Corporations Flashcards
When does corporate existence begin under the Model Business Corporation Act (MBCA)?
When the articles of incorporation are filed
The date of filing rule applies even if the filed articles recite an effective date prior to the date of filing.
What is a ‘delayed effective date’ in the context of corporate articles of incorporation?
A specified future date when the articles will take effect
The MBCA allows parties to specify a delayed effective date but not an earlier effective date.
Under the MBCA, when is a person liable for pre-incorporation transactions?
When they possess actual knowledge that the corporation’s charter has not yet been issued
Actual knowledge does not require that a person should have inquired about the entity’s status.
What standard do courts use to examine business dealings between controlling shareholders and minority shareholders?
A fairness test
This applies when a parent corporation causes a subsidiary to act in a way that benefits the parent to the detriment of minority stockholders.
What is a Director’s Conflicting Interest Transaction (DCIT) according to the MBCA?
A transaction effected by the corporation to which a director is a party
Modern courts will uphold such transactions if properly approved by informed, disinterested directors or shareholders.
Absent approval, the transaction may still be upheld if the conflicted director shoulders the burden of showing the transaction was fair to the corporation on terms comparable to what might have been obtained in an arm’s length transaction. If they can’t show this, the director has violated the fiduciary duty of loyalty.
What must a conflicted director show to uphold a self-dealing transaction?
That the transaction was fair to the corporation
Fairness includes both market fairness of the terms and whether the transaction was likely to yield favorable results for the corporation.
What is the corporate opportunity doctrine?
Under the MBCA, the corporate opportunity doctrine (applicable to directors) addresses the core question of whether the corporation has a a legitimate interest in a business opportunity, either because of the nature of the opportunity or the way in which the opportunity came to the director, of such a nature that the corporation should be afforded prior access to the opportunity before it is pursued (or usurped) by a director.
The American Law Institute defines a corporate opportunity generally as a business opportunity where either the person offering the opportunity expects it to be offered to the corporation, the opportunity would be of interest to the corporation, or the opportunity is closely related to a business in which the corporation is engaged or expects to be engaged.
What does the business judgment rule allow a corporation to do?
Offer a rational business justification for a policy or transaction
This standard protects directors’ decisions made in good faith and in the best interest of the corporation.
Under what conditions can a court order judicial dissolution of a corporation?
If a shareholder demonstrates that the majority shareholder is acting oppressively
Oppression is evaluated based on whether majority shareholders defeat reasonable expectations of minority shareholders.
What is the notice requirement for special meetings of a corporation’s board of directors?
Notice must be given at least two days prior to the meeting
The notice must include time, location, and date but not the purpose of the meeting.
What constitutes a quorum at a special meeting of directors?
A majority of the fixed number of directors
If quorum is present, the meeting is legally held.
What is the record date in the context of shareholder voting?
The date that determines who is entitled to vote at a particular shareholder meeting
Only those registered as shareholders of record on that date can vote.
What is the nature of a shareholder proxy?
Generally revocable, unless explicitly stated otherwise and coupled with an interest
Any action taken inconsistent with a proxy revokes that proxy.
What happens to shares repurchased by a corporation?
They are considered authorized but not outstanding and cannot be voted
Each outstanding share is entitled to one vote at a shareholders’ meeting.
What prevails in case of a conflict between articles of incorporation and bylaws regarding shareholder proposals?
The articles of incorporation prevail over the bylaws
This applies specifically to how many shares must vote in favor of a proposal for approval.
What is the rule of limited liability in an LLC?
Members or managers are not personally liable for the LLC’s debts solely due to their status
This protects members from personal liability for the company’s obligations.
What conditions justify piercing the corporate veil?
Indications of fraud or other inequitable conduct
Factors include undercapitalization, failure to follow formalities, and commingling of assets.
What fiduciary duties do members of a member-managed LLC have?
Duty of loyalty and duty of care
Members must act in the best interests of the company and account for benefits derived from company activities.
What is required for a derivative suit in a member-managed LLC?
A demand must be made on the other member to bring an action, or such demand would be futile
This ensures that the LLC itself has the opportunity to address the issue before members take individual action.
What does the oppression doctrine entail in the context of judicial dissolution?
Finding oppression when actions by controlling shareholders violate the reasonable expectations of non-controlling shareholders
This doctrine is particularly relevant in close corporations.
