Corporations

Question 1

Promotor Liability

Answer 1

A promotor is held personally liable for knowingly acting on behalf of a corporation before incorporation, and remains liable after corporation becomes incorporated unless there is a novation, the third party look to the corporation for performance, or the promotor had no actual knowledge that the corporation’s charter has not yet been issued.

Question 2

Adoption

Answer 2

Corporation is generally not liable for pre-incorporation transactions, even if those transactions ultimately benefit the corporation, BUT corporation may be liable if it expressly or impliedly adopts a contract by accepting the benefits of the transaction or gives an express acceptance of liability for a debt.

Question 3

Ultra Vires Actions

Answer 3

An ultra vires act is when a corporation’s articles of incorporation include a narrow purpose in the articles and the corporation subsequently engages in activities outside that stated purpose.

A third party generally cannot escape liability for a transaction that is an ultra vires corporate act.

An ultra vires act can be enjoined by a SH or the corporation can take action against a director, officer, or employee who engaged in the action.

The state can initiate an ultra vires proceeding as well.

Question 4

De Jure Corporation

Answer 4

A de jure corporation is a corporation that meets all the statutory requirements for incorporation. The corporation can only be held liable for corporate liabilities at that point.

Question 5

De Facto Corporation

Answer 5

A de facto corporation is a defective corporation whose owner makes a good faith effort to comply with the incorporation requirements and operate C without knowing the requirements were not met.

Question 6

Corporation by Estoppel

Answer 6

A person dealing with an entity in a contractual agreement as if it were a corporation is estopped from denying its existence and seeking personal liability.

Question 7

Hierarchy of Stock Distribution

Answer 7

1. Secured Creditors
2. Preferred Stock Holders
3. Common Stock Holders

Question 8

Rule 10b-5 Action

Answer 8

Rule 10b-5 action must meet the following requirements:

1. The P purchased or sold the security
2. Use of interstate commerce
3. The D’s fraudulent/deceptive conduct (untrue statement of material fact/failure to prevent misleading statements/insider trading)
4. Materiality - a reasonable investor would find the fact important in deciding whether to purchase or sell a security
5. Scienter - D must make statement intentionally or recklessly
6. P justifiably relied on the D’s fraudulent conduct
7. Harm to P

Question 9

Rule 16(b) Action (PCSS)

Answer 9

1. Publicly traded corporations - must have securities traded on national securities exchange or have assets of more than ten million and more than 500 SHs
2. Corporate insiders- Ds, Os, or SHs with more than 10% of stock
3. Short swing profits - a corporate insider both bought and sold corporation’s stock during any six month period.
4. SEC report of change in stock ownership

Question 10

Shareholder Meetings

Answer 10

Can be brought by board or SHs holding 10% or more of voting shares.

Notice requires voting SHs be notified of date/time/place no less than 10 days and no more than 60 days before meeting. Can be waived by writing or attendance.

Question 11

Shareholder Meeting Quorum

Answer 11

A majority of the votes entitled to be cast on a matter

Question 12

Board of Director’s Special Meeting

Answer 12

For the board of directors’ acts at a meeting to be valid, a quorum of directors must be present at the meeting. A majority of all directors in office constitutes a quorum, unless the articles of incorporation or bylaws require a higher or lower number. A director must be present at the time that the vote is taken in order to be counted for quorum purposes, but presence includes appearances made through communications equipment that allows all persons participating in the meeting to hear and speak to one another.

Question 13

Duty of Care

Answer 13

Director has a duty to act with the care that a person in a like position would reasonably believe appropriate under similar circumstances and is required to use any additional knowledge and special skills he possess when deciding how to act.

Can rely on opinions and info obtain from officers, employees, outside experts, committees, if D reasonably believes them to be reliable and competent.

Question 14

Business Judgment Rule

Answer 14

BJR is a rebuttable presumption that D reasonably believed his actions were in the best interest of the corporation. This presumption is overcome in the case of fraud, dereliction of duty, illegal conduct, or conflict of interest.

Question 15

Overcoming BJR

Answer 15

Must be shown that D was not acting in good faith, not informed to the extent he reasonably believed was necessary, had material interests in the challenged conduct and was not objective, failed to devote attention to corporation’s affairs, failed to timely investigate matters of material concern, or D received financial benefits to which he was not entitled.

Question 16

Duty of Loyalty

Answer 16

Require director to act in a manner that director reasonably believes is in the best interest of the corporation.

Question 17

Self-Dealing

Answer 17

A D who engages in conflict-of-interest transaction with his own corporation violates the duty of loyalty unless the transaction is protected under the safe-harbor rules. A D cannot profit at the corporations expense.

Question 18

Safe Harbors

Answer 18

A D can make disclosure of all material facts and get majority approval by board of directors or shareholders without a conflicting interest. The major test is whether the transaction is fair at the time of commencement.

Question 19

Actual Authority

Answer 19

defined in articles of incorporation or bylaws

Question 20

Implied Authority

Answer 20

Officers and employees of the corporation have implied authority to perform necessary tasks to carry out duties by virtue of their status or position, so long as the matter is within the scope of ordinary business.

Question 21

Apparent Authority

Answer 21

If the corporation holds an officer out as having authority to bind the corporation to third parties, the officer will have apparent authority.

Question 22

Indemnity/Insurance

Answer 22

Corporation is required to indemnify a D for any reasonable expense incurred in the successful defense of a proceeding against the D.

Corporation is prohibited from indemnifying D against liability due to the receipt of an improper personal benefit.

Corporation MAY indemnify in an unsuccessful defense if D acted in good faith with a reasonable belief that the conduct was in C’s best interest and D did not have reasonable cause to believe conduct was unlawful.

Question 23

Merger

Answer 23

When one company assumes the debts and liabilities of another. Require board of directors and SH approval by a majority vote at a meeting with a quorum present for each corporation. Formal filing required.

Question 24

S Corporation

Answer 24

Avoids double taxation by passing income and expenses through to its SHs, who are then taxed directly

Question 25

Limited Liability Corporation

Answer 25

enjoys pass through of tax advantage of partnership and the limited liability of a corporation.

Organization agreement
“members”

Question 26

Piercing the veil of LLC

Answer 26

undercapitalization, commingling of assets, confusion of business affairs, or deception of creditors

1. Mere instrumentality test:
   - members dominated the entity such that the LLC had no will of its own
   - members used that domination to commit a fruad or wrong, and
   - the control and wrongful action proximately caused an injury
2. Unity of Interest and ownership test: The LLC did not have an existence independent of the members bc there was such a unity of interest and ownership between the enetity and the members that failure to pierce the veil would be unjust or inequitable.