8. Questions Flashcards
X was interested in creating a company with his friends, Y and Z, to sell clothes. They wanted to issue their shares for sale. They included the name of the company and their possessed shares only in the articles of incorporation and filed it with the secretary of state. Has the company been formed?
NO de jure corporation
- RMBCA
- Articles of Incorporation did NOT include X, Y, Z + agent’s names and addresses, shares authorised to be issued (only outstanding shares)
X was interested in creating a company with his friends, Y and Z, to sell clothes. On 1 January, they drew up the articles of incorporation with the necessary information and filed it with the secretary of state three days later. When was the company formed?
4 January
- Date when Articles were filed with SoS
X was interested in creating a company with his friends, Y and Z. They agreed that the company be named SportDirect and be used to market sportswear. X then decided it would be a lucrative idea to market music artist shirts as well. One day, X sold some shirts of Bob Marley to a customer, C. C realised SportDirect specialised in selling sportswear and was unhappy with the shirt he purchased. Can action be pursued?
Yes (RMBCA)
- Shareholder (Y/Z) can sue Company (SportDirect) => Y/Z can enjoin SportDirect’s act => Valid (even though ultra vires)
- Company (SportDirect) can sue Director (X) => SportDirect can enjoin X’s act => Valid (even though ultra vires)
No (Common law)
- NOT lawful business purpose (selling music shirts instead of sports shirts) => Ultra vires (outside scope of business) => Void (SportDirect can NOT be sued)
X was interested in creating a company with his friends, Y and Z. They agreed that the company be named SportDirect and be used to market sportswear. They attended an organisational meeting to elect the directors and officers. The bylaws were later adopted but X wanted to change the laws so that the company must only sell football shirts. However, Y and Z wanted to sell all kinds of sport shirts. They also argued that the Articles prohibit exclusive sales. But X believes the bylaws were already changed according to his wishes and went ahead to inform customers they only sell football shirts. Who is correct?
Y + Z
- Bylaws were NOT amended (NO majority vote, only X voted)
- Articles take precedence over bylaws
X was interested in creating a company with his friends, Y and Z in State A. They agreed that the company be named SportDirect and be used to market sportswear. They were unsure of any relevant law to be complied with in the state. However, they were aware from a friend that an articles of incorporation was required so they filled in the necessary details and kept it safe. X then sold one of its football boots to a customer, C. However, the boot was badly designed and C injured himself. Who can C sue?
NOT X
- Protected by veil
NOT SportDirect
- NOT de jure corporation (Articles NOT filed w/ SoS)
- NOT de facto corporation under common law (NO existing statute)
- NOT by estoppel (C is tort victim)
X was interested in creating a company with his friends, Y and Z in State A. They agreed that the company be named SportDirect and be used to market sportswear. They filled in the Articles of Incorporation as required by State A’s law, but did not bother to file with the Secretary of State as they negligently assumed it was not required. X then sold one of its football boots to a customer, C. However, the boot was badly designed and C injured himself. Who can C sue?
NOT X
- Protected by veil
NOT SportDirect
- NOT de jure corporation (Articles NOT filed w/ SoS)
- NOT de facto corporation under common law (NO good faith attempt to comply with existing law in State A)
- NOT by estoppel (C is tort victim)
X was interested in creating a company with his friends, Y and Z in State A. They agreed that the company be named SportDirect and be used to market sportswear. They filled in the Articles of Incorporation as required by State A’s law. However, X did not bother to file with the Secretary of State although he knew it was required. X then sold one of its football boots to a customer, C. However, the boot was badly designed and C injured himself. Who can C sue?
X
- NO veil protection
- X knew SportDirect was NOT validly formed as de jure corporation (State A’s law)
- X is jointly and severally liable towards SportDirect’s obligations
NOT SportDirect
- NOT de jure corporation (Articles NOT filed w/ SoS) (State A’s law)
- NOT de facto corporation under common law (X knew corporation was NOT validly formed)
- NOT by estoppel (C is tort victim)
X was interested in creating a company with his friends, Y and Z in State A. They agreed that the company be named SportDirect and be used to market sportswear. They were unsure of any relevant law to be complied with in the state. However, they were aware from a friend that an articles of incorporation was required so they filled in the necessary details and kept it safe. X entered a contract on behalf of SD with a football team, Arsenal FC, to sell their shirts. However, SD failed to sell all the shirts and Arsenal FC lost profit. Who can Arsenal FC sue?
NOT X
- Protected by veil
SportDirect (by estoppel)
- NOT de jure corporation (Articles NOT filed w/ SoS) (RMBCA)
- NOT de facto corporation under common law (NO existing statute compliable with)
- By estoppel (Arsenal is contract victim + dealt with SD as though it existed) => SD is estopped from denying its existence (case by case basis)
X and Y decided to set up a company, named Pharma, to sell medicine. They hired Z to promote the company before they filed the Articles with the secretary of state. Z entered a contract with a retailer, Boots, to sell Pharma’s medicine. Both agreed that Z would not be liable for any problems related to Pharma. Boots prepared its posters advertising Pharma’s medicine. Customers complained that Pharma was not in fact incorporated. Who can Boots sue?
Z (promoter)
- NO novation (Z did NOT agree with Pharma, only Boots)
- Jointly + severally liable for Pharma’s obligations (before + after Pharma’s incorporation) (RMBCA)
NOT Pharma
- NO adoption (express/implied) of contract
X and Y decided to set up a company, named Pharma, to sell medicine. They hired Z to promote the company before they filed the Articles with the secretary of state. Z asked X whether he should enter a contract with a retailer, Boots, to sell Pharma’s medicine. X asked one of the company’s employees, E, on his thoughts. E agreed to the deal, although it would only benefit X and Y. X ultimately gave the green light. Boots then sold Pharma’s medicine to customers. Pharma was rewarded with $100,000, in which X and Y were paid equal amounts. However, the customers then complained that Pharma was not in fact incorporated. Who can Boots sue?
Z
- NO novation
- Jointly + severally liable for Pharma’s obligations (before + after Pharma’s incorporation) (RMBCA)
Pharma
- Express adoption: X (director) had knowledge of deal
- NO implied adoption: E (employee) did NOT receive any benefits from deal
- Pharma must reimburse some of its monies to Z
X and Y decided to set up a company, named Pharma, to sell medicine. One of the employees, Z, wants to buy some of the company’s shares over the course of next year. Pharma imposes a 5% commission fee for brokers, to which Z is willing to pay. Can Z purchase the shares?
NO stock subscription
- RMBCA
- Z wants to buy shares for long period (1 year)
- BUT broker commission fee included => NO stock subscription allowed
X and Y decided to set up a company, named Pharma, to sell medicine. Several of its employees have been purchasing its shares during the last few years. However, one of its employees, Z, wants to cancel the subscription, despite no mention of revocation options. Can Z still cancel?
NO revocation of stock subscription
- RMBCA
- Subscription grants NO revocation option
- NO unanimous vote by subscribers to revoke (only Z)
X, Y and Z decided to form a company named RubberCo, which specialised in producing rubber made products. They held an organisational meeting to elect themselves as directors. X was interested in expanding the company’s activities to producing stationery by engaging with a pencil manufacturer. X did not want to delay the transaction so he decided to confirm in writing his approval of the deal. X asked Y and Z to agree in writing as well. Y was on holiday so he called X to tell him he wants in. Z was not content with the idea. Can X enter the deal?
No
- Directors’ decision (NO meeting)
- Ds’ consent NOT in writing (Y consented orally)
- NOT unanimous Ds’ vote (only Y consented)
A, B, C, D and E decided to form a company named RubberCo, which specialised in producing rubber made products. They held an organisational meeting to elect themselves as directors. A was interested in expanding the company’s activities to producing stationery by engaging with a pencil manufacturer. A knew it was important to have a formal approval of the deal. Therefore, A asked B, C and D to attend a special meeting. A notified B and C two days before the meeting of the details of the meeting, in which B received the notice on that day but C received it a day later. A also called D who was on holiday a few days before the meeting. D did not want to attend the meeting. Only B and C attended the meeting. A and B agreed towards the deal. However, B suddenly had to leave the meeting. Can A still enter the deal?
NO
- Special meeting
- NO notice to ALL directors (A excluded E)
A, B, C, D and E decided to form a company named RubberCo, which specialised in producing rubber made products. They held an organisational meeting to elect themselves as directors. A was interested in expanding the company’s activities to producing stationery by engaging with a pencil manufacturer. A knew it was important to have a formal approval of the deal. Therefore, A asked everyone to attend a special meeting. A notified B and C two days before the meeting of the details of the meeting, in which B received the notice on that day but C received it a day later. A also called D and E who were on holiday a few days before the meeting. D and E did not want to attend the meeting. Only A, B and C attended the meeting. They all agreed towards the deal. Can A enter the deal?
No
- Special meeting
- NO 2 days’ advance notice to C (received it 1 day before meeting)
- A + B attended meeting => Less than 50% of Ds (2/5 directors) attended meeting => NO quorum
A, B, C, D and E decided to form a company named RubberCo, which specialised in producing rubber made products. They held an organisational meeting to elect themselves as directors. A was interested in expanding the company’s activities to producing stationery by engaging with a pencil manufacturer. A knew it was important to have a formal approval of the deal. Therefore, A asked everyone to attend a special meeting. A notified B and C two days before the meeting of the details of the meeting, who both received it on that day. A also called D and E who were on holiday a few days before the meeting. C and D did not want to attend the meeting. Only A and B attended the meeting, and E called into the meeting although he could not hear A and B talk. All three agreed towards the deal. Can A enter the deal?
No
- Special meeting
- E did NOT attend meeting (called in BUT could NOT be heard)
- A + B attended meeting => Less than 50% of Ds (2/5 directors) attended meeting => NO quorum
A, B, C, D and E decided to form a company named RubberCo, which specialised in producing rubber made products. They held an organisational meeting to elect themselves as directors. A was interested in expanding the company’s activities to producing stationery by engaging with a pencil manufacturer. A knew it was important to have a formal approval of the deal. Therefore, A asked everyone to attend a special meeting. A notified B and C two days before the meeting of the details of the meeting, who both received it on that day. A also called D and E who were on holiday a few days before the meeting. C and D did not want to attend the meeting. Only A and B attended the meeting, and E called into the meeting and was able to communicate with everyone. Only A and B agreed towards the deal. B suddenly left the meeting. Can A still enter the deal?
No
- Special meeting
- A + B + E attended meeting => At least 50% of Ds (3/5 directors) attended meeting => Quorum
- A + B voted in favour of decision => At least 50% of Ds present (2/3 directors) voted in favour of decision => Quorum
- B left meeting => Broke quorum
X is a director of company NetSky, a software engineering company. X entered a deal with a bank to provide a software development program. X knew that the bank had a low P/L the last financial year, but decided to enter the deal anyway. Y, the shareholder, discovered X’s deal and was not happy. Can Y sue X? Who holds the burden of proof?
X’s breach of duty of care
- Burden of proof => Y
NO business judgment rule applies
- X did act in NetSky’s best interests (deal for program good business for NS)
- X did NOT act in good faith (knowledge of Bank’s low P/L)
- X did NOT act as ordinary prudent person (should have investigated Bank’s financial status further)
NO good faith reliance applies
- X did NOT rely on any reports
X is a director of company NetSky, a software engineering company. X received reports about a bank interested in contracting with a software company to create a software development program. The reports were from X’s team members and third party accountants who X recently hired. X hired them specifically because they are related to X and X wanted to give them an opportunity following a recent business mistake that they made. X then entered the deal with the bank. Y, the shareholder, discovered X’s deal and was not happy. Can Y sue X? Who holds the burden of proof?
X’s breach of duty of care
- Burden of proof => Y
NO business judgment rule applies
- X did act in NetSky’s best interests (deal for program good business for NS)
- X did NOT act in good faith (knowledge of accountants’ incompetence)
- X did NOT act as ordinary prudent person (should not have relied on reports if X knew the accountants were incompetent)
NO good faith reliance applies
- X did NOT reasonably believe accountants to be competent (knowledge of their business mistake)
- Accountants are related to X
X, Y and Z are three of the ten directors of the company NetSky, a software engineering company. NetSky was growing fast at an early stage. X’s cousin from a bank rang X to ask him about creating a software development program for him. X contacted all the directors about the deal, mentioning that ‘a good business opportunity has come up’. Y, Z and another director agreed, but the others refused. Nonetheless, X, Y and Z then entered the deal with the bank in return for $1m. One of the shareholders discovered X’s deal and was not happy. Can the shareholder sue X? Who holds the burden of proof? What can the shareholder recover?
X’s breach of duty of loyalty
- X’s failure to avoid conflicting interests (X’s related family member (Cousin); X knew Cousin would influence X’s judgment)
- Burden of proof => X
NOT disclosure of material facts
- ‘Good business opportunity’ NOT material fact
- X, Y + Z are interested Ds => Their vote is NOT relevant => Majority vote of 7 Ds required (4/7)
- 1 director voted in favour of deal => NO majority vote
Maybe fair transaction at time of deal
- NOT necessary deal (NS in good position at time growing fast at early stage)
- Good consideration ($1m)
Remedies => SH
- Damages (resulting from possibly bad deal)
- Enjoin deal
- Set aside deal
X is a director of the company NetFlix, a video hosting channel. X received a call from a gaming company asking whether NetFlix would be interested in hosting games as well as videos. X knew the company was not doing so well recently and did not want to delay the deal by waiting for the other directors to consent. X then entered the deal in return for $1m. One of the shareholders discovered X’s deal and was not happy. Can the shareholder sue X? Who holds the burden of proof? What can the shareholder recover?
X’s breach of duty of loyalty
- X’s usurpation of corporate opportunity (X did NOT give NetFlix chance to act upon deal + deal was within X’s line of business as an online hosting platform, rather than X’s declining financial status)
- Burden of proof => X
Remedies => SH
- Recover profits from X
- Impose constructive trust on deal (X’s breach of fiduciary duty) => Force X to convey deal to NetFlix for $1m
X is a director of the company NetFlix, a video hosting channel. X was informed by one of his colleagues that one of its main market rivals, Amazon Prime wanted to enter a joint venture with NetFlix. X secretly held shares in Amazon Prime. X agreed to the deal and received 5% profit from the deal. One of the shareholders discovered X’s ownership in Amazon Prime and was not happy. Can the shareholder sue X? Who holds the burden of proof? What can the shareholder recover?
X’s breach of duty of loyalty
- X’s failure to avoid competing ventures (X derived benefit (5% profit) from competitor Amazon Prime)
- Burden of proof => X
Remedies => SH
- Enjoin deal
- Set aside deal
X is a director of a sports channel. X was furious that the company did not distribute extra money for this financial year. X then decided to enter a deal for the company with a poorly performing football team, which derived low profits for the channel. The company’s articles included exculpatory provisions. The shareholders were furious. Can the shareholder sue X? Who holds the burden of proof?
X’s breach of duty of care
- Burden of proof => Y
NO business judgment rule applies
- X did NOT act in channel’s best interests/good faith (X knew team was poorly performing; X wanted revenge on company for low dividend)
Exculpatory provisions do NOT apply
- NOT for intentionally inflicted harms => X is liable
X is a director of a sports channel. X discovered a lucrative deal but knew the channel was not performing well recently. X then decided to change the figures in the channel’s financial statements to show it was doing well, and entered the deal. The shareholders were furious when they found out. Can the shareholder sue X? Who holds the burden of proof?
X’s breach of duty of care
- Burden of proof => Y
NO business judgment rule applies
- X did NOT act in good faith (X fraudulently provided channel’s financial statements)
Exculpatory provisions do NOT apply
- NOT for intentional criminal violation (fraud) => X is liable
