Pg 42

Question 1

What is a wholly owned subsidiary company?

Answer 1

When all of it shares are held by another parent corporation

Question 2

If Ajax is a successful business that wants to expand into a risky new area but also wants to protect its current business if things do not work out, and they are well capitalized and interested in keeping control, what should they do?

Answer 2

Start a wholly owned subsidiary corporation so the agent can insulate the existing business from new business and keep control over its operation

Question 3

If Ajax is a successful business that wants to expand into a risky new area but also wants to protect its current business if things do not work out, and they are well capitalized and interested in keeping control, why would starting a partially owned subsidiary be a bad idea?

Answer 3

Because that would dilute Ajax’s control over the new business if it sold stock to attract investors

Question 4

If an injured person wants to pierce the corporate veil to reach the assets of a parent corporation for the conduct of an employee of the parent corporation’s wholly owned subsidiary, what must happen?

Answer 4

Must meet the three prongs of the Collett test:
– control and complete domination of finances, policy, and business practises so the corporation had no separate mind, will, or existence of its own
– control was used by the defendant to commit fraud or wrong (violate a statute or for dishonest acts)
– the control and breach of duty was the proximate cause of the injury

Question 5

What does it mean to undercapitalize a subsidiary?

Answer 5

Putting a subsidiary in business without a reasonably sufficient supply of money

Question 6

How do you know if a wholly-owned subsidiary is financially responsible?

Answer 6

Look at these factors:
- insurance
- healthy balance sheet
– if dividends were paid
– corporate records were kept
– directors and officers function properly
– corporate formalities observed
– dominant shareholder syphoned off corporate funds
– corporation was just a façade for the dominant shareholder

Question 7

What is the choice of law for a wholly owned subsidiary corporation?

Answer 7

The state of incorporation

Question 8

What are things that are OK for a subsidiary corporation to do that would not allow the corporate veil to be pierced?

Answer 8

• participation in the parent’s cash management system
  – must get parent approval before buying real estate or selling stock
  – overlap in directors
  – parent monitoring the subsidiary’s performance
  – supervision of the subsidiary’s finance and capital budget decisions
  – articulating general policies and procedures

Question 9

What is the situation that a parent corporation can be directly liable for a wholly owned subsidiary’s wrongful act?

Answer 9

If the wrong can be traced to the parent through personnel and management and the parent directly participated in it.

Question 10

What is a partially owned subsidiary corporation?

Answer 10

The parent company owns a majority of the subsidiary’s voting shares, so the parent has control, but some of the shares are owned by other holders.

Question 11

If you own a successful business but you want to get into a highly speculative and maybe profitable new types of business, and you are committed to expanding but you want to protect your current business if things don’t work out, and you want to attract investors but also keep control over operations, what should you do?

Answer 11

Start a partially owned subsidiary corporation

Question 12

What is a hybrid with regard to a subsidiary corporation?

Answer 12

It has characteristics of a wholly owned subsidiary and also of a partly owned subsidiary. Some shares are widely distributed, but the majority of voting shares are likely retained by a single individual, family, or a small number of people.

Question 13

What is a municipal corporation?

Answer 13

A legal institution that is formed by charter from a sovereign power to erect a populous community into a body politic and corporate, with corporate name and continuous succession and for the purpose of subordinate self government improvement and local administration of affairs of the state.

Question 14

What are some examples of municipal corporations?

Answer 14

Incorporated towns, villages, cities, that are both agents of the state and local government entities.

Question 15

What is the key to municipal corporations?

Answer 15

The power and right to local self governance. The entity sets up its own rules and policies that are enforced through its own police power via the general power of the government to regulate for health and safety

Question 16

Where does the legitimacy come from with regard to a municipal corporation?

Answer 16

The state and it is created by a special enactment of legislation through compliance with the state’s general municipal corporate law, or by satisfaction of any existing state constitutional or statutory home rule provision.

Question 17

What are things that a municipal corporation can do?

Answer 17

• control development
• raise revenue through taxes
• participate in state and federal revenue sharing and grants

But if they want to borrow money, they need voter approval

Question 18

What is a nonprofit or charitable corporation?

Answer 18

A privately controlled corporation that deals with charitable, educational, literary, scientific, social, fraternal, religious, recreational, or other nonprofit things. The organizers determine the rules for the organization, how to accept donations, and they do not charge fees for service.

Question 19

Is a nonprofit or charitable corporation automatically tax exempt?

Answer 19

No, they have to file all of the documents in order to get that status

Question 20

What does the revised model nonprofit corporate act do?

Answer 20

Divides nonprofit corporations into these three broad categories:
– public benefit corporation/charitable organization
– mutual benefit corporation: trade associations, social clubs, nonprofits that are not charities or religious
– religious corporations

Question 21

If a corporation makes a profit, does that mean it cannot be considered a nonprofit corporation?

Answer 21

No, it is OK to make a profit as long as the profits are used to further the organization’s educational, charitable, or cultural purposes and are not paid to members as dividends.

Question 22

If a hospital charges money and makes a profit, and then uses that profit to subsidize people that can’t pay for the hospital, can it be considered a nonprofit corporation?

Answer 22

Yes, because the profit goes back into the corporation

Question 23

Do nonprofit corporations usually have shareholders?

Answer 23

No, but they often have members and directors

Question 24

If the residents of a town set up an animal shelter that doesn’t euthanize animals, and they don’t charge for services and they take both private and public funding, can that be considered a nonprofit corporation?

Answer 24

Yes