Corporations - Nc Bar Exam

Front 1

What are the default rules for creation of a corporation in NC?

Back 1

Corporations have perpetual duration, same powers as an individual and can engage in any lawful business purpose

Realistically, corporations leave their purpose as "any lawful purpose." Watch out for businesses who narrow their business purpose and exceed it later [see ultra vires below].
If the incorporators/directors want to modify the default rules it is permissible

Ultra Vires – when a corporation acts outside its “lawful business purpose.” Allows either state/SH to go after the corporation.

Front 2

What is a De Jure Corporation?

Back 2

Once the AOI are filed with Sec of State a corporation is considered a De Jure Corporation

Front 3

What are Articles of Incorporation (AOI)

Back 3

Filed with the Sec of State.

Includes: Name/St Address of corporation; each incorporator; registered agent/office to receive service of process; number of authorized shares

AOI must include the maximum number of shares a corporation may sell and if there are several different types of classes the AOI must list the classes

Front 4

What if the AOI are not filed correctly and the corporation conducts business as a corporation?

Back 4

A De Facto Corporation or Corporation by Estoppel is created

This is a safety net so SH’s are not held personally liable on corporation’s debts. This is an equitable doctrine by which a business can be a corporation even if for some reason the AOI were not filed

Req a good faith attempt to comply with the statute

Beware: A SH who knew of the attempt and knew it was improper!

Front 5

What is a corporation by estoppel?

Back 5

One who deals with a corporation as if it were a corporation is estopped from arguing it is not a corporation later to avoid liability on a contract

Front 6

X slips and falls in the food chain "McBar." McBar holds itself out as a corporation and does business with clients. However, the AOI were improperly filed in NC and the McBar is not a proper corporation.

Can McBar assert it is a de facto corporation and enjoy limited liability, perpetual life, ability to buy and sell property, etc. in this TORT action?

Back 6

Probably not.

The de facto doctrine has occasionally been applied to tort cases (See Kardo Co v Adams) but normally there is little room for an estoppel argument when a tort claim is involved because recognition of corporateness has no relevance to the commission of the tort. (p. 9 of Barbri Outline)

For Bar Exam: Try to only apply the de facto corporation/estoppel doctrine to contract claims.

Front 7

Piercing the Corporate Veil

Back 7

Alter Ego Liability

1. SH is treated as “other self”
2. Applies to the conduct of the SH [ex: commingling funds]
3. With a parent-subsidiary company: Mere Instrumentality of the Parent
a. A SH who exercises actual control over a corporation “operating the later as a mere instrumentality or tool” may be liable for the torts or contracts of the corporation thus controlled
b. Plaintiff must est a complete domination of the corporation in question, misuse and proximate cause
NC requires that there is some fundamental unfairness

Front 8

What are the types of situations NC courts find appropriate for "piercing the corporate veil?"

Back 8

1. Ignoring corporate formalities

-Parent-Subsidiary Corporations – where formalities of separate corporate procedures are not observed the two entities will be viewed as one entity

-Individual SHs- When SH treats assets of corporation as his own – look for injustice

-Affiliated Corporation – domination of stock ownership and control in another affiliated corporation will raise the question of whether its affiliate should liable for the others liabilities

2. Gross Undercapitalization

-When corporation is grossly under capitalized the SHs will be held liable (J/S Liability)

Front 9

What is the test applied by NC courts for determining whether a corporation and its subsidiary are commingling funds. W

Back 9

Mere Instrumentality of the Parent Test

a. A SH who exercises actual control over a corporation “operating the later as a mere instrumentality or tool” may be liable for the torts or contracts of the corporation thus controlled
b. Plaintiff must est a complete domination of the corporation in question, misuse and proximate cause

NC requires fundamental unfairness!

Front 10

A promoter for McBar enters into a commercial lease on Franklin Street. Is McBar automatically liable for the lease?

Back 10

No. A corporation is not liable unless it adopts the contract as its own [either expressly/impliedly].

Front 11

A promoter for McBar enters into a commercial lease on Franklin Street. McBar adopts the lease expressly.

Is the promoter still liable on the lease?

Back 11

Yes.

A promotor remains liable on a K unless there is a novation [an agreement b/w Promoter, Corporation and a third party to substitute the corporation for the promoter as the party liable on the contract]

Here, there was no novation - so the promoter remains liable.

Front 12

A man purchases a lot of land on Franklin St. Shortly thereafter, he becomes a promoter for McBar.

The fair market value of the property is $60,000. The promoter sold it to McBar for $70,000.

Is the promoter in trouble? If so, how much does he have to return to McBar?

Back 12

McBar can recover any excess of the fair market value.

Here, McBar can recover $10K from the promoter.

Front 13

What is an issuance?

Back 13

When a corporation can sell its own shares [one way the corporation raises money] [Note: SH selling his shares is not an issuance!]

Front 14

What are issued shares?

Back 14

Number of shares a corporation actually sells

Front 15

What are outstanding shares?

Back 15

Issued shares a corporation has not reacquired [b/c the SH’s are holding them]

Front 16

What are subscriptions??

Back 16

Are signed written offers from subscribers to buy stock in the corporation which are solicited prior to incorporation and to be accepted once the corporation is formed. These are enforceable whether there is a writing or not.

See Card RE NC Specific Rules on Subscriptions

Front 17

When are subscriptions revocable in NC?

Compare with the C/L rule:

Back 17

C/L: Pre-incorporation share subscription is an offer that does not become a contract until the corporation has accepted the offer. Acceptance can be revoked at anytime before this.

NC law:
i. Provides that preincorporation subscriptions are irrevocable for six months after the date made, unless otherwise provided in the terms of the subscription agreement.
ii. Provides post-incorporation subscriptions are enforceable contracts

Front 18

What is Par Value?

Back 18

NC has eliminated the requirement for par value by the BOD. Meaningless in NC.

Par Value: Minimum issuance price [Arbitrary number the Directors agree to]
2. Paying for Par Value Stock with Property: Is acceptable as long as the property is worth the value of the stock

Front 19

Molly the promoter for McBar has an awesome piece of real estate on Franklin Street. Molly the promoter wants to sell it to McBar. Can she?

Back 19

Yes. Molly the promoter can do business with the corporation but she must disclose the material facts of the transaction.

If the promoter doesn’t disclose all material facts it will be liable to the corporation.

Beware a sneaky promoter on the bar exam!!

Front 20

What are preemptive rights?

Back 20

When a corporation proposes to issue additional shares of stock, the current SHs often want to purchase some shares of stock in order to maintain their proportional voting strength. Under certain circumstances, SHs have a preemptive right to purchase a portion of the new issue.

Preemptive rights are not automatic in NC! Must be in the AOI!!

If a corporation has preemptive rights, the BOD may not fix the price/terms of the stocks in such a way to unfairly dilute a SHs interest in the corporation. Principles of fiduciary duty apply.

Front 21

What exactly are shareholders? What do they do?

Back 21

The BOD manages the corporation - but the SHs are the real owners. They are responsible for electing directors and deciding significant matters in corporate management.

The AOI of a non-public corporation may provide for SH management

Front 22

Shareholder Meetings: When are they required?

Back 22

Annually. If one isn't called within 15 months, a court can require one.

Front 23

Who can call a special meeting of the SHs in a private corporation?

Back 23

For private corporations:

May be called by the BOD, the holders of 10% or more of all voting shares, or by other persons so authorized in the AOI or bylaws.

A special meeting called by the holders of 10% or more of voting shares must be held within 30 days.

SHs cannot call a special meeting in a public corporation in NC

Front 24

What is a public corporation?

Back 24

Corp who:

1) Trades stock on nat stock exchange

2) Any corp with more than 500 SHs of record and more than 10 million in assets

Front 25

Where can SH meetings be held?

Back 25

In or outside NC. Specified in bylaws

Front 26

Notice of annual and special meetings to SHs:

Back 26

Not less than 10 days or more than 60 days before the meeting

Sent by mail -- effective when addressed to the SH and deposited at the post office

Notice can be waived in writing or by attendance

Front 27

Molly and Laura own 25% of all shares of McBar Corporation. Molly and Laura call a special meeting of the SHs. What do they need to provide to the other SHs?

Back 27

Notice must state where and when the meeting will be held and all special meetings require the stated purpose of the meeting

Failure to Give Proper Notice: Meeting is void unless the defect is waived in a signed writing at any time or by attending the meeting without objecting to the meeting’s being held

Front 28

How do Shareholders Vote? ****

Back 28

Requires a quorum:

A majority of the votes entitled to be cast must be represented at the meeting, either in person or by proxy. The percentage required can be moved up or down by the AOI or a SH adopted by-law.

NC Statute does not require a minimum quorum. The AOI or bylaws may set a quorum at any level desired (1%-100%).

Once a quorum is reached by the SHs it cannot be broken [different from BOD meeting! People can leave!]

Front 29

How many votes may each share vote at the SH meeting?

Back 29

Absent contrary provision in the AOI - each share gets one vote regardless of class

AOI may specify that some classes of shares get no votes!

Front 30

The SHs of McBar vote to adopt a lease promoter Tom entered into on behalf of McBar corporation. The adoption of the lease will be a fundamental change to the type of business McBar operates. How many votes will be required for this action?

Back 30

Since this is not the election of a director - here is the rule.

A matter is approved if the number of votes FOR exceeds the number AGAINST, unless the AOI or a SH-adopted by-law provides otherwise **

A majority of the shares actually voting is sufficient to authorize the action proposed - abstentions are not counted.

Front 31

The SHs of McBar hold a SH meeting to elect new directors to the BOD. How many votes does Tom need to be elected as a director?

Back 31

Tom needs a Plurality. You need more votes to elect a director than you do to do other business matters.

Top vote-getters are elected (whether they get plurality or not), unless the AOI or SH agreement provide otherwise

Straight Voting: A SH may vote the number of shares he owns for as many persons as there are directors to be elected

Cumulative Voting ** Very highly testable!!

Front 32

SHs may vote their shares through STRAIGHT voting or CUMULATIVE voting when voting for directors. What is cumulative voting?

Back 32

Cumulative voting is a procedure that gives minority SHs a greater opportunity to secure representation of their interests on the BOD.

Cumulative Voting is a procedure that gives minority SHs a greater opportunity to secure representation of their interests on the BOD

There is no right to vote cumulatively unless the AOI allow for it. Affirmative steps must be taken to vote cumulatively: the meeting notice must state cumulative voting is authorized or a SH must declare in the meeting her intention to vote cumulatively. After either announcement, all shares can vote cumulatively.

Only applies to the election of directors!

To determine the number of cumulative votes each SH is entitled to:

Multiply the number of shares owned by the number of directors to be elected. The total number of votes may be divided among the candidates in any manner that the SH desires.

*Only relevant to the election of DIRECTORS!

Front 33

Molly owns 300 shares of McBar. Nine directors are elected at the annual meeting. How many votes does Molly get for the election of the directors? How can she vote these cumulative votes?

Back 33

Molly is entitled to 2,700 votes (300 X 9). She may vote 100 for one candidate and 2,600 for another. She can distribute these votes in any manner she sees fit for election of the directors

Front 34

Which SHs get to vote on voting day?

Back 34

The Record SH Owner on the Record Date less than 70 days before meeting

Exceptions:

Death: SH’s executor can vote the shares

Proxy: Appoint another to vote by signed writing authorizing the other person to vote the shares

Front 35

How can a SH vote by proxy?

Back 35

- Directors cannot vote by proxy! Only SHs!

- A proxy is good for eleven months in NC

-SH can revoke a proxy by:
-SH cannot revoke a proxy coupled with an interest [includes sale of proxy—purchase/option to buy a share]

Front 36

What is a Voting Trust [Never tested]

Back 36

Trustee gets the irrevocable right to vote the shares, but the SH retains all other rights of ownership

Req: (1) written trust doc, (2) copy to corporation, (3) transfer of legal title to trustee in exchange for trust certificates

Limited to ten years

Front 37

What is a voting agreement?

Back 37

Objective: to consolidate votes for control – it’s an agreement b/w SHs to vote their shares as a majority of signers direct or as the agreement otherwise provides. It must be signed by all of the SHs who are to be bound by it.

SHs can agree in advance how they will vote if they have a signed written agreement

Duration: Limited to ten years (but can be extended) **

Specific Performance is the likely remedy (modern trend)

Transferee bound if conspicuously noted on the shares or the transferee knew abt the agreement when he acquired them

Front 38

Which SHs can inspect the books?

Back 38

A SH must be Qualified: Must have owned shares for at least six months or own at least five percent of any class of the corporation’s shares

Absolute right: A qualified SH may inspect AOI, by-laws, minutes of SH meetings and a list of current directors and officers

Limited Right: To inspect other records, a qualified SH must have a proper purpose- related to being a SH (e.g. communicate with other SHs about corporate waste, not to get potential clients) **

Non-Public Corporations: No right to accounting records if it would affect the corporation adversely or involves material inside information

Refusal: SH can get a court order, costs and attorney’s fees

No Strings: AOI and by-laws cannot restrict inspection rights

Front 39

Who can compel a dividend to the SHs?

Back 39

Dividends are Discretionary: A court will not compel a dividend absent a strong showing of abuse of discretion (e.g. board paid itself huge bonuses, but did not pay a dividend)

There is a HUGE (and highly testable) Exception **************

A corporation with less than 25 SHs may be compelled to declare a dividend of one-third of the net profits on the demand of the holders of at least 20% of any class of shares

Front 40

What form can dividends take?

Back 40

Provided funds are available, dividends can be given in cash, property or shares

Front 41

When can a corporation pay dividends?

Back 41

It must fulfill two tests:

Solvency Test

After giving effect to the distribution, it must be able to pay its debts as they become due in the OCB

Ex: if they can’t pay their debtors they cannot distribute $ to the SHs!!

2. Balance Sheet Test:

Assets exceed liabilities!

Front 42

What is a preferred stock?

Back 42

Shares that have a preference usually are entitled to a fixed amt of money (e.g. $5 each year if the preference is a dividend preference, or on dissolution if the preference is a liquidation preference) before the distributions can be made with respect to nonpreferred shares. The right is not absolute though b.c the BOD must still decide to give a dividend

Front 43

What is a participating share?

Back 43

Participating shares have a right to receive in addition to the state preference – so they receive payment twice

Front 44

What is a cumulative share? When do they get paid dividends?

Back 44

If a dividend is not declared by the BOD in a particular year, the right to receive the preference accumulates and must be paid before nonpreferred shares may be paid any dividend

Front 45

Liability for unlawful distributions (dividends) by the BOD

Back 45

Directors – Directors are personally liable for unlawful distributions if they did not exercise due care in authorizing the distribution
a. Directors may rely in good faith on professionals for their information
2. Reimbursement – A director who is liable may seek reimbursement from a SH for the amt the SH accepted knowing the distribution was unlawful

Front 46

What is an appraisal right?

Back 46

A SH who does not approve of a fundamental corporate change in a private corporation (dissenting SH) may have the right to compel the corporation to buy back his shares for fair value if there is no market for those shares [e.g. it’s not publically traded corporation)

Appraisal rights MUST be PERFECTED!

Front 47

How does a dissenting SH "perfect" her appraisal rights?

Back 47

By (1) sending written notice before the vote of intent to seek repayment, (2) abstaining/voting against the change, (3) making a written demand for payment after the vote.

Front 48

How does a corporation amend its AOI?

Back 48

Approval: By the BOD and SHs using regular quorum voting

Adverse Effect of a particular class
-If a particular class is effected adversely by the amendment, the amendment must be separately approved by an absolute majority of that class, even if that class ordinarily has no voting rights ***

Filing: Amended AOI must be filed with Sec of State

Appraisal Rights: Only for SHs who are adversely affected

Front 49

How does a corporation approve a merger with another corporation?

Back 49

1. Approval: By the BOD of both corporations and by and absolute majority of both corporations’ shares

Exceptions:
-No SH approval is req if 90% or more owned sub is merged into a parent or another sub the parent owns (short-form merger)

Effect: Surviving company succeeds to all rights and liabilities of both firms

Filing: Must file Articles of Merger with Sec of State

Appraisal Rights: In a short-form merger there are appraisal rights only for the SHs of the subsidiary corporation = not the parent corporation!

Share Exchange: Like a merger, but only SHs of the target corporation have the right to vote on the transaction and appraisal rights

Front 50

How does a corporation approve a dissolution of the corporation?

Back 50

There are two types of dissolution:

1. Voluntary Dissolution
REQs Approval by the BOD and by an absolute majority of shares

REQ Filing: Must file articles of dissolution with Sec of State

Winding Up: Creditors are paid first – then dissolution preferences
-Balance is distributed pro rata
-Revocation within 120 days after dissolution has been approved

2. Involuntary Dissolution
-Is court ordered

Front 51

Federal Securities Law- Rule 10b-5 ***
What does it cover generally?

Back 51

[Covers misrepresentation (fraud), tipping and insider trading)

Front 52

Federal Securities Law- Rule 10b-5 ***

What is required for a 10b-5 action?

Back 52

A. Plaintiff: Must be buyer or seller of securities

B. Defendant: Can be any person – it does not have to be an insider

C. Materiality: Info a reasonable SH would consider important

D. Interstate Commerce: SEC gets its jurisdiction from the commerce clause! Must be interstate commerce!

E. Statute of Limitations: No more than 1 year after discovery and no more than 3 years after the transaction

F. Scienter ***
1. Defendant must have intended to defraud
2. Negligence is not enough!

Front 53

Sale of Substantially All the Assets Outside the Ordinary Course of Business ***

Back 53

1. If the sale, lease or exchange of substantially all of the corporate assets is outside the usual and regular course of business, it is a fundamental corporate change and special rules are imposed by NC law.

a. Key: Only a fundamental change for the selling corporation

b. NC does not define what constitutes “substantial sale of all assets” but if at least 75% of the corporation’s assets are sold this would apply


c. Req: (1)BOD must propose the transfer (2) SHs must approve it by majority vote of all the shares entitled to be cast, unless the AOI or bylaws require a greater percentage
d. Dissenters are entitled to an appraisal
e. A transfer of assets for less than fair value may constitute a fraudulent conveyance

Front 54

The BOD of McBar pledges a substantial amt of the corporate assets on a mortgage. What result? Tx

Back 54

This is a TRANSFER of substantially all the assets of the the business outside the OCB and it requires compliance with the special rules for transfer of assets.

c. Req: (1) BOD must propose the transfer (2) SHs must approve it by majority vote of all the shares entitled to be cast, unless the AOI or bylaws require a greater percentage
d. Dissenters are entitled to an appraisal
e. A transfer of assets for less than fair value may constitute a fraudulent conveyance

Front 55

How are directors elected to the BOD?

Back 55

Elected by the SHs at the annual meeting

Front 56

How are directors removed from the BOD?

Back 56

By SHs with/without cause unless the AOI provide directors may be removed only for cause.

Note: A Director elected by a class of shares can only be removed by that class!

Front 57

What are the requirements for a BOD meeting?

Back 57

BOD Meetings are required unless all directors consent in writing to act without a meeting

Notice: Only req for a special meeting b/c they are presumed to know when the regular meetings are

Front 58

At a BOD meeting, how many votes do you need? ***

Back 58

Quorum: Need a majority of directors on the board, unless a greater number is required in the articles or by-laws or a lesser number is permitted by the AOI or a SH by-law (minimum 1/3) ***

Note: You can increase the minimum required but you cannot lower it!! Protect the SHs!!

Beware! Someone leaving the director meetings breaks the quorum requirement!

Voting **
-You need the affirmative vote of a majority of the directors present at the directors meeting to pass a resolution [unless the AOI/bylaws req a bigger number]

Directors cannot vote by proxy!! [SH’s can!]

Front 59

What duty does a Director have to the corporation?

Back 59

1) Duty of Care

2) Duty of Loyalty

3) Director cannot USURP a corporate opportunity

4) Not to set up a competing venture

Front 60

Describe the duty of care that a director has to a corporation in NC

Back 60

Director must do what an ordinarily prudent person in that position would do ***

Nonfeasance
-Failure to act/pay ATTN
-Failing to attend board meetings, etc

Misfeasance
-An act by the director that causes the corporation loss

-Business Judgment Rule: The directors are protected from business decisions gone bad [Ex: Tiger Woods bad for Nike]

Front 61

Describe the duty of loyalty that a director has to a corporation in NC

Back 61

Director must act in good faith and in the corporation’s best interest ***

Conflict of Interest Transaction
-Definition: Watch out for situations where a director is on both sides of a transaction. Isn’t automatically bad b/c a corporation can profit from these relationships if they are cut a deal.

NC has Three “Safe Harbors” for a Director who deals with the corporation:
a. Deal was fair to the corporation
b. Deal was ratified by a majority of all disinterested directors or shares (not just those at the meeting) after full disclosure

Front 62

Describe what the three "safe harbors" are for a director who does business with the corporation:

Back 62

NC has Three “Safe Harbors” for a Director who deals with the corporation:

a. Deal was fair to the corporation
b. Deal was ratified by a majority of all disinterested directors or shares (not just those at the meeting) after full disclosure

Front 63

When does a Director or Officer of a Corporation act on "behalf of the corporation?

Back 63

USE AGENCY PRINCIPLES!!

Ex: CEO, CFO, etc. They are “agents” of the corporation and can act on behalf of the corporation

Front 64

When is indemnification of a director or officer required by the corporation?

Back 64

1. If director is completely successful on the merits or otherwise

-Procedural defenses are just fine here

Corporation is req to indemnify the Director for any expenses or costs incurred while serving in his/her capacity AS long as he/she wins!!

Front 65

What does a SH need to do to bring a derivative lawsuit??

**PAST BAR EXAM QUESTION! HIGHLY TESTABLE!!**

Back 65

A SH has standing to bring a derivative lawsuit on behalf of the corporation if the SH: (1) was a SH when the claim arose or became a SH by operation of law from someone who was a SH at that time, and (2) can fairly and adequately represent the interests of the corporation

Even if a SH has standing to bring a derivative suit – she must show that the corporation will not act on its own behalf. In NC, SHs are required to demonstrate this in every case by making a written demand on the BOD to bring the suit. NC requires a demand on the BOD and a demand is never excused in NC.

Front 66

What duties does a majority SH owe to minority SHs??

Back 66

Claims for breach of fiduciary duty are normally brought against directors, involve harm to the corporation, and are brought on behalf of the corporation in a derivative lawsuit.

In close corporations, however, majority SHs also owe a fiduciary duty to minority SHs, and minority SHs may sue majority SHs directly when these fiduciary duties are breached.

Here the majority SHs owed a fiduciary duty to the minority SH b/c it is a closely-held corporation and there is no market for her shares. The transfer they made deteriorated the value of her shares and hurt her.