Corporations Flashcards
Fiduciary Duties
Directors owe a corporation the fiduciary duties of loyalty and care
Duty of Loyalty
The duty of loyalty prohibits a director from profiting at the expense of a corporation
Interested Director Transactions
An interested director cannot be held liable if the interested director discloses all material facts and the deal is approved by a disinterested majority of directors or shareholders, or the transaction was fair and reasonable at the time it was made.
Duty of Care
The duty of care is met if the directors managed the corporation to the best of their ability in good fait, with the care that a reasonably prudent director in a like position would exercise, and in a manner reasonably believed to be in the best interests of the corporation.
Business Judgment Rule
Under the business judgment rule, courts will not second guess the business judgments of directors who are acting in good fait and in the best interests of the company.
The party challenging the director action must show that the business judgement was not an informed one.
The business judgment rule does not shield an interested director from liability.
Relying on Information
In discharging their duties, directors may rely on information, opinions and reports from officers and other outside professionals who are reliable and competent
Articles of Incorporation Exculpatory Provision
A corporations articles of incorporation may include an exculpatory provision shielding its directors from liability to shareholders for money damages by failing to properly exercise their duties as directors.
There are limitations on these provisions when the directors received an improper personal benefit, engaged in intentional misconduct or violations of the law, or in some states breached a fiduciary duty of loyalty or acted in bad faith.
Conflicted Interest Transaction Or Self Dealing
A conflicting interest transaction is a transaction where a director had knowledge and a material financial interest in the transactions. This type of transaction is subject to judicial scrutiny.
LLC Definition
An LLC is a form of business association that combines aspects of corporations and partnerships
LLC Fiduciary Responsibilities
In a member managed LLC, members owe the fiduciary duties of loyalty and care to each other and to the LLC
LLC - Duty of Loyalty
Under the duty of loyalty, members must refrain from competing with the LLC business
LLC - Restricting the duty of loyalty
The members of a LLC can agree to restrict or limit the duty of loyalty in the operating agreement.
Most states permit opt-outs of the duty of loyalty in an operating agreement as long as it is not manifestly unreasonable. These opt-outs may also identify specific types or categories of activities that do not violate the duty of loyalty.
When there is a conflict between the statutorily defined fiduciary duties and the operating agreement, the operating agreement controls.
LLC Liability
The LLC provides limited liability for its members and generally the members of an LLC will not be held personally liable for the debts of the company.
Personal liability may extend to the members when the proper procedures for dissolution and winding up have not been followed, or where the court decieds to pierce the LLC veil.
LLC Dissolution
An LLC may be dissolved by the consent of all members
Afte a dissolution, the LLC continues so it can wind up its affairs. In widing up the LLC must discharge its debts and obligations, settle and close its activities and provide notice of the dissolution to any known creditors outlining the steps necessary to enforce their claims.
When such procedures have not been followed, a creditor’s claim may be enforced against the LLC members, but may not exceed the total value of assets distributed to the members in dissolution.
Piercing the LLC Veil
Courts may also pierce the veil of limited liablity to reach the personal assets of the members to satisfy LLC obligations when the LLC is an alter ego of the members; there is inadequate capitalization at the inception of the LLC; or if the LLC was formed to perpetrate a fraud.
In evaluating whether the LLC was an alter ego, courts look at several factors including whether personal and LLC assets were commingled, when the LLC assets were used for personal reasons, and determination of control of the LLC.
Member Managed LLC
A members managed LLC is a form of business association that combines aspects of corporations and partnerships.
Fiduciary duties: members owe the LLC the fiduciary duties of loyalty and care
Duty of loyalty: the duty of loyalty prohibits profiting ast the expense of the LLC
Derivative Action
Members may initiate derivative claims against an LLC
A member may maintain a derivative suit brought by a member on behalf of the LLC
In a derivative claim a member is generally required to make a demand on the other members of the LLC prior to bringing the suit unless such a demand would be futile.
Direct Action
A claim against the LLC would not be available for the member to advance personally as a direct action
Judicial Dissolution
A member of an LLC may seek judicial dissolution from the court
A court may dissolve the LLC if the members of the LLC have acted, are acting, or will act in a manner that is illegal or fraudulent, or have acted in a manner that is oppresssive and was, is, or will be directly harmful to the member applying for the dissolution.
Opression may exist when actions by managers for controlling members violate the reasonable expectation of non-controlling members.
LLC managers liable for losses
Unlike partnerships where the allocation of losses follows the allocation of profits, this does not apply to LLCs.
Members of an LLC enjoy limited liability for the debts of the LLC and are usually not personally liable.
Actions of Controlling Shareholders
Under the Model Business Corporation Act (MBCA), the actions of controlling shareholders to minority shareholders may be reviewed by the court for good faith and fair dealing.
The courts examine business dealings using a fairness test
Dividends
Dividends may be paid to shareholders
the decision to declare a divident is within the business judgment of the board of directors.
In order to compel the payment of a dividend, a shareholder must prove that there are funds legally available and that the directors are acting in bad faith by refusing to pay a dividend.
The burden is on the plaintiff to show that the directors acted in bad faith. A hallmark of bad faith is decision making dictated by the personal interests of the directors, rather than the corporate welfare.
If the directors acted in good faith in making this decision, then the courts will not second guess this business decision pursuant to the business judgment rule.
Corporate Opportunity Doctrine
The MBCA does not directly address the duties of controlling shareholders not to usurp corporate opportunities.
Corporate Opportunity Doctrine: the corporate opportunity doctrine prohibits directors from diverting a business opportunity form the corporation to themseleves without first giving the corporation opportunity to act.
Usurping a corporate opportunity arises when the corporation would ahve an interest or expectancy in the opportunity.
For business opportunities within corporate croups, courts have accepted that the parent should have some leeway in allocating business opportunities within the group.
Corporate Existence
Under the Model Business Corporations Act (MBCA), corproate existence begins when the articles of incorporation are filed by the secretary of state or another designated state official.
The MBCA allows the parties to specify a delayed effective date, but not an earlier one.
Liability for Contracts prior to formation
Under the MBCA, all persons purporting to act as a corporation or on behalf of a corporation knowing that there was no incorporation are jointly and severally liable for all liabilities creating by acting.
This includes both participating in the act on behalf of the corporation and knowledge that the corporation has not been formed.
Voting Requirements
the voting requirements for shareholders can be set in a corporations articles of incorporation and bylaws
When there isa conflict between the two regarding how many shares must be voted to approve a proposal, the articles of incorporation control.
Only shareholders of record on the record date are entitled to attend and vote at a shareholder meeting.
A shareholder may vote his shares in person or by proxy.
proxies
Proxies are generally revocable and any action inconsistent with the grant of the proxy is a revocation of the proxy.
A proxy may be made irrevocable if the proxy form explicitly states so and the proxy is couple with an interest in the subject matter on which the power is to be exercised.
Shares
Each share is entitled to one vote at a shareholder meeting
Reacquired Shares
Shares that are reacquired by a corporation are considered authorized but not outstanding. Some jurisdictions refer to these as treasury shares.
Partnership Law - Corporations
Under partnership law, persons who carry on as co-owners of a business for profit become jointly and severally liable as partners. However, courts have inferred limited corporate liability in cases of defective incorporation in two situations:
Defacto Incorporation: Under the defacto corporation doctrine, courts recognize limited liability where there was good faith attempt to incorporate and there was actual use of the corporate from such as entering into a contract int he corporate name.
Incorporation by Estoppel: Under the incorporation by estoppel doctrine, most courts recognize limited liability when a third party deals solely with the corporation and has not relied on the personal assets of a promoter.
inactive particpant - corporation
an inactive particpant, such as an investor is genearlly not liable on pre-incorporation contracts where there has been defective incorporation
Member Managed - LLC
The default rule is that an LLC is member managed unless the certificate of organization or the operating agreement dictate otherwise.
LLC Member Rights
All members have equal rights in the management and conduct of the LLC
Consistent with agency law principles, each member of the LLC has both actual and apparent authority to bind the LLC
Each member can bind the company to contracts for carrying on the ordinary business of the company unless the members lacks authority to do so and that other party to the contrat has notice that the other member lacks authority.
LLC Operating Agreements
The operating agreement of the LLC controls most aspects of teh LLCs business and management.
The member may act under agency law principles with apparent authority
An act that is outside the ordinary course of the activities of the LLC may be undertaken only with the consent of all members
Udner olds LLC acts, including the uniform limited liability company act, a member has authority to sign and deliver a deed of the company’s interest in real prperty and the instrument is conclusive in favor of a bona fide purchaser for value without notice.
When this falls outside the scope of ordinary course of business, the company can be bound only wih authorization of all the members.
Dissociation - LLCs
a member of an LLC has the power to dissociate at any time.
Dissociation occurs on notice of a member’s express will to withdraw from the LLC
Dissocciation does not result in the dissolution of the LLC
Dissolution requires consent of all members
A member who dissociates loses the right to partiipate in the LLC and the rights to distrubitons if and when payments are made by the LLC
Under the older LLC acts, when a member withdraws from an at will LLC, the dissociated member’s interest must be purchased by the LLC at fair market value.
Special Meeting - Board of Directors
Under the Model Business Corporation Act (MBCA) a special meeting of the corporations board of directors requires notice of at least 2 days prior to the date of the meeting.
The time, location and date of the meeting must be specificed but the notice does not need to state the purpose of the meeting.
Waiver of Notice
A director may waive improper notice of the special meeting by attending the meeting and voting, or by signing a written waiver and filing in int he minutes of the meeting.
Quorom
In order for there to be a valid board action, it must be approved by a majority of a quorum at a special meeting of the directors.
Unless the Articles of Incorporation or bylaws state otherwise, a quorum consists of a majority of the directors.
Director Attendance - special meeting
Directors will be considred present at a meeting by attending in person or remotely if all directors can simultaneously hear each other during the meeting.
Only directors who satisfy this requirement are deemed present at the meeting.
Shareholder right to inspect
Under the model business corporation act (MBCA), a shareholder has a right to inspect th ebaord minutes and accounting records for a proper purpose which is reasonably related to their interest as a shareholder.
The shareholder may only inspect relevant portions of the board minutes connected to the shareholders purpose
Accounting records are not as broad as books and records, but generally include records that permit financial statements to be prepared. These records do not necessarily include non financial documents.
The determination of whether improper andpotentially illegal conduct has occurred is a proper purpose. An inspection reques must be granted whenever a sharehodler’s purpose relates to addressing economic risks to the corproation.
The shareholder must present credible evidnec that there was mismanagement or improper conduct
The shareholder’s inspection rights were not terminated by a filing a derivative claim.
Shareholder Suits
Shareholders may initiate derivative or direct claims against a corporation.
Derivative Suit
A shareholder derivative suit is a lawsuit brought by a shareholder on behalf of the corporation.
Dismissal of derivative suit
Under the MBCA, the board can seek dismissal of the shareholder’s derivative action if a majority of the board’s qualified directors (whose who do not have a material interest in the derivative action) determine in good faith, after conducting a reasonable inquiry, that the continuance of the action would be contrary to the corporations best interest.
While the investigation does not need to be exhausitve, failture to investigate credible allegations lacks good faith.
Breach of Fidicuiary Duties
directors breach their fiduciary duties if they knew or should have known of illegal conduct and failed to act.
Direct Suit
A direct suit is when a shareholder brings forth a claim to enforce duties the corporation owes to the sharehodler.
In a direct suit, making a demand is 90 days ahead of a filing a claim is not required.
Right to Inspect - Value of Shares
A shareholder has the right to inspect corporate books and records for a proper purpose which is reasonably related to their interest as a shareholder.
The determination of the value of one’s shares for purposes of sale is a proper purpose.
To exercise the right of inspection, the shareholder must complay with certian procedural requirements including makin ga written demand for inspection and allowing the corproation a certain time to respond, typically 5 business days.
Amending Bylaws
Under the MBCA, shareholders may amend bylaws of a corporation
Bylaws are the rules and regulations adopted by the board of directors that govern the internal operations and management of a corporation.
The bylaws may not contain a provision that is inconsistent with teh Article of incorporation or the law of the jurisdiction
The inclusion of director-nomination procedures in the bylaws is permissible under MBCA
The board of directors shares this power with the shareholders unless the corporations articles of incorporation exclusively reserves the power to the shareholders, or the shareholders in amending, repleasing or adopting a bylaw expressly limit th epower of the board of the directors to later amend or repeal the bylaw
if the bylaw deals with director nomination procedures, the board of directors retain power to safeguard the voting process but cannot repeal th eshareholder approve bylaw.
xxx BJR - both sides of the transaction
Where a director stands on both sides of a transaction, the business judgment rule does not apply.
xxx Exculpatory Provision in Articles of Incorporation
A corporation’s articles of incorporation may include a provision shielding its directors from liability for money damages for the failure to exercise adequate care in the performance of their duties as directors.
This applies unless the shareholders or directors receive an improper benefit.
