Corporations Flashcards
BJR
Under the business judgment rule, a court will not second-guess a business decision if it
(1) was informed;
(2) was made in good faith;
(3) was made without conflicts of interest; and
(4) had a rational basis.
Director May Rely on Reports or Other Information if prepared or presented by employees, officers, professionals, or board committees if they reasonably believes the person is competent to provide this info.
Internal Affairs Doctrine
the internal affairs of a corporation are governed by the law of the state of incorporation.
De Facto Corporation
1) relevant incorporation statute (every state has one so easy just say it)
2)The parties made a good faith, colorable attempt to comply with the statute
3) parties were acting as though they thought there was a corporation (exercise of corporate privileges)
4) the person raising the defense was unaware that there was not valid incorporation
Foreign corporation
a corporation that is incorporated outside of the state (can be american)
Foreign corporations transacting business in a state must register and pay prescribed fees
Transacting business means the regular course of intrastate (not interstate) business activity. Doesn’t include occasional or sporadic activity in this state, nor does it include simply owning property in this state
What consideration must the corporation receive in exchange for an issuance (giving someone stock)?
any tangible or intangible property or benefit to the corporation.
(Money, property, or work already preformed for the corporation all count)
Preemptive Rights
A preemptive right is 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
V easy to circumvent, no right if any other form of consideration
Preemptive Right must be expressly stated in AOI
Was the board authorized to act?
Board must act either by
1) Unanimous agreement in writing or
2) At a meeting with quorum
board meetings
Need a quarum - majoirty of board members (unless AOI says otherwise. Once you have quorum, board can pass resolutions with only a majority of those present.
Broken Quorum - A quorum of the board can be lost (“broken”) if people leave. Once a quorum is no longer present, the board cannot take an act at that meeting.
Notice is required for special meetings, not regular meetings
Appointing proxies or voting agreements are INVALID, void as to public policy
Committees
Board may create committees which may act for the board, but board is responsible for supervision
Committees cannot
* Declare a distribution
* Fill a board vacancy
* Recommend a fundamental change to shareholders, but could make same recomendation to full board
Conflicting interest transactions
any transaction between the corporation (on one side) and (1) one of its directors, or (2) that director’s close relative, or (3) another business of the director’s
remedies for usurping a corporate opprotunity
- Recover under constructive trust theory
- Compel transfer at price paid
- Recover profits if the director has already sold the thing
A director is presumed to concur with board action (and thus is liable for it) unless…
- their dissent or abstention is noted in writing in the corporate records. (in minutes of the meeting or email to presiding officer after the meeting) or
- they were absent from the meeting
No indemnification of directors and officers if
(1) held liable to the corporation or
(2) held to have received an improper benefit.
Mandatory and permissive indemnification
Mandatory Indemnification- Unless limited by the articles, a corporation must indemnify a director or officer who was successful in defending a proceeding
Permissive indemnification - allowed so long as director did not violate the duty of loyalty ): (1) they acted in good faith; and (2) believed that their conduct was in the best interests of the corporation
Generally, the determination whether to indemnify is to be made by a disinterested majority of the board
elemination of director and officer liability?
AOI can eliminate director liability for violations of duty of care (NOT duty of loyalty)
Do shareholders have managerial powers?
NO! the board of directors does, shareholders elect the board
(unless close;y held corp)
Peircing the Corporate Veil
1) The shareholders must have abused the privilege of incorporating AND
2) Fairness must require holding them liable
Alter Ego,
undercapatalization or
Fraud - corporation was formed to avoid liability or obligations
The corporate veil is more easily pierced in tort cases, than in contract cases
requirements for shareholder derivative suit
1) Stock Ownership at Time of Wrong and Throughout the Suit (Or acquired by operation of law)
2) Shareholder fairly and adequately represents the corp.
3) written demand (futility exception in some states)
4) corp. joined as defendant
Shareholder meetings
Annual (within the earlier of six months after the end of the corporation’s fiscal year or 15 months after its last annual meeting)
Special - need notice
Quorum requirement= a quorum is a majority of outstanding shares entitled to vote, unless the articles or bylaws require a greater number.
Shareholder Inspection Rights
for some record’s shareholder’s right is unqualified (inc. AOI, bylaws, shareholder’s meeting minutes, corp. anumal report, etc).
* To acess these the shareholder only needs to make a demand 5 buis days in asvance
For certain records the shareholder has only a qualified right (include board meeting minutes, corporate books, and accounting records):
1) make a written demand at least five business days in advance.
2) state a proper purpose for inspection - a proper purpose is one that is reasonably related to the person’s interest as a shareholder
Purpose is reasonably related to the person’s interest as a shareholder
Mergers and consolidations
merger = one corporation is absorbed into another, and the latter corporation survives while the merging corporation ceases to exist following the merger
consolidation = two corporations combining to form a new entity
Effect: successor liability- The surviving corporation succeeds to all rights and liabilities of the former entity/ies
Transfer of all or substantially all of the assets of the business not in the ordinary course of buisness
Basically one company is gobbling up the other by buying all their assets
Sim idea Share exchange = one company acquires all of the stock of another
These are a fundamental corporate change for the transferring corporation only, not for the corporation doing the buying/ eating
No sucsessor liability unless:
* buyer is a “mere continuation” of the seller, that is, it has the same management, shareholders, and so on or
* court concludes that the deal was really a disguised (de facto) merger
Generally, to do any fundamental corporate change, we need
(1) board action adopting a resolution of fundamental change
(2) the board submits the proposal to the shareholders with written notice; AND
(3) shareholder approval
deep rock doctrine
in general, inside creditrors who are unsecured are not subordinated to outside creditors. But they will be if equity requires
Limitations on Dividends
Not allowed if
* corproation is insolvenet, or dividend would make the corporation insolvent
* violated AOI or
* violated a superior preference right
if violate, then directors who approve may be personally liable
shareholders are liable only for the amount thy accepted while knowing the distribution was improper
