Corporations (additional info on actions)

Question 1

Shareholder’s Direct Action

Answer 1

A direct action may be brought for a breach of a fiduciary duty owed to the shareholder by an officer or director.

To distinguish breaches of duty owed to the corporation and duties owed to the shareholder, ask: (i) who suffers the most immediate and direct damage, the corporation or the shareholder; and (ii) to whom did the defendant’s duty run, the corporation or the shareholder.

In a shareholder direct action, any recovery is for the benefit of the individual shareholder.

Question 2

PREEMPTIVE RIGHTS

Answer 2

Under the LBCA, shareholders do not have a preemptive right to purchase newly issued shares in order to maintain their proportional ownership interest unless the articles of incorporation provide the right.

Moreover, even if the articles do provide a preemptive right, shareholders generally have no preemptive right in shares issued: (i) for consideration other than cash (e.g., for services of an employee), (ii) within six months after incorporation, or (iii) without voting rights but having a distribution preference.

Question 3

Shareholder’s Derivative Actions

Answer 3

In a derivative action, the shareholder is asserting the corporation’s rights rather than her own rights. Recovery in a derivative action generally goes to the corporation rather than to the shareholder bringing the action. Nevertheless, the corporation is named as a defendant.

Question 4

Derivative Action: Standing–Ownership at Time of Wrong

Answer 4

To commence and maintain a derivative proceeding, a shareholder must have been a shareholder at the time of the act or omission complained of or must have become a shareholder through transfer by operation of law from one who was a shareholder at that time.

Also, the shareholder must fairly and adequately represent the interests of the corporation.

Question 5

Derivative Action: Demand Requirements

Answer 5

The shareholder must make a written demand on the corporation to take suitable action.

A derivative proceeding may not be commenced until 90 days have elapsed from the date of demand, unless: (i) the shareholder has earlier been notified that the corporation has rejected the demand; or (ii) irreparable injury to the corporation would result by waiting for the 90 days to pass.

Question 6

Derivative Action: Will Be Dismissed If Found Not in Corporation’s Best Interests

Answer 6

If a majority of the directors (but at least two) who have no personal interest in the controversy find in good faith after reasonable inquiry that the suit is not in the corporation’s best interests, but the shareholder brings the suit anyway, the suit may be dismissed on the corporation’s motion.

*Burden of Proof:
(i) To avoid dismissal, in most cases the shareholder bringing the suit has the burden of proving to the court that the decision was not made in good faith after reasonable inquiry.

(ii) However, if a majority of the directors had a personal interest in the controversy, the corporation will have the burden of showing that the decision was made in good faith after reasonable inquiry.

Question 7

Derivative Actions: Discontinuance or Settlement Requires Court Approval

Answer 7

A derivative proceeding may be discontinued or settled only with the approval of the court.

Question 8

Derivative Action: Expenses

Answer 8

Court May Order Payment of Expenses:
Upon termination of a derivative action, the court may order the corporation to pay the plaintiff’s reasonable expenses if it finds that the action has resulted in a substantial benefit to the corporation.

If the court finds that the action was commenced or maintained without reasonable cause or for an improper purpose, it may order the plaintiff to pay reasonable expenses of the defendant.

Question 9

Share Dividends

Answer 9

Distributions of a corporation’s own shares (i.e., “share dividends” or “stock dividends”) to its shareholders are excluded from the definition of “distribution.”

However, shares of one class or series may not be issued as a share dividend in respect of shares of another class or series unless one of the following occurs: (i) the articles so authorize; (ii) a majority of the votes entitled to be cast by the class or series to be issued approves the issue; or (iii) there are no outstanding shares of the class or series to be issued.

Question 10

REMOVAL OF DIRECTORS

Answer 10

Directors may be removed by the shareholders for cause or without cause.

However, a director elected by cumulative voting cannot be removed if the votes cast against removal would be sufficient to elect her if cumulatively voted at an election of directors.

Similarly, a director elected by a voting group of shares can be removed only by that class.

Question 11

Director’s Liability

Answer 11

Personal Liability of Directors May Be Limited

Unless chosen otherwise in a corporation’s articles of incorporation, Louisiana law eliminates directors’ personal liability for money damages to the corporation or shareholders for actions taken or for failure to take action.

However, the articles may not limit or eliminate liability for financial benefits received by the director to which she is not entitled, an intentionally inflicted harm on the corporation or its shareholders, unlawful corporate distributions, or an intentional violation of criminal law.

Question 12

Director’s Duty of Care

Answer 12

Directors have a duty to manage to the best of their ability. They must discharge their duties:
(i) In good faith;
(ii) With the care that a person in a like position would reasonably believe appropriate under similar circumstances; and
(iii) In a manner the directors reasonably believe to be in the best interests of the corporation.

Directors who meet this standard will not be liable for corporate decisions that in hindsight turn out to be poor or erroneous. This is known as the “business judgment rule.”

a. Burden on Challenger: person challenging the directors’ action has the burden of proving that the statutory standard above was not met.

b. Director May Rely on Reports or Other Information: in discharging her duties, a director is entitled to rely on information, opinions, reports, or statements (including financial statements), if prepared or presented by:
(i) corporate officers or employees whom the director reasonably believes to be reliable and competent;
(ii) legal counsel, accountants, or other persons as to matters the director reasonably believes are within such person’s professional competence; or
(iii) a committee of the board of which the director is not a member, if the director reasonably believes the committee merits confidence.

Question 13

Director’s Duty to Disclose

Answer 13

The directors have a duty to disclose material corporate information to other members of the board.

Question 14

Conflicted Directors

Answer 14

Interested director transactions probably are the most tested issues in Corporations.

Remember, if a director will benefit from a transaction her corporation is about to enter into, the director must disclose this information to the board (or to the shareholders).

Disinterested directors (or the shareholders) must then approve the transaction.

If there is no disclosure, 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.

Question 15

Corporate Opportunity Doctrine

Answer 15

The directors’ fiduciary duties prohibit them from diverting a business opportunity from their corporation to themselves without first giving their corporation an opportunity to act.

This is sometimes known as a “usurpation of a corporate opportunity” problem.

Question 16

Corporate Officers’ Standard of Conduct

Answer 16

Officers must carry out their duties in good faith, with the care that a person in a like position would reasonably exercise under similar circumstances, and in a manner they reasonably believe to be in the best interests of the corporation.

Question 17

Director’s Duties

Answer 17

Directors owe:
(a) duty of loyalty (avoid conflicts, self-interested transactions, and stealing business opportunities);

(b) duty of care – they must discharge their duties:
(i) In good faith;
(ii) With the care that a person in a like position would reasonably believe appropriate under similar circumstances; and
(iii) In a manner the directors reasonably believe to be in the best interests of the corporation.

Question 18

Mandatory Indemnification

Answer 18

Unless limited by the articles, a corporation must indemnify a director or officer who was wholly successful, on the merits or otherwise, in defending a proceeding against the officer or director for reasonable expenses, including attorneys’ fees, incurred in connection with the proceeding.

Question 19

Discretionary Indemnification

Answer 19

A corporation may indemnify a director for reasonable expenses incurred in unsuccessfully defending a suit brought against the director on account of the director’s position if the director:

(i) Acted in good faith; and

(ii) Believed that her conduct was: (a) in the best interests of the corporation (when the conduct at issue was within the director’s official capacity); (b) not opposed to the best interests of the corporation (when the conduct at issue was not within the director’s official capacity); or (c) not unlawful (in criminal proceedings).

Exceptions:
A corporation does not have discretion to indemnify a director who is unsuccessful in defending (i) a direct or derivative action in which the director is found liable to the corporation or (ii) an action charging that the director received an improper benefit.

Who Makes Determination:
Generally, determination whether to indemnify made by a disinterested majority of the board, or if there is not a disinterested quorum, by a majority of a disinterested committee or by legal counsel.
>Shareholders may also make the determination (the shares of the director seeking indemnification are not counted).

Officers:
Officers generally may be indemnified to the same extent as a director.

Question 20

GENERAL PROCEDURE FOR FUNDAMENTAL CHANGES

Answer 20

The following procedure applies to fundamental changes:
(i) the board adopts a resolution;
(ii) written notice is given to the shareholders;
(iii) the shareholders approve the changes; and
(iv) the changes in the form of articles are filed with the state.

Question 21

Procedure for Dissenting Shareholder

Answer 21

a. Corporation Must Give Shareholders Notice:
If a proposed corporate action will create dissenters’ rights, the notice of the shareholders’ meeting at which a vote on the action will be taken must state that the shareholders will be entitled to exercise their dissenting rights.

b. Shareholder Must Give Notice of Intent to Demand Payment:
Before a vote is taken, the shareholder must deliver written notice of her intent to demand payment
for her shares if the proposed action is taken. She cannot vote in favor of the proposed action.

c. Corporation Must Give Dissenters Notice:
If the action is approved, the corporation must notify, within 10 days after approval, all shareholders who filed an intent to demand payment. The notice must include the time and place to submit their shares and the other terms of the repurchase.

d. Shareholders Must Demand Payment:
A shareholder who is sent a dissenter’s notice must then demand payment in accordance with the notice given by the corporation.

e. Corporation Must Pay:
The corporation must pay the dissenters the amount the corporation estimates as the fair value of the shares, plus accrued interest.

f. Notice of Dissatisfaction:
If the shareholder is dissatisfied with the corporation’s determination of value, the shareholder has 30 days in which to send the corporation her own estimate of value and demand payment of that amount (or the difference between her estimate and the amount sent by the corporation).

g. Court Action:
If the corporation does not want to pay what the shareholder demanded, the corporation must file an action in court within 60 days of receiving the shareholder’s demand, requesting the court to determine the fair value of the shares. Otherwise, the corporation must pay what the shareholder demanded.

Question 22

Oppressed Shareholder

Answer 22

(i) Where the corporation’s distribution, compensation, governance, and other practices considered as a whole over time are plainly incompatible with good faith in dealing with the shareholder;

(ii) the oppressed shareholder has right to withdraw from corporation and corporation must buy shares at fair value.

> > 60 days to make payment after notice; within 1 year after 60-day period, either party may file action to determine value of oppressed shareholder’s shares.