Corporations & LLC's

Question 1

Business Judgment Rule

Answer 1

BJR is a rebuttable presumption that a director acted in good faith and in an informed manner in the best interest of the corporation. A presumption that a director upheld his/her duty of care to the corporation.

Burden is on shareholder/plaintiff to show that the BJR does not apply/to rebut the presumption that the actors acted in accordance with their duty of care. This can be done by showing that the director:
1) acted in bad faith
2) acted unreasonably
3) breached his/her duty of care

If director was acting recklessly or with gross negligence, that would also overcome the BJR.

It is okay for directors to rely on the reasonable advice of advisors, so long as the reliance was 1) reasonable and 2) the advisor was qualified to provide such advice.

Question 2

Can Articles of Incorporation Limit or Eliminate Directors’ Personal Liability for Monday Damages to Shareholders or Corporations for actions taken?

Answer 2

A corporation’s articles of incorporation may limit or eliminate directors’ personal liability for money damages to the shareholders or corporations for actions taken, except to the extent that: 1) the director received a benefit to which he was not entitled, 2) intentionally inflicted harm on the corporation or its shareholders, 3) approved unlawful distributions, or 4) unintentionally committed a crime

Question 3

Vote Required for Approval on a Matter when Articles & Bylaws Conflict

Answer 3

Vote required for approval on a matter may be set out in the Articles of Incorporation or bylaws, but when the two conflict, the Articles of Incorporation control.

Question 4

Who can vote at a Shareholders Meeting?

Answer 4

Only shareholders of record on the record date may vote at the shareholders meeting.

They don’t have to vote in person, they may give another a written and signed proxy giving the other the right to vote the shares

Question 5

Voting by Proxy Requirements

Answer 5

1) Writing (fax and email ok),
2) Signed by the record shareholder (email ok as long as can ID the sender)
3) Directed to the Secretary of Corp authorizing another to vote the shares

Question 6

Proxy Time Limit

Answer 6

Proxy is good for 11 months

Question 7

Proxy Revocation

Answer 7

-Proxies generally are revocable unless they say they are irrevocable and coupled with an interest (situations in which the proxy holder essentially pays for the right to be a proxy, such as where the proxy holder has purchased the underlying shares from the owner of record)

-Proxy may be revoked by:
1) Subsequent instrument → Writing to the corporate secretary
2) Attending meeting and voting

Question 8

Authorized stock

Answer 8

max number of shares a corp can sell (this number is set in Articles of Incorporation)

Question 9

Issued stock

Answer 9

number of shares corp actually sells

Question 10

Oustanding stock

Answer 10

-Shares issued and not reacquired
-Each outstanding share has one vote, but must be the record shareholder of that outstanding stock as of the record date in order to vote

Question 11

Treasury Shares

Answer 11

Shares that were issued and outstanding but that have been repurchased by the corp are NOT outstanding so cannot count them in determining number of votes needed to approve a proposal & cannot be voted

Question 12

Promoter

Answer 12

A promoter is a person who is acting on behalf of the corporation that has not yet been formed.

A person who procures commitments for capital and instrumentalities on behalf of a corporation that will be formed in the future.

Question 13

Liability of a Promoter on Pre-Incorporation Contracts

Answer 13

A promoter is personally liable for the contract when the promoter purports to act as or on behalf of a corporation, knowing that no corporation has been formed. Knowledge requires actual knowledge

A promoter will NOT be liable if
1) There is a subsequent novation. Novation is an agreement by all parties to substitute the corporation for the promoter & relieve the promoter of contractual obligation.
OR
2) Contract explicitly provides that the promoter has no liability on the contract

Question 14

Liability of a Corporation on a Promoter’s Contract

Answer 14

Corporation Liability for Pre-Incorporation Contracts:
Generally, corporation is NOT liable for pre-incorporation contracts entered into by a promoter unless the corporation expressly or impliedly adopts the contract after it is incorporated.

Express Adoption: By action by board of directors or by reference in the corporation’s formation documents

Implied Adoption: Corp has 1) reason to know or knows the material terms of k, and 2) accepts some benefit of the contract

Question 15

Authority of a Corporation’s President

Answer 15

A corporate president is an agent of the corporation and has whatever power the corporation grants him. As a general rule, unless specifically excluded by the corporation, a president will have the power to enter into ordinary contracts involving the day-to-day operation of the corporation.

A corporate president can have the power to enter into extraordinary transactions if authorized by the board of directors. However, the board cannot give the president power the board itself does not have.

Question 16

Whether Board can give President Power to Take Actions Outside Normal Scope

Answer 16

Whether the board of directors can give the president power to take an action depends on: whether the board’s meeting and vote were proper and whether the board could delegate such authority (board cannot delegate more authority than it has).

Question 17

When is a Board of Directors Meeting & Vote Proper?

Answer 17

If the articles of incorporation are silent, a meeting can take place if there is a quorum consisting of a majority of the directors.

Resolutions can be passed at the meeting by the vote of the majority of the quorum.

Question 18

Fundamental Corporate Changes

Answer 18

The board of directors does not have the power to authorize fundamental corporate changes (certain extraordinary actions outside the scope of ordinary business) without shareholder approval.

Acts of Fundamental Corporate Change:
1) Amending articles
2) Mergers & consolidations
3) Transfer of all or substantially all assets
4) Conversion
5) Voluntary dissolution

Fundamental Corporate Change Requirements:
A fundamental corporate change can be implemented only if the directors first pass a resolution to implement the plans and the plan is then approved by the shareholders.

First, the board must adopt a resolution of fundamental change and need a majority of the board to vote in favor in order to do so. Then, the board calls a shareholder meeting, submitting a proposal to the shareholders. The shareholders vote on the plan and in order to have shareholder approval, the traditional rule is a majority of the shares entitled to vote.

Question 19

Dissenting Shareholder’s Right of Appraisal

Answer 19

Shareholders who dissent from a fundamental corporate change can force the corporation to purchase their shares at a fair price.

To use the appraisal remedy, the shareholders must 1) file an objection to the transfer before or at the shareholder’s meeting at which the vote is taken, 2) they must not vote in favor of the plan, and 3) they must send the corporation a written demand for the fair value of their shares.

The shareholders must also deposit their shares with the corporation as directed. If the corporation does not want to pay what the shareholders demanded, the corporation must file a suit to have the court determine fair value.

Question 20

Duty of Loyalty Owed by Directors & Officers of a Corporation

Answer 20

Duty of Loyalty: A director or officer owes the corporation a fiduciary duty of loyalty which means the director in his dealings with the corporation must act in the best interest of the corporation and without personal conflict.

Duty of loyalty forbids directors/officers from:
a) entering into conflicting interest trx’s
b) usurping a corporate opportunity
c) competing with the corporation
d) trading on inside information

**Duty of loyalty is often tested w/ duty of care, piercing the corporate veil, and direct v. derivative suits

Question 21

Breach of Duty of Loyalty: Directors/Officers Entering into Conflicting Interest Trx

Answer 21

Duty of loyalty forbids directors from entering into conflicting interest trx’s.

A conflict of interest occurs when the director/officer or a family member is either:
a) a party to the trx
b) has a beneficial interest (stands to profit) in the trx or is so closely linked to it that the director’s judgment may reasonably be affected or
c) is involved with another entity (director, employee or owner) that is conducting business with the corporation and that trx would normally be brought before the board of director’s because of its importance to the corporation

3 Ways a Conflicted Trx Will NOT Constitute Breach by Conflicted Director:
A conflicting interest transaction with the corporation is a breach of the duty of loyalty unless the director shows that
a) it was approved by a majority of disinterested directors after full disclosure of all relevant material facts
b) it was approved by a majority of disinterested shareholder after full disclosure of all relevant material facts or
c) the trx as a whole, was fair to the corporation at the time it was entered into. (fair price, beneficial to corp, & fair dealing)

Question 22

Breach of Duty of Loyalty: Usurping a Corporate Opportunity

Answer 22

Duty of loyalty forbids directors/officers from usurping a corporate opportunity.

A corporate opportunity is any opportunity that:
a) the corporation has an interest or expectancy in
b) is in the corporation’s line of business (construed broadly)

A director/officer may only pursue a corporate opportunity if he:
1) First presents it to the corporation’s board of directors, and
2) Board decides not to take the opportunity
It is NOT a defense to show that the corporation would not have been able to take the opportunity (financially, is not a defense).

Question 23

Piercing the Corporate Veil

Answer 23

Corporate Veil: A corporation is an entity separate and apart from its owners. As a result, the owners of a corp are generally not personally liable for the liabilities and obligations of the corporation.

Pierce the Corporate Veil: (& hold shareholders personally liable when)
1) Corporation is acting as the alter ego of the shareholders
-ex: little to no separation of assets & money b/w shareholders & corp, mingling corp & personal bank accounts

2) Where the shareholders fail to follow corporate formalities
-corporate formalities: create bylaws, hold regular shareholder & regular board of director meetings, maintain accurate records, and maintain separate bank accounts

3) Corporation was inadequately capitalized at its inception to cover debts and prospective liabilities
-will depend on type of corporation & industry.

4) To prevent fraud
-when corporation is just a sham, created to defraud creditors

Applies to:
1) Corporation owned by individual/shareholders
2) Parent Corp for acts of its Subsidiary
-Does not apply to passive investors, even if court pierces the corporate veil

Court is more likely to pierce corporate veil for tort actions rather than contract disputes bc law presumes contracting parties have a greater opportunity to investigate the corporation’s ability to meet its obligations than a tort victim.

Even if a court does not pierce the corporate veil, a person is always personally liable for their own torts, even when acting as an agent for a corp or organization.

Piercing LLC Veil: All the same factors except #3 following corporate formalities.

Question 24

How is a Corporation Properly Formed?

Answer 24

A corporation is not formed until the date the Articles of Incorporation are properly filed with the Secretary of State. All proper formalities must be followed.

Articles of Incorporation must include:
1) Corporate name
2) Number of authorized shares
3) Name of initial Registered Agent & Address of registered agent
4) Name & address of each incorporation

SITUATION A
De Jure Corporation: properly formed corporation. When we have fully formed corporation, those running the corp. get the benefit of limited liability

SITUATION B
If corporation not fully formed → look to 1) De facto corporation doctrine or 2) Incorporation by estoppel

De Facto Corporation Doctrine (not fully formed corporation): A defective corporation, one that was not properly formed, still enjoys the same benefits and powers of a properly formed corporation.

De Facto Corporation Requirements:
1) Good faith attempt to incorporate
2) Corporation was otherwise eligible to incorporate
3) Some action was taken indicating that the entity considered itself a corporation
4) Promoter was unaware that the corporation was not properly formed

Incorporation by Estoppel Doctrine: Under this doctrine any person or entity that treated a business as a corporation can be estopped from denying that the business was a corporation regardless of whether the business was properly formed. Doctrine applies to both: 3rd parties that treat the business as a corporation AND the entity that held itself out as a corporation

SITUATION C
If fully failed attempt at incorporating company & De fact corp. & Incorporation by estoppel doctrine can’t help the promoter. When only 1 owner, similar personal liability rules come into play like sole proprietorship, where owner is personally liable for debts & obligations of business.

Question 25

Director’s Duty of Care

Answer 25

Directors & officers are fiduciaries of a corporation. They owe a duty of care to the corporation.

1) They must act in good faith, in a manner they reasonably believe to be in the best interest of the corporation, and
2) With the care that a reasonably prudent person in a like position would reasonably believe appropriate under the circumstances

If the director breaches the duty of care, he/she may be held personally liable to the corporation for any loss suffered as a result.

**Anytime see: plausible conflict of interest, or illegal or fraudulent or self-dealing, you should consider where there was bad faith.

Question 26

Direct Cause of Action

Answer 26

A direct action involves an injury or breach of a duty owed to a shareholder of a corporation. A shareholder may bring a direct action against a director or officer. Shareholder must prove an actual injury that is not solely the injury result suffered by the corporation.

Duty that was breached must have been a duty owed to shareholder. Injury must be one suffered directly by the shareholder.

Damages awarded in a direct action will be paid directly to the shareholder or member

Question 27

Derivative Cause of Action

Answer 27

In a derivative action, a shareholder is suing to enforce the corporation’s claim, not his own personal claim. The suit must be one that the corporation could have brought itself but what happened has harmed the corporation in some way.

EX: Fraudulent or misleading statements by the Board of Directors resulting in a drop in share value is the type of harm suffered by a corp.

To commence or maintain a derivative suit, the plaintiff shareholder must meet the following requirements:
1) Shareholder must have standing (must be a shareholder at the time of the action or omission or become a shareholder by operation of law by such a shareholder)
2) Shareholder must continue to be a shareholder through entry of judgment
3) Shareholder must fairly & adequately represent the interests of the corporation
4) Shareholder must make written demand on the corporation to take action. Derivative suit cannot be commenced within 90 days of making the written demand, unless: 1) Corporation rejects the demand OR 2) Corporation will suffer irreparable harm if forced to wait
**EXCEPTION: Under the RMBCA (Revised Model Business Corp. Act) there is no exception to the demand requirement. BUT, under DGCL (Delaware General Corporation Law), there is an exception to the demand requirement when asking the board to bring suit would be futile. (Ex of futile: when the directors themselves will be the defendants bc they are the ones that breached the duty. They ain’t gonna sue themselves duh)

Damages: Damages awarded in a derivative action will be paid to the corporation, not the shareholder. But the shareholder can recover the reasonable cost of litigation.

Question 28

Oppression in a Closely Held Corporation

Answer 28

In a closely held corporation, a company with a small number of shareholders, the majority shareholder cannot take action to oppress the minority shareholders.

Oppression would include taking actions to deprive the minority shareholders of their ability to exercise certain rights like voting or financial rights like dividends.