Corporations

Question 1

Incorporation

Answer 1

The articles of incorporation are filed with the state and if in conflict with bylaws, the articles control

A corporation is not generally liable for a contract entered into prior to incorporation unless it expressly or impliedly adopts (ratifies) the contract

Question 2

Shareholders

Answer 2

Shareholders are only owners and do not manage the corporation. Thus they generally just have annual meetings. When notice of meetings is required 10-60 days prior and must state the time, place and purpose of the meeting.

Shareholders can vote by proxy or by voting agreement.

Generally a quorum (majority of all outstanding shares required to vote) must be present to hold a vote

Question 3

Directors

Answer 3

Directors manage the corporation and (like shareholders) act as a body by voting

Shareholders hire and fire directors

Directors cannot vote by proxy or agreement

A quorum (majority of directors) needs to be present for a vote to take place, but unlike shareholders directors can “break quorum” by leaving

Notice is only required for a special meeting

Question 4

Fiduciary Duties

Answer 4

The duty of loyalty and duty of care are heavily tested in Corporations and LLC problems
Whether a director of a corporation (or a member of an LLC) breached the duty of care or loyalty is very fact-based

However, usually when duty of loyalty is an issue, the director or member has breached the duty

Question 5

Duty of care

Answer 5

Business-judgment rule: There is a presumption that “in making a business decision, the directors acted on an informed basis, in good faith and in honest belief that an action taken was in the best interest of the company”

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

Directors are entitled to rely upon information, opinions, reports or statements of corporate officers, legal counsel, public accountants in making a decision

A party claiming that the directors breached their duty of care has the burden of proof

Question 6

Business Judgment Rule

Answer 6

Applies to Duty of Care

Presumption that directors and officers of a corporation acted in good faith, with adequate information, and in the best interest of the corporation

Shields directors and officers from liability

Question 7

Duty of loyalty

Answer 7

A director must act in good faith and with a reasonable belief that what he does is in the corporations best interest
The business-judgment rule presumption does not apply if there is a duty of loyalty issue. A duty of loyalty issue arises in three ways BCC

Director is on both sides of a transaction: a director has a material financial interest in a contract as well as a knowledge of that interest, yet still votes to approve the contract

Question 8

A director may not

Answer 8

Compete with corporation

Question 9

Corporate opportunity

Answer 9

A corporate officer may not usurp a corporate opportunity

Question 10

Defenses to liability for breach of the duty of loyalty

Answer 10

The Revised Model Business Corporation Act (MBCA) includes three safe harbors that may protect a director who breaches his duty of loyalty

1) approval by disinterested directors
2) approval by disinterested shareholders
3) if the transaction is judged to be fair at the time it was entered into

Question 11

Waiver of duty in a LLC

Answer 11

LLC operating agreement may waive duty of loyalty so long as it is not manifestly unreasonable

Question 12

Voting

Answer 12

In order for a resolution to pass there needs to be a quorum present, and more votes must be cast in favor of the resolution than against it

The record owner on the record date. THe record date determines who is entitled to vote at a particular meeting

Exceptions are if the shareholder died or executed a valid proxy

Unless articles of incorporation provide otherwise each outstanding share is entitled to one vote on each matter voted on at a shareholders’ meeting

Question 13

Voting by Proxy

Answer 13

A shareholder may vote by proxy
A shareholder can appoint a proxy by signing an appointment form or making a verifiable electronic submission
A shareholder may not orally ask someone to serve as proxy. A proxy is generally revocable

Question 14

Lawsuits by Shareholders against the Corporation

Answer 14

A shareholder may file an action to establish the acts of the directors are illegal, fraudulent, or willfully unfair and oppressive to either the corporation or the shareholder

Whether a suit is appropriately brought as a direct or derivative action depends on the injury

Question 15

Direct suits

Answer 15

Appropriate when the wrong done amounts to a breach of duty owed to the individual personally

Question 16

Derivative suits

Answer 16

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

This also applies to LLC

Question 17

Filing a derivative suit extra requirements

Answer 17

A shareholder may not commence or maintain a derivative suit unless 3 requirements are met

1) Standing to bring a lawsuit
2) Adequacy (the shareholder represents the interests of the corporation
3) Demand (generally, the shareholder should file a written demand and wait 90 days before filing a suit unless irreparable injury would result or a demand would be futile)

Question 18

Lawsuits Against Shareholders - Piercing the corporate viel

Answer 18

As a general rule, the law treats a corporation as an entity separate from its shareholders, even where one individual owns all of the corporate stock

Piercing the corporate veil - in limited circumstances courts will disregard the limited liability corporate form and hold a shareholder personally liable for corporate debt

Question 19

Piercing the corporate veil

Answer 19

Only allowed in close corporations and LLCs generally a plaintiff must show that the shareholders of the corporation or members of an LLC abused the privilege of incorporating and fairness requires holding them liable

One generally needs to show undercapitalization of the business, failing to follow formalities, commingling of assets, confusion of business affairs, or deception of creditors

Only the shareholders or members who participated in the wrong are personally liable

Question 20

LLCs Formation

Answer 20

Articles of organization must be filed to create an LLC
Since LLCs are relatively new form form of business association, courts tend to analyze them in the context of corporate or partnership law

Question 21

LLC duties

Answer 21

Members of an LLC have fiduciary duties
Members of an LLC in a member-managed LLC are treated as agents of the LLC (with actual and apparent authority to bind the LLC in ordinary but not extraordinary affairs)

Question 22

LLC Dissociation

Answer 22

If a member leaves then it leads to dissociation of that member, but does not lead to winding up or dissolution unless the other members unanimously agree to dissolve the LLC

Question 23

Liability LLC

Answer 23

Generally individual members are not liable for losses
They are liable if the court decides to pierce the LLC veil or if proper procedures for dissolution and winding up have not been followed

Creditors may enforce claims against each of the LLC members however, a member’s total liability may not exceed the total value of assets distributed to the member in dissolution