corporations

Question 1

what is a promoter?

Answer 1

person who procures commitments for capital and instrumentalities on behalf of a corp that will be formed in the future

Question 2

Promoter’s Liability

Answer 2

generally, promoters are personally liable on Ks which they enter into on behalf of a to-be-formed corp

Promoters who act on behalf of a corporation knowing that there was no incorporation are liable for liabilities created by so acting.
so need (1) action on behalf of unformed corp, AND (2) knowledge that the corp had not formed

Even if the corp has adopted the K, the promoter’s liability ends only when there is a:
1. Novation; or
2. Release

Question 3

any exceptions to promoter liability?

Answer 3

a promoter will not be liable on a K for an unformed corp if the agreement b/w the parties expressly indicates that the promoter is not to be bound

Question 4

how can a corp become liable for a promoter’s K?

Answer 4

generally, the corp is not liable on a pre-incorporation K entered into by a promoter, UNLESS:

1. the board of directors expressly ADOPTS the agreement; or
2. there is a knowing acceptance or retention of the contract’s BENEFITS

Question 5

Fiduciary Duty of Care:

Business Judgment Rule

Answer 5

The BJR is a presumption that a Director’s decision may not be challenged if the director:
(1) acted in GOOD FAITH
(2) with the care that a REASONABLE PERSON would exercise in a like position, and
(3) in a manner the Director reasonably believed to be in the BEST INTEREST of the corporation

If the Director does the above, then a court will not second guess the Director’s decisions

A person challenging director action has the burden of proving that the above standard was not met

Question 6

Business Judgment Rule

How informed must Directors be?

Answer 6

Directors must be informed to an extent that they reasonably believe is appropriate

Directors are entitled to rely on reports from (1) corp officers whom the Director reasonably believes to be reliable/competent, and
(2) corp outsiders as to matters that the Director reasonably believes to be within the outsider’s professional competence

Question 7

Fiduciary Duties: Duty of Loyalty

Answer 7

directors have a duty of loyalty to the corporation. Most common issues here involve a conflict of interest

Directors owe the corp a duty of loyalty, which generally prevents the directors from profiting the expense of the corporation

the Business Judgment Rule does NOT apply in duty of loyalty cases. The burden is on the defendant here

A director violates the duty of loyalty if the director:
1. is on both sides of the transaction
2. competes with the corporation
3. usurps a business opportunity

Question 8

Duty of Loyalty:

What constitutes a Conflicting Transaction? (“Self-Dealing”)

Answer 8

a conflicting transaction is any transaction b/w the corporation and:
(1) one of its directors, or
(2) that director’s close relative, or
(3) another business of the director’s

Question 9

Duty of Loyalty:

Upholding a Conflicting Interest transaction

Answer 9

a conflicting interest transaction will not be set aside IF:
1. the director discloses all material facts to the board and a majority of the disinterested directors approve the transaction, or
2. the director discloses all material facts to the disinterested shareholders who then approve the transaction, or
3. the transaction is fair to the corporation

Question 10

Shareholder Lawsuits:

Direct Suits

Answer 10

a direct suit is appropriate when the wrong done amounts to a breach of duty owed to the shareholder PERSONALLY

in a direct suit, the shareholder is bringing suit on their own behalf. NOT on behalf of the corp

direct suits tend to arise when:
- shareholder is denied preemptive rights
- shareholder is denied payment of dividend
- shareholder is oppressed in a close corp

Question 11

Shareholder Lawsuits:

Derivative Suits

Answer 11

a derivative suit is appropriate when the injury is caused to the corporation and the shareholder is trying to enforce the corporation’s rights

Requirements for filing a derivative suit (SAD):
1. STANDING (i.e. shareholder must have been a shareholder at the time the claim arose or became a shareholder through transfer by operation of law from someone who did own stock at time claim arose)
2. ADEQUACY (shareholder fairly and adequately represents the interests of the corp); and
3. DEMAND* (shareholder must make a written demand on the corp to take action)

generally the shareholder should file a written demand on the corp board to take action and wait 90 days before filing a suit, UNLESS
1. irreparable injury would result, or
2. demand would be futile, or
3. corp board rejected demand

Question 12

Piercing the Corporate Veil

Answer 12

generally, shareholders can NOT be held liable for the corp’s debts and obligations. BUT a shareholder might be personally liable for what the corp did if the court “pierces the corporate veil”

to pierce the corp veil and hold shareholders personally liable:
1. the shareholders must have abused the privilege of incorporating; AND
2. fairness must require holding them liable

the court will typically pierce the corporate veil when:
i. shareholders ignore formalities, making the corp a mere “alter ego” (e.g. commingling of assets)
ii. undercapitalization at time of formation (not enough to cover prospective liabilities)
iii. or the corp was formed to commit a fraud

Question 13

Appraisal

Answer 13

Shareholders who dissent from a fundamental corporate change can force the corp to purchase their shares at a fair price (must be a closely held corp)

To use the appraisal remedy, the shareholders must:
1. file an objection to the change/transaction before or at the shareholder’s meeting at which the vote is taken,
2. not vote in favor of the plan, and
3. send the corp a written demand for the fair value of their shares and give estimate of the fair value

If the corp does not want to pay what the shareholders demanded, the corp must file suit to have the court determine fair value

Question 14

Approving a Fundamental Corporate Change

Answer 14

a fundamental corporate change can be implemented ONLY if:
1. the directors first pass a resolution to implement the plan, and
2. the plan is then approved by the shareholders

i.e. a corp board lacks authority to authorize fundamental corp changes unless it has shareholder approval

Question 15

Officers

Answer 15

officers are agents of the corporation. An officer’s authority is therefore governed by agency law. So apply AGENCY analysis

a corp president, CEO, etc. is an agent of the corporation and has whatever power the corp grants him (actual authority)

Unless specifically excluded by the corporation, a president will have the authority to enter into ordinary Ks involving the day to day operation of the corporation

But the president only has authority to enter into extraordinary Ks if authorized by the Board. The board can NOT give the officer power that the board itself does not have

a president does NOT have authority to issue dividends. Only board does

Question 16

When is a board’s meeting and vote proper?

Answer 16

unless the articles of incorporation state otherwise, a board 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

Question 17

When is a Board’s delegation of power to an Officer valid?

Answer 17

whether a board’s resolution granting authority to an officer was valid depends on:
1. whether the board’s meeting and vote were proper, and
2. whether the board could delegate such authority

Question 18

What is required for a shareholder to be entitled to vote at a meeting?

Answer 18

when a corporate meeting is held, generally only shareholders of record on the record date are allowed to vote

EXCEPTION: a shareholder may give a proxy to allow another to vote his shares for him

Question 19

Proxy

Answer 19

A shareholder may give a proxy to allow another to vote his shares for him

A proxy is (1) a writing (2) signed by the record shareholder, (3) directed to the secretary of the corporation, (4) authorizing another to vote the shares

proxies are generally revocable (by attending the meeting, in writing to corp secretary, or by appointment of another proxy).

But a proxy can be irrevocable if it is stated to be irrevocable and is coupled with an interest or given as security (e.g. the sale of the shares)

Question 20

Quorum requirements (Shareholder meeting)

Answer 20

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

Question 21

Shareholder rules for electing directors

Answer 21

Unless the articles or bylaws provide otherwise, directors are elected by a plurality of the votes cast (or the directors receiving the most votes win), even if they do not receive a majority

a quorum must present first

Question 22

Can a corporation prohibit the transfer of shares?

Answer 22

Generally, a corp can restrict the transfer of shares for any reasonable purpose

A prohibition on transferring shares to a designated person/class is also permissible as long as the prohibition is not unreasonable

i.e. if there is a prohibition/limitation on transferring shares, argue whether the prohibition looks reasonable or unreasonable

Question 23

Enforceability of a stock transfer restriction against third parties

Answer 23

a share transfer restriction is unenforceable against a third party who purchases the restricted shares, unless the existence of the restriction is conspicuously noted on the shares or the purchaser otherwise knows of the restriction

i.e. look to if third party knew or should have known about the restriction

Question 24

When can a shareholder seek judicial dissolution of a corporation?

Answer 24

a shareholder may seek a judicial dissolution of the corporation under numerous circumstances, such as where the directors have acted in an oppressive manner or where corporate assets are being wasted

i.e. if a shareholder is seeking dissolution, look for if directors are oppressing the shareholder and/or committing waste by overly benefitting themselves

Question 25

Corporation’s right to issue stock options

Answer 25

Generally, the Board has a right to issue options to purchase shares on whatever terms the board chooses

Options are merely the right to purchase shares and do not themselves constitute shares that have been issued

Question 26

Issuance of Shares

Answer 26

a corporation may NOT issue more stock/shares than it is authorized to do so in its articles of incorporation

i.e. look to how many shares the articles say the corp can issue and how many shares are already issued and outstanding

BUT if this is a problem, then note that the Board could potentially solve it by amending its articles to authorize sale of more stock

Question 27

Issuance of shares that have a preference

Answer 27

a corporation may NOT issue shares that have a preference unless the Articles of Incorporation so provide

BUT if this is a problem, then note that the Board could solve it by amending its articles to authorize the sale of preferred shares

Question 28

Amending Articles of Incorporation

Answer 28

A corporation can amend its articles of incorporation with any provision that would have been valid in the original articles.

To amend:
1. the Board must adopt a resolution to amend the articles
2. Board must then send notice to shareholders that a shareholders meeting will be held to vote on the proposed amendment (notice sent at least 10 days before meeting)
3. the amendment must be approved by a majority of shares entitled to vote at the meeting
4. the amendment must then be filed with the Secretary of State

Question 29

Right of a Shareholder to a Dividend

Answer 29

generally, a shareholder has no right to receive a dividend until it is declared by the Board

The decision whether to declare a dividend is left to the sound discretion of the Board. So if the directors decide in GOOD FAITH not to declare a dividend, the courts will not disturb that decision

The shareholder therefore has a burden of proving bad faith by the directors in deciding not to pay a dividend

This would be a direct suit, not a derivative suit

Question 30

Shareholder Inspection Rights

Answer 30

shareholders generally have a right to inspect their corporation’s books and records for a “proper purpose”

A proper purpose is a purpose related to the SHAREHOLDER’S STATUS as a shareholder

e.g. investigating the actual value of shares when Corp offers to buy your shares is likely a proper purpose

shareholder has to give Corp 5 days written notice and and state the reason for wanting to inspect the records. Can also bring an attorney to facilitate inspection

Question 31

Piercing the Corporate Veil

Subsidiary Corporations & Personal liability for torts

Answer 31

in a piercing the corporate veil problem, when a subsidiary corporation is involved, the corporate veil of the subsidiary may be pierced to reach the assets of the parent corporation if the separateness of the two companies is not formally recognized

A court will also hold a director, officer, shareholder, or employee personally liable for any tort that person personally commits

Question 32

Merger

Answer 32

A merger involves the blending of one or more corporations into another corporation, and the latter corporation survives while the merging corporations cease to exist following the merger

Generally, a merger is treated as a fundamental corporate change (i.e. needs to be approved by majority board, then need shareholder approval, and then formalize change in articles)

the surviving corp takes on all rights and liabilities of the merged corp

Question 33

Short Form Merger

Answer 33

A parent corporation owning 90% or more of the outstanding shares of each class of a subsidiary corporation can merge the subsidiary into itself without the approval of directors of the subsidiary

Question 34

Mergers: No Surviving Change to the Surviving Corporation

Answer 34

approval from the shareholders of the corporation surviving a merger is NOT required if the merger will not result in a significant change in the surviving corporation

look for:
-articles of incorporation will not differ significantly after merger
- shareholders of surviving corp will have same # of shares as before merger w/ same rights
- # of voting shares issued as part of merger does not exceed more than 20% of voting power of shares outstanding before merger

If you don’t have all of the above, then you probably do need shareholder approval of the surviving corp

Question 35

Cumulative Voting: Removing a Director

Answer 35

generally, when a director is elected by cumulative voting, the director can not be removed if the votes cast against removal would be sufficient to elect the director if cumulatively voted at an election of the directors

Question 36

Removing a Director

Answer 36

generally, shareholders may remove a director, with or without cause, at a specifically called shareholders’ meeting unless the articles of incorporation provide otherwise

Question 37

Shareholder Lawsuit:

Direct vs Derivative

Answer 37

direct actions may be filed when the harm done is personal to the plaintiff

Derivative actions are used when a shareholder/member is attempting to recover for a wrong done to the corp/LLC

Question 38

Piercing the Veil for LLCs

Answer 38

Grounds for piercing an LLC are similar to grounds for piercing a corp
1. alter ego
2. undercapitalization
3. fraud

BUT a court generally will not pierce an LLC for lack of formality (e.g. failure to hold meetings) because LLC statutes require less formalities than corporations

Question 39

When does a corporation start to exist?

Answer 39

Corporate existence begins when the articles of incorporation are filed by the Secretary of State, or on a later date designated in the articles (that have been filed)

Either way the articles need to get filed

Question 40

What are the notice and voting requirements for a special directors’ meeting?

Answer 40

For an action be a valid board action, it must be approved by a majority of a quorum at a properly convened meeting

Regular Directors meeting does NOT require notice. But a special meeting requires at least 2 DAYS notice

the Notice must state the time/place of the meeting, but does not need to state purpose (that is only for special shareholder meetings)

A director can waive improper notice by either signing a notice of waiver and filing it with minutes of the meeting, OR by attending the meeting and voting

A director is considered present at the meeting if they attend in person or by telecommunications that allow each participant to simultaneously hear all other participants