corporations commonly tested issues Flashcards
Duty of care—business-judgment rule: There is a presumption that “in making a business decision, the directors acted on an:
note: also applies to LLCs
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
Duty of loyalty: Director in a corporation
Duty of loyalty arises in 3 ways mnemonic: BCC
note: also LLCs
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.
A duty of loyalty issue arises in three ways (mnemonic=BCC):
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.
Competes with corporation: a director may not compete with his corporation.
Corporate opportunity: a corporate officer may not usurp a corporate opportunity.
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:
(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.
T or F 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.”
True
lawsuits against shareholders and piercing the corporate veil
In some (very limited) circumstances, courts will disregard the LLC form and hold a shareholder personally liable for corporate debt. To do so is called piercing the corporate veil. It is only allowed in close corporations and LLCs. What must a Plaintiff show to pierce the corporate veil?
piercing the corporate veil: 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.
Generally, a plaintiff must show that shareholders of the corporation or members of an LLC abused the privilege of incorporating or operating 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.
Note that only the shareholders or members who participated in the wrong are personally liable
A shareholder has a right to inspect corporate books and records as long as his demand is made in good faith and for a proper purpose. Define good faith and proper purpose
good faith and for a proper purpose.
A proper purpose is a purpose reasonably related to a person’s interest as a shareholder (an example is when a shareholder articulates a purpose to address “economic risks” to the corporation).
A shareholder must state
(1) his purpose,
(2) the records he desires to inspect, and
(3) that the records are directly connected to his purpose
how is an LLC formed?
note: fiduciary duties are the same as in corporations
Members of an LLC in a member-managed LLC are treated as ________ of the LCC (with actual and apparent authority to bind the LLC in ordinary—but not in ________ _________.
Articles of organization must be filed to create an LLC. note: Since LLCs are a relatively new form of business association, courts tend to analyze them in the context of corporate or partnership law.
Members of an LLC have fiduciary duties.
Members act as agents of LLC
members can bind LLC in ordinary but not for extraordinary—affairs
explain dissociation in an LLC and its legal effect
Dissociation: 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.
LLC member’s Liability: general rule:
exceptions to general rule:
Generally, individual members are not liable for losses.
exceptions They are liable if the court decides to pierce the LLC veil (discussed above) or if proper procedures for dissolution and winding up have not been followed
(Creditors may enforce claims against each of the LLC members. However, a member’s total liability may not exceed the total value of assets distributed to the member in dissolution.)
what are the two types of LLCs
member managed LLC default rule When the certificate of organization fails to specify whether the LLC is member-managed or manager-managed, the LLC is presumed to be member-managed,
and
manager managed LLC -
how is a manager managed LLC formed?
the members’ operating agreement or the certificate of organization specifies how the LLC is to be managed.
what are the management rights in a member managed LLC under the RULLCA?
Under RULLCA,
-each member has equal rights in the management and conduct of the company’s activities.”
-each member of a member-managed LLC can bind the company to contracts for apparently carrying on the ordinary business of the company unless the member lacks authority to do so and the other party to the contract has notice that the member lacks such authority.
a member of a member- managed LLC has the authority—both actual and apparent—to bind the LLC, much as a partner in a general partnership.
how is it determined whether an LLC member has actual authority?
Whether there is actual authority for a non-ordinary transaction depends on the operating agreement of the LLC, which governs “relations . . . between the members and the limited liability company” and “the activities of the company.” RULLCA
what is required for dissolution of an LLC under the RULLCA?
unanimous consent of all members of the LLC
