Chapter 22 - Corporations Flashcards
(100 cards)
1
Q
What is a Promoter?
A
Someone who organizes a corporation
2
Q
What is a Novation?
A
A new contract (created with the corporation alone)
3
Q
What is the liability of a promoter?
A
The promoter is personally liable for any contract signed as the corporation before the formation of the corporation.
4
Q
How can a corporation be liable for a contract signed before its formation?
A
The corporation is not liable unless it adopts the contract after incorporation. At this point both the corporation and the promoter are liable for the contract.
5
Q
How can a promoter end his liability for a contact?
A
After a corporation adopts a contract, the other party agrees to a novation.
6
Q
What is adoption?
A
Means either that the board of directors approves the contract or the corporation accepts the benefits under the contract. The business is then liable under the contract as well.
7
Q
What are the mechanics of incorporation?
A
- Download form
- Complete form
- mail or fax it to the Secretary of State in your state.
8
Q
What does the corporate charter define?
A
The corporation, including everything from the company’s name to the number of shares it will issue.
9
Q
What are the different terms for a corporate charter?
A
- Articles of Incorporation
- Articles of Organization
- Others say certificate instead of articles.
10
Q
Under what law does a company incorporate?
A
There is no federal corporation code, so a company can only incorporate under state law.
11
Q
What influences the decision of where a company incorporates?
A
- Their home state
- States which have favorable laws for corporations
- State they do the most business in.
They don’t have to incorporate in a state they do business in so.
12
Q
What came about to encourage similarity among state corporation statutes.
A
The American Bar Association drafted the Model Business Corporation Act as a guide. (Delaware doesn’t use it)
13
Q
Why is Delaware such in an important state when it comes to business organization laws?
A
It has a disproportionate influence on corporate law. More than half of all public companies have incorporated their, including 60% of Fortune 500 companies.
14
Q
What is a domestic corporation?
A
What a company is called in the state where it incorporates
15
Q
What is a foreign corporation?
A
What a company is called outside of the state it incorporates in.
16
Q
Where must corporations pay filing fees and franchise taxes?
A
- Their state of incorporation
- Any state in which they do business.
17
Q
What might a corporation do to avoid paying multiple state filing fees and franchise taxes?
A
A business that will be operating primarily in one state would probably select that state for incorporation rather than Delaware.
18
Q
What are the advantages of incorporating in Delaware that may lead a company doing business in multiple states to incorporate there? 3
A
- Laws that favor management -For example, if the shareholders want to take a vote in writing instead of holding a meeting, many other states require the vote to be unanimous; Delaware requires only a majority to agree.
- An efficient court system - Delaware has a special court (called “Chancery Court”) that hears nothing but business cases and has judges that are experts in corporate law.
- An established body of precedent - Because so many businesses incorporate in this state, its court hear a vast number of corporate cases, creating a large body of precedent. This precedent makes the outcome of litigation more predictable.
19
Q
What are the steps in the incorporation process?
A
- Deciding where to incorporate
- The Charter
20
Q
What is a corporate charter’s required provisions? 5
A
- Name of corporation
- Address and Registered Agent
- Incorporator
- Purpose - Can be a broad statement, such as “to conduct lawful business”
- Stock
21
Q
What is an Incorporator?
A
Person who signs the charter and delivers it to the Secretary of State for filing (perhaps the lawyer or the promoter)
22
Q
What must be laid out about stock in the corporate charter?
A
-Whether the stock is:
-Authorized and unissued
-Authorized and issued or
outstanding
-Treasury stock (been issued,
then bought back by the
company
-Par value - Minimum Issue Price (Doesn’t relate to market value, usually some nominal figure or even no par value for stock)
-Classes and series (And quantities of each):
-Owners of preferred stock
have preference on
dividends and liquidation
-Common stock is last in line
for any corporate payouts,
including dividends and
liquidation
23
Q
What two requirements does the Model Act in selection a corporate name?
A
1st - All corporations must use one of the following words in their name:
-corporation
-incorporated
-company
-limited
(Delaware accepts
association or institute)
2nd - (Also a Delaware law) a new corporate name must be different from that of any corporation, limited liability company, or limited partnership that already exists in that state.
(names can be too similar if they share a last name)
24
Q
What is the address requirement in a corporate charter? Why?
A
- Company must have an official address in the state it is incorporated
- so that the Secretary of State knows where to contract it and so anyone who wants to sue the corporation can serve the complaint in state
25
What might a company have in place of in office in their state of incorporation? Why?
- A registered agent
| - To serve as the company's official presence in the state.
26
What discourages a company from issuing an unnecessarily large number of shares in the corporate charter?
The more shares they issue, the higher the filing fee.
27
How does a company add authorized shares after it has already incorporated?
Amend its charter and paying the additional fee.
28
Under the Model Act, what is its requirement regarding directors? What are the two exceptions?
-Have at least one director
Exceptions:
-All the shareholders sign an agreement that eliminates the board, or
-The corporation has 50 or fewer shareholders.
29
How might a corporation elect directors?
- The shareholders may hold a meeting, or
| - In the more typical case for a small company, they elect directors by written consent.
30
What is a Minute Book?
A book that contains the written consents and a record of a firm's official meetings. It is the official record of the corporation.
31
What are Bylaws? What might housekeeping details might they lay out? 5
A document that specifies the organizational rules of a corporation such as:
- the date of the annual meeting
- the required number of directors.
- define what a quorum is
- give titles to officers
- establish the fiscal year of the corporation
32
What is a Quorum?
The percentage of a stock that must be represented for a meeting to count by shareholders in attendance, either in person or by proxy
33
What does it mean to Pierce the Corporate Veil?
A court holds shareholders personally liable for the debts of the corporation.
34
What is Duty of Loyalty?
The obligation of a manager to act without a conflict of interest.
35
What is Duty of Care?
The requirement that a manager act with care and in the best interests of a corporation.
- With the care that an ordinary prudent person would take in a similar situation, and
- In a manner they reasonably believe to be in the best interests of the corporation.
36
What is Plurality Voting?
To be elected, a candidate only needs to receive more votes then her opponent, not a majority of the votes cast.
37
Who do the directors elect?
They elect the officers of the corporation. They can use a consent form if they wish. The Model Act requires a corporation to have whatever officers are described in the bylaws. The same person can hold more than one office.
38
What are the two general ways a corporation dies?
- Voluntarily - the shareholders elect to terminate the corporation)
- Forced (by court order)
39
Generally, what are the fours circumstances in which a court will pierce the corporate veil?
- Failure to observe formalities - If an organization does not act like a corporation, it will not be treated like one.
- Commingling of assets - Using corporate funds to pay personal debts, etc.)
- Inadequate capitalization - the corporation should obtain insurance against liability for torts
- Fraud - Injured party may recover from the guilty party, even if the action was the corporation's)
40
How should officers sign all corporate documents? What does that look like?
With corporate titles, not as an individual
O'Connor Investments, Inc.
By: Leo O'Connor
Leo O'Connor, President
41
What is the three steps in the process of terminating a corporation?
- Vote - The directors recommend to the shareholders that the corporation be dissolved, and a majority of the shareholders agree.
- Filing - The corporation files "Articles of Dissolution" with the Secretary of State.
- Winding up - The officers of the corporation pay its debts and distribute the remaining property to shareholders. When the winding up is complete, the corporation ceases to exist.
42
In a corporation, what does the term manager include?
Directors and officers.
43
What kind of duty does a manager have and to who or what?
They have fiduciary duty to act in the best interests of the corporations shareholders. That means maximize shareholder value.
44
What are the wants of the managers, shareholders, and stakeholders that cause inherent conflict?
Managers - Want, first to keep their jobs and second, to build a strong company
Shareholders - Want the price of a stock to increase
Stakeholders - Want he business to grow and continue to use the stakeholder's services.
45
What is the Business Judgement Rule?
Under the business judgement rule, the courts allow managers great leeway in carrying out their fiduciary duty to act in the best interests of their stockholders.
46
If a manager has complied with the business judgement rule, what does it protect?
- Themselves - The court will not holder them personally liable for any harm her decision has caused the company
- Her decision - the court will not rescind her decision.
47
What must a manager prove if they have violated the business judgement rule?
They have the burden of proof to show that their decision was entirely fair to the shareholders.
48
What happens if a manager violates the business judgement rule and fails to provide what she must under the burden of proof?
- She may be held personally liable
| - Her decision may be rescinded.
49
What must a manager do to be protected by the business judgement rule?
Act in good faith through duty of loyalty and the duty of care.
50
What does a manager's duty of loyalty prohibit?
Making a decision that benefits themselves at the expense of the corporation.
51
What is Self-Dealing?
Means that a manager makes a decision benefiting either himself or another company with which he has a relationship.
52
What no longer applies when a manager engages in self dealing?
The business judgement rule. It doesn't mean that the manager is automatically liable to the corporation or that his decision is automatically void. All it means is that the court will no longer presume that the transaction was acceptable.
53
In what three situations is a self-dealing transaction valid?
- The disinterested members of the board of directors approve the transaction
- The disinterested shareholders approve it
- The transaction was fair to the corporation.
54
What does disinterested mean in the terms disinterested directors and disinterested shareholders?
It means they do not benefit from a transaction
55
When are managers in violation of the Corporate Opportunity doctrine?
If they compete against the corporation without consent.
56
What does the duty of care need in order to be met? 3
- The decision must be legal
- It must have a rational business purpose, and
- The manager must have made an informed decision.
57
What must be true for a manager not to be held personally liable under the business judgement rule even if they have violated the duty of care?
The decision they made was entirely fair to the company.
58
Who has the right to manage the corporate business? Who does not?
Directors have the right to manage the corporate business
| Shareholders do not have the right to manage the corporate business.
59
Who are Inside Directors?
Officers in the corporation, typically control the company's board
60
Who are Outside Directors?
Also known as Independent Directors - Do not work for the company and typically have less control.
61
What are the shareholders rights to manage a corporation?
They have neither the right nor the obligation to manage the day-to-day business of the enterprise.
62
What is a shareholder's right to information?
Under the Model Act, shareholders acting in good faith and with a proper purpose have the right to inspect and copy the corporation's minute book, accounting records, and shareholder lists.
63
What is considered a proper purpose in the context of a shareholders right to information?
One that aids the shareholder in managing and protecting her investment.
64
How does a corporation allow shareholders a right to vote?
By issuing at least one class of stock with voting rights.
65
Although not every state requires a corporation to have an annual shareholder meeting, who does?
The New York Stock Exchange
66
What is the alternative to an annual shareholder meeting for a company that is not publicly traded
Use written consents from their shareholders.
67
What does a proxy refer to?
- A person to vote in a shareholders stead if the shareholder does not with to attend the shareholder's meeting
- The card the shareholder signs to appoint the substitute voter.
Companies are not required to solicit proxies.
68
Why might a company solicit proxies even if they are not required to?
To obtain a quorum or the meeting will be invalid.
69
What is a proxy statement?
Provides information on everything from management compensation to a list of directors who miss too many meetings.
70
What is an annual report?
A companies detailed financial data
71
What do proxy advisers do?
Advise institutional investors on how to vote their shares.
One of these advisers, Institutional Shareholder Services, can alone affect up to 20 to 40 percent of the vote at a company
72
Due to pressure from shareholder activists, two thirds of the S&P 500 companies now refuse to seat a director if what happens?
They get fewer than half of the shares that vote to tick off their name on the ballot.
73
What does the SEC approved proxy access rule require?
Companies to include on their ballot that is provided with the proxy material the names of the board nominees selected by large shareholders (those that have owned at least 3 percent of the company for three years).
Courts invalidated this rule and now a weakened more complicated version exists.
74
What is the problem with officers and directors and their compensation?
They have little fear of being voted out by shareholders, so when they set their own compensation (unless the charter or bylaws provide otherwise) the result can unfairly favor the CEO over the shareholders whose money is being used to pay her.
75
Who sets executive compensation?
Directors, not shareholders.
76
What is compensation's relationship to benchmarking?
Comensation is often linked to overall industry or stock market performance, which is defined in a way to favor executives. Their compensation is rarely closely linked to the individual's performance.
77
What does a company's success have to do with compensation
Often times the companies success is often attributed to the CEO and other top executives, regardless of who or what really allowed the company to succeed.
78
What does compensation have to do with being above average?
Most directors think their executives are above average and reward them as such. Each time one company raises its pay so that its executive will be above average, the industry wide average rises and other companies feel they must respond be increasing their pay too.
79
What fundamental changes must a corporation seek shareholder approval for before undergoing?
- Mergers
- Sales of Assets
- Dissolution
- Amendments to the Charter
- Amendments to the Bylaws.
80
What has the federal government begun to do to respond to the abuses of excessive executive compensation?
- Proxy Rules - Proxy statements must now include a summary table setting out the full amount of the compensation for the five highest-earning executives.
- Sarbandes-Oxley Act (described in other slide)
- Dodd-Frank - requires so-called say-on-pay. At least once every three years, companies must take a non-binding shareholder vote on executive compensation. In addition, companies must disclose the CEO's compensation and the median compensation of all other company employees plus the ratio of these two numbers.
81
What does the Sarbanes-Oxley Act do? 9
- Requires all publicly trades companies to adopt effective financial controls
- CEOs and CFOs must personally certify their company's financial statements
- A board's audit committee must be independent
- No personal loans to directors or officers
- Clawback Provision - If a company has to restate earnings, its CEO and CFO must reimburse the company for any bonus or profits they have received from selling company stock in the past year.
- Each company must disclose if it has an ethics code and, if it does not, why not.
- It is a felony to interfere with a federal fraud investigation.
- Whistleblowing employees are protected
- A new Public Accounting Oversight Board has been established to oversee the auditing of public companies.
82
Carey decided to incorporate her business under the name yStar Inc. Before yStar was incorporated, Carey signed a contract in the name of yStar, Inc. to have some office space remodeled. Which statement is correct?
1. yStar will be liable on the contract only if the corporation adopts the contract.
2. yStar is liable on the contract because the contract was signed in its name.
3. yStar is liable on the contract if the contractor knows that the corporation does not yet exist.
4. yStar becomes liable on the contract as soon as it is incorporated.
1
83
Who has the right to manage the business of a corporation?
1. Shareholders.
2. The board of directors.
3. Bondholders.
4. Officers.
2
84
Incorporation protects:
1. shareholders against personal liability for the debts of the company.
2. anyone involved in management of the business against personal liability for wrongdoing.
3. the public from wrongdoing by either the shareholders or the management of the corporation.
4. All the above are correct.
1
85
Mike is planning on incorporating his business in the state of Delaware. The corporate name of Mike's business must be different from:
1. that of any corporation that already exists in Delaware.
2. that of any limited liability company in Delaware.
3. the name of any sole proprietorship in Delaware.
4. all of the above.
1
86
A corporation must obtain shareholder approval before the company:
1. sells off a major portion of its business to another company.
2. amends its bylaws.
3. amends its charter.
4. All the above are correct.
4
87
Corporate stock can be divided into classes called ________, which can be further divided into ________.
1. equity, common
2. debentures, classes.
3. authorized shares, preferred
4. preferred, common
3
88
Defining a corporation with such information as the corporate name, the number and type of authorized shares of stock, identification of the purpose and the agent, is done through the:
1. charter.
2. articles of incorporation.
3. certificate of organization.
4. All of the above. All of these terms are used to identify the same document.
4
89
The Dodd Frank Wall Street Reform and Consumer Protection Act:
1. not include in its charter any provisions regarding indemnification of directors.
2. requires companies every three years to take a non- binding shareholder vote on executive compensation.
3. requires companies every three years to take a binding board of directors’ vote on executive compensation.
4. requires companies every three years to take a binding shareholder vote on executive compensation.
2
90
If a court determines a manager's corporate decision amounted to self-dealing:
1. the business judgment rule will not apply.
2. the transaction being challenged will be automatically voided.
3. the manager is automatically personally liable to the corporation.
4. All the above.
1
91
Under Sarbanes Oxley what is true?
1. If a company restates its earnings the executive must reimburse its company for any profit they made based on those misstated earnings.
2. a company may not restate its earnings.
3. Executives may retain their bonus even if the earnings of the corporation are restated.
4. None of the above are correct.
1
92
MegaCorp purchased 10,000 shares of its own stock that had previously been owned by private investors. The stock MegaCorp repurchased is called:
1. repurchased stock.
2. authorized and issued.
3. treasury stock.
4. authorized and unissued.
3
93
What is meant by the term "piercing the corporate veil"?
1. Corporate directors and/or officers may be held personally liable to a person damaged by an act of the corporation.
2. Corporate shareholders may be held personally liable to a person damaged by an act of the corporation.
3. Both of the above.
4. None of the above.
2
94
Fashions, Inc. has 12 shareholders. There is no shareholder agreement concerning the board of directors. The company is subject to the Model Act. How many directors is Fashions, Inc. required to have?
1. Five.
2. None.
3. One.
4. Two.
2
95
Under the Business Judgment Rule:
1. Managers have to act in good faith.
2. Managers might have to prove how their decisions was fair to the shareholders.
3. Managers will not be held liable for the damage their decisions cause the company.
4. All of the above
4
96
What committees do the NYSE and NASDAQ require independent directors comprise a majority of?
- Audit
- Compensation
- Nominating Committees
97
What is true about annual shareholders’ meetings?
1. All shareholders must attend to vote on issues.
2. can be waived by a majority of shareholders in a non publicly held corporation.
3. are required by all states if they are publicly traded companies.
4. all of these answers are true.
2
98
Who establishes executive compensation?
1. The shareholders.
2. The officers themselves.
3. An independent CPA firm.
4. The board of directors.
4
99
Self dealing by a manager of a corporation:
1. cannot be made valid by the shareholders.
2. must be approved by at least one directors of the corporation
3. must be entirely fair to the corporation.
4. always violate the corporate opportunity doctrine.
3
100
Fashions, Inc. has 12 shareholders. The company is subject to the Model Act. What officers is Fashions, Inc. required to have?
1. Whatever officers are described in the corporate bylaws.
2. A president, at least one vice-president, a secretary, and a chief financial officer.
3. A president, secretary, and treasurer.
4. A president and a secretary, and they can be the same person.
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