Corporations

Question 1

duties of directors/members

Answer 1

directors of a corporation & members of an LLC have a duty of loyalty & a duty of care.

Question 2

business judgment rule

Answer 2

applies only to duty of care

There is a presumption that in making a business decision, the directors acted on an informed basis, in good faith, & with the honest belief that the action taken was in the best interests of the company

Question 3

duty of loyalty

Answer 3

a director must act in good faith & with a reasonable belief that what he does is in the corp’s best interest

Question 4

3 ways duty of loyalty issue appears

Answer 4

1. self dealing
2. competes with corp
3. usurps corp opportunity

Question 5

self dealing transaction

Answer 5

a transaction where a director is on both sides of the K. the director has a material financial interest in the K, + knowledge of that interest

Question 6

corporate opportunity (rule)

Answer 6

a corp officer has a fiduciary obligation to not usurp a corp business opp for her own personal benefit

absent consent of board

Question 7

defenses to liability for breach of duty of loyalty

Answer 7

RMBCA includes 3 safe harbors that may protect director who breaches his duty of loyalty:

1. approval by disinterested directors (after interested director discloses his interest, plays no part in deliberations or vote, & discloses all information that an ordinarily prudent person would believe to be material to a judgment about whether or not to proceed with the transaction
2. approval by disinterested shareholders
3. if transaction is established to be fair to the corp, judged according to circumstances at time of commitment

**i.e. (1) majority vote of informed & disinterested directors; (2) majority vote of informed & disinterested shareholders, or (3) fairness of the transaction

Question 8

rule - notice of special meeting

Answer 8

Directors are entitled to notice of a special meeting

• -> notice must be provided at least two days prior to the meeting
• -> date, time, and place of the meeting

Question 9

how might a director waive notice requirement of notice for special meeting

Answer 9

a director’s attendance waives notice of that meeting, unless the director promptly objects to lack of notice

Question 10

For the board of directors’ acts at a meeting to be valid…

Answer 10

a quorum of directors must be present at the meeting.

Question 11

what constitutes a quorum (BOD)

Answer 11

A majority of all directors in office constitutes a quorum
–> unless the articles of incorporation or bylaws require a higher or lower number

• *director must be present at the time that the vote is taken in order to be counted for quorum purposes
  
  • -> BUT, presence includes appearances made through communication equipment that allows all persons participating in meeting to hear & speak to one another.

Question 12

in order to form a corporation…

Answer 12

articles of incorporation must be filed with the state

• • must include number of shares corp is authorized to issue
• *corp existence begins when filed

Question 13

When a person conducts business as a corporation without attempting to comply with the statutory incorporation requirements….

Answer 13

that person is liable for any obligations incurred in the name of the nonexistent corporation

Question 14

partnership

Answer 14

A partnership is an association of two or more persons to carry on a for-profit business as co-owners.

Question 15

liability in general partnership

Answer 15

In a general partnership, each partner is jointly and severally liable for all partnership obligations.

Question 16

2 ways for person to potentially escape personal liability after making unsuccessful effort to comply with incorporation requirements

Answer 16

1. de facto corporation doctrine
2. corporation by estoppel doctrine

**both require owner to make a good faith effort to comply with the incorporation requirements + must operate the business as a corporation without knowing that the reqs have not been met

Question 17

effect of corporation by estoppel doctrine

Answer 17

a person who deals with an entity as if it were a corporation is estopped from denying its existence and is thereby prevented from seeking the personal liability of the business owner

**limited to contractual agreements

Question 18

fairness test for safe harbor from breach of duty of loyalty

Answer 18

fairness test looks at the substance and procedure of the transaction

• -> asks whether the corporation received something of comparable value in exchange for what it gave to the director.
• -> looks at whether the process followed by the directors in reaching their decision was appropriate

**interested directors have the burden of establishing both the substantive and procedural fairness of the transaction

Question 19

duty of care

Answer 19

directors have a duty to act with the care that a person in a like position would reasonably believe appropriate under similar circumstances

–>director is presumed to have knowledge & skills of ordinarily prudent person, & is required to use any additional knowledge or special skills that he possesses