R6 Module 5

Question 1

corporation characteristics

Answer 1

1) exists as entity distinct from shareholders
2) only corporation liable for obligations not individuals
3) shareholders, officers, directors not liable for contracts made or for corporate torts, unless participated in tort
4) double taxation (profits then dividends to shareholders)
5) owned by shareholders and managed by directors
6) perpetual life
7) shareholders free to transfer all of ownership rights to others
8) formed by articles of incorporation

Question 2

restrictions of S corporations

Answer 2

1) stock can be held by no more than 100 persons
2) shareholders must be individuals, estates or certain trusts
3) corporation must be domestic corp.
4) only one class of stock
5) foreign shareholders prohibited

Question 3

who runs the corporation?

Answer 3

the board of directors elected by shareholders

Question 4

promoters

Answer 4

-enter into contracts before corporation is formed to obtain financing and things corps need to form
-personally bound on contracts made
-promoter remains liable until there is a novation

Question 5

when is a corporation bound to contracts?

Answer 5

when the corporation adopts the contracts after the corporation is formed, expressly or accepting benefits of contracts

Question 6

novation

Answer 6

an agreement a third party will release promoter in substitution for corporation

Question 7

items included in articles of incorporation under RMBCA

Answer 7

1) name of corporation
2) names and addresses of corporation’s registered agent
3) names and addresses of each incorporator
4) number of shares authorized to be issued
Note: one or more classes of shares have unlimited voting rights

Question 8

purpose clause (ultra vires act)

Answer 8

-if corporation has a narrow purpose clause and undertakes business outside clause called “ultra vires”
-a director or officer who authorizes an ultra vires act liable to corporation for damages

Question 9

bylaws

Answer 9

-contain rules of running corporation
-adopted by incorporators or board of directors
-may be repealed or modified by board of directors
-not part of articles of incorporation and need not be filed to the state

Question 10

piercing the corporate veil

Answer 10

-privilege to conduct the business is abused by shareholders, directors, and officers
-courts pierce corporate veil when:
1) shareholders commingle personal funds with corporate funds or use corporate assets for personal use
2) corporation thinly capitalized at time of formation
3) corporation formed to defraud creditors

Question 11

financing corporation

Answer 11

-comes from securities like equity (stock) or debt (bonds)
-debt securities include bonds, unsecured debentures, convertible bonds (bondholders creditors)
-equity securities like stock option, stock warrants

Question 12

equity security characteristics and consideration

Answer 12

-can issue one class of stock, where each stock has same rights
-can do more than one class with varied rights
-board of directors issue class of stock at any price appropriate
-stock can be issued in exchange for any benefit to corporation

Question 13

voting rights of shareholders

Answer 13

-have right to vote or remove directors
-right to vote to approve fundamental changes to corporation (dissolution)
-each share of stock entitled to one vote
-right to cumulative voting with respect to electing directors (helps shareholders gain representation on board)

Question 14

distributions (dividends) in corporation

Answer 14

-shareholders do not have rights to distributions unless it is declared by board of directors
-shareholders treated as unsecured creditors when distributions declared
-distributions reduce shareholder’s equity

Question 15

preferred shareholders

Answer 15

-corporation does not need to give each shareholder an equal right to receive distributions
1) noncumulative preferred shares (shares with preference usually entitled to fixed amt of money before distributions made)
2) cumulative preferred shares (if dividend not declared in yr, right to receive preference accumulates and be paid before nonpreferred shares paid a dividend)

Question 16

stock dividends

Answer 16

-issued from corp’s own “authorized but unissued shares”
-not taxed because no assets distributed and solvency remains the same
-not considered a distribution of corporate assets

Question 17

right to inspect books

Answer 17

-upon five days after written notice given stating a proper purpose, shareholder can inspect books
-shareholder can send, attorney, accountant, or agent to inspect

Question 18

shareholder preemptive rights

Answer 18

-when corp. proposes to issue additional shares of stock, shareholder can purchase shares to maintain proportional voting strength
-preemptive rights do not exist unless provided in articles of incorporation

Question 19

derivative actions

Answer 19

-when corporation has legal cause of action against someone but refuses to bring action, shareholder has right to bring derivative action to enforce corporation rights
-can be brought against directors or outsiders

Question 20

derivative action vs. direct action

Answer 20

Derivative Action
-may be brought only to vindicate wrongs against corp.
Direct Action
-shareholder seeks to vindicate shareholder’s own rights against corp.

Question 21

rights of directors

Answer 21

1) removal, election and supervision of officers
2) adoption, amendment and repeal of bylaws
3) fixing mgmt compensation
4) initiating fundamental changes to corp. structure

Question 22

declaration of distributions for directors

Answer 22

-directors who authorize distributions in violation of law are personally liable to extent distribution > what would have been lawful
-can defend under their right to rely
-director can recover from a shareholder who received a contribution knowing that it was unlawful

Question 23

fiduciary duties of directors

Answer 23

-are fiduciaries of corp. and act in corp’s best interests
-not liable if acted in good faith for best interests of corp (business judgment rule)
-liable for negligent acts or omissions

Question 24

right to rely for directors

Answer 24

-entitled to rely on info, opinions, reports, statements prepared by:
1) corp officers, employees, or committee of board whom reasonably believes to be competent and reliable
2) legal counsels, accountants, or other persons who seems to have professional competence

Question 25

duty of loyalty for directors

Answer 25

-prohibits directors from competing with corporation but not prohibit from transacting business with corp
-where conflict of interest is upheld:
1) after full disclosure transaction approved by disinterested majority of board of directors or shareholders OR
2) transaction was fair and reasonable to corporation

Question 26

board of directors has power to…

Answer 26

-set director compensation
-distribute shares
-declare dividends

Question 27

indemnification for directors

Answer 27

-corporations allowed to indemnify directors for expenses for any lawsuit brought against them in corporate capacity
-corporation can pay any judgment imposed in lawsuit on director, except in shareholder derivative suit

Question 28

officers of corps characteristics

Answer 28

-individual agents (and employees) who conduct day to day operations
-bind corporation to contracts made on corp behalf
-officers selected and removed by directors
-corporate president has apparent authority to enter into contracts (agent)
-have same fiduciary and indemnification duties as directors
-can serve as directors
-not required to be shareholders
-

Question 29

fundamental changes

Answer 29

-require shareholder approval
fundamental changes include:
1) amendments to articles of incorporation
2) dissolutions
3) mergers
4) consolidations
5) share exchanges
6) sales of all or mostly all of corp. assets

Question 30

board resolution

Answer 30

-majority of board of directors must adopt a resolution setting forth proposed action and submitting it for shareholder’s meeting

Question 31

notice

Answer 31

-corporation must notify all shareholders even if not entitled to vote
-notice should include: summary of plan merger, consolidation, or share exchange
-in share exchange, only corp whose shares are being acquired follow the fundamental change procedures

Question 32

shareholder approval

Answer 32

change must be approved by majority of shares voted at the meeting

Question 33

filing of articles

Answer 33

-document setting forth the action taken must be executed by corporation and be filed with state

Question 34

right to dissent/appraisal rights

Answer 34

-shareholders who have right to vote on fundamental corp change have these rights
-that is, right to have corporation purchase their shares at fair price
-if shareholder votes against fundamental change, not approved

Question 35

amendments to articles of incorporation

Answer 35

-corporation may amend its articles of incorporation in any and as many respects as desired, as long as provisions for amendments lawful

Question 36

merger

Answer 36

-involves one or more corporations joining with another corporation
-one corporation survives merger and continues to exist, while other cease to exist

Question 37

consolidation

Answer 37

-involves one or more corporations joining together to form a new corp.
-each constituent corp. ceases to exist after consolidation
-only new corporation moves on
-new corp liable for debts of old corp

Question 38

share exchange

Answer 38

-a transaction in which one corporation acquires all of the outstanding shares of one or more classes of stock of another corporation
-both corps continue to exist as separate entities

Question 39

general procedure for mergers and consolidations

Answer 39

1) board resolution
2) notice to all shareholders
3) approval by majority of shares
4) filing

Question 40

merger pr share exchange plan

Answer 40

-must include terms and conditions of plan and manner of converting corporation’s securities

Question 41

merger of subsidiary (short-form merger)

Answer 41

-parent corporation owns 90% or more of subsidiary corp can merge together without shareholder approval of either parent or subsidiary
-parent must mail a copy of plan to each shareholder who has not waived this right

Question 42

effect of mergers into a surviving corporation

Answer 42

-ceases to exist as a separate entity
-surviving corp has all rights, liabilities, and obligations of merged corporations
-when share exchange takes place, shares exchanged as plan provides, and holders entitled to only to rights of exchanged shares

Question 43

fending off unwarranted takeover attempts

Answer 43

1) persuade shareholders to reject offer
2) sue person or company trying to takeover for misrepresentation or omission and obtain an injunction against takeover
3) merge with company want to merge with (white knight)
4) make a self-tender (acquire stock from own stockholders)
5) paying greenmail (pay them off)
6) give third party option to purchase company’s most valuable assets (crown jewels)
7) sell off assets or take out loans to look less valuable (scorch earth)
8) amend bylaws or articles of incorporation to be more difficult to merge

Question 44

termination of corporation

Answer 44

1) requires director and shareholder approval
2) can be pursuant to court order
3) corp continues to exist for winding up after dissolution in effect (in liquidation process)

Question 45

calendar yr versus fiscal year

Answer 45

companies have option of choosing calendar yr or fiscal yr
-for tax purposes, fiscal yr must be approved by IRS

Question 46

foreign corporation

Answer 46

-must obtain certificate of authority from each state in which it does intrastate business
-created under the laws of another state
-ex. maintaining office in foreign state
-maintaining bank account, collecting a debt, or hiring employees of foreign state are NOT instances of doing business in foreign state