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Flashcards in Corporations- McDonald Deck (45):

What are the characteristics of a corporation?

Creature of statute
Separate legal entity
Perpetual Existence
Owners have limited liability
Freely transfers ownership interests
Easy to raise capital


What are the disadvantages of a corporation?

Double taxation
Compliance with multiple statutory requirements.


De Jure vs. De Facto

De Jure: lawfully formed
De Facto: minor defect during formation, good faith attempt to comply with statute, conducts business as a corporation, personal liability for persons acting on behalf of the corporation, who knew the corporation did not really exist.


C corp vs. S corp

C corp is a typical corporation
S corp: 100 or fewer shareholders
no double taxation
generally, one class of stock
shareholders must be individuals, estates, or certain types of trusts
no foreign ownership


What must be included in Articles of Incorporation (charter)?

(1) the corporation’s name,
(2) the number of authorized shares,
(3) the street address of the initial registered office,
(4) the name of the registered agent at that office, and
(5) the name and address of each incorporator.
Nature and purpose of the corporation's business MAY be included, but is NOT required.


Financial Structure: What are equity securities?

Stock: preferred stock, common stock, treasury stock, cumulative stock.
Options, warrants, and preemptive rights.


General characteristics of equity securities?

Participate in management, usually through voting
Participate in corporate earnings
Proportionate share of assets upon liquidation.


What kind of stock gets dividends first?

Preferred stocks.


What are debt securities and name a few?

Debt securities are bonds.
Debenture bonds: unsecured bonds
Mortgage bonds: secured bonds
Convertible Bonds: like convertible stock, can be exchanged for other securities of the corp.


What are dividends?

a distribution out of current or past earnings.


What can a distribution consist of?

Stock: not a distribution
Liquidating: distribution of the capital assets.


Do shareholders have rights to a dividend?

no right for shareholders to a dividend.


What is the general rule to pay out a dividend?

Is that corporations are free to pay dividends unless such payment would reduce total assets below total liabilities.


What happens if illegal dividends are distributed?

Illegal dividends must be repaid.


How often are shareholder meetings required?

Annual shareholder meetings required.


Generally shareholders are not personally liable for corporate debts, but there is one exception, what is it?

Unless the corporate veil can be pierced.


How can the corporate veil become pierced?

Must act as a corporation and and hold separate corporate books and not commingle personal and corporate assets together.
Also the use of the corporate entity to promote wrongdoing or fraud will lead courts to pierce the veil.
When a corporation is undercapitalized.


What are bylaws?

Similar to a partnership agreement, contains provisions for managing and running a corporation.


Does a shareholder have fiduciary relationship to the corporation?

No fiduciary relationship with corporation.
Majority or controlling shareholder are a possible exception.


What can the shareholders allowed to vote on?

Vote to:
Elect directors.
Amend Articles of Incorporation
Fundamental changes: sale of virtually all or all corporate assets. Mergers or consolidations. Dissolution.
Voting agreements and voting trusts: agreements among shareholders to vote together on various corporate issues.


Are shareholders allowed to inspect the corporate books?

Shareholders can inspect the corporate books, but must have a proper purpose and advance notice required.


Directors are elected by?

Elected by the shareholders.


What affairs are managed by directors?

Makes major policy decisions
Selects officers
Declares dividends
Changes bylaws


Do directors have a right to a salary?

No right to a salary.


Officers are selected by?

Board of Directors


What are officer's duties?

Run day to day affairs of the corporation


Are officers considered agents of the corporation?

Yes, they owe fiduciary duties.


Can officers be indemnified for expenses incurred in defending lawsuits?

May be indemnified for expenses incurred in defending lawsuits while representing the corporation unless officer has engaged in misconduct.


What are the fiduciary duties of directors and officers?

Duty of care/diligence
Duty of loyalty: must put the interests of the corporation first.
Duty of odebience


What is the process for fundamental changes?

Board of directors adopts a resolution setting forth the transaction
Put to a shareholder vote
Majority rules unless greater %age required by AofI


What are Mergers?

When one corporation acquires all aspects of another corporation.


Is shareholder approval needed to merge?

Do not need shareholder approval to merge with a subsidiary if the parent corporation controls 90% or more of the stock.
Creditors of acquired firm are now creditors of merged corporation.


What is a stock purchase and is shareholder approval required?

when one company acquires all of a controlling interest of another company's stock.
No shareholder approval required
No appraisal remedy


What is a dissolution?

The termination of the corporation.


If dissolution is voluntary who needs to vote?

Board proposal, shareholder vote.


If dissolution is involuntary what happens?

State revokes charter
Judicial decree:usually because the corp can no longer function.
Creditors may sue to dissolve


In corporations, is the ownership interest freely transferable?

Yes, simply acquiring a corporation’s stock gives an individual an ownership interest. Shares can be freely bought and sold, usually without any restriction.


In the course of exercising good business judgment and reasonable care, a director is entitled to rely on information provided by:

In the course of exercising good business judgment and reasonable care, a director is entitled to rely on information provided by an officer (or professional specialist) if the director reasonably believes the officer has competence in the relevant area.


A corporation formed by a political unit to achieve a governmental purpose is best described as

Public. A public corporation is formed and funded by a local, state, or federal political unit to achieve a governmental purpose. Examples are incorporated cities, school districts, water districts, and state universities.


Are officers considered agents and fiduciaries of the corporation?
What kind of authority do they have to manage the business?

Officers are agents and fiduciaries of the corporation, having actual and apparent authority to manage the business.


Under the RMBCA, when a merger becomes effective what happens?

(1) the entity designated in the plan of merger as the survivor comes into existence
(2) every entity merged ceases to exist separately
(3) the property and contract rights of the merged entities are vested in the survivor
(4) the liabilities of the merged entities also are vested in the survivor.


Does a corporation have perpetual existence?
What are the exceptions?

A corporation has perpetual existence unless it is given a shorter life under the articles of incorporation or is dissolved by the state.


Can an individual serve as all three? shareholder, director and officer?



What is the doctrine under which a corporation is made liable for the torts of its employees, committed within the scope of their employment?

Respondeat superior, or “let the master answer”


When a corporation is incorporated in one state and is doing business in that state and another state is considered what kind of state?
What must it obtain in order to be able to do business there?

A corporation doing business but not incorporated in that state is considered a foreign corporation and must obtain a certificate of authority to transact business there.