Corporations Flashcards
Board approves act of director with personal interest in transaction
Did he fail to disclose all of the material facts?
A transaction cannot be set aside merely because a director had a personal interest in the transaction if the director disclosed the material facts of the transaction to disinterested members of the board or the shareholders, who approved the transaction, or the transaction was fair to the corporation
Board Meeting Requirements
- QUORUM needed for ANY meeting of the board
- Unless bylaws say otherwise, quorum = majority of ALL directors on the board
- Quorum can be LOST if people leave! (Broken quorum)
- Majority of those PRESENT required to pass resolution
Resolutions passed by majority of the quorum
Business Judgment Rule
Court will not second guess business decision if made in good faith, informed, and had rational basis
- Good faith
- With the care that an ordinarily prudent person would exercise in like position
- in a manner generally believed to be in the best interests of the corporation
- Presumption that when the board acts, it did appropriate due diligence
- Did the board do their homework before making their decision? Can rely on experts and corporate insiders where reasonable.
Bylaws
Operating manual for corporation
- Not filed with the state
- ARTICLES govern if conflict
- Board or shareholders can amend, repeal, and adopt
Can shareholders be held liable for corporate debts?
Generally not because the corporation is liable for what it does. But…
PIERCING THE CORP VEIL: doctrine that allows shareholders to be sued for debts of corp
- Available only in CLOSE CORPS
Can shareholders manage the company?
Generally not. But can eliminate the board and manage directly in a CLOSELY HELD corporation:
1. Small number of shareholders
2. Stock not publicly traded
*SHAREHOLDER MANAGEMENT AGREEMENT
Should be conspicuously noted on front and back of stock certificate
MANAGER owes duties of care and loyalty to corp
- Sets up alt management
1. In the articles and approved by all shareholders
2. Unanimous written shareholder agreement
** Generally, management is vested in the board of directors, who are voted by the shareholders
Consideration for issuance
- Form: any tangible or intangible property or benefit to the corp
- Very broad
- Only problematic when there is no consideration - Amount: par = minimum issuance price
- No par = no minimum issuance price
- Up to BOARD, if made in good faith
- Watered stock = sold for under required par. Directors are liable if they knowingly authorized the issuance. Purchaser is liable, no defense, since charged with knowledge of par value
** Corporatate statuses
- De jure: followed all statutory provisions, insulates against personal liability of shareholders
- De facto: colorable compliance wiht most provisions and exercise of corporate privilege, insulates against personal liability, but corporation subject to quo warranto by state
- Estoppel: parties act as if there is a corporation; no requirement of following statutory provisions; insulates against personal liability in contract but not in tort
Corporate Opportunity
A director cannot usurp a corporate opportunity until 1. he tells the board about it, and 2. he waits for the board to reject the opportunity
- Breach of duty of loyalty
- Opportunity: something the company has an interest/expectancy in; defendant found on company time/with company resources
- Corp’s financial inability to pay is not a defense!
- Remedy: must sell to corp at his cost. If he sold for profit, corp will get that profit (constructive trust)
Corporation by Estoppel
Not a de jure corporation, but treated that way for people who treated the business like a corp
- Applies only in CONTRACT, not tort!
** ultra vires is not a good excuse
De Facto Corporation Requirements
De facto; treated as corp for all purposes except in action by the state (quo warranto)
- Relevant incorporation statute (automatically met)
- Good faith attempt to comply with statute
- Act like a corp; exercise of corp
Defective Incorp
Wrongly thought there was a corporation, failed to do so. Merely a partnership.
- Proprietors can nevertheless escape liability if they are UNAWARE of failure to form de jure corporation.
- Equitable, must be in good faith
Abolished in many states but…
1. De facto corporation
2. Corporation by estoppel
Director Voting
Directors cannot give proxies or enter into voting agreements
- Void
- Policy: directors owe the corporation NON-DELEGABLE fiduciary duty
- Cf. SHAREHOLDERS, who can vote by proxy and enter into voting agreements
Dissolution
Triggers the winding up process. Can still sue and be sued, but cannot start new business.
- Voluntary: requires board action and shareholder approval. File notice of intent to dissolve with SoS, and corp exists only to wind up, notify creditors so they can make claims
- Involuntary: requires court order.
- Shareholder: for director abuse, waste of assets, misconduct, harmful director deadlock, failure at consecutive meetings to fill board vacancy. Court may just order buyout of objecting shareholder, e.g., in closely held corp
- Creditor: insolvent and creditor has unsatisfied judgment or corp admits debt in writing
Duty of Care
Burden on PLAINTIFF
- Nonfeasance: director does NOTHING
- Liable only if breach causes loss to corporation - Misfeasance: board makes decision that hurts business
- Causation is never a problem
- Director is not liable if she meets the BUSINESS JUDGMENT RULE
Duty of Loyalty
Burden on DEFENDANT. Business Judgement Rule never applies! Cases about conflict of interest
- Self dealing (i.e. between director/close relative and corp) / interested director transaction
- Competing ventures
- Corporate opportunity
Exculpatory provision
A corp’s articles may limit or eliminate directors’ personal liability for damages to shareholders or corporation for actions taken UNLESS
1. Received a benefit to which he/it is not entitled
2. Intentional harm to corporation
3. Approved unlawful distributions
4. Intentionally committed a crime
* Negligence okay
Fiduciary duties in closely held corps
Vertical: manager owes duties to corp
Horizontal: shareholders in close corporations owe a fiduciary duty of utmost good faith to OTHER SHAREHOLDERS
- Close corp looks a lot like a partnership…
- If there is oppression of minority shareholder, courts will sometimes allow suit because minority shareholder cannot sell/no way out
Fiduciary Duty Owed by DIRECTORS
Non-delegable!
- “A director must discharge her duties in good faith and with reasonable belief that actions are in the best interest of the corp.”
- Duty of LOYALTY - “She must also use the care that a prudent person in like position would reasonably believe appropriate under circumstances.”
- Duty of CARE
Formation
- Person: incorporator
- One or more
- Executes the articles and delivers to SoS
- Could be entity
- Need not be citizen of state of incorp - Paper: articles of incorp
- Name (must include corporation, company, incorporated, or limited)
- Name or address of incorporator(s)
- Name of the registered agent and address of the registered office in state of incorporation
- Information re: stock; authorized stock (max shares), number of shares in each class, voting rights and preferences of each class
- Option: initial directors - Act: incorporator delivers notarized articles to SoS and pays fees
- ACCEPTANCE for filing = de jure corporation
Fundamental Corp Change requirements
- Board action
- Written notice to shareholders
- Shareholder approval
- Generally, majority of shares entitled to vote
- Modern, only majority of actual voting shares - Deliver document to SoS
Fundamental Corp Changes
- Amending articles
- Mergers and consolidations
- Transfer of all or substantially all assets
- Voluntary dissolution
- Conversion into another form of business
Kinds of shareholder meetings
- Annual
- Required
- If none held within 15 mos, shareholder can ask court to require one
- Elect directors - Special
- Called by the board, president, the holders of at least 10% of the outstanding shares, or anyone else as authorized in the bylaws
- Can fire directors (not officers)
- Limited to purpose
Notice for meeting
Set in bylaws
- Regular meeting: no notice
- Special meeting: notice required
- Unless bylaws say otheriwise; at least 2 days’ notice of date, time, and place…need not state purpose
- Remedy: anything at the meeting is void/voidable unless the directors who were not notified waive the notice defect - In writing, any time
- Attending meeting without objecting at outset
Organizational meeting
After formation, next step
- If directors named in arts, will hold. If not, incorporators can hold and elect the initial directors
- Must COMPLETE the organization of the org
1. Appoint officers
2. Adopt initial bylaws
Perfecting Right of Appraisal
Shareholder dissents from fundamental corporate change; forces corp to buy shares at fair price
Before vote, shareholder must -
1. File with corp written notice of objection and intent to demand pay
2. At shareholder vote, must abstain or vote against
3. After vote goes through, make written demand to be bought out and deposit stock with company
- If cannot agree on fair value of shares, corp will sue and court may appoint appraiser
** Generally only remedy unless there is fraud
Piercing the Corp Veil
Imposition of liability on shareholder…could be human or another corporation, e.g. parent/subsidiary
1. Shareholders have abused the privilege of incorporating
2. Fairness requires holding them liable
Common situation
- Fraud,
- Alter ego: commingles corp and personal funds, corp funds and resources for personal use…court may allow creditor to collect from shareholder. Other shareholder would not be liable!
- Undercapitalization: corporation did not have enough money WHEN FORMED if shareholders failed to invest enough to cover prospective liabilities, e.g., take out appropriate insurance
* Courts may be more likely to pierce for tort victim than contract claimant
** Powers of the president
Agent of the corp, can enter into contracts for day to day operations
- Extraordinary actions if authorized by the board
Pre-incorporation contracts
Know there’s no corp…requires PROMOTER: person who procures commitments for capital and instrumentalities on behalf of a corporation that will be formed in the future
- Unless CLEARLY says otherwise, e.g., that the promoter is not to be bound (contract is treated as an offer to the proposed corporation), PROMOTER is PERSONALLY liable until there is a NOVATION (agreement of promoter, corp, contracting party that corp replaces promoter under contract)
- Corporation is liable only if it ADOPTS, and adoption makes corp liable but does NOT relieve promoter!
- Express, e.g., by board resolution
- Implied (acquiescence, conduct normally constituting estoppel)
Requirements to Bring Derivative Suit
- Stock ownership when claim AROSE and throughout the suit
- Can also bring if received by operation of law (inheritance/divorce decree) by someone who owned stock when claim arose - Must provide adequate representation of the corp’s interest
- Written demand on corp (usually board) that corp bring suit
- May not have to make demand if it would be futile, e.g., directors themselves would be the defendant…demanding that they sue themselves…
Revocation of a Proxy
Proxies are generally revocable unless they say the are irrevocable and are coupled with an interest (situations in which the proxy holder essentially pays for the right to be a proxy, e.g., purchasing underlying shares)
- May be revoked by a SUBSEQUENT INSTRUMENT or by Shareholder of record SHOWING UP and voting the shares himself
Revocation of Proxy
REVOCATION:
1. Writing to the corporate secretary
2. Attending meeting and voting
IRREVOCABLE PROXY:
1. Must state that it is irrevocable
2. Must be combined with an interest in shares other than voting, e.g. proxy-holder has option
Right to Inspect
Shareholder’s right to review corp’s books and records on written demand
- Any shareholder can do so
Non-controversial request: merely makes written request 5 business days in advance. Need not state a proper purpose.
- Articles, bylaws, minutes of shareholder meetings, names/addresses of current directors/officers
Controversial request: same but demand must state a proper purpose, i.e., related to interest as shareholder
- Minutes of board meetings, accounting records, record of shareholders
* IF corp fails, s/h will seek court order. If wins, can recover fees and costs in making motion.
* C.f. directors, who have unfettered access to these materials
Self Dealing
Violates the duty of loyalty
** An interested director transaction will be set aside or the director will be liable in damages unless the director shows that 1) deal was fair to corp when it was entered or 2) her interest and the relevant facts were disclosed/know and the deal was approved by MAJORITY (min 2) of disinterested directors or a MAJORITY of disinterested shares
- Quorum = majority of disinterested directors (min 2)
- Even if deal gets approved…some courts also require showing of fairness
Shareholder as Plaintiff
Derivative Suit: shareholder sues to enforce CORP’s claim
- Could the corp have brought suit itself? If so, derivative
- Breach of duty of care / loyalty are always derivative suits b/c owned from d/o to corp (vertical fiduciary duty)
C.f., DIRECT suit, where SHAREHOLDER herself is hurt
Shareholder meeting notice
Must be in writing and delivered 10-60 days before meeting
- To every shareholder entitled to vote
- Must state date, time, place of meeting
- For SPECIAL MEETINGS: must state purpose b/c shareholders cannot do anything else at that meeting
- Remedy: actions void/voidable unless those who were not sent notice waive the notice defect by
1. express: in writing, signed anytime
2. implied: attend the meeting without objecting at the outset
Shareholder Meeting Quorum
Majority of VOTING shares, not shareholders!
- Number of people is irrelevant
- Not LOST if people leave (c.f. board quorum)
