Texas Bar Exam - Corporations

Front 1

When does de jure corporation exist?

Back 1

A de jure corporation exists if the articles of incorporation are filed with the Secretary of State

Front 2

What does a de facto corporation exist?

Back 2

1. There was a good faith attempt to to incorporate (i.e. comply w/ the statutory requirements)

2. It has been conducting business in its corporate name; and

3. Existing corporate law provides for incorporation

Front 3

What is a good-faith attempt to incorporate?

Back 3

At a minimum, it entails filing articles of incorporation

Front 4

What is supposed to happen during a corporation's initial organization meeting?

Back 4

The working structure of the corporation is created

This may includes electing members of the board, adopting bylaws, electing officers, issuing initial shares, fixing minimum sotkc prices

Front 5

What type of name must a corporation use?

Back 5

"Corporation"
"Company"
"Incorporated"
"Limited"

(or an abbreviation of these - Ltd, Inc, etc)

Must also refrain from using a corporate name likely to be confused with the name of another domestic or foreign corporation

Front 6

How is stated capital of a corporation determined?

Back 6

By the sum of:

1. the par value of all shares issued with a par value;
2. the consideration fixed by the corp. of all shares issued w/o a par value; and
3. All other amounts transferred to stated capital

Front 7

What is an assumed name?

Back 7

The name under which a business operates or by which it is commonly known

Front 8

Is an assumed name certificate required to be filed?

Back 8

Yes

The certificate must be filed in the SOS's office or the county clerk's office where the principal place of business is located

Can be called D/B/A, "doing business as"

Front 9

What is a corporation's tax effect?

Back 9

1. C Corporation - double taxation applies (corporate income is taxed & an individual SHs pay income tax on the dividends)

2. S corporation - receives pass-through tax treatment (corporation's income or losses are divided among and passed through to its shareholders)

Front 10

What happens when a corporation fails to pay taxes?

Back 10

The corporation may be involuntarily dissolved by the SOS for failure to pay franchise taxes

Directors and Officers will be personally liable

Front 11

What are the consequences for a foreign corporation that fails to obtain a certificated to conduct business in Texas?

Back 11

The foreign corporation will not be able to sue anybody in Texas courts

However, the foreign corporation can be sued by others in Texas courts

The failure will not impair the validity of any contract or other corporate act

Front 12

When will a Texas court "pierce the corporate veil?"

Back 12

1. Corporate formalities have been ignored

2. Corporation is undercapitalized; or

3. Corporation was formed to encourage a fraud or avoid obligations

Front 13

What happens when the court pierces the corporate veil?

Back 13

The shareholders who were active in the management of the business will be held jointly and severally liable for the full amount of the claim

Front 14

What rights does a creditor of a corporation have?

Back 14

1. Attempt to pierce the corporate veil

2. Enforce a corp's contract claim for unpaid stock;

3. Recover against watered stock;

4. Demand that the rights of creditor-shareholders be subordinated; and

5. Initiate proceedings to dissolve an insolvent corporation

Front 15

What is a promoter?

Back 15

A promoter undertakes to form a corporation

Front 16

What are the duties of the promoter?

Back 16

A promoter is bound to act in the best interests of all the investors and not to conceal from them any facts materially affecting the value of the property for sale

Front 17

What duties do multiple promoters have amongst themselves?

Back 17

They are deemed to be joint venturers and thus have a fiduciary duty to one another and an obligation of full disclosure

Front 18

How many directors are need to constitute a board of directors?

Back 18

A board may consist of one or more members

Front 19

When may a director be liable for insider trading?

Back 19

Where he trades on the basis of inside information that he has

Front 20

How can a director or officer be liable for his/her actions in the management of a corporation?

Back 20

If he breaches the duty of due care to the corporation, he is liable for the actual damages his actions caused the corporation

Possible exception - business judgment rule

Front 21

What is the business judgment rule?

Back 21

Under the business judgment rule, a director will not be held liable simply for a bad business judgment absent fraud or illegality

Front 22

Can a director receive a salary?

Back 22

YES

As long as a majority of the directors establish a reasonable compensation for the services of all directors

Front 23

What type of duty of loyalty does a director owe his corporation?

Back 23

A director owes a fiduciary duty to his corporation, this includes:

1. Duty to inform corp of a business opportunity he reasonably believes the corp would be interested in pursuing

Front 24

When will a director's personal transaction with the corporation be set aside?

Back 24

If the transaction is deemed unfair, it will be set aside

If it is fair and approved by a majority of the disinterested board members, it will be upheld

Front 25

What is fairness determined when dealing with a director's personal transaction with the corporation?

Back 25

Fairness is determined by the amount of consideration, corporate need, financial position of the corporation, existence of alternatives, and disclosure

Front 26

What is a director's duty of care?

Back 26

Duty of care governs the acts of a director in managing a corporation's affairs

Front 27

What does a director's duty of loyalty cover?

Back 27

This governs the acts of the director in managing the corporation's funds and employees

Front 28

When is a transaction between a corporation and a director not a violation of the director's duty of loyalty?

Back 28

1. Material facts are known to the board and the board in good faith authorizes the transaction by a vote of the majority of the disinterested directors;

2. Material facts are disclosed to the shareholders who then vote to approve the transaction in good faith;

3. The transaction is fair to the corporation at the time it is authorized or ratified by the board, a committee, or the shareholders

Front 29

How is a close corporation managed?

Back 29

It can be managed by a board of directors or by a shareholder agreement

(if it's managed by SH agreement, the SHs are liable for managerial acts as a director would be)

All SHs of an existing corporation must execute the SH agreement

Front 30

What is a close corporation?

Back 30

A few people who hold stock of corporation and there is no readily market for the stock

Example: small mom and pop business

Front 31

When is a corporation eligible to make the "S Corporation" on its tax return?

Back 31

1. Have fewer than 75 individual shareholders;

2. May not have shareholders who are nonresident aliens or certain artificial entities

Front 32

What is the role of the board of directors in the corporation?

Back 32

They set policy

They DO NOT engage in the day to day handling of the business

Front 33

What is the role of the officers in a corporation?

Back 33

They run the business

Front 34

What is the role of the shareholders in a corporation?

Back 34

In a normal corporate setting, the shareholder is just an investor

They don't participate in the business directly

They are a limited partner unless they hold another role (board of director, officer)

Front 35

Under what circumstances will a director be held personally liable?

Back 35

1. Voting for dividends in violation of the articles of incorporation or the TBCA;

2. Voting for a loan to directors or officers that cannot "reasonably be expected to benefit, directly or indirectly, the corporation;" or

3. Beginning business before receiving consideration of at least $1000 for the issuance of stock

Front 36

When may a board of directors declare a dividend?

Back 36

The declaration of a dividend is within the discretion of the board of directors

Front 37

When is the board prohibited from declaring a dividend?

Back 37

1. When the corporation is insolvent; or

2. When the corporation has or will have net assets less than zero at time of distribution or immediately thereafter

Front 38

Director liability for improper declaration of a dividend

Back 38

If a director votes for a dividend when the corporation is insolvent, he will be jointly and severally liable to the corporation unless he relied, in good faith, or inaccurate financial statements

Front 39

When may dividends be revoked?

Back 39

Cash dividends - revoked if the declaration itself was illegal

Stock dividends - may be revoked at any time

Front 40

May a corporation indemnify officers and directors?

Back 40

It depends on the situation

1. Indemnification is mandatory if he wins/prevails

2. Indemnification is prohibited if he willfully or intentionally engaged in misconduct (e.g. acted on a whim)

3. Indemnification is optional when it is not mandatory or prohibited

Front 41

What procedures must be followed to hold a director's meeting?

Back 41

Notice of a REGULAR directors' meeting is not required unless specified by the by laws

Notice of a SPECIAL is required

Front 42

What may happen if the director fails to receive any required notice?

Back 42

The action taken at the meeting may be invalidated

However, if that director attends the meeting, he waives his notice argument unless he attends simply to object to the proceeding

(the director may act only if there is quorum (majority) present

Front 43

When may directors act without a meeting?

Back 43

If all the directors unanimously agree, in writing, to act without a meeting

Front 44

How and where can meetings occur?

Back 44

In addition to the standard in-person (office) meeting, the directors may hold meetings by conference call or any other communication device that permits all of the directors to hear one another

Front 45

Can directors vote by proxy?

Back 45

NO

Directors are NOT permitted to vote by proxy at a director's meeting

Front 46

Who may call a special meeting?

Back 46

1. The board;

2. 10% of voting shares; or

3. Others provided by in the articles

The meeting must be for a proper shareholder purpose (e.g. to remove a director)

Two days notice is required unless waived

Front 47

What must a director do to register his dissent on a resolution?

Back 47

1. Have his dissent entered into the minutes of the meeting;

2. File a written dissent before the meeting adjourns; or

3. File a written dissent by registered mail after the meeting adjourns

(If he doesn't do either option while present at the meeting, he is deemed to have assented to the resolution)

Front 48

What is an ultra vires action?

Back 48

An action by the corporation that exceeds its powers

Front 49

Who may raise an ultra vires issue?

Back 49

1. A shareholder may raise it to enjoin the corporation from doing the ultra vires act; or

2. The attorney general may raise it to dissolve the corporation

Front 50

Who is liable for an ultra vires act?

Back 50

The corporation may sue the officers and directors for damages resulting from any ultra vires act

Front 51

What are the authorities of officers?

Back 51

Same as directors

Officers are agents of the corporation and can bind the corporation by acts taken within their authority

Front 52

Where to do officers get their authority to act on behalf of the corporation?

Back 52

Authority may be:

1.Actual - given in articles, bylaws, or board resolution; or

2. Apparent - corp holds its officer out as having authority so 3rd parties believe the authority exists and rely on it

3. Inherent/Implied by virtue of their office
* Pres can enter into K's and act in the ordinary course of business
* Secretary can keep records
* Treasurer can maintain funds

Front 53

When may an officer be removed by the board of directors?

Back 53

Whenever the board decides that that course of action would be in the best interests of the corporation

Front 54

What type of authority does an officer need to hire an employee?

Back 54

The authority to hire generally stems from an explicit grant of power by the board

In absence of the grant, an officer may have implied authority if the hiring was routine

Front 55

Can the directors appoint the officers of the corporation?

Back 55

YES

The board has the right to appoint the corporate officers and to pay them a reasonable salary unless the articles or bylaws provide otherwise

Front 56

May officers authorize loans to other directors?

Back 56

The loan is permitted, if the loan is reasonably expected to benefit the corporation either directly or indirectly

However, under Sarbanes-Oxley, a publicly traded company may not make loans to executives unless the corporation is in the business of making loans and then these loans may not be more favorable than to the public

Front 57

When are shareholder voting agreements valid and effective?

Back 57

1. It's reasonable;

2. A copy of the agreement is placed a the registered office of the corporation

3. The agreement is used to maintain control and not used to perpetrate a fraud

Front 58

What is the proper procedure for issuing stock?

Back 58

1. If board sets a stated value for the shares, the shares must be issued at an amount equal to or greater than the state value - otherwise there is watered stock

2. Shares may be issued in exchange for any benefit as long as full consideration has been received before issuance

Front 59

What items may the board receive in exchange for issuing stock?

Back 59

Cash
Promissory notes
Discharge of debt
Property
Services already rendered
Services to be rendered in the future

Front 60

What does the board need to do if it issues stock in exchange for consideration other than money?

Back 60

The board must place a value on the consideration received

Front 61

When are restrictions on the transfer of stock valid?

Back 61

If:

1. The restrictions do not unreasonably restrain or prohibit transferability;

2. The existence of the restrictions is adequately disclosed by notation on the certificate; and

3. The restrictions are set forth in the articles or bylaws of the corporation

(The SH must consent before restrictions on the transfer of those shares may be imposed by the articles or bylaws)

Front 62

What obligations and liabilities is the surviving corporation responsible for after a merger?

Back 62

responsible for all the obligations and liabilities of each constituent corporation

Front 63

What is common stock?

Back 63

Shares of common stock do not have preferential rights

(compare with preferred stock which gives a SH a certain priority or preference over other shareholders)

Front 64

What is preferred stock?

Back 64

Preferred stock gives a SH a certain priority or preference over other SHs.

There are two types of preferred stock: cumulative and participating preferred stock

Front 65

What is cumulative preferred stock?

Back 65

SH receives past dividends before any cash dividends are paid on common stock

Front 66

What is participating preferred stock?

Back 66

The SH is entitled to additional dividends beyond its stated dividend after the common stock dividend has been paid

Front 67

What is treasury stock?

Back 67

Shares issued, repurchased by corporation, and sold again

Treasury shares cannot be voted at any shareholders' meeting

The corporation may cancel all or any part of its treasury shares by resolution of the board

Front 68

How much can treasury shares be sold for?

Back 68

Treasury shares may be sold at any price fixed by the board.

Front 69

What is watered stock?

Back 69

Stock is "watered" when the board sets a stated value (par value) for shares of stock and the stock is sold at a price lower than the stated value

Front 70

Who is liable for watered stock?

Back 70

The original subscriber that purchased and probably the director who knowingly authorized the issuance are liable.


Assignees, transferees, fiduciaries of the original subscriber nor pledgees are liable

Front 71

What are subscription agreements?

Back 71

Written offers to buy stock from a corporation

The subscription agreement is a continuing offer that becomes an enforceable contract ONLY when accepted by the corporation

Front 72

When can a pre-incorporation subscription agreement be revoked

Back 72

A pre-incorporation subscription by third party's cannot be revoked for six months, unless the subscription provides otherwise, or unless all subscribers agree

Front 73

When is a post-incorporation subscription revocable?

Back 73

A post-incorporation subscription is revocable until acceptance

Front 74

When does acceptance of subscription occur?

Back 74

When the Board accepts

The Board's call for payment must be uniform within each class or series of stock

Front 75

When do subscribers become SHs of the corporation?

Back 75

Only after paying for the shares

Front 76

When does a shareholder have a right to inspect corporate books and records?

Back 76

1. Been a shareholder of record for at least six months; or

2. Own at least 5% of the outstanding shares;

3. The court allows the SH a right of inspection upon a showing of proper purpose (this applies to any SH)

SH must give written demand to the corporation

Front 77

When can a majority shareholder sell his interest in the corporation?

Back 77

Majority SH can sell his stock to anyone except a known or suspected corporate looter

A corporate looter is one who seeks control of the corporation for the purpose of liquidation or other misuse of its assets)

Front 78

What are preemptive rights?

Back 78

The rights to purchase proportionate shares to maintain the same proportionate share of voting interest and distributions made by the corporation

Front 79

Define preemptive rights

Back 79

Preemptive right are the rights of existing SHs to acquire additional unissued or treasury shares, options, or rights in proportion to their holdings of the original shares

Front 80

Do shareholders in Texas corporations have preemptive rights?

Back 80

1. If the corporation was formed after 9/1/2003, a SH does not have preemptive rights unless the articles or board resolution provide otherwise


2. If the corporation was formed before 9/1/2003, a SH has preemptive rights unless the articles or board resolution provide otherwise

It's important to note that SHs do not have preemptive rights in shares issued for non-cash consideration

Front 81

Can shareholder agreements affect the management of the corporation?

Back 81

Generally no

Front 82

What is a shareholder's liability for corporate debts?

Back 82

Generally there is no liability of a SH for corporate debts - exceptions:

1. SH is an alter ego of the corp (funds are commingled and SH does not treat the corp as a separate entity);

2. Corp is undercapitalized (i.e. not enough "insurance"); or

3. The corp fails to provide at least $1,000 in capitalization, or reasonable adequate capital for the corps prospective liabilities

Front 83

What is a shareholder's fiduciary duty?

Back 83

SHs generally may act in their own personal interest and have no fiduciary duty to the corporation or their fellow SHs

Front 84

When is a shareholder entitled to vote on a matter presented at a meeting of shareholders?

Back 84

General rule - each outstanding share, regardless of class, is entitled to one vote on each matter presented at the meeting

Exception - the articles can provide for more or less than one vote per share or limit or deny voting rights to the holder of shares of any class or series

Front 85

How can sole management rights be invested in one shareholder of a corporation?

Back 85

When the SH gets acquires an amount of voting stock sufficient to obtain a majority or by issuing nonvoting stock to all other SH

Front 86

What is cumulative voting?

Back 86

It allows shareholders with a certain number of shares to get representation on the board

Cumulative voting increases minority participation on the board of directors

Front 87

How is cumulative voting implemented?

Back 87

The number of shares owned by a SH is multiplied by the number of directors to be elected

The result represents the number of votes the SH can cast for one, or more than one, director to be elected

Front 88

Cumulative voting formula

Back 88

((voting shares present) x (# of Directors desired to be elected)) / (# of directors to elected + 1) +1 = shares required to elect a given number of directors

Front 89

When is cumulative voting in Texas?

Back 89

After 9/1/2003, cumulative voting is not permitted by statute, unless permitted in the articles of incorporation

Front 90

What is the minimum number of shares that must be voted for a resolution at a shareholder's meeting to be valid?

Back 90

A simple majority of the issued and outstanding shares represented at the meeting by the SHs personally or by proxy

Front 91

What is a proxy?

Back 91

This is where a shareholder grants another person the power to vote his shares at the meeting

Front 92

What is the duration of a proxy?

Back 92

1. SH may place a time limitation on the duration of the proxy;

2. A proxy is automatically invalid after 11 months from the date of its execution, unless an extended duration is provided for in the proxy;

Front 93

When is a proxy revocable?

Back 93

A proxy is revocable unless the proxy conspicuously states that it is irrevocable AND the proxy is coupled with an interest

Front 94

What is a derivative suit?

Back 94

A suit brought against the corporation by the SHs and any recovery is on behalf of the corporation

Front 95

Why would a shareholder bring a derivative suit?

Back 95

1. To enforce a corporate cause of action when the corporation has not sought to do so;

2. To hold the officers and directors of a corporation personally liable for losses from resulting from ultra vires acts

Front 96

What are the conditions required for bringing a derivative suit?

Back 96

1. Standing;
2. Demand;
3. Pleading requirements after rejection;

Front 97

Who has standing to bring a derivative suit against the corporation?

Back 97

1. A SH that was a SH at the time of the act or omission complained of; OR

2. A person that became a SH by operation of law (inheritance, devise) from someone who was a SH at the time of the act or omission

The SH must fairly and adequately represent the interests of the corp in enforcing its rights

Front 98

What are the demand requirements for a derivative suit?

Back 98

1. SH must make written demand on the Board that the corp should sue and it must set forth w/ particularity the subject matter of the claim;

2. SH may not file a derivative suit until 90 days after a demand has been made (unless the corp rejects the demand sooner or the delay would cause irreparable damage)

Front 99

What must the SH's petition say if the derivative suit is commenced?

Back 99

The petition must show that the decision was not made in the corporation's best interest by a disinterested majority of the board

Front 100

What must the Board do to pass a fundamental corporate change?

Back 100

1. Adopt a resolution; AND

2. Give written notice to shareholders, who must approve the change by 2/3 vote of all shares entitled to vote, unless otherwise specified in the articles

(If the change is a merger, the surviving corporation does not have to conduct a vote)

Front 101

What constitutes a fundamental corporate change?

Back 101

1. Amendments to the articles
2. Merger
3. Consolidation
4. Share exchange
5. Transfer of assets outside the ordinary course of business which will cause corp's demise
6. Voluntary dissolution

Front 102

Will a fundamental corporate change cause an officer or director to violate his duty of loyalty to the corporation?

Back 102

Not if the change is deemed fair to the corp or are thereafter duly approved by disinterested voters

Front 103

What is a dissenting shareholder's right of appraisal?

Back 103

To perfect this right, the dissenting SHs must:

1. File written notice of objection to the fundamental business change before the shareholders vote.

2. Include an intent to demand payment;

3. Abstain or vote against the proposed change

4. After the vote (w/in 20 days of notification by the corp) they must make written demand to have their interests bought out

Front 104

How can a SH, dissatisfied with the terms of a merger or consolidation or a sale of assets not within the normal course of business, compel the corporation to buy his shares?

Back 104

The shareholder must:
1. file a written objection w/ the board prior to the vote;
2. vote against the fundamental corporate change; and
3. Within 10 days after the corp notifies the SH of the adoption of the change, demand that he be paid his fair value of the shares

The corp has 20 days to accept the SH's estimate of the fair value

if both parties agree within 30 days, the corp has 90 days to pay

If the parties cannot agree, the SH must bring suit against the corp within 60 days of the vote

Front 105

Can a dissolved corporation be held liable for any claim existing on liability incurred prior to dissolution?

Back 105

YES

Claims existing and liabilities incurred prior to dissolution remain viable for a period of five years

Front 106

What is a professional corporation and association?

Back 106

The Professional Corporation Act and Professional Association Act allow professionals, attorneys, doctors, etc. to obtain tax advantages of ordinary business corporations (e.g. pension plans, deferred income plans)

Physicians must form professional associations while other professional who are prohibited from incorporating under the TBCA are allowed to incorporate under the Professional Corporation Act

Front 107

What is the liability of a shareholder in a Professional Corporation?

Back 107

1. Only the individuals who are licensed in the profession may be shareholders

2. Professional Services * personally liable for malpractice
* not personally liable due to acts of ancillary personnel unless under direct supervision
* not personally liable for acts of other professionals

Non-professional services - SH is generally not liable but the corp is

Front 108

Are members of an unincorporated association liable for the actions of other members?

Back 108

Generally no

(Generally only exhorting others to violence can bring liability)

Front 109

Can a professional association engage in a business other than the purpose for which it was formed?

Back 109

NO

For example, a professional association formed for medicine cannot engage in the practice of law

Front 110

What benefit is there in forming a professional limited liability company (PLLC)?

Back 110

A PLLC generally insulates members from individual liability for the negligent acts of other members

Front 111

Is a shareholder in a professional corporation liable for the malpractice of other shareholders?

Back 111

Generally not

Front 112

For what purpose may a professional corporation be formed?

Back 112

Solely for the purposes of providing professional services (legal services), that cannot be rendered without a license

Front 113

Who may be a shareholder in a professional corporation (PC)?

Back 113

Only licensed professionals, e.g., attorneys, doctors

Front 114

What is limited liability company (LLC)?

Back 114

An LLC is statutory entity that offers flexibility, limited liability, and tax advantages

Flexibility - it can be managed like a partnership w/ members running it or run like a corp with managers running it

Tax advantages - no double taxation like a corp because it's taxed like a partnership

Front 115

What are some restrictions on LLCs?

Back 115

1. It can only have a limited number of investors;

2. Cannot have foreign investors

Front 116

What must the articles of incorporation of an LLC have in order to comply with the Texas Limited Liability Act?

Back 116

1. The name of a the limited liability company must contain the words or abbreviations "Limited Liability Company"; "Limited Company"; "L.L.C." "LLC"; "L.C."; "LC"

2. It must state the duration of the LLC. The duration may be perpetual.

3. It must state the purpose of the LLC. The purpose may be "for any legal purpose"

Front 117

Are "charging orders" effective against a member's interest in an LLC?

Back 117

Yes

The member's interest will be charged by the judgment creditor for the amount of the unpaid judgment. However, this does not confer any control to the creditor

Front 118

Are member of an LLC liable for the malpractice of other members?

Back 118

NO