Corporations Flashcards
How is a corporation formed?
In order to form a corporation, articles of incorporation must be filed with the state. They must include certain basic info (e.g., name, agents, incorporators, # of authorized shares) as well as the appropriate filing fee.
When is corporation deemed formed?
Unless a delayed date is specified in the articles, corporate existence begins when the articles are filed.
(Note: If an inadequate filing is made, de facto corporation or corporation by estoppel may apply. However, de jure corporate existence is the above rule – look for revised articles filed.)
What is the effect of noncompliance on liability when there is NO good-faith attempt to comply with formation requirements?
When a person conducts business as a corporation without attempting to comply with the formation requirements, that person is personally liable for any obligations incurred.
What are three potential outcomes when a corporation has not been properly created?
- A general partnership is an association of two or more people to carry on a for-profit business as co-owners. Each partner is jointly & severally liable, unless one of two doctrines below applies.
- A corporation by estoppel is formed when there is a good-faith effort to comply and the owner operates the business without knowing the requirements have not been met. If so, a person who deals with the entity will be estopped from denying its existence, and the owner is not personally liable.
- A de facto corporation is formed when there is a good-faith effort to comply and the owner operates the business without knowing the requirements have not been met. If so, the owner is not personally liable. (Note: Abolished by RMBCA)
What duties does a controlling shareholder owe to the corporation or other shareholders?
A controlling shareholder, such as a parent corporation, generally does not owe fiduciary duties to the corporation or other shareholders. However, decisions by a majority shareholder or control group may be reviewable for good faith and fair dealing toward the minority.
How does the court analyze business dealings between a controlling shareholder and the controlled corporation that do not involve self-dealing?
Business dealings that do not involve self-dealing are analyzed using the business judgment rule. The BJR is a rebuttable presumption that the controlling shareholder reasonably believed his actions were in the best interests of the corporation.
A typical decision protected by the BJR is the decision to declare a dividend and the amount of any dividend.
What is an example of a breach of the duty of loyalty by a parent corporation (generally speaking)?
If a parent corporation causes its subsidiary to participate in a business transaction that prefers the parent at the expense of the subsidiary, it can involve self-dealing. This is a breach of the duty of loyalty unless protected by the safe-harbor rule (the BJR does not apply to conflicts of interest).
What are the three safe harbors by which a conflict of interest transaction may be protected?
The three safe harbors are:
(1) disclosure of all material facts + approval by a majority of the disinterested board members;
(2) disclosure of all material facts + approval by a majority of the disinterested shareholders; and
(3) fairness of the transaction to the corporation (in substance as well as procedure)
Which duty is breached when a director usurps a corporate opportunity? What two tests will courts use?
A director may violate his duty of loyalty by usurping a corporate opportunity rather than first offering it to the corporation.
Courts will apply the “interest or expectancy” test or the “line of business” test (more on these in other cards).
Explain the “interest or expectancy” test for analyzing a corporate opportunity.
Under the “interest or expectancy” test, the key is whether the corporation has an existing interest or expectancy arising from an existing right in the opportunity. An expectancy may also exist when the corporation is actively seeking a similar opportunity.
Explain the “line of business” test for analyzing a corporate opportunity.
Under the broader “line of business” test, the key is whether the opportunity is within the corporation’s current or prospective line of business. This frequently turns on how expansively the corporation’s line of business is characterized.
What notice, if any, are directors entitled to for a special meeting?
Directors are entitled to at least two days notice prior to the special meeting, unless the articles or bylaws provide otherwise. The notice should state the date, time, and place of the meeting (but purpose is not required).
Can a director waive lack of notice?
Yes. A director’s attendance of the meeting waives notice unless the director promptly objects to the lack of notice. If they waive through attendance, they will not have standing to challenge a board action for lack of notice.
What is necessary for a board of directors’ acts at a meeting to be considered valid?
(Hint: what is needed in order for them to conduct business at the meeting?)
For the Board’s acts at a meeting to be valid, a quorum of directors must be present at the meeting (a majority unless the articles or bylaws provide otherwise).
What counts as presence for purposes of determining quorum?
A director must be present at the time the vote is taken in order to be counted for quorum purposes, but presence includes telephonic appearances if all persons participating in the meeting can hear and speak to ALL other persons in attendance.
