Business Law: final exam
What is a *De Jure Corporation* ?
" corporation by law", small/insignificant bettor in incorporation process that is usually acknowledged but overlooked and corporate status affirmed; corp. has substantially complied with all conditions precedent to incorporation, has rightful + lawful existence, sec of state's filing of articles of incorporation. usually conclusive proof that all mandatory statutory provisions have been met. only minor defects such as incorrect address listed on articles
What is the principle of *Respondeat Superior* ?
"let the master answer" people + entities associated with the corporation can impose liability on the corporation, corporation are liable for the tortious or criminal acts of agents/ employees if wrongful act was committed during the course + scope of employment; what went wrong? did the wrongful act occur on company time/ was the employee " at work"? was the wrongful act undertaken with the intent to benefit the corp? on behalf of employer? ordinary part of job?
What is a *holding company* ?
"professional shareholder", umbrella or parent company, a business that has a controlling interest in another business (subsidiary), does NOT provide goods or services, simply owns the other business/businesses; holds shares, cash, bonds, etc
What is a *quorum* ?
# of members of a decision-making body that must be present before business may be transacted or a vote taken. often less than majority but not less than 1/3 of the directors
What two categories of *power* are given to a corporation and what is the difference between them?
*express powers* : states in words, found in the articles of incorporation or statutes/laws *implied powers* : NOT explicitly states, anything lawful + reasonable to do to achieve corporate purpose
What are some *rights granted* to shareholders discussed in class?
- buy/sell shares - vote on directors nominated by board members - purpose Sh resolutions (non- binding) - receive dividends if they are declared - right of inspection - be notifies of + attend annual meetings - bring shareholder derivative suit (often against board members) - no right to make policy decisions - majority shareholders have a fiduciary duty to corp. + minority sh
List the steps required in the *incorporation procedures* :
- select state of incorporation, -secure an appropriate corp name, -prepare articles of incorporation -1st organizational meeting -appoint directors -adopt bylaws
What is the role of a corporation's *board of directors* ?
-Responsible for overall mgt of the firm -Makes policy decisions -hired + fires officers high- level emPloyees -Holds regular meetings with recorded minutes -Each member allowed 1 vote -Has fiduciary duty of Care + loyal to Corp + SH -HaS right to participate, inspection, indemnification - No protection from liability - few qualifications required -Elected by sH -Can be removed for Cause Ex: not performing required duties
List in *order of priority* in the event of conflict the sources that corporations can receive express powers from:
-US constitution -state constitutions -state statutes -articles of incorporation -bylaws -resolutions of the BOD
What are the *three parts* to a director/officer's requirement to uphold duty of care?
-act in good faith (honestly) -exercise care that an ordinarily prudent/ careful person would exercise in similar circumstances -do what she/he believes is in the best interest of the corp. (may be held liable for negligence) exception- business judgement rule
What must the *articles of incorporation* typically contain?
-name of the corp -# of shares of stock the corp is authorized to issue -large corps often also state par value, class of stock authorized for issuance -name + street address of the corp's initial registered agent + registered office
What are some ways corporations are *financed* ?
-securities (Stocks, bonds, other items that represent ownership interest in a corp. or a promise of repayment of debt by a corp.) - venture capital/private equity capital -crowdfunding
What are some factors that the court considers when deciding whether to *grant a plaintiff's request to pierce the corporate veil* ?
1. a party is tricked or misled into dealign with the corp rather than the individual 2. the corp is set up never to make a profit or be insolvent. is too thinly capitalized + insufficient capital at time it is formed to meet its prospective debts + potential liabilities 3. corp is formed to evade an existing legal obligation 4. statutory corp formalities such as holding required meetings, are not followed 5. personal + corp funds/ goods/ interests are mixed together/ comingled to such an extent that the corp has no separate identity
A *disadvantage* of the corporate form is *double-taxation* . How does this work?
1. company pays tax on its profits 2. if the profits are passed in to the SH as dividends, the SH must also pay income tax on them
What are the 6 requirements of an *S-Corporation* discussed in class?
1. must be domestic corp (doing business in same state where incorporated); 2. may NOT be a member of an affiliated group of corp.; 3. shareholders must be individuals, estates, trusts,(cash + assets leave behind; trusts do not require death) or other tax exempt orgs (ex: nonprofits, churches) 4. must have less than 100 SH 5. can only issue one class of stock 6. no shareholder of the corp. may be a non-resident alien
Why might *errors* in incorporation become noteworthy?
3rd party who is attempting to enforce a contract or bring a suit for a tort injury + corp does not lawfully exist
A quorum for action or a vote generally exists when shareholders holding more than __________ of the outstanding shares are present. Most matters require a ___________ vote to pass a resolution.
50%; majority
The corporate ___________________________ has a responsibility to make policy decisions, select and remove officers, determine the capital structure, and declare dividends. Each member is allowed one vote. They are Not considered agents of the corporation because they _____________________ control the corporation. They are Not considered trustees because they don't hold title to ________________ for the use and benefit of others. Subject to statutory limitations, the number of directors set forth in the corporation's articles or bylaws is usually a minimum of 3. The initial directors appointed in the articles or at the first organizational meeting serve until _________________________________________________ during which the subsequent directors are elected by ________________________________________.
BOD; collectively; property; 1st annual shareholder's meeting; majority vote of the shareholders
What is the *business judgment rule* and under what circumstances is it applied?
Courts will NOT hold Corp officers + directors liable for honest mistakes of judgement + bad business decisions that were made in good faith, considering the reasonableness of a decision at the time it was made without the benefit of hindsight. 1. Took reasonable steps to became informed about he matter 2. Had a rational basis for his/her decision 3. Did NOT have a conflict btwn personal interest + that of the corp. (generally applied unless there is evidence of bad faith, fraud, or clear breach of fidaciary duties
What is the role of *corporate officers* ?
Respensible for day- to -day ops - Hired by board members, can be fired by BOD - Have fiduciary duty (Put interest of corp. above own) - No Protection from liability, exception business judgement rule
The responsibility for the overall management of the firm is entrusted to ____________________________ who are elected by _________________________. This group of people makes policy decisions and hires corporate officers and other employees who run daily business operations. The body of shareholders changes without affecting the continued existence of the corporation. A shareholder can sue the corporation, the corporation can sue a shareholder, and under certain circumstances, a shareholder can sue on behalf of a corporation.
a BOD, the SH
What is a corporation by *Estoppel* and why are they recognized?
a business not incorporated pursuant to law, but holds itself out to the public as a corp. when has made no attempt to incorporate, never gained corp status or lost it due to the paperwork/ fees; courts in some states will treat and alleged corporation a if it were an actual corp + prevent from denying corp. status. this keeps from using defense that not a corp in the event of breach of contract or misrepresentation. recognition of corp status does not extend beyond the resolution of the problem at hand
What is *Ultra Vires* ?
acting without authority; exceeding corporate powers which are linked to the corporate purpose; remedy: shareholders can sue; the boundaries are broad but may be breached
A corporation may be held liable for the criminal or tortious acts of its ____________ and ______________ if the incident occurs within the ______________ and _______________ of their employment. What is this called?
agents, employees, course, scope, respondent superior
What is a *shareholder agreement* ?
agreement btwn shareholders that restricts the transferability of shares, often entered into for the purpose of maintaining proportionate control of a close corporation
____________________ is someone who has the power to act on another's behalf.
an agent
Shareholders' meetings must occur at least _______________, but special meetings can be called to deal with urgent matters. A corporation must notify its shareholders of the _________, _________, and ______ of any shareholder meeting at least ________ days before but not more than _______ days before. This information may already be specified in the bylaws.____________ of a special meeting must include a statement of ____________, and business transacted at the meeting is ____________________________.
annually, date, time, place, 10, 60, notice, purpose, limited to that purpose
The __________________________________________ is the founding document/paperwork of a corporation and is sent to the state of incorporation for approval. They may be amended later if necessary. Formats may differ from state to state, but they all have the same general structure. The names and addresses of the ____________________ or initial people who are incorporating are listed. The corporate _____________ must be specific and unique. The period or duration of the corporation may have a specified duration or be indefinite. The statement of corporate ___________________ is optional but can be extremely helpful because it outlines in general terms why the corporation is being formed and what it is intending to do.
articles of incorporation; incorporators; name; purpose
What is a *proxy* ?
authorization to rep. a corp shareholder to serve as his/her agent + vote his/her shares in a certain manner-- must make proxy materials available online, may also send out via mail, notify shareholders how to find that info
What *stock* information is included in the articles of incorporation?
authorized # shares, class issues, par value
What is a shareholder's *derivative suit* ?
brought by a shareholder to enforce a corp cause of action against a 3rd party. SH must submit written demand to the corp/ BOD 1st. if refused, suit goes forward. must be acting not for individual rights or benefits but as guardians of the corp.
The _________________________ rule means that officers and board members are not liable for honest mistakes or bad business decisions if there was due diligence.
business judgement
________________ are the internal rules of management adopted by a corporation to outline rules and procedures for shareholder voting, electing and replacing board members, and when shareholder and board meetings are held. They cannot conflict with the state corporate statute or the article of incorporation. If not already stated in the articles, it is at the first organizational meeting that _________________ are elected. Under the RMBCA, the ______________ may amend or repeal the bylaws. Directors may also be able to do this unless otherwise specified.
bylaws, directors, shareholders
A director may be removed for ______________ or failing to perform a required duty-either as specified in the articles or bylaws or by shareholder action. The ____________________ may also remove a director subject to __________________________. Either the shareholders or directors vote to fill a ____________.
cause, BOD, shareholder review, vacancy
A _____________________ is ones whose shareholders are limited to a small group of persons who are often family members but do not have to be. They do not have a trading market for shares and often operate like a partnership. If all shareholders agree in writing, many of the formalities required of a traditional corporation may be dropped.
close corporation
Cases dealing with the *duty of loyalty* typically involve:
competing with the corp; taking personal advantage of a corp opportunity; pursing an interstate's the conflicts with that of the corp; using info that is not publicly available to make a profit trading securities (insider trading); authorizing a corp transaction that is detrimental to minority shareholders; selling control over the corp.
Shareholders are entitled to examine specified ___________________or have an authorized agent to do so. The right to inspect and copy corporate documents can only be for a ______________________ and must be requested in advance. A corporation may _______________ the right to view company books, but the ____________ can compel inspection.
corp records; proper purpose; deny; court
How does taxation work for a *C-Corporation* ?
corporate profits taxes at a rate of 21%, shareholder dividends taxed at 0% for individuals earning less or dual to 40,000, taxed at 15% for individuals earning 40,401-445,850, taxed at 20% for individuals earring greater than 445,850
__________________ is a firm authorized by statute to act as a legal entity separate and distinct from its owners (shareholders). They are created and recognized by state law.
corporation
What is the *alter ego theory* ?
courts may pierce the veil under the theory that the corp was NOT operated as a separate entity, but as another side corp. so dominated + controlled by an individual/ group that the separate identities of the person/ group + the corp are no longer distinct. court was alter-ego theory to avoid injustice or fraud the would result if wrongdoers were allowed to hide behind the protection of limited liability
____________________ are illegal if they are improperly paid from an unauthorized account or if they make the corporation unable to pay ______________. The shareholder must ___________________________ if they knew they were illegal when received or made the corporation insolvent. The ____________________ can be held personally liable for the amount of the payment. __________________ are ________________, but shareholders can ask the court to compel directors to declare them if the company has large cash reserves and there is evidence of abuse of discretion.
dividends; debts; return dividends amount; BOD; dividends; optional
What is the difference between a *domestic, foreign, and alien corporation* ?
domestic: incorporated in the same state they do business; foreign: incorporated in one state bust do business elsewhere; alien corporation: incorporated outside the US but do business in the US
The corporation's name is subject to approval by the state to ensure against ______________________ or being deceptively similar to an existing corporation.
duplication
Committees of the board of directors are often present in publicly held corporations to delegate certain tasks/subjects. What are two examples given in the textbook?
executive committee: for interim mgt decisions btwn board meetings that do not relate to dividends, stock, or amending bylaws audit committee: responsible for the selection, compensation, and oversight of the independent public accountants that audit the firm's financial records; required by publicly held corps by SOX
True or False: Directors are not allowed to be shareholders in the same corporation.
false
True or False: Someone cannot hold two different officer positions or be both an officer and a director.
false
True or False: A corporation registered in a particular state automatically has the right to business anywhere else.
false; may need to obtain a certificate of authority
True or False: The corporation's directors and officers must be listed in the articles of incorporation?
false; optional, may be determined at 1st org meeting
True or False: Shareholders can personally receive damages awarded in a lawsuit.
false; typically go to corps treasury not the SH personally
The _______________ may cost a few hundred dollars and is sent to the secretary of state in the state of incorporation along with the articles of incorporation.
filing fee
If a majority shareholder takes advantage of his/her position or misappropriated company funds, what is the *common remedy* ?
have shares appraised and too be paid the fair market value for them
What does it mean that directors and officers have a *fiduciary duty* to the corporation?
hold relationship with corp and its shareholders out of trust + confidence; owe ethical + legal duties to the corp and tot he shareholders as a group
A ________________________ or parent company is one whose business activity is holding shares in another company, typically established in a low-tax or no-tax offshore jurisdiction. Cash, bonds, stocks, and other investments are transferred to the company offshore which changes how they are taxed.
holding company
Directors and officers of a corporation have a duty to make ___________________________ meaning they are expected to _____________________, study, and discuss matters and _________________________ before making a decision. They must make a ___________________ effort to obtain and rely on accurate info from others.
informed decisions; investigate; evaluate alternatives; good faith
What is the difference between an *inside director and an outside director* ?
inside director: person on corp's BOD who is also an officer of the corp *a corp's BOD often includes both* outside director: does NOT hold a management position within the corp
A corporation may be formed for any _________________________. A specific statement is not required but a general statement is helpful to avoid future amendments.
lawful purpose
A key advantage of the corporate form is the ____________________ of its owners. This means shareholders are typically not personally liable for the obligations of the corporation beyond the extent of ______________________________. An exception to this is if the court decides to ___________________.
limited liability, their investments, piece the corp veil
Directors and officers have a duty of _______________ meaning faithfulness to one's obligations and duties. What does this mean?
loyalty; -requires directors + officers to subordinate their personal interests to the welfare of the corp. -putting interests of the corp. above personal gains/losses -not self dealing or using corp funds or confidential corp info for personal advantage
What is *cumulative voting* ?
minority SH votes calculated by a formula total votes= # members to be elected x # voting shares held
Directors' votes at meetings should be entered into the _______________. A director is presumed to have _________________ unless dissent is recorded for the meeting or registered with the ________________ of the board by those who didn't attend regarding actions at the meeting.
minutes, assented, secretary
Directors and officers can be held liable for _____________, _____________ or ____________________ committed by themselves or employees. They can be ______________ by shareholders on behalf of the corporation. They can also be held ____________________________ unders statutes such as those to protect the environment or consumers.
negligence crimes, torts, sued, personally liable
If a *subsidiary* goes bankrupt, can its creditors pursue the holding company for payment?
no, can result in tax deferral or reduction
What does it mean if a corporation is *De Facto* , and when are they recognized?
only recoginized by some states- substantial defect in the incorporation process such as failure to hold an org meeting to adopt bylaws. may be recognized if: -state statute exists under which the corp. can be validly incorporated -the parties have made a good faith attempt to comply with the statute -the parties have already undertaken to do business as a corp. (if state does not recognized de fact corp (ex: TN),but continue to act as a corp, the incorporators do not have liability protection and may have to restart the process)
What is meant by the fact that corporations are *"legal people"* ?
operate as separate entity from owners, have many of the same legal rights as human people. ex: contracts, property, religion, free speech, criminal and civil/tortions offenses, access to courts, can sue
Shareholders are ___________________ of a corporation with an ________________ interest in the firm. They have no legal title to corporate _____________, ____________________, or __________________, nor are they responsible for __________________________. ______________________ approval is normally required to amend the articles of incorporation or bylaws, to conduct a _____________ or dissolve the corporation, sell all or a _______________ of the corporation's assets subject to board approval. They may ____________ to elect or remove board members.
owners, equitable, property, buildings, equipment, daily management, shareholder, merger, majority, vote
How *long* does a corporation exist for?
perpetual/ existence unless articles state otherwise
If someone is a *registered agent* as declared by the articles of incorporation, what is the role of this person?
person/ entity designated to receive all gov. communication + service of process in the event of lawsuit (orders to appear in court), legal docs on behalf of corp
___________________________ gives shareholders the first opportunity to purchase new issues of that corporation's stock in proportion to the amount of stock already owned by that shareholder. This option is only available for a specified _______________________. This option helps maintain _________________ over the firm but does not exist unless provided for in the ________________________________________.
preemptive rights; time periods; proportionate control; articles of incorporation
__________________ steps to organize and promote a business prior to incorporating are less common today. However, businesspersons are ____________________________ for any pre incorporation contracts made with investors, accountants, or others on behalf of the future corporation until the newly formed corporation assumes liability for the pre incorporation contracts through _____________________ (transfer of obligations to a new party).
preliminary, personally liable, a novation;
What are the *common* corporate officer and executive positions?
president, VPT, secretary, treasurer; can hold more than one office or be both officer + director
A ___________ corporation is one that operates for profit but does NOT have publicly traded shares. ____________ corporations also do NOT have publicly traded stock but operate without the intention of accumulating excess funds.
private, non profit
A _________________ allows another shareholder to vote your shares so that your voice can be heard at the annual shareholders' meeting even if you do not attend.
proxy
What is the difference between a *public corporation* and a *publicly held company*?
public corporation: made for gov purpose, gov shareholders ex: incorporated cities/towns USPS, TVA, AMTRAK publicly held: shares publicly traded in securities markets such as NYSE or NASDAQ
List and describe some rights given to directors:
right to participation- entitled to participate in + be notified of all board meetings right of inspection- each director can access the corps books + records, facilities, and premises for decision-making and supervision right to indemnification- reimbursement for legal costs, fees, and damages incurred in the event that a director becomes involved in litigation by virtue of his/her position
A ________________________ is a type of close corporation that qualifies under the internal revenue code to be taxed as a partnership. It avoids double taxation because corporate income passes through to the shareholders who pay income tax on it.
s- corp
What are some characteristics of a *statutory close corporation* ?
same double taxation + liability as other corps. , only some states allow them, small # of shareholders, often family but not required to be, managed more informally than frad. corp., but not only if all shareholders agree in writing; less rules + red tape for day to day ops, must not have public offering of stock, usually btwn 30-35 shareholders
The Articles of Incorporation is a document filed with the appropriate state official, usually the ________________________________, when a business is incorporated and contains the basic info about a corporation. It is the primary _____________________________ for the business organization and its business functions. Persons who execute/sign the articles are called ________________________.
secretary of state; source of authority; incorporators
Corporations are created and operated under state law or statute and are owned by __________________.
shareholders
What does it mean that shareholders have *limited liability* ?
shareholders are liable to the extent of their capital contribution/investment in the firm + shareholders are protected from liability to the extent of their capital contribution/ investment in the firm
Incorporating is the process of starting your corporation. Selecting the _____________ of incorporation is critically important.
state
The ______________________________ is often where the corporation will primarily conduct business but not always. Incorporators consider factors such as cost, convenience, and taxation.
state of incorporation
Directors and officers have a duty to exercise reasonable __________________ when delegating work.
supervision
The state can suspend an organization's corporate status until __________ are paid or even dissolve the corporation if they refuse to do so.
taxes
What happens if the corporation enters into a contract or engages in a transaction in which an officer/director has a personal interest?
the director/ officer must make a full disclosure of the nature of the conflicting interest + all facts pertinent to the transaction + abstain from voting on the proposed transaction; then usually allowed to proceed
Why is a *principal office* and its address included in the articles of incorporation?
to know where to send important info/ docs such as bills, taxes ect. often the main corporate office
What is an *S-Corporation* , and how are they taxed?
treated as pass through entity similar to sole prop., part., LLC; taxed 1 time, profits--> SH who pay personal income tax rate on them; type of close corp, subchapter s of internal rev. code
True or False: A corporation's name must include the word "Incorporated"/Corp, "Incorporated"/Inc, or "Limited"/Ltd.
true
True or False: Both individuals and other business can be shareholders
true
True or False: Corporate and managerial officers act as agents of the corporation and are subject to both agency rules and terms of employment within the corporation
true
True or False: Despite the potential for corporate assets to be used for personal gain, especially in a close corporation, courts are reluctant to hold shareholders personally liable for corporate obligations unless there is evidence of fraud or wrongdoing.
true
True or False: If the directors are later held liable for mismanagement as a result of a decision, dissenting directors are rarely held individually liable to the corporation.
true
What is a *benefit corporation* and how do they differ from a traditional corporation?
type of for-profit corp, available by statute in several sates; that seeks to have a material positive impact on society and the environment -purpose: designed to make a profit but also benefit the public as a whole, directors must consider the impact of their decision on society + the environment vs simply providing long-term shareholders value -accountability: SH oversight + right of private action/ benefit enforcement proceeding enabling them to sue the corp. if fails to purpose/ create public benefit -transparancy: annual benefit report on its overall social and environmental performance that uses a recognized 3rd party standard to asses its performance, delivered to SH + posted on a public website
How *long* do directors serve for?
usually a term of 1year, but also common to elect 1/3 of the board each year for a 3 year term
A _______________________ with the names, addresses, and number of voting shares on the corporation's records for each shareholder are prepared before each shareholder meeting and kept on record.
voting list
A ______________________ means the shares are legally transferred to a trustee to vote those shares on another's behalf. _________________ rights of the shareholder are Not transferred to the trustee.
voting trust; ownership
What things do the courts look for to decide whether the *duty of loyalty has been breached* ?
was the opportunivy reasonably related to the corp; line of business?; Was the corp. financially able to undertake the opportunity?; if the corp had "no interest or expectancy" in the opportunity, it is recognized that the officer/director is entitled to treat the opportunity as his own
What does it mean that majority shareholders have a *duty to minority shareholders* ?
when few SH own a sufficient # of shares to exercise de facto control over the corp, majority SH has a fiduciary duty of corp + minority SH. not abuse dominant position or black minority party, act in best interest of the firm
What is *piercing the corporate veil* ?
when the court decides to set aside protections from liability and hold shareholders personally accountable for corporate debts +obligations. equitable remedy. very rare + big deal when it happens; lawsuit against corp -> plaintiff wins + request court order pcv, substantial finding to justify action against shareholders; typically occurs when corp. privilege used for personal benefit, business treated so carelessly that becomes indistinguishable from that of a controlling shareholder, or when facts show that great injustice would result from a shareholders use of a corp. to avoid individual responsibility (in the lecture example that the lawsuit was an account of negligence, this has no standing on whether abuse of corp form or not. treated as separate issues. every case different court looks at variety of factors rather than one)
