MEE Corps and LLCs

Question 1

Incorporation for Corps

Answer 1

The articles of incorporation are filed with the state, and, if in conflict with bylaws, the articles control.

Question 2

Contract liability for K entered into prior to incorporation

Answer 2

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 (the person entering the contract on behalf of the to be formed corporation) is liable

Question 3

Shareholders

Answer 3

Shareholders are only owners and do not manage the corporation.

Question 4

Shareholder meeting requirements

Answer 4

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.

Question 5

Directors

Answer 5

Directors manage the corporation and (like shareholders) act as a body by voting.

Question 6

Who hires and fires directors

Answer 6

Shareholders

Question 7

Director Proxy voting

Answer 7

Directors cannot vote by proxy or agreement.

Question 8

Director quorum

Answer 8

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 only required for a special meeting.

Question 9

Duty of Care - Business Judgment Rule

Answer 9

There is 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.” 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. A party claiming that the directors breached their duty of care has the burden of proof.

Question 10

Duty of Loyalty

Answer 10

A director must act in good faith and with a reasonable belief that what he does is in the corporation’s best interest. 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 (mnemonic=BCC):

1) on both sides of transaction
2) competes with corp
3) corporate opportunity (usurp)

Question 11

Defenses to liability for breach of duty of loyalty

Answer 11

the Revised Model Business Corporation Act (MBCA) includes three safe harbors that may protect a director who breaches his duty of loyalty: (1) approval by disinterested directors (if all relevant information is disclosed), (2) approval by disinterested shareholders, or (3) if the transaction is judged to be fair at the time it was entered into.

Question 12

Waiver of duty in LLC

Answer 12

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

Question 13

Voting for shareholders

Answer 13

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

Question 14

Who votes at shareholder meetings

Answer 14

The record owner on the record date. The record date determines who is entitled to
vote at a particular meeting—namely, those persons who were registered as shareholders “of record” on that date.

Question 15

Outstanding Shares

Answer 15

Unless the articles of incorporation provide otherwise, each outstanding share (regardless of class) is entitled to one vote on each matter voted on at a shareholders’ meeting.

Question 16

when shareholder does not need to be present for meeting to vote

Answer 16

1) died
2) executed a valid proxy

Question 17

Voting by proxy

Answer 17

A shareholder may vote by proxy. A shareholder can appoint a proxy by signing an appointment form or making a verifiable electronic transmission. A shareholder may not orally asksomeone to serve as a proxy.

Question 18

Proxy revocability

Answer 18

A proxy is generally revocable (even if it states it is irrevocable), and any action inconsistent with the grant of a proxy works to revoke it. Thus, when two or more revocable proxies are given, the last given proxy revokes all previous proxies.

Question 19

when proxy is NOT revocable

Answer 19

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

Question 20

Lawsuits by shareholder against a corp

Answer 20

A shareholder may file an action to establish that the acts of the directors are illegal, fraudulent, or willfully unfair and oppressive to either the corporation or the shareholder. Whether a suit is appropriately brought as a direct or derivative action depends on the injury

Question 21

Direct Suit

Answer 21

A direct suit is appropriate when the wrong done amounts to a breach of duty owed to the individual personally. (E.g., when a shareholder sues for denial of preemptive rights, payment of a dividend, or oppression in a close corporation.)

Question 22

derivative suit

Answer 22

A derivative suit is appropriate when the injury is caused to the corporation and a shareholder is trying to enforce the corporation’s rights. (This also applies to LLCs.)

Question 23

Extra Requirements for Derivative Suit

Answer 23

A shareholder may not commence or maintain a derivative suit unless three requirements are met (mnemonic=SAD): (1) standing to bring a lawsuit, (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).

Question 24

Implications of Derivative Suit

Answer 24

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

Question 25

Lawsuits against shareholders

Answer 25

Piercing corporate veil

As a general rule, the law treats a corporation as an entity separate from its shareholders, even where one individual owns all of the corporate stock. In some (very limited) circumstances, courts will disregard the limited liability corporate form and hold a shareholder personally liable for corporate debt.

Question 26

Piercing Corp veil only allowed when

Answer 26

It is only allowed in close corporations and LLCs. 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. Note that only the shareholders or members who participated in the wrong are personally liable.

Question 27

Formation of LLC

Answer 27

Articles of organization must be filed to create an LLC. Since LLCs are a relatively new form of business association, courts tend to analyze them in the context of corporate or partnership law.

Question 28

Members of LLC duties

Answer 28

Members of an LLC have fiduciary duties. Members of an LLC in a member-managed LLC are treated as agents of the LCC (with actual and apparent authority to bind the LLC in ordinary—but not extraordinary—affairs).

Question 29

Dissociation of LLC

Answer 29

if a member leaves, then it leads to dissociation of that member, but it does not lead to winding up or dissolution unless the other members unanimously agree to dissolve the LLC.

Question 30

LLC member liability

Answer 30

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

Question 31

De Facto Corp

Answer 31

1) Relevant incorporation statute (exists in every state, easy)
2) parties made good faith, colorable attempt to comply with statute to form corp
3) has been some exercise of corporate privilege

Question 32

if a de facto corp business is treated

Answer 32

as a corporation for all purposes except in an action by the state

Question 33

corporation by estoppel

Answer 33

persons who have dealt with the entity as if it were a corp will be estopped from denying the corporation’s existence

also prevents the improperly formed corporation from avoiding liability by saying it was not properly formed

Question 34

corp by estoppel only applies in

Answer 34

contract cases. not torts

Question 35

derivative suit requirements

Answer 35

1) standing
2) adequate representation
3) demand requirements

Question 36

corporation president’s authority

Answer 36

governed by agency law. Corp president is an agent of the corporation and has whatever actual authority the corp grants him.

Generally, a corp president has the authority to enter into day to day operations, but extraordinary transactions require authorization by the board.

Question 37

directors meeting requirements

Answer 37

quorum = majority of directors
to pass a resolution = majority of those directors present

Question 38

fundamental change decisions by the board

Answer 38

the board can only delegate the power that it has. the board does not have power to approve fundamental changes without the vote of the shareholders.

so we need: 1) resolution passed by board in a different meeting; 2) shareholder vote

Question 39

what is a fundamental corporate change

Answer 39

decisions that are outside the scope of ordinary business (such as selling off all assets)

Question 40

appraisal remedy

Answer 40

shareholders who dissent from a fundamental corporate change can force the corporation to purchase their shares at a fair price.

Question 41

req’s for shareholders to use the appraisal remedy

Answer 41

1) file an objection to the transfer before or at the shareholders meeting at which the vote is taken; 2) not vote in favor of the plan; 3) send the corp a written demand for the fair value of their shares