Corporations/LLCs Flashcards
Timing of corporation coming into existence
Generally when Articles filed with Secretary of State
Key requirements in AOC
- Name
- Maximum authorized shares
- Names and addresses of board, incorporators and initial registered agent
Ultra Vires actions (what they are and what can be done
Actions beyond those permitted in the AOC.
SHs can enjoin acts, and Corp can sue Board/Officers
Conflict between bylaws and AOC
AOC win
Amendments to AOC requirement
Major amendment: Majority of shares and BoD
Minor: Majority of BoD
Pre-Incorporation Promoter Liability
Any contracts on behalf of Corp if both parties know Corp hasn’t been formed
Avoiding/negating pre-incorporation promoter liability (2 ways)
- Novation where promotor released in favor of Corp; OR
- Promotor able to obtain indemnity
Pre-Incorporation Corp liability
Usually not liable unless Corp adopts contracts via express/implied authority from actions of corporation or agents
De fact corporation
A corporation that is not formed despite a good faith effort to comply with requirements and without knowledge of defects can argue there is a de facto corporation
*Not recognized by RMBCA
Corporation by Estoppel (pre-incorporation)
Prevents a 3P from denying existence of corporation and thereby prevented from seeking personal liability from SHs
*Possible for contracts, not torts
General rule on shareholder liability for corporate debts/obligations
SH not personally liable for Corp debts unless corporate veil pierced
When is piercing corporate veil more likely?
Tort claims
Factors of piercing corporate veil
- Alter ego - SH has dominated Corp to the extent the corp is considered the SH’s alter ego
- SH failed to follow corporate formalities
- Corp was undercapitalized
- Fraud or illegality present
Piercing corporate veil for passive investors
Generally all SHs CAN be liable, but some courts don’t extend pierce to passive investors
Impact of treasury stock on SH votes
Shares issued then bought back not considered outstanding and not counted for SH vote
Right to dividends
No right unless the AOC provides
Permissible consideration for shares
Can be anything
When can SHs compel the board to authorize dividends
When the BoD acts in bad faith, but usually never
Distributions and insolvency
Corp can’t make distributions if insolvent or would cause insolvency
Determined under “equity” or “balance sheet” test at time of dividend
Who can call special meetings
- Per AOC
- Demand from 10% of votes entitled to cast
- BoD (for limited purposes)
Notice for (i) annual and (ii) special meetings (SH and directors)
Annual - all voters need notice (presumed BoD has notice)
Special -
SHs: 10-60 days (typically) and
purpose of meeting must be stated
BoD:2 days notice, including time location and date; and
purpose NOT required
Typical quorum
At least 50% of shares entitled to vote or majority of directors must be present
Presence requirement for director quorum
All directors can simultaneously hear each other - need not be in the same room
Right to inspect books and records
All SH have right so long as purpose of inspection is proper (though don’t need to provide)
Must be reasonably related to interest as shareholder
Procedural requirements for B&R inspection
- Written demand and reasonable time to respond (~5 days)
- Conduct inspection during regular business hours at principal office
Fiduciary duties of officers and directors
- Care
- Loyalty
- (Good Faith)
Duty of care (4)
- Take reasonable steps to monitor management
- Be satisfied that proposals are in Corp’s best interests
- Disclose material information to Board
- Most important - Make reasonably informed decisions; may rely on information from others they reasonably believe are reliable
Business Judgement Rule
Presumption - Court will not second guess decisions so long as:
- In good faith
- With care that ordinary prudent person in similar circumstances would exercise; and
- In the manner the D/O reasonably believes is in the best interests of the Corporation
Liability for breach of the duty of care
May be held personally liable
AOC can limit liability for bad judgment, but not bad faith misconduct
Duty of loyalty triggers
- Conflict of interest
- Usurping corporate opportunities
- Competition
Duty of Loyalty - Conflict of Interest
Duty to avoid implicating personal conflicts in making business decisions. Conflict exists when either:
- Party to transaction; or
- Beneficial financial interest in transaction of such significance that interest would reasonably be expected to exert an influence on judgment if called to a vote
Conflict of interest safe harbor
- Approval by majority of disinterested shareholders;
- Approval by majority of disinterested boardmembers; OR
- Transaction is fair to the corporation at the time of the commitment
Short-form merger
If parent owns 90+% of subsidiary, don’t need SH approval
Dissenters’ Rights
Forces corporation to buy stock at appraised value within 30 days of demand for payment
Triggering events for dissenters’ rights
Fundamental change - Material transaction or amendment to AOC
Qualifying shareholder for dissenters’ rights
SH entitled to vote on the fundamental change
Procedure for dissenters’ rights
- Written notice of dissent before SH vote
- Vote against/abstain
- Written demand for payment
- Corp pays agreed upon fair value or court appoints appraiser
When does asset sale require approval
Sale not in usual/regular course of business - ie typically all/substantially all assets
What is a derivative claim/lawsuit
A lawsuit brought by a SH on behalf of the corporation, suing to enforce the Corp’s rights when the Corp has a valid cause of action but the board didn’t pursue
Derivative claim demand
Written demand to the BoD before commencement, then wait 90 days to file unless the BoD rejects before them
*Under CL/some states: SH doesn’t have to make demand if futile
Damages for derivative lawsuit
Proceeds go to C. If the award benefits defendants court may order damages paid directly to SH(s)
Direct claims - injury
Must prove actual injury, not solely result of injury suffered by the corporation
