Question 1

Under the Model Business Corporation Act, a corporation may not issue its shares in return for any benefit to the corporation.

Accepted Answer

The Model Business Corporation Act allows corporations to issue shares in return for any benefit to the corporation, including money, property, or services rendered.

Question 2

Joe is the promoter of New Corporation (NC). He entered into various preincorporation contracts. NC was properly formed on January 1, 2006. As a result:

Accepted Answer

Even after NC is properly formed,Joe will remain jointly and severally liable on preincorporation contracts until novation occurs.

Question 3

Mandatory dividend provisions enacted in corporate laws have generally been held legal.

Accepted Answer

Mandatory dividend provisions have generally been held illegal as unduly restricting the powers of the board of directors.

Question 4

A party who makes a preincorporation contract with a corporate promoter is liable on the preincorporation contract:

Accepted Answer

A party who makes a preincorporation contract with a corporate promoter is liable on the preincorporation contract only when the promoter is liable on the contract.

Question 5

As per the Model Nonprofit Corporation Act (MNCA), a nonprofit corporation need not have members for its existence.

Accepted Answer

According to the Model Nonprofit Corporation Act, a nonprofit corporation can exist without members. This means that the organization does not need to have voting rights and can be governed by a self-appointed board of directors.

Question 6

A promoter:

Accepted Answer

A promoter can have liability on the contracts that they negotiate on behalf of the prospective corporation. This is because they are acting on behalf of a corporation that does not yet legally exist, making them personally liable for the agreements made. Once the corporation is formed, liability for pre-incorporation contracts will generally shift to the corporation, but the promoter can still be held liable if their actions amounted to fraud, misrepresentation, or a breach of fiduciary duty.

Question 7

A right of first refusal on a share certificate allows the corporation to match the offer that a selling shareholder receives for his shares.

Accepted Answer

A right of first refusal gives the corporation the option to buy the shares before any outsider can purchase them, allowing them to match the offer made by the selling shareholder.

Question 8

A passive investor who believes she has invested in a corporation has no liability for the obligations of the business if the corporation has not in fact been formed.

Accepted Answer

A party to a contract involving a corporation may claim nonexistence of the corporation in order to avoid a contract made in the name of the corporation.So,a passive investor who believes she has invested in a corporation has no liability for the obligations of the business if the corporation has not in fact been formed.

Question 9

Under the MBCA, an incorporator may become jointly and severally liable for preincorporation contracts just by being an incorporator.

Accepted Answer

No special liability attaches to a person merely because she serves as an incorporator.

Question 10

Two corporations in a state may have the same names.

Accepted Answer

A corporation must have a name that is distinguishable from the name of any other corporation incorporated or qualified to do business in the state.

Question 11

A corporation is required to reimburse a promoter for his reasonable expenses incurred on behalf of the corporation prior to incorporation.

Accepted Answer

A corporation is generally not required to reimburse a promoter for his reasonable expenses incurred on behalf of the corporation prior to incorporation because the promoter is self-appointed and has acted for a corporation that is not in existence.

Question 12

In order to capitalize a newly formed corporation, the company will usually seek cash in exchange for equity securities, debt securities, or both.

Accepted Answer

To raise funds and capitalize a newly formed corporation, the company will typically issue equity securities, debt securities or a combination of both in exchange for cash from investors.

Question 13

Memberships in a nonpublic corporation are freely transferable.

Accepted Answer

Nonpublic corporations have the ability to restrict or limit the transferability of its membership interests through its governing documents or shareholder agreements.

Question 14

When a promoter is liable on a preincorporation contract, the promoter is released from liability on the contract:

Accepted Answer

A promoter is released from liability on a preincorporation contract when there is a novation, which occurs when the corporation and the third party agree to release the promoter from liability and substitute the corporation in the promoter's place.

Question 15

Rice is a promoter of a corporation to be known as Dex Corp. On January 1, 1985, Rice signed a nine-month contract with Roe, a CPA, which provided that Roe would perform certain accounting services for Dex. Rice did not disclose to Roe that Dex had not been formed. Prior to the incorporation of Dex on February 1, 1985, Roe rendered accounting services pursuant to the contract. After rendering accounting services for an additional period of six months pursuant to the contract, Roe was discharged without cause by the board of directors of Dex. In the absence of any agreements to the contrary, who will be liable to Roe for breach of contract?

Accepted Answer

When a promoter is liable on a preincorporation contract,the promoter is released from liability on the contract when the corporation and the other party to the contract agree to release the promoter from liability.Since Rice had not been released from liability by Dex or Roe and since Dex had adopted the contract made by Rice (by availing itself of Roe's accounting services),both Rice and Dex will be liable to Roe for breach of contract.

Question 16

Under the Model Business Corporation Act (MBCA), a prospective shareholder may not revoke a preincorporation subscription for a six-month period, in the absence of a contrary provision in the subscription.

Accepted Answer

According to the Model Business Corporation Act (MBCA), a prospective shareholder may not revoke a preincorporation subscription for a six-month period, unless there is a contrary provision in the subscription agreement.

Question 17

Only when the promoter is liable on the preincorporation contract is the other party liable on the contract.

Accepted Answer

Only when the promoter is liable on the preincorporation contract is the other party liable on the contract.

Question 18

Promoters are personally liable on a preincorporation contract but are released from liability when the corporation adopts the contract.

Accepted Answer

Promoters remain liable on a preincorporation contract even after the corporation's adoption of the contract,since adoption does not automatically release the promoter.

Question 19

Corporations are generally liable on preincorporation contracts signed by their promoters.

Accepted Answer

A nonexistent corporation has no liability on contracts made by a promoter prior to its incorporation.

Question 20

Watered shares are shares issued for consideration that has been overvalued impermissibly by the board of directors.

Accepted Answer

Watered shares are also known as "bloated shares" and refer to shares that have been issued for an amount greater than their actual value. This is often done to benefit certain shareholders or to inflate the value of the company's stock. It is considered illegal and unethical.

Quiz 42: Organization and Financial Structure of Corporations

Under the Model Business Corporation Act, a corporation may not issue its shares in return for any benefit to the corporation.

Joe is the promoter of New Corporation (NC) . He entered into various preincorporation contracts. NC was properly formed on January 1, 2006. As a result:

Mandatory dividend provisions enacted in corporate laws have generally been held legal.

A party who makes a preincorporation contract with a corporate promoter is liable on the preincorporation contract:

As per the Model Nonprofit Corporation Act (MNCA), a nonprofit corporation need not have members for its existence.

A promoter:

A right of first refusal on a share certificate allows the corporation to match the offer that a selling shareholder receives for his shares.

A passive investor who believes she has invested in a corporation has no liability for the obligations of the business if the corporation has not in fact been formed.

Under the MBCA, an incorporator may become jointly and severally liable for preincorporation contracts just by being an incorporator.

Two corporations in a state may have the same names.

A corporation is required to reimburse a promoter for his reasonable expenses incurred on behalf of the corporation prior to incorporation.

In order to capitalize a newly formed corporation, the company will usually seek cash in exchange for equity securities, debt securities, or both.

Memberships in a nonpublic corporation are freely transferable.

When a promoter is liable on a preincorporation contract, the promoter is released from liability on the contract:

Under the Model Business Corporation Act (MBCA), a prospective shareholder may not revoke a preincorporation subscription for a six-month period, in the absence of a contrary provision in the subscription.

Only when the promoter is liable on the preincorporation contract is the other party liable on the contract.

Promoters are personally liable on a preincorporation contract but are released from liability when the corporation adopts the contract.

Corporations are generally liable on preincorporation contracts signed by their promoters.

Watered shares are shares issued for consideration that has been overvalued impermissibly by the board of directors.