MEE Corporations/LLCs

Question 1

How does liability work between corporations/promoters in the case of promoter contracts?

Answer 1

Promoter is personally liable for contracts both before and after the corporation is formed.

Corporation is not liable for promoter’s contracts unless they are adopted after incorporation.

Question 2

What creates the beginning of existence for a corporation?

Answer 2

The incorporators will have notarized articles delivered to the secretary of state and pay any required fees.

Question 3

What is the issuance of options?

Answer 3

An option is the right to purchase shares in the future under terms predetermined by the board of directors. Options may be offered in exchange for any type of consideration, including future services.

Question 4

How is the number of shares in a corporation determined?

Answer 4

The articles must give details about the corporation’s authorized stock, which is the maximum number of shares the corporation can sell.

Question 5

Can a for-profit corporation make contribution to charity?

Answer 5

Yes. They are a legal entity like a person.

Question 6

What is undercapitalization mean when piercing the corporate veil?

Answer 6

At the time of formation there is not enough unencumbered capital to reasonably cover prospective liabilities.

Question 7

Can the corporate veil be pierced in tort cases?

Answer 7

Yes, very easily.

Question 8

What is required in the Articles of Incorporation?

Answer 8

(1) Name of the corporation.
(2) Name and address of each incorporator.
(3) A registered agent and the street address of the registered office.
(4) Information regarding the corporation’s stock.

Question 9

What information can be found in the Bylaws?

Answer 9

It is an internal operating manual. Bylaws may contain any provision for managing the corporation that is not inconsistent with the articles or law.

Question 10

What is the “Alter Ego” theory?

Answer 10

Shareholders ignore corporate formalities such that the corporation may be considered the “alter ego” or a “mere instrumentality” of the shareholders or another corporation, and some basic injustice results, a court might pierce the corporate veil.

Question 11

What is a short form merger of a subsidiary?

Answer 11

Parent corporation owning at least 90% of the outstanding shares of each class of a subsidiary corporation may merge the subsidiary into itself without the approval of the shareholders or directors of the subsidiary.

Question 12

Who can give proxies, who cannot?

Answer 12

Shareholders may give proxies for shareholder votes. Members of the board may NOT give proxies for board duties.

Question 13

What is “quorum”?

Answer 13

Unless set by the articles or bylaws, quorum is the majority of shares entitled to vote.

Question 14

What is a voting agreement?

Answer 14

Voting (or “pooling”) agreements provide for how shareholders vote their shares. The requirements are that the agreement be in writing and signed.

Question 15

Who may call a special meeting?

Answer 15

(1) The board of directors,
(2) The president,
(3) The holders of at least 10% of the outstanding shares, or
(4) Anyone else authorized to do so in the articles or bylaws.

Question 16

What are the notice requirements for a special meeting?

Answer 16

Shareholders must be notified of meetings not fewer than 10 or more than 60 days before the meeting.

Question 17

Who elects directors for the board?

Answer 17

Shareholders.

Question 18

What is the record date? Who fixes the record date? What are the limitations?

Answer 18

The date on which a shareholder secures their right to vote at an upcoming meeting.

The record date is fixed by the board of directors but may not be more than 70 days before the meeting.

Question 19

What is a derivative action?

Answer 19

An action by a shareholder(s) to enforce a right belonging to the corporation.

Question 20

Are stock transfer restrictions permissable?

Answer 20

They are fine if reasonable.

Question 21

What are the unqualified rights of inspection for a shareholder?

Answer 21

Regardless of purpose:
(1) The corporation’s articles and
bylaws,
(2) Board resolutions regarding classification of shares,
(3) Minutes of shareholders’ meetings from the past three years,
(4) Communications sent by the corporation to shareholders over the past three years,
(5) A list of the names and business addresses of the corporation’s current directors and officers, and
(6) A copy of the corporation’s most recent annual report.

Question 22

What are the qualified rights of inspection for a shareholder?

Answer 22

Must state a propert purpose (reasonably related to shareholder’s rights):
(1) Excerpts of the minutes of board (in contrast to shareholder, referenced above) meetings,
(2) The corporation’s books, papers, and accounting records, and
(3) Shareholder records.

Question 23

What is a preemptive right?

Answer 23

The right of an existing shareholder of common stock to maintain her percentage of ownership in the company by buying stock whenever there is a new issuance of stock for MONEY.

Must be stated in the articles of incorporation.

Question 24

What is the Standard of Care/Duties of member of the board or officer?

Answer 24

(1) Duty of Good Faith;
(2) Duty of Loyalty (best interest of the company);
(3) Business judgement rule, that of a reasonable business decision.

Question 25

If there is a conflict of interest transaction, what must be present in order to uphold?

Answer 25

The director disclosed all material facts to the board, and approved by the majority (at least 2) of the disinterested directors/shareholders.

Question 26

How is a Director removed?

Answer 26

Shareholders can remove directors before their terms expire. Shareholders may remove a director with or without cause.

Question 27

How is an Officer removed?

Answer 27

The corporation (Board) has the power to remove an officer at any time, with or without cause.

Question 28

Who declares distributions?

Answer 28

Solely within the directors’ discretion, subject to solvency limitations and any provisions to the contrary in a shareholders’ agreement or the articles.

A shareholder has a “right” to a dividend or other distribution only when the board declares it.

Question 29

Can the President of a corporation bind that corporation in a contract?

Answer 29

Yes (a lot like agency law).

Question 30

What are the fundemental changes that require a majority of shareholders must vote to approve?

Answer 30

(1) Amending the articles.
(2) Merging or consolidating into another company.
(3) Transferring substantially all assets (or having stock acquired in a “share exchange”)
(4) Converting to another form of business.
(5) Dissolving.
(6) Appraisal remedy.

Question 31

What is an “involuntary dissolution”? Who can ask for it?

Answer 31

Involuntary dissolution is also known as “judicial dissolution” happens by court order.

(1) Attorney General
(2) Shareholders
(3) Creditors

Question 32

What is Rule 10b-5?

Answer 32

It is unlawful to commit fraud in connection with securities.