CORPORATIONS

Question 1

How is Corporation formed?

Incorporation

Answer 1

Generally, a corporation is formed when the articles of incorporation are filed with the secretary of state

If the Articles are in conflict with bylaws, the articles control.

Question 2

Shareholders

Answer 2

Shareholders are only owners and do not manage the corporation. Thus, they generally just have annual meetings.

Question 3

Directors

Answer 3

Directors manage the corporation and (like shareholders) act as a body by voting.

Question 4

Duty of Care

Answer 4

Directors and officers owe the corporation a duty of care.

Question 5

Business Judgment Rule

Answer 5

The business judgement rule is a presumption that a director (1); acted in good faith;(2)with the care that an ordinarily prudent person would exercise in a like position;(3)in a manner the director reasonably believed to be in the best interest of the corporation.
Corporate law allows directors to rely on the opinions of experts and corporate insiders in making a decision.

Question 6

Duty of loyalty

Answer 6

A director must act in good faith and with a reasonable belief that what he does is in the corporation’s best interest. The business-judgment rule presumption does not apply if there is a duty of loyalty issue.

Question 7

Defenses to liability for breach of the duty of loyalty

Answer 7

A transaction cannot be set aside merely because a director had a personal interest in the transaction if (1) the director disclosed the material facts of the transaction to disinterested members who approved the transaction; (2)the transaction was fair to the corporation.

Question 8

Waiver of duty in an LLC

Answer 8

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”

Question 9

Voting

Answer 9

The votes required at a meeting can be set in the articles or bylaws.

When the articles and the bylaws conflict the articles control.

In order for a resolution to pass, there needs to be a quorum present, and more votes must be cast in favor of the resolution than against it.

Question 10

Who votes?

Answer 10

Only shareholders of record on the record date may vote at a shareholder’s meeting.

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 one vote on each matter voted on at a shareholders’ meeting.

Question 11

Voting Proxy

Answer 11

A shareholder may vote by proxy. A shareholder can appoint a proxy by signing an appointment form or making a verifiable electronic transmission. A shareholder may not orally ask someone to serve as a proxy. A proxy is generally revocable (even if it states it is irrevocable), and any action inconsistent with the grant of a proxy works to revoke it. Thus, when two or more revocable proxies are given, the last given proxy revokes all previous proxies.

Question 12

When is a proxy no revocable?

Answer 12

A proxy is not revocable if it explicitly states it is not revocable and is couple with an interest (e.g. sale of shares) Many states say that a proxy is valid for 11 months unless otherwise stated.

Question 13

Lawsuits by shareholders against the corporation

Answer 13

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 corporation or the shareholder. Whether a suit is appropriately brought as a direct or derivative action depends on the injury.

Question 14

Direct suits?

Answer 14

A direct suit is appropriate when the wrong done amounts to a breach of duty owed to the individual personally. (E.g., when a shareholder sues for denial of preemptive rights, payment of a dividend, or oppression in a close corporation.)

Question 15

Derivative suits?

Answer 15

A derivative suit is appropriate when the injury is caused to the corporation and a shareholder is trying to enforce the corporation’s rights. (This also applies to LLCs.)

Question 16

Filing a derivative lawsuit has extra requirements:

Answer 16

A derivate action seeks to vindicate wrongs done to the corporation. Shareholders may bring derivate actions.

Before bringing a derivate action the shareholder must first make a demand on the board to act on the corporation’s behalf.

Any recovery goes to the corporation.

A derivative lawsuit can be dismissed with court approval if it is not in the best interest of the corporation to continue it.

Question 17

Lawsuits against shareholders—piercing the corporate veil

Answer 17

Generally, shareholders of a corporation are not personally liable for debts of the corporation but in some limited circumstances, the court will allow creditors to pierce the corporate veil and hold the shareholders personally liable for the debts of a corporation.

Generally, a plaintiff must show that shareholders of the corporation or members of an LLC abused the privilege of incorporating and fairness requires holding them liable. One generally needs to show undercapitalization of the business, failing to follow formalities, commingling of assets, confusion of business affairs, or deception of creditors.

Note that only the shareholders or members who participated in the wrong are personally liable.

Question 18

What are the shareholder’s rights to inspect corporate books and records?

Answer 18

A shareholder 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 a purpose reasonably related to a person’s interest as a shareholder (an example is when a shareholder articulates a purpose to address “economic risks” to the corporation). A shareholder must state (1) his purpose, (2) the records he desires to inspect, and (3) that the records are directly connected to his purpose.

Question 19

LLC Formation, rights, and duties

Answer 19

Articles of organization must be filed to create an LLC. Since LLCs are a relatively new form of business association, courts tend to analyze them in the context of corporate or partnership law. Members of an LLC have fiduciary duties. Members of an LLC in a member-managed LLC are treated as agents of the LCC (with actual and apparent authority to bind the LLC in ordinary—but not extraordinary—affairs).

Question 20

LLC - Dissociation

Answer 20

if a member leaves, then it leads to dissociation of that member, but it does not lead to winding up or dissolution unless the other members unanimously agree to dissolve the LLC.

Question 21

LLC- Liability

Answer 21

Generally, individual members are not liable for losses. They are liable if the court decides to pierce the LLC veil (discussed above) or if proper procedures for dissolution and winding up have not been followed. (Creditors may enforce claims against each of the LLC members. However, a member’s total liability may not exceed the total value of assets distributed to the member in dissolution.)

Question 22

Is a corporation liable for a contract entered into prior to incorporation?

Answer 22

A corporation is not generally liable for a contract entered into prior to incorporation unless it expressly or impliedly adopts (ratifies) the contract. The promoter (the person entering the contract on behalf of the to-be-formed corporation) is liable.

Question 23

Who hires the corporation directors?

Answer 23

Shareholders hire and fire directors.

Question 24

Can directors vote by proxy or agreement?

Answer 24

No, Directors cannot vote by proxy or agreement.

Question 25

Quorum

Answer 25

A quorum (majority of directors) needs to be present for a vote to take place, but unlike shareholders, directors can “break quorum” by leaving. Notice is only required for a special meeting.

Question 26

Can the articles of incorporation limit or eliminate the director’s liability for money damages?

Answer 26

Yes, a corporation’s articles may limit or eliminate the director’s personal liability for money damages to the shareholders or corporation for action taken.

Liability can not be eliminated if the director(1) received a benefit to which he was not entitled;(2)intentionally inflicted harm on the corporation shareholders; (3)approved unlawful distribution; (4)intentionally committed a crime.

Question 27

President’s authority?

Answer 27

A corporate president is an agent of the corporation and has whatever powers the corporation grants him.

Unless specifically excluded by the corporation, a president will have the power to enter into ordinary contracts involving the day-to-date operation of the corporation. and into extraordinary transactions only if authorized by the board.

Question 28

Sales of all corporation assets

Answer 28

The sale of all corporation assets outside the scope of ordinary business is a fundamental change.

Such change can only be implemented if (1) the directors first pass a resolution to implement the plan and; (2) the plan is then approved by the shareholders

Question 29

What happens when shareholders dissent from a fundamental change?

Answer 29

The shareholder who dissents from a fundamental corporate change can force the corporation to buy his shares at a fair price.

The shareholder must (1) file an objection to the transfer, or at the shareholder’s meeting at which the vote is taken;(2)not vote in favor of the plan and (3)send the corporation a written demand for the fair value of their shares.

Question 30

Promoter’s liability

Answer 30

As general rule promoters are personally liable for all contracts they enter onto on behalf of the corporation to be formed.

Promoter’s liability continues even after the corporation is formed and even if the corporation also becomes liable on the contract by adopting it.

Question 31

The exception to Promoter’s liability

Answer 31

A promoter will not be liable on a pre-incorporation contract if the agreement between the parties expressly indicates that the promoter is not to be bound

Question 32

Rights to shareholders to receive dividends.

Answer 32

A shareholder has no right to receive dividends until it is declared by the board of directors.

The decision of whether to declare dividends is left to the sole discretion of the board.

If the directors decide in good faith not to declare a dividend, the courts will not disturb that decision unless the shareholder can prove bad faith.

Question 33

What duties do majority shareholders owe to the minority shareholders?

Answer 33

A controlling shareholder must refrain from using his control to obtain a special advantage or to cause the corporation to take actions that unfairly prejudice the minority shareholders.

A controlling shareholder has a duty to disclose material information to the minority shareholder.

Question 34

Notice of shareholders meetings

Answer 34

Written notice of meetings is required 10-60 days prior and must state the time, place, and purpose of the meeting. Shareholders can vote by proxy or by voting agreement. Generally, a quorum (majority of all outstanding shares required to vote) must be present to hold a vote.

Question 35

Duty of loyalty Issues

Answer 35

A duty of loyalty issue arises in three ways (mnemonic=BCC):

1- Director is on both sides of a transaction: a director has a material financial interest in a contract, as well as knowledge of that interest, yet still votes to approve the contract.
2- Competes with corporation: a director may not compete with his corporation.
3- Corporate opportunity: a corporate officer may not usurp a corporate opportunity.