corporations Flashcards
Although shareholders of a corporation are generally not liable for the debts of a corporation, shareholders in a Virginia corporation, including a professional corporation, are
free to enter into agreements that alter the way in which a corporation is managed, including the relationship among shareholders and the corporation, even though the agreement is inconsistent with statutory provisions.
a shareholders agreement regarding liability for unpaid taxes is enforceable provided it is set forth or referenced either
(i) in the articles or the corporate bylaws and approved by all persons who are shareholders at the time of the agreement, or
(ii) in a written agreement that is signed by all persons who are shareholders at the time of the agreement and that is made known to the corporation.
The employees of a professional corporation are not shielded from
liability arising out of their own malpractice.
The employees of a professional corporation are shielded from
vicarious liability for malpractice committed by other professionals in the professional corporation.
a plaintiff in a malpratice action against a professional corporation could content that the court should
pierce the corporate veil and hold a shareholder liable for the corporations obligations
peircing the corporate veil is usually warranted only in extraordinary circumstances and mere failure to
observe corporate formalities( shareholder meetings/keeping minutes) is not sufficient
After a corporation has issued stock, a voluntary dissolution can occur when
the board of directors adopts a proposal for dissolution and two-thirds of the outstanding shares approves, or when all shareholders consent to the dissolution, even without approval of the board.
A shareholder can seek the involuntary dissolution of a corporation if
the acts of the board of directors or those in control of the corporation are illegal, oppressive, or fraudulent.
Upon termination, the property of the corporation passes automatically to
its directors as trustees in liquidation.
As trustees in liquidation, the directors discharge the liabilities and obligations, and then
distribute the remainder of the corporation’s assets among its shareholders according to their respective rights and interests.
While a member of a nonstock corporation is generally not entitled to a distribution, a member generally enjoys
the same rights as a shareholder of a stock corporation, such as the right to inspect the corporation’s books and records, and is subject to the same restrictions.
A shareholder in a stock corporation has the right to
1) inspect and copy corporate documents, so long as
2) the shareholder sends a signed written request at least 10 business days in advance.
For some corporate records, including minutes of the board of directors’ meetings and the list of shareholders of record, the shareholder must
1) have been a shareholder for at least six months or must be the record owner
2) or beneficial owner of at least five percent of the outstanding shares.
For inspecting corporate records the shareholder must have
a proper purpose
For inspecting corporate records the shareholders demand must
describe with reasonable particularity the purpose and the records being requested
A proper purpose is one that
relates to the shareholder’s interest in the corporation.
The law governing a nonstock corporation generally
parallels that of a stock corporation.
As is the case with regard to the shareholders of a stock corporation, the members of a nonstock corporation may
remove a director with or without cause.
To remove a director, unless the articles of incorporation provide otherwise,
a majority of the members must vote in favor of the removal of a director.
As is the case with regard to a director of a stock corporation, a nonstock corporation may generally
indemnify a director
indemnification of a director can be provided for in the corporations
articles of incorporation
indemnification of a director can be for
any judgment awarded against the director for acting in his role as a director, as well as provide for advancement and reimbursement of expenses with respect to the liability.
When the authorization for indemnification of a director (usually in the articles of incorporation) simply obligates the corporation to provide indemnification to the fullest extent permitted by law, the authorization is deemed to also require
the corporation to advance or reimburse reasonable expenses of any kind.
director may seek a court order to compel the corporation to
indemnify the director in accord with the indemnification authorization.
The only restriction on the corporation (relating to indemnification authorization) is that it cannot indemnify a director against liability for
(i) willful misconduct or (ii) a knowing violation of criminal law.
Under Virginia law, a shareholder retains her right to vote if she pledges stock for collateral unless
she signs an agreement to the contrary.
Often small corporations, restrict the ability of the shareholders to
transfer their shares
where a shareholder offers shares as collateral, this can constitute
a potential transfer if the shareholder defaults on the obligation
In Virginia, certain shareholders have the right to inspect and copy corporate documents, so long as
the shareholder sends a signed written request at least 10 business days in advance and has a proper purpose for doing so.
The shareholder may only inspect and copy the records at
the corporation’s main office during business hours
for some corporate records (e.g., minutes of the board of directors’ meetings, corporate accounting records, and the list of shareholders of record), the shareholder must have been
a shareholder for at least six months or must be the record owner or beneficial owner of at least five percent of the outstanding shares.
If there is any problem obtaining the records, shareholder has the right to
go to court and obtain an injunction.
Shareholders must be given written notice of an annual or special meeting
no less than 10 days and no more than 60 days before the meeting date.
A shareholder may waive notice of a meeting either
in writing or by attending the meeting.
a shareholder may attend a meeting to
object to the lack of notice or defective notice if the objection is made at the beginning of the meeting
where a shareholder attends a meeting to object to lack of notice/defective notice, the attendance is
not a waiver of the improper notice
shareholders of a corporation are generally not liable for
the debts of a corporation
shareholders in a Virginia corporation, including a professional corporation, are free to enter into agreements that
alter the way in which a corporation is managed, including the relationship among shareholders and the corporation, even though the agreement is inconsistent with statutory provisions.
The shareholder agreement must be set forth or referenced either
(i) in the articles or the corporate bylaws and approved by all persons who are shareholders at the time of the agreement, or
(ii) in a written agreement that is signed by all persons who are shareholders at the time of the agreement and that is made known to the corporation.
A director owes a duty of
care to the corporation
A director is not liable for a breach of this duty if
the director’s conduct was undertaken in good faith, which is a subjective standard
Virginia’s statutory business judgment rule protects a director’s decision if
the decision was made with good faith business judgment of the best interests of the corporation.
To overcome business judgment protection, the party challenging the director’s conduct bears the burden of persuasion, which generally requires a showing that
the director engaged in self-dealing or fraud or acted in bad faith.
delaying a corporate action for a purely personal reason is
not protected by the business judgment rule, and will be deemed a breach of the directors duty of care to the corporation
While the board of directors is responsible for managing the corporation’s business, the board of directors may generally act through
one or more committees, each of which must consist of at least two directors.
A director is entitled to rely on
the performance of, as well as information, opinions, reports, and statements supplied by a committee of the board of which the director is not a member if the director believes, in good faith, the committee merits confidence.
A director owes a duty of
loyalty to the corporation
In Virginia, subject to the business judgment rule, a director may not
directly or indirectly take a personal advantage from a transaction with the corporation unless the transaction is, “open, fair, and honest,” and competent counsel represents the corporation.
a director owes a duty of care to the corporation, but this duty is evaluated on a
a subjective standard and is subjected to the business judgment rule.
A director can breach the duty of loyalty by
usurping a corporate opportunity unless the director first makes the corporation aware of it.
A corporate opportunity is
a proposed activity that is reasonably incident to the corporation’s present or prospective business and in which the corporation has a capacity to engage.
piercing the corporate veil is appropriate where
shareholders treat the corporation as their alter ego by ignoring corporate formalities, such as using corporate funds for personal debts; or when the corporation is undercapitalized; and in cases to prevent fraud.
Failure to provide adequate capitalization at the time the corporation is formed can be a basis for
piercing the corporate veil
When the corporate veil is pierced, only the shareholders who were
active in managing the corporation are held liable.
contract claimants are less likely to pierce the corporate veil than
tort victims
For both unfair benefit and usurping, the director’s actions can be approved, limiting or negating liability if
independent ratification occurs
independent ratification requires
that a majority vote by shares held by independent shareholders votes to absolve the director of liability.
In Virginia, in order for a shareholder to bring a derivative suit
the corporation itself would have to have been able to bring the suit against the director itself.
claimant bringing the suit must also have standing, meaning
they must own at least one share of stock when the claim arose and during the entire litigation
shareholder who brings the suit must
adequately and fairly represent the corporation’s own interest
Prior to bringing a shareholder derivative suit, a shareholder must
first make written demand on the directors that they bring the suit, or 90 days has to have passed since making the demand on the directors; or the board expresses that irreparable harm will result if the shareholder waits the 90 days
claimant shareholder must still allege that the directors
failed to adequately review the demand, and then a committee of two or more independent directors can investigate and move for dismissal if the directors think the suit is not in the corporation’s best interest.
the termination of the corporations existence does not
terminate its corporate liabilities, nor does it create liability for the shareholders or directors for authorized business transactions of the corporation.
Where there is a vacancy on the board of directors of a corporation
the board of directors may fill the vacancy
For the board of directors to take an action at a meeting, there must be
quorum of the directors.
if there is a qourum at a board of directors meeting, to take an action
a majority of the directors at the meeting must approve of the act
the board of directors can fill a vacancy on the board regardless of
how the vacancy was created.
generally the role of selecting directors falls on
the shareholders
where there is a vacancy on the board of directors
the remaining directors as well as the shareholders may fill the vacancy.
The quorum requirement is applied to determine whether there is
a sufficient number of directors present for the board to act
. Once the quorum requirement is satisfied,
only a majority of the directors present is required to approve of the action.
In Virginia, in any proceeding brought by or in the right of a corporation or brought by or on behalf of shareholders of the corporation, there is a statutory cap on director liability that limits a director’s liability for money damages to
the greater of $100,000, or the cash compensation received by the director during the 12-month period immediately preceding the conduct for which liability was imposed
the corporation, in its articles of incorporations or bylaws, may reduce or eliminate director liability, but cannot
increase it
neither cap is applicable with respect to
willful misconduct or a knowing violation of criminal law.
A corporation’s name must contain the word
“corporation,” “company,” “incorporated,” “limited,” or an abbreviation thereof.
an abbreviation “LLC”
is reserved for a limited liability company
A person may become a member of a manager-managed LLC if
a majority of the managers of the LLC consent.
A person may become a member of an LLC without
making a contribution, monetary or otherwise, to the LLC
in a manager-managed LLC, it is the managers, and not the members of the LLC, who determine
whether a person may become a member of the LLC.
The board of directors of a dissolved corporation must apply corporate assets to
discharge or reasonably provide for the payment of creditor claims before making any distributions to shareholders.
Upon dissolution of a corporation, the board of directors is responsible for
winding up the corporation’s affairs
winding up the corporation’s affairs includes:
paying known obligations that the corporation had incurred.
A director who votes for or assents to an unlawful distribution in violation of the director’s duties of care or loyalty is
1) personally liable to the corporation and its creditors
2) for the amount of the distribution in excess of the lawful amount.
regarding unlawful distributions, a director will not be personally liable for breach of duty if
the director complies with the proper procedures for disposing of creditor claims.
A director may incur liability for illegal or improper action taken by the board at a meeting when the director is present, even though
the director does not vote in favor of the action.
In order to avoid liability for illegal or improper action taken by the board at a meeting, when director is present, the director must
the director must object to the holding of the meeting or vote against the action or explicitly abstain from voting.
Any creditor who did not receive notice of dissolution may
bring an action against a shareholder of the dissolved corporation.
The creditor is entitled to the shareholder’s
pro rata share or the amount received in liquidation, whichever is less.
shareholder’s total liability cannot exceed
the amount of assets distributed to the shareholder.
improper distribution liability: director vs. shareholder:
1) each director personally liable for full amount of improper distribution
2) shareholders-personally liable for their pro rata share of unlawful distribution
A director is entitled to contribution from
any other director who is also liable for the unlawful distribution.
a director is entitled to recoupment from
the shareholders’ pro rata portion of the unlawful distribution when the shareholder accepts an unlawful distribution.
a corporation is owned by
its shareholders (those holding equity securities
generally, shareholders are not subject to unlimited liability for corporate acts, but instead are only at risk to the extent of
their investment
limited liability of shareholders is subject to challenge primarily with respect to shareholders of closely held corporations under
the “piercing the corporate veil” doctrine.
under the “piercing the corporate veil” doctrine
a corporation’s existence will be ignored, and the shareholders (as well as officers and directors) will be held personally liable
As an agent of the corporation, a corporate officer or director does not incur liability to third parties merely for
the performance of duties to the corporation
An officer or director can be liable to a third party when
1) the officer has acted in his personal capacity (e.g., guaranteed a corporate loan)
2) or has engaged in purposeful tortious behavior (e.g., fraud).
the piercing-the-corporate-veil doctrine, is usually warranted
only under extraordinary circumstances
Under the piercing-the-corporate-veil doctrine
a corporation’s existence will be ignored, and the shareholders of the corporation, in addition to the corporation itself, will be held personally liable.
the piercing-the-corporate-veil doctrine is typically applied when
the shareholders have controlled or used the corporation to avoid a personal obligation, to commit fraud, crime, or injustice, or to gain an unfair advantage.
Piercing the corporate veil is justified when
the unity of interest and ownership is such that it is hard to differentiate the separate identities of the corporation and the individual, and to adhere to that separateness would work an injustice
because Victor commingled the corporation’s funds with his own funds as well as those for other business ventures he conducted with Mark, and the specific reason for incorporating the warehouse project was to avoid liability stemming from the leaking roof, which is the basis of the condominium owner’s lawsuit, the circuit court should
pierce the corporate veil and hold Victor and Mark, in addition to Prosperity, Inc. as seller of the condominium units, liable for damages caused by the leaking roof.
when a quorum of directors is present, how many must vote for a resolution in order for it to pass?
a majority of those present must vote in favor for it to pass
by statute what is required to establish a quorum?
a majority
a promoter is generally personally liable for
acts on behalf of an unincorporated business even after the business is incorporated
when would a promotor not be liable for acts on behalf of a unincorporated business after incorporation?
when there is a subsequent novation releasing the promoter from liability
a promoter is also not personally liable for pre-incorporation acts where
a third party contracting with promoter knows that the business has not been incorporated
While a corporation is not liable for pre-incorporation transaction entered into by a promoter, it will be liable if
the corporation accepts the benefits of the contract
Although only the board may declare a distribution, once the board has authorized a distribution and set sufficient parameters, the board may
delegate to a committee the authority to fix the amount and terms of the distribution.
a committee cannot
adopt, amend, or repeal the bylaws.
Corporate bylaws can be amended or repealed by
the board of directors or the shareholders.
A committee cannot
recommend actions that require shareholder approval.
a committee may not
fill vacancies on the board
A restriction on the transfer of stock can be enforceable against a transferee who takes the stock with
knowledge of the restriction
Although placement of a notation regarding a transfer restriction on a stock certificate ensures that the transferee is deemed to have knowledge of the restriction, the failure to do so does not render the restriction
unenforceable against a transferee who has knowledge of the restriction by other means.
Under the default rules, provided there is a quorum, the election of a director by the shareholders requires
a plurality of the votes cast
The default quorum requirement for shareholder voting is
a majority of the votes eligible to vote
default statutory rules do not require that all eligible votes be taken into account in determining the winner of a director election, provided
the quorum requirement is met; nor that the level needed to win be 2/3 of the votes
When shareholders are granted cumulative voting rights in the articles of incorporation, each shareholder is entitled to
multiply the number of votes she is entitled to cast by the number directors for whom she is entitled to vote and cast the resulting product for a single candidate or distribute the product among two or more candidates.
An LLC’s operating agreement determines the allocation of
profits and losses among the members of the LLC.
an LLC operating agreement may provide that each member
shares equally in the profits of the LLC
in the absence of an agreement as to the sharing of profits and losses, profits and losses are allocated according to
each member’s contributions to the LLC
an LLC operating agreement may allocate profits on the same basis as
each member’s voting rights
The laws governing a nonstock corporation organized under Virginia law parallel those of
a stock corporation
Virginia law allows the number of directors of a corporation to be specified in
the articles of incorporation or bylaws
A quorum must be present at a board of directors’ meeting in order for
the acts conducted at the meeting to be valid.
The articles and bylaws may determine the number of directors required for a quorum; however, under Virginia law it cannot be
less than one-third of the board.
If a quorum is present when a vote is taken, then the assent of
a majority of the directors present at that time is typically necessary for the board to approve an action.
Nonstock corporations have _______ rather than shareholders
Nonstock corporations have members rather than shareholders
a member is not entitled to
a distribution from the entity
except for not being entitled to distributions, a member of a nonstock corporation enjoys
the same rights as a shareholder of a stock corporation and is subject to the same restrictions.
a member may bring a
direct or derivative action against the nonstock corporation.
A director owes a duty of loyalty to the corporation, which requires that the director
act in a manner that he reasonably believes is in the best interest of the corporation.
A director who engages in a conflict-of-interest transaction
violates the duty of loyalty and makes the transaction voidable
A director who engages in a conflict-of-interest transaction violates the duty of loyalty and makes the transaction voidable, unless
(1) the material facts were known and disclosed to the board, and the transaction approved by disinterested directors or
(2) the transaction was fair to the corporation.
Virginia’s test of fairness to the corporation is whether
the transaction would have been approved by a disinterested board of directors at the time the transaction was entered into.
A disinterested director is one who
at the time action is taken,
does not have financial interest in the matter
or a familial, financial, professional, employment or other relationship with a person who has a financial interest in the matter that would reasonably be expected to impair the objectivity of the director’s judgment.
In Virginia, the sale or other transfer of a nonstock corporation’s assets in the usual and regular course of business
does not require approval by the members, unless otherwise provided in the articles of incorporation.
Under the “piercing the corporate veil” doctrine, which is usually warranted only under extraordinary circumstances, a corporation’s existence will be
ignored, and the shareholders (as well as officers and directors) of the corporation will be held personally liable.
piercing the corporate veil doctrine is typically applied when
the shareholders have controlled or used the corporation to evade a personal obligation, to perpetrate fraud or a crime, to commit an injustice, or to gain an unfair advantage
Piercing the corporate veil is justified when
the unity of interest and ownership is such that the separate personalities of the corporation and the individuals no longer exist and to adhere to that separateness would work an injustice
For shareholders to be liable in a piercing action,
the corporation itself must be found liable
A corporation may not make a distribution if the corporation is
is insolvent, or the distribution would leave the corporation insolvent
A corporation is considered insolvent if the payment of the distribution
1) prohibits the corporation from paying its debts as they become due in the usual course of business, or
2) if the liabilities of the corporation exceed its assets
A director who votes for or assents to an unlawful distribution in violation of the director’s duties of care or loyalty is
personally liable to the corporation and its creditors for the amount of the distribution in excess of the lawful amount.
A director liable for an unlawful distribution is entitled to contribution from
any other director who is also liable for unlawful distribution
Under Virginia law, a gift, conveyance, assignment or transfer of real or personal property that is intended to defraud creditors
may be set aside
a conveyance, assignment, or transfer of real or personal property not made for valuable consideration by an insolvent transferor (or one who is rendered insolvent by the transfer)
may be set aside by existing creditors.
Intent to defraud need not be
proven
A director may be removed by the shareholders
only at a meeting called for the purpose of removing the director.
when a meeting is called by shareholders to remove a director, the meeting notice must
state that the purpose, or one of the purposes of the meeting, is removal of the director.
The shareholders may remove a director with or without cause by
a vote of the holders of a majority of the voting power entitled to vote for the director, unless the corporation’s articles of incorporation provide otherwise.
The power to authorize a distribution rests with
the board of directors, unless restricted by the articles of incorporation.
A shareholder, may pursue a court order for the involuntary dissolution of a corporation if:
(i) the shareholders are deadlocked;
(ii) the directors are deadlocked in the management of the corporation’s affairs, the shareholders are unable to break the deadlock, and irreparable injury to the corporation is threatened or being suffered;
(iii) the acts of the directors are oppressive, illegal, or fraudulent; or
(iv) the corporate assets are being wasted.
Upon termination, the property of the corporation passes to
the directors as trustees.
After discharge of corporate liabilities, the directors must distribute the remaining assets among
the shareholders according to their respective rights and interests.
In lieu of dissolution, the corporation or one or more shareholders may elect to
purchase all shares owned by the petitioning shareholder at the fair value of the shares.
when electing to purchase dissolution petitioning shareholders shares, If the parties are unable to agree on a fair price for the shares or other purchase terms after 60 days of filing the election, the court, upon the petition of any party, may
determine the fair market value of the shares and set the terms on which the shares are to be purchased.
A shareholder may bring a direct or a derivative action against the corporation in which
the shareholder owns stock
Direct actions by a shareholder include actions to
enforce shareholder rights, such as an action to enforce the shareholder’s right to examine the books and records of the corporation
In a derivative action, a shareholder is suing on behalf of
the corporation for a harm suffered by the corporation
in a derivative suit, While the shareholder also may have suffered harm, recovery generally goes to
the corporation
a shareholder may bring a derivative action to force a director to
disgorge a secret profit earned by the director on a transaction with the corporation.
A close corporation is a special type of corporation with
only a few shareholders and a more relaxed style of governance in which shareholders often serve as both directors and officers of the corporation.
Despite its more relaxed nature, a close corporation is still
considered a corporation and maintains the liability protections for its investors.
investors in a corporation are typically liable only to the extent of their investment and are not subject to
unlimited liability
The duty of loyalty requires a director to act in a manner that the director reasonably believes is
in the best interest of the corporation
Typically, a director breaches the duty of loyalty by
placing his own interests before the interests of the corporation
A director who engages in a business venture that competes with the corporation has breached
his duty of loyalty to the corporation
Virginia’s business judgment rule protects a director’s decision if
the decision was made with “good faith business judgment of the best interests of the corporation.”
Virginia’s business judgment rule protection from liability only applies to conduct undertaken
(1) as a director and (2) on behalf of the corporation
A director who satisfies the business judgment rule standard is presumed to be
not liable for his conduct
To overcome this presumption against liability under the business judgment rule, the party alleging that the director failed to adhere to this standard has the burden to show that
the director engaged in self-dealing or fraud or acted in bad faith.
In any proceeding brought by a corporation or on behalf of the corporation’s shareholders, Virginia has a statutory cap on money damages that limits a director’s liability to
the greater of $100,000 or the cash compensation received by the director during the 12-month period immediately preceding the conduct for which liability was imposed.
the corporation’s articles of incorporation may include a provision shielding its officers and directors from liability, unless
the officer or director engages in willful misconduct or a knowing violation of the criminal law or any federal or state securities law.
