Corporations and LLCs

Question 1

What is the Business Judgment Rule?

Answer 1

The Business Judgment Rule is a presumption that the director’s decision can’t be challenged as long as (1) the director acted in good faith (2) with the care of an ordinarily prudent person in like position (3) in a manner the director reasonably believed to be in the best interest of the corporation.

Question 2

Does a transaction get set aside if it creates a conflict of interest for a director?

Answer 2

If a director has a conflict of interest with a transaction, it will NOT be set aside if:

(1) the director disclosed material facts to disinterested board members or shareholders and they approved OR
(2) the transaction was fair

Question 3

Can a corporations articles of incorporation limit directors’ personal liability?

Answer 3

Yes, a corporation’s articles of incorporation can limit or eliminate directors’ personal liability for money damages to the shareholders or corporation for actions taken (known as “exculpatory provision”), EXCEPT to the extent that:

(1) the director received a benefit to which he was not entitled
(2) the director intentionally inflicted harm on the corporation or its shareholders
(3) the director approved unlawful distributions
(4) the director intentionally committed a crime

***personal liability for negligent actions can be limited or eliminated by articles of incorporation, because negligence is not one of the four categories above

Question 4

Are proxies revocable? If so how can they be revoked?

Answer 4

Proxies are generally revocable, unless (i) it is stated that they are irrevocable and (ii) there is an “interest” (e.g. someone paid for the right to be a proxy).

Proxies may be revoked in two ways:

1. By a subsequent instrument
2. By the shareholder of record showing up to vote in person