Corporations Flashcards
Standard for when a person challenges director action?
Directors are generally vested with the power to manage the business and affairs of the corporation. If they manage to the best of their ability, in good faith, with the care of that of an ordinary person in a like position, and in a manner they reasonably believe is in the best interests of the corporation then courts will not second-guess their decision. This is the business judgment rule.
Duty of care for directors?
Standard of care for directors is that of an ordinary person in a similar position. When making decisions a director is allowed to rely on reports from (1) corporate officers whom the director reasonably believes to be reliable and competent, and (2) corporate outsiders as to matters that the director reasonably believes to be within the outsider’s professional competence.
Duty of loyalty- conflict of interest
Directors owe the corporation a duty of loyalty which prohibits the director from profiting at the expense of the corporation. However, a transaction in which the director has a conflicting personal interest will not be set aside becuase of that interest if the director discloses all of the material facts of the transaction and the deal is approved by a disinterested majority of the directors or the shareholders or the deal is fair.
Business judgment rule
The business judgment rule is a presumption that a director’s decisions may not be challenged if the director acted in good faith, with the care of an ordinary prudent person in in a like position, and in a manner the director reasonably thought to be in the best interest of the corporation.
Articles limiting liability
A corporation’s articles of incorporation may limit or eliminate directors’ personal liability for money damages to the shareholders or corporation for actions taken, except to the extent that the director 1) received a benefit to which he was not entitled, 2) intentionally inflicted harm on the corporation or its shareholders, 3) approved unlawful distributions, or 4) intentionally committed a crime.
Conflicting voting provisions in the articles of incorporation and bylaws.
The vote required may be set in the articles of incorporation or the bylaws, but when the two conflict, the articles of incorporation control.
Which shareholders can vote?
Shareholders of record on the record date may vote at a shareholders’ meeting. They do not have to vote in person; they may give another a written and signed proxy giving the other the right to vote the share.
Revocation of a proxy.
Proxies are generally revocable unless they say that they are irrevocable and are coupled with an interest (situations in which the proxy holder essentially pays for the right to be a proxy). Proxies may be revoked by a subsequent instrument or by the shareholder of record showing up to vote the shares themselves.
Shares owned by the corporation.
Only outstanding shares may be voted. Shares that were issues and outstanding, but that have been repurchased are not outstanding. Those votes are therefore not counted in determining the number of votes needed to approve a proposal and cannot be voted.
Authority of a corporation’s President
A corporate president is an agent of the corporations and has whatever power the corporations grants him. As a general rule, unless specifically excluded by the corporation, a president will have the power to enter into ordinary contracts involving the day-to-day operation of the corporation. A corporate president can have power to enter into extraordinary transactions if authorized by the board of directors. However, the board cannot give the president power that the board itself does not have.
Does board of directors have authority to give president power?
Whether the board has sufficient authority to give the president power to do something depends on two things: whether the board’s meeting and vote were proper, and whether the board could delegate such authority.
When is a meeting and vote proper?
If the articles are silent, a meeting can take place if there is a quorum consisting of a majority of the directors. Resolutions can be passed at the meeting by the vote of the majority of the quorum.
How to implement a fundamental corporate change?
A fundamental corporate change can be implemented only if the directors first pass a resolution to implement the plan and the plan is then approved by the shareholders.
Appraisal Remedy
Shareholders who dissent from a fundamental corporate change can force the corporation to purchase their shares at a fair price. To use the appraisal remedy, the shareholders must file an objection to the transfer before or at the shareholders’ meeting at which the vote is taken; they must not vote in favor of the plan; and they must send the corporation a written demand for the fair value of their shares. The shareholders must also deposit their shares with the corporation as directed. If the corporation does not want to pay what the shareholders demanded, the corporation must file suit to have the court determine the fair value.
Liability of a promoter on a contract entered on behalf of a corporation to be formed.
A promoter is a person who procures commitments for capital and instrumentalities on behalf of a corporation that will be formed in the future. As a general rule, promoters are personally liable on all such contracts, and this liability continues even after the corporation is formed and even if the corporation also becomes liable on the contract by adopting it. However, there is an exception to the general rule: a promoter will not be liable on a preincorporation contract if the agreement between the parties expressly indicates that the promoter is not to be bound. In that case, the contract is considered an offer to the proposed corporation.
Liability of a corporation on a promoter’s contract.
As a general rule, a corporation is not liable on a contract entered into by a promoter. However, the corporation can become liable if it adopts a promoter’s contract. Adoption can be express (resolution by the board of directors with knowledge of the material facts) or implied (by acquiescence or conduct normally constituting estoppel, such as accepting the benefits of the contract if done with knowledge of the material facts).
Quorum requirements when the articles and bylaws are silent.
To validly conduct a shareholders’ meeting, a quorum must be present. If the articles and bylaws are silent, a quorum requires the presence, in person or by proxy, of a majority of the outstanding shares entitled to vote at the meeting.
Votes required to elect directors.
Unless the articles or bylaws provide otherwise, directors are elected by a plurality of the votes cast. This means that the directors which receive the most votes win, even if they do not receive a majority.
