LA BAR EXAM NON-CODE TOPIC 1 BUSINESS ENTITIES (CORPORATIONS)

Question 1

PART ONE: Characteristics and Formation of Corporations – I. Corporation Vs. Other Business Entities - General Characteristics of a Corporation

Answer 1

A corporation is a legal entity distinct from its owners and may be created only by filing certain documents with the state.

Limited Liability for Owners, Directors, and Officers: The owners of a corporation (called “shareholders”) generally are not personally liable for the obligations of the corporation; neither are the corporation’s directors or officers.
Generally, only the corporation itself can be held liable for corporate obligations. The owners risk only the investment that they make in the business to purchase their ownership interests (“shares”).

Generally, the right to manage a corporation is not spread out among the shareholders, but rather is centralized in a board of directors, who usually delegate day-to-day management duties to officers.

Generally, ownership of a corporation is freely transferable.

A corporation may exist perpetually and generally is not affected by changes in ownership (i.e., sale of shares).

Question 2

PART ONE: Characteristics and Formation of Corporations – I. Corporation Vs. Other Business Entities - Comparison with Sole Proprietorship

Answer 2

In a sole proprietorship, one person owns all of the assets of the business. There is no business entity distinct from the owner. The owner is personally liable for the business’s obliga-tions, and the business “entity” cannot continue beyond the life of the owner. Ownership is freely transferable, and all profits and losses from the business flow through directly to the owner.

Question 3

PART ONE: Characteristics and Formation of Corporations – I. Corporation Vs. Other Business Entities - Comparison with Partnership

Answer 3

A partnership is similar to a sole proprietorship except that there are at least two owners of a partnership. Little formality is required to form a partnership (just an intention to carry on as co-owners a business for profit. Partners are personally liable for obligations of the partnership, and management rights generally are spread among the partners. Ownership interests of partners cannot be transferred without the consent of the other partners. Finally, profits and losses of a partnership flow through directly to the partners

Question 4

PART ONE: Characteristics and Formation of Corporations – I. Corporation Vs. Other Business Entities - Comparison with Partnership in Commendam (Limited Partnership)

Answer 4

A partnership in commendam is a partnership that provides for limited liability of some investors (called “limited partners” or “in commendam partners”), but otherwise is similar to other partnerships. A partnership in commendam can be formed only by compliance with the relevant Articles of the Civil Code. There must be at least one general partner, who has full personal liability for partnership debts and has most management rights.

Question 5

PART ONE: Characteristics and Formation of Corporations – I. Corporation Vs. Other Business Entities - Limited Liability Company

Answer 5

The limited liability company (“LLC”) is designed to offer the limited liability of a corporation and the flow-through tax advantages of a partnership. Like a corporation, it may be formed only by filing appropriate documents with the state, but otherwise it is a very flexible business form: owners may choose between centralized management and owner management, free transferability of ownershio or restricted transferability, etc.

Question 6

PART ONE: Characteristics and Formation of Corporations – II. Formation and Status of Corporation - Created Under Statute

Answer 6

Corporations are created by complying with the Louisiana Business Corporation Act (“LBCA”).

Question 7

PART ONE: Characteristics and Formation of Corporations – II. Formation and Status of Corporation - Formation Terminology

Answer 7

A corporation formed in accordance with law is a de jure corporation. If all corporate laws have not been followed, a de facto corporation might result or a corporation might be recognized through estoppel.

Question 8

PART ONE: Characteristics and Formation of Corporations – II. Formation and Status of Corporation - De Jure Corporation

Answer 8

To create a de jure corporation, the incorporators must comply with all applicable statutory requirements. Basically, the incorporators must file articles of incorporation and an affidavit of acceptance of the corporation’s registered agent with the secretary of state. The articles of incorporation must contain the name of the corporation, the number of shares that the corporation is authorized to issue, the name and street address of the corporation’s registered agent, and the name and address of each incorporator. The articles may also include any other provision regarding operation of the corporation that is not inconsistent with law.

Traditionally, corporations have included a statement of business purposes in their articles. Absent such a statement, the LBCA presumes that a corporation is formed to conduct any lawful business and is allowed to undertake any act that is necessary or convenient for carrying on their business purpose, including making charitable donations and lending money to employees, officers, and directors.

In Louisiana, a corporation is given the power to do all things necessary or convenient to effect its purposes, and a corporation may be formed for any lawful purpose. This means that a corporation has authority to do almost anything that is rationally related to a business purpose. Thus, unless
an exam question restricts a corporation’s purposes, you should usually find corporate acts to be within the corporation’s powers.

If a corporation includes a narrow business purpose in its articles, it may not undertake activities unrelated to achieving the stated business purpose. Activities beyond the scope of the stated business purposes are said to be “ultra vires.” Ultra vires acts generally are enforceable, and the ultra vires nature of an act can be raised in only three situations:
1) A shareholder may sue the corporation to enjoin a proposed ultra vires act;
2)
The corporation may sue an officer or director for damages for approving an ultra vires act; and
3)
The state may bring an action to dissolve a corporation for committing an ultra vires act.

Keep in mind that the ultra vires defense is very limited. Therefore, you should not allow a corporation to get out of a contract merely because the contract is outside the scope of the corporation’s stated purposes.

The articles must be submitted to the state, and if they comply with law, the state will file them. Corporate existence begins upon this filing by the state. The filing is conclusive proof of corporate existence.

After the articles are filed, the corporation will have an organizational meeting to elect directors, appoint officers, and adopt bylaws. Bylaws may contain any provision for managing the corporation that is not inconsistent with the articles or law. Generally, bylaws are adopted by directors, but they may be modified or repealed by a majority vote of either the directors or the shareholders.

Question 9

PART ONE: Characteristics and Formation of Corporations – II. Formation and Status of Corporation - Disregard of Corporate Entity (Piercing the Corporate Veil)

Answer 9

Shareholders generally are not personally liable for the debts of the corporation and shareholders’ personal assets may not be taken to satisfy corporation debts. However, shareholders may, under some circumstances, be liable for the corporation’s debts. Courts will not allow the separate corporate entity fiction to shield the shareholders when it would cause injustice or reward fraud. Disregard of the corporate entity to impose personal liability on the shareholders is called “piercing the corporate veil.”
Usually when the veil is pierced, the corporate form is more or less a sham, i.e., merely the alter ego of its shareholders.

Grounds for piercing the corporate veil include:
a. The business has not been conducted in proper corporate form (no shareholder or board meetings, no minutes kept, officers acting outside the scope of their duties, etc.);

b. The assets of the corporation have been treated as the shareholder’s own or commingled with his personal assets, leaving creditors uncertain as to which properties and transactions are those of the corporation;

c. The corporation is undercapitalized, i.e., it was never capitalized with sufficient funds to do its business and meet its reasonably expected risks; and

d.The corporation is thinly capitalized (a similar concept to undercapitalization) where the vast majority of money shareholders put into the corporation has been characterized as debt rather than paid in equity.

Generally, creditors may be allowed to pierce the corporate veil. Courts almost never pierce the veil at the request of a shareholder.

Question 10

PART ONE: Characteristics and Formation of Corporations – III. Capital Stock Structure - Equity Securities (Shares)

Answer 10

Equity securities give their holders an ownership interest in the issuing corporation.

Shares described in the corporation’s articles of incorporation are authorized shares. Those shares that have been sold are issued and outstanding. Those shares that have been reacquired by the corporation through repurchase or redemption are authorized but unissued; but if the articles so provide, the number of authorized shares is reduced by the number of shares repurchased.

Unless a specific exception applies, shares must be represented by a certificate. At a minimum, each share certificate must state on its face all of the following: (i) the name of the issuing corporation and that it is organized under the law of this state; (il) the name of the person to whom it is issued; and (i) the number and class of shares and the designation of the series, if any, the certificate represents. Each share certificate must be signed, either manually or in facsimile, by the president and secretary, or by two officers designated in the bylaws or by the board of directors. Shares need not be represented by a certificate if the issuing corporation is a participant in the Direct Registration System of the Depository Trust & Clearing Corporation or of a similar book-entry system used in the trading of shares of public corporations.

A corporation may choose to issue only one type of shares, giving each shareholder an equal ownership right (in which case the shares are generally called “common shares”).
Alternatively, ownership rights may be varied if the articles provide that the corporation’s stock is to be divided into classes or series within a class
a. Classes and Series Must Be Described in Articles
If shares are to be divided into classes or series within a class, the articles must (i) prescribe the number of shares of each class; (ii) prescribe a distinguishing designation for each class (e.g., “Class A preferred,” “Class B preferred,” etc.); and (ili) either describe the rights, preferences, and limitations of each class or series or provide that the rights, preferences, and limitations of any class or series within a class shall be determined by the board of directors prior to issuance.

Stock subscriptions are promises from subscribers to buy stock in the corporation.
a. Preincorporation Subscription
scribers consent to revocation.
Under the LBCA, preincorporation subscriptions are irrevocable for six months unless otherwise provided in the terms of the subscription agreement or unless all sub-
b. Payment
Unless otherwise provided, payment is upon demand by the board. Demand may not be made in a discriminatory manner. A subscriber who fails to pay may be penalized by sale of the shares or forfeiture of the subscription and any amounts paid thereon, at the corporation’s option.

a. Forms of Consideration
Under the LBCA, shares may be paid for with any tangible or intangible property or benefit to the corporation.

b. Amount
Traditionally, stock could not be issued by a corporation for less than the stock’s stated par value, and the consideration received for par value stock had to be held in a certain account containing at least the aggregate par value of the outstanding par value shares. The LBCA generally does not follow the traditional par value approach and instead allows corporations to issue shares for whatever consideration the directors deem appropriate. Consideration received for the issuance of stock need not be placed in any special account. If the corporation issues stock in exchange for consideration other than cash, the stock is considered fully paid and nonassessable as soon as the corporation receives the consideration for which the board authorized the issuance. Of course, a shareholder who fails to pay the full amount agreed upon can be held liable for any sums remaining unpaid.

Question 11

PART TWO: Intracorporate Parties – IV. Promoters - Promoters Procure Capital and Other Commitments

Answer 11

Before a corporation is formed, promoters procure commitments for capital and other instrumentalities that will be used by the corporation after its formation.

Question 12

PART TWO: Intracorporate Parties – IV. Promoters - Promoters’ Relationship with Each Other

Answer 12

Absent an agreement to the contrary, promoters are joint venturers who occupy a fiduciary relationship with each other. They will breach their fiduciary duty if they secretly pursue personal gain at the expense of their fellow promoters.

Question 13

PART TWO: Intracorporate Parties – IV. Promoters - Promoters’ Relationship with Corporation

Answer 13

A promoter’s fiduciary duty to the corporation is one of fair disclosure and good faith.

Question 14

PART TWO: Intracorporate Parties – IV. Promoters - Promoters’ Relationship with Third Parties-Preincorporation Agreements

Answer 14

RE: Liability -

a. When Promoter is Liable

Unless the contract clearly says otherwise, a promoter is personally liable for a preincorporation contract with a third party if the promoter knew the corporation had not yet come into existence.

Questions often require you to discuss whether a promoter will be liable on a preincorporation contract. If you keep in mind that promoters are forming a corporation, these questions should be fairly easy to answer.

For there to be a valid contract, someone must be bound with the third party. It can’t be the corporation since it does not exist; therefore, the promoter is liable even though she was acting on behalf of the corporation to be formed. (If the agreement expressly relieves the promoter of liability, it will be treated as an offer to the corporation.)

b. When Corporation is Liable

The corporation will be liable on a contract entered into by a promoter on its behalf before incorporation if it ratifies or adopts the contract after coming into existence, either explicitly by directors’ resolution or implicitly by accepting delivery or benefits. The promoter remains personally liable, however, even after the corporation adopts the con-tract, unless the other party discharges him. The corporation can enforce any promoter’s contract which it has adopted against the third party.

c. Liability with Respect to Preincorporation Acquired Immovable Property

Whenever immovable property is acquired by anyone acting on behalf of a corporation that is not yet incorporated, but subsequently does become formally incorporated, the corporate existence will be retroactive to the date of acquisition of that property for the purpose of establishing the corporation’s ownership of the property. But note that such retroactive effect will not prejudice the rights of a third party acquired during the interim period.

Re: Liability for Contracts on Behalf of a Corporation Erroneously Believed to Exist

In some cases, if a promoter enters into a contract on behalf of a not-vet-formed corporation, while erroneously believing that the corporation has come into existence, he mav not be personally liable.

a. De Facto Corporation Doctrine
tion doctrine.
The promoter will not be personally liable if he had made a good faith effort to incorporate and had exercised onlv corporate authority. This is known as the de facto corpora-
b. Corporation b Estoppel Doctrine
In some cases, a court may find that the other party signing the contract may not enforce it against the promoter if that party had relied only on the corporation’s name and assets, and not on the promoter’s name and assets.

Question 15

PART TWO: Intracorporate Parties – V. Shareholders - Shareholder Control Over Management

Answer 15

The power to manage the corporation generally is vested in the directors. Generally, the shareholders have no direct control in management of the corporation’s business. However, the LBCA allows the shareholders to enter into agreements to dispense with the board and vest management power in the shareholders. If the articles do not include such a special provision, shareholders exercise only indirect control of the corporation through their voting power, by which they elect and remove directors, adopt and modify bylaws, and approve fundamental changes in the corporate structure.

If the examiners question you about the power of the shareholders to run the day-to-day affairs of their corporation, unless the corporation’s articles or a shareholder agreement provides otherwise, you should generally respond that the shareholders have no such power; that power is
vested in the board of directors, and the shareholders have the power to elect the board.

Question 16

PART TWO: Intracorporate Parties – V. Shareholders - Shareholders’ Meeting and Voting Power

Answer 16

1. Convening Meetings

a. Annual Meetings
Corporations must hold annual shareholders’ meetings. If no annual shareholders’ meeting is held for a period of 18 months, any shareholder may, by notice to the secretary, demand that the secretary call a meeting to be held at the corporation’s principal office or, if none in this state, at its registered office. The secretary must call the meeting and provide notice of the meeting within 30 days after the notice to the secretary of the shareholder’s demand.
b. Special Meetings
articles or bylaws.
Special meetings may be called by the board of directors, the holders of 1/10 or more of all shares entitled to be cast at the meeting, or other persons so authorized in the

2. Place of Meetings
   Meetings of shareholders may be held within or outside the state.
3. Notice
   Shareholders must be notified of meetings not less than 10 or more than 60 days before the meeting. Notice must state the date, time, and place of the meeting and, for special meetings, the purpose. Notice may be waived in writing or by attendance.
4. Eligibility to Vote
   Shareholders of record on the record date may vote at the meeting. The record date is fixed by the board of directors but may not be more than 70 days before the meeting. If directors do not set a record date, the record date is deemed to be the day the notice of the meeting is mailed to the shareholders. Unless the articles provide otherwise, each share is entitled to one vote.
5. Proxies
   A shareholder may vote her shares in person or by proxy executed in writing. Proxies are valid for 11 months unless they provide otherwise. A proxy is generally revocable by the shareholder and may be revoked by the shareholder attending the meeting to vote himself or by subsequent appointment of another proxy. A proxy will be irrevocable only if it states that it is irrevocable and is coupled with an interest or given as security.
6. Mechanics of Voting
   a. Quorum
   A quorum is usually a majority of outstanding shares entitled to vote, unless the articles require a different number (but note the quorum requirement cannot be made lower than 25% of the shares entitled to vote on a matter). Note also that once a quorum is present, it cannot be broken by withdrawal of shares from the meeting.
   b. Voting-In General
   Absent a contrary provision in the articles, each share is entitled to one vote. The articles may provide for weighted voting or contingent voting. If a quorum is present, shareholders will be deemed to have approved a matter if the votes cast in favor of the matter exceed the votes cast against the matter, unless the articles require a greater proportion. Less than a quorum may adjourn the meeting.

c. Director Elections
Unless the articles provide otherwise, directors are elected by a plurality of the votes cast.
1) Cumulative Voting Optional
Instead of the normal one share, one vote paradigm, the articles may provide for cumulative voting in the election of directors. Under cumulative voting, each shareholder is entitled to a number of votes equal to the number of his voting shares multiplied by the number of directors to be elected. The total number may be divided among the candidates in any manner that the shareholder desires, including casting all for the same candidate.

d. Class Voting on Article Amendments
Whenever an amendment to the articles of incorporation will affect only a particular class of stock, that class has a right to vote on the action even if the class otherwise does not have voting rights.

7. Shareholders May Act Without Meeting by Unanimous Written Consent
   Shareholders may take action without a meeting by the unanimous written consent of all shareholders entitled to vote on the action.

Question 17

PART TWO: Intracorporate Parties – V. Shareholders - Shareholder Agreements

Answer 17

1. Voting Trust
   A voting trust is a written agreement of shareholders under which all of the shares owned by the parties to the agreement are transferred to a trustee, who votes the shares and distributes the dividends in accordance with the provisions of the voting trust agreement. A copy of the trust agreement and the names and addresses of the beneficial owners of the trust must be given to the corporation.
2. Voting Agreement
   Rather than creating a trust, shareholders may enter into a written and signed agreement providing for the manner in which they will vote their shares. Unless the agreement provides otherwise, it will be specifically enforceable. It need not be filed with the corporation.
3. Unanimous Governance Agreements
   The shareholders may enter into agreements among themselves regarding almost any aspect of the exercise of corporate power (e.g., an agreement: eliminating the board and vesting board power in one or more persons, establishing who shall be officers or directors, requiring distributions on certain conditions, etc.). To be valid, the agreement must not be set forth in the articles or bylaws and must be set forth in a written agreement approved by all persons who are shareholders at the time of its adoption. Such agreements are valid for 20 years unless they provide otherwise, but will terminate if the corporation’s shares become listed on a national securities exchange or are otherwise regularly traded on a national securities market.
4. Restrictions on Transfer of Stock
   Stock transfer restrictions must be reasonable (e.g., a right of first refusal). A third-party purchaser is bound by the provisions of an agreement restricting transfer of stock if: (i) the restriction’s existence is conspicuously noted on the certificate (or is contained in the information statement required for uncertificated shares), or (ii) the third party had knowledge of the restriction at the time of the purchase.

Question 18

PART TWO: Intracorporate Parties – V. Shareholders - Shareholders’ Inspection Rights

Answer 18

1. Qualified Right
   Under the LBCA, a shareholder may inspect the corporation’s books, papers, accounting records, shareholder records, etc., upon five days’ written notice stating a proper purpose (i.e., a purpose reasonably related to the person’s interest as a shareholder) for the inspection. The shareholder need not personally conduct the inspection; he may send an attorney, accountant, or other agent.
2. Unqualified Right for Certain Records
   The LBCA also includes an exception to the general rule. It provides that any shareholder may inspect the following records regardless of purpose: () the corporation’s articles and bylaws, (i) board resolutions regarding classification of shares, (ii) minutes of shareholders’ meetings from the past three years, (iv) communications sent by the corporation to shareholders over the past three years, () a list of the names and business addresses of the corporation’s current directors and officers, and (vi) a copy of the corporation’s most recent annual report.

Question 19

PART TWO: Intracorporate Parties – V. Shareholders - Preemptive Rights

Answer 19

Under the LBCA, shareholders do not have a preemptive right to purchase newly issued shares in order to maintain their proportional ownership interest unless the articles of incorporation provide the right. Moreover, even if the articles do provide a preemptive right, shareholders generally have no preemptive right in shares issued: (i) for consideration other than cash (e.g., for services of an employee), (ii) within six months after incorporation, or (i) without voting rights but having a distribution preference.

Question 20

PART TWO: Intracorporate Parties – V. Shareholders - Shareholder Suits

Answer 20

1. Direct Actions
   A direct action may be brought for a breach of a fiduciary duty owed to the shareholder by an officer or director. To distinguish breaches of duty owed to the corporation and duties owed to the shareholder, ask: (i) who suffers the most immediate and direct damage, the corporation or the shareholder; and (ii) to whom did the defendant’s duty run, the corporation or the shareholder. In a shareholder direct action, any recovery is for the benefit of the individual shareholder.
2. Derivative Actions
   In a derivative action, the shareholder is asserting the corporation’s rights rather than her own rights. Recovery in a derivative action generally goes to the corporation rather than to the shareholder bringing the action. Nevertheless, the corporation is named as a defendant.

a. Standing-Ownership at Time of Wrong
To commence and maintain a derivative proceeding, a shareholder must have been a shareholder at the time of the act or omission complained of or must have become a shareholder through transfer by operation of law from one who was a shareholder at that time. Also, the shareholder must fairly and adequately represent the interests of the corporation.

b. Demand Requirements
The shareholder must make a written demand on the corporation to take suitable action. A derivative proceeding may not be commenced until 90 days have elapsed from the date of demand, unless: (i) the shareholder has earlier been notified that the corporation has rejected the demand; or (i) irreparable injury to the corporation would result by waiting for the 90 days to pass.

c. Will Be Dismissed If Found Not in Corporation’s Best Interests
If a majority of the directors (but at least two who have no personal interest in the controversy find in good faith after reasonable inquiry that the suit is not in the corpora-ton’s best interests, but the shareholder brings the suit anyway, the suit may be dismissed on the corporation’s motion.

1) Burden of Proof
To avoid dismissal, in most cases the shareholder bringing the suit has the burden of proving to the court that the decision was not made in good faith after reasonable inquiry. However, if a majority of the directors had a personal interest in the controversy, the corporation will have the burden of showing that the decision was made in good faith after reasonable inquiry.

d. Discontinuance or Settlement Requires Court Approval
A derivative proceeding may be discontinued or settled only with the approval of the court.

e. Court May Order Payment of Expenses
Upon termination of a derivative action, the court may order the corporation to pay the plaintiff’s reasonable expenses if it finds that the action has resulted in a substantial benefit to the corporation. If the court finds that the action was commenced or maintained without reasonable cause or for an improper purpose, it may order the plaintiff to pay reasonable expenses of the defendant.

Question 21

PART TWO: Intracorporate Parties – V. Shareholders - Distributions

Answer 21

1. Types of Distributions

Distributions can take the form of dividends, redemptions of shares, repurchases of shares, distribution of assets upon liquidation, etc.

2. Rights to Distributions
   At least one class of stock must have a right to receive the corporation’s net assets on dissolution. Beyond this rule, distributions generally are discretionary.

a. Declaration Generally Solely Within Board’s Discretion
Even if the articles authorize distributions, the decision whether or not to declare distributions generally is solely within the directors’ discretion, subject to solvency limitations (below) and any provisions to the contrary in a shareholders’ agreement or the articles. The shareholders generally have no general right to compel a distribution.

1) Limitations

a) Solvency Requirements
A distribution is not permitted if, after giving it effect, either:

(1) The corporation would not be able to pay its debts as they become due in the usual course of business (i.e., the corporation is insolvent in the bankruptcy sense); or
(2) The corporation’s total assets would be less than the sum of its total liabilities plus (unless the articles permit otherwise) the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights on dissolution of shareholders whose preferential rights are superior to those receiving the distribution (i.e., the corporation is insolvent in the balance sheet sense).

2) Restrictions in the Articles
The articles may restrict the board’s right to declare dividends (e.g., a creditor might insist that the corporation include in its articles a provision prohibiting payment of any distributions unless the corporation earns a certain amount of profits).

3) Share Dividends
Distributions of a corporation’s own shares (i.e., “share dividends” or “stock dividends”) to its shareholders are excluded from the definition of “distribution.” Therefore, the above restrictions are inapplicable. However, shares of one class or series may not be issued as a share dividend in respect of shares of another class or series unless one of the following occurs: (i) the articles so authorize; (il) a majority of the votes entitled to be cast by the class or series to be issued approves the issue; or (i) there are no outstanding shares of the class or series to be issued.

b. Contractual Rights in Regard to Distributions

1) Limitations and Preferences
have preferences; etc.).
Shares may be divided into classes with varying rights (e.g., some classes may be redeemable, others not; some may have no right to receive distributions, others could

2) Rights After Declaration-Same as a General Creditor

Once a distribution is lawfully declared, the shareholders generally are treated as creditors of the corporation and their claim for the distribution is equal in priority to claims of other unsecured creditors. However, a distribution can be enjoined or revoked if it was declared in violation of the solvency limitations, the articles, or a superior preference right.

c. Who May Receive-Shareholder of Record on Record Date

Dividends are declared payable to persons whom the corporate records show to be shareholders on a specified date-known as the record date. The owner on the record date (not the date of declaration) is entitled to the dividend.

3. Liability for Unlawful Distributions

A shareholder who receives a distribution in excess of what may be authorized will be personally liable to the corporation, or to creditors of the corporation, or both, for an amount not exceeding, in the aggregate, the excess amount received by that shareholder. A director who votes for or assents to a distribution that violates the above rules is personally liable to the corporation for the amount of the distribution that exceeds what could have been properly distributed. However, a director is not liable for distributions approved in good faith: (i) based on financial statements prepared according to reasonable accounting practices, or on a fair valuation or other method that is reasonable under the circum-stances; or (i) by relying on information from officers, employees, legal counsel, accountants, etc., or a committee of the board of which the director is not a member. A director who is held liable for an unlawful distribution is entitled to (i) contribution from every other director who could be held liable for the distribution (i.e., those who voted in favor of the distribution) and (i) indemnity from each shareholder, for the amount she accepted while knowing that the distribution was improper.

Question 22

PART TWO: Intracorporate Parties – V. Shareholders - Shareholders’ Liabilities.

Answer 22

1. General Rule-No Fiduciary Duty
   G
   enerally, shareholders may act in their own personal interests and have no fiduciary duty to the corporation or their fellow shareholders. Shareholder liability generally is limited to the liabilities discussed above for unpaid stock, a pierced corporate veil, receipt of unlawful distributions, or absence of de facto corporation.
2. Liability Pursuant to Shareholder Agreement

If the shareholders enter into agreements that vest some or all of the right to manage the corporation in one or more shareholders, the managing shareholder(s) have the liabilities that a director ordinarily would have with respect to that power.

Question 23

PART TWO: Intracorporate Parties – VI. Board of Directors - General Powers, Qualifications, Number, Election, and Term of Office, Removal of Directors, Directors’ Meetings, Delegation of Authority, Directors’ Right to Inspect, Directors’ Duties and Liabilities.

Answer 23

A. GENERAL POWERS
The directors are responsible for the management of the business and affairs of the corporation.

B. QUALIFICATIONS
Absent a provision otherwise in the articles or bylaws, the directors need not be shareholders in the corporation or residents of any particular state.

C. NUMBER, ELECTION, AND TERM OF OFFICE
There need be only one director. However, the articles or bylaws may require as many directors as desired, without limitation. The directors are elected at each annual shareholders’ meeting, subject to contrary provisions in the articles. They may be divided into two or three equal size classes, with terms of office expiring in staggered years from one to three.
Vacancies on the board generally may be filled by the shareholders or the directors.

D. REMOVAL OF DIRECTORS
Directors may be removed by the shareholders for cause or without cause. However, a director elected by cumulative voting cannot be removed if the votes cast against removal would be sufficient to elect her if cumulatively voted at an election of directors. Similarly, a director elected by a voting group of shares can be removed only by that class

E. DIRECTORS’ MEETINGS
1. Types of Meetings; Notice
Directors may act in regular or special meetings. Regular meetings may be held without notice; special meetings require 48 hours’ written notice of the date, time, and place of the meeting. Attendance constitutes waiver of any required notice unless attendance is for the sole purpose of protesting lack of notice.

2. Quorum
   A majority of the board of directors constitutes a quorum for the meeting unless a higher or lower number is required by the articles or bylaws, but a quorum can be no fewer than one-third of the board members.
3. Approval of Action
   If a quorum is present. resolutions will be deemed approved if approved by a majority of directors present.

a. Action by Unanimous Written Consent
Any action required to be taken by the directors at a formal meeting may be taken by unanimous consent, in writing, without a meeting.

The examiners often ask about the formalities of directors’ meetings by setting up facts where there is no meeting. That is, the facts tell you
Exam Tip
that a director has entered into an extraordinary contract with another entity on the corporation’s behalf, either on his own accord or with the
approval of some of the directors, or with the approval of all of the directors, who were called individually. You must recognize that a director does not have the power to bind the corporation in contract unless there is actual authority to act. Actual authority generally can arise only if: (i) proper notice was given for a directors’ meeting. a quorum was present, and a majority of the directors approved the action, or (ii) there was unanimous written consent of the directors.

F. DELEGATION OF AUTHORITY
Unless the articles or bylaws provide otherwise, the board may create one or more committees, with two or more members, and appoint members of the board of directors to serve on them. The committees may act for the board, but the board remains responsible for supervision of the committees. The board may also delegate authority to officers.

G. DIRECTORS’ RIGHT TO INSPECT
Directors have a right to inspect corporate books.

H. DIRECTORS’ DUTIES AND LIABILITIES

1. Personal Liability of Directors May Be Limited

Unless chosen otherwise in a corporation’s articles of incorporation, Louisiana law eliminates directors’ personal liability for money damages to the corporation or shareholders for actions taken or for failure to take action. However, the articles may not limit or eliminate liability for financial benefits received by the director to which she is not entitled, an intentionally inflicted harm on the corporation or its shareholders, unlawful corporate distributions, or an intentional violation of criminal law.

2. Duty of Care
   Directors have a duty to manage to the best of their ability. They must discharge their duties:

(i) In good faith;
(i) With the care that a person in a like position would reasonably believe appropriate under similar circumstances; and
(iii) In a manner the directors reasonably believe to be in the best interests of the corporation.
Directors who meet this standard will not be liable for corporate decisions that in hindsight turn out to be poor or erroneous. This is known as the “business judgment rule.”

a. Burden on Challenger
The person challenging the directors’ action has the burden of proving that the statutory standard above was not met.

b. Director May Rely on Reports or Other Information
In discharging her duties, a director is entitled to rely on information, opinions, reports, or statements (including financial statements), if prepared or presented by: (i) corporate officers or employees whom the director reasonably believes to be reliable and competent; (¡) legal counsel, accountants, or other persons as to matters the director reasonably believes are within such person’s professional competence; or (i) a committee of the board of which the director is not a member, if the director reasonably believes the committee merits confidence.

3. Duty to Disclose
   The directors also have a duty to disclose material corporate information to other members of the board.

Question 24

PART TWO: Intracorporate Parties – VI. Board of Directors - Directors’ Duties and Liabilities - Duty of Loyalty

Answer 24

a. Conflicting Interest Transactions

1) What Constitutes a Conflicting Interest Transaction

A director has a conflicting interest with respect to a transaction if the director knows that she or a related person -such as a spouse, parent, child, grandchild, etc. - either is a party to the transaction or has a material financial interest in the transaction.

2) Standards for Upholding Conflicting Interest Transaction

A conflicting interest transaction will not be enjoined or give rise to an award of damages due to the director’s interest in the transaction if:
(¡) The transaction was approved by a majority of the directors (but at least two without a conflicting interest after all material facts have been disclosed to the
board;

(ii) The transaction was approved by a majority of the votes entitled to be cast by shareholders without a conflicting interest in the transaction after all material facts have been disclosed to the shareholders (notice of the meeting must describe the conflicting interest transaction); or

(iii) The transaction, judged according to circumstances at the time of commitment, was fair to the corporation.

a) Interested Director’s Presence at Meeting Irrelevant

In order for the qualified director approval to be effective, the qualified directors must have deliberated and voted outside the presence of and without the participation by any other director. The presence of the interested person(s) at the meeting at which the shareholders voted to approve the conflicting interest transaction does not affect the action.

b) Special Quorum Requirements
For purposes of the vote on a conflicting interest transaction (i) at a directors’ meeting, a majority of the directors without a conflicting interest, but not less than two, constitutes a quorum; and (ii) at a shareholders’ meeting, a quorum consists of a majority of the votes entitled to be cast, not including shares owned or controlled directly or beneficially by the director with the conflicting interest.

c) Remedies
Possible remedies for an improper conflicting interest transaction include enjoining the transaction, setting the transaction aside, damages, and similar remedies.

Interested director transactions probably are the most tested issues in Corporations. Remember, if a director will benefit from a transaction her corporation is about to enter into, the director must disclose this information to the board (or to the shareholders). Disinterested
directors (or the shareholders) must then approve the transaction. If there is no disclosure, the transaction can be set aside unless it is fair to the corporation.
Alternatively, the corporation can recover damages equal to the director’s profit.

3) Directors May Set Own Compensation

Despite the apparent conflict of interest, unless the articles or bylaws provide otherwise, the board has authority to fix director compensation. Nevertheless, an unreasonable compensation will breach the directors’ fiduciary duties.

b. Corporate Opportunity Doctrine
The directors’ fiduciary duties prohibit them from diverting a business opportunity from their corporation to themselves without first giving their corporation an opportunity to act. This is sometimes known as a “usurpation of a corporate opportunity” problem.

Question 25

PART TWO: Intracorporate Parties – VII. Officers - In General

Answer 25

The only officer that a Louisiana corporation is required to have is a secretary. The LBCA does not require a corporation to have any other specific officers, but rather provides that a corporation shall have the officers described in its bylaws or appointed by the board pursuant to the bylaws. An officer may appoint other officers or assistant officers if so authorized by the bylaws or the board. One person may simultaneously hold more than one office.

Question 26

PART TWO: Intracorporate Parties – VII. Officers - Duties

Answer 26

The secretary has the authority and responsibility for preparing the minutes of the directors’ and shareholders’ meetings and for maintaining and authenticating other required corporate records. Other officers’ duties are determined by the bylaws or, to the extent consistent with the bylaws, by the board or an officer so authorized by the board.

Question 27

PART TWO: Intracorporate Parties – VII. Officers - Powers

Answer 27

Ordinary rules of mandate determine authority and powers. Authority may be actual or apparent. Unauthorized actions may become binding on the corporation because of ratification, adoption, or estoppel. The corporation is liable for actions by its officers within the scope of their authority, even if the particular act in question was not specifically authorized.

Question 28

PART TWO: Intracorporate Parties – VII. Officers - Standard of Conduct

Answer 28

Officers must carry out their duties in good faith, with the care that a person in a like position would reasonably exercise under similar circumstances, and in a manner they reasonably believe to be in the best interests of the corporation.

Question 29

PART TWO: Intracorporate Parties – VII. Officers - Resignation and Removal

Answer 29

Despite any contractual term to the contrary, an officer has the power to resign at any time by delivering notice to the corporation, and the corporation has the power to remove an officer at any time, with or without cause. If the resignation or removal is a breach of contract, the nonbreaching party may have a right to damages, but note that mere appointment to office itself does not create any contractual right to remain in office.

Question 30

PART TWO: Intracorporate Parties – VIII. Indemnification of Directors, Officers, and Employees - Mandatory Indemnification

Answer 30

Unless limited by the articles, a corporation must indemnify a director or officer who was wholly successful, on the merits or otherwise, in defending a proceeding against the officer or director for reasonable expenses, including attorneys’ fees, incurred in connection with the proceeding.

Question 31

PART TWO: Intracorporate Parties – VIII. Indemnification of Directors, Officers, and Employees - Discretionary Indemnification

Answer 31

A corporation may indemnify a director for reasonable expenses incurred in unsuccessfully defending a suit brought against the director on account of the director’s position if the director:
(i) Acted in good faith; and
(i) Believed that her conduct was: (a) in the best interests of the corporation (when the conduct at issue was within the director’s official capacity); (b) not opposed to the best interests of the corporation (when the conduct at issue was not within the director’s official capacity); or (c) not unlawful (in criminal proceedings).
1. Exceptions
A corporation does not have discretion to indemnify a director who is unsuccessful in defending (i) a direct or derivative action in which the director is found liable to the corporation or (il) an action charging that the director received an improper benefit.
2. Who Makes Determination
Generally, the determination whether to indemnify is to be made by a disinterested majority of the board, or if there is not a disinterested quorum, by a majority of a disinterested committee or by legal counsel. The shareholders may also make the determination (the shares of the director seeking indemnification are not counted).
3. Officers
Officers generally may be indemnified to the same extent as a director.

Question 32

PART TWO: Intracorporate Parties – VIII. Indemnification of Directors, Officers, and Employees - Court-Ordered Indemnification

Answer 32

A court may order indemnification when the court feels this is appropriate.

Question 33

PART TWO: Intracorporate Parties – VIII. Indemnification of Directors, Officers, and Employees - Advances

Answer 33

A corporation may advance expenses to a director defending an action as long as the director furnishes the corporation a statement that the director believes he met the appropriate standard of conduct and that he will repay the advance if he is later found to have not met the appropriate standard.

Question 34

PART TWO: Intracorporate Parties – VIII. Indemnification of Directors, Officers, and Employees - Liability Insurance

Answer 34

A corporation may purchase liability insurance to indemnify directors or officers for actions against them even if the directors or officers would not have been entitled to indemnification under the above standards.

Question 35

PART TWO: Intracorporate Parties – VIII. Indemnification of Directors, Officers, and Employees - Agents and Employees

Answer 35

The LBCA does not limit a corporation’s power to indemnify, advance expenses to, or maintain insurance on agents and employees.

Question 36

PART THREE: Changes in Structure – X. Dissolution and Liquidation - Voluntary Dissolution

Answer 36

A corporation that has been dissolved continues its corporate existence but is not allowed to carry on any business except that which is appropriate to winding up and liquidating its affairs.

a. Barring Claims Against the Corporation
A claim can be asserted against a dissolved corporation, even if the claim does not arise until after dissolution, to the extent of the corporation’s undistributed assets. If the assets have been distributed to the shareholders, a claim can be asserted against each shareholder for his pro rata share of the claim, to the extent of the assets distributed to him. However, a corporation can cut short the time for bringing known claims by notifying claimants in writing of the dissolution and giving them a deadline of not less than 120 days in which to file their claim. The time for filing unknown claims can be limited to three years by publishing notice of the dissolution in a newspaper in the county where the corporation’s known place of business is located.

The corporation may revoke a voluntary dissolution by using the same procedure that was used to approve the dissolution.

Question 37

PART THREE: Changes in Structure – X. Dissolution and Liquidation - Administrative Termination

Answer 37

The state may bring an action to administratively terminate a corporation for reasons such as the failure to pay fees or penalties, failure to file an annual report, and failure to maintain a registered agent in the state. A corporation that is administratively terminated may apply for reinstatement within three years after the effective date of dissolution. Reinstatement relates back to the date of termination, and the corporation may resume carrying on business as if it had never occurred.

Question 38

PART THREE: Changes in Structure – X. Dissolution and Liquidation - Judicial Dissolution

Answer 38

The attorney general may seek judicial dissolution of a corporation on the ground that the corporation fraudulently obtained its articles of incorporation or that the corporation is exceeding or abusing its authority.

Shareholders may seek judicial dissolution on any of the following grounds:
(i) The directors are deadlocked in the management of corporate affairs, the shareholders are unable to break the deadlock, and irreparable injury to the corporation is threatened, or corporate affairs cannot be conducted to the advantage of the shareholders because of the deadlock;
(ji) The shareholders are deadlocked in voting power and have failed to elect one or more directors for a period that includes at least two consecutive annual meeting dates;
or

(ii) The corporation has abandoned its business and failed to dissolve within a reasonable time.
a. Election to Purchase in Lieu of Dissolution
If the corporation’s shares are not listed on a national securities exchange or regularly traded in a market maintained by one or more members of a national or affiliated securities association, the corporation (or one or more shareholders) may elect to purchase the shares owned by the petitioning shareholder at their fair value.

Creditors may seek judicial dissolution if: (i) the creditor’s claim has been reduced to judgment, execution of the judgment has been returned unsatisfied, and the corporation is insolvent, or (ii) the corporation has admitted in writing that the creditor’s claim is due and owing and the corporation is insolvent.

A court may dissolve a corporation in an action by the corporation to have its voluntary dissolution continued under court supervision.

Question 39

PART FOUR: Professional Corporations and Foreign Corporations – XI. Professional Corporations

Answer 39

Louisiana has a series of special statutes allowing certain groups of professionals to form professional corporations for the purpose of practicing their professions. A professional corporation may engage only in the business of the profession, not any other business. While many states do not allow shareholders in professional corporations to be insulated from personal liability for corporate misconduct (especially for malpractice, fraud, or unethical conduct), Louisiana totally insulates shareholders from such personal liability.

Question 40

PART FOUR: Professional Corporations and Foreign Corporations – XII. Foreign Corporations

Answer 40

Foreign corporations are those incorporated in some other jurisdiction. Their internal affairs are not governed by the LBCA. Before a foreign corporation may transact business in
Louisiana, it must first procure a certificate of authority from the secretary of state.