Corps Flashcards
The duty of care:
In the context of Corporations and LLCS, the duty of care creates a presumption that in making a business decision, the directors acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company.
This is the business-judgment rule. Directors must be informed to an extent that they reasonably believe is appropriate. They are entitled to rely on information, opinions, reports, or statements of corporate officers, legal counsel, public accountants, etc., in making decisions.
The duty of loyalty:
The most common issue when a duty of loyalty problem arises is that a director is on both sides of a transaction. Oftentimes, the duty of loyalty is tested in combination with a duty of care issue. For example, a director is on the board of ABC, Inc. The director also owns XYZ, Inc. The director convinces the board that ABC should enter into a contract with XYZ. The ABC board talks it over for 10 minutes, even though it is a major and expensive contract, and all board members, including the interested director, vote to approve the contract. The director has likely breached his duty of loyalty (unless he can show it was a fair contract) since the director is on “both sides” of the deal—he is voting on ABC’s board, and he owns XYZ. Further, the board likely breached their duty of care if they only talked it over for 10 minutes.
Shareholder lawsuits-Direct
A direct suit is appropriate when the wrong done amounts to a breach of duty owed to the shareholder personally.
In a direct suit, the shareholder is not bringing a suit on behalf of the corporation. Instead, they are bringing the suit on behalf of themselves!
Examples of when a direct suit is appropriate are when a shareholder is denied preemptive rights, is denied payment of a dividend, or is bringing a suit for oppression in a close corporation. The key is that these claims are all personal to the shareholder.
Shareholder lawsuits-Derivative
A derivative suit is appropriate when the injury is caused to the corporation and the shareholder is trying to enforce the corporation’s rights. The shareholder can do this because the shareholder is an owner of the corporation, so the shareholder has standing to bring such a suit to enforce the corporation’s rights.
Filing a derivative suit has the following requirements (mnemonic = SAD): (1) the shareholder needs standing to bring a lawsuit (it owns stock in the corporation), (2) adequacy (the shareholder represents the interests of the corporation), and (3) demand (generally, the shareholder should file a written demand and wait 90 days before filing a suit unless irreparable injury would result or a demand would be futile).
An example of when a derivative suit is appropriate is if the board is making a decision that hurts the corporation. Derivative suits are tested more frequently on the MEE than direct suits.
Piercing the LLC or corporate veil:
Generally, a plaintiff must show that shareholders of the corporation or members of an LLC abused the privilege of incorporating, and fairness requires holding them liable.
The plaintiff can pierce the veil if it can show undercapitalization of the business, failing to follow formalities, commingling of assets, etc.
Directors manage:
the corporation!
Thus, they meet regularly. Directors must vote responsibly, so they cannot vote by proxy or voting agreement. (Their judgment should not be unfairly affected by a proxy or voting agreement!).
The business-judgment rule applies, and directors are presumed to act reasonably.
Shareholders own:
The corporation!
Because they are merely owners, shareholders do not meet as often as directors but are entitled to annual meetings.
Shareholders must receive notice for meetings.
Shareholders can vote by proxy or agreement because they are not the ones managing the corporation.
Officers are agents:
The corporation!
Officers are the president, secretary, treasurer, etc. They have the power to enter into transactions on behalf of the corporation. In an Agency combo MEE question, an officer likely has actual or apparent authority to enter into a contract on behalf of the corporation.
A corporation must be:
incorporated (i.e., articles of incorporation must be filed with the state) in order for a valid corporation to be formed.
LLCs must also file
articles of organization with the state. Members of an LLC are similar to officers in that they may have actual or apparent authority to bind the LLC.
Articles of incorporation:
A fancy word for the corporation’s contract with the state. The articles include basic information like the corporation’s name, address, names of incorporators, etc. Additional provisions can be added. Because the corporation files these with the state, they are public.
Dividend
A fancy word for the corporation’s profits. Shareholders buy a corporation’s shares to receive profits.
Subscription
A fancy word for an offer to buy a certain number of a corporation’s shares. In general, the offer must be in a signed writing and state a price.
Promoter
This is someone who “promotes” a corporation before it is even formed by entering into pre-incorporation contracts on behalf of the corporation.
For example, you and I want to form a corporation to sell coffee. We send in our articles of incorporation to the state (but it takes a while to get them back) and we are eager to get started on our very lucrative business idea. Thus, I personally sign a lease with a landlord agreeing to rent space for one year. I sign my name, “John Doe, on behalf of Coffee, Inc., a corporation to be formed.” I am “promoting” the corporation by entering into leases on its behalf before it is even in existence. Thus, I am the promoter and I am liable on the lease.
Ratify
A fancy word for approving the acts of another—often, those of the promoter. In the above example, the corporation is liable if it ratifies or approves of the lease. The corporation could expressly ratify the lease by signing its name to it or impliedly ratify the lease (e.g., by moving in and acting as if the corporation is part of the lease agreement!).
