Corporations Flashcards
How to Incorporate
In order to form a corporation, articles of incorporation must be filed with the state. The articles must include certain basic information, including the number of shares the corporation is authorized to issue. Unless a delayed date is specified in the articles, the corporate existence begins when the articles are filed.
Noncompliance
When a person conducts business as a corporation without attempting to comply with the statutory incorporation requirements, that person is liable for any obligations incurred in the name of the nonexistent corporation. You’re not likely to be liable under this provision because if you make a good-faith attempt to comply with the statutory requirements for incorporation.
De Jure Corporation/General Partnership Treatment
When all of the statutory requirements for incorporation have been satisfied, a de jure corporation is created. Consequently, the corporation, rather than persons associated with the corporation, is liable for activities undertaken by the corporation. However, when a corporation has not been created, the entity may be treated as a general partnership. A partnership is an association of two or more persons to carry on a for-profit business as co-owners. In a general partnership, each partner is jointly and severally liable for all partnership obligations.
Defenses to Personal Liability (failure to incorporate)
When a person makes an unsuccessful effort to comply with the incorporation requirements, that person may be able to escape personal liability under either the de facto corporation doctrine or the corporation by estoppel doctrine. Under either doctrine, the owner must make a good-faith effort to comply with the incorporation requirements and must operate the business as a corporation without knowing that the requirements have not been met. If the owner has done so, then the business entity is treated as a de facto corporation, and the owner, as a de facto shareholder, is not personally liable for obligations incurred in the purported corporation’s name. Note, however, that the RMBCA has abolished the de facto corporation, as have many jurisdictions that have adopted the RMBCA.
Corporation by estoppel
Alternatively, under corporation by estoppel, a person who deals with an entity as if it were a corporation is estopped from denying its existence and is thereby prevented from seeking the personal liability of the business owner. This doctrine is limited to contractual agreements.
Directors: Notice of Special Meeting
Directors are entitled to notice of a special meeting. Unless the articles of incorporation or bylaws provide otherwise, notice must be provided at least two days prior to the meeting and should state the date, time, and place of the meeting. The notice need not describe the purpose of the special meeting.
Directors: Waiver of Notice of Special Meeting
Directors are entitled to notice of a special meeting, but a director’s attendance waives notice of that meeting unless the director promptly objects to lack of notice.
Directors: Quorum
For the board of directors’ acts at a meeting to be valid, a quorum of directors must be present at the meeting. A majority of all directors in office constitutes a quorum, unless the articles of incorporation or bylaws require a higher or lower number. A director must be present at the time that the vote is taken in order to be counted for quorum purposes, but presence includes appearances made through communications equipment that allows all persons participating in the meeting to hear and speak to one another.
Directors: Requisite Votes for Approval
Typically, the assent of a majority of the directors present at the time the vote takes place is necessary for board approval. However, the articles of incorporation or bylaws may specify a higher level of approval.
Fiduciary Duties of Controlling Shareholder:
Business Judgement Rule
A controlling shareholder, such as a parent corporation, generally does not owe fiduciary duties to the corporation or other shareholders. However, decisions by a majority shareholder or control group may be reviewable by a court for good faith and fair dealing toward the minority shareholders under the court’s inherent equity power. Business dealings between a controlling shareholder and the controlled corporation that do not involve self-dealing are analyzed using the business judgment standard. The business judgment rule is a rebuttable presumption that the controlling shareholder reasonably believed that his actions were in the best interests of the corporation. A typical decision protected by the business judgment rule includes whether to declare a dividend and the amount of any dividend.
Parent Corporations: Self-Dealing
If a parent corporation causes its subsidiary to participate in a business transaction that prefers the parent at the expense of the subsidiary, it can involve self-dealing and a breach of loyalty. A parent corporation that engages in a conflict-of-interest transaction with its own corporation, also known as “self-dealing,” has violated the duty of loyalty unless the transaction is protected under the safe-harbor rule. The business judgment rule does not apply in a conflict-of-interest transaction.
There are three safe harbors by which a conflict-of-interest transaction may enjoy protection: (i) disclosure of all material facts to, and approval by a majority of, the board of directors without a conflicting interest; (ii) disclosure of all material facts to, and approval by a majority of, the votes entitled to be cast by the shareholders without a conflicting interest; and (iii) fairness of the transaction to the corporation at the time of commencement.
The fairness test looks at the substance and procedure of the transaction. With regard to a parent corporation engaged in self-dealing, the main concern under the fairness test is whether the benefit is comparable to what might have been obtained in an arm’s length transaction. Procedural fairness is generally not at issue unless there has been a change in control.
Conflict of Interest 3 Safe Harbors
There are three safe harbors by which a conflict-of-interest transaction may enjoy protection: (i) disclosure of all material facts to, and approval by a majority of, the board of directors without a conflicting interest; (ii) disclosure of all material facts to, and approval by a majority of, the votes entitled to be cast by the shareholders without a conflicting interest; and (iii) fairness of the transaction to the corporation at the time of commencement.
Usurpation of Corporate Opportunity:
“Interest or expectancy test” and “Line of Business test”
The MBCA does not directly address the usurpation of corporate opportunity by a parent corporation; however, a director’s duty can be applied in this situation. A director may violate his duty of loyalty by usurping a corporate opportunity rather than first offering the opportunity to the corporation. In determining whether the opportunity is one that must first be offered to the corporation, courts have applied the “interest or expectancy” test or the “line of business” test. Under the “interest or expectancy” test, the key is whether the corporation has an existing interest or an expectancy arising from an existing right in the opportunity. An expectancy can also exist when the corporation is actively seeking a similar opportunity. Under the broader “line of business” test, the key is whether the opportunity is within the corporation’s current or prospective line of business. Whether an opportunity satisfies this test frequently turns on how expansively the corporation’s line of business is characterized.
Business Judgement Rule: Conflict of Interest
The business judgment rule is a rebuttable presumption that a director reasonably believed that his actions were in the best interests of the corporation. The exercise of managerial powers by a director is generally subject to the business judgment rule. However, the business judgment rule does not generally apply to a conflict-of-interest transaction. A conflict-of-interest transaction, or “self-dealing,” is any transaction between a director and his corporation that would normally require approval of the board of directors and that is of such financial significance to the director that it would reasonably be expected to influence the director’s vote on the transaction. The interest involved can be direct or indirect, but it must be financial and material. Majority approval of a conflict-of-interest transaction by fully informed disinterested directors triggers the business judgment rule under a safe harbor provision.
Duty of Care
With respect to the duty of care, directors have a duty to act with the care that a person in a like position would reasonably believe appropriate under similar circumstances. The director is presumed to have the knowledge and skills of an ordinarily prudent person, and is required to use any additional knowledge or special skills that he possesses. Normally, the party alleging a violation of the duty of care must rebut the business judgment rule, but given that the directors were each financially interested in this transaction, the business judgment rule will not apply.
