Corporations

Question 1

De Jure

Answer 1

De jure means “by law” in Latin, and in corporate law, it refers to a corporation that has been formed and is operating in compliance with all legal requirements. A de jure corporation has properly followed the necessary legal procedures to be recognized as a legal entity, with the right to enter into contracts, own property, and sue and be sued.

In simpler terms, a de jure corporation is one that has been set up in accordance with the law and is recognized as a legal entity. This means that the corporation can conduct business, enter into contracts, and be held liable for its actions in the same way as an individual person.

Question 2

De Facto

Answer 2

In corporate law, a corporation can be classified as a de facto corporation if it has been operating as if it were a corporation, but has not complied with all of the legal formalities required for incorporation.

For example, a group of individuals might conduct business as if they were a corporation, by holding meetings, issuing stock, and conducting transactions on behalf of the corporation, but they may have failed to file the necessary paperwork with the state to formally incorporate.

If a de facto corporation is challenged in court, it may be able to continue operating as a corporation, so long as it can show that it has acted in good faith and has complied with as many of the legal requirements as possible. However, the legal protection afforded to a de facto corporation may vary depending on the jurisdiction and specific circumstances of the case.

Yes, there are a few important things to keep in mind about de facto corporations:

A de facto corporation may still be liable for its actions and obligations, just like a de jure corporation.

The laws governing de facto corporations vary by state, so it’s important to check the specific regulations in your area.

To establish a de facto corporation, there must be evidence of a good faith effort to comply with the requirements for incorporation, even if those efforts were not successful.

In some cases, a de facto corporation may be able to become a de jure corporation by taking steps to rectify its initial failure to comply with the requirements for incorporation.

Question 3

Estoppel

Answer 3

If a third party treat an organization as if it is a coporation then it cannot denty that it acted and held itself out as a corporation, theredore they are estopped from doing so.

estoppel is a legal principle that prevents a person from denying or asserting something contrary to what they previously represented or agreed to. In other words, if someone has made a certain representation or promise, they may be prevented from going back on that representation or promise if it would be unfair or harmful to the other party who relied on that representation or promise.

An example of estoppel in corporate law is when a company makes a promise to a supplier to pay for goods or services within a certain timeframe, but fails to do so. The supplier may then argue that they relied on the company’s promise and continued to provide goods or services, and that it would be unfair for the company to deny or go back on their promise. In this case, the principle of estoppel may be applied to prevent the company from denying their promise and require them to fulfill their obligation to pay the supplier.

Question 4

Piercing the corporate Veil

Answer 4

where a court disregards the legal entity of a corporation and holds the individual shareholders or directors personally liable for the corporation’s actions or debts. This is done when the corporation has not been operated as a separate entity and instead used as a vehicle for fraud or to shield the shareholders or directors from personal liability. To pierce the corporate veil, a court will typically examine various factors such as inadequate capitalization, commingling of funds, failure to observe corporate formalities, and use of the corporation to perpetrate fraud or injustice.

or

“Piercing the corporate veil” is a legal term that means a court has decided to ignore the separation between a company and its owners, and holds the owners personally responsible for the company’s actions or debts. This can happen when a court determines that the company was not actually operating as a separate entity, but was instead just a “shell” for the owners’ personal dealings. If this happens, the owners can be sued and forced to pay damages or debts on behalf of the company.

Piercing the corporate veil is a legal concept in corporate law that allows courts to hold individuals responsible for the actions of a corporation. Normally, when a company is formed, it is treated as a separate legal entity from its owners. This means that the owners are not personally responsible for the company’s debts or actions. However, in certain situations, courts may “pierce the corporate veil” and hold the owners liable for the company’s actions.

To pierce the corporate veil, the court looks at several factors to determine whether the company and its owners are truly separate entities. These factors can include things like whether the owners commingled their personal and business finances, whether the company was adequately capitalized at the outset, and whether the company followed formal corporate formalities such as holding regular board meetings and keeping accurate records. If the court determines that the owners did not sufficiently separate themselves from the company, it may hold them personally liable for the company’s debts and actions.

Piercing the corporate veil is a rare and drastic remedy that courts only use in extreme cases where the owners have used the corporate form to engage in fraudulent or illegal activity or have otherwise abused their power as corporate leaders.

Question 5

Piercing the corporate veil

[Alter-Ego Docitrine]

Answer 5

the alter-ego doctrine is a legal concept used in corporate law to determine if a corporation should be treated as an extension of its owners, and thus subject to personal liability for the corporation’s actions. The doctrine applies when the corporation is so closely tied to its owners that it lacks an independent identity, and the owners have used the corporation to engage in improper or fraudulent activities.

Under the alter-ego doctrine, a court may “pierce the corporate veil” and hold the owners personally liable for the corporation’s debts and actions. This means that the owners can be held responsible for any damages or losses caused by the corporation, even though the whole purpose of incorporating was to protect the owners from such liability.

The factors that are considered when applying the alter-ego doctrine may vary by jurisdiction, but they generally include things like the amount of control the owners have over the corporation, whether the corporation follows formalities such as holding regular meetings and keeping accurate records, and whether the corporation has been used to further the owners’ personal interests rather than the interests of the business.

In summary, the alter-ego doctrine is a way to hold owners of closely held corporations personally liable for the corporation’s actions if the corporation is found to lack an independent identity from its owners and has been used to engage in improper or fraudulent activities.

Question 6

Legal test to determine when to Pierce the corporate veil

Answer 6

there are several legal tests that courts may use to determine whether to pierce the corporate veil and hold individual shareholders or members of a corporation or LLC personally liable for the company’s debts or actions. These tests may vary depending on the jurisdiction and the specific circumstances of the case. Here are some common tests:

Unity of Interest and Ownership Test: This test looks at whether the owners of the company have treated it as their alter ego, disregarding the separateness of the company and using it as a mere extension of themselves.

Fraud or Wrongdoing Test: This test focuses on whether the owners have used the corporate form to perpetrate a fraud or other wrongdoing, such as intentionally undercapitalizing the company or using it to shield themselves from personal liability for their own wrongful conduct.

Inadequate Capitalization Test: This test examines whether the company was initially formed with sufficient capital to carry out its intended business activities and meet its financial obligations.

Failure to Follow Corporate Formalities Test: This test looks at whether the company has failed to follow the necessary corporate formalities, such as holding regular board meetings, keeping proper records, and maintaining separate bank accounts.

In general, these tests aim to determine whether the owners of the company have abused the corporate form in some way that would justify holding them personally responsible for the company’s actions or debts.

Question 7

Horizontal piercing

Answer 7

Horizontal piercing is a legal doctrine in corporate law that allows a court to hold one corporation liable for the debts or obligations of another corporation that it is associated with. It is called “horizontal” piercing because it involves piercing the corporate veil between two companies that are on the same level or plane, rather than between a parent company and its subsidiary.

For example, if two companies are owned by the same group of individuals and share the same management, offices, or assets, a court may decide to pierce the corporate veil and hold one company responsible for the debts of the other company. This is often done when there is evidence of fraud, misrepresentation, or other wrongful conduct that suggests that the companies were not operating as separate entities.

The legal test for horizontal piercing varies by jurisdiction, but generally involves a consideration of factors such as the level of control or domination exercised by one company over the other, the degree of unity between the companies, and whether the companies operated as a single economic entity. If the court finds that the companies were not operating as separate entities, it may pierce the corporate veil and hold one company liable for the obligations of the other.

This theory is generally used in cases where the related corporations share common ownership, management, or control and operate as a single enterprise.

Question 8

Enterpise Liabilty

Answer 8

• Enterprise liability is a legal doctrine that holds a parent company responsible for the actions of its subsidiaries or affiliates. In other words, if a subsidiary or affiliate of a parent company engages in illegal or harmful activities, the parent company can also be held liable for those actions, even if the parent company did not directly participate in the wrongdoing.
• This doctrine is based on the idea that a parent company has significant control over the actions of its subsidiaries or affiliates, and therefore should be held responsible for any harm caused by those actions. It is commonly used in cases involving environmental pollution, product liability, and other types of corporate misconduct.
• The purpose of enterprise liability is to ensure that companies are held accountable for their actions and to prevent them from using subsidiaries or affiliates as a shield to avoid liability. It also serves as a deterrent to corporate misconduct, as parent companies have a strong incentive to monitor the actions of their subsidiaries and affiliates to avoid legal liability.

Question 9

Ultra Vires

Answer 9

In corporate law, “Ultra Vires” refers to actions taken by a corporation or its officers that exceed the powers or purposes set forth in the corporation’s governing documents, such as its articles of incorporation or bylaws. The term “Ultra Vires” literally means “beyond powers” in Latin.

For example, if a corporation’s articles of incorporation state that its purpose is to manufacture and sell clothing, but it begins to invest heavily in real estate development, that would be an ultra vires action. Such actions are generally considered invalid and may be challenged in court by shareholders, creditors, or other interested parties.

To prevent ultra vires actions, corporations are often required to state their purpose and powers clearly in their governing documents. If the corporation wishes to engage in a new activity that is not within the scope of its stated purpose, it may need to amend its governing documents or seek approval from its shareholders.

Question 10

Intra vires

Answer 10

Intra vires refers to actions taken by a corporation that fall within the scope of its stated purpose and authority as outlined in its articles of incorporation or other governing documents. In other words, it refers to actions that are “within the powers” of the corporation.

For example, if a corporation is established to manufacture and sell shoes, it would be acting intra vires if it entered into contracts to purchase leather and other materials needed to make shoes, hire employees to manufacture the shoes, and sell the shoes to customers. However, if the same corporation started to invest in real estate, which is outside the scope of its stated purpose, it would be acting ultra vires.

In summary, intra vires refers to actions that a corporation is authorized to take under its governing documents, while ultra vires refers to actions that are beyond its authority.

Question 11

How is a corporation formed

Answer 11

To form a corporation, the following steps are generally taken:

1. Choose a state to incorporate in: A corporation can be formed in any state, but most corporations choose to incorporate in the state where they will have their main business operations.
2. Select a corporate name: The corporation’s name must not already be taken and should include the words “corporation,” “incorporated,” or “company.”
3. File Articles of Incorporation: The Articles of Incorporation is a legal document that is filed with the state’s Secretary of State office. The document includes the corporation’s name, purpose, business address, the number of shares of stock the corporation is authorized to issue, the name and address of the corporation’s initial registered agent, and the name and address of each incorporator.
4. Draft Bylaws: Bylaws are the rules and procedures that govern how a corporation operates. Bylaws are not filed with the state, but they are essential in running a corporation.
5. Appoint Directors: The directors of a corporation are responsible for managing its affairs and making decisions on behalf of the corporation.
6. Issue Stock: A corporation’s owners are known as shareholders, and their ownership in the corporation is represented by shares of stock. The corporation can issue shares of stock in exchange for money or other property.
7. Obtain Necessary Licenses and Permits: Depending on the corporation’s business activities, it may need to obtain licenses and permits from various government agencies.
8. Comply with Ongoing Requirements: Once the corporation is formed, it must comply with ongoing requirements, such as holding annual meetings of shareholders and keeping accurate records of the corporation’s activities.
9. It’s important to note that the process of forming a corporation can vary depending on the state and the type of corporation being formed. It’s recommended to consult with a legal professional to ensure that all requirements are met and the corporation is formed correctly.

Question 12

Piercing the corporate veil in an LLC

Answer 12

Piercing the corporate veil in an LLC refers to the situation when the courts disregard the separate legal entity of the LLC and hold the LLC owners personally liable for the debts or actions of the LLC.

Generally, LLCs offer limited liability protection to their owners, meaning that the owners are not personally liable for the debts or actions of the LLC. However, in certain situations, a court may “pierce the veil” of limited liability and hold the LLC owners personally liable.

To pierce the veil in an LLC, a court will typically look at several factors to determine whether the LLC was used to perpetrate a fraud, injustice, or wrongdoing. Some of the factors that a court may consider include whether the LLC was adequately capitalized, whether the LLC followed corporate formalities, and whether the LLC was used to evade legal obligations.

If a court finds that the LLC was used to perpetrate a fraud or wrongdoing, it may “pierce the veil” and hold the LLC owners personally liable for the LLC’s debts or actions. This can result in the owners losing their limited liability protection and being forced to pay damages or other penalties out of their personal assets.

Question 13

Reverse Piercing

Answer 13

Reverse piercing is a legal concept that is the opposite of piercing the corporate veil. In a reverse piercing, a creditor or claimant seeks to hold a shareholder or member of a corporation or LLC personally liable for the company’s debts or obligations.

This occurs when the shareholder or member has assets that are more easily accessible or sufficient to satisfy the debt, while the corporation or LLC does not have enough assets to cover it. Essentially, the creditor or claimant argues that the shareholder or member should be treated as the true debtor, and the corporate entity should be disregarded.

Reverse piercing is generally a more difficult legal concept to prove than piercing the corporate veil. It is because the courts generally try to protect the limited liability protection of the corporate entity, and therefore, the claimant must provide compelling evidence to show why the shareholder or member should be held personally responsible for the debt.

Question 14

Factors when deciding to pierce the corporate veil

Answer 14

1. Undercapitalization: If a corporation is not adequately capitalized, and there are no reasonable expectations for future profits or contributions, this can be a factor in favor of piercing the veil.
2. Failure to observe corporate formalities: If a corporation fails to follow basic formalities such as holding regular meetings, keeping accurate records, and maintaining a separate corporate identity, this can be a factor in favor of piercing the veil.
3. Intermingling of assets: If a corporation’s assets are commingled with those of its shareholders, or if shareholders treat corporate assets as their own, this can be a factor in favor of piercing the veil.
4. Use of the corporation to perpetuate a fraud or other wrongful act: If a corporation is used as a mere instrumentality to commit a fraud or other wrongful act, this can be a factor in favor of piercing the veil.
5. Inadequate capitalization at the time of incorporation: If a corporation was undercapitalized at the time of its incorporation and this lack of capitalization continued through the relevant period, this can be a factor in favor of piercing the veil.
6. Personal guarantees: If shareholders personally guarantee the corporation’s debts, this can be a factor against piercing the veil.
7. The absence of corporate records: If a corporation has failed to maintain proper corporate records, this can be a factor in favor of piercing the veil.

Question 15

Duty of Care: General

Answer 15

Fiduciary duties of care refer to the legal obligation that the directors and officers of a corporation have to act in the best interests of the corporation and its shareholders. This includes a duty to exercise reasonable care, skill, and diligence in making decisions and taking actions on behalf of the corporation.

Directors and officers must inform themselves of all relevant information and consider all options before making a decision, and they cannot act in their own personal interests or engage in self-dealing. They must also monitor the corporation’s performance and take appropriate action if necessary.

In simple terms, fiduciary duties of care mean that those in positions of authority within a corporation must act in a responsible and informed manner when making decisions and taking actions on behalf of the corporation.

What happen when a shareholder believes that these twwo concepts have not been met: Ans they chanllege the decsion.

Question 16

Duty of Directors

Answer 16

Certainly, the duty of directors in corporation law refers to the legal obligation that directors owe to the corporation and its shareholders. These duties are often referred to as fiduciary duties, which include the duty of care, duty of loyalty, and duty of good faith.

The duty of care requires directors to act in the best interests of the corporation and to exercise reasonable care and prudence in making decisions on behalf of the corporation. This means that directors must make informed decisions based on all relevant information available to them, and they must act with the same level of care and prudence that a reasonable person would use in a similar situation.

The duty of loyalty requires directors to put the interests of the corporation and its shareholders ahead of their own personal interests. This means that directors must avoid conflicts of interest, disclose any potential conflicts of interest, and act with integrity and honesty at all times.

The duty of good faith requires directors to act in the best interests of the corporation with a genuine desire to promote its success and profitability. This means that directors must act with the intent to promote the long-term interests of the corporation and its shareholders, rather than just their own personal gain.

In summary, the duty of directors in corporation law is to act in the best interests of the corporation and its shareholders, while exercising reasonable care and prudence, avoiding conflicts of interest, and acting with integrity and good faith.

Question 17

Business judgemtn Rule

Answer 17

Certainly! The Business Judgment Rule in corporate law is a legal principle that provides protection to directors and officers of a corporation when they make decisions in good faith and with reasonable care.

The rule assumes that the directors and officers of a corporation are acting in the best interest of the corporation and its shareholders, unless there is evidence to the contrary. As long as they act in good faith, do not have conflicts of interest, and have sufficient information before making decisions, the court will not second-guess their judgment. as long as they were made in good faith and with a reasonable belief that the decision was in the best interests of the corporation. However, the Business Judgment Rule does not apply if there is evidence of fraud, bad faith, or other illegal conduct by the directors or officers.

The purpose of the Business Judgment Rule is to promote confident and independent decision-making by directors and officers, without fear of being held personally liable for every decision they make. It encourages them to make decisions based on the best interests of the corporation and its shareholders, rather than the risk of personal liability.

However, the Business Judgment Rule is not an absolute protection, and directors and officers can still be held liable if they act with gross negligence, intentional misconduct, or violate their fiduciary duties.

This means that if a board of directors is sued for their decisions, the court will not substitute its own judgment for that of the board, as long as the board’s decision-making process was reasonable and the board acted in good faith. The Business Judgment Rule is intended to encourage risk-taking and innovation by protecting directors from personal liability for business decisions that later turn out to be unsuccessful.

To satisfy the Business Judgment Rule, the board of directors must act in good faith, meaning they must have no personal financial interests in the decision, and must act with due care, meaning they must make a reasonable effort to gather all the relevant information before making a decision. Additionally, the decision must be made in the best interests of the corporation, rather than the individual interests of the directors.

Question 18

Failure to act

Answer 18

In corporate law, the failure to act refers to the duty of care of directors and officers to take appropriate actions or make informed decisions in the best interests of the corporation and its shareholders. Directors and officers owe a duty of care to exercise reasonable care, skill, and diligence in managing the affairs of the corporation.

If directors and officers fail to act or make decisions in a reasonable and informed manner, they may be held liable for breach of their duty of care. This can occur if they fail to gather relevant information, fail to analyze information adequately, or fail to act on information that is presented to them.

In order to fulfill their duty of care, directors and officers should stay informed about the corporation’s business and financial affairs, attend board meetings and review materials, and ask questions when necessary. They should also seek advice from experts when appropriate and act in good faith in the best interests of the corporation.

Question 19

Caremark Standard

Answer 19

In simple terms, the Caremark standard holds directors responsible for ensuring that a company has adequate compliance programs and controls to prevent illegal or unethical conduct by employees. If a director fails to take reasonable steps to establish and monitor such programs, and as a result, illegal conduct occurs, the director may be held liable.

To meet the Caremark standard, directors must make sure that the company has:

A system in place to monitor and ensure compliance with legal and ethical standards,
Procedures to promptly and effectively respond to reports of illegal or unethical conduct,
Training programs for employees and managers on compliance and ethical issues, and
Oversight and reporting mechanisms to ensure that the company’s compliance programs are working effectively.
If a director can show that they took reasonable steps to ensure that the company had such programs in place, they may avoid liability for the company’s illegal conduct.

Question 20

Duty of Loyalty

Answer 20

he duty of loyalty is a fundamental obligation that directors and officers of a corporation owe to the company and its shareholders. It requires that they act in the best interest of the corporation and its shareholders, rather than their own personal interests or the interests of other parties.

The duty of loyalty has two main components: the duty of care and the duty of loyalty. The duty of care requires that directors and officers act with reasonable care, skill, and diligence in carrying out their duties for the corporation. This means they must make informed decisions, consider all available information, and act with the best interest of the corporation in mind.

The duty of loyalty, on the other hand, requires that directors and officers act with undivided loyalty to the corporation and its shareholders. This means that they must not put their own personal interests above those of the corporation or its shareholders, and they must avoid any conflicts of interest.

Examples of actions that could violate the duty of loyalty include using corporate resources for personal gain, making decisions that favor a director or officer’s personal interests over those of the corporation or its shareholders, and engaging in self-dealing transactions.

Overall, the duty of loyalty is essential for maintaining the integrity of the corporate governance system and ensuring that directors and officers act in the best interest of the corporation and its shareholders.

Question 21

Duty of Loyalty

Answer 21

he duty of loyalty is a fundamental obligation that directors and officers of a corporation owe to the company and its shareholders. It requires that they act in the best interest of the corporation and its shareholders, rather than their own personal interests or the interests of other parties.

The duty of loyalty has two main components: the duty of care and the duty of loyalty. The duty of care requires that directors and officers act with reasonable care, skill, and diligence in carrying out their duties for the corporation. This means they must make informed decisions, consider all available information, and act with the best interest of the corporation in mind.

The duty of loyalty, on the other hand, requires that directors and officers act with undivided loyalty to the corporation and its shareholders. This means that they must not put their own personal interests above those of the corporation or its shareholders, and they must avoid any conflicts of interest.

Examples of actions that could violate the duty of loyalty include using corporate resources for personal gain, making decisions that favor a director or officer’s personal interests over those of the corporation or its shareholders, and engaging in self-dealing transactions.

Overall, the duty of loyalty is essential for maintaining the integrity of the corporate governance system and ensuring that directors and officers act in the best interest of the corporation and its shareholders.

Question 22

Duty of Loyalty

[important terms to remember]

Answer 22

1. Avoiding conflicts of interest: Directors and officers have a duty to avoid situations where their personal interests conflict with the interests of the corporation. This includes not competing with the corporation, not taking corporate opportunities for themselves, and not using corporate assets for personal gain.
2. Acting in good faith: Directors and officers must act in good faith when making decisions for the corporation. This means they must act honestly and in the best interests of the corporation, rather than for personal gain.
3. Disclosure: If a director or officer has a potential conflict of interest, they must disclose it to the board of directors and abstain from voting on any related matters. Failure to disclose conflicts of interest can result in legal liability.
4. Corporate opportunities: Directors and officers must not take advantage of corporate opportunities for their own personal gain. If a corporate opportunity arises, the director or officer must offer it to the corporation first.
5. Confidentiality: Directors and officers have a duty to keep confidential information about the corporation and its operations confidential, and not to use it for personal gain or to disclose it to unauthorized parties.

These duties are designed to ensure that directors and officers act in the best interests of the corporation and its shareholders, rather than for their own personal gain. Failure to uphold the duty of loyalty can result in legal liability for the director or officer and can also harm the corporation and its shareholders.

Question 23

Cleansing the Duty of Loyalty

Answer 23

In corporate law, “cleansing the duty of loyalty” refers to a process through which a conflict of interest transaction that would otherwise violate a director’s duty of loyalty to the corporation is approved or ratified by an independent and disinterested board or committee of the corporation. This approval or ratification can “cleanse” the transaction and absolve the director of any breach of duty.

The process typically involves the independent board or committee receiving all material information regarding the transaction, including any potential conflicts of interest, and making a good faith determination that the transaction is in the best interests of the corporation and its shareholders. The decision must be made by a majority of the independent members of the board or committee.

Cleansing the duty of loyalty can be a valuable tool for directors who are faced with potential conflicts of interest in their dealings with the corporation. However, it is important to note that not all conflicts of interest can be cleansed in this manner, and the process must be conducted in good faith and in accordance with applicable legal requirements to be effective.

Question 24

Delaweare Safe Harbor Rule

Answer 24

The Delaware Safe Harbor Rule is a legal principle in corporate law that provides protection to directors of a corporation when making decisions in the best interests of the company, even if those decisions end up being unfavorable or result in financial losses for shareholders.

Under this rule, as long as directors act in good faith, are fully informed, and do not have any conflicts of interest, they are generally protected from being sued for breach of their fiduciary duties, even if their decisions turn out to be wrong or harmful to the company or shareholders.

This rule is based on the idea that it is important for directors to have the flexibility to make tough decisions that may be in the best interests of the company, even if they are not popular or guaranteed to be successful. The rule is named after the state of Delaware, which is where many corporations are incorporated and where much of corporate law is developed.

Question 25

Corporation Opprotunity doctrine

Answer 25

• The Corporate Opportunity Doctrine in corporate law refers to the legal principle that prohibits directors, officers, and controlling shareholders of a corporation from taking advantage of a business opportunity that belongs to the corporation. In other words, if a business opportunity arises that is within the corporation’s line of business, the directors, officers, and controlling shareholders have a duty to offer the opportunity to the corporation first before pursuing it for their own personal benefit.
• This doctrine is based on the fiduciary duty of loyalty owed by the directors, officers, and controlling shareholders to the corporation. The duty of loyalty requires them to act in the best interests of the corporation and not use their position for personal gain.
• The Corporate Opportunity Doctrine is designed to prevent conflicts of interest between the corporation and its directors, officers, and controlling shareholders. It also ensures that the corporation has the first opportunity to pursue business opportunities that are related to its line of business, which helps to protect the interests of the corporation and its shareholders.
• If a director, officer, or controlling shareholder breaches the Corporate Opportunity Doctrine by taking advantage of a business opportunity that belongs to the corporation, they can be held liable for any damages that result.

Question 26

Line of Business Test:

Answer 26

a corporate opportunity would include activities as to which the corporation has fundament knowledge, practical experience and ability to pursue

Question 27

Fairness test:

Answer 27

one would need to determine whether the officer or director taking the opportunity would violate standards of what is fair and equitable by corporate standards—a lot more wishy washy

Question 28

Tangible Expectancy:

Answer 28

whether the corporation had a “tangible expectancy” in the opportunity, “more certain than a desire or hope.” New York courts have generally applied the doctrine broadly

Question 29

American Law Institute Test (ALI):

Answer 29

Broad definition of corporate opportunity—closely related to a business in which the corporation is engaged. Strict disclosure requirement (treats all as if corporate opportunity)

Question 30

what are some possible defense to breach under the Corporation Opportunity Doctrine

Answer 30

1. The opportunity was not within the company’s line of business: If the opportunity is outside the scope of the company’s current or future business operations, then it may not be considered a corporate opportunity. In such cases, the director or officer is free to pursue the opportunity on their own without breaching their duty of loyalty.
2. The company lacked the resources to pursue the opportunity: If the company did not have sufficient resources, such as funds or personnel, to pursue the opportunity, then the director or officer may be able to pursue it on their own without breaching their duty of loyalty.
3. The company expressly or impliedly waived the opportunity: If the company waived its right to pursue the opportunity, or if it impliedly authorized the director or officer to pursue it, then there may not be a breach of the duty of loyalty.
4. The opportunity was disclosed to and approved by the company: If the director or officer disclosed the opportunity to the company and obtained its approval to pursue it, then there may not be a breach of the duty of loyalty.

Under the American Law Institute (ALI) test, a corporate officer or director can take a corporate opportunity if:

1. The opportunity is presented to the officer or director in their personal, rather than official, capacity.
2. The opportunity is not essential to the corporation’s existence or success.
3. The officer or director has not wrongfully employed the resources or information of the corporation in connection with the opportunity.
4. The corporation either is financially able to exploit the opportunity or has passed on the opportunity.
5. If all four criteria are met, then the officer or director may take advantage of the opportunity without breaching their duty of loyalty to the corporation.

Acceptable behavior if full disclosure plus refusal of the corporation (or ratification)

Question 31

Obligation of Dominate Share holders

Answer 31

• In corporate law, dominant shareholders have an obligation to act in the best interest of the company and its shareholders as a whole. This means that they should not use their power to benefit themselves at the expense of other shareholders.
• The duty of dominant shareholders is often closely related to the duty of loyalty that directors and officers owe to the company. Dominant shareholders have a responsibility to refrain from self-dealing, which means using their power to benefit themselves or a related entity at the expense of the company.
• Additionally, the duty of dominant shareholders may be further heightened in certain circumstances, such as when they have the ability to control important corporate decisions or transactions.
• Disinterested shareholders, on the other hand, have a duty to act in the best interests of the company and its shareholders as a whole, but they are not subject to the same heightened obligations as dominant shareholders. Disinterested shareholders are not in a position of power or control over the company, and therefore, they do not have the same potential to abuse that power for their own benefit. However, disinterested shareholders may still be held accountable for breaches of their duty of loyalty if they engage in self-dealing or fail to act in the best interests of the company and its shareholders.

Disinterested Directors CANNOT cleanse controlling shareholders actions because the dominant shareholders control the Board

AND

A vote of shareholders cannot cleanse because this is the dominant shareholder

THEREFORE, Dominant Shareholders Must ultimately show that the transactions were fair and reasonable

Question 32

What is the breach of duty loyalty for dominate shareholders

Answer 32

In corporate law, dominant shareholders have a fiduciary duty to act in the best interests of the company and its shareholders. This duty includes the duty of loyalty, which requires dominant shareholders to prioritize the interests of the company and its shareholders over their own interests. A breach of loyalty occurs when a dominant shareholder engages in actions that benefit themselves at the expense of the company or other shareholders.

One way to determine whether a dominant shareholder has breached their duty of loyalty is by applying the intrinsic fairness test. This test examines whether the transaction or decision made by the dominant shareholder was fair to the company and all shareholders. To pass the intrinsic fairness test, the transaction or decision must be both substantively fair and procedurally fair.

Substantive fairness involves examining the economic outcomes of the transaction or decision. For example, if a dominant shareholder sells their shares to the company at an inflated price, this would not be substantively fair. On the other hand, if the shareholder sells their shares to the company at market value, this would be substantively fair.

Procedural fairness involves examining the process by which the transaction or decision was made. For example, if a dominant shareholder failed to disclose important information to the board of directors or other shareholders, this would not be procedurally fair. On the other hand, if the shareholder fully disclosed all relevant information and allowed other shareholders to provide input, this would be procedurally fair.

If a transaction or decision fails the intrinsic fairness test, it is likely that the dominant shareholder breached their duty of loyalty. In such cases, the shareholder may be liable for damages and could face legal action from other shareholders or the company itself.

In summary, the intrinsic fairness test is an important tool for determining whether a dominant shareholder has breached their duty of loyalty. This test examines both the economic outcomes and procedural fairness of a transaction or decision to ensure that it is fair to the company and all shareholders. A breach of loyalty can result in serious consequences for the shareholder and the company, including legal action and financial penalties.

Question 33

Control

Answer 33

A percentage of stock sufficient to enable the holder to elect a controlling block of the board

In corporate law, control refers to the ability of a person or a group of people to make decisions that affect the direction of a company. When someone has control over a company, they have the power to influence how it operates and make decisions that can impact the company’s future. This can include decisions about things like who gets hired, how much people get paid, and what the company does.

Stock ownership can be a way to gain control over a company. When someone owns a significant portion of a company’s stock, they have a say in how the company is run. This is because people who own stock are typically given the right to vote on important company decisions, such as electing board members and approving major transactions.

For example, imagine that you and a group of your friends each own a share of a lemonade stand. If one of your friends owns five shares while the rest of you own only one share each, that friend has more control over the lemonade stand because they have more votes in important decisions. They could use their voting power to make decisions that benefit themselves more than the rest of the group.

In summary, control in corporation law refers to the ability to make decisions that affect a company’s direction. Stock ownership can be a way to gain control over a company, as stockholders are given the right to vote on important company decisions. This means that people who own more stock can have more control over the company than those who own less.

Question 34

What are the sharholder rights

Answer 34

Shareholders have certain rights and protections under the law, including:

• Voting: Shareholders have the right to vote on certain matters that affect the company, such as electing the board of directors and approving major transactions. Shareholders can vote in person at shareholder meetings, or they can vote by proxy, which means they authorize someone else to vote on their behalf.
• Dividends: Shareholders have the right to receive a portion of the company’s profits, known as dividends. The amount of dividends paid to shareholders is determined by the company’s board of directors.
• Information: Shareholders have the right to certain information about the company, such as financial statements and reports, to help them make informed decisions about their investment.
• Inspection: Shareholders have the right to inspect certain company records, such as meeting minutes and shareholder lists.
• Lawsuits: Shareholders have the right to bring lawsuits against the company or its directors and officers if they believe their rights have been violated.
• Proxy rules are a set of regulations that govern the use of proxies in shareholder voting. A proxy is a person or entity that is authorized to vote on behalf of a shareholder who is unable or unwilling to attend a shareholder meeting. Proxy rules require that companies provide shareholders with information about the matters that will be voted on, as well as information about the candidates running for the board of directors.

In summary, shareholders in corporation law have the right to vote, receive dividends, access information and company records, bring lawsuits, and use proxies to vote if they cannot attend shareholder meetings. Proxy rules regulate the use of proxies in shareholder voting. Understanding shareholder rights and proxy rules is important for shareholders to protect their investment and ensure that their voices are heard in company decision-making.

Ownership rights: All ownership interests in a corporation are represented by shares of stock. Rights are generally economic rights or voting rights once becoming a shareholder

Question 35

Shareholder prooposals

Answer 35

• corporate law, a shareholder proposal is a suggestion made by a shareholder to a company’s board of directors for a specific action or change. Shareholder proposals are a way for shareholders to use their ownership stake in the company to influence its decision-making and operations.
• To submit a shareholder proposal, a shareholder must meet certain eligibility requirements, which typically include owning a certain amount of stock in the company. The exact amount of stock required can vary depending on the company’s bylaws and the rules of the stock exchange where the company’s shares are listed.
• For example, under SEC Rule 14a-8, a shareholder must have owned at least $2,000 in market value, or 1% of the company’s securities, for at least one year prior to the date the proposal is submitted. Alternatively, if the shareholder owns less than 1% of the company’s securities, they must have held the shares for at least three years.
• Shareholder proposals can address a wide range of issues, such as environmental policies, executive compensation, political contributions, and human rights practices. Shareholders typically submit their proposals in writing to the company’s board of directors and the proposal is included in the company’s proxy statement, which is distributed to all shareholders.
• Once a shareholder proposal is submitted, the company’s board of directors must decide whether to include the proposal in the proxy statement and allow shareholders to vote on it. If the proposal is approved by a majority of shareholders, it becomes a formal request for the company to take action on the issue raised in the proposal.
• In summary, shareholder proposals in corporate law are suggestions made by shareholders to a company’s board of directors for a specific action or change. Shareholders must meet certain eligibility requirements, such as owning a certain amount of stock in the company for a certain period of time. The exact amount of stock required can vary depending on the company’s bylaws and the rules of the stock exchange. Shareholder proposals can address a wide range of issues and are typically submitted in writing to the company’s board of directors and included in the proxy statement.

Question 36

Shareholder inspection rights

Answer 36

• shareholder inspection rights refer to the legal right of a shareholder to access certain company records and information, such as financial statements, minutes from board meetings, and other corporate documents.
• Shareholder inspection rights are an important aspect of corporate governance because they allow shareholders to monitor the company’s operations and ensure that the board of directors is acting in the best interests of the company and its shareholders.
• The exact scope of shareholder inspection rights can vary depending on the jurisdiction and the company’s bylaws, but in general, shareholders have the right to inspect the company’s books and records upon written demand, as long as the demand is made for a proper purpose. A proper purpose may include investigating potential mismanagement, preparing for a shareholder meeting, or determining the value of their shares.
• However, there are limitations to these inspection rights. Shareholders may not have the right to access certain confidential or proprietary information, such as trade secrets or customer lists. Additionally, shareholders may need to demonstrate that they own a certain amount of shares in the company in order to exercise their inspection rights.
• In the United States, the Securities and Exchange Commission (SEC) has established rules that govern shareholder inspection rights for publicly traded companies. Under these rules, shareholders must make a written demand to inspect the company’s books and records and may be subject to certain procedural requirements, such as providing advance notice to the company or obtaining a court order.
• Proxy rules also come into play when exercising shareholder inspection rights. Shareholders may use the proxy process to nominate directors, propose bylaw changes, or make other proposals to the company. The proxy process allows shareholders who cannot attend a meeting in person to vote by proxy, which means they authorize someone else to vote on their behalf.
• In summary, shareholder inspection rights in corporate law refer to a shareholder’s legal right to access certain company records and information. The exact scope of these rights can vary depending on the jurisdiction and the company’s bylaws, but in general, shareholders have the right to inspect the company’s books and records upon written demand for a proper purpose. There are limitations and procedural requirements associated with exercising these rights, and the proxy process may also be used to exercise these rights.

Question 37

Direct v. derivative suits

Answer 37

• In corporate law, direct and derivative suits are two types of legal actions that shareholders can use to seek redress for grievances against a corporation.
• A direct suit is a legal action that a shareholder can bring against a corporation when the shareholder has been directly harmed. The harm could be a breach of a contract, a violation of the shareholder’s rights, or any other harm that directly affects the shareholder. For example, if a corporation fails to pay dividends to its shareholders, a shareholder may bring a direct suit to enforce their rights to receive those divdends.
• In contrast, a derivative suit is a legal action that a shareholder can bring on behalf of the corporation when the corporation has suffered harm as a result of the actions of its directors, officers, or employees. For example, if the corporation’s directors engage in self-dealing or waste corporate assets, a shareholder may bring a derivative suit to seek relief on behalf of the corporation.
• The key difference between direct and derivative suits is the party that is being represented. In a direct suit, the shareholder is representing their own individual interests, while in a derivative suit, the shareholder is representing the interests of the corporation as a whole.
• To bring a derivative suit, the shareholder must first make a demand on the corporation’s board of directors to take action to address the harm. If the board fails to act or refuses to take action, the shareholder can then bring a derivative suit on behalf of the corporation. This requirement is in place to ensure that shareholders only bring derivative suits when the board has failed to fulfill its duties.
• Additionally, in a derivative suit, the shareholder must show that they have standing to bring the action. This means that the shareholder must show that they are a shareholder of the corporation and that they have the right to bring the suit on behalf of the corporation.
• In summary, direct suits and derivative suits are two types of legal actions that shareholders can bring in corporate law. Direct suits are brought when the shareholder has been directly harmed, while derivative suits are brought on behalf of the corporation when it has suffered harm due to the actions of its directors, officers, or employees. The main difference between the two is the party being represented and the procedural requirements involved in bringing a derivative suit.

B.O.D decsion are protected by the BJR

Question 38

Direct v. Derivative suits

[part 2]

Answer 38

Direct suits and derivative suits are two types of legal actions that shareholders can use to seek redress for grievances against a corporation. The key difference between these two types of suits is the party that is being represented.

A direct suit is a legal action that a shareholder can bring against a corporation when the shareholder has been directly harmed. The harm could be a breach of a contract, a violation of the shareholder’s rights, or any other harm that directly affects the shareholder. For example, if a corporation fails to pay dividends to its shareholders, a shareholder may bring a direct suit to enforce their rights to receive those dividends.

In contrast, a derivative suit is a legal action that a shareholder can bring on behalf of the corporation when the corporation has suffered harm as a result of the actions of its directors, officers, or employees. For example, if the corporation’s directors engage in self-dealing or waste corporate assets, a shareholder may bring a derivative suit to seek relief on behalf of the corporation.

The key differences between direct and derivative suits are as follows:

1. The party being represented: In a direct suit, the shareholder is representing their own individual interests, while in a derivative suit, the shareholder is representing the interests of the corporation as a whole.
2. Recovery: In a direct suit, any damages awarded go directly to the individual shareholder who brought the suit. In a derivative suit, any damages awarded go to the corporation, and ultimately to all of its shareholders.
3. Control: In a direct suit, the individual shareholder has control over the litigation and can choose whether to settle the case or take it to trial. In a derivative suit, the corporation’s board of directors has control over the litigation and can choose whether to settle the case or take it to trial.
4. Standing: To bring a derivative suit, the shareholder must have standing, which means they must be a shareholder of the corporation and must have owned the stock at the time the alleged harm occurred. In a direct suit, the shareholder simply needs to show that they were directly harmed.
5. Procedural requirements: The procedural requirements for bringing a direct suit and a derivative suit can differ. For example, some jurisdictions may require a higher standard of proof for derivative suits, or may require the shareholder to post a bond to cover the corporation’s legal fees in the event the suit is unsuccessful.
7. Proxy Rules: In a derivative suit, a shareholder must make a demand on the corporation’s board of directors to take action to address the harm before bringing the suit. If the board fails to act or refuses to take action, the shareholder can then bring a derivative suit on behalf of the corporation. The demand requirement is to ensure that shareholders only bring derivative suits when the board has failed to fulfill its duties.
8. In summary, direct suits and derivative suits are two types of legal actions that shareholders can bring in corporate law. The main difference between the two is the party being represented, the recovery of damages, the control over the litigation, standing, procedural requirements, and the requirement to make a demand before bringing a derivative suit.

Question 39

Issue of control generally: Public Company v. private company in corporate law

Answer 39

In a public company, control is typically more dispersed among the shareholders, with no single shareholder having a controlling interest. Shareholders may exercise control through their ability to vote on important matters, such as the election of directors, executive compensation, and mergers and acquisitions. Public companies are also subject to greater regulatory oversight and reporting requirements, which can limit the ability of any one shareholder or group of shareholders to exert excessive control.

In contrast, a private company may be owned and controlled by a single shareholder or a small group of shareholders, often the founders or their families. In this case, the controlling shareholder or shareholders may have a significant influence on the company’s operations and decision-making, including the appointment of directors and executive officers, dividend policy, and the strategic direction of the company. Private companies are generally subject to fewer regulatory requirements than public companies, which can give the controlling shareholders more leeway in their decision-making.

or

In corporate law, the issue of control refers to the ability of shareholders or other stakeholders to influence or make decisions about a company’s affairs.

In public companies, control is often more dispersed among shareholders, with no single shareholder or group of shareholders having a controlling interest. Institutional investors may hold significant stakes and can use their voting power to influence decisions.

In private companies, control is often more centralized, with a single shareholder or small group of shareholders holding a controlling interest. However, even in private companies, mechanisms may exist to limit the power of the controlling shareholder or shareholders.

Overall, the issue of control in corporate law is complex and can depend on factors such as ownership structure, shareholder rights, and regulatory requirements.

Question 40

Issue of control generally: Public Company v. private company in corporate law

Answer 40

In a public company, control is typically more dispersed among the shareholders, with no single shareholder having a controlling interest. Shareholders may exercise control through their ability to vote on important matters, such as the election of directors, executive compensation, and mergers and acquisitions. Public companies are also subject to greater regulatory oversight and reporting requirements, which can limit the ability of any one shareholder or group of shareholders to exert excessive control.

In contrast, a private company may be owned and controlled by a single shareholder or a small group of shareholders, often the founders or their families. In this case, the controlling shareholder or shareholders may have a significant influence on the company’s operations and decision-making, including the appointment of directors and executive officers, dividend policy, and the strategic direction of the company. Private companies are generally subject to fewer regulatory requirements than public companies, which can give the controlling shareholders more leeway in their decision-making.

or

In corporate law, the issue of control refers to the ability of shareholders or other stakeholders to influence or make decisions about a company’s affairs.

In public companies, control is often more dispersed among shareholders, with no single shareholder or group of shareholders having a controlling interest. Institutional investors may hold significant stakes and can use their voting power to influence decisions.

In private companies, control is often more centralized, with a single shareholder or small group of shareholders holding a controlling interest. However, even in private companies, mechanisms may exist to limit the power of the controlling shareholder or shareholders.

Overall, the issue of control in corporate law is complex and can depend on factors such as ownership structure, shareholder rights, and regulatory requirements.

Question 41

Types of control mechanisms

Answer 41

there are several types of control mechanisms that exist to regulate the power of shareholders and other stakeholders in a company. Here are some common types of control mechanisms, along with explanations of each:

• Voting Trusts: A voting trust is an agreement between two or more shareholders of a company in which they transfer their voting rights to a trustee. The trustee then votes the shares on behalf of the shareholders according to their instructions. Voting trusts are often used to consolidate voting power and gain control of a company.
• Vote Pooling Agreements: A vote pooling agreement is similar to a voting trust in that it allows shareholders to pool their voting power. However, unlike a voting trust, the shareholders retain ownership of their shares and only agree to vote their shares in a certain way.
• Shareholding Agreements: A shareholding agreement is a contract between shareholders of a company that governs their rights and obligations. Shareholding agreements can cover a wide range of issues, including the transfer of shares, the appointment of directors, and the distribution of dividends. Shareholding agreements can also include provisions to limit the power of certain shareholders or groups of shareholders.
• Irrevocable Proxies: An irrevocable proxy is a proxy that cannot be revoked by the shareholder who grants it. Irrevocable proxies are often used in situations where a shareholder wants to give another party the power to vote their shares in a certain way, but wants to ensure that the proxy cannot be revoked.

Overall, these control mechanisms are designed to regulate the power of shareholders and other stakeholders in a company. The specific mechanisms that are used can depend on the ownership structure of the company, the agreements between shareholders, and regulatory requirements.

Question 42

What is a Freeze out

Answer 42

In corporate law, a “freeze-out” occurs when a majority shareholder or group of shareholders takes steps to limit the rights or powers of minority shareholders. This can happen in several ways, such as by reducing the value of minority shares, diluting their ownership, or limiting their ability to participate in decision-making processes.

One common method of implementing a freeze-out is through a merger or acquisition in which minority shareholders are bought out at a price that is below the fair market value of their shares. This can result in significant losses for minority shareholders, who may not have the same bargaining power as the majority shareholders.

Another way a freeze-out can occur is through the use of shareholder agreements or other mechanisms that limit the voting rights or ability to sell shares of minority shareholders. These types of agreements can make it difficult or impossible for minority shareholders to effectively participate in the management or governance of the company.

When a freeze-out occurs, minority shareholders may have legal recourse to challenge the actions of the majority shareholders. For example, they may be able to bring a lawsuit alleging breach of fiduciary duty, or seek to have the actions of the majority shareholders overturned. The specific legal remedies available will depend on the circumstances of the case and the applicable laws and regulations in the jurisdiction where the company is incorporated or operates.

Question 43

Remdies Re Freeze outs

Answer 43

When minority shareholders are “frozen out” by the majority shareholders in a company, they may have legal recourse to protect their rights and interests. One potential remedy for a freeze-out is a derivative suit, which is a legal action brought by shareholders on behalf of the company against its directors or officers for breaches of fiduciary duty or other violations of corporate law.

Other potential remedies for a freeze-out include:

Bringing a legal action: Minority shareholders may be able to bring a legal action against the majority shareholders for breach of fiduciary duty or other violations of corporate law. This could result in a court order requiring the majority shareholders to restore the rights and powers of minority shareholders, or awarding damages for any harm suffered as a result of the freeze-out.

Challenging the validity of the action: In some cases, the freeze-out may be challenged on the grounds that the action taken by the majority shareholders was invalid or illegal. For example, if the freeze-out was implemented through a merger or acquisition, minority shareholders may be able to challenge the fairness of the price paid for their shares.

Negotiating a buyout: In some cases, minority shareholders may be able to negotiate a buyout of their shares by the majority shareholders or a third party. This can help to minimize losses and provide a way for minority shareholders to exit the company on their own terms.

Derivative suit first line of defense. if ratify then dividend

One potential remedy for a freeze-out is a derivative suit, which is a legal action brought by shareholders on behalf of the company against its directors or officers for breaches of fiduciary duty or other violations of corporate law. In a derivative suit, the minority shareholders may be able to recover damages on behalf of the company for harm caused by the freeze-out, or force changes to the management or governance of the company to prevent future harm to minority shareholders. However, it is important to note that derivative suits can be complex and expensive, and the outcome is not guaranteed. It is best to consult with an experienced attorney to determine if a derivative suit is a viable option in the event of a freeze-out.

Question 44

Merger v Acquistion

Answer 44

Mergers and acquisitions (M&A) involve the combination of companies. A merger is the consolidation of two or more companies into a single entity, while an acquisition is the purchase of one company by another. Both involve the exchange of ownership interests and may require regulatory approval. Companies seek legal and financial advice to navigate M&A transactions.

Question 45

Greenmail

Answer 45

Greenmail is a practice in which a company that is the target of a hostile takeover buys back its own shares at a premium from the acquiring party, usually to prevent the acquisition from taking place. This strategy effectively pays off the hostile bidder, allowing them to exit the situation with a profit and abandoning their takeover plans.

Question 46

Whit knight

Answer 46

A white knight is a friendly party that comes to the aid of a company that is facing a hostile takeover bid. The white knight typically offers to purchase the target company at a higher price than the hostile bidder, effectively thwarting the takeover attempt.

Question 47

Poision Pill

Answer 47

A poison pill is a tactic used by a company to discourage a hostile takeover bid. This strategy involves making the target company less attractive to the bidder by issuing new shares of stock to existing shareholders at a discounted price, which dilutes the value of the acquiring company’s shares. Other forms of poison pills include granting existing shareholders the right to buy additional shares at a discount if a takeover occurs, or making a takeover more expensive by forcing the acquiring company to pay a high premium for the target company’s stock.

Question 48

Can corporations seerve as a memeber of the board of Directors

Answer 48

No Board members must be natural persons.

Question 49

shareholder primacy doctrine

Answer 49

The shareholder primacy doctrine is a principle in corporate law that holds that the primary responsibility of a corporation is to maximize shareholder value. This doctrine suggests that a corporation should prioritize the interests of its shareholders above all else, including the interests of its employees, customers, or the wider society.

Under this doctrine, the board of directors and executives of a corporation have a fiduciary duty to act in the best interests of the shareholders, which usually means maximizing profits and share prices. Shareholders can hold the corporation accountable for its actions and decisions through voting and by bringing derivative suits if they believe that the corporation is not acting in their best interests.

The shareholder primacy doctrine has been subject to criticism for its narrow focus on shareholder value, which some argue can lead to unethical behavior and negative impacts on stakeholders such as employees, customers, and the environment. Some alternative views suggest that corporations should take into account the interests of all stakeholders and operate in a more socially responsible manner.

Question 50

de facto controlling interest

Answer 50

In corporate law, a de facto controlling interest refers to a situation where an individual or entity may not own a majority of a company’s shares, but has significant power and influence over the company’s decision-making process.

This control is gained through various means such as owning a substantial number of shares, having a majority on the board of directors, or having the ability to veto important decisions. This type of control is not necessarily formal or legal, but rather is based on the actual ability to exert significant influence over the company’s operations.

For example, suppose a wealthy individual owns only 10% of a company’s shares but has control over the majority of the board of directors, including the power to hire and fire top executives. In this case, that individual may have a de facto controlling interest in the company even though they do not own a majority of the shares.

Question 51

closely held corporation

Answer 51

A closely held corporation is a type of corporation where the majority of the company’s ownership is held by a small number of shareholders, typically a group of family members, business partners, or close friends. In a closely held corporation, the shareholders are often involved in the day-to-day management of the business, and there may be little separation between the ownership and management of the company.

Closely held corporations differ from publicly traded corporations, where ownership is spread among a large number of shareholders, and there is a clear separation between ownership and management.

In closely held corporations, the shareholders often have a close personal relationship with one another, and decisions may be made on a more informal basis than in larger public corporations. However, it is still important for closely held corporations to have clear governance structures and policies in place to ensure that decisions are made in the best interests of the company and all of its shareholders.

Overall, closely held corporations can be a good option for small businesses or family-run enterprises, as they allow for more control and flexibility over the management and direction of the company.