Corporations Essay Cards

Question 1

Director Duties

Answer 1

Directors are fiduciaries of the corporation and owe the corporation the Duty of Care and Duty of Loyalty.

Duty of Care: (i) act in good faith and (ii) in the best interests of the corporation, using (iii) the care that would be exercised by an ordinarily prudent person in a like position.

Duty of Loyalty: No self-dealing without disclosure and approval, also implicated in the usurpation of corporate opportunity.

Question 2

BJR

Answer 2

Under the BJR a directors who meet the Duty of Care are protected against lawsuits challenging the decision. In making their decision the Director is allowed to rely on opinions and reports of other directors, corporate officers, corporate employees, and outside experts if the reports are within their competence.

Question 3

Piercing the Corporate Veil

Answer 3

Generally, shareholders in a properly formed corporation are not personally liable for the obligations of their corporation. However, court will pierce the corporate veil and hold shareholders personally liable where:

1. Corp formalities have been ignored;
2. The corporation was inadequately capitalized; or
3. The corporate form is being used to perpetrate a fraud.

Question 4

Alter Ego

Answer 4

Where shareholders treat the corporation as their alter ego, such as where they take corporate funds for personal use, and the corporation does not have sufficient funds to pay its creditors as a result, the courts will often pierce.

Question 5

Duty of Loyalty: Insider Information

Answer 5

Corporate officers are fiduciaries and owe their corporation the duty to act in its best interests and not for personal gain. A corporate officer who has inside information has a duty to disclose that information to the shareholder with whom he deals or refrain from trading.

Question 6

Duty of Care

Answer 6

Corporate directors are fiduciaries of the corporation and must (i) act in good faith, (ii) with the care of an ordinarily prudent person under like circumstances, and (iii) in a manner reasonable believed to be in the best interests of the corporation.

Question 7

Approval of a Merger

Answer 7

Approval by the Board > Notice to SH > Approval by SH.

Question 8

Effect of Shareholder Approval

Answer 8

A person may be estopped from complaining about actions that he himself approved; (ii) however, estoppel works only when all material facts are known by the party against whom estoppel is sought.

Question 9

Compelling Payment of a Dividend

Answer 9

1. Absent a provision in the Articles of Incorporation or Bylaws the declaration of a dividend is left to the discretion of the Board.
2. A strong case is required to convince a court of equity to order directors to declare a dividend.

Question 10

Indemnification

Answer 10

1. A director is entitled to reimbursement from the C for expenditures for corporate purposes. Further, if the director is successful in defending a lawsuit brought against the director in his corporate capacity, indemnification for expenses of the suit is mandatory.
2. Even if a director loses such a lawsuit, the directors usually have discretion to grant indemnification if: (i) Director acted in good faith; and (ii) the director believed his conduct was in, or at least not opposed to, the corporation’s best interests.
3. Indemnification is prohibited if a Director loses a derivative suit and is found liable to the corporation or if the director is found to have received an improper benefit.
4. Generally, the decision to indemnify must be made by: (i) a disinterested majority of the board of directors; (ii) if there is no disinterested majority, then it can be made by a majority of a disinterested committee, or by legal counsel, or by the shareholders (shares of directors seeking indemnification not counted.

Question 11

Advancement

Answer 11

Advancement is permitted if the directors furnish the corporation with a statement that they believe they met the appropriate standard of care and that they will repay the corporation if they are later found not to have met the appropriate standard.

Question 12

Rule 10b-5

Answer 12

Makes it unlawful for anyone to: (i) use an instrument of interstate commerce to make (ii) an untrue statement of material fact; (iii) in connection with the purchase or sale of a security.

A private party can sue under this rule if they purchased or sold a security and was damaged as a result of the untrue statement. Moreover, such a suit may be brought against a defendant who neither purchased nor sold the security.

Question 13

Rules for FCC

Answer 13

1. Majority of Directors adopt the resolution approving the change
2. Call a special meeting of the SH to vote on whether to approve the change
3. The change is approved by the SH
4. The change is formalized, if necessary, in articles that are filed with the state.

SH are given at least 10 days written notice of the meeting describing the proposed change.

Question 14

Limited Purpose Provision

Answer 14

1. A corporation has the power to engage in any lawful business.
2. A corporation may limit the business in which it may engage by having a narrow purpose provision in its articles of incorporation.
3. A corporation may not carry on business outside the scope of its stated purpose.
4. Business outside the scope of the stated purpose is said to be ultra vires.

Question 15

Who can raise Ultra Vires?

Answer 15

1. Shareholder seeking to enjoin the action;
2. The corporation seeking damages against the officers or directors who authorized the act
3. The state, seeking to dissolve the corporation for engaging in an ultra vires act.

Question 16

Ultra Vires: Injunction

Answer 16

1. Injunction is equitable act
2. Equitable court will NOT enjoin an act where it would harm an innocent third party—-SUCH AS where a third party who entered into an ultra vires K not knowing that the K was ultra vires.

Question 17

Ultra Vires: Action for Damages

Answer 17

1. A SH can bring action against director for breach of duty of care for authorizing the ultra vires act.
2. Directors are fiduciaries and owe the corporation the duty to act with the care that an ordinary person would exercise in his own affairs.
3. Taking business outside the scope of the corporation’s stated purpose violates this duty.
4. Damages, not an injunction would result from the suit.

Question 18

Corporate Opportunity Definition

Answer 18

Director owes the corporation a duty of loyalty, which prohibits:

1. The director from competing with his corporation; or
2. Usurping a corporate opportunity.

Question 19

Corporation Opportunity: Factors/Considerations

Answer 19

Factors/Elements:

1. Director cannot take for himself a business opportunity in which his corporation might have an interest unless he first offers the opportunity to the corporation and the corporation rejects the opportunity.
2. A corporation’s interest does not extend to every conceivable opportunity.
3. The closer a corporation’s line of business is to the opportunity, the more likely a court will find it to be a corporate opportunity.
4. Generally, the Director should present the opportunity to the Board and allow it to decide whether to take advantage of the opportunity.

Question 20

Corporate Opportunity: Effect of Usurpation

Answer 20

Corporation can:

1. Recover the profits;
2. Force the Director, if still possible, to convey the opportunity to the corporation.

Question 21

Corporate Opportunity Defense: Disinterest

Answer 21

It is a defense to a claim of usurpation of corporate opportunity that the corporation would not have an interest in the opportunity.

Question 22

Removal of Director

Answer 22

1. Generally only SH have the power to remove directors. May do so with or without cause.
2. Directors have no power to remove other Directors unless the articles or bylaws provide for it.
3. Directors can call a special meeting of the shareholders to vote on the matter: must be at least 10 (but no more than 60) days notice to SH and must specify the time, place, and purpose of the meeting.
4. A director may be removed if (i) a quorum of shares is present; and (ii) at least the majority vote for removal.

Question 23

Liability for Pre-Incorporation K

Answer 23

Corps are legal entities separate and apart from their shareholders. Generally:

1. Corporations are not liable for K made prior to incorporation;
2. Only promoters are typically liable;
3. Corporation may become liable if it adopts the contract. This may be explicit or implicit.

Question 24

Shareholder Loans

Answer 24

This is permissible.

Question 25

Equitable Subordination

Answer 25

Generally, SH who are unsecured creditors are not subordinate to outside unsecured creditors. However:

1. Court might subordinate their claim if wrongdoing is attributable to them;
2. This is the deep rock doctrine.

Question 26

Promoter Liability

Answer 26

1. A promoter is one who undertakes to procure commitments for a corporation before it is formed.
2. A promoter who enters into a K knowing that there has been no valid incorporation is personally liable on the K. This is true even where the 3rd party KNEW that the corporation has yet to be formed.
3. Promoters generally jointly and severally liable.

Exceptions:

1. K expressly indicates contractor not to be bound, in which case it is construed as a revocable offer to the corp; or
2. All parties have agreed to a novation.

Question 27

Shareholder Liability

Answer 27

Generally, shareholders are not personally liable for the obligations of a properly formed corporation. Exception:

1. A court will ignore the separateness and pierce the corporate veil to hold shareholders personally liable for the corporations obligations IF the privilege of conducting business as a corporation has been abused.
2. Corporate Veil Test:

Question 28

Derivative Suit

Answer 28

Brought to remedy injury to the corporation, that the corporation has done nothing to vindicate. Require elements:

1. The shareholder was a shareholder at the time of the act or omission complained of;
2. The SH makes a written demand on the board (some allow demand futility);
3. The SH remains a SH during pendency of proceedings
4. The SH can fairly and adequately represent the interests of the corporation.

After demand is brought:

1. Must wait 90 days before filing suit, unless corp responds and says no.

2.

Question 29

BJR Safe Harbor

Answer 29

Generally, a transaction will not be set aside merely because a director has a personal interest, if it can be shown that:

1. The transaction is fair to the corporation; or
2. It can be shown that (i) all material facts were disclosed to the board; and (ii) it was approved by a majority of the board without a personal interest in the transaction.