MEE - Corporations

Question 1

Formation formalities

Answer 1

Name of corporation
Max number of shares
Names and addresses of incorporators
Registered office & agent

Question 2

Articles of Incorporation vs By laws

Answer 2

Articles of incorporation prevail in the event of inconsistency

Question 3

Corp liability - pre-incorporation contracts

Answer 3

Corp liable if they expressly or implicitly endorse the contract. Can be found to endorse contract even if have not reviewed the whole contract. Cannot pick and choose which aspect of contract they endorse

Question 4

Promoter liability - pre incorporation contract

Answer 4

Promoter remains liable even if the corp adopts the contract. Only way to rid liability is to NOVATE the contract

Question 5

Foreign corporations

Answer 5

Out of state corporations; can be sued but cannot sue until they incorporate in the state

Question 6

Ultra vires acts

Answer 6

Articles of incorporation may state purpose, acts outside the purpose are ultra vires. 3 options: 1/ sue to injunct ultra vires acts 2/ sue directors involved incl for resulting damages 3/ the state may bring an action to dissolve

Question 7

De facto corporation

Answer 7

A corporation which is not incorporated owing to some lack of formality., but It could’ve been incorporate and good faith attempts were made to incorporate it. Where a person within the corp KNEW the corp was not incorporated, they will be jointly and severally liable (and vice versa if the person DID NOT KNOW -> no liability)

Question 8

Corporation by estoppel

Answer 8

Person who treats corp like a corp cannot deny contractual liability if later found out corp not incorporated - only applies for contract liability

Question 9

Authorised shares

Answer 9

The maximum number of shares that a company may issue

Question 10

Issued/outstanding shares vs reacquired shares

Answer 10

Issued/outstanding are sold to investors, Reacquired are those that are reacquired and can be sold again

Question 11

Classes of shares

Answer 11

Corp may classify shares, to do this the articles of incorporation MUST: classify shares, state which rights/ limitations attach to them

Question 12

Pre incorporation subscriptions

Answer 12

If you subscribe in pre incorporation round, you cannot revoke offer for 6 months unless (i) subscription agreement says otherwise, (ii) subscribers agree

Question 13

Consideration for shares

Answer 13

Can be issued for any value - tangible or intangible incl for services rendered by employees

Question 14

Par stock

Answer 14

Par stock cannot be sold for less than par, directors liable for difference if they authorised, buyer always liable, on-buyer liable only if they knew + acted in bad faith

Question 15

Pre emptive rights to percentage

Answer 15

Holders of pre emptive rights can accept/reject but cannot block as this would be a restriction on alienation

Question 16

Pre emptive rights to percentage (do not apply to …)

Answer 16

1/ Shares issued for consideration other than cash (i.e. employees for services)
2/ Shares issued 6 months within incorporation
3/ Shares with no voting rights (just dividends)

Question 17

Pre emptive rights to percentage (third parties)

Answer 17

Third parties who buy in breach of pre emptive rights will be liable if they had notice of the breach

Question 18

Directors appointment / removal

Answer 18

Elected by shareholders at annual meeting, can be removed by shareholders with or without cause

Question 19

Directors meetings (regular)

Answer 19

Don’t need to give them notice

Question 20

Directors meetings (special)

Answer 20

Need to give them 2 days’ notice

Question 21

Quorum of directors

Answer 21

Majority of directors is quorum and majority of quorum is the voting majority

Question 22

Board action without meeting

Answer 22

Board acts as a collective group, in the absence of a meeting, the board can take action if there is written and unanimous agreement to it

Question 23

Directors’s delegation of authority

Answer 23

Can delegate authority for the day to day running to other officers - can create committees chaired by one or more director

Question 24

Directors’ duty of care

Answer 24

Burden on plaintiff. Director owes fiduciary duty of care. In determining whether it has been breached, court will apply business judgment rule: 1/ acted in good faith 2/ with due care of a reasonably prudent person 3/ believed action would be in interests of co

Question 25

Director liability exclusion

Answer 25

Articles cannot exclude liability for 1/ intentional wrongs, 2/ approving unlawful distributions 3/ taking funds from co. In effect, can only exclude liability for negligence.

Question 26

No indemnification for directors

Answer 26

Where directors are held to be liable to the corporation, they will receive no indemnification

Question 27

Mandatory indemnification for directors

Answer 27

Director will receive mandatory indemnification covering reasonably attorney fees if the suit, whether the action is dismissed don merits or otherwise

Question 28

Permissive indemnification for directors

Answer 28

Where the director is found guilty of the conduct but acted in good faith and believed it was for the benefit of the corp

Question 29

Duty of loyalty

Answer 29

The burden is on the director. Three main things:
1/ conflict of interest (and safe harbour defence)
2/ corporate opportunity 3/ duty to disclose

Question 30

Conflict of interest (safe harbour defence)

Answer 30

Where director has an interest in transaction to which the corp is a party such that it cannot be expected that he would act independently. Safe harbour defence applies where:
1/ transaction ratified by disinterested board or shareholders; or
2/ the transaction is fair value given the circumstances existing at the time

Question 31

Closed corporations - duties to shareholders

Answer 31

Often no distinction between shareholders and owners - so duty directly owed to shareholders

Question 32

Closed corporations - oppression of minority

Answer 32

Comes in the form of: exclusion from management, starving off dividends etc

Question 33

Closed corporations - piercing the corporate veil

Answer 33

Directors/shareholders typically not personally liable bc of separate personhood. In closed corporations, corporate veil can be pierced:
1/ Using corp as instrumentality of one person rather than group/corp decision making
2/ Using corp as instrumentality of fraud/illegality
3/ Where the corp is under capitalised at the outset

Question 34

Shareholder suits - direct

Answer 34

Rare, for duties owed directly to shareholders, no notice requirements, usually for lack of payment for dividends

Question 35

Shareholder suits - derivative

Answer 35

Action on behalf of co where directors not willing to bring suit, requires 90 days notice unless 1/ previously asked and rejected 2/ period would cause irreparable harm to the co. *Any damages received go to corp.

Question 36

Shareholder suits - derivative (independent report)

Answer 36

The corp can argue that the derivative suit has no action via an independent investigative report, upon which burden shifts back to plaintiff to prove breach

Question 37

Annual shareholder meetings

Answer 37

Must be held

Question 38

Notice of shareholders’ meeting

Answer 38

More than 10 days, less than 60 days

Question 39

Special shareholders’ meeting

Answer 39

Can be called by 10% shareholders, president, board of directors or any one per bylaws

Question 40

Shareholders’ votes

Answer 40

1 share is 1 votes, unless articles say otherwise; cumulative voting allowed for election of directors; modern trend to count majority of who voted not majority of all shareholders

Question 41

Shareholder proxies

Answer 41

Revocable proxies last for 11 months or until voted by shareholder; irrevocable proxies cannot be revoked, must state they’re irrevocable in writing and coupled by interest

Question 42

Shareholders’ inspection rights

Answer 42

Can inspect on 5 days’ notice and for “proper purpose” which is everything associated with their position as shareholder. Can inspect without showing “proper purpose”:
1/ articles / by laws
2/ board minutes / annual reports
3/ corp comms to shareholders
4/ resolutions re share classifications

Question 43

Distributions

Answer 43

Dividends are discretionary for the board; shareholders’ have no right to demand a dividend even if they have a right to a dividend; shareholders may have claim if funds applied for directors salaries (in bad faith etc)

Question 44

Distributions - Wrongful

Answer 44

Cannot make distribution if co is nearing insolvency (unless they relied in good faith on data); shareholders will be liable if they knowingly accepted wrongful distributions.

Question 45

Types of “fundamental corporate change”

Answer 45

1/ Amendment of articles
2/ Merger *
3/ Selling off business assets *
4/ Changing business *
5/ Dissolving

Question 46

Fundamental corporate change - Procedure

Answer 46

Approved by majority of directors then put to shareholders, must be proved by majority of shareholders, and where change includes dissenter rights, notice must state so

Question 47

Fundamental corporate change - dissenters’ procedure

Answer 47

Where a fundamental corporate change evokes dissenters’ rights, the notice to shareholders must state so, dissenter must notify of dissent before the vote, dissenters must be bought out. Dispute as to value? dissenter report in 30 days, if no agreement company files suit in 60 days.

Question 48

Fundamental corporate change - Mergers

Answer 48

No need for approval where absorbing corporation would not change (no change in shareholding, articles). Also, no need for approval where target is 90% owned by absorbing entity.

Question 49

Statutory dissolution

Answer 49

Can dissolve corporation if it has failed to adhere to statutory formalities (payment of fees, eg)

Question 50

Judicial dissolution

Answer 50

Can be sought by attorney general where corp used to perpetuate a fraud; shareholders where there is a deadlock, where the co has abandoned business, where corp assets have been misused (i.e. OPPRESSION)