Corporations Flashcards

Question

What generally is limited liability?

Answer 1

It's one of the most important consequences of forming a corp - they get limited liability Generally, shareholders are liable only to pay for their stock, not for corporate debts so if corporation gets debts, commits a tort, etc., the shareholders are not personally liable Directors and officers are also not vicariously liable for corporate debts - just the corporation is liable for its debts

Answer 2

(1) de facto corporation and (2) corporation by estoppel But note: anyone asserting either doctrine must be unaware of the failure to form a de jure corporation AND NOTE: these have been abolished in many states - so on exam, raise the possibility of de facto or estoppel but then note caveat that doctrine likely doesn't apply, but if it does, here's how

Answer 3

In short: incorporation statute; good faith, colorable attempt; exercise of corporate privileges (1) must be a relevant incorporation statute (on exam, can address this quickly because there's always a statute in every state) (2) parties made a good faith, colorable attempt to comply with the statute; meaning they tried and came close (3) there has been some exercise of corporate privileges, meaning parties were acting as though they thought there was a corporation If they meet these rquirements, the de facto corporation doctrine applies, and the business is treated as a corporation for all purposes except in an action by the state

Answer 4

Under CL doctrine of corporation by estoppel, persons who have dealt w the entity as if it were a corporation will be estopped from denying the corporation's existence Can't back out of contracts And will also prevent improperly formed "corporation" from avoiding liability by saying it was not properly formed ONLY applies in contract cases

Answer 5

A person acting on behalf of a corporation not yet formed Before a corporation is formed, promoters procure commitments for capital that will be used when it is formed

Answer 6

Promoters are joint venturers (partners) who have a fiduciary relationship with each other Will breach duty if they secretly pursue personal gain at the expense of their fellow promoters

Answer 7

Fiduciary duty is one of fair disclosure and good faith Promoter who profits by selling property to the corp may be liable for his profit unless all material facts of the transaction were disclosed If transaction is disclosed to an independent board of directors and approved, promoter has met his duty and will not be liable for his profits If the board is not completely independent, the promoter still will not be liable for his profits if the subscribers knew of the transaction at the time they subscribed or unanimously ratified the transaction after full disclosure Disclosure must be to all who are contemplated to be part of the initial financing scheme If the promoters purchase all the stock and subsequently sell their individual shares to outsiders, the promoters cannot be held liable for the profits from the sale of property to the corporation Promoters may always be liable if Ps can show that they were damaged by the promoters' fraudulent misrepresentations or fraudulent failure to disclose all material facts

Answer 8

A promoter may enter into contracts on behalf of a corporation not yet formed Since the corporate entity doesn't exist prior to incorporation, it is not bound on contracts entered into by the promoter in the corporate name prior to incorporation Corporation may become liable only if it expressly or impliedly adopts the promoter's contract

Answer 9

Yes, if it adopted the contract Express adoption: board takes an action adopting the contract Implied adoption: corporation accepts a benefit of the contract

Answer 10

Express adoption: board takes an action adopting the contract Implied adoption: corporation accepts a benefit of the contract

Answer 11

Anyone who acts on behalf of a corp knowing that it is not in existence is jointly and severally liable for the obligations incurred thus, if a promoter enters into an agreement w a third party on behalf of a planned but unformed corporation, the promoter is personally liable on the contract Promoter's liability continues even after corporation is formed, even if the corporation adopts the contract and benefits from it Promoter will be released from liabiltiy only if there is an express or implied novation (substituting corporation for promoter)

Answer 12

yes, he is personally liable for contracts formed when corporation is not yet formed

Answer 13

Yes, he remains personally liable until there's a novation The corporation will be on the hook too since they've adopted the lease, but the promoter remains liable until he's substituted out

Answer 14

If you keep in mind that promoters are forming a corporation, these questions should be fairly easy to answer. For there to be a valid contract, someone must be bound with the third party. It can’t be the corporation since it does not exist; therefore, the promoter is liable even though she was acting on behalf of the corporation to be formed. (If the agreement expressly relieves the promoter of liability, it will be treated as an offer to the corporation.)

Answer 15

Yes, a promoter who is held personally liable on a preincorporation contract may have a right to reimbursement from the corporation to the extent of any benefits received by the corporation

Answer 16

Anything outside of your state is foreign - doesn't mean just outside of the country

Answer 17

Register and pay fees Must register with secretary of state in each state in which it wishes to transact business Corp has to provide info about its articles and prove good standing in its home state

Answer 18

Means the regular course of intrastate (within the state) business activity So doesn't include occasional or sporadic business in the state

Answer 19

Means the regular course of intrastate (within the state) business activity So doesn't include occasional or sporadic business in the state

Answer 20

There can be a civil fine and the corp can't assert a claim in this state It can defend, but can't assert

Answer 21

Yes, then it can assert a claim in this state

Answer 22

Promoter will not be liable on a preincorporation contract if the agreemetn bt the parties expressly indicates that the promoter is not to be bound. In such a case, the "contract" is considered to be an offer to the proposed corporation. If the exception is applying, something would indicate that the third party would look to the corporation only for payment

Answer 23

Promoter will not be liable on a preincorporation contract if the agreemetn bt the parties expressly indicates that the promoter is not to be bound. In such a case, the "contract" is considered to be an offer to the proposed corporation. If the exception is applying, something would indicate that the third party would look to the corporation only for payment

Answer 24

SECOND FACT PATTERN: ISSUANCE OF STOCK

Answer 25

borrow the money or raise it by selling stock (or both) Either way, the corporation will issue a security to the investor Security is a fancy word for investment

Answer 26

Corporation will issue a security to an investor, whether the corp is borrowing money or raising it by selling stock Security is basically an investment

Answer 27

When the corporation borrows money, it issues a debt security, which is usually called a bond Bond is a promise that the corp will repay the loan with interest If loan is unsecured by corporate assets, it may be called a debenture The holder of a debt securities is a creditor, but NOT an owner, of the corporation Debt obligations may be payable to either the holder of the bond (a bearer or coupon bond) or to the owner registered on the corporation's records (a registered bond) May also have special features, like that it's convertible to equity securities at the option of the holder, or that the corp may redeem the obligation at a specified price before the obligation matures

Answer 28

Debt obligations may be payable to either the holder of the bond (a bearer or coupon bond) or to the owner registered on the corporation's records (a registered bond)

Answer 29

When the investor buys an ownership interest in the corporation, it issues equity securities, which is stock (the investor holds shares of stock) Money invested does NOT create a debt Shareholder is an OWNER, but NOT a creditor, of the corporation Remember: the shares described in the corp's articles are authorized shares The shares that have been sold are issued and outstanding Shares that have been reacquired by the corp through repurchase or redemption are authorized but unissued (treasury shares)

Answer 30

the shares described in the corp's articles are authorized shares

Answer 31

The shares that have been sold are issued and outstanding

Answer 32

Shares that have been reacquired by the corp through repurchase or redemption are authorized but unissued (treasury shares)

Answer 33

Yes, a corporation may choose to issue only one type of share, giving each shareholder an equal ownership right (shares are sometimes called common shares) Or ownership rights may be varied if the articles provide that the corp's stock is to be divided into classes or series within a class (if this is the case, then the articles must include info such as the number of shares in each class)

Answer 34

A corporation may issue share options An option is the right to purchase shares in the future under terms predetermined by the board of directors Options may be offered in exchange for any type of consideration, including future services

Answer 35

An issuance of stock is when a corp sells its own stock Rule in this fact pattern apply ONLY when there is an issuance

Answer 36

Subscriptions are written offers to buy stock from a corporation One potential issue is whether they may be revoked

Answer 37

Under MBCA, preincorporation subscriptions are irreovcable for six months unless otherwise provided, or unless all subscribers consent to revocation

Answer 38

No, irrevocable for 6 months

Answer 39

Unless otherwise provided, payment is due upon demand of the board Demand may not be done in a discriminatory manner Subscriber who fails to pay may be penalized by sale of the shares or forfeiture of the subscription and any amounts paid on the subscription, at the corporation's option

Answer 40

Revocable until accepted by the corporation The corporation and the subscriber are obligated under a subscription agreement when the board accepts the offer

Answer 41

Under MBCA, stock or stock options may be issued for any tangible or intangible property or benefit to the corporation Includes money, property, services already performed for the corporation, and discharge of a debt Also includes promissory notes to the corp and future services to the corp

Answer 42

Traditional view = par Par = minimum issuance price Traditionally, stock could not be issued by a corporation for less than the stock's stated par value And the consideration rec'd for par value stock had to be held in a certain account containing at least the aggregate par value of the outstanding par value shares No par = no minimum issuance price = board can have the stock issued for any price it sets

Answer 43

must receive at least $30,000 can receive more; par is just the minimum

Answer 44

Watch for this on exam - occurs when par value stock is issued for less than its par value If sold for less than what it should be, directors would be liable if they knowingly authorized; buyer would be liable no matter what; if X transfers stock to third party, third party is not liable if she acted in good faith

Answer 45

Yes, the directors are liable if they knowingly authorized issuance Yes X is liable no matter what Third party is not liable if she acted in good faith, if she didn’t know this is not an issuance; only applies when the corp is selling its own stock; doesn’t apply to you or me

Answer 46

Traditional view = par MBCA = whatever the directors deem appropriate as long as it's in good faith MBCA generally has eliminated the concept of par and allows corporations to issue shares for whatever consideration the directors deem appropriate Consideration rec'd need not be placed in any special account Board's valuation is conclusive if made in good faith But watch: a corporation's articles can still specify a par value for stock; in which case, if the directors authorize a sale of stock for less than the stated par value, the shares will probably be treated as validly issued, but the authorizing directors can be held liable for breach of their fiduciary duty

Answer 47

The right of an existing shareholder of common stock to maintain her percentage of ownership in the company by buying stock whenever there is a new issuance of stock for money Preemptive rights don't exist unless stated in the articles Even if they are stated in the articles, shareholders generally have no preemptive right in the shares issued: (1) for consideration other than money, (2) within 6 months after incorporation, or (3) without voting rights but having a distribution preference

Answer 48

as many as 600 shares; doesn't have to, but can; 20%

Answer 49

Even if they are stated in the articles, shareholders generally have no preemptive right in the shares issued: (1) for consideration other than money, (2) within 6 months after incorporation, or (3) without voting rights but having a distribution preference

Answer 50

no, bc this was not an issuance for money; only attaches if issuance is for money; this one isn’t for money

Answer 51

FACT PATTERN THREE: DIRECTORS AND OFFICERS

Answer 52

Must be adult natural persons, meaning they must be human beings w legal capacity Absent a provision to the contrary, directors need not be shareholders in the corp or residents of any particular state Any qualifications for directors in articles or bylaws must be rsble and lawful No qualification may limit the ability of a director to discharge her duties

Answer 53

One or more Number can be set in articles or bylaws

Answer 54

Initial directors may be named in the articles If not, they're elected by the incorporator(s) at the organizational meeting After that, sharehodlers elect the directors Directors are elected at each annual shareholders' meeting, subject to contrary provisions in articles Entire board is selected each year unless there's a staggered board Whether there is a staggered board is usually set in the articles Staggered board is divided into 1/2 or 1/3s, with 1/2 or 1/3 elected each year

Answer 55

Shareholders can remove directors before their terms expire Shareholders may remove a director with or without cause A director elected by cumulative voting cannot be removed if the votes cast against removal would be sufficient to elect her if cumulatively voted at an election of directors Similarly, a director elected by a voting group of shares can be removed only by that class

Answer 56

Board or the shareholders fill the vacancies But if the shareholders created the vacancy by removing a director, the shareholders generally must select the replacement

Answer 57

Board of directors must act as a group Individual directors have no authority to speak for or bind the corporation May act in the following ways: (1) unanimous agreement in writing (email, conference call, or separate documents, are ok); or (2) at a meeting, which must satisfy the quorum and voting requirements discussed below

Answer 58

Yes, may ratify. To ratify such an action, the board must state the action to be ratified and the nature of the failure of authorization, approve the ratification, and seek shareholder approval if necessary

Answer 59

the bylaws

Answer 60

For regular meetings, notice is not required For special meetings, at least two days' written notice of date, time, and place is required - purpose need not be disclosed

Answer 61

Means that whatever happened at the meeting is voidable - maybe even void - unless the directors who were not notified waive the notice defect Can do this (1) in writing any time, or (2) by attending the meeting without objecting at the outset of the meeting

Answer 62

No - any efforts to do so are void Because directors owe the corporation non-delegable fiduciary duties Note: this is different from shareholders who can vote by proxy and enter into voting agreements

Answer 63

WHEN? Shareholders: Annual = as board of directors or president directs, but must be within 18 months of prior annual meeting Special = as board of directors or president directs Directors: Regular = as board of directors or president directs Special = as board of directors or president directs NOTICE REQUIREMENTS Shareholders Annual = can be by mail bt 10 and 60 days before meeting; must include time and place Special = can be by mail bt 10 and 60 days before meeting; must include time, place and purpose Directors Regular = none needed Special = at least two days written notice; must include time and place but NOT purpose PROXY VOTING ALLOWED? Shareholders = yes at both annual and special Directors = no at both regular and special

Answer 64

For any meeting of the board, we need a quorum A majority of all directors (unless bylaws say otherwise, but can't be fewer than 1/3 of all members) Without quorum, board can't act

Answer 65

If quorum is present at a meeting, passing a resolution (which is how the board takes action at a meeting) requires only a majority vote of those present So if there are 9 directors, at least 5 directors must attend the meeting to constitute a quorum. If 5 directors attend, then at least 3 must vote for a resolution for it to pass.

Answer 66

A quorum of the board can be lost (broken) if people leave Once a quorum is no longer present, the board can't take an act at that meeting (Different from shareholder meetings)

Answer 67

If there was unanimous written consent of the directors

Answer 68

(1) proper notice was given for a directors’ meeting, a quorum was present, and a majority of the directors approved the action, or (2) there was unanimous written consent of the directors

Answer 69

Manages corporation Sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corporation changes to shareholders, etc. Unless provided otherwise, board may create one or more committs, with one or more members, and appoint members of the board of directors to serve on them Committees may act for the board, but the board remains responsible for supervision of the committees Board may also delegate authority to officers

Answer 70

(1) declare a distribution (2) fill a board vacancy (2) recommend a fundamental change to shareholders However, a committee can recommend such actions to the full board for its action

Answer 71

Duty of loyalty = A director must discharge her duties in good faith and with the rsble belief that her actions are in the best interest of the corporation Duty of care = She must also use the care that a person in like position would rsbly believe appropriate under the circumstances - BUT only liable if his breach causes a loss to the corporation - BUT even if there is causation, look at business judgment rule *Always go into both on exam when I see a potential breach*

Answer 72

The person challenging the directors' action on the basis of a breach of the DOC has burden of proving that the standard was not met

Answer 73

Nonfeasance or misfeasance Nonfeasance = occurs when a director basically does nothing; they are lazy Misfeasance = occurs when the board makes a decision that hurts the business

Answer 74

state the standard in full; then focus on second sentence; a person in like condition would do some work, here he did nothing; so he’s liable only if his behavior causes a loss to the corporation

Answer 75

state the standard in full; then focus on second sentence; a person in like condition would do some work, here he did nothing; so he’s liable only if his behavior causes a loss to the corporation

Answer 76

To answer this question, first state the standard in full, then focus on the duty of care portion. Here, the directors’ action caused a loss to the corporation, so causation is clear. But remember, a director is not liable if she meets the business judgment rule. Business judgment rule = court will not second guess business decision if made in good faith, informed, and had rational basis

Answer 77

court will not second guess business decision if made in good faith, informed, and had rational basis After I evaluate duty of care, see that there's causation (directors made a decision that then hurt the company), then go into business judgment rule - if they made a bad decision but it was in good faith, informed, and had rational basis, the director won't be found liable A director is entitled to rely on info, etc. if prepared or presented by: (1) corporate officers or employees whom the director rsbly believes to be reliable and competent; (2) legal counsel, accountants, or other persons as to matters the director rsbly believes are within such person's professional competence; or (3) a committee of the board of which the director is not a member, if the director rsbly believes the committee merits confidence

Answer 78

Duty of loyalty cases are about conflicts of interest Business judgment rule doesn't apply Burden is on the defendant to prove they were loyal and did not have or violate a conflict of interest

Answer 79

Any transaction between the corporation and: (1) one of its directors, or (2) that director's close relative, or (3) another business of the director's Ex: XYZ Corp enters into a contract with LMN Corp, which is owned or run by one of XYZ Corp's directors - we worry that the director has divided loyalties

Answer 80

(1) it was approved by a majority of the disinterested directors - imperative that either the director disclosed all material facts to the board or they were known when the board approved the transaction; or (2) it was approved by a majority of votes entitled to be cast by disinterested shareholders - again, after disclosure or the facts were known - notice of the shareholders' meeting must describe the transaction; or (3) judged by the circum at the time the corp entered into the transaction, it was fair to the corp

Answer 81

State standard in full: A director must discharge her duties in good faith and with the rsble belief that her actions are in the best interest of the corporation. She must also use the care that a person in like position would rsbly believe appropriate under the circumstances Then focus on duty of loyalty portion. Interested director transactions will be set aside (or the director will be liable in damages) unless the director shows that either: (1) the deal was fair to the corporation when entered; or (2) her interest and the relevant facts were disclosed or known, and the deal was approved by either (1) a majority of the disinterested directors or (2) a majority of the disinterested shares AND NOTE: even if the deal is approved by an appropriate group, some courts also require a showing of fairness - in determining whether a transaction is fair, courts look to factors such as adequacy of the consideration, corporate need to enter into the transaction, financial position of the corporation, and available alternatives

Answer 82

No, the presence of the interested director at the meeting at which the directors or shareholders voted to approve the conflicting interest transaction doesn't affect the action

Answer 83

Yes, even if the deal is approved by an appropriate group, some courts also require a showing of fairness In determining whether a transaction is fair, courts look to factors such as adequacy of the consideration, corporate need to enter into the transaction, financial position of the corporation, and available alternatives

Answer 84

Enjoining the transaction, setting the transaction aside, damages, and similar remedies

Answer 85

Yes but it must be rsble and in good faith Otherwise, they're wasting corporate assets and breaching duty of loyalty

Answer 86

Directors' fiduciary duties prohibit them from diverting a business opportunity from their corporation to themselves without first giving their corporation an opportunity to act What counts as a business opportunity? Ex: something in business line; something the corp has an interest or expectation in; closer to the business's line of business, more likely a court will find it to be a corp opportunity

Answer 87

Start with standard in full: duty of loyalty which is director needs to discharge her duties in good faith with the rsble belief that her actions are in the best interest of the company; and she must take the care that a rsble person would believe appropriate in her position Then focus on duty of loyalty A director can't usurp a coporoate oporutnity. This means a director can't take it until he (1) tells the board about it and (2) waits for the board to reject the opp

Answer 88

No Director should still present opp to corp and allow it to decide whether it can take advantage of it or not

Answer 89

if director usurps a corp opp, the corp can sue to recover under a constructive trust theory Can be compelled to transfer property to the corp at the price she paid If she sold property at a profit, corp may recover that profit

Answer 90

A director is presumed to concur with a board action unless her dissent or abstention is noted in writing in the corp records In writing means: (1) in the minutes, (2) delivered in writing to the presiding officer at the meeting, or (3) written dissent to the corporation immediately after the meeting Exception: a director is not liable if she was absent from the board meeting Exception: good faith reliance on someone or some information presented

Answer 91

Officers are agents of the corporation Corporation is the principal and officers are the agents

Answer 92

Whether officer can bind the corp is determined by whether she has agency authority to do so (actual or apparent authority) Unauthorized actions may become binding on corp because of ratification, adoption, or estoppel Corp is liable for actions by its officers within the scope of their authority, even if the particular act in question was not specifically authorized

Answer 93

President of a corp generally has apparent authority to bind the corporation to contracts in the ordinary course of business

Answer 94

Traditionally, had to have a president, secretary, and treasurer Now, doesn't need to have anything in particular and one person can serve in more than one office

Answer 95

Same care and loyalty as directors And anything determined by the bylaws or authorized by the board

Answer 96

By the board, which also sets officer compensation Unless contrary provision, an officer has the power to resign at any time by delivering notice to the corp, and the corp has the power to remove an officer at any time, with or without cause If resignation or removal is a breach of contract, can have damages - but mere appointment to office doesn't in itself create a contract Shareholders fire and hire directors Shareholders DO NOT fire and hire officers - the board of directors does

Answer 97

No indemnification (I think only directors) Mandatory indemnification Permissive indemnification

Answer 98

A corp cannot indemnify (reimburse) a director who is: (1) held liable to the corp or (2) held to have rec'd an improper benefit

Answer 99

Unless contrary provision, a corp MUST indemnify a director or officer who was successful in defending a proceeding on the merits or otherwise for rsble expenses, including atty fees, incurred in connection with the proceeding

Answer 100

A corp MAY indemnify a director or officer for rsble litigation expenses incurred in unsuccessfully defending a suit brought against the director or officer on account of the person's position if the person: (1) acted in good faith; and (2) believed that her conduct was in the best interests of the corporation That's the duty of loyalty standard Generally, determination whether to indemnify is to be made by a disinterested majority of the board, or if not enough people, by a majority of a disinterested committee or independent legal counsel Shareholders may also make the determination

Answer 101

Didn't win or lose - goes to category 3, permissive

Answer 102

Notwithstanding the above rules, a court in which a D or O was sued may order indemnification if it is justified in view of all circum If D or O was held liable to the corp, reimbursement is limited to costs and atty's fees

Answer 103

Can for damages but not for intentional misconduct, usurping corporate opportunities, unlawful distributions, or improper personal benefit So can eliminate liability only for duty of care cases

Answer 104

Yes as long as the director furnishes the corp a statement that the director believes he met the appropriate standard of conduct and that he'll repay the advance if he's later found to have not met the standard

Answer 105

Yes even if the D or O would not have been entitled to indemnification in the situations above

Answer 106

FACT PATTERN FOUR: SHAREHOLDERS

Answer 107

Generally, no fiduciary duties They usually have no direct control in management of the corporation's business Can act in their own personal interests and don't have the duty of care or loyalty Liability is therefore usually limited to liabilities for unpaid stock, a pierced corporate veil, or the absence of a de facto corporation

Answer 108

Small number of shareholders Stock not publicly traded Shareholders can manage directly They run the corporation - can set up a board of directors to run it like normal, or can forgo the board and run it themselves, or just appoint a manager

Answer 109

These agreements set up alternative management for a close corporation MBCA allows shareholders to enter into agreements to dispense w the board and vest management power in the shareholders If the articles don't include such a special provision, shareholders exercise only indirect control of the corporation through their voting power, by which they elect and remove directors, adopt and modify bylaws, and approve fundamental changes in the corporate structure Two ways to set up a shareholder management agreement: (1) in the articles and approved by all shareholders OR (2) by unanimous written shareholder agreement Either way, agreement should be conspicuously noted on the front and back of stock certificates If shareholders do this and set up management by shareholder or by a manager, now the shareholders owe the duty of care and loyalty like directors normally would

Answer 110

Two ways to set up a shareholder management agreement: (1) in the articles and approved by all shareholders OR (2) by unanimous written shareholder agreement

Answer 111

unless the corporation’s articles or a shareholder agreement provides otherwise, you should generally respond that the shareholders have no such power; that power is vested in the board of directors, and the shareholders have the power to elect the board.

Answer 112

Whoever is managing the corp So normally it's the board of directors But if the shareholders are managing, they have the liabilities

Answer 113

So if shareholders are managing, they'll have duty of care and loyalty Whether or not they're managing, in close corporations, they'll also have a duty to the other shareholders because this is like a partnership So they owe a duty of utmost good faith

Answer 114

Controlling shareholders can't use their power to benefit at the expense of minority shareholders Controlling shareholder could be a corporation For ex: a parent corporation should not use its domination of a subsidiary corporation to receive something to the detriment of the subsidiary's minority shareholders Would breach the duty of not hurting the minority shareholders Also a duty to disclose material information to the minority shareholders

Answer 115

they can sue the controlling shareholders who oppress them for breach of this fiduciary duty For ex: controlling S might deny the minority any voice in corp affairs, fire them from employment, refuse to declare dividends, and refuse to buy the minority's stock (so the minority is getting no return on investment) Why do courts let minority shareholder sue? Because oppression thwarts their legitimate goals for investing and they have no way out

Answer 116

No, bc the corp is liable for what it does

Answer 117

Yes, a shareholder might be personally liable for what the corp did if the court pierces the corporate veil Can happen in close corporations only

Answer 118

Doctrine that allows shareholders to be sued for debts of corp Avail only in close corporations To pierce the corporate veil and hold shareholders personally liable: (1) the shareholders must have abused the privilege of incorporating; and (2) fairness must require holding them liable So courts may pierce corporate veil to avoid fraud or unfairness by sharheolders in a close corporation But something like sloppy admin isn't enough

Answer 119

Alter ego (identity of interests) Undercapitalization Fraud, avoidance of existing obligations, or evasion of statutory provisions

Answer 120

If the shareholders ignore corporate formalities such that the corporation may be considered the "alter ego" or a "mere instrumentality" of the shareholders or another corporation, AND some basic injustice results, a court might pierce the CV May arise where shareholders treat corporate assets liek their own, commingle their money w corporate money, etc.

Answer 121

To answer this question, we start with the general rule: shareholders are not liable for the acts or debts of the corporation. Then, give the piercing the corporate veil standard: A court may pierce the corporate veil and hold shareholders personally liable where the shareholders have abused the privilege of incorporating and fairness requires holding them liable. Here, a court might pierce the corporate veil. Why? First, did a shareholder abuse the corporation? YES - abused corp by using card for its own purchases, commingling funds, using car as his own, etc. Second, would it be unfair for X to have limited liability? YES because then creditors aren't getting paid If the court does pierce the corporate veil, only X would be liable. Y did nothing wrong. Only X treated corporate assets as his own.

Answer 122

corporate veil may be pierced where the corporation is inadequately capitalized, so that at the time of formation there is not enough unencumbered capital to rsbly cover prospective liabilities

Answer 123

Start w general rule: shareholders are not liable for corporate obligations. But a shareholder may be personally liable for corporate obligations where they abused the privilege of incorporating and fairness requires it. Here, a court may pierce the CV because the corporation was undercapitalized when formed. The shareholders failed to invest enough to cover prosepctive liabilities. Additionally, courts may be more willing to pierce the corporate veil for a tort victim than a contract claimant. Fairness requires holding the shareholder personally liable because otherwise the injured party won't see justice because of the shareholders' failings.

Answer 124

Corporate veil may be pierced where necesary to prevent fraud or to prevent an individual shareholder from using the entity to avoid his existing personal obligations But mere fact that an individual chooses to adopt the corporate form of business to avoid future personal liability is not in itself a reason to pierce the CV

Answer 125

normally, only shareholders who are active in the operation of the business will be held liable Liability is joint and several Doesn't matter if the shareholder at fault is a corporation; can hold them "personally" liable

Answer 126

Stock ownership when claim arose Adequate representation of corp's interest Written demand on corp to take action

Answer 127

Authorized stock: maximum number of shares a corp can sell Issued stock: number of shares the corp actually sells Outstanding stock: shares issued but not reacquired

Answer 128

Can vote her shares either in person or by proxy executed in writing A proxy is: (1) a writing (fax and email are fine), (2) signed by the record shareholder (email is fine if the sender can be identified), (3) directed to the secretary of the corp, (4) authorizing another to vote the shares

Answer 129

Only if it states that it is irrevocable and is coupled with an interest or given as security (1) the proxy says it's irrevocable and (2) the proxy holder has some interest in the shares other than voting

Answer 130

(1) a written trust agreement (2) copy of the agreement is given to corp (3) legal title to the shares is transferred to voting trustee (4) original shareholders receive trust certificates and retain all shareholder rights except for voting

Answer 131

the agreement has to be in writing and signed

Answer 132

Elect director: plurality (person gets more votes than anyone else) Approve fundamental change: traditionally, we needed a majority of the shares entitled to vote. But now increasingly just need the majority of the shares that actually vote on the issue. Remove a direct: Traditionally, needed a majority of the shares entitled to vote. Now, need majority of the shares that actually vote on the issue. Other matters: majority of shares that actually vote on the issue.

Answer 133

Valid they are not an undue restraint on alienation Can be enforced against third party if: (1) the restriction is conspicuously noted on the stock certificate or is contained in the information statement required for uncertificated shares) or (2) the transferee had actual knowledge of the restriction at the time of the purchase

Answer 134

(1) the corp's articles and bylaws (2) board resolutions regarding classification of shares (3) minutes of shareholders' meetings from the past three years (4) communications sent by the corporation to shareholders over the past three years (5) a list of the names and business addresses of the corporation's current directors and officers (6) a copy of the corporation's most recent annual report

Answer 135

(1) excerpts of the minutes of the board meetings (2) the corp's books, papers, and accounting records (3) shareholder records Must state a proper purpose for demand - one that's rsbly related to the person's interest as a shareholder

Answer 136

(1) board action adopting a resolution of fundamental change; (2) board submits the proposal to the shareholders w written notice; and (3) shareholder approval (trad: majority of shares entitled to vote; modern: majority of shares that actually voted) Most of the time, we also need to deliver a doc to the secretary of state

Answer 137

(1) notice of shareholders' meeting at which vote will take place must state that the shareholders will be entitled to exercise their dissenting rights (2) before vote, shareholder must file w the corporation a written notice of objection and intent to demand payment (3) at vote, shareholder must abstain or vote against (4) if action is approved, corp must notify shareholders who filed an intent to demand payment - must into T and P to submit her shares - within 10 days (5) within time set by corp, shareholder must make written demand to be bought out and deposit her stock with corp (6) corp must pay dissenters the amount the corp estimates as the fair value of the shares plus accrued interest Then (7) if shareholder is dissatisfied with valuation, he has 30 days in which to send the corp her own estimate and demand payment (8) if shareholder and corp can't agree, corp must file action in court wihtin 60 days of receiving demand (9) if corp doesn't file, the corp must pay the demand

Answer 138

(1) the articles of incorporation of the surviving corporation will not differ from the articles before the merger (2) each shareholder of the survivor whose shares were oustanding immediately prior to the effective date of hte merger will hold the same number of shares, w identical preferences, limitations, and rights; and (3) the voting power of the shares issued as a result of the merger will comprise no more than 20% of the voting power of the shares of the surviving corporation that were outstanding immediately prior to the merger

Answer 139

Grounds that corp fraudulently obtained its articles of incorporation or that corp is exceeding or abusing its authority

Answer 140

(1) director abuse, waste or assets, or misconduct (2) directors are deadlocked in management of affairs, shareholders are unable to break deadlock, and irreparable injury to the corp is threatened (3) shareholders are deadlocked in voting power and have failed to elect one or more directors for a period that includes at least two consecutive annual meeting dates (4) corp has abandoned its business and failed to dissolve wihtin rsble time

Answer 141

(1) the creditor's claim has been reduced to judgment, execution of the judgment has been returned unsatisfied, and the corp is insolvent; or (2) the corp has admitted in writing that the creditor's claim is due and owing and the corp is insolvent

Answer 142

Give written notice to creditors and publish notice of dissolution in newspaper in PPB Gather all assets Convert assets to cash Pay creditors Distribute any remaining sums to shareholders pro rata

Corporations Flashcards

(169 cards)