PQs

Question 1

What are the “articles of incorporation”?

Answer 1

The articles of incorporation constitute the agreement between the incorporators regarding the details of organization of the proposed corporation. It is often referred to as the charter, and may be likened to a constitution.

Question 2

How is “incorporation” accomplished?

Answer 2

Incorporation is accomplished by the incorporators preparing, signing, acknowledging and delivering the articles of incorporation to the department of state.

Question 3

What are the requirements to be a “director”?

Answer 3

A director must be 18 years of age or older. They do NOT have to be residents of Florida or shareholders of the corporation unless the articles or bylaws so require.

Question 4

Can one person be the sole incorporator, the sole shareholder, and the sole member of the board of directors?

Answer 4

Yes, one person may fulfill all of these roles in a corporation. One or more natural persons, or an entity such as a corporation, partnership, or association may act as incorporator. A Florida corporation may have as few as one director, and one person can hold all the stock in a corporation.

Question 5

Is a corporation bound on preincorporation contracts entered into by promoters on behalf of the corporation or in its name?

Answer 5

No, the corporate entity does not yet exist.

Question 6

Are promoters on behalf of a corporation bound by preincorporation contracts?

Answer 6

Yes - all persons purporting to act as or on behalf of a corporation knowing that there was no incorporation are jointly and severally liable for all liabilities created while so acting.

Question 7

How can a corporation become liable on promoters’ contracts?

Answer 7

By “adopting” them. Adoption may be expressed or implied, but the mere act of incorporation is not sufficient to constitute adoption.

• acceptance of the benefits of the contract is usually deemed to constitute adoption

Question 8

After adoption by the corporation, will the promoter still be liable?

Answer 8

Yes, unless there is a novation.

Question 9

What is a “novation”?

Answer 9

A novation is a specific agreement by all parties that, upon adoption of the K by the corporation after it comes into being, the promoter will be released from personal liability on the contract. Thereafter, the contracting party will look exclusively to the corporation for performance under the K.

Question 10

Describe written preincorporation subscription agreements.

Answer 10

A subscription agreement is a K by which the subscriber agrees to purchase a certain number of shares of stock of the corporation at the subscription price specified in the agreement. Preincorporation subscription agreements are usually revocable until adopted by the corporation after its formation unless more than one subscriber is party to the agreement.

Question 11

For how long is a written preincorporation agreement irrevocable?

Answer 11

For six months, unless the agreement provides otherwise, or unless all of the subscribers consent to revocation.

Question 12

Duty of loyalty

Answer 12

The duty of loyalty comes into play when the director has a personal stake in the action to be taken by the board, such as subscribing to shares of the corporation.

Question 13

Is self-dealing permitted?

Answer 13

Yes, but the courts strictly scrutinize any transaction involving a conflict of interest, and the burden of proof is on the director to show that she has not violated her duty of loyalty.

Question 14

Can a subscriber, or parties other than a director, bring a derivative suit?

Answer 14

No. A subscriber is under no obligation to the corporation or its creditors other than the obligation to pay the corporation the full consideration for which such shares were issued.

Question 15

Can a shareholder sue derivatively to enforce a claim that accrued before he became a shareholder?

Answer 15

No.

Question 16

What is a “subsidiary” and how is it treated?

Answer 16

A subsidiary is generally treated as an entity distinct from its parent.

Question 17

In what situations will a subsidiary be treated as a single entity with its parent?

Answer 17

If the subsidiary is inadequately capitalized, its operations or assets are intermingled with the parent’s, or its business is operated solely for the benefit of the parent.

Question 18

What is the result of treating a subsidiary and its parent as a single entity?

Answer 18

The parent will be liable for the debts of the subsidiary.

Question 19

Does the par value of stock or any statement that it shall have no par value NEED to be listed in the Articles of Incorporation?

Answer 19

No, it is an optional inclusion.

Question 20

At common law, “ultra vires” acts of a corporation are:

Answer 20

acts beyond the powers of the corporation.

Question 21

Is “ultra vires” recognized in Florida?

Answer 21

No. The Florida statute provides that no act of a corporation, and no conveyance of property to or by a corporation is invalid by reason of the fact that the corporation was without capacity or power. Thus, generally neither the corporation nor third parties dealing with it can avoid responsibility for their acts or contractual obligations on the ground of ultra vires.

Question 22

What implied authority does the president of a corporation have?

Answer 22

The president of a corporation has implied authority to do all acts necessary and proper in the usual course of business. She does NOT have implied power to take extraordinary actions not in the usual course of business.

Question 23

What law governs the authority of corporate officers and agents?

Answer 23

The law of agency

Question 24

What types of authority may an agent have?

Answer 24

1. actual; or
2. apparent

In either case, the agent has the power to bind the corporation, his principal, in contractual dealings with third parties.

Question 25

May directors participate in a meeting by means of conference telephone?

Answer 25

Yes, and such participation constitutes personal presence at the meeting.

Question 26

Do meetings need to be formal?

Answer 26

No.

Question 27

Is notice of regular meetings required?

Answer 27

No.

Question 28

If notice IS required, and the director who was not notified nevertheless attends and participates in the meeting without objection, does she waive the notice requirement?

Answer 28

Yes.

Question 29

What constitues a quorum at a meeting of shareholders?

Answer 29

A majority of the shares entitled to vote, represented in person or by proxy.

Question 30

What are the standards for article provisions re: quorum required?

Answer 30

The articles may provide for no less than a one-third quorum or may provide for a super-majority quorum. The articles DO NOT have to provide for the amount that constitutes a quorum, but may.

Question 31

What happens when a foreign corporation transacts business without authority in Florida?

Answer 31

A foreign corporation transacting business without authority CANNOT bring an action in any court in Florida until the corporation obtains authority (but the corporation can defend any action in Florida). A foreign corporation that transacts business in Florida without authority is liable to the state in an amount equal to all fees and taxes that would have been imposed for the years in which it failed to qualify and must forfeit to the state between $500 and $1,000 for each year it failed to qualify.

Question 32

A contract between a director and a Florida corporation…

Answer 32

Is not void or voidable solely because of the director’s relationship or interest if the contract or transaction is fair to the corporation.

Question 33

May a director/officer divert to himself a business opportunity in which his corporation may reasonably be interested?

Answer 33

No, not without first giving the corporation an opportunity to act.

Question 34

What happens if a director fails to give the corporation a chance to act on a business opportunity?

Answer 34

The director will be liable to the corporation for any profits made.

Question 35

How does a court determine whether a corporate opportunity has been diverted?

Answer 35

Directors are generally held to a standard of good faith, measured by general business ethics.

• some courts also consider whether the opportunity was presented to the director in his capacity as a director or as an individual, and whether the corporation was financially able to avail itself of the opportunity.

Question 36

In Florida, a director may be removed…

Answer 36

With or without cause, unless otherwise provided.

Question 37

Directors elected by a class of stock may be removed only:

Answer 37

By vote of that class.

Question 38

If the corporation has cumulative voting, a director may NOT be removed if:

Answer 38

The votes cast against her removal would be sufficient to elect her at an election of the full board.

Question 39

What does “cumulative voting” mean?

Answer 39

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 vote for any one candidate or divide them among any number of candidates.

Question 40

What is the cumulative voting formula needed to elect a director?

Answer 40

(NxS)/(D_1)

Question 41

Do close corporations need to register their sales under Florida’s blue sky law?

Answer 41

No, not usually. The Florida statute exempts from registration sales to less than 35 persons.

Question 42

When can a shareholder successfully maintain an action to involuntarily dissolve the corporation?

Answer 42

When:

1. the corporate assets are being misapplied or wasted, or are causing material injury to the corporation; or
2. the directors or those in control of the corporation have acted, are acting, or are reasonably expected to act in an illegal or fraudulent manner.

Question 43

Can a business trust be merged into a corporation wholly owned by the trust?

Answer 43

Yes, Florida law provides that a business trust can be merged into a corporation wholly owned by the trust (i.e., a subsiduary).

• in such a merger, the corporation survives and the trust disappears

Question 44

Who initiates a merger of a trust into a corporation?

Answer 44

A merger is initiated by the trustees, who adopt a plan of merger which then must be approved by an absolute majority of the shareholders of the trust.

Question 45

When does the merger from business trust to corporation become effective?

Answer 45

The merger becomes effective upon the filing of articles of merger and has the same effect as a corporate merger.

Question 46

Who may create a voting trust?

Answer 46

Any number of shareholders of a corporation may create a voting trust for the purpose of conferring upon a trustee an irrevocable right to vote their shares, by entering into a written voting trust agreement and transferring their shares to such trustee, who becomes the record holder entitled to vote the shares.

Question 47

What is the purpose of Rule 10b-5?

Answer 47

Rule 10b-5 prohibits any fraud or deceit, including any false or misleading statements or omissions in connection with the purchase or sale of any security.

• this rule requires traders, possessed of material information concerning the value of securities that they know to be confidential, to divulge the information to other investors with whom they deal or to refrain from trading.

Question 48

What is the purpose of Section 16(b)?

Answer 48

Section 16(b) is narrowly aimed at “short-swing” profits by insiders. It establishes a rather arbitrary and rigid rule providing for the recovery by the corporation of any profits realized by insiders (defined to include officers, directors, and shareholders owning more than 10% of any class of stock) from any purchase and sale, or sale and repurchase of the corporation’s securities within a six-month period.

Question 49

Unless the amendment is one the board may adopt without shareholder approval, amendments of the articles of incorporation in Florida

Question 50

What are the most commonly accepted anti-takeover devices?

Answer 50

Poison pill, restructuring defenses, lock-up and self-tender

Question 51

When is shareholder management available despite the general rule that corporations are managed through a board of directors?

Answer 51

When stated in the articles of incorporation or pursuant to a unanimous shareholder agreement (unless the shares are publicly traded).

Question 52

What is the effect of invalid notice of a shareholder meeting?

Answer 52

The meeting is VOID unless the defect is expressly or implicitly waived

Question 53

Who receives recovery in a shareholder derivative suit?

Answer 53

The corporation, but the shareholder gets attorney’s fees and expenses.

Question 54

Shareholders who are dissatisfied with the terms of a fundamental corporate change usually are permitted to…

Answer 54

compel the corporation to buy their shares at a fair value (the “appraisal right”)

Question 55

What classes are NOT entitled to appraisal rights?

Answer 55

Appraisal rights are NOT available for holders of any class or series of shares that has at least 2,000 shareholders and the outstanding shares of the class or series have a market value of at least $20 million

Question 56

What is the theory of the de facto merger doctine?

Answer 56

To accord the shareholders the same rights they would have been entitled to under a statutory merger, thus preventing the corporation from accomplishing indirectly what it could not do directly

Question 57

What is a de facto merger?

Answer 57

When one corporation buys all of the assets of another and agrees to assume all of the selling corporation’s liabilities, and in exchange therefore into the acquiring corporation issues stock to the selling corporation.

Question 58

Are the trustees of a business trust held personally liable to trust creditors?

Answer 58

Usually, yes.

Question 59

Are contractual exculpatory clauses negating the trustee’s personal liability and relegating creditors to the trust assets typically valid?

Answer 59

Yes. Even absent such clauses, however, when a trustee is found liable, she is usually entitled to indemnification from the trust and judgment creditors of the trustee may have an equitable derivative right to enforce the trustee’s indemnification rights for their own benefit.

Question 60

Is dissolution mandator?

Answer 60

No, it is always discretionary with the court.