Corporations

Question 1

pre-formation liability

Answer 1

Promoters - promoters are personally liable for the K’s they entered into for the benefit of a not yet existent corporation.

Corp. - is not liable b/c it is not formed

Exception- K specifically disclaims liability; or circumstances demonstrate that the other party agreed to look only to the corporation for performance.

Question 2

pre-incorporation transactions AFTER formation

Answer 2

Corp. generally NOT LIABLE

unless, the corporation assumes liability by its own act through adoption or novation (e.g., adoption at meeting;

Adoption: promoters liable but can seek indemnification
Novation: promoters not liable.

Question 3

Corporation by estoppel

Answer 3

a court may estop the third party from alleging that: the corp. is defectively Incorporated If it would unjustly expose the corporate principals to liability.

When a contractual dispute arises between a third party and an entity believed to be a corporation, a court may estop the business entity from alleging that: it is not legally a corp. liable on the K if that would unjustly deprive the third party from relief from injury.

Question 4

Duty of care for Corporate officers/directors

Answer 4

(1) in good faith;
(2) ordinary prudent person care; and
(3) in manner reasonably believe to be in best interest of corporation.

Question 5

Business Judgment Rule

Answer 5

Rebuttable presumption that decisions are made:

(1) on an informed basis;
(2) in good faith; and
(3) honest belief that decision was in best Interest of the corporation.

Question 6

Duty of Loyalty for Corporate Officers/Directors

Answer 6

(1) loyal to corp. and not promote their own interest in a manner injurious to the corp.

Cannot:

(1) transact act business w/ corp;
(2) usurp corp. opportunity;
(3) or directly compete with the corpora-tion.

Question 7

Requirement for officer/director self dealing?

Answer 7

must:

(a) Notify and disclose all material facts;
(b) receive majority approval

Remedy:

voidable if not followed.

Question 8

Requirements for officer/director usurping corp. opportunity?

Answer 8

(1) determine if opportunity exists using factors:
(a) opportunity discovered while acting on behalf of corp.
(b) related to corp.
(c) interest in corp. using opportunity
(d) corp. line of business
(e) corp. funds used to discover opportunity

(2) If yes, then director must:
(a) fully disclosed
(b) corp. declines to pursue

Question 9

Shareholder voting requirements.

Answer 9

see outline

Question 10

Types of shareholder suits

Answer 10

Direct - wrong done directly to shareholder (e.g., didn’t declare dividend.

Derivative - is an equitable action brought by a shareholder on behalf of the corporation and for the corporation’s benefit. (e.g., breach of duty)

Question 11

When can a shareholder sue the corp. to compel a dividend.

Answer 11

When the action was done in bad faith, fraud, or abuse of discretion. (examples: shareholder oppression, large bonuses salaries, preferential income tax, acquiring minority stock cheaply.)

Requires shareholder to make a written demand on corp. to enforce the rights prior to bringing suit UNLESS the shareholder can show that the demand would be futile.

Question 12

What are the duties of shareholders to corp.

Answer 12

Generally none

Exception - majority shareholders duty of good faith (can’t obtain benefit not shared with minority shareholders)

Question 13

How do you pierce the corporate veil?

Answer 13

Necessary to prevent a grave injustice
Factors include:
(1) the extent to which the corp. is undercapitalized
(2) the extent to which corp. formalities have not been followed
(3) the extent to the comingling of personal and corp. funds
(4) the extent to which the corp. entity is the alter ego of the shareholders (not a separate entity)