Corporations

Question 1

What are the duties of Promoters and what is their role with the corporation?

Answer 1

Promoters act on behalf of a corporation that is not yet formed.

Promoters are fiduciaries of each other and the corporation.
- promoters may not make a secret profit on their dealings with the corporation.

Question 2

When will a corporation be liable on a promoter’s pre-incorporation contract?

Answer 2

Liable on promoter’s pre-incorporation contract only if corp. adopts the contract by:
(1) express board resolution, or
(2) implied ratification through knowledge and acceptance of benefits.

Question 3

Promoter is personally liable on pre-incorporation contracts until what point?

Answer 3

Personally liable on pre-incorporation contracts until
- there is a valid novation.

Question 4

What are Subscribers as they relate to pre-incorporation?

Answer 4

Subscribers are
- persons or entities
- that make written offers
- to buy a corporation’s stock
- before the corporation has been formed.

Question 5

How long is a pre-incorporation subscription to buy stock irrevocable for?

Answer 5

6 months.

Question 6

A valid de jure corporation is formed when the Articles of Incorporation have been accepted by the Secretary of State.

What 5 things must the Articles of Incorporation include?

Answer 6

Articles of Incorporation must include:
(1) the number of authorized shares
(2) a corporate purpose
(3) designation of an agent for service of process and legal representative
(4) the names and addresses of the incorporators, and
(5) the name of the corporation

Question 7

What is the corporate purpose of a De Jure corporation

Answer 7

The corporate purpose is generally presumed to
- any general legal purpose into perpetuity.
- or any specific purpose stated in the articles of incorporation.

Question 8

What happens if a specific purpose is stated in the articles of incorporation and the De Jure corporation deviates from that purpose?

Answer 8

The activity
- is considered an Ultra Vires activity
- and the state can enjoin the corporation from carrying on that purpose.

Corporation can recover damages from directors engaged in Ultra Vires activities.

Question 9

May De Jure corporations can recover damages from directors engaged in Ultra Vires activities?

Answer 9

Yes.

Question 10

Are bylaws a requirement of a validly formed de jure corporation?

Answer 10

No.

Question 11

Who has discretion over bylaws for a de jure corporation?

Answer 11

The board of directors has discretion.

Question 12

What is a De Facto Corporation?

Answer 12

A corporation that forms when
- the promoter fails to form a de jure corporation, and
- is unaware they failed to validly form the de jure corporation.

Question 13

If a De Facto Corporation is found to exist, how is it treated in comparison to a properly formed corporation?

Answer 13

If a de facto corporation exists, it will be treated
- as a valid corporation,
- except in dealings with the government, and
- shareholders will not be personally liable for the corporation.

Government does not recognize a corp. exists (because formation process with gov. was not correct) but everyone else is to treat a de facto corp. as one that had properly filed, because they would not know that they messed up in the formation process.

Question 14

What 3 requirements must be satisfied in order for a De Facto corporation to exist?

Answer 14

(1) there is a relevant incorporation statute
(2) the parties made a good faith and colorable attempt to comply with the statute
(3) some exercise of corporate privileges (e.g., acting like a corporation was formed)

Question 15

When does a Corporation by Estoppel exist?

Answer 15

When there is one who treats a business as a corporation.

If they treated a business as a corporation, they are estopped from denying the business was a corporation.
- (cannot turn around and say a corporation didn’t exist after they had been treating the business as one)

Question 16

What is Par Value in regards to issuance of corporate stock?

Answer 16

Par value is the minimum issuance price.

Question 17

What consideration can be received in exchange for stock?

Answer 17

Any consideration may be received
- if the Board values it
- in good faith
- to be at least par value (minimum issuance price)

Question 18

What 3 things may be included as consideration in exchange for stock?

Answer 18

Consideration may include
(1) money,
(2) labor already rendered, or
(3) property received
- tangible and intangible

Question 19

What is treasury stock?

Answer 19

Treasury stock is stock that was previously issued by the corporation and reacquired by the corporation.

Question 20

Can treasury stock be reissued?

Answer 20

Yes.

Question 21

How is treasury stock valued?

Answer 21

Considered “no par” stock.

Directors will be liable for authorizing a below-par issuance.
(issuance below minimum issuance price)

Question 22

What are the general responsibilities of the Board of Directors of a corporation?

Answer 22

Generally, the board of directors manages the business of the corporation, which includes:
- setting policy
- supervising officers
- declaring distributions
- determining issuances of stock, and
- recommending fundamental corporate changes.

Question 23

What are the Statutory Requirements for a Board of Directors?

Answer 23

Statutory requirements:
(1) Directors must be natural adult persons
(2) Corporation is required to have more than one director
(3) initial directors are generally to be named in the articles of incorporation, and thereafter elected by shareholders at the annual meeting.

Question 24

How may a board of directors take effective action?

Answer 24

A board of directors can take effective action either:
(1) through a unanimous agreement in writing, or
(2) at a meeting satisfying the quorum and voting requirements.

Question 25

Is notice required for an effective board action?

Answer 25

Yes. - Notice of the board meeting is required. - failure to give proper notice will void whatever happened at the meeting, - - unless the directors who were not notified waive the notice defect.

Question 26

Can directors use proxies for board meetings?

Answer 26

No. Directors CANNOT use proxies.

Question 27

What is the Quorum Requirement for directors to take action at a meeting?

Answer 27

For directors to take action at a meeting, there must be a quorum.

Question 28

When does a quorum exist?

Answer 28

A quorum exists - when a majority of all directors are present to do business - unless otherwise stated in the bylaws.

Question 29

If a quorum is present, how does a resolution pass?

Answer 29

If a quorum is present, a resolution will pass - with a majority vote of those present at the meeting ex: (9 board members total, 5 show up to meeting makes it a quorum, 3 votes in favor means a resolution will pass)

Question 30

What are the duties of directors of corporations?

Answer 30

Directors are fiduciaries to the corporation. They owe the corp: (1) a duty of care, and (2) a duty of loyalty

Question 31

What is required for the Director's duty to disclose?

Answer 31

Directors have a duty to - disclose material corporate information - to other members of the board.

Question 32

What is required for the Director's duty of care?

Answer 32

Directors must discharge their duties - in good faith and in a manner that is in the best interest of the corp. - with the degree of care, skill, and diligence an ordinary prudent person would exercise under similar circumstances.

Question 33

How does the Doctrine of Waste apply to the Director's duty of care?

Answer 33

As part of their duty of care, directors - have a duty to not waste corporate assets - by overpaying for property or employment services.

Question 34

What are directors entitled to rely on in regards to their duty of care?

Answer 34

Directors are entitled to rely on - information, opinions, reports, or statements - if they were prepared by corporate officers or employees - whom the directors believe to be competent and reliable

Question 35

How is delegation of duty treated for directors of a corp?

Answer 35

Directors - may delegate a duty to another director or officer - but remains ultimately responsible for the decision made.

Question 36

Under the Business Judgment Rule, when are directors insulated from liability for the consequences of a business decision?

Answer 36

Insulated from liability if they - exercised due care - acted in good faith - and had a rational basis for the decision.

Question 37

Will courts use hindsight to decide whether a business decision at the time breached the duty of care? (business judgment rule)

Answer 37

No. Court will NOT use hindsight to decide if the business decision breached the duty of care.

Question 38

What is the Duty of Loyalty for directors of a corporation and what does it require them to do?

Answer 38

All directors owe the corp. a duty of loyalty. It requires them to - put the corp's best interest before their own, and - to not personally profit at the corp's expense.

Question 39

When do Duty of Loyalty issues pertaining to corp. directors typically arise?

Answer 39

Duty of loyalty issues typically arise where (1) there is a conflict of interest (2) a director becomes involved in self-dealing (3) a director decides to compete directly with the corporation, or (4) the director takes for personal gain an opportunity well suited for the corporation.

Question 40

Are directors permitted to directly or indirectly compete with the corporation they owe a fiduciary duty to?

Answer 40

No.

Question 41

What is self-dealing in regards to directors of corporations?

Answer 41

Self-dealing involves - a director - deriving a personal benefit - through the use of corporate resources.

Question 42

What is the breach of duty of loyalty committed by a director usurping corporate opportunities?

Answer 42

The director's duty of loyalty is breached when - he takes for himself - a business opportunity - that is within the realm of opportunities the corp. would typically engage in - or, where the corp. has an interest or expectancy in the opportunity.

Question 43

How can a director taking a corporate opportunity NOT breach the duty of loyalty?

Answer 43

To take the corporate opportunity without breaching the duty of loyalty, director must - offer the opportunity to the corp. and - the board decides the corp. will not take the opportunity. if offered to corp then corp passes on it, the director can take it for himself without breach of duty

Question 44

What may a corporation do once a director usurps a corporate opportunity?

Answer 44

Corp.: (1) can recover profits the director made from the transaction, or (2) may force the director to convey the opportunity to the corp. - this can be accomplished through a constructive trust.

Question 45

When does an Interested Director's Transaction not breach his duty of loyalty? (Ratification of Interested Director Transaction) (3 possibilities)

Answer 45

Director not in breach of duty of loyalty if: (1) transaction was approved by a majority of disinterested directors (at least 2) after all material facts have been disclosed to the board; or (2) transaction was approved by a majority of the votes entitled to be cast by disinterested shareholders after all material facts have been disclosed to the shareholders; or (3) transaction, according to circumstances at the time of the commitment, was fair to the corporation.

Question 46

Are directors entitled to reimbursement from the corporation?

Answer 46

Yes. Specifically for expenditures made for corporate purposes.

Question 47

How are the requirements for indemnification of a corporation for the director’s expenses in a lawsuit determined? (Depends on if lawsuit is won or lost)

Answer 47

If director is successful in the lawsuit, indemnification for expenses is MANDATORY. If the director loses the lawsuit, the right to indemnification will depend on the nature of the lawsuit.

Question 48

When a director loses a lawsuit, his right to indemnify the corporation depends on the nature of the lawsuit. Generally, what acts (that would result in a lawsuit) are banned from having their liability limited or eliminated?

Answer 48

Generally, articles of incorporation may not limit or eliminate liability for - violations of the duty of loyalty - intentional harm to the corporation or its shareholders - unlawful corporate distributions, or - an intentional violation of criminal law.

Question 49

What are the duties owed by Officers of a corporation?

Answer 49

Officers owe the same duties of *care* and *loyalty* as directors.

Question 50

How are Officers of a corporation appointed, and how is their pay determined?

Answer 50

Officers are selected and removed by the board. The board sets the pay rate for officer compensation.

Question 51

What is a Derivative Suit?

Answer 51

In a derivative suit, a *shareholder is suing to enforce the corporation’s claim*, and not her own personal claim.

Question 52

What 3 things are required for a shareholder’s derivative suit to be proper?

Answer 52

Shareholder’s derivative suit proper only if shareholder: (1) owns stock at the time the act complained of occurred, and continues to own the stock throughout the litigation (2) made a demand on the directors to sue, and demand was refused in bad faith or shown to be futile (3) posts a bond to protect the corp’s interest if the suit fails.

Question 53

When is a demand (as required for a derivative suit) deemed futile?

Answer 53

A demand may be deemed futile - when the members of the board, or their family members, are the wrongdoers - and will likely not decide to sue themselves.

Question 54

Minority jurisdiction requirement: Shareholder Demand In some states, before a derivative suit can be filed, a shareholder may need to make a demand on the other shareholders to determine ___.

Answer 54

A shareholder may need to make a demand on the shareholders to determine - if the majority ratify (approve of ) the board’s behavior. If the majority approves of the board’s behavior, then the action by the board is seen to be “authorized” and the derivative suit cannot proceed.

Question 55

What must a shareholder show before she can enforce her own rights against the corporation through a direct action? (Direct action by a shareholder)

Answer 55

Shareholder must show that the directors - have breached a fiduciary duty owed to her as a shareholder

Question 56

As to shareholder rights, who has the Right to Vote?

Answer 56

Only *the owner of the shares on the record date* may vote.

Question 57

Regarding shareholder meetings, what do shareholders do at annual meetings?

Answer 57

At the annual meeting, shareholders elect directors. If no meeting is held within 15 months, a shareholder can petition to order one.

Question 58

Who can call a special meeting? (Hint: 4 categories of people)

Answer 58

Special meetings can be called by (1) the board (2) the president (3) holders of at least 10% of voting shares; or (4) anyone else authorized by the bylaws.

Question 59

What are the requirements for Notice of Shareholder Meetings? (3 requirements, but #3 only applies for special meetings)

Answer 59

(1) written notice must be provided to every shareholder for a meeting between 10-60 days in advance of the meeting (2) The notice must state the time and place of the meeting (3) For special meetings, the purpose of the meeting must also be stated. - anything done at the meeting that is outside of the purpose of the special meeting will not be valid.

Question 60

What is a proxy as it relates to shareholders and corporations?

Answer 60

A proxy (for corporation shareholder purposes) is where: - the shareholder (principal) authorizes another person or entity - to act as a proxy and vote his shares on his behalf - at corporate meetings.

Question 61

What are the rules regarding shareholder use of proxies and voting?

Answer 61

A shareholder may vote his shares either - in person, or - by proxy Proxy must be executed in writing by the shareholder or his attorney-in-fact.

Question 62

How long is a shareholder proxy valid for?

Answer 62

A proxy is only valid for 11 months, unless the writing that executes the proxy provides otherwise.

Question 63

What is the revocability status of shareholder proxies?

Answer 63

An appointment of a proxy is generally revocable by the shareholder.

Question 64

When is a shareholder proxy irrevocable?

Answer 64

A shareholder proxy is irrevocable only if - the appointment form conspicuously states that it is irrevocable, and - the appointment is coupled with an interest. The “interest” necessary to create an irrevocable proxy may be established by some type of interest in the shares or interest in the corporation.

Question 65

How can a proxy be revoked?

Answer 65

Can be revoked - in writing - by the shareholder showing up to vote himself, or - by later appointment of another proxy.