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ANSWER KEY
Chapter 26 The Business Entity: The Corporation
Opening Case Questions
1. The plaintiff (William Stewart) was forced to amend his complaint twice because he began to
suspect that the company that he had been dealing with, Eberts, Inc., was being used by the
officers, directors and shareholders of Eberts, Inc. to defraud him. His first amended complaint
2. A limited liability corporation is a cross between a partnership and a corporation, offering the
protection of limited liability like a corporation and the tax benefits of a partnership. Like a
corporation, the LLC offers the protection of limited liability to its owners. However, unlike a
corporation, the LLC’s tax liability flows through the LLC and to the owners. In this way, an
3. In general, it is safe to say that an LLC possesses the same corporate entity status enjoyed by a
5. The text tells us this about the three elements: “Regardless of the size or the configuration of a
corporation, however, some states will simplify matters by applying the three requirements for
veil piercing, especially when the fraud that is committed is fairly straightforward and obvious.
The three prong test for veil piercing is (1) complete control of the alleged corporate entity by
Self-Evident Questions
1. Whether perpetual existence is a good idea from a legal and financial perspective is
problematic. However, there is no reason to push for a limited lifespan. The fact that long-lived
corporations become fat, lazy, dumb and uninnovative, does not mean that corporations with a limited
2. According to Gordon, all corporations, even the great goliaths like GM and Chrysler,
“become fat, lazy, dumb, and uninnovative.” Is he correct in this judgment? He is probably not correct,
but only because he has engaged in unnecessary hyperbole. Had he written that most corporations, even
3. There seems to be nothing ethically wrong with avoiding “headline risk” by forming an
alter ego. In fact, using the alter ego tactic to engage in innovative but controversial, even risky
programs, might not be a bad idea. The alter ego tactic actually protects the parent corporation and its
4. Hudson really does appear to be independent. Remember, as discussed previously, despite
the name change, Hudson remained a legally incorporated entity with its own separate identity and its
own independent corporate status. It had incorporation papers; its own board, and its own employees. It
is true that Hudson was almost totally dedicated to supporting Lehman Brothers. The close relationship
between Lehman and the Hudson alter ego was solidified by Lehman’s control of Hudson’s board; by
its ownership of 25% of Hudson’s stock; by a contract that prevented Hudson from working with
5. Corporations should be granted citizenship and constitutional rights because most of them
are doing what they are supposed to do. They are protecting their own best interests and the best
Questions for Review and Discussion
1. Capitalism prospered in America in the nineteenth century because the economic system provided
the perfect engine for capitalistic progress. Much of this was because there was a lot of land to be
developed and an influx of energetic immigrants who were willing to improve that land. The
2. A corporation is a legal entity (also referred to as a legal person) the creation of which is
3. A corporation is a legal person and, therefore, has certain constitutional rights such as the right to
equal protection of the law and the right not to be deprived of property without due process.
4. A private corporation is one formed by private persons to accomplish a task best undertaken by an
entity that can raise large amounts of capital quickly and which offers limited liability. A public
5. A close corporation is a corporation in which the outstanding shares of stock and managerial
control are closely held by a few people (hence the term “close” corporation) or held by one person. An
6. Typically, the articles of incorporation of a corporation should include such things as the name of
the corporation, the duration of the corporation, the purpose of the corporation, the number and classes
7. The articles of organization are the written application to form a limited liability company. The
8. A de jure corporation is a corporation in law, that is, one that has been lawfully created; a de facto
corporation is a corporation in fact, that is, one that, while not legally formed, nevertheless acts like a
corporation. To prove the existence of a de facto corporation a party must show that there has been a
9. The objective of corporate veil piercing is to cut through a corporate façade to reach the true
owner or owners of the corporation who are literally hiding behind a fake corporate “veil.” Generally,
10. Common stock carries the risks of the business, inasmuch as it does not guarantee its holders the
Cases for Analysis
1. Yes. The court found enough evidence to permit veil piercing. The court took notice of the fact
that the new corporation used the exact same offices, had the same patients, used the same phone
number, had the same equipment, utilized the same furniture, and employed the same people as the
2. Aerenthal is correct. The corporation is a separate legal entity that has certain constitutional
3. Yes. The two names were similar enough that, along with the damage that had been caused to
4. No. Balderson was incorrect. He was a promoter when he entered the pre-incorporation
agreement. Since there was no evidence that the corporation formally adopted the contract, and since
Balderson was not released from liability on that agreement, he remained personally liable. The court
said, “mere adoption of the contract by the corporation will not relieve promoters from liability in the
absence of a subsequent novation [citations omitted]. This view is founded upon ‘the well-settled
principle of the law of contracts that a party to a contract cannot relieve himself from its obligations by
the substitution of another person, without the consent of [the] other party’ [citations omitted].
Consequently, the promoters of a corporation who execute a contract on its behalf are personally liable
5. No. The due process clause of the Fourteenth Amendment of the U.S. Constitution allows a state
court to exercise jurisdiction over a noncitizen corporation only so long as there exists an appropriate
contact between the defendant corporation and the state where the lawsuit started. The relationship
between the defendant corporation and the state must be such that it is reasonable to require the
corporation to defend in the forum state. In this case, there was a total absence of those circumstances
6. No. Spence is a promoter. As a promoter, he is liable for all contracts he makes for the
7. No. A de facto corporation existed at the time the contract was made between MBI and the
Department of Administration. MBI had made a good faith attempt to incorporate under Montana’s
8. Yes. Under the corporation by estoppel doctrine, Baldwin could not deny that he had dealt with
9. Yes. The court could not disregard the corporate entity because it could find no fraud, no attempt
to conceal a crime, and no intent to evade contractual or tort liability. In addition, there was some
10. Yes. Alaskan Chemical Disposal had no business other than providing waste disposal services to
NCIT. Alaskan Chemical Disposal was listed as a division of NCIT, was financed by NCIT, and shared
the same board of directors and officers as NCIT. Alaskan Chemical Disposal was also badly
END CHAPTER TWENTY-SIX
