Corporations

Question 1

What are the different rules of revocation for pre & post incorporation subscriptions?

Answer 1

pre- irrevocable for 3 months unless otherwise stated

post- remains revocable until corporations

Question 2

What are the 2 rules that effect subscriber default of payment?

Answer 2

if subscriber paid…

1. < 50% of purchase price & fails to pay balance w/ in 30 days of written demand = corp may keep money (forfeiture) & cancel shares
2. > 50% of purchase price & fails to pay balance w/ in 30 days of written demand corp must try to sell stock 1st
   - if no sale= forfeiture & cancellation of shares
   - if sale for > purchase price, defaulting subscriber recovers excess

Question 3

When is corp liable for pre-incorporation contracts? (3)

Answer 3

1. express adoption
2. implied adoption (corp accepts benefit knowingly)
3. novation
   - corp replaces promoter in contract= relieves promoter of liability
   - mere adoption not novation (promoter still liable)

Question 4

In corp formation, what is necessary to establishing par value?

Answer 4

At least 1 class of unlimited voting & dividend rights, for stocks or bonds (respectively)

Question 5

What circumstances allow a court to pierce the corp veil?

Answer 5

• to prevent fraud & use of corporations to cloak illegality
• excessive domination

Question 6

What are the 4 mechanical requirements of forming a corp?

Answer 6

1. execute (sing) C.O.I.
2. deliver to secretary of state
3. pay filing fee
4. hold organizational meeting to
   - adopt bylaws
   - elect board

Question 7

What are the requirements of a valid restriction on sale/ transfer of shares?

Answer 7

1. restriction on the certificate/ share
2. is reasonable under circumstances
3. not an undue restraint
   - right of 1st refusal by corp. is a valid restriction if price reasonable

Question 8

When is a de facto corp created?

Answer 8

under limited circumstances to prevent injustice & shareholders from being personally liable

Question 9

What are the 3 requirements for establishing de facto corp status?

Answer 9

1. relevant incorporation statute
2. parties make good faith attempt to comply
3. there is some exercise of corporate privileges

Question 10

What are 5 forms of allowable considerations for issuing stock? (what can you trade for stock?)

Answer 10

1. $
2. property
3. labor or services
4. binding promise to purchase
5. binding promise to perform future services

Question 11

When can a corp not declare dividends due to insolvency?

Answer 11

• if paying dividends would make corp insolvent

- if corp is (already) insolvent

Question 12

What are the requirements of a valid proxy?

Answer 12

1. writing
2. signed by record shareholder
3. directed to secretary of corps
   - proxy good for 11 months & freely revocable unless it states otherwise to coupled w/ an interest

Question 13

What are pre-emptive rights?

Answer 13

right of existing shareholder to maintain his percentage of ownership by buying stock whenever there is a new issuance for $

• before 2/22/98: such rights exist for all commonstock
• after: don’t exist unless granted in COI

Question 14

What does a shareholder inspection rights grant?

Answer 14

allowed to inspect

1. minutes
2. record of shareholers
3. list of current directors/ officers

Question 15

What can corp require shareholder to disclose in an affidavit prior to inspection?

Answer 15

1. purpose of inspection not against interst of corp

2. shareholder has not sold a shareholder list in last 5 years

Question 16

What are the 4 reqs for a shareholder to bring a derivative suit?

Answer 16

shareholder

1. owns stock at time of claim’
2. owns stock when action brought through entry of judgement
3. adequately represents interests of corp (not self)
4. make a demand on board, unless demand futile

Question 17

What 3 factors make a demand on board futile?

Answer 17

1. majority of board interested in transaction (or under control of interested board members)
2. board uninformed of transaction
3. action so egregious on its face that bus. jud. rule doesn’t apply

Question 18

How can a director be removed from he board w/o cause?

Answer 18

only by shareholders & if COI allows such removal

Question 19

What are directors not permitted to do in terms of director voting?

Answer 19

1. no voting agreements
2. cant use proxies for director voting
   - shareholders may enter into voting agreement for electing directors, must be provided for in COI

Question 20

What must a dissenting director who misses a meeting do to avoid liability?

Answer 20

register written dissent w/in a reasonable time after learning of action

Question 21

What is a closely held corp?

Answer 21

corp with few shareholders & stock is not publicly traded

Question 22

In what 4 ways may a COI limit the liability of directors in breach of their duties of care/ loyalty?

Answer 22

liab. limited if breach not found to
1. be in bad faith (through negligence)
2. be due to intentional misconduct/ knowing violation
3. result in financial profit or other advantage
4. violate statutory liabilities

Question 23

What can never be indemnified?

Answer 23

1. judgments for bad faith actions

- settlement amounts, attorneys fees may be reimbursed/ indem. in certain situations

Question 24

What is the general rule about indemnification of a director (or officer)?

Answer 24

• if successfully defends (wins) gets indemnified

- if loses/ held liable, no indenmificaion

Question 25

In a closely held corp, what are the 2 grounds for dissolution?

Answer 25

managements 1. illegal, oppressive/ fraudulent acts towards complaining shareholders 2. wasting, diverting or looting of assets - ct will consider whether heir are any adequate alternatives to dissolution including buying out complaining shareholder

Question 26

What 3 types of amendments will grant a dissenter appraisal rights?

Answer 26

one that 1. alters/ abolishes preference 2. change redemption rights 3. alters/ abolishes pre-emptive rights or limits voting rights

Question 27

What 4 merger/ consolidaton scenarios give dissenters appraisal rights?

Answer 27

1. corp merger including dissenters in a short term merger (parent w/ subsidiary) 2. corp consolidation 3. corp transfers all/ substantially all its assets 4. corps shares are acquired in a share exchange

Question 28

When will a company acquiring assets be liable for the torts of the acquired company?

Answer 28

1. when the deal provides so 2. when purchasing company is a mere continuation of the seller 3. or deal was entered into fraudulently to escape tort obligation/ liability

Question 29

What level of approval is required for changes to the board's authorities?

Answer 29

director & shareholder approval before 2/22/98= 2/3 shares after 2/33/98= majority -board authorities= supermajority quorum, voting reqs

Question 30

What level of approval is req for changes/ amends to shareholder authorities?

Answer 30

- director approval AND - 2/3 shareholders - shareholder authority= voting req/ supermajority quorum

Question 31

When may a board seek judicial dissolution?

Answer 31

corp has insufficient assets to discharge liablility OR dissolution in best interest of corp

Question 32

What level of approval is required for a board to seek judicial dissolution?

Answer 32

majority

Question 33

In what 3 situations may shareholders seek judicial dissolution? What level of approval is required?

Answer 33

1. directors too divided to manage 2. shareholders too divided to elect director 3. other internal dissention making dissolution beneficial -1/2 shares =if unable to elect directors for 2 yrs, any shareholder entitiled to vote may petition

Question 34

In closely held corp, what are the 10 largest shareholders personally liable for?

Answer 34

wages & benefits of corp employees

Question 35

What is treasury stock?

Answer 35

stock previously issued that has been reacquired by corp | -no min amt required for sale of treasury stock

Question 36

What is the main consequence of failure to give proper notice to shareholders/ board members of meetings?

Answer 36

action taken at meeting will be void

Question 37

What constitutes an adequate waiver of notice?

Answer 37

1. express (written and signed) | 2. implied (attendance at mtg w/o objection)

Question 38

What is required for shareholders/ board to take action w/o a meeting?

Answer 38

written consent of whatever % of shareholders would be needed to pass the action at a mtg

Question 39

What is a proxy?

Answer 39

authorizes someone to vote the shares of another

Question 40

What is the business judgment rule?

Answer 40

if directors manage corp in good faith in manner direcors reas. believe in best interest of corp, ct will not punish poor/ bad investment decisions

Question 41

What is an utra vires act?

Answer 41

act outside corps stated purpose

Question 42

What is the corp opportunity doctrine?

Answer 42

director cannot usurp a corp opportunity that corp tangibly expects should be granted to it -director must wait for corp to reject opportunity =related to directors duty of loyalty & requirement that director cant compete w/ corp

Question 43

What is the standard of care associated with a director of officers duty?

Answer 43

act in good faith w/ the degree of care an ordinarily prudent person would use under similar circumstances

Question 44

In what 3 situations will a corp be deemed not to have a tangible expectation of an opportunity? (corp opp. doc)

Answer 44

1. corp refused/ rejected opportunity 2. corp unable to take advantage of opp 3. opp not related to corps business

Question 45

What is a right of appraisal?

Answer 45

rights of a shareholder to force corp to buy his shares at fair value

Question 46

What 3 things must a dissenter do to perfect their appraisal right?

Answer 46

1. file written objection before vote 2. abstain OR vote against action 3. after vote, make written demand to be bought out

Question 47

What approval is req for voluntary dissolution?

Answer 47

only shareholder vote required not board - before 2/22/98: 2/3 - after: majority

Question 48

What must a COI for a professional service corp include?

Answer 48

the profession to be practiced must be included

Question 49

What are professional liable for in professional service corps?

Answer 49

their own malpractice | -not liable for rent due on leases in corps name or other contracts of corp