Business Associations Flashcards
Promoter
A promoter is someone who, prior to formation of a corporation, procures capital and enters into Ks to bring the corporation into existence. A promoter is personally liable for a K entered into pre-incorporation, even after the corporation comes into existence.
Exceptions to promoter personal liability
Novation or adoption
Novation
If there is a novation, that means the corporation and the other party to the K agree to substitute the corporation for the promoter in the K, and the promoter will no longer be liable.
Adoption
If there is an adoption, that means the corporation adopted the K (expressly or by using the benefits of the K) and agrees to accept sole liability on the K.
Incorporation requirement
To form a corporation, the articles of incorporation must be filed with the state. The articles must include a statement of the corporation’s purposes; a broad statement is acceptable.
De jure corporation
When the statutory requirements for incorporation are met, a de jure corporation has been formed. The corporation is then liable for its activities (not the individuals).
De facto corporation
If the owner made a good faith effort to incorporate and operate the business w/o knowing that the requirements were not met, the business will be treated as a de facto corporation and the individual owner will not be personally liable.
Corporation by estoppel
A party who deals with an entity as if it were a corporation is estopped from denying its existence and is thereby prevented from seeking personal liability against the business owner. This is limited to contractual agreements. The owner must have made a good faith effort to incorporate and operated the business w/o knowing that the requirements were not met.
Ultra vires doctrine
If a corporation has a narrow business purpose in its articles of incorporation and engages in activities outside the purpose, it has engaged in an ultra vires act. If an ultra vires act occurs, a shareholder can file a suit to enjoin the action and/or the corporation can take action against a director/officer/employee who engaged in the act. A 3rd party cannot assert ultra vires acts as a defense to escape liability.
Common stock
A corporation must issue common stock that is entitled to vote and represents ownership in the corporation.
Preferred stock
Preferred stock is stock given priority w/ dividends and during liquidation.
Who determines valuation
The BOD must determine that the consideration (e.g., money) paid for the stock is adequate.
Par value stock
In the process of incorporating, a corporation may issue par value stock. For such stock, the corporation is required to receive at least the value assigned to the stock (the par value). The par value does not have to be market value and can be nominal.
Watered stock
If the BOD issues (sells/trades) par value stock for below par value (watered stock), the BOD is liable to the corporation for the difference between the par value and amount actually received. A shareholder that knowingly received watered stock is also liable to the corporation.
Annual shareholder meetings are for what primary purpose
Annual shareholder meetings for the primary purpose of electing directors are required.
Special shareholder meetings are for what
Special shareholder meetings are required for approval of fundamental corporate changes (e.g., merge, sell itself, or sell substantial assets).
Proxy shareholder voting
A proxy is a written agreement by a shareholder to allow a person to vote for them. The proxy is valid for 11 months unless otherwise stated and is generally revocable. To be irrevocable, the proxy must expressly say so and the person who is receiving the shareholder’s right to vote must provide consideration to the shareholder.
Shareholder agreements relating to voting
Shareholders may enter into a binding voting agreement which governs how they will vote their shares. The agreement is a K and may be enforced; there is no time limit.
Shareholder direct action
In a direct action to enforce a shareholder’s rights, the shareholders sues the corporation for breach of fiduciary duty owed to the shareholder by a director/officers. The recovery goes to the shareholder.
Shareholder derivative action
In a derivative action against a corporation, a shareholder is suing (usually a director or officer) on behalf of the corporation for a harm suffered by the corporation. The shareholder must 1) demand on board unless futile, 2) have enough shares to adequately represent the shareholders, and 3) continue to be a shareholder through the suit. The recovery goes to the corporation.
Shareholder right to inspect records
Shareholders have a right to inspect corporate records upon 5 days’ written notice so long as it is for a proper purpose (e.g., related to the affairs of the corporations).
Piercing the corporate veil
Generally, shareholders are not personally liable for corporate acts. However, courts may allow a plaintiff to pierce the corporate veil and sue a shareholder individually depending on the totality of the circumstances including: 1) undercapitalization of corporation, 2) disregard of corporate formalities (e.g., no annual meetings or voting), and 3) fraud.
Controlling shareholder
Anyone with more than 50% of a corporation’s share or substantially more shares than anyone else is a controlling shareholder. A controlling shareholder owes a fiduciary duty to minority shareholders to not use their voting power in a way to disadvantage the minority shareholders.
Board of Directors
The BOD manages and directs the management of the corporation’s business and affairs; regular meetings are required.
Shareholder removal of a Board member
Shareholders may remove a director for breach of fiduciary duty (CL) or without cause (modern trend)
Validity of BoD voting
For the BOD’s acts at a meeting to be valid, a quorum of directors must be present at the meeting, meaning a majority of all directors.
Who has the sole power to authorize a dividend
BoD
Directors’ fiduciary duties
Duty of care
Duty of loyalty
Duty of care
Under the duty of care, directors & officers have a duty to act with the care of an ordinarily prudent person in a similar position and under similar circumstances (objective standard).
Reliance under the duty of care
Directors are entitled to rely on the performance of other officers, employees, and outside experts. This includes reliance on info, reports, and opinions provided by these people.
BJR
Under the duty of care, BJR is a rebuttable presumption where courts will not disturb good faith business decisions in the absence of fraud, illegality, or self-dealing.
Duty of loyalty
BJR is a rebuttable presumption where courts will not disturb good faith business decisions in the absence of fraud, illegality, or self-dealing.
Self-dealing
Self-dealing occurs when a director engages in a transaction with a corporation that benefits themself or a closely related family member. Self-dealing can also occur if the transaction benefits another corporation or partnership that the director is associated with or their closely related family member is associated with. Self-dealing violates the duty of loyalty unless the transaction is protected by the safe harbor rule.
Safe harbor rule
A self-dealing transaction can be protected under 3 ways: 1) interested director discloses to the BOD and receives approval by a majority of the disinterested directors, 2) interested director discloses to shareholders and receives approval by a majority of the disinterested shareholders, OR 3) the transaction is fair to the corporation at the time of the deal.
Remedies for self-dealing transaction
A self-dealing transaction not protected by the safe harbor rule can be enjoined or rescinded and the corporation can seek damages from the interest director.
Usurpation
Directors violate the duty of loyalty by usurping corporate opportunities by taking the opportunity for themself rather than offering it to the corporation first.
