blaw chapter 34
Identify four circumstances that might persuade a court to pierce the corporate veil.
Courts generally pierce the corporate veil in four circumstances: (1) Failure to observe formalities, such as holding shareholders' meetings or keeping minute books; (2) commingling of assets of the corporation and the shareholders; (3) inadequate capitalization; and/or (4) fraud.
MegaCorp has five directors. The company has 1,050 shares of voting stock. Jessica would like to purchase enough stock to elect herself to the board of directors. The company allows for cumulative voting. Explain the concept of cumulative voting and also state how many shares of MegaCorp stock Jessica will need to own to assure herself a place on the board of directors.
Cumulative voting allows a shareholder to pool her votes for one nominee to the board. The alternative, noncumulative voting, would allow her to vote one vote for each of her voting shares for each nominee (not place multiple votes with one person). The formula for cumulative voting is: Number of shares needed to elect one director = (Number of shares outstanding ÷ Number of directors to be elected plus one) plus one. In this situation, if all five directors are elected at the same time, then Jessica needs to purchase at least 176 shares of voting stock [1,050/5 + 1] + 1 = 176]. If she has 176 votes, she can cast all her votes for herself. Since 176 votes is enough to guarantee her election to the board, she will be elected.
What are some of the advantages for a business to incorporate in Delaware?
Delaware offers corporations several advantages: ∙ Laws that favor management. Delaware allows a great deal of flexibility for corporations with respect to the management of the business. For example, if shareholders want to vote on a matter in writing rather than holding a meeting, Delaware law requires only a majority vote rather than a unanimous vote (as required in most other states). Delaware is very progressive in passing legislation to permit corporations to operate with a minimum of rigid formalities. ∙ Delaware has a special court called a Chancery Court that hears only corporate matters. The judges are experts in business matters. Corporate cases in Delaware can get to trial quickly. ∙ Given this special court structure, a large volume of corporate law precedent has developed in Delaware. The precedent helps attorneys better advise their corporate clients since the law is well defined.
Discuss how a corporation is terminated.
Ordinarily, terminating a corporation is a three-step process. First, the directors recommend to the shareholders that the corporation be dissolved, and a majority of the shareholders agree. Second, the corporation files "Articles of Dissolution" with the Secretary of State. Third, the officers of the corporation pay its debts and distribute the remaining property to shareholders. When this winding up is completed, the corporation ceases to exist. Alternatively, the Secretary of State may dissolve a corporation that violates state law or a court may dissolve a corporation if it is insolvent or if its directors and shareholders cannot resolve conflict over how the corporation should be managed.
Denise is a promoter for a proposed corporation, EVR-Young Corp. As promoter, she signed a three-year lease to rent office space in an office park. 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 is never incorporated. The lessor believes that Denise is personally liable for any damages it will sustain as a result of the three-year lease having to be breached. Is Denise personally liable? Explain.
Since Denise signed the contract as a promoter for a company yet to be incorporated, she is personally liable for any damages sustained by the lessor. She cannot claim she was an agent for the corporation since a person can only be an agent for an existing principal. Since EVR-Young Corp. was not legally recognized as an entity at the time the lease was signed, Denise could not be the company's agent. She is personally liable on this contract unless she and the lessor had an express agreement that she would not be liable in the event the corporation was never formed.
Isabel, Wesley, Gina, and Lucas worked together intensively to form and become the only shareholders of a corporation that is environmentally conscious. Is there anything they can do to avoid having shares of stock in their company sold to someone who does not share their vision for the environment?
Yes, they can sign a shareholder agreement that grants a right of first refusal for their company's stock. Typically with such an agreement, if a shareholder wants to sell his stock, he must first offer it to the company. If the company does not buy the stock, he must offer it to the other shareholders. Only if they also refuse to purchase the stock within a specified time can he sell to an outsider.
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? a. None. b. One. c. Two. d. Five.
a. None.
A corporate charter is filed with: a. a state's Secretary of State office. b. a state's Treasury and/or Revenue Division. c. the United States Department of Commerce. d. All the above.
a. a state's Secretary of State office.
The officers of a corporation are: a. chosen by the board of directors. b. appointed by the president of the company. c. elected by shareholders. d. appointed by the Secretary of State.
a. chosen by the board of directors.
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): a. de jure corporation. b. de facto corporation. c. corporation by estoppel. d. indemnified corporation.
a. de jure corporation.
Under most state statutes, a corporation may: a. include in its charter a provision indemnifying directors unless they have engaged in intentional misconduct or bad faith. b. include in its charter a provision indemnifying directors under any circumstances in the conduct of their duties for the corporation. c. not include in its charter a provision indemnifying directors who engage in negligent conduct of their duties. d. not include in its charter any provisions regarding indemnification of directors.
a. include in its charter a provision indemnifying directors unless they have engaged in intentional misconduct or bad faith.
Incorporation protects: a. shareholders against personal liability for the debts of the company. b. anyone involved in management of the business against personal liability for wrongdoing. c. the public from wrongdoing by either the shareholders or the management of the corporation. d. All the above are correct.
a. shareholders against personal liability for the debts of the company.
Mike is planning on incorporating his business in the state of Delaware. The corporate name of Mike's business must be different from: a. that of any corporation that already exists in Delaware. b. that of any limited liability company in Delaware. c. the name of any sole proprietorship in Delaware. d. all of the above.
a. that of any corporation that already exists in Delaware.
What is meant by the term "piercing the corporate veil"? a. Corporate directors and/or officers may be held personally liable to a person damaged by an act of the corporation. b. Corporate shareholders may be held personally liable to a person damaged by an act of the corporation. c. Both of the above. d. None of the above.
b. Corporate shareholders may be held personally liable to a person damaged by an act of the corporation.
MegaCorp is incorporated under Delaware law. It is registered to do business in New York. Legally, in New York MegaCorp is known as what kind of corporation? a. Domestic. b. Foreign. c. Alien. d. Cumulative.
b. Foreign.
MegaCorp occasionally sells products in Michigan. It does not have an office in that state and does not advertise in Michigan. The company's marketing representatives are based in New York but do travel to Michigan once a year to attend a trade show. Which statement is correct? a. MegaCorp must register in Michigan because its sales representatives attend a trade show in Michigan. b. MegaCorp is not required to register in Michigan because it does not have an ongoing presence in Michigan. c. MegaCorp must register in Michigan because its actions qualify as doing business. d. Whether MegaCorp has to register in Michigan depends on where its shareholders reside.
b. MegaCorp is not required to register in Michigan because it does not have an ongoing presence in Michigan.
Corporate stock can be divided into categories called ________, which can be further divided into ________. a. authorized shares, classes. b. classes, series. c. equity, assets. d. debentures, classes.
b. classes, series.
Preemptive rights are: a. not legal in the majority of states. b. designed to prevent dilution of a shareholder's ownership in the company. c. required to be offered to shareholders by the Model Act. d. designed to indemnify managers who act in good faith.
b. designed to prevent dilution of a shareholder's ownership in the company.
In Delaware, a person may reserve a corporate name: a. online for a $10 fee. b. for 30 days by writing a letter and paying a $100 fee. c. for 120 days by paying a $75 fee. d. only if the name is simultaneously reserved on a national basis.
c. for 120 days by paying a $75 fee.
Once a provision is in the corporate charter, it can only be changed by: a. a vote of the shareholders. b. filing an amendment with the Secretary of State. c. Both of the above are necessary to change a corporate charter. d. Neither a nor b is necessary to change a corporate charter. The board of directors merely needs to file a change of charter form.
c. Both of the above are necessary to change a corporate charter.
MegaCorp is incorporated in the state of Delaware and is registered only in Delaware. Jolene purchased a MegaCorp product from a company's sales representative following a presentation in Michigan. Jolene was seriously injured by the product in Michigan. Under the Model Act, if Jolene sues in Michigan, can MegaCorp defend the suit there? a. MegaCorp may only defend against a lawsuit in Michigan if it first registers by paying back fees, taxes, and penalties. b. Yes, MegaCorp can bring or defend against a lawsuit in any state regardless of whether the corporation is registered to business in that state. c. Yes, MegaCorp can defend against a lawsuit in Michigan regardless of whether MegaCorp is registered to do business in that state. d. No. Jolene must sue and MegaCorp may defend a lawsuit only in Delaware.
c. Yes, MegaCorp can defend against a lawsuit in Michigan regardless of whether MegaCorp is registered to do business in that state.
The executives of Jornaginn Corporation have decided they need to sell 50,000 additional shares of stock to finance their plans. The executives: a. cannot sell that many shares unless they were authorized initially in the corporate charter. b. can sell as many shares as the market will bear. c. are limited by the number of shares authorized in the corporate charter, but this number can be increased by amending the charter and paying a fee. d. can sell the shares only if the shares have a par value which is close to the current market price.
c. are limited by the number of shares authorized in the corporate charter, but this number can be increased by amending the charter and paying a fee.
Wizardry Corporation's purpose clause in its charter states, "To operate a home-cleaning service business." After a few years of successful operation, Wizardry is offered the challenge of landscaping a neighboring business. If Wizardry accepts the offer, it would be violating its charter under: a. the de jure doctrine. b. the de facto doctrine. c. the ultra vires doctrine. d. an estoppel theory.
c. the ultra vires doctrine.
MegaCorp purchased 10,000 shares of its own stock that had previously been owned by private investors. The stock MegaCorp repurchased is called: a. authorized and unissued. b. authorized and issued. c. treasury stock. d. repurchased stock.
c. treasury stock.
Hank owns 100 shares of cumulative preferred stock in Wayside Transport, Inc. Kelsey owns 50 non-cumulative preferred shares, and Oleg owns 120 shares of common stock. Wayside does not pay dividends in 2007. In 2009: a. Hank and Kelsey must receive their 2009 dividends before Oleg is paid any 2009 dividends. b. Oleg cannot receive any 2009 dividends until Hank is paid for the 2007 dividends. c. Kelsey cannot receive the dividends Wayside could not afford to pay in 2007. She will just lose them. d. All of the above.
d. All of the above.
Defining a corporation with such information as the corporate name, the number and type of authorized shares of stock, identification of the purpose and the agent, is done through the: a. charter. b. articles of incorporation. c. certificate of organization. d. All of the above. All of these terms are used to identify the same document.
d. All of the above. All of these terms are used to identify the same document.
Which of the following statements is correct? a. Bonds are long-term debt secured by company assets. b. Debentures are long-term unsecured debt. c. Notes are short-term debt and may be secured or unsecured. d. All the above are correct.
d. All the above are correct.
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? a. Yes. The United States Supreme Court has ruled that a publicly held corporation that purposefully sets about to eliminate cumulative voting to prevent a person from getting herself elected to the board has acted illegally. b. Yes, but only if the company is incorporated in a state that has adopted the Model Act. c. No, provided the company did not change its cumulative voting provision solely for the purpose of preventing a particular person from taking advantage of that right. d. No. Under the Model Act, regardless of MegaCorp's motives, it had the right to act as it did.
d. No. Under the Model Act, regardless of MegaCorp's motives, it had the right to act as it did.
Fashions, Inc. has 12 shareholders. The company is subject to the Model Act. What officers is Fashions, Inc. required to have? a. A president, secretary, and treasurer. b. A president and a secretary, and they can be the same person. c. A president, at least one vice-president, a secretary, and a chief financial officer. d. Whatever officers are described in the corporate bylaws.
d. Whatever officers are described in the corporate bylaws.
Laurie is incorporating her business. The business's home state is Wisconsin. Business will be conducted in California, Michigan, Pennsylvania, and Virginia. Laurie: a. must incorporate the business in Wisconsin, the home state. b. must incorporate the business in Wisconsin, California, Michigan, Pennsylvania and Virginia. c. must incorporate in Delaware. d. can incorporate the business in any state.
d. can incorporate the business in any state.
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? a. yStar is liable on the contract because the contract was signed in its name. b. yStar becomes liable on the contract as soon as it is incorporated. c. yStar is liable on the contract if the contractor knows that the corporation does not yet exist. d. yStar will be liable on the contract only if the corporation adopts the contract.
d. yStar will be liable on the contract only if the corporation adopts the contract.
A business corporation can be incorporated under either state law or federal law. t/f
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. t/f
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. t/f
false
It is illegal for shareholders to transfer their stock to a trust and give the trustee the power to vote the shares. t/f
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. t/f
false
terminating a corporation is a three-step process: dissolution, winding up, and termination. t/f
false
A corporation by estoppel is based on fairness rather than strict legal rules. t/f
true
A corporation is not allowed to issue dividends to shareholders unless it is solvent. t/f
true
A corporation must always have a registered agent within the state of incorporation, even if the corporation does not maintain an office in that state. t/f
true
A de jure corporation is recognized as a corporation despite a defect in incorporation. t/f
true
Lee owns 1,000 shares of common stock in TriColor, Inc. Common stock is last stock in line for any corporate payouts, including dividends and liquidation payments. t/f
true
Owners of preferred stock typically have a preference in liquidation. t/f
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. t/f
true
Shyff decided to incorporate his business under the name of "Zamm." In addition to "Zamm," the Model Act requires that Shyff include one of the following words: "corporation," "incorporated," "limited," or "company" or an abbreviation thereof. t/f
true
TriColor, Inc. is doing business in Minnesota, West Virginia, and Oklahoma. TriColor must register in all three of these states. t/f
true
