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Bar Exam > Corporations > Flashcards

Corporations Flashcards

1
Q

What are the six defining attributes of a corporation?

A

(1) Separate entity
(2) Perpetual life
(3) Powers granted by State Statute
(4) Centralized Management and Control
(5) Transferability of Interest
(6) Limited Liability for Shareholders

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2
Q

When is the corporate veil likely to be pierced?

A

Elements:

(1) 3rd Party “injured” by Corporation
(2) Corporate formalities were not followed or corporation was not adequately capitalized at time of formation, AND
(3) Injustice would otherwise result

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3
Q

What is the most common example of corporate formalities not being followed?

A

Commingling of corporate funds, or using corporate assets for personal use

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4
Q

Who are the primary players during the pre-incorporation period?

A

Promoters:

any person who directly or indirectly takes the initiative of setting up the corporation.

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5
Q

What are the fiduciary duties of the Promoters during the pre-incorporation period, and who are they owed to?

A

Duties:

  • Full disclosure of material facts
  • Promote Corporation’s interests
  • Good Faith

Owed to:

  • fellow promoters
  • investors
  • the corporation being formed
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6
Q

What liabilities does a Promoter have to 3rd parties?

A

“Any person who acts on behalf of a corporation, knowing that it does not yet exist, is PERSONALLY LIABLE for debts incurred.”

More than one promoter? Joint and several liability.

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7
Q

What are the filing requirements for forming a corporation (what needs to be included)?

A

Must File, and PAY FEE

Articles of Incorporation, including:

(1) Incorporators’ names/addresses
(2) Corporation’s name w/ designation (“Inc.”)
(3) Classes and number of shares authorized
(4) Registered agent and office
(5) Number of directors (unless in bylaws)

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8
Q

What if a corporation files the Articles of Incorporation, but forgets to pay the filing fee?

A

It has NOT been incorporated.

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9
Q

At what point in time does a corporation come into existence?

A

When it has been properly filed.

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10
Q

Who is liable, and for what, if a corporation is improperly filed?

A

(1) Active participates are jointly and severally liable for debts/torts of business
(2) Passive investors probably NOT personally liable

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11
Q

What if there was a filing error in forming the corporation, but the Secretary of State didn’t notice?

A

Then the corporation is still formed.

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12
Q

After filing (incorporating), what is the first thing that a corporation must do?

A

ORGANIZATIONAL MEETING:

(1) Adopt bylaws
(2) Issue at least ONE share of stock, before doing anything else
(3) Other business is then acceptable

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13
Q

What is the process for issuing stock?

A

(1) Board must authorize issuance of shares
(2) Share must be issued for adequate consideration
- (a) determined by Board in good faith, but
- (b) Shares of same class, sold at same time, same price.

Minority rule: no issuing shares for FUTURE payment/services

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14
Q

What are the Principal Office Records (list) and what is important about these?

A

Records:

(1) Articles and Bylaws
(2) Board Resolutions and Share classification
(3) Shareholder minutes and actions (3 years)
(4) General written communications to shareholders (3 years)
(5) Financial statements (3 years)
(6) Names/addresses of officers and directors
(7) Most recent annual report

Importance:
Shareholders may inspect these AS A MATTER OF RIGHT

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15
Q

Besides the Principal Office Records, what other records is a corporation required to maintain? Can shareholders inspect these?

A

(1) Director meetings and actions
(2) Accounting records (beyond financial statements)
(3) Shareholder names and addresses

Shareholders can inspect these upon a showing of PROPER PURPOSE.

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16
Q

What counts as a “proper purpose,” relating to shareholders’ inspection rights?

A

Proper purpose =

relates to the shareholder’s interest as a shareholder

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17
Q

What notice is required for Annual Shareholder Meetings?

A

Notice must be:

(1) in writing
(2) 10-60 days before meeting
(3) including time, place, date

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18
Q

Who can call a Special Meeting for the corporation?

A

(1) Board
(2) Shareholders of at least 10% of voting stock
(3) Court

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19
Q

What must be included in notice for a Special Meeting?

A

(1) PURPOSE of meeting

(2) Time, place, date

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20
Q

What is the effect of errors in the proper notice procedures for a meeting?

A

(1) The results of the meeting are VOIDABLE by those who did not get proper notice.
(2) Also, notice can be waived in writing, or by showing up to the meeting

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21
Q

What duties do shareholders owe to the corporation?

A

(1) Generally - no duties, EXCEPT:
(2) Controlling Shareholders (own majority of stock):
- (a) Same duty as Directors/Officers
- (b) Look especially for LOYALTY violations
- (c) If controlling shareholder acts to own benefit in a way that damages the minority, this is OPPRESSION OF THE MINORITY

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22
Q

What do shareholders get to vote on?

A

(1) Electing the Board
(2) Removing a Board Director
(3) Fundamental Changes

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23
Q

Besides proper notice, what is needed for a proper shareholder meeting?

A

“Quorum”:

  • Majority of shares entitled to vote, at START of meeting
  • Articles may provide some fraction other than majority
  • A proxy = present, for quorum purposes
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24
Q

What are “preemptive rights?”

A

Right of shareholder to acquire additional shares of corporation as they are issued, so as to maintain same % of shares

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25
Q

What are “dissenters’ rights?”

A

The right to vote no on a fundamental corporate change, and to receive the fair value of one’s shares if the dissenter loses.

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26
Q

What shareholder litigation actions are available?

A

(1) Direct actions, for benefit of the shareholder
(2) Derivative actions:
- (a) Shareholder can sue in name of corporation,
- (b) FOLLOWING proper demand on the Board (or showing of futility)
- (c) recovery is for the benefit of the corporation

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27
Q

When does the Board declare dividends?

A

At its own discretion, except CANNOT when dividend would render Corporation insolvent.

Insolvent =

(1) Can’t pay debts when they’re due, or
(2) Liabilities are greater than assets after the dividend is paid

28
Q

Can the Articles of Incorporation give different dividend rights to different classes of stock?

A

Yes. Totes McGoats.

But stock w/in the same class always receives the same dividends.

29
Q

What is a “share repurchase,” or “buyback?”

A

When corporation chooses to buy back shares, provided it meets the same financial test applicable to dividends (insolvency.)

This gives each remaining shareholder a larger portion of corporate ownership.

30
Q

How are the powers of the Board vested?

A

Vested as a WHOLE.

Although, Board is allowed to form committees and delegate matters, except for declaring dividends.

31
Q

What notice is required for Board Meetings?

A

Regular meetings (pre-scheduled): no notice

Special meetings:

(1) 2 days notice, written or oral
(2) Notice may be waived
(3) Purpose of the special meeting doesn’t have to be included

32
Q

What is needed for a quorum at Board Meetings?

A

(1) Default: Majority of director SLOTS;

(2) Must be present for ENTIRE meeting, not just the beginning

33
Q

How are votes counted in Board Meetings?

A

(1) Presumed “Yes” if Director is present, UNLESS
- (a) dissent on the record, OR
- (b) written notice of dissent immediately after the meeting

34
Q

Can the Board take action without a meeting?

A

Only with unanimous written consent.

35
Q

What compensation rights do Directors have?

A

(1) Entitled to reasonable compensation

(2) Entitled to reimbursement for out-of-pocket expenses

36
Q

Who pays for litigation if a Director is sued?

A

If Director wins: reimbursed for litigation expenses

If Director loses: up to corporation about whether to indemnify

37
Q

If an “interested” Director fully discloses his conflict of interest, how can his suggestion still go through?

A

(1) Majority of disinterested shareholders, OR
(2) Majority of disinterested Directors
May RATIFY the decision

38
Q

What are the consequences if an interested Director fails to disclose his conflict of interest in a deal?

A

(1) Transaction may be undone
(2) Profits may be recovered by the corporation
(3) UNLESS: Director proves that the transaction was fair to the corporation

39
Q

What is the Corporate Opportunity Doctrine?

A

A Director must put the corporation’s interests ahead of his own business interests, so….
Taking a business opportunity in the same line of business as the corporation = a conflict of interest.

40
Q

What liability does the Director have to the corporation?

A

Directors are PERSONALLY LIABLE for losses suffered by the corporation as DIRECT AND PROXIMATE CAUSE of breach of duty.

41
Q

What are the six defenses and protections from liability that a Director may have?

A

(1) Dissent from Board Action
(2) Absence from Board meeting
(3) Unanimous shareholder ratification of Board Action
(4) Reliance (good faith) on expert advice
(5) Business Judgment Rule
(6) Liability Limitations written out in the Articles
- (a) Articles can limit liability for breach of care, but NEVER for breach of Loyalty

42
Q

How are corporate officers elected and removed?

A

Discretion of the Board of Directors

43
Q

What duties do officers owe to corporation?

A

Care, Loyalty…same as Directors

44
Q

How are the Articles of Incorporation amended?

A

(1) Board files Articles of Amendment w/ Secretary of State
(2) Any affected shareholder whose rights are affected by amendment can vote
(3) Usually need a majority of the total shares ENTITLED to vote for Amendment to be adopted (not just majority of present)

45
Q

What is a “merger?”

A

Merger =

  • one company is merged into another through a “plan of merger
  • the merged company’s assets and liabilities immediately become those of the surviving company
46
Q

What is “consolidation?”

A

Consolidation =

  • two companies joined pursuant to a plan, into a NEW, third company
  • neither original company survives
47
Q

What is a “share exchange?”

A

Share exchange =

  • one company acquires ALL stock of another corporation
  • Both companies survive, but they are owned by the same people
  • Subsidiary-Parent
48
Q

How are mergers and consolidations approved?

A

General Requirements:

(1) Board of BOTH merged and surviving companies approve, AND
(2) Shareholders of BOTH merged and surviving companies approve.

49
Q

What are the exceptions to the normal approval procedures for mergers and consolidations?

A

(1) Small Acquisition:
- if minimal effect on surviving company’s shareholders (a tiny company merged into a huge company), surviving company’s shareholders don’t have to approve

(2) Short-form Merger:
- if parent already owns 90%+ of subsidiary, subsidiary can be merged w/o vote of Board OR shareholders of subsidiary

50
Q

What is a short-form merger?

A

Merger where:
parent company that owns 90%+ of subsidiary chooses to merge subsidiary w/o the consent of either the Board of the Shareholders of the subsidiary

51
Q

What approval is needed for a share exchange to occur?

A

(1) Both boards must approve, and

(2) Shareholders of acquired company must approve

52
Q

Since there is no actual vote, are there dissenters rights for short-form mergers?

A

Yes, there can be, except

MBCA denies this right to PUBLICLY TRADED stock.

53
Q

Can a corporation convert into a different type of entity?

A

Yes, with both shareholder and Board approval, a corporation can convert into:

  • LLC, or
  • Partnership
54
Q

When is approval needed for corporate sale of assets?

A

If it is a sale of all or substantially all of the corporation’s assets other than in the ordinary course of business.

55
Q

What approval process is needed for a sale of assets?

A

(1) Both Boards (buying and selling), and
(2) Shareholders of selling corporations
- (a) by majority entitled to vote

56
Q

Are there dissenters’ rights for a corporate sale of assets?

A

Yes.

57
Q

How is a corporation voluntarily dissolved before shares have been issued?

A

To dissolve:

(1) Majority or promoters or initial directors vote
(2) Deliver Articles of Dissolution to Secretary of State

58
Q

How is a corporation voluntarily dissolved after shares have been issued?

A

(1) Board recommends dissolution
(2) Shareholders approve dissolution
- (a) by majority entitled to vote
- (b) If there are multiple classes of stock, each class gets a vote (MBCA), or otherwise if stated in Articles
(3) Deliver Articles of Dissolution to Sec. of State

59
Q

Why might the Secretary of State dissolve a corporation?

A

(1) Failure to pay fees
(2) Failure to deliver reports when due
(3) No registered agent, or
(4) Expiration of stated period of duration

60
Q

If Secretary of State is dissolving a corporation for a valid reason, what notice is required?

A

60 days notice, with opportunity to cure.

Also, all states give corporations additional time to see reinstatement of corporate status (sometimes up to 5 years)

61
Q

Who are all the folks who can dissolve a corporation?

A

(1) Board and shareholders
(2) Secretary of state
(3) Court

62
Q

What are the three routes where a Court may end up dissolving a corporation?

A

(1) Suit by State AG
- fraud/abuse of legal power
(2) Suit by Shareholder
- voting deadlock, illegality, waste of assets
(3) Suit by Creditor
- creditor has judgment, or corporation admits debt but is insolvent

63
Q

What is the final step in dissolution by a Court?

A

File a Decree of Dissolution with the Secretary of State.

64
Q

What if a corporation continues its business after there has been a Decree of Dissolution delivered to the Secretary of State?

A

This is a partnership now.

65
Q

Upon liquidation, how are corporate assets distributed?

A

(1) Debts to creditors
(2) Debts to shareholders
(3) Leftovers to shareholders, pursuant to any liquidation rights in the Articles of Incorporation
- all shares in same class get same distribution

Bar Exam (26 decks)

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