LAW 532 ch 15

A promoter that acts on behalf of a corporation, knowing incorporation has not yet occurred, may be jointly and severally liable for all liabilities created by those acts.

True -Generally, a promoter is personally liable when she knows (and the other party has no reason to know) that the corporation is not in existence on the day of the signing. The Revised Model Business Corporation Act (RMBCA) provides that anyone purporting to act on behalf of a corporation (i.e., a promoter), knowing incorporation has not yet occurred, is jointly and severally liable for all liabilities created by those acts.

Corporate officers have only express authority, as outlined by the company bylaws, and do not have any implied or inherent authority to act on behalf of the corporation.

False - Corporate officers have both express and implied authority. Express authority comes from the bylaws or through a board of directors' resolution that gives specific authority to a particular officer. Certain corporate officers also have implied or inherent authority to act as agents of the corporation.

Josef, a director of TrikeBike, Inc., misrepresents important facts about the financial condition of his company to a creditor. Even if he committed fraud, this could not lead to a piercing of the company's corporate veil.

False. - Misrepresentations to creditors regarding important facts about the financial condition of the company or lying to investors about potential liabilities of the corporation are examples of fraud that could lead to a piercing of the corporate veil.

_____ of a corporation have the power to elect and remove directors at their annual meetings.

Shareholders -Shareholders are the owners of the corporation. While shareholders do not directly manage the corporation, most states give shareholders certain rights to protect their ownership interests. Most importantly, shareholders, assuming a majority of the ownership consent, have the power to elect and remove directors at the annual shareholders' meetings.

Privately held corporations may issue bonds to raise capital, but publicly held corporations may not.

False -Both privately held and publicly held corporations may issue bonds. Even relatively small corporations use bonds to finance expansion or the building of a new facility, and bonds can range in amount from several hundred million dollars to as little as $500,000. Bonds for such small amounts are sometimes called "micro bonds".

If a promoter makes a contract on behalf of a not-yet-formed corporation, he is personally liable to perform under the contract even after the corporation is formed and adopts that contract.

False -If a promoter makes a contract on behalf of a not-yet-formed corporation, he may have some degree of personal liability to perform under the contract. Generally, the promoter is personally liable when she knows (and the other party has no reason to know) that the corporation is not in existence on the day of the signing. However, a promoter's personal liability ceases at the moment that the corporation is formed and has adopted the contract.

ZincX Inc. shareholders sue Ralph, a director, for making a poor financial decision that cost the company millions of dollars. Ralph can claim protection under the business judgment rule as long as he had a vested financial self-interest in the disputed financial decision.

False -Ralph may not claim protection under the business judgment rule if he had any financial self-interest in the disputed transaction or decision. Being a shareholder of a merging company or a supplier to a corporation may be dangerous territory for a director because a transaction with the merger partner or supplier may have some degree of self-dealing contamination that will deprive the director of any business judgment rule protection.

Corporations are created through a federal law filing, and their formation is governed by federal statutes.

False. - Corporations are created through a state law filing, and their formation is governed through state statutes. State statutes vary in their corporate formation and governance rules, but each state has a specific law, often called the business corporation law.

In a direct action suit, the individual shareholder or group of shareholders sues an insider on behalf of the corporation.

False. -A shareholder's derivative action suit is not the same as a shareholder's direct action suit. In a derivative action suit, an individual shareholder (or a group of shareholders) brings a lawsuit against an insider in the name of the corporation itself. In a direct action suit, the shareholder brings suit on her own behalf.

A corporate insider has the right to take a lucrative business opportunity for herself, regardless of whether that opportunity relates to the corporation's business or would otherwise benefit the corporation.

False. -The duty of loyalty requires disclosure and good faith when an insider (i.e., director, officer, or controlling shareholder) learns of a potentially lucrative business opportunity that could enrich her individually but is related to the corporation's business. That is, an insider may not usurp (seize) for herself a business opportunity that rightfully belongs to the corporation or would benefit the corporation in some direct way.

Which of the following is true of the taxation of a C corporation?

In a C corporation, both the entity and the shareholders pay tax through a system of double taxation. -In a double taxation system, C corporations pay tax on their earnings, then shareholders pay tax on any corporate earnings distributed to them in the form of dividends. The taxation occurs at both (1) the corporate level, when income is earned by the corporation, and (2) the individual level, when it is distributed as a dividend (profit) to the shareholder.

Lindsay is one of the directors of Sky Create, Inc, a graphic design company. In which of the following situations will a court most likely find that Lindsay breached her duty of care?

Lindsay believes that a reporting officer has been acting suspiciously but still allows him to make decisions. -A court will most likely find that Lindsay breached her duty of care if she believes that a reporting officer has been acting suspiciously but still allows him to make decisions. Under the Revised Model Business Corporation Act (RMBCA), directors still fulfill their duty of care even though they did not personally verify the records or other information provided to them by officers or outside experts whom they reasonably believe to be reliable and competent. However, directors have the obligation to question any suspicious activity by the corporation or its officers. If the issue is outside their field, they must investigate it by consulting outside experts (such as a CPA or an attorney).

Sandra is a member of the board of directors at SwimGym, Inc. Sandra failed to attend most of last year's board meetings, claiming that she was unaware of their occurrence. During the meetings she did attend, it was clear that she had not read the reports or financial records provided by the company and was not up to date with the latest developments. In this scenario, Sandra breached her duty of care primarily through _____.

Negligence -In this scenario, Sanra breached her duty of care primarily through negligence. Courts have held that a director breaches her duty of care when she has failed to fulfill her role in oversight. When a director does not read reports, financial records, or other information provided by the corporation or fails to attend meetings, this weighs heavily in favor of a finding of a breach of duty through negligence.

Which of the following is true of privately held corporations?

They often use unanimous consent resolutions to handle tasks like electing directors or issuing stock. -In lieu of an actual meeting, privately held corporations often use a single document signed by each principal to dispose of necessary tasks such as electing directors or issuing stock. This document is known as a unanimous consent resolution.

Before shareholders of a corporation can file a derivative action lawsuit, they must first make a formal demand on the board of directors to take corrective action and must allow sufficient time for correction.

True. -There are several special procedural requirements for a derivative action. The most important requirement is that the shareholders must first make a formal demand on the board of directors to take corrective action and must allow sufficient time for correction.

When principals wish to convert a privately held corporation to a publicly held corporation, they will typically

engage in an initial public offering (IPO). -When privately held corporations require more capital to expand, they may go through the very complex and time-consuming process of converting the corporation from privately held to publicly held by engaging in an initial public offering (IPO). At that point, the corporation may raise equity by selling its shares to the general public and financial institutions.

An S corporation

has the ability to distribute earnings without incurring double level taxation. -Subject to certain exceptions under the tax laws, Subchapter S corporations are not subject to tax at the entity level. They have the ability to distribute earnings without incurring double level taxation (i.e., without having a tax imposed on both the entity and the equity holder).

A court is most likely to pierce the corporate veil when the

liability claim involves a tort committed by the corporation's employees. -Courts are more likely to pierce the corporate veil when the claim involves some sort of tort, such as negligence by the corporation's employees or even the principals themselves. This is essentially because the victims of negligence (such as a pedestrian struck by a delivery truck operated by a corporate employee) have become involuntary creditors and have never had the opportunity to mitigate the risk of loss.

Corporate bylaws typically set the procedures and requirements for electing a board of directors. When the bylaws specify the number of shareholders who must be present to hold a vote, this is known as the _______ requirement

quorum -Shareholders elect directors. In most corporations directors hold office for one year, but the bylaws can set any term. The bylaws also set the procedures and requirements for an election in terms of time and date, notification to shareholders, and the number of shareholders who must be present to hold a vote—known as the quorum requirement.

The business judgment rule protects corporate officers and directors when

they set up a committee to establish a decision-making procedure that serves the best interests of the corporation. -Directors' and officers' decision-making procedures must be set up in a way that allows careful decisions to be made regarding the best interests of the corporation. Boards will often form committees to carry out their work, and often this committee structure itself is a significant step in establishing a procedure that helps preserve the business judgment rule protection.