Corporations & LLC's Flashcards
Business Judgment Rule
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.
Can Articles of Incorporation Limit or Eliminate Directors’ Personal Liability for Monday Damages to Shareholders or Corporations for actions taken?
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
Vote Required for Approval on a Matter when Articles & Bylaws Conflict
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.
Who can vote at a Shareholders Meeting?
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
Voting by Proxy Requirements
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
Proxy Time Limit
Proxy is good for 11 months
Proxy Revocation
-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
Authorized stock
max number of shares a corp can sell (this number is set in Articles of Incorporation)
Issued stock
number of shares corp actually sells
Oustanding stock
-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
Treasury Shares
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
Promoter
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.
Liability of a Promoter on Pre-Incorporation Contracts
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
Liability of a Corporation on a Promoter’s Contract
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
Authority of a Corporation’s President
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.
Whether Board can give President Power to Take Actions Outside Normal Scope
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).
When is a Board of Directors Meeting & Vote Proper?
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.
Fundamental Corporate Changes
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.
Dissenting Shareholder’s Right of Appraisal
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.
Duty of Loyalty Owed by Directors & Officers of a Corporation
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
Breach of Duty of Loyalty: Directors/Officers Entering into Conflicting Interest Trx
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)
Breach of Duty of Loyalty: Usurping a Corporate Opportunity
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).
Piercing the Corporate Veil
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.
How is a Corporation Properly Formed?
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.
