Term
| Who is an incorporator and what does she do? |
|
Definition
| A person designated to incorporate the corporation by 1) executing the articles of incorporation and 2) delivering them to the secretary of state |
|
|
Term
| Are there any limits as to who can perform as an incorporator? |
|
Definition
| Not really. An incorporator may be a “natural person” or an entity |
|
|
Term
| What are the purposes for the articles of incorporation? |
|
Definition
| The articles are a contract between the corporation and the shareholders AND a contract between the corporation and the state |
|
|
Term
| What three items must be included within the articles of incorporation? |
|
Definition
MANDATORY (per Outline)
The name of the corporation
The names and addresses of the incorporator
The name and address of the registered agent
And the capital structure (# shares authorized)
OPTIONAL (per Outline)
The stated purpose of the corporation
The duration of the corporation (if there is one)
The names and addresses of each initial director |
|
|
Term
| What if the articles of incorporation do not include the expected duration of the corporation? |
|
Definition
| We presume perpetual existence. |
|
|
Term
| Can the purpose of the corporation simply be “to engage in al lawful activity after first obtaining necessary state agency approval”? |
|
Definition
| Yes – these amorphous can be as vague as this – it’s typical in the “real world” |
|
|
Term
| Is Vance Refrigeration a proper name for a corporation (in its articles) |
|
Definition
No
A corporation must have one of the following in its name:
Corporation
Incorporated
Limited |
|
|
Term
| If Vance Refrigeration, Inc.’s stated purpose is to manufacture refrigeration machinery, can they buy and sell race cars? |
|
Definition
No
This is beyond the scope of its purpose and could be voided under the doctrine of ultra vires |
|
|
Term
| What are the consequences if a corporation is acting beyond the scope of its purposes under the doctrine of ultra vires? |
|
Definition
Its contracts are still valid (under modern law)
However a SH could seek an injunction of the violating activity
Responsible D&O’s are liable to the corporation for any ultra vires losses
State may bring action to have dissolved |
|
|
Term
| What information concerning capital structure must be in the articles? |
|
Definition
Articles must include
Authorized stock
Number of shares per class
Information on voting rights and preferences of each class |
|
|
Term
| What act must take place in order for the corporation to be a de jure corporation |
|
Definition
| The corporation (incorporator) must deliver notarized articles to the Secretary of State and pay the required fees. The Sec’y must accept the filing. This is conclusive proof that we have a legal corporation |
|
|
Term
| Under what formal process are the initial officers selected and the by-laws adopted? |
|
Definition
| Once the articles have been filed, these acts are taken by the BOD at the organizational meeting |
|
|
Term
| Widgets, Inc. was incorporated in Delaware but it conducts all its business in Michigan. Which laws govern the internal affairs of the corporation |
|
Definition
| Delaware – incorporation meaning that it was formed in that state. |
|
|
Term
What are the consequences if the corporation was not properly incorporated
How might this change under the de facto corporation doctrine |
|
Definition
Essentially the corporation is treated as a partnership – therefore they (nor SHs) cannot escape liability to the extent they can under corporate entity theory.
Under the de factor corporation exception, the business will be treated as a corporation (so SHs will not be personally liable for what the business did) if:
There was a relevant incorporation statute (al 50 states do)
The parties made a good faith, colorable attempt to comply with the incorporation statute
And the entity was acting s if they were a corporation (“exercising corporation privileges”)
Anyone asserting protection under the de facto doctrine was unaware of failure to form a de jure corporation |
|
|
Term
| If Widgets, Inc. is not a de jure corporation (perhaps due to some failure in formation) but continues to operate as though it were and entered into a contract with Mercury Supply. Would the contract be enforced? |
|
Definition
Possibly under the doctrine of corporation by estoppel. If it acted in this way, the corporation is estopped from asserting its own lack of valid formation to repudiate the contract.
Anyone asserting protection under the corporation by estoppel doctrine must be unaware of failure to form a de jure corporation |
|
|
Term
Adoption of by-laws are not a condition precedent for formation of a corporation.
True or False? |
|
Definition
| True, Adoption of by-laws are not a condition precedent for formation of a corporation. They are usually adopted by the BOD at the organizational meeting following de jure corporation formation |
|
|
Term
| If the by-laws and the articles of incorporation conflict, which is controlling? |
|
Definition
| Articles. By-laws are only internal guidance |
|
|
Term
| Who is a promoter for the corporation? |
|
Definition
| A person acting on behalf of the corporation not yet formed. Typically, this involves some pre-formation contracting like leasing space, etc. |
|
|
Term
| As a general rule are corporations liable for pre-incorporation contracts entered into by a promoter |
|
Definition
| No – not unless and until they adopt the contract. |
|
|
Term
| If the corporation adopts the pre-incorporation contracts entered into by a promoter, is the promoter no longer liable? |
|
Definition
No. (Watch for this it can be trip you up)
If the corporation adopts the pre-corporation contract they are liable for the contract – but the promoter is still liable as well.
The promoter remains liable until there is a novation |
|
|
Term
| What is a novation (for pre-incorporation contracts) |
|
Definition
| An agreement between the promoter, the corporation, and the contracting party whereby the corporation agrees to replace the promoter on the contract |
|
|
Term
| Can a corporation be liable for a pre-incorporation contract without expressly adopting it? |
|
Definition
| Yes. The corporation can effect an implied adoption if the corporation accepts a benefit from the contract (for example, moving into the leased space) |
|
|
Term
| A “foreign corporation” is one that is was incorporated outside of the state in which it is doing business (as opposed to from outside of the U.S.) True or False? |
|
Definition
| True. Foreign corporations transacting business in the state must qualify by getting a certificate of authority from the Sec’y of State. It also must pay its registration fee, submit its articles, and provide proof of good standing in its domicile state. Finally, the foreign corporation must have a registered agent in the state |
|
|
Term
| What are the consequences for being a non-qualified foreign corporation? |
|
Definition
Civil fines
It cannot sue instate (YET it can be sued and defend in state). Once it qualifies nd resolves all back fees, it can then sue instate |
|
|
Term
Who can issue the corporation’s stock
Does that mean no one else can sell or trade stock? |
|
Definition
Only the corporation itself.
Other can sell or trade stock but that stock will not be held to be “issued” |
|
|
Term
| Name 4 different status of corporation stock |
|
Definition
Authorized stock: the maximum number of shares the corporation can sell
Issued stock – number of shares the corporation actually sells
Outstanding stock – shares that have been issued but not reacquired
Treasury stock – Stock that was previously issued but reacquired by the corporation. It is authorized but not issued. When issued, only the BOD can set the price. |
|
|
Term
| What is a subscription (subscription agreement) |
|
Definition
| A written offer to buy stock from the corporation |
|
|
Term
| Can stock be acquired prior to incorporation? May the offer to purchase stock prior to incorporation be revoked? |
|
Definition
| A buyer may enter into a pre-incorporation stock subscription. The subscription offer cannot be revoked for 6 months. This can be revocable by contract (in the subscription agreement) or if all other subscribers agree to let you revoke. |
|
|
Term
| When is the subscription agreement made binding on the parties? Can the subscriber revoke a subscription (post-incorporation)? |
|
Definition
When it is accepted by the BOD
Subscriber may revoke ny time up until the subscription is accepted. |
|
|
Term
| What do ALL states agree constitute valid consideration for corporation’s stock |
|
Definition
Cash (or equivalent)
Tangible or intangible property
Services already performed for the corporation |
|
|
Term
| What do only some states allow for consideration for corporation’s stock? |
|
Definition
Promissory notes
Future services (remember this could be a way to hide compensation) |
|
|
Term
| What is par value for stock? Must stock have par value? If there is par value for stock, what happens if the stock is sold for less? |
|
Definition
Par represents the “minimum issuance price”. This means, for example, if the corporation sets the par value at $3 and issues 10,000 shares of stock, it must receive $30,000 in proceeds. “No par” simply means that there is no minimum issuance price – the BOD must set the price at sale.
If the corporation issues stock for below par (“watered stock”), the corporation, SH or the corp.’s creditors can make the BOD (or the buyer!) liable for the difference if they authorized the sale knowingly. |
|
|
Term
| Can the BOD accept property or services in exchange for stock? If so can they value the property and services |
|
Definition
| Yes – all states recognize property and past services as consideration for exchange of stock. The BOD can do the valuation – provided it’s done so in good faith. |
|
|
Term
| What is a preemptive right for an existing shareholder? When can it and can it not be asserted? |
|
Definition
A pre-emptive right is the right of an existing SH to maintain her percentage of ownership in the company by buying stock whenever there is a new issuance of stock for money. (Watch out – some states are split on whether that includes issung Treasury stock)
A SH can only assert a pre-emptive right when the stock is being issued for money (cash) WATCH for hypos that have the company issuing stock to use to purchase property or complete a merger/acquisition! |
|
|
Term
| When can we assume SH’s have a pre-emptive right (on the Bar) |
|
Definition
| When the right is indicated in the articles (but note the states are split on this) |
|
|
Term
| How many directors does a corporation have? |
|
Definition
| One or more. The number is set either in the articles or the bylaws. They must be adult natural people (no entities). |
|
|
Term
| Who hires and fires the directors? |
|
Definition
|
|
Term
| How must the SH remove a sitting director and on what basis? |
|
Definition
| By a vote of a majority of the shares entitled to vote. They may remove the director with or without cause to do so. |
|
|
Term
| How must the SH remove a current officer and on what basis? |
|
Definition
Trick question
Shareholders do NOT elect or remove officers – only the directors. The BOD appoints officers |
|
|
Term
| Who fills a vacancy on the BOD? What if the vacancy was created by a SH removal? |
|
Definition
| Either the BOD or the SH can elect a new director. However, if the vacancy was caused by a SH removal, then the SH must replace. |
|
|
Term
| How does a BOD take official action? |
|
Definition
Either at a board meeting that satisfies quorum and voting requirements OR
Without a meeting with unanimous written consent to act without a meeting |
|
|
Term
| Is a BOD action valid is the matter is discussed by individual conversations with all the BOD members? If not cannot it be ratified? |
|
Definition
No, not unless there is unanimous written consent to act.
The action will be void unless it is ratified through valid means.
A simultaneous oral communication in which all BOD members hear all other BOD members – i.e. a conference call – will be valid. |
|
|
Term
Is notice required for regular board meetings?
Is notice required for special meetings of the BOD? |
|
Definition
|
|
Term
| If I attend a special board meting despite lack of notice have I waived my objection for lack of notice? |
|
Definition
Yes – unless I object at that time.
Note, I can also waive notice requirement (or acknowledge the failure to give notice?) in writing any time. |
|
|
Term
| I can’t make the BOD meeting, is it OK if I just give a proxy to the BOD or enter a “voting agreement” to cast votes on any business |
|
Definition
|
|
Term
| If the BOD has 9 members, what is the maximum number of directors who could conceivably pass a resolution? |
|
Definition
3
The meeting requires quorum (in this case 5 members) and to pass a resolution requires a majority of members present. In the case of minimum quorum that would be 3. |
|
|
Term
| If the BOD has 9 members, and 5 members attend, can the BOD continue to conduct business if one member leaves during the meeting? |
|
Definition
| No – quorum can be “broken” when members leave th meeting. |
|
|
Term
| What is almost always going to be the question on the Bar when it comes to the role of Directors? |
|
Definition
|
|
Term
| What is the overall role of the BOD. What specific items does this entail? |
|
Definition
| Generally, the BOD manages the business of the corporation. This may include setting policy, supervising officers, declaring distributions, issuing stock, recommending changes to the corporate structure. |
|
|
Term
| Can the BOD delegate its duties? What duties cannot be delegated. |
|
Definition
Yes – the Board can delegate some of it duties to committees made up of, at least, one director.
A committee cannot:
Fill a BOD vacancy
Declare a dividend
They can make recommendations on these matters however. |
|
|
Term
| What are the two prime fiduciary duties undertaken by the BOD? |
|
Definition
Duty of care
Duty of loyalty |
|
|
Term
| What is the duty of care? (This MUST ALWAYS be on your exam answer) |
|
Definition
| A director owe the corporation a duty of care. She must act in good faith and do what a prudent person would do with regard to her own business. (a.k.a. “the prudent person standard”) |
|
|
Term
| If you can prove the director breached her duty of care, can you conclude liability. |
|
Definition
No!
This is a 2-part analysis:
First must prove breach of fiduciary duty of care (did not act as a prudent person)
Then must prove causation – the breach was the cause of the harm |
|
|
Term
| What are two form of breach of duty of care? |
|
Definition
Nonfeasance (board or director did nothing when a prudent person would have taken some action)
Misfeasance (the board or director does something that hurts the corporation) |
|
|
Term
| When considering an action (or inaction?) that may rise to the level of breach of duty of care, is it enough that the action taken caused a loss |
|
Definition
No
The BOD may not be liable if its decision to act was 1) made in good faith, 2) was informed, 3) and had a rational basis. Look for deliberation and analysis
This is referred to as the “business judgment rule” |
|
|
Term
| Who has the prima facie burden when proving breach of duty of care? |
|
Definition
|
|
Term
| Who has the prima facie burden when proving breach of duty of loyalty? |
|
Definition
|
|
Term
| What is the duty of loyalty? (This MUST ALWAYS be on your exam answer) |
|
Definition
| A director owes the corporation a duty of loyalty. She must act in good faith and with a reasonable belief that what she does is in the best interest of the corporation. |
|
|
Term
| What’s the basis breach of duty of loyalty case? |
|
Definition
|
|
Term
| Can the defendant/director claim business judgment in a decision that breaches loyalty? |
|
Definition
No.
Since it is a conflict that favors the director, it’s presumed not to be sound business judgment. |
|
|
Term
| What is the term for any deal between the corporation and one of its directors (or another business |
|
Definition
An Interested Director Transaction.
This is potentially a conflict of interest which may violate the breach of duty of loyalty. |
|
|
Term
| When will an interested director transaction be set aside |
|
Definition
Interested director transaction are a breach of fiduciary duty of loyalty and will be set aside UNLESS the director shows 1) the deal was fair to the corporation when entered OR 2) her interest and the relevant facts were disclosed or known AND the deal was approved by either a) BOD - a majority of disinterested member or b) by a majority of the disinterested shares (not SH’s!).
MENTION THIS: Even if the director can qualify under deal approval, some courts may still require her to prove the deal was fair to the corp.
For purposes of quorum, can count the interested director(s) |
|
|
Term
| Is setting their own compensation a conflict of interest for the BOD? |
|
Definition
| No – as long as it is reasonable and done in good faith. Excessive compensation is deemed waste of corporation assets and violation of fiduciary duty of loyalty. |
|
|
Term
| Can a director be allowed to engage in a venture that essentially performs in the same business as the corporation? What would the remedy be if he did? |
|
Definition
No
Competing directly with one’s own company is a clear breach of duty of loyalty.
The profits from such competing venture could be held in a constructive trust for the benefit of the corp. |
|
|
Term
What is a “corporate opportunity”
What is the rule concerning “corporate opportunity” |
|
Definition
Something in the corporation’s business line OR
Which the corporation has an interest or expectancy
OR something found on company time or with company resources (example: acquiring property across the street from a development)
This is a potential issue regarding duty of loyalty.
A director cannot usurp a corporate opportunity. He may act on such opportunity only after he 1) tells the board and 2) waits for the board to reject the opportunity. |
|
|
Term
| What is the remedy for a director inappropriately taking advantage of a corporate opportunity? |
|
Definition
He must sell it to the corporation at his cost.
If he already profited, those profits must be disgorged and held in a constructive trust for the benefit of the corp. |
|
|
Term
| Under what condition can a corporation lend money to a director? |
|
Definition
| It may lend money to a director only if it’s reasonably expected to benefit the corporation. |
|
|
Term
| In what (3) ways can a director be absolved from liability for actions taken by the BOD |
|
Definition
Dissents to it
Was absent when the action was voted on
Acted in good faith reliance on information presented to her |
|
|
Term
| If she didn’t agree in the first place, how may a director be absolved from liability for actions taken by the BOD |
|
Definition
A director is presumed to concur with any board action unless her dissent or abstention is noted in writing in corporate records.
a) The writing is in the minutes or b) the writing was hand delivered to the presiding officer (?) at the meeting or c) written dissent to the corporation immediately after the meeting
Watch for “Olga soundly or vociferously objected at the meeting”
Naturally you cannot be absolved from liability if you voted for the action to take place |
|
|
Term
| May a director be absolved from liability for actions taken by the BOD if she wasn’t present at the meeting in which the action as voted on? |
|
Definition
| Yes – a director is not liable for stuff done at the meeting she missed. |
|
|
Term
| Can a director be absolved from liability for actions taken by the BOD if she claims she was misled? |
|
Definition
| Yes, she must prove good faith reliance on info (including financial info) presented by 1) an officer, 2) an employee, 3) committee which she was not a member, or 4) professional reasonably believed to be competent. |
|
|
Term
| If a person sued in his capacity as officer or director has incurred costs, attorneys’ fees, fines, can he seek indemnification from the corporation |
|
Definition
Not if he was found liable to the corporation.
Such indemnification is against public policy (and just doesn’t make sense) |
|
|
Term
| Is a corporation ever required to indemnify a director or officer? Permitted but not required? |
|
Definition
If the D/O was successful in defending suit on the merits (judgment of some sort without prejudice) the corporation must indemnify the person.
A corporation may choose to (or not) indemnify a person if all that resulted was he settled the suit. In such cases disinterested director or shares must conclude such person acted in good faith an with reasonable belief that her actions were in the company’s best interests (i.e. the duty of loyalty) |
|
|
Term
| Can a court order a corporation to indemnify a person sued in his capacity as officer? |
|
Definition
| Yes if the court feels such reimbursement is justified; however, if he is liable to the corporation such reimbursements are limited to costs or attorney’s fees |
|
|
Term
| Can the articles of corporation eliminate director liability to the corporation for damages? |
|
Definition
| It’s important to add this to a D&O liability question. The articles of incorporation eliminate director liability to the corporation for damages BUT NOT FOR: intentional misconduct, usurping corporate opportunities, unlawful distributions, or improper personal benefit. |
|
|
Term
| Can shareholders manage a close corporation? |
|
Definition
Generally, SHs do NOT manage a corporation – that’s the job of the BOD.
But SH’s can run the close corporation. The SH can vote to eliminate the BOD and run the corp. It can be accomplished either through 1) approval in the articles or the bylaws by ALL the SHs or 2) by UNANIMOUS written SH agreement and 3) the agreement is conspicuously noted on the front and back of the stock certificates |
|
|
Term
| What are the characteristics of close corporation |
|
Definition
| Look for: 1) Few shareholders (no “magic number”), and 2) stock is not publicly traded. Examiners will make it clear it’s a close corporation – usually suffices to say the stock was not traded on a national exchange. |
|
|
Term
| Can professionals (attorney, doctors) form a corporation? |
|
Definition
Yes, these parties can form a Professional Association (P.A.) or a Professional Corporation (P.C.) The purpose must be clearly indiated in the articles and the D, Os and SHs can ONLY be professionals. They may have limited liability but are still liable for their malpractice.
(Most other rules concerning corporations apply here – so be prepared to conduct all the other corporation analysis on a P.C. question) |
|
|
Term
| Under what circumstances might shareholders be held liable for act or debts of the corporation? |
|
Definition
Generally, SHs are not liable for the acts/debts of the corporation. ( Always start with that)
However, a SH might be personally liable for what the corporation did if the court “pierces the corporate veil.” |
|
|
Term
| On what bases may a court pierce a corporate veil ? |
|
Definition
| To pierce the corporate veil and hold shareholders personally liable 1) the action MUST involve a close corporation and the court have determined that 2) ABUSE: the SHs had abused the privilege of incorporating (basically have used the corp. as an alter ego to use the assets of the corporation as their own) and 3) SOMEONE BEING TREATED UNFAIRLY: fairness must require holding them liable |
|
|
Term
| What other remarks should be added to a PCV question? |
|
Definition
| Always say this: Courts may be more willing to PCV for a tort victim than a contract claimant. Also PCV will operate in related corporation situation (Forming a subsidiary corporation to escape an obligation or avoid a liability)/ |
|
|
Term
| What is the objective of a derivative suit (IOW what question should you be asking?) |
|
Definition
In a derivstive suit, a SH is suing to enforce the corporation’s claim – not his own personal claim
Ask: Could the corporation have brought suit but didn’t?). Example suing a director who usurped a corporate opportunity – because the corporation itself was owed a duty of loyalty. |
|
|
Term
| Who gets the money damages in a successful derivative suit? |
|
Definition
| Usually, th corporation. The SH/Π gets costs and attorney’s fees. |
|
|
Term
| What happens if the π loses in a derivative suit action? |
|
Definition
Bad stuff
Will definitely not receive costs and attorny’s fees
If it is determined his suit was unreasonable or in bad faith, he may end up paying the defendant’s cost and attorney’s fees |
|
|
Term
| What are the elements of a shareholder derivative suit |
|
Definition
Stock ownership at the time when the claim arose. Includes ownership by operation of law from one who owned it at the time (inheritance or divorce)
Adequate representation of the corporations’ interests
Have made a written demand on the corporation that they bring suit (Note this is not required if such a demand would be futile – i.e. if director(s) will end up being the defendants in the actual suit).
The corporation must be joined (as a ∆? Yes they filed to bring the claim) |
|
|
Term
| Can parties settle a derivative suit |
|
Definition
| Only with court approval and usually with notice to the other shareholders for their consent |
|
|
Term
| On what grounds can a corporation move to dismiss a derivative suit |
|
Definition
| If, upon an independent investigation (add that in some states the court will appoint an independent panel or make it’s own review) the corporation can show the suit is not in the corporations best interest (low chance f success for expense) |
|
|
Term
| How is it determined which shareholders will be entitled to vote on a matter |
|
Definition
| The “record shareholder” as of the “record date” has the right to vote |
|
|
Term
| C Corp sets its annual meeting on July 7 with a record date of June 6. Seller sells his C Corp stock to Buyer on June 25. Who is entitled to vote at the annual meeting ? |
|
Definition
|
|
Term
| If a corporation has acquired Treasury Stock before the record date, who is entitled to vote the stock? Previous owner or the corporation? |
|
Definition
| Neither – the stock carries no voting rights |
|
|
Term
| If S is a record shareholder on the record date – but dies before the meeting, can his executor vote the stock |
|
Definition
|
|
Term
|
Definition
A proxy is a 1) writing (now fax or e-mail is OK) 2) signed by record shareholder. 3) directed to the secretary of the corporation, 4) authorizing another to vote the shares.
A proxy is good for only 11 months |
|
|
Term
| Can shareholder proxy be irrevocable? |
|
Definition
The only way a proxy an be made irrevocable if when it has been “coupled with an interest” Elements:
The proxy must indicate that it’s irrevocable and
The proxy holder has some interest in the shares other than voting.
The classic example is that A gives an irrevocable proxy to B then sells the shares after the record date. A cannot revoke the proxy since now B owns the shares and has that interest in them |
|
|
Term
| Other than a proxy what two devices can SHs use to direct how their shares are to be voted |
|
Definition
Voting trusts
Voting agreements (“pooling agreements”) |
|
|
Term
| What is a voting trust? What are the required elements of a voting trust |
|
Definition
An arrangement where a number of shareholder agree to have ther shares voted in a similar manner (creates a voting block)
Votng trusts must:
Be a written trust which by its instrument controls how the shares will be voted
A copy must be given to the corporation
It must transfer legal title to the trust
SH’s retina ll other SH rights other than voting
No more than 10 years? |
|
|
Term
| What is a voting agreement. What elements are required. |
|
Definition
| Similar to a voting trust – an agreement tbetween a group of SH’s in which they agree to vote ina certain manner. The agreement must be in writing and signed by each party seeking to be bound by it. Unless it states differently, the voting agreement is specifically enforceable. |
|
|
Term
| What are the two types of SH meetings? |
|
Definition
The annual meeting: The major order of business is toe let directors. If an annual meetingof the corporation has nit been held in over 15 months, the SH can petition a court to compel one be held.
Special meetings: These can be called either by the board, the president, or the holders of at least 10% of the shares. Also look to any special rules in the bylaws. Meeting must be called for a particular purpose included in the notice |
|
|
Term
Is notice required for the annual SH meeting? Special SH meetings?
What must be contained within the notice?
Can notice be waived? |
|
Definition
Notice is required for any meeting (including the annual meeting).
Notice must be in writing (fax or e-mail is OK) no sooner than 10 days and no more than 60 days before the meeting.
Notice must include: 1) when 2) where and 3) why the meeting is being held. Business is limited to that included in the meeting notice (can not expand the scope).
Shareholders may waive notice expressly in writing – or by attending the meeting and not objecting for failure of notice. |
|
|
Term
| Where may the annual meeting be held? |
|
Definition
|
|
Term
| What are the consequences for not providing appropriate notice for a SH meeting? |
|
Definition
| Action at the meeting is void (unless notice was appropriately waived) |
|
|
Term
| How many shareholder must be present at an annual meeting to effect quorum? If there is quorum, but then people leave the meeting will quorum be lost? |
|
Definition
Trick question
Quorum is based on the number of shares NOT shareholders (Prof. Freer: The only one who cares how many shareholders are there is the caterer)
Instead, a quorum requires a majority of outstanding shares voting.
There is no danger of losing quorum if people leave (see how this differs from BOD meetings) |
|
|
Term
| For most items, what determines whether an action is approved by the SH |
|
Definition
| If the action is approved by a majority of shares actually voting. |
|
|
Term
How does cumulative voting occr?
When can cumulative voting be used? Why? |
|
Definition
Cumulative voting occurs by multiplying the number of directors to be elected by the number of shares you own. Rather than voting once (or not voting) for each director, you can vote all your chares for just one. Cumulative voting is used for electing directors only – it is intended to provide at least some power for small shareholders
In addition, cumulative voting MUST be reflected in the articles in order to be available |
|
|
Term
What is the more frequent means to restrict transferring shares in a corporation?
How do courts approach a challenge to a stock transfer restriction as a restraint on alienation? |
|
Definition
By using a Stock Transfers Restriction
Generally courts will uphold a stock transfer restriction as long as it does not cause an undue hardship to the SH. (Ex: right of first refusal is OK as long as the price offered by the corp isn’t unreasonable. |
|
|
Term
| What is required to make a stock transfer restriction valid? |
|
Definition
The restriction must be reasonable and not cause undue hardship to the transferor
It cannot be invoked on the transferee unless 1) it is conspicuously noted on the stock certificate OR the transferee had actual knowledge of the restriction |
|
|
Term
Can a SH demand access to inspect the books and records of the corporation
If so who can make the request and what is required? |
|
Definition
Yes
Any SH can demand access to inspect the books of the corp. The request must
Be in writing
Stating which documents are being requested
And the purpose for the inspection
The purpose for the inspection must be “proper” – meaning the documents requested are related to the reason you are asking to inspect (Example?) |
|
|
Term
| What remedies are available to a SH if a corp. refuses to comply with a proper request to inspect the books? |
|
Definition
| The SH may seek a court order and if successful, can recover costs and attorney’s fees. |
|
|
Term
| What are the three kinds of distribution made by a corporation |
|
Definition
Dividends (liquidated distributions)
Shareholder stock repurchase
Stock redemption (at price set in the articles) |
|
|
Term
| Who determines when a distribution is made? |
|
Definition
| The BOD at their discretion |
|
|
Term
| Can a shareholder compel the BOD to declare a distribution |
|
Definition
| Though it’s possible, it’s very tough to prevail on such an action |
|
|
Term
| Can corporations fund distributions from an earned surplus? |
|
Definition
| Yes – usually the source of funds for distributions. It consists of all earnings minus distribution previously paid. |
|
|
Term
| Can corporations fund distributions from sale of stock? |
|
Definition
Only partly.
When the company sells stock at par (or in the case of non-par, that consideration the BOD allocates as “par”), the proceeds are stated capital and cannot be used for distributions. Any proceeds that exceed par (or that consideration not considered par by the BOD) may be used for distribution provided you inform the SHs of that fact. |
|
|
Term
| What recent developments have been formulated with regad to when a corp. can or cannot make a distribution (put this in your answer) |
|
Definition
First, a corporation may not make a istribution is it is insolvent or rendering a distribution would make it insolvent.
This means it can’t pay it’s debts when they are due or it’s liabilities – including preferential liquidation rights – exceed its assets |
|
|
Term
| When are directors liable for “improper distributions” Shareholders? |
|
Definition
Directors are jointly and severally liable for improper distributions. Shareholders are personally liable if they knew the distribution was improper when they received it.
Don’t forget the rules that except liability for a director (absent, dissents, good faith reliance on information) |
|
|
Term
| What four corporate changes would be so fundamental that they would require BOD action and SH approval? |
|
Definition
Amendment of Article of Incorporation
Mergers
Transfer of all assets not in the ordinary course of business (Share Exchange)
Dissolution |
|
|
Term
| What measurements are required in order to effect a fundamental corporate change |
|
Definition
Requires:
Board of Director action
Approval of a majority of shares entitled to vote |
|
|
Term
What can a dissenting shareholder demand if she opposes the fundamental corporate change
What does this entail?
When is it NOT available to a dissenting SH |
|
Definition
The SH may demand a shareholder right of appraisal
It is the right of the SH to force the corporation to redeem her shares at FMV. This request can be triggered by
Mergers or consolidations
Transfer of all assets not in the ordinary course of business
Share Exchange
The right is not available if the stock is listed on a national stock exchange of the corporation has more than 2000 shareholders (WATCH NUMBERS!!! – they will sneak it in; generally a close corp) |
|
|
Term
| What does a SH have to do to perfect a shareholder right of appraisal |
|
Definition
Before the shareholder vote, she must file with the corporation written notice of objection and intent to demand payment
Vote against the change or abstain from voting
After the vote, within a time set by the corporation, make written demand to be bought out |
|
|
Term
| What is required in order to amend the articles of incorporation? |
|
Definition
Board of Director action
Approval of a majority of shares entitled to vote
File amended articles with the Secretary of State
Remember – this change is not normally available for shareholder right of appraisal |
|
|
Term
| What is required for a corporation to merge or consolidate? |
|
Definition
Board of direction action by both corporations
Notice to all shareholders
Approval of a majority of shares entitled to vote (both corporations)
No shareholder approval for a “short-form merger” – parent who owns 90% of the subsidiary. SH right of appraisal still available though
Successor liability |
|
|
Term
| The Bar will usually examine on transfer of all of the assets in the ordinary course of business, BUT what constitutes “substantial” transfer of the assets? |
|
Definition
| More than 75% of the assets. |
|
|
Term
| Can the buying company consider a transfer of assets from a transferee corporation to be a fundamental corporate change. |
|
Definition
|
|
Term
| What is required for the transferring corporation to transfer all/substantial assets? |
|
Definition
Board of direction action by both corporations
Notice to all shareholders (transferring corporation)
Approval of a majority of shares entitled to vote (transferring corporation)
SH right of appraisal still available though (transferring corp. only)
NO successor liability (unless the exchange agreement includes)
File articles of exchange with Sec’y of State |
|
|
Term
| What is required in order to (voluntarily) dissolve the corporation? |
|
Definition
Board of Director action
Approval of a majority of shares entitled to vote
File notice of the intent to dissolve with the Secretary of State
Remember – this change is not normally available for shareholder right of appraisal |
|
|
Term
| How is a corporation dissolved involuntarily? |
|
Definition
By court order – however, the court may simply order buying out the petitioner (close corps.)
A SH can petition because of:
Director abuse, waste of assets, misconduct;
Director deadlock that harms the corporation
SHs have failed – at two consecutive annual meetings – to fill a vacant BOD position
A creditor can petition when
There is an unsatisfied judgment OR
The corporation admits the debt in writing |
|
|
Term
| After dissolution occurs, what events takes place? |
|
Definition
Winding up of the corporation’s existence:
1. gathering all the assets
2. converting assets to cash
3. paying creditors
4. distributing remainder to SHs – pro-rata per share |
|
|
Term
| Can a preference be made to distributing remainder to SH’s of a dissolved corporation |
|
Definition
| Liquidating distributions are made on pro-rta basis according to shares. However the corporation may make distributions based on a “liquidation preference” which means those shares SH with such preference get paid first. These preferences need to be indicated in the articles. |
|
|
Term
| When corporate debt is secured by corporate assets, what is it referred to as? What is it isn’t secured? |
|
Definition
|
|
Term
| What is the primary aim of Rule 10b-(5) |
|
Definition
| Deceit. It is a federal law which prohibits fraud or misrepresentation (or nondisclosure) in connection in connection with the purchase or sale of any security |
|
|
Term
| What are the elements of a Rule 10b-5 violation? |
|
Definition
- There is an “instrumentality of interstate commerce”: look for telephone solicitation or simply a sale on a national exchange on the Bar
- The errant transaction is one of the following:
- Trading on material inside information when there is a duty to disclose. This comes from a relationship of trust and confidence with the SH of the corp use this language)
- Tipping (passing along material inside information for a wrongful purpose) Materiality: Means one reasonable investor would consider important in making an investment decision
|
|
|
Term
| Who are the possible plaintiffs in a Rule 10b-5 action? |
|
Definition
Private action for damages by a buyer or seller of securities. (e.g. simply holding the stock or refraining from buying or selling stock does not qualify) OR
The SEC |
|
|
Term
| Who are the possible defendant in a Rule 10b-5 action? |
|
Definition
A company that issues a misleading press release
Buyer or seller of securities who misrepresents material information
Buyer or seller of securities who sells or trades on material inside information – but only if there is duty to disclose again cite a relationship of trust and confidence with the SH of the corp
Tipper or tippee |
|
|
Term
| What are the elements of a tipper? Tippee? |
|
Definition
Tipper:
She passed along material information in breach of duty to the corp. (does not include negligence (though such is actionable). Must have intent to manipulate – recklessness)
She benefited (benefitting is pretty broad – enhancing reputation, fostering affection)
Tippee:
Traded on the tip (relied on material information passed along in breach of duty to the corp.)
Knew or should have known that the information was improperly passed |
|
|
Term
| What is prohibited under Section 16b? |
|
Definition
| This is federal law which provides for recovery by the corporation (so remember – this could be a subject for a derivative suit) of “profits” gained by certain insiders from buying or selling the corporation’s stock. It is based on the theory that such actions are bad for market confidence |
|
|
Term
| What are the element of a 16b cause of action |
|
Definition
It occurs in a “reporting” corporation:
a) listed on a national exchange OR
b) at least 500 SHs and $10million in assest
Includes any of these ∆s:
a) Directors
b) Officer
c) SH who owns at least 10% (BOTH when he bought or sold)
And he bought or sold during the “short-swing trading” period: We are looking for profits coming from a sale where the purchase was at a lower price. SO LOOK FOR WHEN THE PURCHASE OCCURRED – could be before or AFTER. To determine the profits compare the lowest common number of shares between the purchase and the sale. |
|
|
Term
| What are 5 characteristics of a corporation? |
|
Definition
1. Limited liability for owners, officers, and directors
2. Centralized management
3. Free transferability of ownership
Continuity of life
5. Taxed as an entity (i.e. no pass-thru taxation). S-Corps may choose |
|
|
Term
| In what three disctinct ways might a corporation be formed? |
|
Definition
1. De jure - essentially they adhere to all the requirements for formation of a corporation
2. De Facto Taxation - good faith compliance with most statutory requirements of formation and exercising privileges of corporation status
3. Estoppel: This is not formation, it's just an equitable remedy that prevents (estops)one from claiming lack of corporation status when they or another acted in reliance that there was |
|
|
Term
| List the different ways a director may violate his duty of loyalty |
|
Definition
1. Interested Director Transaction
2. Engaging in Competing Ventures
3. Usurping a Corporate Opportunity |
|
|
Term
| What 2 forms of securities can a corporation issue |
|
Definition
Debt securities
Equity securities (shares of stock) |
|
|
Term
| Might a promoter have a fiduciary duty to the corporation |
|
Definition
Yes
The promoter may need approval (initial board members or subscribers) before profiting from a sale of property for the benefit of the corporation. Also may be held liable for fraud |
|
|
Term
| Can shareholders be held liable if they undercapitalize at incorporation. |
|
Definition
| Possibly. The SH have an obligation to put at risk unencumbered capital reasonably adequate for its prospective liabilities. Insolvency, however, is not conclusive evidence of undercapitalization |
|
|
Term
| If it is determined that the SH's have "pierced the corporate veil" will all SH's be held personally liable? How is liability apportioned? |
|
Definition
Generally, only those SH's who were actively involved in the management or operation of the corp will be held liable (passive investors are OK).
Liabilities for obligations of the corporation is extended to the SH's in joint and several liability. |
|
|
