Corporations Flashcards
1
Q
Incorporation / Promotor Liability
A
- The articles of incorporation are filed with the state, and if in conflict with bylaws, the articles control..
- Definition of Promotor: A promoter is a person who procures commitments for capital and instrumentalities on behalf of a corp that will be formed in the future.
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General Rule: Promotors are personally liable on all such contract they enter into on behalf of the corporation to be formed
- Promotor liability continues even after the corp is formed and even if the corp also become liable on the contract by adopting.
- A promotor will not be liable on a preincorporation contract if the agreement between the parties expressly indicates that the promotor is not to be bound.
- In such a case, the “contract” is considered to be an offer to the proposed corporation.
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Corp Liability: A corp is generally not liable for a contract entered into prior to incorporation unless:
- the corp expressly or impliedly adopts the contract.
- Express adoption requires express official action to adopt the contract with knowledge of the material facts.
- Implied adoption requires someone in authority to accept the benefits of the contract with knowledge of the material facts.
- the corp expressly or impliedly adopts the contract.
2
Q
Role of Shareholders
A
- Shareholders are only owners and do not manage the corporation. Thus they generally just have annual meetings.
- Written notice of meetings is required 10-60 days prior and must state time, place, and purpose of the meeting.
- Shareholders can vote by proxy (have someone vote their shares for them) or by voting agreement.
- Generally a quorum (majority of all outstanding shares required to vote) must be present to hold a vote.
3
Q
Role of Directors
A
- BoD is generally responsible for corp affairs and management (subject to any limitation by articles of incorporation)
- Quroum. A quorum (majority of directors) needs to be present for a vote to take place or action. Can be held in any medium where Directors participate simultaneously (conference sall, in person).
- Vote Required to elect directors: Plurality of the votes cast = directors receiving most votes wins.
- Informal Action. May be taken by the board without quorum so long as board unanimously consents to the action in writing.
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Notice is only required for a special meetings. Notice is presumed for regular meetings.
- Special: directors mst have 2 days notice (time place location, not purpose)
4
Q
Directors Duty of Care: Business Judgment Rule
A
- D&Os ower the corp a fiduciary duty of care. In determining whether that duty was breached, courts apply the business judgment rule.
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Business Judgment Rule: There is a presumption that “in making a business decision, the directors acted:
- on an informed basis (with the care that an ordinarily prudent person would exercise in a like position),
- in good faith, and
- in the honest belief that the action taken in the best interest of the company”.
- If breach has occurred, D/O can be held personally liable for damages.
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Articles can limit personal liability unless:
- intentional violation of law
- Unlawful corp distributions
- Receiving unentitled financial benefits or
- intentionally inflicting harm on the corp or its SHs
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Articles can limit personal liability unless:
- Directors must be informed to an extent that they reasonably believe is appropriate. They are entitled to rely upon information, opinions, reports, or statements of corporate officers, legal counsel, public accountants, etc., in making a decision. A party claiming that the directors breach their duty of care has the burden of proof.
5
Q
Directors Duty of Loyalty
A
- D&Os ower a duty of loyalty to the corp, which prohibits them from profting at the expense of the corp - arises with conflicts of interest or usurpation of a corp opportunity
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Conflicts of Interest arises when:
- 1) D/O has a personal interest in some transaction in which the corp is a party; and
- 2) D/O knowes that he or a family members is:
- A party to the transaction,
- Has a beneficial financial interest or is closely linked to the transaction such that it could be reasonably expected to influence how the D/O votes on the transaction or
- Is affiliated with another entity that is party to the transaction
- I.e.if an agent, employee, of other other entity
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Usurpation of Corp Opportunity - D/O cannot divert business opportunity to themselves where:
- 1) Corp would have an interest or expetnacy in the opportunity; and
- 2) D/O does not give corp an opportunity to act first.
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Conflicts of Interest arises when:
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Safe Harbor: D/O that enteres into a conflicting interest transaction may be protected from liability if the transaction is either:
- 1) Fair to the corp given the cirucmstances existing at the time, or
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2) Material facts have been disclosed and trans. is approved by either:
- Disinterested SHs or A majority of disinterested BoDs
6
Q
Defenses to Liability for breach of duty of loyalty (Safe Harbor)
A
Under the Revised Model Business Corp Act (MBCA)
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Safe Harbor: D/O that enter into a conflicting interest transaction may be protected from liability if the transaction is either:
- 1) Fair to the corp given the cirucmstances existing at the time, or
- 2) Material facts have been disclosed and trans. is approved by either:
- Disinterested SHs or A majority of disinterested BoDs
7
Q
Waiver of Duty in an LLC
A
- An LLC operating agreement may waive the duty of loyalty (e.g. allow members to open competing businesses) so long as it is not “manifestly unreasonable”.
8
Q
Shareholder Voting
A
- In order for a resolution to pass, there needs to a quorum present (unless articles provide otherwise), and more votes must be cast in favor of the resolution than against it.
- Quorum for shareholders is # of shares regardless of # of shareholders
9
Q
Shareholder Voting - Who Votes?
A
- The record owner on the record date.
- The record date determines who is entitled to vote at a particular meeting - namely, those persons who were registered as shareholders “of record” on that date.
- Exceptions are if the shareholder died (then the shareholder’s executor may vote) or executed a valid proxy (then the proxy may vote).
- Unless the articles of incorporation provide otherwise, each outstanding share (regardless of class) is entitled to to one vote on each matter voted on at a shareholders’ meeting.
10
Q
Shareholder Voting by Proxy
A
- SHs can vote their shares via proxy (w/o physically attending the SH meeting by authorizing another person to vote her shares on her behalf)
- A valid proxy must exist in the form of a signed appointment form or verifiable electronic transmission.
- A proxy is generally revocable
- Exception: Proxy is irrevocable if it explicitly states it is revocable and is coupled with an economic interest (a sale of shares).
- Many states say that a proxy is valid for 11 months unless otherwise stated.
11
Q
Lawsuits by shareholders against the corporation
A
- A shareholder may file an action to establish that the acts of the directors are illegal, fraudulent, or willfully unfair and oppressive to either the corp or the shareholder.
- Whether a suit is appropriate brought as a direct or derivative action depends on the injury.
12
Q
Derivative Suit by Shareholder
A
- Note: Arises when D/O breaches a duty to owed to corp, but corp has not taken action.*
- (This is also applies to LLCs).*
A derivative suit is brought by a SH, on behalf of the corporation, against the corp. The SH is suing to enforce the corporation’s rights when a corporation has a valid cause of action, but fails to pursue it. Requirements to bring suit (SADD):
- 1) Standing to bring a lawsuit (be SHs at time of alleged wrong)
- 2) Adequacy: the SH represents the interests of the corp
- 3) Demand: the SH should must file a written demand on the board and wait 90 days before filing a suit unless
- irreparable injury would result and demand would be futile or
- Corp has already rejected SH’s demand
- 4) Damages - Any recovery goes to the corporation. SHs can recoup legal expenses.
A derivative suit can be dismissed with court approval if it not in the best interest of the corp to continue it.
13
Q
Direct Suits
A
Rare
A direct suit can be brought by a Shareholder to enforce his own rights against the corporation, officer,or director that caused harm or breached a duty owed to a particular shareholder.
Examples: when a shareholder sues for denial of preemptive rights, payment of a dividend, or oppression in a close corp
14
Q
Lawsuits against Shareholders: Piercing the Corporate Veil
A
- General Rule: Shareholders of a corporation are generally not personally liable for the debts of the corporation. However, the major exception to this rule is the doctrine of piercing the corporate veil.
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Piercing the Corporate Veil. Under this doctrine, Courts will allow a creditor to pierce the corporate veil and hold a shareholder pesonally liable for the debts of a corporation when:
- The SH has dominated the corporation to the extent that the corp. may be considered the SHs alter ego (e.g. SH utilitzes the corp form for personal reasons)
- The SH failed to follow corporate formalities
- The Corp was undercapitalized (inadequately funded at its inception to cover debts and prospective liabilities); OR
- There is fraud or illegality present
- Passive Investor Liability. Once the corp veil has been pierced, courts generally hold all SHs liable. However some courts do not extend liabilty to passive investors.
15
Q
Shareholder’s Inspection Rights
A
- A SH has a right to inspect corporate books and records as long as his demand is made in good faith and for a proper purpose.
- A proper purpose is one that is reasonably related to a person’s interest as a SH (ex. when SH articulates a purpose to address “economic risks” to the corp).
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A SH must state
- 1) his purpose,
- 2) the records he desires to inspect, and
- 3) that the records are directly connected to his purpose.
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A SH must state
- Notice: 5 days written notice must be provided to corp and state the proper purpose
- Inspections without Proper Purpose are OK for:
- Articles and Bylaws, Annual Reports and meeting minutes, BoD resolutions regarding share class, Corp comms to SHs
