Corporations and LLCs Flashcards
LOW
CORPORATE BYLAWS
Corporate bylaws are written rules of conduct that must be initially adopted by the incorporators or board of directors.
The bylaws may contain any provision for managing the business and regulating the affairs of the corporation to the extent that is consistent with the law and articles of incorporation.
If there is a conflict between the articles and bylaws, the articles of incorporation govern.
LOW
AMENDING CORPORATE BYLAWS
Corporate bylaws may be amended or repealed by the corporation’s shareholders.
The board of directors may also amend or repeal the bylaws unless the shareholders expressly specify otherwise.
LOW
PROMOTER LIABILITY
A promoter acts on behalf of a corporation that is yet to be formed (usually assists in the planning and formation of the new business).
A promoter is personally liable for any contracts entered into on behalf of the corporation so long as both parties to the transaction know that the corporation has not yet been formed, unless:
- There is a novation where the parties agree to release the promoter from liability in favor of holding the corporation solely liable; OR
- The promoter is able to obtain indemnity from the corporation.
MED
*PIERCING THE CORPORATE VEIL
Courts will allow a creditor to pierce the corporate veil and hold a shareholder personally liable for the debts of a corporation when:
- The shareholder has dominated the corporation to the extent that the corporation may be considered the shareholder’s alter ego;
- The shareholder failed to follow corporate formalities;
- The corporation was undercapitalized; OR
- There is fraud or illegality present.
LOW
ANNUAL AND SPECIAL MEETINGS
A corporation must hold an annual meeting of shareholders at a time that is stated or fixed in accordance with the bylaws.
Special meetings can generally be called by:
- Persons authorized under the articles of incorporation;
- A demand from shareholders that accounts for at least 10% of the votes entitled to be cast at the meeting; OR
- The board of directors for limited purposes (e.g., dissolution of the corporation).
LOW
NOTICE OF SHAREHOLDER MEETINGS
Generally, shareholders who are entitled to vote must be provided with notice of all annual and special meetings. For special meetings, the notice must:
- State the purpose of the meeting; AND
- Be provided 10-60 days before the meeting commences (in most states).
LOW
SHAREHOLDER QUORUM
A quorum must be present in order for the shareholders to take action at a meeting. Unless otherwise set forth in the articles of incorporation,
a quorum exists when at least a majority of the shares entitled to vote are present.
MED
*VOTE BY PROXY
A vote by proxy allows a shareholder to vote without physically attending the shareholder’s meeting by authorizing another person to vote her shares on her behalf.
A valid proxy must exist in the form of a verifiable electronic transmission or a signed written appointment form.
A proxy is freely revocable by the shareholder (unless the recipient of the proxy has an economic interest in the shares).
LOW
CORPORATE INSPECTION OF BOOKS AND RECORDS
A shareholder possesses the right to inspect corporate books and records during regular business hours so long as the purpose for the inspection is proper. In order to be proper, the purpose for the inspection must be reasonably related to a person’s interest as a shareholder.
Generally, a shareholder must make a written demand to inspect corporate books and records and allow the corporation a reasonable amount of time to respond (usually 5 days).
Procedural Requirements. Generally, a shareholder must:
(1) Make a written demand to inspect corporate books and records and allow the corporation a reasonable amount of time to respond (usually 5 days); AND
(2) Conduct the inspection during regular business hours at the corporation’s principal office.
HIGH
**DIRECTOR AND OFFICER DUTY OF CARE
Directors and officers owe the corporation a fiduciary duty of care. This duty includes:
- The duty to take reasonable steps to monitor the corporation’s management;
- The duty to be satisfied that proposals are in the corporation’s best interests;
- The duty to disclose material information to the board; AND
- The duty to make reasonably informed decisions. (In making such decisions, directors and officers may rely on information from others whom they reasonably believe are reliable.)
HIGH
**BUSINESS JUDGMENT RULE [BJR]
In suits alleging that a director or officer violated his duty of care owed to the corporation, courts will apply the business judgment rule. Under this rule, a court will not second guess the decisions of a director/officer so long as the decisions are made:
- In good faith;
- With the care an ordinarily prudent person in a like position would exercise under similar circumstances; AND
- In a manner the director/officer reasonably believes to be in the best interests of the corporation.
Liability. If a director or officer breaches the duty of care, he may be held personally liable for damages.
A corporation’s articles of incorporation may reasonably limit the liability of directors and officers for bad judgment, but NOT for bad faith misconduct.
MED
*CONFLICTING INTEREST TRANSACTIONS
Directors and officers have a duty to avoid implicating their personal conflicting interests in making business decisions for the corporation.
A director/officer has a conflicting interest in a transaction when the director/officer or a family member either:
- Is a party to the transaction; OR
- 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.
MED
*SAFE HARBORS
A director/officer that enters into a conflicting interest transaction may be protected from liability if:
- Disinterested shareholders approve the conflicting interest transaction;
- The non-interested members of the board authorize the conflicting interest transaction; OR
- The transaction, judged according to the circumstances at the time of commitment, is established to have been fair to the corporation.
LOW
CORPORATE OPPORTUNITY DOCTRINE
The corporate opportunity doctrine prohibits directors and officers from usurping business opportunities that rightfully belong to the corporation for their own benefit.
LOW
DISSENTERS’ RIGHTS
After a merger or consolidation takes place, dissenting shareholders opposed to the merger or consolidation may either:
- Challenge the action; OR
- Receive payment determined at the fair market value of their shares immediately before the merger/consolidation took effect.
