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Corporations Flashcards

1
Q

When is a corporation created?

A

Generally, a corporation is formed when the articles of incorporation are filed with the secretary of state (unless the articles specify a delayed effective date).

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2
Q

When is an LLC created?

A

When the certificate of formation is filed with the secretary of state.

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3
Q

What must a certificate of formation include?

A
  1. The name and purpose for which the LLC is organized;
  2. The address of the principal place of business;
  3. The name and address of the registered agent in the state;
  4. The initial capital contributions agreed to be made by all members; AND
  5. The number of persons, or classes of members, who will manage the LLC and the names and addresses of the persons or members who will serve as managers
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4
Q

Are shareholders of a corporation personally liable for the debts of the corporation?

A

No

Generally, shareholders of a corporation are NOT personally liable for the debts of the corporation. An exception is available through piercing the corporate veil.

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5
Q

Define

Piercing the Corporate Veil

A

Courts will allow a creditor to pierce the corporate veil and hold a shareholder personally liable for the debts of a corporation.

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6
Q

When is piercing the corporate veil a viable remedy for creditors?

A

When:

  1. The shareholder has dominated the corporation to the extent that the corporation may be considered the shareholder’s alter ego;
  2. The shareholder failed to follow corporate formalities;
  3. The corporation was undercapitalized;
  4. There is fraud or illegality present.
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7
Q

Define

Alter Ego

A

A shareholder utilizes the corporate form for personal reasons

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8
Q

Define

Undercapitalization

A

Inadequately funded at its inception to cover debts and prospective liabilities

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9
Q

What is Passive Investor Liability?

A

Once the corporate veil has been pierced, courts generally hold ALL the shareholders liable. However, some courts do not extend liability to passive investors.

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10
Q

What are the fiduciary duties of directors and officers of a corporation?

A
  1. Duty of Care
    1. Business Judgement Rule
  2. Duty of Loyalty
    1. Corporate Opportunities Doctrine
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11
Q

What do directors and officers owe a corporation under their duty of care?

A
  1. The duty to take reasonable steps to monitor the corporation’s management;
  2. The duty to be satisfied that proposals are in the corporation’s best interest;
  3. The duty to disclose material information to the board; AND
  4. The duty to make reasonably informed decisions.
    1. In making such decisions, directors and officers may rely on information from others whom they reasonably believe are reliable.
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12
Q

What is the Business Judgment Rule?

A

In suits alleging that a director or officer violated his duty of care owed to the corporation, courts will apply the business judgment rule where a court will NOT second guess the decisions of a director/officer.

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13
Q

Elements of the Business Judgment Rule?

A

Director/officer’s decisions are made:

  1. In good faith;
  2. With the care an ordinarily prudent person in a like position would exercise under similar circumstances; AND
  3. In a manner, the director/officer reasonably believes to be in the best interests of the corporation.
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14
Q

What remedy is available if a director/officer breaches their duty of care?

A

He may be held personally liable for damages.

Note: A corporation’s article of incorporation may reasonably limit the liability of directors and officers for bad judgment but NOT for bad faith misconduct.

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15
Q

What is a director/officer’s duty of loyalty?

A

The duty to avoid implicating their personal conflicting interests in making business decisions for the corporation.

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16
Q

What constitutes a “conflicting interest”?

A

A director/officer has a conflicting interest in a transaction when the director/officer or a family member either:

  1. Is a party to the transaction; OR
  2. Has a beneficial financial interest in the transaction of such significance to the director/officer that the interest would reasonably be expected to exert an influence on the director/officer’s judgment if called upon to vote on the transaction.
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17
Q

What is a safe harbor for directors/officers for liability of conflicting interests?

A

They are protected if:

  1. Disinterested shareholders approve the conflicting interest transaction;
  2. The non-interested members of the board authorize the conflicting interest transaction; OR
  3. The transaction, judged according to the circumstances at the time of commitment, is established to have been fair to the corporation.
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18
Q

What is the Corporate Opportunities Doctrine?

A

The Corporate Opportunity Doctrine prohibits directors and officers from usurping business opportunities that rightfully belong to the corporation for their own benefit.

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19
Q

What is a derivative claim?

A

A derivative claim is a lawsuit brought by a shareholder on behalf of the corporation.

Shareholder (Representative of Corp.) v. Director/Officer

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20
Q

What is the purpose of a derivative suit?

A

The shareholder is suing to enforce the corporation’s rights when the corporation has a valid cause of action but has failed to pursue it.

This often happens when the defendant in the suit is someone close to the corporation (e.g., a director or officer).

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21
Q

How is a derivative claim initiated?

A

Generally, a shareholder must make a written demand on the board before commencing a derivative action.

After submitting the written demand, the shareholder must wait 90 days to file the derivative action, UNLESS the board rejects the demand during the 90-day period.

22
Q

What’s the exception to the written demand rule?

A

Under common law, and in some jurisdictions today, the plaintiff shareholder does NOT have to make a demand on the board if it would be futile to do so (e.g., the board is interested in the transaction being challenged).

23
Q

What is the remedy of a derivative suit?

A

If a derivative claim is successful, the proceeds go to the corporation, not the shareholder who brought the action.

However, if the award to the corporation benefits the defendants, the court may order that damages be paid directly to the shareholder.

24
Q

What is a direct claim?

A
  • A direct claim is a lawsuit brought by a shareholder to enforce his OWN rights.
  • The shareholder must prove actual injury that is NOT solely the result of an injury suffered by the corporation.
  • If a direct claim is successful, the proceeds go to the shareholder.

Shareholder X v. Corporation

25
Q

What is a promoter?

A

A person who procures commitments for capital and instrumentalities on behalf of a corporation that will be formed in the future.

26
Q

When are promoters liable?

A

As a general rule, promoters are personally liable on all such contracts they enter into on behalf of the corporation to be formed.

27
Q

When does promoter liability stop?

A

Only by novation or if the agreement by the parties expressly indicates that the promoter is not to be bound.

Otherwise, a promotor’s liability continues even after the corporation is formed, and even if the corporation also becomes liable on the contract by adopting it.

28
Q

Can an individual be an agent of a non-existent principal?

A

No

But they could possibly be a promoter for a non-existent corporation

29
Q

Are corporations liable for the contracts their promoters enter into?

A

No

30
Q

How do corporations become liable for contracts their promoters entered into?

A

If the corporation adopts the contract through either express or implied conduct

31
Q

What is required for express adoption?

A

Express, official action to adopt the contract with knowledge of the material facts, such as a resolution by the board of directors

32
Q

What is an implied adoption?

A

Implied adoption requires someone in authority to accept the benefits of the contract with knowledge of material facts (e.g., by acquiescence or conduct normally constituting estoppel)

33
Q

How do you amend the Articles of Incorporation?

A

The articles may be amended if there is a majority vote from the directors and shareholders.

Note: Minor amendments may be made by the board of directors without shareholder approval.

34
Q

In there is a conflict between the Articles of Incorporation and the Bylaws, who prevails?

A

Articles of Incorporation govern

35
Q

When is a quorum present?

A

Unless otherwise set forth in the articles, a quorum exists when at least a majority of the shares entitled to vote are present.

36
Q

What is required in order to sell corporate assets?

A

Shareholder approval is required for the corporation to sell, lease, exchange, or otherwise dispose of all, or substantially all, of its property if the disposal is not in the corporation’s usual and regular course of business.

37
Q

What is a de jure corporation?

A

A corporation that has been made in accordance with appropriate laws

38
Q

What is required for the Articles of Incorporation?

A

A PAIN

  1. Authorized number of shares the corporation has to use
  2. Purpose and duration
  3. Agent (name and address)
  4. Incorporators (name and address)
  5. Name of the Corporation
39
Q

What are two ways a corporation can still be noticed even though it is not legally recognized?

A
  1. De Facto Incorporation
  2. Corporation by Estoppel
40
Q

What is the RMBCA?

A

The Revised Model Business Corporation Act

The majority rule for corporations

41
Q

What’s required for a de facto corporation?

A
  1. Colorable, good faith compliance with most statutory requirements
  2. Shareholder/member does not have knowledge that there is a lack of incorporation
42
Q

What is required for corporation by estoppel?

A

A contractual situation where parties have acted as if there were a corporation

43
Q

Does a director/officer have the power to bind a corporation in a contract?

A

Only if they have actual authority

44
Q

How does a director/officer have actual authority?

A

If:

  1. Proper notice was given for a directors’ meeting, a quorum was present, and a majority of the directors approved the action; or
  2. There was unanimous written consent of the directors.
45
Q

What must happen if a director will benefit from a transaction her corporation is about to enter into?

A
  1. She must disclose that information to the board (or to the shareholders)
  2. The disinterested directors (or the shareholders) must then approve the transaction.
46
Q

What happens if a director does not disclose that they would receive benefits from a transaction?

A

The transaction can be set aside unless it is fair to the corporation.

Alternatively, the corporation can recover damages equal to the director’s profit

47
Q

What triggers a Corporate Opportunity Doctrine issue?

A

A director learns of a business opportunity that the corporation may be interested in

48
Q

Can a corporation use ultra vires as a defense?

A

No

Under modern statutes, the ultra vires defense is very limited and should usually not allow a corporation to get out of a contract merely because the contract is outside the scope of the corporation’s stated purposes

49
Q

Under the RMBCA, what is acceptable consideration for a share?

A

Any tangible or intangible property or benefit to the corporation.

The RMBCA will also allow a promise to convey property in the future

50
Q

Under the RMBCA, what happens if a director sells a stock for under par value?

A

The shares will probably be treated as validly issued, but the director who authorized the issuance can be held liable for breach of their fiduciary duty

51
Q

Do shareholders have the power to run the day-to-day operations of corporations?

A

No, unless the articles say otherwise

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