Issues Tested

Question 1

Formation

Promoter

Answer 1

• Enters into contracts securing capital to bring the corporation into existence
• Personally liable for a contract entered into pre-incorporation

Question 2

Novation

(promoter exception)

Answer 2

the corporation and the third party contract agree to substitute the corporation for the promoter

Question 3

Adoption

(promoter exception)

Answer 3

the corporation takes the benefits of the contract

Question 4

Formation

Incorporation

Answer 4

Must file the articles of incorporation with the state

Question 5

Ultra Vires act

Answer 5

occurs when a corporation has a narrow purpose and acts outside the scope of that purpose

Question 6

De Jure corporation

Answer 6

exists when the statutory requirements for incorporation are met

Question 7

De Facto corporation

Answer 7

attempted to incorporate and ran business believing it was incorporated

Question 8

Corporation by Estoppel

Answer 8

a third party entered into a contract with the corporation as though it was properly incorporated; the third party is estopped from asserting that the corporation was not formed properly

Question 9

Securities

Issuance

Answer 9

Issuance of stock must be authorized by the board of directors

Question 10

Par Value Stock

Answer 10

• Corporation assigns a minimum value to its stock
• If sold for less than par value, the board is liable
• Shareholder may also be liable if had knowledge of par value

Question 11

Shareholders

Meetings

Answer 11

• Required to hold an annual shareholders meeting
• The primary purpose is to elect directors

Question 12

Shareholders

Right to Inspect Corporate Records

Answer 12

• Restricted to normal business hours
• Requires five days’ notice
• Must state a proper purpose

Question 13

Shareholders

Right to Vote

Answer 13

• To select the board of directors
• To approve fundamental corporate changes

Question 14

Proxy Voting

Answer 14

• Proxy: written agreement to allow a person to vote on behalf of the shareholder
• Revocable unless otherwise stated

Question 15

Shareholders

Power to Amend Corporate Bylaws

Answer 15

• Can amend or repeal existing bylaws
• Can pass new bylaws
• Can limit the board of director’s ability to change the bylaws

Question 16

Shareholders

Shareholder Agreements

Answer 16

May enter into an agreement to vote their shares together

Question 17

Right to Sue the Corporation

Direct Action

Answer 17

• Shareholder suing for their own benefit
• Usually arises when denied voting rights, failed to declare a dividend, failed to approve a merger

Question 18

Right to Sue the Corporation

Derivative Action

Answer 18

• Suing on behalf of the corporation
• Any recovery goes to the corporation

Question 19

Derivative Action

Standing

Answer 19

any person who is a shareholder at the time of the bad act (and at the time the action is filed)

Question 20

Derivative Action

Demand upon the board

Answer 20

• Required to demand action by the board
• Board has 90 days to act (unless demand is rejected or irreparable harm would occur)
• Futility exception: no demand required

Question 21

Shareholder Liability

Piercing the Corporate Veil

Answer 21

Based on totality of circumstances:
* Undercapitalization
* Corporate formalities
* Use of assets
* Self-dealing

Question 22

Shareholder’s Fiduciary Duty

Answer 22

Controlling shareholders have a duty not to abuse their power to disadvantage minority shareholders

Question 23

Board of Directors

Removal

Answer 23

• Breach of fiduciary duty (common law)
• Without cause (modern)

Question 24

Board of Directors

Voting

Answer 24

• Must have a quorum of directors present to hold a vote
• Presence: must be able to hear and participate

Question 25

Board of Directors

Special Meeting

Answer 25

• Requires at least two days notice
• Notice must include date, time, place
• Director who did not receive notice can object (if not waived by attendance)

Question 26

Fiduciary Duties

Duty of Care

Answer 26

• Must act as an ordinarily prudent person
• Includes the duty to investigate and ask questions
• Can rely on reports and outside experts

Question 27

Business Judgment Rule

Answer 27

• A rebuttable presumption that the director reasonably believed his actions were in the best interest of the corporation

To overcome the presumption:
* did not act in good faith
* not reasonably informed
* had a material interest
* failed to investigate

Question 28

Duty of Loyalty

Answer 28

Must act in the best interests of the corporation

Violated if:
* Self dealing
* or Usurping corporate opportunity

Question 29

Self-Dealing

Answer 29

Engaging in a transaction with the corporation that benefits the director or a close family member

Question 30

Self-Dealing

Safe Harbor Rules

Answer 30

• The interested director discloses all material facts to the board of directors and receives approval by a majority of disinterested board members; or
• by a majority of disinterested shareholders; or
• The transaction is fair to the corporation substantively and procedurally

Question 31

Usurping a Corporate Opportunity

Answer 31

• Director must present the opportunity to the corporation first
• If the corp. declines, the director may take

Question 32

Officers

Answer 32

• Run the day to day operation
• Act as agents of the corporation

Question 33

Order of Distribution

Answer 33

1. Creditors of the corporation
2. Shareholders of stock with preference in liquidation
3. Other remaining shareholders of stock