Deck 33: Life and Death of a Corporation

Question 1

Michael incorporated Erin Homes, Inc., to manufacture mobile homes. He issued himself a stock certificate for 100 shares for which he made no payment. He and his wife served as officers and directors of the organization, but, during the eight years of its existence, the corporation held only one meeting. Erin always had its own checking account, and all proceeds from the sales of mobile homes were deposited there. It filed federal income tax returns each year, using its own federal identification number. John and Thelma paid $17,500 to purchase a mobile home from Erin, but the company never delivered it to them. John and Thelma sued Erin Homes and Michael, individually. Should the court "pierce the corporate veil" and hold Michael personally liable?

Answer 1

The court will usually resort to " piercing the corporate veil " in four situations:
• When a corporation fails to observe formalities. If an organization does not act like a corporation, it will not be treated like one. A corporation should have shareholders' and directors' meetings (or sign consents), keep a minute book as a record of these meetings, and make all the required state filings. Additionally, corporate officers must be careful to sign all corporate documents with a corporate title, not as an individual.
• When a corporation's individual members commingle their assets with corporate assets. If shareholders commingle assets, it is difficult for creditors to determine which assets belong to whom. This confusion is generally resolved in favor of the creditors-all assets are deemed to belong to the corporation.
• If the founders of a corporation do not raise enough money (either through debt or equity) to give the business the ability to pay off its debts , courts may require shareholders to pay corporate obligations. Therefore, if the corporation does not have sufficient capital, it needs to buy insurance, particularly to protect against this kind of tort liability. Judges are likelier to hold shareholders liable if the alternative is to send an injured tort victim away empty-handed.
• When fraud is committed. If fraud is committed in the name of a corporation, victims can make claims against the personal assets of the shareholders who profited from the fraud.
Although Erin Homes did not hold annual meetings, it did keep observe other legal formalities governing corporations, such as keeping accurate and separate checking accounts for the corporation and filing federal income tax returns with its own federal identification number. Furthermore, Michael Ferns and his wife did not commingle their assets with those of the corporation.
It is unclear as to why Erin Homes failed to deliver the home to the Layas in return for their payment. If the failure to deliver the home resulted from the corporation's lack of sufficient capital, then Michael Ferns should be held individually liable to pay off the corporation's debts to the Layas.
Additionally, because Erin Homes failed to deliver the mobile home purchased by the Layas, the contract of sale between the Layas and Erin Homes was violated and thus fraud was committed, fraud that benefited the Ferns.
Based on the committing of fraud and the possibility of the corporation lacking sufficient capital , the court should "pierce the corporate veil" and hold Michael Ferns individually liable.

Question 2

Facebook's charter has an exculpatory clause, which protects directors from liability unless they act in bad faith or they intentionally engage in wrongdoing. Is that a reasonable standard?

Answer 2

Exculpatory clause:
Exculpatory clause has the following provisions:
• Exculpatory clause is a provision that protects a director from personal liability.
• The personal liability might be towards the company and shareholders.
• A corporation may include in its charter the exculpatory clause which protects the director from personal liability towards company and shareholders.
• The exculpatory clause is not applicable in the case of intentional misbehavior.
Conclusion:
FB charter has an exculpatory clause which protects the directors from the liability unless they act in bad faith. Such exculpatory clause is valid and a reasonable standard.

Question 3

CPA QUESTION Generally, a corporation's articles of incorporation must include all of the following except: (a) the name of the corporation's registered agent.
(b) the name of each incorporator.
(c) the number of authorized shares.
(d) the quorum requirements.

Answer 3

A corporation's articles of incorporation must include:
• The name of the corporation's registered agent,
• The number of authorized shares, and
• The names of each incorporator.
A quorum is a percentage of the shareholders who must be present at a meeting for it to count. The quorum requirements do not need to appear in the articles of incorporation.
Therefore the answer (c) quorum requirement is correct.

Question 4

Angelica is planning to start a home security business in McGehee, Arkansas. She plans to start modestly but hopes to expand her business within 5 years to neighboring towns and, perhaps, within 10 years to neighboring states. Her inclination is to incorporate her business in Delaware. Is her inclination correct?

Question 5

Facebook, Inc. (and other Internet companies) have created dual classes of stock so that the founders can continue to control their company long after it goes public or they die. Should corporate laws permit this? If the founders want to control a company, why shouldn't they buy enough regular stock to do so?

Question 6

CPA QUESTION DestinyManufacturing, Inc., is incorporated under the laws of Nevada. Its principal place of business is in California, and it has permanent sales offices in several other states. Under the circumstances, which of the following is correct? (a) California may validly demand that Destiny incorporate under the laws of the state of California.
(b) Destiny must obtain a certificate of authority to transact business in California and the other states in which it does business.
(c) Destiny is a foreign corporation in California, but not in the other states.
(d) California may prevent Destiny from operating as a corporation if the laws of California differ regarding organization and conduct of the corporation's internal affairs.

Question 7

The Resolution Trust Corp. (RTC) sued the directors of the Commonwealth Savings Association seeking to recover from them personally $200 million that the bank lost in bad real estate loans. The directors approved the loans after state and federal regulatory agencies had issued reports criticizing the bank's loan practices. The directors failed to implement policies and procedures to prevent problems with the loan portfolio and failed to monitor loan officers adequately. There was no evidence that the directors knowingly committed illegal acts or acts outside their authority. Under Texas law, the RTC could recover for the directors' negligence only if their acts were ultra vires. Were these acts ultra vires ?

Question 8

When Facebook went public, its disclosure document said:
As a board member and officer, Mr. Zuckerberg owes a fiduciary duty to our stockholders and must act in good faith in a manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a controlling stockholder, Mr. Zuckerberg is entitled to vote his shares in his own interests, which may not always be in the interests of our stockholders.
Should corporate laws permit Zuckerberg to control the company without imposing a duty to act in the best interests of the other shareholders?

Question 9

CPA QUESTION A corporate stockholder is entitled to which of the following rights? (a) Elect officers.
(b) Receive annual dividends.
(c) Approve dissolution.
(d) Prevent corporate borrowing.

Question 10

Waste Management, Inc., the country's largest waste hauler, changed its name to WMX Technologies, Inc. Similarly, U.S. Steel changed its name to USX Corp. and American Airlines became AMR Corp. What legal steps would be necessary for these companies to protect their new corporate names?

Question 11

ETHICS In the Bigmar case, the court clearly believed that the directors had lied on the witness stand. Should the directors have been charged with perjury? Did they do the right thing when they lied on the stand to protect their company from the evil Ms. May? What would Mill and Kant have said?

Question 12

Participating preferred stockholders: (a) only receive payment after other preferred shareholders have been paid.
(b) only receive payment after common shareholders have been paid.
(c) are treated like both a preferred shareholder and a common shareholder.
(d) receive all their payments before all other shareholders.

Question 13

Dickens, Inc. is a bookstore incorporated in Nevada. From its warehouse in Montana, it ships books to all 50 states. The company's owner lives in New York, and its web designer lives in California. Where is Dickens a domestic corporation? Where must it qualify to do business?

Question 14

States compete for lucrative filing fees by passing corporate statutes that favor management. One proposed solution to this problem would be a federal system of corporate registration. Is this a good idea? What are the impediments to creating such as system?

Question 15

Which of the following statements is/are true? (a) Shareholders can amend the bylaws.
(b) Directors can amend the bylaws.
(c) Both shareholders and directors must approve any amendment to the bylaws.
(d) Both (a) and (b)