3.4 Some Special Rules Flashcards
What is corporate fraud under CCQ 316?
Corporate fraud occurs when directors or officers misappropriate company assets for personal gain, harming the company and its stakeholders.
What problem arises when company leaders commit fraud?
The directors and officers, who would normally represent the company in lawsuits, are the ones committing the fraud, making it unlikely they would sue themselves.
What is a derivative action?
A legal process that allows an interested person (e.g., a minority shareholder, honest director, or employee representative) to sue on behalf of the corporation when company leaders are engaged in fraud.
Who qualifies as an “interested person” in a derivative action?
A minority shareholder
An honest director or officer
A union or employee representative
What does a derivative action allow an interested person to do?
Petition the court for authorization to sue company leaders for fraud in the name of the corporation.
What does lifting the corporate veil mean?
A legal principle allowing courts to hold directors, officers, or shareholders personally liable when they use the company to commit fraud.
Why does lifting the corporate veil exist?
To prevent individuals from hiding behind a corporation to commit fraud against customers, creditors, or the public.
Give an example of when the corporate veil may be lifted.
If a director creates a fake company to commit telemarketing fraud, the court can ignore the company’s separate legal status and hold the director personally responsible.
What is the indoor management rule?
A legal principle that allows people dealing with a corporation in good faith to assume directors and officers have the authority to act on behalf of the company.
Why is the indoor management rule important?
It ensures** business transactions remain efficient** by preventing excessive legal verification when dealing with corporate representatives.
What is an example of the indoor management rule in practice?
If a Chief Operating Officer signs a contract during regular business hours in their office, the other party can assume they have authority to do so, even if their appointment was technically incorrect.
When does the indoor management rule NOT apply?
If someone is not acting in good faith, such as a person claiming to be a company executive in a parking lot at 2 AM, the rule would not protect the transaction.
