Corporate Law Practice Flashcards

Question 1

What is the main legal difference between a corporation and a general partnership?

Accepted Answer

A corporation is a separate legal entity from its owners, so it can own property and enter contracts in its own name. Shareholders generally have limited liability for company debts. A general partnership arises when two or more people carry on a business for profit, and partners typically share unlimited personal liability for its obligations.

Question 2

What does a corporation's articles of incorporation typically contain?

Accepted Answer

The articles of incorporation, sometimes called the certificate of incorporation, are the founding document filed with the state. They usually state the corporate name, registered agent, number and classes of authorized shares, and the incorporator's information. Bylaws, by contrast, are internal rules covering meetings, officers, and procedures.

Question 3

What is a limited liability company and how does it differ from a corporation in management?

Accepted Answer

A limited liability company is an entity that gives owners limited liability while allowing flexible management and tax treatment. Unlike a corporation, an LLC is generally not required to have a board of directors or formal annual shareholder meetings, and its operating agreement can set management by members or appointed managers.

Question 4

What is a registered agent and why must a business have one?

Accepted Answer

A registered agent is a person or company designated to receive service of legal process and official state notices on behalf of an entity. Most states require every corporation and LLC to maintain a registered agent with a physical address in the state of formation. This helps lawsuits and government mail reach the business.

Question 5

What is a partnership agreement and why is it important even if not legally required?

Accepted Answer

A partnership agreement is a contract among partners that sets out capital contributions, profit and loss sharing, management authority, and procedures for admitting or removing partners. Although many partnerships can exist without a written agreement, default statutory rules then apply, which may not match the owners' intentions. A written agreement reduces disputes.

Question 6

What does it mean to pierce the corporate veil?

Accepted Answer

Piercing the corporate veil is an equitable doctrine under which a court disregards the separate existence of a corporation and holds shareholders personally liable. Courts typically require showing that the entity was a mere alter ego of its owners and that respecting the separation would produce injustice or fraud.

Question 7

What is the difference between a sole proprietorship and a single-member LLC for liability?

Accepted Answer

A sole proprietorship has no legal separation between the owner and the business, so the owner is personally liable for all business debts and obligations. A single-member LLC creates a separate legal entity, which generally shields the owner's personal assets from business debts, provided formalities are respected and the entity is not misused.

Question 8

What is the internal affairs doctrine and why does it matter in choosing a state of incorporation?

Accepted Answer

The internal affairs doctrine holds that the law of the state of incorporation governs relationships among a corporation, its directors, officers, and shareholders. This lets a company choose one state's corporate statute and case law even if it operates elsewhere. Companies often weigh predictable courts and well-developed precedent when selecting a state.

Question 9

What is the business judgment rule and what does it protect?

Accepted Answer

The business judgment rule is a presumption that directors acted on an informed basis, in good faith, and in the honest belief that their decision served the company. Courts will not second-guess them with hindsight. The presumption can be rebutted by showing fraud, bad faith, or a conflict of interest.

Question 10

What is the duty of care for corporate directors?

Accepted Answer

The duty of care requires directors to act with the diligence that a reasonably prudent person would use in similar circumstances. In practice, directors should review material information, ask questions, consult experts when appropriate, and attend meetings. Liability for breaches usually turns on process failures rather than poor business results.

Question 11

What is the duty of loyalty and what does it require of directors?

Accepted Answer

The duty of loyalty requires directors and officers to put the corporation's interests ahead of their own when acting for the company. It prohibits self-dealing, usurping corporate opportunities, and misusing confidential information. Conflicted transactions require disclosure and may need approval by disinterested directors or shareholders.

Question 12

What is a corporate opportunity and when may a director pursue one?

Accepted Answer

A corporate opportunity is a business prospect that the corporation is financially able to pursue, that falls within its line of business, and in which it has an interest or expectancy. Directors generally may not take such an opportunity without first offering it to the corporation and obtaining proper approval.

Question 13

What is the difference between inside and outside directors?

Accepted Answer

Inside directors are also employees or officers of the corporation, such as the chief executive officer, while outside directors have no employment relationship with the company. Outside directors are often expected to provide independent oversight, and many listed companies must have a majority of independent directors. Exchange rules set detailed independence tests.

Question 14

What is the role of a board committee such as an audit committee?

Accepted Answer

Board committees are subgroups of directors that handle specialized oversight and report back to the full board. An audit committee typically oversees financial reporting, the independent auditor relationship, and internal controls. Delegation does not remove the full board's ultimate responsibility. Audit committee members are typically required to be independent.

Question 15

What is oversight liability for directors and when does it arise?

Accepted Answer

Oversight liability arises when directors fail to make a good faith effort to implement a reporting or compliance system, or consciously ignore red flags that signal serious problems. Courts typically look for a sustained or systematic failure of oversight rather than an isolated mistake. Minutes of compliance discussions can help directors defend claims.

Question 16

How do directors typically make decisions validly at a board meeting?

Accepted Answer

Directors generally act as a board through a vote at a meeting with a quorum present, or by unanimous written consent where the statute or bylaws permit it. A quorum is usually a majority of the total number of directors unless the bylaws set a different figure. Governing documents may set different voting thresholds.

Question 17

What are the basic rights shareholders hold in a typical corporation?

Accepted Answer

Common shareholder rights include voting on fundamental matters such as electing directors, the right to receive dividends when declared, and the right to inspect certain corporate records. Shareholders also share in residual assets on liquidation. The exact rights depend on the statute, articles, and share class.

Question 18

What is a derivative lawsuit and who brings it?

Accepted Answer

A derivative lawsuit is brought by a shareholder on behalf of the corporation to enforce a claim the corporation itself holds. Any recovery generally flows to the corporation rather than to the suing shareholder. Plaintiffs often must first demand board action or show that doing so would be futile.

Question 19

What is a proxy and how is it used in shareholder voting?

Accepted Answer

A proxy is written authority that allows a shareholder to appoint another person to attend a meeting and vote their shares. Many public company shareholders vote this way rather than in person. Proxy solicitation for public companies is regulated by federal securities rules requiring disclosure to shareholders.

Question 20

What notice must a corporation give before a shareholder meeting?

Accepted Answer

Corporations generally must give shareholders written notice of the meeting's date, time, and place within a period set by statute and the bylaws. The notice typically must also state the purposes of special meetings. Notice periods vary by jurisdiction, so the governing statute should be checked for minimum and maximum limits.

Question 21

What is a quorum for a shareholder meeting?

Accepted Answer

A quorum is the minimum number of shares that must be represented at a meeting before the shareholders can validly transact business. It is commonly a majority of outstanding voting shares, though the articles or bylaws may set a different threshold within legal limits. Actions taken without a quorum are generally void or voidable.

Question 22

What is cumulative voting and why do some shareholders want it?

Accepted Answer

Cumulative voting lets each shareholder multiply their shares by the number of directors being elected and cast all those votes for one candidate or spread them among several. This method can help minority holders win at least one board seat. Whether cumulative voting is available depends on state law and the articles.

Question 23

What are preemptive rights and when do they apply?

Accepted Answer

Preemptive rights give existing shareholders the option to buy a proportional share of newly issued stock before it is offered to outsiders, which protects against dilution. In many jurisdictions these rights exist only if the articles expressly grant them. Shareholders must usually receive a timely chance to buy at the same terms.

Question 24

How does a shareholder typically remove a director?

Accepted Answer

Shareholders can usually remove a director by a vote at a meeting called for that purpose, subject to requirements in the statute, articles, and bylaws. Some jurisdictions allow removal only for cause, while others permit removal without cause. Staggered boards and cumulative voting can limit or change how removal works.

Question 25

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

Accepted Answer

Authorized shares are the maximum number of shares a corporation may issue under its articles. Issued shares are those the corporation has actually sold or granted at some point. Outstanding shares are issued shares still held by shareholders, excluding any shares the company has repurchased and holds as treasury stock.

Question 26

What is par value and why is it often set low?

Accepted Answer

Par value is a nominal figure stated in the charter for each share, often far below the price at which shares are sold. Because issuing shares below par can create liability for purchasers in some jurisdictions, companies often set par value at a low nominal figure. Many modern corporations choose no par stock, where the board sets the consideration for issuance.

Question 27

What is a dividend and what conditions usually limit when it can be paid?

Accepted Answer

A dividend is a distribution of corporate assets or earnings to shareholders in proportion to their holdings. Corporate law usually prohibits distributions that would leave the company unable to pay debts as they come due or exceed statutory limits. The board decides timing and amount.

Question 28

What is a securities offering and why is it generally regulated?

Accepted Answer

A securities offering is the sale of stock, bonds, or other investment interests to investors, often to raise capital. It is generally regulated because investors need reliable information to make informed decisions and because securities markets depend on public confidence. Federal securities law generally requires registration of public offerings unless an exemption applies.

Question 29

What is the difference between a private placement and a public offering?

Accepted Answer

A public offering sells securities to the general public and generally requires registration with the federal securities regulator unless an exemption applies. A private placement sells securities to a limited group of investors, such as accredited investors, under an exemption from registration. Private placements usually involve restrictions on resale of the securities.

Question 30

What is a convertible security and how does it work?

Accepted Answer

A convertible security, such as a convertible bond or preferred stock, gives the holder the right to exchange it for common stock at a set ratio or price. Investors receive fixed income or a preference until conversion, and they may benefit if the company's stock price rises. Terms are set in the governing instrument.

Question 31

What is a debt covenant and why do lenders include them?

Accepted Answer

A debt covenant is a contractual promise in a loan or bond agreement that restricts or requires certain borrower conduct. Affirmative covenants require actions such as providing financial statements, while negative covenants limit actions such as taking on additional debt or paying large dividends. Lenders include them to reduce risk and monitor the borrower.

Question 32

Why do disclosure rules matter for public companies?

Accepted Answer

Disclosure rules require public companies to share material information such as financial results, risks, and management compensation on a regular and timely basis. They allow investors to compare companies and price securities more accurately. Material misstatements can lead to civil liability and enforcement action by regulators.

Question 33

What is the difference between a merger and an acquisition of assets?

Accepted Answer

In a merger, two companies combine so that one survives and the other's assets and liabilities pass to it by operation of law. In an asset acquisition, the buyer selects specific assets and assumes only the liabilities it agrees to take, which leaves most seller liabilities behind. Asset deals often need more transfer steps.

Question 34

What is due diligence in a corporate transaction?

Accepted Answer

Due diligence is the investigation a buyer or investor conducts to verify a target company's condition before closing. Lawyers typically review corporate records, material contracts, litigation, intellectual property, employment matters, and regulatory compliance. Findings shape price, representations, indemnities, and closing conditions.

Question 35

What is a representation and warranty in a purchase agreement?

Accepted Answer

A representation and warranty is a contractual statement of fact by the seller about the business, such as that its financial statements are accurate or that it owns its intellectual property. If a statement proves untrue, the buyer may have a claim for breach. These provisions allocate risk between the parties.

Question 36

What is an indemnification clause and how is it used in deals?

Accepted Answer

An indemnification clause requires one party to compensate the other for specified losses, such as third-party claims or breaches of representations. In acquisitions, indemnities are often backed by escrow, holdbacks, or insurance. Negotiation focuses on caps, baskets, survival periods, and whether the indemnity covers known risks.

Question 37

What does a closing checklist accomplish in a transaction?

Accepted Answer

A closing checklist lists every document, signature, consent, filing, and payment needed to complete a transaction and assigns responsibility for each item. It helps counsel track conditions precedent, such as required shareholder or board approvals and third-party consents. Keeping it current reduces the risk of missed steps on the closing date.

Question 38

What are the main purposes of a corporate minute book?

Accepted Answer

A corporate minute book is the official record of a company's authorizing actions, including articles, bylaws, board and shareholder minutes, and written consents. It provides evidence that decisions were properly authorized, which matters for financing, transactions, and disputes. Maintaining accurate minute books is a routine but important compliance task.

Question 39

Why do companies adopt a code of conduct and an insider trading policy?

Accepted Answer

Codes of conduct set expected ethical standards for employees, officers, and directors, while insider trading policies restrict trading by people who possess material nonpublic information. These policies help reduce legal exposure under securities law and build stakeholder trust. Clear procedures such as trading windows and preclearance requirements make compliance easier to monitor.

Question 40

What is a compliance program and what core elements does it usually include?

Accepted Answer

A compliance program is a structured set of policies, procedures, and controls designed to prevent, detect, and respond to legal violations within an organization. Common elements include clear written standards, designated oversight personnel, training, confidential reporting channels, periodic risk assessments, and consistent discipline. Board-level oversight is essential for the program to be effective.

Corporate Law Practice Flashcards

1Business Entities and Formation

2Corporate Governance and Fiduciary Duties

3Shareholder Rights and Meetings

4Corporate Finance and Securities Basics

5Mergers, Transactions and Compliance Practice

Learning Resources