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72 Cards in this Set

  • Front
  • Back
What fiduciary duties does an incorporator owe the corporation?
Duty of good faith, loyalty and fair dealing.
What is an incorporator's role?
Acts as an agent in initiating and organizing the corporation to be formed. Usually, he also arranges for the initial capitalization.
What liability does an incorporator purporting to act on behalf of a corporation have?
He is always personally liable on pre-incorporation contracts unless there was an express release or a novation. If he doesn't disclose the planned corporation to a third party, the incorporator may be potentially liable under the agency rules of undisclosed principal.
What liability can a corporation have to third parties prior to incorporation?
None absent an adoption or novation. If the corporation expressly or impliedly adopts or ratifies the benefit of the incorporator's contract, the third party can go against the corporation and the incorporator. The incorporator may also seek indemnification from the corporation.
What right to compensation does an incorporator have for pre-incorporation services.
None, although the board could approve an incorporator's compensation.
What begins the corporate legal existence?
Filing of duplicate originals of the articles of incorporation signed by the incorporator(s) with the Secretary of State. When the Secretary of State files the Articles, it is conclusive evidence that the incorporator(s) have complied with all legal conditions of incorporation.
What information is required to be included in the articles of incorporation?
RINS

1. Registered office and agent

2. Name of incorporator(s)

3. Name of corporation

4. Stock information - the number of shares per class that the corporation is authorized to issue.
For what may the Articles not limit or indemnify a director?
BEIC

1. Breach of fiduciary duty

2. Excess distributions to shareholders

3. Intentional wrongdoing

4. Criminal act
What provision apply in the event of gaps in the Articles?
Under ALI model RMBCA almost all of the default provisions apply if the Articles do not specify to the contrary.
When must shareholder approval be obtained to amend the Articles?
When the change significantly affects the rights of shareholders, e.g., stock-related amendments, in which case the Board must propose the change to the shareholders, who must approve the amendment by 2/3 (or majority vote in the case of a public company).
What happens if the Secretary of State rejects the submitted Articles?
A "de facto" corporation exists, resulting in the possibility that the purported shareholders of the enterprise may become jointly and severally liable as partners.
What is a "de jure" corporation?
One that substantially complies with the state corporate laws, which means, unlike the case for a "de facto" corporation, shareholders usually become insulated from personal liability.
What occurs at the organizational meeting of the incorporators?
Must be held within 120 days of filing of Articles.

Corporation accepts stock subscriptions, shareholders receive their shares, and shareholders elect the initial board of directors, who appoint the officers.

Adopt bylaws.

Corporation ratifies and adopts pre-incorporation contracts.

If minutes of organizational meeting are written, an in-person meeting is not necessary.
What are corporate by-laws?
They define and specify day-to-day corporate governancy rules applicable to managing the business and regulating the affairs of the corporation. The RMBCA has many default provisions that apply unless the bylaws specify to the contrary. Bylaws must specify the number of directors or the means by which that number is determined.
Who may amend the bylaws?
The board, unless the Articles reserve this right solely to the shareholders.
What is the hierarchy of authority for a corporation?
1. CA corporate law.

2. Articles.

3. Bylaws.

4. Corporate resolutions and the minutes of meetings.
What must a foreign corporation do to obtain authority to transact business in CA?
Must obtain a certificate of authority from the secretary of state.
When is a corporation deemed to be transacting business in CA?
When its in-state activities are permanent, substantial and continuous. Appearing in court, owning property, holding meetings, having bank accounts and in-state borrowing activities by themselves do not constitute transacting business. Nexus must rise above isolated transactions completed within a 30-day period or sales by mail and through independent contractors.
What factors suggest a corporation is transacting business in CA?
A fixed permanent facility within the state is a strong factor.

If more than half the corporate stockholders' revenue, profit or property is located in CA, jurisdiction attaches.
What's the effect of the failure of a corporation (foreign or domestic) to register in CA if it's doing business in CA?
1. Shareholders may become personally liable.

2. A civil monetary penalty may be assessed.

3. Corp. deprived of right to maintain court proceedings as a plaintiff, rendering its contracts legally unenforceable in CA.
If the corporation has no registered agent or the registered agent cannot reasonably be served at the registered office, how may service be effected?
Service upon the secretary of state.
Who may assert the incapacity defense of ultra vires?
Only a shareholder seeking to enjoin or set aside an act allegedly outside the authority of corporate statute, articles or bylaws. Neither a third person nor the corporation may assert ultra vires as a sword or a shield.
If the Articles do not specify any limitations on the scope of business in which a corporation may engage, how is that scope defined?
A corporation may engage in any lawful business unless the Articles set forth a more limited purpose.
Can a board have less than 5 directors and include non-shareholders from states other than CA?
Yes. There is no minimum number of directors and no residency or shareholder requirements, absent provisions in the Articles or the bylaws to the contrary.
How often and by whom are directors elected?
Annually by the shareholders. The Articles, however, may give the Board authority to appoint directors under special or emergency circumstances.
What is cumulative voting?
Each shareholder may cumulate his votes (shares times open board seats) and cast them for one director-nominee. CA requires cumulative voting as the default rule unless the Articles or bylaws specifically eliminate this right. Notice of intent to cumulate vote must be given to the Corp. no less than 48 hrs before the meeting.
Who may remove directors?
Shareholders may with or without cause through a special meeting and prior notice. Directors may also be removed in a judicial proceeding. Officers may not remove a director.
What are the limitations upon dividends?
A dividend may not be paid if the Corp. will be rendered insolvent by the distribution or unable to meet its liabilities as they mature. Directors who approve such a dividend will be personally liable.
What is the minimum number of directors necessary to form a quorum?
A quorum to do business requires only a simply majority, but the Articles or bylaws may reduce this to no less than 1/3. Attendance by phone or video conference is permitted unless the Articles or bylaws provide the contrary.
What notice is required to hold meetings of the Board?
Regular board meeting may be held w/o prior notice unless the Articles or bylaws provide otherwise. Two days' notice must be given to hold special meetings and notice must identify the date, time, place and purpose of the meeting. The notice must be in writing, unless the Articles or bylaws permit oral notice.
May a director give a voting right proxy to another director?
No
When is a director who is present at a board meeting deemed not to have assented to a board action?
1. He dissents or objects at the beginning of the meeting.

2. His dissent or abstention is entered into the minutes of the meeting, or

3. he delivers written notice of his dissent before the meeting adjourns or within a reasonable time thereafter.
When may the board take action without a formal meeting?
If every director signs written consent, an action may be proper without a formal meeting. A later ratification also qualifies.
When is notice in electronic form permitted?
If the director or shareholder has consented to notice in that form. Consent is deemed to have been revoked if the corporation is unable to transmit two consecutive notices and this inability is known to the person who is responsible for transmitting notice.
What standard of care is a board member held to?
A board member is held to the standard of care that a prudent director would exercise under similar circumstances, including a good faith duty to stay informed about the corporation's financial condition.
What are the three categories of conflicts of interest that a board member must avoid in keeping with his duty of loyalty?
CUT

1. Competing with the corporation

2. Usurp corporate opportunities

3. Trade secret appropriation
What is the remedy for a board member's breach of duty to avoid conflicts of interest?
The transaction may be set aside and/or their profits disgorged. Alternatively, damages resulting from the breach of duty may be recovered.
When may a board member transact business with the corporation?
1. Transaction must be disclosed to all other directors

2. Transaction must be recorded in the corporate minutes.

3. The price must be at market and fair with reasonable terms.

4. A majority of non-interested directors must approve the transaction unless it constitutes fraud or waste. Or the transaction can be approved by the shareholders after proper notice and full disclosure.
What is the business judgment rule?
Directors and officers must exercise due care and diligence in managing the corporation. The test is whether an ordinarily prudent business person under similar circumstances could have reached the same conclusion. There must have been a reasonable investigation appropriate to the importance of the matter. The negligence cannot be gross. And the decision must have been made in good faith.
When might a director or officer not be entitled to rely upon information and assurances by officers, employees and board committees?
If they have knowledge that makes their reliance unwarranted.
Absent mandatory indemnification provided for in the Articles, who grant permissive indemnification to a director, officer or employee?
1. Majority vote of a quorum of directors,

2. A committee of directors,

3. Special legal counsel, or

4. shareholders (if permitted by Articles).
When may a director, officer or employee be indemnified?
If he acted in good faith and with a reasonable belief that he was acting in the best interests of the Corp., or if he was not acting in an official capacity and the actions were not opposed to Corp.'s best interests.
Must a corporation report its indemnification expenses?
Yes. The Corp. must report in writing all indemnification expenses by including them with each notice of the next shareholders' meeting.
What is a stock subscription?
A future shareholder's promise to purchase stock.
When are stock subscriptions revocable?
After a period of six months unless specified otherwise.
When may an issuer place restraints on the alienation?
Any issuer's restraints on alienation or other restrictions on transfer must be conspicuously noted on the front or back of the stock certificate. Only reasonable restrictions are permitted.
What are preemptive stock rights?
Preemptive rights entitle an existing shareholder to purchase pro rata shares of any newly issued stock so that they may maintain their proportional ownership interest. In CA, preemptive rights only allowed if specified in the Articles.
What are redeemed shares?
Shares reaquired by the corporation, which may be cancelled or held in the treasury for potential later use.
How frequently must a Corp. hold a shareholder meeting?
Annually.
Who may a special shareholder meeting be called?
The board of directors or 10% or more of the stockholders may make written demand upon the Corp., specifying the purpose of the meeting. Or a court may order a meeting if it finds that the annual meeting was not held or a stockholder request was improperly denied.
How much notice must shareholders receive of the annual shareholder meeting?
No fewer than 10 days and no more than 60 days.

If the meeting includes action on fundamental changes, the notice must be no fewer than 20 days and no more than 60 days.

If it is a special meeting, the notice must contain a description of the purpose(s) for which the meeting is called.
What is the maximum amount of time for setting the record date to determine which shareholders must be given notice of a shareholder meeting?
70 days.
When are defects in the notice of shareholder meetings waived?
If the shareholder attends the meeting and does not object at the beginning.
May shareholders submit resolutions at the annual shareholder meeting?
Yes, if

(1) the shareholder owns 1% of outstanding stock or shares valued at a minimum of $1,000;

(2) Prior notice is given; and

(3) The proposed resolution involves a proper subject for shareholder action and not a personal claim or grievance.
What must be done to obtain a proxy for voting?
An appointment must be executed by signing. It is valid for 11 months. If management solicits the proxy, management must make full disclosure of all items on the agenda for the meeting.
What percentage of shares is required to form a quorum?
A simply majority, unless the Articles require a greater number.
When may shareholders take action without a meeting?
A meeting is not required if all the shareholders entitled to vote on the action engage in that action, or, if permitted in the Articles, shareholders who hold the requisite number of votes needed to approve an action take that action.

Such action must be evidenced by a consent that describes the action taken.
What is a voting trust?
It confers upon the trustee the power to vote and act on behalf of all the beneficial interest of those who are members of the stock-block group. It must be in writing and is only valid for a maximum of 10 years.
What is the time limit of a written voting agreement between shareholders?
There is not one, which differentiates it from a voting trust, which is valid for a max of 10 years only.
Must the shareholders approve loans to officers and directors?
Yes.
Do shareholders have a right to vote on any amendment to the Articles or Bylaws that affects their rights?
Yes.
When must shareholders receive annual financial statements?
Within 120 days of the close of the fiscal year unless expressly waived.
What is the dollar threshold requiring disclosure of any transaction between the corporation and an officer or a director?
Over $40,000.
What is the dollar threshold requiring disclosure of any indemnification of an officer or a director?
Over $10,000.
May a shareholder of record inspect and copy relevant books, records and shareholder lists?
Yes, if

(1) Demand is made 5 days in advance; and

(2) The demand identifies the purpose of the inspection with reasonable particularity and it is for a proper.
Who may bring a derivative action?
Any shareholder that was a shareholder at the time the claim arose and who continues to be a shareholder throughout the litigation.
When can a derivative action be dismissed by the company?
If the independent directors or a panel of independent directors determines in good faith that maintenance of a the lawsuit is not in the best interests of the corporation.
A shareholder bringing a derivative action may be required to post a bond of up to $50,000 if what?
If the corporation can show that it has no reasonable possibility of benefit from the derivative action.
May a corporation the subject of a derivative action be required to pay the shareholder's legal expenses?
Yes, if the derivative action results in substantial benefit to the Corp.
May a court require the shareholder plaintiff in a derivative suit to pay the corporation's expenses, including counsel fees?
Yes, the Corp.'s reasonable expenses, including counsel fees, if the proceeding was commenced without reasonable cause or for an improper purpose.
Can a Corp. require a greater than majority vote on shareholder provisions?
Yes. Non-SEC Corps. (non-public) may set forth in the Articles a requirement that specified decisions require up to 66 2/3% shareholder vote.
Does a shareholder in the minority of a vote to enact a fundamental change have any redress?
Yes, shareholders dissenting from fundamental changes shall have appraisal rights to receive the fair value of their shares in cash.