Corporations and LLCs

Question 1

MED

*PIERCING THE CORPORATE VEIL

Answer 1

Courts will allow a creditor to pierce the corporate veil and hold a shareholder personally liable for the debts of a corporation when:

1. The shareholder has dominated the corporation to the extent that the corporation may be considered the shareholder’s alter ego;
2. The shareholder failed to follow corporate formalities;
3. The corporation was undercapitalized; OR
4. There is fraud or illegality present.

Question 2

MED

*VOTE BY PROXY

Answer 2

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).

Question 3

HIGH

**DIRECTOR AND OFFICER DUTY OF CARE

Answer 3

Directors and officers owe the corporation a fiduciary duty of care. This duty includes:

1. The duty to take reasonable steps to monitor the corporation’s management;
2. The duty to be satisfied that proposals are in the corporation’s best interests;
3. The duty to disclose material information to the board; AND
4. 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.)

Question 4

HIGH

**BUSINESS JUDGMENT RULE [BJR]

Answer 4

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:

1. In good faith;
2. With the care an ordinarily prudent person in a like position would exercise under similar circumstances; AND
3. 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.

Question 5

MED

*CONFLICTING INTEREST TRANSACTIONS

Answer 5

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:

1. Is a party to the transaction; OR
2. 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.

Question 6

MED

*SAFE HARBORS

Answer 6

A director/officer that enters into a conflicting interest transaction may be protected from liability if:

1. Disinterested shareholders approve the conflicting interest transaction;
2. The non-interested members of the board authorize the conflicting interest transaction; OR
3. The transaction, judged according to the circumstances at the time of commitment, is established to have been fair to the corporation.

Question 7

HIGH

**DERIVATIVE CLAIMS

Answer 7

A derivative claim is a lawsuit brought by a shareholder on behalf of the corporation.

The shareholder is suing to enforce the corporation’s rights when the corporation has a valid cause of action, but has failed to pursue it.

(This often occurs when the defendant in the suit is someone close to the corporation (e.g., a director or officer.))

If successful, the proceeds go to the corporation.

[However, if the award to the corporation benefits the defendants, the court may order that damages be paid directly to the shareholder who brought the action.]

Question 8

HIGH

**DERIVATIVE CLAIMS DEMAND REQUIREMENT

Answer 8

Generally, a shareholder must make a written demand on the board before commencing a derivative action.

After submitting the written demand, the shareholder must wait 90 days to file the derivative action, unless the board rejects the demand during the 90-day period.

[However, under the common law, and in some jurisdictions today, the plaintiff shareholder does not have to make a demand on the board if it would be futile to do so (e.g., the board is interested in the transaction being challenged).

Question 9

MED

*DIRECT CLAIMS

Answer 9

A direct claim is a lawsuit brought by a shareholder to enforce his own rights.

The shareholder must prove actual injury that is not solely the result of an injury suffered by the corporation.

If a direct claim is successful, the proceeds go to the shareholder.