Corporations

Question 1

Promoter liability

Answer 1

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)

Question 2

When does a corporation form?

Answer 2

When the articles are accepted and filed by the state

Question 3

De jure corporation

Answer 3

All statutory requirements are satisfied, shifts liability for activities from individuals to the corporation

Question 4

Each partner is _________ for all partnership obligations

Answer 4

Jointly and severally liable

Question 5

De facto corporation

Answer 5

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

Question 6

Corporation by estoppel

Answer 6

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

Question 7

Shareholder inspection of records

Answer 7

Shareholders have a right to inspect and copy records during normal business hours as long as they give 5 day notice + state proper purpose

Question 8

Majority shareholder duties

Answer 8

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.

Question 9

Parent corporation: conflict of interest

Answer 9

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.

Question 10

Safe harbors for conflict of interest transactions

Answer 10

(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.

Question 11

Special meeting notice

Answer 11

Directors are entitled to notice. Unless articles or bylaws say otherwise, has to be at least 2 days notice + state date, time, place

Question 12

Par value stock

Answer 12

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

Question 13

Member managed v. manager managed LLC

Answer 13

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

Question 14

Operating agreement

Answer 14

Not required. Supersedes contrary statutes

Question 15

LLC member duties

Answer 15

Care + loyalty to BOTH the LLC and each other

Question 16

LLC dissolution

Answer 16

(1) consent of all members, (2) 90d with no members, (3) court order, or (4) dissolution-causing event under the operating agreement

Question 17

LLC dissociation by member

Answer 17

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.

Question 18

Piercing the veil - mere instrumentality test

Answer 18

(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.

Question 19

Piercing the veil - unity of interest and ownership

Answer 19

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.

Question 20

Distribution of corporate assets after dissolution

Answer 20

(1) creditors, (2) shareholders with preferred stock, (3) remaining shareholders

Question 21

Director duties

Answer 21

Loyalty and care. No self dealing, act in the best interests of the corporation, fairly conduct COI transactions, act with reasonable care.

Question 22

Direct v. derivative action

Answer 22

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

Question 23

Derivative requirements

Answer 23

(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

Question 24

BJR rule statement

Answer 24

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.

Question 25

COI transaction safe harbor rule statement

Answer 25

A conflict-of-interest transaction may enjoy safe-harbor protection via (i) a majority vote of informed and disinterested directors; (ii) a majority vote of informed and disinterested shareholders; or (iii) fairness of the transaction.

Question 26

director duty of loyalty rule statement

Answer 26

A director owes a duty of loyalty and a duty of care to the corporation. The duty of loyalty requires a director to act in a manner that the director reasonably believes is in the best interests of the corporation. A director who engages in a conflict-of-interest transaction with his own corporation has violated his duty of loyalty unless the transaction is protected under the safe-harbor rule.

Question 27

Theory of improper dissolution

Answer 27

This is an alternative to piercing the veil for LLCs

When members agree to voluntarily dissolve an entity, the entity must wind up its affairs and liquidate its business. Only after the entity’s debts and obligations to creditors have been paid may the members receive a portion of the liquidated value of the LLC. Those responsible for winding up can be liable for improper distributions.

Question 28

Shareholder amendment of corporate bylaws rule statement

Answer 28

Shareholders have the power to amend a corporation’s bylaws under state law. A corporation’s bylaws for the management of the corporation’s business or regulation of its affairs are enforceable, so long as the bylaws do not conflict with state law or the articles of incorporation. The nomination of directors and the procedure for nominating directors are common provisions in the bylaws and are consistent with regular corporate practice.

Question 29

Shareholder v. director bylaw

Answer 29

Shareholders have the power to amend the bylaws. The board of directors can also amend the bylaws unless the articles of incorporation or a vote by the shareholders limits this power. Shareholder-approved bylaws can amend or repeal existing bylaw provisions, regardless of whether the bylaw was initially approved by the shareholders or the board of directors. However, a shareholder-approved bylaw dealing with director nominations may not limit the board’s power to amend, add, or repeal to ensure an orderly process. Thus, if shareholders approve a bylaw amendment that limits further board changes, the board could only amend or add to the bylaw to safeguard the voting process; it could not repeal the shareholder-approved bylaw.