Corporations

Question 1

Corporation

Answer 1

a legal entity distinct from its owners and may be
created only by filing certain documents with the state.

Question 2

Ultra Vires Activity

Answer 2

An activity beyond the scope of the articles of incorporation (where the articles specify a specific business purpose)

Question 3

Stock Issuance

Answer 3

Issuance = when the corporation sells its own stock as a means of raising capital (corporations sell interest in the corporation).
* If Natalie sells Rachel stock of XYZ Corp – not an issuance.

Question 4

Preemptive Rights

Answer 4

The right of an existing shareholder of common stock to maintain their percentage of ownership in the company by buying stock whenever there is a new issuance of stock for money.

• Under the MBCA, a shareholder only has preemptive rights if they are prescribed in the COI.

Question 5

Statutory Requirements for Corporate Directors

Answer 5

1. Director must be an adult human.
2. Board must be composed of one or more directors.

Question 6

Removal of Directors

Answer 6

Shareholders may remove directors before their terms expire; directors can be removed with or without cause.

Question 7

Election of Directors

Answer 7

Shareholders elect directors at the annual meeting.

Elections occur ANNUALLY UNLESS there is a staggered board; a staggered board is divided into halves or thirds

Question 8

Valid Methods of Board Action

Answer 8

1. Board members can act at a meeting.
2. Board members can act without a meeting with unanimous written consent.

Any other act is VOID.

Question 9

What does the board fucking do?

Answer 9

Manages the business of a corporation (e.g., sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corporation changes to shareholders).

Directors have a right to inspect the corporate books.

Question 10

Director’s Duty of Care

Answer 10

Directors owes the corporation a duty of care and must manage the corporation to the best of their abilities.

Directors must discharge their duties:

1. In good faith, AND
2. With the care a person in a similar position

Question 11

Director Nonfeasance & Misfeasance

Answer 11

Nonfeasance = occurs when a director does jack shit; “the lazy director.”

Misfeasance = board makes a decision that hurts corporation; causation is clear.

Question 12

The Business Judgment Rule

Answer 12

Rule: a court will not second-guess a business decision made by the board if:

1. it was informed,
2. it was made in good faith
3. made without conflicts of interest, AND
4. had a rational basis

Burden is on the plaintiff

Question 13

Duty of Loyalty

Answer 13

A director must act in good faith and with reasonable faith that her actions are in the best interest of the corporation.

Duty of loyalty concerns conflicts of interest; director breaches a duty of loyalty when she fails to put the interests of the corporation first.

Question 14

Interested Director Transaction

Answer 14

A BREACH OF LOYALTY

Interested Director Transaction: Corp does business with director or a director’s relative; the transaction is void UNLESS:

1. the transaction was fair to the corporation, OR
2. the relevant facts were disclosed and disinterested directors approved of the transaction.

Question 15

Director Starts Competing Venture

Answer 15

A BREACH OF LOYALTY.

A director breached the duty of loyalty by starting a competing venture.

• Remedie = constructive trust (Director must return any profits to the corporation)

Question 16

Corporate Opportunity Doctrine

Answer 16

A BREACH OF LOYALTY.

Director takes a corporate opportunity for herself.

• A director cannot usurp a corporate opportunity; the director must first disclose the opportunity to the company before pursuing it herself.
• Remedy = constructive trust (director gives profits/property to the corporation).

Question 17

Doctrine of Individual Director Responsibility

Answer 17

A director is presumed to concur with board action unless their abstention or objection is noted in writing in the meeting minutes OR delivered to an officer after the meeting.

• A director is not responsible for board action if they were not present on the meeting.

Question 18

Corporate Officers

Definitions, Duties

Answer 18

OFFICERS = manage the day-to-day operations of the corporation; employed by the corporation.
* Officers owe the same fiduciary duties of care and loyalty as directors.
* Officers are agents of the corporation

Question 19

Appointment & Removal of Officers

Answer 19

Officers are appointed and removed by the board; the board also sets officer compensation.

Question 20

Indemnification of Officers & Directors

(When is NO indemnification available?!)

Answer 20

Indemnification = reimbursement from the corporation when a director or officer gets sued aas part of their role in the corporation.

NO INDEMNIFICATION IF: there’s a breach of fiduciary duty.

Question 21

Mandatory Indemnification

Answer 21

Corporation must indemnify the officer or director if the officer/director successfully defended on the merits or otherwise.

Question 22

Permissive Indemnification

Answer 22

Where a corporation may indemnify but has no duty to; anything that isn’t mandatory or no indemnification is permissive.

• Eligibility: to be eligible for permissive indemnification, a director/officer must show that they acted in good faith and that her defense of the corporation was what she reasonably believed was in the corporation’s best interest.

Question 23

Court Ordered Indemnification

Answer 23

A court in which a director or officer was sued may order indemnification when it is justified in view of all circumstances.

• If the director/officer was held liable to the corporation, reimbursement is limited to costs and attorneys’ fees (it cannot include the judgment).

Question 24

Piercing the Corporate Veil

Answer 24

Rule: In general, shareholders cannot be held liable for the debts of a corporation UNLESS the court pierces the corporate veil to avoid fraud or unfairness.

Requirements for Piercing
1. Shareholders abused privileges of incorporating AND
2. Fairness requires holding the shareholders liable.