incorporators and shareholders – corporations

Question 1

incorporators

what is the effect of entering into pre-incorporation contracts on incorporators

Answer 1

they are personally liable on the contract

Question 2

incorporators

when can incorporators be relieved of liability for pre-incorporation contracts

Answer 2

if discharged by the corporation

Question 3

incorporators

what are the other methods for an incorporator to be relieved of liability from a pre-incorporation contract

Answer 3

1. de facto corporation doctrine
2. corporation by estoppel

if they can show that they entered into the contract under the mistaken belief that the corporation was in existence at the time

Question 4

shareholders

who do the shareholders owe a fiduciary duty to

Answer 4

no one –neither each other nor the corporation

Question 5

shareholders

what are the shareholders liable for

Answer 5

no personal liability & only liable fo the debts of the corporation up to the amount of money they’ve invested in the corporation in the way of funds they paid for their shares of stock

Question 6

shareholders

what is the general rule with respect to management for shareholders

Answer 6

they do not have the authority to make decisions on behalf of the corporation –no direct control in management

Question 7

shareholders

when can shareholders have the authority to make decisions on behalf of the corporation

Answer 7

unanimous governance agreement

Question 8

shareholders

what is a quorum and when is it required

Answer 8

a quorum is a majority of shares entitled to vote must be present to properly conduc tbusiness at a shareholders’ meeting; once it is present, bsuiness may be conducted

Question 9

shareholders

what is the effect of a person who represents a share leaves the meeting early (and thus there is no longer a majority present)

Answer 9

once a share is represented at a meeting, it is deemed present for quorum purposes for the remainder of the meeting (regardless of whehter they leave or not)

Question 10

shareholders

what type of vote is standard for director elections

Answer 10

straight voting; directors are elected by a plurality of votes cast at a meeting at which there’s a quorum (receive the most votes and you win)

Question 11

shareholders

what is cumulative voting

Answer 11

each share may cast as many votes as there are board vacancies to be filled; the votes may be cast for a single candidate or they may be divided among the candidates in any manner the shareholder desires

Question 12

shareholders

what is required for an amendment of the articles of incorporation

Answer 12

unless articles provide otherwise, approval of an amendment to the articles requires a majority of votes entitled to be cast on the amendment

Question 13

shareholders

what is required if a class or series of shares is entitled to vote as a separate group on amendment

Answer 13

the approval of at least a majority of the votes entitled to eb cast on the amendment by each separate voting group is required

Question 14

shareholders

what is a voting trust

Answer 14

ensures a group of shares will be voted a particular way in the future

Question 15

shareholders

how is a voting trust created

Answer 15

1. entering into a signed agreement setting forth the trust’s terms
2. transferring legal ownership of their shares to the trustee

Question 16

shareholders

what is required of the trustee in a voting trust

Answer 16

must vote the shares in accordance with the trust

Question 17

shareholders

what must be given to the corporation in relation to a voting trust

Answer 17

copy of the trust agreement and names and addresses of the beneficial owners of the trust

Question 18

shareholders

what is a voting agreement

Answer 18

written and signed agreement that provides for the manner in which they will vote their shares

Question 19

shareholders

how is a voting agreement different from a voting trust

Answer 19

need not be filed with the corporation

Question 20

shareholders

what is a unanimous governance agreement

Answer 20

shareholders can enter into an agreement among themselves regarding almost any aspect of the exercise of corporate powers or management

Question 21

shareholders

what is required for a unanimous governance agreement

Answer 21

1. agreement must not be set forth in the articles or bylaws
2. be set forth in a written agreement signed by all persons who are shareholders at the time of the agreement
3. state that it is a unanimous governance agreement
4. be filed with the corporation

Question 22

shareholders

how long is a unanimous governance agreement valid for

Answer 22

20 years (default)

Question 23

shareholders

what is the derivative action

Answer 23

brought for harm caused to the corporation itself by the director; any recovery belongs to the corporation

Question 24

shareholders

what are the procedural hurdles that a shareholder faces for a derivative action

Answer 24

1. must be a shareholder at the time the act or omission giving rise to the suit occurred
2. shareholder must fairly and adequately represent the corporation’s interest in proceeding with the litigation
3. if the first 2 requirements are met, p must make demand on the corporation to take suitable action to correct or remedy the issue at least 90 days prior to filing suit, unless it can be shown that an earlier demand was rejected or that irreparable injury would result from waiting
4. action can be dismissed by a majority of directors that have no personal interest in the dispute if they vote, in GF after reasonable inquiry, that the lawsuit is not in the best interest of the corporation

Question 25

shareholders

how does one show whether a derivative suit is in the best interest of the corporation

Answer 25

depends on whether the shareholder is likely to prevail and whether the cost of litigation would outweigh the potential recovery to the corporation

Question 26

shareholders

who does recovery belong to in a personal action brought against a corporation, officer, director, etc.

Answer 26

the shareholder

Question 27

shareholders

what is an injunction for ultra vires action

Answer 27

the shareholder can file suit to seek an injunction to prevent the board from voting on a matter because the action is ultra vices

court can also set aside the act if doing so is equitable (if the act has already happened)

Question 28

shareholders

how can the shareholder bring action for director breach of loyalty

Answer 28

1. transaction was not approved by qualified shareholders or qualified directors
2. harm to the corporation
3. the harm was proximately caused by the director’s conduct

Question 29

shareholders

what must shareholder bring in an action for director breach of care

Answer 29

1. board suffered a sustained failure to devote attention to ongoing oversight of the business and affairs of the organization
2. harm to the corporation
3. failure was the proximate cause of harm

Question 30

shareholders

what are preemptive rights

Answer 30

allows for corporate shareholder to purchase the same percentage of any newly issued stock as the shareholder currently holds of the current outstanding voting shares

these rights must be explicitly granted in the articles

Question 31

shareholders

how are shareholders paid distributions

Answer 31

dividends can be paid to shareholders in the form of cash while the corporation is operating

Question 32

shareholders

how are shares redeemed from shareholders

Answer 32

when there’s a redemption right or repurchased

Question 33

shareholders

when can liquidating distributions be paid

Answer 33

when the corporation is dissolved

Question 34

shareholders

what liability does a shareholder face if they receive a distribution in excess of what’s authorized

Answer 34

the shareholder is personally liable to the corporations or creditors (or both) for an amount equaling the excess amount received by that shareholder

Question 35

shareholders

how can a shareholder withdraw

Answer 35

corporation’s actions considered as a whole, over a period of time, are incompatible with a genuine effort on the part of the corporation to deal fairly and in good faith with the shareholder

oppression

Question 36

shareholders

what is required of the corporation if a shareholder withdraws due to oppression

Answer 36

must buy shares back at fair value

Question 37

shareholders

how are records request made by any shareholder

Answer 37

shareholder must give the corporation a signed notice of the demand at least 5 days before the date on which the shareholder wants to inspect and copy such records

Question 38

shareholders

how are records requests made to inspect any and all of the corporation’s records

Answer 38

1. shareholder or shareholders collectively must be and have been the holders of record of at least 5% of any class of the corporation’s stock for the last 6 months
2. Must give the corporation at least 5 days notice
3. demand must be made in good faith and proper purpose
4. shareholder must describe with particularity the purpose and the records the shareholder desires to inspect
5. records are directly connected with the shareholder’s purpose

Question 39

shareholders

how can shareholders remove directors

Answer 39

can remove them before expiration of their terms with or without cause