Formation
Elizabeth ran a successful cosmetics business out of her home. As business grew, she realized that she should incorporate her business in order to obtain tax benefits and limit her personal liability. Elizabeth attempted to file articles of incorporation, but she forgot to include the name of the corporation's initial registered agent. The articles of incorporation otherwise included all of the required information, and were properly filed.
Will Elizabeth be found to have created a de facto Corporation?
A -No, because she has not complied with the requirements for formation of a corporation.
B -No, because she has not carried on her business openly as a corporation.
C -Yes, because she has made a good faith effort to comply with the statutory requirements for formation.
D -Yes, because she has only failed to supply one of the required elements of the articles of incorporation.
B -No, because she has not carried on her business openly as a corporation.
Discussion of correct answer: A de facto corporation will be found to exist where there has been a good-faith attempt to comply with the statutory requirements for formation and there has been actual use of the purported corporate existence. Here, there is no indication that Elizabeth has carried on the business openly as a corporation. As such, there is no basis for finding that a de facto corporation existed.
Christina is on the board of directors of Adventure Corp., a travel agency incorporated in Florida that organizes tours of Europe. Christina recently adopted a child from Guyana and wanted Adventure Corp. to expand its business to South America. She presented a business proposal for expansion to the rest of the board. The board members were skeptical because tourism in South America had sharply declined in recent years due to political unrest. However, Christina's proposal seemed sound and included extensive data. After questioning her about it, the board decided to accept the proposal. The corporation lost a lot of money when the expansion into South American tourism proved to be unprofitable.
Will Christina be protected by the business judgment rule?
A -Yes, because Christina researched the expansion and believed it would be profitable.
B -Yes, because Christina's proposal was not grossly negligent or uninformed.
C -No, because Christina was motivated by personal interests when she made the proposal to the rest of the board.
D-No, because Christina made a clear error in business judgment by expanding Adventure Corp. into South America.
A -Yes, because Christina researched the expansion and believed it would be profitable.
Discussion of correct answer: Under the business judgment rule, directors and officers of a corporation who act with reasonable diligence and in good faith are shielded from personal liability and judicial review. The rationale behind this rule is that directors and officers are in a better position than the courts to determine the best course of action for the business. Here, Christina did indeed act with reasonable diligence and good faith. The facts indicate that Christina researched the proposed expansion and determined that it could indeed be profitable. Even though the expansion did not prove to be profitable, Christina will likely be protected by the business judgment rule. Mere errors in business judgment are not actionable in themselves.
Albie, a shareholder of Monument, Inc., seeks to inspect the corporation's books and records.
Which of the following is true?
A -Albie will not be permitted to inspect the corporate books and records if he wants to determine the reason Monument has not paid dividends.
B -Albie will not be permitted to inspect the corporate books and records if he wants to obtain data to promote a new political bill that is being voted upon next month.
C -Albie will not be permitted to inspect the corporate books and records if he seeks to investigate possible mismanagement of Monument, Inc., even if he has some evidence to justify his concerns.
D -Albie will not be permitted to inspect the corporate books and records for the purpose of obtaining stockholder names and addresses to solicit proxies to oppose present board policies.
B -Albie will not be permitted to inspect the corporate books and records if he wants to obtain data to promote a new political bill that is being voted upon next month.
Discussion of correct answer: Under Florida law, a shareholder ordinarily has the right to inspect corporate books and records, provided that the shareholder provides written notice of his or her demand and that the shareholder has a proper purpose (i.e., advancing the corporation's interests in some manner) for inspecting the records. A shareholder does not have a proper purpose for inspecting corporate records if he or she seeks to obtain the data to promote the shareholder's personal, social, or political concerns. Thus, in this case, if Albie seeks to inspect the corporation's records for the purpose of advancing his own political agenda, he will be acting with an improper purpose and will not be permitted to inspect the records.
ABC Corp. is liquidated. During its life, the corporation had issued both secured and unsecured debt, along with equity securities.
What will be the order of priority for repayment?
A -Secured debt holders, followed by unsecured debt holders, with equity shareholders last.
B -Unsecured debt holders, followed by secured debt holders, with equity shareholders last.
C -Equity shareholders, followed by secured debt holders, with unsecured debt holders last.
D -Equity shareholders, followed by unsecured debt holders, with secured debt holders last.
A -Secured debt holders, followed by unsecured debt holders, with equity shareholders last.
Discussion of correct answer: Upon liquidation of a corporation, debt security holders will have priority of repayment over the equity (stock) shareholders. Secured debt holders have first priority over unsecured debt holders, just as is true in other areas of the law.
Janet entered into a services contract with Befud Corp., a corporation incorporated in Nevada. Befud was to perform the services for Janet in Florida. Janet knows that Befud does not have a certificate of authority to transact business in Florida.
Which of the following statements is true?
A -The services contract is not enforceable.
B -Janet may not sue Befud Corp. for a claim arising out of the services contract.
C -Both A and B are true.
D -Neither A nor B are true.
D -Neither A nor B are true.
Discussion of correct answer: If a foreign corporation transacts business in Florida without obtaining a certificate of authority from the Department of State, the corporation is subject to a number of penalties. However, the corporation's failure to obtain a certificate of authority does not impair the validity of any of its contracts, and neither does it prevent it from defending any lawsuit in Florida. Here, Befud Corp. is a foreign corporation that is doing business in Florida, without having obtained a certificate of authority. In fact, Janet knows that Befud does not have a certificate of authority. Nevertheless, the validity of Befud's contract with Janet is not impaired by Befud's failure to obtain a certificate of authority. Also, since Befud is not prevented from defending a lawsuit brought against it in Florida, therefore, Janet may sue Befud.
Carl, a homeowner, hired Pat’s Paving to pour a new driveway on which to store Carl’s collection of vintage sport cars. Pat’s paving told Carl that he could park the cars on the driveway within 24 hours. Carl did so, and came out the next day to find all of his cars several inches deep in concrete which had not completely set. Carl sued Pat’s Paving for damages, but found that Pat’s paving was now insolvent. If Carl now wishes to proceed against Pat personally as the primary shareholder of Pat's Paving which of the following is least helpful to Carl in finding Pat liable?
A - Pat formed pat's paving to get around a non-compete agreement he had with Doug’s driveways, Pat’s former employer.
B -Pat is the sole shareholder of pat's paving.
C -Pat has commingled his personal assets with those of pat's paving.
D- Pat's paving was capitalized with inadequate assets, because Pat did not sufficiently understand the business.
D- Pat's Paving was capitalized with inadequate assets, because Pat did not sufficiently understand the business.
Discussion of correct answer: Florida courts may pierce the veil of a corporation that is undercapitalized, but this is relevant only if it can be shown that the corporation was underfunded to mislead or defraud creditors. If Pat underfunded Pat's Paving simply because he did not have the business acumen to properly capitalize the business, this fact will not help Carl. Thus, this is the correct answer.
Under what circumstances may a director of a Florida corporation be removed without cause where the director was voted onto the board by a shareholders' cumulative vote?
A -The director must be removed by a majority of shareholders.
B -The director may be removed without cause only by unanimous vote of the shareholders.
C -The director may not be removed if the number of cumulative votes sufficient to elect him voted against his removal.
D -The director may not be removed unless the number of cumulative votes sufficient to elect him is voted for his removal.
Discussion of correct answer: Special rules are in place to protect minority shareholders of a corporation. One such rule provides that where a director is elected under a system of cumulative voting, that director cannot be removed if the number of cumulative votes sufficient to elect the director is voted against his removal. The reason for this rule is because, under a cumulative voting system, it is possible for a minority of shareholders to elect a director without having the majority vote. If that director could then be removed by a majority vote, the minority shareholders would have no way to place a director on the board without fear of him being immediately removed.
Robin held 51% of the shares of Lightning Bolt Cola. The other 49% of the shares were widely dispersed and held by several thousand different shareholders. Which of the following would be an impermissible exercise of Robin's power as controlling shareholder?
A -Forcing the resignation of the present directors.
B -Selling her shares for a premium without dispersing the premium to other shareholders.
C -Appointing directors who are favorable to her interests
D -Forcing the board of directors to grant her a loan.
D -Forcing the board of directors to grant her a loan.
Discussion of correct answer: It is improper for a majority shareholder to cause the board of directors to enter into loans with the majority shareholder. Because this is an impermissible course of action, this is the correct answer choice.
Six attorneys formed a professional services LLC which rendered services in personal injury law for plaintiffs. Dan, one of the members, was disbarred for fraudulently representing settlement results to potential clients.
As attorney for the LLC, what is your best advice?
A -The LLC must file articles of dissolution with the Department of State.
B -Dan must sever his employment with the LLC but may maintain a financial interest.
C-Dan must immediately sever his employment and all financial interests in the LLC.
D -The majority of members must vote to dissociate Dan.
C-Dan must immediately sever his employment and all financial interests in the LLC.
Discussion of correct answer: By statute, members, officers, and shareholders who lose their license or authority to provide professional services offered by the professional services corporation or professional LLC must immediately sever their employment with, and financial interests in, the corporation or LLC. Here, Dan has been disbarred and must quit the LLC.
The boards of directors of Tarton Inc. and Sinders Inc. have adopted a plan of merger pursuant to which Sinders Inc. will be merged into Tarton Inc., with Tarton Inc. being the sole surviving corporation. All of Sinders' shareholders will receive cash in exchange for their shares.
What must happen in order for the merger to proceed?
A -A majority vote of the outstanding voting shares of Sinders must approve the merger, but no approval from the shareholders of Tarton needs to be sought.
B -A two-thirds vote of the outstanding voting shares of Sinders must approve the merger, but no approval from the shareholders of Tarton needs to be sought.
C -A majority vote of the outstanding voting shares of both corporations must approve the merger.
D -A two-thirds vote of the outstanding voting shares of Sinders must approve the merger, and a majority vote of the outstanding voting shares of Tarton must approve the merger.
C -A majority vote of the outstanding voting shares of both corporations must approve the merger.
Discussion of correct answer: A statutory merger occurs when one corporation (the surviving corporation) acquires another corporation (the target), the shareholders of the target receive cash or stock in the surviving corporation in exchange for their target shares, and the target is absorbed into the survivor. In order for a statutory merger to proceed, a plan of merger must be adopted by the boards of directors of each corporation, and approved by a majority vote of the outstanding shares of both corporations. Here, Tarton and Sinders are considering a statutory merger, because Sinders will be absorbed into Tarton, with the Sinders shareholders receiving cash in exchange for their Sinders shares. As such, once the boards of directors of each corporation have approved the plan of merger, the shareholders of each corporation (via a majority vote of the outstanding shares of each) must approve the merger.
Which of the following is correct regarding a director's tenure on a Florida corporation's board of directors?
A -Directors usually hold their positions for one year and are elected at annual meetings of the shareholders.
B -Directors usually hold their positions for two years and are elected at annual meetings of the shareholders.
C -Directors usually hold their positions for one year and are elected at special meetings of the shareholders.
D -Directors usually hold their positions for two years and are elected at special meetings of the shareholders.
Discussion of correct answer: A director of a Florida corporation will hold his position for one year unless the articles of incorporation provide for staggered terms. Also, a director is generally elected at annual shareholders' meetings.
The articles of incorporation of Biotech Corporation, a Florida corporation, called for an annual shareholder meeting on April 10. The articles did not include a definition of a quorum. Biotech's board of directors wanted to sell one of its divisions and planned to submit the sale for shareholder approval at the next annual meeting. Thirty days before the meeting, Biotech sent notice of the meeting to shareholders by first class mail, using a list of the corporation's 150 voting shareholders. However, the address list was incomplete and did not include any of the 20 voting shareholders whose last names began with the letter "S."
Nevertheless, these shareholders had anticipated the annual meeting. They all inquired about it and appeared at the right place and time. In total, 90 Biotech shareholders attended, representing 60% of the corporation's total shares. However, by the time the proposal to sell the corporate division was raised, holders of only 48% of the corporation's shares remained. The proposal was approved. The following week, several of the shareholders who had not received written notice of the meeting informed the board that they objected to the approval of the sale based on not having received notice of the meeting. They sued to prevent the sale.
Should the court uphold the approval of the sale?
A -Yes, because the corporation's bylaws specified the date of the annual meeting, which gave the shareholders constructive notice even without written notice.
B -Yes, because the shareholders who had not received written notice attended the meeting without objecting to the lack of notice.
C -No, because the shareholders who did not receive written notice of the meeting are considered not to have attended the meeting.
D -No, because there was no quorum of the voting shareholders when the shareholders approved the sale.
B -Yes, because the shareholders who had not received written notice attended the meeting without objecting to the lack of notice.
Discussion of correct answer: Florida law requires that notice of the annual shareholders' meeting be provided 10-60 days prior to the meeting. Generally, the notice need only state the date, time, and location of the meeting; however, even regular meetings require special notice if they are going to address extraordinary business issues. A shareholder can waive her right to notice in writing or by attending the meeting without objecting to lack of notice at the meeting. Here, the shareholders did attend without raising the issue, so a court will uphold the approval.
Richards Accounting Corp. is a Florida corporation that hired Sylvestro to be its registered agent. After Richards Accounting defaulted on its monthly payments for six months in a row, Sylvestro terminated his services as Richards Accounting's registered agent. Two months later, Sylvestro sued Richards Accounting for the unpaid fees. In its answer to the complaint, Richards Accounting admitted that the fees were due and unpaid, and furthermore alleged that the corporation was insolvent. Sylvestro now requests that the court order the dissolution of the corporation.
What may the court do?
A -Not order the dissolution, because Sylvestro needs to file his request for dissolution with the Department of State, not a court.
B -Not order the dissolution, because the request is being made by a creditor, rather than a shareholder or the board of directors.
C -Order the dissolution, because Richards Accounting lacks a registered agent.
D -Order the dissolution, because Richards Accounting admitted that it was insolvent.
D -Order the dissolution, because Richards Accounting admitted that it was insolvent.
Discussion of correct answer: A court may order a dissolution of a corporation in certain limited situations. For example, a creditor may request a court to dissolve a corporation if: (1) the creditor has a judgment against the corporation and the corporation is insolvent; or (2) the corporation has admitted in writing that the creditor's claim is due and owing and that the corporation is insolvent. The Department of State may also dissolve a corporation, without a court order, in a limited number of situations, one of which is that the corporation has not had a registered agent for at least 30 days. Here, Richards Accounting has admitted in writing that Sylvestro's debt is due and owing, and that it is insolvent. Therefore, the court may order the dissolution of Richards Accounting. The fact that Richards Accounting has not had a registered agent for more than 30 days would not be grounds for a court to order dissolution, although the Department of State could dissolve the corporation on that ground.
Owners of stock in Figtree Group Inc. have the right, if any buyer purchases 15% or more of the corporation's stock, to purchase newly issued shares of the corporation at a substantially discounted price.
What is this known as?
A -Greenmail.
B -A lock-up.
C -A poison pill.
D -A recapitalization.
C -A poison pill.
Discussion of correct answer: A poison pill is a defensive tactic used to thwart a hostile tender offer. In a poison pill, shareholders (other than the bidder making the tender offer) have the right to purchase additional shares of the target's stock at a low price. Since Figtree Group shareholders have such a right, this is a poison pill.
Miguel is on the board of directors of Sign Corp., a company that rents billboard space along the highways running through Florida. Miguel's wife Connie has just become a real estate agent, and she is seeking to place some ads on billboards owned by Sign Corp. Connie is seeking a reduced price, in exchange for a long-term contract with Sign Corp.
Regarding Sign Corp.'s contract negotiations with Connie, which of the following is correct?
A -Miguel must disclose his interest in the contract to the rest of the board, remove himself from negotiations on the contract, and he must refrain from voting on the matter.
B -Miguel must disclose his interest in the contract to the rest of the board, and any vote he might cast must be disregarded.
C -Miguel must disclose his interest in the contract to the rest of the board, but he may then vote and have his vote counted.
D -Regardless of whether Miguel discloses his interest in the contract to the rest of the board and refrains from voting on the matter, the conflict of interest makes a contract between Connie and Sign Corp. voidable.
B -Miguel must disclose his interest in the contract to the rest of the board, and any vote he might cast must be disregarded.
The correct answer is: Miguel must disclose his interest in the contract to the rest of the board, and any vote he might cast must be disregarded.
Maxwell Desks Inc. merged with Simmons Inc., with Simmons being the surviving corporation. The shares of both companies are listed on the New York Stock Exchange. Steven, a shareholder in Simmons, opposed the merger, and filed a written objection to it prior to the special meeting of Simmons' shareholders that was called to approve the merger. After the merger was complete, Steven filed a demand with the board of directors of Simmons, demanding that the corporation repurchase his shares from him at their fair market value.
Must Simmons do so?
A -No, because Simmons is publicly traded.
B -No, because their fair market value does not necessarily reflect their trading value.
C -Yes, because Steven objected to the merger prior to the special meeting.
D -Yes, because Simmons is the surviving corporation.
A -No, because Simmons is publicly traded.
Discussion of correct answer: A shareholder who objects to a fundamental corporate change (such as a merger or a corporation's sale of all or substantially all of its assets) is entitled to an appraisal and payment of fair value for his shares. The shareholder asserting appraisal rights is required to surrender his shares to the corporation. However, a shareholder does not have appraisal rights if his corporation: (1) is listed on a national exchange; or (2) if not listed on a national exchange, has 2,000 shareholders or more and the market value of its outstanding shares is $10 million or more. Here, Steven objected to a fundamental corporate change, and therefore would ordinarily be entitled to appraisal rights. However, Simmons is listed on a national exchange, and he will have to sell his shares there.
Bianca bought 100 shares of Teddy Bear Corp., a Florida corporation with fewer than 35 shareholders, at a price of $100 per share. Six months later, her shares were worth less than $1 each. Claiming waste of corporate assets, Bianca sought a forced dissolution of Teddy Bear Corp. and the distribution of its assets.
Is Bianca likely to get a Florida court to institute an involuntary dissolution of Teddy Bear Corp.?
A -No, because a Florida court may not force an involuntary dissolution.
B -No, because there is no evidence of fraud.
C -Yes, because she may be able to establish that wasting corporate assets has caused material injury to the corporation.
D -Yes, because such a suit is possible if the shareholder is joined in her suit by a member of the board of directors.
C -Yes, because she may be able to establish that wasting corporate assets has caused material injury to the corporation.
Discussion of correct answer: Involuntary (court-ordered) dissolutions are rare in Florida. However, a court would have the authority to force one if Bianca established that wasting corporate assets has caused material injury to the corporation. An involuntary dissolution may be initiated by a shareholder or director suit and may be ordered on several grounds. One basis for dissolution in a corporation having 35 or fewer shareholders is that corporate assets have been wasted, causing material injury to the corporation.
Semper Slimmer Inc.'s stated capital is $6,000, and its capital surplus is $4,300. The corporation has a number of shareholders. Semper Slimmer's board of directors meets to determine whether to declare a dividend this year. Semper Slimmer follows Florida's default rules applicable to declarations of dividends.
Which of the following is true?
A -The board may issue dividends, even if doing so would result in the corporation's total liabilities exceeding its total assets.
B -The board may issue dividends, if the company's net earnings this year are below $6,000.
C -The board must issue dividends, if the company's net earnings this year exceed $6,000.
D -The board must issue dividends in any amount up to $6,000.
B -The board may issue dividends, if the company's net earnings this year are below $6,000.
Discussion of correct answer: The decision as to whether to declare a dividend lies in the discretion of a corporation's board of directors, unless the articles of incorporation or an agreement with the shareholders provides otherwise. However, dividends may only be paid out of capital surplus or net earnings. Also, dividends may not be issued if the result would be that the corporation's liabilities exceed its assets. Here, Semper Slimmer's capital surplus is $4,300, and so it may pay dividends out of that amount, regardless of whether its net earnings are above or below $6,000. On the other hand, the board may also in its discretion declare no dividend this year.
A group of computer experts form a corporation in the state of Florida. The corporation is in the business of search engine optimization, and their business soars. With more clients than it can handle, the board of directors authorizes the corporation's president to sell a branch of its Web development department. The president arranges for the sale of the branch to a computer software company, for what appears to be a highly profitable price. However, it is later revealed that the chief executive officer of the computer software company was the president's college roommate. Rumors begin flying that the president had received, and declined, offers to purchase the division at a much higher price than that he accepted from his old roommate. Following numerous shareholder complaints, the board of directors begins an investigation into the president's sale of the division.
Which of the following is true?
A -The investigation is improper, because rumors alone are insufficient to warrant an investigation into an authorized act by a corporate officer where there is no appearance of impropriety.
B -The president is not entitled to the presumption of the business judgment rule, unless he proves that he acted in good faith, with the same degree of care and skill as an ordinarily prudent and diligent person under similar circumstances, and in a manner reasonably believed to be in the best interests of the corporation.
C -The president is shielded from personal liability and judicial review, if he acted with reasonable diligence and in good faith.
D -The president is entitled to the presumption of the business judgment rule, unless his act lacked a rational business purpose.
Discussion of correct answer: The business judgment rule is a rebuttable presumption that directors and officers are better equipped than courts to make business judgments, because they are more intimately familiar with the corporation's affairs. Mere errors in business judgment are not actionable in themselves; rather, directors or officers who are disinterested and who act with reasonable diligence and in good faith are shielded from personal liability and judicial review. Thus, in this case, if the president, in fact, acted with reasonable diligence and in good faith in selling the division to his college roommate, he will be shielded from personal liability and judicial review.
On June 1, the board of directors of Make A Break Inc. sent a notice to each of the company's 30 shareholders stating, in full: "The annual meeting of Make A Break Inc. will take place at 10:00 a.m. on July 15, at the corporation's headquarters at 15 Corporate St."
Is the notice proper?
A -No, because the meeting is more than one month in the future.
B -No, because the notice does not state the matters to be decided at the meeting.
C -Yes, because the meeting is more than two weeks away.
D -Yes, because it names the place of the meeting.
D -Yes, because it names the place of the meeting.
Discussion of correct answer: Notice of a corporation's annual meeting need only state the date, time, and place of the meeting. Notice of a meeting must be sent between 10 and 60 days prior to the meeting. Here, the notice of Make A Break Inc.'s annual meeting included all of this information, and was timely. Therefore, the notice is proper.
Five shareholders own a steakhouse in an urban neighborhood. The steakhouse is incorporated in the state of Florida, with each shareholder owning 20 percent of the corporation. The articles of incorporation do not include any provision regarding the dissolution of the corporation, nor do the corporation's bylaws. After ten years of doing business, two of the shareholders (a married couple) make a lifestyle change to veganism and decide that they cannot in good conscience continue selling meat. One of the other shareholders wishes to continue the business, but the remaining two shareholders are not interested in taking over the day-to-day operations of the company. Except for the one shareholder who wishes to continue in the business, the shareholders wish to cease operations.
Which of the following is true?
A -Prior to dissolving the corporation, the shareholders must liquidate the corporate assets.
B -The shareholders must initiate a proposal for dissolution, which must be approved by a shareholder majority.
C -Following authorization by the shareholders, the board of directors may at any time file articles of dissolution with the Secretary of State.
D -Following the filing of articles of dissolution with the Secretary of State, the dissolution is irrevocable
C -Following authorization by the shareholders, the board of directors may at any time file articles of dissolution with the Secretary of State.
Discussion of correct answer: Corporations may dissolve voluntarily or involuntarily. Involuntary dissolutions are rare and must be ordered by a court. A voluntary dissolution generally involves a proposal for dissolution by the corporation's board of directors to its shareholders. The proposal for dissolution must be approved by a majority of the votes entitled to be cast, unless otherwise provided in the articles of incorporation. After the dissolution is authorized, the corporation may dissolve at any time by filing articles of dissolution with the Secretary of State. Therefore, this answer is correct.
Jaime and Peter decided to open a hobby shop together. Jaime properly filed articles of incorporation with the Florida Secretary of State. Peter drafted the company's bylaws. Eager to open for business, the two did not hold an initial organizational meeting, nor did they officially adopt bylaws and elect officers. Jaime met with a real estate agent to locate a building for the business, and he signed the lease in the name of the corporation. The shop opened for business, but due to difficult economic times, the corporation was unable to pay the monthly rent.
At the time the lease agreement was signed, did the purported corporation legally exist?
A -No, because Jaime and Peter did not hold an organizational meeting.
B -No, because no corporate officers had been appointed or elected.
C -Yes, because articles of incorporation had been properly filed.
D -Yes, because Jaime acted as an agent for the corporation.
C -Yes, because articles of incorporation had been properly filed.
Discussion of correct answer: Under Florida law, a business's corporate existence begins when the articles of incorporation are filed. Here, given that Jaime and Peter did file articles of incorporation with the Florida Secretary of State, the corporation was in existence at the time that Jaime entered into the lease on behalf of the corporation. As such, the corporation itself is liable for the rent, and neither Jaime nor Peter is personally liable for its debts.