Multistate Essay Examination (MEE) Business Associations Flashcards

24 sample cards from the Business Associations deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. Distinguish a de facto corporation from corporation by estoppel.

   De facto corporation: despite a defective filing, an entity made a good-faith effort to incorporate and operated as a corporation, so its owners get limited liability. Corporation by estoppel: a party who dealt with the business as a corporation is estopped from later denying its corporate status to reach owners personally (applies mainly in contract).

2. What is the difference between authorized, issued, and outstanding shares?

   Authorized shares are the maximum the articles permit the corporation to issue. Issued shares are those actually sold/distributed by the corporation. Outstanding shares are issued shares currently held by shareholders (issued minus any reacquired treasury shares). Only outstanding shares vote.

3. What is par value, and what is the rule on issuing stock below par?

   Par value is the minimum issue price set for a share. Stock issued for less than par is 'watered stock'; the shareholder is liable to the corporation for the difference (the water). Modern statutes (e.g., the MBCA) have largely eliminated mandatory par value.

4. What is a preemptive right, and does it exist by default?

   A preemptive right lets an existing shareholder buy newly issued shares to maintain her proportional ownership. Under the MBCA, preemptive rights do NOT exist unless the articles of incorporation expressly provide for them ('opt-in').

5. Distinguish common stock from preferred stock.

   Common stock typically carries voting rights and residual claims to dividends and liquidation proceeds. Preferred stock has a preference—priority over common in dividends and/or liquidation distributions—and may be cumulative, participating, and/or convertible; it often has limited or no voting rights.

6. Under the modern MBCA, what is the legal test for whether a corporation may lawfully pay a dividend or make a distribution?

   A distribution is prohibited if, after it, the corporation could not pay its debts as they come due in the ordinary course (equity insolvency test) OR its total assets would be less than its total liabilities plus any liquidation preference of senior shares (balance sheet/bankruptcy test). Directors authorizing an unlawful distribution can be personally liable.

7. What is the role and standard of conduct of a corporation's board of directors?

   The board manages or directs the management of the corporation's business and makes major policy decisions. Directors must act in good faith, with the care of an ordinarily prudent person in a like position, and in a manner they reasonably believe to be in the corporation's best interests.

8. How does the board take valid action, and what are the quorum and voting defaults?

   The board acts by majority vote at a duly called meeting where a quorum (a majority of directors, unless changed) is present, or by unanimous written consent without a meeting. A director cannot vote by proxy. Quorum is broken if directors leave.

9. What is required for a valid shareholder vote at an annual or special meeting?

   A quorum—a majority of the outstanding voting shares—must be represented (in person or by proxy). Once quorum is present, an action other than the election of directors passes if votes cast in favor exceed votes against; directors are elected by a plurality. Quorum is determined at the outset and is not broken if shares leave.

10. What is cumulative voting, and how does it help minority shareholders?

    In electing directors, cumulative voting lets each shareholder multiply her shares by the number of directors being elected and cast all those votes for one or a few candidates. This helps minority shareholders elect at least one director. It applies only if the articles provide for it.

11. What is a voting trust and a voting (pooling) agreement?

    A voting trust is a written agreement transferring legal title of shares to a trustee who votes them per the agreement (often limited, e.g., 10 years; must be filed with the corporation). A voting agreement (pooling agreement) is a written contract among shareholders to vote their shares a certain way; it is specifically enforceable and need not be filed.

12. State the business judgment rule and when it does NOT protect a director.

    The business judgment rule presumes directors act on an informed basis, in good faith, and in the honest belief the action is in the corporation's best interest; courts will not second-guess such decisions. It does not protect directors who are uninformed (gross negligence), act in bad faith, breach the duty of loyalty, or engage in fraud, illegality, or self-dealing.

13. What does a director's duty of loyalty prohibit, and what is the conflicting-interest (self-dealing) transaction analysis?

    It prohibits acting in the director's own interest at the corporation's expense. A conflicting-interest transaction is upheld (not voidable) if (1) disclosed and approved by a majority of disinterested directors, (2) disclosed and approved by a majority of disinterested shareholders, OR (3) the transaction was fair to the corporation when entered.

14. What is the corporate opportunity doctrine?

    A director or officer may not divert to herself a business opportunity in which the corporation has an interest or expectancy without first offering it to the corporation. If she usurps such an opportunity, the corporation may recover the profits or force a constructive trust on the opportunity.

15. What is a derivative suit, and what are its key prerequisites?

    A derivative suit is a shareholder suing on the corporation's behalf to enforce the corporation's rights (recovery goes to the corporation). Requirements: the plaintiff must (1) have been a shareholder at the time of the wrong (contemporaneous ownership) and remain one, (2) fairly represent the corporation's interests, and (3) make a demand on the board (or show demand is excused/futile).

16. What is the difference between a direct action and a derivative action by a shareholder?

    A direct action enforces the shareholder's own rights (e.g., to vote, receive a declared dividend, inspect records), and recovery goes to the shareholder. A derivative action enforces the corporation's rights for harm to the corporation, and any recovery (minus costs) goes to the corporation.

17. What are a shareholder's rights to inspect corporate books and records under the MBCA?

    A shareholder may inspect on five business days' written notice. Certain records (articles, bylaws, minutes of shareholder meetings, annual reports) are available unconditionally. Other records (accounting records, board minutes, shareholder lists) require a proper purpose reasonably related to the shareholder's interest as a shareholder.

18. What is the doctrine of piercing the corporate veil, and what is its general effect?

    Piercing the corporate veil disregards the corporate entity to hold shareholders personally liable for corporate obligations, preventing fraud or injustice. It is applied cautiously and most often against closely held corporations; it is rarely applied to publicly traded ones.

19. What are the principal grounds (factors) for piercing the corporate veil?

    Courts pierce when shareholders abuse the corporate form, such as: (1) the alter ego/disregard of formalities (commingling assets, no separate identity), (2) undercapitalization at formation, or (3) using the corporation to perpetrate fraud or avoid existing obligations. Courts also more readily pierce for tort victims than voluntary contract creditors.

20. Generally, are corporate officers liable for the corporation's contracts, and what duties do officers owe?

    No—officers acting within their authority bind the corporation, not themselves, on its contracts. Officers are agents of the corporation and owe it the same fiduciary duties of care and loyalty that directors owe; their authority can be actual or apparent.

21. What is the general procedure for approving a fundamental corporate change (e.g., merger, sale of substantially all assets, or amendment of the articles)?

    Fundamental changes require: (1) a resolution by the board adopting the change, (2) written notice to shareholders, and (3) approval by the required shareholder vote (under the MBCA, a majority of shares entitled to vote; many states require a larger majority). The change is then effected by filing the appropriate document with the state.

22. What are dissenters' (appraisal) rights?

    Appraisal rights let a shareholder who objects to certain fundamental changes (e.g., merger, share exchange, sale of substantially all assets) compel the corporation to buy her shares at fair value. The shareholder must follow procedure: file written objection before the vote, not vote in favor, and demand payment. It is generally the exclusive remedy absent fraud.

23. What is the difference between voluntary and involuntary (judicial) dissolution of a corporation?

    Voluntary dissolution is initiated by board resolution plus shareholder approval, followed by filing articles of dissolution. Involuntary dissolution is ordered by a court—e.g., on the state's action, on a creditor's claim, or on a shareholder's petition for director deadlock, oppression of minority shareholders, waste, or fraud.

24. What happens to a corporation's business after dissolution, and how are remaining assets distributed?

    A dissolved corporation continues only to wind up: collecting assets, discharging liabilities, and distributing the remainder. Assets are distributed first to creditors, then to preferred shareholders per their liquidation preferences, and finally to common shareholders pro rata.

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