Corps Flashcards
Duty Introduction
A director of a corporation has a duty of loyalty and a duty of care towards the corporation. These duties require that directors and officers undertake actions in good faith, in the honest belief that the action was in the best interests of the corporation, with “the care that a person in a like position would reasonably believe appropriate under similar circumstances” in “becoming informed in connection with their decision-making function.”
Duty of Loyalty
A director must act in good faith and with a reasonable belief that what he does is
in the corporation’s best interest. An LLC operating agreement may waive the duty of loyalty so long as it is not “manifestly unreasonable.”
The business-judgment rule presumption does not apply if there is a duty of loyalty issue. A duty of loyalty issue arises in three ways:
▪Director is on both sides of a transaction: a director has a material financial interest in a contract, as well as knowledge of that interest, yet still votes to approve the contract.
▪ Competes with corporation: a director may not compete with his corporation.
▪ Corporate opportunity: a corporate officer may not usurp a corporate opportunity.
Defenses to Liability for breach of duty of loyalty
The MBCA includes three safe harbors that may protect a director who breaches his duty of
loyalty: (1) approval by disinterested and fully informed directors, (2)
approval by disinterested shareholders and fully informed shareholders, or (3) if the transaction is judged to be fair to the
corporation at the time it was entered into.
The director has the burden of proving that one of these safe harbors applies. Doing so successfully grants the director the protection of the BJR.
Duty of Care, informed
Under the MBCA, a director is called on to exercise “the care that a person in a like position would reasonably believe appropriate under similar circumstances” in “becoming informed in connection with their decision-making function.”
Directors must be informed to an extent that they
reasonably believe is appropriate. They are entitled to rely upon information, opinions, reports, or statements of corporate officers, legal counsel, public accountants, etc., in making a decision.
Duty of Care
A party claiming that a director has breached her duty of care has the burden of proof and must rebut the business judgment presumption.
Under the business judgment rule, “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.”
Damages for Breach of Duty of Care
For the shareholder to recover money damages based on a claim that the directors breached their duty of care, the shareholder would have to prove that the corporation was harmed by a sales price that was below market and that the sales price was proximately caused by the
directors’ failure to become adequately informed.
A director may be liable for harm to the corporation from a board decision where it is proven that the director was “not
informed to an extent the director reasonably believed appropriate in the circumstances.”
Entire Fairness for Breach of Duty of Loyalty
The directors have the burden to show that the transaction as a whole was fair in terms of “fair
price” and “fair dealing.”
This means courts will inquire into (1) whether the transaction price
was comparable to what might have been obtained in an arm’s-length transaction, given the consideration received by the corporation, and (2) whether the process followed by the directors in reaching their decision was appropriate
LLC Default Rule for Management
The default rule is that an LLC is member-managed unless the
certificate of organization or the operating agreement specifies otherwise
LLC Formation
Generally, an LLC is formed when
the certificate of organization (a.k.a. articles of organization) is filed with the Secretary of State
and the LLC has at least one member.
Agency and Member-Managed LLC
Under RULLCA, each member in a member-managed LLC has equal rights in the management and conduct of the company’s activities. Thus, consistent
with general agency law, a member of a member-managed LLC has the authority—both actual and apparent—to bind the LLC, much as a partner in a general partnership.
Whether there is actual authority for a non-ordinary transaction depends on the operating agreement of the LLC, which governs “relations . . . between the members and the limited liability company” and “the activities of the company.”
In a member-managed LLC,
matters “outside the ordinary course of the activities of the company” require the consent of all members.
LLC and Dissociation/Dissolution
Under RULLCA, the express will of a member to withdraw results in “dissociation.” Dissociation does not result in dissolution of the LLC. Dissolution under
RULLCA requires the consent of all the members.
A member’s dissociation results in (1) loss of his rights to participate in the LLC and (2) rights to distributions only if and when made by the continuing members.
Internal Affairs Doctrine
Internal affairs of the corporation, such as the conduct of shareholder meetings and election of directors, are subject to the corporate law of the state of incorporation.
By-Laws Amendments and Director Elections
The MBCA states that the bylaws “may contain any provision that is not inconsistent with law or the articles of incorporation,” and that shareholders may amend the corporation’s bylaws. Although shareholders are generally limited to adopting precatory resolutions that recommend or encourage board action, this limitation does not apply when shareholders have specific authority to take binding action on their own—such as to amend the bylaws.
The board shares this power with the shareholders, unless (1) the corporation’s articles “reserve that power exclusively to the shareholders” or (2) “the shareholders in amending, repealing, or adopting a bylaw expressly provide that the board of directors may not amend, repeal, or reinstate that bylaw.”
In addition, the MBCA clarifies that bylaws can define the processes and procedures for director elections.
Who has more power over by-laws-board or shareholders?
Under the MBCA, shareholders have the power to amend the bylaws. The board also shares this power with the shareholders, unless (1) the corporation’s articles “reserve that power exclusively to the shareholders” or (2) “the shareholders in amending, repealing, or adopting a bylaw expressly provide that the board of directors may not amend, repeal, or reinstate that bylaw.”
Shareholder-approved bylaw provisions can amend or repeal existing bylaw provisions, whether originally approved by the board or by shareholders. Further, a shareholder-approved bylaw generally can limit the power of the board to later
amend or repeal it.
Requirements for Bringing Derivative Suits
A shareholder is entitled to bring lawsuit as a derivative action on behalf of the corporation against a third party or the directors. A derivative suit is appropriate when the injury is caused to the corporation and a shareholder is trying to enforce the corporation’s rights.
requirements (SAD):
(1) standing to bring a lawsuit,
(2) adequacy (the shareholder represents the interests of the corporation), and
(3) demand
Standing requires the shareholder to be a contemporaneous owner at the time of the alleged act or omission.
A derivative suit can be dismissed with court approval if it’s not in the best interest of the corporation to continue it.
Demand
Written demand must be made on corporation to bring a derivative suit.
The demand permits the board to investigate the situation identified by the shareholder and take suitable action.
Shareholder should file a written demand and wait 90 days before filing suit
unless “irreparable injury to the corporation would result by waiting for the expiration of the 90-day period.” or demand would be futile
Derivative versus direct
The MBCA defines a “derivative proceeding” as one brought “in the right of a domestic corporation.”
Thus, the answer to how the investor’s suit should be characterized turns on what rights the investor seeks
to vindicate.
If the investor frames its claim as one of fiduciary breach by directors—for example, for failing to become adequately informed about voting procedures or for seeking to entrench themselves in office by manipulating the voting structure to avoid a shareholder insurgency — then the suit is “derivative” and the investor must make a demand on the board. If, however, the investor frames its claim as one to vindicate shareholder rights, the suit is direct and no demand is required.
For many courts, the direct-derivative question turns on who is injured and who is to receive the relief sought by the plaintiff-shareholders.
Board of Directors Composition and quorum
The board of directors is the corporate body in charge of overseeing the management of the corporation and taking strategic decisions for its business. The board of directors may be comprised of any number of individuals, as appointed by the shareholders meeting.
The board of directors may have special or regular meetings. In order to take valid decisions, a minimum quorum must be met during such meetings. Unless provided otherwise by the articles of incorporation or the bylaws, a majority of the directors being present in the meeting is sufficient.
Under the MBCA, the presence requirement is met if the directors are able to talk and hear one another. Once the quorum requirements are met, decisions are generally valid by a majority vote of the directors, unless the governing documents of the corporation provide otherwise.
Incorporation
The articles of incorporation are filed with the state, and, if in conflict with bylaws,
the articles control. A corporation is not generally liable for a contract entered into prior to incorporation unless it expressly or impliedly adopts (ratifies) the contract. The promoter (person entering the contract on behalf of the to be formed corporation) is liable.
Directors, generally
Directors manage the corporation and (like shareholders) act as a body by voting.
Directors may exercise all corporate powers that are not limited by the articles of incorporation or a shareholders’ agreement, including the power to form contracts and acquire liabilities.
Shareholders hire and fire directors. Directors cannot vote by proxy or agreement.
A quorum (majority of directors) needs to be present for a vote to take place, but unlike shareholders, directors can “break quorum” by leaving.
Notice is required only for special meetings.
Shareholders, generally
Shareholders are only owners and do not manage the corporation. Thus, they
generally just have annual meetings. Written notice of meetings is required 10−60 days prior and must state the time, place, and purpose of the meeting.
Shareholders can vote by proxy (have someone vote their shares for them) or by voting agreement.
Generally, a quorum (majority of all
outstanding shares required to vote) must be present to hold a vote.
Voting by Proxy
A shareholder may vote by proxy. A shareholder can appoint a proxy in writing by signing an appointment form or making a verifiable electronic transmission. A proxy is generally revocable (even if it states it’s irrevocable), and any action inconsistent with the grant of a proxy works to revoke it. Thus, when or more revocable proxies are given, the last given proxy revokes all previous.
▪ Exception: A proxy is not revocable if it explicitly states it’s irrevocable and is coupled with an interest (e.g., sale of shares). Many states say a proxy is valid for 11 months unless otherwise stated.
Piercing the Veil (only allowed in close corporations and LLCs)
Generally, the law treats a corporation as an entity separate from its shareholders, even where one individual owns all the corporate stock. In some (very limited) circumstances, courts will disregard the LLC form and hold a shareholder personally liable for corporate debt.
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.
One generally needs to show undercapitalization of the business, failing to follow formalities,
commingling of assets, confusion of business affairs, or deception of creditors. Only the
shareholders or members who participated in the wrong are personally liable.
Right to Inspect
A shareholder has a right to inspect corporate books and records as long as his demand is made in good faith and for a proper purpose. A proper purpose is a purpose reasonably related to a person’s interest as a shareholder (e.g., shareholder articulates a purpose to address “economic risks” to the corporation). A shareholder must state (1) his purpose, (2) the records he desires to inspect, and (3) that the records are directly connected to his purpose.
