BA Flashcards
Breach of Fiduciary Duty of Care
Directors are jointly and severally liable for breach of their fiduciary duties. Directors owe a fiduciary duty of care to the corporation where they must: 1) act in the best interest of the corporation; 2) act in good faith; and 3) act as a reasonable person would in handling their own business.
Business Judgment Rule - A director may rely on the information, opinions, and reports provided by other directors, officers, or employees who he reasonably believes are reliable and competent. Director will not be liable if he makes a good faith business decision, which in hind sight turns out to be wrong. Director will be liabel for gross negligence - where the decision was uninformed, fraudulent, illegal, in bad faith.
Remedy - damages the corp. suffered as a result of Director’s bad decision; ouster D for breach.
Breach of Fiduciary Duty of Loyalty - Self Dealing
Directors owe a duty of loyalty to the corporation and may not profit at the expense of the corporation. A conflict of interest exists when: 1) the director or his relative is a party to the transaction; 2) the director has a beneficial financial interest or will infer a benefit because he is related to the third party; or 3) the director is a partner, agent, or employee of the entity the corp. is transacting with.
Remedy - set aside transaction; enjoin transaction; damages; ouster D for breach
Setting Aside Interested Director Transaction
Interested D transaction will NOT be set aside if:
1) Transaction was fair and reasonable to corp. when entered;
2) Approval by a majority of disinterested Directors after full disclosure of the nature of the conflict and transaction; or
3) Ratification by shareholders after full disclosure of the nature of the conflict and transaction.
Breach of Fiduciary Duty of Loyalty - Usurping Corporate Opportunities
A Director cannot usurp a corporate opporunity that could benefit the corproation without first giving the corporation opportunity to act. A corporate opportunity exists when: 1) it is in the corporation’s line of business; 2) the corporation is financially able to take the opportunity; and 3) corporation has an interest or expectancy in the opportunity.
Director may take the opporunity if he first notified the BOD of opportunity and waited for BOD to reject.
Remedy - sell corp. opportunity at D’s cost, constructive trust on profit; ouster D for breach
Breach of Fiduciary Duty of Loyalty - Competing Business
Director may not engage in competing business with the corporation.
Remedy - constructive trust on profit; ouster of D by majority SH vote for breach of duty
Breach of Fiduciary Duty to Disclose (Insider Trading)
A Director that has inside information has a duty to disclose that information to the shareholder with whom he is dealing or refrain from trading.
Fundamental Corporate Change
An amendment to the AOI, Merger, exchange or sale of all or substantially all (75%) of the corporation’s assets outside the regular course of business is a fundamental corporate change.
The Requirements for adoption are:
1) A special meeting must be held when a fundamental change is proposed for the corp.
2) Notice of the meeting must be given including the date, time, place, and purpose.
3) A majority of the BOD must adopt a resolution recommending the change.
4) Approval by a majority of the shares entitled to vote.
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Right of Appraisal - SH who does not vote in favor of the change has a right to force the corp. to buy out her shares at fair value
5) Change is formalized in AOI
10B-5
It is unlawful to use any fraudulent scheme in connection with the purchase OR sale of any security (debt or equity) using any instrumentality of interstate commerce. Private P must prove the following elements to recover damages under 10B-5:
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Fraudulent Conduct - making material misrepresentation (lies) or omission
• Scienter - intent to deceive, manipulative or defraud (recklessness sufficient, but not negligence)
• Materiality - a statement/omission is material if there is a substantial likelihood that reasonable investor would consider it important in making investment decision - In connection with the sale or purchase of a security by the P
• Private P cannot bring suit based on aiding and abetting, but gov’t can
• So long as P purchased or sold securities, D does not need to be a “trader” (i.e. a company that intentionally publishes a misleading press release can be liable to a person who purchased or sold on the basis of the press release) - Instrumentality of interstate commerce - involve use of some means of interstate commerce (telephone, mail)
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Reliance - P relied on D’s statement (P would only have to prove reliance on a face-to-face misrepresentation - stock not sold on stock exchange)
• Reliance presumed in cases of non-disclosure and public misrepresentation (securities sold on national stock exchange) - Damages - private P must show that Ds fraudulent conduct caused Ps damages
Section 16B
Provides for recovery by the corp. of “profits” gained by D/O/SH (owning 10%+ of corp. stocks) of a public corp. from any purchase and sale of the company’s stock within a single 6 month period (short swing trade).
• The rule applies to corporations: 1) whose stocks are traded on national exchange; or (2) have at least 2,000 SHs and at least $10 million in assets
• Section 16(b) imposes strict liability - no proof of inside information required
Remedy - largest # of shares she both bought and sold w/in 6 months
• Could come up in a derivative law suit
Statement of Purpose
There is a presumption that the corporation was formed to conduct any lawful business purpose, unless the AOI provides a narrow business purpose.
Ultra Vires Act
If a corporation includes a narrow business purpose and the corp. undertakes activities beyond the scope, it is said to be acting “ultra vires.” Ultra vires acts are enforceable, but:
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SH can seek an injunction to enjoin the UVA
- Transaction involving innocent 3rd party will not be enjoined unless 3rd party knew of corp.’s purpose
- Corp can seek damages against D/O for any losses for approving UVA.
De Facto Corporation
A de facto corporation will be found where: 1) there is a valid incorporation statute available; 2) the organization made a good faith attempt to comply with the statute; 3) the organization must not know of their invalid status; and 4) the organization conducted business as if it were validly incorporated.
Corporation by Estoppel
Parties who treated an entity as a corporation will be estopped from claiming later that the entity was not a corporation.
Doctrine can be applied to a third party seeking to avoid liability on a contract or an entity seeking to avoid liability.
SH Liability - Piercing Veil
Shareholders in a validly formed corporation are not personally liable for the obligations of the corporation. However, a court will disregard the corporate entity and pierce the corporate veil to hold Shareholders personally liable if: 1) the corporate formalities have been ignored and injustice has resulted (Alter Ego-commingling/no issuance of shares); or 2) the corporate form is being used to perpetrate a fraud (D siphons all $ so corp. cannot pay debts); or 3) the corporation was inadequately capitalized at the time of formation. SHs must put up enough capital to enable corp. to reasonably meet its prospective liabilities.
Pre-incorporation Contract - Promoter Liability
A promoter enters into Ks with third parties to procure commitments for corporations before it is formed. The Promoter remains personally liable on pre-incorporation K unless the K expressly relieves promoter of liability or if there is a novation (an agreement between the corp., promoter, and 3rd party that the promoter is released and corp. will assume liability).
