CORPORATIONS Flashcards
Criminal Prosecution of a Corporation
A corporation can be prosecuted if:
- The GA code specifically intends for the law violated to subject corporations to prosecution. Or,
- The commission of the crime was authorized or tolerated by the Board of Directors or a managerial officer.
Corporation by Estoppel
A ∆ who has held themselves out as a corporation cannot avoid liability by claiming that they were not a corporation.
Only applies when there was a business relationship between the plaintiff and ∆ (not torts).
Formation of a Corporation
Requires filing the Articles of Incorporation with the Secretary of State, including the (1) name of the corporation, (2) number of shares, (3) name/address of the registered office and (4) agent, and (5) the name of all incorporators.
The existence of a corporation begins at the time of filing unless otherwise specified. Acceptance of the Articles of Incorporation by the S.O.S. is conclusive evidence of proper incorporation.
After filing, an organizational meeting must be held to determine the Board of Directors and other corporate structure/organization.
If the corporation was improperly formed, a creditor may seek to enforce liability via corporation by estoppel.
Bylaws
The internal rules and regulations that govern the corporations actions. Must not be inconsistent with the law or the Articles of Incorporation.
Can be amended by the Board of Directors or shareholders.
Shareholder Rights
Shareholders have the right to:
- Elect and remove directors;
- Amend the bylaws;
- Approve fundamental changes to the organization/corporation.
Shareholders do not have an inherent right to dividends.
Promoter/Pre-Incorporation Liability
A corporation is generally not liable for pre-incorporation contracts or obligations unless or until they expressly or impliedly adopt said contract.
A promoter is personally liable even after incorporation until the corporation expressly or impliedly adopts the contract. Promoters have a fiduciary duty to the corporation.
Distributing Dividends
Shareholders do not have an inherent right to dividends.
The Board of Directors have the discretion to retain corporate earnings to expand the business, etc.
Shareholders can compel distribution by establishing bad faith or fraud by the Board of Directors.
Officers
Are appointed by the Board of Directors to conduct the day to day operations of the corporations.
The powers of an officer are like those of an agent, and can be apparent, actual/express, or implied. Authorized actions by an officer can bind the corporations.
Actions that are not authorized may still be ratified by the corporation and thus applicable.
Duty of Care
The Board of Directors and officers must operate —
- Informed and in good faith;
- In a manner reasonably believed to be in the best interests of the corporation;
- With such care as an ordinarily prudent person in a like position and similar circumstances.
Breach of the duty of care is subject to the business judgment rule.
Business Judgment Rule
(BIG)
There is a rebuttable presumption that directors and officers are acting in the BEST INTERESTS of the corporation, on an INFORMED basis, and in GOOD FAITH.
The challenging party has the burden of proof in showing that the officer/director was uninformed/acting in bad faith/not acting in the best interests of the corporation.
An officer/director may rely on opinions, reports, information, or statements of corporate officers, legal counsel, public accountants, etc. in making a decision. Must be informed to the extent “reasonably appropriate”.
Does not apply to the duty of loyalty.
Duty of Loyalty
The duty to not promote one’s own interest over those of the corporation in an injurious manner.
Courts have applied a safe harbor in that a conflict of interest will not rise to the level of a breach of duty if the conflicting transaction was (1) ultimately fair to the corporation, or (2) was disclosed and approved by a majority of disinterested directors/shareholders.
Usurping a corporate opportunity will be a breach unless it was disclosed and turned down by the corporation, or the corporation could not have pursued it.
The duty of loyalty may be waived in the Articles of Incorporation or bylaws as long as it is not “manifestly unreasonable.”
Usurping Corporate Opportunity
The duty of loyalty prohibits directors from usurping an opportunity that belongs to the corporation.
Georgia courts will apply the “Interest or Expectancy” test to determine if an opportunity belonged to a corporation. A corporate opportunity is one in which the corporation has an “interest or a reasonable expectancy.”
The director will not be liable if the opportunity was disclosed and declined by the corporation prior to pursuing, or if the corporation could not have pursued it (financially or otherwise).
Interest Expectancy Test
A corporate opportunity is one in which the corporation has an “interest or a reasonable expectancy.”
Piercing the Corporate Veil
In general, shareholders are shielded from personal liability for the debts and obligations of a corporation.
However, courts will allow a creditor to “pierce the corporate veil” and hold a shareholder liable if —
- The corporation is acting as a “mere alter ego” of the shareholder;
- The shareholder disregarded the corporate form and/or did not comply with corporate formalities such as shareholder/director meetings, commingling of funds, etc.
- Undercapitalization upon incorporation; or
- Fraud/illegality.
Rule 10b-5
Rule 10b-5 of the Exchange Act is an anti-fraud provision that prohibits false or misleading statements made in connection with the sale or trade of securities, as well as insider trading.
