Corporations and LLCs Flashcards
What are the 5 key fact patterns for corporations questions?
- Organization of a corporation
- Issuance of stock
- Directors and officers
- Shareholders
- Fundamental corporate changes
Identify:
Basic Players in the Corporation
- Shareholders/Stockholders: Owners of the corporation
- Board of directors: In charge of management
- Officers: Agent’s who carry out corporation’s policy
Corporation Formation Requirements
- Person: Incorporator
- Paper: Articles of Incorporation
- Act: Deliver articles to secretary of state with required fees
Broadly, what are bylaws and what are its characteristics?
- Operating manual for corporation
- Not filed with state
- Articles govern if conflict
- Board or shareholders can amend, repeal, and adopt
What are the consequences of forming a corporation?
- Internal affairs doctrine: Internal affairs of corporation governed by law of state of incorporation
- Entity status (Corp is legal person)
- Double taxation
- Limited liability: Generally, shareholders are liable only to pay for their stock, not for corporate debts
De Facto Corporation Requirements
- Relevant incorporation statute
- Good faith attempt to comply
- Act like a corporation
Corporation by Estoppel
Not a de jure corporation, but treated that way for people who treated the business like a corporation. Applies only in contract cases, not tort victims.
Who is liable for pre-incorporation contracts?
- Corporation: Liable only if it expressly or impliedly adopts (ratifies) contract
- Promoter (person entering the contract on behalf of the to-be formed corp): Liable until novation
Foreign corporations transacting business in a state must…
Foreign (out-of-state) corporations transacting business in a state must register and pay prescribed fees. If a foreign corp transacts business without registering, it can be assessed a civil fine and can’t assert a claim in the state.
Which ways can money be raised in a corporation?
- Debt securities: Corp borrows money (bonds)
- Equity securities: Corp sells ownership interest (stock)
- Issuance: Corp sells its own stock
What must the corporation receive when it issues stock?
Consideration.
- Form: Under MBCA, any tangible or intangible property or benefit to the corp
- Amount: Par = minimum issuance price
Preemptive Rights
Right of existing shareholder to maintain % of ownership by buying stock if there is a new issuance for money. Right must be stated in the articles. If articles are silent on this issue, no preemptive rights.
Requirements for Directors
- Adult natural persons
- One or more
- Initial directors named in articles/elected by incorporators
- Shareholders elect thereafter
When can directors be removed?
Directors are removable with or without cause.
Exception: Staggered board = Only with cause
What are the methods for board action?
- Unanimous agreement in writing
- At a meeting
When is notice required for a board of directors meeting?
- Regular meeting: No notice
- Special meeting: Must give at least two days notice
May directors vote by proxy or agreement?
No
Board of Director Meeting Requirements
- Quorum: Majority of all directors
- Majority of those present required to pass resolution
What happens if directors leave a meeting?
A quorum of the board can be lost (“broken”) if directors leave. Note that this rule is different for shareholder voting.
What are the fiduciary duties of directors to the corporation? What are the standards for those duties?
- Duty of loyalty: A director must act in good faith and with a reasonable belief that his actions are in the best interest of the corporation.
- Duty of care: A director must use the care that a prudent person in a like position would reasonably believe is appropriate under the circumstances.
Who has the burden to show that a director has violated his duty of care to the corp?
For the duty of care, the burden is on the plaintiff
What are the two common scenarios for a duty of care question?
- Nonfeasance: Director does nothing
- Misfeasance: Board makes decision that hurts business
Duty of Care - Business Judgment Rule
There is a presumption that “in making a business decision, the directors acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company.”
Directors must be informed to an extent that they reasonably believe is appropriate. They are entitled to rely upon information, opinions, reports, or statements of corporate officers, legal counsel, public accountants, etc., in making a decision. A party claiming that the directors breached their duty of care has the burden of proof.
Who has the burden of proof in duty of loyalty cases?
Burden on the defendant - business judgement rule does not apply
In which ways does a duty of loyalty issue arise?
A duty of loyalty issue arises in three ways (“BCC”):
- Self-dealing / Interested director transaction (Director is on both sides of a transaction): a director has a material financial interest in a contract, as well as knowledge of that interest, yet still votes to approve the contract.
- Competing ventures: a director may not compete with his corporation.
- Corporate opportunity: a corporate officer may not usurp a corporate opportunity.
What are defenses to liability for breach of the duty of loyalty?
The Revised Model Business Corporation Act (MBCA) includes three safe harbors that may protect a director who breaches his duty of loyalty:
- Approval by a majority (but at least two) disinterested (qualified) directors, if all relevant information is disclosed.
- Approval by disinterested (qualified) shareholders.
- If the transaction is judged to be **fair to the corporation at the time ** it was entered into.
A qualified director is a director without a conflicting interest. Qualified shares are those not held by a conflicted director or related person.
When can a corp make a loan to a director?
Corp can make loan to director if reasonably expected to benefit the corp.
How do we determine director liability?
Director presumed to concur with board action unless dissent/abstention noted in writing in corp records.
What duties to officers owe to the corp?
Officers owe same duties of care and loyalty as directors.
Who may select and remove officers?
Officers are selected and removed by the board of directors. The board may remove an officer at any time, with or without cause.
Indemnification of directors, officers, and employees
- Category 1 - No Indemnification: Corp cannot indemnify director or officer who is (1) held liable to the corp or (2) held to have received an improper benefit.
- Category 2 - Mandatory Indemnification: Corp must indemnify director or officer who was successful in defending a proceeding on the merits or otherwise.
- Category 3 - Permissive Indemnification: Corp may indemnify if director or officer shows that they acted in good faith and believed her conduct was in best interests of the corp.
When can the articles eliminate director (and, in some states, officer) liability to the corp?
Articles can eliminate D/O liability only for duty of care cases.
Closely Held (Close) Corporation
- Small number of shareholders
- Stock not publicly traded
- Shareholders can manage directly
Special fiduciary duty in close corporations
Shareholders in close corporations owe a fiduciary duty of utmost good faith
Professional Corporation
Corp where directors, officers, and shareholders must be licensed professionals
Piercing the Corporate Veil
Doctrine that allows shareholders to be sued for debts of the corp.
- Available only in close corporations or LLCs
- Must show: (1) shareholders of corp (or members of LLC) abused the privilege of incorporating and (2) fairness requires holding them liable.
What are the situations in which the corporate veil is often pierced?
- Alter Ego: If shareholders ignore corporate formalities such that the corp may be considered the “alter ego” or a “mere instrumentality” of the shareholders or another corporation, and some basic injustice results. (E.g., Shareholders treating corp assets as their own, commingling their money with corp money).
- Undercapitalization: Corp is inadequately capitalized, so at the time of formation there is not enough unencumbered capital to reasonably cover prospective liabilities.
- Deception of creditors
Who is liable when court pierces the corporate veil?
Only shareholders (or members, if LLC) who participated in the wrong are personally liable.
What is a derivative suit?
Shareholder sues to enforce the corp’s claim.
A derivative suit is appropriate when the injury is caused to the corporation and a shareholder is trying to enforce the corporation’s rights. (This also applies to LLCs.)
Derivative suit outcome if:
1. Plaintiff shareholder wins
2. Plaintiff shareholder loses
- If plaintiff shareholder wins, money from judgment goes to corp and plaintiff recovers costs and fees.
- If plaintiff shareholder loses, they are liable for defendant’s fees if sued without reasonable cause and other shareholders are barred from suing on the same transaction again.
