Corporations Flashcards

Question 1

Q

Major advantage of corporation

CORPORATE MODEL /corporations

Answer

A

Limited liability

in partnership, each partner is liable for business debt

Question 2

Q

Limited liability

CORPORATE MODEL /corporations

Answer

A

Concept that allows corporations to avoid personal liability for the debts incurred by the corporation (may lose share/investment, but will not be personally liable)

Question 3

Q

Major disadvantage of corporation

CORPORATE MODEL /corporations

Answer

A

Double-taxation
(partnership isn’t taxed on its profit, simply credit each partner for share and tax individually = flow-through taxation)

Question 4

Q

Taxation

CORPORATE MODEL /corporations

Answer

A

Disadvantage of corporation = double-taxation

- Have to pay income taxes on its profits, then taxed again when dividends distributed to shareholders

Question 5

Q

S corporations

CORPORATE MODEL /corporations

Answer

A

Smaller corporation in which all shareholders are human being and US citizens
(Exception to double-taxation)

Question 6

Q

C corporation

CORPORATE MODEL /corporations

Answer

A

Antithesis to S corporation

Taxed at entity level = double-taxation

Question 7

Q

3 sets of players in corporation

CORPORATE MODEL /corporations

Answer

A

shareholders/stockholders
Board of directors
officers

Question 8

Q

Shareholder

CORPORATE MODEL /corporations

Answer

A

Owners of corporation
Buy stock from corp to become shareholder
Do NOT manage corporation, instead ELECT people who do run it (board of directors)

Question 9

Q

Shareholder’s power

CORPORATE MODEL /corporations

Answer

A

Measured by the number of shares owned

Question 10

Q

Board of directors

CORPORATE MODEL /corporations

Answer

A

Managers of corporation
Run the organization
Must act as a group
Not agents of the corporation

Question 11

Q

Passive investment

CORPORATE MODEL /corporations

Answer

A

separation of management and ownership rights
= allows shareholders to own corp without burden of running it
Big advantage of corporation form (distinct from partnership)

Question 12

Q

Officers

CORPORATE MODEL /corporations

Answer

A

Appointed and monitored by the board of directors to carry out board’s policy
Act as individuals, not as a group
Agents of the corporation = can bind the corporation to contract

Question 13

Q

Can one person be shareholder, director, officer (or some combination) at the same time?
CORPORATE MODEL /corporations

Answer

A

Yes

Key exam tip: keep track of which hat person is wearing when acting to know which rules/duties apply

Question 14

Q

Can a corporation consist of only one person?

CORPORATE MODEL /corporations

Question 15

Q

Exceptions to basic corporate model

CORPORATE MODEL /corporations

Answer

A

Often come up in closely held corporation

Question 16

Q

2 categories of corporation

CORPORATE MODEL /corporations

Answer

A

Public corporation

Close(ly held) corporation

Question 17

Q

Public corporation

CORPORATE MODEL /corporations

Answer

A

Enormous business (thousands of shareholders)
Stock is included on the stock exchange
Example = Coca Cola, Microsoft

Question 18

Q

Close corporation

CORPORATE MODEL /corporations

Answer

A

Vast majority of corporations in this county
Smaller business (fewer shareholders, sometimes family)
No public market for stock
Example = uber

Question 19

Q

Close corporation exceptions

CORPORATE MODEL /corporations

Answer

A

Can eliminate board of directors

- Shareholders can sometimes be liable for business debt

Question 20

Q

Law for corporations

CORPORATE MODEL /corporations

Answer

A

State law, each has its own corporation code (vary from state to state)
No federal law for corporation
(federal corporations, like Red Cross, are created by legislative acts)

Question 21

Q

Why Delaware is cool

CORPORATE MODEL /corporations

Answer

A

Provided the most business-friendly, flexible code

but today the model act is better, but inertia blah blah

Question 22

Q

Law for formation of corporation

CORPORATE MODEL /corporations

Answer

A

Can only be formed by complying with state regulation

Question 23

Q

Requirements to form corporation

CORPORATE MODEL /corporations

Answer

A

Usually means

Article of corporation
Capital

Question 24

Q

Articles of corporation

CORPORATE MODEL /corporations

Answer

A

Must be accepted

Question 25

Q

Limited liability filing

CORPORATE MODEL /corporations

Answer

A

Any time we have limited liability company, state must accept document for filing (gotta get dat stamp)
(distinct from partnership = doesn’t need that, because not limited liability)

Question 26

Q

Capital

CORPORATE MODEL /corporations

Answer

A

= Money
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$M$$$$$0$$$$$$$$N$$$$$$$$$$E$$$$$$$$$$$$Y$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

Question 27

Q

2 ways of raising capital

CORPORATE MODEL /corporations

Answer

A

Debt financing (loans)

2. Equity financing (selling ownership interest)

Question 28

Q

Debt financing

CORPORATE MODEL /corporations

Question 29

Q

Equity financing

CORPORATE MODEL /corporations

Answer

A

Selling ownership interest

Question 30

Q

Inherent conflict in corporations

CORPORATE MODEL /corporations

Answer

A

Bifurcation of ownership/management interest
Board of directors are calling shots that affect the money of shareholders
KEY issue = philanthropic decisions

Question 31

Q

Can corporations participate in philanthropy?

CORPORATE MODEL /corporations

Answer

A

Law recognizes corporations are members of the community, and as members of the community, can support charitable causes

Question 32

Q

B corporation

CORPORATE MODEL /corporations

Answer

A

AKA benefit corporation
= For-profit corporation that is expressly committed to benefit society by certain causes
EXAMPLE = corporation that manufactures widgets in foreign country, pays foreign workers same wage as U.S. workers (cause is expressly stated, board cannot be sued for wasting shareholders money)

Question 33

Q

Significance of corporation

CORPORATE MODEL /corporations

Answer

A

Development of corporation unlocked economic engines

- Created jobs, spurred innovation, created tax revenue

Question 34

Q

3 requirements to form a corporation

FORMATION, ETC /corporations

Answer

A

Person (incorporator)
Paper (typically articles of incorporation)
Acts (delivery, filing by usually Secretary of State)

Question 35

Q

Incorporator

FORMATION, ETC /corporations

Answer

A

Can have more than one incorporator
Usually human being, but doesn’t have to be
Job = execute articles and delivery to state

Question 36

Q

4 types of info required by model act

ARTICLES OF INCORPORATION /formation of corporation

Answer

A

4 things that must be in the articles

Name of corporation
Name and address of each incorporator
Name of registered agent, address of registered office
Information about the stock

Question 37

Q

Name of corporation

FORMATION, ETC /corporations

Answer

A

Must have one of magic words, spelled out or abbreviated

Question 38

Q

4 magic words of corporation name

ARTICLES OF INCORPORATION /formation of corporation

Answer

A

(required by model act, vary slightly from state to state)

Corporation
Company
Incorporation
Limited

Question 39

Q

Address of registered office

ARTICLES OF INCORPORATION /formation of corporation

Answer

A

Must be in the state of incorporation

Question 40

Q

Registered agent

ARTICLES OF INCORPORATION /formation of corporation

Answer

A

Official legal representative of the corporation

EXAMPLE = someone who can receive service of process or tax docs

Question 41

Q

Information about the stock

ARTICLES OF INCORPORATION /formation of corporation

Answer

A

Number of shares available

If having classes of stock, must note this and describe

Question 42

Q

additional info required by some states

Answer

A

Some states require article of incorporation to include

Statement of purpose for corporation (can be very general)

Question 43

Q

2 types of info that can be included

ARTICLES OF INCORPORATION /formation of corporation

Answer

A

Exculpation provision

2. Names/addresses of initial directors

Question 44

Q

5 steps of required action

FORMATION, ETC /corporations

Answer

A

Incorporator signs articles
Have them notarized
Deliver them to secretary of state
Have to pay filing fee
Secretary stamps and files = corporation forms at this moment

Question 45

Q

Organizational meetings - 2 situations

ORGANIZATION /corporations

Answer

A

Initial directors were named in articles

2. Initial directors were not named in articles

Question 46

Q

Organizational meeting if initial directors named in articles
ORGANIZATION /corporations

Answer

A

Named directors hold meeting to

Select directors
Adopt initial bylaws
Conduct other appropriate business, like authorizing issuance of stock

Question 47

Q

Organizational meeting if no directors named in articles

ORGANIZATION /corporations

Answer

A

incorporator(s) holds meeting (doesn’t have to be in person, can be by written consent) to SELECT initial directors
Most states = can also adopt initial bylaws/conduct other biz OR can let initial directors do it

Question 48

Q

Differences between bylaws and articles of incorporation

ORGANIZATION /corporations

Answer

A

Articles = far more important, actually form corporation when filed with state, public documents, usually very short document, extremely difficult to amend (constitutes “fundamental corporate change”)

Bylaws = not filed with state, completely internal, lay out internal rules, easy to amend (most states = shareholders can do it, some state = directors or shareholders can)

Question 49

Q

When articles and bylaws conflict, which prevails?

ORGANIZATION /corporations

Question 50

Q

Form corporation in state A and want to do business in state B
INTERNAL AFFAIRS RULE & FOREIGN CORPORATION /corporations

Answer

A

Incorporate in state A (= domestic corporation in state A)

- Qualify to do business in state B (= foreign corporation in state B)

Question 51

Q

Doing business

INTERNAL AFFAIRS RULE & FOREIGN CORPORATION /corporations

Answer

A

Engaged in the regular course of intrastate business activity
= must qualify as foreign corporation
(if activity is more sporadic, don’t need to qualify AKA corp doesn’t need to qualify in every single state in which it has ever done a single business)

Question 52

Q

Qualifying as foreign corporation

INTERNAL AFFAIRS RULE & FOREIGN CORPORATION /corporations

Answer

A

Must get certificate of authority from state B
by showing
1. Content of articles
2. Proof that corporation is in good standing in state A

Question 53

Q

Requirements as foreign corporation (once you get certificate of authority)
INTERNAL AFFAIRS RULE & FOREIGN CORPORATION /corporations

Answer

A

Must get registered agent in state B (so somebody there to receive service of process if sued in state B)
Must pay taxes and stuff to state B

Question 54

Q

Failure to qualify

INTERNAL AFFAIRS RULE & FOREIGN CORPORATION /corporations

Answer

A

Subject to civil fine

- Cannot assert a claim in state B (until pay fine and get qualified)

Question 55

Q

Internal affairs rule

INTERNAL AFFAIRS RULE & FOREIGN CORPORATION /corporations

Answer

A

Q = what law governs internal affairs?
A = internal affairs of a state A incorporation are governed by state A law
AKA governing law for internal affairs is state of incorporation EVEN IF corp doesn’t do any business at all in incorporating state

Question 56

Q

Definition

PRE-INCORPORATION CONTRACTS /corporations

Answer

A

Somebody acts on behalf of corporation that’s not yet formed and enters contract on behalf of that corp WHEN EVERYONE KNOWS THERE’S NO CORPORATION

Question 57

Q

Promoter

PRE-INCORPORATION CONTRACTS /corporations

Answer

A

Person acting on behalf of corporation that’s not yet formed and enters pre-incorporation contracts

Question 58

Q

Liability of corporation

PRE-INCORPORATION CONTRACTS /corporations

Answer

A

Corporation is never automatically liable on pre-incorporation contract
Not liable UNTIL it adopts the contract

Question 59

Q

2 types of adoption

PRE-INCORPORATION CONTRACTS /corporations

Answer

A

Can be express or implied

Question 60

Q

Express adoption

PRE-INCORPORATION CONTRACTS /corporations

Answer

A

Board of directors has meeting and agrees to adopt or something like that

Question 61

Q

Implied adoption

PRE-INCORPORATION CONTRACTS /corporations

Answer

A

Corporation accepts a benefit under that contract

Question 62

Q

Liability of promoter

PRE-INCORPORATION CONTRACTS /corporations

Answer

A

Promoter is PERSONALLY liable because she is a party to that contract
EVEN IF corporation is never formed

Question 63

Q

Effect of adoption on liability of promoter

PRE-INCORPORATION CONTRACTS /corporations

Answer

A

Promoter is liable on pre-incorporation contracts until there’s a novation

Question 64

Q

Novation

PRE-INCORPORATION CONTRACTS /corporations

Answer

A

Agreement between promotor and corporation and lessee that corporation will replace promoter on contract
(adoption is not novation = if corp adopts contract, BOTH promoter and corp are liable until novation occurs)

Answer 62

A

Everyone THINKS there is a corporation but legally there isn’t due to defect in formation (= no de jure corporation)

Answer 63

A

PIC = everyone knows the corp doesn’t exist
DI = everyone believes the corp does exist

Answer 64

A

No formation of de jure corporation BUT if defective incorporators are acting together, probably formed partnership
= personally liable (by rules of partnership)

Answer 65

A

= under these common law doctrines, treated as corporation = not personally liable

De facto corporation (DFC)
Corporation by estoppel (CBE)

Answer 66

A

Must be unaware of failure (defect) to form a corporation

Answer 67

A

Must show that
1. There is relevant incorporation statute (met in every state)
2. Parties made good faith, colorable (you were soooo close) attempt to comply with statute
3. Some exercise of corporate privilege (AKA acting as though corporation existed)
= de facto corporation doctrine applies, court treats as if corporation was actually formed

Answer 68

A

Parties not personally liable
Applies in BOTH for contracts and in tort
BUT state can still enforce penalties/action for failure to incorporate (= still liable to state)

Answer 69

A

Still liable to state for failure to incorporate correctly

Answer 70

A

If parties treats business as incorporation and act under that belief, 3P can be estopped from denying the corporation’s existence (AKA estopped from claiming the entity is not a corporation)
Used as defense by defective incorporation to prevent 3P from suing them individually

Answer 71

A

Very narrow doctrine (narrower than DFC)

- Applies only in contract (not tort)

Answer 72

A

Common law doctrines
All over the map
Some states abolished both, some follow one, some follow both
NOTE WHAT PROFESSOR THINKS RE: WHETHER GOOD LAW

Answer 73

A

people who act behalf of corporation KNOWING that it doesn’t exist/wasn’t formed = personally liable

Answer 74

A

Some think it implies CBE and DFC are abolished
Some think that lack of knowledge means that you can use CBE and DFC
NOTE WHICH PROFESSOR THINKS

Answer 75

A

Fancy word for money

Answer 76

A

Debt financing
Equity financing
(usually raise capital using both)

Answer 77

A

Borrow money

Answer 78

A

Allow investors to buy ownership interest in the business

Answer 79

A

Gives money to corporation to loan for interest (debt financing)
Payment from corporation does not vary with profits/losses of corporation
Riskier for the business

Answer 80

A

Gives money to corporation to buy for ownership (equity financing)
Payment from corporation varies with profits/losses of corporation
Riskier for the investor

Answer 81

A

By issuing securities

Answer 82

A

Fancy word for sell

Answer 83

A

Fancy word for investment

Answer 84

A

Security issued by corporation to lender (creditor)

- With debt financing

Answer 85

A

Loan to corporation, repayment of which is not secured by corporate assets
Form of debt financing

Answer 86

A

Security of ownership interest issued by corporation to investor
With equity financing

Answer 87

A

Corporation is selling its own stock

Answer 88

A

Maximum number of shares corporation may sell

- Always set out in the article (cannot sell more unless amend articles)

Answer 89

A

Number of shares corporation actually does sell

Answer 90

A

Number of shares corporation has sold and has not reacquired

if issued and bought back, no longer outstanding

Answer 91

A

When corporation is selling its own stock, must abide by 2 rules

Must be for a proper form of consideration
Must be for a proper amount of consideration

Answer 92

A

Historically = couldn’t do promissory notes and promise for future services
Modern view = buyer may pay for an issuance with any tangible or intangible property or benefit to corporation (AKA pretty much any consideration)

Answer 93

A

Corporation has to get at least par value

Answer 94

A

= minimum issuance price
Completely arbitrary, has no relationship with actual value of stock
(key word = minimum, can be more)

Answer 95

A

Not required

- Set up by the articles

Answer 96

A

No minimum issuance price

- Board can set whatever price it wants

Answer 97

A

ONLY applies when corporation sells its own stock

- Don’t apply to regular people selling the corporation’s stock

Answer 98

A

When stock is listed for less than par value

Difference btwn par value and selling price = water

Answer 99

A

AKA what happens when stock is listed for less than par value
= corporations sue for payment of water
- Directors who approve the issuance of watered stock = liable for the water
- Buyer of watered stock = liable for the water charged with notice of par value (can’t use ignorance of par value as defense)
- 3P to whom buyer transfers watered stock = not liable for the water if didn’t know about the water

Answer 100

A

Term of art

= Payment by corporation to its shareholders

Answer 101

A

Dividends
Repurchase
Redemption

Answer 102

A

= where corporation is paying the shareholders

Corporation is doing well, making money = can choose to put that back into corporation OR to pay dividends
Some corporations never pay dividends

Answer 103

A

= corporation buys stock back from shareholder

Answer 104

A

= corporation forces shareholder to sell back her stock, pays her for it (redeemed stock)

Fairly rare
MUST be set up in the articles of incorporation

Answer 105

A

No, shareholder’s don’t have rights to distribution
Payment of distribution is left entirely to discretion of the board
(if shareholder sues, very hard to win, must show bad faith and stuff)

Answer 106

A

Paid pro rata per each share (unless articles say otherwise)

Answer 107

A

Preferred = pay first (NOT pay more = might get more, might get less)
Articles will set up classes
Articles will set up preferred amount

Answer 108

A

Law imposes restrictions on when corporation can make distribution
2 schools of thought

Answer 109

A

historical/fund approach

2. Modern approach (majority approach)

Answer 110

A

Must know about 3 types of funds in life of corporation

Answer 111

A

Earned surplus
Stated capital
Capital surplus

Answer 112

A

= profits corporation earned by doing well on market (making more than it spends)
- Proper source (fund) for distribution AKA may pay distribution from earned surplus

Answer 113

A

= par value of a par issuance (at board’s discretion with no-par balance)

Related to corporation’s raising money by issuing stock (rather than profiting from business)
Can NEVER be used to pay distribution

Answer 114

A

= excess over par value (at board’s discretion with no-par balance)

Related to corporation’s raising money by issuing stock (rather than profiting from business)
CAN be used to pay distribution

Answer 115

A

Corporation can make a distribution UNLESS
1. Corporation is insolvent OR
2. The distribution would render it insolvent
Looks at insolvency, not the type of funds

Answer 116

A

Company is insolvent if
1. Unable to pay its debts as they come due
2. Corporation’s assets are less than its liability
These are ALTERNATIVE tests = if corporation meets either, it is insolvent
Model act section 6.40(c)(1) and (2)

Answer 117

A

Liabilities INCLUDE preferential liquidation rights

= must be taken into account when testing for insolvency

Answer 118

A

Class of stock with liquidation preference (analogous to dividend preference)
Comes up when company dissolves (rather than during distribution)
= distributed first to those with liquidation preferences

Answer 119

A

Directors who approved the distribution = usually liable to the extent that distribution was improper (some states = strict liability, some states require breach of duty of care)
Shareholders who received distribution = liable ONLY if knew distribution was improper AT TIME IT WAS RECEIVED

Answer 120

A

Either named in articles or elected by incorporators

Answer 121

A

Elected by shareholders every year at annual meeting

Answer 122

A

Need only one
Model act = can be enumerated in articles OR bylaws
(varies by state)

Answer 123

A

Nope

- Has to been an adult human being

Answer 124

A

Nope

- No authority to bind the corporation

Answer 125

A

Smaller companies = day-to-day operations

- Large companies = oversee management, but officers undertake actual management

Answer 126

A

Held by the board of directors
Directors can
1. Set management policy
2. Make big decisions
NOT the shareholders

Answer 127

A

Not only a director but also employed full-time by the corporation (as officer)
Sometimes called management director

Answer 128

A

Someone whose day job is not within the corporation

Answer 129

A

Required, shareholders must hold it to elect directors

- If late, directors will be holdover directors until successor is appointed

Answer 130

A

Up for election every year

- Sometimes can be longer in staggered boards

Answer 131

A

divided into halves or thirds

- half/third of board is elected each year

Answer 132

A

Can remove a director before term is up
With or without cause
(some states = if staggered board, must have cause)

Answer 133

A

Majority = shareholder or remaining directors can fill that position
Majority = if shareholders created the vacancy, shareholders should select replacement

Answer 134

A

Must act as a group

Answer 135

A

Unanimous written agreement (generally includes email)

2. Meetings

Answer 136

A

Regular

2. Special

Answer 137

A

Corporation does not have to give notice to shareholders

time/date/frequency is usually set up in the bylaws

Answer 138

A

Corporation MUST give notice to directors

Answer 139

A

Must state time and place of meeting
Does not have to state the purpose of the meeting
Model act 8.22(b) requires notice be given at least two days before meeting
Details of how to give notice = statutes usually vague, often put in bylaws

Answer 140

A

Any action taken by board at that meeting may be voided

UNLESS those not given notice waive the defect

Answer 141

A

May do this in writing at any time

2. May do this by attending the meeting without objecting at the outset of the meeting

Answer 142

A

Every decision board makes comes to board as resolution to be passed or not
Key Q = does it have a quorum

Answer 143

A

Majority of the directors (unless bylaws say otherwise)

Answer 144

A

Once have a quorum, just need positive/affirmative vote from majority of those in attendance

Answer 145

A

If director leaves meeting (even for short bit) and majority is not longer present = quorum is broken, board cannot act

Answer 146

A

Directors don’t have to be in the same place or see each other
TEST = directors merely have to hear each other live
Everyone participating is considered present

Answer 147

A

Can vote by proxy

- Can enter voting agreements

Answer 148

A

voting proxies/agreements = void by public policy

directors owe nondelegable fiduciary duties to corporation

Answer 149

A

Every director present is PRESUMED to have concurred with whatever action board took
UNLESS dissent or abstention is noted in writing

Answer 150

A

In the minutes OR
Deliver in writing to presiding officer in the meeting OR
Filed written dissent with the corporation immediately after the meeting

Answer 151

A

Liable UNLESS the dissent or abstention is noted in writing in 1 of 3 permitted ways
(usually in the minutes)

Answer 152

A

You can create a shell LLC with no assets and merge with the corporation with the LLC being the survivor

Answer 153

A

Corporation = Formalities required.

Partnership = Can be informal.

Answer 154

A

Corporation = Yes.

Partnership = Depends on type.

Answer 155

A

Corporation = Easier.

Partnership = More difficult.

Answer 156

A

Corporation = Default infinite.

Partnership = Default at will.

Answer 157

A

Corporation = Yes.

Partnership = No.

Answer 158

A

Corporation = Lawyer, filing fees, etc.

Partnership = Zero for GP.

Answer 159

A

Corporation = More extensive.

Partnership = Extensive.

Answer 160

A

Corporation = Easier to understand and high prestige.

Partnership = Hard to understand and low prestige.

Answer 161

A

Corporation = More limited.

Partnership = High.

Answer 162

A

Corporation = Double.

Partnership = Single. Pass though.

Answer 163

A

(Courts says you must have 3 out of 4)

Limited L
Unlimited Duration
Centralized management, and
Freely transferable interest

Answer 164

A

Legal personality: a corporation is a legal entity distinct from its owners;
More freely transferable ownership interest (Liquidity)
Flexible capital structure
Infinite duration
Limited liability

Answer 165

A

Centralized corporate management =

the right to manage the corporation is not spread out among the shareholders
but rather is centralized in a board of directors, who usually delegates day-to-day management duties to officers

Answer 166

A

a shareholder can sell his shares to whomever he wants, whenever he wants in most circumstances

Answer 167

A

Corporations are taxed twice:

Corporation is taxed as an entity, and
Taxed when corporation pays out dividends to shareholders

Answer 168

A

Stock: an equity security is an instrument representing an investment in the corporation whereby its holder become a part owner of the business

Answer 169

A

Bonds: set return, interest. Debt gets paid first if company goes bankrupt.
A debt security represents a creditor/debtor relationship with the corporation, whereby the corporation has borrowed funds from an outside creditor and promised to repay the creditor
A bond holder has no ownership interest in the business

Answer 170

A

May be amended at any time by a three step process:

The Board recommends amendment to the shareholders
Shareholders must approve the amendment, AND
Amendment must be field with the secretary of state’s office

Answer 171

A

May not be same or confusingly similar to that of another corporation incorporated or qualified to do business in the state of incorporation
The name must also include some word or abbreviation indicating that the business is incorporated such as corporation, company, Inc, or the like

Answer 172

A

The articles must state the maximum number of shares the corporation is authorized to issue

Answer 173

A

The articles must state the name of the corporation’s registered agent and the address of its registered office
The registered office must be located within the state of incorporation
The registered agent receives service of process when the corporation is sued

Answer 174

A

The articles must state the name and address of each incorporator
Traditionally needed 3, but today you only need 1

Answer 175

A

Statement of Purpose
Classes and Series of Shares
Director and Officer Indemnification and Liability Limitation

Answer 176

A

The articles may state the nature of the corporation’s business or the purpose for which it was formed

Answer 177

A

Corporate stocks may be separated into multiple classes and series
If the corporation wishes to do so, the articles must identify the different classes and the number of shares of each class the corporation is authorized to issue
Where one or more classes of shares have certain preferential rights over other classes, those rights must be spelled out in this part

Answer 178

A

Most corporate statutes now permit the articles to include provisions limiting the scope of a director’s liability and/or permitting indemnification of directors

Answer 179

A

= the rules the Corporations Adopts to Govern Internal Affairs

Binding contracts between directors, officers and shareholders
May contain any provision, not inconsistent with the law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers, or employees
Stockholders are put on notice of bylaws upon the purchase of stock

Answer 180

A

Bylaws tend to be far more detailed than the articles of incorporation for these reasons
1. Bylaws need not be filed with the state government, so they are not part of any public record
2. Bylaws are more easily amended than articles of incorporation
3. Officers and directors tend to be more familiar with bylaws than with the articles, which makes them a ready repository for organizational rules.
Articles control over bylaws

Answer 181

A

A contractual provision in which the parties establish the place (such as the country, state, or type of court) for a specified litigation between them
Cuts down on a corporation’s litigation because cases from different states can be consolidated
The only requirement is that it must be internal business for it to be subject to the forum selection clause

Answer 182

A

Re: Forum Selection Clause
1. Under Delaware law, forum selection bylaws adopted pursuant to articles of incorporation w/o a vote by stockholders are not facially invalid.
2. Shareholders can bring direct and derivative actions.
3. Stockholders have the power to adopt, amend, or repeal bylaws, but a corporation may confer this power upon the directors (but this never divests this power from the stockholders).
4. When challenging the contractual validity of the bylaws:
Burden is a difficult one – must show that bylaws cannot operate lawfully or equitable under any circumstances.

Answer 183

A

C-Corporations
Close Corporations
De Facto Corporation
Corporation by Estoppel

Answer 184

A

Public v. Private

Most common formation
Taxation: it pays income taxes on any profits that it makes, and generally shareholders do not have to pay income tax on the corporation’s profits until the profits are distributed. Double taxation

Answer 185

A

50% of the company’s stocks are in the hands of 5 or fewer people

Answer 186

A

This is a corporation in fact
This doctrine provides that a defectively formed corporation (that is one that fails to meet the technical requirements for forming a de jure corporation) may attain the legal status of a de facto corporation if certain elements are met
Elements = instantly comes into being when
1. Proceeding in good faith (a good faith attempt to comply)
2. Using a valid LLC/Corporation statute
3. For an authorized/permitted purposes, AND
4. Have executing and acknowledged articles of association pursuant to that purpose
5. Cannot have a true corporation until that state says you are (must complete all requirements, paperwork, etc.)
(However, if a state has not done what it is supposed to do, it can still be recognized as a corporation because courts look to substance over form)

Answer 187

A

A person who treats an entity as a corporation will be estopped from later claiming that the entity was not a corporation
This is an equitable remedy, the purpose of which is to prevent one who contracts with a corporation from later denying its existence in order to hold the individual officers or partners liable
Court applies this doctrine to LLCs because the corporate structure has little impact on the equitable principles at stake, there is no reason to draw a distinction, and it can coexist with an LLC like it coexists with the BCA

Answer 188

A

The courts will disregard the corporate form, or pierce the corporate veil whenever necessary to prevent fraud or to achieve equity (would promote injustice or fraud)

(This is the opposite of de facto and estoppel argument because here, a valid corporate existence is ignored in equity to make individuals personally liable)

Answer 189

A

Veil will be pierced when corporate formalities are ignored (when the corporation is the alter ego or mere instrumentality of another corporation)

Answer 190

A

= corporation is dummy for its individual stockholders who are actually carrying on business in their person capacities; the stockholder would be personally liable

Alter ego results in basic injustice
When a company’s owner does not take care to observe the formal separation between himself and his business, the business creditors can collect their debts directly from him

Answer 191

A

= the plaintiff must allege that a shareholder used the corporate form to conduct business in his individual capacity and further his own business interests’ rather than the corporations:

He will be liable for the corporation’s acts upon the principle of Respondeat superior applicable even where the agent is a natural person
This liability extends even to the corporation’s negligent acts as well

Answer 192

A

= Corporation is a fragment of a larger corporation which actually conducts business; only larger corporate entity financially responsible

If one corporation owns all the shares of common stock of another corporation
A showing of substantial domination is required
1. First company (owner of shares) is generally the parent corporation
2. The second company is generally the subsidiary
Like an individual shareholder; however a corporate shareholder must be aware of the danger that if it is not careful, the creditors of the subsidiary may be able to pierce the corporate veil of the subsidiary
The parent must also be careful to not become directly liable by virtue of its participation in the activities of the subsidiary

Answer 193

A

The failure to maintain adequate corporate records or to comply with corporate formalities
The comingling of funds or assets
Undercapitalization
One corporation treating the assets of another corporation as its own

Answer 194

A

Daily operation of the two corporations is not kept separate
Subsidiary does not observe basic corporate formalities, such as keeping separate books and records and holding shareholders and board meetings
(This was the most important factor In Re Silicone)

Answer 195

A

Parent and subsidiary file consolidated financial statements and tax returns
Parent finances subsidiary

Answer 196

A

Subsidiary operate with grossly inadequate capital

Answer 197

A

Parent and subsidiary have common directors or officers;
Parent and subsidiary have common business departments
Parent causes the incorporation of the subsidiary
Parent pays the salaries and other expenses of the subsidiary
Parent uses subsidiary’s property as its own

Answer 198

A

When the corporation is inadequately capitalized at the outset
To prevent fraud
- Circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice (must allege more than simply a promotion of injustice because that would be an issue in every case and too general; some element of unfairness, something akin to fraud, deception, or the existence of a compelling pubic interest must present in order to disregard the corporate fiction
The corporate veil of limited liability does not protect from criminal liability
- A corporation is an agent of human action so if a corporation injures someone an individual authorizing such action may/can be liable
- This does not happen often

Answer 199

A

pulling corporate assets on a personal suit by claiming an individual was acting as an agent for the corporation

Answer 200

A

If shareholders respect the requirements of a corporation then they are relieved of personal liability
See Netjets for an example of what NOT respecting the existence of shareholders and a corporation looks like

Answer 201

A

Who suffered the alleged harm (corporation or suing shareholders individually)?
Who would receive the benefit of any recovery or other remedy (corporation or shareholders individually)

Answer 202

A

Class action:
- E.g. directors reconfigured Shareholder rights to harm preferred shareholders
Direct individual action:
- E.g. director reconfigured bylaws to squeeze out a particular shareholder
Generally:
- A breach of fiduciary duty owed to the shareholder by an officer or a director of a corporation
- Brought by shareholder in his own name
- Cause of action belongs to shareholder in his individual capacity
- Arises from an injury directly to the shareholder
- Often brought as a class action
Recovery goes to the shareholder

Answer 203

A

Suit brought by the shareholders, not in their name, but in the name of the corporation enforcing the rights of the corporation
Arises out of an injury to the corporation as an entity
Asking the court to declare that under the circumstances they should be allowed to step into the shoes of the directors and take action
Ex. CEO is messing with the corporation’s money
a. If you go to the CEO he will likely do nothing
b. If you go to the board they will likely not do anything either
A shareholder fails to state a cause of action unless it alleges that a corporation’s directors’ conduct was causing financial loss to the shareholder AND was based upon fraud, illegality, or conflict of interest
a. A shareholder’s derivative suit can only be based on conduct by the directors, which borders on fraud, illegality, or conflict of interest

Answer 204

A

In Delaware, creditors may only bring derivative actions if the corporation is insolvent
In a minority of jurisdictions, creditors can only bring derivative actions if the corporation is insolvent or in the zone of insolvency

Answer 205

A

(either universal demand juris or can’t skip b/c can’t meet qualifications)
- Prohibited from filing a suit within 90 days of the issuance of a demand to the corporation unless rejected earlier except
- Shareholder may file prior to the expiration of the 90-day period, but only if they can show that the corporation would suffer irreparable injury as a result
- Board of corporation rejected the pre-suit demand made by SHs that board assert the corporate claim
- SH can drop the claims or abandon suit OR File suit that rejection was wrongful
(in universal demand jurisdiction this is the SH’s only option)

Answer 206

A

(Demand futility)
(NY, DE, TN)
You can go straight to court w/o making a demand if:
- Action occurs and you plead with particularity that reasonable doubt exists that:
1. Board lacks independence
2. Decision was not protected by BJR
- Director Oversight cases where inaction/failure to act
(In Re China Agrotech)
- You do this by showing:
1. Majority of board has material familial or financial interest
2. Majority of board is incapable of acting independently
3. Underlying transaction is not the product of valid business judgement

Answer 207

A

Grimes/Aronson Test

2. Rales Test

Answer 208

A

use if challenging an action made by a majority of current directors

TEST: must plead particularized facts that lead to reasonable doubt that
1. Disinterested or independent directors
- Majority of the board has material financial or familial interest
- Majority of the board lacks independence
2. Whether the director exercised valid business judgment in the actions being challenged in the proposed law suit
OR underlying transaction is not a product of Business Judgement Rule
- This is a disjunctive test: if the first rule applies, you don’t have to move the second step
3. Once director interest is established, the Business Judgment Rule is inapplicable and demand is excused

Answer 209

A

= applies where the subject of the derivative suit is not a business decision of the board (when the plaintiff alleges a Caremark violation by the board for failing its oversight duties, there is no business decision) AKA there is no action, simply inaction

This rule is in place for the common sense reason that a board facing liability likely would not admit any wrongdoing or change its course of action upon receiving such a demand
1. Comes into play when the Business Judgement Rule is inapplicable because there has not been an action
OR
2. Involves board members that were not directors at the time of the underlying transactions, because we are worried that they are not disinterested because of the control of the board majority

TEST: must plead particularized facts that, if true, raise reasonable doubt as to,
- Director disinterest or independence/impartiality
(E.g. when directors “consciously disregarded their duties” and acted in bad faith, and thus face a substantial likelihood of liability)

Generally: a sustained or systematic failure of the board to exercise oversight will establish the lack of good faith that is a necessary condition to director liability

Answer 210

A

A special litigation committee’s determination forecloses further inquiry into a matter, provided the investigation is bona fide.
A director’s lack of independence turns on whether the director is, for any substantial reason, incapable of making a decision with only the best interests of the corporation in mind
Special Litigation Committees are subject to heightened scrutiny – has to be bulletproof

Answer 211

A

If demand is sought
The Court looks to see if the Board’s decision falls within the Business Judgment Rule
- If it does, there is no judicial review
- If not, use the 2 step test from Zapata Corp. v. Maldonado
1. Inquire into the independence and good faith of the committee and the bases supporting its conclusions
- If not satisfied, deny motion to dismiss
- If satisfied, go to step 2
2. The court should determine, apply its own independent business judgement, whether the motion to dismiss should be granted

Answer 212

A

(from In Re Oracle Corp.)
= Whether the director is, for any substantial reason, incapable of making a decision with only the best interest of the corporation in mind

Answer 213

A

Most powerful group. Meet once a month generally (on an as-needed basis)
Responsible for the management of the business and affairs of the corporation
May be removed by shareholders with or without cause
May delegate authority to committees, made up of two or more members of the board

Answer 214

A

The C-Suite: CEO, COO, CFO
Officers have whatever duties the board prescribed
The board remains responsible for supervision of the officers despite the delegation of a duty
Some officers may also be directors:
- Officers who sit on the Board are called inside directors
- The majority of directors must be “independent” rather than inside directors

Answer 215

A

Individuals who have residual interest in the company
Shareholders have indirect control over the corporation through the power to elect directors, amend the bylaws, and approve fundamental changes to the corporation
Annual meetings to vote on directors
Notice of meetings to shareholders entitled to vote: 10-60 days before the meeting

Answer 216

A

Doctrine relieving corporate directors and/or officers from liability for decisions honestly and rationally made in the corporation’s best interest
This broad protection/immunity from their decisions that directors/officers receive that protects them even when they lose lots of company money

Answer 217

A

A class of stock representing the corporation’s ownership, the holders of which are entitled to dividends only after the holders of preferred stock are paid
Shares entitling their holder to dividends that vary in amount and may even be missed, depending upon the fortunes of the company (risky); these shareholders typically want more control

Answer 218

A

The payment of earning to a corporation’s shareholders in proportion to the number of shares held

Answer 219

A

Stock that entitled the holder to a fixed dividend, whose payment takes priority over that of common stock dividends (it accumulates)
Hybrid between debt and equity
When company goes belly-up, these get paid first

Answer 220

A

Stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually any time after a pre-determined date

Answer 221

A

Businesses that trade to tackle social problems, improve communities, people’s life chances or the environment
They make their money from selling goods and services in the open market, but they invest their profits back into the business or the local community
Benefit corporations: pushback on cases like Dodge and eBay that push corporations too far towards shareholders
Low-profit LLC

Answer 222

A

Donation to Princeton University
A corporation may make reasonable charitable contributions, even in the absence of express statutory provisions.
- Must be SOME benefit to the corporation
- Some jurisdictions place cap on % of earnings

Answer 223

A

A corporation’s primary purpose is to provide profits for its stockholders.
Although a corporation’s directors have discretion in the means they choose to make products and earn a profit, the directors may not reduce profits or withhold dividends from the corporation’s shareholders in order to benefit the public.

Answer 224

A

Directors have gathered information and thought about the problem
Corporate decision-making is, by nature, largely discretionary
We do not want courts substituting their judgment for that of the directors, we only want courts stepping in when the directors act in an illegal manner
This is about balancing between allowing corporations to be run by Boards and the interests of the public and shareholders in being protected from stupid imprudent decisions by the board
A director/officer must act:
1. In good faith
2. In a manner the director reasonably believes in the best interest of the corporation;
3. With the care that a person in a like position would reasonably believe appropriate under similar circumstances

Answer 225

A

Directors must make a wise choice if delegating duties and must closely monitor persons making decisions on the corporation’s behalf
Directors are only liable if their actions were illegal or unconscionable
Policy:
1. If a director were open to liability for his uncompromised decisions, few people would seek out or accept a position on the Board
2. Directors must often make quick decisions with huge impacts
3. Directors must trust that if their decision looks poor in hindsight, they cannot be sued if they made their best efforts to understand the factors relating to the issue
The issue of director liability can be difficult when a director shrinks his duties and allows a third party to act on behalf of the corporation, particularly if the third party’s actions are not closely monitored

Answer 226

A

Officer duties are similar to directors, although the law is less well settled for officers
Standard of Conduct for Officers:
= an officer shall act:
1. In good faith
2. Care of a reasonable person (in similar circumstances); AND
3. Reasonably believes to be in the best interest of the corporation
Inform superior officer or board directors of information that is:
1. Within officer’s scope and material to the superior,
2. Actual or probable violation of the law, and
3. Breach of duty

Answer 227

A

(from Smith v. Van Gorkom)
- Presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action was taken in the best interest of the company.
- Requires more than imprudence or mistaken judgment to overcome this presumption.
- Whether directors have informed themselves “prior to making a business decision, of all material information reasonably available to them
- Gross negligence standard (can’t just close eyes to the problem)
- Courts will generally not second guess the BJR unless P shows:
Fraud, illegality, bad faith, self-dealing/conflict of interest, or gross negligence.

Answer 228

A

Does NOT apply if:
(a) waste, or
(b) no decision
Policy:
1. Encourages Board service and risk taking (and potential reward)
2. Courts recognize that directors are generally better suited to make business decisions than judges
3. Courts also recognize the statutory regime provides responsibility for managing the corporation to directors, not shareholders
4. Courts recognize that unhappy shareholders can always vote the directors out of office

Answer 229

A

Directors have avoided conflicts of interest or negligence (includes obligation of good faith)
A director, officer, and sometimes a dominant shareholder’s “duty to not engage in self-dealing, or otherwise use his or her position to further personal interests rather than those of the beneficiary”
Duty as director is to the shareholders

Answer 230

A

Directors may engage in interested transactions with the corporation, with certain protections:
- If a majority of disinterested directors approve the transaction
• Were all material facts disclosed?
• Were independent directors really independent or were they dominated or controlled by the interested party
- Disinterested shareholders may ratify the transaction
- Entire fairness: if approval cannot be had, director can show that the deal is fair to the company, or similar to an arm’s length deal
- Courts look to the terms of the transaction and ask if it is similar to a deal with a third party?

Answer 231

A

Re: duty of loyalty

A director does NOT breach his fiduciary duty by approving a radio advertising program in which the wife of the corporate president, who was also a member of the Board of Directors, was one of the featured performers.
B/c the program’s purpose was not to enhance the wife’s career or to give her any financial benefit as she was only one of many performers on the campaign and her wages were comparable to that of other performers.

Answer 232

A

Delaware General Corporation Law § 144 provides a safe harbor for interested transactions if the material facts as to the director’s relationship or interests as to the K or transaction are disclosed or are known to the Board, and the Board in good faith still authorizes the K or transaction by the affirmative votes of a majority of disinterested directors.
If committee members are disinterested in independent, the business judgment rule will shield the committee’s decision

Answer 233

A

Duty of care or duty of loyalty

If duty of care is properly alleged, the burden is on the plaintiff
If duty of loyalty is properly alleged, the burden is on the defendant to show intrinsic fairness, unless the defendant ratifies the transaction according to DGCL § 144(a)(1) or § 144(a)(2)
- If properly ratified, the burden shifts back to the plaintiff

Answer 234

A

There is a duty to deter appropriateness of business prospects “belonging to” the corporation
Factors for Corporate Opportunity (Broz): this test is used for guidance only, the court does not necessarily require all four factors:
1. The corporation is financially able to take the opportunity;
3. The opportunity is in the corporation’s line of business;
4. The corporation has an interest or expectancy in the opportunity; AND
5. By embracing the opportunity, the officer or director would create a conflict between his or her self-interest and that of the corporation

Answer 235

A

The rule that a corporation’s directors, officer’s, and employees are precluded from using information gained in corporate capacity to take personal advantage of any business opportunity that the corporation has an expectancy right or property interest in, or that in fairness should otherwise belong to the corporation
Opportunity must be integral to the business

Answer 236

A

Generally, shareholders do not owe a fiduciary duty to other shareholders, however, dominant shareholders owe a fiduciary duty to minority shareholders not to take advantage
One must show self-dealing in order to shift the burden to the dominant shareholders, and then the burden is on the dominant shareholders to show intrinsic fairness
Shareholders have no reciprocal duties to the corporation, unless they are dominant shareholders (partners always owe a duty)
- Being a dominant or “controlling” shareholder puts you in a position of determining who will be on the board
- Here, the liability shifts from the directors to the people who are really calling the shots
- HOWEVER, the court makes it clear that when a majority shareholder votes PURELY in his capacity as shareholder (and not as a director), he may vote with only his self-interest in mind, at the expense of minority shareholders, without violating any fiduciary duties (otherwise there would be little value in being a controlling shareholder)

Answer 237

A

A defense to a claim that a director engaged in an interested director transaction by showing the transaction’s fairness to the corporation

Answer 238

A

Duty of Candor = Idea that when you ask shareholders to take an action, then the Board has the duty to provide them w/ all material information related to that decision or action.

Answer 239

A

If material information was withheld from the stockholders before their ratification of the action and the withheld information may have had an effect on the stockholder’s decision, then the decision was not informed and will not validate the interested transaction
If there is a ratification by a majority of shareholders, the burden is on the shareholders to prove unfairness

Answer 240

A

The Court reads into the statute to require a majority vote of the disinterested shareholders in a voidable transaction
A “void” transaction cannot be ratified: examples of waste (like a gift of company assets or a transaction no reasonable shareholder would have approved of), ultra vires, fraudulent transactions, and illegal transactions
A shareholder could argue that this was a “void” not just a voidable and fair transaction. This is likely a losing argument, because here the Board demonstrated fairness

Answer 241

A

These are always going to be subjected to scrutiny
The general rule in shareholder derivative suits involving interested director or officer transactions is that the burden of proof is on the defendant director/officer to prove the transaction was intrinsically unfair

Answer 242

A

Ratification of an “interested transaction” by a majority of independent, fully informed shareholders shifts the burden of proof to the objecting shareholder to demonstrate that the terms of the transaction are so unequal as to amount to a gift or corporate waste of corporate assets.
A majority of disinterested shareholders must ratify corporate transactions w/ an interested director.
• This rule is meant to protect against invalidation of an action solely b/c a director is involved, not to provide a means for interested shareholders to approve actions in their own personal interests.

Answer 243

A

Interested transaction between corp. and directors
- Will not be voidable if approved in good faith by a majority of disinterested shareholders. Approval by fully informed, disinterested shareholders pursuant to § 144 invokes the Business Judgment Rule and limits judicial review to issues of gift or waste with the burden on the plaintiff

Transaction between corp. and its controlling shareholder

In a parent/sub merger, the standard of review is ordinarily intrinsic fairness, with the directors having the burden of proving that the merger was entirely fair
But where the merger is conditioned upon approval by a majority of the minority shareholders, the standard of review remains entire fairness, but with the burden of demonstrating that the merger was unfair shifting to the plaintiff
Here, a speedy decision is not sufficient evidence to support a contention that the board’s decision was not informed.

Answer 244

A

Good Faith
Loyalty; and
Due care

Answer 245

A

This is a subsidiary element, a condition of the duty of loyalty
A state of mind consisting of:
1. Honesty in belief or purpose
2. Faithfulness to one’s duty;
3. Observance of reasonable commercial standards of fair
dealings or
4. Absence of intent to defraud or to seek unconscionable advantage
The law presumes good faith
The business judgement rule applies if the directors were acting in good faith

Answer 246

A

Can run the gamut from

Subjective bad faith (fiduciary conduct motivated by an actual intent to do harm)
Intentional dereliction of duty (conscious disregard for one’s responsibilities); AND
Lack of due care (fiduciary action taken solely by reason of gross negligence; but without any malevolent intent

Failure to act in the face of a known duty to act; must be more than merely gross negligence

Answer 247

A

The law presumes that in making a business decision, the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action was taken in the best interests of the company

Answer 248

A

= necessary conditions predicate for Director Oversight Liability
- This is when the directors are accused of failure to provide adequate oversight
 The board never met,
 Discrepancies in financial reporting
 Complaint supports allegations with references to books and records
1. The directors utterly failed to implement any reporting or information system or controls, OR
2. Having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention
- Note: in either case, imposition of liability requires a showing that the directors knew that they were not discharging their fiduciary obligations
- Remedy: damages, an injunction, or handing over the ill-gotten gains; here the business judgment rule does not apply

Answer 249

A

Cases involving oversight failures almost never reach merits of claims
Typically dismissed for failure to comply with the Delaware Rules of Civil Procedure
Typically issued in a case: whether demand was excused as futile
No board action

Answer 250

A

re: oversight > derivative aspects > no board action
- Under Delaware law, a sustained or systematic failure of the Board of Directors to exercise oversight establishes the lack of good faith that is a necessary condition to Board L.
- In a derivative suit that involves something other than a business decision of the Board (i.e. failure to exercise oversight) a litigation demand is futile when directors would face a substantial likelihood of L if the suit were filed.
- This rule is in place for the common-sense reason that a Board facing L likely would not admit any wrongdoing or change its course of action upon receiving such a demand.

Answer 251

A

Does complaint create reasonable doubt that directors could have exercised independent judgment in responding to a demand
- Substantial risk of monetary liability (Under Delaware law, 102(b)(7)
- Risk of liability analysis depends on whether your state has a 102(b)(7) law
If it does, there is an absolute affirmative defense as long as you can prove that you haven’t violated the statute
If so, is there a reason to believe the plaintiff can show breach of loyalty or bad faith
- Burden of proof is on the defendant because 102 is an affirmative defense
- If only a Caremark claim, 102 precludes liability and demand required
- In the real world, the plaintiff would probably go away
- If the defendant cannot prove that he or she was not acting in bad faith or loyalty, liability cannot be exculpated
Is the liability risk high enough to excuse demand?
- We care about this even with directors not there at the time, because to the extent that their liability risk is too high, they are always going to say no always

Answer 252

A

Direct or derivative?
If derivative - demand excused or required?
- complaint creates reasonable doubt that directors could have exercised independent judgment in responding to a demand (substantial risk of monetary liability)
Risk of liability analysis depends on whether 102(b)(7) clause is present
If so, is there reason to believe P can show loyalty or bad faith?
- burden of proof likely on D b/c 102(b)(7) is an affirmative defense
If only care claim, 102(b)(7) precludes liability and demand required
- In real world, P probably goes away
If bad faith or loyalty, liability cannot be exculpated
Liability risk high enough to excuse demand?

Answer 253

A

Corporations may provide public benefit, but it has limitations and must have some benefit to the corporation (depending on jurisdiction)
Corporations will typically be able to make decisions regarding operations and dividends, subject to the business judgment rule, unless such decisions seem to provide no benefit to shareholders
LLC liability principles are similar to corporate law principles; de facto corporations and corporation by estoppel theories apply to LLC
Operating Agreement is a contract between members and the company, therefore a forum selection clause was binding (because it was not prohibited by law)

Answer 254

A

Fiduciary duties apply to LLC members similarly to directors and partners, subject to terms of an LLC agreement in which the parties can agree otherwise
Limitations of liability will be applied similarly as to corporations
Directors must abide by a duty of care and duty of loyalty to have the benefit of the business judgment rule
- – Duty of care is not breached so long as the decision is considered in good faith based on reliable information
- – Duty of care may be breached if directors fail to inform themselves of relevant information, including through review of reports, pricing information, and value the company
Even if business judgment rule does not apply, a transaction may nevertheless be saved if the deal can be deemed to be entirely fair for the company

Answer 255

A

Directors may owe a duty to creditors in special situations, including a duty not to make themselves aware or informed
If a conflict of interest exists, directors owe a duty of loyalty and thus must disclose the conflict and take such action to ensure fairness in the deal
Directors may owe a duty to creditors in special situations, including a duty not to make themselves aware or informed

Answer 256

A

Directors owe a duty to account for profits obtained personally in connection with transactions related to his or her company
2 Standards of Review application for Parent-Subsidiary relationships
— Intrinsic Fairness –
—— Used when parent has received a benefit to the exclusion of the minority shareholders of the subsidiary and at the expense of the minority shareholders of the subsidiary
—— Burden of Proof is on defendant to show transaction is fair to corporation
— Business Judgment Rule –
—— Used when minority shareholders have received the same benefit of the subsidiary
—— Burden of Proof is on plaintiff to rebut presumption
When fiduciary duties conflict, directors should protect the interests of the
investors bearing the greatest risk - see Zhan
Transactions that were a product of corporation and interested directors, or a product of a corporation and interested/majority shareholders, may be ratified by a majority vote of disinterested shareholders or proof of intrinsic fairness
“To act in good faith, a director must act at all times with an honesty of purpose and in the best interests and welfare of the corporation…a true faithfulness and devotion to the interests of the corporation and its shareholders…”

Answer 257

A

Good faith is not a separate claim, but part of duty of loyalty and is brought as part of that
Caremark rule requires that boards implement compliance plans when they have already had an issue or know an issue could come up
Different tests may apply for demand excused depending on whether the claim is an oversight claim or whether directors were directors at the time of the underlying action

Answer 258

A

There is a distinction between direct actions (actions harming only an individual or a group of individuals) and derivative actions (actions harming the corporation) and establishment of the type of claim is necessary
Most states have requirements that a shareholder must make a demand to the corporation that it take the case, which demand can be approved or rejected
- – If rejected, shareholder can only proceed if rejection was wrongful
Can file without demand, if demand would be futile or excused, but subject to certain pleading requirements
Special Committees of disinterested directors may request dismissal of derivative suits, but subject to specific tests established under state law

Answer 259

A

Close corporation is one in which stock is held by only a few people or families that is often not dealt in by buying or selling
- – There are certain statutes that will enable anyone to create a statutory close corporation
Vote Pooling Agreement and Shareholder Voting Agreements are permitted to enable minority shareholders to pool together their shares to protect their interests
For a vote pooling agreement to elect officers to be valid, the directors need to be able to retain an ability to exercise their fiduciary duty
The rule in McQuade is limited to situations in which there are not minority shareholders to protect

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