Business Entities Flashcards
(214 cards)
1
Q
As a general rule, an incorporator’s role is limited to
A
executing the articles of incorporation, delivering the articles of incorporation for filing to the secretary of state’s office, and holding an organizational meeting strictly for purposes of appointing initial directors, if those directors were not identified in the articles of incorporation.
2
Q
Prior to holding a special meeting of the board of directors, all directors must receive what notice?
A
They must receive at least two days’ notice of the date, time, and place of the meeting, as well as a description of the purpose of the special meeting.
3
Q
Cumulative voting by corporate shareholders is allowed under what circumstance?
A
Cumulative voting by corporate shareholders is allowed if stated in the articles of incorporation.
4
Q
Is a merger or consolidation that occurs deemed to affect shareholders’ rights?
A
No.
5
Q
For how long does a promoter have personal liability for pre-incorporation contracts?
A
Personal liability will continue even after the corporation is formed unless there is a novation.
6
Q
What is “novation”?
A
The substitution of a new contract for an old one.
7
Q
A corporation’s bylaws may be amended or repealed by
A
either the corporation’s shareholders or the board of directors. Note that this differs from an amendment to the Articles of Incorporation, which requires a vote of both the directors and the shareholders.
8
Q
Do the managers of an LLC have the authority to amend the LLC’s operating agreement?
A
No. Managers of an LLC do not have the authority to amend the LLC’s operating agreement. That must be done by the LLC’s members.
9
Q
For an LLC, for state income tax purposes.
A
An LLC is taxed in the same matter as it is for federal tax purposes.
10
Q
Every unrevoked proxy expires ___
A
Every unrevoked proxy expires 11 months after the date of its execution, unless some other definite period of validity is expressly provided therein.
11
Q
(Partnerships) Among the partners themselves, virtually all of the rules of partnership law are merely suppletive (or default) in nature; they apply only to
A
the extent that the partners have not agreed to something different
12
Q
(Partnerships) What default partnership rules can partnerships NOT agree to alter?
A
- all partners must have the right to look at the books and records of the partnership
- though the La. Courts haven’t yet expressly decided the issues, it is likely that partners may not contract away their duty of loyalty
- rules affecting third parties are not enforceable against third parties
13
Q
(Partnerships) Formation
A
A partnership is a juridical person, distinct from its partners, that is created by two or more persons who agree to contribute their efforts or resources in determined proportions and to collaborate in mutual risk for the common profit or commercial benefit
14
Q
(Partnerships) A general partnership is created when
A
two or more people contract to collaborate. No writing or filing of a document is required to form a general partnership
15
Q
(Partnerships) Writing and Filing Requirements
A
Despite the rule that partnerships may be formed without a writing or a filing of any kind, a partnership that is formed without a written and properly filed contract of partnership lacks the capacity to own immovable property, either entirely or as against third persons
16
Q
(Partnerships) If the partnership contract is not in writing, and the partnership purports to acquire ownership of immovable property in the partnership’s name
A
the property is not owned by the partnership, but rather by the partners as co-owners in indivision. If the contract of partnership is later put in writing, the ownership of the property is not automatically transferred from the partners as co-owners to the partnership. Rather, the partners must transfer the property to the partnership in a separate act.
17
Q
(Partnerships) If the partnership purports to acquire ownership of immovable property when the partnership contract is in writing, but is not properly filed (or “registered”) as required by law, then as among the partners and the partnership, the property is owned by
A
the partnership. But as against third persons, the property continues to be owned by the partners as co-owners in indivision until the contract is properly filed. When that filing occurs, no new act of transfer is required; the filing itself resolves the ownership issue with respect to third person claims that arise after the date of the filing.
18
Q
(Partnerships) The so-called “contract of partnership” that is to be filed to enable the partnership to own immovable property as to third persons must be:
A
- must be in writing
- must be signed by all partners
- must be filed with the secretary of state
19
Q
(Partnerships) The required content of the filed “contract of partnership” includes nothing beyond a bare identification of
A
the names and addresses of the partnership and partners—it is effectively a contract without terms.
Should also include a Taxpayer Identification Number, but statute explicitly says that not including this will not affect the effectiveness of the filing
20
Q
(Partnerships) Equal-per-partner
A
is the default rule on virtually all issues, including each partner’s share of the partnership’s profits, losses, commercial benefits, distribution of assets, and voting power
EXCEPTION: Capital contributions are restored to each partner in ratio made, unless otherwise agreed.
21
Q
(Partnerships) Decisions Affecting the Partnership
A
Three levels of importance, with three different approval requirements (all, as usual, subject among the partners to contrary agreement).
22
Q
(Partnerships) who can make decisions that are Ordinary course of business
A
any single partner acting by herself has authority to bind the partnership
EXCEPT: the ordinary course rule does not apply to transactions in which the partnership is in some way disposing of interest in immovable property
23
Q
(Partnerships) who can make decisions that are important, but not fundamental
A
this requires a majority vote, one vote per partner, not percentage interest
24
Q
(Partnerships) who can make decisions that are fundamental
A
requires unanimous consent of all partners
25
(Partnerships) what is a fundamental decision
1) amend the partnership agreement;
2) merge the partnership with another entity;
3) terminate the partnership;
4) admit a new partner; or
5) permit a partner to withdraw without just cause if the partnership has been constituted for a term.
26
(Partnerships) A partner owes a fiduciary duty to
the partnership and to his partners
If a partner violates his fiduciary duty, the partner must account to the partnership and to his partners for the resulting profits.
27
(Partnerships) partner exceeds the scope of his mandatory authority; affect on third parties
the partnership is bound to the good faith third party, but will be able to seek recourse from the rogue partner for damages causes
28
(Partnerships) An obligation contracted for the partnership by a partner either in his own name or the name of the partnership binds the partnership if
the partnership benefits by the transaction or the transaction involves matters in the ordinary course of its business. If the partnership is so bound, it can enforce the contract in its own name
29
(Partnerships) who is primarily liable for partnership debts?
The partnership, as a separate entity or juridical person, is “primarily” liable for all partnership debts
30
(Partnerships) who is secondarily liable for partnership debts? and in what proportion?
all partners in a general partnership (and all general partners in a partnership in commendam) are personally liable “secondarily” for their “virile” share of the partnership’s liabilities.
31
(Partnerships) The “primary” liability of the partnership vs. the “secondary” liability of the partners has little practical importance. Why?
It does not mean that the creditor must exhaust the assets of the partnership before pursuing a claim against the partners.
A partner may plead “discussion," but no partner in La. ever has
32
The partners of an existing partnership may not be sued on a partnership debt unless
partnership itself is joined as a party
33
(Partnerships) Who is a "no-loss-sharing" agreement enforceable against?
a no-loss-sharing agreement is enforceable among the partners themselves, but not against third persons
34
(Partnerships) Cessation of membership
(1) death;
(2) interdiction;
(3) bankruptcy under Chapter 7 (where trustee is appointed to take charge of the debtor’s assets and claims, and so would take charge of the partner’s affairs);
(4) seizure of partnership interest through a writ of execution that is not released in 30 days [LSA-C.C. 2819];
(5) expulsion;
(6) withdrawal;
(7) other events or causes as provided in the partnership agreement.
35
(Partnerships) May a partner's interest be transferred or inherited?
No.
36
(Partnerships) A new partner may not be admitted to the partnership without:
a universal yes vote of all existing partners
37
(Partnerships) The closest thing allowed to a “transfer” of a partnership interest is
a “sharing” of the interest between the partner and a third person. the sharing partner is liable to the partnership by the sharing third person as if the partner had caused the loss personally
38
(Partnerships) Regardless of the cause of the cessation of a partner’s membership in the partnership, the partnership must pay the former partner, or his successor (i.e., heir or legatee) or seizing creditor,
the “value” of the partnership interest at the time the membership ceased, plus interest at the legal rate from that date
39
(Partnerships) Withdrawal from a partnership without a term
(1) A partner may withdraw at any time and without the consent of the other partners, provided that the withdrawing partner:
(a) gives reasonable notice (to whom is not stated, but to be safe, the notice should be provided to all other partners);
(b) in good faith (again not defined—but be alert for something suggesting bad faith or an effort to take advantage of the other partners); and
(c) at a time that is not unfavorable to the partnership (be alert for facts suggesting that the partnership is especially vulnerable to the ill effects of having to buy out the withdrawing partner at the particular time involved).
40
(Partnerships) Withdrawal from a partnership with a term
(1) A partner may not withdraw without either:
(a) Just cause—arising out of the failure of another partner to perform an obligation; or
(b) Unanimous consent from the other partners (Art. 2821 requires consent; Art. 2807 requires that it be unanimous).
41
(Partnerships) Expulsion
A partnership may expel a partner for “just cause” if the expulsion is approved by a majority of the partners
NOTE: The majority of partners required to approve the expulsion would be calculated based on the total number of partners in the partnership, including the partner or partners to be expelled
42
(Partnerships) Partner unaware of termination
Anything done in what would have been the usual course of business of the partnership by a partner acting in good faith, who is unaware that the partnership has terminated, binds the partnership as if it still existed.
43
(Partnerships) Third person unaware of termination
Regardless of a partner’s knowledge of termination, the rights of a third person who transacts business with a partner or other mandatary of a terminated partnership are not affected by the termination if the third party does not know or have reason to know of the termination
44
(Partnerships) Division of partnership assets
1. creditors of the partnership
2. capital contributions of partners
3. surplus to partners divided among the partners proportionally based on their respective interests in the partnership—which, remember, are equal in the absence of contrary agreement.
45
(Partnership) The creditors of a partnership must be paid in the following order of priority (which may not be varied by agreement among the partners):
1) secured creditors in accordance with their security rights;
2) unsecured creditors who are not partners;
3) unsecured creditors who are partners (notice that the unsecured debt claims held by partners against the partnership are automatically subordinated to those held by outside creditors; that would not occur under corporation or LLC law).
46
To "become" an LLP, a partnership must file an application that sets forth
(1) Name of the partnership;
(a) The name must include the words “registered limited liability partnership,” or the “L.L.P.” abbreviation as the last words or letters of its name [LSA-R.S. §9:3433];
(2) Address of the partnership’s principal office;
(3) Number of partners; and
(4) A brief statement of the business in which the partnership engages.
47
(LLP) Application for LLP status. Application must be executed by
a majority in interest of the partners or by one or more partners authorized by a majority of the partners.
48
(LLP) Partners responsible for virile share?
No. Unlike a partner in a general partnership, a partner in an LLP is not personally liable for his or her virile share of the partnership’s liability for what can be summarized as tortious conduct of other persons (whether partners or other kinds of representatives) in the partnership.
A partner in a Louisiana LLP, therefore, may avoid personal liability for malpractice and other partnership-related torts committed by other partners or agents or employees of the partnership.
49
(LLP) LLPs do not protect a partner from:
1. their own malpractice
NOTE: LLPs provide no protection to the partnership itself for the liabilities arising out of the malpractice or other tortious behavior of its partners and employees.
2. doesn't affect the liability of any partner, innocent or not, for contract obligation if the debt of the partner doesn't arise from a tort, LLP status is irrelevant. All partners are liable.
50
(LLP) Must LLP status be renewed?
The protection against liability that is provided by an LLP must be renewed annually [LSA-R.S. 3432 (E)]. No such rule applies to any other form of limited liability business entity.
If the registration of the LLP is not renewed, the partnership continues as a general partnership, without the protection afforded by the LLP registration [LSA-R.S. 3435].
51
(Limited Partnership) how many partners?
Unlike a general partnership or an LLP, a partnership in commendam has two kinds of partners:
(1) General partners, who are entitled to participate in the management of the partnership, and who bear personal liability for their virile share of the partnership’s debts; and
(2) Partners in commendam, who are passive investors (i.e., do not participate in management) that do not bear any personal liability for the debts of the partnership.
52
(Limited Partnership) If you lose a GP, does the LP dissolve immediately?
A partnership in commendam must, by definition, have at least one of both types of partners [LSA-C.C. Art. 2837] (except for a 90-day grace period allowed for the replacement of a sole general partner who dies or is interdicted or dissolved [LSA-C.C. Art. 2826]).
53
(Limited Partnership) A partner in commendam does not have the authority of a general partner to:
1. bind the partnership
2. participate in management or administration of the partnership
3. cannot conduct any business with a third party on behalf of the LP
54
(Limited Partnership) Restriction on Distributions
A partner in commendam may not receive any distribution from the partnership if it would render the partnership insolvent.
55
(Limited Partnership) Special Rule on Termination
A partnership in commendam terminates by the retirement from the partnership, or the death, interdiction, or dissolution, of the sole or any general partner, unless:
(a) the partnership is continued with the consent of the remaining general partners under a right to do so stated in the partnership agreement; or
(b) if, within 90 days after such event, all the remaining partners agree in writing to continue the partnership and to the appointment of one or more general partners if necessary or desired.
56
(Limited Partnership) Until the contract is filed, all partners in commendam
remain liable as general partners.
57
(Limited Partnership) The filing and content of the contract are governed by exactly the same rules that govern the filing of a contract of partnership for purposes of giving the partnership the capacity to own immovable property PLUS two additional requirements. Remember, that means the contract
1. all partners must sign
2. need the partnership's address
3. partners' addresses
4. Name of partnership (indicating its a limited partnership)
5. The agreed contributions of the partners in commendam to the partnership’s capital must be described.
58
The name of the partnership must not
“imply that [a] partner in commendam is a general partner” LSA-C.C. Art. 2838].
59
A partner in commendam must not “participate in the control” of the partnership. But there are exceptions
1) certain listed actions permissible for the acts of a shareholder-like passive investor; or
2) acting in some role other than as partner in commendam.
60
Reliance rule
when a partner in commendam participates in the partnership management, he is exposed to personal liability, but only to the third party who extended credit to the partnership reasonably believing that the partner in commendam was actually a general partner.
61
(Limited Partnership) A partner in commendam must agree to make a contribution to the partnership, and the partnership contract must describe the contribution and state either its agreed value or a method of determining that value; it should also state the time or circumstances upon which the contribution is to be delivered; otherwise
the contribution is due on demand from the partnership
62
(Limited Partnership) Does a a partner in commendam lose his or her limited liability if the contract fails to describe the partner’s agreed contribution to the partnership?
Article 2840 does not actually say that , but the comments to the rule do, so you should assume that a failure to include a description in the filed partnership contract of the agreed contribution of a partner in commendam causes that partner to lose his or her limited liability.
63
(Corporations) Incorporators
One or more persons capable of contracting may act as the incorporator or incorporators of a corporation by delivering to the secretary of state for filing articles of incorporation and the written consent of the registered agent
64
(Corporations) As a general rule, an incorporator’s role is limited to
a. executing the articles of incorporation;
b. delivering the articles of incorporation for filing to the secretary of state’s office; and
c. holding an organizational meeting strictly for purposes of appointing initial directors, if those directors were not identified in the articles of incorporation. Louisiana rejected a Model Act rule that would have permitted the incorporators to adopt bylaws, appoint officers and otherwise complete the organization of the corporation. Under Louisiana law, those tasks must be completed by the initial directors.
65
(Corporations) Articles of Incorporation, Mandatory Provisions
1. The corporate name
2. the number of shares the corporation is authorized to issue
3. the street address of the corporation’s initial registered office, initial principal office (if different from the registered office) and initial registered agent
4. the street address of the corporation’s principal office
5. whether the corporation accepts, rejects, or limits, with a statement of limitations, the default statutory protection against liability of directors and officers; and
6. the name and mailing address of each incorporator.
66
(Corporations) Rules re: registered office
(1) A corporation must continuously maintain both a registered office and a registered agent in Louisiana.
(2) The registered office may be the same as any of the corporation’s places of business.
(3) The principal office is the office designated in the latest annual report (or in the articles until an annual report is filed) where the corporation’s principal executive offices are located.
(a) Unlike the registered office, which must be located in Louisiana, the principal office may be located either in-side or outside Louisiana.
67
(Corporations) The appointment of the registered agent or a successor registered agent is not effective until
the agent delivers a statement in writing with the agent’s signed written consent to the secretary of state accepting the appointment.
68
(Corporations) Articles of incorporation, Execution and Filing Requirements
1. The document must be submitted to the secretary of state with the correct filing fee.
2. The document must be in English and typewritten, printed, or electronically transmitted (although handwritten notations or entries to fill in blanks are acceptable).
3. signed by the appropriate people
4. the person executing it must sign and date it
5. notarized
69
(Corporations) The articles of incorporation must be signed by
a. the chairman of its board of directors, its president, or by another of its officers;
b. an incorporator, if the directors have not been selected or the corporation has not been formed;
c. if the corporation is in the hands of a court-appointed liquidator or other fiduciary, by that person.
70
(Corporations) The corporate existence begins at
the date and time of filing the articles of incorporation with the secretary of state, provided that a delayed effective date is not specified in the articles. Louisiana also retains the “five-day” rule, specifying that a corporation’s original articles of incorporation become effective when signed if the articles are received and accepted for filing by the secretary of state within five days after the date that the articles are signed.
71
(Corporation) If Initial Directors Are Named in the Articles of Incorporation
After incorporation, initial directors must hold an organizational meeting to complete the organization of the corpora-tion by appointing officers, adopting bylaws, and carrying on any other corporate business
72
(Corporation) If Initial Directors Are Not Named in the Articles of Incorporation
After incorporation, incorporators must hold an organizational meeting to elect initial directors. The initial directors are then required to complete the organization of the corporation.
73
(Corporation) Bylaws, how adopted
The board of directors may adopt initial bylaws for the corporation. Note that Louisiana rejected the Model Act rule that required the adoption of bylaws, and retained its earlier rule that permitted, but did not require, the adoption of by-laws.
74
(Corporation) The board of directors may amend or repeal the bylaws, unless:
(1) the articles of incorporation reserve this power exclusively to the shareholders in whole or part; or
(2) the shareholders, in amending or repealing a particular bylaw, provide expressly that the board of directors may not amend or repeal that bylaw.
75
(Corporation) The LBCA creates a third form of governance document (in addition to the first two, the articles of incorporation and by-laws) that is called
a unanimous governance agreement, or UGA.
Unlike the articles of incorporation and bylaws, a UGA may override even provisions of the LBCA that would otherwise be mandatory, including the rule that a corporation must be managed by a board of directors. For example, a UGA may eliminate the board of directors and allow the corporation to be managed directly by one or more shareholders or other persons.
76
(Corporation) What is a UGA? What does it do and how is it created?
a. It is approved in one or more writings that are signed by all persons who are shareholders at the time of the agreement (or by all incorporators if no shares have been issued).
b. It governs the exercise of the corporate powers or the management of the business and affairs of the corporation or the relationship among the shareholders, directors and corporation, of among any of them.
c. It states that it is a unanimous governance agreement or that it is governed by § 1-732, the provision dealing with unanimous governance agreements. This last provision is designed to make sure that shareholders do not trigger the extraordinary rules applicable to UGAs by accident. The exclusion of articles and bylaws from the definition is de-signed to do the same thing.
77
(Corporation) UGA default rules
a. Has an initial term of 20 years.
b. May be amended, renewed, or terminated before the end of its term by means of written consents from all persons who are shareholders at the time.
c. Continues in effect even after the expiration of its terms unless the shareholders holding at least 25% of the issued shares of any class deliver to the corporation written consents to the termination of the UGA.
78
(Corporation) A promoter
is one who causes a corporation to be formed, organized, and financed
79
(Corporation) general rules for promoter
2. As a general rule, the promoter is personally liable on any contract he entered into on behalf of the yet nonexistent corporation, unless the circumstances demonstrate that the other party looked only to the corporation for performance.
3. As a general rule, a corporation is not liable on any preincorporation agreements its promoters entered into on its behalf, unless it assumes liability by its own act after it comes into existence.
80
(Corporation) Traditionally, if statutory compliance was insufficient for de jure status, a de facto corporation may still have been formed if:
a. a good-faith, colorable attempt was made to comply with the incorporation statute; and
b. the corporate principals acted in good faith as if they were a corporation.
81
(Corporation) Absent de jure or de facto status, a corporation may still exist by
estoppel. Under this doctrine, persons who dealt with the entity as if it were a corporation are estopped from later alleging that the corporation is defective if that would unjustly harm the principals.
82
(Corporation) Piercing the Corporate Veil, what test?
Alter-Ego-Plus-Fraud or Indistinguishability Test
83
(Corporation) Alter-Ego-Plus-Fraud or Indistinguishability Test
1. failure to comply with statutory formalities in the organization and operation of the corporation
2. failure to hold director and shareholder's meetings as required by law
3. inadequate capitalization
4. commingling of assets
5. no separate bank account for the corporation
84
(Corporation) Number of Directors on the Board
a. The board must consist of one or more individuals.
b. The number of directors is determined by or in accordance with the following documents or acts, in the following order of priority:
(1) the articles of incorporation;
(2) the bylaws;
(3) the number elected from time to time by the shareholders; or
(4) the number named as initial directors in the articles of incorporation
85
(Corporation) Unless the articles of incorporation provide otherwise, if a vacancy occurs on a board of directors, including a vacancy resulting from an increase in the number of directors:
(1) the shareholders may fill the vacancy;
(2) the board of directors may fill the vacancy; or
(3) if the directors remaining in office constitute fewer than a quorum of the board, they may fill the vacancy by the affirmative vote of a majority of all the directors remaining in office.
86
(Corporation) Removal of directors
The shareholders may remove one or more directors, with or without cause, unless the articles of incorporation provide that directors may be removed only for cause.
b. A director may be removed by the shareholders only at a meeting called for the purpose of removing the director. The meeting notice must state that the purpose, or one of the purposes, of the meeting is removal of the director.
c. The vote required to remove a director is a majority of shares entitled to be cast in the election of directors, subject to the following two special rules.
87
(Corporation) Notice. Unless the articles of incorporation or bylaws provide otherwise, regular meetings of the board of directors may be held
without notice of the date, time, place or purpose of the meeting.
88
(Corporation) Notice. Unless the articles of incorporation or bylaws provide for a longer or shorter period, special meetings of the board of directors must be preceded by at least
48 hours’ notice of the date, time, and place of the meeting.
89
(Corporation) Waiver of Notice for meetings
(a) In Writing: the director may waive notice in a writing signed by the director, either before or after the time stated in the notice, and filed in the minutes or corporate records; or
(b) By Presence: A director’s attendance at the meeting waives notice unless the director objects at the beginning of the meeting, or promptly after arriving at the meeting, or, with respect to an objection as to purpose, objects promptly after the non-noticed item is raised for consideration. A director who objects, but who later participates in the meetings, waives notice only with respect to those actions that the director votes to approve.
90
(Corporation) A quorum of a board of directors consists of:
a majority of all directors, unless stated otherwise
91
(Corporation) Directors' voting. If a quorum is present when a vote is taken, the affirmative vote of a
a majority of the directors present is the act of the board of directors unless the articles of incorporation or bylaws require a greater number.
92
(Corporation) Action Without a Meeting
(1) Unless the articles of incorporation or bylaws provide otherwise, action required or permitted by the LBCA to be taken by the board of directors may be taken without a meeting if each director signs a consent describing the action to be taken and delivers it to the corporation.
(2) Action taken without a meeting is the act of the board of directors when one or more consents signed by all the directors are delivered to the corporation, unless the consent specifies a different effective date.
93
(Corporation) In Louisiana, a corporation must have a (member of corporation)
secretary and may have any other officers it chooses to have, as provided in its bylaws or as appointed by its board of directors in a manner not inconsistent with any bylaws.
94
(corporation) An officer may resign
resign at any time by delivering notice to the corporation
95
(Corporation) A board of directors (or the appointing or other officer with removal authority) may remove any officer at any time,
with or without cause.
96
(Corporation) Shareholders have the right to:
a. elect and remove directors;
b. amend the bylaws; and
c. approve fundamental changes in the corporation, such as amendment of the articles of incorporation, mergers, share exchanges, conversions, or the sale of all or substantially all assets.
97
(Corporation) Except as provided in the articles of incorporation, action required or permitted by the LBCA to be taken at a shareholders’ meeting may be taken without a meeting and without prior notice, if
the action is taken by all the shareholders entitled to vote on the action.
98
(Corporation) Shareholder consents must be signed and dated. They are effective only if the required number of consents are signed and delivered to the corporation within
60 days of the date the first consent that was delivered to the corporation
99
(Corporation) A corporation must hold a special meeting of the shareholders:
(1) on call of its board of directors or the person(s) authorized to do so by the articles of incorporation or bylaws; or
(2) if the shareholders holding at least 10% (or such higher or lower percentage as is contained in the articles of in-corporation, not to exceed 25%) of all votes entitled to be cast on any issue to be considered at the special meeting sign, date, and deliver to the corporation’s secretary one or more written demands for the meeting describing the purpose(s) for which it is to be held. (Note that the 10% figure is a reduction in the pre-2015 law, which required 20%).
100
(Corporation) If no annual meeting is held for a period of 18 months (and directors are not elected during that period by written con-sents), any shareholder may demand that the secretary call such a meeting. The secretary is required to call and pro-vide notice of the meeting within
30 days of the shareholder’s notice to the secretary demanding the meeting. (Note that this 18-month rule retains the pre-2015 Louisiana law on this issue, which was a frequent topic on the bar exam, except that the shareholder no longer calls the meeting himself or herself, but instead demands that the secretary do so.)
101
(Corporation) The district court of the parish where a corporation’s principal office (or, if none in this state, its registered office) is located may, in a summary proceeding, order a meeting to be held upon application of any shareholder of the corpora-tion if an annual meeting was not held or action by written consent in lieu thereof did not become effective within
the earlier of 6 months after the end of the corporation’s fiscal year or 15 months after its last annual meeting. This rule does overlap with the 18-month rule that was retained from pre-2015 Louisiana law, discussed above. But a conscious decision was made by the drafting committee to keep the old 18-month rule in addition to this Model Act provision.
102
(Corporation) Both annual and special shareholder meetings require notice of
the date, time, and place no fewer than 10 days and not more than 60 days before the meeting.
103
(Corporation) Unless the LBCA or the articles of incorporation require otherwise, notice of an annual meeting need not include a description of the purpose(s) of the meeting. However, notice of a special meeting must include
a description of the purpose for which the meeting is called.
104
(Corporation) The shareholder list must be made available for inspection by any shareholder, beginning
two business days after notice of the meeting is given for which the list was prepared and continuing through the meeting, at the corporation’s principal office or at a place identified in the meeting notice in the city where the meeting will be held.
105
(Corporation) Voting at a shareholders' meeting. What is a quorum
Unless the articles of incorporation or the LBCA provide otherwise, a majority of the votes entitled to be cast on the matter by a voting group constitutes a quorum for that voting group.
106
(Corporation) If a quorum exists, action on a matter (other than the election of directors) by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless
the articles of incorporation or the LBCA require a greater number of affirmative votes.
107
(Corporation) Directors are not permitted to vote by proxy unless
the articles of incorporation allow it.
108
(Corporation) a proxy is
The LBCA, like the Model Act, uses the term “proxy” to refer to the person who is given the voting power. The grant of authority is called the “appointment,” and the document that is used to make the appointment is called the “appointment form” or “electronic transmission.”
109
(Corporation) A shareholder, or his or her agent or attorney-in-fact, may appoint a proxy to vote or otherwise act for the shareholder by
signing an appointment form or by an electronic transmission
110
(Corporation) An appointment of a proxy is effective when
a signed appointment form or an electronic transmission of the appointment form is received by the secretary or other officer or agent authorized to tabulate votes.
111
(Corporation) A proxy appointment is valid for
11 months unless a longer period is expressly provided in the appointment form. Note that the pre-2015 rule against a proxy having a term longer than three years has been eliminated
112
(Corporation) An appointment of a proxy is revocable unless
(1) the appointment form or electronic transmission states that it is irrevocable; and
(2) the appointment is coupled with an interest.
113
(Corporation) Appointments coupled with an interest include the appointment of
(1) a pledgee or other person having a security interest in the shares;
(2) a person who has purchased or agreed to purchase the shares;
(3) a creditor of the corporation who extended credit under terms requiring the appointment;
(4) an employee of the corporation whose employment contract requires the appointment; or
(5) a party to a voting agreement.
114
(Corporation) One or more shareholders may create a voting trust, conferring on a trustee the right to vote or otherwise act for them, by
signing an agreement setting out the provisions of the trust (which may include anything consistent with its purpose) and transferring their share to the trustee.
115
(Corporation) Although the trust becomes the record owner of the shares, beneficial ownership
remains in the shareholders, and they are entitled to any dividends or distributions and to all other rights except voting.
116
(Corporation) Voting Agreements
a. Unlike a voting trust, a voting agreement does not involve a transfer of record ownership of the shares.
b. However, a voting agreement is specifically enforceable, and it is one of the types of interest that support the issuance of a proxy that may be made irrevocable because it is coupled with an interest.
117
(Corporation) Cumulative Voting
If the articles of incorporation provide for cumulative voting, designated shareholders are entitled to multiply the number of votes they are entitled to cast by the number of directors for whom they are entitled to vote and cast the product for a single candidate or distribute the product among two or more candidates.
118
(Corporation) Any shareholder is entitled to inspect and copy, during regular business hours, at the corporation’s principal office, upon five days’ written notice of demand, the following corporate records:
(a) its articles or restated articles of incorporation and all amendments to them currently in effect;
(b) its bylaws or restated bylaws and all amendments to them currently in effect;
(c) resolutions adopted by its board of directors creating classes or series of shares, and fixing their relative rights, preferences, and limitations, if the shares are outstanding;
(d) the minutes of all shareholders’ meetings and records of action taken by shareholders without a meeting, for the past three years;
(e) all written communications to shareholders generally in the last three years, including any financial statements that were furnished to shareholders for the past three years;
(f) a list of the names and business addresses of its current directors and officers;
(g) its most recent annual report; and
(h) any unanimous governance agreement then in effect.
119
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(Corporation) 5% Shareholder’s Conditional Right to Inspect and Copy “Any and All” Records
(1) A shareholder of at least 5% of the issued shares of any class for at least the preceding six months is entitled to in-spect and copy, during regular business hours at a reasonable location specified by the corporation “any and all” records of the corporation, if the following requirements are met
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(a) the shareholder’s demand is made in good faith and for a proper purpose;
(b) the shareholder describes with reasonable particularity the shareholder’s purpose and the records the share-holder desires to inspect; and
(c) the records are directly connected with the shareholder’s purpose.
(2) Shareholders may aggregate their share ownership percentages to reach the 5% requirement.
120
If a corporation does not allow a shareholder to inspect and copy records pursuant to the shareholder’s unconditional right, or does not within a reasonable time allow inspection and copying with respect to a shareholder’s conditional right, and the shareholder has satisfied those conditions, the shareholder may
apply to the district court of the parish where the corporation’s principal office (or, if none in this state, its registered office) is located for an order to permit inspection and copying of the records demanded.
121
(Corporations) If the court orders the inspection of the “absolute right” records, then
the court is required to order the corporation to provide copies of the records at the corporation’s expense.
122
If the court orders inspection, it shall also order
the corporation to pay the shareholder’s expenses (which includes attorneys’ fees) incurred in obtaining the order, unless the corporation proves that it refused inspection in good faith because it had a reasonable basis for doubt about the shareholder’s right to inspect the records demanded.
123
(Corporations) The members of the board of directors or a committee of the board, when becoming informed in connection with their decision-making function or devoting attention to their oversight function, must discharge their duties with
the care that a person in a like position would reasonably believe appropriate under similar circumstances. Officers are required to act in good faith and with the care that a person in like position would reasonably exercise under like circumstances.
124
(Corporations) If the directors satisfy their duty of care to become reasonably informed, and if they act in good faith and in a manner they reasonably believe to be in the best interests of the corporation, courts will
not second-guess their decisions to determine whether the substance of the decision is correct or sound. The courts defer to the directors’ judgment on the substance of the decision.
125
(Corporations) Unless the articles of incorporation reject or limit the protection provided by the LBCA, no director or officer may be held liable to the corporation or its shareholders for money damages for any action taken, or for any failure to take action, as a director or officer, except for:
1. cannot be protected from violating the duty of loyalty—not limited to the $ benefit they got, but the total damage done to the corporation (what they lost out on)
2. intentional infliction of harm on the corporation or its shareholders
3. intentional violation of criminal law
4. votes to make an unlawful distribution without the exercise of reasonable care; each director voting affirmatively can become personally liable to the corporation and its creditors to the amount of the unlawful distribution.
126
(Corporations) Assuming that a director is not protected against liability by the default statutory rule, a director still may not be held liable to the corporation or its shareholders for any decision to take or not to take action, or any failure to take any action, as a director, unless the party asserting liability in a proceeding establishes:
a. the director has breached or failed to perform his duties as required in § 1-830; and
b. the challenged conduct consisted of or was the result of 1) an action not in good faith; 2) a decision that the director did not reasonably believe to be in the best interests of the corporation; 3) a lack of objectivity due to the director’s familial, financial or business relationship with another person having a material interest in the challenged conduct; 4) a sustained failure to devote attention to ongoing oversight of the business and affairs of the corporation; or 5) receipt of a financial benefit to which the director was not entitled.
127
(Corporations) In the case of an action for monetary damages, who bears the burden of proving that director’s challenged conduct proximately caused harm to the corporation or its shareholders?
In the case of an action for monetary damages, the person alleging the breach of duty bears the burden of proving that director’s challenged conduct proximately caused harm to the corporation or its shareholders.
128
(Corporations) A conflicting interest transaction is
a transaction with the corporation in which a director is a party, has knowledge and a material financial interest, or knew that a related person was a party or had a material financial interest.
129
(Corporations) A material financial interest in a transaction is
one that would reasonably be expected to impair the objectivity of the director’s judgment when participating in action on the authorization of the transaction.
130
(Corporation) If a transaction does indeed constitute a director’s conflicting interest transaction, then it still may not be the sub-ject of any form of judicial relief or damages if any of the following conditions are satisfied
(a) a majority, but not less than two, of the qualified directors have voted to approve the transaction, after delib-erating and voting outside the presence of the conflicted director(s), and following disclosure to them of the conflicting interests and of all material facts known by the conflicted directors and not known by the qualified directors;
(b) a majority of the votes cast by qualified shares (i.e., shares owned by someone other than the conflicted director or related persons of the conflicted director) approved the transaction following disclosure to them of the conflicting interests and of all material facts concerning the transaction known by the conflicted; or
(c) the transaction was fair to the corporation at the time that the corporation became legally obligated to con-summate the transaction.
131
(Corporation) Under the corporate opportunity doctrine, one entrusted with active corporate management, such as an officer or director of a corporation, occupies a fiduciary relationship and may not
exploit this position by appropriating a business opportunity properly belonging to the corporation.
132
(Corporation) If the business opportunity constitutes a corporate opportunity, the next question is whether
he corporation was able to avail itself of the opportunity—i.e., financially able to undertake the opportunity.
133
(Corporation) Does the LBCA limit a corporation’s power to provide indemnification, advancement of expenses, or to buy insurance on behalf of an employee or agent who is not a director or officer?
No.
134
(Corporation) Under the LBCA, may a corporation provide indemnification or advance expenses to a director or officer?
Yes.
135
(Corporation) A corporation must indemnify a director
If a director is "wholly successful" in defending a proceeding. S/he may be successful on the merits or otherwise. This also applies to officers, but not to agents or other employees.
An officer is entitled to mandatory indemnification to the same extent as a director.
136
A corporation may not indemnify a director
(1) in connection with a proceeding by, or in the right of, the corporation, except for expenses incurred in connection with the proceeding if it is determined that the director has met the relevant standards of conduct; or
(2) in connection with any other proceeding with respect to conduct for which the director was adjudged liable on the basis of receiving a financial benefit to which he or she was not entitled, whether or not involving action in the director’s official capacity.
137
A corporation may indemnify an individual who has been made party to a proceeding because the individual is or was a director against liability incurred in the proceeding if
(1) the individual’s conduct was in good faith;
(2) the individual reasonably believed:
(a) in the case of conduct in the individual’s official capacity with the corporation, that the individual’s conduct was in the corporation’s best interests; and
(b) in all other cases, that the individual’s conduct was at least not opposed to the corporation’s best interests; and
(3) in a criminal proceeding, the individual had no reasonable cause to believe the individual’s conduct was unlawful.
138
(Corporation) When the director or officer is acting in his or her official capacity for the indemnifying corporation, the higher stand-ard—reasonable belief that the conduct was in the indemnifying corporation’s best interests—applies. However,
when the individual is acting in his role for the subsidiary or employee benefit plan, he may owe an obligation to that entity to act in that entity’s best interests. Those are the cases in which the individual need only believe reasonably that the conduct was “at least not opposed” to the best interests of the indemnifying corporation.
139
(Corporation) A special rule is provided for service in the management of an employee benefit plan, because
federal law requires plan fiduciaries to act solely in the best interests of plan beneficiaries.
140
(Corporation) The determination whether a director has met the required standard of conduct for indemnification must be made by
(1) If there are two or more qualified directors (sufficiently disinterested to make the decision), then by a majority vote of all the qualified directors, or by a majority of a committee of at least two qualified directors, appointed by the vote of a majority of all qualified directors;
(2) Special legal counsel selected by the qualified directors if at least two are qualified, and otherwise by the board in the usual way; or
(3) By the shareholders, except that shares that are owned or controlled by a director who is not qualified may not vote.
141
To obtain an advancement of expenses, the director must deliver to the corporation:
(1) A written affirmation of the director’s good faith belief that he met the required standard of conduct or met the requirements for the automatic statutory protection against liability under § 1-832; and
(2) A written undertaking to repay any funds that are advanced if it is ultimately determined that the director did not meet the requirements for indemnification or protection against liability.
(a) This undertaking must be an unlimited general obligation of the director, but it need not be secured and may be accepted by the corporation without reference to the financial ability of the director to make the repayment.
142
A director who is a party to a proceeding may petition the court for indemnification or an advance for expenses. The court must hear the petition and must order one of the following:
(1) Indemnification, if the court determines the director is entitled to mandatory indemnification.
(2) Indemnification or advance expenses, if the court determines, in view of all the relevant circumstances, that it is fair and reasonable to indemnify the director or advance expenses to the director, even if he or she has not met the relevant standards.
143
A corporation may purchase and maintain insurance on behalf of a director or officer to cover liability arising from
that person’s status as an officer or director that it could not indemnify.
144
(Corporation) Derivative Suits, requirements to bring suit
a. Contemporaneous ownership
b. Adequate representation
c. Demand upon directors
(1) In Louisiana, no shareholder may commence a derivative proceeding until a written demand has been made upon the corporation to take suitable action; and, 90 days have expired from the date the demand was made unless the shareholder has earlier been notified that the demand has been rejected by the corporation or unless irreparable in-jury to the corporation would result by waiting for the expiration of the 90-day period. This rule is called a “universal demand” rule, and rejects earlier Louisiana cases that allowed a shareholder to establish “demand futility” simply by naming a majority of directors as defendants in the suit.
145
(Corporations) Dismissal of a derivative suit
The court must dismiss the derivative proceeding if a reasonable inquiry finds the maintenance of the derivative proceeding is not in the best interests of the corporation.
b. One of two groups must conduct this inquiry:
(1) A majority vote of qualified directors present at a meeting of the board of directors if the qualified directors constitute a quorum; or
(2) A majority vote of a committee consisting of two or more qualified directors appointed by majority vote of qualified directors present at a meeting of the board of directors, regardless of whether such qualified directors constitute a quorum.
146
(Corporation) Before the corporation issues shares, the board of directors must determine that the consideration received or to be received for the shares to be issued is
adequate
147
When the corporation receives the consideration for which the board of directors authorized the issuance of shares, the shares issued therefor are
fully paid and non-assessable.
148
The board of directors may authorize shares to be issued for consideration consisting of any tangible or intangible property or benefit to the corporation
including cash, promissory notes, services performed, contracts for services to be performed, or other securities of the corporation.
149
Shares must be represented by share certificates unless
the issuing corporation is a participant in the Direct Registration System of the Depository Trust & Clearing Corporation or of a similar book-entry system used in the trading of shares of public corporations.
150
A share transfer restriction is valid and enforceable against a holder or transferee of the holder if the restriction is authorized by the LBCA and its existence is
noted conspicuously on the front or back of the certificate or is contained in the information statement that is required for shares that are issued without a certificate. If the restriction is not so noted, it is not enforceable against a person without actual knowledge of the restriction.
151
Preemptive rights
are the rights of existing shareholders to acquire unissued shares in the corporation in proportion to their holdings of the original shares upon the board of director’s decision to issue them.
Under Louisiana law, shareholders do not have a preemptive right to acquire the corporation’s unissued shares except to the extent provided in the articles of incorporation.
Exception: Because pre-1969 Louisiana law provided preemptive rights automatically, unless the articles of incorporation rejected them, a grandfathering rule is provided to protect the preemptive rights that shareholders in those corporations would have had under the earlier law. The articles of a corporation formed before 1969 are deemed to pro-vide for preemptive rights unless the articles contain a provision to the contrary.
152
Preemptive rights. What is a "fair and reasonable opportunity" to purchase the stock?
A period of 45 days to purchase the shares is deemed to satisfy the requirement that a “fair and reasonable opportunity” to purchase the shares be provided.
NOTE: There is no preemptive right with respect to shares sold for payment other than money.
153
A distribution may be in the form of
(1) a declaration or payment of a dividend;
(2) a purchase, redemption, or other acquisition of shares;
(3) a distribution of indebtedness; or
(4) any other form.
154
The board may not declare a dividend if, after giving it effect
(1) The corporation would not be able to pay its debts as they become due in the usual course of business; or
(2) The corporation’s total assets would be less than:
(a) the sum of its total liabilities; plus
(b) unless the articles of incorporation permit otherwise, the amount that would be needed, if the corporation were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of those shareholders whose preferential rights are superior to those receiving the distribution.
155
A director who votes for, or who assents to, an unlawful distribution may be
personally liable to the corporation for the amount of the distribution that exceeds what could have been distributed without violating the statute or the articles of incorporation if it is established that the director did not perform his or her duties in compliance with the LBCA.
156
A shareholder who receives an unlawful dividend is liable to the corporation, to the corporation’s creditors, or to both, for
the amount received by the shareholder for the excess amount received by that shareholder. The shareholder’s liability, unlike that of a director, does not require any culpability on the part of the shareholder, but is based simply on the receipt of a distribution that was unlawful. But, unlike a director, a shareholder is liable only for the unlawful portion of the amount that the particular shareholder received.
157
The following changes to the corporate structure are fundamental changes
a. amendment to the articles of incorporation;
b. mergers and share exchanges;
c. conversions; and
d. sale of all or substantially all assets.
158
If the corporation is a public corporation (i.e., its shares are traded on a national securities exchange or regularly traded in a market maintained by members of a national securities association), an amendment of the articles of incorporation must be approved by
the board of directors and then recommended by the board for shareholder approval (unless the board has a conflict that precludes such a recommendation) before the shareholders are permitted to vote on the amendment.
159
If the corporation is not a public corporation (which will be true for most Louisiana corporations), prior approval and recommendation by the board of directors for an amendment to the article of incorporation
is not legally required, although, as a practical matter, it may very well occur
160
In both types of corporations, the article may be amended only with the approval of
the shareholders. Unless the articles of incorporation require a greater vote, approval of an amendment by the shareholders requires the approval of at least a majority of the votes entitled to be cast on the amendment.
161
A parent corporation owning at least 90% of the outstanding shares of each class of a subsidiary corporation may merge the subsidiary into itself or into another such subsidiary without
approval of the board of directors or shareholders of the subsidiary.
162
What if the corporation sells substantially all of its assets if selling that is normal business; if it's not?
If it is, then don't need shareholder approval
If it isn't, then:
(1) the board of directors must submit the proposed disposition to the shareholders for their approval;
(2) the board of directors must recommend the proposed transaction to the shareholders, unless the board of directors determines that because of a conflict of interest or other special circumstances it should make no recommendation, in which event the board of directors must communicate the basis for its lack of a recommendation to the share-holders; and
(3) the shareholders entitled to vote must approve the transaction.
163
Dissenter's rights, procedure
a. Notice of appraisal rights
b. Required shareholder steps to preserve appraisal rights
c. Appraisal notice and form
d. Corporation must pay amount it estimates to be fair
e. Shareholder’s counter-demand for payment
164
A corporation may be terminated in one of three ways
The board of directors or the liquidator (if one has been appointed) may file articles of termination after the board or liquidator completes the winding up of a dissolved corporation’s affairs.
b. A corporation that owes no debts, owns no immovable property, and is not doing business (or has never issued shares) may file articles of termination without engaging in any formal dissolution and liquidation process.
c. The secretary of state may file a certificate of termination if the corporation fails to file its annual reports for 90 days after they are due, or fails for 90 consecutive days to maintain a registered agent or registered office.
NOTE: For three years after the date of termination, the corporation may be fully reinstated, with retroactive effect.
165
A corporation engages in oppression of a shareholder if
the corporation’s distribution, compensation, governance, and other practices, considered as a whole over an appropriate period of time, are plainly incompatible with a genuine effort on the part of the corporation to deal fairly and in good faith with the shareholder.
166
The following factors are relevant in assessing the fairness and good faith of the corporation’s practices
a. The conduct of the shareholder alleging oppression; and
b. The treatment that a reasonable shareholder would consider fair under the circumstances, considering the reasonable expectations of all shareholders in the corporation.
167
(Corporation) Buyout Remedy and Procedure
1. A shareholder initiates the oppression procedure by giving written notice to the corporation that the shareholder is with-drawing from the corporation on grounds of oppression.
2. When the notice becomes effective, it operates as an offer by the shareholder, irrevocable for 60 days, to sell all of his or her shares to the corporation at their fair value.
3. The corporation may accept the shareholder’s offer any time during the 60 days that the offer is irrevocable by giving the shareholder written notice of the acceptance.
4. The corporation’s acceptance of the shareholder’s offer does not operate as an admission or as evidence that the corporation engaged in oppression of the shareholder.
5. If the corporation accepts both the offer to sell and the price, it forms a contract of sale of the shares at that price, payable in cash.
6. If the corporation does not accept the shareholder’s offer, the shareholder may file an ordinary proceeding against the corporation in district court to enforce the shareholder’s right to withdraw. A judgment in the action that recognizes the right of the shareholder to withdraw is a partial judgment under Code of Civ. Proc. art. 1915 (B).
168
(Corporations) Valuation Proceeding
The statute provides a 60-day period during which the parties may attempt to negotiate the price for the shares. If the offer to sell was accepted, the 60-day delay is imposed by permitting a valuation proceeding to be commenced only during the one-year period following the 60-day delay. If the shareholder’s right to sell was recognized by a judgment, the delay is provided by a mandatory 60-day stay in the proceeding.
Done in a summary proceeding
169
At the conclusion of the trial for valuation proceedings, the court is required to render one of two alternative judgments
a. The “default” judgment is one that is rendered:
(1) In favor of the shareholder and against the corporation for the fair value of the shareholder’s shares; and
(2) In favor of the corporation and against the shareholder:
(a) Terminating the shareholder’s ownership of shares in the corporation; and
(b) Ordering the shareholder to deliver to the corporation within 30 days after the judgment any certificate issued by the corporation for the shares or an affidavit that the certificate has been lost, stolen or destroyed.
b. An alternative form of judgment is available that allows the corporation to pay for the shares through an unsecured promissory note, with a term of up to 10 years, if the corporation has proved in the proceeding that an immediate payment of the full value of the shares either would violate the distribution restrictions imposed by 12:1-640, or would cause undue harm to the corporation or its creditors.
170
(LLC) LLCs provide limited liability as corporations do, but are taxed as
partnerships or, in the case of a single-member LLC, as a proprietorship. Thus, the company itself owes no taxes; rather, profits and losses flow through to the owners, unless the LLC elects to be taxed as a corporation.
171
(LLC) An LLC is formed by filing with the Louisiana Secretary of State the following three documents [LSA-R.S. §§12:1304(A), 12:1305(E)]:
a. articles of organization;
b. initial report; and
c. notarized affidavit of acceptance by the LLC’s registered agent(s).
172
(LLC) The general rule is that the effective date of organization is retroactive to
the date the documents were filed
a. There also is a five-day grace period, which means that if the documents are properly filed within five days of execution, exclusive of legal holidays, the effective date is retroactive to execution of the documents.
b. The documents may be delivered to the Secretary of State up to 30 days in advance of a specified date that the legal filing of the documents will occur.
173
(LLC) When immovable property is acquired in the name of a LLC that has not been issued a certificate of organization, and the LLC later is issued a certificate of organization, the LLC’s existence is
retroactive to the date of the acquisition of an interest in the immovable property [LSA-R.S. § 12:1310.1].
174
(LLC) The Articles of Organization require
a. LLC’s name;
b. a standardized recitation that the LLC is being formed to engage in any activity lawful for LLCs; and
c. an indication whether the company is a low-profit LLC—the secretary of state’s office interprets this requirement to apply only if the LLC is a low-profit LLC; if not, the statement is not required.
175
(LLC) The Articles of Organization must be
a. written in English;
b. executed by at least one person, who need not be a member or manager of the LLC;
c. acknowledged by the person or one of the persons who signed the articles of organization or may be executed by authentic act.
176
(LLC) The name of an LLC must include an indication of
LLC status. Except for low-profit LLCs, the LLC’s name must contain the words “limited liability company” or the abbreviation “L.L.C.” or “L.C.” For low-profit LLCs, the name must contain “L3C” or “l3c.”
177
The initial reports for LLCs are essentially identical to those required of corporations, except that, instead of listing initial directors, the report calls for the listing of
the person who will have comparable managerial power in the LLC, which generally means the members if the LLC is member-managed or the first managers if the LLC is to be manager-managed.
178
Operating agreement, Similarities to Bylaws
1. An operating agreement, like bylaws, need not be filed with the Secretary of State.
2. Just as bylaws are not required in a corporation, an operating agreement is not required by law in an LLC.
179
Operating agreement, differences to Bylaws
a. By definition, an operating agreement is an agreement among the members or, in a single member LLC, between the member and the LLC itself. Unlike the corporate statute, which permits the board of directors to adopt and amend bylaws, the LLC statute does not confer authority on the managers of a manager-managed LLC to adopt an operating agreement.
b. Unlike bylaws, which are understood to be a written document, an operating agreement may be written or oral.
180
(LLC) The owners of the LLC are called
members (not “shareholders”).
181
(LLC) Default rule for LLC's management
Management by Members
182
(LLC) Management by Members means
Except as otherwise provided in the articles of organization, the business of the LLC will be managed by the members, subject to any provision in a written operating agreement restricting or enlarging the management rights and duties of any member or group or class of members [LSA-R.S. §12:1311].
183
(LLC) The articles of organization may provide that the business of the LLC shall be managed by or under the authority of one or more managers who may, but need not, be members
a. Managers are elected by a plurality vote of the members (as people).
b. They are removed, with or without cause, by a majority vote of all members at a meeting called expressly for that purpose.
184
(LLC) Decision-making, Ordinary Course of Business
Any member (or manager in a manager-managed LLC) is able to make a decision without consultation.
185
(LLC) Decision-making, not ordinary course, but also not fundamental
Majority member approval if member managed; majority manager, if
186
(LLC) Decision-making, Fundamental Transactions (member-managed)
(1) Unanimity is not required. Only a majority vote of members is required.
(a) EXCEPTIONS: Unanimous consent required
1) An agreement to compromise a member’s promised contribution to the LLC.
2) An assignee of a membership interest is admitted only with the unanimous written consent of members.
(b) Otherwise, everything else can be approved by a majority vote of members.
187
(LLC) Decision-making, Fundamental Transactions (manager-managed)
In a manager-managed LLC, only the members can approve a fundamental transaction.
188
(LLC) Fundamental transactions
(a) dissolving the LLC;
(b) sale, lease, exchange, or encumbrance of substantially all assets of the LLC;
(c) merger or consolidation;
(d) incurrence of indebtedness outside the LLC’s ordinary course of business;
(e) alienation, lease, or encumbrance of the LLC’s immovable property;
(f) amendment of the articles or operating agreement;
(g) authorizing an interim distribution.
189
(LLC) "ordinary course of business" defined in articles of organization, affect on third parties
If you restrict authority in a written operating agreement, third parties are deemed to have actual knowledge of that restriction if the articles contain a provision stating that such a restriction exists
A “certifying official” may be named in the articles of organization.
(a) If one is not named, any member or manager can serve as the certifying official and provide a certification of the membership of any member, the authenticity of any record, and the authority of any person to act on behalf of the LLC in a transaction, even fundamental transactions.
190
A person managing an LLC (whether a member or manager) must act
in good faith, with the diligence, care, judgment, and skill of an ordinary prudent person in a like position would exercise under similar circumstances [LSA-R.S. §12:1314(A)(1)].
191
(LLC) Standards Applied in Determining Breach; Gross Negligence
(1) A member or manager is not personally liable for monetary damages unless the member or manager acted with gross negligence or an even greater disregard of the duty of care.
(2) The statute defines “gross negligence” as reckless disregard of or a carelessness amounting to indifference to the best interests of the LLC or its members.
192
(LLC) Standards Applied in Determining Breach; Business judgment rule
(1) Under Louisiana law, a member or manager fulfills the duty of diligence, care, judgment, and skill in making a business judgment if the member or manager:
(a) does not have a conflict of interest with respect to the matter;
(b) is informed with respect to the matter to the extent the member or manager reasonably believes to be appropriate under the circumstances; and
(c) rationally believes that the business judgment is in the best interests of the LLC and its members.
193
The articles or a written operating agreement of a LLC may contain a provision that limits or eliminates
the personal liability of a member or manager to the LLC or its members for a breach of fiduciary duty.
194
The exceptions to the entity’s ability to eliminate liability are much narrower in LLC law than in corporation law. The following two types of liability cannot be eliminated by a provision limiting or eliminating liability in an LLC [LSA-RS 12:1315 (B)]:
(1) the amount of a financial benefit received by a member or manager to which he is not entitled; and
(2) liability for an intentional violation of criminal law.
195
LLC, indemnity
a. The LLC may indemnify its members or managers for judgments, penalties, fines and expenses incurred because they were members or managers.
b. There are no required findings about the standard of conduct met.
c. There is no distinction between third party and derivative claims.
d. The same exceptions for exculpation apply.
e. If a member or manager is successful in defending a suit, you cannot require indemnification. There is no mandatory indemnification.
196
LLC, liability
No member, manager, employee, or agent of an LLC is liable in such capacity for a debt, obligation, or liability of the LLC, and do not become so by participating in the management or control of the business [LSA-R.S. §12:1320(B)].
2. LLCs do not protect against personal liability for a member’s own tortious conduct, to include [LSA-R.S. §12:1320(D)]:
(1) fraud; or
(2) breach of professional duty or other negligent or wrongful acts.
197
(LLC) Veil piercing
LLCs are subject to veil piercing on same grounds as corporations.
198
(LLC) Distribution of profit/ownership
Unless the articles or a written operating agreement provide otherwise, every member shares equally in the profits and losses, distributions, allocations of gains and losses, etc., that occur in the LLC.
199
(LLC) weight of votes
Every member has the authority to vote in transactions proposed for the LLC at an equal rate—one vote per member.
200
(LLC) Distributions
a. Distributions are made only in accordance with the articles or an operating agreement.
b. Otherwise, you’re entitled to receive interim distributions only as authorized by the members. You’d have to have, in a default situation, a majority vote of members to approve that transaction
201
LLC, financing. A member is expected to make a contribution, which can consist of
a. cash, property, or services rendered, or
b. a promissory note or other binding obligation to pay cash, property, or performed services.
(1) Promissory forms of payment are explicitly permitted.
A member’s contribution obligation is enforceable only if it is expressed in a writing.
202
(LLC) Compromise; Inability
a. Compromise: A member’s obligation to make the contribution can be compromised only with the unanimous consent of other members.
b. Inability: The member or the member’s representative gets to choose between two alternatives: (1) forced payment of the cash value of the non-cash contribution, or (2) relinquishment of the claim for the contribution in exchange for forfeit of the entire membership interest in the LLC.
c. Creditors: If a creditor extends credit to the LLC, between the time a member makes an enforceable promise and the time the compromise occurs, the creditor can enforce the contribution obligation if the LLC is unable or fails to honor the extension of credit. The same applies in cases of inability.
203
It is unlawful for the LLC to make a distribution if, after giving effect to the distribution
(a) the LLC would not be able to pay its debts as they became due in the ordinary course of business (the same as the corporate “insolvency” restriction); or
(b) the LLC’s assets would be less than the sum of the LLC’s liabilities plus the amount that would be needed, if the company were dissolved to satisfy the preferential rights to payment of members that are superior to the rights of the members receiving the distribution.
(2) Payment can be made to the extent that assets exceed liabilities, plus the amount owed to preferred owners upon dissolution.
204
LLC dividends, Non-cash form of payment
(1) No member has any right to demand any distribution in any form other than cash.
(2) The LLC cannot require members to accept non-cash distributions to the extent that the percentage ownership in the asset distributed exceeds the percentage interest in the LLC.
205
Are LLC memberships interests heritable or transferable?
No.
206
When must the other members of an LLC buyout another member's interest?
A LLC is obligated to buy a member’s interest only upon the voluntary withdrawal of a member from the LLC, if withdrawal is permitted. Withdrawal is permitted only if the LLC is not constituted for a term.
207
Except in the case of a permitted voluntary withdrawal, any event that would be treated as a transfer of shares under corporation law, including a sale, donation, inheritance, or seizure of the interest by a creditor, is treated as
an assignment of the interest under LLC law.
208
(LLC) The assignee of a membership interest is entitled only to receive
the assignor member’s share of any distribution that the LLC may choose to make, and to share in any profits and losses and allocation of income, gain, loss, deduction, credit or similar item [LSA-RS 12:1330(A)].
209
(LLC) The assignee does not become a member of the LLC, unless
he is admitted to membership through the unanimous written consent of the members [LSA-RS 12:1332 (A) (2)].
210
(LLC) On the death of a member, or a court’s adjudging the member to be incapable of managing his affairs, the member’s executor, administrator, guardian or other legal representative is treated as
an assignee of the member’s interest.
211
(LLC) Rather than seizing a member’s interest, a judgment creditor of a member is entitled only to obtain
a “charging order” on the interest. This charging order causes the creditor to be entitled only to the rights of an assignee [LSA-R.S. § 12:1332(A)(1)].
212
Under the default rules of the Louisiana LLC Law, an LLC dissolves and its affairs must be wound up upon:
a. the occurrence of events specified in the LLC’s articles of organization or a written operating agreement;
b. the consent of its members, or
c. the entry of a decree of judicial dissolution.
213
LLCs, annual reports
1. LLCs must file annual reports [LSA-R.S. §12:1308.1].
2. The Secretary of State must revoke the articles of organization of a domestic LLC if it fails to file an annual report for three consecutive years [LSA-R.S. §12:1308.2].
214
LLC, taxation
1. For income tax purposes, a LLC is taxed under Louisiana law in the same way that it is taxed under federal income tax law. Thus, if taxed as a partnership or proprietorship under federal law, then it is so taxed under state law; if taxed as a corporation under federal law, it is so taxed under state income tax law.
2. LLCs may choose to be taxed as a corporation for federal income tax purposes.
3. For purposes of all other state taxes, an LLC is taxed as a partnership. Thus, corporate franchise taxes do not apply to LLCs.
