Corporations

Question 1

Business Judgment Rule

Answer 1

Remember: good-faith, informed, rational

Applies only to duty of care, not loyalty.

Protects directors from personal liability to corporation and shareholders if they acted (1) in good-faith, (2) with care that an ordinarily prudent person in a like position would exercise, and (3) in a manner reasonably believed to be in the best interests of the corporation.

Courts won’t second-guess a business decision that was poor or erroneous if made in good faith, was informed, and had a rational basis.

Question 2

Corporate Opportunity Doctrine

Answer 2

A director may not divert to himself a business opportunity within corporation’s line of business without first giving corporation an opportunity to act (usurpation).

As a remedy, the corporation may recover director’s profits or force director to convey the opportunity to the corporation.

Question 3

Officers

Answer 3

Appointed by board of directors (not by shareholders) and may be removed by the board. If removal is in breach of contract, officer is entitled to damages. Officers have actual and apparent authority.

Question 4

Administrative Dissolution

Answer 4

The state may bring action to administratively dissolve corporation for failure to: pay fees or penalties, file an annual report, or maintain a registered agent in the state.

Question 5

Corporate Duty of Loyalty

Answer 5

A director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation. Burden is on defendant.

Question 6

Corporate Duty of Care

Answer 6

A director must use the care that a prudent person in like position would reasonably believe appropriate under the circumstances. Burden is on plaintiff.

Question 7

Misfeasance

Answer 7

When the board makes a decision that hurts the business. Causation is clear, so it’s a breach of the corporate duty of care, but a director is not liable if he meets the business judgment rule.

Question 8

Nonfeasance

Answer 8

When a lazy director does nothing, which is a breach of the corporate duty of care. He is only liable if his breach caused a loss to the corporation.

Question 9

Proxy

Answer 9

Writing signed by record shareholder authorizing someone to vote for them. Good for 11 months unless it states otherwise. Revocable by writing to corporate secretary or showing up and voting. Only proxies that state they’re irrevocable and are coupled with interest are irrevocable.

Question 10

Par

Answer 10

Minimum issuance price.

Question 11

Voting Eligibility

Answer 11

Shareholders of record on the record date may vote. Each share gets one vote, unless articles provide otherwise.

Question 12

Record Date

Answer 12

Shareholders of record on the record date may vote. The record date is fixed by the board of directors, but may be no more than 70 days before the meeting. If directors set no record date, the date is deemed to be the date the notice of the meeting is mailed to shareholders.

Question 13

Quorum

Answer 13

Majority of outstanding shares entitled to vote, unless the articles or bylaws requires a greater number. Once a quorum is present, it cannot be broken by withdrawal of shares from the meeting.

For the board of directors, a quorum can be no fewer than 1/3 of the members, and unlike shareholders, a director can break quorum by leaving a meeting.

Question 14

Director Elections

Answer 14

Unless articles provide otherwise, directors are elected by a plurality (most) of votes cast.

Question 15

Voting Trust

Answer 15

Transfers votes to trustee to vote in accordance with provisions of trust agreement. Valid 10 years unless extended.

Question 16

Conflicting Interest Transactions

Answer 16

Remember: conflict if party, interest/influence, or director

Director has conflicting interest with a transaction if he knows he or a related person either: (1) is a party to the transaction; (2) has a beneficial interest in or is so closely linked to the transaction that the interest would reasonably be expected to influence director’s judgment if he were to vote on the transaction; or (3) is a director, general partner, agent, or employee of another entity with whom the corporation is transacting business and the transaction is of such importance to the corporation that it’d in the normal course of business be brought before the board.

Question 17

Upholding Conflicting Interest Transactions

Answer 17

Will not be enjoined if: transaction was approved by a majority of directors (at least 2) without a conflicting interest after all material facts were disclosed; (2) transaction was approved by majority of votes entitled to be cast by shareholders without conflicting interest after all material facts were disclosed; or (3) the transaction was fair to the corporation, judged according to circumstances at the time of commitment.

Question 18

Directors’ Meetings

Answer 18

If quorum (majority unless otherwise in articles or bylaws) is present, resolutions will be deemed approved if approved by a majority of directors present. A director (unlike a shareholder because directors have more power) can break quorum by withdrawing from a meeting.

Question 19

Treasury Stock

Answer 19

Stock the company issued then reacquired. It’s considered authorized, and the corporation can resell stat any issuance price the board sets.

Question 20

Preemptive Right

Answer 20

Right of an existing shareholder of common stock to maintain her percentage of ownership by buying stock whenever there’s a new issuance of stock for money. Only exists if it’s in the articles.

Question 21

Shareholder Voting

Answer 21

Quorum (majority of shares, not shareholders) required for a meeting. Quorum cannot be lost if people leave the meeting.

Question 22

Promoter

Answer 22

Person acting on behalf of a corporation that hasn’t been formed yet.

Liable unless contract states otherwise, or until there is a novation (agreement between promoter, corporations, and contracting party that corporation replaces promoter under the contract).