Corporations Flashcards
Promoter liability
Promoter is liable for K formed before the corporation existed even after the corporation is formed. Can escape by novation (corporation + 3rd party agree to let promoter off hook) or adoption (corporation benefits from the K)
When does a corporation form?
When the articles are accepted and filed by the state
De jure corporation
All statutory requirements are satisfied, shifts liability for activities from individuals to the corporation
Each partner is _________ for all partnership obligations
Jointly and severally liable
De facto corporation
Individual must make a good faith effort to comply with the incorporation requirements and must operate the business as a corporation without knowing the requirements have not been met.
If individual does the above –> escape personal liability
Corporation by estoppel
Person who deals with an entity as if it were a corporation is estopped from denying its existence and seeking personal liability from the business owner. LIMITED TO CONTRACTS ONLY
Shareholder inspection of records
Shareholders have a right to inspect and copy records during normal business hours as long as they give 5 day notice + state proper purpose
Majority shareholder duties
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 by a court for good faith and fair dealing toward the minority shareholders under the court’s inherent equity power.
Business dealings between a controlling shareholder and the controlled corporation that do not involve self-dealing are analyzed using the business judgment standard. The business judgment rule is a rebuttable presumption that the controlling shareholder reasonably believed that his actions were in the best interests of the corporation. A typical decision protected by the business judgment rule includes whether to declare a dividend and the amount of any dividend.
Parent corporation: conflict of interest
TLDR: same as conflict of interest/self dealing when it comes to directors
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 and a breach of loyalty. A parent corporation that engages in a conflict-of-interest transaction with its own corporation, also known as “self-dealing,” has violated the duty of loyalty unless the transaction is protected under the safe-harbor rule. The business judgment rule does not apply in a conflict-of-interest transaction.
Safe harbors for conflict of interest transactions
(i) disclosure of all material facts to, and approval by a majority of, the board of directors without a conflicting interest; (ii) disclosure of all material facts to, and approval by a majority of, the votes entitled to be cast by the shareholders without a conflicting interest; and (iii) fairness of the transaction to the corporation at the time of commencement.
The fairness test looks at the substance and procedure of the transaction. With regard to a parent corporation engaged in self-dealing, the main concern under the fairness test is whether the benefit is comparable to what might have been obtained in an arm’s length transaction. Procedural fairness is generally not at issue unless there has been a change in control.
Special meeting notice
Directors are entitled to notice. Unless articles or bylaws say otherwise, has to be at least 2 days notice + state date, time, place
Par value stock
Corporation decides to assign a minimum value for a stock and it cannot be sold for less than that and if it is sold for less, the board can be liable, and if the shareholder who buys it knows they are getting it for less than par value, they can also be liable.
Note: stock sold for less than par value is watered stock
Member managed v. manager managed LLC
Member: direct management of the LLC by its members, members can bind LLC as its agent
Manager: centralized management by one or more managers who need not be members.
DEFAULT: member-managed
Operating agreement
Not required. Supersedes contrary statutes
LLC member duties
Care + loyalty to BOTH the LLC and each other
LLC dissolution
(1) consent of all members, (2) 90d with no members, (3) court order, or (4) dissolution-causing event under the operating agreement
LLC dissociation by member
Member can dissociate at any time and without reason, even if doing so violates the operating agreement. Usually have to give written notice to the LLC.
Piercing the veil - mere instrumentality test
(1) members dominated the corporation in such a way that the corporation had no free will, (2) members used that domination to do something bad, and (3) control and wrongful action proximately caused the injury.
Piercing the veil - unity of interest and ownership
P must demonstrate that there was such a unity of interest and ownership between the entity and the members that, in fact, the company did not have an existence independent of the members and that failure to pierce the veil through to the members would be unjust or inequitable.
Distribution of corporate assets after dissolution
(1) creditors, (2) shareholders with preferred stock, (3) remaining shareholders
Director duties
Loyalty and care. No self dealing, act in the best interests of the corporation, fairly conduct COI transactions, act with reasonable care.
Direct v. derivative action
Direct: shareholder asserting their own rights, not required to make a demand on the board before proceedings with the suit
Derivative: shareholders sue on behalf of the corporation, usually based on misconduct by board
Derivative requirements
(1) standing - need to have been a shareholder at the time of the wrong, when the action was filed, and during the litigation.
(2) written demand on board - written demand to board, give them 90 days to fix it. If board does nothing –> sue.
- -> EXCEPTIONS: can be waived if there is imminent irreparable injury OR if the demand would be futile
BJR rule statement
The business judgment rule is a rebuttable presumption that a director reasonably believed that his actions were in the best interests of the corporation. The exercise of managerial powers by a director is generally subject to the business judgment rule. However, the business judgment rule does not generally apply to a conflict-of-interest transaction. A conflict-of-interest transaction, or “self-dealing,” is any transaction between a director and his corporation that would normally require approval of the board of directors and that is of such financial significance to the director that it would reasonably be expected to influence the director’s vote on the transaction.
