Glossary of Missouri Corporations Bar Exam 2007
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- What is a C Corporation
- A corporation that is taxed as an entity distinct from it's owners. However, when the corporation makes distributions to shareholders, the distributions are treated as taxable income even though the corporation has already paid taxes on its profits.
- What is an S Corporation?
- Not subject to double taxation. Profits and losses flow directly to the owners. Stock cannot be held by more than 100 persons. Shareholders must be individuals.
- What is a Sole Proprietorship?
- A form of business where one person owns all of the assets. Owner is liable for all the business's obligations and the business "entity" cannot continue beyond life of the owner.
- What is a General Partnership?
- Similar to sole proprietorship, but with two or more people. Profits and losses flow directly to the partners. No double taxation. Personal assets of both partners are at risk for business liabilities.
- What is a Limited Partnership?
- Similar to other partnerships, but allows for the limited liability of some investors. Must be one general partner that is personally responsible for partnership debts.
- What is a Limited Liability Corporation?
- Must file papers with the State. Provides the limited liability of a corporation and the flow through tax advantages of a partnership.
- Is a corporation a "person"?
- Yes. Corporations are entitled to due process of law and equal protection of the law.
- For federal diversity jx, how do we determine where a corporation is a "citizen"?
- A corporation is deemed to be a citizen of any state by which it has been incorporated AND of the state where it has its principal place of business.
- How do we determine a corporations' principle place of business?
- Determined by either the "corporate nerve center" test (location of executive offices), or "corporate operations" test (location of major business activity).
- For Missouri's venue statute, how do we determine of which county the corporation is a resident?
- A corporation is a resident of any county where it maintains an office or transacts business.
- Where is a corporations' domicile?
- The state of its incorporation. A corporation may have multiple domiciles.
- What is an Ultra Vires Act?
- When a corporation exceeds its statutory powers or its purposes as stated in the articles of incorporation. (Most articles will allow for a corporation to engage in any lawful business)
- List the three situations in which the ultra vires nature of an act my be asserted.
- 1. A shareholder may sue the corporation to enjoin a proposed ultra vires act.
2. The corporation may sue an officer or director for damages arising from the commision of an ultra vires act authorized by the director or officer.
3. The state may bring an action against the corporation to have it dissolved for committing an ultra vires act.
- What is a de jure corporation?
- A corporation formed in accordance with all applicable laws.
- What information is required to be contained within the articles of incorporation?
- 1. Name of corporation
2. Registered Agent and Office
3. Capital Stock Structure
5. Number and Terms of Directors
6. Corporate Duration
7. Purpose of Corporation
8. Limitations of Director Liability for Breach of Fiduciary Duty
- What is the Secret Profit rule?
- Promoters owe to each other and the future corporation a fiduciary duty and therefore cannot make a secret profit.
- What must be contained in the Articles of Incorporation?
- A PAIN.
1) Authorized Shares
2) Purpose and Duration
4) Incorporaters (names and addresses)
5) Name of corporation
- What is a defacto corporation?
- The parties made a good faith, colorable attempt to comply with corporate formalities and have no knowledge of the lack of corporate status.
- Why is the creation of a corporation legally significant?
- 1) A corporation is a seperate legal person.
2) Generally, shareholders are ot personally liable for the debts of the corporation.
- For what reasons would a court "pierce the corporate veil"?
- To avoid fraud or unfairness
- What are the two common scenarios would a court pierce the corporate veil?
- Alter Ego scenario
- Describe the Alter Ego scenario
- The controlling shareholders fail to observe sufficent corporate formalities. (i.e. comingiling corporate and personal funds)
- Describe the Undercapitalization scenario.
- The failure to maintain sufficent capital to satisfy forseeable liabilities.
- For which type of victim are courts more willing to pierce the corporate veil for: Tort or Contract?
- When does an issuance of stock occur?
- When the corporation sells its own stock.
- What is a subscription agreement?
- A written offer to buy stock from a corporation.
- May a buyer revoke his preincorporation subscription agreement?
- Yes. A buyer can revoke his offer until the corporation is formed.
- What is par value stock?
- Stock that has a minimum issuance price.
- What is treasury stock?
- Stock that was previously issued by the corporation, then repurchased by the corporation, and is not being offered again for sale by the corporation.
- Is treasury stock par or no par stock?
- No par stock.
- May a corporation acquire property in exchange for par value stock?
- Yes. Any valid consideration may be received so long as it is equal to or exceeds the par value of the stock
- Who can be held liable for a below-par issuance of stock?
- The directors.
- May the corporation recover from the purchaser of below par value stock?
- What are preemptive rights regarding stock purchases?
- Preemptive rights is the right of an existing shareholder to maintain her percentage of ownership buy buying tup to that percentage whenever there is a new issuance of stock. But the new stock must be bought in CASH!
- What if the articles of incorporation (or the bar exam question) is silent as to preemptive rights?
- Preemptive rights are PRESUMED unless the articles take them away.
- What are the requirements of boards of directors in missouri?
- Every corporation must have a board with one or more members. But if less than three members, the number must be spelled out in the articles.
- Who elects directors?
- The shareholders.
- Must the shareholders have cause to remove a director?
- No. Shareholders may remove a director before the exparation of a term WITH or WITHOUT cause.
- May a director use a proxy?
- No. Attendance at meetings is required to vote.
- What is quorum for a directors meeting?
- A majority of all directors must be present.
- What is required to pass a resolution at a directors meeting?
- A majority of all directors present at the meeting.
- How are directors protected from liability?
- Via the Business Judgment Rule.
- What is the Business Judgment Rule?
- A presumption that the directors manage the corporation in good faith and in the best interests of the corporation and its shareholders. As such, directors will not be liable for innocent mistakes of business judgment.
- Directors are fiduciaries, and owe what duties to the corporation?
- Duties of care and loyalty.
- What is the definition of the duty of care re: directors?
- Director must act with the care that a prudent person would use with regard to her own business.
- re: director duty of care, what are the two types of questions regarding the duty of care?
- Nonfeasance and Misfeasance.
- re: director, what is nonfeasance and will the director generally be held liable?
- This is the lazy director question (i.e. doesn't go to meetings, etc). Generally, this director will be found liable for breaching the duty of care.
- re: director, what is misfeasance and will the director generally be held liable?
- Doofus director that makes bad business decisions. Generally, this director will not be held liable.
- re: director, what is the duty of loyalty?
- Directors may not receive an unfair benefit to the detriment of the corporation or its shareholders.
- re: director duty of loyalty, what are the two general fact patterns you will see on the exam?
- 1) Interested Director Transaction -- any deal b/t the corporation and one of its directors (or a director's relative or director's related business)
2) Corporate Opportunity -- A director will always take away or usurp an opportunity from the corporation.
- When is indemnification of Officers / Directors prohibited?
- Indemnification is not allowed when an officer / director has been adjudged to be liable to his own corporation.
- When is indemnification of Officers / Directors mandatory?
- When a Director / Officer is successful in a lawsuit against ANY PARTY.
- When is indemnification of Officers / Directors permissive?
1) The officer / director settles a lawsuit against his own corporation.
2) Director must show he acted in good faith and with the reasonable belief that his actions were in the corporation's best interest.
- re: permissive indemnification, who may determine eligibility?
- Any of the following may determine eligibility for permissive indemnification:
1) Majority of independent directors may approve.
2) A committee of at least two independent directors approves it.
3) A majority of share held by independent shareholders approves it.
4) A special legal counsel's opinion may recommend indemnification (the "magic option")
- What are the requirements to bring a derivative suit as a shareholder?
- 1) Must own at least one share of stock at the time of the occurance and throughout the litigation.
2) Must make demand on directors that the corporation bring the suit
3) The demand must be rejected by the board, unless you can show that making a demand would be futile.
- As a shareholder, who gets to vote?
- Generally, only the shareholder of record as of the record date.
- What is the record owner and record date?
- 1) The record owner is the person shown as the owner in the corporate records.
2) The record date is the voter eligibility cut-off (no earlier than 70 days before a meeting).
- re: shareholders, what makes a proxy valid?
- 1) In writing
2) Signed by record shareholder
3) Directed to secretary of corporation
4) Authorizing another person to vote the shares
5) Valid for up to 11 months
- May a proxy be revoked?
- Yes, assuming two things are true:
1) The word "irrevocable" is place conspicuously on the document; and
2) The proxy is coupled with some independent interest (usually the transfer of the stock)
- Must a corporation hold annual shareholder meetings?
- Yes. And at least one director's position must be open for voting.
- What is a special meeting of shareholders?
- A meeting to approve of a proposal or a fundamental corporate change.
- What is required in the notice for a special shareholder's meeting?
- Date, Time, Place, and purpose of the special meeting.
- May the shareholders consider any business other than the special purpose at the special meeting?
- What constitutes a quorum of shareholders?
- A quorum requires a majority of all shares be represented (number of shareholders does not matter).
- If a quorum of shares is present, what is required to pass a vote?
- An action will be approved if a majority of the shares represented at the meeting pass it.
- What is a voting trust?
- 1) Written trust agreement signed by the shareholders directing how their votes must be cast.
2) Transfer of legal title of shares to the voting trust.
3) Original shareholders receive trust certificates and retain all shareholder rights, except voting.
- What is a voting agreement?
- 1) Written trust agreement signed by the shareholders directing how their votes must be cast.
2) If there are 50 or fewer shareholders, and 2/3 of them vote to eliminate formalities and there is a share-transfer restriction.
- How and when do shareholders use cumulative voting?
- Simply multiply the number of shares by the number of directors to be elected.
- What if the articles of incorporation are silent as to cumulative voting?
- Then cumulative voting is PRESUMED.
- Do shareholders have the right to examine the books and records of the corporation?
- Yes, at an appropriate time.
- re: Dividends, what are the four types of distribution priorities?
- 1) Common Stock
- Describe each of the dividend distribution priorities.
- 1) Common stock -- paid last.
2) Preferred -- paid first.
3) Participating -- paid twice.
4) Cumulative -- add
- May the board distribute a dividend payment if the company is insolvent, or the payment would cause the company to become insolvent?
- Who is responsible for issuing unlawful dividends?
- The directors are responsible. However, if they relied on a financial officer's representations they are immune.
- What do LLCs equal?
- Limited liability + limited life + limited liquidity + limited tax.
- To form an LLC, what must the organizers file with the state?
- Articles of organization and the operating agreement.
- What are the characteristics of Fundamental Corporate Changes?
- Merger; consolidation; dissolutions; non-ministerial amendment of the articles; sale of all of the assets or substantially all of the assets.
- What are the procedural steps for fundamental corporate changes?
- 1) Resolution by the board at a valid board meeting.
2) Notice of special meeting
3) Approval by 2/3 of ALL SHARES ENTITLED TO VOTE, and by 2/3 of each class of shares adversly affected by the change.
4) Possibility of dissenting shareholder right of appraisal.
- What is the dissenting shareholder right of appraisal?
- The right of a shareholder to force the corporation to buy his shares at a fair value.
- When will a dissenting shareholder have a right of appraisal?
- Merger or consolidation, or a sale of all or substantially all assets.
- What must a shareholder do to perfect their right of appraisal?
- 1) Before shareholder vote, file written notice of objection and intent to demand payment.
2) Abstain or vote against the proposed change.
3) Make timely (w/in 20 days) written demand to be bought out.
4) File notice w/the State
- What are the three components of Section 10(b) (anti-fraud) of the Securities Exchange Act?
- 1) Scienter - Intent to deceive
2) Deception - Material misrepresentation or misappropriation of material, nonpublic information.
3) In connection with actual sale or purchase of securities.
- When does Section 16(b) (short swing trading profits) apply?
- 1) Big corporation
2) Big shot defendant -- officer, director, owner of more than 10% of stock
3) Neither of the above may profit by selling and then repurchasing stock for a profit within a six-month time frame.
All profits are recoverable by the corporation.
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