Corporations Flashcards
Incorporation: promotors
function and duty
Promotors are people finding investors for corp and enters into K on behalf of the nonexistent corp.
Promotors are fiduciaries to corporation—cannot make secret profits
Incorporation: promotors’ liability
general rule
exceptions
Personally liable for K entered into before incorporation
© Novation: agreement by promotor, corp, and 3rd party will shift liability to corporatio
© Adoption: if corp takes the benefits of the contract, promotor not liable
Incorporation: Incorporation start date
Incorporation– begins when secretary of state accepts fee and files the articles of the incorporation.
When a corporation has not been created, the entity may be treated as a general partnership.
Incorporation: Article of incorporation content
corporation name, agent info, incorporator info (and signed by incorporator)
purpose,
authorized shares.
duration.
bylaws not required
Only SH can amend
Ultra vires
If the corp or director/officer/employee acts outside of the corporation’s stated purpose in the articles of incorporation, SH, corp, or state can enjoin
Incorporation: De facto corp
A defective corp will be treated as a corp if organizers
(a) made a good faith effort to incorporate and
(b) have no actual knowledge of a defect in corp status
Incorporation: Corp by estoppel
Third party is estopped from asserting defect if organizers (a) made good faith attempt to incorporate, and (b) the third party entered into a K as though it was properly incorporated,
Corporate governance: director requirement
A corp must have at least one director, director must be a natural person.
Corporate governance: director appointment
general appointment authority
replacement authority
Elected by SH, for 1 year usually © staggered.
© Director replacement/increase in #: Board or SH can choose
Corporate governance: director removal
Removable by SH with or without cause © for cause if articles specify
Board meeting: Notice requirement
Rule
Waiver rule
2-day notice required for special meetings but not regular meetings.
© attendance waives notice unless director attends and promptly objects
Board meeting: voting requirement
voting requirement
voting agreement
Quorum and affirmative vote (majority vote of those present).
Proxy/Voting K prohibited.© close corp can have voting agreements.
Board meeting: quorum
Majority of total # of directors must be present unless specified otherwise in bylaws
Board meeting: quorum–presence requirement
A director must be present at the time that the vote is taken for quorum.
Presence includes video/phone call equipment only if ALL persons participating in the meeting to hear and speak to one another
Board meeting: requirement to hold meetings
Board may act without a meeting if unanimous written consent.
Board meeting: dissent is effective when
A director’s dissent is effective if
(1) entered dissent in the meeting minutes;
(2) filed written dissent before meeting is over; or
(3) mailed subsequent written dissent to secretary of the corp
Directors and officers’ fiduciary duties
Directors and officers owe a duty of care and loyalty to the corp
Director’s duty of care
Directors must act with care that a person in a like position would reasonably believe appropriate under similar circumstances. Special skills are expected to be used
Directors may rely on expertise of officers/employees, outside experts, or committees
Directors’ duty of care: Business Judgment Rule
Definition
Rule (4 elements)
Definition: A rebuttable presumption that D reasonably believed his actions were in the corp’s best interest.
Rule: In the absence of (a) fraud, (b) illegality or (c) self-dealing, courts will not disturb a (d) good faith business decision
Good faith decision: no BJR for uninformed, hastily made decisions
Director’s duty of loyalty
Definition
When is it violated
Directors, executives, and other insiders have duty to put corp.’s interests above own
Violated if director engages in (1) self-dealing unless safe harbor rules or
(2) usurp a corporate opportunity
Director’s duty of loyalty: self-dealing transaction
Definition – 3 types
(1) FINANCIAL MATERIAL INTEREST: transaction involving Interest involved that is financial AND material (material interest is if a reasonable D would be been influenced by the financial interest when voting on the matter)
(2) RELATIVE: transaction in which director/officer/relative receives a substantial benefit directly from the corp. or
(3) ASSOCIATION: transaction with another business that director is associated with
Director’s duty of loyalty: ratification
safe harbor for self-dealing
burden of proof shifts to P to prove it was unfair if (a) disclosed material facts and (b) ratified by majority of disinterested directors/shareholders.
Disinterestedness: Conflicts have to be (1) material (financial) + (2) One director’s conflict not necessarily conflict of entire board.
Director’s duty of loyalty: fairness doctrine
safe harbor for self-dealing
if transaction was substantively and procedurally fair to corp
Substantive fairness: whether corp received something of comparable value in exchange for what it gave to D
Procedural fairness: if directors followed proper procedure
Director’s duty of loyalty: corporate opportunity doctrine
Rule (3 factors determining corporate opportunity)
Exception
Directors and officers may not usurp a corp opportunity
Corporate opportunity exists if
(1) interest-or-expectancy or line-of-business test
(2) relationship btw offeror and D / corp and D, and
(3) how/when D obtained knowledge
© Ratification: director may take it if corp. declines the opportunity
Director’s duty of loyalty: corporate opportunity doctrine
Interest or expectancy test—
corporation have
(1) an existing interest (e.g. option to buy) or
(2) an expectancy arising from an existing right in the opportunity (e.g. purchase of property currently leased, corp actively seeking similar opportunity)
Director’s duty of loyalty: corporate opportunity doctrine
Line of business test—
is the opportunity within C’s current/prospective line of business (ask how expansive is C’s business).
Corporate indemnification of directors and officers
Definition
practice of corp paying for costs of director/officer’s defense in litigation
Corporate indemnification: mandatory
Corp must indemnify if D successfully defends
Corporate indemnification: prohibited indemnification
Corp cannot indemnify if D is liable for receiving an improper benefit
Corporate indemnification: permissive indemnification
Corp may indemnify if ∑2
(a) D acted in good faith with reasonable belief that it was in corp’s best interest and
(b) D had no reasonable cause to believe conduct was unlawful
Shareholders liability, generally
Generally, not personally liable for corp debt, unless court pierces veil
Piercing the veil: 4 factors in deciding whether to pierce veil
(1) alter ego (SH failed to observe corporate formalities);
(2) undercapitalization (failure to maintain funds sufficient to cover foreseeable liabilities;
(3) commingling assets/self-dealing and
(4) fraudulent dealings with creditor
Piercing more likely in
- tort situations (not K);
- in close corporations (not public)