Corporations

Question 1

Basics of Incorporation

Answer 1

• The articles of incorporation are filed with the state, and, if in conflict with bylaws, the articles control.
• 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 2

Define; Role of Shareholders

Answer 2

• Shareholders are only owners and do not manage the corporation. Thus, they generally just have annual meetings.
• Written notice of meetings is required 10-60 days prior and must state the time, place, and purpose of the meeting.
• 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 3

Define: Role of Directors

Answer 3

• Directors manage the corporation and (like shareholders) act as a body by voting.
• 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.
• Shareholders hire and fire directors.
• 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 4

What duties does a director owe to a corporation?

Answer 4

1. Duty of Loyalty
2. Duty of Care

Question 5

What is the presumption in regards to a director’s duty of care?

Answer 5

There is a presumption that “in making a business decision, the directors acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interest of the company.”

Also known as the business judgment rule.

Question 6

When does a duty of loyalty issue arise?

Answer 6

1. The 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.
2. Competes with corporation: a director may not compete with his corporation.
3. Corporate opportunity: a corporate officer may not usurp a corporate opportunity.

Mnemonic: BCC

Question 7

What are the defenses to liability for breach of the duty of loyalty?

Answer 7

1. Approved by disinterested (qualified) directors (if all relevant information is disclosed);
2. Approved 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 8

True or False: An LLC may waive the duty of loyalty

Answer 8

True.

So long as it is not “manifestly unreasonable.”

Question 9

What are the requirements for shareholder voting?

Answer 9

In order for a resolution to pass, there needs to be a quorum present, and more votes must be cast in favor of the resolution than against it.

Question 10

Who votes during shareholder votes?

Answer 10

The record owner on the record date.

Question 11

When may a shareholder vote by proxy?

Answer 11

A shareholder can appoint a proxy:

1. In writing by signing an appointment form; OR
2. Making a verifiable electronic transmission.

Question 12

Is a proxy revocable?

Answer 12

Yes.

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 13

When can shareholders file a lawsuit against the corporation?

Answer 13

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.

Question 14

What are the two types of lawsuits available for shareholders?

Answer 14

1. Direct Suits: Appropriate when the wrong done amounts to a breach of duty owed to the individual personally.
   - Recovery goes to corporation, not shareholder
2. Derivative Suit: Appropriate when the injury is caused to the corporation and a shareholder is trying to enforce the corporation’s rights.

Question 15

What are the filing requirements for a derivative lawsuit?

Answer 15

1. Standing to bring a lawsuit;
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

Mnemonic: SAD
“I don’t mind standing every day, adequacy and demand all day.” - Maroon 5, She Will Be Loved

Question 16

Define: Piercing the Corporate Veil

Answer 16

Generally, the law treats a corporation as an entity separate from its shareholders, even where one individual owns all the corporate stock. In some (very limited) circumstances, courts will disregard the LLC form and hold a shareholder personally liable for corporate debt.

It is only allowed in close corporations and LLCs.

Question 17

What must a plaintiff show in order to pierce the corporate veil?

Answer 17

Must show that:

1. Shareholders of the corporation or members of an LLC abused the privilege of incorporating; AND
2. Fairness requires holding them liable

Question 18

What are examples of what a plaintiff must show in order to pierce the corporate veil?

Answer 18

• Undercapitalization of the business
• Failing to follow formalities
• Commingling of assets
• Confusion of business affairs
• Deception of creditors

Question 19

True or False: A shareholder can inspect corporate books and records

Answer 19

True.

As long as his demand is made in good faith and for a proper purpose.

Question 20

What does a shareholder need to do in order to inspect corporate books and records?

Answer 20

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 21

Define: LLC Formation, Rights, and Duties

Answer 21

• Articles of incorporation 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 LLC (with actual and apparent authority to bind the LLC in ordinary–but not extraordinary–affairs).

Question 22

True of False: When a member leaves, the LLC dissolves

Answer 22

False.

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 23

When are individual members of an LLC liable for losses?

Answer 23

Only when a court decides to pierce the LLC veil or if proper procedures for dissolution and winding up have not been follows.