Corporations 31-45

Question 1

What does the Duty of Loyalty forbid a Director/Officer from doing?

Answer 1

A Director is forbidden from:

Entering into conflicting interest transactions;

Usurping a corporate opportunity;

Competing with the corporation; OR

Trading on inside information.

Priority: HIGH

Question 2

When is a conflicting interest transaction NOT a breach of loyalty?

Answer 2

When a director shows that:

It was approved by a majority of disinterested directorsafter full disclosure of all material facts;

It was approved by a majority of disinterested shareholders after full disclosure of all material facts; OR

The transaction as a whole was fair to the corporation at the time it was entered into.

Priority: HIGH

Question 3

When does a conflict of interest arise?

Answer 3

When the Director or a family member either:

Is a party to the transaction;

Has a beneficial interest in the transaction or is so closely linked to it that the director’s judgment may be affected; OR

Is involved with another entity that is conducting business with the corporation and that transaction would normally be brought before the Board because of its importance.

Priority: HIGH

Question 4

What is a corporate opportunity?

Answer 4

Any opportunity that the corporation has an interest/expectancy in;

OR

Any opportunity that’s in the corporation’s line of business.

Priority: HIGH

Question 5

When may a Director/Officer pursue a

corporate opportunity?

Answer 5

If he:

First presents it to the corporation’s Board of Directors; AND

The Board decides NOT to pursue the opportunity.

*It is not a defense to show that the corporation would not have been able to take the opportunity.

Priority: HIGH

Question 6

Direct Action

vs.

Derivative Action

Answer 6

Direct Action: Involves an injury or breach of duty owed to the shareholder of a corporation. Damages are awarded directly to the shareholder.

Derivative Action: A shareholder is suing to enforce the corporation’s claim, NOT his own personal claim. Damages awarded will be paid to the corporation.

Priority: Medium

Question 7

What are the requirements to commence a Derivative Suit?

Answer 7

The plaintiff-shareholder must:

Be a shareholder at the time of the act/omission OR became a shareholder by operation of law from such a shareholder;

Be a shareholder through entry of judgment;

Fairly and adequately represent the interests of the corporation; AND

Make a written demand upon the corporation to take suitable action (suit can’t commence until 90 days after).

Priority: Medium

Question 8

What is needed for a Fundamental Change to be approved?

Answer 8

It must be approved by a majority of the total votesentitled to be cast for the corporation, NOT just the majority of votes present at the meeting.

*A corp. MUST hold a special meeting when a fundamental change is proposed, with notice mailed to all shareholders.

Priority: Medium

Question 9

What does Rule 10b-5 prohibit?

Answer 9

The use of any means or instrumentality of interstate commerce in any scheme to defraud, make material misrepresentations or omissions, or in any other way use fraud in the purchase and/or sale of securities.

Priority: Medium

Question 10

What are the elements of a Rule 10b-5 claim?

Answer 10

That the defendant:

Engaged in a fraudulent scheme or device;

That was relied upon;

In connection with the purchase/sale of securities;

Acted with scienter;

Used some means of interstate commerce; AND

Caused damages.

Priority: Medium

Question 11

What does a fraudulent scheme or device include?

Answer 11

It includes:

Misrepresentation of material facts;

Insider trading; OR

Tipping.

Priority: Medium

Question 12

What is an “insider”?

Answer 12

A person that discloses non-public information that a reasonable trader would want to know before buying/selling stock OR abstaining from trading.

Priority: Medium

Question 13

What does Section 16(b) require of a director, shareholder, or officer?

Answer 13

That if they own more than 10% of a corporation, they must surrender any profit realized to the corporation from the sale or purchase of equity securities within a 6 month period when the corporation:

Is publicly traded; OR

Has more than 10 million in assets and at least 2,000 shareholders.

Priority: Medium

Question 14

Upon Dissolution, in what order are corporate assets distributed?

Answer 14

Outside creditors

Inside creditors

Shareholders

Priority: Medium

Question 15

Under the Deep Rock Doctrine, when will the claims of shareholders (who make a loan to the corporation) be subordinated to the claims of outside creditors?

Answer 15

If the corporation:

was undercapitalized; OR

the shareholder acted wrongly.

Priority: Low