Ch 15 Master

What are three situations in which courts will ignore the corporate structure and pierce the corporate veil

1. Owners use the corporate entity to perpetuate fraud 2. Owners use the corporate entity to circumvent the law 3. Owners use the corporate entity to accomplish an illegitimate objective

The three sources from which dividends may be paid.

1. Retained earnings 2. Net Profits 3. Surplus

Three most important rights of the directors

1. Right to Participation 2. Right of Inspection 3. Right of Indemnification

Shareholder's Liability

1. Shareholders may be LIABLE for watered stock 2. In certain situations, majority shareholders may be regarded as having a FIDUCIARY duty to minority shareholders and will be liable if that duty is breached.

Factors for One-Person Corps or Family Owned Corps that may lead to piercing the corporate veil

1. The commingling of corporate and personal FUNDS 2. The failure to hold board of director's MEETINGS and record the minutes 3. The shareholder's continuous personal use of corporate PROPERTY

The Way In Which Benefit Corporations Differ From Traditional Corporations.

1. The directors of a benefit corp must, during the decision-making process, consider the IMPACT of their decisions on society and the environment. 2. Shareholders also have a right of private ACTION, called a benefit proceeding, ENABLING them to sue the corp if it fails to pursue or create public benefit 3. A benefit corporation must issue an ANNUAL benefit report on its overall social and environmental performance that uses a RECOGNIZED third-party standard to assess its performance.

What is the correct order of priority used if a conflict arises among the various documents involving a corporation

1. US constitution 2. State constitutions 3. State statutes 4. The articles of incorporation 5. Bylaws 6. Resolutions of the board of directors

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. a. True b. False

True

Most corporate enterprises in the U.S. fall into the category of close corporation. a. True b. False

True

Private equity firms use their private equity capital to invest in existing corporations. a. True b. False

True

Shareholders have the power to vote to elect or remove members of the board of the directors. a. True b. False

True

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

Ultra Vires

A major power held by shareholders is the power to

Vote to amend the Articles of Incorporation or the Corporate bylaws

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"

Betty has engaged in a number of acts that constitute a conflict of interest between her and Global Mfg., Inc. The corporation wants to remove her, and can do so a. for cause. b. in good faith. c. when her term expires. d. when the shareholders vote at the next annual meeting.

a

Don, Keith, Jack and Diane are shareholders in a close corporation. Don and Keith, as majority shareholders owe which of the following duty to Jack and Diane as minority shareholders: a. a fiduciary duty to minority shareholders. b. a good faith and fair dealing duty to minority shareholders. c. a goodwill duty to minority shareholders. d. no duty to minority shareholders.

a

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? a. The corporation was under-capitalized from the beginning, and never had sufficient assets to operate as a viable business. b. The officers make their decisions based on information presented to them, but unknown to them is the fact the information is incorrect. c. The officers loaned money to the corporation in an attempt to delay any adverse actions. d. The corporation has struggled to make a profit from the beginning.

a

Lysco gives to all 15,000 of its shareholders the right to purchase newly issued shares of Lysco stock in proportion to the percentage of shares they currently own and before anyone else is offered the shares. This right is known as a. a preemptive right. b. a proxy right. c. a warrant agreement. d. an attachment right.

a

The directors and officers of Sports Color, Inc., vote to refuse to declare a dividend. The shareholders can a. overrule the directors and vote themselves to declare a dividend. b. file an action to require the directors to declare a dividend. c. demand that a court declare a dividend. d. return treasury shares in exchange for a dividend.

b

What are the factors that lead courts to pierce the corporate veil?

1. A party is TRICKED into dealing with the corporation rather than the individual 2. The corporation is set up never to make a PROFIT or always to be insolvent, or it is too "thinly" capitalized 3. The corporation is formed to EVADE an existing obligation 4. Statutory corporate FORMALITIES, such as holding required corporation meetings, are not followed 5. Personal and corporate interests are MIXED together or commingled.

The duty of care of Directors and Officers

1. Act in Good FAITH 2. Exercise CARE of that of a normal person 3. Do what she or he BELIEVES is in the best interests of the corp

Requirements for S Corporation Status

1. Domestic corporation. 2. The corporation must NOT be a member of an affiliated group of corporation. 3. The shareholders of the corporations must be individuals, estates, or certain trusts and tax-exempt organizations. 4. The corporation must have no more than 100 shareholders. 5. The corporation must have only one class of stock, although all shareholders do not need to have the same voting rights. 6. No shareholder of the corporation may be a non-resident alien.

The Articles of Incorporation Must Include the following.

1. NAME of corp 2. Number of SHARES the corp is allowed to issue 3. Name and Stress address of the corp's INITIAL registered agent and registered office 4. The name and ADDRESS of each incorporator

Stock Certificates

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

Stock warrants

A certificate that grants the owner the option to buy a given number of shares of stock, usually within a set time period.

De Facto Corporations

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

Alien Corporation

A designation in the United States for a corporation formed in another country but doing business in the United States

Dividend

A distribution to corporate shareholders of corporate profits or income, disbursed in proportion to the number of shares held.

Outside Director

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

Inside Director

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

Any corporate director who sits on more than one board is engaging in illegal activity. a. True b. False

False

Once a quorum is present, shareholders do not have the inherent power to pass resolutions by a majority vote. a. True b. False

False

The directors and offices of Sports Color, Inc., vote to refuse to declare a dividend. The shareholders can:

File an action in equity to require the directors to declare a dividend

Foreign Corporation

In a given state, a corporation that does business in the state without being incorporated therein

Domestic Corporation

In a given state, a corporation that does business in, and is organized under the laws of, that state

Liftco gives to all 15,000 of its shareholders the right to purchase newly issued shares of Liftco's stock in proportion to the percentage of shares they currently own and before anyone else is offered the shares. This right is known as

Preemptive Right

Preemptive Rights

Rights held by shareholders that entitle them to purchase newly issued shares of a corporation's stock, equal in percentage to shares already held, before the stock is offered to any outside buyers. Preemptive rights enable shareholders to maintain their proportionate ownership and voice in the corporation.

Quorum

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

Upon dissolution of the corporation, after all outstanding debts and claims of creditors have been satisfied, what happens to the remaining assets?

They are distributed to shareholders in proportion to their percentage shares

A proxy is a written or electronically transmitted form in which a stockholder authorizes another party to vote the stockholder's shares in a certain manner. a. True b. False

True

Corporate officers and other executive employees are hired by the board of directors. a. True b. False

True

The business judgment rule states that: a. directors and officers are immune from liability for exercising poor business judgment in certain circumstances. b. directors and officers are never immune from liability for exercising poor business judgment, regardless of the circumstances. c. directors may never be held liable for corporate harms or losses so long as they have attended board meetings and agreed to corporate actions.

a

The reason most states either permit or require the use of cumulative voting when electing directors is to: a. allow minority shareholders a greater chance at representation on the board. b. allow directors to have a greater input into the election process. c. reduce fraud among voters.

a

De Jure Corporations

a corporation that has substantially complied with all conditions precedent to incorporation

A corporation normally has a ten-year existence a. True b. False

b

Acme Co. 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 a. amend the articles of incorporation. b. adopt bylaws. c. determine the details of the stock sale. d. create a hiring policy.

b

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 a. amend the articles of incorporation b. adopt bylaws c. determine the details of the stock sale d. create a hiring policy

b

Buck is a director of Bromley Corp. Buck owns a printing company, and Bromley needs to have a book printed. If Buck contracts with Bromley to print the book, he must a. Do nothing special; the contract is valid. b. Fully disclose his interest to the other board members and abstain from voting on the matter. c. Never enter into a contract like this. d. Resign from the board if anyone questions the conflict of interest.

b

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 a. the corporation can file a lawsuit against her. b. she can file a lawsuit against the corporation if it refuses to reimburse the expenses she incurred to make the contracts. c. the shareholders can file a lawsuit on behalf of the corporation. d. the state attorney general may seek an injunction against the transactions or seek a dissolution order from a court.

b

Preferred stock is often considered a more conservative (less aggressive) investment than common stock because: a. its holders have voting right, unlike stockholders. b. it is less volatile and more like a bond. c. it never pays dividends.

b

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 a. derivative agreement. b. proxy. c. subpoena. d. cumulative voting agreement.

b

As a director and officer of Harold Transport, Inc., Harold would most likely be considered to have breached his duty of loyalty if he a. suggests to the other members of the board that the company should purchase a new line of trucks. b. becomes a director of Cineplex, a chain of multiplex theaters. c. buys stock in Arnold's Transport, Inc., a competing trucking firm. d. personally takes advantage of a business opportunity that the officers and directors of Harold Transport voted against.

c

Individual corporate directors have the ability, as agents of a corporation, to bind the corporation: a. As long as the articles of incorporation allow it. b. In all situations. c. Not at all, as individual directors do not have agency power.

c

One of the first steps in corporation process is a. drafting a prospectus b. drafting bylaws c. deciding in which state to incorporate d. completing the articles of incorporation

c

Wendy is a member of the board of directors and the chief financial officer of The Shoe Fits, Inc. Under the duty of due care that she owes the corporation, Wendy does NOT need to a. attend board meetings and oversee the corporation's employees and other officers. b. attend presentations and make a careful study of business choices before making decisions. c. oversee every aspect of the business, including such things as ordering merchandise and arranging for janitorial services. d. subordinate her personal interests to the welfare of the corporation.

c

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

A corporation is a legal entity

created and recognized by state law in most situations

A group of lawyers in Plainsville decide to start a law firm together. They use the name of the three lawyers who first decided to create the firm. The law firm of Adams, Bell, and Clyde has the letters P.C. at the end of its name. The letters stand for a. public corporation. All of its members are professionals, and they pay taxes at a lower rate than most corporations. b. public company. None of its members are professionals, and they pay taxes at a higher rate than most corporations. c. professional corporation. All of its members are professionals and are subject to less liability than most corporate officers. d. professional corporation. All of its members are professionals and are subject to greater liability than most corporate officers.

d

Sally incorporates her business, Sally's Rhinestones, in her home state of Maryland. She wants to expand and sell some of her jewelry in Virginia. In Virginia, her company will be considered a. an alien corporation because her business has been chartered in another state. b. a public corporation, so she will probably not have to obtain a license to do business there. c. an open corporation, so she can do business in any state that allows open corporations to operate. d. a foreign corporation, and she will probably have to obtain a certificate of authority to do business there.

d

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

limited liability of its owners