Corporations And LLCs Flashcards
Incorporation
The articles of incorporation are filed with the state and, if in conflict with bylaws, the articles control.
A corporation is not generally liable for a contract entered into prior to incorporation unless it expressly or impliedly adopts (ratifies) the contract.
The PROMOTER (the person entering the contract on behalf of the to-be-formed corporation) is liable.
Shareholders
Only owners—do not manage the corporation. They generally just have annual meetings.
Notice of shareholders’ meetings
Written notice of meetings is required 10-60 days prior and must state the time, place, and purpose of the meeting.
How can shareholders vote at meetings?
By proxy: have someone vote their shares for them
By voting agreement
Generally, a quorum (majority of all outstanding shares required to vote) must be present to hold a vote.
Directors
Manage the corporation and (like shareholders) act as a body by voting.
Shareholders hire and fire directors.
Directors cannot vote by proxy or agreement. A quorum (majority of directors) needs to be present for a vote to take place, but unlike shareholders, directors can “break quorum” by leaving. Notice is only required for a special meeting.
Directors’ duties are:
Duty of care and duty of loyalty
Duty of care—business-judgment rule
There is a presumption that “in making a business decision, the directors acted on an (1) informed basis, (2) in good faith and (3) 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.
What may directors rely on in their duty of care/business-judgment rule?
Information, opinions, reports, or statements of corporate officers, legal counsel, public accountants, etc., in making a decision.
Who has the burden of proof when a director is accused of breaching her duty of care?
The party claiming that the breach occurred.
Duty of loyalty
A director must act in good faith and with a reasonable belief that what he does is in the corporation’s best interest.
The business-judgment rule presumption does not apply if there is a duty of loyalty issue.
Three ways a duty of loyalty issue can arise:
(BCC): (1) director is on Both sides of a transaction—director has a material interest in a contract, as well as knowledge of that interest, yet still votes to approve the contract; (2) Competes with corporation; or (3) Corporate opportunity—corporate officer may not usurp a corporate opportunity.
Defenses to liability for breach of the duty of loyalty
Three safe harbors that may protect a director who breaches his duty of loyalty: (1) approval by disinterested directors—if all relevant information is disclosed; (2) approval by disinterested shareholders; or (3) if the transaction is judged to be fair at the time it was entered into.
Waiver of duty in an LLC
An LLC operating agreement may waive the duty of loyalty (e.g., allow members to open competing businesses) so long as it is not “manifestly unreasonable.”
Voting requirements for shareholders:
In order for a resolution to pass, there needs to be a quorum present, and more votes must be cast in favor of the resolution than against it.
Who votes out of the shareholders?
The record owner on the record date.
Record date: determines who is entitled to vote at a particular meeting—namely, those persons who were registered as shareholders of record on that date.
Exceptions: shareholder died (shareholder’s executor may vote) or executed a valid proxy (proxy may vote).
Unless the articles of incorporation provide otherwise, each outstanding share (regardless of class) is entitled to one vote on each matter voted on at a shareholders’ meeting.
Voting by proxy
A shareholder may vote by proxy. A shareholder can appoint a proxy by (1) signing an appointment form or (2) making a verifiable electronic transmission.
A shareholder may not orally ask someone to serve as a proxy.
A proxy is generally revocable (even if it states it is irrevocable) and any action inconsistent with the grant of a proxy works to revoke it (ex: when two or more revocable proxies are given, the last given proxy revokes all previous proxies).
When is a proxy not revocable?
If it explicitly states it is irrevocable and is coupled with an interest (ex: sale of shares).
Many states say that a proxy is valid for 11 months unless otherwise stated.
Lawsuits by shareholders against the corporation
Shareholder may file an action to establish that the acts of the directors are illegal, fraudulent, or willfully unfair and oppressive to either the corporation or the shareholder.
Whether a suit is appropriately brought as a direct or derivative action depends on the injury.
Direct shareholder suits
Appropriate when the wrong done amounts to a breach of duty owed to the individual personally (ex: shareholder sues for denial of preemptive rights, payment of a dividend, or oppression in a close corporation).
Derivative shareholder suits
Appropriate when the injury is caused to the corporation and a shareholder is trying to enforce the corporation’s rights (also applies to LLCs).
Requirements for filing a derivative shareholder suit
Shareholder may not commence or maintain a derivative suit unless three requirements are met (SAD):
(1) Standing to bring a lawsuit;
(2) Adequacy—shareholder represents the corporation’s interests; and
(3) Demand—generally should file a written demand and wait 90 days before filing suit unless irreparable injury would result or a demand would be futile.
Who gets recovery in a derivative suit?
The corporation
Can a derivative suit be dismissed?
Yes—with court approval if it is not in the best interest of the corporation to continue it.
Lawsuits against shareholders—piercing the corporate veil.
Only allowed in close corporations and LLCs—courts will hold a shareholder personally liable for corporate debt.
Generally, a plaintiff must show that shareholders of the corporation or members of an LLC abused the privilege of incorporating and fairness requires holding them liable.
One generally needs to show undercapitalization of the business, failing to follow formalities, commingling of assets, confusion of business affairs, or deception of creditors.
Only the shareholders or members who participated in the wrong are personally liable.
As a general rule, the law treats a corporation as ____.
An entity separate from its shareholders, even where one individual owns all the corporate stock.
Shareholder’s right to inspect corporate books and records.
Shareholder has a right to inspect corporate books and records as long as his demand is made in (1) good faith and (2) for a proper purpose.
Proper purpose: reasonably related to a person’s interest as a shareholder.
Shareholder must state: (1) his purpose, (2) the records he desires to inspect, and (3) that the records are directly connected to his purpose.
Formation, rights, and duties for LLCs
Articles of organization must be filed to create an LLC. Since LLCs are a relatively new form of business association, courts tend to analyze them in the context of corporate or partnership law.
What duties do members of an LLC have?
Fiduciary duties.
Members of an LLC in a member-managed LLC are treated as ___ of the LLC.
Agents—with actual and apparent authority to bind the LLC in ordinary—but not extraordinary—affairs.
Dissociation of an LLC
If a member leaves, then it leads to dissociation of that member, but it does not lead to winding up or dissolution unless the other members unanimously agree to dissolve the LLC.
Liability of an LLC’s members
generally, individual members are not liable for losses. They are liable if the court decides to pierce the LLC veil or if proper procedures for dissolution and winding up have not been followed.
May creditors enforce claims against each of the LLC members?
Yes—however, a member’s total liability may not exceed the total value of assets distributed to the member in dissolution.
A corporation is owned by its ___.
Shareholders
The group in charge of management of a corporation is the ___.
Board of directors
Members of the board of directors are elected by the ___.
Shareholders
The board appoints people to carry out its policy. Who are they?
Officers
To form a corporation, we need:
A person, a paper, and an act.
Person: incorporator—must have one or more. They execute articles and deliver to the Secretary of State.
Paper: articles of incorporation—(1) name of the corporation; (2) name and address of each incorporator; (3) registered agent and street address of the registered office; (4) information regarding authorized stock.
Act: deliver notarized articles to the Secretary of State—this forms a de jure corporation.
At the organizational meeting, the board of directors (or incorporator if no directors were named in the articles) must “complete the organization of the corporation.” This means:
Appoint officers and adopt initial bylaws.
If bylaws and articles conflict, which governs?
Articles
Entity status of a corporation:
It is a legal person—it can sue and be sued, hold property, be a partner in a partnership, invest in other companies or commodities, make contributions to charity, etc.
