Corporations Flashcards
Dividends
A distribution of profits to shareholders. Within the board’s discretion to grant (cannot grant if the corporation is insolvent).
The court will not overrule the Board’s decision absent evidence of extreme unreasonableness, abuse of discretion, or bad faith. This involves considering:
- Justification for not declaring a dividend
- Profits earned vs. business needs and future profitability
- Size of corporation
- Legit expectations of investors
Preemptive Rights
Gives shareholders a reasonable opportunity to exercise their right to acquire newly issued shares, and maintain their proportional interest.
- No preemptive rights if newly issued shares are for compensation
- You only have preemptive rights to get your proportional share, nothing more
Preemptive rights are either created by:
- Articles of Incorporation; or
- Agreement between corp and ≥ 1 Shareholders.
If a shareholder waives their preemptive rights, in writing, the waiver is IRREVOCABLE.
Directors: How do Directors make decisions?
Can directors use remote communication?
Can directors use proxies or voting agreements?
- There is a board meeting with a quorum present; and
- A majority of the quorum passes the resolution.
- Can use remote communication, but not a proxy/voting agreement
Notice of a board meeting is generally not required (unless otherwise stated).
Director: Duty of Care
How are directors liable for a breach?
Directors have a duty to act reasonably and in good faith.
BJR: Absent evidence of fraud, bad faith, or self-dealing, there is a presumption that the decision was made by directors that are disinterested and independent, on an informed basis, and with a good faith belief that the decision best serves the interests of the corporation and its SH’s.
- Must be rebutted by plaintiff
Duty of Care: Directors must discharge their duties to the corporation:
- In good faith
- With the care of an ordinarily prudent person in a like situation; and
- In a manner they reasonably believe is in the best interests of the corporation
- Directors can rely on information prepared by others that they reasonably believe is within their expertise
Directors are J&S liable for breaches of their duty of care
Directors: Duty of Loyalty
- Director is on both sides of a transaction (voidable unless it was fair; majority of disinterested directors approved it; or shareholders authorized to vote approved it).
- Director competes with its corporation
- Director takes a corporate opportunity
Directors: Duties in the case of insolvency
The directors’ duties might start to shift from the corporation’s shareholders to the creditors.
Equity Insolvency Test: If there is potential value beyond the amount owed, the duty is with the corporation.
Balance Sheet Test: If the value of the corporation is less than the amount it owes to creditors, the duties may partially/fully shift to creditors.
Also, note the importance of making distributions during/leading to insolvency.
Improper Distributions
Before distributing assets upon dissolution, a corporation is required to pay its debts and liabilities.
If the Board makes an improper dividend:
- Directors are J&S liable if they negligently vote in favor of it
- Director can use BJR and duty of care as a defense
- Liable for difference b/w amount paid and what should have been paid
If Shareholders accept improper dividends:
- Only liable to return excess if they had knowledge of illegal distribution
Distributions = dividends, remaining capital, repurchase of shares, etc.
Shareholder Removal of Directors
Are voting agreements enforceable for SH?
SH can remove directors with or without cause by:
- Majority of voting shares agree to remove
- Voting agreements are enforceable once they are in a signed writing - Shareholder with 10%+ of shares brings an action to have them removed.
- Court will order removal if director engaged in dishonest conduct and removal is in the corp’s best interest.
Shareholders: Compelling a Meeting
If no date is set for a meeting within 15 months after incorporation or since the last meeting, a shareholder can ask the court to compel a meeting.
Court in county where principal place of business or registered office is
Shareholders: Notice of Meetings
Notice must be given personally, electronically, or by mail 10-60 days before the meeting. Notice must state the time, place, and purpose of the meeting.
If there is a defect, any action taken is void unless ratified or waived.
Attendance at the meeting w/o objection is a waiver to defective notice/meeting purpose.
Shareholders: Voting
- A majority of shares are present
- A majority of eligible votes is enough
(If you are electing a director, you need a majority of the shares).
Shareholders: Voting by Proxy
MI law permits SH to authorize others to act for them by proxy. SH can grant proxy by:
- Signed writing;
- Electronically, with sufficient info to validate it; or
- Any other way
A SH may revoke a proxy even if it says it’s irrevocable, unless it’s coupled with an interest (i.e., option to sell, sale, collateral).
- Proxy is revocable after 3 years, or the date specified, whichever is earlier; or
- Proxy is revocable by the purchaser of shares who did not know about the proxy
Shareholders: Piercing Corporate Veil
The law treats a corporation as separate from shareholders. So, SH are not personally liable for debts of the corporation. However, sometimes, the court will pierce the corporate veil, allowing a SH to be held liable.
A Plaintiff must show:
- Corporation was merely an instrumentality of another;
- Corporation was used to commit an injustice, wrong, or fraud; AND
- There was an unjust injury or loss to Plaintiff.
Shareholder Lawsuits: Order for Answer
Intro: A shareholder may file an action to establish that the acts of the directors, or those in control of the corporation, are illegal, fraudulent, or unfair to the corporation or shareholder.
Direct: director breached a duty owed to SH personally (i.e., denied rights).
- Court can enter appropriate relief (cancellation, injunction, alteration).
Derivative: duty owed to the corporation is breached. SH must establish:
- Standing
SH was a SH at the time of the act, and remains a SH until judgment (unless the failure to remain a SH was a result of the action taken). - Adequacy
SH adequately represents the interest of the corporation and is free from personal interests. - Demand
SH files a written demand on the corporation to take suitable action. SH must wait 90 days after making demand, unless it was rejected or if irreparable harm would result from waiting 90 days.
Shareholders: Dismissing a Derivative Suit
On corporation’s motion, the court will dismiss if it finds that 1 of 4 statutory groups made a good faith determination (after reasonable investigation) that maintaining the derivative suit is not in the best interests of the corporation.
- Majority vote of disinterested directors that are a quorum
- All disinterested independent directors
- Panel of 1+ disinterested persons appointed by the court on motion of the corporation
- A majority of 2+ disinterested directors appointed by majority vote of disinterested directors at a meeting of the board (regardless of whether they were a quorum).
