Corporations Flashcards
Alter Ego Doctrine (PCV)
Harm caused to third party because:
(1) Owners do not treat corporation as a separate entity;
(2) Commingle personal and corporate funds;
(3) Use corporate assets for personal purposes;
(4) Owners do not hold meetings
Inadequate Capitalization at Inception (PCV)
Must start corporation with sufficient unencumbered capital to meet its prospective liabilities.
Perpetrating a Fraud (PCV)
Cannot be formed to avoid existing liabilities. Cannot be formed to limit future liabilities.
Business Judgment Rule (BJR)
Presumption that a director’s decision may not be challenged if the director: (1) acted in good faith; (2) with the care that an ordinarily prudent person would exercise in a like position; and (3) in a manner the director reasonably believed to be in the best interests of the corporation.
When will a transaction be set aside because a director has a personal interest in the transaction?
If (1) the director did not disclose the material facts of the transaction to disinterested members of the board, who approved the transaction; or (2) the transaction was not fair to the corporation.
If director discloses material facts to disinterested members or if if the transaction was fair to the corp, it’ll be okay.
To what extent may director liability NOT be eliminated in the articles of incorporation?
Liability cannot be eliminated to the extent that the director (1) received a benefit to which he was not entitled, (2) intentionally inflicted harm on the corporation or its shareholders, (3) approved unlawful distributions, or (4) intentionally committed a crime.
What must a shareholder do before commencing a derivative action?
Generally, must make a written demand on the board. After submitting the written damn, the shareholder must wait 90 days to file the derivative action, unless the board rejects the demand during the 90 day period.
What must be present in the articles of incorporation?
(1) The name of the corporation;
(2) The maximum number of shares the corporation is authorized to issue; and
(3) The names and addresses of: (a) the first board of directors; (b) the incorporators executing the articles of incorporation; and (c) the initial registered agent.
Corporation’s Right to Issue Stock Options
Generally, the Board has a right to issue options to purchase shares on whatever terms the board chooses. Options are merely the right to purchase shares and do not themselves constitute shares that have been issued.
Amending articles of incorporation
A corporation can amend its articles with any provision that would be valid in original articles. To amend:
(1) Board must first adopt a resolution to amend the articles;
(2) Then send notice to the shareholders that a meeting will be held to vote on the amendment;
(3) Notice must be sent 10 days before the meeting;
(4) Amendment must then be approved by a majority of the shares entitled to vote at the meeting; and
(5) Finally, changes must be filed with the SOS.
Preemptive Rights
Must be explicitly provided for in the articles of incorporation.
These are the right to buy a sufficient number of newly issued shares in order to maintain current voting strength. Where provided for, these rights generally only extend to shares that are newly authorized and issued for cash; they do not extend to shares issued as party of an employee’s or officer’s compensation or in exchange for options issued as party of an employee’s compensation.
RMBCA Permissible Restrictions
Generally, a corporation can restrict the transfer of shares for any reasonable purpose.
(1) A restriction can require a shareholder to offer the shares to the corporation first or require the corporation or other persons to purchase offered shares.
(2) A prohibition on transfer to a designated person or class of persons is also permissible as long as the prohibition is not manifestly unreasonable.
Board’s power to set their compensation
The Board has the power to set their own compensation as well as the compensation for employees. Nevertheless, directors are restricted by their fiduciary duty to act in the best interests of the corporation. If the directors set unreasonably high salaries, especially for themselves, they breach their fiduciary duty and commit a waste of corporate assets.
