Formation

Question 1

What is the source of law for corporations questions?

Answer 1

Corporate procedures are controlled by state law and the Revised Model Business Corporations Act, which has been adopted in most states. Unless a corporation adopts contrary bylaws, the RMBCA supplies default provisions for the internal governance of the corporation.

Question 2

What is a promoter?

Answer 2

The person acting as the corporation’s agent in forming the corporation.

Question 3

What is the fiduciary status of a promoter?

Answer 3

A fiduciary owing a duty of care, loyalty, and fair dealing.

• no conflicts of interest, unless [consent or?] ratification of subscribers or board of directors
• must make full disclosures
• no secret profits

Question 4

Is a promoter personally liable for pre-incorporation contracts he enters on the corporation’s behalf?

Answer 4

Yes, even after adoption by the corporation, unless and until there is a novation

Question 5

How does a promoter get reimbursed and compensated for time spent during the pre-incorporation process?

Answer 5

Only if the board of directors later approves compensation or reimbursements. There is no absolute right to reimbursement for time or costs for pre-incorporation services under the RMBCA.

Question 6

When does a corporation’s legal existence begin?

Answer 6

When the articles of incorporation are filed

Question 7

What must the articles of incorporation contain?

Answer 7

• registered agent
• incorporators
• name of corporation
• stock details

Question 8

What must the articles of incorporation contain?

Answer 8

• registered agent name & address
• incorporators names & address
• name of corporation
• stock details

Question 9

What is required of the registered agent?

Answer 9

The registered agent must affirmatively agree to accept service of process at an in-state address.

Question 10

What rules apply to the corporation’s name?

Answer 10

It must contain one of these words or abbreviations:

• “corporation”/”corp.”
• “incorporated”/”inc.”
• “limited”/”ltd.”

Question 11

What stock details must be included in the articles of incorporation?

Answer 11

• number of authorized shares per class

- descriptions of each class, if there’s more than one

Question 12

What is required in creating classes of stock?

Answer 12

Preferences, limitations, voting powers, and relative rights must be the same for the whole class.

Question 13

When can the articles of incorporation provide for indemnification of directors?

Answer 13

When not for an improper reason:

• breach of fiduciary duty
• intentional wrongdoing
• crimes
• excess distributions to shareholders

Question 14

How are the articles of incorporation amended?

Answer 14

Minor ministerial matters: the articles can be amended by the board.

Significant effect on rights of shareholders: must be approved by shareholders

Question 15

What is required for an amendment to pass a vote of shareholders?

Answer 15

If closely held: 2/3 majority

If publicly traded: simple majority

Question 16

What happens when an entity has failed to meet a requirement of state law in the formation process?

Answer 16

If a corporations is not properly formed, the purported shareholders may be held jointly and severally liable as partners.

However, the doctrines of “de facto corporation” and “corporation by estoppel” may shield shareholders form liability.

Question 17

What is required for a “de facto corporation”?

Answer 17

If the corporation has acted in good faith as if fully legally incorporated, though failing to meet every requirement of state law, then it will be deemed a “de facto” corporation and the shareholders may be shielded from liability.

Question 18

What is a corporation by estoppel?

Answer 18

if creditors dealt with the entity as if a corporation, then they are estopped form bring claims against the individual shareholders.

Question 19

After the articles of incorporation are filed, what must happen?

Answer 19

• An organizational meeting must be held.
• An initial report must usually be filed within 120 days, specifying officers, directors, and describing the nature of the business.

Question 20

What happens at the organizational meeting?

Answer 20

• the corporation accepts stock
• shares are distributed
• the board of directors is elected
• the board appoints officers
• bylaws are adopted
• any ratifications of acts, or adoption of contracts can also be made

Question 21

Must the organizational meeting be in person?

Answer 21

In most states no, as long as minutes are written.

Question 22

In a closely held corporation, what additional right do shareholder’s have?

Answer 22

They have a right to participate in management.

Question 23

What is the hierarchy of authority limiting corporate activity?

Answer 23

(1) state law
(2) articles
(3) bylaws
(4) resolutions and minutes

Question 24

What are foreign corporations required to do?

Answer 24

obtain a certificate of authority to transact business in the state

Question 25

What is the test for whether an entity “transacts business in the state”?

Answer 25

If the in-state activities are permanent, substantial, and continuous.

• having a fixed facility in the state qualifies
• taking orders on a website qualifies

NOT sufficient on their own:

• sales by mail or by independent contractors
• owning property
• holding meetings
• a passive website
• borrowing money

Question 26

If transacting business in a state without a certificate of authority, what can happen?

Answer 26

• civil fines
• potential personal liability
• lose the right to sue in the state as plaintiff