Corporations

Which of the following people would NOT be held liable for insider trading under rule 10b-5?

A bartender who sells all of her stock in the corporation after she overhears two of the corporation's directors discussing the company's recent financial difficulties over drinks.

Which of these corporations would most likely be deemed the "alter ego" of its sole shareholder for the purposes of piercing the corporate veil and holding that shareholder personally liable for the corporation's debts?

A corporation in which the sole shareholder uses the assets of the corporation to pay her personal bills, leaving the corporation unable to pay its own creditors.

Which of the following statements regarding creditors' claims against a dissolved corporation is false?

Creditors' claims must be brought against the shareholders personally since the corporation ceases to exist upon dissolution.

Which would most likely be considered a conflicting interest transaction that could be enjoined or give rise to an award of damages?

A director places the deciding vote that a corporation will make an interest-free loan to a start-up company that the director has formed, after fully disclosing his personal connection to the company to the other voting board members.

Under the Revised Model Business Corporation Act ("RMBCA"), who can be held personally liable for business transacted before the articles of incorporation are filed?

A person who is charged with filing the articles, but who enters into a lease contract on behalf of the corporation the day before filing.

Which of the following statements is true regarding a promoter's personal liability on a preincorporation contract?

A promoter remains liable even if the corporation is formed and adopts the contract.

Under the RMBCA, when a proposed action would trigger dissenters' rights, which of the following actions is NOT required of a shareholder to guarantee payment for his shares?

Filing an intent to exercise his dissenters' rights with a court within 10 days of receiving notice of the proposed action.

Which of the following qualities generally is NOT considered a characteristic of the corporate form?

Flow-through taxation.

Under the Revised Model Business Corporation Act ("RMBCA") approach, what must a majority shareholder do to inspect the corporation's accounting records?

He must give five days' written notice of his request, stating a proper purpose for the inspection.

Under the Revised Model Business Corporation Act ("RMBCA"), assuming that the articles of incorporation are silent on the issue and a quorum exists, what is the default standard used for determining the outcome of an ordinary shareholders' vote?

If the votes cast in favor of the action exceed the votes cast against the action, the action will be deemed approved.

Under the Revised Model Business Corporation Act ("RMBCA"), which of the following statements regarding a shareholder's right to notice of a shareholder meeting is true?

A shareholder will be deemed to waive her right to notice of a meeting by attending the meeting and not immediately objecting to the lack of notice at the beginning of the meeting.

Under the Revised Model Business Corporation Act ("RMBCA"), a corporation's articles of incorporation can limit or eliminate a director's personal liability for:

Money damages for failure to take action as a director.

A 3% shareholder of a corporation purchases an additional 11% of the company's stock. Two months later, he sells all his stock to fund his retirement overseas. Is the shareholder liable under section 16(b) of the Securities Exchange Act of 1934 for the profits he made on the sale?

No, section 16(b) would not be triggered because he was not a 10% shareholder at the time he purchased the additional 11% of the stock.

Under the Revised Model Business Corporation Act ("RMBCA") notice of a shareholders' meeting must be delivered:

Not less than 10 days or more than 60 days before the meeting.

Under the Revised Model Business Corporation Act ("RMBCA"), which of the following statements regarding meetings of the board of directors is correct?

Regular board meetings may be held without notice, but special meetings require at least two days' notice of the date, time, and place of the meeting, but a purpose need not be included in the notice.

Which of the following statements regarding shareholder lawsuits is most accurate?

Shareholders can bring direct actions against their corporation to enforce their own rights and any recovery will be for their own benefit; shareholders can sometimes bring derivative actions to enforce the rights of the corporation, but in those cases recovery generally goes to the corporation and the shareholders bringing the action can only recover their reasonable expenses.

Under the Revised Model Business Corporation Act ("RMBCA"), which of the following statements regarding preemptive rights is true?

Shareholders do not have preemptive rights unless the articles of incorporation so provide.

How much power do shareholders generally have in determining whether or not to declare the payment of a dividend?

Shareholders have very little right to compel the payment of a dividend; declaration is generally solely within the board's discretion.

Under the Revised Model Business Corporation Act ("RMBCA"), which of the following could trigger preemptive rights in a corporation that provides preemptive rights?

Shares issued in exchange for money.

Under the Revised Model Business Corporation Act ("RMBCA"), a preincorporation subscription is irrevocable by the subscriber for ____________________ from the date of the subscription unless otherwise provided in the terms of the subscription, or unless all subscribers consent to revocation.

Six months.

Under the default rules of the Revised Model Business Corporation Act ("RMBCA"), what does it mean for there to be a "quorum" at a shareholders' meeting?

That a majority of votes entitled to be cast on a matter were present at the meeting before a vote on the matter took place.

When an action creating dissenters' rights is taken, the corporation must pay the dissenters:

The amount the corporation estimates as the fair value of the shares, but if the shareholder disagrees with that assessment, the corporation must either pay the amount the shareholder demands or file a court action to determine the fair value of the shares.

What are the proper steps for adopting a fundamental corporate change?

The board adopts a resolution recommending the change; a notice describing the proposed change is sent to the shareholders; the change is approved by the shareholders; the change is formalized in articles that are filed with the state.

For a private plaintiff to recover damages under rule 10b-5, the plaintiff must show all of the following EXCEPT:

The defendant purchased or sold securities.

Which of the following is NOT a requirement to satisfy a director's duty of care?

The director must act in reliance on her own business judgment and not in reliance on the opinions of others.

At common law, in spite of a defective incorporation, a business entity can be recognized as a de facto corporation if:

The incorporators made a good faith attempt to comply with the state's corporate law, and the entity has since exercised corporate privileges.

Under the RMBCA, all of the following must be included in the articles of incorporation EXCEPT:

The name and address of each of the corporation's initial directors.

Which of the following statements regarding the president of a corporation is true?

The president of a corporation has implied authority to enter into contracts on behalf of the corporation in the ordinary course of corporate affairs.

Which of the following is NOT a necessary element for a successful cause of action under section 16(b) of the Securities Exchange Act?

The profit was made by use of insider information.

least likely to pierce the corporate veil?

When the corporation becomes insolvent due to poor management. A de jure corporation will be treated as a legal entity distinct from its owners until sufficient reason to the contrary appears. Each case is different, but there are three recurring situations in which the corporate veil is often pierced: (i) when corporate formalities are ignored and injustice results; (ii) when the corporation is inadequately capitalized at the outset; and (iii) to prevent fraud. Insolvency of the corporation due to poor management generally would not be a reason to pierce the veil, although insolvency that occurs soon after incorporation might indicate that there was undercapitalization at the outset.

When is a corporation liable for a pre-incorporation contract that a promoter signed on behalf of the corporation?

When the corporation expressly or impliedly adopts the contract as its own.

When is a court most likely to disregard the separate identity of a subsidiary corporation and allow recovery from the parent corporation?

When the parent corporation has inadequately capitalized the subsidiary without a reasonable expectation that the subsidiary will achieve financial independence.

Once a shareholder appoints a proxy to vote his shares, can the shareholder later revoke that proxy?

Yes, a proxy is revocable at any time, unless the appointment form states that the proxy is irrevocable and the appointment is coupled with an interest.

Does a promoter who signs a contract in the name of a planned, but as of yet unformed corporation, remain personally liable on the contract once the corporation is formed?

Yes, unless the parties agree to a novation.

Under the Revised Model Business Corporation Act ("RMBCA"), can duly elected directors be removed by the shareholders?

Yes, with or without cause.

A corporation formed in accordance with all applicable laws is a

de jure corporation. Corporations are created by complying with state corporate law. In a majority of states, this is a statute based on the Revised Model Business Corporation Act ("RMBCA"). When incorporation under a state's statute is defective in some way, the veil of corporate protection still may be available under the de facto corporation or the corporation by estoppel doctrines.

When does corporate existence begin?

the filing of the articles by the state is conclusive proof of the beginning of the corporate existence. The incorporator will sign and submit the articles to the state along with any required filing fees.

Under the Revised Model Business Corporation Act ("RMBCA"), what would be considered a fundamental corporate change requiring a vote by the shareholders?

Changing the preferences of one class of shares.

The directors of a corporation incorporated under the default rules of the Revised Model Business Corporation Act ("RMBCA") want to enact a particular management rule, but they also want to maximize future flexibility on that issue. They are unsure whether the rule should be included in the articles of incorporation or the bylaws. What would you advise them?

The rule should be placed in the bylaws; it would be more difficult to change the articles of incorporation later because normally that would require a vote of both the directors and the shareholders.

Which of the following statements is true if a share has a $5 noncumulative preference?

The share is entitled to a $5 payment before a distribution can be made on account of common shares.

Under the RMBCA, what is necessary for a shareholder to have standing to bring a derivative action?

The shareholder must have been a shareholder at the time of the alleged wrongful act or omission, or become a shareholder through transfer by operation of law from one who was a shareholder at that time, and he must be able to fairly and adequately represent the interests of the corporation.

What alone is NOT an adequate reason for upholding a transaction in which a director has a conflicting personal interest?

The transaction will result in any tangible or intangible benefit to the corporation. A conflicting interest transaction can be upheld if: (i) the transaction was approved by a majority of the directors (but at least two) without a conflicting interest after all material facts have been disclosed to the board; (ii) the transaction was approved by a majority of the votes entitled to be cast by shareholders without a conflicting interest in the transaction after all material facts have been disclosed to the shareholders (notice of the meeting must describe the conflicting interest transaction); or (iii) the transaction, judged according to circumstances at the time of commitment, was fair to the corporation. Under the RMBCA, any tangible or intangible property or benefit to the corporation can serve as consideration for shares, but this is not the standard that is used to judge a conflicting interest transaction. A transaction might offer some benefit to a corporation, but still be unfair at the time of the commitment.

A corporation's bylaws fix a record date of 20 days before any shareholders' meeting. The week before a meeting, a shareholder sold half of her shares to her aunt and executed a written proxy authorizing her uncle to vote the remainder of her shares. Assuming the sale and proxy appointment are both valid, can the aunt or the uncle vote at the meeting?

The uncle can vote the shareholder's shares under the proxy, but the aunt cannot vote her shares because the purchase was made after the record date. A corporation's bylaws may fix, or provide the manner of fixing, a record date to determine which shareholders are entitled to notice of a meeting, to vote, or to take any other action. Here the record date was 20 days before the meeting. Thus, only persons who were shareholders as indicated in the corporation's records on the date 20 days before the meeting would be allowed to vote at the meeting. The aunt did not become a shareholder until the week before the meeting. Since she was not a shareholder of record on the record date she was not entitled to vote at the meeting. On the other hand, the record date requirement does not apply to proxies—as long as the shareholder who gave the proxy was a shareholder of record on the record date, and the proxy is valid, the proxy holder will be allowed to vote the shareholder's shares and the shares are counted as being present for quorum and other voting purposes. Therefore the uncle can vote the remainder of the shares.

If less than the entire board is to be removed, a director elected by cumulative voting may NOT be removed by a shareholders' vote if:

The votes cast against her removal would have been sufficient to elect her if cumulatively voted at an election of the board.