Corporate Law Exam Review

Flashcards cover major doctrines and rules in corporate formation, governance, securities, shareholder rights, mergers, dissolutions, and LLC basics.

Who is considered a promoter in corporate formation?

A person who undertakes activities such as procuring capital or entering contracts to bring a corporation into existence.

When is a promoter personally liable on pre-incorporation contracts?

When the promoter knowingly acts on behalf of a corporation before it exists, unless a later novation releases the promoter.

What fiduciary duty does a promoter owe the pre-incorporated corporation?

A duty to act in the corporation’s best interests and disclose any profits or commissions earned in pre-incorporation dealings.

How can a corporation become liable for a promoter’s pre-incorporation contract?

By expressly or impliedly adopting the contract after formation (e.g., board resolution or accepting its benefits).

Does merely acting as an incorporator create liability for promoter contracts?

No. An incorporator only signs and files the articles of incorporation and is not liable for promoter contracts.

What document must be filed to create a corporation?

Articles of Incorporation (a.k.a. charter).

Name four mandatory items in the articles of incorporation?

1. Corporate name
2. Number of authorized shares
3. Name/address of registered agent
4. Name/address of each incorporator

What is an ultra vires act?

Corporate action outside a narrow purpose stated in the articles.

List the three situations in which an ultra vires act may be challenged under the RMBCA?

1. Shareholder suit to enjoin
2. Corporation action against a responsible insider
3. State action to enjoin

Define a de jure corporation?

A corporation that has satisfied all statutory formation requirements and shields owners from personal liability.

What is the de facto corporation doctrine?

A good-faith attempt to incorporate plus actual use of corporate powers treats the entity as a corporation, shielding owners from liability (abolished in the RMBCA).

Explain corporation by estoppel?

A party that treats a business as a corporation is estopped from denying its existence if the owner tried in good faith to incorporate and lacked knowledge of defects.

Differentiate common and preferred stock?

Common stock carries basic ownership and voting rights; preferred stock has priority in distributions or other preferences.

Who typically authorizes the issuance of new stock?

The board of directors, unless the articles give that power to shareholders.

What types of consideration are valid for issuing stock under the RMBCA?

1. Money
2. Tangible or intangible property
3. Past services rendered

What is par-value stock?

Shares assigned a minimum issuance price; the corporation must receive at least that amount when issuing the shares.

How long is a pre-incorporation stock subscription irrevocable?

Six months unless the agreement says otherwise or all subscribers consent to revocation.

Define shareholder preemptive rights?

The right of existing shareholders to purchase new shares to maintain their proportional ownership; absent unless the articles grant them.

When are corporate distributions prohibited?

When the corporation is insolvent or the distribution would cause insolvency under the equity and balance-sheet tests.

What are the two solvency tests for distributions?

1. Equity test (ability to pay debts as they come due)
2. Balance-sheet test (assets exceed liabilities plus senior liquidation preferences)

What personal liability can directors face for unlawful distributions?

Directors who approve unlawful distributions are personally liable for the excess and may seek contribution from other liable directors or recoupment from shareholders who knew the distribution was unlawful.

Who sets the record date for dividend eligibility?

The board of directors.

Do stock dividends constitute a “distribution” under the RMBCA?

No; issuing stock to shareholders without charge (stock dividend/split) is not a distribution.

What two federal causes of action frequently arise from stock transactions?

1. Rule 10b-5 fraud
2. Section 16(b) short-swing profits

List the six private-plaintiff elements for a Rule 10b-5 action?

1. Plaintiff bought/sold a security
2. Interstate commerce used
3. Fraudulent/deceptive conduct
4. Material information
5. Scienter
6. Reliance
7. Damages

What is the ‘disclose or abstain’ rule?

Insiders with material non-public information must either disclose it before trading or abstain from trading.

Define a tippee under insider-trading law?

A person who receives material non-public information from an insider with an expectation it will be used for trading and knows or should know it breaches the insider’s duty.

How are short-swing profits calculated under Section 16(b)?

Match highest sales with lowest purchases within any six-month window; profits go to the corporation.

What shareholder vote is required to amend bylaws when not reserved exclusively to shareholders?

A majority vote of either the directors or shareholders.

What is the quorum requirement for a shareholder meeting under default rules?

A majority of shares entitled to vote present in person or by proxy.

Explain cumulative voting?

When electing multiple directors, shareholders may allocate their total votes to one or more candidates, enabling minority shareholders to elect at least one director.

How long is an ordinary proxy valid?

11 months unless the proxy states a longer or shorter term.

When is a proxy irrevocable?

If it states it is irrevocable AND is coupled with an interest (e.g., pledgee, option holder).

Differentiate a voting pool from a voting trust?

Voting pool: contract among shareholders, no transfer of shares, specifically enforceable, unlimited term.
Voting trust: legal title to trustee, written document, filed with corporation, maximum 10-year term (renewable).

What records may any shareholder inspect without showing a proper purpose?

• Articles
• Bylaws
• Shareholder meeting minutes for three years
• Written communications to shareholders
• Names/addresses of directors and officers
• The most recent annual report

What must a shareholder show to inspect accounting records or the shareholder list?

A good-faith proper purpose reasonably related to their interest and specificity of requested records.

Define a derivative action?

A lawsuit brought by a shareholder on behalf of the corporation for harm suffered by the corporation.

What is the ‘contemporaneous ownership’ rule for derivative suits?

Plaintiff must have been a shareholder at the time of the challenged act and continuously thereafter until judgment.

When must a shareholder make demand on the board before filing a derivative suit under the RMBCA?

Always—demand is universal; there is no futility exception in RMBCA states.

List three common factors courts use to pierce the corporate veil?

• Undercapitalization
• Commingling of assets/failure to observe formalities
• Using the corporation to perpetrate fraud or injustice

Who qualifies as a controlling shareholder?

Anyone (or group) owning >50% of shares or a lower percentage that effectively controls corporate decisions due to dispersed ownership.

Name the two fundamental fiduciary duties owed by directors?

1. Duty of care
2. Duty of loyalty (both exercised in good faith)

What presumption does the business judgment rule create?

Directors are presumed to act on an informed basis, in good faith, and in the corporation’s best interests.

Give two ways a plaintiff can rebut the business judgment rule?

Show directors acted in bad faith, were uninformed, had a conflict of interest, or engaged in waste or illegality.

What are the three safe-harbor methods to cleanse a director’s conflicting-interest transaction?

1. Disinterested board approval after full disclosure
2. Disinterested shareholder approval after disclosure
3. Transaction is fair to the corporation at the time entered

Define usurpation of a corporate opportunity?

Taking for oneself a business opportunity that is within the corporation’s line of business or in which it had an expectancy, without first offering it to the corporation.

What indemnification is mandatory for directors?

Reasonable expenses (including attorney fees) incurred in a successful defense of a proceeding.

Under Sarbanes-Oxley, what must a public company’s CEO and CFO certify?

Accuracy of the company’s filed financial reports; false certification entails forfeiture of bonuses and potential criminal liability.

What are the quorum and voting default rules for board of directors’ meetings?

Quorum = majority of directors in office; action passes with majority of directors present unless bylaws/articles say otherwise.

Can directors vote by proxy?

No; directors must personally participate (in person or via real-time communication).

Name one power a board committee cannot exercise?

• Declare distributions beyond limits set by the full board,

• amend bylaws,

• fill board vacancies, or

• approve actions requiring shareholder approval.

What is required for shareholder approval of an ordinary statutory merger?

Board approval AND majority of votes cast by shareholders at a meeting with quorum (plus class votes if classes are affected).

Explain a short-form (parent-subsidiary) merger?

A parent owning ≥90% of each class of subsidiary shares may merge with the subsidiary without the approval of the subsidiary’s shareholders or board.

What is a shareholder’s appraisal right?

The right to force the corporation to purchase the shareholder’s shares at fair value when the shareholder dissents from certain fundamental changes.

When is appraisal unavailable because of a public market?

When shares are listed on a national securities exchange or held by >2,000 shareholders and market liquidity lets the shareholder sell stock at a fair value instead.

Describe the basic order of distribution in corporate dissolution?

1. Creditors (including shareholder loans)
2. Preferred shareholders per liquidation preferences
3. Common shareholders

List two statutory grounds for a minority shareholder to seek involuntary dissolution?

• Director deadlock causing harm
• Shareholder deadlock in electing directors
• Waste/misapplication of assets
• Illegal/oppressive/fraudulent acts by those in control

What is a benefit corporation?

A for-profit corporation formed to create a stated social or environmental benefit; directors may prioritize that purpose over maximizing profits.

Define an S corporation?

A corporation that elects pass-through taxation—profits/losses flow directly to ≤100 eligible shareholders (all U.S. individuals/trusts/estates, one class of stock).

Name two major advantages of forming an LLC?

1. Pass-through taxation like a partnership
2. Limited liability like a corporation
3. Plus management flexibility

What document forms an LLC?

Articles (Certificate) of Organization filed with the state.

What is an LLC operating agreement?

A contract among members governing the LLC’s business; it prevails over default statutory rules unless manifestly unreasonable.

Differentiate a member-managed from a manager-managed LLC?

Member-managed: all members have authority and owe duties.
Manager-managed: management vested in designated managers; ordinary members act like passive investors.

What fiduciary duties do members/managers owe in an LLC?

Duties of loyalty and care (refrain from gross negligence, reckless conduct, intentional misconduct, or knowing law violations).

Does an LLC member’s dissociation automatically trigger dissolution?

No; the LLC continues unless the operating agreement or unanimous consent dictates otherwise.

What is a charging order against an LLC member?

A creditor remedy placing a lien on the member’s transferable interest and redirecting distributions to the creditor.

List two common veil-piercing factors for LLCs?

• Undercapitalization
• Commingling of assets or using the LLC to perpetrate fraud

When can an LLC member bring a derivative suit?

After making demand on managers/members to act unless demand would be futile, and stating efforts in the complaint.

Name one statutory event that causes LLC dissolution absent contrary agreement?

Consent of all members, 90 consecutive days without members, court order, or event specified in the operating agreement.

What two primary tests determine if a distribution renders a corporation insolvent?

1. Equity test (can pay debts as they come due)
2. Balance-sheet test (assets > liabilities + senior liquidation prefs)

Under Rule 10b-5, what measure of damages do courts generally award?

Out-of-pocket loss: difference between price paid/received and stock’s value at time of fraud (capped at 90-day post-disclosure average market price).

How long must stock-transfer restrictions be conspicuously noted to bind transferees?

Restriction must appear conspicuously on the certificate (or, for uncertificated shares, in required notices) to bind persons without actual knowledge.

What two shareholder actions can substitute for holding a meeting?

1. Unanimous written consent
2. Waiver of notice and attendance/voting at the meeting

How may a director properly dissent to avoid liability for a board action?

• Record objection at meeting’s start
• Ensure dissent noted in minutes
• Deliver written dissent before or immediately after adjournment

What corporate records must be produced to any shareholder upon 5 days’ notice and a proper purpose?

1. Accounting records
2. Excerpts of board minutes
3. The current list of shareholders

Explain the balance-sheet test for unlawful distributions?

Total assets must exceed total liabilities plus preferential rights of senior securities after the distribution.

Who may call a special shareholder meeting under default rules?

The board of directors or holders of at least 10% of voting shares.

When is a shareholder proxy revocable by attending the meeting?

If the proxy is not coupled with an interest, the shareholder’s attendance and vote revoke the proxy.

What is the ‘bespeaks-caution’ doctrine in securities law?

Forward-looking statements accompanied by meaningful cautionary language are generally not actionable as fraud.

Can an officer be indemnified to the same extent as a director?

Yes, officers generally receive identical indemnification and insurance protections as directors.

Under Section 16(b), which corporations are subject to short-swing profit rules?

Public companies with securities on a national exchange OR with >$10 million assets and >500 shareholders.

How can directors be paid for serving on the board?

Boards may set reasonable compensation for directors unless the articles/bylaws provide otherwise.

What is the effect of issuing treasury stock on voting rights?

Treasury shares cannot be voted while held by the corporation.

Define ‘watered stock.’

Stock issued for consideration less than its par value (concept eliminated under the RMBCA because board’s adequacy determination is conclusive).

What liability does a shareholder have on unpaid subscription amounts?

Shareholder is liable to the corporation, which may sue or cancel the shares; creditors may also recover unpaid amounts.

What are directors’ inspection rights?

A director may inspect corporate books and records for any purpose reasonably related to fulfilling their duties; denial allows court enforcement.

How is a quorum of directors defined by default?

A majority of directors in office unless bylaws/articles specify a different number.

What is a ‘minnow-whale’ merger and when is shareholder approval of the whale not required?

Small corporation merges into large one; whale shareholders need not approve if:

1. No >20% share increase
2. Articles unchanged
3. Their rights unaffected

Explain the Deep Rock doctrine in dissolution?

When shareholders are also creditors (e.g., loans), their claims may be subordinated to outside creditors if veil-piercing factors exist.

Under the RMBCA, can shareholders limit the board’s power via shareholder agreement?

Yes; a unanimous shareholder agreement may eliminate the board, distribute powers, or otherwise govern management for up to 10 years unless stated otherwise.

What is the maximum default term of a voting trust?

10 years unless extended by agreement or statute.

In a Rule 10b-5 case, when can rescission be ordered?

If the defendant was a party (seller/buyer) to the challenged securities transaction.

What is the purpose of an audit committee under the Sarbanes-Oxley Act?

To oversee selection, compensation, and performance of the corporation’s outside auditors; members must be independent directors.

Describe the equity test for distributions?

Corporation must be able to pay its debts as they become due after the distribution.

Who must approve amendments to the articles when no stock has been issued and no board exists?

The incorporators.

When does corporate existence begin if articles list no delayed effective date?

On the date the articles are filed with the state.

What is a tender offer?

A public offer to buy shares from shareholders at a fixed, often premium, price—commonly used in hostile takeovers.

What information must a 5% shareholder disclose to the SEC?

Ownership stake, funding source, and purpose for acquiring the shares (Schedule 13D).

Under MBCA, who sets director compensation?

The board of directors, subject to fiduciary duties and any restrictions in articles/bylaws.

Define a ‘proper purpose’ for shareholder inspection.

Purpose reasonably related to shareholder’s interest, such