Drills 1-25

Question 1

The promoter is liable even after the corporation has been formed unless:

(i) the corporation formally releases the promoter from responsibility through a _______________,
(ii) the contract __________ _________ that the promoter has no personal liability.

Answer 1

(i) novation
(ii) explicitly provides

Question 2

Under what theory can someone avoid personal liability when acting in good-faith in complying with the state’s incorporation requirements and operating a corporation without knowing that the requirements were not met?

Answer 2

Under the de facto (defective) corporation doctrine.

In this case, the owner is not personally liable for obligations incurred in the purported corporation’s name.

Question 3

What is a corporation’s key constitutional document called?

Answer 3

The Articles of Incorporation

Question 4

The articles of incorporation must contain the corporation’s _________ including one of the following 4 words, (or an abbreviation thereof) “corporation,” ____________, ________________, ___________.

Answer 4

name

company, incorporated, limited

Question 5

Par value is the _______________ price for which the stock can be sold by the corporation (need not be its __________ value).

Answer 5

minimum
market

Question 6

In making decisions, Directors must be ______________ _____________.

They may rely on the advice of advisors if the reliance was __________ and the advisor was ____________.

Answer 6

Reasonably informed

Reasonable
Qualified

Question 7

A ______________ ________ is the right to buy enough stock to maintain your ownership percentage in the corporation if the corporation does what?

Answer 7

preemptive right

sells more stock

Question 8

Generally, SHs have only limited liability for corporate acts and are only at risk to the extent of their investment. What is the exception to this rule?

Answer 8

Piercing the corporate veil–if a plaintiff can pierce the corporate veil, then the SHs can be held personally liable.

Question 9

If a director violates the duty of care or loyalty in approving an improper dividend, the director is personally liable for any amount ________ the _________ distribution amount.

Answer 9

above
lawful

Question 10

A corporate insider can be forced to return short-swing profits to the corporation through a Section _______ action.

Name the 4 elements necessary:

1) Only ___________ traded corporations that have securities traded on a __________ securities exchange OR have assets of more than $___ million and >____ SHs
2) What group of people?
3) Short swing profits: during any _____-_______ period, a corporate insider who both buys and sells the c’s stock will be liable for any profits made
4) Reporting: Corporate insiders must report changes in stock ownership to…..?

Answer 10

Section 16(b)

1) publicly
national
$10 million
> 500 SHs
2) Only corporate insiders (directors, officers, and SHs holding more than 10% of a class of stock) are subject to a Section 16(b) action
3) six-month
4) the SEC

Question 11

When does a corporation engage in an ultra vires act?

Answer 11

When it has stated a narrow business purpose in its articles
and then engages in activities outside that stated purpose.

Question 12

What is the general rule for a corporation’s liability for pre-incorporation transactions entered into by a promoter?

What is the exception?

Answer 12

The corporation is not liable for contracts entered into by the promoter (because there is no fiduciary relationship between the promoter and corporation before the corporation exists).

However, the corporation IS liable if it expressly or impliedly adopts a contract by accepting the benefits of the transaction, or gives an express acceptance of liability for the debt.

Question 13

If there is a conflict between the articles and bylaws, which of the two controls?

Answer 13

The articles of incorporation control

Question 14

Other than using the de facto corporation doctrine, how else can someone who acted in good faith avoid personal liability when a company was not in compliance with a state’s incorporation requirements?

Answer 14

Corporation by Estoppel Doctrine:

A person who deals with an entity as if it were a corporation is estopped from denying its existence and thereby prevented from seeking the personal liability of the business owner.

Question 15

There are two types of SH meetings: annual and special.

SHs entitled to vote must be given notice of either type of meeting in a timely manner.

What is considered to be a timely manner?

Answer 15

Voting SHs must be notified of the time, date, and place in a timely manner no less than 10 days and no more than 60 days before the meeting

Question 16

Unless the articles provide otherwise, corporations may choose directors by ____________ voting.

Rather than having separate votes for each directorial slot, SHs are given a number of votes equal to the number of _________ multiplied by the number of ___________ being voted on.

Answer 16

cumulative
shares
positions

Question 17

In what 4 situations is the presumption of good faith afforded by the Business Judgment rule overcome?

Answer 17

If the challenger shows:

1. fraud
2. dereliction of duty
3. condoning illegal conduct
   OR
4. a conflict of interest

Question 18

If a shareholder wins a derivative suit, who recovers the judgment?

Answer 18

In a derivative action, the SH is suing on behalf of the corporation for harm suffered by the corporation.

Thus, recovery generally goes to the corporation. But the shareholder/member recovers reasonable costs of litigation

Question 19

Courts are generally ________ to pierce the corporate veil.

A court’s analysis whether to do so is generally very ____ intensive, and a court will look at the _________ __ ____________.

Ultimately, the court is concerned with whether the corporation is being used as……what?

Answer 19

Reluctant

Fact

Totality of circumstances

A façade for a dominant SH’s personal dealings.

Question 20

Who, if anyone, is responsible for contracts entered into before the corporation is actually formed?

Answer 20

A promoter is personally liable for knowingly acting on behalf of a corporation before incorporation, and remains liable after the corporation comes into existence.

Question 21

What are the two types of stock?

Answer 21

(1) Common stock - a basic ownership interest that entitles the owner to vote on corporate governance matters

(2) Preferred stock - has preference over other stock with regards to distributions

Question 22

In an LLC, what document governs any or all aspects of its business?

Answer 22

An LLC may adopt an operating agreement to govern its business.

The operating agreement can be oral, in a record, or implied by conduct.

(Statutory default provisions apply when the operating agreement is silent.)

Question 23

True or False?

Par value applies ONLY when the stock is first sold by the corporation (as opposed to a shareholder selling to another).

Answer 23

True

Question 24

How do SHs waive their rights to notice of SH meetings?

Answer 24

SHs may waive notice either in writing or by attending the meeting

Question 25

What is the effect of cumulative voting?

Answer 25

The effect of cumulative voting is to allow minority SHs to elect representatives to the board. (In other words, SHs can stack their votes on one or a small number of candidates if they wish, making it easier for minority shareholders to elect at least one director.)

Question 26

What factors does a court use in determining whether to pierce the corporate veil?

Answer 26

Common factors courts use in deciding whether to pierce the corporate veil are:
*Undercapitalization
*Disregard of corporate formalities
*Using corporate assets as SH’s own assets
*Self-dealing with the corporation

Question 27

What is a corporate insider?

Answer 27

directors, officers, and SHs holding more than 10% of a class of stock

Question 28

True or False?

Shareholders owe a fiduciary duty to the corporation

Answer 28

False.
Although SHs do not owe fiduciary duties to the corporation or generally, to each other, a controlling SH may owe a fiduciary duty to minority SHs in certain circumstances

Question 29

Proxy agreements are freely revocable by the shareholder unless 1) it states that it is ? AND 2) it is coupled with ? Or ?

Answer 29

Irrevocable
An interest or
A legal right

Question 30

Officers have actual authority to act _____________ with their duties as outlined in the bylaws or as provided by ?

Answer 30

Consistently
The board of directors

Question 31

A corporation is not liable on a contract made by a promoter unless the corporation does what after incorporation?

Answer 31

Expressly or implied adopts the contract after incorporation

Question 32

A derivative suit cannot be commenced until (when), unless the corporation either 1) rejects the demand or 2) will _______ ____________ ____ if forced to wait.

Answer 32

90 days after the demand
Suffer irreperable harm