Ba Corps Chaps 15-21

Front 1

What is the test in MN for piercing of the corporate veil?

Back 1

Two-prong Victoria Elevator test:

(1) Has the shareholder established the corporation sufficiently as a separate entity? (focuses on the shareholder’s relationship to the corporation)

(2) Failure to impose personal liability would work an injustice or would be fundamentally unfair to the plaintiff. (focuses on the plaintiff’s relationship to the corporation)

Front 2

What factors are considered under prong-one of the Victoria Elevator test?

Back 2

(1) insufficient capitalization for purposes of the corporate undertaking

(2) failure to observe corporate formalities

(3) nonpayment of dividends

(4) insolvency of the debtor corporation at the time of the transaction in question

(5) siphoning of funds by a dominant S/H

(6) nonfunctioning of other officers and directors

(7) absence of corporate records

(8) existence of the corporation merely as a façade for individual dealings

Front 3

Is fraud on the part of the corporation likely to trigger piercing of the corporate veil?

Back 3

No, fraud by a shareholder may trigger piercing of the corporate veil, but fraud by the corporation without shareholder knowledge likely does not.

Front 4

Who does vertical piercing of the corporate veil hold liable?

Back 4

The shareholders are held liable because they are conducting business in their personal capacity.

Front 5

Who does horizontal piercing of the corporate veil hold liable?

Back 5

Sibling corporations, but not the owner – only a larger corporate entity would be held responsible (aggregation). Horizontal piercing is possible when a single business enterprise is set up using separate and multiple limited liability entities operating on the same level and having the same owners and/or managers.

Front 6

What is the difference between piercing the corporate veil and piercing the LLC veil?

Back 6

There is no difference.

Front 7

What is the difference between debt and equity claims?

Back 7

Debt: fixed claims that must be repaid (repayment is not contingent on success of the business), accrue periodic interest.

Equity (ownership): residual claims composed of contributions by the original entrepreneurs in the firm, capital contributed by subsequent investors (usually in exchange for ownership interests in the business), and retained earnings of the enterprise.

Front 8

How is the issuance value of shares determined in MN, since par value is not relied on?

Back 8

MN shares are issued for “fair value” rather than par value. The board sets a minimum value for issuance of shares, and the board may be liable for issuing shares for less than what they are worth. Consideration can be practically anything, as long as the shareholder “pays” what he said he would pay. Future services are also valid consideration in MN.

Front 9

What are the fundamental rights of shareholders of common shares?

Back 9

(1) They are entitled to vote for the election of directors and on other matters coming before the shareholders.

(2) They are entitled to the net assets of the corporation (after debts) when distributions are made in the form of dividends or liquidating distributions.

Front 10

How can preemptive rights be altered under MN law?

Back 10

In MN preemptive rights are the statutory default [302A.413], and they can only be denied in the articles of incorporation. If the articles of incorporation did not initially deny preemptive rights they can only be denied if the shareholders vote to amend the articles of incorporation [302A.135].

Front 11

What restrictions does the board of directors face when deciding to issue new shares?

Back 11

(1) The board can only issue shares authorized by the articles of incorporation (maximum number of shares authorized) [302A.401(1)].

(2) The board must issue shares for “fair value,” in part to avoid improper dilution of the ownership interests of existing shareholders.

Front 12

When do preemptive rights apply?

Back 12

Preemptive rights only apply when the board of directors authorizes the issuance of additional shares for sale (money). This means that preemptive rights do not apply to additional shares issued to forgive debt (Katzowitz).

Front 13

Who elects who in a corporate structure?

Back 13

The shareholders elect the board of directors. The board of directors then elects the directors/officers. The board of directors is then responsible for the management of the business with the shareholders as passive investors.

Front 14

What documents are binding on the corporation, and what is their order of authority?

Back 14

(1) Chapter 302A

(2) Articles of Incorporation

(3) Corporate Bylaws

(4) Resolutions by the Board of Directors

Front 15

What documents are required to form and operate a corporation?

Back 15

Only the Articles of Incorporation are required. Corporate Bylaws are an optional operational document that is not filed with the state.

Front 16

How many votes must a director receive in order to get elected?

Back 16

Directors are elected by a plurality, unless otherwise stated in the Articles of Incorporation [302A.215(1)].

Front 17

What is the equation for determining the number of votes necessary to elect a director to the board (cumulative voting)?

Back 17

(S/D+1) + 1 = X

Where S = the total number of shares voting;

D = the total number of directors to be elected at the meeting; and

X = the number of shares needed to elect one director to the board.

Front 18

Can cumulative voting be denied in MN?

Back 18

Yes, but only in the Articles of Incorporation.

Front 19

What does cumulative voting apply to?

Back 19

It applies to the election of directors and to proposals that would alter the articles of incorporation to deny cumulative voting.