Corporations

Question 1

Promoter liability

Answer 1

Person who procures commitments for capital and instrumentalities on behalf of the corp.

Personally liable for all contracts they enter into on behalf of the corp to be formed and continues after corp formation, even if corp is also liable for adopting it

Question 2

Promoter liability: exception

Answer 2

promoter not liable on a pre-incorporation K if the agreement between parties expressly says that promoter is not bound

Question 3

Corporation’s liability

Answer 3

Generally, not liable on K that was entered into by the promoter, unless the corporation adopts the K expressly/impliedly

Question 4

Express adoption

Answer 4

by official action to adopt K w/ knowledge of the material facts

Question 5

implied adoption

Answer 5

someone in authority accepts the benefits of the K w/ knowledge of the material facts

Question 6

Shareholder voting

Answer 6

only shareholders of record on the record date may vote at the shareholder’s meetings

• S may give another a written + signed proxy to allow the proxy to vote

Question 7

Revocability of proxies

Answer 7

Revocable UNLESS they say it is irrevocable and coupled with interests —- aka when the proxy holder pays for the right to be proxy (ex. proxy bought underlying shares from the owner of the record)

Revoked = when a subsequent interest/shareholder shows up to vote in person

Question 8

Incorporation

Answer 8

• filing Articles in appropriate state office

- if Articles and bylaws conflict, the Article control

Question 9

Articles and limiting liability

Answer 9

Articles may limit directors’ personal liability for money damages to shareholders/corp for actions taken

CANNOT be eliminated to extent that:

1. director received benefit which he wasn’t entitled to
2. intentionally inflicted harm on the corp/shareholders
3. approved unlawful distributions’; or
4. intentionally committed a crime

Question 10

duty of loyalty & when does it arise?

Answer 10

Must act for sole benefit of corp. —- NOT BJR!!!!
Arises when:
1. director on both sides of the transaction
2. takes a corporate opportunity
3. competes with corporation

Question 11

how to overcome duty of loyalty

Answer 11

1. if approved by majority of disinterested directors if all relevant information is disclosed
2. approved by majority of disinterested shareholders; or
3. transaction judged to be fair at time entered into

Question 12

Business judgment rule (BJR)

Answer 12

Presumption that director’s decision may not be challenged if director acted:

• in good faith
• on an informed basis; and
• honest belief that the action was in the best interests of the company

Question 13

duty of care

Answer 13

to act as a prudent person would in a like position

Question 14

Lawsuit by shareholder against corporation (shareholder v. corp)

Answer 14

Establishes that acts of directors are illegal, fraudulent, or willfully unfair and oppressive to either the corporation or the shareholder —— direct or derivative suit

Question 15

Direct suit

Answer 15

When the wrong breaches duty owed to individual personally (shareholder)

Question 16

Derivative suit

Answer 16

When the injury is caused to the CORPORATION and shareholder just wants to enforce the corp’s rights

Question 17

Filing derivative suit = SAD

Answer 17

1. standing to bring suit
2. adequacy (shareholder represents interests of the corporation)
3. demand (generally, S should file written demand and wait 90 days before filing suit unless there is irreparable injury that would result or it would be useless)

• Recovery goes to the corporation
• can be dismissed w/ court approval if not in corp’s best interest

Question 18

Lawsuit against shareholder = Piercing the corporate veil

corp v. shareholder

Answer 18

General rule = law treats corp as separate entity from shareholders

BUT Shareholder can be personally liable for corporate debt (very limited circumstances)

Question 19

PCV pt. 2

Answer 19

P must show that shareholder of corp/LLC members:

1. abused the privilege of incorporating; and
2. fairness requires holding them liable

ex. undercapitalizing business, not following formalities, commingling of assets, lying to creditors, etc.

** only the bad apples are personally liable**