Corporations

Question 1

Formation of a Corporation, liability in contract , promoter’s liability

Answer 1

The articles of incorporation are filed with the state, and, if in conflict with bylaws, the articles control.

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 2

Shareholders

Answer 2

Shareholders are only owners and do not manage the corporation. Thus, they generally just have annual meetings. Can vote on fundamental changes, changes in bylaws, and to remove or add a director.

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 (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.

Question 3

Directors

Answer 3

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

Note: Shareholders hire and fire directors.

Directors cannot vote by proxy or agreement. 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 4

Applies to in general Corporation members and LLC members

Standard of care

Answer 4

Standard of Care: In general directors, officers, and incorporators of a corporation must perform their duties in: good faith; in a manner reasonably believed to be in the best interests of the corporation; and with such care as a person in a like position would use under similar circumstances

Question 5

Duty of Loyalty Director

Answer 5

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. A duty of loyalty issue arises in three ways (mnemonic=BCC):
§ 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. Competes with corporation :a director may not compete with his corporation.
§ Corporate opportunity: a corporate officer may not usurp a corporate opportunity.

Question 6

Waiver of Duty of Loyalty in an LLC

Answer 6

Waiver of duty in an LLC: 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 7

Shareholder Voting

Answer 7

Voting: to pass a resolution requires a quorum present, with more votes in favor of the resolution than against it. 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.
• Who votes? 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).

Voting by proxy: 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),

-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 proxy.

Question 8

Voting by Proxy

Answer 8

Voting by proxy: 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 proxy

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

Question 9

Lawsuits against the Corporation by the Shareholders

Answer 9

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 10

Shareholders Direct lawsuit against the corporation

Answer 10

Direct suits: A direct lawsuit 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 11

Shareholders Derivative Lawsuits against the Corporation: and requirements

Answer 11

Derivative suits: A derivative suit is appropriate when the injury is caused to the corporation and a shareholder is trying to enforce the corporation’s rights Note: also applies to LLCs.

Filing a derivative lawsuit has extra requirements: A shareholder may not commence or maintain a derivative suit unless three requirements are met (mnemonic=SAD):

(1) standing to bring a lawsuit,
(2) adequacy (the shareholder represents the interests of the corporation), and
(3) demand (generally, the shareholder should file a written demand and wait 90 days before filing a suit unless irreparable injury would result or a demand would be futile).

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 12

Lawsuits against shareholders—piercing the corporate veil:

Answer 12

As a general rule, the law treats a corporation as an entity separate from its shareholders, even where one individual owns all the corporate stock.

In some (very limited) circumstances, courts will disregard the LLC form and hold a shareholder personally liable for corporate debt. To do so is called piercing the corporate veil. It is only allowed in close corporations and LLCs.

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 13

Shareholder’s Right to inspect Corporate Books and records

Answer 13

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 14

Formation, Duties, and Rights of an LLC

Answer 14

Formation, rights, and duties: 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 of reasonable care and loyalty and just like in a corporation the right to inspect records.
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 15

Dissociation of an LLC

Answer 15

Dissociation: 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 16

LLC Liability and Exceptions

Answer 16

Liability: 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 17

LLC Liability and piercing the veil

Answer 17

Generally speaking, under the rules of LLCs, members cannot be held personally liable for the debts, obligations, or liabilities of the LLC. There are limited circumstances, however, under which most stakes will allow the members to be held liable.

Under the doctrine of piercing the corporate veil of limited liability, the most common circumstance under which members can be held liable are if (1) the LLC is found to be a mere instrumentality of the members, the claimant must show that (1) the members dominated the LLC to such an extent that the LLC had no will of its own; (2) the members used their dominance to commit a wrong or fraud; and (3) such control and wrongful or fraudulent conduct proximately caused the injury alleged in the complaint. To establish that the members had a unity of interest and ownership with the LLC, the claimant must show that the unity of interest and ownership between the LLC and its members was so strong that the LLC had no existence separate and apart from its members such that not piercing the veil would be unjust and unequitable. The court will look to all surrounding facts, including whether the LLC was, in effect, just an alter ego of its members, if there was a substantive overlap between the company business and the personal business of its members, or if there was significant failure to fund the LLC.

Question 18

LLC type of lawsuit members can bring

Answer 18

Members of manager-managed LLC may not bring direct action against manager where alleged harm was only to LLC.

Question 19

how an LLC member can bring a derivative suit against an LLC manager

Answer 19

Members may bring a derivative action against an LLC’s manager. Prior to bringing the derivative action, corporate laws generally require the members to make a demand on the manager to bring such action. In their subsequent complaint the members should include an explanation of the efforts undertaken to have the manager bring the action, why those efforts failed, or why they did not make such a demand.

Question 20

Duty of Care and LLC

Answer 20

Under ULLCA, managers of an LLC owe a duty of care to the LLC. This duty requires the manager not to engage in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law. The duty of care a manager owes to the LLC generally does not encompass simple negligence as a violation. Some states, however, reject this aspect of the ULLCA’s duty of care standard, and will consider ordinary negligence as a violation of the manager’s fiduciary duty. In these jurisdictions, a manager may still be protected from liability for his negligent acts by the business judgment rule. When applying the business judgment rule, courts are hesitant to question a manager’s business decisions, even if those business decisions prove to be bad, and were informed and made in good faith, with a sincere belief that they were in the best interest of the company.

Question 21

Bylaws

Answer 21

Bylaws are the written rules that control the internal affairs of an organization. Bylaws generally define things like the group’s official name, purpose, requirements for membership, officers’ titles and responsibilities, how offices are to be assigned, how meetings should be conducted, and how often meetings will be held.

Question 22

which type of suit is appropriate when the injury is caused to the corporation and a shareholder is trying to enforce the corporation’s rights.

Answer 22

derivative suit.

Question 23

Amending the bylaws

Answer 23

Under the Model Business Corporation Act, shareholders may amend a corporation’s bylaws. Bylaws may include any provisions for the regulation and management of the affairs of the corporation that are not inconsistent with law or the articles of incorporation. Specifically, the bylaws may contain a requirement that the corporation include in its proxy materials one or more individuals nominated by a shareholder.

Question 24

Under the Model Business Corporation Act, both the board and the shareholders have the power to amend the bylaws. However, that power belongs exclusively to the shareholders if :

Answer 24

1) the corporation’s articles reserve that power exclusively to the shareholders; or 2) the shareholders in amending, repealing, or adopting a bylaw expressly provide that the board of directors may not amend, repeal, or reinstate that bylaw. Shareholder-approved bylaw provisions can amend or repeal existing bylaw provisions, whether originally approved by the board or by shareholders.

Question 25

What type of suit? a shareholder sues on his own behalf to redress an injury to his interest as a shareholder.

Answer 25

Direct suit

Question 26

Business judgment Rule

Answer 26

The business judgment rule shields directors from liability and insulates board decisions from review.

The BJR creates a rebuttable presumption that directors are honest, well meaning and acting through informed decisions and in good faith.

A director is entitled to rely on information, reports, opinions, financial statements, and other financial data presented or prepared under authority delegated by the board of directors.

Question 27

Duty of Loyalty

Answer 27

Duty of loyalty: The fiduciary duty of loyalty of officers, directors, employees requires that they be loyal to the corporation and not promote their own interests in a manner injurous to the corporation.