Corporations Flashcards
What is the default management arrangement of an LLC?
Member-managed
Although members of a manager managed LLC do not have authority to bind, members of a member-managed LLC:
have broad authority to bind the LLC, similar to that of a partner in a general partnership
In a member managed LLC, an act outside the ordinary course of business:
may be undertaken only with the consent of all members
An LLC may dissolve upon the occurrence of various events, including:
- consent of all members,
- passage of 90 days without members,
- by court order, or
- by the happening of a dissolution-causing event per the operating agreement
When can a member of an LLC withdraw?
ULLCA: At any time without written notice
Otherwise, a member can withdraw or dissociate at any time and without reason, even if doing so violates the operating agreement, by providing notice to the LLC
Three safe harbors (defenses) for Director who breached Duty of Loyalty
(1) Approval by majority of disinterested director’s IF the director disclosed his or her interest and played no part directly or indirectly in the deliberations or vote
(2) Approval by majority of disinterested shareholders
(3) Proof that the transaction, judged according to the circumstances at the time of commitment, is established to have been fair to the corporation
If directors do not qualify for the protection of the business judgment rule:
They likely will be found to have breached their duty of care
102(b)(7) Provision
A corporation’s articles of incorporation may include a provision shielding its directors from liability for money damages for the failure to exercise adequate care in the performance of their duties
*Cannot include shield for breach of duty of loyalty
A SH has a right to inspect corporate books and records as long as:
His demand is made in good faith and for a proper purpose
- Proper Purpose: purpose reasonably related to a person’s interest as a SH; must state (1) his purpose, (2) the records he desires to inspect, and (3) that the records are directly connected to his purpose
A suit to compel the payment of a dividend:
Is not a suit to enforce a right of the corporation, therefore, there is no requirement that a shareholder make a demand on the corporation prior to demanding dividend distribution
To prevail in suit to compel the payment of a dividend, a SH must prove:
That there are funds legally available for the payment of a dividend and that the directors acted in bad faith in their refusal to pay
The choice not to distribute a dividend is a matter of business judgment, thus that choice is subject to the duty of care and business judgment rule
SUBJECT TO BJR
Essential test of bad faith:
Determine whether the policy of the directors is dictated by their personal interests rather than the corporate welfare
Duty of Care - Business Judgment Rule
There is a presumption that “in making a business decision, the directors acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company”
- Directors must be informed to an extent that they reasonably believe is appropriate
Duty of Loyalty
A director must act in good faith and with a reasonable belief that what he does is in the best interest of the corporation
Three Manifestations:
(1) Director on both sides of transaction;
(2) Competes with corporation;
(3) Usurps a corporate opportunity
*Remember the 3 safeharbors
DOL - Duty not to usurp corporate opportunity
Directors may not usurp a corporate opportunity that was in the corporation’s line of business, in which the corporation had an expectancy interest
De Facto Corporation
(1) incorporator filed the articles with the secretary in good faith that they had been fully completed and would be accepted,
(2) proceeded to act under the privileges of the corporation,
(3) then the corporation will be treated as having validly incorporated for the purpose of that transaction
Corporation by Estoppel
If one acts on behalf of a corporation and a third party reasonably relies on such appearance and enters into a contract with such person, then both parties will be estopped from treating the contract otherwise
*ONLY APPLIES TO CONTRACTS
Incorporation
Articles of incorporation are filed with the state
- Corporation is generally not liable for a contract entered into prior to incorporation unless it expressly or impliedly adopts the contract (promoter is liable)
Shareholders
Do not manage the corporation
- Generally just have annual meets which they receive written notice of between 10-60 days in advance
- Can vote by proxy or by voting agreement
- Quorum (majority of all outstanding share) must be present to vote
- Only owner on RECORD date can vote
Board of Directors
Directors manage the corporation and act as a voting body
SH vote by proxy
SH can appoint a proxy by signing an appointment form or making a verifiable electronic transmission
Lawsuits by SHs against Corporation
Direct suit: Appropriate when the wrong done amounts to a breach of duty owed to the individual personally
Derivative suit: Appropriate when injury is caused to the corporation and SH is trying to enforce corporation’s rights
Derivative Suit Requirements
(1) standing to bring lawsut;
(2) SH adequately represents the interests of the corporation; and
(3) file written demand on the board and wait 90 days before filing suit
Piercing the Corporate Veil
Corporation is a separate entity apart from its SHs
- P must show undercapitalization, failing to follow formalities, commingling of assets, confusion of business affairs, or deception of creditors
