BULE chapter 15 corporations

9. One of the first steps in corporation process is .

deciding in which state to incorporate

watered stock

Shares of stock issued by a corporation for which the corporation receives, as payment, less than the stated value of the shares. shareholder is personally liable

the business judgement rule applies as long as the officer:

Took reasonable steps to become informed about the matter. Had a rational basis for his or her decision. Did not have a conflict of interest between his or her personal interest and that of the corporation.

15. Preferred stock is often considered a more conservative (less aggressive) investment than common stock because:

c. it is less volatile and more like a bond.

piercing the corporate veil

exposing shareholders to personal liabilitiy in the even of illegal actions

18. In the absence of expressed, constitutional, statutory, or other prohibitions, the corporation has the implied power to perform all acts reasonably necessary to accomplish its corporate purpose.

true

S corps

If a corporation has S corporation status, it can avoid the imposition of income taxes at the corporate level while retaining many of the advantages of a corporation, particularly limited liability.

4. Individual corporate directors have the ability, as agents of a corporation, to bind the corporation:

Not at all, as individual directors do not have agency power

inside director

a person on the board of directors who is also an officer of the corporation

cumulative voting

a procedure in which a shareholder may cast all votes for one member of the board of directors

3. One of the key advantages of a corporate form of business is .

limited liability of its owners

shareholders meetings

must occur at least annually

retained earnigns

when a corporation keeps some of the profits for itself.

idvidends

when a corporation passes profits onto shareholders

2. Do corporations enjoy many of the same rights and privileges under state and federal law that U.S. citizens enjoy?

yes because they are recognized as persons

proxy

(n.) an agent, substitute; a written permission allowing one person to act in another's place

Cases Dealing with the Duty of Loyalty Typically Involve One or More of the Following:

-competing with the corporation -usurping (taking personal advantage of) a corporate opportunity -pursuing an interest that conflicts with that of the corporation -using information that is not available to the public to make a profit trading securities -authorizing a corporate transaction that is detrimental to minority shareholders -selling control over the corporation

factors that lead courts to pierce the corporate veil

A party is tricked or misled into dealing with the corporation rather than the individual. The corporation is set up never to make a profit or always to be insolvent, or it is too "thinly" capitalized—that is, it has insufficient capital at the time of formation to meet its prospective debts or other potential liabilities. The corporation is formed to evade an existing legal obligation. Statutory corporate formalities, such as holding required corporation meetings, are not followed. Personal and corporate interests are commingled (mixed together) to such an extent that the corporation has no separate identity.

shareholders derivative suit

A suit brought by a shareholder to enforce a corporate cause of action against a third person. shareholders dont bring a derivative suit in their own interest, but in the interests of the corporate entity. any damages recovered go into corporate treasury

cases dealing with the duty of loyalty typically involve one or more of the following

Competing with the corporation. Usurping (taking advantage of) a corporate opportunity. Having an interest that conflicts with the interest of the corporation. Using information that is not available to the public to make a profit trading securities (insider trading will be discussed in Chapter 24). Authorizing a corporate transaction that is detrimental to minority shareholders. Selling control over the corporation.

private equity capital

Funds invested by a private equity firm in an existing corporation, usually to purchase and reorganize it.

corporations by estoppel

If a business holds itself out to others as being a corporation but has made no attempt to incorporate, the firm may be estopped (prevented) from denying corporate status in a lawsuit by a third party.

De Jure Corporation

Lawful corporation that has met the substantial elements of incorporation process

close corporation

most coporations in the US are close corps. -one whose shares are held by members of a family or by relatively few persons. usually operated like a partnership. RMBCA gives close corporations a substantial amount of flexibility in determining the rules by which they will operate

a corporation is liable for torts committed by its agents or officers

truwe

three of the situations in which courts will ignore the corporate structure and pierce the corporate veil.

-owners use the corporate entity to perpetuate fraud -owners use the corporate entity to circumvent the law -owners use the corporate entity to accomplish an illegitimate objective

The Most Important Requirements for S Corporation Status

-the corporation must be a domestic corporation -the corporation must not be a member of an affiliate group of corporations -the shareholders of the corporation must be individuals, estates, or certain trusts and tax exempt organizations -the corporation must have no more than 100 shareholders -the corporation must have only one class of stock, although all shareholders do not have the same voting rights -no shareholder of the corporation may be a non resident alien

incorporation procedures

1. Select a state of incorporation 2. Secure the corporate name 3. Prepare the articles of incorporation 4. File the articles of incorporation with the secretary of state

The following order of priority is used if a conflict arises among the various documents involving a corporation

1. U.S. Constitution 2. State constitutions 3. State statutes 4. The articles of incorporation 5. Bylaws 6. Resolutions of the board of directors

three most important rights of directors:

1. right to participation 2. right to inspection 3. right to indemnification

stock certificates

A certificate issued by a corporation evidencing the ownership of a specified number of shares in the corporation.

management of close corporations

A close corporation has a single shareholder or a closely knit group of shareholders, who usually hold the positions of directors and officers. Management of a close corporation resembles that of a sole proprietorship or a partnership.

de facto corporations

A company acting as a corporation without having completed all of the legal steps necessary to be incorporated

corporate express powers

Perpetual existence; right to litigate; right to make contracts; right to borrow/loan money; right to make charitable donations; ability to establish rules for managing corporation

depending on state law, dividends may be paid form the following sources

Retained earnings. All states allow dividends to be paid from retained earnings—the undistributed net profits earned by the corporation, including capital gains from the sale of fixed assets. Net profits. A few states allow dividends to be issued from current net profits without regard to deficits in prior years. Surplus. A number of states allow dividends to be paid out of any kind of surplus. For instance, earned surplus is the sum of a company's net profits over a period of time. It increases by the amount of each year's net income after dividend payments. Earned surplus is not extra cash, but shareholder equity. A company's board of directors may choose to pay dividends from the surplus or to use it for some other corporate purpose (such as for acquisitions).

preemptive rights

Rights that entitle shareholders to purchase newly issued shares of a corporation's stock, equal in percentage to shares already held, before the stock is offered to outside buyers.

important requirements for S coprs

The corporation must be a domestic corporation. The corporation must not be a member of an affiliated group of corporations. The shareholders of the corporation must be individuals, estates, or certain trusts. Partnerships and nonqualifying trusts cannot be shareholders. Corporations can be shareholders under certain circumstances. The corporation must have no more than one hundred shareholders. The corporation must have only one class of stock, although all shareholders do not have to have the same voting rights. No shareholder of the corporation may be a nonresident alien.

Elliot is suing Acme, Inc. for a breach of contract, but because it has very little in assets, he asking the court to pierce the corporate veil and hold the officers personally liable. In which of the following situations would the court likely approve Elliot's request?

The corporation was under-capitalized from the beginning, and never had sufficient assets to operate as a viable business.

19. Acts of a corporation that are beyond its expressed or implied powers are .

Ultra Vires Doctrine

stock warrants

Vouchers issued to shareholders, entitling them to given number of shares at specified price

corporate implied powers

Whatever actions necessary (within the law) to execute express powers

business judgement rule

a corporate director or officer will not be hald liable to the corporation or its shareholders for honest mistakes of bad judgement and bad business decisions

ultra vires doctrine

a corporation cannot undertake any transaction unless its charter permits it

alien corporation

a corporation formed in another country but doing business in the US

foreign corporation

a corporation formed in one state but doing business in another

duty of care

a director or officer is expected to act in good faith, to exercise the care that an ordinarily prudent person would exercise in similar circumstances, and to act in what he or she considers to be the best interests of the corporation

outside director

a person on the board of directors who does not hold a management position at the corporation

10. Acme Company has just completed the incorporation process and received its articles of incorporation from the state. At the first organizational meeting of the new company, the officers' most important task is to

adopt bylaws

board of directors management responsibilities

authorize major corporate policy decisions select and remove corporate officers and other managerial employees, and determine their compensation make financial decisions

Jazmine is an officer of New Stage, a theater production company. Without telling any other officers or the board of directors, she decides that New Stage should try to sell gardening tools over the Internet. She makes contracts with suppliers and a Web-based remote order-fulfillment company. The only action that may NOT be taken is

b. she can file a lawsuit against the corporation if it refuses to reimburse the expenses she incurred to make the contracts.

As a director and officer of Harold Transport, Inc., Harold would most likely be considered to have breached his duty of loyalty if he

c. buys stock in Arnold's Transport, Inc., a competing trucking firm.

6. To make, sell, and distribute candy that Ethan has developed, he incorporates his business and designates his sister and brother as corporate officers. He sells them shares of stock. No shares are offered to the public. The three agree that if any one of them decides to leave the business, the others will buy that person's stock. Ethan has chosen a business form known as .

close corporation

1. A corporation is a legal entity:

created and recognized by state law in most situtions

10. The business judgment rule states that:

directors and officers are immune from liability for exercising poor business judgment in certain circumstances.

duties and liabilities of corporate directors and officers

owe ethical and legal duties to the corporation and shareholders. fiduciary duties include care and loyalty

corporate financing

primarily financed by issuance and sale of corporate securirties: stocks and bonds. stocks- equity securities bonds-debt securities

Tara signs a written agreement with Harry, giving Harry the right to cast Tara's votes for a certain group of people nominated for the Syllibar Corporation board of directors. This agreement between Tara and Harry is known as a

proxy

domestic corporation

reffered to by its home state, the state it is incorporated in.

illegal dividends

shareholders must return dividends only if they knew the dividends were illegal when they received them

S corps taxation

taxed like a partnership, avoids double corporate taxation

duty of loyalty

the duty of loyalty requires directors and officers to subordinate their personal interests to the welfare of the corporation. Directors cannot use corporate funds or confidential corporate information for personal advantage and must refrain from self-dealing.

quorum

the number of members of a decision-making body that must be present before business may be transacted

16. Private equity firms use their private equity capital to invest in existing corporations.

true

5. Most corporate enterprises in the U.S. fall into the category of close corporation.

true