BUL ch 29

The rights of shareholders are established only in the articles of incorporation.

F

Duties of Majority SH

Fiduciary duty to the corp & to the minority SH -breaches duty -> minority SH can sue for damages -oppressive conduct (close corp)

General Manufacturing, Inc. (GMI), issues bonds to finance the purchase of a factory. Regarding those bonds, which of the following is true? The bonds must be repaid. The bondholders will receive interest payments only when voted by GMI directors. The bonds are identical to preferred stock from an investment standpoint. The bondholders will be the last investors paid on GMI's dissolution.

The bonds must be repaid.

U.S. Digital Corporation incorporated in Ohio, its only place of business. Its stock is owned by ten shareholders. Two are resident aliens. Three of the others are the directors and officers. The stock has never been sold to the public. If a shareholder wants to sell his or her shares, the other shareholders must be given the opportunity to buy them first. U.S. Digital is a close corporation. a foreign corporation. an alien corporation. none of the above.

a close corporation.

The board of directors of U.S. Goods Corporation announces that the corporation will pay a cash dividend to its shareholders. Once declared, a cash dividend is a corporate debt. a personal debt of the directors. a personal debt of the shareholders. an illusory promise.

a corporate debt.

Annie owns stock in a company and feels that her stock has lost significant value as a result of actions taken by the corporate directors. When a corporation suffers a wrong as a result of its directors' conduct, one way to address the harm is through: a. a shareholder's derivative suit. b. holding a shareholders' meeting to elect new officers. c. the issuance of preemptive rights. d. the use of stock warrants.

a. a shareholder's derivative suit.

A corporation whose shares are held by members of a family most likely is a: a. close corporation. b. private corporation. c. nonprofit corporation. d. benefit corporation.

a. close corporation.

Suzy signs a written agreement with Phillip, giving Phillip the right to cast Suzy's votes for a certain group of people nominated for the Syllibar Corporation board of directors. This agreement between Suzy and Phillip is known as a: a. proxy. b. subpoena. c. cumulative voting agreement. d. derivative agreement.

a. proxy.

corporate ownership

acq a share of stock-> owner and Shareholder

De Facto Corporations

actual corporate status may be held to legally exist in spite of a defect in formation -good faith -comply w/ statute -already undertaken to do business in corp -can only be challenged by state

Adam, Terry, and Victor want to form ATV Corporation. Which of the following is not a step in forming the corporation? selecting a state of incorporation. preparing articles of incorporation. adopting bylaws at a shareholders' meeting. filing articles of incorporation.

adopting bylaws at a shareholders' meeting.

adoption of the bylaws

after incorporation procedures, first org meeting must be held to adopt bylaws

shareholder powers

approve fundamental changes -amendments of the articles of incorp -bylaws -merger or termination -sale of significant corp assets elect & remove directors (for cause by majority vote) -w/o cause: vote of majority of holders of outstanding shares

Shareholder meetings

at least annually -proxy -quorum -majority voting or cumulative voting

Mercado Corporation is voting for two directors. Candace owns 500 shares of Mercado stock. Because Mercado uses cumulative voting to elect its directors, Candace has: a. 1,500 votes. b. 1,000 votes. c. 500 votes. d. 2,000 votes.

b. 1,000 votes.

The exclusion of minority shareholders from the benefits of participating in the firm by majority shareholders is: a. permissible only in close corporations. b. a breach of the shareholders' fiduciary duty. c. a common right of majority shareholders. d. necessary under certain circumstances.

b. a breach of the shareholders' fiduciary duty.

Carla's cupcake business could really grow if she had enough money to expand. To generate funds, she sells shares in the company to her two brothers, her cousin, and her friend. Her company likely would be considered: a. a benefit corporation. b. a close corporation. c. an alien corporation. d. a nonprofit corporation.

b. a close corporation.

Rena incorporates her business, Rena's Rhinestones, in her home state of Maryland. She wants to expand and sell some of her baubles in Virginia. In Virginia, her company will be considered: a. an alien corporation, because her business has been incorporated in another state. b. a foreign corporation, because her business has been incorporated in another state. c. an open corporation, so she can do business in any state that allows open corporations to operate. d. a public corporation, because she is doing business across state lines.

b. a foreign corporation, because her business has been incorporated in another state.

When a corporation suffers a wrong as a result of actions taken or not taken by the corporate directors, one way to address the harm is through: a. the issuance of preemptive rights. b. a shareholder's derivative suit. c. the use of stock warrants. d. holding a shareholders' meeting to elect new officers.

b. a shareholder's derivative suit.

Leslie is starting up a new business, and she needs to raise additional capital to get it going. Her associate, Lenny, set up an Internet site with information about the company in an attempt to attract investors. This is an example of: a. obtaining venture capital. b. crowdfunding. c. issuing preferred stock. d. issuing common stock.

b. crowdfunding.

Cohen, Stracher & Bloom, Inc., was a close corporation with Bloom, Cohen, and Stracher as the only officers, directors, and shareholders. The corporation entered into a lease agreement with Property Co. to rent office space. The lease was signed by Paul Bloom, with a note that he was signing as the vice president of Cohen, Stracher & Bloom. When the corporation became delinquent in paying its rent, Property Co. sued to recover approximately $9,000 in lease payments and other charges due under the lease. The complaint was filed against the corporation and each individual shareholder. The individual shareholders moved to dismiss the actions against them individually. The court most likely: a. did not grant the motion, because a corporation is similar to a partnership, and its members retain personal liability for company actions. b. granted the motions to dismiss, because shareholders in corporations are not individually liable unless the court pierces the corporate veil. c. did not grant the motion, because shareholders in a close corporation retain more liability than shareholders in other corporations. d. granted the motion, because only one of the shareholders signed the lease agreement and that one shareholder could not bind all three of them individually.

b. granted the motions to dismiss, because shareholders in corporations are not individually liable unless the court pierces the corporate veil. court most likely would hold that SH in a close corp enjoy the benefits of limited liability afforded to any corp. the motion to dismiss the claims against the lawyers individually should have been granted.

Mark is the CEO of TruLawn Landscaping. The stated purpose of TruLawn is to do yard and garden work. Mark contracts with Judah in TruLawn's name to use TruLawn trucks to help move Judah's office. Mark likely: a. has pierced the corporate veil. b. has committed an ultra vires act. c. has acted within his express powers. d. has acted within his implied powers.

b. has committed an ultra vires act.

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

b. preemptive right.

Keenan wants to incorporate his business. He buys business cards and labels with the name "Keenan's Kwips" on them and begins selling gag gifts. Keenan follows the rules for incorporation in his state, including a statement that he is the sole shareholder, and he is granted a certificate of incorporation. Keenan's business is probably a: a. corporation by estoppel. b. properly formed corporation. c. public corporation. d. de facto corporation.

b. properly formed corporation.

Jacob Shimmel and Herbert Kosak, the founders of Komel Electric Corp., each owned 50 percent of the corporation's shares and served as the corporation's only officers. Kosak brought a shareholder's derivative suit against Shimmel, alleging that Shimmel had diverted Komel assets and opportunities to Shimmelly Systems, Inc., a corporation wholly owned by Shimmel. The court held that Shimmel had wrongfully diverted the funds and had stolen corporate opportunities. On the issue of the damages, Kosak argued that they should be awarded to him personally so that Shimmel, as a shareholder of Komel, would not be able to share in the proceeds of the award. The court most likely granted damages to: a. Kosak personally, because, as the only other owner, he was the only shareholder damaged by Shimmel's actions. b. the corporation, because Shimmel's actions deprived the entire corporation, not just Kosak, of profits. c. the corporation, because Kosak breached his fiduciary duty of care in failing to oversee Shimmel's actions. d. Kosak personally, in order to prevent Shimmel's unjust enrichment.

b. the corporation, because Shimmel's actions deprived the entire corporation, not just Kosak, of profits.

In simple terms, an S corporation can be defined as a corporation: a. whose shareholders are taxed like shareholders but who face full, significant liability. b. whose shareholders have limited liability but avoid corporate income taxes. c. composed entirely of licensed professionals. d. regulated by the securities authorities.

b. whose shareholders have limited liability but avoid corporate income taxes.

inspection rights

books & records for proper purpose in advance

corporation by estoppel

business claims to be a corp but has not filed articles of incorp -cant question the validity of the business corp status

A major power held by shareholders is the power to: a. manage and supervise daily operations of the corporation. b. declare dividends. c. amend the articles of incorporation or the corporate bylaws. d. appoint corporate officers.

c. amend the articles of incorporation or the corporate bylaws.

Stock may be described as: a. a debt owed by the corporation to the shareholder. b. a debt owed by the government to the shareholder. c. an ownership interest in the corporation. d. a document describing the ownership and management structure of the corporation.

c. an ownership interest in the corporation.

Acts of a corporation that are beyond the authority given to it by its charter are called: a. implied powers. b. express powers. c. ultra vires acts. d. piercing the corporate veil.

c. ultra vires acts.

Trey owns 250 shares of common stock in a toy store company. This means that he owns a percentage of the company based on the proportion of shares he owns out of the total shares issued by the company. With this ownership he also acquires rights to: a. vote and receive dividends before any other creditors. b. determine the amount of dividends that will be paid. c. vote. d. vote and receive a fixed sum on a fixed date.

c. vote.

securities fraud

can sue for violations on basis of material misrep in connection w/ the transaction & reliance on that misrep -defendant must have had scienter (wrongful state of mind) -plaintiff must have suffered economic loss

piercing the corp veil

courts - *to disregard the corp entity and hold the shareholders personally liable for a corporate obligation* -corp fraud, circumvent law, illegitimate 1. party tricked into dealing with corp rather than a person 2.corp is set up to never make a profit 3.statutory corp formalities not followed 4.personal and corp interests are commingled (mixed) to an extent that the corp has no sep identity

Linda and Jerry started a consignment business called Cozy Consignment. They would take furniture and clothing from sellers and hold it in their shop until it was purchased. Upon purchase, Cozy Consignment would keep a commission and would give the remaining income to the owners of the furniture and clothing. Cozy Consignment was incorporated with Linda and Jerry as the only shareholders, directors, and officers. The sign on the building did not include the terms Corp., Inc., or any other indication that the business was a corporation. Similarly, letterhead, business cards, and other outward marketing and publicity did not include any notice that the business was incorporated. Linda admitted that she had not been as regular as she should have been in filing annual reports and statements with the state, though she stated that the company did have annual meetings. Mary Ann contacted Cozy Consignment and dropped off approximately $15,000 worth of clothing and furniture for sale. Because of sloppy bookkeeping and a failure to pay corporate income taxes, the Cozy Consignment went out of business. Linda and Jerry donated all inventory to a charity. Mary Ann sued, alleging that Linda and Jerry had converted (taken as their own) all of her consigned furniture and clothing. Jerry and Linda responded that the corporation had gone out of business and had no assets. Mary Ann asked the court to pierce the corporate veil. In this case, a court likely would: a. pierce the corporate veil because the nature of the business was to hold the property of others and not to convert it. b. not pierce the corporate veil because Mary Ann assumed the risk that this would happen when she delivered her goods. c. not pierce the corporate veil because the corporation did have meetings even though they failed to document them. d. pierce the corporate veil because the corporation failed to observe corporate formalities.

d. pierce the corporate veil because the corporation failed to observe corporate formalities.

Preventing insider trading (when someone uses information that is not available to the public to buy or sell securities to make a profit or avoid a loss) is one of the major goals of: a. the Securities Act of 1933. b. the Insider Trading Penalty Act of 1937. c. the Sherman Act of 1890. d. the Securities Exchange Act of 1934.

d. the Securities Exchange Act of 1934.

Shareholders have a right to inspect: a. only the corporation's public records. b. the corporate books and records for any or no reason. c. records that relate to a shareholder's personal account. d. the corporate books and records, but only for a proper purpose.

d. the corporate books and records, but only for a proper purpose.

Articles of incorporation must contain: a. a list of officers of the corporation and their qualifications. b. resolutions of the board of directors regarding accepting the contracts of the incorporators. c. the minutes of meetings of the board of directors. d. the name or the corporation and its registered agent

d. the name or the corporation and its registered agent

violation of securities act

damages criminal prosecution

if the articles of incorporation name the initial board of directors

directors by majority vote call the meeting to adopt the bylaws and complete the company's organization

The management of National Brands, Inc., is at odds with the shareholders over some recent decisions. To redress a wrong suffered by National from the actions of management, the shareholders may exercise their preemptive rights. exercise their inspection rights. file a shareholder's derivative suit. issue a proxy.

file a shareholder's derivative suit.

express powers

found in - articles of incorp - law of the state of incorporation -state & federal constitutions

securities act of 1933

governs initial sales of stock by businesses -req investors receive financial and other important info regarding securities being offered for public sale -issuing corp: must register w. the SEC first -must provide investors with a prospectus

if the articles of the incorporation DID NOT name the initial board of directors

incorporators hold the meeting to elect the directors, adopt bylaws, and complete the routine business

Corp terminates: common stock

last in line for repayment of investments -after fed & state taxes, preferred stockholders, bondholders, supplies, employees

corporate liabilities

may be liable for criminal acts or torts of its agents and employees w/ scope of employment (respondead superior) -fines

Securities exchange act of 1934

most can be sold w/o registration registration is req of stockbrokers, other dealers of securities & publicly held corp (shares are publicly traded in sec markets) -req corp make periodic disclosures about its organization & financial situation -prevents securities fraud -prevent insider trading

Shareholder responsibility for corps daily management

none

exemption to securities act

nonprofits securities sold in certain transactions -small $ amount -limited manner

Shareholder liability

not personally liable for corp debts, liability is limited to the amount they invested

once securities are sold to public

often traded among investors through a securities exchange

dividends

ordered by the directors and paid to the SH in proportion to their shares -cash, property, stock of the corp -all states allow dividends to be paid from the undistributed net profits earned by the corp ex/ surplus

Mike, Nora, and Paula are shareholders in National Business, Inc. All of the shareholders are National's owners. directors. incorporators. officers.

owners.

if procedures are not followed precisely

party may attempt to avoid liability on the ground of a defect in the incorp procedure

implied powers

perform all acts reasonable appropriate and necessary to accomplish its corporate purpose

stocks or equity securities

represent the purchase of ownership in the business firm does not represent debt (never need to be repaid) -common stock -preferred stock -bonds

Jill is a shareholder of United Manufacturing Company. As a shareholder, Jill's rights include all of the following except a right to have one vote per share. access corporate books and records. transfer shares. sell corporate property when directors are mishandling corporate assets.

sell corporate property when directors are mishandling corporate assets.

S corp

special tax treatment under Subchapter S revision Act of the IRS: avoid the imposition of income taxes @ the corporate level while retaining adv of a corp (limited liability)

cumulative voting

(# of members of the board to be elected) X (# of voting shares held) = # of votes a SH has -cast # of votes for 1 or more nominee -allows minority SH to obtain a representation on board of directors

quorum

*# of decision-makers that must be present before business can be conducted* -SH holding more than 50% must be present -articles of incorp can set higher or lower req

preemptive rights

*SH right to purchase a prorated share of a new stock issue before the stock is offered to others*

Ultra Vires Acts

*acts of a corp that are beyond its express & implied authority* -may lead to lawsuit -b/c of this: corps adopt broad statements of purpose in articles of incorp to include all activities -any legal action a corp takes to profit SH is allowed

stock certificates

*certificate evidencing the ownership of corp shares*

crowdfunding

*cooperative online activity in which people network & poolfunds to assist a cause of invest in a business venture*

foreign corp

*corp does business in the state but is not incorporated there*

alien corp

*corp formed in another country but doing business in US*

prospectus

*disclosure doc for investors that is required when selling securities* -describes securities being offered & corp financial operations

dividends

*distributions of profits*

articles of incorpation

*document filed w/ appropriate gov agency when a business is incorp* include: -corps name -# of shares authorized to issue -registered agent -name of its incorporators -primary source of authority for the corp future organization & business operations

venture capital

*financing provided by outside investors to new business ventures* -typically gives up a share of ownership to the venture capitalist

Benefit Corp

*for-profit that seeks to have a materially positive impact on society and env.* -public as a whole over SH value

domestic corp

*incorporated under state law & conducting business there*

preferred stock

*priority over holders of common stock* -receive dividends: possibly periodically -fixed % of face amount -*may* not have the right to vote

insider trading

*purchase or sale of securities based on info not available to the public* -scienter req -corp director, officer, etc buys then sells (vice versa) securities w/in 6 months -profits must be return to the corp

corporation

*recognized by law as a single entity* -same constitutional guarantees as a US citizen -formed under state law -board of directors elected by SH-> manage business -Day to day ops: corp officers

securities

*represent ownership interests or promises to repay debt by a corporation* -stocks & bonds -sold to investors

bonds

*security that evidences a corp long-term debt* -long-term borrowing of funds by a corp, no ownership interest -maturity date: return to investor

common stock

*security that evidences ownership in a corp* -control, earning capacity, net assets -SH interest proportionate to the # of shares owned out of the total number of shares issued -SH *may* receive dividends -hope to benefit financially when the market value of their shares inc

bylaws

*set of governing rules or regulations adopted by a corporation*

close corporations

*shareholders are limited to a small group*

SH's derivative suit

*suit brought by a SH to enforce a corp cause of action against a 3rd person* -important when a corp suffers due to a wrong by corp directors or officers (not willing to sue themselves) -SH act as guardians of the corp -> damages recovered go into corp treasury

proxy

*written agreement authorizing 1 shareholder to vote for another's shares (few shares) in a certain matter*

voting rights

1 vote per share articles of incorp can exclude or limit

Corporate classifications

1. domestic, foreign, alien corps 2.public & private corp 3. nonprofit 4. s corp 5. close corp 6.benefit corp

incorporation procedures

1. select a state of incorp 2. secure the corp name - include name corp., inc., co., ltd. 3. prepare the articles of incorporation 4. file the articles of incorp: secretary of state

rights of SH

1. voting 2. stock certificates 3. preemptive rights 4. dividends 5. inspection rights 6. transfer of shares 7.. SH's derivative suit

Federated Products Corporation uses cumulative voting in its elections of directors. Mary owns 3,000 Federated shares. At an annual shareholders' meeting at which three directors are to be elected, how many votes may Mary cast for any one candidate? 1,000. 3,000. 9,000. 2,700.

9,000

A corporation that is formed in a country other than the United States, but which does business in the United States, is a foreign corporation.

F

Damages recovered in a shareholder's derivative suit are normally paid to the shareholder who brought the suit.

F

transfer of shares

SH can transfer

A corporation is an artificial being.

T

As a general rule, shareholders are not personally responsible for the debts of the corporation.

T

Cumulative voting allows minority shareholders to obtain representation on the board of directors.

T

Stocks represent the purchase of corporate ownership.

T