Corporations

Question 1

What must be included in filing the articles of incorporation?

Answer 1

SPAWN- share info, preparer info, address info, why, name

Question 2

What increases the risk of veil piercing?

Answer 2

Three Is in VeIl PIercIng- insufficient initial funding, ignored formalities, injustice

Question 3

Controlling shareholders (including ______ ) owe ________ to their partially owned subsidiaries and may not _________________.

Answer 3

Controlling shareholders (including parent corporations) generally owe fiduciary duties to their partially owned subsidiaries and may not use their power to benefit themselves at the expense of the subsidiary and its minority shareholders.

Question 4

Courts examine business dealings between a controlling shareholder and the controlled corporation ….

Answer 4

using a fairness test.

BUT when the transaction does not involve self-dealing, the business judgement rule applies.

Question 5

If a policy (like a no-dividend) policy affects shareholders equally,

Answer 5

it is not a self-dealing transaction, as the controlling shareholder is not receiving something to the exclusion of the other shareholders.

Question 6

Generally, the person seeking to justify a self-dealing transaction

Answer 6

has the burden of proving its fairness to the corporation.

Question 7

Facts that would show that the controlling shareholder did not abide by the duty of care

Answer 7

• wasteful transaction

- faulty decision making

Question 8

Noncompliance

Answer 8

When a person conducts business as a corporation without attempting to comply with the statutory incorporation requirements, that person is liable for any obligations incurred in the name of the nonexistent corporation.

However, if the fact pattern shows that the person acted in good faith, conclude that noncompliance was not at issue.

Question 9

De Jure Corporation

Answer 9

When all of the statutory requirements for incorporation have been satisfied, a de jure corporation is created. Consequently, the corporation, rather than persons associated with the corporation, is liable for activities undertaken by the corporation.

Question 10

However, when a corporation has not been created,

Answer 10

the entity may be treated as a general partnership. A partnership is an association of two or more persons to carry on a for-profit business as co-owners. In a general partnership, each partner is jointly and severally liable for all partnership obligations.

Question 11

Defenses to personal liability- de facto corporation

Answer 11

When a person makes an unsuccessful effort to comply with the incorporation requirements, that person may be able to escape personal liability under either the de facto corporation doctrine or the corporation by estoppel doctrine. Under either doctrine, the owner must make a good-faith effort to comply with the incorporation requirements and must operate the business as a corporation without knowing that the requirements have not been met. If the owner has done so, then the business entity is treated as a de facto corporation, and the owner, as a de facto shareholder, is not personally liable for obligations incurred in the purported corporation’s name.

Question 12

Corporation by estoppel

Answer 12

Alternatively, under corporation by estoppel, a person who deals with an entity as if it were a corporation is estopped from denying its existence and is thereby prevented from seeking the personal liability of the business owner. This doctrine is limited to contractual agreements.

Question 13

What if a corporation or LLC commits ultra vires acts—acts beyond the scope of its stated why or purpose?

Answer 13

The acts are void and the company may seek damages from the responsible insiders to clean up the mess they made. Shareholders can sue to enjoin future ultra vires acts. If severe enough, states may dissolve companies because of ultra vires acts.

Question 14

When are promoters personally liable on pre-organization contracts?

Answer 14

Promoters are normally presumed personally liable until novation.

Promoters can rebut the presumption if the other parties expressly agree to hold only the future entity liable.

Question 15

Novation

Answer 15

A novation is when the old contract is cancelled and replaced. In the case of pre-organization contracts, that means the newly formed entity agrees to take over the contract and the third party agrees to let the promoters off the hook.

Prior to novation, promoters are often indemnified by the entity once the entity adopts the pre-organization contract.

Question 16

Preferred stock types

Answer 16

Preferred stock has priority for dividends and distributions.

Some preferred stock is participating—they get paid twice. Once as preferred, once as common.

Some preferred stock is cumulative­—if a mandatory payment is missed, it gets made up later.

Question 17

LLC Management- Members

Answer 17

Members. Members normally share profits equally but can agree otherwise. By default, LLCs are member-managed.

Member-managed means all members manage everything.
Each member is normally an equal agent with power to bind the LLC and unilaterally conduct ordinary business.
Non-ordinary business normally requires at least a majority and, sometimes, a unanimous member vote, depending on state law and operating agreements.
Individual members can normally transfer their financial rights without consent from the other members. But the only way new members can join an LLC (and have management authority) is if the current members consent.

Question 18

LLC Management- Manager

Answer 18

Managers. LLCs can also be manager-managed by one or more managers, which may be members too.

Each manager is an agent with power to bind the LLC and unilaterally conduct ordinary business.
But non-ordinary business normally still requires approval by most and, sometimes, all members.
Members can normally remove managers for any reason.
Managers may be other companies.

Question 19

Shareholder Duties

Answer 19

Normally, shareholders have no fiduciary duties. But duties can COMe to shareholders in three key ways.

Close corporation – Shareholders in a close corporation have an “utmost” duty of good faith and loyalty.
More on close corporations in a moment.
Officers or directors—when shareholders become officers or directors. Or,
Minority protection – Controlling shareholders—shareholders with majority interest—cannot take unfair advantage of or oppress minority shareholders.

Question 20

General rule statement for piercing the corporate veil

Answer 20

A court may disregard the corporate entity of “pierce the corporate veil” in certain situations. Piercing the corporate veil is used to describe the action of a court to hold corporate shareholders and LLC owners personally liable for the debts and liabilities of a corporation.

Question 21

NEGLIGENCE

Duty

Answer 21

The first issue is whether the D owed a duty to the plaintiff to conform to a specific standard of care.

Majority

The majority rule is that a duty of care is owed to all foreseeable plaintiffs. Under Justice Cordozo’s majority opinion in Palsgraf, the defendant owes a duty to plaintiffs who are within the zone of foreseeable danger.

Restatement

Under the Restatement, if the defendant can foresee harm to anyone as a result of his negligence, then a duty is owed to every person harmed as a proximate cause of his breach. Under this approach, the issue is whether the plaintiff was foreseeable is reserved for the analysis of proximate cause.

Question 22

NEGLIGENCE
Duty
Standard of Care

Answer 22

Standard of Care

The next issue is what standard of care the D owed to the P.

In most cases, the standard of care owed by the D to the P is that of a reasonably prudent person under like circumstances as measured by an objective standard (the reasonable person standard). However, the standard of care owed may change when certain types of involved, or a statute defines a specific standard of care as a matter of law (negligence per se). Traditionally, the standard of care owed by the D to P is subject to modification if the D is: a child, a professional, a physician, a common carrier or innkeeper, an automobile driver, a bailor, or a possessor of land.

Question 23

NEGLIGENCE
Duty
Standard of Care
Reasonable Person Standard of Care

Answer 23

The reasonable person standard of care is the default standard of care that is applied in most cases. Under the reasonable person standard, the D owes a duty to exercise the care that a reasonable person under like circumstances would recognize as necessary to avoid or prevent an unreasonable risk of harm to another person.

Question 24

(Reasonable person) Here, statement

Answer 24

Here, the D owed a duty to P to conform to the reasonable person standard of care because the D is not a member of a protected class that requires a diff standard of care, and there is not a statute that defines a specific standard of care as a matter of law.

Question 25

Standard of care: doctors

Answer 25

A physician owes a duty of care to 1) conform their conduct to the customary practice of other physicians in like circumstances, as measured by a national standard and 2) explain the risks of a medical procedure to a patient before the patient decides to consent to treatment.

However, a physician is not requires to explain the risks of a medical procedure when:

the risk is commonly known
the patient is unconscious or otherwise incapable of giving consent
the P waives or refuses the info
explanation of the risks would be detrimental to the patient

Question 26

Standard of care: automobile drivers

Answer 26

In most jurisdictions, an automobile driver owes a duty to conform to a reasonable person standard of care to their guests and passengers (passengers are people in the car who confer an economic benefit to the driver). However, in a minority of jurisdictions, an automobile driver only owes a duty to refrain from gross or wanton and willful misconduct to their guests, while still owing a duty to conform to the reasonable person standard to their passengers.

Question 27

Standard of Care: Possessors of Land

Answer 27

Under the traditional approach, the standard of care that possessors of land owe to entrants upon their land varies depending on whether the entrant is a trespasser, licensee, or invitee.

Question 28

types of trespassers

Answer 28

Ts are people who enter a land owner’s property without valid consent or necessity.

discovered trespasser- enters without consent, but may be expected by the landowner.

undiscovered trespasser- enter the land without consent, and are not expected by the landowner.

Question 29

Traditional and modern approach regarding liability to trespassers

Answer 29

Under the traditional approach, D owes a duty based on the type of entrant.

Modern Approach

Today, several states have rejected the traditional distinctions between licensees and invitees holding that a land possessor owes a duty to all entrants, regardless of their status, to conform to the reasonable person standard of care.

Question 30

Standard of Care/Duty: Attractive Nuisance

Answer 30

owes a duty to

child trespassers

to: warn, or make safe, artificial conditions on the land,

provided that:
1. the artificial condition exists in a place whether the land owner has reason to know children are likely to trespass

2. the possessor of land knows or has reason to know that the artificial condition poses an unreasonable risk of death or serious bodily harm;
3. the children, due to their age, do not appreciate the danger involved
4. the risk of harm outweighs the expense of making the condition safe

Question 31

CAUSATION

Answer 31

The next issue is whether the breach was the actual and proximate cause of the plaintiff’s injuries

Actual Cause

To prove actual cause, the P must prove that her injury would not have occurred but for the D’s BREACH.

Proximate Cause

To prove proximate cause, the P must prove that her injury was a foreseeable result of the D’s breach. An INTERVENING cause is an outside force or action that contributes to the P’s harm after the D’s breach has occurred. IF THE INTERVENING CAUSE is unforeseeable, it is a SUPER-CEDING cause and D’s liability is cut off from that point forward.