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93 Cards in this Set

  • Front
  • Back
How do you incorporate a business?
by filing with the secretary of state.
What is an ultra vires action?
act is one not within the express or implied powers of the corporation.
Who can bring an ultra vires action?
ultra vires may be raised in aaction by a shareholder against the corporation to enjoin a legal represenative or through shareholders' suit against officer or director for exceeding their authority or in a proceeding by the state to dissolve the corporation or to enjoin it from transacting unauthorized business.
What is dissenting shareholders appraisal rights?
1. notice and objection--stockholder must file with the corporation before the shareholders' vote written objection to the proposed action stating the intention to demand payment for shares if the action is taken.

2. shareholder must not his/her shares in favor of the proposed action.
What is the procedure for dissenting shareholders appraisal rights?
1. if he action is approved the corporation must notify each shareholder who filed an objection and did not vote in favor of the action that he action has taken effect

1. Notice must state where and when demand for payment must be made and supply the shareholder with a form for demanding payment

Time demand must not be less than 30 days from the mailing of the notice.

Note: within 30 days after receipt of a payment demand, the corporation must pay to each dissenter the amount the corporation estimates to be the fair value of his shares plus interest accrued to the date of the payment
What is the 60 day rule for appraisal proceedings?
If the dissenter may commence a proceeding within 60 days after the earlier of the date payment is made by the corporation by a filing a complaint with the Superior Court.
What is the rule for the sale or transfer of corporation assets?
In general, a transfer can be authorized by the board of directors alone if it does not include all or substantially all of the corporate assets; if it does, shareholder approval will be required unless the transfer is in the usual and regular course of business or falls within some other exception.
What is the all or substantially all test?
The ''substantially all'' part is included to make it clear that the retention of a minimal or nonoperating portion of the assets, such as cash and cash equivalents in an otherwise complete asset sale, will not avoid the requirement of shareholder approval
How can there be an amendment to the articles of incorporation?
1. majority vote to effect a change
(a) board resolution
(b) written notice
(c) vote
2. amendment authorized by majority vote

3. must be filed signed by president or vice presidet and by secretary or assistant secretary and submitted to secretary
What is a direct suit?
a shareholder sues on his or her own behalf to redress an injury to his or her interest as a shareholder.
What are the types of direct suits?
1. compel payment of dividends

2. enforce the right to inspect corporate records

3. protect preemptive rights

4. enfoce the right to vote

5 enforce the right to vote

6. recover for breach of a shareholders' agreement

7. pre-incorporation

8. contract with a shareholder

9. minority shareholders in a closely held corporation who allege wrongful conduct and corruption against the majority shareholders in the corporation
What is a derivative suits?
shareholder sues on behalf of the corporation to redress a wrong to it when the corporation fails to enforce its right
What is Condition Precedent for derivative suits?
contemporaneous ownership

the plaintiff must allege in the complaint that he or she was a shareholder at the time of transaction
What is the demand upon directors for derivative suits?
a shareholder must first attempt to pesuade the board of directors to enforce the corporation right

Note: the complaint must allege "with particularity" the efforts to secure from the board of directors the desired redress of his or her complaint

Note: if demand upon the directors would be futile it will be excused, but reasons must be alleged with particularity in the complaint.
When must the shareholder given a demand for a derivative proceeding?
a written demand has been made on the corporation to take suitable action acnd

2. 90 days have expired from the date the demand was made unless prior to the expiration of the 90 days, the shareholder was notified that eh corporation rejected the demand or unless irreparable injury to the corporation would result waiting for the expiration of the 90 dya period.

3. written demand must be on the corporation to take suitable action, regardless of whether such demand would be futile.
What is a defense to a derivative action?
a derivative action may not be maintained if it appears tha the plaintiff does not fairly and adequately represent the interest of the shareholders similarly situated in enforcing the right of the corporation.
What are the expenses for a derivative action?
1. corporation to pay plaintiff's fees

2. order to plaintiff to pay defendant's reasonable expenses
How is a derivative suit dismissed?
In NC a derivative suit cannot be discontinued or settled without the court's approval.
What is the duty of loyalty?
the fiduciary duty of officers, directors and employees require that they be loyal to the corporation and not promote their own interests in a manner injurious to it.
When may a conflict of interest for duty of loyalty?
1. business dealings with the corporation

2. takes advantage of a corporate opportunity or

3. enters into competition with the corporation
What is the business dealing with the corporation?
a conflict of interest is inherent whenever a director or officer contracts with the corporation to buy or sell goods or services. Such transaction are not void but at most voidable by or behalf.
What is usurpation of corporate opportunity?
fiduciary duty of loyalty prohibits directors and officers from taking for their own benefit any busines opportunity whihc property belongs to the corporation, unless the corporation is first given a chance to pursue the opportunity.
What are the factors for determining corporate opportunity?
1. the business constituting opportunity is closely related to that of the corporation

2. whether the board had expressed an interest in acquiring that the type of business

3. the individual became aware of the opportunity while acting in the capacity of a director or officer and

4. whether the individual used any corporate funds or facilities in discovering or developing the opportunity
What is the Meiselman test for corporate usurpation?
1. functionally related ot the corporation's business or

2. the corporation must have an interest or expectancy in the opportunity.
What is the general rule for competition with corporation?
directors and officers may engage in independent business, but if the independent business competes with the corporation, equitable limitations will apply.
What is the duty of care?
Directors, officers and incorporators of a corporation must perform thier duties in good faith and in ammaner reasonably believed to be in the best interests of the corporation, and with such care as an ordinarily prudent person in a like position would use under similar circumstances.
What is the standard of care under business judgment?
1. the prudent person standard fact finder would consider the individual's skill and sophistication and his familiarity with business

2. a director or officer can be liable for negligently selecting subordinates, but is not liable for the negligence of his ppers unless he participated or was negligent in not dsicovering it.
What is the business judgment rule?
a director or officer who makes a good-faith error of business judgment will not have breached the duty of care.
What are statutory liabilites?
1. improper declaration of dividend

2. purchasing corporation's shares

3. distributions during liquidation

4. Contribution
What is the authority of Corporate Officers?
1. the powers of a corporate officer are like the powers of an agent, either actual or apparent.
What is the power of President?
Preisdent--implied or inherent authority which is not made express by virtue of the bylaws or other regulations. The president has the inherent authority to do any act on behalf of the corporation that is being performed in the usual and ordinary course of buiess.
What is apparent authority of officers?
Apparent or ostensible authority of an officer to do an act is based upon a holding out by the corporation to the 3rd party that the officer has the authority to the act, together with reliance by the 3rd party on the holding out.
What is indemnification for corporate officer or director?
a corporation may indemnify a director, officer, employee or agent of the corporation or persons who serve at its request in any capacity with respect to any expenses incurred threatened, pending or competed action, whether civil criminal adminstrative or investigative by reason of the fact that he or she is or was a director, officer employee or agent of the corporation.

Note: indemnification is mandatory if the director, officer employee or agent was successful on the merits of the action

Note: indemnification shall not be provided for any person as to any matter in which he is adudged liable for negligence or misconduct in the performance of his duty to the corporation, unless the court specifically holds him entitled to indemnification.
What is a voting trust?
a voting trust involves a transfer of legal title to the shares to a trustee who votes them for a specified period according to the trust.
What is the duration of a trust?
Voting trust is limited 10 years, any of the parties may extend the trust for one or more additional periods exceed 10 years
What is shareholder voting agreement?
shareholder voting agreement are contracts designed to ensure the shareholder will vote in concert with regard to issues designated by the agreement.
What is the necessary form of a proxy agreement?
The appointment of a proxy has traditionally been made by a written document (''appointment form'') signed either personally by the shareholder or by the shareholder's duly authorized attorney-in-fact
How is a proxy vote irrevocable?
An appointment of a proxy is revocable by the shareholder unless the appointment form conspicuously states that it is irrevocable and the appointment is coupled with an interest
What is the duration of a proxy vote?
11 months
What are shareholder preemptive rights?
preemptive rights are the rights of existing shareholders to acquire un-issued or treasury shares in the corporation, or corporation, or options or rights in proportion to their holdings of the original shares
What is the general rule for preemptive rights?
Shareholders have no preemptive right excepts to the extent provided in the articles of incorporation.
Who is a promoter?
a promoter is one who causes a corporation to be formed, organized and financed.
What is a promoter's liability for breach of fidcuiary duty?
a corporation's action for the breach of the promoter's fiduciary duty, the corporation may either avoid the transaction or may hold the prmomoters liable for the secret profits
Was is the liability of a promoter?
the promoter is personally liable on any contract he or she entered into in behalf of the yet nonexistent corporation, whether the contract is made in the promoter's name or in the corporation's name, unless the circumstances demonstrate that the other party looked only to the corporation for performance.
What is the liability of the corporation for pre-incorporation agreements?
a corporation is not liable on any pre-incorporation agreements its promoters entered into on its behalf, unless it assumes liability by its own act it comes into existence

Note: a pre-incorporation contract may be adopted by the corporation either by an express resolution of the board of directors, with full knowledge of the terms of the contract or by accepting the benefits.
What is de jure corporation?
a corporation organized in compliance with the statute.
What is de facto corporation?
statutory compliance is insufficient, a de facto corporation may still have been formed if a good faith colorable attempt was made to comply with the incorporation statute, and if hte corporate principals in good faith acted if they were a corporation
What is piercing the corporate veil?
A court may disregard the corporate structure and hold shareholders or affiliated corporations liable on corporate obligations.
What is the general rule for piercing the corporate veil?
Corporation will be looked upon as a seperate legal entity however the courts will disregard the corporate form and "pierce the corporate veil" when necessry to prevent fraud or achieve equity.
What are the elements of the instrumentality rule?
1. complete domination of the corporation by the defendant

2. misuse by defendant of his position of control to commit wrong or do an unjust act and

3. proximate cause between the misue of defendant's control and the plaintiff's injury
What are the factors for piercing the corporate veil?
inadequate capitlization

failure to comply with corporate formalities

excessive fragmentation of a single enterprise into seperate corporations.
What is a quorum?
a majority of the shares entitled to vote at a meeting constitutes a quorum; if a transaction must be voted on by a class, a majority shares in that class constitutes a quorum.
What are grounds for judicial dissolution?
dissolution because deadlock is available if there is a deadlock at the directors' level but only if

1. the shareholders are unable to break the deadlock

2. either irreparable injury to the corporation is being threatened or suffered or the business and affairs "can no longer be conducted to the advantage of" the shareholders.
How does a shareholder waive notice of the meeting?
1. A shareholder may waive any notice required for a meeting by a written waiver signed by the shareholder and delivered to the corporation, and a waiver of notice by all of the shareholders entitled thereto dispenses with the requirement of notice and renders valid a meeting held on inadequate notice or without any notice whatsoever

2. A shareholder's attendance at a meeting in person or by proxy waives an objection to the holding of the meeting unless the shareholder states his objection at the beginning of the meeting. Such attendance also waives objection to the consideration of any particular matter at the meeting that is not within the purposes described in the notice of meeting unless the shareholder states his objection before that particular matter is voted upon
Does a controlling shareholder owe a fiduciary duty to minor shareholders?
Yes,''In North Carolina it is well established that a controlling shareholder owes a fiduciary duty to minority shareholders
What is director deadlock for dissolution?
A shareholder must show the existence of three conditions to establish a claim for involuntary dissolution on the basis of a deadlock by the directors: (i) the directors or those in control of the corporation are deadlocked in the management of the corporate affairs, (ii) the shareholders are unable to break the deadlock, and (iii) irreparable injury to the corporation is threatened or being suffered, or the business and affairs of the corporation can no longer be conducted to the advantage of the shareholders generally, because of the deadlock
What is shareholder deadlock?
1. Involuntary dissolution may be ordered if the shareholders are deadlocked in voting power and have failed, for a period that includes at least two consecutive annual meeting dates, to elect successors to directors whose terms have expired.
What is rule of waste for judicial dissolution?
The statute provides as a separate and independent ground for involuntary dissolution in a shareholder suit that ''the corporate assets are being misapplied or wasted
Can there involuntary dissolution of a corporation to protect the interest of another shareholder?
The statute provides as a separate and independent ground for involuntary dissolution in a shareholder suit that ''the corporate assets are being misapplied or wasted
What does the complaining shareholder must show to bring a involuntary dismissal?
To obtain relief, the complaining shareholder must prove that: (1) he had one or more substantial reasonable expectations, known or assumed and concurred in by the other shareholders, (2) which have been frustrated, (3) without his fault and beyond his control, and (4) under all of the circumstances, including the interests of others involved with the corporation, he is entitled to some form of equitable relief
What is the general for stock subscription?
A subscription, sometimes called a subscription agreement, is a promise or a contract to purchase shares of a corporation from the corporation itself
How are stocksubscription enforcable?
A subscription agreement is enforceable whether or not there is a writing signed or a record authenticated by a party against whom enforcement is sought
What are three things needed for stock restriction?
1.First, it must be established for a purpose permitted by the statute. Restrictions may be adopted to maintain the corporation's status when it is dependent upon the number or identity of its shareholders (for example, a Subchapter S corporation or a professional corporation), to preserve exemptions under state and federal securities law, and for any other reasonable purpose

2.Second, in addition to being adopted for a reasonable purpose, the restriction must not be unconscionable under the circumstances,4 which means all of the facts and circumstances including those that may have changed since its adoption

3.Finally, the restriction must be noted conspicuously on the front or back of the share certificate or on the information statement describing uncertificated shares.
What is a subscription agreement?
a subscription agreement is a promise by a prospective shareholder to buy shares in the corporation
What is watered stock?
novel watered stock provision, which imposed liability upon the original holders of shares issued for consideration that ''substantially and unfairly diluted the holdings of other shareholders,'' and which then defined the other ''shareholders'' to include anyone who purchased shares ''in accordance with a plan already entertained by the promoters ... without adequate disclosure'' of the dilution
Under Ultra Vires, what are the actions that can be brought?
1. Suit by Shareholder to Enjoin Act
2. Suit by Corporation Against Officers or Directors

3. Suit by state to enjoin act or dissolve corporation
When can a suit disregard a corporate entity?
NC follows the "instrumentality rule" a corporation which exercises actual control over another, operating the latter as a mere instrumentality or tool, is liable for the torts of the corp.
What do you need to establish for a case of piercing the corporate veil under the instrumentality?
1. complete domination of the corporation in question by the defendant

2. misuse by the defendant of his position, to commit a wrong or to do an unjust act; and

3. proximate cause between the misue of defendant's control
What are the factors to support piercing the corporate veil?
a. alter ego
1. shareholders treat the corp assets as their own

2. parent subsidary corpoartions

3. affiliated corporations

b. Inadequate capitalization

c. fraud or evasion of statutory provisions
Who is liable under the piercing corporate veil?
a. Active-Iactive Test only the shareholders who were active in the management or operation of the business will be held personally liable
What is stock subscription agreement?
Promises for subsribers to buy stock in the corporation.
What is the enforceability of subsription agreement?
To be enforceable, the subscription agreements need to be in writing. The agreement is subject to the Statute of Frauds contained.
What is the Revocation and Acceptance?
1. Common Law-preincorporation share subscription is an offer to the corp. does not become a K until the corp. has accepted the offer. Until acceptance the ofer may be revoked.

2.Irrevocable by statute--preincorporation subscriptions are irrevocable for 6 months after the date made, unless otherwise provided in the terms of the subsription agreement or unless all subscribers consent to revocation.

When a stock subscription is entered after incorporation, it is an enforceable contract obligating the corporation to issue and the subscriber to purchase the shares in question.
What are the requirements for transfer of stock?
1. delivery of the certificate

2. endorsement of the certificate by the registered owner.

Note: a written assignment of the stock certificate would be effective.
Promoters' liability can arise in which situations?
1. breach of fiduciary duty

2. fraud or misrepresentation

3. obtaining unpaid or "bonus" stock
What are the theories for promoter liability?
1. that the promoter has impliedly warranted his authority to act for the corporation

2. that he has impliedly warranted that the corporation would be formed and would adopt the contract or

3. that he should be viewed as a guarantor of the corporation's performance.
Who generaly controls the corp's day-to-day affairs?
The board of directors and the appointed officers.
Who may call special meeting?
1. by the board of directors

2. by the holders of 10% or more of all voting shares

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

Note: exception no special meeting for public corporation.
What are the requirements for notice of a special or annual meeting?
notice must be given not less than 10 days or more than 60 days b/f meeting
What is a proxy vote?
a shareholder may vote his shares either in person or by appointing a proxy in writing signed by the shareholder or his attorney.
What can be the form of a proxy?
1. telgram, telex, or facsimile. A photographic reproduction.
What is the duration of a proxy?
valid for 11 months.
What is an irrevocable proxy?
A proxy is irrevocable only when it conspicously states that it is irrevocable, and it held by:

1. creditor
2. a person who has purchaed or has agreed to purchase the shares that are the subject of the proxy

3. a pledgee

4. an employee whose employement k requires a proxy

5. a party to avlid voting agreement
What is a voting trust?
a voting trust is an agreement of shareholders under which all the shares owned by the parties to the agreement are transferred to a trustee, who votes the shares and distributes the dividends in accordance with the provisions of the voting trust agreement.
What are the requirments for a voting trust?
IN exhcange for the shares transferred to this trustee, the trust issues voting trust certificates registered in the names of the original shareholders.

Note: voting trusts are generally transferable
What is the duration of a voting trusts?
10 years.
What are the requirements for restrictions on transfer of stock?
1. restriction must be placed in either articles or bylaws

2. restriction must be
a. be for a "reasonable purpose

b. appear conspicuously on the stock certificates; and

c. not be unconscionable under the circumstances
What is enforceability of transfer stock restriction?
1. the restriction is noted conspicuously on the stokc certificate or

2. she has received actual written notice of the restictions
What is preemptive Rights?
when the corp. proposes ot issue additional shares of stock, the current shareholders often want to purchase some shares of stock in order to maintain their proportional voting strength.

Note: corps formed after July 1, 1990 there are no preemptive rights unless they are xpressly granted in the articles of incorporation.
What are the two types of suits that can be brought by a shareholder?
1. direct suit

2. derivative actions
What is a direct suit by a shareholder?
a breach of a fiduciary duty owed to the shareholder by an officer or director of a corp.
What are the qualifications for a derivative action?
1. shareholder must own stock (1) reciept by operation of law, (2) continuing wrong theory

2. fair and adequate representation interest of corp

3. Universal demand requirment-written demand on the board of directors "to take suitable action."

Under a deritative suit, what are the waiting periods
1. 90 days after written demand unless "irreparable injury"

2. must be good faith after reasonable inquirty