CORPORATIONS & LLCS LAW

Question 1

Fiduciary Duties of Directors: Duty of Care
DAFOTC IADBDOC HMBPL2C4LTR
DFC BPL

Answer 1

Rule Statement:

Directors are fiduciaries of the corporation. If a director breaches the duty of care, he may be personally liable to the corporation for any losses that result.

Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“Directors: Fiduciary Care Duty. Breach = Personal Liability for Losses.”

Memorization techniques:

Mnemonic: “DFC-BPL” (Directors Fiduciary Care - Breach Personal Liability)
Visualization: Picture a director holding a fragile glass “C” (for Care) while walking a tightrope. If they drop it (breach), they fall into a pool of “PL” (Personal Liability).
Acronym: DCBL (Directors Care Breach Liability)
Common ways this rule is tested:

Fact patterns involving director decisions that led to corporate losses.
Questions about the standard of care expected from directors.
Scenarios where directors delegate responsibilities to others.
Common tricks/mistakes:

Confusing the duty of care with the duty of loyalty.
Assuming that all poor business decisions automatically result in liability.
Forgetting that the business judgment rule often protects directors from liability for honest mistakes.
Overlooking the possibility of exculpatory clauses in corporate charters that may limit director liability.

Question 2

Fiduciary Duties of Directors: Duty of Care (2)
DODOC2C2DD
IGF
WRBAIBIOC
WCTPILPWRBAULC
GRBIC

Answer 2

Rule Statement

Directors owe a duty of care to the corporation to discharge their duties:

in good faith;
with the reasonable belief that they are acting in the best interests of the corporation; AND
with the care that a person in a like position would reasonably believe appropriate under like circumstances.
Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“Directors’ Duty of Care: Good Faith + Reasonable Belief in Best Interests + Appropriate Care in Context”

Memorization techniques:

Mnemonic: “GRaB CAre” (Good faith, Reasonable belief, Best interests, Care Appropriate)
Acronym: GRBIC (Good faith, Reasonable belief, Best Interests, Care)
Visualization: Picture a director grabbing (“GRaB”) a briefcase labeled “CARE” while standing on a corporate logo.
Chunking: Break the rule into three parts: (1) Good Faith, (2) Reasonable Best Interests, (3) Contextual Care
Common ways this rule is tested:

Fact patterns involving director decisions made without proper information or investigation.
Scenarios where directors’ actions seem to conflict with corporate interests.
Questions about the standard of care in specific industry contexts.
Common tricks/mistakes:

Forgetting the “good faith” element, which is separate from the reasonable belief requirement.
Overlooking the “like position” and “like circumstances” aspects, which provide context for judging appropriate care.
Confusing “best interests of the corporation” with best interests of shareholders or other stakeholders.
Assuming that bad outcomes automatically mean a breach of duty of care.

Question 3

Fiduciary Duties of Directors: Duty of Care (3)
DMBRI MRORAOA I RWR + A/CWQ
RIRAQ

Answer 3

Rule Statement
In making decisions, directors must be reasonably informed. They may rely on the reasonable advice of advisors if 1) the reliance was reasonable and 2) the advisor/committee was qualified.

Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“Directors: Reasonably Informed + May Rely on Qualified Advisors if Reasonable”

Memorization techniques:

Mnemonic: “RIRAQ” (Reasonably Informed, Rely if Advisors Qualified)
Acronym: IRAR2Q (Informed, Rely on Advisors, Reasonable Reliance, Qualified)
Visualization: Picture a director (D) sitting at a desk with a light bulb (I for Informed) above their head, surrounded by advisors (A) with graduation caps (Q for Qualified), all connected by a reasonable (R) chain.
Rhyme: “Be informed and you may lean, on advice that’s sound and clean, if reliance is just right, and the source has proven might.”
Common ways this rule is tested:

Scenarios where directors make decisions based on expert advice.
Questions about the extent of investigation required before making a decision.
Fact patterns involving reliance on potentially unqualified or biased advisors.
Common tricks/mistakes:

Assuming that any reliance on advisors is automatically reasonable.
Forgetting that directors must still be reasonably informed, even when relying on advisors.
Overlooking the qualification requirement for advisors or committees.
Mistaking blind reliance for reasonable reliance.

Question 4

Direct Actions (Corporations)
SMBDA WBODO2SOC ICBSROISBC DIDAA2SH
SUDS

Answer 4

Rule Statement
A shareholder may bring a direct action when there is a breach of a duty owed to a shareholder of a corporation. The injury cannot be solely the result of an injury suffered by the corporation. Damages in a direct action are awarded to the shareholder.

Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“Direct Action: Shareholder Duty Breach, Unique Injury, Shareholder Damages”

Memorization techniques:

Mnemonic: “SUDS” (Shareholder duty, Unique injury, Direct action, Shareholder damages)
Acronym: BINUS (Breach, Injury Not Uniquely corporate, Shareholder compensated)
Visualization: Picture a shareholder holding a shield (direct action) with “SUDS” written on it, protecting against a unique injury (represented by a lightning bolt) that’s not hitting the corporate building behind them.
Rhyme: “When duty to holder is broke, and harm’s not just corporate smoke, direct action takes the stand, with damages in shareholder’s hand.”
Common ways this rule is tested:

Fact patterns distinguishing between injuries to shareholders vs. injuries to the corporation.
Scenarios involving breaches of shareholder agreements or voting rights.
Questions about the appropriate type of action for different corporate conflicts.
Common tricks/mistakes:

Confusing direct actions with derivative actions.
Assuming any injury to a shareholder qualifies for a direct action, even if it’s solely a result of corporate injury.
Forgetting that the damages in a direct action go to the shareholder, not the corporation.
Overlooking the requirement that the duty breached must be owed to the shareholder, not just to the corporation.

Question 5

Direct Actions (LLCs)
MMBDAAMMOLOSIINSROI2L
DAMSEL

Answer 5

Rule Statement

In an LLC, a member may bring a direct action against a member, manager, or the LLC on showing that the injury is not solely the result of an injury to the LLC.

Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“LLC Direct Action: Member vs. M-M-L, Injury Beyond LLC Harm”

Memorization techniques:

Mnemonic: “MMLID” (Member vs. Member-Manager-LLC, Injury Direct)
Acronym: DAMSEL (Direct Action, Member Sues, Exceeds LLC injury)
Visualization: Picture an LLC member holding a shield (direct action) with “MMLID” written on it, facing three targets (Member, Manager, LLC) while standing apart from a wounded LLC building.
Rhyme: “When a member feels the sting, beyond what LLC’s suffering, direct action they can bring, against M-M-L, that’s the thing!”
Common ways this rule is tested:

Fact patterns distinguishing between injuries to individual members vs. injuries to the LLC as a whole.
Scenarios involving disputes between LLC members or between members and managers.
Questions about the appropriate type of action for different LLC conflicts.
Common tricks/mistakes:

Confusing LLC direct actions with corporate direct actions or derivative actions.
Assuming any injury to a member qualifies for a direct action, even if it’s solely a result of LLC injury.
Forgetting that the action can be brought against members, managers, or the LLC itself.
Overlooking the “not solely” requirement, which allows for some overlap with LLC injury.

Question 6

Derivative Actions
ADA OW SH S2E CC
SHM
OSATCA
C2BSHTEOJ
F&ARCI
MRD2C2TSA
OCFWD

Answer 6

A derivative action occurs when a shareholder sues to enforce the corporation’s claim.

Under the Revised Model Business Code Act, in order to bring a derivative action, the shareholder must:

own stock at the time the claim arose (or became a shareholder by operation of law from a shareholder who owned stock at the time the claim arose);
continue to be a shareholder through entry of judgment;
fairly and adequately represent the corporation’s interests; and
make a written demand to the corporation to take suitable action.
Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“Derivative Action: Shareholder Enforces Corp Claim. Requirements: Own Stock at Claim Time, Continuous Ownership, Fair Representation, Written Demand.”

Memorization techniques:

Mnemonic: “OCFWD” (Own, Continue, Fair rep, Written Demand)
Acronym: SCARF (Shareholder Claim Arises, Represent Fairly, Written demand)
Visualization: Picture a shareholder wearing a scarf labeled “OCFWD”, holding a document (the claim) with a timeline showing ownership from claim to judgment, standing in front of a corporate building with a mailbox for “Written Demands”.
Rhyme: “Own when claim arose, hold ‘til judgment shows, represent with care, demand in writing there.”
Common ways this rule is tested:

Fact patterns testing the timing of stock ownership.
Scenarios involving transfer of shares during litigation.
Questions about the adequacy of shareholder representation.
Issues related to the demand requirement and its exceptions.
Common tricks/mistakes:

Forgetting the “continuous ownership” requirement through entry of judgment.
Overlooking the exception for shareholders who acquired stock by operation of law.
Assuming that any shareholder can automatically represent the corporation’s interests.
Neglecting the written demand requirement or its importance.
To reinforce your memory:

Create a flowchart of the requirements, starting with stock ownership and ending with written demand.
Practice explaining the “OCFWD” mnemonic, giving examples for each component.
Write out scenarios where a derivative action would be proper vs. improper based on these requirements.

Question 7

Derivative Action Timing (Corporations)
DS CBC U 90DAD U C RD OR WSIHIF2W
WURI90

Answer 7

A derivative suit cannot be commenced until 90 days after the demand, unless the corporation either a) rejects the demand, or b) will suffer irreparable harm if forced to wait.

Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“Derivative Suit: 90-Day Wait Post-Demand, Unless Rejected or Irreparable Harm”

Memorization techniques:

Mnemonic: “WURI-90” (Wait Unless Rejected or Irreparable - 90 days)
Acronym: DRAIN (Demand, Reject, Act Immediately, Ninety days)
Visualization: Picture a clock face with “90” prominently displayed, with two escape hatches labeled “R” (Reject) and “I” (Irreparable harm).
Rhyme: “Ninety days the rule does state, unless reject or can’t wait.”
Common ways this rule is tested:

Fact patterns involving timing of suit commencement after demand.
Scenarios testing what constitutes a rejection of demand.
Questions about what qualifies as “irreparable harm” to the corporation.
Issues related to premature filing of derivative suits.
Common tricks/mistakes:

Forgetting the 90-day waiting period.
Assuming any negative response from the corporation counts as a rejection.
Overlooking the “irreparable harm” exception.
Misunderstanding that the harm must be to the corporation, not the shareholder.
To reinforce your memory:

Create a timeline showing the 90-day period with branching paths for rejection and irreparable harm.
Practice explaining the “WURI-90” mnemonic, giving examples for each component.
Write out scenarios where immediate filing would or would not be allowed.
Remember, this rule is designed to give the corporation time to investigate and respond to the shareholder’s demand before a suit is filed. The exceptions (rejection and irreparable harm) are meant to balance this with the need for prompt action in certain circumstances.

To integrate this with the previous rule on derivative actions:

Add a final step to your flowchart: after “Written Demand,” add “Wait 90 Days Unless…”
Expand your “OCFWD” mnemonic to “OCFWD-W” (Own, Continue, Fair rep, Written Demand, Wait)
In your visualization, add a 90-day calendar next to the mailbox for “Written Demands”

Question 8

Derivative Action Timing (LLCs)
AMBC WRTAD + DRMBWIF
RAFT

Answer 8

Rule Statement

For an LLC, the elements of bringing a derivative action are the same except:

the action may be commenced within a reasonable time after the demand; and
the demand requirement may be waived if futile.
Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“LLC Derivative Action: Same Rules + Reasonable Time & Futility Exception”

Memorization techniques:

Mnemonic: “RAFT” (Reasonable time After demand, Futility exemption, Time flexible)
Acronym: SURF (Same rules, Undetermined time, Reasonable, Futility)
Visualization: Picture an LLC member riding a surfboard labeled “RAFT”, navigating between two buoys - one marked “Reasonable Time” and the other “Futility Exception”.
Rhyme: “For LLC, the rules align, but time’s not set and futile’s fine.”
Common ways this rule is tested:

Fact patterns comparing corporate and LLC derivative actions.
Scenarios testing what constitutes a “reasonable time” after demand.
Questions about when a demand might be considered futile.
Issues related to the flexibility of LLC derivative action requirements.
Common tricks/mistakes:

Assuming the 90-day rule from corporate derivative actions applies to LLCs.
Forgetting that all other requirements (ownership, continuity, fair representation) still apply.
Overlooking the potential for a futility exception to the demand requirement.
Misunderstanding what constitutes a “reasonable time” in different contexts.
To reinforce your memory:

Create a Venn diagram comparing corporate and LLC derivative action requirements, with “Reasonable Time” and “Futility Exception” in the LLC-only section.
Practice explaining the “RAFT” mnemonic, giving examples for each component.
Write out scenarios where the futility exception might or might not apply.
Remember, this rule highlights the slightly more flexible approach to derivative actions in LLCs compared to corporations. The “reasonable time” standard and the futility exception reflect the often more informal and adaptable nature of LLCs.

To integrate this with the previous rules on derivative actions:

Add an “LLC Exception” box to your flowchart, branching off from the “Written Demand” and “Wait 90 Days” steps.
Expand your mnemonic to “OCFWD-WR” (Own, Continue, Fair rep, Written Demand, Wait or Reasonable time)
In your visualization, add an “LLC” surfboard riding alongside the corporate timeline.

Question 9

Derivative Actions Damages
IDA DP2COL BSH OR M RRCOL
DERC

Answer 9

Rule Statement:

In derivative actions, the damages are paid to the corporation or LLC, but the shareholder or member recovers reasonable costs of litigation.

Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“Derivative Damages: Entity Receives, Plaintiff Recovers Costs”

Memorization techniques:

Mnemonic: “DERC” (Damages to Entity, Reasonable Costs to plaintiff)
Acronym: SERC (Suit benefits Entity, Reasonable Costs to plaintiff)
Visualization: Picture a large piggy bank labeled “Corp/LLC” receiving coins (damages), while a smaller piggy bank labeled “Plaintiff” receives a receipt (costs).
Rhyme: “Entity gains the damage pay, but costs to plaintiff come their way.”
Common ways this rule is tested:

Fact patterns involving the distribution of damages after a successful derivative action.
Questions about what constitutes “reasonable costs of litigation.”
Scenarios testing the distinction between direct and derivative actions in terms of damages.
Issues related to the incentives for shareholders/members to bring derivative actions.
Common tricks/mistakes:

Assuming the plaintiff receives the damages directly.
Forgetting that the rule applies to both corporations and LLCs.
Overlooking the limitation to “reasonable” costs of litigation.
Misunderstanding the purpose of allowing cost recovery for the plaintiff.
To reinforce your memory:

Create a flowchart showing the flow of damages to the entity and costs to the plaintiff.
Practice explaining the “DERC” mnemonic, giving examples for each component.
Write out scenarios comparing the outcomes of successful direct vs. derivative actions.
Remember, this rule underscores the nature of derivative actions as being brought on behalf of the entity, not for the direct benefit of the plaintiff. The cost recovery provision serves as an incentive for shareholders/members to bring meritorious suits that benefit the entity as a whole.

To integrate this with the previous rules on derivative actions:

Add a “Damages Distribution” box to your flowchart, coming after the successful resolution of the action.
Expand your mnemonic to “OCFWD-WRD” (Own, Continue, Fair rep, Written Demand, Wait or Reasonable time, Damages to entity)
In your visualization, add two piggy banks next to the corporate/LLC building, one large and one small.

Question 10

Derivative Action Dismissal
DAMBDOMBCI MOBODQDHDIGF ACRI AINIBIOC
QDIR

Answer 10

Rule Statement:

A derivative action must be dismissed on a motion by the corporation if:

a majority of the board of directors’ qualified directors have,
determined in good faith,
after conducting a reasonable inquiry; that
the action is not in the best interests of the corporation.
Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“Derivative Dismissal: Majority Qualified Directors, Good Faith Determination, Reasonable Inquiry, Not Best Interest”

Memorization techniques:

Mnemonic: “MaGReN” (Majority, Good faith, Reasonable inquiry, Not best interest)
Acronym: QDIR (Qualified Directors, Determine, Inquire Reasonably, Reject as not in best interest)
Visualization: Picture a corporate boardroom with a green light (MaGReN) over the door, and directors examining a large magnifying glass (inquiry) before stamping “Not Best Interest” on a document.
Rhyme: “When qualified majority decides with care, and reasonable inquiry shows it’s not fair, the derivative action meets its end there.”
Common ways this rule is tested:

Fact patterns involving board decisions to dismiss derivative actions.
Questions about what constitutes a “qualified director” in this context.
Scenarios testing the “good faith” and “reasonable inquiry” requirements.
Issues related to the “best interests of the corporation” standard.
Common tricks/mistakes:

Forgetting that it must be a majority of qualified directors, not just any directors.
Overlooking the “good faith” requirement.
Assuming any inquiry is sufficient without considering reasonableness.
Misunderstanding the “best interests” standard as solely financial.
To reinforce your memory:

Create a flowchart of the dismissal process, starting with “Majority of Qualified Directors” and ending with “Not in Best Interests”.
Practice explaining the “MaGReN” mnemonic, giving examples for each component.
Write out scenarios where a dismissal would or would not be proper based on these requirements.
Remember, this rule provides a mechanism for corporations to end derivative litigation that they deem not beneficial, while ensuring that such decisions are made carefully and in good faith.

To integrate this with the previous rules on derivative actions:

Add a “Potential Dismissal” box to your flowchart, branching off after the commencement of the action.
Expand your mnemonic to “OCFWD-WRD-M” (Own, Continue, Fair rep, Written Demand, Wait or Reasonable time, Damages to entity, MaGReN dismissal)
In your visualization, add a “dismissal” door next to the corporate building, with a “MaGReN” traffic light above it.

Question 11

Personal Liability (Corporations)
SAGNPL4CL&O
CMDCF&HISH(D/O) PL4ATOBOCW
CAAEOSH
F2FCF
CICAI OR
2PF
VEILF

Answer 11

Rule Statement

Shareholders are generally not personally liable for corporation liabilities and obligations.

Courts may disregard the corporate form and hold an individual shareholder (or director/officer) personally liable for actions taken on behalf of the corporation when:
a) the corporation is acting as the alter ego of the shareholder;
b) there is a failure to follow corporate formalities;
c) the corporation is inadequately capitalized at its inception; OR
d) to prevent fraud.

Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“Shareholder Liability Exception: Alter Ego, Formality Failure, Inadequate Capital, Fraud Prevention”

Memorization techniques:

Mnemonic: “AFIF” (Alter ego, Formalities ignored, Inadequate capital, Fraud)
Acronym: VEIL (Veil pierced when: Entity is alter ego, Ignore formalities, Lack of capital, or Fraud)
Visualization: Picture a corporate veil being torn apart by four hands labeled A, F, I, and F.
Rhyme: “When alter ego’s at the helm, or formalities overwhelm, capital’s low from the start, or fraud plays a part, the corporate veil we’ll overwhelm.”
Common ways this rule is tested:

Fact patterns involving small, closely-held corporations.
Scenarios testing the boundaries between personal and corporate actions.
Questions about what constitutes adequate capitalization.
Issues related to corporate formalities and record-keeping.
Common tricks/mistakes:

Assuming any shareholder involvement in management creates alter ego status.
Forgetting that inadequate capitalization is judged at inception, not later.
Overlooking the importance of corporate formalities.
Assuming that any corporate wrongdoing automatically leads to piercing the veil.
To reinforce your memory:

Create a flowchart of the exceptions, starting with “Corporate Veil Intact” and branching into the four exceptions.
Practice explaining the “AFIF” mnemonic, giving examples for each component.
Write out scenarios where veil piercing would or would not be appropriate based on these exceptions.
Remember, this rule emphasizes the exceptional nature of piercing the corporate veil. The corporate form is generally respected, and these exceptions are applied cautiously by courts.

To integrate this with previous corporate law rules:

Add a “Veil Piercing” box to your corporate structure flowchart, connected to shareholder liability.
Expand your corporate law mnemonic to include “AFIF” at the end.
In your corporate visualization, add a translucent veil around the corporate building with four weak points labeled A, F, I, and F.

Question 12

Personal Liability (LLCs)
CGASF2PTVOLLC 2HMOML
F2FF NOT G2PLLCV
SAFE-T

Answer 12

Rule Statement:

Courts generally apply the same factors to pierce the veil of an LLC to hold members or managers liable. But failure to follow formalities is NOT a ground to pierce the LLC veil.

Shareholders and LLC members are always liable for their own torts.

Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“LLC Veil Piercing: Same as Corps, Except Formalities; Owners Always Liable for Own Torts”

Memorization techniques:

Mnemonic: “SAFE-T” (Same factors As corporations, Formalities Exempt; Torts always personal)
Acronym: VENOM (Veil piercing Elements Nearly identical for LLCs, Omit formalities, Members liable for personal torts)
Visualization: Picture an LLC shield with the same weak points as a corporate veil, but with “Formalities” crossed out, and a separate “Tort” arrow piercing directly through.
Rhyme: “LLC veil, same tale, but formalities don’t fail. For personal wrongs, liability belongs.”
Common ways this rule is tested:

Fact patterns comparing veil piercing in corporations and LLCs.
Scenarios testing the relevance of formal procedures in LLCs.
Questions about personal tort liability in the context of business entities.
Issues related to the distinction between entity actions and personal actions.
Common tricks/mistakes:

Assuming that all corporate veil piercing factors apply equally to LLCs.
Forgetting that formalities are less important for LLCs.
Overlooking personal tort liability even when the business veil is intact.
Confusing entity liability with personal liability for torts.
To reinforce your memory:

Create a Venn diagram comparing corporate and LLC veil piercing factors, with “formalities” outside the LLC circle.
Practice explaining the “SAFE-T” mnemonic, giving examples for each component.
Write out scenarios distinguishing between actions that would lead to entity veil piercing versus personal tort liability.
Remember, this rule highlights the slightly different approach to veil piercing for LLCs, reflecting their often more informal nature. It also emphasizes that personal tort liability exists regardless of the business entity structure.

To integrate this with previous business entity rules:

Add an “LLC Veil Piercing” box to your flowchart, showing the overlap and differences with corporate veil piercing.
Expand your business law mnemonic to include “SAFE-T” at the end.
In your business entity visualization, add an LLC shield next to the corporate veil, with similar but not identical weak points, and a separate “Personal Tort” arrow.

Question 13

Directors’ Duty of Loyalty (Corporation)
DMAIBIOC+WOPC
DOL PDF
EICT
UCO
CWC OR
TOII
BINCCUC OR T

Answer 13

Rule Statement:

Directors must act in the best interests of the corporation and without personal conflict.

The Duty of Loyalty prevents a director from:

entering into conflicting interest transactions;
usurping a corporate opportunity;
competing with the corporation; or
trading on inside information.
Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“Directors’ Duty of Loyalty: Best Interests, No Conflicts. Prohibits: Conflicting Transactions, Usurping Opportunities, Competition, Insider Trading”

Memorization techniques:

Mnemonic: “BNIC-CUCT” (Best interests, No conflicts; Can’t Use Conflicts or Trade)
Acronym: LOCO (Loyalty Obliges Caution in Opportunities)
Visualization: Picture a director standing at a crossroads, with four paths labeled C, U, C, and T, all blocked by a “Loyalty” barrier.
Rhyme: “For the corp’s best, conflicts shun, no deals, chances, rivalry, or inside run.”
Common ways this rule is tested:

Fact patterns involving potential conflicts of interest.
Scenarios testing what constitutes a corporate opportunity.
Questions about permissible and impermissible competition with the corporation.
Issues related to the use of non-public information.
Common tricks/mistakes:

Assuming any transaction with the corporation is automatically a violation.
Forgetting that corporate opportunities must be disclosed and offered to the corporation first.
Overlooking that competition doesn’t have to be direct to be a violation.
Misunderstanding the scope of “inside information.”
To reinforce your memory:

Create a flowchart of director decisions, with “Loyalty Check” boxes for each of the four prohibited actions.
Practice explaining the “CUCT” (Can’t Use Conflicts or Trade) mnemonic, giving examples for each component.
Write out scenarios where each of the four prohibitions might come into play.
Remember, this rule emphasizes the fiduciary nature of a director’s role. The duty of loyalty requires directors to put the corporation’s interests ahead of their own.

To integrate this with previous corporate law rules:

Add a “Duty of Loyalty” box to your corporate governance flowchart, connected to director responsibilities.
Expand your corporate law mnemonic to include “LOCO” at the end.
In your corporate visualization, add a “Loyalty Shield” protecting the corporate building from four threats labeled C, U, C, and T.

Question 14

Conflicting Interest Transction & Breach of Duty of Loyalty
ACITIBODOL U
ABMODDAFDOARMF
ABMODSH OR
TAAWWF2CATEI IPC2ALT+FN
DD DSH F

Answer 14

Rule Statement:

Any conflicting interest transaction is a breach of the duty of loyalty unless:

approved by a majority of disinterested directors after full disclosure of all relevant material facts;
approved by a majority of disinterested shareholders; OR
the transaction as a whole was fair to the corporation at the time it was entered into, including a price comparable to an arm’s length transaction and fair negotiations.
Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“Conflicting Interest Safe Harbors: Disinterested Director Approval, Disinterested Shareholder Approval, or Fairness Test”

Memorization techniques:

Mnemonic: “DDSF” (Disinterested Directors, Disinterested Shareholders, Fairness)
Acronym: SAFE (Shareholder Approval, Arm’s length price, Full disclosure, Entire fairness)
Visualization: Picture three doors labeled “DD,” “DS,” and “F,” each leading to a “Safe Harbor” room.
Rhyme: “Directors disinterested and aware, shareholders uninvolved who care, or fairness clear beyond compare - these make conflict transactions square.”
Common ways this rule is tested:

Fact patterns involving transactions between directors and the corporation.
Scenarios testing the sufficiency of disclosure to disinterested directors or shareholders.
Questions about what constitutes “fairness” in a transaction.
Issues related to the timing of approval or fairness assessment.
Common tricks/mistakes:

Forgetting that director approval requires both disinterest and full disclosure.
Overlooking the need for a majority of disinterested shareholders, not just a majority of all shareholders.
Assuming that meeting one safe harbor is enough without considering the others.
Misunderstanding the comprehensive nature of the fairness test.
To reinforce your memory:

Create a flowchart of conflicting interest transactions, with three branches leading to “Safe Harbor.”
Practice explaining the “DDSF” mnemonic, giving examples for each component.
Write out scenarios where each of the three safe harbors might apply.
Remember, this rule provides ways to cleanse potentially problematic transactions. It emphasizes the importance of transparency, independent decision-making, and overall fairness in corporate dealings.

To integrate this with previous corporate law rules:

Add a “Conflicting Interest Safe Harbors” box to your duty of loyalty flowchart, connected to the “conflicting interest transactions” prohibition.
Expand your corporate law mnemonic to include “DDSF” at the end.
In your corporate visualization, add three “Safe Harbor” islands near the “Loyalty Shield,” labeled DD, DS, and F.
This rule underscores the balance between protecting corporate interests and allowing beneficial transactions to proceed. It’s crucial to understand that these safe harbors are not automatic - they require careful adherence to procedural and substantive fairness standards.

The rule also highlights the importance of independent decision-making in corporate governance, whether by disinterested directors, shareholders, or through an objective fairness test. Understanding these concepts is key to navigating potential conflicts of interest in corporate transactions.

Question 15

Conflict Occurence
ACOWD/O OR FM
IAP2T
HBIIT OR SCL2I TDJMRBA OR
IIWAECBWC + TWNBBBBOD
P I/I CE

Answer 15

Rule Statement:

A conflict occurs when a director/officer or family member:

is a party to the transaction;
has a beneficial interest in the transaction or is so closely linked to it that that director’s judgment may reasonably be affected; or
is involved with another entity that is conducting business with the corporation and that transaction would normally be brought before the board of directors.
Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“Director/Officer Conflict: Direct Party, Beneficial Interest/Close Link, or Connected Entity Transaction”

Memorization techniques:

Mnemonic: “PIC” (Party, Interest/influence, Connected entity)
Acronym: BIBLE (Board Involvement, Beneficial Interest, Linked closely, Entity connection)
Visualization: Picture a director standing at a fork in the road with three paths: one labeled “P” (Party), one labeled “I” (Interest/Influence), and one labeled “C” (Connected Entity).
Rhyme: “When you’re a party, have interest true, or linked so close your judgment’s skewed, or entities connect in board’s purview, conflict’s the path you then pursue.”
Common ways this rule is tested:

Fact patterns involving complex business relationships.
Scenarios testing the extent of “beneficial interest” or “close link.”
Questions about what transactions “would normally be brought before the board.”
Issues related to family members’ involvement in transactions.
Common tricks/mistakes:

Forgetting that family members’ involvement can create a conflict.
Overlooking indirect benefits or influences that may affect judgment.
Assuming that only direct competitors create conflicts in the “connected entity” scenario.
Misunderstanding what types of transactions typically require board involvement.
To reinforce your memory:

Create a flowchart of potential conflicts, with three main branches for each type of conflict.
Practice explaining the “PIC” mnemonic, giving examples for each component.
Write out scenarios where each of the three conflict types might arise.
Remember, this rule defines what constitutes a conflict of interest, which is crucial for triggering the duty of loyalty considerations and potential safe harbor requirements.

To integrate this with previous corporate law rules:

Add a “Conflict Identification” box to your duty of loyalty flowchart, connected to the “conflicting interest transactions” prohibition.
Expand your corporate law mnemonic to include “PIC” at the end.
In your corporate visualization, add three “Conflict Alert” flags near the director figure, labeled P, I, and C.
This rule underscores the broad scope of what can be considered a conflict of interest. It’s crucial to understand that conflicts aren’t limited to direct participation in transactions, but can arise from various forms of influence or connection.

The rule also highlights the importance of considering both direct and indirect interests, as well as the potential for conflicts arising from relationships with other entities. Understanding these concepts is key to identifying potential conflicts early and addressing them appropriately through disclosure, recusal, or other means.

Question 16

Shareholder Meetings
ORSHORDAE2VASHM EISHSSBRD&M U
PIG2B RDC>70DP2SHM
RSHVBP70

Answer 16

Rule Statement:

Only registered shareholders on the record date are entitled to vote at the shareholders meeting, even if a shareholder sells the shares between the record date and the meeting, unless a proxy is given to the buyer. The record date cannot be more than 70 days prior to the shareholder meeting.

Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“Voting Rights: Registered Shareholders on Record Date (Max 70 Days Before Meeting); Sale Doesn’t Transfer Vote Unless Proxy Given”

Memorization techniques:

Mnemonic: “RSVP-70” (Registered Shareholders Vote by Proxy, 70 days max)
Acronym: RECORD (Registered shareholders, Even if sold, COunts for voting, Record date, Date limit 70 days)
Visualization: Picture a calendar with a “Record Date” stamp 70 days before a “Meeting” date, with a shareholder holding a “Voting Ticket” that can only be transferred via a special “Proxy Pass.”
Rhyme: “On record day, your vote’s okay, even if you sell away. Unless by proxy you convey, your vote will stay, come meeting day. Seventy days, the max delay.”
Common ways this rule is tested:

Fact patterns involving share transfers close to meeting dates.
Scenarios testing the validity of votes based on record date.
Questions about the transferability of voting rights.
Issues related to the timing of record dates and meetings.
Common tricks/mistakes:

Forgetting that selling shares after the record date doesn’t automatically transfer voting rights.
Overlooking the possibility of transferring voting rights via proxy.
Assuming the record date can be set at any time before the meeting.
Misunderstanding who qualifies as a “registered shareholder.”
To reinforce your memory:

Create a timeline showing the relationship between record date, potential sale date, and meeting date.
Practice explaining the “RSVP-70” mnemonic, giving examples for each component.
Write out scenarios where voting rights would or wouldn’t transfer in case of a sale.
Remember, this rule emphasizes the importance of the record date in determining voting rights, and the limited transferability of those rights without a proxy.

To integrate this with previous corporate law rules:

Add a “Shareholder Voting Rights” box to your corporate governance flowchart, connected to shareholder meetings.
Expand your corporate law mnemonic to include “RSVP-70” at the end.
In your corporate visualization, add a “Voting Booth” with a calendar showing the 70-day window and a “Proxy Transfer” option.
This rule underscores the balance between administrative efficiency (having a fixed record date) and shareholder rights (allowing proxy transfers). It’s crucial to understand the implications of the record date system, especially in situations where share ownership changes close to meeting dates.

The rule also highlights the importance of proxies as a mechanism for transferring voting rights. Understanding these concepts is key to grasping how corporate democracy functions and how voting power is determined and potentially transferred in corporate governance.

Question 17

Proxy Voting
APGHA2VSDAIPS AP OR ET
PGAVFNMT11M
SAF OR ES 11M

Answer 17

Rule Statement:

A proxy grants the holder the ability to vote shares as he or she deems appropriate if the proxy is signed on either a) an appointment form, or b) electronic transmission. Proxy grants are valid for no more than 11 months.

Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“Proxy Voting: Signed Appointment Form or Electronic Transmission; Valid up to 11 Months”

Memorization techniques:

Mnemonic: “SAFE-11” (Signed Appointment Form or Electronic, 11 months)
Acronym: VOTE (Valid for 11, On form or Electronic, Transmission signed, Empowers proxy)
Visualization: Picture a voting ballot with two checkboxes: “Paper Form” and “Electronic,” and a large “11” stamped on top, slowly fading away.
Rhyme: “Form or e-sign, both are fine, for proxy power to align. But remember, there’s a line - eleven months, then it’s ‘Goodbye!’”
Common ways this rule is tested:

Fact patterns involving different methods of granting proxies.
Scenarios testing the validity of proxies based on their age.
Questions about the scope of proxy holder’s voting power.
Issues related to electronic versus paper proxy appointments.
Common tricks/mistakes:

Forgetting that electronic transmissions are valid for proxy appointments.
Overlooking the 11-month time limit on proxy validity.
Assuming that proxies must specify how to vote on each issue.
Misunderstanding the extent of discretion given to proxy holders.
To reinforce your memory:

Create a flowchart of proxy appointment methods, with a “11-month expiration” box at the end.
Practice explaining the “SAFE-11” mnemonic, giving examples for each component.
Write out scenarios where proxies would or wouldn’t be valid based on form and timing.
Remember, this rule emphasizes the flexibility in granting proxies (paper or electronic) while also imposing a time limit to ensure relatively current shareholder intent.

To integrate this with previous corporate law rules:

Add a “Proxy Appointment” box to your shareholder voting rights flowchart, connected to the voting process.
Expand your corporate law mnemonic to include “SAFE-11” at the end.
In your corporate visualization, add a “Proxy Pass” with two issuance methods (paper and electronic) and an “11-month timer.”
This rule underscores the balance between making proxy voting accessible (allowing electronic transmission) and ensuring that proxy appointments don’t become stale (11-month limit). It’s crucial to understand both the methods of granting proxies and their temporal limitations.

The rule also highlights the discretion given to proxy holders (“as he or she deems appropriate”), which is an important aspect of proxy voting. Understanding these concepts is key to grasping how shareholder representation works in practice, especially for shareholders who can’t attend meetings in person.

Question 18

Proxy Agreements
PAAFRBSH U STIR + CWI OR LR
FRINS+CWI OR LR

Answer 18

Rule Statement:

Proxy agreements are freely revocable by the shareholder unless 1) it states that it is irrevocable, AND 2) it is coupled with an interest or a legal right.

Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“Proxies: Freely Revocable Unless Stated Irrevocable AND Coupled with Interest/Legal Right”

Memorization techniques:

Mnemonic: “FRISCI” (Freely Revocable If not Stated and Coupled with Interest)
Acronym: RICE (Revocable unless Irrevocable, Coupled with interest, Explicitly stated)
Visualization: Picture a proxy document with a large “REVOCABLE” stamp that can only be covered by two overlapping stamps: “IRREVOCABLE” and “INTEREST/RIGHT.”
Rhyme: “Proxies fly free on revocation spree, unless ‘irrevocable’ you see, and interest or right must be, to lock it down permanently.”
Common ways this rule is tested:

Fact patterns involving attempts to revoke proxies.
Scenarios testing the sufficiency of “irrevocable” statements.
Questions about what constitutes an “interest” or “legal right.”
Issues related to the interaction between revocability and coupling with interest.
Common tricks/mistakes:

Forgetting that both conditions (stated irrevocable AND coupled with interest/right) must be met for irrevocability.
Overlooking the need for an explicit statement of irrevocability.
Assuming any proxy coupled with an interest is automatically irrevocable.
Misunderstanding what qualifies as an “interest” or “legal right.”
To reinforce your memory:

Create a flowchart of proxy revocability, with two gates that must be passed for irrevocability.
Practice explaining the “FRISCI” mnemonic, giving examples for each component.
Write out scenarios where proxies would or wouldn’t be revocable based on statements and interests.
Remember, this rule emphasizes the default revocability of proxies and the strict requirements for making them irrevocable.

To integrate this with previous corporate law rules:

Add a “Proxy Revocability” box to your proxy voting flowchart, connected to the proxy appointment process.
Expand your corporate law mnemonic to include “FRISCI” at the end.
In your corporate visualization, add a “Revocation Lock” that requires two keys: “Irrevocable Statement” and “Interest/Right.”
This rule underscores the balance between shareholder flexibility (default revocability) and the ability to create binding commitments (irrevocable proxies). It’s crucial to understand both the presumption of revocability and the specific requirements for overcoming this presumption.

The rule also highlights the importance of clear documentation (“states that it is irrevocable”) and substantive backing (“coupled with an interest or a legal right”). Understanding these concepts is key to grasping how proxy agreements can be structured and the limits on their bindingness.

Question 19

Promoter Liability
PIPL W P2AA OR OBOC + KTNCWF
PA4NECIKLNOXCE

Answer 19

Rule Statement:

A promoter is personally liable when he purports to act as or on behalf of a corporation, AND knows that no corporation was formed.

A promoter is not liable if a) there is novation of the contract, or b) the contract explicitly provides that the promoter has no personal liability.

Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“Promoter Liability: Acting for Non-Existent Corp + Knowledge = Liable; Exceptions: Novation or Explicit Non-Liability Clause”

Memorization techniques:

Mnemonic: “PANIC-NE” (Promoter Acts for Non-existent corp, If Knows = liable; Novation or Explicit clause excuses)
Acronym: FAKE (False corp, Acting knowingly, Know no corp exists, Exceptions: novation/explicit clause)
Visualization: Picture a promoter standing on a “Corporation” platform that doesn’t exist, with a thought bubble showing “I know it’s not real.” Then show two escape routes: a “Novation” bridge and an “Explicit Clause” shield.
Rhyme: “Act for fake corp, know it’s not there, personal debt you’ll have to bear. But novation new, or clause that’s clear, can make that liability disappear.”
Common ways this rule is tested:

Fact patterns involving promoters acting before incorporation.
Scenarios testing the promoter’s knowledge of non-incorporation.
Questions about the effectiveness of novation in shifting liability.
Issues related to contract clauses limiting promoter liability.
Common tricks/mistakes:

Forgetting that both acting for a non-existent corporation AND knowledge are required for liability.
Overlooking the possibility of novation as a way to avoid liability.
Assuming any limitation of liability clause will be effective.
Misunderstanding what constitutes “purporting to act” for a corporation.
To reinforce your memory:

Create a flowchart of promoter actions, with branches for knowledge, novation, and explicit clauses.
Practice explaining the “PANIC-NE” mnemonic, giving examples for each component.
Write out scenarios where promoters would or wouldn’t be liable based on their actions and contract terms.
Remember, this rule emphasizes the risks of acting on behalf of a non-existent corporation and the importance of proper documentation.

To integrate this with previous corporate law rules:

Add a “Promoter Liability” box to your corporate formation flowchart, connected to pre-incorporation activities.
Expand your corporate law mnemonic to include “PANIC-NE” at the end.
In your corporate visualization, add a “Promoter” figure standing on a “Ghost Corporation” with “Liability” chains that can be broken by “Novation” scissors or an “Explicit Clause” key.
This rule underscores the importance of proper incorporation procedures and clear contractual terms. It’s crucial to understand both the conditions for promoter liability and the methods for avoiding it.

The rule also highlights the significance of novation in corporate law, as well as the power of explicit contractual provisions. Understanding these concepts is key to grasping the risks and responsibilities involved in the early stages of corporate formation and operation.

Question 20

Pre-Formation Contracts
ACINLOCMBP U CEORIACAC
AE/IOAI

Answer 20

Rule Statement:

A corporation is not liable on a contract made by a promoter unless the corporation expressly or impliedly adopts the contract after incorporation.

A corporation can expressly adopt a pre-formation contract by board of director action or reference in the corporation’s formation documents. It can be deemed to impliedly adopt a pre-formation contract where the corporation 1) knows or has reason to know the material terms of the contract; AND 2) accepts some benefit of the contract.

Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“Corporate Liability for Promoter Contracts: Express/Implied Adoption Post-Incorporation. Express: Board Action or Formation Docs. Implied: Knowledge of Terms + Benefit Acceptance”

Memorization techniques:

Mnemonic: “AEIOU” (Adoption Express or Implied, Only after incorporation)
Acronym: CAFE (Corporate Adoption, Formation documents or Express board action, Implied by knowledge and benefit)
Visualization: Picture a newly formed corporation with two doors: “Express Adoption” (with a board meeting inside and formation documents on the door) and “Implied Adoption” (with a “Terms Known” sign and benefits flowing in).
Rhyme: “After birth, not before, the corp can choose to take on more. Board acts clear or docs recite, or knowledge plus benefits might. Either way, adoption’s key, to bind the corp contractually.”
Common ways this rule is tested:

Fact patterns involving contracts made before incorporation.
Scenarios testing different methods of express adoption.
Questions about what constitutes implied adoption.
Issues related to the timing of adoption (pre vs. post-incorporation).
Common tricks/mistakes:

Forgetting that adoption must occur after incorporation.
Overlooking the possibility of implied adoption.
Assuming any benefit acceptance automatically leads to adoption.
Misunderstanding what qualifies as “knowledge of material terms.”
To reinforce your memory:

Create a flowchart of contract adoption methods, with branches for express and implied adoption.
Practice explaining the “AEIOU” mnemonic, giving examples for each component.
Write out scenarios where corporations would or wouldn’t be liable based on different adoption circumstances.
Remember, this rule emphasizes the importance of post-incorporation actions in determining corporate liability for pre-formation contracts.

To integrate this with previous corporate law rules:

Add a “Contract Adoption” box to your corporate formation flowchart, connected to post-incorporation activities.
Expand your corporate law mnemonic to include “CAFE” at the end.
In your corporate visualization, add an “Adoption Chamber” with two entrances: “Express” (with a boardroom and document stack) and “Implied” (with a “Terms Known” sign and a benefit package).
This rule underscores the principle that a corporation, as a new legal entity, is not automatically bound by pre-formation contracts. It’s crucial to understand both the express and implied methods of adoption and their requirements.

The rule also highlights the importance of board actions, corporate documents, and the corporation’s conduct in determining liability. Understanding these concepts is key to grasping how a newly formed corporation can become bound by agreements made during its formative stages.

Question 21

Post-Formation Liability
AF PRPLOPFC EACE/IAC
PLOF/AP

Answer 21

Rule Statement:

After formation, promoters remain personally liable on a pre-formation contract even after the corporation expressly or impliedly adopts the contract.

Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“Promoter Liability Persists: Personal Responsibility Continues Post-Formation and Post-Adoption”

Memorization techniques:

Mnemonic: “PLOP” (Promoter Liability Outlasts formation/adoption Permanently)
Acronym: SNAP (Still liable, No change after adoption, Always responsible, Promoter’s burden)
Visualization: Picture a promoter carrying a heavy “Liability” backpack, walking through corporate formation gates and past an “Adoption” sign, but the backpack remains.
Rhyme: “Though the corp may take it on, promoter’s duty isn’t gone. Formation, adoption change no fact, liable still for pre-form pact.”
Common ways this rule is tested:

Fact patterns involving attempts to shift liability entirely to the corporation.
Scenarios testing the effect of corporate adoption on promoter liability.
Questions about the duration of promoter liability.
Issues related to the interaction between corporate and promoter liability.
Common tricks/mistakes:

Assuming that corporate adoption releases the promoter from liability.
Overlooking the continuing nature of promoter liability post-formation.
Thinking that express adoption might have a different effect than implied adoption on promoter liability.
Misunderstanding the relationship between corporate and promoter liability (they can coexist).
To reinforce your memory:

Create a timeline showing promoter liability continuing through formation and adoption stages.
Practice explaining the “PLOP” mnemonic, giving examples for each component.
Write out scenarios where promoters remain liable despite various corporate actions.
Remember, this rule emphasizes the enduring nature of promoter liability, regardless of subsequent corporate actions.

To integrate this with previous corporate law rules:

Add a “Persistent Promoter Liability” box to your corporate formation and contract adoption flowchart.
Expand your corporate law mnemonic to include “PLOP” at the end.
In your corporate visualization, add a “Liability Chain” connecting the promoter to pre-formation contracts, which remains unbroken through formation and adoption stages.
This rule underscores the principle that promoters can’t simply offload their pre-formation responsibilities onto the corporation. It’s crucial to understand that corporate adoption of a contract doesn’t release the promoter from personal liability.

The rule also highlights the potential for dual liability - both the corporation and the promoter can be liable on the same contract. Understanding this concept is key to grasping the full implications of acting as a promoter and the importance of clear agreements about liability allocation.

This principle serves to protect third parties who contract with promoters, ensuring they retain their original obligor even as they potentially gain an additional one (the corporation). It also incentivizes promoters to be cautious and clear in their pre-formation dealings, knowing they can’t easily escape liability later.

Question 22

Authority of Officers
OHAA2ACWDAOIBL OR APBBOD
OMABCW 3PRBP/EHA + BIROCATHOOAHA
AAFBLOBOD AAFA

Answer 22

Rule Statement:

Officers have actual authority to act consistently with their duties as outlined in the bylaws, OR as provided by the board of directors.

Officers may also bind the corporation when 1) a third party reasonably believes the person/entity has authority; AND 2) the belief is the result of the corporation’s actions that hold out the officer as having authority.

Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“Officer Authority: Actual (Bylaws/Board) or Apparent (Reasonable Third-Party Belief from Corporate Actions)”

Memorization techniques:

Mnemonic: “ABBA” (Actual authority from Bylaws or Board, Apparent authority from Actions)
Acronym: BOAT (Bylaws Or board for Actual authority, Third-party belief for apparent)
Visualization: Picture an officer standing on two platforms: “Actual Authority” (built with bylaw books and board member figures) and “Apparent Authority” (built with a “Corporate Actions” sign and a “Third Party Belief” thought bubble).
Rhyme: “Bylaws set or board decrees, actual power guarantees. But actions can make others think, apparent power’s there in sync. Third party’s belief, if sound, can make the corp be duty-bound.”
Common ways this rule is tested:

Fact patterns involving officers acting beyond their stated authority.
Scenarios testing the reasonableness of third-party beliefs about authority.
Questions about the source and scope of actual authority.
Issues related to corporate actions creating apparent authority.
Common tricks/mistakes:

Forgetting that actual authority can come from either bylaws or board decisions.
Overlooking the two-part test for apparent authority (belief + corporate actions).
Assuming any third-party belief in authority is sufficient for binding.
Misunderstanding what qualifies as corporate actions “holding out” an officer as having authority.
To reinforce your memory:

Create a flowchart of officer authority, with branches for actual and apparent authority.
Practice explaining the “ABBA” mnemonic, giving examples for each component.
Write out scenarios where officers would or wouldn’t have authority to bind the corporation.
Remember, this rule emphasizes both the formal sources of authority and the potential for authority based on reasonable perceptions.

To integrate this with previous corporate law rules:

Add an “Officer Authority” box to your corporate governance flowchart, connected to both bylaws and board actions.
Expand your corporate law mnemonic to include “BOAT” at the end.
In your corporate visualization, add an “Authority Bridge” with two lanes: “Actual” (paved with bylaw books and board stamps) and “Apparent” (paved with corporate action signs and third-party figures).
This rule underscores the dual nature of officer authority - stemming from both explicit grants and implied representations. It’s crucial to understand both the formal mechanisms of granting authority and the potential for authority to arise from corporate conduct.

The rule also highlights the importance of third-party perceptions in determining corporate liability. Understanding these concepts is key to grasping how corporations can be bound by officer actions, even when those actions might exceed formally granted authority.

This principle serves to protect third parties who reasonably rely on apparent corporate authority, while also emphasizing the need for corporations to be clear about the scope of their officers’ powers.

Question 23

LLC Members’ Duties
MOMMLLC O DOC DOL 2 LLC + OM
MMLLC C+L C+C

Answer 23

Rule Statement:

Members of Member-Managed LLCs owe the duty of care and duty of loyalty to both the LLC and other members.

Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“Member-Managed LLC: Members Owe Duty of Care and Loyalty to LLC and Other Members”

Memorization techniques:

Mnemonic: “MMLC²” (Member-Managed LLC, Care and loyalty, Company and colleagues)
Acronym: CALM (Care And Loyalty to Members and LLC)
Visualization: Picture a circle of LLC members, each holding two badges: “Care” and “Loyalty,” pointing both to a central “LLC” icon and to each other.
Rhyme: “In member-managed LLC’s domain, two duties members must maintain. Care and loyalty, twin guides true, to LLC and members too.”
Common ways this rule is tested:

Fact patterns involving potential breaches of duty by LLC members.
Scenarios testing the scope of duties owed to the LLC versus other members.
Questions about the specific requirements of the duty of care and duty of loyalty.
Issues related to conflicts between member interests and LLC interests.
Common tricks/mistakes:

Forgetting that duties are owed to both the LLC and other members.
Overlooking the dual nature of the duties (both care and loyalty).
Assuming that duties in member-managed LLCs are identical to those in corporations.
Misunderstanding the potential for conflicts between duties to the LLC and to other members.
To reinforce your memory:

Create a diagram showing the flow of duties from each member to the LLC and to other members.
Practice explaining the “MMLC²” mnemonic, giving examples for each component.
Write out scenarios where members might face challenges in fulfilling both duties to both parties.
Remember, this rule emphasizes the dual responsibilities of members in a member-managed LLC structure.

To integrate this with previous business entities law rules:

Add a “Member Duties” box to your LLC structure flowchart, connected to both the LLC entity and individual members.
Expand your business entities law mnemonic to include “CALM” at the end.
In your business entities visualization, add a “Member-Managed LLC” circle with members linked by “Care” and “Loyalty” bonds to both a central LLC icon and each other.
This rule underscores the unique nature of member-managed LLCs, where members take on management responsibilities and corresponding duties. It’s crucial to understand that these duties extend both to the entity itself and to fellow members.

The rule also highlights the potential for complex situations where duties to the LLC and to other members might not align perfectly. Understanding these concepts is key to grasping the responsibilities and potential conflicts inherent in member-managed LLC structures.

This principle serves to protect both the LLC as an entity and the individual members, ensuring that those in control exercise care and loyalty in their management roles. It reflects the more intimate and potentially overlapping nature of interests in an LLC compared to a traditional corporation.

Question 24

LLC Members’ Duty of Care
MDOCRHA
WCTAPILPW
REUC
WRB2BAIBIOLLC
CR4P IOLLCBB

Answer 24

Rule Statement:

A Member’s duty of care requires he or she act:

with the care that a person in a like position would reasonably exercise under the circumstances; and
with a reasonable belief to be acting in the best interests of the LLC.
Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“LLC Member Duty of Care: Reasonable Care for Position + Reasonable Belief in LLC’s Best Interests”

Memorization techniques:

Mnemonic: “CRIB” (Care Reasonable for position, Interests of LLC Believed best)
Acronym: RELIC (Reasonable Exercise Like position, Interests of LLC Considered)
Visualization: Picture an LLC member standing on a “Reasonable Care” platform, holding a “Position-Specific” measuring stick, while looking through “Best Interest” binoculars at an LLC logo.
Rhyme: “Care like others in your shoes, act as reason would you choose. Believe your choice, with thought profound, serves LLC interests sound.”
Common ways this rule is tested:

Fact patterns involving member decisions and actions.
Scenarios testing what constitutes “reasonable” care in different contexts.
Questions about how to determine what a “person in a like position” would do.
Issues related to balancing personal judgment with LLC interests.
Common tricks/mistakes:

Forgetting the two-part nature of the duty (reasonable care + reasonable belief).
Overlooking the context-specific nature of “reasonable” care.
Assuming that good intentions alone satisfy the duty of care.
Misunderstanding what constitutes “best interests” of the LLC.
To reinforce your memory:

Create a flowchart of member decision-making, incorporating both the “reasonable care” and “best interests” components.
Practice explaining the “CRIB” mnemonic, giving examples for each component.
Write out scenarios where members might face challenges in meeting the duty of care standard.
Remember, this rule emphasizes both objective standards (reasonable person in like position) and subjective elements (reasonable belief in best interests).

To integrate this with previous LLC law rules:

Add a “Duty of Care” box to your LLC member responsibilities flowchart, with sub-boxes for “Reasonable Care” and “Best Interests Belief.”
Expand your LLC law mnemonic to include “RELIC” at the end.
In your LLC visualization, add a “Care Compass” with two needles: one pointing to “Position-Specific Reasonableness” and the other to “LLC Best Interests.”
This rule underscores the balance between expecting professional-level care and acknowledging the unique position of each LLC member. It’s crucial to understand both the objective standard of care and the subjective element of belief in acting for the LLC’s benefit.

The rule also highlights the importance of context in determining what constitutes reasonable care. Understanding these concepts is key to grasping how LLC members should approach their responsibilities and decision-making processes.

This principle serves to protect the LLC and its members by ensuring that those in management roles exercise appropriate care and always aim to act in the entity’s best interests. It reflects the need for both competence and good faith in LLC management.

Question 25

LLC Members’ Duty of Loyalty
MDOLRH A4APPBDFLLCBP RFHAIWDWLLC RFCWLLCB4D
AFG ADI AFC

Answer 25

Rule Statement:

A Member’s duty of loyalty requires that he or she:

account for any property, profit, or benefit derived from the LLC’s business/property;
refrain from having an adverse interest when dealing with the LLC (unless the transaction is fair); and
refrain from competing with the LLC before dissolution.
Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“LLC Member Duty of Loyalty: Account for LLC-derived gains, Avoid adverse interests (unless fair), No competition pre-dissolution”

Memorization techniques:

Mnemonic: “AAA Rating” (Account for gains, Avoid adverse interests, Abstain from competition)
Acronym: LOYAL (LLC-derived gains, Only fair dealings, Yield competition, Account for all, Let LLC thrive)
Visualization: Picture an LLC member standing on a “Loyalty” platform with three stations: a “Gains Accounting” desk, a “Fair Dealings” scale, and a “No Competition” barrier.
Rhyme: “Account for gains from LLC’s realm, avoid conflicts at the helm. Fair deals may pass, but compete you can’t, loyalty’s your guiding grant.”
Common ways this rule is tested:

Fact patterns involving members using LLC opportunities for personal gain.
Scenarios testing what constitutes a “fair” transaction with adverse interests.
Questions about the scope of competition prohibition.
Issues related to accounting for LLC-derived benefits.
Common tricks/mistakes:

Forgetting the three distinct components of the duty of loyalty.
Overlooking the “fairness” exception for adverse interest dealings.
Assuming competition is allowed if it doesn’t directly harm the LLC.
Misunderstanding what constitutes LLC-derived property, profit, or benefit.
To reinforce your memory:

Create a flowchart of member actions, with branches for each loyalty duty component.
Practice explaining the “AAA Rating” mnemonic, giving examples for each component.
Write out scenarios where members might face challenges in meeting the duty of loyalty standard.
Remember, this rule emphasizes the prioritization of LLC interests over personal interests in various contexts.

To integrate this with previous LLC law rules:

Add a “Duty of Loyalty” box to your LLC member responsibilities flowchart, with sub-boxes for “Accounting,” “Fair Dealing,” and “Non-Competition.”
Expand your LLC law mnemonic to include “LOYAL” at the end.
In your LLC visualization, add a “Loyalty Shield” with three layers: “Gains Accountability,” “Fair Transactions,” and “Competition Barrier.”
This rule underscores the fiduciary nature of an LLC member’s role, requiring them to put the LLC’s interests first in various situations. It’s crucial to understand the broad scope of this duty, covering financial accountability, conflict avoidance, and competitive restraint.

The rule also highlights the nuanced nature of loyalty, allowing for some self-interested transactions if they meet a fairness standard. Understanding these concepts is key to grasping how LLC members should navigate potential conflicts between personal and LLC interests.

This principle serves to protect the LLC and its members by ensuring that those in management roles don’t exploit their positions for personal gain at the expense of the LLC. It reflects the need for transparency, fairness, and dedication to the LLC’s success in member conduct.

Question 26

Manager-Managed LLC Liability
IMMLLC MOFD BMDN
MMFD4MO

Answer 26

Rule Statement:

In Manager-Managed LLCs, the managers owe fiduciary duties but the members do not.

Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“Manager-Managed LLC: Managers Have Fiduciary Duties, Members Don’t”

Memorization techniques:

Mnemonic: “MMF” (Manager-Managed, Fiduciary duties for managers only)
Acronym: MILD (Managers In LLC have Duties)
Visualization: Picture an LLC building with two floors: managers on the top floor wearing “Fiduciary Duty” badges, members on the bottom floor without badges.
Rhyme: “In LLCs where managers reign, fiduciary duties they maintain. But for members in this scene, of such duties they are clean.”
Common ways this rule is tested:

Fact patterns contrasting manager and member actions in Manager-Managed LLCs.
Scenarios testing the extent of manager fiduciary duties.
Questions about member responsibilities in Manager-Managed LLCs.
Issues related to the distinction between Manager-Managed and Member-Managed LLCs.
Common tricks/mistakes:

Forgetting that this rule applies specifically to Manager-Managed LLCs.
Assuming members have some level of fiduciary duty in Manager-Managed LLCs.
Overlooking the full scope of fiduciary duties for managers.
Confusing the roles and responsibilities of managers and members in this structure.
To reinforce your memory:

Create a diagram showing the flow of fiduciary duties in a Manager-Managed LLC structure.
Practice explaining the “MMF” mnemonic, giving examples of how it applies.
Write out scenarios contrasting manager and member actions and their legal implications.
Remember, this rule emphasizes the clear distinction in responsibilities between managers and members in a Manager-Managed LLC.

To integrate this with previous LLC law rules:

Add a “Manager-Managed LLC Duties” box to your LLC structure flowchart, with arrows pointing fiduciary duties to managers but not to members.
Expand your LLC law mnemonic to include “MILD” at the end.
In your LLC visualization, add a “Duty Division” barrier between manager and member levels in the LLC structure.
This rule underscores the fundamental difference between Manager-Managed and Member-Managed LLCs in terms of fiduciary responsibilities. It’s crucial to understand that in this structure, the managers take on a role similar to directors in a corporation, while members are more akin to passive investors.

The rule also highlights the importance of clearly defining roles and responsibilities in LLC operating agreements. Understanding these concepts is key to grasping how Manager-Managed LLCs allocate duties and liabilities among their participants.

This principle serves to protect the interests of members who choose a Manager-Managed structure, allowing them to invest in the LLC without taking on the fiduciary responsibilities that come with management. It reflects the flexibility of LLC structures in accommodating different levels of member involvement and responsibility.

Remember that while members don’t have fiduciary duties in this structure, they still have contractual obligations as defined in the LLC agreement. The absence of fiduciary duties doesn’t mean complete freedom from all responsibilities.

Question 27

LLC Operating Agreement
OAM ROEDOL SFATDNVDOL ADOC AOEFD SFS2MDOGF+FD
LRES CANM ODAE GFSS

Answer 27

Rule Statement:

Under the RULLCA, the LLC Operating Agreement may, so long as it is not manifestly unreasonable,

restrict or eliminate the duty of loyalty;
set forth activities that do not violate the duty of loyalty;
alter the duty of care (but it cannot authorize intentional misconduct or a knowing violation of law);
alter or eliminate any other fiduciary duty; and
set forth standards to measure the duty of good faith and fair dealing.
Now, let’s create a concise version that’s easy to memorize while retaining all elements:

“RULLCA LLC Agreement Modifications: Loyalty (restrict/eliminate/specify), Care (alter, no misconduct), Other Duties (alter/eliminate), Good Faith (set standards)”

Memorization techniques:

Mnemonic: “LOCO-G” (Loyalty, Other duties, Care, Only no misconduct, Good faith standards)
Acronym: REALM (Restrict/Eliminate/Alter Loyalty and More)
Visualization: Picture an LLC agreement as a control panel with sliders for “Loyalty” (full range), “Care” (limited range), “Other Duties” (full range), and a “Good Faith” meter with adjustable scales.
Rhyme: “Loyalty can shift or go, specific acts we can show. Care can change but not too far, misconduct’s still behind bars. Other duties flex with ease, Good faith standards as we please.”
Common ways this rule is tested:

Fact patterns involving LLC agreements with modified fiduciary duties.
Scenarios testing the limits of “manifestly unreasonable” modifications.
Questions about the interplay between different types of fiduciary duties.
Issues related to the immutable aspects of the duty of care.
Common tricks/mistakes:

Forgetting the “manifestly unreasonable” limitation on all modifications.
Overlooking the distinction between “restrict” and “eliminate” for loyalty duty.
Assuming the duty of care can be eliminated like other duties.
Misunderstanding the scope of “other fiduciary duties” that can be altered or eliminated.
To reinforce your memory:

Create a flowchart of possible LLC agreement modifications for each type of duty.
Practice explaining the “LOCO-G” mnemonic, giving examples for each component.
Write out scenarios where LLC members might want to modify each type of duty and how they could do so within the RULLCA framework.
Remember, this rule emphasizes the flexibility of LLC structures while maintaining some core protections.

To integrate this with previous LLC law rules:

Add a “Duty Modification” box to your LLC agreement flowchart, with branches for each type of duty.
Expand your LLC law mnemonic to include “REALM” at the end.
In your LLC visualization, add a “Duty Customization Center” where each duty has its own adjustment mechanism.
This rule underscores the contractual nature of LLCs and the significant freedom parties have to tailor fiduciary obligations to their specific needs. It’s crucial to understand both the breadth of possible modifications and the few immutable aspects (like the prohibition on authorizing intentional misconduct).

The rule also highlights the balance between flexibility and basic standards of business ethics. Understanding these concepts is key to drafting effective LLC agreements that appropriately allocate rights and responsibilities among members and managers.

This principle serves to allow LLC participants to create structures that best suit their business needs and relationships, while still maintaining some fundamental protections against egregious misconduct. It reflects the RULLCA’s approach of maximizing contractual freedom within broad bounds of reasonableness.

Remember that while extensive modifications are possible, courts may still scrutinize them under the “manifestly unreasonable” standard, providing a safeguard against overly opportunistic or unfair arrangements.

Question 28

Director’s Duty of Care

Answer 28

Directors are fiduciaries of the corporation. If a director breaches the duty of care, he may be personally liable to the corporation for any losses that result.

Directors owe a duty of care to the corporation to discharge their duties:

in good faith;
with the reasonable belief that they are acting in the best interests of the corporation; AND
with the care that a person in a like position would reasonably believe appropriate under like circumstances.
In making decisions, directors must be reasonably informed. They may rely on the reasonable advice of advisors if 1) the reliance was reasonable and 2) the advisor/committee was qualified.

Summary of the Duty of Care for Directors:

Fiduciary Relationship:
Directors are fiduciaries of the corporation.
Personal liability may result from breaching the duty of care.
Three-part Duty of Care:
a) Act in good faith
b) Have a reasonable belief of acting in the corporation’s best interests
c) Exercise care as a reasonable person in a similar position would
Decision-making Requirements:
Directors must be reasonably informed
May rely on advisors’ reasonable advice if:
i) Reliance is reasonable
ii) Advisor/committee is qualified
Key Points to Remember:

The duty of care is about the process of decision-making, not the outcome.
“Reasonable” and “reasonably” are used frequently, emphasizing an objective standard.
Personal liability is a potential consequence of breaching this duty.

Question 29

Direct Actions

Answer 29

A shareholder may bring a direct action when there is a breach of a duty owed to a shareholder of a corporation. The injury cannot be solely the result of an injury suffered by the corporation. Damages in a direct action are awarded to the shareholder.

In an LLC, a member may bring a direct action against a member/manager, member/manager, or the LLC on showing that the injury is not solely the result of an injury to the LLC.

Summary of Direct Actions:

For Corporations:
Shareholders can bring direct actions for breaches of duty owed to them
Injury must not be solely a result of corporate injury
Damages go directly to the shareholder
For LLCs:
Members can bring direct actions against members, managers, or the LLC
Injury must not be solely a result of LLC injury
Key Points to Remember:

Direct actions are for personal injuries to shareholders/members
The injury must be distinct from the corporation’s/LLC’s injury
Damages in direct actions go to the individual, not the entity
Mnemonic: “DIRECT”

D - Duty owed to shareholder/member
I - Individual injury (not solely entity’s)
R - Result in personal damages
E - Entity (corporation or LLC) not the sole injured party
C - Claim brought by shareholder/member
T - To the individual go the damages

This mnemonic helps remember the key elements of a direct action:

It involves a duty owed directly to the individual
The injury must be to the individual, not just the entity
Damages go directly to the individual
The claim is brought by the individual shareholder or member
When analyzing fact patterns, look for situations where a shareholder or LLC member has suffered a personal injury that is distinct from any harm to the corporation or LLC. This will help you determine whether a direct action is appropriate.

Question 30

Derivative Actions

Answer 30

A derivative action occurs when a shareholder sues to enforce the corporation’s claim.

Under the Revised Model Business Code Act, in order to bring a derivative action, the shareholder must:

own stock at the time the claim arose (or became a shareholder by operation of law from a shareholder who owned stock at the time the claim arose);
continue to be a shareholder through entry of judgment;
fairly and adequately represent the corporation’s interests; and
make a written demand to the corporation to take suitable action.
A derivative suit cannot be commenced until 90 days after the demand, unless the corporation either a) rejects the demand, or b) will suffer irreparable harm if forced to wait.

For an LLC, the elements of bringing a derivative action are the same except:

the action may be commenced within a reasonable time after the demand; and
the demand requirement may be waived if futile.
In derivative actions, the damages are paid to the corporation/LLC, but the shareholder or shareholder/member recovers reasonable costs of litigation.

A derivative action must be dismissed on a motion by the corporation if:

a majority of the board of directors’ qualified directors have,
determined in good faith,
after conducting a reasonable inquiry; that
the action is not in the best interests of the corporation.
Summary of Derivative Actions:

Mnemonic: “SCALE” (Shareholder Claims Action for Legal Entity)

S - Shareholder status (at time of claim and through judgment)
C - Corporation’s claim enforced
A - Adequate representation of corporation’s interests
L - Legal demand made in writing
E - Evaluation period (90 days) before commencing action

Key Points:

Standing requirements for shareholders
Written demand and waiting period
Differences for LLCs
Damages go to the entity, but costs may be recovered
Dismissal conditions
Expanded explanation:

Standing (S):
Own stock when claim arose (or inherited from such a shareholder)
Maintain shareholder status through judgment
Fairly and adequately represent corporation’s interests
Corporation’s Claim (C):
Action enforces the corporation’s rights, not individual shareholder’s
Adequate Representation (A):
Shareholder must fairly and adequately represent corporation’s interests
Legal Demand (L):
Written demand to corporation required
90-day waiting period (unless rejected or irreparable harm)
LLC: reasonable time, may be waived if futile
Evaluation and Damages (E):
Damages paid to corporation/LLC
Shareholder may recover reasonable litigation costs
Can be dismissed if qualified directors determine it’s not in corporation’s best interests
When analyzing fact patterns, consider:

Shareholder’s standing and timing
Whether proper demand was made
If waiting period was observed (or exceptions apply)
Whether the claim is truly on behalf of the entity
Potential for dismissal by qualified directors
This mnemonic and summary should help you remember the key elements of derivative actions and how they differ from direct actions.

Question 31

Personal Liability and Piercing the Veil

Answer 31

Shareholders are generally not personally liable for corporation liabilities and obligations.

Courts may disregard the corporate form and hold an individual shareholder (or director/officer) personally liable for actions taken on behalf of the corporation when:
a) the corporation is acting as the alter ego of the shareholder;
b) there is a failure to follow corporate formalities;
c) the corporation is inadequately capitalized at its inception; OR
d) to prevent fraud.

Courts generally apply the same factors to pierce the veil of an LLC to hold members or managers liable. But failure to follow formalities is NOT a ground to pierce the LLC veil.

Shareholders and LLC members are always liable for their own torts.

Summary of Personal Liability and Piercing the Veil:

Mnemonic: “VEIL” (Violation Exposes Individual Liability)

V - Veil of limited liability is the norm
E - Exceptions exist for piercing the veil
I - Individual liability possible in specific cases
L - Liability for personal torts always applies

Key Points:

Limited liability is the general rule
Piercing the corporate veil exceptions
LLC veil piercing similarities and differences
Personal tort liability
Expanded explanation:

Veil of limited liability (V):
Shareholders and LLC members generally not personally liable for entity debts
Exceptions for piercing (E):
Alter ego doctrine
Failure to follow corporate formalities (corporations only)
Inadequate capitalization at inception
Prevention of fraud
Individual liability cases (I):
Courts may disregard the corporate/LLC form in specific circumstances
Similar factors apply to both corporations and LLCs
Formalities exception doesn’t apply to LLCs
Liability for personal torts (L):
Shareholders and LLC members always liable for their own torts
When analyzing fact patterns, consider:

Is there a reason to pierce the corporate/LLC veil?
Are any of the exceptions present (alter ego, inadequate capitalization, fraud)?
For corporations, were corporate formalities followed?
Is the issue related to personal torts of shareholders/members?
Additional notes:

The “alter ego” doctrine refers to when the corporation is essentially treated as an extension of the individual shareholder, rather than a separate entity.
Inadequate capitalization typically refers to the corporation not having sufficient assets to meet foreseeable business liabilities at its formation.
While similar factors apply to both corporations and LLCs, courts may be more reluctant to pierce the LLC veil due to the more flexible nature of LLC governance.
This mnemonic and summary should help you remember the key elements of personal liability and veil piercing for both corporations and LLCs, as well as the important distinctions between them.

Question 32

Fiduciary Duties of Directors

Answer 32

Directors must act in the best interests of the corporation and without personal conflict.

The Duty of Loyalty prevents a director from:

entering into conflicting interest transactions;
usurping a corporate opportunity;
competing with the corporation; or
trading on inside information.
Any conflicting interest transaction is a breach of the duty of loyalty unless:

approved by a majority of disinterested directors after full disclosure of all relevant material facts;
approved by a majority of disinterested shareholders; OR
the transaction as a whole was fair to the corporation at the time it was entered into, including a price comparable to an arm’s length transaction and fair negotiations.
A conflict occurs when a director/officer or family member:

is a party to the transaction;
has a beneficial interest in the transaction or is so closely linked to it that that director’s judgment may reasonably be affected; or
is involved with another entity that is conducting business with the corporation and that transaction would normally be brought before the board of directors.
Summary of Duty of Loyalty:

Mnemonic: “COIN” (Conflicts Of Interest Nixed)

C - Conflicting interests prohibited
O - Opportunities belong to the corporation
I - Insider trading forbidden
N - No competition with the corporation

Key Points:

Best interests of the corporation
Prohibited actions
Exceptions to conflicting interest transactions
Definition of conflicts
Expanded explanation:

Conflicting interests (C):
Directors must act without personal conflicts
Conflicting interest transactions are prohibited unless exceptions apply
Opportunities (O):
Corporate opportunities must not be usurped by directors
Insider trading (I):
Trading on inside information is forbidden
No competition (N):
Directors must not compete with the corporation
Exceptions to conflicting interest transactions:
Mnemonic: “DAF” (Disinterested Approval or Fairness)

D - Disinterested directors approve after full disclosure
A - Approval by disinterested shareholders
F - Fair to the corporation as a whole

Conflict definition:
Mnemonic: “PIE” (Party, Interest, Entity)

P - Party to the transaction
I - Interest (beneficial) or influence on judgment
E - Entity involvement that affects board decisions

When analyzing fact patterns, consider:

Is the director acting in the best interests of the corporation?
Does the situation fall under any of the prohibited actions (COIN)?
If there’s a conflicting interest transaction, does it meet any of the exceptions (DAF)?
Does the situation meet the definition of a conflict (PIE)?
This mnemonic and summary should help you remember the key elements of the Duty of Loyalty for directors, including prohibited actions, exceptions for conflicting interest transactions, and how conflicts are defined. Remember that the overarching principle is that directors must always act in the best interests of the corporation and avoid personal conflicts.

Question 33

Proxy Voting and Revocation of a Proxy

Answer 33

Only registered shareholders on the record date are entitled to vote at the shareholders meeting, even if a shareholder sells the shares between the record date and the meeting, unless a proxy is given to the buyer. The record date cannot be more than 70 days prior to the shareholder meeting.

A proxy grants the holder the ability to vote shares as he or she deems appropriate if the proxy is signed on either a) an appointment form, or b) electronic transmission. Proxy grants are valid for no more than 11 months.

Proxy agreements are freely revocable by the shareholder unless 1) it states that it is irrevocable, AND 2) it is coupled with an interest or a legal right.

Summary of Proxy Voting and Revocation:

Mnemonic: “VOTER” (Voting Opportunities Through Effective Representation)

V - Voting rights based on record date
O - Only registered shareholders can vote
T - Time limit for record date (70 days max)
E - Eleven months maximum for proxy validity
R - Revocable unless stated otherwise and coupled with interest

Key Points:

Record date determines voting eligibility
Proxy voting process
Duration of proxy validity
Revocability of proxies
Expanded explanation:

Voting rights (V):
Based on registered shareholders as of the record date
Record date can’t be more than 70 days before the meeting
Only registered shareholders (O):
Entitled to vote even if shares are sold after record date
Exception: proxy given to buyer
Time limits (T):
Record date: maximum 70 days before meeting
Proxy validity: maximum 11 months
Eleven months maximum (E):
Proxy grants valid for no more than 11 months
Revocability (R):
Proxies are freely revocable by default
Exceptions: stated irrevocability AND coupled with interest/legal right
Additional mnemonic for proxy creation: “SEA” (Signed Either Appointment or electronic)

S - Signed proxy
E - Either appointment form
A - Or electronic transmission

When analyzing fact patterns, consider:

Who are the registered shareholders on the record date?
Has a proxy been properly created and is it still valid?
Is there any question of proxy revocation?
Are there any time limit issues with the record date or proxy validity?
This mnemonic and summary should help you remember the key elements of proxy voting and revocation in shareholder meetings. Remember that the overarching principle is to ensure fair representation of shareholders’ interests while maintaining practical voting procedures.

Question 34

Liability of Promoter for Pre-Incorporation Contracts

Answer 34

A promoter is personally liable when he purports to act as or on behalf of a corporation, AND knows that no corporation was formed.

A promoter is not liable if a) there is novation of the contract, or b) the contract explicitly provides that the promoter has no personal liability.

A corporation is not liable on a contract made by a promoter unless the corporation expressly or impliedly adopts the contract after incorporation.

A corporation can expressly adopt a pre-formation contract by board of director action or reference in the corporation’s formation documents. It can be deemed to impliedly adopt a pre-formation contract where the corporation 1) knows or has reason to know the material terms of the contract; AND 2) accepts some benefit of the contract.

After formation, promoters remain personally liable on a pre-formation contract even after the corporation expressly or impliedly adopts the contract.

Summary of Liability of Promoter for Pre-Incorporation Contracts:

Mnemonic: “PACT” (Promoter Accountability in Contract Transactions)

P - Promoter’s personal liability
A - Adoption by corporation
C - Corporation’s liability limitations
T - Terms for express and implied adoption

Key Points:

Promoter’s personal liability
Exceptions to promoter’s liability
Corporation’s liability
Methods of contract adoption
Ongoing promoter liability
Expanded explanation:

Promoter’s liability (P):
Personally liable when acting for non-existent corporation
Liability continues even after corporation adopts contract
Adoption by corporation (A):
Express adoption: board action or formation documents
Implied adoption: knowledge of terms and acceptance of benefits
Corporation’s liability limitations (C):
Not liable unless contract is adopted after incorporation
Terms for adoption (T):
Express: board action or formation documents
Implied: knowledge of terms and acceptance of benefits
Exceptions to promoter’s liability:
Mnemonic: “NEC” (Novation or Explicit Contract)

N - Novation of the contract
E - Explicit provision
C - Contract states no personal liability

When analyzing fact patterns, consider:

Did the promoter knowingly act on behalf of a non-existent corporation?
Are there any exceptions to the promoter’s liability (novation or explicit contract provision)?
Has the corporation adopted the contract, either expressly or impliedly?
Does the corporation know the material terms and accept benefits of the contract?
Is the promoter still personally liable even after corporate adoption?
This mnemonic and summary should help you remember the key elements of promoter liability for pre-incorporation contracts. Remember that the overarching principle is to hold promoters accountable for their actions while allowing corporations to adopt beneficial contracts after formation. The ongoing personal liability of promoters, even after corporate adoption, is a crucial point to keep in mind.

Question 35

Authority of Officers

Answer 35

Officers have actual authority to act consistently with their duties as outlined in the bylaws, OR as provided by the board of directors.

Officers may also bind the corporation when 1) a third party reasonably believes the person/entity has authority; AND 2) the belief is the result of the corporation’s actions that hold out the officer as having authority.

Summary of Authority of Officers:

Mnemonic: “ABBA” (Authority Basis and Binding Actions)

A - Actual authority
B - Bylaws or board define duties
B - Binding through apparent authority
A - Actions of corporation create belief

Key Points:

Sources of actual authority
Apparent authority
Requirements for binding the corporation
Expanded explanation:

Actual Authority (A):
Officers have authority to act within their defined duties
Sources of authority: bylaws or board of directors
Bylaws or Board Define Duties (B):
Bylaws outline officer duties
Board of directors can provide additional authority
Binding through Apparent Authority (B):
Officers can bind the corporation even without actual authority
Based on reasonable belief of third parties
Actions of Corporation Create Belief (A):
Corporation’s actions must hold out the officer as having authority
Third party’s belief must result from these actions
Additional mnemonic for Apparent Authority: “RCB” (Reasonable Corporate Belief)

R - Reasonable belief by third party
C - Corporate actions
B - Belief results from those actions

When analyzing fact patterns, consider:

What is the source of the officer’s actual authority (bylaws or board)?
Is there a question of apparent authority?
Did the third party reasonably believe the officer had authority?
Did the corporation’s actions contribute to this belief?
This mnemonic and summary should help you remember the key elements of officer authority in corporations. Remember that there are two main ways an officer can have authority to bind the corporation: actual authority based on bylaws or board decisions, and apparent authority based on reasonable belief resulting from corporate actions.

The distinction between actual and apparent authority is crucial. Actual authority is internal and based on the corporation’s formal structure, while apparent authority is external and based on how the corporation presents its officers to third parties. Both can result in binding the corporation, but the requirements and implications may differ.

Question 36

Fiduciary Duties Owed by Members/Managers of an LLC

Answer 36

Members of Member-Managed LLCs owe the duty of care and duty of loyalty to both the LLC and other members.

A Member’s duty of care requires he or she act:

with the care that a person in a like position would reasonably exercise under the circumstances; and
with a reasonable belief to be acting in the best interests of the LLC.
A Member’s duty of loyalty requires that he or she:

account for any property, profit, or benefit derived from the LLC’s business/property;
refrain from having an adverse interest when dealing with the LLC (unless the transaction is fair); and
refrain from competing with the LLC before dissolution.
In Manager-Managed LLCs, the managers owe fiduciary duties but the members do not.

Under the RULLCA, the LLC Operating Agreement may, so long as it is not manifestly unreasonable,

restrict or eliminate the duty of loyalty;
set forth activities that do not violate the duty of loyalty;
alter the duty of care (but it cannot authorize intentional misconduct or a knowing violation of law);
alter or eliminate any other fiduciary duty; and
set forth standards to measure the duty of good faith and fair dealing.
Summary of Fiduciary Duties in LLCs:

Mnemonic: “CAMEL” (Care And loyalty for Members, Exceptions in LLCs)

C - Care duty for members
A - Account for benefits (loyalty)
M - Managers in manager-managed LLCs
E - Exceptions allowed by RULLCA
L - Loyalty duty for members

Key Points:

Duties owed in member-managed LLCs
Components of duty of care
Components of duty of loyalty
Differences in manager-managed LLCs
Modifications allowed under RULLCA
Expanded explanation:

Care duty (C):
Reasonable care as a person in a like position
Reasonable belief of acting in LLC’s best interests
Account for benefits (A):
Part of loyalty duty
Account for property, profit, or benefit from LLC
Managers in manager-managed LLCs (M):
Managers owe fiduciary duties
Members do not owe fiduciary duties
Exceptions allowed by RULLCA (E):
Operating agreement can modify duties
Must not be manifestly unreasonable
Loyalty duty (L):
Account for benefits
Avoid adverse interests
Refrain from competition
Additional mnemonic for RULLCA modifications: “LASER” (Loyalty Alterations, Standards, Exceptions in RULLCA)

L - Loyalty duty can be restricted or eliminated
A - Activities not violating loyalty can be specified
S - Standards for good faith can be set
E - Exceptions to care duty (no intentional misconduct)
R - Restrict or eliminate other fiduciary duties

When analyzing fact patterns, consider:

Is it a member-managed or manager-managed LLC?
What specific actions are at issue (care, loyalty, or both)?
Has the operating agreement modified any fiduciary duties?
Are any modifications “manifestly unreasonable”?
This mnemonic and summary should help you remember the key elements of fiduciary duties in LLCs. Remember that the default rules can be significantly modified by the operating agreement, subject to the “manifestly unreasonable” standard. The distinction between member-managed and manager-managed LLCs is also crucial in determining who owes fiduciary duties.

Question 37

Ultra Vires Rule

Answer 37

Ultra Vires Rule
Rule: Actions beyond the scope of a corporation’s articles of incorporation or permitted activities are ultra vires.
Elements: (1) Corporate action, (2) Outside scope of articles/permitted activities
Mnemonic: “CASO” - Corporate Action, Scope Outside

Question 38

Limited Liability

Answer 38

Limited Liability
Rule: Shareholders and managers are generally not personally liable for corporate debts.
Elements: (1) Valid corporation, (2) Proper corporate formalities maintained
Mnemonic: “VCPF” - Valid Corporation, Proper Formalities

Question 38

Consideration for Stock

Answer 38

Consideration for Stock
Rule: Board’s valuation of consideration is conclusive if made in good faith.
Elements: (1) Board valuation, (2) Good faith
Mnemonic: “BVGF” - Board Valuation, Good Faith

Question 39

Watered Stock

Answer 39

Watered Stock
Rule: Issuing stock for less than par value creates liability for the difference.
Elements: (1) Stock issued, (2) Consideration less than par value
Mnemonic: “SILP” - Stock Issued, Less than Par

Question 40

Subscription Agreements

Answer 40

Subscription Agreements
Rule: Stock subscriptions are generally revocable until the corporation is formed.
Elements: (1) Subscription agreement, (2) Pre-incorporation
Mnemonic: “SAPI” - Subscription Agreement, Pre-Incorporation

Question 41

Meetings

Answer 41

Meetings
Rule: Board meetings are required unless all directors consent in writing to act without a meeting.
Elements: (1) Board action, (2) Meeting or unanimous written consent
Mnemonic: “BAMW” - Board Action, Meeting or Writing

Question 42

Inspection Rights

Answer 42

Inspection Rights
Rule: Shareholders have the right to inspect corporate books and records for a proper purpose.
Elements: (1) Shareholder status, (2) Proper purpose, (3) Reasonable notice
Mnemonic: “SPR” - Shareholder, Proper purpose, Reasonable notice

Question 43

Voting Rights

Answer 43

Voting Rights
Rule: Shareholders elect directors and vote on major corporate decisions.
Elements: (1) Shareholder status, (2) Record date, (3) Proper notice
Mnemonic: “SRN” - Shareholder, Record date, Notice

Question 44

Mergers

Answer 44

Mergers
Rule: Mergers require approval by directors and shareholders of both corporations.
Elements: (1) Director approval, (2) Shareholder approval, (3) Filing with state
Mnemonic: “DSF” - Directors, Shareholders, Filing

Question 45

Sale of Assets

Answer 45

Sale of Assets
Rule: Sale of all or substantially all corporate assets requires director and shareholder approval.
Elements: (1) Substantial asset sale, (2) Director approval, (3) Shareholder approval
Mnemonic: “SAD” - Substantial Assets, Director approval, shareholder approval

Question 46

Overall Mnemonic for Corporate Law:
“FIRM DOGS”

Answer 46

Overall Mnemonic for Corporate Law:
“FIRM DOGS”
F - Formation and piercing the veil
I - Issuance of stock
R - Rights of shareholders
M - Meetings and management

D - Duties of directors and officers
O - Organizational changes (mergers, dissolutions)
G - Governance (voting, inspection rights)
S - Suits (derivative and direct)