FL Corporations - MCQ #6
m/h Sawdust Corp. sold a 10,000 pound sawmill to Sticks and Stones Company. Both companies are located in Florida. One of Sticks and Stone's employees, Woody, caught his right hand and fingers in the sawmill, causing partial amputation of several fingers. Thereafter, Sawdust Corp. sold most of its assets, including real property, goodwill, trade names, and inventory to Live Oak, Inc. The purchase contract specifically stated that Live Oak assumed none of Sawdust's liabilities, except for the receipt of and payment for ordered but undelivered inventory. Live Oak paid Sawdust's outstanding corporate debts in the months after the closing. In addition, Live Oak manufactured the same type of sawmills at the same plant where Sawdust formerly produced them, and retained many of Sawdust's former employees. Live Oak's advertising described Live Oak as "formerly Sawdust Corp." Woody thereafter commenced an action for damages, alleging strict liability, and naming Live Oak as a defendant. Live Oak moved to have the action dismissed on the grounds that it is not liable for Sawdust's torts. The court should: Answers: A. Grant the motion and dismiss the action, because Live Oak is not liable for Sawdust's previous tort. B. Grant the motion and dismiss the action, because a corporation cannot be held liable for the torts of its predecessors. C. Deny the motion, because a corporation assumes the torts of any corporation it acquires. D. Deny the motion, because although corporations are generally not liable for the torts of their predecessors, there is an exception for cases of strict products liability.
Answer choice A is correct. In general, a corporation that acquires the assets of another corporation is not liable for torts of the predecessor corporation, unless the transferee corporation assumes such liabilities. Here, not only did Live Oak not assume the liabilities, Live Oak specifically disclaimed them
m/e Rita, Deborah, and Lila are all members of Sunshine LLC ("Sunshine"). Rita contributed 50% of the initial contribution to Sunshine, while Deborah and Lila both contributed 25%; no other contributions have been made. In the LLC's operating agreement, the three members set forth a voting agreement, stating that Rita and Deborah would each get two votes, while Lila would have one vote. Lila manages the day-to-day operations of the LLC. The operating agreement is silent as to how profits and losses are allocated. If there are $10,000 in profits to be distributed, how should those profits be distributed? Answers: A. Rita, Deborah, and Lila should split it equally. B. Rita should get $5,000, while Deborah and Lila should each get $2,500. C. Rita and Deborah should each get $4,000, while Lila should get $2,000. D. Lila should get $5,000, while Rita and Deborah should each get $2,500.
Answer choice B is correct. An LLC's operating agreement usually allocates how profits and losses are split among members. In the absence of such an agreement, profits and losses are allocated and distributions are made according to each member's contributions to the LLC. Because Rita made half of the LLC's contributions, she is entitled to half the profits, and because Deborah and Lila each contributed one quarter, they each get one quarter of the profits.
Max was the majority shareholder, president, and a director of Mega Corporation. Max, individually, and Mega Corporation were indicted for tax fraud based on actions taken by Max on behalf of Mega Corporation. After consulting with counsel, Max pled guilty. Thereafter, Mega Corporation's board of directors decided to indemnify Max for legal fees and expenses incurred in defending himself against the charges. Without notice or attempt to resolve the matter with the board, shareholder Min commenced a lawsuit against Mega Corporation on the grounds that financing Max's legal fees was a breach of fiduciary duties and a waste of corporate assets. Max moved to have the action dismissed. The court should: Answers: A. Grant the motion, because a demand on the board of directors must always precede the filing of a shareholder derivative suit. B. Deny the motion, because the decision to indemnify Max after he admitted guilt evidenced that he controlled the board, and any demand would have been futile. C. Grant the motion, because the decision whether to initiate litigation should be made exclusively by the board of directors. D. Deny the motion, because indemnifying an officer or director for legal fees is a decision that must be made by shareholders rather than the board of directors.
Answer choice B is correct. Demand is futile when, among other instances, a majority of the board of directors is interested in the transaction, a self-interested director controls the board, or the challenged transaction was so egregious that it could not have been the result of sound business judgment. Here, the plaintiff is not required to make a demand because Max's control of the board of directors is evidenced by the board's continued financial support even after Max admitted guilt, and thus, the circumstances satisfy the futility exception.
E of the following is not required to be set forth in a corporation's articles of incorporation? Answers: A. The names and addresses of each of the corporation's incorporators B. The names and addresses of the corporation's initial directors C. The name and address of the corporation's principal office D. The corporation's number of authorized shares of stock
Answer choice B is correct. The corporation's articles of incorporation may, but are not required to, set forth the names and addresses of the individuals who will serve as the corporation's initial board of directors. Answer choices A, C, and D are incorrect because all of the information contained in those answer choices must be contained in the articles of incorporation.
E In Florida, what is not an appropriate time for a shareholder to pursue the involuntary dissolution of a corporation? Answers: A. When the corporation's corporate assets are being misapplied or wasted, causing material injury to the corporation B. When the directors refuse to make distributions C. When the directors are acting illegally, oppressively, or fraudulently D. When the shareholders are deadlocked in voting power and have failed to elect successors to the directors whose terms have expired
Answer choice B is correct. Under any of the circumstances described in answer choices A, C, and D, a shareholder may move for the involuntary dissolution of a corporation. Shareholders can also move for the dissolution of a corporation when the directors are deadlocked in the management of the corporation's affairs, the shareholders are unable to break the deadlock, and irreparable injury to the corporation is being threatened or suffered. The directors' failure to issue a distribution is not grounds for involuntary dissolution of a corporation. The power to authorize a distribution is in the discretion of the board of directors, though a court may order the board to authorize a distribution if the board abuses its discretion and refuses to declare a distribution in bad faith.
m/h Which of the following activities is, by itself, least likely to sufficiently justify piercing the corporate veil? Answers: A. Making substantial capital contributions in the form of loans to gain bankruptcy protection B. Failing to respect the corporate entity C. Using the corporate form to avoid legal obligations D. Self-dealing with the corporation
Answer choice B is correct. While failing to respect the corporate entity can be considered in deciding whether to pierce the corporate veil, it is insufficient by itself. The failure must also adversely affect a third party's ability to recover from the corporation. Answer choices A, C, and D are incorrect because any one of those factors may be so compelling in a particular case as to convince the court to find the shareholders personally liable.
E The directors of Huge Corporation are considering whether to declare a cash dividend to the corporation's shareholders. To be able to properly declare the dividend, the directors must: Answers: A. obtain the approval of a majority of the shareholders. B. obtain the approval of all of the corporation's creditors. C. determine that the corporation is not insolvent and that the distribution would not cause the corporation to become insolvent. D. All of the above.
Answer choice C is correct. A corporation may not make a distribution if the corporation is insolvent or the distribution would cause the corporation to become insolvent
M A plaintiff was harmed by a corporation's failure to comply with environmental regulations. The corporation is undercapitalized, and has few assets that could be used to satisfy a potential judgment in favor of the plaintiff. Accordingly, the plaintiff seeks to recover from the majority shareholder, a billionaire who owns 70% of the corporation's stock, which is publicly traded. The plaintiff can provide evidence that the majority shareholder caused the corporation to act in a manner that did not comply with the regulations, and that the corporation neglected corporate formalities and acted as a facade for some of the shareholder's personal dealings. May the plaintiff seek recovery from the majority shareholder? Answers: A. No, because shareholders in a corporation may not be held personally liable. B. No, because the corporation is not a closely-held corporation. C. Yes, because the plaintiff can show that corporate formalities were neglected. D. Yes, because the majority shareholder owes a fiduciary duty to all potential plaintiffs.
Answer choice C is correct. If a plaintiff is able to "pierce the corporate veil," a corporation's existence is ignored, and the shareholders of the corporation are held personally liable. In general, a plaintiff must prove that the incorporation was merely a formality and that the corporation neglected corporate formalities and protocols.
m/h Which of the following is not an accurate statement regarding an "S Corporation?" Answers: A. Shareholders in an S corporation must be either United States citizens or resident aliens. B. S corporations may have no more than 100 shareholders. C. Only individuals may be shareholders in an S corporation. D. S corporations may have no more than one class of stock.
Answer choice C is correct. While the types of shareholders that may hold shares in S Corporations are limited, they are not limited to just individuals; estates, certain exempt organizations, and certain trusts may also be shareholders in an S corporation. Answer choices A, B, and D are incorrect because they are all true statements.
Delilah, a shareholder of record of Magic Corp., wanted to form her own magic company. She wanted to examine minutes of the meetings of the board of directors for the past three years to see if she could learn of undisclosed arrangements with suppliers that could help her in forming her own business. She gave the corporation five days' advance written notice and agreed to inspect the records during business hours. However, the corporation refused to allow her to inspect the minutes of the board's meetings. Delilah initiated a court proceeding to secure access to the corporate records and reimbursement for her litigation expenses. Can she successfully pursue such a proceeding? Answers: A. Yes, because a shareholder's inspection rights are unlimited in scope. B. Yes, because a shareholder has a right to inspect and copy corporate records upon five days' written notice. C. No, because a court proceeding is not the appropriate way to enforce the inspection right. D. No, because the inspection right regarding this information is conditional on having a proper purpose.
Answer choice D is correct. A shareholder's inspection right with regard to many corporate records, including the minutes of board meetings, is conditional upon the shareholder having a proper purpose for reviewing the records. A proper purpose is one that relates to the shareholder's interest in the corporation and is not meant to harass corporate officials or acquire corporate secrets. Because Delilah seeks to gain access to undisclosed arrangements with suppliers (i.e., corporate secrets) to aid her in forming her own business, the corporation was entitled to deny her rights.
m Which of the following statements regarding shareholders' agreements is true? Answers: A. Voting trusts must be in writing, but voting pools need not be. B. Voting pools are limited to 10 years. C. When establishing a voting trust, shareholders transfer both beneficial and legal ownership to the trustee. D. Shareholders may alter the manner of selection of directors and authorizing distributions.
Answer choice D is correct. Shareholders may enter management agreements, altering the way in which a corporation is managed even if the agreement is inconsistent with statutory provisions. Such agreements can involve the transfer of both beneficial and legal ownership to the trustee, as well as elimination of or restriction on the board of directors, exercise or division of voting power, and other matters of corporate powers and management.
m/h Aaron and Charmaine plan to form Tippi's Inc. ("Tippi's"), a live music venue. They enter into a contract with Al to construct a building for them. Al knows that Aaron and Charmaine have not yet formed Tippi's, but all parties decide to draft and execute the contract as between Al and Tippi's. Tippi's is later validly formed. After constructing the building, Al finds it necessary to sue to recover on the contract. Which of the following statements is accurate? Answers: A. Aaron and Charmaine, as promoters, will be jointly and severally liable on the contract. B. Aaron and Charmaine will not be personally liable on the contract, but only if the corporation adopts the contract. C. Aaron and Charmaine will not be personally liable on the contract, but only if they enter a novation with Tippi's. D. After incorporation, Aaron and Charmaine will not be personally liable on the contract.
Answer choice D is correct. While promoters are generally liable for pre-incorporation agreements absent an adoption or novation, they are not personally liable to individuals who have actual knowledge that a corporation is not yet in existence.