R6 M5 - Business Structures: Part II Flashcards
(17 cards)
Under the Revised Model Business Corporation Act, which of the following statements is correct regarding corporate officers of a public corporation?
A. An officer may not simultaneously serve as a director. B. A corporation may be authorized to indemnify its officers for liability incurred in a suit by stockholders. C. Stockholders always have the right to elect a corporation's officers. D. An officer of a corporation is required to own at least one share of the corporation's stock.
Choice “B” is correct. A corporation may indemnify its officers for liabilities incurred in a suit by stockholders, especially if the officer prevails.
Choice “A” is incorrect. There is no restriction against serving as both a director and an officer.
Choice “C” is incorrect. The RMBCA provides that officers are to be appointed by the board unless the bylaws provide otherwise.
Choice “D” is incorrect. There is no requirement that an officer own stock in the corporation in which he or she serves.
When there is a merger, both corporations must give shareholders notice and a summary of the merger plan.
The merger needs to be approved by a majority of the shareholder, not all shareholders
In a corporation day to day management is done by the officers
-Ownership is freely transferable
- Corporation are creatures of state law and are regulated by each state
Similarities between C corporation and S corporation is that a shareholder can contribute property to the corporations without paying tax
Trish is a promoter for Alpha Corporation. Generally, Trish is personally liable for any pre-incorporation contract until Alpha:
A. Releases Trish from liability. B. Ratifies the contract. C. Rejects the contract. D. Assumes the pre-incorporation contract by novation.
Choice “D” is correct. In a novation, a new party (the corporation) is substituted for an old party (the promoter) in the contract. All parties must agree to the novation.
Choice “A” is incorrect. The corporation does not have the power to release Trish; the other party to the contract must agree to the release as well.
Choice “B” is incorrect. Technically, only a principal can ratify a contract made by an agent. Because the corporation is not in existence when the promoter acts, the promoter cannot be acting on the corporation’s behalf. Thus, the corporation is not the promoter’s principal and cannot “ratify” the promoter’s contract. Instead, the corporation is said to “adopt” a promoter’s contract. In any case, ratification/adoption does not release the promoter from liability; instead, it merely makes the corporation liable along with the promoter.
Choice “C” is incorrect. Rejection of the contract does not affect the promoter’s liability.
Under which of the following circumstances would a promoter be relieved of personal liability on contracts entered into while engaged in forming a corporation?
When the third party, the corporation, and the promoter enter into an agreement to substitute the corporation for the promoter.
Davis, an inventor, developed a new product, but lacked money to get the product to the marketplace. Before creating a corporation to raise capital, Davis leased office space and equipment, entered into contracts with third parties, and identified investors. Who has liability for pre-incorporation debts?
A. Davis is liable until the corporation assumed the debts in novation. B. Davis is liable until the articles of incorporation were filed. C. If this corporation is never formed, Davis is not liable. D. If this corporation is never formed, the unpaid third parties must write off the debt because no corporate entity existed at the time debt was incurred.
Choice “A” is correct. Davis acted as a promoter (a person who procures capital and other commitments for a corporation to be formed). Promoters are personally liable for contracts that they enter into on behalf of the corporation to be formed. They remain liable on the contracts even after the corporation is formed unless the parties enter into a novation (i.e., an agreement among the parties to substitute the corporation for the promoter).
Choice “B” is incorrect. A promoter remains liable on contracts he enters into on behalf of a corporation, even if the corporation is formed by filing articles of incorporation. The corporation does not become liable on the contracts merely because articles were filed.
Choices “C” and “D” are incorrect. Promoters remain liable on contracts they enter into on behalf of corporations even if the corporations are never formed.
By laws in a corporation contains rules desired regarding the operation of the corporation (management of a business corporation.).
In a legal action, a shareholder of Smackey, Inc. might be personally liable for the company’s debts if:
A. Smackey is overcapitalized. B. Smackey's articles of incorporation allow for more than one class of stock. C. The shareholder's personal funds are materially commingled with Smackey's funds. D. All of the answer choices are correct.
Choice “C” is correct. Commingling shareholders’ personal funds with the corporation’s funds is a breach of corporate formalities designed to create and keep the corporation as a separate legal entity. Thus, it is a ground for reaching the shareholder’s personal assets (i.e., piercing the corporate veil).
Choice “A” is incorrect. Overcapitalization is acceptable. Undercapitalization at the time of formation may cause the shareholder to be personally liable.
Choice “B” is incorrect. It is acceptable for most corporations to have more than one class of stock and this does not affect shareholder liability.
Choice “D” is incorrect as it includes choices “A” and “B”, both of which are incorrect per the above explanations.
Convertible and debenture bonds are corporate debt securities
A warrant is a contractual right to purchase stock, which constitutes a share of corporate equity.
Peters owned 500 shares of common stock in Kidsmart, Inc. Accordingly, Peters had the right to:
A. Automatically receive a dividend in any quarter in which the corporation made a profit. B. Inspect the corporate records on demand. C. Vote for the election and removal of the board of directors. D. Vote for and remove the corporate officers and set their compensation.
Choice “C” is correct. Shareholders have the right to vote to elect (typically annually) or remove directors. They also have the right to vote on whether to approve fundamental changes to the corporation, such as dissolution.
Choice “A” is incorrect. The board of directors has the power to decide whether or not to declare dividends. There is no automatic right to dividends.
Choice “B” is incorrect. Shareholders do have a right to inspect corporate records—but not on demand. Typically, five days’ written notice is required.
Choice “D” is incorrect. Officers are selected by the board of directors and the board sets the compensation of officers (and for themselves, as well).
Which of the following corporate actions is subject to shareholder approval?
A. Election of officers. B. Removal of officers. C. Declaration of cash dividends. D. Removal of directors
Choice “D” is correct. Shareholders have the right to elect and remove directors through the voting process.
Choice “A” is incorrect. Officers are selected by the directors rather than by the shareholders.
Choice “B” is incorrect. Because officers are selected by the directors, generally they may be removed only by the directors.
Choice “C” is incorrect. Dividends generally can be declared only by the directors; shareholders usually do not have any right to declare or vote on a distribution.
Johns owns 400 shares of Abco Corp. cumulative preferred stock. In the absence of any specific contrary provisions in Abco’s articles of incorporation, which of the following statements is correct?
A. Johns is entitled to convert the 400 shares of preferred stock to a like number of shares of common stock. B. If Abco declares a cash dividend on its preferred stock, Johns becomes an unsecured creditor of Abco. C. If Abco declares a dividend on its common stock, Johns will be entitled to participate with the common stock shareholders in any dividend distribution made after preferred dividends are paid. D. Johns will be entitled to vote if dividend payments are in arrears.
Choice “B” is correct. Once a dividend is declared, a shareholder becomes an unsecured creditor of the corporation for the amount of the unpaid dividend.
Choice “A” is incorrect. Absent a provision otherwise, cumulative preferred shares have no conversion privilege.
Choice “C” is incorrect. Absent a provision otherwise, cumulative preferred shares have no participation rights in dividends declared on common stock; the cumulative preferred shares are limited to the preferred dividend.
Choice “D” is incorrect. Whether cumulative preferred shares have a right to be voted depends on the provisions in the articles. There is no automatic right to vote, even if dividend payments are in arrears.
For what purpose will a stockholder of a publicly held corporation be permitted to file a stockholders’ derivative suit in the name of the corporation?
A. To compel payment of a properly declared dividend. B. To enforce a right to inspect corporate records. C. To compel dissolution of the corporation. D. To recover damages from corporate management for an ultra vires management act.
Choice “D” is correct. A derivative action is an action by a stockholder in the name of the corporation to recover damages or to seek some other remedy on behalf of the corporation when the corporation does not enforce its own rights. Such actions are often brought when the directors or officers have breached their duty to the corporation and have refused to sue themselves. An ultra vires act is an act outside of a director’s or an officer’s scope of authority and thus is a breach of duty to the corporation.
Choices “A”, “B”, and “C” are incorrect, because these would all be causes of action against the corporate directors or officers on behalf of the stockholder to recover damages or seek some other remedy against the corporate directors or officers on behalf of the stockholder, not on behalf of the corporation.
Absent a specific provision in its articles of incorporation, a corporation’s board of directors has the unilateral power to do all of the following, except:
A. Repeal the bylaws. B. Declare dividends. C. Fix compensation of directors. D. Amend the articles of incorporation.
Choice “D” is correct. Amendment of the articles of incorporation, albeit proposed by the directors, cannot usually be effected without the affirmative vote of the shareholders.
Choice “A” is incorrect. The directors ordinarily have the power to repeal bylaws unless the articles or the specific bylaw to be repealed provides otherwise.
Choice “B” is incorrect. The directors have the power to declare dividends at their discretion as long as the dividends do not violate any statute, article provision, bylaw, or contract with a creditor.
Choice “C” is incorrect. Although it seems like there would be a conflict of interest, directors do have the power to set their own compensation, limited only by the fiduciary duties owed to the corporation (e.g., the directors cannot set salaries so high as to constitute waste).
Hughes and Brody start a business as a closely-held corporation. Hughes owns 51 of the 100 shares of stock issued by the firm and Brody owns 49. One year later, the corporation decides to sell another 200 shares. Which of the following types of rights would give Hughes and Brody a preference over other purchasers to buy shares to maintain control of the firm?
A. Shareholder derivative rights.
B. Pre-emptive rights.
C. Cumulative voting rights.
D. Inspection rights.
Choice “B” is correct. The right to purchase new issuances of additional stock in order to maintain current proportional ownership is known as a pre-emptive right.
Choice “A” is incorrect. A shareholder’s derivative right is the right of a shareholder to enforce a legal obligation, for example, by filing a lawsuit, owed to the corporation by a third party when the corporation does not seek to vindicate its own rights.
Choice “C” is incorrect. Cumulative voting rights refers to the right of a shareholder to cast votes in the election of directors equal to the product of the number of shares the shareholder owns times the number of directors being elected (e.g., if a shareholder owns 100 shares and three directors are being elected, the shareholder may cast 300 votes). Cumulative voting is often used to help assure representation of minority shareholders.
Choice “D” is incorrect. A shareholder’s inspection rights refer to the right of a shareholder to inspect and copy certain shareholder records (e.g., minutes of shareholder meetings, list of shareholders, etc.).
Under the Revised Model Business Corporation Act, a merger of two public corporations usually requires all of the following, except:
A. A formal plan of merger.
B. An affirmative vote by the holders of a majority of each corporation’s voting shares.
C. Receipt of voting stock by all stockholders of the original corporations.
D. Approval by the board of directors of each corporation.
Choice “C” is correct. A merger can be effected by giving some parties cash or property; not everyone need receive voting shares.
Choice “A” is incorrect. The merger must be pursuant to a formal plan.
Choice “B” is incorrect. An affirmative vote by the holders of each corporation’s voting shares is required.
Choice “D” is incorrect. A plan of merger must be approved by the boards of the merging corporations.
