chapter 33

Wayne borrows money from Phyllis, who in good faith represents herself as an agent for Retail Lender, Inc. Wayne learns that Retail was never incorporated due to a significant error in Phyllis' incorporation paperwork. If Phyllis sues to recover the loan amount, can Wayne avoid liability based on the fact that Retail does not exist?

no, because Retail is a corporation by estoppel

A corporation may include in its charter an __________ provision, which requires the company to pay the legal fees of directors who are sued for any actions taken on behalf of the company. Corporations may also include an ____________ provision to protect directors from personal liability to the corporation or its shareholders for anything other than egregious misbehavior, such as intentional misconduct.

indemnification exculpatory

Delaware's Chancery Court

is a specialized business court with judges who are experts in corporate law

The written consents and any records of actual meetings are kept in an official record of the corporation called the

minute book

Which of the following can challenge the validity of a de jure corporation?

no entity can challenge the validity of a de jure corportaion

Shareholders may elect directors by _________ or by providing __________, which is more common for a __________.

holding a meeting written consent smaller corporation

Which of the following are advantages of incorporating in Delaware?

1. a neutral arena 2. an efficient court system 3. flexible laws that favor management 4. an established body of law that makes outcomes predictable

A promoter may be released from liability from a contract once adopted by the corporation

if the corporation or the third party sign a novation or if it is clear that the parties did not intend the promoter to remain liable

A corporation's name must

include "corporation" or an acceptable equivalent and must be unlike any other corporation's name that already exists in the state

Pursuant to the Model Act, under which of the following circumstances may a corporation not have any directors?

1. all shareholders sign an agreement that eliminates the board 2. the corporation has 50 or fewer shareholders

In which of the following states must a corporation pay filing fees and franchise taxes?

1. any state in which it has ongoing business 2. state of incorporation

In which of the following situations is a court likely to pierce the corporate veil?

1. commingling assets 2. inadequate capitalization 3. failure to observe formalities 4. fraud

Which of the following are features of stocks that may be defined in different ways for different classes and series?

1. conversion rights 2. dividend rights 3. redemption rights 4. preemptive rights 5. liquidation rights 6. voting rights

Which of the following generally do not count as "doing business" for a corporation?

1. holding meetings 2. opening bank account 3. isolated transactions

Which of the following information must a corporate charter include regarding the company's stock?

1. number of shares 2. par value 3. classes and series

Which of the following are typical requirements of a start-up's shareholder agreement?

1. shareholder must offer stock to other shareholders at same price outsider has offered 2. shareholder looking to sell must offer the stock to the company at the same price outsider has offered 3. if shareholder dies, his estate must offer the stock to the company or other shareholders

Which of the following is required to change a provision of a corporate charter?

1. shareholder vote 2. filing amendment with Secretary of State

Which of the following are ways a corporation can adopt a contract executed by the promoter prior to the formation of the corporation?

1. taking a formal vote to adopt the contract 2. acting as if the corporation adopted the contract

The court in Atze, Inc. v. Auto Collection, Inc. was willing to pierce the corporate veil with respect to Steven because he did which of the following?

1. treated the company as his alter ego 2. commingled assets 3. failed to observe corporate formalities

MegaCorp has five directors and 1,050 shares of voting stock. Jessica would like to purchase enough stock to elect herself to the board of directors. How many shares of MegaCorp stock will Jessica need to own to secure a place on the board of directors?

176 shares if MegaCorp uses cumulative voting and 526 shares if MegaCorp uses regular voting

The ________ signs the charter and files it with ______. She need not ________ or even have a(n) _________ with the company. She is liable if she knows that _______ when she signs it.

incorporator the Secretary of State own stock future relationship something in the charter is untrue

The defendant-directors in Rodriguez v. Loudeye Corporation could only be found liable if they acted with an actual intent to do harm.

true

The first set of a corporation's directors are elected by the incorporators. All others are elected by shareholders.

true

Zach decided to incorporate his business under the name of "Zamm." In addition to "Zamm," the Model Act requires that Zach include one of the following words: "corporation," "incorporated," "limited," or "company" or an abbreviation thereof.

true

The court in Rodriguez v. Loudeye Corporation applied

Delaware law, because that is where the company is incorporated

George is president of Plumbers, Inc. He signs a contract with Susan, which calls for Susan to perform some services and receive $10,000. Susan performs, but Plumbers does not pay. Which of the following, if true, will grant Susan the right to recover from George personally?

George commingled personal assets with corporate assets

Under the ultra vires doctrine

a corporation cannot undertake any transactions unless its charter permits it

A corporate charter is filed with

a state's Secretary of State office

In incorporating E-prise, the promoter gave an incorrect ZIP Code for the registered agent. All of the other requirements for incorporation were met. E-prise is a(n)

de jure corporation

Preemptive rights are

designed to prevent dilution of a shareholder's ownership in the company

A business corporation can be incorporated under either state law or federal law.

false

A corporation cannot be involuntarily dissolved.

false

A corporation must have a registered agent within the state of incorporation only if the corporation maintains an office in that state.

false

A de jure corporation is not legal and cannot be recognized as a corporation because the incorporation process was defective.

false

Incorporators are required to sign the charter, deliver it to the proper state officials, and purchase a certain percentage of the initial stock offering.

false

Incorporators of Maizey Co. signed and delivered the corporate charter to the proper office, but due to inefficiencies in the government office, the filing was delayed. During the period between the delivery of the charter and the filing, a promoter of Maizey Co. entered a contract for the delivery of goods using the corporate name. The supplier, if it finds out the filing had not been completed when the contract was entered, may hold the promoter personally liable on the contract.

false

Originally, par value could be some nominal value, but now it is close to the market value because companies cannot sell the stock for less than par.

false

The promoter is the first shareholder of the corporation.

false

Under corporate law, a corporation that officially states its purpose is "to engage in any lawful activity for which corporations may be organized under the General Corporation Law of Idaho" is too broad. A corporation's purpose must be more narrowly defined.

false

The court in In Re Bigmar found that the directors

acted in good faith, but failed to comply with the bylaw's procedural requirements

Zoom-Bot has common stock and cumulative preferred stock shareholders. The company is issuing dividends for the first time in three years. How will the dividend funds be divided by the shareholders?

all cumulative preferred shareholders will be paid for all previously unpaid dividends along with this year's and any remaining funds will go towards the payment of this year's dividend to common shareholders

One of the primary reasons corporations are required to have an official address in the state of incorporation is so that

anyone who wants to sue the corporation con serve the complaint in the state

Laurie is incorporating her business. Laurie's home state is Wisconsin. Business will be conducted in California, Michigan, Pennsylvania, and Virginia. Laurie

can incorporate the business in any state

In Delaware, lawsuits involving corporations are tried in a special court called

chancery court

The officers of a corporation are

chosen by the board of directors

Corporate stock can be divided into categories called ________, which can be further divided into ________.

classes, series

Several states have amended their corporate laws to bring them more in line with those of Delaware in order to

collect more filing fees and corporate taxes

Hannah owns non-voting stock shares in Asset Management, Inc., but would like to vote at the next shareholders meeting. What tool could help Hannah gain the authority to vote in shareholder meetings?

conversion rights

A novation

creates a new contract

Mike is planning on incorporating his business in the state of Delaware. Which of the following regarding the name of Mike's business is TRUE?

he will be able to use the words "Association" or "Institute" in his company name

The Resolution Trust Corp. (RTC) sued the directors of the Commonwealth Savings Corp. (CSC) seeking to recover from them personally $200 million that the bank lost in bad real estate loans. The directors approved the loans after state and federal regulatory agencies had issued reports criticizing the bank's loan practices, but the loans did not violate any laws. CSC's charter stated that the purpose of the corporation "is to engage in any lawful activity for which corporations may be organized." Under Texas law, RTC could recover for CSC directors' negligence only if their acts were ultra vires. Will RTC be able to recover from the directors?

no, because there is no indication that the board acted without authority or illegally

Marcus owns common stock in XO, an oil and energy company that is about to be liquidated. Is Marcus guaranteed to be paid in the process of dissolution?

no, unless there are assets remaining after all creditors and preferred stockholders are paid

The directors of MegaCorp learn that an outsider is planning on buying enough voting stock to get herself elected to the board of directors. MegaCorp, which has cumulative voting, quickly puts together a vote of shareholders to eliminate the company's cumulative voting procedure. The shareholders vote to do away with cumulative voting. The outsider, Dawn, who wanted to get herself elected to MegaCorp's board, claims that the company has committed an illegal act. Is she right?

no. under the Model Act, regardless of MegaCorp's motives, it had the right to act as it did

Fashions, Inc. has 12 shareholders. There is no shareholder agreement concerning the board of directors. The company is subject to the Model Act. How many directors is Fashions, Inc. required to have?

none

Which of the following, if true, would be most helpful to Simpson and Stamm in avoiding personal liability in GS Petroleum, Inc. v. R and S Fuel, Inc.?

on March 10, Simpson and Stamm gave all of the necessary paperwork for incorporation to their lawyer, who told them he would file it promptly and let them know if there were any issue

corporation by estoppel

party has entered into a contract believing in good faith that the corporation exists

A promoter is _________ liable for any contract signed ________ the corporation is formed. The _________ is liable for contracts signed before it was formed if _________. The promoter remains liable until _________ agrees to a(n) _________.

personally before corporation it adopts them the third party novation

de jure corporation

promoter has substantially complied with the requirements for incorporation, but made some minor error

de facto corporation

promoter made good faith effort to incorporate and has actually used the corporation to conduct business

A company can only incorporate under ________ law because there is no _________ corporation code. A company may incorporate _________ regardless of where it _________, and must live by the laws of whichever state it chooses for _________.

state federal in any state actually does business incorporation

authorized and unissued stock

stock that has been authorized but not yet sold

outstanding stock

stock that has been sold

treasury stock

stock that has been sold and later bought back

Who may challenge a validity of a de facto corporation?

the state

Which of the following states that a corporation cannot undertake any transaction unless its charter permits it?

the ultra vires doctrine

Cumulative voting enables a shareholder with less than a majority of the company's shares to singlehandedly elect a director by allowing the shareholder

to aggregate her shares and vote them all for the same person

MegaCorp purchased 10,000 shares of its own stock that had previously been owned by private investors. The stock MegaCorp repurchased is called

treasury stock

A corporation is not allowed to issue dividends to shareholders unless it is solvent.

true

All stock in a series has the same rights, and all series in a class are fundamentally the same except for minor distinctions.

true

Bylaws are easier to amend than a corporate charter, because the charter may permit directors to amend the bylaws, but the charter can only be amended by shareholder vote.

true

Companies can reserve names by paying a fee in Delaware and by creating a "nameholder" corporation in other states.

true

If a party enters into a contract believing in good faith that the corporation exists, he cannot later take advantage of the fact that it does not.

true

Sara decided to incorporate her business under the name Gomo, Inc. Before Gomo was incorporated, Sara signed a contract in the name of Gomo, Inc. to lease a store front. Sara did not tell the other party that Gomo was not yet formed. Sara is personally liable on the lease.

true

A company is called a domestic corporation in the state _________ and a _________ everywhere else. A corporation must ________ in any state in which it is doing business, which is any state in which it ________ or establishes any other _________.

was incorporated foreign corporation register opens an office ongoing business

Fashions, Inc. has 12 shareholders. The company is subject to the Model Act. What officers is Fashions, Inc. required to have?

whatever officers are described in the corporate bylaws

Carey decided to incorporate her business under the name yStar Inc. Before yStar was incorporated, Carey signed a contract in the name of yStar, Inc. to have some office space remodeled. Which statement is correct?

yStar will be liable on the contract only if the corporation adopts the contract

Michi Corp.'s board of directors has determined that the insolvent company will not be able recover financially and it is best to terminate the corporation. The board unanimously votes to dissolve and makes a recommendation to dissolve to the shareholders, but only 40 percent of the shareholders vote to approve dissolution. The shareholders insist that Michi is simply mismanaged and can be saved if the board appoints a new CEO. May the Michi board request a court to order dissolution of the company?

yes, because a court may dissolve a corporation if it is insolvent or if its directors and shareholders cannot resolve a conflict over corporate management

Denise was a promoter for a proposed corporation, EVR-Young Corp. As promoter, she signed a three-year lease to rent office space from Landlord. She signed her name and indicated below her signature she is signing as "promoter for EVR-Young Corp., a company yet to be incorporated." EVR-Young never files incorporation documents with the state. Is Denise personally liable for the lease?

yes, she remains liable as the promoter on a contract for which there has been no novation

Isabel, Wesley, Gina, and Lucas worked together intensively to form an environmentally conscious corporation named Icon Corp. They are the only shareholders. Is there anything the group can do to avoid having Icon shares sold to someone who does not share their vision for the environment?

yes, they can sign a shareholder agreement