Maryland - Corporations
Which of the following is a true statement regarding the rights and privileges of a corporation? A A corporation is a citizen for purposes of the Privileges and Immunities Clause of the United States Constitution. B A corporation has the power to sue and be sued. C A corporation generally does not exist as an entity apart from its owners. D A corporation is protected by the usury laws in Maryland.
A corporation is a separate legal entity that is created through compliance with the Maryland Corporation and Association Article ("MCAA"). Generally, a corporation has the same rights and privileges as an individual, such as the power to sue and be sued, but under certain circumstances a corporation is treated differently. A corporation is not a citizen for purposes of the Privileges and Immunities Clause of either Article IV or the Fourteenth Amendment of the United States Constitution. A corporation is not protected by the usury laws in Maryland. A lender may charge a corporation any rate of interest.
All of the following are true regarding a promoter, EXCEPT: A The promoter must exercise the utmost good faith toward those invited to invest in the corporation. B The promoter owes a fiduciary duty to the corporation he is promoting. C The promoter cannot conceal from those invited to invest in the corporation any material fact affecting the value of the stock offered for subscription. D The promoter may not profit from his role as promoter.
A corporation is free to compensate or reimburse a promoter if it so chooses, but a promoter is not allowed to benefit by any secret profit gained at the expense of the corporation or its stockholders. A promoter must disclose any profits gained. Even though a promoter is not an agent of the corporation, the promoter owes a fiduciary duty to the corporation that he is promoting. Promoters must exercise the utmost good faith toward those invited to invest in the corporation and cannot conceal from such persons any material fact affecting the value of the stock offered for subscription.
Which of the following is true regarding corporate officers? A A corporation must have a president, vice president, secretary, and treasurer. B The board may remove an officer only for cause. C Officers are elected by the stockholders unless the charter or bylaws provide otherwise. D One person may hold more than one office, except that one person may not be both president and vice president.
A corporation must have a president, secretary, and treasurer. One person may hold more than one office except when a corporation has a vice president, one person may not be both president and vice president. Subject to the statutory duty of care imposed on the board of directors, the board may remove any officer with or without cause. Officers are elected by the board of directors unless the charter or bylaws provide otherwise.
Which of the following is true regarding the personal liability of a director to the corporation for an improper distribution? A A director's liability for improper dividends is the amount the actual distribution exceeds the otherwise allowable distribution, plus punitive damages. B A director who is found liable to the corporation for an improper distribution may not be liable under other provisions, such as the statutory standard of care. C A director held liable for authorizing an illegal dividend is not entitled to contribution from stockholders who accepted the dividend knowing that the distribution was made in violation of the charter or law. D A director is not personally liable for an illegal distribution if in voting for the distribution she believed in good faith that the distribution was proper based on either the financial statements prepared using reasonable accounting practices and principles, or a fair valuation or other method that is reasonable under the circumstances.
A director is not personally liable for an illegal distribution if in voting for the distribution she believed in good faith that the distribution was proper based on either (i) financial statements prepared using reasonable accounting practices and principles, or (ii) a fair valuation or other method that is reasonable under the circumstances. A director's liability for improper dividends is limited to the amount the actual distribution exceeds an otherwise allowable distribution. A director who is found liable to the corporation for any improper distribution may also be held liable under other provisions, such as the statutory standard of care. A director held liable for authorizing an illegal dividend is entitled to contribution from (i) every other director who could be held liable for the illegal distribution, and (ii) each stockholder for the amount the stockholder accepted knowing the distribution was made in violation of the charter or law.
Unless proven otherwise, a promoter is: A Presumed to be personally bound under all preincorporation contracts entered into on behalf of the corporation to be formed. B No longer liable on a contract after the corporation adopts the contract. C Relieved of liability on a preincorporation contract if there is a failure of the corporation to incorporate. D Considered an agent of the corporation prior to incorporation.
A promoter is presumed to be personally bound under all preincorporation contracts entered into on behalf of the corporation to be formed unless the promoter proves that all of the parties did not intend the promoter to be bound (e.g., by express language of contract). The promoter will remain liable on a contract even after the corporation adopts the contract unless it is clear that all of the parties intended a novation (i.e., a release of the promoter and a substitution of the corporation). The intention can be found in the acts of the parties. The mere failure of the corporation to be incorporated will not relieve the promoter of liability on a preincorporation contract. A corporation is not automatically bound on contracts that a promoter enters into on the corporation's behalf prior to incorporation. The corporation does not exist prior to incorporation, and so it has no capacity to contract. Agency law does not change this. A principal cannot be bound by the acts of an agent unless the principal has capacity, and an agent cannot bind a nonexistent principal.
The initial step in a corporate dissolution is a resolution adopted ____________________. A By unanimous vote of the board of directors. B By a supermajority of the board of directors. C By a majority of the board of directors. D By a two-thirds vote of the board of directors.
A resolution adopted by a majority of the entire board is needed to initiate the dissolution of a corporation.
Which of the following is considered an extraordinary act requiring approval by the stockholders? A Reverse stock split. B Change in shares authorized. C Share exchange. D Restatement of charter.
A share exchange is an extraordinary act and requires approval of the stockholders. There are four basic types of extraordinary acts: consolidation, merger, share exchange, and asset transfer outside the corporation's ordinary course of business. By statute, a corporation that engages in an extraordinary act must generally follow the same procedure that is required for a charter amendment (i.e., board resolution, notice to stockholders, approval by stockholders, and filing of articles with the state).
Once a shareholder appoints a proxy to vote his shares, can the shareholder later revoke that proxy? A No, the proxy thereafter takes the place of the shareholder in all voting matters until the shares are transferred to another party. B No, a proxy is irrevocable for 11 months. C Yes, a proxy is revocable by the shareholder at any time, unless the appointment form states that the proxy is irrevocable. D Yes, a proxy is revocable at any time, unless the appointment form states that the proxy is irrevocable and the appointment is coupled with an interest.
A shareholder may vote his shares either in person or by proxy executed in writing and signed by the shareholder or her authorized agent. A proxy is valid for only 11 months unless it provides otherwise. During that time, the shareholder may revoke the proxy. A proxy will be irrevocable only if it is coupled with an interest.
For a private plaintiff to recover damages under Rule 10b-5, the plaintiff must show all of the following EXCEPT: A The defendant engaged in fraudulent conduct. B The defendant purchased or sold securities. C The defendant's conduct involved the use of some means of interstate commerce. D The defendant's actions caused the plaintiff damages.
A violation of rule 10b-5 can result in a private suit for damages, a suit for injunctive relief, or criminal prosecution. To recover damages under rule 10b-5, a private plaintiff must show that (i) the defendant engaged in some fraudulent conduct, (ii) the fraudulent conduct was in connection with the purchase or sale of a security by the plaintiff, (iii) the fraudulent conduct involved the use of some means of interstate commerce, (iv) the plaintiff relied on the fraudulent conduct (although this can be presumed based on the fraud on the market theory), and (v) the defendant's fraud caused the plaintiff damages. The focus is on a sale or purchase by the plaintiff; the defendant need not have purchased or sold any securities. Thus, a nontrading defendant, such as a company that intentionally publishes a misleading press release, can be held liable to a person who purchased or sold securities on the market on the basis of the press release.
Anyone who owns any percentage of stock in a corporation has the right to inspect or request all of the following records EXCEPT: A Any voting trust agreements on file at the corporation's principal office. B The minutes of the stockholders' meetings. C The bylaws. D The corporation's account books.
Anyone who owns any stock in a corporation (regardless of the amount or holding period) has the right to inspect or request the following records: (i) corporate documents, including the bylaws, minutes of stockholders' meetings, annual statement of corporate affairs, and voting trust agreements on file at the corporation's principal office; and (ii) a sworn written statement concerning the type and number of shares issued during a period not to exceed 12 months, together with information as to the consideration received for such stock. Only stockholders who have owned at least 5% of the outstanding stock of any class for the last six months may inspect the corporation's books of account and stock ledger.
An officer may be personally liable to third parties ___________________. A For all corporate acts merely by virtue of being an officer of the corporation. B For specifically directing that a tortious act be done by the corporation. C For all contracts between the corporation and a third party. D For tortious acts by the corporation in which the officer takes no part.
As is the case with a director, an officer is not liable to third parties for corporate acts merely by virtue of being an officer of the corporation. However, like a director, an officer may be liable for contracts between the corporation and a third party for which she accepts personal liability. Similarly, an officer who takes part in the commission of a tort by the corporation or specifically directs that the tortious act be done may be held personally liable.
Which of the following actions may be taken by the corporate board without stockholder approval? A Consolidation. B Share exchange. C Merger. D Corporate name change.
Certain changes can be made to the charter without stockholder approval. These changes include restatement of charter, certificate of correction, articles supplementary, change in shares authorized, name change, and reverse stock splits. By statute, a corporation that engages in an extraordinary act must generally follow the same procedure that is required for a charter amendment, including board resolution, notice to stockholders, approval by stockholders, and filing of articles with the state. There are four basic types of extraordinary acts: consolidation, merger, share exchange, and asset transfer outside the corporation's ordinary course of business.
Which of the following situations would most likely lead to a decision by a court to pierce the corporate veil? A Insolvency due to poor management. B Sloppy administration, such as a failure to keep accurate corporate records. C Use of the corporate form to circumvent a licensing requirement. D Transfer of individual assets to the corporation to keep them away from personal creditors.
Despite compliance with statutory requirements, the stockholders of a corporation may nevertheless be faced with personal liability for the debts and obligations of a corporation when removal of the limited liability shield (also known as piercing the corporate veil) is necessary to prevent fraud or enforce a paramount equity. The independent identity of a corporation will be disregarded when the corporation is used as a vehicle for fraud. For example, the transfer of individual assets to a corporation solely to keep them away from personal creditors who exist as creditors at the time of the transfer is a fraudulent act that would justify piercing. Sloppy administration alone is not grounds for piercing, there must be some resulting inequity. Use of a corporation to circumvent licensing requirements is not a sufficient basis to pierce on the ground of paramount equity. Insolvency of the corporation due to poor management generally would not be a reason to pierce the veil.
Which of the following is true regarding a stockholders' annual meeting? A A corporation is required to hold a stockholders' meeting each year. B The directors may not chose to hold an annual meeting via remote communication. C Failure to hold an annual meeting invalidates the corporation's existence and may affect the validity of an otherwise valid corporate act. D The stockholders' annual meeting is held at the time set in the Articles of Incorporation.
Each year a corporation is required to hold a stockholders' meeting. Unless restricted by the charter or bylaws, the stockholders' annual meetings can be held anywhere. The charter or bylaws may allow directors to choose the location of the meeting, and they may choose to hold the meeting via remote communication rather than in a physical place, unless a stockholder objects. The failure to hold the required annual meeting does not invalidate the corporation's existence or affect the validity of an otherwise valid corporate act. The stockholder's annual meeting is held at the time set in the bylaws.
For purposes of corporate law, there are three main types of individuals involved in the affairs of a corporation. Which of the following is NOT one of the three? A Board of directors. B Stockholders. C Members. D Officers.
For purposes of corporate law, there are three main types of individuals involved in the affairs of a corporation: stockholders, directors, and officers. In a given corporation, one person may wear all three hats and be subject to the rules governing all three. The owners of a limited liability company are called members.
Generally speaking, initial bylaws are adopted by the ____________________ and the power to amend or repeal the bylaws resides with the ____________________. A Directors; stockholders. B Directors; directors. C Stockholders; directors. D Stockholders; stockholders.
Generally speaking, bylaws are adopted by the directors at the organizational or initial meeting of directors. If the directors fail to adopt corporate bylaws, the power to take such action rests with the stockholders. In any case, the power to amend or repeal the bylaws rests with the stockholders, except to the extent that the charter or bylaws vest such power in the board of directors.
Unless otherwise provided in the charter, which of the following statements regarding removal of a director is false? A Removal of a director requires a majority vote of all of the shares entitled to be cast generally in an election of directors. B A vote to remove a director must be taken at a duly called meeting. C A director may be removed by the stockholders only for cause. D There must be a quorum present at the meeting when the removal vote takes place.
Generally, a director may be removed by the stockholders with or without cause. Removal of a director requires a majority vote of all of the shares entitled to be cast generally in an election of directors. The vote must be taken at a duly called meeting at which there is a quorum.
Which one of the following stock restrictions would NOT be upheld? A A restriction requiring a selling stockholder to first offer his stock to a particular stockholder. B An absolute prohibition against sales of stock. C A prohibition on sales to certain persons. D A prohibition on sales to certain classes of persons.
Generally, a stockholder may sell her stock whenever and to whomever the stockholder desires. However, when corporations are formed, especially closely held corporations, the owners (stockholders) often want some control over who their co-owners will be in the future. Thus, the owners often impose restrictions on the sale of stock, which really are nothing more than contractual agreements to follow the terms of the restrictions. While an absolute prohibition against sales of stock will not be upheld, restrictions requiring a selling stockholder to first offer his stock to the corporation or a particular stockholder, prohibiting sales to certain persons or certain classes of persons, or similar restrictions are generally upheld as long as they have some rational business purpose.
When is an employee of a professional service corporation personally liable for a negligent or wrongful act or omission of another employee? A Always, employees of a professional service corporations are treated as partners. B Only when the employee is negligent in appointing, supervising, or cooperating with the wrongdoing employee. C Only when the employee is also a shareholder of the professional service corporation. D Never, a professional service corporation shields employees from liability for any wrongdoing.
In general, a professional service corporation is subject to the same rules as any other corporation. Professionals continue to be personally liable for services that they render. An employee of a professional service corporation is not liable for negligent or wrongful acts or omissions of another employee unless the employee is negligent in appointing, supervising, or cooperating with the other employee.
Which of the following actions by the board of director typically also requires stockholder approval? A Entering into a corporate merger. B Initiating or defending a lawsuit. C Entering into a contract on behalf of the corporation. D Hiring or firing an officer.
In general, the board may take any action on behalf of the corporation that a sole proprietor can take with regard to his business. The board may hire or fire employees (including officers of the corporation), enter into contracts, and initiate or defend lawsuits without stockholder approval. For some actions involving a fundamental change in the corporation (e.g., merger, consolidation), stockholder approval is required.
Generally, a ____________________ vote is required for stockholder approval of an extraordinary act. A Majority. B Two-thirds. C Three-fourths. D Unanimous.
In general, the same procedure required for amendment of the charter is required for an extraordinary act, including board approval, notice to stockholders, stockholder approval by two-thirds of the votes, and filing of the appropriate document (i.e., articles of consolidation, merger, share exchange, or transfer).
Which of the following is NOT a requirement to satisfy a director's duty of care? A A director must perform his duties in good faith. B A director must perform his duties in a manner that he reasonably believes is in the best interest of the corporation. C A director must act in reliance on his own business judgment and not in reliance on the opinions of others. D A director must perform his duties with the care that an ordinarily prudent person in a like position would use under similar circumstances.
In Maryland, the duty of care has been codified. By statute, a director must perform his duties (i) in good faith, (ii) in a manner that he reasonably believes is in the best interest of the corporation, and (iii) with the care that an ordinarily prudent person in a like position would use under similar circumstances. There is a rebuttable presumption that an act of a director complies with the statutory standard. In discharging his duties, a director is entitled to rely on information, opinions, reports, or statements (including financial statements), if prepared or presented by any of the following: (i) corporate officers or employees whom the director reasonably believes to be reliable and competent; (ii) legal counsel, accountants, or other persons as to matters the director reasonably believes are within such person's professional competence; or (iii) a committee of the board of which the director is not a member, if the director reasonably believes the committee merits confidence.
Generally, for a quorum to exist, the presence ____________________ is required. A In person of a majority of all votes entitled to be cast at the meeting. B In person of two-thirds of all votes entitled to be cast at the meeting. C Either in person or by proxy of a majority of all votes entitled to be cast at the meeting. D Either in person or by proxy of two thirds of all votes entitled to be cast at the meeting.
Matters can be approved at a shareholders meeting only if a quorum is present. Unless the charter provides otherwise, a quorum is the presence either in person or by proxy of a majority of all votes entitled to be cast at the meeting.
Which of the following is true regarding who may be a director? A A corporation may be a director of another corporation. B Only a natural person may serve as a corporate director. C A director must be independent and thus may not be a stockholder in the corporation. D A director must be a stockholder in the corporation.
Only a natural person may serve as a corporate director. A corporation may not be a director of another corporation. Otherwise, the qualifications of directors are left up to the corporation. A director may be a stockholder, but need not be, unless the charter or bylaws so require.
Which of the following is NOT a necessary element for a successful cause of action under section 16(b) of the Securities Exchange Act? A An officer, director, or more than 10% shareholder of a corporation made a profit. B The profit was made on the purchase or sale of an equity security. C The profit was made by use of insider information. D The purchase and sale or sale and purchase was within a six-month period.
Section 16(b) of the Securities Exchange Act of 1934 provides that any profit realized by a director, officer, or shareholder owning more than 10% of the outstanding shares of the corporation from any purchase and sale, or sale and purchase, of any equity security of his corporation within a period of less than six months must be returned to the corporation. The purpose of section 16(b) is to prevent unfair use of inside information and internal manipulation of price. This is accomplished by imposing strict liability for covered transactions whether or not there is any material fact that should or could have been disclosed—no proof of use of inside information is required.
Which of the following statements regarding preemptive rights is true? A Shareholders always have preemptive rights. B Shareholders have preemptive rights unless the corporate charter provides otherwise. C Shareholders do not have preemptive rights unless the corporate charter so provides. D Preemptive rights are never permitted.
Stockholders, especially stockholders in closely held corporations, often wish to maintain a proportional ownership interest when the corporation sells additional stock so that they may maintain their voting power and dividend interest. At common law, stockholders have a preemptive right to purchase newly issued stock. In Maryland, however, stockholders do not have any preemptive rights except to the extent that they are provided in the corporate charter.
A charter is required to contain all of the following provisions, EXCEPT: A Number and names of initial directors. B Corporate name. C Limitations on corporate power. D Corporate purpose.
The charter must reveal the corporation's name and purpose. In addition the charter must set out information regarding the corporation's stock, directors (including number and names of initial directors), and incorporators, and it must appoint a resident agent. The charter need not include a statement of the corporation's powers, although a clause limiting the corporation's powers may be included.
At common law, in spite of a defective incorporation, a business entity can be recognized as a de facto corporation if: A The incorporators realized they made a mistake in incorporation and halted all business to make a good faith effort to correct it. B The incorporators made a good faith attempt to comply with the state's corporate law and have since conducted business using the corporate name. C The incorporators knowingly failed to follow a minor technical requirement of incorporation, but their failure is not easily apparent to any third parties dealing with the entity as a corporation. D The incorporators intentionally failed to comply with the state's corporate law, but nevertheless held the entity out as a corporation to innocent third parties.
The de facto corporation doctrine is a common law doctrine under which the courts will recognize corporate existence when the incorporation process was not quite perfectly completed. For a de facto corporation to exist (i) there must be a corporate law under which the entity could have been properly incorporated, (ii) there must have been a good faith attempt to incorporate the business entity, and (iii) the entity must have conducted its business using a corporate name. The party seeking to invoke the de facto corporation doctrine must also have been unaware of the failure to achieve corporate status, but there is no requirement that the corporation halt all business when the mistake comes to light. A de facto corporation must be distinguished from a corporation by estoppel. For the corporation by estoppel doctrine to apply, the third party must have (i) known that the business entity was holding itself out as a corporation and (ii) relied on this holding out in dealing with the entity.
To transfer stock of a close corporation, the stockholders generally must obtain the approval of ____________________. A The board of directors. B The other stockholders. C The corporate officers. D The Securities and Exchange Commission.
To transfer stock of a close corporation, the stockholder generally must obtain the approval of the other stockholders. A stockholder may transfer her close corporation stock by obtaining the written consent of every other stockholder, and consent must be given within 90 days of the transfer of stock.
The holders of at least 25% of the voting stock are needed to apply for dissolution in which of the following situations? A A failure by the stockholders to fill expired board positions at two successive annual meetings. B Director deadlock is preventing action of the board. C The corporation is unable to pay its debts as they become due. D Illegal, oppressive, or fraudulent acts were perpetrated by the board.
The holders of at least 25% of the voting stock may apply for dissolution if: (i) director deadlock is preventing action of the board; or (ii) stockholder deadlock is preventing election of directors. There is no percentage requirement for a stockholder petition for involuntary dissolution if it is demonstrated that: (i) there was a stockholder failure at two successive annual meetings to fill expired board positions; (ii) illegal, oppressive, or fraudulent acts were perpetrated by the board; or (iii) the corporation is unable to pay its debts as they become due (i.e. insolvent).
How much power do shareholders generally have in the decision whether or not to declare the payment of a dividend? A As the record owners of the corporation, it is within the sole discretion of the shareholders whether the corporation will declare the payment of a dividend. B A shareholders' vote is necessary to declare a dividend, but the issue can only be raised for a vote by the board of directors. C Shareholders can make a demand for a dividend at any time, which the board of directors must honor so long as it would not cause the corporation to become insolvent. D Shareholders have very little right to compel the payment of a dividend; declaration generally is within the board's discretion, unless the board's refusal is made in bad faith.
The power to declare distributions is vested in the board of directors. The board alone determines if and when distributions are to be made, subject to any charter restrictions and statutory solvency requirements. Ordinarily, stockholders have no rights to compel a declaration of distributions, even if funds are available. However, if the directors' refusal to declare distributions is in bad faith, the refusal may constitute a violation of the directors' fiduciary duty to the corporation, and thus a court of equity might compel some reasonable distribution.
The two conditions that must be satisfied for a stockholder to bring a derivative suit are: A The stockholder generally must make an application to the directors to take action, and the stockholder must have owned stock in the corporation at the time of the wrong. B The stockholder generally must make an application to an independent committee to take action, and the stockholder must have owned stock in the corporation at the time of the wrong. C The stockholder generally must make an application to the directors to take action, and the stockholder must have owned stock in the corporation at the time of such application. D The stockholder generally must make an application to an independent committee to take action, and the stockholder must have owned stock in the corporation at the time of such application.
There are two conditions that must be satisfied for a stockholder to bring a derivative suit: (i) the stockholder generally must make an application to the directors to take action, and (ii) the stockholder must have owned stock in the corporation at the time of the wrong.
Before doing any interstate or foreign business in Maryland, a foreign corporation not qualified to do intrastate business must register with the state by: A Filing corporate bylaws with the state commerce department. B Filing articles of incorporation with the state. C Certifying the address of the corporation and the name and address of its resident agent in the state. D Certifying the address of the corporation and filing a consent to be governed by state law.
Unless qualified to do intrastate business, a foreign corporation must register with the state of Maryland before doing any interstate or foreign business in the state. To register, a foreign corporation must certify and file the address of the corporation and the name and address of its resident agent in the state.
All of the following are reasons the state may seek forfeiture of the charter and dissolution of a corporation EXCEPT: A The corporation has abused, misused, or failed to use its powers in such a manner that the public interest requires forfeiture. B The corporation has failed to pay taxes or unemployment insurance. C The corporation has failed to file an annual report with the SDAT. D The corporation has failed to hold an annual stockholders' meeting.
Upon authorization of the SDAT, the Maryland Attorney General may seek forfeiture of the charter and dissolution of a corporation when the corporation has abused, misused, or failed to use its powers in such a manner that the public interest requires forfeiture. In addition, after notice to the corporation, the SDAT may, by proclamation, revoke the charter of a corporation for the nonpayment of taxes or unemployment insurance or the failure to file an annual report with the SDAT. The failure to hold the annual meeting does not invalidate the corporation's existence.
When there has been a sale or other transfer of stock, the person entitled to vote is usually the person who is the owner of the stock as of the close of business on the ____________________. A Day on which notice of the meeting is mailed. B Thirtieth day before the meeting. C Record date. D Day on which the intent to hold a vote is declared.
When there has been a sale or other transfer of stock, the person entitled to vote is usually the person who is the owner of the stock as of the close of business on the record date.