Corps Flashcards
Explain the Duty owed by a controlling shareholder.
A controlling shareholder, such as a parent corporation, generally does not owe fiduciary duties to the corporation or other shareholders. However, decisions by a majority shareholder or control group may be reviewable by a court for good faith and fair dealing toward the minority shareholders under the court’s inherent equity power. Business dealings between a controlling shareholder and the controlled corporation that do not involve self-dealing are analyzed using the business judgment standard. The business judgment rule is a rebuttable presumption that the controlling shareholder reasonably believed that his actions were in the best interests of the corporation. A typical decision protected by the business judgment rule includes whether to declare a dividend and the amount of any dividend.
Explain the rule for if a parent corporation causes its subsidiary to participate in a business transaction that prefers the parent at the expense of the subsidiary,
If a parent corporation causes its subsidiary to participate in a business transaction that prefers the parent at the expense of the subsidiary, it can involve self-dealing and a breach of loyalty. A parent corporation that engages in a conflict-of-interest transaction with its own corporation, also known as “self-dealing,” has violated the duty of loyalty unless the transaction is protected under the safe-harbor rule. The business judgment rule does not apply in a conflict-of-interest transaction. There are three safe harbors by which a conflict-of-interest transaction may enjoy protection: (i) disclosure of all material facts to, and approval by a majority of, the board of directors without a conflicting interest; (ii) disclosure of all material facts to, and approval by a majority of, the votes entitled to be cast by the shareholders without a conflicting interest; and (iii) fairness of the transaction to the corporation at the time of commencement. The fairness test looks at the substance and procedure of the transaction. With regard to a parent corporation engaged in self-dealing, the main concern under the fairness test is whether the benefit is comparable to what might have been obtained in an arm’s length transaction. Procedural fairness is generally not at issue unless there has been a change in control.
Explain the rule on usurpation
The MBCA does not directly address the usurpation of corporate opportunity by a parent corporation; however, a director’s duty can be applied in this situation. A director may violate his duty of loyalty by usurping a corporate opportunity rather than first offering the opportunity to the corporation. In determining whether the opportunity is one that must first be offered to the corporation, courts have applied the “interest or expectancy” test or the “line of business” test. Under the “interest or expectancy” test, the key is whether the corporation has an existing interest or an expectancy arising from an existing right in the opportunity. An expectancy can also exist when the corporation is actively seeking a similar opportunity. Under the broader “line of business” test, the key is whether the opportunity is within the corporation’s current or prospective line of business. Whether an opportunity satisfies this test frequently turns on how expansively the corporation’s line of business is characterized.
What notice do directors need for a special meeting?
How do directors waive objections to notice?
Directors are entitled to notice of a special meeting. Unless the articles of incorporation or bylaws provide otherwise, notice must be provided at least two days prior to the meeting and should state the date, time, and place of the meeting. The notice need not describe the purpose of the special meeting.
Directors are entitled to notice of a special meeting, but a director’s attendance waives notice of that meeting unless the director promptly objects to lack of notice.
Explain how you determine what type of LLC an LLC is?
An LLC can be member-managed (direct management of the LLC by its members) or manager-managed (centralized management of the LLC by one or more managers who need not be members). Unless the operating agreement or certificate of incorporation provide otherwise, the default management arrangement is member-management.
Explain the level of authority members of an LLC have to bind the LLC.
What’s the difference between the authority held by members of a manager-managed LLC and a member-managed LLC?
Members of a manager-managed LLC do not have authority to bind the LLC, members of a member-managed LLC have broad authority to bind the LLC, similar to that of a partner in a general partnership. Each member has equal rights with respect to the management of the LLC. However, an act outside the ordinary course of the activities of the company may be undertaken only with the consent of all members. A principal is subject to liability on a contract that the agent enters into on the principal’s behalf if the agent has that authority, whether actual or apparent. Actual authority can be expressly created or implied by the agent’s position. Apparent authority is based on a third party’s reasonable reliance on the principal’s manifestation that the agent has authority to act, such as through the agent’s position in a business.
Explain the rule regarding an LLC’s dissaosiation.
An LLC may dissolve upon the occurrence of various events, including consent of all members, passage of 90 days without members, by court order, or by the happening of a dissolution-causing event per the operating agreement. Dissociation alone does not cause dissolution. A member can withdraw or dissociate at any time and without reason, even if doing so violates the operating agreement, by providing notice to the LLC. Written notice is not required under the ULLCA. Dissociation does not discharge the member’s interest or liability and does not necessarily trigger dissolution and winding up. The dissociated member relinquishes his right to participate in the LLC and is entitled to distributions only if the continuing members receive payment.
