Corporations Flashcards
Fiduciary Duties owed to the Corporation by the Directors
Duty of Loyalty: 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.
Duty of Care: Director must use the care that a person in a like position would reasonably believe to be appropriate under the circumstances.
Subtypes of the Duty of Care
- Nonfeasance (director does nothing; liable only if causation)
- Misfeasance (director makes harmful decision; causation is clear)
BOP is on P bc of BJR
Business Judgement Rule
Court will not second guess business decision if made in good faith, informed, and had rational basis.
(BJR presumes this; that is why the burden is on the P to show otherwise.)
Duty of Loyalty Breaches
- self-dealing/interested director transaction
- competing ventures
- corporate opportunity
BOP is on D bc BJR does not apply
Indemnification
Category 1: Corp CANNOT indemnify if D/O held liable to corp or improper benefit
Category 2: Corp MUST indemnify if D/O successful in defending on the merits or otherwise
Category 3: Corp MAY indemnify if D/O shows they acted in good faith w/ rznbl belief acting in corp’s best interest (ie duty of loyalty)
Articles can eliminate liability of D/O for
duty of care cases only (not duty of loyalty violations).
Closely held corporation
- small number of shareholders;
- stock not publicly traded;
- shareholders can manage directly
In many states, cts hold that shareholders owe a fiduciary duty of utmost good faith to the other shareholders (to each other). No oppression allowed.
Piercing the Corporate Veil
Doctrine that allows shareholders to be sued for debts of corp. Available only in close corp’s.
Must show that shareholders have abused the privilege of incorporating and fairness requires holding them liable.
Common fact patterns:
- alter ego;
- undercapitalization
derivative suit
Shareholder sues to enforce corp’s claim (rather than shareholder’s personal claim). If corporation could have brought the suit, it is a derivative suit.
If P/shareholder wins, the money from judgment goes to the corp; P recovers costs and fees.
If P/shareholder loses, P is liable for D’s fees if sued without reasonable cause; other shareholders barred from suing on same transaction again.
If the vote required for approval conflicts between the articles of incorporation and the bylaws, the ___ control.
articles of incorporation
Shareholder voting
Only shareholders of record on the record date may vote at a shareholders’ meeting. They do not have to vote in person; they may give another person a written and signed proxy giving the other person the right to vote the shares.
Shareholder voting
A shareholder may attend a SH meeting and vote his shares personally/in person.
Only shareholders of record on the record date may vote at a shareholders’ meeting.
Only outstanding shares may be voted. Shares that were issued and outstanding, but that have been repurchased are not outstanding. Therefore, such repurchased shares are not counted in determining the number of votes needed to approve a proposal and cannot be voted.
Proxy voting
A SH may give another person a written and signed proxy giving the other person the right to vote the shares.
Proxies are generally revocable unless they say that they are irrevocable and are coupled with an interest (situations where the proxy holder essentially pays for the right to be a proxy, such as when the proxy holder has purchased the underlying shares from the owner of record).
Proxies may be revoked by a subsequent instrument or by the shareholder of record showing up to vote in person.
Promoters
A promoter acts on behalf of a corp. that has not yet been formed.
A promoter is personally liable when:
1) he purports to act as or on behalf of a corp.; AND
2) knows no corp. was formed.
Generally, a promoter remains personally liable for a pre-corp. contract even if the corp. subsequently adopts the contract.
− BOTH the corp. and the promotor will be liable if adopted.
BUT a promoter is NOT liable if:
a) there is a subsequent novation; OR b) K explicitly provides that the promoter has no personal liability.
Fact that a promoter signs the K “as agent for X Corp” is not dispositive. While under agency law, such a signature would release an agent from liability on a K that the agent entered into on behalf of a principal, one cannot be an agent of a nonexistent principal.
Corporation’s Liability r/t Promotors
A corp. is NOT liable on a contract made by a promoter UNLESS the corp. expressly or impliedly adopts the contract postincorporation.
− Express Adoption = BoD action or reference in corp.’s formation documents.
− Implied Adoption = Corp. (1) knows / has reason to know the material terms of the contract; AND (2) accepts some benefit of it.
