CORPS & LLCS

Question 1

Directors

Answer 1

Directors make decisions for corporation, unless shareholders’ agreement provides otherwise and/or powers limited by Articles of Incorporation. Directors can only act if quorum present - majority of directors necessary to make quorum. Quorum must be present at time vote is taken, directors subsequently leaving breaks quorum and then directors CANNOT vote/act. Notice only required for special meeting.

Question 2

If conflict between bylaws and articles of incorporation

Answer 2

If conflict between bylaws and articles of incorporation, the articles of incorporation govern.

Question 3

Corporation is formed when

Answer 3

Corporation is formed when articles of incorporation are filed with secretary of state.

Question 4

K entered into prior to incorporation

Answer 4

Corporation not generally liable for contracts entered into prior to incorporation unless corporation expressly or impliedly adopts contract.

Question 5

Promoter Liability

Answer 5

Promoter acts on behalf of a corporation that is yet to be formed. Promoter personally liable for any K entered into on behalf of the corporation unless there is a novation or the promotor is able to obtain indemnity from corporation.

Question 6

Business-Judgment Rule

Answer 6

In suits alleging that a director/officer violated duty of care owed to corporation, courts will apply business judgment rule. Under rule, court will NOT second guess decisions of director/officer so long as decisions made:
(1) in good faith;
(2) with care an ordinarily prudent person in like position would exercise under similar circumstances; AND
(3) in manner director/officer reasonable believes to be in best interests of corporation.
If director/officer breaches duty of care, may be held personally liable for damages.

Question 7

Duty of Care

Answer 7

Directors/officers owe corporation fiduciary duty of care which includes:
(1) duty to take reasonable steps to monitor corporation’s management;
(2) duty to be satisfied that proposals are in corporation’s best interests;
(3) duty to disclose material information to board; AND
(4) duty to make reasonably informed decisions.

Question 8

Duty of Loyalty - Generally

Answer 8

Directors/officers have duty to avoid implicating their personal conflicting interests in making business decisions for corporation.

Question 9

Duty of Loyalty - When director/officer has conflicting interest

Answer 9

Duty of loyalty arises when:
(1) director on both sides of transaction and has material financial interest in K as well as knowledge of interest;
(2) competes with corporation; OR
(3) usurps corporate opportunity.

Question 10

Defenses to Liability for Breach of Duty of Loyalty

Answer 10

The MBCA includes 3 safe harbors that may protect director who breaches duty of loyalty: (1) approval by disinterested directors (if all relevant info disclosed); (2) approval by disinterested shareholders, or (3) if transaction judged to be fair at time entered into.

Question 11

Waiver of Duty in an LLC

Answer 11

LLC operating agreement may waive duty of loyalty (e.g, allow members to open competing businesses) so long as it’s not manifestly unreasonable.

Question 12

Voting

Answer 12

In order for resolution to pass, needs to be a quorum present, and more votes must be cast in favor of resolution than against it.

Question 13

Voting by Proxy

Answer 13

Vote by proxy allows shareholder to vote without physically attending shareholder’s meeting by authorizing another person to vote shares on their behalf. Valid proxy must exist in form of verifiable electronic transmission or signed written appointment form. Proxy freely revocable by shareholder UNLESS recipient of proxy has economic interest in shares.

Question 14

Exception to Voting by Proxy

Answer 14

A proxy isn’t revocable if explicitly states irrevocable and is coupled with an interest (e.g, sale of shares). Many states say proxy valid for 11 months unless otherwise stated.

Question 15

Lawsuits by Shareholders Against Corporation

Answer 15

Shareholder may file action to establish that acts of directors illegal, fraudulent, or willfully unfair and oppressive to either corporation or shareholder. Whether suit appropriately brought as direct or derivative action depends on inquiry.

Question 16

Direct Suits

Answer 16

Direct suit is lawsuit brought by shareholder to enforce OWN rights. Shareholder must prove actual injury that’s NOT solely result of injury suffered by corporation. If direct claim successful, proceeds go to shareholder.

Question 17

Derivative Suits

Answer 17

Derivative suit appropriate when injury caused to corporation and shareholder trying to enforce corporation’s rights (also applies to LLCs)

Question 18

Filing Derivative Lawsuit - Extra Requirements

Answer 18

Shareholder may not commence/maintain derivate suit unless 3 requirements met (SAD):
(1) standing to bring lawsuit;
(2) adequacy (shareholder represents interests of corporation); &
(3) demand (generally, shareholder should file written demand and wait 90d before filing suit unless irreparable injury would result or demand would be futile).

Any recovery goes to corporation. Derivative lawsuit can be dismissed with court approval if not in best interest of corporation to continue it.

Question 19

Lawsuits against Shareholders - Piercing Corporate Veil

Answer 19

Generally, shareholders of corporation NOT personally liable for debts of corporation. However, exception to rule is doctrine of piercing corporate veil.
Courts will allow creditor to pierce corporate veil and hold shareholder personally liable for debts of corporation when:
(1) shareholder dominated corporation to extent corporation may be consider shareholder’s alter ego;
(2) shareholder failed to follow corporate formalities;
(3) corporation was undercapitalized; OR
(4) fraud or illegality present.

Once corporate veil pierced, courts generally hold ALL shareholders liable. However, some courts don’t extend liability to passive investors.

Question 20

Shareholder’s Right to Inspect Books & Records

Answer 20

Shareholder possesses right to inspect corporate books/records so long as purpose for inspection proper. To be proper, purpose for inspection must be reasonably related to person’s interest as shareholder. But shareholder may inspect articles of incorporation & bylaws without providing proper purpose.

Question 21

LLCs - Formation, Rights, & Duties

Answer 21

Articles of organization must be filed to create LLC. Members of LLC have fiduciary duties. Members of LLC in a member-managed LLC are treated as agents of LLC (with actual & apparent authority to bind LLC in ordinary affairs)

Question 22

LLCs - Dissociation

Answer 22

If member leaves, then leads to disassociation of that member, but does not lead to winding up/dissolution unless members unanimously agree to dissolve LLC.

Question 23

LLCs - Liability

Answer 23

Generally, individual members not liable for losses. They’re liable if court decides to pierce the LLC veil or if proper procedures for dissolution and winding up have not been followed. Creditors may enforce claims against each of LLC members - however, member’s total liability may not exceed total value of assets distributed to member in dissolution.