CORPS

Question 1

Promotors

Answer 1

A promotor is one who raises capital and enters into contracts in order to form the corporation.

Promotors stand as fiduciaries of the corporation and may not make secret profits from dealings related to the corporation.

Question 2

Promotors - Liability

Answer 2

Generally, the promotor, not the corporation, is personally liable for all contracts entered into prior to incorporation, unless

(i) there is a subsequent novation or (ii) the corporation adopts the contract

Novation - a novation occurs when all parties agree to replace the promotor with the corporation in the contract, thereby absolving the promotor’s liability

Adoption - A corporation’s adoption of a pre-incorporation contract may be (i) express, per board resolution or (ii) implied, by accepting the benefits of the contract.

Question 3

Incorporation Procedure

Answer 3

To validly incorporate, the incorporator must file the articles of incorporation with the Secretary of State.

The articles of incorporation must include

i. the corporation’s name
ii. corporation’s purpose
iii. number of shares it is authorized to issue
iv. registered agent’s name and address, and
v. incorporator’s name and address

Question 4

Ultra Vires

Answer 4

An ultra vires act occurs when a corporation specifies a narrow purpose, then engages in transactions beyond the scope of that purpose.

Ultra vires acts are unenforceable, and a challenge to enjoin the act can be brought by

i. a shareholder against the corporation
ii. the corporation against a director, officer, employee, or agent, or
iii. the state

Question 5

De Jure Corporation

Answer 5

A validly incorporated corporation is called a de jure corporation.

Once a de jure corporation is in existence, the corporation, not its constituents, becomes liable for the corporation’s transactions.

Question 6

De Facto Corporation

Answer 6

A de facto corporation exists when the owner has made a good faith effort to incorporate and operates the business without knowing that his attempt to incorporate has been unsuccessful.

The owner will not be personally liable for the corporation’s transactions.

Question 7

Corporation by Estoppel

Answer 7

If

(1) a business owner made a good faith effort to incorporate and operated the business unaware that his attempt to incorporate was unsuccessful and
(2) a third party contracted with the owner believing it to be a de jure corporation,

then corporation by estoppel prevents the third party from

(i) denying the corporation’s existence or
(ii) holding the business owner personally liable

Question 8

Bylaws

Answer 8

The bylaws are a board-approved document setting out the governing rules by which a corporation operates.

It is common, but not mandatory, for a corporation to file bylaws.

Where there are inconsistencies between the articles of incorporation and the bylaws, the articles of incorporation govern.

Question 9

Board of Directors

Answer 9

The board of directors governs the management of the corporation by making high level corporate decisions and appointing and overseeing officers.

A corporation must have at least one director.

Shareholders elect the board of directors at the annual shareholder’s meeting.

Unless otherwise stated in the articles of incorporation, shareholders may remove directors through a majority vote, with or without cause.

Question 10

Board of Directors Meetings

Answer 10

The board of directors holds regular and special meetings.

The time and date of regular meetings are set according to the bylaws and do not require notice.

However, notice is required for special meetings but can be waived by a special waiver or by attendance at the meeting.

Question 11

Meetings - Voting

Answer 11

A quorum, or majority, of directors must be in attendance at the meeting when the vote is taken in order for a board’s actions to be valid.

A resolution of the board will pass upon a majority vote among the directors

Question 12

Action Without Meeting

Answer 12

Upon unanimous written consent, the board may approve proposals and resolutions without a meeting

Question 13

Officers

Answer 13

Officers are selected by the board of directors and are responsible for carrying out the daily operation of the corporation. Typically, the corporation’s officers are the president, secretary, and treasurer.

Question 14

Officers - Authority to Act

Answer 14

An officer has the authority to act on behalf a corporation based on actual authority, apparent authority, or ratification.

Question 15

Ratification

Answer 15

A corporation can ratify an officer’s actions after-the-fact even if the agent did not originally have authority to act.

Question 16

Fiduciary Duties

Answer 16

Directors and officers owe the corporation the

duty of care

duty of loyalty

duty to disclose

Question 17

Duty of Care

Answer 17

Directors and officers of a corporation must act with the care of a reasonably prudent person in a similar position.

If the duty of care is breached, the director or officer responsible must be held personally liable.

Question 18

Duty of Care - Reliance

Answer 18

As a defense against a breach of the duty of care, officers and directors are permitted to rely on the reasonable advice of advisors, employees, other officers, committees of the board, and outside experts

Question 19

Business Judgment Rule

Answer 19

The BJR creates a rebuttable presumption that a director’s or officer’s decision was made

(1) in good faith
(2) with the care of a reasonably prudent person, and
(3) with the reasonable belief that his actions were in the best interest of the corporation

Question 20

Duty of Loyalty

Answer 20

The duty of loyalty requires an officer or director to prioritize the interests of the corporation above his own interests.

The duty of loyalty precludes directors and officers from

i. self dealing
ii. usurping a corporate opportunity
iii. competing with the corporation, or
iv. insider trading

Question 21

Self-Dealing

Answer 21

Self-dealing occurs when a director or officer transacts with a corporation for his own benefit or for the benefit of a corporation he or his relatives own or are associate with.

Self-dealing transactions breach the duty of loyalty unless protected by the Safe-Harbor Rule.

Question 22

Safe Harbor Rule

Answer 22

Under the Safe Harbor Rule, self-dealing transactions can be protected if the interest director demonstrates that he

(i) receive approval from the majority of disinterested directors after disclosing all material facts
(ii) received approval by a majority vote of disinterested shareholders after disclosing all material facts, or
(iii) the transaction was fair to the corporation when the deal was made

Question 23

Usurping a Corporate Opportunity

Answer 23

If a director of officer is presented with an opportunity that the corporation

(i) has an interest in or
(ii) is within the line of the corporation’s business, he has a duty to first disclose all material facts pertaining to the opportunity and may personally pursue the opportunity only after it is rejected by the corporation.

Question 24

Shareholders

Answer 24

Shareholders elect the board of directors and vote on significant decisions that affect important changes I the corporation.

Question 25

Shareholder Meetings

Answer 25

Annual Meetings - annual meetings are mandatory, and the main purpose is to elect directors

Special Meetings - special meetings are called outside of annual meetings to vote on matters that cannot wait until the next annual meeting to be resolved. Special meetings require notice specifying the time, date, location, and purpose of the meeting. Notice must be given between 10 to 60 days prior.

Shareholders may also take action absent a meeting through unanimous written consent.

Question 26

Voting

Answer 26

Shareholders have indirect corporate power through their right to vote. Unless the articles of incorporation state otherwise, each share of stock is entitled to one vote.

Question 27

Voting - Quorum

Answer 27

For the shareholders’ decision to be valid, a quorum of the corporation’s shares must be present at the meeting either in person or by proxy.

A majority of the corporation’s outstanding shares constitutes a quorum.

Question 28

Voting - Record Date

Answer 28

Directors set a record date to determine which shareholders are eligible to vote.

The record must not be more than 70 days prior to the meeting.

Only shareholders who hold shares on the record date are entitled

Question 29

Voting - Proxy Voting

Answer 29

Shareholders may vote by proxy, which is an authorization signed by the shareholder allowing another to vote on his behalf.

Unless otherwise stated, a proxy is valid for up to 11 months.

it is generally revocable but can be made irrevocable if

(1) it is coupled with an interest and
(2) the proxy expressly states that it is irrevocable

Question 30

Voting - Voting Agreements

Answer 30

Multiple shareholders may provide for the manner in which they will vote their shares by entering into a signed agreement. A voting agreement is specifically enforceable and does not expire.

Question 31

Shareholder Litigation

Answer 31

Shareholders may file direct or derivative lawsuits against a corporation.

Question 32

Direct Lawsuits

Answer 32

A shareholder can personally sue the cooperation for damages

(Generally, a shareholder will sue the corp for a breach of fiduciary duty that was owed to him)

Question 33

Derivative Lawsuits

Answer 33

A shareholder with standing may file a derivative lawsuit on the corporation’s behalf. Recovery goes to the corporation and the shareholder may seek reimbursement for litigation expenses

(look for breaches of duty of care and loyalty)

Question 34

Derivative Lawsuits - Standing

Answer 34

A shareholder will have standing if he

1. owns shares in the corporation at the time of the harm and throughout the litigation
2. adequately represents the interests of the corporation

Question 35

Derivative Lawsuit - Written Demand

Answer 35

Prior to bringing a derivative lawsuit, the shareholder must

(1) make a written demand for the board to file an action
(2) the demand must be rejected

The shareholder must wait 90 days after the written demand before filing an action, unless the delay would cause irreparable injury.

Question 36

Fiduciary Duties

Answer 36

Controlling shareholders owe a fiduciary duty to the corporation and to minority shareholders.

Minority shareholders do not owe any fiduciary duties

Question 37

Piercing the Corporate Veil

Answer 37

Although a corporation’s directors, officers, and shareholders are generally protected by limited liability, courts may allow a plaintiff to pierce the corporate veil and hold a corporation’s constituents personally liable for its obligations.

Question 38

Piercing the Corporate Veil Factors

Answer 38

1. undercapitalization when the corporation was formed
2. alter ego
3. fraud
4. siphoning corporate funds and stripping the corporation of its assets
5. failure to observe corporate formalities
6. self-dealing
7. commingling personal and corporate assets

Question 39

Stock

Answer 39

Stock ownership correlates with the stock owner’s rights and interest in a corporation.

All corporations must have common stock but may also elect to have other classes of stock, providing stockholders with preferred voting, distribution, or liquidation rights.

The board of directors must approve the issuance of stock.

Question 40

Stock Valuation

Answer 40

Adequate consideration is required in exchange for shares of stock.

Adequacy is determined by the board of direcotrs

Par Value - minimum amount for which a share of stock may be sold. Directors may, but are not required to, set par value on the corporation’s shares

Watered Stock - shares of stock that have been sold for below par value

liability - a corporation will hold the board of directors liable for the differences between the par value and the value received. Shareholders will also be held liable if they knowingly received watered stock

Question 41

Distribution

Answer 41

Dividend - distribution of a corporation’s profits to its shareholders

Authority to Distribute - the board of directors has the power to authorize dividend unless the corporation is insolvent or rendering the distribution would make it insolvent

Question 42

Federal Securities Laws - Rule 10b5

Answer 42

Rule 10b5 prohibits the use of fraud to effectuate the purchase of sale of securities

A plaintiff may bring a Rule 10b5 action if he can show

1. he purchased or sold a security
2. using any means of interstate commerce
3. the defendant intentionally or recklessly
4. engaged in fraudulent conduct
5. pertaining to material information
6. upon which the plaintiff relied
7. and suffered harm as a result

Question 43

Rule 16b

Answer 43

Rule 16b, applicable to directors, officers, and shareholder owning more than 10%, obstructs the unethical use of insider information for the purchase and sale of securities.

It is applicable to public corporations that are traded on a national exchange, or corporations with assets in excess of 10 million dollars and a minimum of 2,000 shareholders.

Any profits made within a six-month period by a director, officer, or shareholder owning more than 10% must be returned to the corporation.

Question 44

Dissolution

Answer 44

Dissolution occurs when a corporation ceases to exist though voluntary or involuntary action

Question 45

Voluntary Dissolution

Answer 45

A corporation can be voluntarily dissolved by its directors and shareholders through a majority vote

Question 46

Involuntary Dissolution

Answer 46

Creditors - a corporation can be involuntarily dissolved by creditors upon a showing that the corporation is insolvent

Shareholders - a corporation can be involuntarily dissolved by its shareholders if the shareholders can show that directors are engaging in fraud or that corporate assets are being wasted

Question 47

Winding UP

Answer 47

a corporation continues after dissolution only for the purpose of winding up and liquidating its business.