Corporations California Bar Exam

Front 1

What is a corp?

Back 1

Letqal entity distinct from its owners that may be created only by filing doc's with the state.
1. The owners directors and officers have LIMITED LIABILITY and are generally not personally liable fro the obligations of the corp.. Generally, only the corp itself can be held liable for corp. obligations. The owners risk only the investment tehy make in the business to purchase their ownership interest ("shares").
- Generally a corp has CENTRALIZED MANAGEMENT, centralized in a board of directors who delegate day-to-day management duties to officers.
- Ownership of a corp is GENERALLY FREELY TRANSFERABLE....CHANGES in ownership generally don't affect a corp.

Front 2

How are Corps taxed?

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C Corp.- Generally taxed as an entity distinct from its owners. The corp. tax rate is generally lower than the personal tax rate, and so this arrangement can be adcantageous to people who want to delay the realization of income. However, this advantage comes at a price of double taxation- becasue when the corp does make distributions to shareholders, the distributions are treated as taxable income to the shareholders even though the corp. has already paid taxes on its profits.
- S corps. - tax laws permit certain corps. to elect to be taxed like partnerships and yet retain the other advantages of the corporate form. Such corps. are called "S corporations." Parnerships and S corps. are not subject to double taxation, profits and losses flow through the entity to the owners. THere are a number of restrictions on S corps (e.g. stock can be held by no more than 100 persons, generally shareholders must be individuals and there can be one class of stock, et.c

Front 3

What is the difference between a corp and a sole propritorship?

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- Sole propriorship: 1 person owns all of the assets. The owner is personally liable for the business's obligations, and the business entity cannot continue beyond the life of the owner. Ownership is freely transferable and all profits and losses flow directly to owner.

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What is the difference between a partnership and a corp?

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-Similar to sole propritorship except that there are at least 2 owners. Little formality is req'ed to form a partnership (just an intention to carry on as coowners of a business for profit). Partnerships are generally not treated as legal entitites apart from the owners. Partners are personally liable for obligations of the partnership and management rights are spread among them. Ownership interests cannot be transferred w/o other partners' consent. A partnership doesn't continue beyond the lives of its owners. (profits and losses flow directly)

Front 5

What is the difference between an limited partnership and a corp?

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A limited partnership that provides for limited liablity of some investers ("limited partners"), but otherwise is similar to other partnerships. A limited partnership can be formed only by compliance with the limited partnershp statute. Ther must be at least one gen. partner, who has full personal liabilty for partnership debts and has most management rights.

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What is the difference between a corp. and an Limited Liability Company ("LLC")?

Back 6

the LLC is designed to offer the limited liability of a corp. and flow through the tax advantages of a partnership. Like a corp., it may be formed only by filing appropriate doc's with the state, but otherwise it is a very flexible business form; owners may choose between centralized mangaement and owner management, free transferability of ownership or restricted transferablity, etc.

Front 7

What are the Constitutional Characteristics of a Corporation?

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1. PERSON: Corp is a person entitled to due process, equal protection and atty-client priv., but not to 5th amendment privilege against self-incrimination.
2. CITIZEN: Corp is not a citizen for purposes of the Privileges and Immunities Clause. For fed div. j. purposes, a corp. is a citizen of any state of incorporation and the state of its principal place of business.
RESIDENT: A corp is a resident of its state of incorporation, where it is doing business, and where it is qualified to do business.
DOMICILE: a corp is domiciled in any state in which it is incorporated.

Front 8

What are the legal requirments for forming a corp?

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1. Corps are created by compplying with state corporation law usually under RMBCA ("Revised Model Business Corporation Act")
2. A corp formed in accordance with the law is a DE JURE corp. If all corporate laws have not been followed, a DE FACTO corp might be recognized through ESTOPPEL.

Front 9

What is required to crate a DE JURE corp?

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1. incorporators must comply with all applicable statutory req's. File articles of incorpration with the SEC of STATE. Articles must contain the name of the corp. the number of shares that the corp is authorized to issue, the name and address of the corp's registred agent, and the name adn address of each incorporator. The articles may also include any other provision regarding operation of the corperation that is not inconsistent with the law.

Front 10

What is the business purposes statement?

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Traditionally, included in articled. Absent sucha statemnt the RMBCA presumes that a corp is formed to conduct ANY LAWFUL BUSINESS and is allowed ot undertake any act that is necessary or convenient for carrying on their business purpose, including making charitable donations and lending money to employees, officers, and directors.

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EXAM TIP

Back 11

Under modern corp statutes, a corp is given the power to do all things necessary or convenient to effect it purpose. Most modern statutes also provide that a corp may be formed for any lawful purpose. Combined, these provisions provide authority for a corp to do almost anyting that is rationally related to a business purpose. Thus, unless an exam question restricts a corp's purposes, you shoudl usually find corporate acts to be within the corp's powers.

Front 12

What is an Ultra Vires Act?

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If a corp includes a NARROW business purpose in its articles, it may not undertake activities unrelated to achieving teh stated business purpose. Activiteis beyond teh scope of the stated business purposes are said to be "ultra vires." Under common law, ultra vires acts were void and unenforceable. Under the RMBCA, ultra vires acts generally are enforceable, and the ultra vires nature of an act can be raised in only 3 situations:
1. A SHAREHOLDER sues the corp to enjoin the ultra vires act.
2. THE CORP sues the officer or director for dx for approving an ultra vires act.
3. THE STATE may bring an action to dissolve a corporation for committing an ultra vires act.

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EXAM TIP

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Remember that under modern statutes, the ultra vires defense is very limited. Thus, you should not allow a corp to get out of a K merely because the K is outside of the stated purposes of the corp.

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When does a Corp come into existence?

Back 14

Upon filing with the state.

Front 15

What are Bylaws?

Back 15

After articles are filed, the corp has an organizational meeting to elect directors, appoint officers, and adopt bylaws. Bylaws may contain any provision for managing the corp that is not inconsitent with the articles or law. Generally, bylaws are adopted by directors, but they may be modified or repealed by a majority vote of eitehr directors or shareholders.

Front 16

What are the charctaristics and Requirements of a DE FACTO corp?

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Under common law a de facto corp has all the rights and powers of a de jure corp but remeains subject o direct attack in a quo warranto proceeding by the state. For a de facto corp to exist there must have been:
1. a statute under which the entity could have validly incorporated
2. colorable complaince with the statue and a good faith attempt to comply; and
3. the conduct of business in the corporate name and the exercies of corporate privileges?
=LIMITATION: The RMBCA provides that persons who purport to act on behalf of acopr. Knowing that ther has been no incorporation are liable for all liabilities created in so acting. Thus, the de facto doctrine can be raised as a defense to personal liablity only by a person who is unaware that ther was no valid incorporation?

Front 17

What is the doctrine of CORPORATION BY ESTOPPEL?

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Under common law, persons who have dealth with the entity as if it were a corp will be estoped from denying the corp's existence. THe doctrine applies in K to prevent teh corporate entity and parties who have dealt with the entity as if it were a corp, from backing out of their contracts. However, it doesn't apply to TORT VICTIMS.

- Generally, if a de facto corp is found, it is treated like any other corp for all purposes, except that a state may seek dissolution in a quo warranto proceeding. Estoppel applies on a case-by-case basis. THe de facto doctrine applies equally in contract and tort situations, but estoppel generally is applied only in K cases. If there is no valid incorporation and the facts don't support a de facto or estoppel argument, generally, the courts will hold only the ACTIVE business members personally liable, and their liability is joint and several.

Front 18

What are the elements that justify piercing the corporate veil?

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3 Situations:
1. ALTER EGO: Where ther corp ignores corporate formaliteis such that it may be considered the alter ego of the shareholders or anotehr corp, the corporate veil may be piereced. THese situations may arise where shareholders treat corp. assets as their own, fail to observe corporate formalities, etc. AND some basic injustice results. (Sloppy admin, may not be enough)
2. INADEQUATE CAPITALIZATION AT TIME OF FORMATION: if ther is not enough unencumbered capital to reasonably cover prospective liabilities AT THE TIME OF FORMATION.
3. AVOIDANCE OF EXISTING OBLIGATIONS, FRAUD OR EVASION OF STATUTORY PROVISIONS: Corp veil may be pired to prevent fraud or to prevent and individual shareholder from using the entity to avoid his EXISTING personal obligations. BUt the mere fact that an individual chooses to adopt the corporate form of business to avoid future personal liabilty is not iteslf a reason to pierce.

Front 19

Who is liable?

What types of liability are there?

Who may pierce the corporate veil?

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1. Normally only shareholders active in the operation will be personally liable. JSL applies.
2. Corp. veil easily piereced in tort, but not in K since parties who contracted with teh forp had an apportunity to invsetigate its stability. WHere teh corp is insolvent, claims of shareholder-creditors may be subordinated to outside creditors claims if equity so requires (b/c of fraud)
3. Generally, creditors may be allowed to pierce the corporate veil. Courts almost never pierece the veil for a shareholder.

Front 20

What is the rule on debt securities?

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Debt securities aries when a corp has borrowed funds from outside investors and promises to repay them. Holders of a debt securities don't have an ownership interst in the corp. Debt obligations may be secured (bond or unsecured (debenture) and may be payable to either the holder of the bond (bearer or coupon) bond or to the owner registered on the corp's records (registered bond. A debt obligatin may also have special features e.g. it may provide that it is convertible to equity securties at the option of the holder, or it might provide that the corp may redeem the obligation at a specified price before the obligation matures.

Front 21

What are equity securties (shares)?

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Terminology: Shares described in the corp's articles of incorp are authorized hsares. THose shares that have been sold are issued and outstanding. Those shares that have been reacquried by the corp through the repurchase or redemption are authorized but unissued; but if the articles so provide, the number of authorized shares is reduced by the number of shares repurchased.

Front 22

How are shares classified?

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Common shares:every share is equal.
Class divided shares (ownership rights may be varied)- Classes and series must be described in the articles: If shares are to be divided into classes or series w/in a class, teh articles must 1. prescribe the number of shares of each class; 2 prescribe a distingushing designation for each class; and 3. eiterh describe teh rights, preferences and limitations of each class or series or provide taht the rights, prefernces, and limitations of any class or series w/in a class shall be determined by the board prior to issuance.

Front 23

What are the rules on Stock Subscriptions?

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-Preincorporation Subscription: RMBCA says, preincorporatin subscriptions are IRREVOCABLE FOR 6 MOS. unless otherwise provided in teh terms of the subscription agreement or unless all other subscribers consent to revocatoin.
- Payment...unless otherwise provided, payment is upon demand by teh board. Demand may not be mad ina discrimnatory manner. A subscriber who fails to pay may be penalized by sale of the shares or forfeitrue of thesubscripriton and any amounds paid theron, at the corporations' option.

Front 24

What do propoters do and how do they relate to each other?

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Before corp formed, promoters procure commitments for capital and other instrumentaliteis that will be used by the corp. after its formation. Absent an agreement to teh contrary , promoters are joint venturers who occupy a fiduciary relationship with each other. They will breach their fiduciary duty if they secretly pursue personal gain at the expense of their fellow promotors.

Front 25

What is the promoter's relationshp with the corporation?

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- Duty of fair disclosure and good faith
- Breach of fiduciary duty arising from sales to the corp: A promoter who profits by selling property to the corp may be liable for his profit uless all material facts of the transaction were disclosed. If the transaction is disclosed to an independent BOD and approved, he promoter has met his duty and will not be liable for his profits. If the Board is not completely independent, the promoter still will not be liable for his profits if the subscribers knew of the transaction at the time they subscribed or unanimously ratified the transaction after full disclosure. Disclosure must be to all who are contemplated to be part of the initial financing scheme. If the promoters purchase all the stock and susequently sell thier individual shares to outsiders, the promoters cannot be held liable for the profits from the sale of property to the corp.
FRAUD: Promoters may always be liable if P's can show that they were damaged by teh promoter's fraudulent misrepresentations or fraudulent failure to disclose all material factS.
STATE/FED SECURITIES LAW: Many states have enacted securities laws (blue sky laws) similar to the fed securities laws. However, fed law preempts state reg. of securities EXCEPT with regard to: 1. penny stocks (generally stocks selling for less than $5.00); 2. intrastate offerings exempt under teh 1933 ACT; 3. actions aginst brokers for fraud; and 4. notice filing requirement for stocks sold within the state.

Front 26

What is the rule on promoter's liablity when dealing with 3rd parties?

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RMBCA says that anyone who acts on behalf of a corp knowing that it is not in existence is JSL for the obligations incurred. Thus, ifthe promoter enters into an agreement with a 3rd party on behalf of a planned but unformed corp the promoter is peronsally liable on the K. The promotor's liablity continues after the corp is fomred, even if teh corp adopts the contract and beneftis from it, the promoter will be released from liability only if there is an express or implied novation (i.e. agreement among all three parties to release the promoter from liablity and substitute the corp.).
- Exception: If the agreement expressly relieves the promoter of liabity, there is no K; such an arrangement may be constured as a revocable offer to the proposed corp., and the promoter has no rights or liability under the agreement.
-PROMOTER'S RIGHT TO REIMBURSEMENT: A prmoter who's held personally liable on a preincorporation K may have a right to rimbursement from the corp to the extent of any benefits received by the corp.

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EXAM TIP:

Back 27

Questions often requrie to discuss whether a promoter will be liable on a preincorporation contract, If you keep in mind that promoters are forming a contract, someone msut be bound with the third party. It can't be the corp since it doesn't exist; Therefore, the promoter is liable even though seh was acting on behalf of the corp to be formed (if the agreement expressly relieves the promoter of liabilty it will be treted as an offer to the corp).
Note that if the promoter is bound, she is not relieved merely by the corp's creation or adoption of the K; only if the 3rd party agrees to substitute the corp for the promoter (a novation) will the promoter be relieved).

Front 28

What is the corporation's liabilty when a promoter deals with 3rd parties?

Back 28

Corp doesn't exist, so its not bound on K's entered into by the promoter in the corporate name prior to incorporation. THe corp may be bound by expressly or impliedly adopting teh promoter's K.

Front 29

SHAREHOLDERS

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GOOD LUCK!

Front 30

what is the extent of the shareholder's control over management?

Back 30

The power to manage is vested in teh directors. RMBCA allos shareholders to enter into agreements to dispense ith the board and vest mangement power in the shareholders. If the articles don't include such a special provision, shareholders exercise only indirect control fo the corp through their voting power, by which they elect and remove directors, adopt and modify bylaws, and approve fundamental changes in the corporate structure.

EXAM TIP: If there is a question about the power of shareholders to run the day-to-day affairs of their corp, unles the corp's articles or a shareholder agreement provides otherwise, you should generally respond that the the shareholders have no such power; that power is vested in the board, and the shareholders have the power to elect the board.

Front 31

What are the rules on Shareholder's meetings and voting power?

Back 31

1. ANNUAL: cor's must hold annual shareholder's meetings. If the annual meeting isn't held within the earlier six months after the end of the corp's fiscal year or 15 months after its last annual meeting, a court may order the meeting to be held.
SPECIAL: may be called by BOD, the holders of 1/10 or more of all shares entiteld to be case at the meeting, or other persons so authorized in the articles or bylaws.
Place: W/in state or not...doesn't matter.
Notice: SH notified not less than 10 or more than 60 days before meeting. Notice must state, day, place, hour of the meeting and for SPECIAL meetings, purpose. Notice may be waived by writing or attendence.
Eligibility to vote: SH of record on teh record date may vote at the meeting. The record date is fixed by the boardbut may not be more tahn 70 days before the meeting. If directors do not set a record date, the record date is deemed to be teh day teh notice of the meeting is mailed to the sh unless the articles provide othrewise, each share gets 1 vote.

Front 32

What are voting proxies?

Back 32

Shareholder may vote shares in person or in proxy executed in writing:
Duration: valid for 11 months unless otherwise provided. Revocable by SH and may be revoked by sh attending meeting to vote himself or by subsequent appointment of another proxy. Proxy is irrevocable only if sated and couple with and interest or given as security.

STATUTORY PROXY CONTROL: Rules provide 1. there must be full and fair disclosure of all material facts with regard to any management-submitted propsal upon which the sh are to vote; 2. material misstatements, omissions, and fraud in connection with the solicitation of proxies are prohibited; and 3. management must include certian shareholder proposals on issues otehr than election of directors and allow proponents to explain their position.

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What are the mechanics of the voting process?

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1. QUORUM: Usually a majority of outstanding shares entitled to vote, unless the articles or bylaws require a greater number. Note also that once a quorum is present, it cannot be broken by withdrawing of shares from the meeting.
VOTING: absent a contrary provision in the articles, each share is entitled to 1 vote. The articles may provide for weighted voting or contingent voting. If a quorum is present, sh will be deemed to have approved a matter if the votes cast in favor of the matter exceed the votes cast against the matter, unless articles or bylaws require a greater propertion. Less than quorum adjourns the meeting.
c. Director Elections: Directors elected by a plurality of the votes cast.
- Cumulative voting optional: articles may provide for cumulative voting in electing directors. Each sh is entitled to a number of votes equal to the number of his voting shares multiplied by the number of dir. to be elected. The total number may be divided among the candidates in any manner that the sh desires, including casting all votes for 1 dir.

CLASS VOTING ON ARTICLE AMENDMENTS: whenever an amendment to the aic will affect only a particular class of stock, that class has a right to vote on the action even if the class otherwise doesn't have voting rights.
Also:
SH may take action w/o meeting by unanimous written consent of all shareholders entitled to vote on the action.