Corp and LLCs

Question 1

When is a derivative suit appropriate?

Answer 1

• when the injury is to the corporation and the shareholder is trying to enforce the corporation’s rights.

Question 2

What are the requirements of filing a derivative suit?

Answer 2

1. party must be shareholder at time of act or omission
2. shareholder adequately represents the interests of the corp
3. shareholder must serve a written demand for relief and wait 90 days before filing
   - no demand needed if irreparable injury would result
   - no demand needed if it would be futile.

Question 3

When is a direct suit proper?

Answer 3

• A direct suit is proper when the wrong done amounts to a breach of duty owed to the shareholder personally. The claim is personal to the shareholder.

Question 4

How are directors protected by the business judgment rule?

duty of care

Answer 4

Under BJR, there is a presumption that director:
- acted in good faith
- acted with the care that a person would exercise in a like position
- acted with the honest belief the action was in the company’s best interest.

A party claiming that the directors breached their duty of care has the burden of proof

Question 5

Can a transaction be set aside whenever a director has/had personal interest in a transaction?

duty of loyalty

Answer 5

No. A transaction where director had personal interest will be upheld if:
- director disclosed material facts of transaction to disinterested board members or shareholders who then approved transaction, or
- the transaction is fair to the corporation

Question 6

Can a director’s personal liability be limited? If so, how much?

Answer 6

• articles of incorporation may limit or elimante director’s personal liability for monetary damages arising from their decisions.
• however, will be personally liable where:
  1. recieved a benefit they were not entitled to
  2. intentionally inflicted harm on corp or shareholders
  3. approve unlawful distributions
  4. intentionally commit a crime

Question 7

What factors can a plaintiff use to prove abuse of the corporate form to pierce the veil?

Answer 7

The plaintiff can pierce the veil if it can show:

• Undercapitalization of the business
• Failure to follow corporate formalities
• Commingling of personal and business assets
• Other abuse of the corporate form

Question 8

What must a plaintiff show to pierce the LLC or corporate veil?

Answer 8

• p must prove they abused the privilege of incorporating, and
• fairness requires holding them liable.

Question 9

Are promoters personally liable for contracts made on behalf of a to-be-formed corporation?

Answer 9

• Promoters are personally liable on contracts entered into on behalf of a to-be-formed corporation.

Question 10

When does a promoter’s liability on pre-incorporation contracts end?

Answer 10

A promoter’s liability ends only when there is:
* A novation (agreement to substitute the corporation for the promoter), or
* A release by the third party

Question 11

When is a corporation liable for pre-incorporation contracts?

Answer 11

A corporation is liable for a pre-incorporation contract only if:
- The board of directors expressly adopts the agreement, or
- There is a knowing acceptance or retention of the contract’s benefits.

Question 12

When has the power to amend corporate bylaws?

Answer 12

1. shareholders may as long as the bylaws don’t conflict with the law or articles of incorporation.
2. board may unless:
   * articles of incorp reserve this power exclusively to shareholders
   * shareholders expressly limit board’s ability to amend or repeal

Question 13

The shareholder and board share the power to amend bylaws unless . . .

Answer 13

• articles reserve this power exclusively to shareholders, or
• shareholders expressly limit the board’s power to amend or repeal specific provisions