Corporations Flashcards
What must be included in filing the articles of incorporation?
SPAWN- share info, preparer info, address info, why, name
What increases the risk of veil piercing?
Three Is in VeIl PIercIng- insufficient initial funding, ignored formalities, injustice
Controlling shareholders (including ______ ) owe ________ to their partially owned subsidiaries and may not _________________.
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.
Courts examine business dealings between a controlling shareholder and the controlled corporation ….
using a fairness test.
BUT when the transaction does not involve self-dealing, the business judgement rule applies.
If a policy (like a no-dividend) policy affects shareholders equally,
it is not a self-dealing transaction, as the controlling shareholder is not receiving something to the exclusion of the other shareholders.
Generally, the person seeking to justify a self-dealing transaction
has the burden of proving its fairness to the corporation.
Facts that would show that the controlling shareholder did not abide by the duty of care
- wasteful transaction
- faulty decision making
Noncompliance
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.
De Jure Corporation
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.
However, when a corporation has not been created,
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.
Defenses to personal liability- de facto corporation
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.
Corporation by estoppel
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.
What if a corporation or LLC commits ultra vires acts—acts beyond the scope of its stated why or purpose?
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.
When are promoters personally liable on pre-organization contracts?
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.
Novation
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.
Preferred stock types
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.
LLC Management- Members
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.
LLC Management- Manager
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.
Shareholder Duties
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.
General rule statement for piercing the corporate veil
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.
NEGLIGENCE
Duty
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.
NEGLIGENCE
Duty
Standard of Care
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.
NEGLIGENCE
Duty
Standard of Care
Reasonable Person Standard of Care
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.
(Reasonable person) Here, statement
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.
