Corporations

Question 1

Incorporation

Answer 1

The articles of incorporation are filed with the state, and, if in conflict with bylaws, the articles control

Question 2

Liability

Answer 2

-A corporation is not generally liable for a contract entered into prior to incorporation unless it expressly or impliedly adopts (ratifies) the contract. —-The promoter (person entering the contract on behalf of the to be formed corporation) is liable.

Question 3

Shareholders Power

Answer 3

Shareholders are only owners and do not manage the corporation. Thus, they generally just have annual meetings.

Question 4

Directors and Officers - Notice for Meetings

Answer 4

• only needed for special meetings.
• Must give 2 days notice notice of date, time and place, but not purpose.
• Defect can be waived in writing or attending meeting w/o objection

Question 5

Shareholders Notice for Meetings

Answer 5

Written notice of meetings is required 10-60 days prior and

must state the time, place, and purpose of the meeting.

Question 6

Shareholders Voting

Answer 6

• Shareholders can vote by proxy (have someone vote their shares for them) or by voting agreement.
• Generally, a quorum (majority of all outstanding shares required to vote) must be present to hold a vote.

Question 7

Role of Directors

Answer 7

Directors may exercise all corporate powers that are not limited by the articles of incorporation or a shareholders’ agreement, including the power to form contracts and acquire liabilities.

Question 8

Directors Voting

Answer 8

Directors cannot vote by proxy or agreement.

• A quorum (majority of directors) needs to be present for a vote to take place, but unlike shareholders, directors can “break quorum” by leaving.
• Notice is required only for special meetings.

Question 9

Fiduciary Duties

Answer 9

a director must discharge duties of care and loyalty.

Question 10

Duty of Care (Burden on P) and Business Judgment Rule

Answer 10

he director must use the care that a person in a like positon would reasoanble believe appropriate under the circumstances.

Under the business judgment rule a court will not second guess business decision if made in good faith, informed, had rational basis.

Commnon Scenarios: (1) nonfeasance (does nothing) or (2) Misfeasance (decsision that hurts business)

Question 11

Duty of loyalty

Answer 11

a director must discharge her duties in good faith and with the reasonable believe that her actions are in the best interests of the organization.

Common scenarios: (1) self dealing transactions, (2) competing ventures, (3) Corporate Opportunity Doctrine (director cannot take a opportunty until he tells the board the board rejects the opp.), (4) Common Law Insider Trading – Special Circumstances Rule

Question 12

A duty of loyalty issue arises in three ways (mnemonic=BCC):

Answer 12

• Director is on both sides of a transaction: a director has a material financial interest in a contract, as well as knowledge of that interest, yet still votes to approve the contract.
• Competes with corporation: a director may not compete with his corporation.
• Corporate opportunity: a corporate officer may not usurp a corporate opportunity.

Question 13

Defenses to liability for breach of the duty of loyalty:

Answer 13

(1) approval by disinterested (qualified) directors (if all relevant information is disclosed),
(2) approval by disinterested (qualified) shareholders, or
(3) if the transaction is judged to be fair to the corporation at the time it was entered into.

A qualified director is a director without a conflicting
material interest.

Qualified shares are those not held by a conflicted director or related person.

Question 14

Waiver of duty in an LLC:

Answer 14

an LLC operating agreement may waive the duty of loyalty (e.g., allow
members to open competing businesses) so long as it is not “manifestly unreasonable.”

Question 15

Voting

Answer 15

in order for a resolution to pass, there must be a quorum and majority vote.

Question 16

Who votes

Answer 16

The record shareholder owner on the record date.

Question 17

Voting by Proxy

Answer 17

-A shareholder may vote by proxy. A shareholder can appoint a proxy in writing by signing an appointment form or making a verifiable electronic transmission.

Question 18

Revocability of Proxy

Answer 18

a proxy is generally revocable (even if it states it’s irrevocable), and any action inconsistent with the grant of a proxy works to revoke it.

Thus, when 2 or more revocable proxies are given, the last given proxy revokes all previous.

Question 19

Exception to a Proxies Revocability

Answer 19

A proxy is not revocable if it explicitly states it’s irrevocable and is coupled with an interest (e.g., sale of shares). Many states say a proxy is valid for 11 months unless otherwise stated.

Question 20

Lawsuits by shareholders against the corporation:

Answer 20

A shareholder may file an action to establish that the acts of the directors are illegal, fraudulent, or willfully unfair and oppressive to either the corporation or the shareholder. Whether a suit is appropriately brought as a direct or derivative action depends on the injury.

Question 21

Direct suits:

Answer 21

A direct suit is appropriate when the wrong done amounts to a breach of duty owed to the individual personally. (E.g., shareholder sues for denial of preemptive rights, payment of a dividend, or oppression in a close corporation.)

Question 22

Derivative suits:

Answer 22

A derivative suit is appropriate when the injury is caused to the corporation and a shareholder is trying to enforce the corporation’s rights. (This also applies to LLCs.)

Question 23

A shareholder may not commence or maintain a derivative suit unless three requirements are met:(mnemonic=SAD):

Answer 23

(1) standing to bring a lawsuit ( the shareholder to be a contemporaneous owner at the time of the alleged act or omission.)

(2) adequacy (the shareholder
represents the interests of the corporation), and

(3) demand (generally, the
shareholder should file a written demand and wait 90 days before filing suit
unless irreparable injury would result or demand would be futile).

A derivative suit can be dismissed with court approval if it’s not in the best interest of the corporation to continue it.

Question 24

Piercing the corporate veil:

Answer 24

a court will peirce the corporate veil and hold shareholders personally liable if:

the shareholders abused the privilige of incorporating and fairness must require holding them liable.

Common Scenarios (1) alter ego (commingling money), (2) undercaptilization at the time of formation, (3) Fraud, avoidance of existing obligations, and evasion of statutory provisions.

• applies to LLCs and closed corps.

Question 25

Shareholders right to inspect corporate books and records if:

Answer 25

1. his demand is made in
   good faith and
2. for a proper purpose.
   - a proper purpose is a purpose reasonably related to a person’s interest as a shareholder (e.g., shareholder articulates a purpose to address “economic risks” to the corporation).
   - A shareholder must state (1) his purpose, (2) the records he desires to inspect, and (3) that the records are directly connected to his purpose.

Question 26

LLC -Formation, rights, and duties:

Answer 26

-Articles of organization must be filed to create an LLC. Since LLCs
are a relatively new form of business association, courts tend to analyze them in the context of corporate or partnership law.

• Members of an LLC have fiduciary duties.
• Members of an LLC in a member-managed LLC are treated as agents of the LCC (with actual and apparent authority to bind the LLC in ordinary—but not extraordinary—affairs).

Question 27

Dissociation:

Answer 27

if a member leaves, then it leads to dissociation of that member, but it does not lead to winding up or dissolution unless the other members unanimously agree to dissolve the LLC.

Question 28

Liability

Answer 28

• Generally, individual members are not liable for losses. They are liable if
  (1) the court decides to pierce the LLC veil (discussed above) or
  (2) if proper procedures for dissolution and winding up have not been followed. (Creditors may enforce claims against each of the LLC members. However, a member’s total liability may not exceed the total value of assets distributed to the member in dissolution.)