Quiz 2 Rules Flashcards
What does Ultra Vires mean
Acting beyond one’s legal authority
Purpose of corporations
Any lawful purpose unless defined in bylaws
Rule for making donations
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)
Rule for when courts step in
The discretion of directors will not be interfered with by the courts, unless there has been bad faith, willful neglect, or abuse of discretion
Rule for duty of care
Directors’ actions must be made
1) In good faith and
2) In a manner reasonably believed to be in the corporations best interest
Rule for Business Judgement Rule (BJR)
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
What are the exceptions to the BJR?
FICBEW
Fraud, Illegality, Conflict of interest, Bad faith, egregious decision making, Waste
Procedural rules for BJR to apply
Only informed decisions are protected by BJR.
Omissions not protected by BJR.
Uninformed decisions not protected by BJR.
Defense to DOC actions
Intrinsic Fairness
Entire Fairness
Intrinsic Fairness standard
Fair price, beneficial to corp, or caused no harm.
Mostly used for everyday decisions.
Entire fairness standard
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?
Rule on whether Omission breached DOC
1) if a reasonable director would have acted differently, &
2) If action would have prevented the harm.
Caremark Rule
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
Obligation to act in good faith
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
Bad actions can be cleansed
Full diclosure and approval by SH or Board of Directors.
Could be cleansed through fairness
When are directors liable for breach of fiduciary duties?
1) breach of DOL
2) act/omissions are not in good faith, involve intentional misconduct, or knowing violation of the law
Corporate opportunity doctrine tests
Line of business test, fairness test, hybrid, ALI
Line of business test
Cannot take opportunity if the corp is financially able, its within the scope of the business, and a conflict of interest would arise
Fairness test
Note: not used in CA or DE
Whether a fiduciary, taking a corporate opportunity, violates what is fair or equitable
Hybrid test
combines line of business and fairness test to decide if corporate opportunity is allowed.
ALI test
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
defenses to corporate opportunity claims
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
Self-dealing dominant SH’s
Dom SH’s to show intrinsic fairness; otherwise burden on P’s to show action not fiar
Quorum default
50% + 1 share
incumbents
Existing management
insurgents
those trying to take over existing management and exert change
Distributing materials for proxy battles
incumbents can distribute insurgent materials to shareholders (preferred) or provide the mailing list directly to insurgents
Reimbursement of incumbents for proxy battle
Requirements: not excessive or illegal, and must spend money on policy, not entrenchment.
Reimbursements of insurgents for proxy battle
Requirements: not excessive or illegal, and must spend money on policy, not entrenchment, must win, SH’s ratify the expenses
procedural requirements for shareholder proposal
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.
substantive rules for shareholder proposal
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
No-action letter
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.
Direct Suit
SH sues for personal harm
Derivative suit
SH sues on behalf of corp.
Proceeds go to corp, not SH.
SH benefit only indirectly (e.g. stock price goes up)
how to determine whether a suit is direct or derivative
ask who is harmed (corp = derivative, SH = direct, Both = derivative)?
Ask who gets the benefit?
Demand requirement
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.
SLC in DE
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.
SLC Auerbach rule (CA, NY, and others)
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
Requirements for shares of corporations
One class of shares must have economic rights. one calss of shares must have voting rights. They are often the same class
Define freeze out
a benefit conferred to majority SH at the expense to minority SH
MA approach to determining freeze out is actionable
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.
DE approach to determining freeze out is actionable
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
Dissolution
only available for closely held corporations.
