Intracorporate Groups

Question 1

Who is a promoter?

Answer 1

A person who undertakes to form a corporation and to procure for it the rights, capital, labor, facilities, and other necessities to carry out the purposes set forth in its charter and to establish it as fully able to do its business.

Question 2

Who is an incorporator?

Answer 2

One who signs the articles of incorporation.

Question 3

Does the promoter have a fiduciary duty to the corporation?

Answer 3

Yes. They are bound to act in utmost fairness with the corporation and in the best interest of all the investors, to exercise good faith

Question 4

Is a promoter who profits from the sale of property to the corporation potentially liable?

Answer 4

Yes, unless:

1. There is full disclosure of all material facts to an independent board of directors that approves or ratifies the transaction;
2. There is full disclosure of all material facts to each shareholder before he subscribes to his shares or the shareholders unanimously ratify the transaction after subscribing; or
3. The promoter is the sole shareholder at the time of the sale to the corporation and there is no plan to sell stock thereafter to the investors.

Question 5

What is the Florida Law regarding promoter liability?

Answer 5

The Florida courts follow the so-called federal rule, which holds that the promoter has not violated his fiduciary duty to the corporation since the promoter, being the sole shareholder at the time, was not harmed and the corporation, being the same entity, is thereafter estopped to complain.

• Under this rule, the defrauded investors may have a personal action against the promoter under the state or federal securities laws or the common law action of deceit

Question 6

Is the corporation bound on preincorporation contracts entered into by the promoters on behalf of the corporation or in its name?

Answer 6

No, the corporate entity does not exist.

Question 7

Are promoters bound on preincorporation contracts?

Answer 7

Yes; all persons purporting to act as or on behalf of a corporation knowing that there was no incorporation are jointly and severally liable for all liabilities created while so acting.

Question 8

How may a corporation become liable on promoters’ contrafcts?

Answer 8

By adopting them.

Question 9

Must adoption be express?

Answer 9

No, adoption may be express or implied, but the mere act of incorporation is not sufficient to constitute adoption.

• Acceptance of the benefits of the contract is usually deemed to constitute adoption.
  
  • Even AFTER adoption, the promoter still remains liable unless there is a novation

Question 10

What is a novation?

Answer 10

A novation is a specific agreement by all parties that, upon adoption of the contract by the corporation after it comes into being, the promoter will be released from personal liability on the contract, and the contracting party will look exclusively to the corporation for performance under the contract.

Question 11

What should the promoter do if he wishes to bind the other party before the corporation was formed, but avoid any personal liability?

Answer 11

He may obtain an option from the other party, irrevocable for a specified period and assignable to the corporation after it is formed.

Question 12

What rights does the promoter have?

Answer 12

He has no right of action against the corporation for expenses incurred by him prior to incorporation NOR for salary for the time devoted to organizing the corporation

Question 13

What happens where the proposed corporation is never organized?

Answer 13

The promoters must return all money to the subscribers and may not deduct any amount for expenses, regardless of the fact that the promoters have acted in good faith without any misrepresentations or fraud and honestly endeavored to complete the incorporation

Question 14

What are the management rights of shareholders?

Answer 14

They have virtually no power to control directly the day-to-day management of corporate affiars. This norm can be varied in the articles by vesting the power of management in the shareholders.

Question 15

What are the indirect methods of control that shareholders can use to gain some control?

Answer 15

1. election of directors;
2. approval of amendments to articles;
3. approval of certain fundamental changes such as merger, sale of assets, or dissolution;
4. amendment of bylaws when provided by the articles

Question 16

Where can shareholders’ meetings be held?

Answer 16

They may be held within or outside the state, as may be provided in the bylaws.

Question 17

When is the annual meeting of the shareholders held?

Answer 17

At a time stated in or in accordance with the bylaws. BUT, if the annual meeting is not held within any 15-month period, any shareholder may apply to the court for an order requiring the meeting to be held.

Question 18

Can attendance at the annual shareholder meeting be via remote communication?

Answer 18

Yes, if authorized by the board of directors.

Question 19

For what purpose may special meetings be called?

Answer 19

For any appropriate purpose. Can be called by the holders of at least one-tenth of all the outstanding voting shares, or such other persons as may be authorized in the articles or bylaws

Question 20

When is written notice of a special meeting and its purpose required to be given?

Answer 20

At least 10 days in advance to each shareholder of record entitled to vote at the meeting.

Question 21

What is the record date?

Answer 21

The day on which eligibility to vote or receive notice is determined.

Question 22

Who sets the record date?

Answer 22

The record date is fixed by the board of directors, and may NOT be more than 70 days prior to the meeting.

Question 23

What happens after the record date?

Answer 23

The stock transfer books are closed until the meeting, and the list of eligible voters is determined.

Question 24

Who are the record holders?

Answer 24

The holders of voting shares on the record date, as shown on the stock transfer books of the corporation. They are eligible to vote at shareholder meetings and are entitled to notice of meetings.

Question 25

What is the voting list?

Answer 25

At least 10 days before each shareholders’ meeting, the corporation must compile a complete list of the shareholders of record entitled to vote at the meeting.

Question 26

What is a quorum?

Answer 26

Unless otherwise provided in the articles, a majority of the shares entitled to vote, represented in person or by proxy, constitutes a quorum at a meeting of shareholders.

Question 27

The articles may provide for no less than a ___ quorum or may provide for a ___ quorum.

Answer 27

one-third; super-majority

Question 28

Who may authorize another person to act for him by written proxy?

Answer 28

Every shareholder entitled to vote, or express consent or dissent, may authorize so.

Question 29

How long is a proxy appointment valid for?

Answer 29

It is valid for the term provided in the appointment. If no term is provided, proxies expire after 11 months unless the appointment is irrevocable.

Question 30

Proxies are revocable at the pleasure of the shareholder unless…

Answer 30

the proxy provides it is irrevocable and the proxy holder has an interest in the shares.

Question 31

When may a proxy be revoked by a BFP?

Answer 31

A proxy may be revoked, even if otherwise irrevocable, by a BFP of the shares without notice of the proxy

Question 32

What is the presumed voting allocation?

Answer 32

Each outstanding share, regardless of class, is entitled to one vote, unless otherwise provided in the articles.

Question 33

What vote is the presumption for election of directors?

Answer 33

Election of directors is by plurality vote of the shareholders unless the articles provide for cumulative voting.

Question 34

What is the formula to compute shares needed to elect a director under cumulative voting?

Answer 34

N x S / D + 1

N=number of directors

S-shares voting at meeting

D=number of directors being elected

Question 35

Fundamental changes which must be approved by the shareholders.

Answer 35

• Amendments to the articles of incorporation,
• Merger,
• Share exchange,
• Sale of substantially all corporate assets, or
• Dissolution

Question 36

Shareholders Rights to Dividends/Distributions

Answer 36

The board may authorize and the corporation may pay dividends to its shareholders subject to restriction by the articles.

Question 37

Can a shareholder compel the directors to declare a dividend?

Answer 37

No, and in the absence of bad faith, directors are afforded wide discretion - business judgment - in determining whether to declare a dividend

Question 38

When can bad faith be found?

Answer 38

Bad faith may be found when the directors arbitrarily refuse to declare a dividend in spite of the existence of a large sum legally available for such, without any definite plans for the use thereof, or when the withholding of dividends is part of a general plan to freeze out minority shareholders.

Question 39

May dividends be declared and paid in the corporation’s own authorized but unissued stock?

Answer 39

Yes, unless the articles provide otherwise. Such an issuance of shares is a stock dividend. Shares of one class or series may not be issued as a stock dividend in respect to shares of another class or series unless:

1. the articles so authorize;
2. a majority of the votes entitled to be cast by the class or series to be issued approves the issue; or
3. there are no outstanding shares of the class or series to be issued.