Rule Statements

Question 1

Pre-incorporation Promoter Liability

Answer 1

A promoter is a person who acts on behalf of a corporation prior to formation. They are personally liable for Pre-incorporation Ks unless

1. there is a subsequent novation, or
2. the contract explicitly provides there is no promoter liability.

Question 2

Corporate Liability

Answer 2

A corporation is not liable for a pre-incorporation K unless the corp. knows the material terms and accepts the benefits of the K.

If the corporation accepts the benefits of the K, it may be adopted, and while it doesn’t relieve the promotor of liability, it offers the creditor an alternative avenue to seek reimbursement.

Question 3

Corporations

Answer 3

A corporation is a legal entity that exists separate from its owners, thus shielding the owners and managers from liability.

Question 4

Formation

Answer 4

A corporation’s existence begins on the date the Articles of Incorporation are filed with the Secretary of State, unless a delayed effective date is specified.

Question 5

Articles of Incorporation

Answer 5

The AOI must contain: (4x)

1. Corporate Name
2. Number of shares the corporation is authorized to issue
3. Corporation’s initial registered office address and the name of its initial registered agent at that office; and
4. The name and address of each incorporator.

Question 6

Election of Directors

Answer 6

Shareholders elect directors at the annual shareholder meetings. Shareholders may remove directors with or without cause.

Primary officers are appointed by the board, who determine their salary.

Question 7

Fundamental Changes

Answer 7

Fundamental Changes require a special meeting and majority of all votes, not just those at the quorum. Fundamental changes include merger, consolidation, changes to the AOI, sale of all or substantial assets, and dissolution.

Question 8

De Jure Corporation

Answer 8

A DJC is a legally formed corporation. A corporation is legally formed when the AoI are filed with the Secretary of State. If the corporation is not legally formed, it cannot enter into contractual obligations. In such instance,owner/spromoters will be personally liable, unless either an exception for De Facto Corporations or Corporation by Estoppel applies.

Question 9

De Facto Corporation

Answer 9

A DFC enjoys the benefits and powers of a properly formed corporation, but through some error, it is not legally incorporated. A DFC exists where the entity:

1. made a good faith attempt to incorporate;
2. is otherwise eligible to incorporate; and
3. Took some action indicating that it considered itself a corporation. However, only a person who was unaware that the corporation was not proeprly formed may assert the de facto corporation defense.

Question 10

Corporation by Estoppel

Answer 10

Any person or entitty that treated a business as a corporation may be later estopped from denying that the business is a corporation, even if a valid corporation was not formed.

Question 11

Ultra Vires Act

Answer 11

When a corporation’s activities are outside the scope of their Articles of Incorporation, such activities are deemed Ultra Vires Acts. Under CL, Ultra Vires Acts are void and unenforceable. However, under the Revised Model Business Corporation Act (RMBCA), UVAs are generally enforceable if they benefit the corporation. However, individual directors and officers who approved these UVAs can be held personally liable. UVA claims are raised when

1. A shareholder sues to enjoin the UVA;
2. The corporation sues an officer; or
3. A state brings action to dissolve the corporation based on UVA.

Question 12

Piercing the veil

Answer 12

Generally, shareholders, directors, and officers are not personally liable for the liabilities of the corporation. However, a court will pierce the corporate veil and hold shareholders personally liable when: 1) the corporation is acting as the alter ego of shareholders; 2) where shareholders fail to follow corporate formalities; 3) the corporation was inadequately capitalized at formation or 4) to prevent fraud.

Question 13

Duty of Care

Answer 13

Directors have a duty to act in good faith, in a manner in the best interests of the corporation, and with the care of a like person in similar circumstances. This requires they be reasonably informed. If they meet these elements they are generally not liable for decisions that adversely affect the corporation.

Question 14

Business Judgement Rule

Answer 14

The business judgement rule is a rebuttable presumption that a director reasonably believed their actions were in the best interest of the corporation.

Question 15

Duty of Loyalty–Fiduciary Duty Owed (CUCT)

Answer 15

A Director must act in the corporation’s best interest and without personal conflict. This duty of fiduciary loyalty forbids (CUCT)

1. Entering conflicting interest transactions;
2. Usurping a Corporate opportunity;
3. Competing with the corporation; and
4. Trading on inside information.

Question 16

Duty of Loyalty- Conflicts of Interest (C of CUCT)

Answer 16

A conflict of interest is a breach of the duty of loyalty unless the director shows that

1. it was approved by a majority of disinterested directors after full disclosure;
2. it was approved by a majority of disinterested shareholders after full disclosure of all relevant material facts; or
3. the transaction as a whole was fair to representation

Question 17

Usurpation of Corporate Opportunity (U in CUCT)

Answer 17

A corporate opportunity exists if the corproation has an interest in opportunity, or the opportunity is in the corporation’s line of business. A director may only pursue a corporate opportunity if they first present it to the corporation and the board decides not to pursue the opportunity.

Question 18

Board Meetings

Answer 18

The board can only act if a quorum is present. A majority of the Board is neccessary to form a quorum, unless the Articles of Incorporation state a higher or lower number. At least 1/3 of directors are required to form a quorum, and you need a quorum to secure a valid vote. If one of the board members leaves a meeting early, no voting is allowed during that meeting.

Question 19

Removal of Directors

Answer 19

A Director may be removed from the board of directors by court order for fraud or gross abuse of authority, or by a vote of the majoirty of shareholders for any reason.

Question 20

10(b)(5)

Answer 20

Trading on inside information. This rule prohibits any person from

using fraud or deception

in the purchase or sale of any security

by means of any instrumentality in interstate commerce.

Question 21

16(b)

Answer 21

A director, officer, or shareholder owning more than 10% of a corporation must surrender any profit realized to the corporation from the re-sale or re-purchase of equity securities within a 6-month period when the corporation:

a. Is publicly traded on a national stock exchange; or
b. Has more than $10 million in assets and at least 2,000 shareholders.

Question 22

Shareholder Agreement

Answer 22

Shareholders may enter into agreements cocnerning the management of a corporation as long as the agreement is set forth in the Articles of Incorporation, bylaws or some written argument signed by all shareholders, and made known to the corporation.

Question 23

Voluntary Dissolution Distribution

Answer 23

In the case of a voluntary dissolution, a corporation’s assets are distributed to

1) Creditors of the corporation to pay debts and other obligations,
2) Preferred stock,
3) Common stock.