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Flashcards in Corporations Deck (75)
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What does an incorporator do?

Executes articles of incorporation and delivers to SoS


Can an incorporator be an entity?



What information must be in the articles of incorporation?

1. Corporate name (must include: corp, co, inc, or ltd)
2. Name and address of each incorporator.
3. Name and address of each initial director.
4. Name of registered agent and address of the registered office


Articles of Vance Refrigeration, Inc. say the
corporation will “manufacture refrigeration machinery” and the corporation then goes into gold mining. Company enters contracts. What happens with the contracts under both common law and today?

It's ultra vires activity (beyond scope of articles).

Common law: ultra vires contracts voidable

Today: While Ks valid, shareholders can seek injunction and responsible managers are liable for ultra vires losses.


What's the difference between issued stock and outstanding stock?

Issued stock includes stock that has been repurchased by the company whereas outstanding stock only includes stock currently held by shareholders.


What's a de jure corporation?

Validly formed corporation following Incorporators notarized articles delivered to the SoS with required fees


A corporation formed in Rhode Island only does business in Ireland. Does Ireland or Rhode Island law govern the corporation's internal affairs?

Rhode Island


What is the general rule that I need to repeat in every question implicating liability of the directors, officers, or shareholders for what the corporation has done?

Generally, only the corporation itself has liability for its actions.


What are the two doctrines under which the shareholders of a corporation that has failed to form de jure will escape partnership treatment (unlimited personal liability)?

1. De Facto Corp. (except for actions by the state, quo warranto). Abolished in RI.

2. Corporation by estoppel.

These two doctrines have been abolished in many states.


Incorporators put together the proper documents and mail them to the Secretary of State. Unbeknownst to them, the documents are lost in the mail. In the meantime, the business is being operated as a corporation, and enters a contract. Are the shareholders personally liable on the contract?

Yes, unless the court applies the De Facto Corp. doctrine: (i) where there's a relevant incorporation statute (ii) the parties made a good faith, colorable attempt to comply with it; and (iii) there's been some exercise of corporate privileges.


You do business with people who hold their business out as a corporation. They think it’s a corporation. You think it’s a corporation. You write checks to the “corporation” and deal with it as a corporation. Turns out it’s not a de jure corporation. You sue the partners individually. Will you win?

No, under the doctrine of corporation by estoppel: in contract matters (but, unlike DFC, not torts), one who treats a business has a corporation may be estopped from denying that it is a corporation.

Here, you are estopped to deny that the business was a corporation because you have treated it as a corporation.


When is a corporation liable on contracts entered into by a promoter?

The corporation is not liable on pre-incorporation contracts until (i) there's a novation or (ii) it adopts the contract either explicitly or impliedly by accepting the benefit of the contract (ratification).


What is the liability of the promoter on pre-incorporation contracts it enters into?

Unless the contract clearly says otherwise, the promoter is liable on pre-incorporation contracts until there is a novation. Adoption (ratification) makes the corporation liable too, but does not relieve promoter.


Do the issuance of stock rules apply when there's a sale of stock between existing shareholders?



On January 10, S signs a subscription, offering to buy 100 shares of C Corp., a corporation not yet formed. A week later, S changes his mind. Can S revoke?

No, the offer is irrevocable for 6 months, unless it says otherwise or all subscribers agree to the revocation


On January 10, S signs a subscription, offering to buy 100 shares of C Corp., a corporation formed a week earlier. S later changes his mind. Can S revoke?

Yes, until accepted by the corporation's board of directors


What forms of consideration are acceptable in exchange for an issuance of stock?

Every state agrees that these are permitted: (1) money (cash or check), (2) tangible or intangible property, and (3) services already performed for the corporation.

There is a split of authority over these two other forms: promissory notes and future services (in states that disallow it's all treated as "water"). RI allows.


C Corp. is issuing 10,000 shares of $3 par stock. Could it get more than $30,000?

Yes, however, it must receive at least $30,000 as par is the minimum issue price.


When does the Board of Directors (or shareholders in RI) conclusively determine the issue price of the shares?

If (i) made in good faith, (ii) when the shares are issued for no-par or (iii) when issued in exchange for property or past services.


C Corp. issues 10,000 shares of $3 par to X for $22,000. The corporation wants to recover the $8,000 of “water.” Who is liable?

1. The directors if they knowingly authorize the issuance
2. X who is charged with notice of the par value and any transferee of X who knew about the water.


C Corp. articles provide for pre-emptive rights. You own 20% of the stock of C Corp. C Corp. issues stock to Peggy Olson to purchase property from Peggy. Do you have pre-emptive rights?

No, a preemptive right applies whenever there is a new issuance of stock for money
(cash or its equivalent, like a check). In RI, post 7/1/05, preemptive right must be in AoI.


When can shareholders remove a director?

On a majority vote, with or without cause; but if board is staggered its for cause only.


How may a Board of Directors act?

Either by unanimous agreement in writing or by resolution at a meeting which satisfies the notice, quorum, and voting requirements. In RI, unanimity required only for significant corporate events; all others AoI may provide from less than unanimity.


What are the notice, quorum and voting requirements of the BOD?

Notice: annual meeting and special meetings require notice of time and place, regular meetings don't; special meetings require purpose of meeting stated (meeting limited to purpose)
Quorum: Majority of all directors to do business; broken if enough leave during meeting.
Voting: majority vote of those present.
Example:, if 9 directors, at least 5 directors must attend the meeting to constitute a quorum; if 5 attend, at least 3 must vote for a
resolution for it to pass.


What is the duty of care standard for a director, and who has the burden of proof?

(1) Manage to the best of their ability
(2) in good faith
(3) with the care that an ordinarily prudent person in a like position would exercise under similar circumstances
(4) in a manner that the director reasonably believes to be in the best interests of the corporation.

The burden is on the plaintiff.


When will a director be liable for a breach of his duty of care for nonfeasance?

Breach must cause a loss to the corporation


When will a director be liable for a breach of his duty of care for misfeasance?

Under the business judgment rule, a court will not upset the presumption that directors acted in good faith and in the best interests of the corporation and second guess directors' decisions that in hindsight prove poor or erroneous. A director is not a guarantor of success.

Only where the business judgment of the director was not made in good faith, was not informed, or had no rational basis will a court upset the presumption.


What is the duty of loyalty standard for a director, and who has the burden of proof?

These are conflict of interest cases. D must act in good faith and with reasonable belief that what D does is in the corporation’s best interest.

Director has burden of proof.


Does the business judgment rule apply in duty of loyalty cases?

No, because director has alleged conflict of interest.


Martha is a director of XYZ, Inc. She sells sporks to XYZ, Inc. Is this an interested director transaction?

Interested director transaction will be set aside (or the director liable in damages) UNLESS the director shows 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 of these:
(a) majority of disinterested directors
(b) majority of disinterested shares (not shareholders).