Vorps Flashcards
Director entitlement to notice of a special meeting
Directors are entitled to notice of a special meeting.
Requirements for notice of a special meeting to a director
Unless the articles of incorporation or bylaws provide otherwise, notice must be provided at least two days prior to the meeting and specify the date, time, and place of the meeting. The notice need not describe the purpose of the special meeting.
Waiver of notice for a special meeting
Directors are entitled to notice of a special meeting, but a director’s attendance waives notice of that meeting unless the director promptly objects to lack of notice.
Quorum requirement for board actions
For a board of directors’ acts at a meeting to be valid, a quorum of directors must be present at the meeting.
What constitutes a quorum for the board of directors
A majority of all directors constitutes a quorum, unless the articles of incorporation require a higher or lower number
Presence for quorum purposes
for directors
A director must be present at the time the vote is taken in order to be counted for quorum purposes, but presence includes appearances made through communications equipment that allows all persons participating in the meeting to hear and speak to one another.
Amount of directors needed to assent to a decision for it to be effective
Typically, the assent of a majority of the directors present at the time the vote takes place is necessary for board approval. However, the articles of incorporation or bylaws may specify a higher level of approval.
AOI requirement
In order to form a corporation, the articles of incorporation must be filed with the state.
Requirements for AOI
The articles must include certain basic information, including the number of shares the corporation is authorized to issue.
Effect of filing the AOI
Unless a delayed date is specified in the articles, the corporate existence begins when the articles are filed.
Conducting biz as corp but not attempting to comply with incorporation requirements
When a person conducts business as a corporation without attempting to comply with the statutory incorporation requirements, that person is liable for any obligations incurred in the name of the nonexistent corporation
De jure corporation
When all the statutory requirements for incorporation have been satisfied, a de jure corporation is created.
Effect of a de jure corporation
When a de jure corporation is created, the corporation, rather than the persons associated with it, are liable for activities undertaken by the corporation
What if a corp hasn’t been created?
partnership
When a corporation has not been created, the entity may be treated as a general partnership.
Partnership
A partnership is an association of two or more persons to carry on a for profit business as co owners.
Liability in a general partnership
In a general partnership, each partner is jointly and severally liable for all partnership obligations
RMBCA and de facto corporations
The RMBCA has abolished the de facto corporation, as have many jurisdictions that have adopted the RMBCA
Corporation by estoppel
Under corporation by estoppel, a person who deals with an entity as if it were a corporation is estopped from denying its existence and is thereby prevented from seeking the personal liability of the business owner.
Limits of corporation by estoppel
The doctrine of corproation by estoppel is limited to contractual agreements.
Controlling SH fiduciary duties
A controlling shareholder, such as a parent corporation, generally does not owe fiduciary duties to the corporation or other shareholders
What standards are controlling SHs held to
Decisions by a majority shareholder or control group may be reviewable by a court for good faith and fair dealing toward the minority shareholders under the court’s inherent equity power
Standard to review biz dealings between controlling SH and controlling corp
Business dealings between a controlling shareholder and the controlled corporation that do not involve self dealing are analyzed using the business judgment standard
Business judgment rule
The business judgment rule is a rebuttable presumption that the controlling shareholder reasonably believed that his actions were in the best interests of the corporation.
Dividends and BJR
A decision protected by the business judgment rule includes whether to declare a dividend and the amount of any dividend
Self dealing with parent corps and subsidiaries
If a parent corporation causes its subsidiary to participate in a business transaction that prefers the parent at the expense of the subsidiary, it can involve self dealing and a breach of loyalty
application of BJR to self dealing transactions
The business judgment rule does not apply in a conflict of interest transaction
Safe harbors for conflict of interest transactions
There are three safe harbors by which a conflict of itnerest transaction may enjoy protection
1. Disclosure of all material facts and approval by a majority of disinterested board members
2. Disclosure of all material facts and approval by a majority of votes to be cast by shareholders without a conflicting interests
3. Fairness of the transaction to the corporation at the time of commencement
What does the fairness test look for with regard to self dealing
The fairness test looks at the substance and procedure of the transaction.
Fairness test, parent companies, and subsidiaries
With regard to a aprent corporation engaged in self dealing, the main concern under the fairness test is whether the benefit is comparable to what might have been obtained in an arm’s length transaction.
Usurping business opportunities
A director may breach their duty of loyalty by usurping a corporate opportunity rather than first offering the opportunity to the corporation.
How do courts decide wheher an opportunity should have been offered to the corp first
In determining whether the opportunity is one that must be offered to the corpoartion first, courts have applied the “interest or expectancy” test or the “line of business” test
Interest or expectancy test
for usurping biz opps
Under this test, the key is whether the corporation has an existing interst or expectancy arising from an existing right in the opportuntity. An expectancy can also exist when the corp is actively seeking a similar opportunity
Line of business test
Under the line of business test, the key is whether the opportunity is within the corporation’s current or prospective line of business. Whether an opportunity satisfies this test frequently turns on how expansively their line of business is characterized.
BJR
The BJR is a rebuttable presumption that a director reasonably believed that his actions were in the best interests of a corporation. The exercise of managerial powers by a director is generally subject to the BJR
BJR and self dealing
The BJR does not apply to a COI transaction
COI transactions
A COI transaction, or “self dealing” is any transaction between a director and his corporation that would normally require approval of the board of directors and that is of such financial significance to the director that it would reasonably be expected to influence the director’s vote on the transaction
safe harbor for COI transactions by vote of BOD
Majority approval of a COI transaction by fully informed disinterested director triggers the BJR under a safe harbor provision
directors fid duties to corp
a director owes a duty of loyalty and care to the corporation
what does the duty of loyalty require
for directors
the duty of loyalty requires a director to act in a manner that the director reasonably believes is in the best interests of the corporation.
directors and COI transactions
A director who engages in a COI transaction with his own corporation has violated his DOL unless the transaction is protected under a safe harbor rule
safe harbor for DOL violations
A COI may enjoy a safe harbor via (i) majority vote of informed and disinterested directors (ii) majority vote of informed and disinterested SHs or (iii) fairness of the transaction
Fairness of COI transactions
The fairness test looks at the substance and the procedure of the transaction
- substantively, the test asks whether the corporation received something of comparable value in exchange for what it gave the director
- procedurally, it looks at whether the process followed by the directors in reaching their decision was appropriate.
What if a COI transaction violates safe harbor provisions
A COI transaction in violation of the safe harbor provisions may be enjoined or rescinded, and the corporation may seek damages from the directors
Directors’ duty of care
Directors have a duty to act with the care that a person in a like position would reaosnably believe appropriate under similar circumstances
Director as an ordinarily prudent person
A director is presumed to have the knowledge and skills of an ordinarily prudent person, and is required to use any additional knowledge or special skills that he possesses
LLC operating agreement, generally
While an operating agreement by an LLC is generally not required, many LLCs may adopt an operating agreement that governs any and all aspects of the entity’s affairs.
Precedence of LLC operating agreement
An operating agreement generally takes precedence over contrary statutory provisions
LLC members’ fiduciary duties
Generally, LLC members owe each other and the LLC a duty of loyalty
Duty of loyalty
The duty of loyalty includes the duties to refrain from dealing with the company on behalf of one with an adverse interest in the company, and to refrain from competing with the company
LLC limits on duty of loyalty
An operating agreement may amend the duty of loyalty so long as the amendment is not unreasonable
What happens when LLC members voluntarily dissolve
When members agree to voluntarily dissolve an entity, the entity must wind up its affairs and liquidate its business.
When may LLC members receive a portion of the liquidated value of the LLC
Only after the entity’s debts and obligations to creditors have been paid may the members receive a portion of the liquidated value of the LLC
Liability for LLC members participating in winding up
Memebrs responsible for winding up an LLC may be liable for improper distributions to members before creditors.
Liability of an LLC member, generally
A member of an LLC is generally not liable personally for the LLC’s obligations.
Piercing the veil for LLCs
If a plaintiff can pierce the veil. members of an LLC may be held personally liable
Circumstances that justify piercing the veil for an LLC
and other corps probably
Circumstances that would justify piercing the veil include undercapitalization of the business, commingling of assets, confusion of business affairs, or deception of creditors
Mere instrumentality test
for veil piercing
One tests courts rely on is the mere instrumentality test, wherein a plaintiff would have to show that (i) the members dominated the entity in such a way that the LLC had no will of its own, (ii) the members used their domination to commit a fraud or wrong, and (iii) control and wrongful action proximately caused the injury.
Unity of interest and ownership test
for veil piercing
Under the unity of interest and ownership test, a petitioner must demonstrate that there was such a unity of interest and ownership between the entity and the members that, in fact, the LLC did not have an existence independent of the members and that failure to pierce the veil through to the members would be unjust or inequitable
Shareholders’ power to amend bylaws
SHs have the power to amend a corp’s bylaws under state law.
When are bylaws enforceable
A corp’s bylaws for the management of business or regulation of its affairs are enforceable, so long as the bylaws do not conflict with state law or the AOI.
director’s power to amend bylaws
The board of directors can also amend bylaws unless the AOI or a vote by shareholders limits this power
New SH bylaws provisions amending/repealing existing ones
Shareholder approved bylaws can amend or repeal existing bylaw provisions, regardless of whether the bylaw was initially aproved by SHs or the BOD
Limits on SH appoved bylaws dealing wth directors
A SH approved bylaw dealing with director nominations may not limit the board’s power to amend, add, or repeal to ensure an orderly process.
When can a BOD amend/add to SH bylaw provisions
If SHs approve a bylaw amendment that limits further board changes, the board can only amend or add to the bylaw to safeguard the voting process. It cannot wholly repeal the SH approved bylaw
Kinds of actions a SH can bring against a corp
A SH may bring a direct or derivative action against a corp in which the SH owns stock
Direct actions
In a direct action, the SH is vindicating their own rights and is not required to make a demand on the BOD before proceeding with the litigation.
Derivative suits
In a derivative action, a SH brings suit on behalf of the corp and is typically based on a breach of fiduciary duties by the BOD.
Requirements for a SH to bring a derivative action
To bring a derivative action, the SH must have standing and must make a written demand on the BOD.
When does a SH have standing for derivative suits
To have standing, the SH must have been a SH at the time of the wrong and at the time the action was filed, and continue to be a SH throughout the litigation.
Demand requirement
The SH is required to make a written demand upon the BOD unless the demand would be futile. Not all JDXs recognize the futility exception, however. In states that don’t recognize it, demand must always be made upon the board
