BLUW exam 3

Bonds

way for the corporation to split up its long-term debt so that it can be more easily marketed.

Example of close corporation- not pierce the corporate veil

Pip, Jimmy, and Theodore Brennan are brothers and shareholders of Brennan's, Inc., which owns and operates New Orleans's famous Brennan's Restaurant. As a close corporation, Brennan's, Inc., did not hold formal corporate meetings with agendas and minutes, but it did maintain corporate books, hold corporate bank accounts, and file corporate tax returns. The Brennan brothers retained attorney Edward Colbert to represent them in a family matter, and the attorney's bills were sent to the restaurant and paid from the corporate account. Later, when Brennan's, Inc., sued Colbert for malpractice, Colbert argued that the court should pierce the corporate veil because the Brennan brothers did not observe corporate formalities. The court refused to do so, however, because there was no evidence of fraud, malfeasance, or other wrongdoing by the Brennan brothers. There is no requirement for small, close corporations to operate with the formality usually expected of larger corporations.

· Rights of directors include:

Right to participation Right of inspection Right of indemnification

Remedies for Ultra Vires Acts

Section 3.04 of the RMBCA, shareholders can seek an injunction from a court to prevent (or stop) the corporation from engaging in ultra vires acts -attorney general in the state of incorporation can also bring an action to obtain an injunction against the ultra vires transactions or to seek dissolution of the corporation. -The corporation or its shareholders (on behalf of the corporation) can seek damages from the officers and directors who were responsible for the ultra vires acts.

false

Shareholders are personally liable for the debts of a corporation.

Alter-Ego Theory

Sometimes, courts pierce the corporate veil under the theory that the corporation was not operated as a separate entity. Rather, it was just another side (the alter ego) of the individual or group that actually controlled the corporation.

Venture capital

Start-up businesses( give up share of its ownership) and high-risk enterprises obtain_____ Financing provided to new business ventures by professional, outside investors Many Internet-based companies, such as Google and Amazon, were initially financed by____

Securities and Exchange Commission (SEC)

Starting in 2016______ rules allow companies to offer and sell securities through crowdfunding—removing a decades-old ban on public solicitation for private investments -meant to help smaller companies raise capital while providing investors with additional protections. Companies are required to make specific disclosures and are limited to raising $1 million a year through crowdfunding.

alter-ego theory example

Steiner Electric Company (Steiner) is an Illinois corporation that sells electrical products. Steiner sold goods to Delta Equipment Company and Sackett Systems, Inc., on credit. Both Delta and Sackett were owned and controlled by a single shareholder—Leonard Maniscalco. Steiner was not fully paid for the products it sold on credit to Delta and Sackett. Eventually, Steiner sued Delta and won a default judgment, but by that time, Delta had been dissolved. Steiner then asked a state court to pierce the corporate veil and hold Maniscalco liable for the debts of the two companies, claiming the companies were merely Maniscalco's alter egos. The court agreed and held Maniscalco liable. Delta and Sackett were inadequately capitalized, transactions were not properly documented, funds were commingled, and corporate formalities were not observed. Maniscalco had consistently treated both companies in such a manner that they were, in practice, his alter egos

piercing the corporate veil

The action of a court to disregard the corporate entity and hold the shareholders personally liable for corporate debts and obligations.

true

The articles of incorporation serve as the primary source of authority for a corporation.

record date.

The corporation prepares a voting list before each shareholders' meeting, which contains the name, number of shares, and address of each shareholder as shown on the corporate records on a given cutoff date,

articles of incorporation

The document that is filed with the appropriate state official, usually the secretary of state, when a business is incorporated and that contains basic information about the corporation.

bylaws

The internal rules of management adopted by a corporation at its first organizational meeting. cannot conflict with the state corporation statute or the articles of incorporation [RMBCA 2.06].

· proxy.

The law allows stockholders to appoint another person as their agent to vote their shares at the meeting. The agent's formal authorization to vote the shares is called a___

close corporation.

The potential for corporate assets to be used for personal benefit is especially great in - An example would be commingling of corporate and personal funds and the shareholders' continuous personal use of corporate property (like vehicles). - Courts are typically reluctant to hold shareholders in _____personally liable for corporate obligations unless there is some evidence of fraud or wrongdoing.

Liability of directors and officers:

They can be held liable for negligence and for crimes and torts committed by themselves or by corporate employees under their supervision.

shareholders

This business (corporation) entity can have one or more owners -individuals and other businesses can be____

false

To pierce the corporate veil is to disregard the corporate entity and hold the directors liable for a corporate obligation.

c. The extent of Walter's investment in the firm.

Treehorn Corporation authorizes Jeffrey, its employee to oversee its timber operation. In the course of his employment, Jeffrey disposes of the operation's waste illegally. Walter is a Treehorn shareholder. Liability for this act most likely rests with Walter to: a. No extent. b. The proportionate extent of the number of shares Walter owns. c. The extent of Walter's investment in the firm. d. The full extent.

bylaws.

Under the RMBCA, the shareholders may amend or repeal the ____ The board of directors may also amend or repeal the ____unless the articles of incorporation or provisions of the state corporation statute reserve this power to the shareholders [RMBCA 10.20].

true

When directors do not act in the best interests of their corporations, the shareholders may sue them on the company's behalf.

courts pierce the veil

When owners use a corporate entity to perpetrate fraud, circumvent the law, or in some other way accomplish an illegitimate objective, the courts will ignore the corporate structure by

d. Perform all acts reasonably appropriate and necessary to accomplish its corporate purpose

Wild & Scenic River Tours, Inc., is a corporation. Wild & Scenic has the implied power to: a. Issue stocks and bonds b. Execute contracts and negotiable instruments c. Buy and sell (or lease) property d. Perform all acts reasonably appropriate and necessary to accomplish its corporate purpose

retained earnings

_____ are invested properly, they will yield higher corporate profits in the future which may cause the company's stock price to rise which would benefit shareholders in the capital gains they would receive when they sell their stock

pierce the corporate veil

a court can ______ and impose liability on shareholders for the corporation's obligations.

Corporation by Estoppel

a defective corporation that has conducted business with a third party and therefore cannot deny its status as a corporation to escape liability

Private corporations

are created either wholly or in part for private benefit—that is, for profit. Most corporations are private.

Bonds

are debt securities, which represent the borrowing of funds. _____ are issued by business firms and by governments at all levels as evidence of funds they are borrowing from investors. -have a designated maturity date(date when the principal, or face amount, of the bond is returned to the bondholder.)

Holders of common stock

are investors who assume a residual position in the overall financial structure of a business. -benefit when the market price of the stock increases -last in line in terms of payment for their investment

board of directors- not trustees

because they do not hold title to property for the use and benefit of others.

Under the RMBCA,

close corporations have considerable flexibility in determining their operating rules -If all of a corporation's shareholders agree in writing, the corporation can operate without directors and bylaws. In addition, the corporation can operate without annual or special shareholders' or directors' meetings, stock certificates, or formal records of shareholders' or directors' decisions

Common stock provides an interest in the corporation with regard to

control earnings net assets.

bylaws

describe such matters as voting requirements for shareholders, the election of the board of directors, and the methods of replacing directors. - frequently outline the manner/time of holding shareholders' and board meetings.

stock certificates

evidenced ownership of a specified number of shares in the corporation -· Shareholders have the right to demand that the corporation issue ______ (or replace those that were lost or destroyed).

Express Powers of corporation

found in its articles of incorporation, in the law of the state of incorporation, and in the state and federal constitutions.

Executive committee:

handles interim management decisions between board meetings (limited to ordinary business matters).

Venture capital investments

high risk—the investors must be willing to lose all of their invested funds—but offer the potential for well-above-average returns in the future.

Dividends are illegal

if - they are improperly paid from an unauthorized account or if their payment causes the corporation to become insolvent. - When directors fail to declare a dividend, shareholders may ask a court to compel the directors to do so, and the shareholders must show that the directors have acted so unreasonably in withholding the dividend that their conduct is an abuse of their discretion.

holding company

is a company whose business activity consists of holding shares in another company. -U.S. corporations use ______ (parent companies) to reduce or defer their U.S. income taxes

Crowdfunding

is a cooperative activity in which people network and pool funds and other resources via the Internet to assist a cause or invest in a venture

public corporation

is a corporation formed by the government to meet some political or governmental purpose. -NOT the same as publicly held corporation - Examples are cities and towns that incorporate and the U.S. Postal Service

An inside director

is a director who is also an officer of the corporation

A corporation

is a legal entity created and recognized by state law. - Some (like public organizations) are created under federal law

Preferred stock

is an equity security with preferences. means that holders of _____have priority over holders of common stock as to dividends and payment on dissolution of the corporation.

The alter-ego theory

is applied when a corporation is so dominated and controlled by an individual (or group) that the separate identities of the person (or group) and the corporation are no longer distinct.

corporate name

is subject to state approval to ensure against duplication or deception. -cannot be the same as, or deceptively similar to, the name of an existing corporation doing business within the state -All states require the corporation's name to include the word Corporation (Corp.), Incorporated (Inc.), Company (Co.), or Limited (Ltd.).

· The duty of officers and directors

is to act in the best interests of the corporation and its shareholder-owners as a whole.

crowdfunding

is used to raise funds for charitable purposes, such as disaster relief, but increasingly it is being used to finance budding entrepreneurs.

Holders of preferred stock

may or may not have the right to vote -they will not share in the full prosperity of the firm if it grows successfully over time.

ultra vires

means "beyond the power."

articles of incorporation

must be filled with the state -once signed, sent to state official (secretary of state) with filling fee. the secretary of state then stamps the articles "Filed" and returns a copy of the articles to the incorporators. Once this occurs, the corporation officially exists.

Quorum

must be present in order for shareholders to act during meeting -· generally means that shareholders holding more than 50% of the outstanding shares are present.

Shareholders

own the corporation. Although they have no legal title to corporate property, such as buildings and equipment, they do have an equitable (ownership) interest in the firm. -have no responsibility for the daily management of the corporation -responsible for choosing the board of directors

Most corporations have a

president one or more vice presidents a secretary a treasurer

Stocks, or equity securities

represent the purchase of ownership in the business firm.

Audit committee:

responsible for the selection, compensation, and oversight of the independent public accountants that audit the firm's financial records. - Required by the Sarbanes-Oxley Act

board of directors

sometimes inappropriately characterized as agents because they act on behalf of the corporation.

Professional Corporations

such as physicians, lawyers, dentists, and accountants can incorporate. treated like partnership some courts hold ___ each professional liable for malpractice committed within the scope of the business by others in the firm.

board of directors

ultimate authority in every corporation. -must act as a body in carrying out routine corporate business -selects and removes the corporate officers, determines the capital structure of the corporation, and declares dividends

venture capitalists

usually groups of wealthy investors and securities firms. -may provide managerial and technical expertise, and they nearly always are given some control over the new company's decisions

fiduciary duty

when a single shareholder (or a few shareholders acting in concert) owns a sufficient number of shares to exercise de facto control over the corporation

De Facto

when courts treat a corporation as a legal corporation despite a defect in its formation -states, including Mississippi, New York, Ohio, and Oklahoma, recognize the common law doctrine of____

courts pierce the veil

when the corporate privilege is abused for personal benefit or when the corporate business is treated so carelessly that it is indistinguishable from that of a controlling shareholder.

Voting:

· Corporate business matters are presented in the form of resolutions, which shareholders vote to approve or disapprove.

Conflicts of interest

· Directors and officers have a fiduciary duty that requires them to make a full disclosure of any potential conflicts of interest that might arise in any corporate transaction. - They must abstain from voting on the proposed transaction.

Right to participation

· Directors are entitled to participate in all board of directors' meetings.

Right of inspection

· Each director can access the corporation's books and records, facilities, and premises (may not be restricted by articles, bylaws, or any act of the board).

shareholder proposal

· If a shareholder would like to change a company policy, they do this by submitting a _____ to the board and asking the board to include the proposal in the proxy materials that are sent to all shareholders before meetings.

cumulative voting

· Most states permit, and many require, shareholders to elect directors by ____, a voting method designed to allow minority shareholders to be represented on the board of directors.

liabilities of shareholders:

· Shareholders are not personally liable for the debt of the corporation. A shareholder may be personally liable if a court pierces the corporate veil or if instances related to illegal dividends and watered stock occur. An oppressive or exclusive majority shareholder can also be held personally liable.

Meetings

· The board of directors conducts business by holding formal meetings with recorded minutes, and the dates of regular meetings are usually established in the articles of bylaws or by board resolution.

Implied Powers

· The corporation have ___ to perform all acts reasonably necessary to accomplish its corporate purposes.

Transfer of shares

· The law generally recognizes the owner's right to transfer stock to another person unless there are valid restrictions on its transferability, such as frequently occur with close corporation stock. - A new entry is made in the corporate stock book to indicate a new owner when shares are transferred.

Right of indemnification

· When a director becomes involved in litigation by virtue of their position, the director may have a right to reimbursement for the legal costs, fees, and damaged incurred.

Model Business Corporation Act (MBCA):

· a codification of modern corporation law that has been influential in shaping state corporation statutes - Most recent version that guides the majority of state statutes is the revised act (RMBCA)

Tort liability

· a corporation is liable for its _____ committed by its agents or officers within the course and scope of their employments under the doctrine of respondeat superior

Criminal acts

· a corporation may be held liable for the _____ of its agents and employees - Corporate directors and officers may be imprisoned, but since corporations may not be imprisoned, they may be fined amounts of hundreds of millions of dollars

Preemptive rights

· are provided in the articles of incorporation and give shareholders a preference over all other purchases to subscribe to or purchase a prorated share of a new issue of stock, which generally must be exercised within a specific time period. - These rights are most important in close corporations.

Stock warrants

· are rights given by a company to buy stock at a stated price y a specified date.

Committees of the board:

· are typically created to delegate certain tasks to these committees. By focusing on certain specific subjects, committees can increase the efficiency of the board.

Inspection rights

· both common law and statutory, are enjoyed by the shareholders. - A shareholder has a right to inspect and copy corporate books and records only for a proper purpose, and the request to inspect must be made in advance.

Shareholders' Powers

· do not have responsibility for the daily management of the corporation, but they do choose the board of directors, which does have such control. · Approval is normally required by shareholders to amend the articles of incorporation or bylaws, to conduct a merger or dissolve the corporation, and to sell all or substantially all of the corporation's assets. · Shareholders also have the power to vote to elect or remove (generally with cause) members of the board.

Corporate taxation:

· earnings could be passed to shareholders as dividends or the corporation could retain the earnings - earnings are subject to taxation by various levels of government

voting trust

· in another technique of voting. It is an agreement (a trust contract) under which a shareholder assigns the right to vote their shares to a trustee, usually for a specified period of time. - The trustee is then responsible for voting the shares on behalf of all of the shareholders in the trust.

Board of Directors

· is responsible for the overall management of the firm - Members are elected by the shareholders - They make policy decisions and hire corporate officers and other employees to run daily business operations

Dividends

· may be paid in cash, property, stock of the corporation, or stock of other corporations.

Shareholders' meetings

· must occur at least annually, and they must be notified of the date, time, and place of the meeting at least ten days, but not more than sixty days, before the meeting date.

Corporate financing:

· normally are financed by the issuance and sale of corporate securities.

SEC rule

· rule provides that all shareholders who own stock worth at least $1000 are eligible to submit proposals for inclusion in corporate proxy materials.

Limited liability of shareholders

· shareholders are normally not personally liable for the obligations of the corporation beyond the extent of their investments - in some limited situations, a court could "pierce the corporate veil" and impose liability on shareholders for the corporation's obligations - creditors often will not extend credit to small companies unless shareholders assume personal liability as guarantors

Quorum of directors

· the minimum number of members of a body of officials or other group that must be present for business to be validly transacted.

Watered stock:

· when a corporation issues shares for less than their fair market value. - The shareholder who receives the ______must pay the difference to the corporation (the shareholder is personally liable).

Dissenting Directors

- (directors who disagree with the majority vote of the board) must have their dissent entered into the minutes of the meetings, so they are not held liable for mismanagement as a result of a decision.

proxies

- Any person may solicit _____ to concentrate voting power, and they are normally revocable (may be withdrawn), unless they are specified as irrevocable and coupled with an interest.

Shareholder Voting

- Each shareholder is entitled to a total number of votes equal to the number of board members to be elected multiplied by the number of voting shares that the shareholder owns, for one candidate or split among several nominees for director.

· Management of close corporations:

- Resembles that of a sole proprietorship or a partnership - However, the firm must meet all specific requirements set forth in state statutes - To prevent a majority shareholder from dominating the company, a close corporation may require more than a simple majority of the directors to approve any action taken by the board

Preemptive rights

- The shareholder can purchase a percentage of the new shares being issued that is equal to the percentages of the shares they already hold in the company. - This allows them to maintain their proportionate control, voting power, and financial interest in the firm.

corporation

- They have the constitutional guarantees of due process, free speech, and freedom from unreasonable searches and seizures

Corporate and managerial officers

- act an agent of the corporation, so ordinary rules of agency normally apply to their employment.

double taxation

- corporate profits could also be subject to ________when the company pays tax on its profits and then the shareholders who receive dividends must also pay income tax on them

S corporation

- could avoid the imposition if income taxes at the corporate level while retaining many of the advantages of a corporation (like limited liability)

A corporate officer

- does not have the authority to bind the corporation to an action that will greatly affect the corporate purpose or undertaking, such as the sale of substantial corporate assets.

Directors and officers

- have a duty to make informed decisions, so they must investigate, study, and discuss matters and evaluate alternatives before making a decision. They are normally entitled to rely on information given to them by certain other persons. - They also have a duty to exercise reasonable supervision when they delegate work.

Corporate officers

- have the implied power to bind the corporation in matters directly connected with the ordinary business affairs of the enterprise.

An outside director

- is a director who does not hold a management position.

· proxy.

- is coupled with an interest, like when the person receiving the proxies from shareholders has agreed to buy their shares. ___ are valid for eleven months, unless the proxy agreement mandates a longer period

A shareholder's derivative suit

- is when shareholders perceive that the corporate directors are not acting in the best interest of the firm, so they may sue the directors on behalf of the corporation.

Corporation has Implied Powers to

- power to borrow and lend funds within certain limits and to extend credit to parties with whom it has contracts.

Once the quorum is present,

- the directors transact business and vote on issues affecting the firm. - Most matters generally require a majority vote, but certain extraordinary issues may require a greater-than-majority vote.

A corporation

-· creatures of statute that exist only in law - They are intangible and not visible - Their existence generally depends on state law

d. Have only one class of stock

. Boutique Corporation would like to remain a corporation but change its corporate status to avoid income taxes at the corporate level. To qualify, among other things, Boutique must: a. Be a subsidiary of another corporation b. Have shareholders who are members of the same family c. Be publicly traded d. Have only one class of stock

d. A publicly held corporation

. The shares of Home Mortgage Corporation are publicly traded in securities markets. Home Mortgage Corporation is: a. A close corporation b. A privately held corporation c. A public corporation d. A publicly held corporation

factors that frequently cause the courts to pierce the corporate veil:

1. A party is tricked or misled 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. Alternatively, it is too thinly capitalized, which means it have insufficient capital at the time it is formed to meet its prospective debts or potential liabilities. 3. The corporation is formed to evade an existing legal obligation. 4. Statutory corporate formalities, such as holding required corporation meetings, are not followed. 5. Personal and corporate interests are mixed together, or commingled, to such an extend that the corporation has no separate identity.

De Facto requirements

1. A state statute exists under which the corporation can be validly incorporated. 2.The parties have made a good faith attempt to comply with the statute. 3.The parties have already undertaken to do business as a corporation.

due care requires a director or officer to:

1. Act in good faith (honestly) 2. Exercise the care that an ordinary prudent (careful) person would exercise in similar circumstances 3.Do what they believe is in the best interest of the firm

· Cases dealing with the duty of loyalty typically involve one or more of the following:

1. Competing with the corporation 2. Usurping (taking personal advantage of) a corporate opportunity 3. Pursuing an interest that conflicts with that of the corporation 4. Using information that is not available to the public to make a profit trading securities (insider trading) 5. Authorizing a corporate transaction that is detrimental to minority shareholders 6. Selling control over the corporation

Benefit corporations differ from traditional corporations in the following ways:

1. Purpose (benefit public as a whole- consider the impact of their decisions on society and the environment.) 2.Accountability (Shareholders of a benefit corporation determine whether the company has achieved a material positive impact. Shareholders also have a right of private action, called a benefit enforcement proceeding, enabling them to sue the corporation if it fails to pursue or create public benefit.) 3.Transparency (must issue an annual benefit report on its overall social and environmental performance that uses a recognized third-party standard to assess its performance. The report must be delivered to the shareholders and posted on a public website.)

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

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

S corporation requirements

1. The corporation must be a domestic corporation. 2.The corporation must not be a member of an affiliated group of corporations. 3 .The shareholders must be individuals, estates, or certain trusts and tax-exempt organizations. Partnerships and nonqualifying trusts cannot be shareholders. Corporations can be shareholders under certain circumstances. 4. The corporation must have no more than one hundred shareholders. 5. The corporation must have only one class of stock, although it is not necessary that all shareholders have the same voting rights. 6. No shareholder of the corporation may be a nonresident alien.

articles of incorporation must include the following [RMBCA 2.02] :

1. The name of the corporation 2. The number of shares of stock the corporation is authorized to issue 3. The name and street address if the corporation's initial registered agent (person who can receive legal documents on behalf of the corporation) and registered office (usually the main corporate office) 4. The name and address of each incorporator

business judgment rule will apply as long as the director or officer:

1. Took reasonable steps to become informed about the matter. 2. Had a rational basis for her or his decision. 3.Did not have a conflict between her or his personal interest and the interest of the corporation.

oppressive conduct.

A breach of fiduciary duties by those who control a close corporation normally constitutes____

S corporation

A close business corporation that has most of the attributes of a corporation, including limited liability, but qualifies under the Internal Revenue Code to be taxed as a partnership. -- so the corporate income passes through to the shareholders, who pay personal income tax on it which enables the _____to avoid the double taxation.

Business judgement rule

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

false

A corporation is not liable for the misconduct of its agents or officers.

close corporation/privately held corporation

A corporation whose shareholders are limited to a small group of persons, often family members. -no trading market for the shares. -operate like partnership

publicly held corporation

A corporation whose shares are publicly traded in securities markets, such as the New York Stock Exchange or the NASDAQ

shareholder's derivative suit.

A suit brought by a shareholder to enforce a corporate cause of action against a third person. -Before shareholders can bring a ______, they must submit a written demand to the corporation, asking the board of directors to take appropriate action -directors have 90 days to act

benefit corporation

A type of for-profit corporation, available by statute in a number of states, that seeks to have a material positive impact on society and the environment.

De Facto doesn't exist in following states

Alaska, Arizona, Minnesota, New Mexico, Oregon, South Dakota, Tennessee, Utah, and Washington, as well as the District of Columbia. RMBCA as abolishing the common law doctrine -if there is a substantial defect in complying with the incorporation statute, the corporation does not legally exist, and the incorporators are personally liable.

a. A close corporation

All of a certain corporation's small number of shareholders agree that the firm can operate without directors, bylaws, shareholder meetings, stock certificates, and formal records of shareholders' decisions. This firm is most likely: a. A close corporation b. A corporation by estoppel c. A de jure corporation d. A de facto corporation

shareholder agreement.

An agreement between shareholders that restricts the transferability of shares, often entered into for the purpose of maintaining proportionate control of a close corporation.

conflict of interest example

Ballo Corporation needs office space. Stephanie Colson, one of its five directors, owns the building adjoining the corporation's headquarters. Colson can negotiate a lease for the space to Ballo if she fully discloses her conflicting interest and any facts known to her about the proposed transaction to Ballo and the other four directors. If the lease arrangement is fair and reasonable, Colson abstains from voting on it, and the other members of the corporation's board of directors unanimously approve it, the contract is valid.

true

Because a close corporation is one whose shares are held by a relatively small group of persons, the firm often operates like a partnership.

shareholder voting agreement

Before a meeting, a group of shareholders may agree in writing to vote their share together in a specified manner, which is called

Example of violation of fiduciary duty

Brodie, Jordan, and Barbara form a close corporation to operate a machine shop. Brodie and Jordan own 75 percent of the shares in the company, but all three are directors. After disagreements arise, Brodie asks the company to purchase his shares, but his requests are refused. A few years later, Brodie dies, and his wife, Ella, inherits his shares. Jordan and Barbara refuse to perform a valuation of the company, deny Ella access to corporate information, do not declare any dividends, and refuse to elect Ella as a director. In this situation, the majority shareholders have _______ to Ella.

private equity capital

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

example of Inspection Rights

Carlia Cichon is president of Advent Home Medical, Inc. Her daughter, Amanda Hammoud, owned 400 shares (40 percent) of Advent stock. Hammoud submitted a written request to Cichon to review Advent's financial records "to monitor the financial health of the corporation." When Advent did not respond, Hammoud filed a complaint in a state court seeking an order to compel the corporation to permit an inspection. The court granted Hammoud's motion to compel the inspection. Advent appealed. A Michigan state appellate court affirmed. Hammoud was a shareholder and had stated a proper purpose for inspecting the records she requested

express powers.

Corporate bylaws and the resolutions of the corporation's board of directors also establish____

false

Corporate officers hire the board of directors.

Nonprofit Corporations

Corporations formed for purposes other than making a profit are called ____ convenient-allow groups to own property/form contract without exposing the individual members to personal liability.

alter-ego theory

Courts use the ___ to avoid injustice or fraud that would result if wrongdoers were allowed to hide behind the protection of limited liability.

example of Corporation by Estoppel

Dale Ross formed Big Little Farms, Inc. (BLF), in Trumbull County, Ohio, to breed and train racehorses. Dale failed to pay BLF's taxes, and the state cancelled its corporate status. Dale continued operating the farm business, however. Over a number of years, Dale's brother, Gene, loaned him funds to make improvements to BLF. At one point, Dale signed—as president of BLF Corporation—a promissory note to Gene and a mortgage on the farm. A few months later, Gene died. Gene's wife filed a claim against Dale and his wife seeking, in part, to foreclose on the mortgage. Then Dale died. Dale's wife claimed that the mortgage note her husband had signed was void because the corporation did not legally exist at the time he had signed it. Gene's wife argued that Dale's estate should not be able to avoid paying a note that Dale had knowingly signed as president of a corporation whose legal status had been revoked. Ultimately, a state appellate court ruled that the mortgage note was valid. BLF was estopped from denying its corporate status for the purpose of invalidating the loan contract

Duty of Loyalty

Directors and officers are required to subordinate their personal interests to the welfare of the firm

Example of pierced the corporate veil

Dog House Investments, LLC, operated a dog "camp" in Nashville, Tennessee. Dog House leased the property from Teal Properties, Inc., which was owned by Jerry Teal, its sole shareholder. Under the lease, the landlord promised to repair damage that rendered the property "untenantable" (unusable). Following a flood, Dog House notified Jerry that the property was untenantable. Jerry assured Dog House that the flood damage was covered by insurance but took no steps to restore the property. The parties then agreed that Dog House would undertake the repairs and be reimbursed by Teal Properties. Dog House spent $39,000 to repair the damage and submitted invoices for reimbursement. Teal Properties recovered $40,000 from its insurance company but did not pay Dog House. Close to bankruptcy, Dog House sued Teal Properties and Jerry. The court ______ and held Jerry personally liable for the repair costs. An appellate court affirmed. Teal Properties owned no property and had no assets. It received rent but paid it immediately to Jerry. The court concluded that the company was not operated as an entity separate from its sole shareholder

example of foreign corporation

Drake Manufacturing Company, a Delaware corporation, entered into a contract to sell certain products to Polyflow, Inc., headquartered in Pennsylvania. Drake promised to ship the goods from Drake's plant in Sheffield, Pennsylvania, to Polyflow's place of business in Oaks, Pennsylvania, as well as to addresses in California, Canada, and Holland. When Polyflow withheld payment of about $300,000 for some of the goods, Drake filed a breach-of-contract suit in a Pennsylvania state court against Polyflow seeking to collect the unpaid amount. But Drake had failed to obtain a certificate of authority to do business in Pennsylvania as a foreign corporation. Polyflow asserted that this failure to register with the state deprived Drake of the capacity to bring an action against Polyflow in the state's courts. The court issued a judgment in Drake's favor. Polyflow appealed -The court should not have allowed Drake to prosecute its action against Polyflow.

Watered Stock example

During the formation of a corporation, Gomez, one of the incorporators, transfers his property, Sunset Beach, to the corporation for 10,000 shares of stock at a par value of $100 per share for a total price of $1 million. After the property is transferred and the shares are issued, Sunset Beach is carried on the corporate books at a value of $1 million. On appraisal, it is discovered that the market value of the property at the time of transfer was only $500,000. The shares issued to Gomez are therefore watered stock, and he is liable to the corporation for the difference between the value of the shares and the value of the property.

d. Select a state in which to incorporate

Ed and Doris want to form a corporation to bake and sell cookies. The first step in the incorporation procedure is to: a. File the articles of incorporation. b. Hold the first organizational meeting. 11 c. Secure a corporate name. d. Select a state in which to incorporate

c. A proxy.

Glen and Dot are directors and shareholders of SomethingToCuddle, Inc. Dot's written authorization to Glen to vote Dot's shares at a shareholders' meeting is: a. A violation of the duty of loyalty. b. A preemptive right. c. A proxy. d. A quorum.

c. Legal or natural persons

Gus and Mike want to form and do business as Kayak Adventures Corporation. A corporation can be owned by: a. Natural persons only b. Legal persons only c. Legal or natural persons d. Neither legal nor natural persons

true

If the procedures for incorporation are not followed precisely, others may be able to challenge the existence of the corporation.

Duty of Loyalty example

In 1930, Charles Guth became the president of Loft, Inc., a candy-and-restaurant chain. Guth and his family also owned Grace Company, which made syrups for soft drinks. Coca-Cola Company supplied Loft with cola syrup. Unhappy with what he felt was Coca-Cola's high price, Guth entered into an agreement with Roy Megargel to acquire the trademark and formula for Pepsi-Cola and form Pepsi-Cola Corporation. Neither Guth nor Megargel could finance the new venture, however, and Grace Company was insolvent. Without the knowledge of Loft's board, Guth used Loft's capital, credit, facilities, and employees to further the Pepsi enterprise. At Guth's direction, a Loft employee made the concentrate for the syrup, which was sent to Grace to add sugar and water. Loft charged Grace for the concentrate but allowed forty months' credit. Grace charged Pepsi for the syrup but also granted substantial credit. Grace sold the syrup to Pepsi's customers, including Loft, which paid on delivery or within thirty days. Loft also paid for Pepsi's advertising. Finally, with profits declining as a result of switching from Coca-Cola, Loft filed a suit in a Delaware state court against Guth, Grace, and Pepsi, seeking their Pepsi stock and an accounting. The court entered a judgment in the plaintiff's favor. The defendants appealed to the Delaware Supreme Court. The Delaware Supreme Court upheld the judgment of the lower court. The state supreme court was "convinced that the opportunity to acquire the Pepsi-Cola trademark and formula, goodwill and business belonged to [Loft], and that Guth, as its President, had no right to appropriate the opportunity to himself."

Misappropriation of Close Corporation Funds example

John Murray, Stephen Hopkins, and Paul Ryan were officers, directors, employees, and majority shareholders of Olympic Adhesives, Inc. Merek Rubin was a minority shareholder. Murray, Hopkins, and Ryan were paid salaries. Twice a year, they paid themselves additional compensation—between 75 and 98 percent of Olympic's net profits, allocated according to their stock ownership. Rubin filed a suit against the majority shareholders, alleging that their compensation deprived him of his share of Olympic's profits. The court explained that a salary should reasonably relate to a corporate officer's ability and the quantity and quality of his or her services. The court found that a reasonable amount of compensation would have been 10 percent of Olympic's average annual net sales. Therefore, the additional compensation the majority shareholders paid themselves—based on stock ownership and not on performance—was excessive. The court ordered the defendants to repay Olympic nearly $6 million to be distributed among its shareholders. On appeal, the reviewing court affirmed this decision

example of preemptive rights

Katlin is a shareholder who owns 10 percent of a company. Because she also has preemptive rights, she can buy 10 percent of any new issue (to maintain her 10 percent position). Thus, if the corporation issues 1,000 more shares, Katlin can buy 100 of the new shares.

example of tort liability

Mark Bloom was an officer and a director of MB Investment Partners, Inc. (MB), at the time that he formed North Hills, LP, a stock investment fund. Bloom and other MB employees used MB's offices and equipment to administer investments in North Hills. Later, investors in North Hills requested a full redemption of their investments. By that time, however, most of the funds that had been invested were gone. North Hills had, in fact, been a Ponzi scheme that Bloom had used to finance his lavish personal lifestyle, taking at least $20 million from North Hills for his personal use. Barry Belmont and other North Hills investors filed a suit in a federal district court against MB, alleging fraud. The court held that MB was liable for Bloom's fraud. MB appealed, and the appellate court affirmed. ________ can be attributed to a corporation for the acts of its agent that were committed within the scope of the agent's employment

a. An ultra vires act

Masonry Inc.'s stated purpose is to perform the stonework on buildings and other structures. Masonry contracts with New Contracting to pour the pilings for a bridge's foundation despite lacking the skill and license to do the work. This is most likely a. An ultra vires act b. Within Masonry's express powers c. Within the corporation's implied powers d. Allowable and profit as an act to profit corporate shareholders

c. A pierce of Urban Achiever's corporate veil

Maude owns Urban Achiever Corporation. Maude uses Urban Achiever's funds to pay her personal expenses, creates Fun and Games Corporation to engage in the same business as Urban Achiever, transfers Urban Achiever's assets to Fun and Games, and petitions Urban Achiever into bankruptcy. This most likely warrants: a. A bonus to Maude for financial maneuvers b. A discharge for Urban Achiever in bankruptcy c. A pierce of Urban Achiever's corporate veil d. A review of Fun and Games' articles of incorporation

a. A corporation by estoppel

Metro Moving Service holds itself out to customers as being a corporation but makes no attempt to incorporate. In this circumstance, the outfit is most likely a. A corporation by estoppel b. Ultra vires c. A de facto corporation d. A de jure corporation

example of right to inspection

NavLink, Inc., a Delaware corporation, provides high-end data management for customers and governments in Saudi Arabia, Qatar, Lebanon, and the United Arab Emirates. NavLink's co-founders, George Chammas and Laurent Delifer, served on its board of directors. Chammas and Delifer were concerned about the company's 2015 annual budget and three-year operating plan. Despite repeated requests, Chammas was never given the meeting minutes from several board meetings in 2015. Chammas and Delifer believed that the other directors were withholding information and holding secret "pre-board meetings" at which plans and decisions were being made without them. They filed a suit in a Delaware state court seeking inspection rights. The court ordered NavLink to provide the plaintiffs with board meeting minutes and with communications from NavLink's secretary regarding the minutes. The plaintiffs were also entitled to inspect corporate documents and communications concerning NavLink's budget and three-year plan.

agent

No individual director, however, can act as an ____ to bind the corporation

true

One of the key advantages of the corporate form is the limited liability of its owners.

Election of Directors

# of directors are set forth in the articles of incorporation and limited by statute: the minimum number of directors has been three, but today many states permit fewer. 1. Directors appointed at the first organizational meeting 2. Term of office: 1 year (generally) -most states permits longer (elect one-third of the board members each year for a three-year term) 3. director can be removed for cause (for failing to perform a required duty—either as specified in the articles or bylaws or by shareholder action.) -board of directors may also have the power to remove a director for cause, subject to shareholder review. -When a vacancy on the board, the shareholders or the board itself can fill the vacant position

corporation

- A _____ substitutes itself for its shareholders when conducting corporate business and incurring liability; the authority to act and the liability for its actions are separate and apart from the shareholders who own it

Compensation of Directors

- Directors are often paid at least nominal sums, and they also receive indirect benefits, such as business contracts and prestige, and other rewards, such as stock options.

alien corporation.

A corporation formed in another country but doing business in the United States.

artificial legal person

A corporation is recognized under U.S. law as an_____ -- They may possess the same right of access to the courts as citizens and could sue and be sued

domestic corporation

A corporation is referred to as a _____ by its home state (the state in which it incorporates) In a given state, a corporation that is organized under the law of that state.

voting rights

Any person who purchases common stock acquires ______—one vote per share held.

fixed-income securities.

Bonds are sometimes referred to as ____ receive fixed-dollar interest payments, usually semiannually, during the period of time prior to maturity

example of ultra vires

Four men formed a nonprofit corporation to create the Armenian Genocide Museum & Memorial (AGM&M). The bylaws appointed them as trustees (similar to corporate directors) for life. One of the trustees, Gerard Cafesjian, became the chair and president of AGM&M. Eventually, the relationship among the trustees deteriorated, and Cafesjian resigned. The corporation then brought a suit claiming that Cafesjian had engaged in numerous ultra vires acts, self-dealing, and mismanagement. Although the bylaws required an 80 percent affirmative vote of the trustees to take action, Cafesjian had taken many actions without the board's approval. He had also entered into contracts for real estate transactions in which he had a personal interest. Because Cafesjian had taken actions that exceeded his authority and had failed to follow rules set forth in the bylaws, the court ruled that the corporation could go forward with its suit

Securities

Generally, stocks, bonds, or other items that represent an ownership interest in a corporation or a promise of repayment of debt by a corporation.

De Jure

If a corporation has substantially complied with all conditions precedent to incorporation, the corporation is said to have_____

foreign corporation.

In a given state, a corporation that does business in that state but is not incorporated there.

ultra vires acts

In corporate law, acts of a corporation that are beyond its express or implied powers are

Delaware

Many corporations, for instance, have chosen to incorporate in _______because it has historically had the least restrictive laws, along with provisions that favor corporate management. For reasons of convenience and cost, though, businesses often choose to incorporate in the state in which the corporation's business will primarily be conducted.

common stock

The true ownership of a corporation is represented by