Corporations (Highs)

Question 1

Personal Liability & Piercing the Veil

Answer 1

• SH Personal Liability – Generally, SH’s are NOT personally liable for corp. liabilities and obligations.
  
  • BUT, a court may pierce the corporate veil to impose personal liability in certain situations.
• Piercing the Corporate Veil – Courts may disregard the corporate form, and hold an individual shareholder (or director / officer) personally liable for actions taken on behalf of the corp. when:
  
  1. Corp. is acting as the alter ego of the shareholder – when he/she utilizes the corp. for personal reasons;
  2. There is a failure to follow corporate formalities;
  3. Corp. is inadequately capitalized at its inception; OR
  4. To prevent fraud.
• Courts are more likely to pierce in tort actions than in contract disputes.
• Passive Investors → are generally NOT liable, even if a court pierces the veil against an active SH/Member.
• Piercing the Veil for LLC’s – Courts generally apply the same factors to pierce the veil of an LLC to hold members or managers liable.
  
  • BUT the failure to follow formalities is NOT a ground to pierce the LLC veil.

Question 2

Proxy Voting & Revocation of a Proxy

Answer 2

• Proxy – A proxy grants the proxy holder the ability to vote shares as the proxy holder deems appropriate.
  
  • Must be signed on either an: (a) appointment form; OR (b) electronic transmission.
  • Only valid for 11 months.
• Proxy Agreements are freely revocable by the shareholder, even if the proxy states that it’s irrevocable.
  
  • Exception→NOT revocable if proxy: (1) is coupled with an interest or legal right; AND (2) states it’s irrevocable.

Question 3

Duty of Care

Answer 3

• Directors are fiduciaries of the corp., and as such owe a duty of care.
• This means they must discharge their duties:
  
  1. in good faith;
  2. with the reasonable belief that they are acting in the best interests of the corp.; AND
  3. with the care that a person in a like position would reasonably believe appropriate under like circumstances.
     *If the 3-part test above is met, then a Director is NOT liable.
• Common Law→the above test was known as the Business Judgment Rule (BJR).
• A court will NOT disturb decisions subject to the BJR standard if a rational business purpose exists.
• Directors must be reasonably informed on the decisions they make.
  
  • They MAY rely on the reasonable advice of advisors if: (1) the reliance was reasonable, AND (2) the advisor or committee was qualified.
• If a director breaches the duty of care, he may be personally liable to the corp. for any losses that result.

Question 4

Duty of Loyalty

Answer 4

• Directors must act in the best interests of the corp. and without personal conflict.
• Forbids a Director from:
  
  1. Entering into conflicting interest transactions;
  2. Usurping a corporate opportunity;
  3. Competing with the corporation; OR
  4. Trading on inside information.

Question 5

Conflicitng Interest Transactions

Answer 5

• Is a breach of the duty of loyalty UNLESS:
  
  1. approved by a majority of disinterested directors after full disclosure of all relevant material facts;
  2. approved by a majority of disinterested shareholders; OR
  3. the transaction as a whole was fair to the corp. at the time it was entered into (fair price + beneficial to corp. + fair dealing).
• The Business Judgment Rule DOES NOT apply/protect directors financially interested in a transaction or who engaged in fraud/illegality.
• A conflict occurs when a director/officer (or their family member):
  
  1. is a party to the transaction;
  2. has a beneficial interest in the transaction or is so closely linked to it that the director’s judgment may reasonable be affected; OR
  3. is involved with another entity that is conducting business with the corp. and that transaction would normally be brought before the BoD.

Question 6

Direct & Derivative Actions

Answer 6

• Direct Action – May be brought when there is a breach of a duty owed to a shareholder of a corp. The injury CANNOT be solely the result of an injury suffered by the corp.
  
  • Similarly, a member of an LLC may bring an action against a member, manager, or the LLC (same standard for showing of injury).
  • Damages awarded will go to the SH or Member.
• Derivative Action – When a SH is suing to enforce the corp.’s claim.
  
  • The RMBCA requires the SH to:
    
    1. Own the corp.’s stock at the time the claim arose (or became a SH by operation of law from such a SH);
    2. Be a SH through entry of judgment;
    3. Fairly and adequately represent the corp.’s interests; AND
    4. Make a written demand to the corp. to take suitable action.
  • A derivative suit CANNOT be commenced until 90-days after the demand, UNLESS the corp.:
    
    1. rejects the demand; OR
    2. will suffer irreparable harm if forced to wait.
  • For an LLC, all of the elements are the same, except:
    
    1. The action may be brought within a reasonable time after the demand; and
    2. The demand requirement may be waived if futile.
  • Damage Award→is paid directly to the Corp./LLC, but the SH/Member may recover reasonable costs of the litigation.