Corps (Smart sheets)

Question 1

Formation

Answer 1

Date of Corporate Existence → begins on the date the Articles of Incorporation are properly filed with the Secretary of State, unless a delayed effective date is specified.

− RMBCA → DOES NOT allow an earlier effective
date.

Question 1

RMBCA

Answer 1

Revised Model Business Corporation Act

Question 2

RULLCA

Answer 2

Revised Uniform LLC Act

Question 3

Articles of incorporation

Answer 3

are filed to form a corporation, and MUST contain:
1) corporate name;
2) number of shares the corp. is authorized to
issue;
3) corp.’s address and name of the initial registered agent; AND
4) name and address of each incorporator.

The Articles of Incorporation control if there is a
conflict with the Bylaws.

Question 4

De Jure Corporation

Answer 4

Properly formed corporation

Question 5

Bylaws

Answer 5

rules and regulations adopted by the BoD that govern the internal operations of a corp.
− RMBCA → bylaws may contain any provision not inconsistent with the: (a) Articles of Incorporation; OR (b) law of the jurisdiction.

Question 6

Power of a corp

Answer 6

A corp. has the power to do all things necessary or convenient to carry out its business and affairs.

Includes → lawsuits, own/lease real property, contracts, incur liabilities, borrow/loan money, make investments, involvement with other businesses, fix compensation/salaries, charitable donations, pay/engage in lobbying.

Question 7

Formation of an LLC

Answer 7

Articles of Organization – An LLC is formed when the:
1) Articles of Organization (a.k.a. Certificate of Formation) is properly filed with the Secretary of State; AND
2) LLC has at least one member.
Operating Agreement – Governs: (1) the relations between the members and LLC; (2) the rights/duties of managers; (3) activities and affairs of the LLC; and (4) any means and conditions for amending the Operating Agreement.

Question 8

Promoter liability

Answer 8

promoter acts on behalf of a
corp. that has not yet been formed.

A promoter is personally liable when:
1) he purports to act as or on behalf of a corp.; AND
2) knows no corp. was formed.
A promoter remains personally liable for a pre-corp. contract even if the corp. subsequently adopts the
contract.
− BOTH the corp. and the promotor will be liable if adopted.

A promoter is NOT liable if:
a) there is a subsequent novation; OR
b) the contract explicitly provides that the promoter has no personal liability.

Question 9

Liability of a corporation

Answer 9

A corp. is NOT liable on a contract made by a promoter UNLESS the corp. expressly or impliedly adopts the contract postincorporation.
− Express Adoption = BoD action or reference in corp.’s formation documents.
− Implied Adoption = Corp. (1) knows / has reason to know the material terms of the contract; AND (2) accepts some benefit of it.

Question 10

Shareholder personal liability

Answer 10

Generally, SH’s are NOT personally liable for corp. liabilities and obligations.
− BUT, a court may pierce the corporate veil to impose personal liability in certain situations.

Question 11

Piercing the corporate veil

Answer 11

Courts may disregard the corporate form, and hold an individual shareholder (or director / officer) personally liable for actions taken on behalf of the corp. when:
a) Corp. is acting as the alter ego of the shareholder – when he/she utilizes the corp. for personal reasons;
b) There is a failure to follow corporate formalities;
c) Corp. is inadequately capitalized at its inception; OR
d) To prevent fraud.

*Courts are more likely to pierce it tort actions than in contract disputes.

Passive Investors → are generally NOT liable, even if a court pierces the veil against an active SH/Member.

Question 12

Piercing LLCs

Answer 12

Courts generally apply the same factors to pierce the veil of an LLC to hold members or managers liable.

− BUT the failure to follow formalities is NOT a ground to pierce the LLC veil.

Question 13

SH / Member liability for own torts

Answer 13

Even if the court does not pierce the veil, a person is ALWAYS liable for their own torts.

Question 14

Authorized shares

Answer 14

Maximum number of shares a corp may issue

Question 15

Outstanding shares

Answer 15

The total number of shares issues by the corp and held by the SH’s

Each share is entitled to one vote unless otherwise specified

Question 15

Reacquired Shares (a.k.a Treasury Shares)

Answer 15

These shares are considered authorized, but are NOT outstanding (because the corp. owns them, not the SH’s).

− Reacquired shares are NOT allowed to be voted.

Question 16

Dividends and distributions to SH’s

Answer 16

Distributions are declared at the discretion of the BoD (their decisions
are protected under the Business Judgment Rule).

− Once a dividend is declared, the SH has a legal right to the distribution.

SH’s DO NOT have the right to compel a distribution, unless such right is expressly granted in the Articles of Incorporation.

− BUT, a court will interfere and compel a distribution upon a showing: (1) of bad faith or dishonest purpose; AND (2) that funds were available.

Question 17

SH meetings- right to vote & record date

Answer 17

Only registered shareholders on the record date are entitled to vote at the shareholders meeting (even if a SH sells the shares before the meeting – unless a proxy is given to the buyer).
− Record date CANNOT be more than 70 days prior to the SH meeting.

Question 18

Proxy

Answer 18

A proxy grants the proxy holder the ability to vote shares as the proxy holder deems appropriate.

− Must be signed on either an: (a) appointment form; OR (b) electronic transmission.
− Only valid for 11 months.

Question 19

Proxy agreements

Answer 19

are freely revocable by the shareholder, even if the proxy states that it’s irrevocable.
− Exception → NOT revocable if proxy: (1) is coupled with an interest or legal right; AND (2) states it’s irrevocable.

Can be revoked by in person appearance

Question 20

Notice

Answer 20

Must be given to all SH’s entitled to vote AND requires:
1) At least 10 days advance notice of the meeting but not more than 60 days);
2) The meeting’s date, time, and place; AND
3) A description of the meeting’s purpose (for special meetings only).

*If the meeting involves a fundamental change, ALL shareholders (whether or not entitled to vote) are entitled to notice.

Question 21

Waiver of notice

Answer 21

SH may waive notice:
a) in a signed writing; OR
b) by attending the meeting and not objecting at the beginning of it (or not objecting to a matter not described in the notice).

Question 22

Quorum & voting

Answer 22

Quorum – Needed for the SH’s to take action at a meeting, and requires a majority of the shares entitled to vote.

Voting – If a quorum exists, then action on a matter (other than election of directors) is approved by a
majority of votes cast in favor UNLESS the Articles of Incorporation requires a greater number.

− Each outstanding share gets 1 vote (unless the Articles of Incorp. states otherwise).

Question 23

Election of directors: Plurality voting

Answer 23

Plurality Voting – Candidates who receive the most votes are elected to the BoD, as long as there is a quorum of SH’s present.

− A majority of votes is NOT necessary to be elected (in most states).

Question 24

Election of directors: cumulative voting

Answer 24

Cumulative Voting – Articles of Incorporation or Bylaws may provide for cumulative voting to elect Directors.

Under cumulative voting a SH’s total number of votes = shares owned x director spots open.

− Example → 100 shares owned x 3 BoD spots = 300 votes

A SH may cast ALL of his votes for one director nominee (i.e. 300 votes) rather than being limited to a maximum number of votes for each nominee.

Under cumulative voting, a director can be removed ONLY IF the number of votes for removal are greater
than those needed to elect him.

Question 25

SH’s Right to Inspect Books and Records

Answer 25

Under the RMBCA, a SH has the right to inspect and copy the corp.’s accounting records, excerpts of BoD meetings, and the record of shareholders if:
1) made during regular business hours at a reasonable location (specified by the corp.);
2) with 5-days written notice;
3) made in good faith and for a proper purpose;
4) described the purpose with particularity; AND
5) the requested records are directly connected with the purpose.

A SH may inspect the following records without providing a proper purpose:
▪ Articles of Incorporation;
▪ Bylaws;
▪ BoD Resolutions on classification of shares;
▪ Minutes of SH meetings (for past 3 years);
▪ Name and business addresses of current directors and officers; and
▪ Most recent annual report.

Question 26

Shareholder Voting Agreements

Answer 26

RMBCA → a SH may sign an agreement providing how
they will vote their shares.
− A SH Agreement is specifically enforceable, and a claim for breach of contract may be brought to enforce this right.

Question 27

BoD Meetings

Answer 27

The BoD can act only if a quorum is
present at the time when a vote is taken.

Quorum for BoD Action → a majority of directors is necessary to make a quorum, UNLESS a higher or lower
number is required by the Articles of Incorporation.
− If the Articles of Incorporation lowers the number, it cannot be less than 1/3 of the directors.

The BoD may permit participation of a director by any means of communication, BUT all directors must be able to simultaneously hear each other during the meeting.

Question 28

BOD exercise of corp. powers

Answer 28

The BOD generally makes decisions for the corporation

Question 29

BOD Voting

Answer 29

Voting – If a quorum is present, then an act is approved
by the affirmative vote of a majority of directors
present at the meeting.
− UNLESS a greater number is required by the
Articles of Incorporation or Bylaws.

Question 30

BOD notice and waiver

Answer 30

Notice & Waiver
Regular Meeting → may be held without notice.
Special Meeting → requires at least 2-days’ notice (of
the date, time, and place of the meeting)
Waiver – A director may waive notice:
a) in a signed writing; OR
b) if the director attends the meeting (unless he
objects at the beginning of the meeting or upon
his arrival and does not vote)

Question 31

Removal of Directors

Answer 31

RMBCA → SH’s may remove a director with or without
cause UNLESS the Articles of Incorporation requires
cause.
Common Law → could only be removed for cause.

Question 32

Officers

Answer 32

The BoD may elect individuals as Officers to manage the
day-to-day business of the corp.

Question 33

Authority of Officers

Answer 33

Actual Authority – Officers have authority to act
consistently with their duties:
a) as outlined in the Bylaws; OR
b) as provided by the BoD.

Apparent Authority – Officers may bind the corp. when:
1) a third-party reasonably believes the person/entity has authority; AND
2) that belief is traceable to the corp.’s manifestations (holding an officer out as having authority).

President → Generally, has authority for matters within the ordinary course of business (but not extraordinary acts).

Secretary → Generally, has authority to maintain and authenticate records of the company

Question 34

Management of an LLC

Answer 34

Member-Managed LLC → An LLC is presumed to be member-managed.

Manager-Managed → To be manager-managed, the Operating Agreement must state that the LLC will be manager-managed.

− A manager-managed LLC is run by an elected group of managers (similar to a BoD).

Question 35

Authority of Members

Answer 35

Under RULLCA and general agency principles, each member has authority to bind the LLC for business purposes (including contracts).

Question 36

Duty of Care

Answer 36

Directors are fiduciaries of the corp., and as such owe a duty of care.

This means they must discharge their duties:
1) in good faith;
2) with the reasonable belief that they are acting in the best interests of the corp.; AND
3) with the care that a person in a like position would reasonably believe appropriate under like circumstances.

*If the 3-part test above is met, then a Director is NOT liable.

Question 36

LLC Express Actual Authority

Answer 36

Members receive such authority from the Operating Agreement or from the managing members/managers.

− Differences among members for

Acts within the ordinary course of business → need only be approved by a majority of the members.

Acts outside the ordinary course of business → may be undertaken only with the consent of ALL members.

Question 36

LLC apparent authority

Answer 36

Each member of an LLC can bind
the LLC if the action is made in the ordinary course of business UNLESS:
1) the member lacked authority; AND
2) the other party had notice of a lack of authority.

Managers in a manager-managed LLC have similar authority.

Question 37

LLC Implied Actual Authority

Answer 37

Members have authority to take
actions that are reasonably incidental or necessary for the person’s authorized duties.

Question 38

Business Judgment Rule (BJR)

Answer 38

Common law: A court will NOT disturb decisions subject to the BJR standard if a rational business purpose exists.

BJR requires a director to be informed and act with a reasonable belief they are acting in the best interest of the corporation.

Directors must be reasonably informed on the decisions they make.
− They MAY rely on the reasonable advice of advisors if: (1) the reliance was reasonable, AND (2) the advisor or committee was qualified.

If a director breaches the duty of care, he may be personally liable to the corp. for any losses that result.

Question 39

Duty of loyalty

Answer 39

Duty of Loyalty – Directors must act in the best interests of the corp. and without personal conflict.

Forbids a Director from:
a) Entering into conflicting interest transactions;
b) Usurping a corporate opportunity;
c) Competing with the corporation; OR
d) Trading on inside information.

Question 40

Conflicting Interest Transactions

Answer 40

Is a breach of the duty of loyalty UNLESS:
a) approved by a majority of disinterested directors after full disclosure of all relevant material facts;
b) approved by a majority of disinterested shareholders; OR
c) the transaction as a whole was fair to the corp. at the time it was entered into (fair price + beneficial to corp. + fair dealing).

*The Business Judgment Rule DOES NOT apply/protect directors financially interested in a transaction or who engaged in fraud/illegality.

Question 41

A conflict occurs when a director/officer (or their family
member)

Answer 41

a) is a party to the transaction;
b) has a beneficial interest in the transaction or is so closely linked to it that the director’s judgment may reasonable be affected; OR
c) is involved with another entity that is conducting business with the corp. and that transaction would normally be brought before the BoD.

Question 42

Usurping a Corporate Opportunity

Answer 42

Is a breach of the duty of loyalty UNLESS:
1) First presents it to the corp.’s BoD; AND
2) BoD decides not to pursue the opportunity.

*Showing that the corp. was not financially able to take the opportunity is NOT a defense.

A corporate opportunity is any opportunity that: a) the corp. has an interest/expectancy in; OR b) is in the corp.’s line of business.

*A parent corp. has some freedom in allocating an opportunity within a corporate group.

Question 43

Fiduciary Duties of Shareholders –

Answer 43

SH’s generally DO NOT owe fiduciary duties to fellow SH’s.

− Close-Corporation Exception → SH’s in a close corporation owe the fiduciary duties of loyalty and good faith & fair dealing to minority SH’s.
− Controlling SH Exception → Controlling SH’s owe fiduciary duties to other SH’s and the corp.’s partially owned subsidiaries.

Question 44

Restricting Fiduciary Duties – Corporations

Answer 44

RMBCA → The Articles of Incorporation MAY eliminate or limit the personal liability of a director for actions taken or not taken.
− BUT, the following CANNOT be limited:
(1) financial benefits improperly received;
(2) intentional infliction of harm to the corp. or SH’s;
(3) unlawful dividends; or
(4) an intentional violation of criminal law.

Question 45

Fiduciary Duties Owed by LLC Members/Managers

Answer 45

Member-Managed LLC’s → Members owe the duty of care and loyalty to both the company and other members.
Duty of Care → a member must act:
1) with the care that a person in a like position would reasonably exercise under the circumstances; AND
2) with a reasonable belief to be in the best interests of the company.

Duty of Loyalty → Includes the duty to:
1) account for any property, profit, or benefit derived from the LLC’s business/property;
2) refrain from having an adverse interest when dealing with the LLC (unless the transaction was
fair); AND
3) refrain from competing with the LLC (before dissolution).

*EXCEPTION → All members authorize an act/transaction after receiving full disclosure.

Question 46

Fiduciary duties in Manager-managed LLCs

Answer 46

The managers owe fiduciary duties, not the members.

The duties are the same as a member-managed LLC.
− BUT, two notable differences for the Duty of Loyalty:
▪ Only the members (not the managers) may authorize an act/transaction that would otherwise violate the duty of loyalty.
▪ Managers must refrain from competing with the LLC until winding up is completed (the duty does not end upon dissolution).

Question 47

Direct Action

Answer 47

May be brought when there is a breach of a duty owed to a shareholder of a corp. The injury CANNOT be solely the result of an injury suffered by the corp.

− Similarly, a member of an LLC may bring an action against a member, manager, or the LLC (same standard for showing of injury).

*Damages awarded will go to the SH or Member.

Question 48

Derivative Action

Answer 48

When a SH is suing to enforce the corp.’s claim.

The RMBCA requires the SH to:
1) Own the corp.’s stock at the time the claim arose (or became a SH by operation of law from such SH);
2) Be a SH through entry of judgment;
3) Fairly and adequately represent the corp.’s interests; AND
4) Make a written demand to the corp. to take suitable action.

A derivative suit CANNOT be commenced until 90-days after the demand, UNLESS the corp.:
a) rejects the demand; OR
b) will suffer irreparable harm if forced to wait.

For an LLC, all of the elements are the same, except:
1) The action may be brought within a reasonable time after the demand; and
2) The demand requirement may be waived if futile.

Damage Award → is paid directly to the Corp./LLC, but the SH/Member may recover reasonable costs of the
litigation.

Question 49

Dismissal of Derivative Action by the BoD

Answer 49

A derivative action MUST be dismissed (on a motion by the corp.) if:
1) A majority of the BoD’s qualified directors,
2) Have determined in good faith,
3) After conducting a reasonable inquiry, AND
4) That the action is not in the best interests of the corp.

Question 50

Amending the Articles of Incorporation

Answer 50

May be amended at any time by the following process:
1) Adoption by the BoD;
2) Notice to all SH’s of a meeting to vote on the amendment; AND
3) Adoption by the SH’s by a majority vote – unless a greater number is required under state law or
the Articles of Incorp.

Exception #1 → The BoD has the authority to make general minor amendments without SH approval.

Exception #2 → BoD or Incorporators may adopt any amendment if the corp. has not issued shares yet.

Question 51

Merger

Answer 51

The BoD of both Corporations must first approve, then the SH’s of both must approve with a majority vote.

But, SH approval of a corp. is NOT required if:
1) Articles of Incorporation will not be changed;
2) Outstanding shares will not change; AND
3) Voting power of any shares issued as a result of the merger is 20% or less of the surviving corp.

Short Form Merger – Occurs when a parent corp. merges with its subsidiary, and the parent corp. owns at least 90% of the subsidiary’s outstanding shares.
− In such a case, only the BoD of the parent corp. has to approve the merger.

Question 52

Share Exchange

Answer 52

The BoD of both Corporations must
first approve, then the SH’s of the acquired corp. must approve with a majority vote.
− SH Approval of the acquiring corp. is NOT required.

Question 53

Sale of All / Substantially All of the Corp.’s Assets

Answer 53

deemed a fundamental change if the sale is NOT in the usual and regular course of business.

Fundamental Changes – require the following:
1) Adoption by the BoD;
2) Notice to all SH’s – must state purpose of the meeting; AND
3) Adoption by the SH’s by a majority vote – unless a greater number is required under state law or the Articles of Incorp.

A majority vote of SH’s is not required if the sale is in the usual and regular course of business.

Question 54

Dissenter’s Appraisal Rights

Answer 54

A dissenting SH is entitled to appraisal rights (to obtain payment for the fair market value of his shares) for any of the following
fundamental changes:

1) SH has the right to vote on the merger plan.
2) SH of the subsidiary in a short form merger.
3) SH’s shares are being acquired in a share exchange.
4) SH has the right to vote on the distribution of all or substantially all assets.
5) If an amendment of the Articles of Incorporation materially and adversely affects the SH’s rights.

Procedure to Enforce Appraisal Rights – SH may force the corp. to purchase his shares if:
1) he gives notice to the corp. of his intent to assert appraisal rights;
2) notice was given before the vote;
3) the fundamental change is effectuated; AND
4) the SH did not vote in favor of the change.

*Appraisal rights are NOT available to SH’s of publicly traded companies.

Question 55

Judicial Dissolution of a Corp

Answer 55

A shareholder may petition the court to dissolve the corp. if:
a) Deadlock of the directors and irreparable injury to the corp.;
b) Directors acted in a manner that is illegal, oppressive, or fraudulent (violating SH’s reasonable expectation or preventing minority SH’s from having equal rights/opportunities);
c) SH’s are deadlocked in voting power and have failed to elect Directors for at least 2 consecutive annual meetings; OR
d) Corp. assets have been wasted or misapplied.

Question 56

Voluntary Dissolution of a Corp

Answer 56

A corp. will be voluntarily dissolved if:
1) The BoD adopts a proposal to dissolve;
2) Notice to all SH’s – must state the purpose of the meeting; AND
3) Adoption by the SH’s by a majority vote – unless a greater number is required under state law or the Articles of Incorp.

Early Dissolution – A corp. may also be dissolved by a majority of the incorporators or initial directors if:
1) Corp. has not issued shares or commenced business; AND
2) Articles of Dissolution are filed with the Secretary of State.

Question 57

Dissociation of a Member from an LLC

Answer 57

A member has a right to dissociate (rightfully or wrongfully) at any time, and occurs when the LLC has notice of the person’s express will to withdraw.

− A dissociating member loses the right to participate in management of the LLC, BUT he still has the right to receive distributions.

− RULLCA → dissociation DOES NOT result in dissolution of the LLC.

Question 58

Dissolution of an LLC

Answer 58

Dissolution Events (under RULLCA) – An LLC is dissolved upon:
a) Occurrence of a dissolution event in the Operating Agreement;
b) Consent of all members;
c) The passage of 90 consecutive days where the LLC has no members; OR
d) Judicial dissolution.

Judicial Dissolution – A court may grant this upon a showing of any of the following grounds:
a) Managers or controlling members acted in an illegal/fraudulent manner;
b) Managers or controlling members acted in an oppressive and directly harmful manner to the member;
c) The conduct of all (or substantially all) of the LLC’s activities is unlawful; OR
d) It’s not reasonably practicable to carry on the business.