Corporations 4 Flashcards
1
Q
A&R Charter
A
Required document.
- Can be amended as needed by the Board of Directors AND the Shareholders
2
Q
A&R Charter
Can be barebones
A
- Name of corporation
- Has to have an indication of the corporate form: corporation, incorporated,
limited, company or an abbreviated - Can’t take a name someone is already using
- Name and address of incorporators (initial charter)
- Registered agent name and address
- Corporate purpose
- Authorized stock- amount, class and par value
- Details/specifics of class can be in charter or filed along with board resolutions in a separate certificate of designation (DGCL §151(g))
- Signature
3
Q
A&R Charter
What has to be in the charter if you want it
A
- Supermajority votes of shareholders (MBCA § 7.25(c)) or tweaking the votes per share (DGCL §212(a))
- Limitation or elimination of personal liability of directors/officers for breaches of fiduciary duties, subject to limitations (DGCL §102(b)(7))
- Cumulative voting (DGCL §214; MBCA §7.28(a))
- Allowing the Board of Directors to amend Bylaws (DGCL §109(a))
1. Default for the Model Act
4
Q
A&R Charter
Anything you’d like that isn’t prohibited (DGCL §102(b)(1); MBCA § 2.02(b))
A
- Indemnification of directors and officers
- Shareholder consent
- Naming initial directors
5
Q
Bylaws are read alongside the charter to get more details on
A
how the corporation will be governed
6
Q
Form Written Consent of the Directors
Default is directors can act by
A
unanimous written consent.
7
Q
Certified Resolutions of the Board of Directors
Directors are always allowed to act at
A
a meeting with a quorum.
8
Q
Form Written Consent of Shareholders
Generally, these are allowed but
A
the charters could say otherwise.
9
Q
Form Secretary’s Certificate
A
Houses and certifies to the accuracy of other documents like organizational documents, written consent/resolutions, incumbency certificate and good standing certificate
10
Q
Stockholders’ Agreement
Allows shareholders to
A
- agree amongst themselves, with the company signing on, to have certain rights and obligations.
- It’s not an “organizational document” but it provides another layer of what you can and can’t do
11
Q
Corporate Transparency Act (CTA) Filing
A
- Tiered Approach
- Companies formed before 2024 – have until 2025
- Companies formed in 2024 – 90 days
- Companies formed in 2025 – 30 days
Applies for all entities formed by a state filing
12
Q
Corporate Transparency Act (CTA) Filing
Identifying information about the Company,
A
its Beneficial Owners and “Company Applicants”
13
Q
Corporate Transparency Act (CTA) Filing
Beneficial Owners
A
- 25% or more of equity
- Substantial control over entity (directly or indirectly)
14
Q
Corporate Transparency Act (CTA) Filing
Company Applicants
A
After January 1, 2024 who either actually files the formation or registration document; and (2) if applicable, the individual who directs or controls the filing of the formation or registration document
15
Q
Corporate Transparency Act (CTA) Filing
30 days to make needed changes to reported information
A
- Name changes of ”beneficial owners”
- Address change of “beneficial owners”
- New “beneficial owners”
*Applies for all entities formed by a state filing
16
Q
Duties of Officers and Directors
Duties don’t mean you must
A
break the law
17
Q
Duties of Officers and Directors
Directors and officers owe fiduciary duties to
A
the corporation and shareholders (MBCA § 8.42)
- 3rd parties if insolvent
* When holding property of clients or 3rd parties
18
Q
Duties of Officers and DIrectors
2 situations
A
- monitoring
- Decision making
19
Q
Duties of Officers and Directors
A
- fiduciary duties
- loyalty
- care
20
Q
Duties of Officers and Directors
Duty of Care
A
- Share Information with the Other Fiduciaries
- Oversight
1. Monitoring the activities of the corporation, officers, and employees
2. Asleep at the wheel or inattentive - Decision-making
1. Substance
2. Process
21
Q
Duties of Officers and Directors
Duty of care 3 main requirements
A
- god faith
- best interest of the corperation
- with care of prudent person
22
Q
Duties of Officers and Directors
Duty of Care
* Subject to the business judgment rule, a director or officer has a duty to the corporation to:
A
- perform the director’s or officer’s functions in good faith,
- in a manner that he or she reasonably believes to be in the best interests of the corporation, and
- with the care that an ordinarily prudent person would reasonably be expected to exercise in a like position and under similar circumstances.
23
Q
Objective or Subjective Standard of the Duty of Care
Baseline standard of minimum director
competence you can’t cross below
A
- Need at least a rudimentary understanding of the business.
- If you have special skills or expertise
above the standard of minimum
competence, you should carry out
duties with those background skills and
expertise. - If you have more access, if you see something, say something
24
Q
Reliance on Others
The board can delegate functions, unless specified by statute, to:
A
- (1) Corporate officers or employees
- (2) Legal counsel, accountants, or other persons
- (3) A committee of the board
25
# Reliance on Others
The board of directors can rely on information from:
* (1) Corporate officers or employees
* (2) Legal counsel, accountants, or other persons
* (3) A committee of the board
26
# Reliance on Others
The focus for duty of care purposes is on the
reasonableness of the board's reliance on the person or persons to whom a matter has been delegated.
(ALI § 4.01(b); MBCA § 8.30(d)-(f))
27
# Informing Others
Directors have to loop in their team to information that is
material to their decision-making and oversight functions
28
# Informing others
Exception for disclosing information that the director:
reasonably believes would violate a duty imposed under law, a legally enforceable obligation of confidentiality, or a professional ethics rule.
29
# Causation for Breaches of the Duty of Care
Plaintiff must prove causation to be awarded
damages in a duty of
care case
30
# Causation for Breaches of the Duty of Care
Determination of the reasonable
steps a director should have taken and whether that course of action would have averted the loss.
31
# Causation for Breaches of the Duty of Care
Harder for omission or allegations of nonfeasance.
Reasonable to conclude the failure to act would produce a particular result and the result follows, causation is inferred
32
# Duty of Care: Oversight
Compliance System
* Duty to maintain adequate systems of internal controls and compliance.
* Duty to attempt in good faith to assure that a corporate information and reporting system,
which the board concludes is adequate exists.
* A detailed inspection of day-to-day activities isn’t required, just general monitoring.
33
Hear No Evil/See No Evil
isn’t a Defense to
Not Monitoring
34
What do you do if you spot wrongdoing
* Objection and noisy exit
* In some cases, talk to counsel and maybe bring a suit
35
# Duty of Care: Decision-Making (Substance)
Business Judgment Rule
* A director or officer who makes a business judgment will no be held liable if the director or officer:
(1) made a rational decision in good faith
(2) had no conflict of interest
(3) used a reasonable decision-making process
36
# Duty of Care: Decision-Making (Substance)
Business Judgment Rule
(1) made a rational decision in good faith
Honest belief they were acting in the best interest of the corporation
37
# Duty of Care: Decision-Making (Substance)
Business Judgment Rule
- Examples of bad faith
* Purpose other than the best interest of the corporation
* Intent to violate law
* Fail to act in the face of a known duty to act, demonstrating a conscious disregard for duties
38
# Duty of Care: Decision-Making (Substance)
Business Judgment Rule
(3) used a reasonable decision-making process
**informed** with respect to the subject of the business judgment to the extent the director or officer reasonably believes to be appropriate under the circumstances
39
Business Judgement Rule for Substance
Informed and rational brain
+
Good Faith Heart without conflict
40
Rebuttable Presumption for Decisions
A court will not interfere, absent egregious circumstances, with the substantive business decisions of directors and officers.
* Rebuttable presumption – director or officer’s decision is presumptively valid unless a plaintiff can rebut the preconditions .
A failure to act, as opposed to a deliberate decision to refrain from acting, is not eligible for business judgment rule protection.
41
Liability for Breach vs. Injunction
Same standard of the duty of care exists, we just don’t hold the director/officer liable for it if the Business Judgment Rule applies
42
Subject to the business judgment rule, a director or officer has a duty to the corporation to:
* perform the director's or officer's functions in good faith,
* in a manner that he or she reasonably believes to be in the best interest of the corporation, and
* with the care that an ordinarily prudent person would reasonably be expected to exercise in a like position and under similar circumstances.
43
# Directors
Delegate functions and rely on information from:
* (1) Corporate officers or employees
* (2) Legal counsel, accountants, or other persons
* (3) A committee of the board
44
# Duty of Care – Oversight
Maintain adequate systems of
internal controls and compliance.
45
# Duty of Care – Oversight
Tips for Directors and Officers
- Oversight
* Have a compliance system
* Show up to meetings
* Read the financial statements
* Do not ignore problems
46
# Duty of Care – Oversight
Tips for Directors and Officers
- Action steps
* Objection
* Noisy Withdrawal or Threaten to Sue
47
# Duty of Care: Decision-Making (Substance)
Business Judgment Rule
- 3 requirements
* (1) Makes a rational decision in good faith
* (2) Had no conflict of interest
* (3) Used a reasonable decision-making process
48
# Duty of Care: Decision-Making (Substance)
Rebuttable Presumption
A court will not interfere, absent egregious circumstances, with the substantive business decisions of directors and officers.
| Decision v. Apathy
## Footnote
Rebut preconditions or establish irrationality
49
Policy Justifications for the Business Judgment Rule
* Risk is inherent in business
* Hindsight is 20/20
* You knew this was the deal
* Nobody is dying
* Market correction
50
Duty of Care: Decision-Making (Process)
Directors have a duty to **inform themselves** prior to making a business decision, of all material information reasonably available to them.
51
Shareholder Ratification
- Informed and Disinterested
A board’s process violation of the duty of care can be cured by the approval of an informed majority of disinterested shares (Smith v. Van Gorkom)
- A 2009 DE case says this only applies to transactions that the shareholders are not otherwise legally required to approve. (Gantler v. Stephens)
52
Leverage Buyout (LBO)
Using a loan to buy a company and securing the loan by using the assets of the company that you are buying.
53
Financing Contingency/Condition
* My obligations won’t go into effect until I receive financing.
54
# Cash-Out Merger
The shareholders of the acquired company/the
target are not
sticking around
- they take cash and go
55
# Cash-Out Merger
In mergers, companies come together and the shareholders can either get
stock of the combined company or cash.
56
There is a rebuttable presumption that a business determination made by a corporation’s board of directors is
fully informed and made in good faith and in the best interests of the corporation.
57
Directors must inform themselves of
all material information reasonably available to them before making a business decsion and must disclose all material facts to shareholders to uphold thier fiduciary duties
58
DGCL § 102(b)(7) and MBCA §2.02(b)(4) allow corporations to limit personal liability of
directors
for breaches of fiduciary duties in certain circumstances.
59
# Duty of Loyalty
Directors and officers must put the corporation’s
interest ahead of their
personal interests.
60
# Duty of Loyalty
Circumstances
* Conflict of Interest
* Corporate Opportunity
* Executive Compensation
61
# Duty of Loyalty
Remedies
Conflicts of interest
- Recission or damages (difference between the contract price and a fair price)
Corperate Oppertunity
- Constructive trust
Punititve, repayment of salary, attorney's fees and expenses
62
# Duty of Loyalty
Conflict of Interest
When a director or officer enters into a transaction with the corporation, it is a yellow flag.
- 2 points
* The director or officer can’t place their own personal interests before the corporation.
* Sometimes it might be in the best interest of the corporation to do business with its directors and officers.
63
# Duty of Loyalty
Conflict of Interest
When a director or officer enters into a transaction with the corporation, it is a yellow flag.
- Check for
* Fairness
* Approval of disinterested directors or shareholders
64
# Duty of Loyalty
Conflict of Interest
- Conflict doesn't exist if
the shareholders get the same benefit
65
DE Conflict of Interest Transactions
* A transaction between a corporation and one or more of its director or officers (DGCL § 144(a))
* A transaction between a corporation and any other corporation, partnership, association or organization in which one or more of its directors or officers are directors or officers or have a financial interest. (DGCL § 144(a))
* No per se rule to govern transactions with close relatives, friends and business associates (dealt with on a case-by-case basis)
66
# MBCA Conflict of Interest Transactions
“Director’s conflicting interest transaction” means a transaction effected or proposed to be effected by the corporation (or by an entity controlled by the
corporation)
* (i) to which, at the relevant time, the director is a party;
* (ii) respecting which, at the relevant time, the director had knowledge and a material financial interest known to the director; or
* (iii) respecting which, at the relevant time, the director knew that a related person was a party or had a material financial interest.
67
# MBCA Conflict of Interest Transactions
If directors have a familial, financial, professional, employment or other
relationship that would
reasonably be expect to impair their objectivity (material relationship) with another director they can spread the conflict.
68
# MBCA Conflict of Interest Transactions
Material Financial Interest
*financial interest* in a transaction that would *reasonably
be expected to impair the objectivity * of the director’s judgment
- Makes them secnd guess their allegance to the corp.
- Must know about it! must be enough $$$$
69
# MBCA Conflict of Interest Transactions
Related person
* spouse, child (step or grand), parent (step or grand), siblings (half or step), aunt/uncle, niece/nephew and spouses of any of these or any of these as it applies to your spouse
* Person living in your house
* Entity controlled by the director or any related persons
* Entity where the director is a director, general partner, or member of the governing body
* Person/entity controlled by the director’s employer
70
DE Valid Conflict of Interest Transactions
1. Director authorization
2. Shareholder authorization
3. Fairness
71
# DE Valid Conflict of Interest Transactions
Director Authorization
* The *material facts* as to the director’s or officer’s relationship or interest and as to the
contract or transaction are *disclosed or are known* to the board of directors or the committee,
* the board or committee in *good faith*…
* authorizes the contract or transaction by the *affirmative votes of a majority of the
disinterested directors,* even though the disinterested directors are less than a quorum;
72
# DE Valid Conflict of Interest Transactions
sharehoder authorization
* The *material facts* as to the director’s or officer’s relationship or interest and as to the
contract or transaction are *disclosed or are known to the stockholders* entitled to vote
thereon
* the contract or transaction is specifically approved in *good faith (aka disinterested)* by vote of the stockholders
73
# DE Valid Conflict of Interest Transactions
Fairness
The contract or transaction is fair as to the corporation as of the time it is *authorized, approved or ratified,* by the board of directors, a committee or the stockholders.
74
# MBCA Valid Conflict of Interest Transactions
Director Authorization
* The transaction was approved by a *majority of the directors (but at least two)* without
a conflicting interest after all *material facts* have been *disclosed* to the board or are
*known.*
* If director approval is reached through the use of a *committee*, there are *additional
requirements* for the approval to be valid.
* Directors have to deliberate and vote *outside the presence *of and without the participation of interested directors.
75
# MBCA Valid Conflict of Interest Transactions
Shaerholder Authorization
The transaction was approved by a *majority* of the votes entitled to be cast by shareholders* without a conflicting interest *in the transaction after all material facts have been *disclosed* to the shareholders or are *known* (notice of the meeting must describe the conflicting interest transaction)
76
# MBCA Valid Conflict of Interest Transactions
Fairness
The transaction, judged according to circumstances at the time of commitment, was
fair to the corporation.
77
# Limited Exception on Quorum
Directors and shareholders can cleanse even if
* the amount of disinterested
directors/shareholders wouldn’t constitute a normal quorum.
* Majority of disinterested cleanses
78
# Business Judgment Rule
A director or officer who makes a business judgment will not be held liable if the director or officer:
* (1) made a rational decision in good faith
* (2) had no conflict of interest
* (3) used a reasonable decision-making process
