Corporations

Question 1

How can shareholders remove a director?

Answer 1

They can hold a specially called meeting for that purpose (if the articles permit), and they can do it without cause. A majority vote is sufficient.

If the corporation is nonpublic and has 35 or fewer shareholders, VA allows a special meeting to be called by a group of shareholders owning at least 20% of the shares entitled to vote at the meeting (unless the articles provide otherwise).

Question 2

What is required for a valid Board action?

Answer 2

A quorum

Question 3

What is a quorum?

Answer 3

A majority of directors unless a higher or lower number is set by the articles or bylaws, but it cannot be less than 1/3 of the board. It’s based on the number of board seats, so vacancies do not matter.

Question 4

How many of the quorum members must approve of an action for it to be valid?

Answer 4

A majority but the articles and bylaws can set a higher proportion

Question 5

Can the board act without a meeting?

Answer 5

Yes, by unanimous written consent

Question 6

Generally, are shareholders, directors or officers liable for the debts of a corporation or for contracts signed as agents of the corporation?

Answer 6

Generally, shareholders, directors and officers are not liable for the debts of the corporation or for contracts that they signed as agents of the corporation.

Question 7

When will a shareholder, director, or officer be liable on a contract or for a debt of the corporation?

Answer 7

Anyone that purports to act on behalf of corporation knowing that the entity has not been incorporated is personally liable unless the other party also knew that there was no incorporation.

Question 8

What 2 duties do Directors owe to their corporations? AND?

Answer 8

1. Duty of care
2. Duty of loyalty; AND
3. Act in good faith in discharging these duties

Question 9

What is the business judgment rule? Explain it. How presumption overcome?

Answer 9

So long as a director or officers acts (1) In good faith, (2) with the care that a reasonably prudent person would use, and (3) with the reasonable belief that the director is acting in the best interests of the corporation, A court will normally not second guess a reasonable business decision that proved to be a bad decision in hindsight.

Overcome by P proving self-dealing, unreasonable acts, or bad faith.

Question 10

What does the duty of care require in a general sense? I.e. standard of care

Answer 10

A director must not behave in a grossly negligent or reckless manner in connection with business decisions.

Question 11

Information gathering aspect of duty of care? Reliance on others?

Answer 11

Requires that the director gather information and take care when carrying out the business of the firm. A director is often entitled to rely on the performance and opinions of officers, outside experts, and board committees, if that director believes them to be reliable and competent. Relying on the assertions of a seller is definitely not sufficient. Must do due diligence.

Question 12

Will a director be liable if they are absent from the meeting in which a bad decision is made or if they dissent?

Answer 12

No a Director will not be liable for a fiduciary duty breach if they are absent from the meeting or if they dissent from the decision

Question 13

What does the duty of loyalty require in a general sense?

Answer 13

Requires that the director act in an unselfish manner by not placing his interests ahead of the corporation.

Question 14

Rule regarding self dealing?

Answer 14

A Director violates his duty of loyalty by engaging in a conflict-of-interest transaction with his corporation. In other words, the director must not profit at his firm’s expense

Question 15

Safe-harbor exceptions for self-dealing?

Answer 15

1. A committee of the board approves the transaction with knowledge of all material facts, including the director’s personal interests;
2. The Shareholders approve the transaction with knowledge of all material facts, including the director’s personal interests; OR
3. The transaction is fair to the corporation

Question 16

What is the VA fairness test for a COI transaction?

Answer 16

1. Would the transaction have been approved by a disinterested BoD?
2. Would the same result have been accomplished between two parties under equal bargaining power who were not under duress?

Question 17

Is a loan to a director from the corporation per se improper?

Answer 17

No

Question 18

Does the vote of an interested director in a CoI transaction automatically invalidate it?

Answer 18

no

Question 19

May a director engage in a business venture that competes with the corporation?

Answer 19

No, but the Articles of Incorporation can have a provision that limits or eliminates this duty.

Question 20

Rule regarding misappropriating or usurping corporate opportunity?

Answer 20

Requires a corporate opportunity to be offered to the corporation and rejected before a director can seize it.
1. Corporate opportunity, factors to consider: (1) similarity of the opportunity to the business of the corporation and (2) how the director learned of the opportunity.
2. Doesn’t matter that the director sought to use the opportunity for a purpose separate from the corporations general purposes.

Question 21

Waste rule?

Answer 21

A director may not waste corporate assets by using resources in a way that is not in the best interest of the corporation

Question 22

May corporations cap D & O liability in the Articles of Incorporation

Answer 22

Yes, but it will not be applicable for willful misconduct

Question 23

In general, to what extent are shareholders liable for activities undertaken by the corporation?

Answer 23

They enjoy limited liability so they only risk their capital contribution in the corporation.

Question 24

When can the corporate veil be pierced?

Answer 24

Where shareholders have controlled or used the corporation to evade a personal obligation or perpetrate a fraud or crime, to commit an injustice or to gain an unfair advantage, the court may pierce the corporate veil and hold shareholders liable for the debts of the corporation.

Question 25

While in VA, piercing is extraordinary, when is it justified?

Answer 25

When the unity of interest is such that the separate personalities of the corporation and the individual no longer exists and to adhere to that separateness would work an injustice

Question 26

What two F’s should you look for when faced with a piercing claim?

Answer 26

1. Look for a lack of respect for corporate formalities, e.g., (1) lack of required meetings, (2) lack of meeting minutes, (3) inappropriate decision making, and (4) comingling of personal and corporate funds
2. Look for the corporation being used to promote fraud or injustice, e.g., inadequate capitalization, lies, and shareholders abusing limited liability protection.

Question 27

Who must be sued when trying to pierce the corporate veil?

Answer 27

The corporation and the shareholders that you seek to hold personally liable.

Question 28

VA Civ Pro: if you sue the corporation and forget to add the shareholders you want to hold personally liable as defendants, what should you do procedurally?

Answer 28

Plaintiffs must seek leave of court to file an amended complaint. Virginia allows new parties to be added to a case by order of the court at any time as the ends of justice may require.

Question 29

What are shareholder agreements?

Answer 29

Under the Virginia Stock Corporation Act, shareholders have broad latitude to enter agreements concerning, among other things, Corporate governance, distributions, and the relationship among the shareholders.

Question 30

To be enforceable, shareholder agreements must:

Answer 30

Be set forth or referenced in either:
1. The articles or bylaws and approved by all persons who are shareholders at the time of the agreement; OR
2. In a written agreement that is singed by all persons who are shareholders at the time of the agreement AND that is made known to the corporation.

Question 31

Is a shareholder agreement that allocates liability for unpaid taxes enforceable?

Answer 31

Yes

Question 32

Who is the duty of loyalty owed to: the corporation or shareholders? Exception?

Answer 32

The corporation, not shareholders. No exception, other states make exception for close corporations, therefore bring a derivative action on behalf of the corporation if a shareholder in VA.

Question 33

When may a shareholder initiate a direct shareholder action?

Answer 33

Two basic circumstances
1. An action to recover for harm linked to their status/rights. Ask whether the shareholder, rather than the corporation, has suffered the harm (e.g., interference with shareholder voting rights)
2. An action that does not arise based on the P’s status as a shareholder (e.g., Shareholder struck by an employee)

Question 34

How does a shareholder benefit on a derivative suit?

Answer 34

They benefit only to the extent that the recovery increases the value of the stock.

Question 35

When does a shareholder have standing to bring a derivative suit?

Answer 35

1. They are a shareholder at the time of the act or omission;
2. Become a shareholder through transfer by operation of law from someone who was a shareholder at the time of the act or omission; OR
3. Become a shareholder before public disclosure and without public knowledge of the act or omission; AND
4. Be able to represent the interests of the corporation (a creditor cannot bring a derivative action)

Question 36

Demand requirements and rules before bringing a derivative action?

Answer 36

• Virginia requires the plaintiff to make a written demand upon the Board to take action even if the demand is futile.
• If there is no response for 90 days, then may file action.
• Exception to 90 day rule—waiting would lead to irreparable harm.
• If demand denied, shareholder can still proceed by alleging that the corporation’s review and evaluation procedures were not complied with.

Question 37

How can a corporation get a court to dismiss a derivative claim by actions of disinterested directors?

Answer 37

Upon a motion by the corporation, a court may dismiss if disinterested directors (1) conduct an adequately informed review and evaluation of the allegations made in the demand or complaint; (2) determine in good faith that continuing the litigation is not in the best interests of the corporation; AND (3) submit a short statement of the reason for its determination
The determination should either be made by (1) a majority vote of disinterested directors (if there is a quorum); OR (2) a majority vote of a special committee consisting of two or more disinterested directors appointed by a majority of disinterested directors at a board meeting.

Question 38

What is a merger?

Answer 38

A statutory merger is the combination of two or more corporations where only one firm survives.

Question 39

What is the general procedure for conducting a statutory merger (4 steps)?

Answer 39

1. The BoD for each Corp. must adopt a resolution authorizing the merger.
2. Notice must be given to the shareholders between 25-60 days before the meeting and the notice must include a summary of the merger plan.
3. The shareholders of each Corp. must approve the merger, which requires a 2/3 vote unless the articles specify otherwise.
4. The required documents must be filed with the Commission.

Question 40

If a small corporation is being merged into a larger one, and the larger corporation survives, then a shareholder vote is not needed by the surviving company shareholders (unless the articles say otherwise) if:

Answer 40

1. The number and rights of their shares are unchanged
2. The number of shares entitled to vote unconditionally in the election of directors is not increased by more than 20%; and
3. The articles are unchanged

Question 41

Effects of merger?

Answer 41

1. At completion, all rights, assets, and liabilities vest in the surviving company
2. Any change in ownership is not treated as an assignment of rights, assets, and liabilities
3. Merger is not treated as a dissolution of the non-surviving firm.

Question 42

When is a shareholder vote required?

Answer 42

For fundamental corporate changes like a merger, amendment to articles, and the sale of substantially all assets.

Question 43

What is the difference between an asset sale in the regular course of business and outside the regular course of business? Shareholder vote required?

Answer 43

1. Regular would be a relatively small sale of assets, where as outside the regular course would be substantially all of the assets
2. Selling substantially all of the assets requires shareholder approval.

Question 44

What process does the selling of substantially all of corporate assets mirror?

Answer 44

That of a merger, except only for the corporation selling substantially all of its assets (even if they assume the selling corps. Liabilities)

Question 45

Exception to process requirements for selling substantially all assets?

Answer 45

100% shareholder approval

Question 46

What is an at-will employment contract?

Answer 46

A K where the employer can terminate the employee, after reasonable notice, at any time and for any reason, and the employee can quit at any time and for any reason.

Question 47

When will an employment K be interpreted as at-will?

Answer 47

1. There is no duration on the K, or
2. If there is one then where the parties have not indicated grounds for termination.

Question 48

When will a firing under an at-will K be improper such that the employee could sue?

Answer 48

When it would be contrary to public policy.

Question 49

At-will K and Public Policy

Specific fact scenario: §13.1-662(A) of the Virginia Code, states in part that “each outstanding share, regardless of class, is entitled to one vote on each matter voted on at a shareholders’ meeting.” You are an at-will employee threatened w/ termination if you do not vote in favor of a merger, what do you argue in favor of an improper discharge claim?

Answer 49

The firing is against public policy. The public policy undergirding the statute is that shareholders be free from duress or intimidation from the corporate management in deciding their vote. To achieve that goal, an employee-shareholder should be free from reprisal in casting their vote

Question 50

What must a plaintiff prove for the tort claim for conspiracy to induce breach of contract?

Answer 50

1. Conspiracy
2. To procure the breach of K; and
3. Pursuant to such conspiracy, the K was breached.

Question 51

How does firm that has not issued stock voluntarily dissolve?

Answer 51

A majority of the incorporators or initial directors sign a resolution of dissolution

Question 52

How does a corporation that has issued stock voluntarily dissolve?

Answer 52

1. Either have the board adopt a proposal to dissolve and obtain shareholder approval; OR
2. Obtain a 100% vote to dissolve by the outstanding shares entitled to vote

Question 53

Dissolution

What does shareholder approval mean in this context?

Answer 53

It requires that more than 2/3 of those shares can vote within a voting group approve. The vote must be taken for each separate voting group.

Question 54

Dissolution

Rules regarding altering the proportion needed for shareholder approval?

Answer 54

The necessary vote may be increased (bylaws or articles) or decreased (articles) but not below a majority vote.

Question 55

After dissolution, what happens?

Answer 55

It will exist for the limited purpose of winding up and liquidating the business. Winding up:
- Collect the corporations assets
- Dispose of properties that will not be distributed to shareholders
- Discharge liabilities
- Distribute any remaining assets to shareholders according to their interests.
- Conduct any other act necessary to wind up and liquidate the corporation’s business

Question 56

When can the State Corporation Commission act to involuntarily dissolve a corporation?

Answer 56

A legal action to involuntarily dissolve a corporation may be brought by the State Corporation Commission if the corporation has:
1. Abused its authority;
2. Failed to keep a resident agent;
3. Failed to file a required document; or
4. Violated a federal employment law

Question 57

When may shareholders pursue involuntary dissolution of the corporation?

Answer 57

1. The shareholders are deadlocked;
2. The directors are deadlocked and the shareholders are unable to break the deadlock, and irreparable injury to the corporation is threatened;
3. The acts of the directors are oppressive, illegal, or fraudulent; OR
4. The corporate assets are being wasted

Question 58

How would you describe a controlling shareholder removing minority shareholders, suspending payments of dividends and increasing his salary as a director threefold?

Answer 58

Oppressive, a court would likely dissolve the corporation upon legal action by the removed minority shareholders.

Question 59

In a proceeding for judicial dissolution, may the corporation or a shareholder elect to purchase the shares of the shareholders seeking dissolution?

Answer 59

Yes, he can elect to purchase at fair value.

Question 60

When may a creditor seek involuntary dissolution?

Answer 60

When the claim has been reduced to an unsatisfied judgment and the corporation is bankrupt

Question 61

1. Before the BoD can make distributions to shareholders, they must:
2. Amount of personal liability?

Answer 61

1. Pay creditors
2. A director who votes for or assents (fails to abstain or dissent) to an improper distribution is liable to the corporation and its creditors for the amount of the improper distribution.

Question 62

How can a director avoid being made personally liable to creditors for a breach of duty but also dissolve creditor claims?

Answer 62

Go through the proper procedure, or the director is present at the meeting and dissents or abstains

Question 63

Proper procedure for dissolving of known creditors?

Answer 63

Provide notice of dissolution:
1. State whether the claim is admitted or non-admitted;
2. Providing a mailing address where the claim may be sent;
3. Setting a deadline to confirm the claim; and
4. Stating that any claim will be barred if (1) confirmation is not received by the deadline, or (2) if the claim is not admitted, if the claimant does not commence a proceeding by that deadline.

Question 64

Rule for creditors that are unknown or did not receive notice?

Answer 64

They may bring an action against a shareholder of the dissolved corporation. They are entitled to the lower of the shareholder’s pro rata share or the amount received in liquidation.

Question 65

How long does a creditor have to bring a claim?

Answer 65

Until the relevant SoL has run or 3 years after the date of notice of dissolution was delivered.

Question 66

Rights of directors against other directors and shareholders for an improper distribution?

Answer 66

If the director satisfies a judgment in which the directors are joint and severally liable, she will have a claim of contribution.
With regard to shareholders, she will have a claim of recoupment and a will be about to recoup the amount improperly distributed to the shareholders.

Question 67

Explain the creation of actual authority

Answer 67

The principal expressly gives authority to the agent. The agent can execute that authority so long as they reasonably believe that the actions pursuant are within the scope of that authority.

Question 68

Explain Apparent authority. Notice that they do not?

Answer 68

Requires that the third party reasonably believe, based on the manifestations of the principal, that the agent has the authority to enter into the transaction.
Upon some indication giving the third party enough that they know or should know that the agent does not have authority, the burden is on the third party to make further inquiry into whether the agent actually has authority.
If no notice, the principal is on the hook for the K even if they repudiate and even if they expressly told the agent they do not have authority to enter the K (contribution from A to P though).

Question 69

Can an agent that lacks authority be sued?

Answer 69

Yes the third party may sue the agent if they lacked actual and apparent authority to enter the transaction and the principal repudiates the transaction. The agent impliedly warrant that they have authority so they will be liable for damages.

Question 70

Comparing Corporations, General Partnerships, LPs, and LLCs

Who governs each?

Answer 70

1. Corporations: directors and officers
2. General partnerships: the general partners
3. Limited partnerships: the general partners
4. LLC: the members unless the articles or an operating agreement provides in writing for management by a manager or managers.

Question 71

Comparing Corporations, General Partnerships, LPs, and LLCs

Liability for entity debts?

Answer 71

1. Corporations: Yes, the owners (shareholders) and the governors are protected from liability on corporate debts.
2. General partnerships: No shield. General partners are liable for partnership debts
3. Limited partnerships: general partners are liable for partnership debts; Limited partners are liable but only up to their capital contributions, so long as the limited partners do not become involved In the day-to-day operation of the partnership’s business.
4. LLC: the members are not liable for LLC debts

Question 72

Comparing Corporations, General Partnerships, LPs, and LLCs

Net income taxed under federal income tax?

Answer 72

1. Corporations: If a C Corp., the corp. pays tax on income when earned and the shareholders pay tax on dividends paid. The income is taxed at two levels. If the corp. is an S. Corp, the corp. pays no tax but the owners, pay tax on income earned. Income is passed through the shareholders.
2. General partnerships: partnership not taxed; net income, for tax purposes is passed onto and taxed to the partners
3. Limited partnerships: partnership not taxed; net income, for tax purposes is passed onto and taxed to the partners
4. LLC: partnership not taxed; net income, for tax purposes is passed onto and taxed to the members

Question 73

Can the board of directors sue officers on behalf of the corporation for a breach of duties?

Answer 73

yes