MC Corporations

Question 1

What are the five advantages of the corporate form

Answer 1

1. Limited liability of shareholders for corporate obligations;
2. Centralized management;
3. Continuity of existence;
4. Ease of transferring ownership; and
5. Access to capital through the sale of share

Question 2

How does taxation of corporations work? (including small business corporations)

Answer 2

Corporate earnings paid to shareholders are said to be subject to double taxation; i.e., as income to the corporation and as income to the shareholder. Small business corporations may avoid this by electing taxation under Subchapter S of the IRC, which taxes corporate income directly to the shareholder in proportion to their ownership

Question 3

Corporations qualified to do business in Florida must file an annual report with the department of state disclosing what six things

Answer 3

(i) the corporation’s name and the state or county of incorporation;
(ii) the date of incorporation, or if a foreign corporation, the date admitted to do business in this state;
(iii) the address of its principal office and the mailing address of the corporation;
(iv) its federal employer identification number;
(v) the names and business street addresses of its principal officers and directors; and
(vi) the street address of its registered office and name of its registered agent at that office

Question 4

What is the consequence if a corporation does not follow the annual report requirement? Additionally, what is the additional obligation to the state

Answer 4

A corporation not complying with the annual reports requirement may not bring or defend an action in Florida courts until the report is filed, and may be involuntarily dissolved. Corporations may be required to provide certain other information to the state upon request, including the identity of ultimate equitable owners. Additionally, each corporation must maintain a registered office and agent in the state

Question 5

Unless otherwise provided by its articles, by statute every Florida corporation has the following 18 powers

Answer 5

1. To sue and be sued in its corporate name;
2. perpetual duration and succession in its corporate name;
3. to have a corporate seal;
4. to purchase, receive, lease, or otherwise acquire, hold, own, use, and improve real and personal property, or any legal or equitable interest in property, wherever situated;
5. to sell, mortgage, convey, pledge, lease, exchange, create a security interest in, and dispose of all or any part of its property;
6. to lend money to and use its credit to assist its officers and employees when such may reasonably be expected to benefit the corporation;
7. to purchase, receive, subscribe for, or otherwise acquire, vote, own, hold, use, sell, mortgage, lend, pledge, or otherwise dispose of shares or interest in, or other obligations of, other corporations, partnerships, and governments;
8. to enter into contracts, borrow money, and guarantee debts (the last was doubtful at common law);
9. to lend, invest, and reinvest money for its corporate purpose;
10. to elect directors and appoint officers, employees, and agents and fix their compensation;
11. to adopt and amend bylaws for the administration and regulation of its affairs;
12. to make donations for the public welfare or for charitable, scientific, or educations purposes (charitable gifts were questionable at early common law);
13. to transact any lawful business in aid of governmental policy;
14. to pay pensions and establish pension and profit-sharing plans and other employee incentive plans;
15. to enter into general or limited partnerships or joint ventures (usually prohibited at common law);
16. to indemnify corporate officers, directors, agents, and employees and purchase liability insurance therefor;
17. to provide life insurance for its benefit on directors, officers, or employees, or on a shareholder for the purpose of acquiring shares of the deceased’s stock; and
18. to conducts its business, locate offices, and exercise all other powers necessary or convenient to effect its purposes, i.e., so-called implied or incidental powers

Question 6

To what extent may corporations offer political contributions

Answer 6

Corporations may contribute within limits to candidates for state or local office. They are otherwise as free as individuals to expend funds to support or oppose ballot referendums or a candidate for political office, as long as the spending is independent of a candidate

Question 7

What may a corporation be liable for

Answer 7

Corporations are liable for their contracts and for torts committed by their agents. A corporation may be held liable for punitive damages if an employee or agent engages in intentional misconduct or is grossly negligent and the corporation participates in or condones the conduct or is itself grossly negligent

Question 8

If a corporation enters into a contract that is beyond its powers to act (called an ultra vires contract under common law), that fact generally cannot be used as a defense to enforcement of the contract, except for three applications:

Answer 8

(i) in a proceeding by a shareholder to enjoin the corporation’s actions;
(ii) in a direct or derivative action by the corporation against a director, officer, employee, or agent of the corporation; or
(iii) in a proceedings by the Department of Legal Affairs to enjoin the corporation from unauthorized business

Question 9

What is a basic exam tip to remember about the power of corporations in FL

Answer 9

Given the broad statutory powers conferred on Florida corporations by statute, corporations generally can do anything that is rationally related to a business purpose (except donate to candidates for federal office). Thus, unless a corporation’s articles restrict its powers, you generally should not find any rational act to be beyond its “powers to act.” If you do find an act to be ultra vires, remember that ultra vires defense is very limited. Therefore, you should not allow a corporation to get our of a contract merely because the contract is outside the corporation’s powers

Question 10

What are the requirements for the incorporators upon corporation formation

Answer 10

One or more natural persons, or an entity such as a corporation, partnership, or association, may act as an incorporator. No further qualifications, such as age, residency, or citizenship are required

Question 11

What do the articles of incorporation constitute

Answer 11

The agreement among the incorporators regarding the details of the corporation’s organization

Question 12

What six things MUST the articles of incorporation state

Answer 12

(i) the corporation’s name, which must indicate the corporate status;
(ii) the number of shares and the distinguishing characteristics of each class or series;
(iii) the address of the initial registered office;
(iv) the name of the initial registered agent together with the agent’s written acceptance;
(v) the names and addresses of the incorporators; and
(vi) the address of the principal office, if known, and the mailing address of the corporation

Question 13

What other five things MAY the articles of incorporation include

Answer 13

(i) the number of directors constituting the initial board, and the names and addresses of each member thereof;
(ii) the par value of stock or a statement that stock shall have no par value;
(iii) the imposition of personal liability on shareholders to a specific extent and on specific conditions;
(iv) the initial purposes, which may include any lawful business; and
(v) any other provision, not inconsistent with law, regarding managing the business or defining powers of the corporation, directors, and shareholders

Question 14

What is the procedure required to incorporate, and when does corporate existence begin

Answer 14

The incorporators deliver the articles to the department of state, which files them if all legal requirements are met. Corporate existence begins upon filing

Question 15

What are the contents of the organizational meeting that directly follows incorporation

Answer 15

After incorporation, the initial directors (if named in the articles of incorporation) or the incorporators will hold an organizational meeting to complete the organization of the corporation by appointing officers, adopting bylaws, etc. The directors or incorporators calling the meeting must give at least two days’ notice to each director or incorporator, stating the time and place of the meeting. These actions can be taken without a meeting if evidenced by a written consent describing the action taken and signed by each incorporator or director

Question 16

Who adopts the initial bylaws and what is contained in them

Answer 16

The incorporators or board of directors will adopt initial bylaws for the corporation, unless that power is reserved to the shareholders by the articles of incorporation. The bylaws may contain any provision for managing the business and regulating the affairs of the corporation that is not inconsistent with law or the articles of incorporation

Question 17

How strongly are defective formations given application in Florida?

Answer 17

The common law (defective formation) concepts of de jure corporation, de facto corporation, or corporation by estoppel have limited application under Florida law, where the filing of the articles is deemed conclusive evidence of valid incorporation, except as against the state

Question 18

What is de jure corporation

Answer 18

At common law, a de jure corporation was formed upon substantial compliance with all mandatory requirements for incorporation, and its corporate status could not be challenged by anyone, including the state

Question 19

What is de facto corporation

Answer 19

A de facto corporation may exist even if there is a substantial defect in formation, provided there has been a good faith effort to incorporate, colorable compliance with the law, and actual use of corporate status. The de facto corporation doctrine is not available if the defendant knew of the lack of incorporation

Question 20

what is corporation by estoppel

Answer 20

Corporation by estoppel is an equitable doctrine that may be applied when persons have dealt with a defectively formed corporation as if it were a legal corporation. These persons may be estopped from avoiding contracts or attempting to hold shareholders personally liable on grounds of defective corporate status. The doctrine is normally not applicable in tort actions, where there has been no course of dealing.

Question 21

In Florida, when can a person be held personally liable for a defectively formed corpoation

Answer 21

Only if the person purports to act on behalf of the corporation knowing that there was no valid incorporation

Question 22

What is the liability level of corporate shareholders when the corporate veil is pierced

Answer 22

Shareholders active in the business may be held jointly and severally liable as if they were partners, but inactive shareholders are generally not held liable

Question 23

What is the alter ego doctrine

Answer 23

The court might disregard the corporate entity when the corporation appears to be the alter ego of the shareholders and used by them as a conduit for their personal affairs. Florida law requires a showing of improper conduct.

Question 24

What is the deep rock doctrine

Answer 24

In bankruptcy proceedings, capital contributions that are denominated as “loans” by shareholders of close corporations may be subordinated to debts owed to outsiders

Question 25

In what three situations may a parent corporation be liable for the debts of a subsidiary

Answer 25

When the subsidiary is inadequately capitalized, intermingled with the parent, or otherwise not a true distinct entity

Question 26

What are the two things that compose the capital structure of a corporation and what does each entitle the holder to?

Answer 26

Capital structure refers to long-term investment in the corporation, including stock (representing an ownership interest) and long-term debt such as bonds (representing a creditor interest). The structure may also be viewed in terms of senior securities generally having a fixed, priority claim to income (e.g., preferred stock and bonds), and equity securities, with a claim only to residual earnings (e.g., common stock).

Question 27

What does authorized capital refer to

Answer 27

Authorized capital refers to the number and kinds of shares provided for in the articles of incorporation, whether or not actually issued

Question 28

What are the authorized capital requirements of common stock and preferred stock

Answer 28

There must be at least one class of common stock (voting or nonvoting) representing the residual ownership of the corporation and claim to assets upon liquidation. Preferred stock (voting or nonvoting) may be of several different kinds, generally with a right to be paid a fixed dividend ahead of any dividend payments to holders of common stock. The precise nature and terms of such preferences must be:

(i) stated in the articles of incorporation and
(ii) either set forth or summarized on the stock certificates.

Question 29

On liquidation, what are preferred shareholders usually accorded before common shareholders

Answer 29

Preferred shareholders are usually accorded the right to receive a stated value for their shares, plus any accumulated but unpaid dividends, before the common shareholders receive anything for their shares

Question 30

What are subscription agreements, and how long does the Florida statute make preincorporation subscription agreements irrevocable for?

Answer 30

A subscription agreement is a contract under which the subscriber agrees to purchase a certain number of shares at a specified price. At common law, subscription agreements were generally revocable until adopted by the corporation unless more than one subscriber was party to the agreement, in which case some courts would hold the agreement enforceable on the theory that the mutual subscriptions provided adequate consideration. The Florida statute makes preincorporation subscription agreements irrevocable for six months unless the agreement provides otherwise, or all subscribers consent to revocation.

Question 31

In Florida, what may corporations receive as consideration for shares of stock

Answer 31

Shares may be issued for cash, other property, past services, or promises to perform services evidenced by a written contract. Florida allows payment by promissory note. The amount and adequacy of consideration is determined by the board. In Florida, the judgment of the directors as to the adequacy of consideration received for shares is conclusive

Question 32

What is the consequence to a shareholder or subscriber who pays less than the full consideration he agreed to pay

Answer 32

He may be held liable by the corporation and its successors and assigns, trustees in bankruptcy, and shareholders suing derivatively

Question 33

Is it true that under the doctrine of equitable contribution, all subscribers purchasing stock at the same time should pay the same price, and the price for new stock issues should be adequate so as not to dilute unfairly the value of existing shareholders’ stock

Answer 33

Yes

Question 34

What two types of laws must stocks and bonds issued by a corporation satisfy

Answer 34

Stocks and bonds issued by a corporation must satisfy the requirements of the federal Securities Act of 1933. For nonexempt securities, a registration statement must be filed with the SEC disclosing all material facts. Sales of securities are also regulated through state “blue sky” laws, which impose standards governing the quality of securities sold, in addition to the disclosure and antifraud provisions

Question 35

What is a shareholder’s preemptive rights, and do shareholder have preemptive rights to acquire unissued shares or treasury shares?

Answer 35

A shareholder’s preemptive rights entitle her to purchase a number of shares of new stock or treasury shares that are being issued sufficient to maintain her relative voting strength. In Florida, shareholders have no preemptive rights to acquire unissued shares or treasury shares unless granted by the articles

Question 36

When a statement is included in the articles of incorporation that “the corporation elects to have preemptive rights” (or words of similar import) it means that what two principles apply except the extent provided otherwise:

Answer 36

1) the shareholders have a preemptive right, granted on uniform terms and conditions prescribed by the board, to acquire proportional amounts of the corporation’s unissued shares and treasury shares upon the decision of the board to issue them; and
2) a shareholder may waive his preemptive right. A written waiver is irrevocable

Question 37

What is the difference between a certificated and uncertificated security

Answer 37

Florida has adopted the 1994 revision of UCC Article 8–Investment Securities. An investment security may be either certificated (represented by an instrument issued in bearer or registered form), or uncertificated (not represented by an instrument, but registered on books maintained by the issuer).

Question 38

IS a contract or modification of a contract for the purchase or sale of an investment security within the statute of frauds?

Answer 38

no

Question 39

What does a seller of a security warrant to a purchaser for value?

Answer 39

that the transfer is effective and rightful, that the security is genuine and unaltered, and that she knows of no fact impairing its validity

Question 40

What are the rights of a true owner of a wrongfully transferred security

Answer 40

the true owner of a wrongfully transferred security may reclaim it from anyone except a protected purchase; and may also go against a protected purchaser if the security was transferred because of an unauthorized indorsement, unless the protected purchaser has in good faith received a new certificate or had the transfer registered in her name.

Question 41

What are the rights of a true owner of a lost, destroyed, or wrongfully taken certificated security

Answer 41

the true owner is entitled to a replacement if she demands it before the issuer has notice that a protected purchaser holds the original, files an indemnity bond, and satisfies the issuer’s other reasonable requirements. If a protected purchaser later turns up with the original the issuer must register it, even if the issuer has also registered a replacement to the true owner. The issuer may then reclaim the replacement or sue on the indemnity bond.

Question 42

What are the rules regarding restrictions on the transfer of stock

Answer 42

Restrictions on the transfer of stock (e.g., a right of first refusal upon sale) are common in close corporations. Restrictions will be enforced if reasonable. By statute, certificates must summarize on their face any restrictions pertaining to their transfer or state that the corporation will furnish a full statement thereof. A third party who purchases stock without notice of restrictions can compel a corporation to transfer stock to him on its books even though transfer violates an existing agreement. If a third party purchases stock with notice of the restriction, he has no rights against the corporation for failure to transfer, but may recover from the seller

Question 43

Do a majority of courts today require insiders to disclose inside information to persons from whom they buy shares?

Answer 43

No, a majority of courts do not require insiders to disclose inside information to persons from whom they buy shares

Question 44

What is the exception to the general rule that a majority of courts do not require insiders to disclose inside information to persons from whom they buy shares?

Answer 44

The special facts doctrine, under which insiders dealing face to face with shareholder/sellers must disclose inside facts of an unusual nature

Question 45

Are directors and tippees liable to the corporation for personal profits realized in trading on the basis of inside information?

Answer 45

no

Question 46

Section 16(b) of the Securities Exchange Act of 1934 requires that officers, directors, and 10% shareholders do what?

Answer 46

It requires these persons return to their corporation all profits from any purchase and sale or sale and repurchase of shares within a six-month period

Question 47

Does the application of Section 16(b) of the Securities Exchange Act of 1934 require showing of bad faith or use of inside information?

Answer 47

No, bad faith or use of inside information need to be shown before Section 16(b) kicks in

Question 48

To what corporations does Section 16(b) of the Securities Exchange Act apply

Answer 48

to publicly held corporations whose shares are traded on a national exchange or that have at least 2,000 shareholders (or 500 shareholders who are not accredited investors) in any outstanding class and more than $10 million in assets. “Accredited investors” include high income or net worth individuals and officers or directors of the issuer

Question 49

What does Securities and Exchange Commision rule 10b-5 broadly prohibit?

Answer 49

broadly prohibits fraud and deceit, including omissions, of any material fact in connection with the purchase or sale of any security, subject only to a minimal nexus with interstate commerce and a showing of scienter (knowledge or intent, and probably recklessness)

Question 50

What are the Insider Trading Sanctions

Answer 50

The SEC may sue persons (including tippees) illegally trading on the basis of inside information for an amount equal to three times their profit or loss avoided. Private persons who trade contemporaneously with a securities law violator may sue for damages

Question 51

What is a tender offer

Answer 51

A tender offer is a public invitation to shareholders to sell their shares in the targeted corporation, usually at a premium over the market price. The offer is often conditioned on acceptance by the holders of a specified number of shares.

Question 52

What does the Williams Act require (relates to tender offers)

Answer 52

The Williams Act imposes antifraud and disclosure requirements on all tender offers involving more than 5% of a target’s stock.

Question 53

What is a control share acquisition statute (what does it do)

Answer 53

Enacted in some states, including Florida, control share acquisition statutes operate by disenfranchising the control shares acquired by a tender offer until the remaining shareholders approve restoration of voting rights, and provide other protections

Question 54

What is Florida’s blue sky law

Answer 54

it contains broad antifraud provisions similar to those of rule 10b-5. The state law, however, does not require scienter, and may be the only basis for civil relief if the transaction has no nexus with interstate commerce

Question 55

What does a promoter do for a corporation and what important type of person is not considered a promoter

Answer 55

A promoter undertakes to form a corporation and to procure the necessary capital and other items. Persons such as attorneys acting in a professional advisory capacity are not considered promoters.

Question 56

What does an incorporator do for the corporation?

Answer 56

An incorporator is one who signs the articles of incorporation, and may or may not be a promoter

Question 57

What is the scope of the fiduciary duty of a promoter

Answer 57

Promoters must act in good faith and in the best interest of all investors. A promoter who profits from a sale to the corporation may be liable to it for the profits or forced to rescind the sale unless there was full disclosure to and approval by the directors or shareholders.

Question 58

What are the rules surrounding promoters who contract on behalf of the corporation before the corporation is formed

Answer 58

Except as a particular contract otherwise provides, promoters remain liable on contracts they enter on behalf of the corporation, even after the corporation adopts the contract, unless the parties agree to a novation. Persons purporting to act on behalf of a corporation knowing that there was no incorporation are jointly and severally liable for all liabilities created while so acting

Question 59

To what extent does a promoter have a right of action to recover expenses or salary from a corporation

Answer 59

In general, a promoter has no right of action to recover expenses or salary from the corporation, but some courts have allowed recovery of the reasonable value of services rendered. If the corporation is never formed, the promoters must return all subscribers’ money, even if there has been no wrongdoing

Question 60

To what extent to shareholders have the power to control day-to-day management of a corporation

Answer 60

Shareholders normally do not have power to control the day-to-day management of a corporation, but may be given management powers by the articles. Shareholders exercise indirect management by electing directors, amending articles or bylaws, or approving fundamental corporate changes.

Question 61

What are the rules for annual shareholders’ meetings (when, and how often, must they be held)

Answer 61

An annual meeting must be held for the election of directors and other business. If an annual meeting is not held within any 15-month period, any shareholder may apply to the court for an order requiring the meeting

Question 62

What are the rules for special meetings (for what purpose may they be held and who may call the meeting)

Answer 62

Special meetings may be called for any appropriate purpose by the board of directors, the holders of at least one-tenth of all outstanding voting shares, or other such persons as authorized in the articles or bylaws

Question 63

Eligibility to vote is determined by stock ownership as of what date (and must that be after)

Answer 63

the record date, which may not be more than 70 days before the meeting

Question 64

What does a quorum consist of

Answer 64

A quorum consists of a majority of shares entitled to vote, unless otherwise provided

Question 65

Which shareholders have the write to authorize another to act for him by written proxy?

Answer 65

Every shareholder entitled to vote, or express consent or dissent, may authorize another person to act for him by written proxy

Question 66

How long is a proxy appointment valid?

Answer 66

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

Question 67

When are proxies revocable/irrevocable

Answer 67

Proxies are revocable at the pleasure of the shareholder unless the proxy provides it is irrevocable and the proxy holder has an interest in shares, such as a pledgee, purchaser, or employee

Question 68

When may a proxy be revoked, even when it is otherwise irrevocable

Answer 68

By a bona fide purchaser of the shares without notice of the proxy

Question 69

What amount of vote is needed for election of directors (what is the exception)

Answer 69

election of directors is by plurality vote of the shareholders unless the articles provide for cumulative voting. Also, the bylaws of a corporation having shares registered to be traded on a national securities exchange at the time of adoption may fix a greater voting requirement for the election of directors. Such a bylaw provision or amendment adopted by shareholders may not be further amended or repealed by the board of directors.

Question 70

Who does cumulative voting help and how does it work

Answer 70

Cumulative voting is intended to aid minority shareholders in obtaining some representation on the board of directors. Cumulative voting means that each shareholder is entitled to a number of votes equal to the number of his voting shares multiplied by the number of directors to be elected and may cast his votes for any one candidate or divide them among any number of candidates

Question 71

What are the rules on fundamental changes to the corporation and what is first required (and also when a specific fundamental change would adversely affect the shares of a particular class)

Answer 71

Amendments to the articles of incorporation, merger, share exchange, sale of substantially all corporate assets, or dissolution must normally be approved by the shareholders. Whenever an amendment, plan of merger, or consolidation contains a provision that adversely affects the shares of a particular class in the manner enumerated in the statute, the holders of each such class are entitled to vote separately as a class on the amendment, whether or not the class is entitled to vote by the terms of the articles, and the amendment must be approved by an absolute majority of each such class and of the total shares entitled to vote

Question 72

What is the scope of a shareholder’s right to compel a director to declare dividends both before and after being declared

Answer 72

In general, shareholders cannot compel directors to declare dividends. Absent bad faith, directors are given wide discretion in this area. Once declared, a dividend may not be revoked, except when payment would be illegal. Declaration of a dividend creates an enforceable debt owed to the shareholders.

Question 73

What are the two two tests that must be met for a distribution other than a distribution of the corporation’s own shares to be legal

Answer 73

The equity test and the balance sheet (or bankruptcy) test. Under the equity test, a distribution is permissible only if, after giving it effect, the corporation will be able to pay its debts as they become due in the usual course of business. Under the balance sheet test, distributions are limited to the amount by which total assets exceed the sum of total liabilities and the liquidation preferences of preferred shares

Question 74

What is the liability for improper dividends

Answer 74

Directors who willfully or negligently vote to declare dividends are liable to the corporation for the amount paid improperly. Florida’s director immunity statute does not insulate directors from this liability. Shareholders are liable to corporate creditors for the amount of dividends received, whether or not they knew the corporation was insolvent. Liability for contribution to a director may exist if the shareholder received the dividend knowing that it was improper

Question 75

What is the scope of the right of a shareholder to inspect books and records

Answer 75

Every shareholder has an absolute right to inspect, during regular business hours at the corporation’s principal office, such items as the articles, bylaws, minutes of all meetings of, and records of all actions taken without a meeting by, its shareholders, all written communications within the past three years to shareholders, lists of the names and business addresses of the current directors and officers, and the most recent annual report. On five days’ written notice, a shareholder of a Florida corporation who resides in Florida is entitled to inspect the bylaws and/or a list of the names and business addresses of the current directors and officers at a reasonable location in Florida specified by the corporation.

Question 76

What is the scope of a right of a shareholder to inspect the minutes of any meeting of the board, or records of any actions taken without a meeting by the board or any board committees, financial statements and accounting records of the corporation, the records of shareholders, and any other books and records

Answer 76

Shareholders have the right if: (i) the demand is made in good faith and for a proper purpose; (ii) the shareholder describes with reasonable particularity his purpose and the records he desires to inspect; and (iii) the records are directly connected to his purpose. In any case, written demand must be made at least five business days before the day on which the shareholder wishes to inspect.

Question 77

In what four instances may a corporation refuse the request of a shareholder to inspect meeting minutes, or records of actions taken without meeting, etc. by the board and any of its committees

Answer 77

if the shareholder: (i) has within the past two years offered for sale a list of shareholders of any corporation or aided and abetted another in so doing; (ii) has improperly used any information secured through any prior examination of the books of any corporation; (iii) is not acting in good faith; or (iv) does not have a proper purpose. Note that a proper purpose means a purpose reasonably related to such person’s interest as a shareholder.

Question 78

What are voting trusts and voting agreements

Answer 78

Shareholders may establish a voting trust to irrevocably confer upon a trustee the right to vote their shares. The trust agreement must be deposited with the corporation and is subject to inspection by any shareholder. Trust certificates representing shares are freely transferable, but the transferee is bound by the agreement. In a voting agreement, shareholders agree to vote their shares a certain way. The agreement must be in writing and signed. Transferees of the shares are bound if the existence of the agreement is noted on the share certificate or they otherwise have notice of it. specific performance may be available to enforce the agreement.

Question 79

What fiduciary duty do shareholders owe to the corporation

Answer 79

In general, shareholders have no fiduciary duty to the corporation and may act in their personal interest. However, controlling shareholders may not use their power to defraud or oppress the minority

Question 80

Shareholders must first make a demand on the directors but then wait 90 days before bringing their own derivative suit unless either of what two things

Answer 80

unless (i) the shareholder is notified sooner that her demand has been rejected or (ii) the delay will cause irreparable injury. Note that to be eligible to bring a suit, the shareholder must have owned stock in the corporation at the time the action commenced and when the alleged wrong took place,or the shares must have devolved upon her by operation of law.

Question 81

On motion by the corporation, the court may dismiss a derivative proceeding if the court finds that one of what three groups has made a good faith determination, after conducting a reasonable investigation, that maintenance of the derivative suit is not in the best interests of the corporation

Answer 81

a majority vote of qualified directors present, if the qualified directors constitute a quorum; a majority vote of a committee consisting of two or more qualified directors appointed by majority vote of the qualified directors, regardless of whether they constitute a quorum; or a panel of one or more disinterested and independent individual persons appointed by the court upon motion of the corporation

Question 82

A shareholder may maintain a direct action against another shareholder, director, officer, or the corporation, to protect the shareholder’s personal interests. But the shareholder must plead and prove one of what two things

Answer 82

(i) an actual or threatened injury to the shareholder personally; or (ii) an actual or threatened injury resulting from a violation of a statutory or contractual duty owed by the wrongdoer, even if the injury is the same as that to the company

Question 83

How does election of a director onto the board work

Answer 83

A corporation may have one or more directors, as fixed by the article or bylaws. Directors must be 18 years of age or older. Directors are elected by plurality vote, unless elected by written consent, and continue to hold office until their successors are elected and qualified. Cumulative voting and staggering of terms are optional. Directors may be removed with or without cause by the shareholders, unless otherwise provided. A corporation may dispense with or limit the authority of a board of directors.

Question 84

If a director is elected by a certain class of stock, may the director only be removed by that same class of stock?

Answer 84

yes

Question 85

What happens if there is a vacancy on the board, who fills that role and until when

Answer 85

Any vacancy on the board is filled by the remaining directors or shareholders, unless the articles provide otherwise, until the next annual election. An increase in the number of directors is deemed to create vacancies for this purpose

Question 86

What are the notice requirements for holding a meeting

Answer 86

Notice of regular meetings is not required, but written notice of special meetings must be given at least two days in advance. The notice need not specify the purpose of the meeting. If a director does not receive the required notice and does not attend, any action taken at the meeting is unauthorized. A director who attends and participates in a meeting without objection waives the notice requirement.

Question 87

What is a considered a ‘quorum’

Answer 87

A quorum consists of a majority of the authorized number of directors, with vacant directorships counted as absent. The articles or bylaws may authorize a quorum to consist of less than a majority but no fewer than one-third of the authorized number of directors. To approve an action, a majority of directors present must assent, unless the articles or bylaws require a greater number. Actions may also be approved without a meeting if the directors consent unanimously in writing.

Question 88

What is the scope of the powers and of the rights possessed by directors

Answer 88

Directors have powers as necessary to manage the business of the corporation, including the power to elect and remove officers, to declare dividends, and to initiate fundamental changes for submission to shareholders for approval. Directors have a right to inspect corporate records, to reasonably rely on information provided by management and experts, to be reimbursed for expenses, and generally to be indemnified in defending their actions taken in good faith. Directors’ compensation is only as the bylaws provide.

Question 89

What fiduciary duties do directors owe to the corporation and its shareholders

Answer 89

the fiduciary duties of care and loyalty

Question 90

What is the scope of the duty of care owed by directors

Answer 90

A director must generally exercise the care and skill an ordinarily prudent person would reasonably believe appropriate in like circumstances. The standard is objective, and does not make exceptions for figurehead directors or for an individual’s actual level of skill. When a court is called upon to consider the wisdom of directors’ decisions, it will apply the business judgment rule and will not second-guess rational, informed, good-faith decisions over which reasonable persons could have differed. Note that Florida has statutorily abolished most such liability of directors to be held personally liable to the corporation for breaches of the duty of care

Question 91

When does the duty of loyalty come into play for directors

Answer 91

The duty of loyalty comes into play whenever a director has a personal stake in an action to be taken by the board

Question 92

How does the duty of loyalty come into play when there is an interested director transaction

Answer 92

The good faith aspect of loyalty requires that the director make full and fair disclosure of her conflict of interest to the other members of the board. It also requires her to act in the best interests of the corporation. A contract in which a director is financially interested is not voidable by the corporation solely because of the director’s relationship or interest if the contract is fair to the corporation. the burden is on the director to show fairness. However, that burden will shift to the person contesting the transaction if the transaction is approved or ratified by a disinterested majority of the board or a majority of disinterested shares upon full disclosure of the conflict

Question 93

What is the Corporate Opportunity Doctrine as it plays into a directors duty of loyalty

Answer 93

Under the corporate opportunity doctrine, directors and officers must inform the corporation of business opportunities of which it might wish to take advantage. If a director fails to do so and personally takes advantage of the opportunity, she may be compelled to transfer the benefits to the corporation. In FL, director liability to the corporation for breaches of the duty of loyalty have been statutorily limited, but not abolished

Question 94

What is a director’s statutory liability for improper distributions

Answer 94

For the amount of the distribution in excess of the amount legally available, if the general standards for directors were violated. It is a defense that the director reasonably relied, in good faith, on financial statements prepared by management or the corporation’s public accountants. Directors may also base a determination that a distribution is not prohibited on the basis of a fair valuation of the corporation’s assets.

Question 95

What determines what officers will be appointed, how many positions may one person hold, and what is the officer’s authority

Answer 95

A corporation must have the officers described in its bylaws or appointed by the board, but one person may hold two or more offices. The law of agency applies to give the officer or agent the power to bind the corporation in dealings with third parties. The authority may be actual or apparent. The president (CEO) has implied authority to do acts in the ordinary course of business, but not extraordinary acts. Note that officers’ fiduciary duties, rights, and liabilities are similar to those of directors

Question 96

What is required to amend the articles of incorporation

Answer 96

A corporation may amend its articles of incorporation at any time. Amendments may include any provision that would be lawful and proper to include in original articles at the time of making the amendment, thereby permitting existing corporations to take advantage of changes in the law. Amendments first must be adopted by the board. The board then must recommend the amendment to the shareholders, unless the board determines that, because of a conflict of interest or other circumstances, it should not make a recommendation and informs the shareholders of this. The board may set conditions for the approval of the amendment by the shareholders or the effectiveness of the amendment.

Question 97

What is the required vote to amend the articles of incorporation

Answer 97

Unless the articles, statute, or board requires a greater vote or a greater quorum, the amendment must be approved by: (i) an absolute majority of the total shares entitled to vote; and (ii) if the proposed amendment would adversely affect a particular class of shareholders, an absolute majority of that class (even if nonvoting)

Question 98

Are there some amendments to the articles of incorporation that do not require shareholder approval?

Answer 98

yes, unless the articles provide otherwise. these include extending the duration of the corporation, deleting the names of initial directors, and making certain changes to the corporate name, without shareholder approval

Question 99

What is a share exchange as opposed to a merger

Answer 99

In a merger, one of the combining corporations remains in being and absorbs the other; in a share exchange, one corporation acquires all of the outstanding shares of one or more classes or series of another corporation. In Florida, practically any legally recognized business entity can merge into another business entity

Question 100

What is a short form merger

Answer 100

This involves the merging of a parent and a subsidiary at least 80% owned by the parent, and does not require approval of the subsidiary’s board or shareholders

Question 101

How does a sale of a substantial portion of a corporation’s assets work, including restrictions and classification

Answer 101

The sale by a corporation of all or substantially all of its assets is deemed a fundamental change and must be approved by the shareholders of the acquired corporation. Where such a sale of assets is made in exchange for stock of the acquiring corporation that assumes the liabilities of the acquired corporation and the latter dissolves, distributing the stock received to its shareholders, the net effect is almost identical to a merger. In this situation, some courts treat the sale as a de facto merger entitling the shareholders of the acquiring corporation to a vote and other rights

Question 102

What are the rights of creditors in a sale of assets

Answer 102

Generally, a corporation purchasing the entire assets of another does not by reason of the purchase become liable for the other’s debts unless it agrees to assume them

Question 103

What are dissenting shareholders permitted to do if they are dissatisfied with the terms of a fundamental corporate change

Answer 103

They usually are permitted to compel the corporation to buy their shares at a fair value by following a special statutory procedure. Absent fraud, misrepresentation, or improper procedure, the appraisal right generally is a shareholder’s exclusive remedy for a completed corporate action.

Question 104

If an action will be submitted to a vote at a shareholder’s meeting that will entitle shareholders to assert appraisal rights, must shareholders the meeting notice state as such?

Answer 104

Yes, the meeting notice must state whether the shareholders will be entitled to assert appraisal rights. If appraisal rights are or may be available, a copy of the relevant statutes must accompany the meeting notice

Question 105

What two requirements are there for a shareholder who wishes to assert her appraisal right

Answer 105

the shareholder (i) must, before a vote is taken, deliver written notice of her intent to demand payment for her shares if the proposed action is taken; and (ii) cannot vote in favor of the proposed action

Question 106

When must dissenters to fundamental changes be paid, and who determines the value

Answer 106

When the proposed action is taken, unless the corporation is insolvent, it must pay the dissenters the amount the corporation estimates is the fair value of the shares within 90 days of receipt of the shareholder’s demand. If the shareholder is dissatisfied with the corporation’s determination of value, he must notify the corporation of his estimate of the fair value and demand payment of that estimate plus interest.

Question 107

What are the rules regarding voluntary dissolution (when is it allowed, etc.)

Answer 107

A corporation may voluntarily liquidate and dissolve at any time without judicial supervision. Notice must be given to all known creditors. In Florida, the articles of dissolution are not filed until the liquidation has been completed.

Question 108

Who can bring an action for involuntary dissolution, and what are the four circumstances in which this is allowed

Answer 108

Any shareholder can bring an action to have the corporation involuntarily liquidated an dissolved if: (i) there is a deadlock of the directors and the corporation is threatened with irreparable injury, or the corporation’s business and affairs cannot be conducted to the advantage of the shareholders because of the deadlock, or both; (ii) the shareholders are deadlocked in voting power and unable to elect successor directors; (iii) there is waste or misappropriation of the corporate assets; or (iv) the directors or those involved in the control of the corporation are acting, will act, or have acted illegally or fraudulently. (Note that these grounds are not available for shareholders in public companies)

Question 109

Involuntary dissolution is discretionary and usually will not be granted by the court unless what

Answer 109

unless it is necessary to prevent irreparable injury and is in the best interest of the corporation and of the shareholders as a whole. Note that unsatisfied judgment creditors may also sue to liquidate an insolvent corporation, and the state may seek administrative dissolution of a corporation for fraud, illegality, abuse of its corporate powers, or failure to file an annual report or appoint a registered agent. In an action for dissolution, the court has alternative remedies that it may impose instead of dissolution

Question 110

What are the two ways in which a dissolving corporation may limit its liability upon liquidation for unknown claims

Answer 110

a corporation may (i) file a notice of dissolution with the department of state and request that persons with claims that are not known present them in accordance with the notice; or (ii) within 10 days after adopting the articles of dissolution, publish a “notice of corporate dissolution” once a week for two consecutive weeks in a newspaper of general circulation in a Florida county in which the corporation has its principal office, or if none, in a Florida county in which the corporation owns real or personal property. Note that in either case, the notice must provide a mailing address to which the claim may be sent and state that a claim will be barred unless a proceeding to enforce the claim is commenced within four years.

Question 111

The Florida statute provides that dissolution shall not impair any remedy available to or against the corporation if action is commenced within what time period after dissolution

Answer 111

within three years after dissolution. Note that the same applies to claims by or against any officer, director, or shareholder. By operation of law, the directors at the time of dissolution become trustee for any property owned or thereafter acquired by the dissolved corporation and continue as such for three years or for such longer period as any real property is held of record by the dissolved corporation.

Question 112

What is the affiliated transaction statute

Answer 112

An affiliated transaction (such as a merger or sale of substantial assets) with an interested shareholder owning more than 10% of the corporation’s shares must also be approved by (i) a majority of the corporation’s disinterested directors or (ii) two-thirds vote of the disinterested shareholders, unless the consideration to be received by the remaining public shareholders is fair or another exception is met. Note, however, that a corporation may opt out of such requirements by charter or bylaw amendment. The statute is inapplicable to corporations with fewer than 300 shareholders.

Question 113

What two kinds of businesses may a business trust not engage in

Answer 113

banking or a security business

Question 114

Who has the liability in a business trust

Answer 114

The trustees may be held personally liable to trust creditors, and are the proper parties for suits by or against the trust. Shareholders are generally not liable

Question 115

What is the tax status of business trusts

Answer 115

For federal income tax purposes, business trusts are usually classified as associations and thus taxed as corporations. Special rules apply to real estate investment trusts to eliminate the double taxation effect. For state ad valorem tax purposes, shares of a business trust are considered personal property

Question 116

What are the requirements for not for profit corporation formation

Answer 116

Provisions required to be set forth in the articles are similar to those for corporations for profit except that the articles must set forth the corporation’s purpose (which may be for any lawful purpose other than pecuniary gain, e.g., charitable, benevolent, educational, religious, social, trade association, etc.). In addition, the articles may set forth (i) the transferability or nontransferability of membership; and (ii) a provision to the effect that the corporation will be subordinate and subject to the authority of any head or national association, lodge, order, etc.

Question 117

What are the rules for the directors of a not for profit corporation

Answer 117

A board of directors must consist of three or more individuals, with the number specified in, or fixed in accordance with, the articles of incorporation or the bylaws. Generally, the corporation may not make loans to its directors or officers, or to any other entity in which one or more of its directors or officers is a director or officer or holds a substantial financial interest, except loans between certain corporations exempt from federal income taxation. Directors may be removed from office with or without cause by the vote of the members like directors for a for profit corporation.

Question 118

What does it take for the board of directors to dissolve a not for profit corporation

Answer 118

The board of directors may dissolve by a majority vote. If the corporation has members entitled to vote on dissolution, a majority vote of those members is also required.

Question 119

To what extent does Florida exclude foreign corporations from doing business within the state

Answer 119

A state generally is free to exclude foreign corporations from doing business within the state, although the negative implications of the Commerce Clause prevent a state from prohibiting a foreign corporation from conducting business activities within a state that constitute interstate commerce. Florida, like most states, allows foreign corporations to transact business in Florida only if they qualify by filing an application with the Florida Department of State. The formalities are similar to those for incorporation

Question 120

To whom may process by served for for a domestic or qualified foreign corporation

Answer 120

Process may be served on a corporation by personally serving its registered agent. If the corporation ceases to have a registered agent, or the agent cannot be served, process may be served on, in order of availability: the chair of the board, the president, vice president, secretary, or treasurer at the corporation’s principal office. In their absence, service may be had on the secretary of state. If a foreign corporation has none of the above persons in Florida, process may be served on any agent transacting business for it within the state