Corporations

Question 1

what are the three fiduciary duties of directors and officers

Answer 1

1. business judgment rule
2. duty of care
3. duty of loyalty

Question 2

What is the business judgment rule

Answer 2

a rebuttable presumption that when the directors make a business decision they act on an informed basis, in good faith and in the honest belief that the action was in the best interest of the company so the court will uphold their decision absent evidence of fraud, illegality or self dealing.

Protects a director from liability for breaching duty of care if he acted in good faith

Question 3

Explain the Duty of Care

Answer 3

director/officer must act as ordinary reasonable person
-> duty to investigate and ask questions
–> can rely on reports and outside experts

If director has special skills, he is obligated to use them

Question 4

Explain the Duty of Loyalty

Answer 4

Directors and officers must act in the best interest of the corporation.

Violated if the director engages in 1) self dealing or 2) usurping a corporate opportunity

Question 5

How can a director avoid liability from self-dealing transaction or usurping corporate opportunity- SAFE HARBOR RULES

Answer 5

By getting 1) approval of disinterested board members, 2) approval of disinterested shareholders or 3) a court deciding the transaction was fair

Question 6

what is a distribution and who can authorize it

Answer 6

distribution is when a corp removes profit from corp and gives it to shareholder
Authorized by board of directors
distributions can not be authorized if the co is insolvent or issuing the dividend would make the co insolvent.
If a dividend is unlawfully authorized - the directors who voted for it would be personally jointly and severally liable to the corp in amt of excess of lawful amt

Question 7

what is the record date

Answer 7

to determine what shareholders are eligible to vote, directors fix a record date not more than 70 days before mtg. Only shareholders who actually hold shares ON THAT DATE are eligible to vote.

Question 8

who is a promoter and what is their liability

Answer 8

Promotoer enters contracts to secure capital to bring the corporation into existence. Promoters are PERSONALLY LIABLE for contracts entered into pre-incorporation unless there is a novation or adoption by the corporation

Question 9

How is a corporation incorporated

Answer 9

Must file articles of incorporation with the state.

Generally the purpose of corp in articles = any legal actions but if there is a narrow purpose states- look for Ultra Vires (actions by corp outside scope of purpose)

Question 10

What is a De Facto Corporation and how can they be liable for actions

Answer 10

De Facto Corp is when the corporation attempted to incorporate in good faith but fucked up and then ran the business believing it was incorporated.

If they then default on a loan, a creditor can’t go after the personally and claim they are not a corporation b/c they fucked up the paperwork- they are a corp by estoppel and get the liability of a corp

Question 11

What determines initial stock valuation

Answer 11

the board of directors.

They can set Par Value (minimum value for the stock). Then if it sold below par value, board is liable or stockholders can be liable if they knowingly bought stock below par

Question 12

What rights do shareholders have

Answer 12

Right to elect directors at annual meeting
Right to inspect books for a purpose
Right to vote on fundamental corporate changes- merger, sale of corp
power to amend bylaws

Question 13

How can a shareholder sue the corporation

Answer 13

1. direct action: suing corp for their own benefit- i.e when a shareholder is denied voting rights or a dividend. Shareholder gets benefit
2. Derivative action: suing on behalf of the corporation for action of director. Recovery goest to corporation

Question 14

who can file a derivative lawsuit against a corp and how?

Answer 14

Anyone who is a shareholder at the the time the board committed the bad act can file a derivative suit

1.You must make DEMAND on the board- to demand action- then the board has 90 days to act.
2. if board doesn’t act after 90 days, can file derivative lawsuit.

Question 15

What is the futility exception

Answer 15

You don’t need to make a demand on the board if it would be futile- ie. if you are accusing the board of wrongdoing, it would be futile to demand the board bring a suit against itself.

Question 16

When would shareholders be liable for actions of the board- ie. when would the court allow “piercing the corporate veil” to get to the $ of the shareholders?

Answer 16

• alter ego: disregard of corporate formalities, use of corporate assets as shareholder’s own, shareholder and corp are one and the same
• under capitalization of the corp at time of formation
  -fraud- siphoning corporate funds or assets, self dealing

Question 17

what are the two key fiduciary duties of directors (and what must be discussed with one of them)

Answer 17

1. Duty of care + business judgment rule
2. Duty of loyalty

Question 18

what protects the director from liability for a breach of duty of care

Answer 18

The business judgment rule- b/c presumes the director acted in best interest of the corporation if he acted in GF

Question 19

How can you overcome the presumption of the business judgment rule and show that the director violated the duty of care

Answer 19

prove:
- the director did not act in good faith
-the director was not informed enough
- the director did not investigate after being alerted to a significant matter
- the director failed to act reasonably

Question 20

how can a director avoid liability for usurping a corporate opportunity

Answer 20

• must present opportunity to corporation first
  if the corp declines the opportunity, the direct may take it w/o violating the duty of loyalty

Question 21

Do officers have power to bind the corporation

Answer 21

YES- the act as agents- so go thru express actual authority, implied actual authority and apparent authority issues

Question 22

LLC- benefits?

Answer 22

has tax advantages of partnership but liability of corp
members NOT liable for LLC obligations
Still have duty of care, duty of loyalty
Can still have direct and derivative suits

Question 23

Requirements for directors meetings

Answer 23

Need a quorum of all the directors - i.e majority of total number of directors.

Directors can call in but they are not considered legally present unless they can hear and speak to everyone

For an affirmative vote- most have a majority of those present at the meeting

Question 24

Requirements for shareholders vote

Answer 24

Need a quorum of corporation’s outstanding SHARES (not shareholders) to be represented at meeting

Vote passes if votes in favor exceed votes against the proposal.

Can have cumulative voting- for election of directors- where shareholders get # of votes = # of shares x # of director positions being voted on.

Question 25

If two people tried to form corporation but fucked up, what to mention

Answer 25

That they form a partnership by default (and personal liability in a partnership for actions of either partner)… and de FACTO corporation, corp by estoppel

Question 26

If a parent corporation causes a subsidiary to participate in a transaction that prefers the parent to the subsidiary, what is that a breach of?

Answer 26

= self-dealing, breach of duty of loyalty

Talk about 3 safe harbors- approval by majority of board, approval by majority of s/h, or “fair” transaction- substantively and procedurally FAIR

Question 27

If there is a conflict of interest b/ directors and transaction–>

Answer 27

-duty of loyalty, self dealing– look at how this would affect safe harbors b/c then not enough DISINTERESTED directors to approve the deal

Question 28

Two tests to use for USURPING a corporation’s business opportunity

Answer 28

1) “interest or expectancy” test
2) “line of business” test.

Under the “interest or expectancy” test, the key is whether the corporation has an existing interest in the opportunity. An expectancy can also exist when the corporation is actively seeking a similar opportunity.

Under “line of business” test, the key is whether the opportunity is within the corporation’s current or prospective line of business.

Question 29

when can a board seek dismissal of a shareholder’s derivative action

Answer 29

if a majority of the board’s “qualified directors”—those directors who do not have a material interest in the derivative action—determine in good faith, after conducting a reasonable inquiry upon which its conclusions are based, that continuance would be contrary to the corporation’s best interests.

Question 30

if a board ignores red flags of corporate illegality, what is it a breach of

Answer 30

Duty of care, duty to act in good faith

Question 31

If a partnership changes from regular partnership to LLP, are they still liable for debts or judgments incurred when they were regular partnership

Answer 31

Yes. and any incoming partners contributions are can be accessed to pay a previous debt incurred.

Answer 32

he test of whether a person is an employee is whether the person’s “physical conduct in the performance of the services is subject to the [employer’s] control or right to control.” Restatement (Second) Agency § 220(1); see also Restatement (Third) agency § 7.07(3)(a) (“[A]n employee is an agent whose principal controls or has the right to control the manner and means of the agent’s performance of work.”). This is generally a question of fact. Restatement (Second) Agency § 220 cmt. c. A number of factors are relevant, including the level of skill required to perform the work, who supplies the instrumentalities used, the duration of the relationship, and whether the work is part of the principal’s regular business. No single factor is determinati

Question 33

What is the key characteristic of a partnership

Answer 33

Two or more people agree to share profits in a business.

Shared management. Personal liability for any action the partner takes
Profits and losses pass thru to partners

Question 34

In a general partnership, how is management divided, liability? and profits?

Answer 34

all partners share in management and liability. Share profits equally

Question 35

For an LP- limited partnership, how are the responsibilities divided

Answer 35

One partner is a general partner- responsible for management, personally liable.

The other partner is a limited partner, can NOT participate in management, not personally liable

Question 36

For an LLP, what are the key characteristics

Answer 36

It is only made of limited partners, all limited partners can mage, all protected from personal liability

Question 37

What duties are owed to other partners and the partnership

Answer 37

Duty of care, duty of loyalty, duty of GF and fair dealing

Question 38

what is unique about member managed LLC

Answer 38

Members are agents of the LLC and have actual and apparent authority to bind the LLC in business dealings.

Question 39

what is the default for an LLC unless the articles of incorporate specify otherwise- member managed or manager managed

Answer 39

mebmber managed

Question 40

does an act OUTSIDE the normal course of business for an LLC require approval of all members?

Answer 40

Yes

Question 41

How do you dissociate from an LLC and what is the legal effect

Answer 41

you can just say you want to withdraw or dissociate, it does not need to be in writing BUT it does not discharge your interest or liability. You just lose your right to participate in management. You also can still get any distribution from the LLC but can’t force them to give you a distribution

Question 42

How is dissociation from an LLC different from dissociation from a partnership

Answer 42

Dissociation from an LLC does NOT require payment for LLC interest unless operating agreement specifies.

Dissociation from partnership at will=> dissociation of partnership plus right to cash payment of your share of interest after satisfying creditor claims

Question 43

for the business judgment rule to apply, board members have to be___ before making a decision

Answer 43

Adequately informed