Corporations

Question 1

De Jure Corporation?

Answer 1

A corporation that has been properly formed. I.e., satisfies all legal requirements.

Existence begins the date articles are accepted.

Question 2

Internal Affairs Doctrine

Answer 2

The internal affairs of a corporation (e.g. conflict between shareholders and management) will be governed by the law of the state of incorporation.

Question 3

De Facto Corporation?

Answer 3

Has not complied with statutory requirements.

Requirements:

1. A valid law that allows for incorporation;
2. A good faith attempt to comply with the law;

and

3. actual exercise of corporate power, such as conducting business under the corporate name.

Essentially, a de facto is a corporation in which the parties may not deny its existence but the state may.

Question 4

Corporation by Estoppel?

Answer 4

Prevents 3d party from denying existence of a defective corporation, where 3d party has treated it like a corporation and denial would result in UNJUST HARM.

Factors:

  1. would be contrary to general principles of law to let D avoid liability?
  2. What was intent of parties at time of contract?
  3. Had D relied on P's misrepresentation regarding corporate status to its detriment? 

The third party is estopped from denying the corporations existence and therefore holding that individual personally liable.

Note: This goes both ways. The individual is not allowed to deny the existence of the corporation in lieu of some defect.

Question 5

What is a Promoter?

Answer 5

A person who attempts to bring a corporation into existence.

Typically enters into a contract on behalf of the “proposed” corporation.

Question 6

Promoter Liability?

Answer 6

A promoter may be personally liable for breach of a pre-incorporation contract made on behalf of a nonexistent corporation unless the facts show that the other party looked only to the corporation for performance. (similar to corp. by estoppel)

Question 7

Corporation’s liability wrt to promoter contracts

Answer 7

A corporation is not liable for contracts entered into by the promoter, unless the corporation adopts the contract or there is a novation.

Note: for adoption the corporation becomes primarily liable, while for a novation the promoter is not liable at all.

Note: adoption can be either implied or express.

Note: promoter’s who remain personally liable may seek indemnity from the corporation if it was adopted.

Question 8

Promoter Fiduciary Duties

Answer 8

Promoter may not unduly profit at the corporation’s expense.

Promoters must act in good faith and with utmost fairness.

Promoter must fully disclose all material facts of any transaction.

Question 9

Par Value?

Answer 9

The par value is set within the articles of incorporation.

A corporation may not sell its stock for less than the par value. (i.e., minimum price for which a stock may be sold.)

Question 10

Watered Stock?

Answer 10

Occurs when a share is sold for less than the par value.

Results in liability for both the shareholder and the directors who authorized the sale.

Damages = Par value of the stock MINUS amount received.

Question 11

Ultra Vires Acts?

Answer 11

It s illegal for a corporation to commit waste. They may not enter into contracts that are outside of their corporate power.

Question 12

Remedy for ultra vires transactions?

Answer 12

Shareholders may sue the officers or directors who authorized the ultra vires act in a suit for damages.

Question 13

Hierarchy of a Corporation?

Answer 13

Shareholders – own the company

Board of Directors – Selected / Removed by the shareholders. The board hires / fire officers.

Officers – Agents of the corporation, president, secretary, vice president, treasurer…

Employees – Workers

Question 14

Duty of Officers?

Answer 14

Officers are agents of the corporation.

Duties of officers are set forth by the BOD, articles of incorporations, bylaws or by resolution of the board. (this is known as express authority)

Officers may also have implied authority, based on the principles of agency laws.

Therefore, what an officer can do is governed by what there are authorized to do.

Question 15

Compensation of Directors

Answer 15

BOD has discretion to set compensation of directors.

BOD may not waste the corporations’ assets by granting excessive compensation.

It is important that the compensation terms were impartially approved by other directors or shareholders.

Question 16

What makes for a valid board action?

Answer 16

Board can take action in 2 ways:

1. Unanimous written consent
   (needs to be in writing, no meeting required, unless bylaws/articles say otherwise.)
2. With a meeting
   either special or regular,
   (notice req. if special and a quorum.)
3. Approval by majority of directors present at meeting.

Question 17

Valid Board Meetings

Answer 17

Meetings can be either regular or special.

1. Regular
   
   • • Requires a quorum to valid, a majority of directors. (no notice requirement unless bylaws / articles say so.)
2. Special
   • • Any meeting other than a regular meeting. (need 2 days notice of location and time, purpose not necessary.)
   • • requires quorum.

Note: bylaws can change a quorum to be less than a majority but not less than 1/3.

Question 18

Valid Sh Voting

Answer 18

Can be via a meeting OR action by written consent.

Note: for written consent,
in MBCA need unanimous consent
in DE/CA need absolute majority of voteable shares.

Question 19

Annual Sh Meetings

Answer 19

Held annually at time fixed in bylaws.

C.N.Q.

C - call
N - Notice, purpose

Notice – between 60 and 10 days before meeting date, date, time and place.

Purpose – Include description of purpose for which meeting is called if it is for a special purpose.

Q - Quorum

Note: by statute 10% of sh can force board to call a special meeting.

Question 20

Annual Sh Meetings – Notice Waiver

Answer 20

Sh can waive notice by writing delivered or by attending meeting and not objecting at beginning to lack of notice.

Question 21

Requirements for an officer to bind the corporation.

Answer 21

Agreement between corp. and a third party valid as long as either chairman of board, president, or vp AND either sec, ass. sec., CFO or ass. treasurer sign.

Note: one officer can satisfy both prongs (see Snukal)

Question 22

Interested directors?

Answer 22

A director with a conflict of interest has no right to vote.

They also do not count for purposes of establishing a quorum.

Question 23

Director’s Duty of Care?

Answer 23

Every director owes a duty of care to the corporation. This duty requires a director to act in:

i) good faith;
ii) in a manner the director believes to be in the best interests of the corporation; and
iii) with care that a person in a similar position would reasonably believe appropriate under similar circumstances.

Additionally, directors must be proactive and familiarize themselves with all the facts before making a decision.

Question 24

Business Judgment Rule

Answer 24

This rule protects a director for any decision made:

G.I.R. - Get Info. Right

i) in good faith,
ii) on an informed basis, and
iii) in the honest and rational belief that the action was in the best interests of the corporation.

The focus is not the results of the director’s decisions, rather the process in which the director employed to come to his decision.

BJR does not apply to duty of loyalty. Only looks at duty of CARE.

Question 25

Director's Duty of Loyalty

Answer 25

Directors should refrain from engaging in contracts involving a conflict of interest. A conflict of interest arises when the director is essentially on both sides of the deal. Director conflict elements: 1. Director party to the transaction; 2. a related person or spouse is a party to the transaction

Question 26

Director's Duty to Monitor

Answer 26

This falls under the director's duty of loyalty. Apply the Carmark standard, to determine is director breached this duty 1. directors fail to implement system to monitor reporting of info.; or 2. they implemented such a system, but consciously failed to monitor or oversee its operations.

Question 27

Director's Duty of Good Faith

Answer 27

This also falls under duty of loyalty. Directors should act with reasonable diligence when performing their managerial duties. A breach occurs when a director: NBR 1. intentionally Neglects their duties as a corporation's manager; 2. acts in Bad faith; OR 3. fails to exercise Reasonable oversight of the corporation. (so this is different than DoC in that it has to be more willful)

Question 28

Raincoat Provision

Answer 28

A DE provision that may be placed within articles that either eliminates or limits the amount of monetary damages available for breach of duty of care. I.e., it helps limit personal liabilities. It is opt-in. It does not limit damages recoverable for breach of duty of loyalty. DE §102(b)(7)

Question 29

Corporate Opportunity

Answer 29

A Director must first fully disclose all material facts and wait for the board to either accept it or reject it. If the board rejects it, the director is free to take advantage of the opportunity himself. A Director may attempt to avoid liability by showing that the corporation would not have taken advantage of the opportunity. usurping a corporate opportunity is a breach of duty of loyalty. Remedy? - Director may be required to disgorge the profits - force director to convey property to the corporation.

Question 30

Tests for determining whether the director usurped a corporate opportunity?

Answer 30

Director usurps a corporate opportunity for personal gain - putting their own interests ahead of corporation. line of business test: whether the corp. has fundamental knowledge, practical experience, ability to pursue the opportunity, and if it is logically and naturally adaptable to the corp's business. interest / expectancy test: existing biz arrangement would've led corp. to reasonably anticipate being able to take advantage of opp. Look at whether: opportunity within scope of corporation's interests. whether corporation has been seeking such an opportunity Fairness test: apply ethical standards to see what is fair under circumstances and equitable.combo biz and Fairness test (modern test): first apply the LOB test, then look at whether it is fair to first present the opportunity to the court factors to consider are: 1. relationship of receiver of opportunity to management 2. whether opp. presented in individual or official capacity, 3. whether corporate facilities are used in perfecting the opp.

Question 31

Election

Answer 31

Shareholders have inherent power to elect directors and remove them with or without cause. Sh agreements may not takeaway the right of shs to remove FOR CAUSE a director. They can make cause a requirement for removal though. Directors may only be removed at a meeting called for purpose of removing him. Note: for classified/staggered boards, removal requires cause.

Question 32

Voting Trusts

Answer 32

Shs may create a voting trust by transferring shares to a trustee who votes shares according to the agreement. There must be a separation of record ownership. (key diff. btwn pooling) The trust must be signed in writing and a copy must be delivered to corporation. The trust is valid for up to 10 years unless extended by agreement.

Question 33

Shareholder voting agreements

Answer 33

Known as pooling agreements, these must be signed and in writing. Easier to create and less formal than a voting trust. Difference between this and a voting trust is that this is much easier to create and less formal. Further, this does not need to be filed the corporation and is not subject to a 10year limit.

Question 34

Shareholder Managing Agreement

Answer 34

In closely held corps., sh can enter such an agreement. They basically do what the BOD would do. The agreement can entail things like: P.E.E.U. a. give one sh the Power to manage the corp: b. Eliminating / restricting BOD discretion; OR c. Establish who will be a director / officer and for how long as well as how they will be elected / removed. (must be in writing and approved by all persons who are sh at time of agreement. (Unanimous consent)

Question 35

Proxy

Answer 35

A proxy votes on behalf of a sh. To be valid, a proxy form must be given to the corporation and be in writing. If there is nothing about expiration, the proxy will expire after 11 months. Proxy statements must contain full disclosure of compensation plans and statements as to why they have been made. The proxy is an agent of the proxy holder.

Question 36

Types of Proxies

Answer 36

Limited Proxy = sh of record directs agent to vote General Proxy = sh of record gives agent authority to vote

Question 37

Proxy Irrevocability

Answer 37

Proxys' are revocable unless: 1. it says irrevocable; and 2. it is coupled with an interest.

Question 38

What is a Proxy Solicitiation?

Answer 38

When a group attempts to get authorization by other members to vote on their behalf. Each solicitation must have a proxy statement.

Question 39

Proxy statement requirements

Answer 39

Must fully and adequately disclose all material facts necessary to make adequate vote on the specific proposal. Must disclose: 1. conflicts of interest 2. details of compensation plans 3. highest 5 paid officers. 4. and details of major corporate changes voted on. Basically, the majorly important stuff. NOTE: Rule 14a = PROXY FRAUD RULE

Question 40

Right to Receive a Dividend

Answer 40

BOD in good faith declares if they want to do a dividend. So it's a business judgment.

Question 41

Legal sources of dividend distribution?

Answer 41

Retains earnings and capital surplus

Question 42

Fundamental Corporate Changes

Answer 42

For sh*t like mergers, amendments to articles or sale of a substantial amount assets the BOD gonna need the majority of sh approval. The procedure is: R.N.M. (real nice man) 1. First you gotta have a Resolution by majority of board; 2. Board must give all sh Notice with full disclosure; 3. Lastly, you need an approval by a Majority of all outstanding shares. (but in closed corporation may need approval of ALL shares.) For non-fundamental votes need the following: In DE -- need majority of shares present In MBCA -- need majority of shares actually voting In CA - need majority of shares present and voting AND majority of required quorum Note: sh can do election / removal OR amend bylaws WITHOUT concurrent director approval.

Question 43

Director Elections

Answer 43

BOD shall consist of one or more individuals, exact number stated in articles or bylaws. Note: In CA need minimum of 3 directors. By default, all directors elected annual at sh meeting.

Question 44

Classified Board

Answer 44

Can affix the election of a certain director to one class of stock to help distribute sh power. This is common in closely held corps.

Question 45

Classified Board

Answer 45

Can affix the election of a certain director to one class of stock to help distribute sh power. This is common in closely held corps.

Question 46

Derivative Actions

Answer 46

Sh can bring a derivative action when they think director(s) breached their fiduciary duty. Steps: D.E.R.D. -- Damn Eisner Really Dumb 1. Demand - written demand to corp. to take action. If they say nah, sh has right to bring suit. 2. Excused demand? - if the bod is too tainted then demand is excused, as it would be futile. 3. shareholder Requirement - Plaintiff must be a sh when BOD allegedly f'd up and continue to be one throughout the suit. 4. Damages? - The money won goes to the corp. (but P can still request fees)

Question 47

Special litigation committees

Answer 47

This organization can be created in anticipation of a disgruntled sh pursuing a derivative action. Goal to find that demand was not futile. Consists of non-interested directors. Basically, this organization intends to convince the court that litigation is futile and that the action should be governed by the BJR. The burden of proving that BJR should be applied on the SLC.

Question 48

Direct Actions

Answer 48

Sh can bring this when they feel their own individual rights was violated.

Question 49

Shareholder Fiduciary Obligations

Answer 49

If you own a sh*t ton of shares, you gonna have some additional obligations. All the tx the controlling sh's are involved in must meet the fairness test. They also have the duty of loyalty.

Question 50

SH right to information

Answer 50

Sh can ask to look at the corp. info. (docs, minutes, records, etc.) so long as it is for a proper purpose.

Question 51

Proper Purpose Definition

Answer 51

Satisfied if the information is reasonably related to person's interest/status as a SH AND is not harmful to the corporation or other sh's. Burden falls on Sh to make a proper demand. Burden falls on corp. to establish the purpose is improper. Dont need to show proper purpose (only demand) for the following: MBCA 16.02(b) Need to show proper purpose for following: 16.02(C)

Question 52

Piercing the Corporate Veil Factors?

Answer 52

A court will "pierce the veil," if there is some fundamental unfairness or injustice. Factors considered are the following: U.F.A.T. 1. Under-capitalization (inadequate financing) Did the corporation, enter a venture with shitty financial planning? (unexpected losses do not count) 2. Fraud on the Creditors Whether they used the corporation to evade existing obligations or defraud creditors. 3. Alter Ego (observing corporation formalities) Did the shareholders treat the corporate business and property as their own? Factors to consider: 1. failure to observe corporate formalities such as director or stockholder meetings; 2. an absence of corporate records; and 3. mixing corporate and personal assets. 4. Tort v. Contract claims Courts more willing to PCV when it is a tort claim. This is because the contract claimant had a much better opportunity to perform DD on the corporation. Note: the personally liability once the veil is pierced will, generally, fall onto those shareholders who are actively managing the corporation (not passive investors). The corporation will not dissolve.

Question 53

Enterprise Liability

Answer 53

A parent company will be held liable for wrongful actions of subsidiary if: 1. Parent corporation exercises control over subsidiary; and 2. The control leads to harm or prevents the subsidiary from fulfilling its duty. (can also blend together horizontally, sister companies.) Fort Tort example: see Taxi Case (goldberg) For creditor case: basically just apply PCV factors, i.e., similar name, identical businesses, same president, address and phone #.

Question 54

Corporate Dissolution

Answer 54

Occurs when corporation dissolved and business terminated. Debt will be paid in the following order: 1. Creditors 2. surplus used to reimburse shareholders for their capital contributions.

Question 55

Enterprise Liability Factors

Answer 55

S.M.I.U 1. Parent and subsidiary operate as SINGLE ECONOMY ENTITY. 2. Corporation is Misleading to public. (i. e., it is unclear to the public who in the parent and subsidiary are operating which part of the business.) 3. Corporation was Insolvent. 4. Overall injustice/Unfairness

Question 56

Closely Held Corporations

Answer 56

Few shareholders. CA: <35 DE: <30 Low Liquidity Note: in CA need provision in article that says this is a close corporation. Can amend articles to become a close corporation, but need unanimous consent of all outstanding shares. Each sh owes one another a fiduciary duty of good faith. Duty is akin to that owed by partners to one another. There is generally no open market to trade the shares. Management agreements are valid, generally these require unanimous consent by all shareholders.

Question 57

What is needed in the articles of incorporation?

Answer 57

MBCA § 2.02 CA § 212(a) 1. Corporation's name 2. Address of each person incorporating 3. name and address of agent 4. statement of authorized capital, i.e., # of shares 5. at least one board member that is named (can't be a corporation.) 6. purpose of the corporation. (only in DE and CA) Note: In CA, need to name at least 3 directors. Also, in CA need name to show corporate form i.e., inc., corp. etc. ( 1 director okay if only 1 sh.) Also note: just because SoS accepts and issues a certificate of completion that may not necessarily mean you have a de jure corporation, it could very well still be a de facto one.

Question 58

How to describe shares in Articles?

Answer 58

Par or No par value. Type of shares (voting, non-voting, common, preferred) Number of shares authorized in each class.

Question 59

Issuance of Shares?

Answer 59

MBCA 6.21 must pay more than the par value. But in CA, consideration may not be a promise of future employment. Consideration may be intangible property like a contractual commitment.

Question 60

Cumulative Voting

Answer 60

A sh can put all their votes on one candidate or they can distribute them. e.g. A has 10 shares, B has 90 shares. There are 5 directors positions open. So A has 10 x 5 = 50 votes. A can put all 50 votes on one director. Note: Cumulative voting is mandatory in CA, unless the company is publicly traded. Staggered terms are illegal in CA. Note: Under MBCA and DE, it is OPT-IN

Question 61

What are Staggered Terms?

Answer 61

Allows having certain classes of shares the power to elect certain directors. So the election of directors will be staggered to every two to three years. Every year only certain shares will vote. These are illegal in CA.

Question 62

Cumulative Voting Formula

Answer 62

Minimum Votes to Elect One Seat [S/(D+1)] + 1 S = # of shares actually voting D = # of directors to be elected

Question 63

Straight Voting

Answer 63

Straight: 1 vote per share. e.g. A has 10 shares, B has 90 shares. There are 5 directors positions open. A may cast 10 votes for each and B can case 90 for each. B will pick the whole board. Favors maj. sh's. Default rule under MBCA and DE = straight voting

Question 64

Self-dealing Transaction

Answer 64

When director on both sides of a tx., director has burden to show the entire fairness of the deal through: The Entire Fairness Standard which as two components: 1. fair price (economic and financial consideration) and; 2. fair dealing (timing of tx, initiation, structure, negotiation, etc) NOTE: fairness is determined at the time the tx is entered into.

Question 65

Cleansing the self-dealing tx

Answer 65

Steps for cleansing 3 Different Ways of cleaning sh vote approval req: OR board vote approval req: OR if fail to get a vote, court will decide if tx is fair. the director has burden to show tx meets the entire fairness standard.

Question 66

Sh method of cleansing the self-dealing tx

Answer 66

sh vote approval req: 1. full disclosure of material facts. 2. vote in good faith 3. need majority of disinterested sh.

Question 67

Board method of cleansing the self-dealing tx

Answer 67

board vote approval req: 1. full disclosure of material facts. 2. good faith approval by majority of disinterested director (apply quorum rules) 3. fairness of tx to corp. at time of tx.

Question 68

Buy-sell agreements

Answer 68

A legally binding contract that stipulates how a partner's share of a business may be reassigned if that partner dies or otherwise leaves the business. Commonly used by sole prop., partnerships and closed corporations in an attempt to smooth transitions in ownership when each partner dies, retires, or decides to the exit the business.

Question 69

Cash out Merger?

Answer 69

Needs to pass self-dealing. Occurs when majority receives benefit to detriment of minority. Need to apply business purpose test, i.e., does the majority have a valid business purpose for wanting to get rid of the minority?

Question 70

Rule of McQuade

Answer 70

In a public corporation, you are not allowed to make a contract which prevents the BOD from basically carrying out their managerial duties. Duties such as electing officers and setting salaries. MAY NOT PLACE LIMITATION's on DIERCTOR'S ability to do what is in best interest of corporation in public companies.

Question 71

Rule of Clark

Answer 71

An agreement limiting the BOD from making decisions is legal if : 1. corp. is closely held; 2. all sh are party to agreement; 3. the limitation is only a "slight impingement;" 4. the limitation is only triggered when it is in the best interest of the corp.

Question 72

3 options a sh has when they disagree with board's decision

Answer 72

1. Wall street vote -- sell their changes. 2. Derivative suit 3. vote out directors.

Question 73

Federal Proxy Rules

Answer 73

Publicly traded companies are required to file with SEC: Basically the reporting company is required to inform sh of material changes and also not engage in material waste of company resources. SEC 14(a)(9) -- company liable for false/misleading statements. SEC 14(a)(8) -- sh can propose something and if it is a proper subject of voting must be placed on agenda for vote at annual meeting.

Question 74

When director or officer is involved in something that is a conflict of interest.

Answer 74

You should determine whether it passes the intrinsic fairness test.

Question 75

Majority, controlling sh duties?

Answer 75

May not take actions to his benefit and to the detriment of minority.

Question 76

Balance Sheet Equation

Answer 76

Assets = Liability + Shareholder Equity

Question 77

Tax model for corporations?

Answer 77

Corporations are viewed as individuals which pays taxes on its income. Shareholders pay tax on their dividends.

Question 78

What are Authorized Shares?

Answer 78

The maximum number of shares that a corporation may sell. Articles specify the # of shares the corporation is authorized to issue.

Question 79

What are issue shares?

Answer 79

The number of shares the corporation DID sell.

Question 80

What is Preferred stock?

Answer 80

Stock that has priority over stock in either the payment of dividends/distribution of assets on dissolution, or both.

Question 81

What are the types of preferred stocks?

Answer 81

1. Dividend Preference. (gets distribution before common stock) 2. Cumulative v. non-cumulative dividend preference 3. participating preferring (hybrid with common) 4. Dissolution preference (upon dissolution gets paid before common stock holders) 5. redeemable and convertible preferred (r: require corp. to purchase their shares and c: sh has option for exchanging shares for fixed amount of security in corp.) 6. Blank check preferred, basically allowed board to issue new preferred stock with privilege they can come up with on the fly. 7. voting or non-voting preferred

Question 82

When are stock transfer restrictions permissible?

Answer 82

In closely held corps. only. If: 1. restriction made conspicuous on the stock certificate; and 2. the restriction is reasonable a restriction is reasonable if it "does not unreasonably restrain or prohibit transferability." notice may be: actual or constructive.

Question 83

Rights of First Refusal

Answer 83

A stock transfer restriction, may have require a transfer or grant the corporation an option to purchase first. If corp. not interest it could then first go to the sh's before the general public.

Question 84

Deadlock?

Answer 84

See MBCA 14.30 Generally, court will hold that dissolution may be initiated, if it can be proven that the deadlock is threatening the economic operations of the corporation. MBCA: Cts have discretionary power to dissolve corp. in event of deadlock. DE: Cts have right to liquidate but not dissolve corp.

Question 85

Sh petitioning for dissolution?

Answer 85

A sh may petition for dissolution if there is: 1. deadlock; or 2. fraud/illegal activities.

Question 86

Sh of closely held corporations fiduciary duties?

Answer 86

Sh of closely held corp. owe same fiduciary duty of utmost trust that is required in partnerships. Majority sh decisions must be intrinsically fair to the minority interest.

Question 87

When apply BJR v. fairness test?

Answer 87

If self-dealing --> apply fairness test. If no self-dealing --> BJR

Question 88

Oppression?

Answer 88

In closely held corporations. A sh may petition for dissolution if they are able to establish oppression. Two ways of establishing oppression: 1. Reasonable Expectations whether reasonable expectations of minority sh would be frustrated by actions of minority. 2. Conduct of Majority Basically look at unfair conduct. (this is because in closely held corps. majority sh owe minority sh duty of trust and confidence.) Note: Judge like buy outs more than dissolution.

Question 89

Sh Voting Rules

Answer 89

DE - Need majority of shares present (abstention count as no) MBCA - need majority of shares ACTUALLY VOTING CA - need majority of share present (but abstention does not count) e.g. 1000 shares outstanding, 600 shares present. 250 vote yes and 150 vote no, 200 abstain (Does not count)

Question 90

Van Gorkom

Answer 90

Way of rebutting BJR, by showing that directors acted with GROSS NEGLIGENCE by failing to inform themselves of all material info. available to them.