Corporations

Question 1

Corporations

Answer 1

A corporation is a separate legal entity and its owners are called shareholders. Shareholders are generally not liable for the debts of the corporations, which is a main incentive to ultimately start a corporation. The most risk that shareholders typically have is the amount they paid for their shares of their stock, this is the concept of limited liability.

Question 2

Public

Answer 2

Large corporations are called publicly held corporations for the simple reason that they have many shareholders and the interest in them is that they are publicly traded.

Question 3

Closely held

Answer 3

Smaller corporations are called closely held corporations and have relatively few shareholders. There is no public market for buying or selling interest in them, and there are different rights associated with closely held corporations that you wouldn’t see in publicly held corporations

Question 4

Starting a corporation

Answer 4

Corporation existence begins when the Articles of Incorporation are filed with the secretary of state. Certain default rights under the MBCA may only be modified by a provision in the Articles of Incorporation. Further, the articles of incorporation must set forth any classes of stock and the amount of stock the corporation is authorized to issue. The incorporators or board of directs also will adopt initial bylaws for the corporation during this state. Bylaws contain provisions for managing business and regulating the affairs of that corporation that are not inconsistent with the AOI or with the law.

Question 5

Liability pre-incorporation

Answer 5

there can be liability for promoters acting on behalf of a corporation that has not been formed.

Question 6

General rule?

Answer 6

since corporation did not exist when promoter was acting on its behalf, general rule is that it does not become liable automatically by coming into existence. The corporation must take some action, expressl or impliedly to adopt it.

Question 7

Three ways to fight this

Answer 7

(1) attempt to prove that a partnership existed instead; (2) de jure corporation theory in which individuals believed that there was in fact a corporation and reasonably relied on that; and (3) corproation by estoppel.

Question 8

What is a promoter?

Answer 8

an individual who enters into a contract for a corporation yet to be formed.

Question 9

How to escape liability?

Answer 9

To ensure avoidance of personal liability of the promoter, it should also be made clear to the other party to the contract that the corporation on behalf of which the contract is agreed upon has not yet been formed. If there is adequate consideration from the promoter, a provision in the promoter’s contract that only the corporation to be formed may be looked to for performance may effectively avoid personal liability of the promoter.

Question 10

Shareholders

Answer 10

Shareholders are the beneficial owners of shares. They elect the directors and must approve certain fundamental changes to the corporation such as dissolution, merger, sales of substantially all assets, or amendments to the incorporation.

Question 11

Election of board

Answer 11

They elect directors at the annual meeting of shareholders, and unless otherwise provided in the articles, directors are elected by a plurality of votes cast by the shares entitled to vote in the election, at a meeting in which a quorum is present.

• A quorum is a majority of shares entitled to be case.
• Know record date – this establishing who gets to vote at annual meeting. Same with proxy.

Question 12

Two ways of voting

Answer 12

Shareholders may vote in either two ways: (1) straight voting, or (2) cumulative voting. Straight voting is the default in which shareholders vote to fill each vacancy on the board separately and may vote no more than the number of shares they own for a single candidate. Here, those with the most shares would win every time. Cumulative voting on the other hand is very appealing for minority shareholders as they can multiply the number of votes, they are entitled to cast by the number of directors for whom they are entitle dot vote. They can cast the product for a single candidate or distribute the votes among two or more candidates.

Question 13

Default

Answer 13

Straight. Shareholders do not have a right to cumulate their votes for directors unless the articles of incorporation so provide, and this only applies to the election of directors.

Question 14

Voter agreements

Answer 14

In a small, closely held corporation, shareholders may try to pool their voting power, so they can have more influence over the business.
- E.g., in Ringling, one party asserted that by virtue of an agreement between her and another stockholder, the other stockholder was bound to vote for a certain slate of directors. The court found that yes, a group of shareholders lawfully contract with each other to vote in the future in such a way as they, or a majority of their group, form time to time determine.

Question 15

restricting duties as directors?

Answer 15

• E.g., in Villar, shareholders agreed that they would never accept a salary, just distributions. The court found that agreements are enforceable even if they (1) related to the affairs of the corporation such as management of corp, payment of dividend, or employment of shareholders; (2) restrict director discretion or (3) transfer management duties to shareholders. However, these agreements must be in writing.

Question 16

The Board

Answer 16

The board exercises all corporate powers and manages the business and affairs of the corporation. They typically serve for a year, unless the corporation has staggered terms. If staggered, it must be provided in the articles of incorporation. They also elect the officers.

Question 17

Corporation liability?

Answer 17

A corporation is an entity and a person. As such, a corporation can own property and can sue and be sued for the actions of its employees and other agents. As a general rule, shareholders are not personally liable to the corporation’s creditors. This is because shareholder’s receiving protection from personal liability is basic to the corporate structure and to corporate law.

Question 18

Exception - Piercing the Veil

Answer 18

An exception to this is that Shareholders can be personally liable to the corporation’s creditors through piercing the corporate veil. Ignoring corporate formalities and in a substantial ways which relieves them of liability. + an element of unfairness.

Question 19

Factors?

Answer 19

The court considered factors such as: inadequate capitalization; (2) the failure to observe corporate formalities; (3) nonpayment of dividends; (4) the insolvency of the debtor corporation at the time; (5) siphoning of funds of the corporation by the dominant shareholder; (6) absence of corporate records; and (7) the fact that the corporation is merely a façade for the dominant stockholder. Additionally, there must be an element of unfairness.

Question 20

Exceptions for parent corporations?

Answer 20

mere instrumentality rule and alter ego.

Question 21

Mere instrumantality

Answer 21

• E.g., in Wagner, P was evicted from a motel and sued under the theory of PCV. The court found that the parent company had actual control over the subsidiary and used it as a mere instrumentality. For instrumentality, courts look: (1) at control by majority in complete domination of finances and policy; (2) use of control by the D to commit fraud or wrongdoing; and (3) proximate cause because of such control by D.

Question 22

alter ego

Answer 22

• E.g., These factors were expounded upon in in re Silicone company, a case in which a subsidiary of a parent corporation committed a tort, but the parent corporation was highly involved in most aspects of the business, including the decision making. The courts look at whether the parent and subsidiary shared officers or directors, consolidated finances, and many other things, which inevitably examined the relationship between the parent and the subsidiary in regard to whether the corporation is so controlled by the parent as to be the alter ego or mere instrumentality of its stockholders. Here, the labeling of products used the parent names and thus was meant to do so to be relied on.

Question 23

Liability for directors

Answer 23

Typically, an officer or director is not personally liable for bad judgment while acting within their roles as an officer of director.

Question 24

Business Judgment Rule

Answer 24

This is a codification of the business judgmetn rule. This rule, used by the Courts, makes it so courts will decline to second guess board of director descision.

Question 25

Gen rule?

Answer 25

director is not exposed to personal liabilitiy for injury or damage cuased by an unwise decision. Potential profits often corresponds with potential risks and litigation is an imperfect device to evaluate such decisions.

Question 26

What does BJR ultimately do?

Answer 26

BJR creates a presumption that the directors, in making a decision, were informed, acted in good faith, and honestly believed their decision was best for the corporation.

Question 27

Exception?

Answer 27

A director of a corporation, as well as board members, owe fiduciary duties to the corporation. There are three fiduciary duties: (1) the duty of care, (2) duty of loyalty and (3) duty of good faith. The duty of care requires that corporate directors exercise the amount of care which ordinarily careful and prudent directors in similar circumstances would. In addition, the business judgment rule is a rule that makes it so that a director is not exposed to personal liability for injury or damaged caused by an “unwise” decision. However, a shareholder may show that a director or officer is not protected under the business judgment rule if the directors did not act in good faith, there was no legitimate business purpose, the decision involved a conflict of interest and/or it was uninformed.

Question 28

Director Fiduciary duties?

Answer 28

A director of a corporation owes fiduciary duties to the stockholders of the corporation and the corporation itself. There are three fiduciary duties owed: (1) the duty of care, (2) duty of loyalty, and (3) a duty of good faith.

Question 29

Duty of care

Answer 29

This duty requires that corporate directors exercise that amount of care which ordinarily careful and prude directors would use in similar circumstances, and to do so in good faith.

Question 30

Duty of loyalty

Answer 30

The duty of loyalty seeks to prevent directors from acting against the best interest of the corporation or in a way that reaps personal benefit at the expense of the corporation. This typically arises from directors: (1) competing with the corporate opportunity; (2) usurpation of a corporate opportunity; or (3) self-dealing transaction.

Question 31

Avoiding duty of loyalty problems?

Answer 31

I think you can disclose interest and have it voted on by a board of disinterested individuals. check this though.

Question 32

usurping corporate opportunity

Answer 32

For line of business, a corporate director or officer may not take a business opportunity for his own if: (1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation’s line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the fiduciary will be placed in a position adverse to his duties to the corporation.

Question 33

Self-dealing transactions?

Answer 33

There are different levels of scrutiny given to interested director transactions depending on whether the conflict was disclosed. If an interested director disclosed this conflict and the transaction is approved by disinterested directors or shareholders, courts will not review the fairness of the transactions. If disclosure of the conflict is not fully made, fairness will be reviewed through the entire fairness test.

Question 34

Entire fairness test?

Answer 34

Because, disclosure was not made, the court looked at the entire fairness test in which the D must prove: (1) fair dealings, and (2) fair price. The court found that there were not fair dealings because Gray, the head negotiated, was conflicted in the matter. Similarly, there wasn’t fair price either because a skilled negotiator in the Defendants position could have done better given the circumstances. NOTE to self – Find out price and include in here.

Question 35

Shareholder actions?

Answer 35

There are two types of claims that shareholders might intend to bring against directors, direct claims, or shareholder derivative actions, each of these have different rules. A derivative action is an equitable device that permits a shareholder to assert a claim on behalf of the corporation which the corporation is unwilling to assert on its own behalf. Injury to the corporation is a prerequisite and any recover belongs to the corporation. There are more significant procedural restrictions for bringing suits for derivative actions.

Question 36

Direct claims?

Answer 36

only help the shareholders, e.g., shareholder agreements, , rights in voting. difference is derivative suits are claiming an injury to the corporation rather than individual shareholder

Question 37

Contemporaneous ownership

Answer 37

Additionally, a shareholder may not bring a derivative action unless he was a shareholder at the time of the act or omission or became a shareholder through a transfer by operation of law and the shareholder must fairly and adequately represent the best interest of the corporation, as well as the interest of the remaining shareholders.

Question 38

what must he do in a derivative action?

Answer 38

In any derivative action, the complaint shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reason for not making such effort. Conclusory allegations are insufficient. The MCBA provides a universal demand requirement in that the stockholders must make a written demand upon the corporation and there is 90 days waiting period. After the waiting period, the SH may bring a derivative action, but if the board rejected demand, the P must show that the rejection was: (1) not disinterested; (2) not in good faith; or (3) not informed.

Question 39

Exception

Answer 39

• Exception to the 90-day requirement if there would be irreparable harm to the corporation is it 90 days in VA (check)

Question 40

Access to information

Answer 40

A general rule is that a shareholder is entitled to inspect and copy certain records of a corporation just by giving 5 days’ notice. These records include: articles of incorporation, bylaws, resolutions creating classes of stock, minutes of shareholder meetings, list of directors and officers, etc. A shareholder may inspect more private records if (1) 5 days’ notice is given, (2) request is in good faith, (3) SH gives particularity his purpose and the records he wants to inspect, and (4) the records are directly connected to his purpose. Some of these private records are minutes from board meetings, records of actions taken in those meetings, or other things.

Question 41

Director inspection rights?

Answer 41

A direct is entitled to inspect and copy records of a corp., at any reasonable time, to the extend reasonably related to the performance of his duties, but not for any other purpose or any manner that would violate duty to the corporation.

Question 42

Indemnification (must)

Answer 42

A corporation must indemnify a director if the defendant is wholly successful, on the merits or otherwise. Wholly successful means prevailing on all claims.

Question 43

Identification (prohibited)

Answer 43

A corporation may not indemnify a director if the defendant is liable in a derivative action, or if the defendant received a benefit he was not entitled. Except for expenses if the defendant met the standard of conduct, i.e., has acted in good faith and reasonably believed they were acting in the best interest of the corporation. Only for duty of care cases.

Question 44

May

Answer 44

A corporation may indemnify a director in any case that falls between one of the first two categories and in which the director acted in good faith and in the best information of the corporation, provided it is in the articles of incorporation.

Question 45

Can you limit transfers and sellability of stock?

Answer 45

check this?

Question 46

Close corporations

Answer 46

A close corporation is a business entity that is typified by: (1) a small number of stockholders, (2) absence of a market for the corporation’s stock, and (3) substantial majority shareholder participation in management, direction, and operation of the corporation. For owners of a close corporation, dividends and salaries are the main ways to get money out of the business.

Question 47

Minority shareholders?

Answer 47

Because of these problems and how closely held corporations are run, courts may often use partnership law to govern the relationships between minority and majority shareholders.

Question 48

They owe what?

Answer 48

Fiduciary duties? what

Question 49

Recourse for Minority Shareholders

Answer 49

Under the MBCA, the court may dissolve a corporation in a proceeding by a shareholder if it is established that directors or those in control of the corporation have acted in a manner that is illegal, oppressive, or fraudulent. This was discussed in Meisleman v. Meisleman, where two brothers of a company, owed a pool of companies but one brother was being oppressed as a minority shareholder and sought dissolution. The court laid down a test to be used for these situations: (1) a court must determine the rights and interest of the shareholder, and (2) determine if liquidation is reasonably necessary for the protection of those rights and interest.

Question 50

Dvidends?

Answer 50

acting bad or in BJ, expectations of the parties?

Question 51

Fundamental Corporate Changes

Answer 51

Some fundamental corporate changes require shareholder approval. These include: amendment of the articles of incorporation, dissolution, merger, and sales of substantially all of a corporation’s assets. The process for this is that the board must approve the change and then notify the shareholders of the recommendation of the change. The shareholders then will hold a special meeting in which they vote on the proposed change. If the change is approved, shareholders who opposed the change may, in certain circumstances, have the right to force the corporation to buy them out, i.e., use their appraisal rights.

Question 52

Votes

Answer 52

the majority of the votes entitled to be case.

Question 53

Merger for fundamental change

Answer 53

The same process is required for fundamental changes. However, there is an exception that approval of a merger may not be required form shareholders of the merged corporation if: the corporation being merged into its parent corporation and the parent corporation owns 90% or more of the subsidiary/merged corporation’s stock.

Question 54

Surviving Corp

Answer 54

Approval of surviving shareholder’s is needed unless: (1) their shares will have the same value after the merger, (2) the surviving corporation’s articles will not be substantially changed, and (3) the merger consideration provided by the surviving corporation, if comprised of stock of the surviving corporation, amounts to less than 20% of the surviving corporation’s outstanding stock prior to the merger. i.e., if stock is consideration and your stock is going to be diluted, then you get to vote.

Question 55

Those who vote against?

Answer 55

If a shareholder votes against a fundamental change that is approved, the shareholder may be able to force the corporation to purchase his shares for their fair value. It applies to those corporation’s selling assets, shareholders of a merged corporation, or when articles of incorporation are amended. Appraisal rights do not apply: (1) to shareholders of a surviving corporation, (2) when the fundamental change is dissolution, (3) minor amendments of the articles of incorporation, or (4) when the corporation is publicly traded.

Question 56

Liability of a corporation who guys assets of another corporation?

Answer 56

The general common law rule is that the buyer of a corporation’s assets is not liable for the selling corporation’s obligations. There are some exceptions to this general rule which are discussed in Franklin.

Question 57

exception?

Answer 57

The crucial factor in determining whether a corporation acquisition is a de facto merger of a mere continuation is the same in that it is whether adequate cash consideration was paid for the selling corporation’s assets. In Franklin, adequate consideration was paid and only a single person with minimal ownership remained on each board of the company. are they just trying to escape liability?