Definitions

Question 1

De Jure Corporation

Answer 1

Full or substantial compliance with all of the mandatory conditions precedent to incorporation.

Question 2

De Facto Corporation (Colorable Compliance Defense)

Answer 2

A good faith compliance with all of the mandatory conditions precedent to incorporation but with some defect (i.e. Article were not accepted by Secretary of State). At a minimum, the incorporators must not know of the defect.

Question 3

Corporation by Estoppel

Answer 3

A corporation where the defect in the incorporation process was serious enough so that it would not qualify as De Jure or De Facto. However, a person who dealt with the corporation may be estopped from denying corporate validity. Corporation by Estoppel is only good for the contractual obligation in question and may not be applicable to other transactions.

Question 4

Piercing the Corporate Veil

Answer 4

Shareholders may be subject to unlimited liability where the corporate entity is cast aside by a court of equity even if the corporation is validly formed.

Question 5

Piercing the Corporate Veil

Answer 5

Shareholders may be subject to unlimited liability where the corporate entity is cast aside by a court of equity even if the corporation is validly formed.

Question 6

Six Factors that will be considered in attempting to pierce the corporate veil

Answer 6

Contract creditors need to show violation of 2 whereas tort creditors only need to show violation of 1 of the following.

1. Basic corporate formalities not followed
2. Corporation undercapitalized
3. Commingling of corporate assets and shareholder’s personal assets
4. Corporation dominated/controlled by an individual or another corporation.
5. Alter Ego Theory
6. Corporate form was used to commit fraud.

Question 7

Promoter

Answer 7

One who participates in the formation of a corporation by securing the initial capital, arranging compliance with the legal formation requirements, and entering into necessary contracts on behalf of the corporation before it is formed.

Question 8

Promoters Duties to Other Promoters

Answer 8

1. Duty not to make a profit at the expense of the other promoter.
2. Duty of full disclosure and fair dealings
3. Duty not to engage in secret dealings

Question 9

Liabilities of Promoter

Answer 9

Promoter is primary liable for contracts both prior to incorporation and after corporation has been formed, even if the contract is silent, unless there is a novation, either express or implied.

Question 10

Ultra Vires Transactions

Answer 10

Transactions that exceed or are beyond the purposes and powers of the corporation. However, shareholders can ratify.

Question 11

Doctrine of Waste

Answer 11

All executive compensation is subject to the test of waste even where board approved. Where it is held to be unreasonable or excessive, it cannot be enforced against the corporation and can be enjoined.

Question 12

Two Methods of Shareholder Voting

Answer 12

Straight Voting or Cumulative Voting

Question 13

Straight Voting vs. Cumulative Voting

Answer 13

Straight: A shareholder is entitled to one vote for each share held.

Cumulative: Shareholder is given one vote for each share held times the each director to be elected.

Question 14

Proxy

Answer 14

A power of attorney given by a shareholder in writing to someone else to exercise the voting rights attached to his shares. The corporation must have notice. A writing is required and the proxy is only good for 11 months.

Question 15

Preemptive Rights

Answer 15

Allows shareholders to keep their proportionate interests in the corporation through the right to subscribe to that amount of new shares in a new issuance which will preserve that existing proportionate interest in shares held by them.

Question 16

Direct Action by Shareholder

Answer 16

A shareholder is enforcing his own personal rights for injury to his interest as a shareholder against the corporation.

Question 17

Derivative Action by Shareholder

Answer 17

If management or a third party has abridged a legal duty owed to the corporation and the corporation fails to enforce its cause of action, a shareholder may bring the cause of action in the name of the corporation asserting the right of the corporation against the defendant.

Question 18

Duties Owed by Director’s/Officers

Answer 18

Duty of Due Care and Loyalty

Question 19

Duty of Due Care

Answer 19

Officers/Directors owe a fiduciary duty to the corporation and must discharge their duties with the same degree of diligence, care and skill, which the ordinary prudent person would exercise in the management of his own affairs.

Question 20

Four Defenses to Breach of Duty of Due Care

Answer 20

1. Business Judgement Rule
2. Reasonable reliance on expert advice
3. Good faith reliance on management
4. Absence from meeting at which misconduct occurred.

Question 21

Business Judgment Rule

Answer 21

Directors are not liable for losses flowing from their business decisions provided that decisions were the result of a well-informed, independent, good faith decision.

Question 22

Duty of Loyalty

Answer 22

Officers and directors are held to a fiduciary duty of loyalty in all of their dealings with the corporation without regard for personal gain.

Question 23

Interested Director Transaction

Answer 23

Occurs where a director sells or buys property or services to or from the corporation. Under majority rule, the transaction is not voidable if the director’s interest was disclosed, the transaction was approved by a majority of the disinterested directors and shareholders OR the transaction is fair to the corporation (no fraud or bad faith)

Question 24

10b-5 Rule

Answer 24

It is unlawful for any person, directly or indirectly, by use of any means or instrumentality of interstate commerce or the mails, to employ any fraudulent or manipulative devices in connection with the purchase or sale of any securities.

Question 25

Elements of 10b-5

Answer 25

Jeff Once Made Some Spice Revolting Pork Rice

1. Jurisdiction: Interstate Commerce/National Stock Exchange.
2. Omission/Misstatement
3. Material: Reasonable Investor Test
4. Scienter (Intent): Corporation’s reckless disregard for the rules and regulations.
5. Standing Requirement
6. Reliance: Presumed. If affirmative misrepresentation, plaintiff must prove reliance.
7. Privity: NONE Required unlike common law.
8. Remedies:

Question 26

Insider

Answer 26

Agent of the corporation who has access to material non public information.

Question 27

Misappropriation Theory

Answer 27

Attempt by courts to impose liability under 10b-5 on individuals who apparently violated 10b-5 but had no duty to disclose the corporation in whose stock they trade (not an insider or tipee). If use of the inside information was a breach of the defendant’s duty to somebody (anybody), the duty requirement is satisfied.

Question 28

Closed Corporation

Answer 28

Includes features of a corporation and a partnership in that the owners manage the day-to-day operations. it has some restrictions on the transferability of its stock and does not make public offerings of its stock or other securities.

Question 29

Elements of 16(b)

Answer 29

JISP

1. Jurisdiction
2. Insiders: Statutory
   
   • Officer/Director
   • Holders of more than 10% stock at time of both purchase and sale.
3. Short Swing Profit: Includes losses avoided.
   
   • Profit is determined by matching the highest sales price against lowest purchase price during any six-month period.
4. Purchase or sale of an equity security?

Question 30

Three types of stock and their definitions

Answer 30

1. Bonus Stock: No consideration paid
2. Discount Stock: Cash payment less then par stated value.
3. Watered Stock: Payment of property/services that are overvalued.

Question 31

Section 5

Answer 31

Forbids use of interstate commerce to offer to sell a security unless a registration statement has been filed with the SEC.

Question 32

Redemption

Answer 32

Corporation acquires some or all of a class of outstanding shares by paying a stipulated redemption price which is generally in excess of par to the shareholders who then must surrender their certificate.

Question 33

Materiality

Answer 33

An omitted fact is material if there is a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the shareholder’s deliberations

Question 34

Liquidation

Answer 34

The process of winding up corporate affairs, liquidating corporate assets, satisfying the claims of the creditors and then distributing remainder to the shareholders.

Question 35

16(b) Rule

Answer 35

Profits realized in connection with the purchase and sale (or sale and purchase) within 6 months, of equity securities listed on a national stock exchange by officer/director/or holders of more than 10% stock of the corporation by the corporation, are recoverable by the corporation.