Corporations/LLCs

Question 1

Articles of Incorporation

Answer 1

To form a corporation, we also need a particular paper—the articles of incorporation. The articles of incorporation are filed with the state, and , if in conflict with the bylaws, the articles control.

Question 2

Shareholders

Answer 2

Shareholders are only owners and do not manage the corporation. The do, however, hire and fire directors.

Question 3

Directors

Answer 3

Directors manage the corporation and (like shareholders) acts as a body by voting. Directors may exercise all corporate powers that are not limited by the articles of incorporation or a shareholders’ agreement, including the power to form contracts and acquire liabilities.

Question 4

Duty of Loyalty and Care Standard/s

Answer 4

Loyalty: “A director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation.”

Care: “She must also use the care that a person in like position would reasonably believe appropriate under the circumstances.”

Question 5

Business Judgement Rule

Answer 5

“There is a presumption that in making a business decision, the directors acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company.”

The BJR presumption does NOT apply if there is a duty of LOYALTY issue.

Question 6

3 Instances of Duty of Loyalty Issues

Answer 6

BBC
1. Director is on BOTH sides of a transaction
2. Competes with corporation
Corporate opportunity

Question 7

3 Defenses to Breach of Loyalty Allegations

Answer 7

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
2. approval by disinterested shareholders OR
3. if the transaction is judged to be fair to the corporation at the time it was entered into.

Question 8

Exceptions to the Duty of Loyalty

Answer 8

“Interested director transactions will be set aside UNLESS the director shows either:

1. The deal was fair to the corporation when entered; OR
2. Her interest and relevant facts were disclosed or known, and the deal was approved by EITHER:i. A majority of the disinterested directors; OR
   ii. A majority of the disinterested shares.

“Some courts also require a showing of fairness.”

Question 9

Voting Requirements for shareholders (voting, who votes, voting by proxy)

Answer 9

Voting: In order for a resolution to pass, there needs to be a quorum present, and more votes must be case in favor of the resolution than against it.

Who Votes: the record owner on the record date

Voting by Proxy: A shareholder may vote by proxy. A shareholder can appoint a proxy in writing by signing an appointment form or making a verifiable electronic transmission.

Question 10

Lawsuits by shareholders against the corporation (generally)

Answer 10

A shareholder may file an action to establish that the acts of the directors are illegal, fraudulent, or willfully unfair and oppressive to either the corporation or the shareholder.

Question 11

Direct Suits by Shareholder

Answer 11

A direct suit is appropriate when the wrong done amounts to a breach of duty owed to he individual personally.

Question 12

Derivative Suits by Shareholder

Answer 12

A derivative suit is appropriate when the injury is caused to the corporation and a shareholder is trying to enforce the corporation’s rights (this also applies to LLCs)

Recovery from a derivative lawsuit goes to the corporation, not the shareholder.

A derivative suit can be dismissed with cost approval if it is not int he best interest of the corporation to continue it.

Question 13

Derivative suit requirements

Answer 13

A shareholder may note commence or maintain a derivative suit unless three requirements are met (SAD):
1. Standing to bring the suit,
2. adequacy (the shareholder represents the interest of the corporation), and
3. demand

Question 14

Veil Piercing

Answer 14

Generally, the law creates a corporation as an entity separate from its shareholders, even where one individual owns all the corporate stock. In some very limited circumstances, courts will disregard the LLC form and hold a shareholder PERSONALLY liable for corporate debt.

It is only allowed in CLOSE corporations and LLCs.

Generally, a plaintiff must show that shareholders of the corporation or members of an LLC abused the privilege of incorporating and fairness requires holding them liable.

Only the shareholders or members who participated in the wrong are personally liable.

Question 15

Shareholder’s rights to inspect

Answer 15

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.

Question 16

General Tenants of an LLC

Answer 16

1. Article of organization must be filed to create.
2. Members of an LLC have fiduciary duties.
3. Members of an LLC in a member managed LLC are treated as agents of the LLC
4. 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.
5. Generally, individual members are NOT liable for losses. They are liable if the court decides to veil pierce or if proper procedures for dissolution and winding up have not been followed.
6. 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.

Question 17

USURPATION OF CORPORATE OPPORTUNITY

Answer 17

“A director cannot usurp a corporate opportunity.”

That means the director cannot take until he:
1. Tells the board about it; and
2. Waits for the board to reject the opportunity.

Question 18

Officer Power (President)

Answer 18

“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 power to enter into extraordinary transactions IF authorized by the board of directors.”

“HOWEVER, the board cannot give the president power that the board itself does not have.”

Question 19

Board Voting Rights

Answer 19

“If the articles 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.”

“The board cannot vote to make fundamental changes to the corporation without shareholder approval. Such a change can be implemented only if the directors first pass a resolution to implement the plan and the plan is THEN approved by the shareholders.”

Question 20

Shareholder Remedy: Appraisal

Answer 20

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

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