Corporations/Partnerships Flashcards
Authorizing dividends
Power to authorize dividends rests with the BOD.
BOD may not issue dividend if: (1) corporation is insolvent, or (2) issuing dividends would render the corporation insolvent
Shareholder generally CANNOT compel BOD to issue dividends. But if BOD acts abused discretion in failing to issue dividend, court may order board to authorize a dividend if shareholder can prove (1) existence of funds available for dividend, (2) bad faith on part of directors in their refusal to pay.
Valid Board Action
For a BOD to take a valid action at a meeting, there must be a quorum of directors present. A quorum may be a majority or any other number specified in the bylaws. Further, valid actions must be supported by a vote of at least a majority of the quorum. Each director has equal voting power.
Quorum - To be counted for quorum purposes, director must be PRESENT at the time the vote is taken
Analyze QUORUM and MAJORITY separately
Dissent at BOD meeting
To avoid potential liability for a BOD action, a director must demonstrate dissent in one of three ways:
(1) vote no on the action
(2) file written dissent before meeting is adjourned
(3) mail written dissent to corporation’s secretary immediately following meeting
Director liability
Directors who vote to authorize unlawful dividends in breach of fiduciary duty are PERSONALLY LIABLE, JOINTLY AND SEVERALLY, to the corporation
BOD meeting protocol
Notice only needed for special meetings, not regular meetings
Directors CANNOT vote by proxy or enter into voting agreements (actually have to be present)
Shareholder Right of Inspection
Shareholders generally may inspect main records of the corporation (Articles, bylaws, or shareholder meeting notes).
But need proper purpose to inspect certain other records, including corporation financial statements and BOD meeting minutes.
Requirements: Written notice + proper purpose (analyze individually)
PROPER PURPOSE = one that related to shareholder’s interest in corporation
WRITTEN NOTICE - must give 5-days notice
Shareholder Litigation - Direct Action
A direct action is an action to enforce shareholder rights. A shareholder may sue the corporation for breach of a fiduciary duty owed to the shareholder by a director or an officer.
Shareholder is suing in his or her own name and damages go to the shareholder
Shareholder Litigation - Derivative Action
In a derivative action, a shareholder is suing on behalf of the corporation for a harm suffered by the corporation. These can only be brought atleast 90 days after making a demand on the BOD (but such demand not necessary if it would be futile)
Recovery generally goes to the corporation
Standing - Shareholder must hold shares when harm arose and throughout litigation + must adequately represent interests of corporation
Directors - Selection + Removal
Chosen by shareholders at annual shareholder meeting; can only be removed for breach of fiduciary duty (common law) or for any cause (modern trend)
BOD Fiduciary Duties (Duty of Care + Duty of Loyalty)
Duty of Care - must act as a RPP in similar or same circumstances (but special skills are expected to be used)
Reliance Defense - BOD is entitled to rely on performance of other officers, employees, and outside experts.
ALWAYS FOLLOW UP WITH BUSINESS JUDGMENT RULE
Business Judgment Rule (always pair with Duty of Care)
Rebuttable presumption that a director reasonably believed his actions were in the best interest of the
corporation.
Rule - In the absence of FRAUD, ILLEGALITY, or SELF-DEALING, a court will not disturb any good-faith business decision (shields director/officer from liability)
How to overcome -
Failure to act as reasonable director
Failure to act in good faith
Failure to exercise reasonable diligence
Duty of Loyalty (2nd Duty owed)
The duty of loyalty requires a director to act in a manner that the director reasonably believes is in the best interest of the corporation
Two main violations: SELF-DEALING and USURPING BUSINESS OPPORTUNITIES
Self-dealing (Violation of Duty of Loyalty)
When a director or officer engages in a corporate transaction for his or her own benefit (or the benefit of a relative). This includes engaging in transactions with other corporations or partnerships the director, officer, or one of their family members is part of.
Safe Harbor Rule - safe-dealing transactions may be upheld (and director/officer may be insulated from liability) when transaction is DISCLOSED to and RATIFIED by
- (1) majority of disinterested shareholders
- (2) majority of disinterested board of directors, OR
- (3) Transaction is fair to the corporation at the time of deal
If self-dealing transaction is not protected by safe harbor rule - it can be rescinded and corporation can seek damages from director/officer who made transaction
Usurpation of Corporate Opportunity (Violation of Duty of Loyalty)
Occurs when director or officer usurps a business opportunity and takes the opportunity for himself
First explain why opportunity is a corporate opportunity (in corporation’s line of business)
If an opportunity is a corporate opportunity, director must first present it to corporation. Only after corporation declines can officer/director take it for himself.
Contractual Liability - Partnership
A partnership may be liable for contractual agreements entered into by agents of the partnership (partners) if those agents act with actual or apparent authority.
