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.