Corporations Flashcards
Corporation
a legal entity distinct from its owners and may be
created only by filing certain documents with the state.
Ultra Vires Activity
An activity beyond the scope of the articles of incorporation (where the articles specify a specific business purpose)
Stock Issuance
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.
Preemptive Rights
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.
Statutory Requirements for Corporate Directors
- Director must be an adult human.
- Board must be composed of one or more directors.
Removal of Directors
Shareholders may remove directors before their terms expire; directors can be removed with or without cause.
Election of Directors
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
Valid Methods of Board Action
- Board members can act at a meeting.
- Board members can act without a meeting with unanimous written consent.
Any other act is VOID.
What does the board fucking do?
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.
Director’s Duty of Care
Directors owes the corporation a duty of care and must manage the corporation to the best of their abilities.
Directors must discharge their duties:
- In good faith, AND
- With the care a person in a similar position
Director Nonfeasance & Misfeasance
Nonfeasance = occurs when a director does jack shit; “the lazy director.”
Misfeasance = board makes a decision that hurts corporation; causation is clear.
The Business Judgment Rule
Rule: a court will not second-guess a business decision made by the board if:
- it was informed,
- it was made in good faith
- made without conflicts of interest, AND
- had a rational basis
Burden is on the plaintiff
Duty of Loyalty
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.
Interested Director Transaction
A BREACH OF LOYALTY
Interested Director Transaction: Corp does business with director or a director’s relative; the transaction is void UNLESS:
- the transaction was fair to the corporation, OR
- the relevant facts were disclosed and disinterested directors approved of the transaction.
Director Starts Competing Venture
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)
Corporate Opportunity Doctrine
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).
Doctrine of Individual Director Responsibility
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.
Corporate Officers
Definitions, Duties
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
Appointment & Removal of Officers
Officers are appointed and removed by the board; the board also sets officer compensation.
Indemnification of Officers & Directors
(When is NO indemnification available?!)
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.
Mandatory Indemnification
Corporation must indemnify the officer or director if the officer/director successfully defended on the merits or otherwise.
Permissive Indemnification
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.
Court Ordered Indemnification
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).
Piercing the Corporate Veil
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.
