Corporations and LLCs Flashcards
Articles of incorporation must include what?
- Corporate name
- Corporate purpose (may be broad)
- Corporate powers (e.g., buy property, sue and be sued, broad powers unless otherwise limited)
- Duration (perpetual unless otherwise specified)
What is an ultra vires act?
When a corp has stated a narrow business purpose in its articles of incorporation and engages in an action outside of that purpose.
At CL, such actions were void or voidable, but under RMBCA, UVAs can only be challenged when a shareholder files suit to enjoin such actions, corp takes action against an officer, director or employee, or the state initiates a proceeding to enjoin such actions.
Will be enjoined only if equitable to do so.
Limitations on distributions: when is a corp considered insolvent?
Insolvency determination
Equity test: must be able to pay off debts as they come due in the usual course of business.
Balance sheet test: corp total assets must exceed total liabilities plus liquidation preferences of senior securities.
What is a voting pool?
Binding voting agreement that provides for the manner in which a group of stockholders will vote using their shares. They retain ownership and the agreement is a contract that may be specifically enforced.
What is a voting trust?
Separate legal entity to which shares are transferred while shareholder retains beneficial ownership (trust has legal ownership and is the trustee, who votes and shares dividends in accordance with the trust terms). Trust must be in writing, limited to ten years, and filed w the corp.
Demand requirement
P must make written demand upon BOD. Derivative action cannot commence until after 90 days have passed from demand. Under RMBCA, demand requirement is universal, but in states that have not adopted it and the demand would be futile (directors are interested, valid exercise of BJR), demand is not required.
Futility: 1) a majority of BOD is interested in the challenged tx, 2) BOD did not fully inform themselves about the tx to the extent reasonably appropriate under the circumstances, or 3) tx was not a product of a valid business judgment
Piercing the corp. veil
Courts look at totality of the circumstances, including whether there is unity or interest and ownership and whether the corp is a facade for personal dealings (ie, alter ego)
Controlling shareholder fiduciary duties to minority shareholders
50% of shares plus one is majority. Fiduciary duties arise if selling an interest to outsider, seeking to eliminate other shareholders, receiving distribution denied to other shareholders.
Overcoming the BJR
BJR is a rebuttable presumption that the director/officer acted in the best interests of the corp. To overcome must show the director/officer:
- did not act in good faith
- was not informed to the extent they believed reasonably necessary to make a decision
- did not show objectivity or independence from relation to/control by another w material interest in challenged conduct.
- received financial benefit to which he was not entitled
- failed to timely investigate a material concern after being alerted in a manner that would have caused a reasonably attentive individual to do so
What is a conflict of interest transaction
Between director and corp that would normally require board approval and is of such financial significance to director that it would reasonably be expected to influence directors vote. Must be a financial and material interest.
What is a close corp?
Has only a few shareholders, relaxed style of governance and fewer formalities. Shareholders can be directors and officers.
What is a foreign corp?
Incorporated in another state. To do business in another state, the corporation must receive a certificate of authority. A corp cannot sue in that state until it has a cert of authority.
C corp versus S corp.
C corp is taxed on profits and as shareholders on distributions. S corp passes income and expenses to shareholders, which are directly taxed on these items (can have no more than 100 shareholders, 1 class of stock, and all shareholders must consent to S corp election).
Piercing the veil of an LLC
Equitable grounds: commingling assets, undercapitalization, confusion of business affairs, deception of creditors. Failure to follow formalities is less of a justification.
Also mere instrumentality (no will of its own, members used domination to commit fraud, control and wrongful action proximately caused injury)
And
Unity of interest and ownership x no existence independent of its members
To wind up, an LLC must
1) discharge debts and liabilities
2) settle and close company activities
3) marshal and distribute company assets
