Quiz 2 Rules

Question 1

What does Ultra Vires mean

Answer 1

Acting beyond one’s legal authority

Question 2

Purpose of corporations

Answer 2

Any lawful purpose unless defined in bylaws

Question 3

Rule for making donations

Answer 3

Corporations can make donation to charities as longa as donations are:

1) Reasonable amounts
2) Not made indiscriminately or to pet charities
3) With reasonable belief donation will advance the corporations’ interest (can’t be anonymous)

Question 4

Rule for when courts step in

Answer 4

The discretion of directors will not be interfered with by the courts, unless there has been bad faith, willful neglect, or abuse of discretion

Question 5

Rule for duty of care

Answer 5

Directors’ actions must be made

1) In good faith and
2) In a manner reasonably believed to be in the corporations best interest

Question 6

Rule for Business Judgement Rule (BJR)

Answer 6

Default: Court shouldn’t interfere with board’s business judgment.
If not protected by BJR, directors still could be OK if not grossly negligent
Policy: protecting all judgments made in good faith
Exceptions: FICBEW

Question 7

What are the exceptions to the BJR?

Answer 7

FICBEW

Fraud, Illegality, Conflict of interest, Bad faith, egregious decision making, Waste

Question 8

Procedural rules for BJR to apply

Answer 8

Only informed decisions are protected by BJR.
Omissions not protected by BJR.
Uninformed decisions not protected by BJR.

Question 9

Defense to DOC actions

Answer 9

Intrinsic Fairness

Entire Fairness

Question 10

Intrinsic Fairness standard

Answer 10

Fair price, beneficial to corp, or caused no harm.

Mostly used for everyday decisions.

Question 11

Entire fairness standard

Answer 11

intrinsic + procedural fairness.
Rushed or deliberative process
Did they have the info they needed?
How was transaction timed?
How it was initiated?
Structured?
How was it negotiated?
How was decision disclosed to directors?

Question 12

Rule on whether Omission breached DOC

Answer 12

1) if a reasonable director would have acted differently, &
2) If action would have prevented the harm.

Question 13

Caremark Rule

Answer 13

1) unless suspicion of wrongdoing, no duty to install/operate a system to find wrongdoing
2) Board still has to have an adequate reporting system in place

Question 14

Obligation to act in good faith

Answer 14

General: Directors should act in good faith in corp’s best interest.
Bad faith: Subjective bad faith, lack of due care, intentional dereliction of duty

Question 15

Bad actions can be cleansed

Answer 15

Full diclosure and approval by SH or Board of Directors.

Could be cleansed through fairness

Question 16

When are directors liable for breach of fiduciary duties?

Answer 16

1) breach of DOL

2) act/omissions are not in good faith, involve intentional misconduct, or knowing violation of the law

Question 17

Corporate opportunity doctrine tests

Answer 17

Line of business test, fairness test, hybrid, ALI

Question 18

Line of business test

Answer 18

Cannot take opportunity if the corp is financially able, its within the scope of the business, and a conflict of interest would arise

Question 19

Fairness test

Answer 19

Note: not used in CA or DE

Whether a fiduciary, taking a corporate opportunity, violates what is fair or equitable

Question 20

Hybrid test

Answer 20

combines line of business and fairness test to decide if corporate opportunity is allowed.

Question 21

ALI test

Answer 21

Note: very few courts use

1) First, disclose
2) Then, board rejects the opportunity
3) Good faith but defective disclosure can be ratified by a majortiy vote of the board

Question 22

defenses to corporate opportunity claims

Answer 22

Capacity: corp doesn’t have the capacity to take advantage of the opportunity (e.g. financial, contractual, or legal reasons)
Source: came to director through personal connections, not as a director

Question 23

Self-dealing dominant SH’s

Answer 23

Dom SH’s to show intrinsic fairness; otherwise burden on P’s to show action not fiar

Question 24

Quorum default

Answer 24

50% + 1 share

Question 25

incumbents

Answer 25

Existing management

Question 26

insurgents

Answer 26

those trying to take over existing management and exert change

Question 27

Distributing materials for proxy battles

Answer 27

incumbents can distribute insurgent materials to shareholders (preferred) or provide the mailing list directly to insurgents

Question 28

Reimbursement of incumbents for proxy battle

Answer 28

Requirements: not excessive or illegal, and must spend money on policy, not entrenchment.

Question 29

Reimbursements of insurgents for proxy battle

Answer 29

Requirements: not excessive or illegal, and must spend money on policy, not entrenchment, must win, SH’s ratify the expenses

Question 30

procedural requirements for shareholder proposal

Answer 30

Must hold $2,000 worth of stock or 1% of voting stock.
Held continuously for 12 months before the proposal.
Proposal must be submitted at least 180 days before proxy statement is sent out.
500 words or less.
1 proposal per meeting.
Must attend or have rep present.

Question 31

substantive rules for shareholder proposal

Answer 31

Can’t break proxy rules.
Can’t break the law.
Can’t be beyond company’s power to implement.
Address personal grievance
If it involves company operations, it must involve at least 5% of company assets, net earnings or gross sales, OR operations must otherwise be significantly related to company business

Question 32

No-action letter

Answer 32

comes from the SEC and gives the company a non-binding opinion on whether they can exclude a shareholder proposal without action from the SEC.

Question 33

Direct Suit

Answer 33

SH sues for personal harm

Question 34

Derivative suit

Answer 34

SH sues on behalf of corp.
Proceeds go to corp, not SH.
SH benefit only indirectly (e.g. stock price goes up)

Question 35

how to determine whether a suit is direct or derivative

Answer 35

ask who is harmed (corp = derivative, SH = direct, Both = derivative)?
Ask who gets the benefit?

Question 36

Demand requirement

Answer 36

a SH cannot bring suit unless SH made a demand on the corp and they wrongfully refused, or demand would be futile.
P has burden to show board has familial or financial COI, or, P has burden to show board doesn’t have BJR.

Question 37

SLC in DE

Answer 37

1) Was the board independent and acting in good faith (w/ basis for supporting its decisions) to dismiss the suit.
2) Then court should determine, applying its own independent business judgment, whether corp’s motion to dismiss should be granted.

Question 38

SLC Auerbach rule (CA, NY, and others)

Answer 38

Was independent
Conducted an adequate investigation and
Followed proper and complete procedures in reaching a decision to dismiss a case
If yes, then BJR applies and case dismissed w/o court’s independent evaluation of substance of SLC’s decision

Question 39

Requirements for shares of corporations

Answer 39

One class of shares must have economic rights.
one calss of shares must have voting rights.
They are often the same class

Question 40

Define freeze out

Answer 40

a benefit conferred to majority SH at the expense to minority SH

Question 41

MA approach to determining freeze out is actionable

Answer 41

1) Majority SH must show legitimate business purpose for “freeze out” actions.
2) Minority SH can show same legitimate objective could have been achieved through an alternative course of action less harmful to minority SHs.
3) Courts weigh majority SH legitimate business purposes v. practicability of minority SH less harmful alternative.

Question 42

DE approach to determining freeze out is actionable

Answer 42

fiduciary DoL of controlling group prohibits them from taking the bulk of ownership benefits at expense of minority SHs + they must act in good faith & have a business reason for actions

Question 43

Dissolution

Answer 43

only available for closely held corporations.