Exam 3

Question 1

General Formalities to Form Corporation

Answer 1

1) Filing papers with secretary of state
2) Secretary issues certificate of incorporation signifying formal beginning of legal existence
3) Bylaws must be adopted, directors and officers elected, shares of stock issued
4) Regular meetings of directors and shareholders must occur

Question 2

Who holds the investor role?

Answer 2

Shareholders

Question 3

What rights do shareholders have in their investor role?

Answer 3

• vote for BOD and major changes in the organizational structure
• receive dividends if directors choose to authorize such

Question 4

Can shareholders occupy other roles in the corporation

Answer 4

Yes

Question 5

Who has power or control of the organization

Answer 5

Board of Directors as a group

Question 6

How is Board of Directors selected

Answer 6

by a vote of the shareholders

Question 7

Who do the Board of Directors vote for

Answer 7

Officers

Question 8

Who controls the day-to-day management of the company

Answer 8

Corporate officers

Question 9

What rights do the board of directors hold

Answer 9

set policy

ultimate decision makers

Question 10

What rights do the corporate officers hold

Answer 10

carry out policy decisions and directives of the board

Question 11

What rights do the corporate officers hold

Answer 11

carry out policy decisions and directives of the board

Question 12

Who are the top officers provided by corporation statute

Answer 12

president, secretary, treasurer

Question 13

Return on Investment Comes From

Answer 13

market appreciation

dividends

Question 14

What is the goal of return on investment

Answer 14

buy low, sell high

Question 15

What is market appreciation

Answer 15

profit is “returned” via the share price

Question 16

Limited Liability

Answer 16

only lose amount invested in corporation

Question 17

Unsecured Debt

Answer 17

contract between debtor and creditor in which creditor lends money to debtor, and debtor promises to pay repay it

***no collateral

Question 18

Secured Debt

Answer 18

• **creditor has hedge against risk of default
• **debtors continued ownership of specific property subject to full repayment of loan
• ***collateral

Question 19

If using personal property as collateral what do you use to transfer collateral right

Answer 19

Article 9 of Uniform Commercial Code

Question 20

If using real property as collateral what do you use to transfer collateral right

Answer 20

mortgage

Question 21

Secured Creditor

Answer 21

creditor with the benefit of a security interest over some or all of the assets of the debtor

Question 22

Mortgagee

Answer 22

entity that lends money to the mortgagor for the purpose of purchasing a piece of real property

Question 23

Debtor

Answer 23

person or institution that owes a sum of money

Question 24

mortgagor

Answer 24

the borrower in a mortgage, typically a homeowner

Question 25

Sell Property

Answer 25

- property it owns | - bonds or shares of stock

Question 26

Sell Property

Answer 26

- property it owns | - bonds or shares of stock

Question 27

1933 Securities Regulation Act

Answer 27

goals of information disclosure and reinforcing the perception of fairness within the market

Question 28

Elements of Fraud

Answer 28

1. must be material information missing or misstated 2. parties that face liability risk because of missing or misstated material information include anyone who was involved in preparing the statement (due diligence defense for everyone but the issuer of securities, they must prove they were careful when preparing and then they are free of liability)

Question 29

Interests companies need to consider before entering contract

Answer 29

- attractiveness of being obligated to pay back any capital it receives (borrows) - whether it is worth while to exchange some kind of property for another - effect of having additional shareholders on the operation of corporate structure - what is the legal risk when using any of the capital formation methods - what is the cost

Question 30

Implications of Raising Capital by borrowing from a bank

Answer 30

- you have to pay back money - may need to use property as collateral - legal risk (default=lost property) - cost of creating contract and structuring the transfer of collateral right

Question 31

Implications of Raising Capital by selling bonds

Answer 31

- pay back money - bond may be "secured" - must be structured and comply with securities law - legal risk - cost of creating the bond and cost of complying with securities law

Question 32

Implications of Raising Capital by selling stock

Answer 32

- additional shareholders cause current shareholders power to be diluted - transferring new share of stock to each buyer - legal risk - cost of compliance