Corporations

Question 1

The Corporate Identity

Answer 1

• Corporation is a separate legal entity
  
  • Owns its own property
  • Shareholders own stock
  • Can sue and be sued
  • Created under state law

Question 2

Forming Corporation

Answer 2

1. File art of incorp with Sec. of State and pay fees
2. Receive Cert. of Incorp
3. Adopt by-laws and elect directors
4. Sell and distribute shares
5. Hold initial shareholder meeting
   
   1. Ratify bylaws
   2. Director appoints officers
6. Minutes

Question 3

Required Future Conduct of a Corp

Answer 3

• Annual shareholder meetings - election of directors, minutes
• Keep separate books & records for the corporation, separate from the shareholders
  
  • Assets
  • Liabilities
  • Income
  • Expenses
• File corporate tax returns and pay corporate taxes
• Pay annual fee to state of incorporation and other states it has permission to work in

Question 4

Corporate Status

Answer 4

• De jure corp
  
  • active valid status
• Suspended
  
  • not paying fees
    
    • Cant conduct business, can’t sue, can’t defend suits
• Non-existent corporation
  
  • shareholders liable as a general partners, unless:
    
    1. De facto corp
       
       • Tries to incorporate
       • Has a legal right to incorporate
       • Acts as acorp
       • But technical defect that is easily cured
    2. Corporation by estoppel
       
       • Person dealing w corp thought it was de jure corporation or knew status
       • 3rd party would get a windfall if corporate form ignored
       • Only applies to contact creditors

Question 5

Structure of Corp

Answer 5

• Shareholders
  
  • passive investors
  • elect
• Directors
  
  • control major decisions.
  • Must act as a board. Appoint
• Officers:
  
  • Day to day management of corporation

Question 6

Shareholder Limited Liability

Answer 6

• Why?
  
  • Encourage investment in corps. Promote commerce
• Exceptions to LL
  
  • Illegal dividends: can only distribute profits. Cannot distribute assets if no profits. Directors liable for illegal dividends
  • Fraudulent conveyances
  • Piercing the corporate veil
  • Enterprise liability
  • Acts by shareholders

Question 7

Enterprise Liability Theory

Answer 7

When one person owns several corporations, but operates them in a way that is such that they are essentially one corporation they will be treated as one corporation in the eyes of the law.

Question 8

Piercing the Corporate Veil - Respondeat Superior

Answer 8

• An individual can be held liable for the acts of a corporation through the doctrine of respondeat superior if it can be shown that the individual used his control of the corporation for personal gain.
  
  • Wrongful use of corporate form is for furthering own, rather than corps, ends - Respondeat Superior
• Commingling and Fraud are forms of wrongful use

Question 9

Undercapitalization

Answer 9

Is not enough to pierce veil without fraud or commingling

Question 10

Tort Actions against Corps

Answer 10

• In tort actions against corporations, a plaintiff needs to show that the corporation is an instrument of the stockholder, but there is no burden to prove fraud.
• in cases where a plaintiff is arguing to pierce the corporate veil, a decision based upon a totality of the circumstances, summary judgments will rarely be applicable because the decision is so fact-based.

Question 11

Parent/Subsidiary Relationship

Answer 11

• When a corporation owns 100% of the stock of another corporation the corporation that owns 100% of the stock is the Parent corporation and the corporation that is owned is the subsidiary.
• The parent corporation enjoys the same stockholder liability protection as any other stockholder, so long as they do not take control to such an extent that they are determined to be liable under the alter ego, or enterprise liability theories.

Question 12

Sharehold Liability Limitation

Answer 12

While there has been cases where the corporate veil has been pierced in a parent/subsidiary relationship, there has NEVER been a case where the corporate veil has been pierced and public shareholders have been liable.

Question 13

Hat Rule

Answer 13

If you wear the right hat at the right times, and do not commingle your roles, even if the roles are significantly intertwined, the corporate veil will not be pierced.

Question 14

Derivitave Action

Answer 14

• A derivative suit is a suit by a shareholder on behalf of the corporation against the corporate officers/directors for damage done to the corporation. It is a completely separate theory from piercing the corporate veil.
• subject to state limitations on strike suits

Question 15

Direct or Derivitave

Answer 15

• Is the shareholder bringing the suit on behalf of himself?
  
  • If the shareholder is claiming that he is personally damaged and that the damages should be awarded to him personally then it is personal.
  • If he is claiming that the corporation was damaged and that the proceeds of the suit should go to the corporation it is derivative.

Question 16

Strike Suit -

Answer 16

• Fraudulent
• A strike suit is a lawsuit brought by a single person or group of people with the purpose of gaining a private settlement before going to court that would be less than the cost of the defendant’s legal costs.[1] Such suits frequently appear where the defendant is a considerably larger entity than the plaintiff, such as a corporation or an estate

Question 17

Damages Claim from Demand/Refusal Formula

Answer 17

Demand before suing or show demand futility (excusal) + wrongful refusal of demand

Question 18

Rules for Committees

Answer 18

• A party may challenge the independence of a special committee, but once a committee is deemed to be independent then their decisions are protected under the business judgment rule.
• NY Special Committee Standard:
  
  • Committee must show for dismissal:
    
    • It was independent
  • Thorough investigation
  • Good faith

Question 19

Independence

Answer 19

when evaluating whether a director is “disinterested” you have to look as broadly as possible:

• Focuses on economically consequential relationships and economically material ties
• Personal relationships are not labeled “non-independent”. You also have to look at non-economic social ties, or anything else that could affect that director’s loyalties.

Question 20

Domination

Answer 20

• In order for there to be domination, there needs to be a bias producing relationship
• More than friendship and normal business relationship

Question 21

Goal of Corps

Answer 21

The primary goal of a corporation is to make money for its shareholders. Any other goals are ancillary to that principle goal.

Question 22

Standard for when Ct will not interfere with management of directors:

Answer 22

A court will not interfere with an honest business judgment absent a showing of:

• fraud
• missapropriations
• refusal to disclose dividends when the corp has a surplus of net profits
• illegality
• conflict of interest.
• disloyalty

Business decisions should not be disturbed just because a defendant can make a reasonable case that the policy chosen by the company may not be the wisest policy available.