corporations

Question 1

characteristics

Answer 1

limited liability
free transferability of interests
legal entity status
continuity of existence
centralized management

Question 2

equitable subordination of SH claims - preconditions

Answer 2

claiming SH must have engaged in inequitable conduct
misconduct injured creditors or gave claimant unfair advantage
must be consistent w Bktcy ACt

Question 3

Valid action by the BOARD

Answer 3

notice of meeting (time, place, purpose)

but in closely held corps, can keep valid of
–unanimous explicit consent
–explicit approval by maj. directors and acquiescence of remaining directors
–majority approval/acq
–unanimous written consent

Question 4

Valid action by SH

Answer 4

notice of meeting/proposal and enough time to make valid judgment

voting purposes:
–elect directors to board
–approve fundamental corporate changes (amendments, mergers, dissolution)
–initiate limited changes to governance structure (non-binding proposals to the board and amending the bylaws)

board prepares docs for vote –> board sets meeting date/time/purpose –> board nominates candidates and proposes matters for SHs –> SH receive materials –> voting/proxy voting –> tabulated at SH meeting –> results reported

can remove directors as well as elect them

Question 5

SH info rights

Answer 5

power to investigate matters reasonably related to the interests as SH
–allowed access to docs prepared before they earned stocks or prepared by 3P if reasonably related (Saito)

Question 6

12a-8: SH proposals

Answer 6

allowed in proxy materials if adequate notice given; there are few exceptions to exclude them and they rarely win

Question 7

proxy rules 14a-9

Answer 7

no proxy solicitation may contain false/misleading facts

Question 8

test for inqury from proxy solicitation

Answer 8

1/ is it material
fact is material if there is a substantial likelihood a reasonable SH would consider it important in deciding how to vote
–includes beliefs
–includes omitted facts
–can be hidden in conclusory terms

2/ is proxy solicitation an essential link to all of the transaction

3/did SHs vote

4/ scienter

Question 9

legal powers of the BoD

Answer 9

–manage affairs
–amand their power to give to sH
–cannot act with sole purpose of obstructing SH vote (no entrenchment) (even if legal and in good faith)
–protected by BJR

Question 10

veil piercing

Answer 10

to attack SH for misuse of corporate legal identity

1/ unity of interest and ownership separate personalities no longer exist
2/ adherence to such fiction would sanction fraud or injustice

Question 11

veil piercing triggers

Answer 11

undercapitalization, misuse of corporate structure in favor of D’s personal interests, moving corporate funds to personal funds without regard to formality and to suit immediate needs

Question 12

reverse pierce

Answer 12

through one entity to get to their other entities, or to the person behind the corp

insider - SH attacking other SH or other entity
outside - creditor attacking corp/SH (sky cable)

Question 13

vote pooling arrangements

Answer 13

no time limit
agree on how to vote shares
can be secret
(ringling bros)

Question 14

voting trusts

Answer 14

trustee exercise vote
time limit / can renew but requires unanimous consent
can be secret

Question 15

irrevocable proxies

Answer 15

receive proxy for interest in corp in general or stock

Question 16

close corporations

Answer 16

small number of SH, resemble partnerships

Question 17

when min SH brings br of fid duty claim

Answer 17

can maj SH show a legitimate business purpose for its actions
and allows min SH chance to show a reasonably practicable alternative move of action if so

Question 18

entire fairness test (intrinsic fairness test)

Answer 18

fair dealing (the transaction)
fair price (financial considerations to the co)

Question 19

duty of care

Answer 19

act in a manner the director reasonably believes to be in the best interest of the corporation (difficult to prove was violated - threshold is gross negligence)

Question 20

basics of the duty of care

Answer 20

knowledgable/adequate skills

aware of goings on and finances

aware of misconduct and acts if is aware

Question 21

Business Judgement Rule

Answer 21

business decisions uphold if
1) made in good faith
2) with the care that a reasonably prudent person would use and
3) with the reasonable belief that a director is acting in the best interests of the corporation

Question 22

how to defeat business judgment rule

Answer 22

director acted in gross negligence or bad faith

director had a conflict of interest

^^must be serious or be majority

Question 23

exculpation statutes (102(b)(7))

Answer 23

exculpates board for the breach of care for money damages if included in the articles of incorporation (not injunctive relief) (del code 102(b)(7))

Question 24

duty of loyalty

Answer 24

requires fiduciaries (BoD/officers) to put interests of the corp ahead of their own interests

subtypes
- good faith (violated with intentional dereliction of duty (engage in misconduct)
-monitor
-act lawfully

violate: subjective bad faith (intent to do harm)
types
-self-interested transaction (BJR not applc)
-self-dealing transactions
-excessive executive compensation
-misuse of corporate assets

Question 25

duty to monitor (Caremark and Marchand)

Answer 25

• failure to act when due attention would have prevented loss
• informed of the situation (Cant act on suspicion)
  -reporting system in place
  -sustained /systemic failure to oversee
  -utter failure to attempt to assure reasonable information/reporting system exists
  Marchand - yellow flags ignored; mission critical facets of corp unmonitored

Question 26

caremark claim

Answer 26

1) corp knew or should have known
2) took no steps to prevent or remedy
3) such failure proximately resulted in losses

Question 27

duty of loyalty violation defenses

Answer 27

safe harbor provisions
– director approval
–SH approval
–EF test

doctrine of waste: waste of corporate assets for which no consideration received in exchange and no rational business purpose

EF

BJR (not self-dealing)

Question 28

corporate opportunity doctrine

Answer 28

any opportunity to engage in a business activity of which a director or senior exec officer becomes aware either
1. in connection with the performance of functions as senior director/exec or circumstances thats reasonably should have led opportunity to the corp
2. through the use of corporate info or property, or reasonably expect it ..

**if higher position in co, more likely any way you come across corp opp –> should be offered to the corp first (Harris)

Question 29

corporate opportunity doc test (ALI)

Answer 29

1. full disclosure to the corp
2. if rejected by corp
   – rejection is fair to the corp
   –opp is rejected in advance (post disclosure) that satisfies the BJR (and decided by disinterest directors)
   –rejection authorized in advance or ratified (post disclosure) by fully informed and disinterested SH, in a way that is not equivalent to waste

Question 30

direct SH suit

Answer 30

1. SH suffered alleged harm
2. SH would receive benefit of remedy

Question 31

derivative SH suit

Answer 31

1. Corp suffers alleged harm
2. Corp would receive benefit of remedy

Question 32

standing to bring a derivative suit

Answer 32

contemporaneous holding and ownership rule

–SH must retain ownership of shares at time of injury throughout litigation
–make presuit demand (or argue demand futility)
–obtain court approval of any settlement
–recovery flows to corp

Question 33

bringing the right type of SH suit

Answer 33

if choose incorrectly, suit will be dismissed

but in close corps:
courts are more lenient bc it mirrors partnerships/not the same type of distinction as publicly held corps

Question 34

self-dealing transactions (Lewis v. SL&E) claims

Answer 34

directors have burden because BJR presupposes the directors have no conflict of interest and when they do. it must be set aside unless the proponent of the transaction shall affirmatively establish that the transaction was
–fair and reasonable to the corp
–at the time it was approved by the board
^i.e. Defense of directors is the EF test

Question 35

in self interested transactions, does BJR defense work

Answer 35

if only factor is self-interest – no BJR doesn’t work

if other factors present, it is said the SH have ratified the corporate act

Question 36

defense to SH ratification (of corporate actions under dispute ie self-interested transactions)

Answer 36

i. SH approval of specific awards
ii. Plan was self-executing – meaning directors had no discretion when making the awards
iii. Directors exercised discretion and determined the amounts and terms of the awards for stockholder approval (issues arise)
1. RULE: ratification doesn’t count if directors have discretion after the ratifying vote – must be twice tested – by law and by equity
2.  rule: directors should demonstrate that their self-interested actions were entirely fair to the company / Directors are required to demonstrate entire fairness test met concerning this plan

Question 37

does it matter what a person’s position in the corp is when determining if something constitutes a corporate opp? (ALI approach 5.05(B)

Answer 37

a. Under ALI approach 5.05(B)
i. Senior management corp opp is more broadly defined than for a director
ii. Know they’re treated differently

b. If found through corp property, information, or position – position is not as important because the HOW u found it matters, and is linked to the corp

c. But if found on your own – your position will matter because higher up you are, broader reaching of one’s duties

Question 38

close corp SH suits

Answer 38

will not dismiss if bring the wrong type of claim if it finds that to do so will not
1. unfairly expose the corp or the defendant to other actions
2. materially prejudice the interests of creditors
3. interfere with a fair distribution of the recovery among all interested persons

Question 39

demand requirement

Answer 39

before bringing a derivative suit, SH required to make a demand on the BOD to bring the action, unless the demand is excused by the board

(demand is required unless it would be futile (which then must be proved))

MBCA - after making demand, SH must wait 90 days before filing suit unless board rejects the demand or the corp would be irreparably injured by waiting

Question 40

Zuckerberg demand futility rule

Answer 40

must apply director by director
1. did director receive a material personal benefit from alleged misconduct

2. does the director face a substantial likelihood of liability on any of the claims (exculpated liability does not satisfy this)
3. does director lack independence from someone who received a material benefit from alleged misconduct (ie social groups (Beam))

Question 41

connection between demand futility and exculpation

Answer 41

a. Section 102(b)(7) of the DGCL allows corporations to eliminate or limit directors’ personal liability to the corporation or its shareholders for monetary damages (only) stemming from breaches of the duty of care, and companies typically include such provisions in their certificates of incorporation.
b. Allows breachs of duty of care claims to die in demand futility stage

Question 42

P in a derivative action must plead particularized facts creating a reasonable doubt that either (generally)

Answer 42

1. The directors are disinterested and independent
2. The challenged transaction was otherwise the product of a valid exercise of business judgment

Question 43

special litigation committees

Answer 43

corp creates when SH makes demand on the corp to bring legal action

-disinterested board members
–often recently appointed (unassociated with the wrong)

holds exclusive power to decide whether the suit should go forward

often assisted by outside counsel, investigate the charges and prepare a report

usually recommends dismissal

Question 44

what P pleads if SLC dismisses suit

Answer 44

a. SLC was not disinterested or independent (self-interest)
b. Investigative procedures and methods were not adequate (gross negligence)