Corporations Flashcards
business judgment rule
Directors may be protected under the business-judgment rule.
The business judgment rule is a rebuttable presumption that a director reasonably believed that his actions were in the best interest of the corporation.
The exercise of managerial powers by a director is generally subject to the business judgment rule.
Courts will not second-guess a business judgment if, at the time it was made, it was informed, reasonable (based on sound business judgment), and made in good faith.
Directors will still be liable for decisions that are grossly negligent or reckless
shareholder liability
When all of the statutory requirements for incorporation have been satisfied, a de jure corporation is created.
Consequently, the corporation, rather than persons associated with the corporation (i.e., shareholders, directors, officers, and other employees), is liable for activities undertaken by the corporation. One reason the corporate form is favorable is that the investors in a corporation are subject to limited liability for corporate acts, and they are only at risk to the extent of their investment. This principle of limited liability is subject to challenge
In this case, there are no facts to suggest that all the elements needed for successful incorporation have not been satisfied. As such, the shareholders of Adco would generally not be personally liable for actions taken by the corporation.
piercing the corporate veil
If a plaintiff can “pierce the corporate veil,” then a corporation’s existence is ignored, and the shareholders of the corporation are held personally liable.
In most jurisdictions, no bright-line rule exists for piercing the corporate veil, and courts look at the totality of circumstances. Factors considered by the courts when piercing the corporate veil include when the corporation is actually just an alter ego of the shareholders, among others. Courts might find that one factor is so compelling in a particular case that it will find the shareholders personally liable.
A corporation will be found to be the alter ego of its shareholders when there is serious lack of corporate formalities. If shareholders commingle corporate funds with personal funds or use corporate funds for any personal benefit, then that would be grounds to pierce the corporate veil.
a director owes two basic duties: of care, and of loyalty. in discharging these duties, a director must act how?
act in good faith and in a manner she reasonably believes to be in the best interest of the corporation.
Shareholder Derivative Lawsuit
In a derivative action, a shareholder is suing on behalf of the corporation for a harm suffered by the corporation, such as harm caused by a breach by the directors.
Although the shareholder also may have suffered harm, recovery generally goes to the corporation. In order to bring the suit, the shareholder must show that she has standing and made a demand upon the board first.
standing + demand upon the board (for derivative suit)
To have standing, (i) a shareholder must have been a shareholder at the time of the wrong and at the time that the action is filed and (ii) he must continue to be a shareholder throughout the litigation.
The plaintiff in a derivative action must make a written demand upon the board of directors in order to take action unless she can prove it would be futile to do so. A derivative action may not commence until 90 days have passed from the date of demand.
what’s the consequence of a breach of loyalty?
When a breach occurs, the transaction may be enjoined or rescinded. In addition, he may be liable for resulting damages.
what can 3P that’s owed money by corp do when its shareholders pierce the corporate veil?
Supplier will likely be able to pierce the corporate veil and hold Art personally liable for the $10,000 owed on the computer because, at the very least, Art treated the corporation as his alter ego.
