Corporations Flashcards
What is a nonstock corporation?
It has members rather than shareholders. Members are not entitled to distributions but otherwise have the same rights and restrictions as shareholders in corporations
What records can a shareholder inspect without restriction?
Articles & Bylaws; Annual Reports; Contact Details of Current Directors and Officers; Minutes of Shareholder Meetings; Certain Board of Director Resolutions
What records can a shareholder inspect only with proper purpose?
Records related to the proper purpose if the shareholder has held stock for at least six months OR owns at least 5% of outstanding shares
Removal of Directors by Shareholders
With or without cause by majority vote of shareholders
Mandatory Indemnification
Corporation is required to indemnify a Director for any expense incurred in the wholly successful defense of a proceeding against the Director in his role as a Director
Permissive indemnification
Articles, bylaws, or resolution can authorize the corporation to indemnify and reimburse or advance expenses or liability incurred if (1) Director acted in good faith believing his conduct was in the best interest of the corporation and (2) Director has no reasonable cause to believe conduct was unlawful
Prohibited Indemnification
Corporation prohibited from indemnifying a director against liability for willful misconduct or a knowing violation of a criminal law
What is Piercing the Corporate Veil?
When the corporation’s existence is ignored and SH, Os, or Ds are held personally liable to third parties
Most typical application of piercing the corporate veil
When shareholders control or use the corporation to evade a personal obligation or to perpetuate crime/fraud/injustice
Promoter liability
A promoter is personally liable for pre-incorporation transactions, even after the corporation comes into existence
Exception to promoter liability
If the third party knew that a corporation had not been formed
Promoter’s right to reimbursement
When held personally liable for pre-incorporation transaction made in good faith, the promoter has a right to reimbursement for the corporation for benefits C received
Election of Directors
Plurality of votes present if there is a quorom
Shareholder management agreements
Must be in articles or bylaws, or in an agreement signed by all shareholders.
Shareholders have broad latitude to enter agreements concerning corporate governance, distributions, and the relationship among shareholders.
Voluntary dissolution prior to issuing stock
A majority of the incorporators or initial directors of a corporation may voluntarily dissolve the corpration by signing a resolution of dissolution
Voluntary dissolution after issuance of stock
When either BoD adopts a proposal for the dissolution and shareholders approve by 2/3 vote (unless modified in agreement) OR all shareholders consent to dissolution, even without board proposal
Involuntary dissolution by shareholders
Shareholder may pursue involuntary dissolution if (i) shareholders are deadlocked; (ii) directors are deadlocked in the management of the C’s affairs; (iii) the acts of those in control are oppressive, illegal or fraudulent; OR (iv) the corporate assets are being wasted.
When is a corporation treated like a partnership?
When partners form a professional corporation but continue their business as a partnership may have their rights and liabilities determined according to the law of partnership
Types of Suits by Shareholders
Direct actions - Action to enforce shareholder rights for breach of fiduciary duty by director or officer
Derivative actions - Shareholder sues on behalf of Corporation for harm suffered by corporation; recovery goes to corporation
Standing for derivative actions
Plaintiff must have been shareholder at time of act or omission; OR became a shareholder before public disclosure and without fair notice of the act or omission;
Must adequately represent corporation’s interests
Procedural requirements for Derivative ctions
Plaintiff must make written demand upon board of directors to act, even if it would be futile, then must wait 90 days after filing demand before taking action unless (1) BD rejects demand; or (2) Corporation will suffer irreparabble harm from the delay
What do shareholders vote on?
1) Electing Board of Directors
2) Fundamental Corporate Changes
Non-Fundamental corporate changes do not require shareholder votes
Duties owed by directors
Duty of Care and duty of loyalty
Business Judgment Rule
A rebuttable presumption that D acted properrly and in good faith in the exercise of business judgment
Typical ways to overcome business judgment
Self-dealing; Fraud; bad faith
Duty of Care
Subjective standard.
No breach when acting in good faith.
No breach when relying on information received and believed in good faith
How can a director avoid personal liability for breach of duty of care or loyalty?
Absence from the meeting where decision was made or dissent
Duty of Loyalty
Requires Director to act in a manner that the director reasonably believes is in the best interest of the corporation
How is duty of loyalty commonly breached?
DIrector places his own interests before the interests of the corporation
Duty of Loyalty Safe Harbors
1) majority of disinterested directors with knowledge approve or authorize
2) Majority of disinterested shareholders with knowledge approve or authorize
3) The transaction was fair to the cooperation
How do cumulative votes work?
each SH can multiply the number of votes she is entitled to cast by the
number of directors to be elected
