Corporations

Question 1

the standard for fiduciary duries owed to the coporation (duty of care and duty of loyalty)

Answer 1

A director has
a fiduciary duty comprising of:
a duty of loyalty to act in the best interest of the coporation in good faith andavoid conflicts of interest, and
a duty of care to act on an informed basis with reasonable diligence under the circumstances

Question 2

Challenging the duty of care

Answer 2

Plaintiff has burden to prove that the duty of care was breached, and that the breach caused a loss to the corporation.

Question 3

The business judgment presumption

Answer 3

• presumes that the duty of care, to act with reasonable diligence under the circumstances and to act on an informed basis, is met.
• Plaintiff has the burden to prove that the directors were negligently uninformed or acted unreasonably.
• Directors may rely on information, opinions, reports, or statements of corporate officers, legal counsel, public accountants, etc., in making decisions.

Question 4

What consitutes a conflict of interest in corporations?

Answer 4

1) conflicting transaction/self dealing: A transaction where the coporation is on one side and on the other side is a director, his close family member, or his business interest.
2) competition between a director and the corporation
3) usurption of a corporate opportunity: A director can’t personally take a business opportunity the corporation would have an interest in it until he (1) tells the board about it and (2) waits for the board to reject the opportunity).

Question 5

When may a conflicting transaction be upheld? (Not violate the duty of loyalty leading to damages)

Answer 5

1) the transaction was approved by a majority of the disinterested directors IF director disclosed all material facts to the board or the facts were already known
2) the transaction was approved by a majority of votes entitled to be
cast by disinterested shareholders IF director disclosed all material facts to the board or the facts were already known
3) Judged by the circumstances at the time the corporation entered into the transaction, it was fair to the corporation (same terms as an arms length transaction)

some jurisdictions require fairness and either 1 or 2.

Question 6

Other conflicts

Answer 6

• A corporation can make a loan to a director if it is reasonably expected to benefit the corporation.
• An LLC operating agreement may waive the duty of loyalty so long as it is not “manifestly unreasonable”

Question 7

What are corporate Directors?

Answer 7

• Directors manage the corporation. They meet regularly. Directors must
• vote responsibly, so they cannot vote by proxy or voting agreement. (Their judgment should not be unfairly affected by a proxy or voting agreement!).
• To hold a vote there must be quorum (a majority of directors) present throughout the meeting.
• Passing a resolution requires only a majority vote of the directors present.
• Meeting notice is only required for special meetings. (2 days)
• Any action required to be taken by the directors at a formal meeting may be taken by unanimous consent, in writing, without a meeting.
• A director only has actual authority to bind a corporation under the meeting rules or unanimous written consent rules.
• Under the business-judgment rule directors are presumed to act reasonably.

Question 8

What are shareholders

Answer 8

• Shareholders own the corporation.
• Entitled to annual meetings.
• Meeting notice: 10-60 days + state the time, place, and purpose of the meeting.
• Shareholders can vote by proxy or agreement.
• To hold a shareholder vote, there must be a quorum (a majority of all outstanding shares are present). Qurorum is not quashed by shareholders leaving.

Question 9

What are corporate officers

Answer 9

• Officers are agents of the corporation.
• Officers are the president, secretary, treasurer, etc.
• They have the inherent power to enter into transactions on behalf of the corporation.
• In an Agency combo MEE question, an officer likely has actual or apparent authority to enter into a contract on behalf of the corporation.

Question 10

What are corporate officers

Answer 10

• Officers are agents of the corporation.
• Officers are the president, secretary, treasurer, etc.
• They have the inherent power to enter into transactions on behalf of the corporation.
• In an Agency combo MEE question, an officer likely has actual or apparent authority to enter into a contract on behalf of the corporation.

Question 11

Requirements for incorporation

Answer 11

• Articles of incorporation must be filed with the state) in order for a valid corporation to be formed.

The articles must include basic information inlcuding the corporation’s:
* name
* address
* names of incorporators
* purpose
* number of shares authorized.

Notes
* Additional provisions can be added.
* In a conflict between articles and bylaws, the articles control
* Because the corporation files these with the state, they are public.

Question 12

What is a “subscription”?

Answer 12

• An offer to buy a certain number of a corporation’s shares.
• In general, the offer must be in a signed writing and state a price.

Question 13

What is a “promoter”?

Answer 13

• someone who “promotes” a corporation before it is even formed by entering into preincorporation contracts on behalf of the corporation.
• The promoter is liable for preincorporation contracts.

Question 14

What is a “promoter”?

Answer 14

• someone who “promotes” a corporation before it is even formed by entering into preincorporation contracts on behalf of the corporation.
• The promoter is liable for preincorporation contracts.

Question 15

is a coporation liable for a preincorporation contract?

Answer 15

• A corporating is not generally liable for a contract entered into proor to incorporation unless it expressly or impliedly adopts (ratifies) the contract.
  *Express: the board of directors expressly ratifies the agreement.
• Implied: therr is a knowing acceptance or retention of the contract benefits.
• Otherwise, the promoter is liable for preincorporation contracts.

Question 16

Who can vote in a shareholder vote?

Answer 16

Shareholders of record on the record date may vote at the meeting.

Question 17

What is recquired for a shareholder vote to pass?

Question 18

What is a proxy vote?

Answer 18

• A shareholder may vote her shares in person or by proxy.
• A proxy is (1) a writing (fax and email are fine), (2) signed by the record shareholder (email is fine if the sender can be identified), (3) directed to the secretary of the corporation, (4) authorizing another to vote the shares.
• a proxy may be revoked by the shareholder attending the meeting to vote themselves, in writing to the corporate secretary, or by subsequent appointment of another proxy.
• for a proxy to be irrecovable (1) the proxy says it’s irrevocable and (2) the proxy holder has some interest in the shares other than voting (such as an option to buy the shares).

Question 19

What is a voting trust?

Answer 19

a written agreement of shareholders under which all of the shares owned by the parties to the agreement are transferred to a trustee. valid for max of 10 years unless extended.

requires:
1. the agreement be in writing and signed
2. a copy is given to the coproration
3. legal title to the shares is transferred to the trustee
4. The original shareholders receive trust certificates and retain all shareholder rights except for voting

Question 20

annual shareholder meetings

Answer 20

• primarily vote for directors
• must be at least every 15 months, or within 6 months of fiscal year end.

Question 21

special shareholder meetings

Answer 21

Special meetings may be called by (1) the board of directors, (2) the president, (3) the holders of at least 10 percent of the outstanding shares, or (4) anyone else authorized to do so in the articles or bylaws.

Question 22

shareholder voting rules

Answer 22

• Must be a quorum.
• Each share is entitled to one vote
• Generally an action requires a majority of actualy voted shares to be approved.
• Fundemental corporate change and removal of a director require a majority of outstanding shares

Question 23

cumulative voting

Answer 23

• Often used in close corporations with few shareholders.
• each share holder has one vote per share per board seat, but can use all on one candidate.
• one at large election where the top overall finishers win.

Question 24

straight voting for directors

Answer 24

• default.
• there is a speparate election for each board seat
• one vote per share per seat.

Question 25

Shareholder direct action

Answer 25

• Can be brought when an officer or director has breached a duty owed to the shareholder personally.
• Inlcudes payment of a dividend or opression in a close corporation.
• In a shareholder direct action, any recovery is for the benefit of the
  individual shareholder.

Question 26

Shareholder derivitve action

Answer 26

• In a derivative suit, a shareholder is suing to enforce the corporation’s claim, not her own personal claim.
• The coporation gets the award.
• The shareholder-plaintiff may recover costs and attorneys’ fees, usually from the judgment won for the corporation. However, if the court finds that the action was commenced or maintained without reasonable cause or for an improper purpose, it may order the plaintiff to pay reasonable expenses of the defendant.
• The corporation must be joined to the suit as a defendant.

Question 27

Requirements for bringing a derivative suit.

Answer 27

1) Standing
* A shareholder must have been a shareholder at the time the claim arose or must have become a shareholder through transfer by operation of law (inheretence or divorce) from someone who did own stock at the time the claim arose.

2) Adequacy
* Must adequately represent the coporations interests

3) Demand
* Must make a written demand to the board for action and either wait 90 days, receive notice that the corporation has rejected the demand, or show that wiating 90 days would cause irreperable harm.
* Some states have no demand requirment if demand would be fuitile (such as when directors are the defendant).

Question 28

Shareholder liability - peircing the corporate veil

Answer 28

• shareholders generally have limited liability and are only liable for the value they put into the firm (the stocks)

To piece the corporate veil the shareholders must have abused the privilige of incorporation. Three common scenarios:**
* Alter Ego (Identity of Interests): the corporation may be considered the “alter ego” or a “mere instrumentality” of the shareholders or another corporation. comingling of shareholder and coporate assets/money
* Undercapitalization at the time of formation
* Fraud, Avoidance of Existing Obligations, or Evasion of Statutory Provisions

Notes:
* Veil peircing is more common in tort cases, but extremely rare in contract cases.
* Generally only creditors or tort victims can pierce, not shareholders.

Question 29

consequences of failure to incorporate

Answer 29

• If the incorporators thought they formed a corporation, but they failed to do so, they’d be personally liable for business debts.
• de facto corporation and corporation by estoppel can help avoid liability BUT are abolished in many states

Question 30

De facto Corporation

Answer 30

doctrine limiting liabilty in the case of an improper incorporation
requirements:
1. a relevant corporate statute exists
2. the parties made a good faith attempt to form a corporation under the statute
3. the parties acted as if there was a corporation
4. parties were unaware that they hadn’t actually fromed a corporation

limitiation of liability applies except against the state.

Question 31

Corporation by estoppel

Answer 31

• Corporation by Estoppel limits liabilty in the case of an improper incorporation only in contract cases- does not apply to tort victims.
• Persons who have dealt with the entity as if it were a corporation will be estopped from denying the corporation’s existence (they can’t back out of their contracts)
• Corporation cannot avoid liability by claiming it was improperly formed.

Question 32

preemptive rights

Answer 32

• A preemptive right is the right of an existing shareholder of common stock to maintain her percentage of ownership in the company by buying stock whenever there is a new issuance of stock for money
• preemptive right is not a default and must be contained in the articles.

Question 33

limitation of liability of liability for directors and officers

Answer 33

The articles can eliminate director (and, in some states, officer) liability to the corporation for damages, but not for intentional misconduct, usurping corporate opportunities, unlawful distributions, or improper personal benefit. So, these provisions can eliminate liability only for duty of care cases.

Question 34

Indemnification of officers and directors

Answer 34

• A corporation cannot indemnify a director who is (1) held liable to the corporation or (2) held to have received an improper benefit.
• Unless limited by the articles, a corporation must indemnify a director
  or officer who was successful in defending themself in case brought against the director on account of their position.
• A corporation may indemnify a director for reasonable litigation expenses incurred in unsuccessfully defending a suit brought against the director on account of the director’s position if they violated the duty of care **but ** they did not violate the duty of loyaly (inlcuding settlement).
• Officers generally may be indemnified to the same extent as a director.

Question 35

what is aclose corporation

Answer 35

The characteristics of a close corporation are that there are few shareholders, and the stock is not publicly traded.

Question 36

what is a shareholder management agreement

Answer 36

• Shareholder management agreements set up alternative management for a close corporation. Must be in the articles approved by all shareholders or by unanimous written consent of the shareholders.
• whoever manages the corporation assumes the fiduciary duties of loyalty and care.

Question 37

Special Fiduciary Duty in Close Corporations

Answer 37

• Fiduciary duties on shareholders owed to other shareholders.
• Controlling shareholders cannot use their power to benefit at the expense of minority shareholders because oppression thwarts their legitimate goals
  for investing and they have no way out.

Question 39

shareholder’s right to inspect corporate books and records

Answer 39

• A shareholder has a right to inspect corporate books and records as long as his demand is made in good faith and for a proper purpose reasonable related to his interest as a shareholder
• A share holde rmust state 1) is his purpose, 2) the records he desires to inspect, and 3) that the records are directly related to his purpose

Question 40

preemptive rights

Answer 40

• A preemptive right is the right of an existing shareholder of common stock to maintain her percentage of ownership in the company by buying stock whenever there is a new issuance of stock for money
• preemptive right is not a default and must be contained in the articles.