as a pledgee, purchaser, or employee

Question 68

When may a proxy be revoked, even when it is otherwise irrevocable

Answer 68

By a bona fide purchaser of the shares without notice of the proxy

Question 69

What amount of vote is needed for election of directors (what is the exception)

Answer 69

election of directors is by plurality vote of the shareholders unless the articles provide for cumulative voting. Also, the bylaws of a corporation having shares registered to be traded on a national securities exchange at the time of adoption may fix a greater voting requirement for the election of directors. Such a bylaw provision or amendment adopted by shareholders may not be further amended or repealed by the board of directors.

Question 70

Who does cumulative voting help and how does it work

Answer 70

Cumulative voting is intended to aid minority shareholders in obtaining some representation on the board of directors. Cumulative voting means that each shareholder is entitled to a number of votes equal to the number of his voting shares multiplied by the number of directors to be elected and may cast his votes for any one candidate or divide them among any number of candidates

Question 71

What are the rules on fundamental changes to the corporation and what is first required (and also when a specific fundamental change would adversely affect the shares of a particular class)

Answer 71

Amendments to the articles of incorporation, merger, share exchange, sale of substantially all corporate assets, or dissolution must normally be approved by the shareholders. Whenever an amendment, plan of merger, or consolidation contains a provision that adversely affects the shares of a particular class in the manner enumerated in the statute, the holders of each such class are entitled to vote separately as a class on the amendment, whether or not the class is entitled to vote by the terms of the articles, and the amendment must be approved by an absolute majority of each such class and of the total shares entitled to vote