Quiz 33: Life and Death of a Corporation


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.

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.

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.

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