Corporations 3

Question 1

Directors have greater information rights than shareholders

Answer 1

• Can inspect books and records for a purpose reasonably related to the director’s position (DGCL §220(d))
• Can inspect books and records at any reasonable time to the extent reasonably related to the performance of the director’s duties, but not for any other purpose or in any manner that would violate any duty to the corporation (MBCA §16.05(a))

Question 2

Information Rights of Shareholders

Answer 2

• Can inspect books and records upon written demand stating the purpose thereof, during the usual hours for business for any proper purpose. Can get subsidiary book in certain circumstances (DGCL §220(b))
• Can inspect main documents (bylaws/minutes) upon 5 days written notice and during regular business hours (MBCA §16.02(a))

Question 3

Directors have greater information rights than shareholders
* Can inspect other records like financial statements upon 5 days written notice and during regular business hours if (MBCA §16.02(b)):

Answer 3

• Demand is made in good faith for a proper purpose
• demand describes with reasonable particularity the shareholder’s purpose and the records the shareholder desires to inspect
• The records are directly connected with shareholder’s purpose

Question 4

Information Rights of Shareholders

Some states limit inspection to shareholders who:

Answer 4

(1) hold at least 5% of the corporation’s outstanding shares, or
(2) have held any lesser number of shares for at least six months.

Question 5

Information Rights of Shareholders

Proper Purpose Examples

Answer 5

• Investigating mismanagement
• Attempting to value shares
• Ascertaining the corporation’s financial condition
• Getting the list of shareholders to communicate in connection with a vote

Question 6

Information Rights of Shareholders

Improper Purpose Examples

Answer 6

• Harassing the corporation
• Satisfying curiosity
• Giving information to a competitor
• Gathering ammunition for a lawsuit that is not related to the plaintiff’s interest as a stockholder
• Getting the list of shareholders to sell the list or find potential purchasers

Question 7

General Rules on Shareholders Agreement

class note

Answer 7

Not commit self how you will act once a director

Question 8

General Rules on Shareholders’ Agreements

Because it is the job of the board to manage, or supervise the managing of, the corporation’s affairs, shareholder agreements that limit the board’s
discretion may be

Answer 8

invalidated by the courts

Question 9

General Rules on Shareholders’ Agreements

Shareholders can agree on how to vote for

Answer 9

directors.
- Directors generally can’t agree on keeping an officer in place for a certain salary.

Question 10

General Rules on Shareholders’ Agreements

Factors for upholding Shareholder’s Agreements

Answer 10

a. Absence of an objecting minority interest
b. Absence of public detriment

Question 11

Supermajority Rules

Supermajority Rules

Answer 11

• Can require more than a majority to accomplish something.
• Draft supermajority voting provisions with care and provide that it takes the same supermajority vote to amend such provisions. (Only as protected as the the amendment provisions)
• For charter amendments, supermajority provisions can be amended only by the same supermajority vote. (No similar rule for bylaws but in the MBCA the supermajority requirement needs to be in the charter)

Question 12

Why corps need limited liability

Answer 12

Not personally liable for obligation of corp unless you did it (own torts, etc)

Question 13

Why Corporations are Efficient

Answer 13

1. Corporations allow money andn knowledge to come together
2. Corporations allow diversification

Question 14

Imbedded in the Idea of a Corporations is Limited Liability

What limit liability provides

Answer 14

• Giving up Control:
  1. Not willing to give up
  control if my liability will
  be unlimited
  2. Limited liability reduces
  the cost of monitoring
• Diversification
• Taking a shot

Question 15

DGCL and MBCA on Limiting Liability

General rule shareholders of a corporation shall not be

Answer 15

personally liable for the payment of the corporation’s debts except by reason of their own conduct or acts.

Question 16

Opposite of De Facto Corporation or Corporation by Estoppel

De Facto Corporation and Corporation by Estoppel

Answer 16

In some cases, even if the corporation wasn’t formed correctly, we treat it as if it is a corporation for liability purposes.

Question 17

Opposite of De Facto Corporation or Corporation by Estoppel

Piercing the Corporate Veil

Answer 17

In some cases, even though a corporation was formed correctly, we treat it as if there isn’t a corporation for liability purposes.

Question 18

What is the impact of piercing the corporate veil?

Answer 18

• Limitation of liability for the
  obligations of the corporation is
  lost.
• Only for active shareholders

Question 19

Ways to Pierce the Corporate Veil

1. When corporate formalities are ignored. (alter ego/mere instrumentality)

Answer 19

a. Shareholders exercise complete dominion or control over the corporation.
b. Shareholders treat the assets of the corporation as their own.
c. Shareholders use corporate funds to pay their private debts
d. Shareholders and the corporation co-mingle assets and funds and fail to keep separate corporate books
e. Shareholders and the corporation generally fail to observe corporate formalities like getting consents and having meetings. (administrative)

Sloppy formalities alone aren’t enough.

Has to be unjust and usually combined with #2 or #3

Question 20

Ways to Pierce the Corporate Veil

2. When the corporation is inadequately capitalized at the outset or shareholders drained too much.

Answer 20

a. How much is inadequate?
i. It depends on the industry
ii. Insurance is considered
b. Don’t look at hind-sight

Question 21

Ways to Pierce the Corporate Veil

3. To prevent fraud and achieve equality

Answer 21

a. Can use a corporation to avoid future liability. Can’t use a corporation to get out of liabilities you already have.
b. The corporate veil will be pierced whenever the avoidance of personal liability through the formation of a corporation operates as a fraud on creditors or other outsiders.
c. Contract
1. Virginia Law – Need to show corporation was a device or sham used to disguise wrongs, obscure fraud or conceal crimes
2. Misrepresentation of corporate finances for example

Fairness is baked into this, but it is more than just fairness.

Question 22

Impact of piercing corp. veil points

Answer 22

1. hard to do
2. allows court to disregar entity
3. can hold partners personally liable when misused corp. form
   - only partners with act in corp
   - not passibe shareholders
4. rare that it actuall yhappens: but easy to protect against.

Question 23

Horizontal vs. Vertical Veil Piercing

Horizontal

Answer 23

(Enterprise Liability) – among other related entities
* Corporation is a fragment of a larger corporate enterprise.
* Blurred lines among corporate structure

Question 24

Horizontal vs. Vertical Veil Piercing

Vertical

Answer 24

the owner
* Blurred lines between the shareholder and corporation

Question 25

More likely to pierce veil for

Answer 25

torts than contracts

Question 26

Veil piercing is more likely to be a problem for

Answer 26

smaller corporations

Question 27

The more shareholders there are, the less likely

Answer 27

a court will pierce the veil.

Question 28

# Piercing the veil Torts v. Contracts in court

Answer 28

- More sympathetic to tort victims - More sympathetic to unsophisticated contract parties.

Question 29

Strongest case to pierce the corporate veil

Answer 29

1. Co-mingling of funds 2. Inadequate capitalization 3. Corperation with a small amount of owners 4. Tort or fraud

Question 30

# Fraudulent Transfer vs Veil Piercing - Fradulent Transfer - Proof - Relief

Answer 30

* Moving money with the intent to defraud a creditor or for less than adequate consideration, and the remaining corporate assets were unlikely to be sufficient to pay creditors Proof * actual proof of money taken out Relief * Return of the assets

Question 31

Shareholders Controlling Matters within the Board’s Discretion

Answer 31

Shareholder agreements that limit the board’s discretion may be invalidated by the courts.

Question 32

Factors for upholding Shareholder’s Agreements

Answer 32

* Absence of an objecting minority interest * Absence of public detriment

Question 33

3 supermajority rules

Answer 33

* Can require more than a majority to accomplish something. * Draft supermajority voting provisions with care and provide that it takes the same supermajority vote to namend such provisions. * For charter amendments, supermajority provisions can be amended only by the same supermajority vote.

Question 34

# Piercing the Corporate Veil In some cases, even though a corporation was formed correctly, we treat it as if

Answer 34

there isn’t a corporation for liability purposes.

Question 35

Ways to Pierce the Corporate Veil

Answer 35

* When corporate formalities are _______. (alter ego/mere instrumentality) * Ignored * When the corporation is inadequately capitalized at the outset or money is drained out. * To prevent fraud and achieve equality

Question 36

# General Rules on Parent/Subsidiaries Generally, courts will not pierce the corporate veil to reach the parent if the parent:

Answer 36

* respects the separate identity of the subsidiary * does not exercise undue dominion and control over the subsidiary’s activities. * does not use the corporate form to accomplish wrongful purposes, notably fraud, on the parent’s behalf.

Question 37

# General Rules on Parent/Subsidiaries does not exercise undue dominion and control over the subsidiary’s activities.

Answer 37

* Exercise of control that stock ownership gives stockholder (i.e. electing directors and adopting bylaws) will not create liability beyond the assets of the subsidiary * Having the same directors or officers typically isn’t enough

Question 38

# General Rules on Parent/Subsidiaries Direct Liability

Answer 38

* Parent corporations can be directly liable for its own actions in managing the subsidiary * Can be shown by acting through agents of just the parent

Question 39

# Equitable Subordination Loans from Shareholders

Answer 39

* Shareholders can purchase and ownership interest (equity) in the corporation. * Shareholders may also provide a loan to the corporation. * In a bankruptcy scenario there is not enough to go around. 1. Equitable subordination tells shareholders who made a loan to get in the back of the creditor line because given your actions that is what is fair.

Question 40

# Before Equitable Subordination List of who gets paid first (in bankrupcy situation?)

Answer 40

1. Creditors (Secured) 2. Creditors (Unsecured) including shareholder creditors 3. Equity

Question 41

# After Equitable Subordination List of who gets paid first (in bankrupcy situation?)

Answer 41

1. Creditors (secured) 2. Creditors (unsecured) 3. Shareholder creditors 4. equity