The USA Corporations Law - Assignment Example

Part I 1) A 2) B (False – Sarbanes-Oxley applies only to publicly-traded companies, not to “all” companies.) 3) A (The Articles of Incorporation fail to identify the name and address of at least one incorporator, as required by MBCA § 2.02.) 4) B (According to Basic Inc. v. Levinson, reliance may be presumed in some cases; this presumption may be rebutted, but proof of reliance is not required a priori.) 5) C (The stock cannot be sold, at least not after a waiting time of less than six months.) 6) A (Rule 10B-5 would be the most obviously applicable. It doesn’t specifically mention civil liability, but it is routinely used for this purpose.) 7) E (All answers are correct.) 8) C (Shareholders are empowered to amend bylaws by majority vote, whatever the current bylaws say. See MBCA 10.20/21.) 9) A (Losers of proxy fights are not normally reimbursed for their expenses.) 10) B (False – unless the corporation is in fact formed and does in fact take on the rights and obligations of the contract, the promoter is personally liable.) 11) D (This is a classic case of self-dealing.) 12) B (See MBCA 7.44(A); the requirement is that the SLC “has determined in good faith after conducting a reasonable inquiry upon which its conclusions are based that the maintenance of the derivative proceeding is not in the best interests of the corporation”. MBCA doesn’t include requirements for outside advisors and the like.) 13) E (None of the answers is correct, as all of them include MBCA and/or DGCL, which are state rather than Federal law. The correct answer is Securities Act 1933, Securities Exchange Act 1934, and Sarbanes-Oxley 2002.) 14) B (It’s hard to say exactly what “often” means in this context; but in general, minority stockholders’ rights are defended more by statute and case law than by bylaws and the like—which, after all, majority owners could easily amend.) 15) B (A note does not normally convey any voting rights, so equal ownership of stock will convey equal control rights.) 16) B (There are some limitations to the limitation of liability. For example, the IRS can pursue individually-held assets if a corporation has failed to remit employees’ withheld federal income tax. Owners can also be held personally liable for torts if they were negligent in their managerial duties, or for fraud or other malfeasance.) 17) A (See MBCA 8.33.) 18) A (Although MBCA 8.60(4)(ii) requires disclosure of all facts “that an ordinarily prudent person would reasonably believe to be material to a judgment about whether or not to proceed with the transaction”, it is far from clear that profitability projections are “material” in this sense. It is worth noting that Hot Nut Services is paying a fixed fee for a concession, the actual value of which is dependent on factors largely beyond its control. It is entirely reasonable for the firm to project a profit based on a “most likely” scenario, and as long as the bidding process was fair, no impropriety has taken place.) 19) A (True.) 20) B (False—under MBCA 7.45, the court must grant its approval to any settlement reached in a derivative suit. This constitutes “supervision”, even if the court has not rendered a judgment in the case.) Part II 1) Brett and Gretchen should probably establish their business as a Subchapter S corporation; this type of corporation provides limited liability without subjecting the owners to double taxation of the corporation’s income. 2) If Super-Solar’s CEO’s ownership of the rock-energy developer had not been revealed in advance to Super-Solar’s board of directors, this information would be of considerable value in preventing Super-Solar from investing in rock energy. But because the conflict of interest was revealed in advance, it will not be very useful in preventing the investment unless the CEO has concealed material facts from Super-Solar’s board. (See MBCA 8.60 and 8.62.) 3) The advantage of the proposed arrangement is that it permits Steffi and Travis to have equal interests in the new demolition business, even though Travis is providing a larger initial share of the business’s assets. The $50,000 note is somewhat problematic, however, in that it represents 100% of the business’s initial cash on hand; unless the business is profitable from the outset, an attempt to collect on the note could put the company effectively out of business. If there is good reason to believe that the business will be quickly profitable, however, this arrangement could work well. 4) Apparent authority is the appearance of being a legitimately appointed and empowered agent able to make commitments on behalf of another person or entity, even if this appearance is not accurate. In a corporate context, the corporation may be held liable for the commitments made by an apparent (but not actual) agent if the corporation has actively or passively indicated that this person is an actual authorized agent, and if the other party has acted in reliance upon his belief in the authority of the apparent agent. 5) By default, each of CEM, Inc.’s six directors is elected at the firm’s annual shareholder meeting, by plurality vote of all holders of voting stock (including shareholders’ proxies) on a one-share-one-vote basis. Each director position is elected separately from the others, since cumulative voting (in which shareholders may combine their votes for multiple board positions in favor of a single candidate) is not allowed by law unless specified in the corporation’s articles of incorporation. 6) The fiduciary duties imposed on corporate officers and senior executives require them to act solely in the interest of the corporation and its legitimate stakeholders—meaning, traditionally, first and foremost its stockholders. As such, these senior officers must avoid self-dealing or other conflicts of interest, misuse or appropriation of corporate assets, and other violations of trust. Further, they must exercise the responsibilities of their office with due care and consideration; careless or reckless decision-making is a violation of fiduciary responsibility even if the person in question derived no benefit (and did not intend to derive any benefit) from the decisions made. 7A) If Mona is issued stock at $1.00/share while John is simultaneously issued stock with identical rights at $2.00/share, something would appear to be amiss. Absent a meaningful par price, there may not be any legal prohibition on such a transaction for newly-issued shares in a closely-held corporation (see, for example, MBCA 6.21(b/c)); but unless there is some additional right or obligation involved (for example, Mona could sign a note acknowledging that she owes an additional $4,000 for her shares) that would bring things into balance, a transaction like this should be avoided. 7B) If John agrees to pay for his shares by contributing work to the firm instead of paying cash, this avoids the problems noted above. Since the quantity of labor contributed can be adjusted and the value of an hour of labor varies widely, John’s contribution can easily be valued such that his effective share price is equal to Mona’s. 8) The principal procedural requirement that Stacy would like to avoid is the “demand rule”, which requires Stacy to demand that Aussie’s directors take legal action to redress the wrong that she alleges has been committed. In most cases directors will reject such a demand, and courts are likely to defer to the directors’ “business judgment” in subsequent legal proceedings. Stacy would thus prefer not to have to make such a demand and receive the board’s (almost certainly negative) response. Instead, she can attempt to use the “futility exception” by claiming that as the board of directors was itself complicit in the wrongdoing, there is no point in demanding that the board, in essence, sue themselves. (See Federal Rules of Civil Procedure 23.1(b)(3)(B).) 9) In proxy voting, the owner of a block of a corporation’s shares assigns to someone else (who may or may not be a shareholder) the right to attend the firm’s annual meeting (or other shareholder meeting) and cast a vote on the owner’s behalf. A proxy may be given discretion over how to vote, or may be instructed as to how the shareholder wishes his/her votes to be cast on specific issues. The proxy holder is allowed to debate at the meeting only if s/he is him/herself a shareholder. The management of a public corporation typically solicits proxies when (or after) distributing the firm’s annual report; dissident shareholders may also initiate proxy campaigns when they feel that management has not been doing its job properly. 10) Normally, legal remedies against a corporation (e.g. for debt recovery) can be applied only against the corporation itself—not against its shareholders, directors, or managers. This limitation of liability is the “corporate veil”, and it means that only the corporation’s assets are available for settlement of claims; shareholders’ stock can become worthless, but they are protected from further losses. “Piercing the veil” refers to those situations in which claims can be pursued against managers and owners and their personal assets; these situations can include fraud, torts, and other malfeasance, failure to pay employees’ withheld taxes to the government, and other serious breaches. Read More