CORPORATIONS RULES!

Question 1

Incorporation

Answer 1

Incorporation is process by which corporation is created. The incorporator may a person/entity who must submit & sign AOI & hold organizational meeting to adopt bylaws & elect directors if not named in the AOI.

Question 2

Articles of Incorporation

Answer 2

AOI must contain the name/address of corporation, incorporators & registered agent and max shares it may sell. If more than 1 class shares auth, then include number and attributes of each class. Name not deceptively similar.

Question 3

Default Rules

Answer 3

Unless otherwise provided in AOI, a corporation has the broad purpose of engaging in any lawful business.

Question 4

Narrow Purpose Clause & Ultra Vires Acts

Answer 4

An Ultra Vires act occurs when corporation acts/contracts outside its corporate purpose. Although legal/valid, officers/directors are personally liable for any UV losses they cause. SH or NC may seek injunction of it.

Question 5

De Jure Corporation

Answer 5

Exists when all requirements for obtaining charter were followed. Filing AOI is conclusive proof it was formed.

Question 6

De Facto Corporation

Answer 6

De facto if made good faith attempt to comply/colorful compliance with formation & one acted on C behalf.

Question 7

Corporation by Estoppel

Answer 7

One who deals with a business as if it were a corporation may be estopped from later arguing it’s not a C.

Question 8

Limitations of De Facto & Estoppel

Answer 8

Both protect SH against K claims only, not tort b/c creditor could protect itself by personal guarantee.

Question 9

Bylaws & Amending Bylaws

Answer 9

Bylaws are the internal governance of the C (duties, meeting times). Initial bylaws are adopted by directors. Directors or SH may amend bylaws, but a SH bylaw may only be amended by SHs unless AOI or the SH bylaw itself authorizes directors to amend it. If AOI & bylaws conflict, AOI controls.

Question 10

Pre-Incorporation Contracts – Promoter & Liability on Corporation

Answer 10

A promoter is a person acting on behalf of C before formation. Corporation not liable for promoter unless it adopts K as its own. Expressly if board passes resolution to adopt; implied if C knowingly accepts benefit of K. However, even if C does adopt, promoter still personally liable unless novation occurs.

Question 11

Foreign Corporations

Answer 11

One not organized in NC; if transacting business in NC, it must qualify to do so. Transacting business means engaging in intrastate transactions on regular basis. To qualify, C must get Certificate of Authority from SOS.

Question 12

Issuance of Stock

Answer 12

Stock is Issued when a Corporation sells its own shares.

Question 13

Issued Shares v. Authorized Shares

Answer 13

Issued shares are the number of shares a C actually sells. Authorized shares are the total number they can sell.

Question 14

Outstanding Shares

Answer 14

Shares outstanding are issued shares that the Corporation has NOT Reacquired.

Question 15

Subscription

Answer 15

A signed offer to buy stock from Corporation. If executed before incorporation, it is irrevocable for 6 months. If executed after, revocable until board accepts. C may sue subscriber or sell the stock to another.

Question 16

Consideration

Answer 16

C’s consideration may be anything, even past consideration; even a promissory note in exchange for shares.

Question 17

Par Value

Answer 17

The minimum issuance price of a C’s shares; however, in NC, C need not state par value in its AOI.

Question 18

Paying for Par Value Stock with Property

Answer 18

Property must be worth min par value. However, board need only determine that consideration is adequate; it need not assign a dollar value. Absent fraud, their decision is conclusive.

Question 19

Watered Stock Liability

Answer 19

If directors accept property < minimum par value of shares issued, the C cannot recover the difference in value (water) from Directors or Buyer if they acted in good faith. If buyer is liable, purchasers too unless he was BFP.

Question 20

Preemptive Rights

Answer 20

If AOI permit preemptive rights, existing SH may maintain his ownership % by buying same % of new stock when issued; but he must pay CASH, not property.

Question 21

Directors & Officers

Answer 21

Directors: (1) 18, (2) elected by SH at annual meeting, (3) removed by SH with/out cause unless AOI otherwise.

Question 22

Director Vacancy

Answer 22

Unless in AOI, SH or Director may fill a vacancy; HOWEVER, if a director whose seat is vacant was elected by a Class of Shares, only the other directors elected by that class or SH of, may fill.

Question 23

Quorum at Director Meetings

Answer 23

By default, quorum is a majority of all directors on board. Bylaws/AOI may require a greater number. A lesser number may be permitted, but never below 1/3, and only by AOI or a SH Bylaw.

Question 24

Director Meetings

Answer 24

Directors may only act at director meetings unless all directors consent in writing to an action w/o meeting.

Question 25

Notice of Director Meetings

Answer 25

Unless otherwise in Bylaws, only special meetings require notice of at least 5 days before. Any 2 D’s can call.

Question 26

Voting at Director Meetings

Answer 26

To pass resolution, majority of the quorum must vote for it unless AOI/bylaw require > number; NEVER less.

Question 27

Voting by Proxy

Answer 27

Voting agreements among Directors are void as against Public Policy; cannot vote by proxy.

Question 28

Role of Directors

Answer 28

They manage C, set policy, supervise, declare dividends, & recommend big changes. May delegate duties to committee, but committee cannot amend or adopt AOI/bylaws, authorize distributions, or fill vacancies.

Question 29

Director Duty of Care

Answer 29

Act in good faith with care ordinarily prudent person would exercise, & in best interests of C. If director’s act causes loss to the C, he may be liable only for direct/proximate losses suffered from the breach. However, BJR establishes presumption that decisions are reasonable, informed, & reached in good faith (See doctrine of waste)

Question 30

Director Duty of Loyalty

Answer 30

Directors must serve C interests over their self interest. If a Director enters into a conflict of interest transaction, presumption that loyalty breached. Set aside UNLESS (1) director shows it was fair to C, or (2) ratified by a majority of ALL disinterested directors or shares (not just Quorum) after full disclosure. Safe Harbors. A director is interested if he or family member stands to profit from it.

Question 31

Director Duty of Loyalty – Competing Venture/Corporate Opportunity Doctrine

Answer 31

The duty of loyalty is implicated if a Director engages in direct competition with the C; he is a fiduciary. Corporate Opportunity Doctrine declares that director cannot usurp D opportunity w/o making full disclosure & getting board approval. If he does usurp, C can get opportunity at director’s cost OR get his profit if he sold it.

Question 32

Loans to Directors

Answer 32

Permitted if approved by majority of all outstanding shares OR board determines that loans will benefit the C.

Question 33

Limits on Director Liability for Breach of Fiduciary Duty

Answer 33

A Dissenting Director whose vote is recorded in the minutes is NOT liable. Absent director NOT liable either. Directors not liable if relied, in good faith, on opinion or info provided by officers, employee, or professionals.

Question 34

Limiting Director Liability in the AOI

Answer 34

The AOI may shield Directors from personal liability for breach of the Duty of Care only if they acted in the Corporation’s best interests AND received no improper personal benefit. Does NOT apply to Duty of Loyalty.

Question 35

Indemnification of Directors and Officers

Answer 35

MUST indemnify director/officer if completely successful in the case, on merits or otherwise (SOL). Indemnification is prohibited ONLY IF held liable to the C or held to have received improper personal benefit. Otherwise, the C may indemnify D/O for anything else: unless really bad conduct, C permitted to indemnify.

Question 36

Officers

Answer 36

Same fiduciary duties as directors. They are corporate agents. NC doesn’t give inherent authority to officers. Officers are selected and removed by the directors.

Question 37

Sarbanes – Oxley Act

Answer 37

CEO & CFO must certify that reports filed w/ SEC fairly represent the C’s financial position.

Question 38

Shareholder Management

Answer 38

The AOI of a NON-PUBLIC C may provide for shareholder management; if so, they have fiduciary duties.

Question 39

Piercing the Corporate Veil – Alter Ego Liability

Answer 39

Where a C is the alter ego of an individual, its separate identity may be disregarded and pierced to avoid some fundamental unfairness. Must result in some injustice so equity requires SH to respond for damage he caused.

Question 40

Piercing the Corporate Veil – Alter Ego Parent or Subsidiary Company

Answer 40

Under the Mere Instrumentality Test, P must show that D (1) had complete dominion of the C, (2) misused his position to do unjust act, & (3) proximate cause between misuse of D’s control & P’s injury.

Question 41

Piercing the Corporate Veil – Gross Undercapitalization

Answer 41

SH’s are personally liable for corporate obligations if they fail to provide adequate capitalization for the C. For a closely-held or 1 person corporation, adequate capitalization is a question of fact for which there is no test.

Question 42

Shareholder Derivative Suit

Answer 42

To bring a derivative suit, P (1) must have standing, & (2) must make a demand. P has standing if he owned shares in the C when the claim arose or acquired them by operation of law (inherit/divorce). Demand requires that P make a demand on board that the C bring suit & wait 90 days before filing it himself. C is joined as a nominal defendant, but gets the recovery. P gets attorney fees/expenses for benefit conferred on C by winning.

Question 43

Dismissal of Derivative Suit

Answer 43

Upon demand, if disinterested directors or a special litigation committee find, in good faith after reasonable inquiry, that suit not in C best interest, court will dismiss. P has burden of showing not made in good faith or reasonable inquiry not conducted. Judge can make P pay D’s expenses if suit brought w/o reasonable cause.

Question 44

Derivative Suits with Public Corporations

Answer 44

Plaintiff must have owned stock for at least 1 year. Suit must be brought w/in 2 years. P may have to post bond.

Question 45

Shareholder Voting – Who Votes?

Answer 45

SHs entitled to vote are the record owner on record date. Record Date is fixed by directors or bylaws, but record date cannot be set > 70 days before meeting. If no date, it’s close of business on day before 1st notice to SH. If shareholder dies, then his Executor may vote the shares.

Question 46

Proxy Voting

Answer 46

Record owner may appoint another (proxy) to vote his by sending C a signed writing authorizing it. Proxy is good for 11 months unless stated; merely stating irrevocable not enough, must be coupled w/ an interest.

Question 47

Voting Trust

Answer 47

Instrument giving trustee irrevocable right to vote shares. Must have (1) written trust doc, (2) copy sent to C, & (3) which transfers legal title to trustee in exchange for trust certificates. 10 Year Limit, but can be extended.

Question 48

Voting Agreement

Answer 48

SHs can have voting agreements if in writing & signed. 10 year limit, but can be extended. Transferee of shares is bound if conspicuously noted on shares or he knew about it when acquired. Specific performance permitted.

Question 49

Shareholders Vote without a Meeting

Answer 49

SHs may vote without a meeting with unanimous consent. If AOI permits, SHs of a non-public C may act w/o a meeting if consent of min number of shares required to act where shares entitled to vote were present & voting. (C is a Non-Public C with 1000 shares entitled to vote. AOI permit SHs to act w/o a meeting with less than unanimous consent. Still need 501 shares, a majority. Cannot allow less than majority).

Question 50

Annual Meeting

Answer 50

If no annual meeting is held for 15 months, a court may order a meeting upon application of any SH.

Question 51

Special Meeting

Answer 51

May be called by board or by anyone authorized to in AOI or Bylaws. In NON-PUBLIC Corporations, a special meeting may also be called by 10% of shares entitled to be cast on any issue to be considered at the meeting.

Question 52

Notice of Meetings

Answer 52

SHs must receive written notice of all meetings between 10 & 60 days before. Include date, time, & place of special meeting, it must also state the purpose & can only act on what’s specified. Meeting void if improper notice UNLESS defect waived in writing OR by attending it w/o objecting to it being held.

Question 53

Shareholder Quorum

Answer 53

SH quorum requires majority of the votes entitled to be cast to be present in person or proxy. However, AOI or SH adopted Bylaw can increase or lower quorum requirements AND there is NO MINIMUM.

Question 54

Shareholder Voting other than for Electing Directors

Answer 54

Matter is approved if number of votes in favor of it exceeds the number against it unless AOI or a Shareholder adopted By-law provides otherwise.

Question 55

Shareholder Voting to Elect Directors

Answer 55

Directors are elected by plurality; the top vote-getters are elected unless the AOI or SH agreement otherwise.

Question 56

Straight Voting to Elect Directors

Answer 56

A shareholder may vote the number of shares he owns for as many persons as there are directors to be elected. (1000 shares of Corp stock. 9 directors are to be elected. He can cast 1000 for each director).

Question 57

Cumulative Voting to Elect Directors

Answer 57

Cumulative voting allows SHs to multiply the number of their shares owned by the number of directors to be elected, and the SH can cast all the votes for one person or divide them up how he wishes. Must be in AOI only.

Question 58

Stock Transfer Restrictions

Answer 58

Restriction must be reasonable. Enforceable against transferee w/ knowledge or notice of it. Strictly construed!

Question 59

Inspection Rights for Qualified Shareholders

Answer 59

Qualified SH has absolute right to inspect AOI/Bylaws, minutes of SH meetings, & list of directors & officers. To be qualified, a SH must have owned shares for at least 6 months OR own at least 5% of any class of the corporation’s shares. AOI or Bylaws Cannot restrict inspection rights. A qualified SH has a limited right to inspect other records; that is, a proper purpose related to being a SH (Yes to talk to other SH’s about waste; No to get list of potential clients). SH’s in Public have NO right to accounting if adversely affect or give inside info.

Question 60

Distributions are Subject to Special Tests to Protect Creditors

Answer 60

Distributions include (1) dividends, (2) a repurchase, or (3) a redemption. Dividend is payment from C to SH. Timing & amount determined by board & court will not compel dividend absent abuse of discretion. C w/ < 25 SH may be compelled to declare dividend of 1/3 net profits on demand of holders of 20% of any class of shares.

Question 61

Dividends & Preferred Shareholders

Answer 61

Preferred means pay first; common SHs can get larger dividend since it means pay first, not pay more. (Board of Corp decides to distributed dividends totaling $400,000. Outstanding stock is 100,000 shares of common stock & 20,000 shares of $2 Preferred Stock = Preferred SHs get a $2.00/share dividend off the top: $40,000 (20,000 X $2.00). Then common SHs split the balance which is $360,000/100,000 shares = $3.60/ share).

Question 62

Dividends & Participating Shareholders

Answer 62

Participating means pay again. If the preferred shares were participating, those SH’s would get their $2 per share dividend preference, and then share in the distribution of the $360,000 balance. Preferred get $40k off top.

Question 63

Dividends & Cumulative Shareholders

Answer 63

Cumulative means carries forward. If C did not pay last year, the $2 dividend would carry forward to this year.

Question 64

Tests in Allowing Dividends

Answer 64

Solvency test declares that, after distribution, C must be able to pay debts as they become due in ordinary course of business. The balance sheet test declares that, after distribution, C’s assets must exceed its liabilities.

Question 65

Liability for Unlawful Distributions

Answer 65

Directors personally liable if did not use due care in authorizing unlawful distribution, unless protected by BJR. Director may seek reimbursement for the amount the SH accepted knowing distribution was unlawful.

Question 66

Appraisal Rights – NON-PUBLIC Corporations ONLY

Answer 66

SH may have right to compel C to buy back his shares for their FMV. SH must perfect his appraisal rights by (1) sending written notice to board before the vote, (2) not vote for the change, & (3) make a written demand for payment after the vote too. Court may appoint appraiser to determine Fair Value.

Question 67

Merger or Share Exchange

Answer 67

A merger or share exchange must be approved by an ABSOLUTE MAJORITY of BOTH Corporations’ shares. Absolute majority means a majority of all shares entitled to vote, not just those represented at the meeting. No SH approval required if subsidiary is merged into parent that owns 90% of it (Short Form Merger).
Appraisal Rights are only given to those SHs who were entitled to vote on the merger or share exchange. In a Short Form Merger, only SHs of subsidiary have appraisal rights. In Share Exchange, only SH of target C have.

Question 68

Disposition of Most Assets Outside Ordinary Course of Business

Answer 68

Must be approved by absolute majority of selling C shares. Appraisal for SH’s of selling C entitled to vote on it.

Question 69

Voluntary Dissolution

Answer 69

Must be approved by Absolute Majority of Shares & C must file Articles of Dissolution. Articles of dissolution can be revoke w/in 120 days. In Winding Up, pay creditors, then distribution preferences, then common shares.

Question 70

Involuntary Dissolution

Answer 70

May be dissolved involuntarily at court’s discretion, on the petition of (1) attorney general, (2) unsatisfied judgment creditor, or (3) SH who shows deadlock, waste, or it is reasonably necessary to protect his rights.

Question 71

Suspension of Charter for Unpaid Taxes

Answer 71

Contracts & acts taken while Charter suspended are invalid. Officer/director/principal SH liable if knew of susp.

Question 72

Amendment of the Articles of Incorporation

Answer 72

AOI may be amended by a majority of shares represented at meeting & filed. If the amend has adverse effect on particular class of SH, must be separately approved by absolute majority of class, even if they don’t have voting rights. SH have appraisal rights only if amendment involves reverse stock split or makes C into a non-profit.

Question 73

Securities Fraud

Answer 73

NCGS 78A-8 closely resembles Rule 10b-5. NC statute not preempted as to (1) penny stock transactions, (2) intrastate offerings, & (3) fraud actions against brokers. Plaintiff must show D made a material misstatement or omission with scienter, on which the plaintiff relied upon, in connection with the purchase or sale of a security which caused damages. Plaintiff must be a buyer or seller of securities to have standing. SOL: 2 years in NC.