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Flashcards in Corporation Deck (35):

Promoter liability

A promoter is personally liable for knowingly acting on behalf of a corporation before incorporation and remains liable after C comes into existence unless (1) there is a subsequent novation; (2) the third party knows a corporation has not been formed and agrees to look only to C for performance; or (3) the promoter has no actual knowledge that C's charter has not yet been issued


Adoption by C

C is liable for pre-incorporation agreements if it expressly or impliedly adopts a K by accepting the benefits of the transaction or gives an express acceptance of liability for the debt


C's liability for pre-incorporation agreement

Not liable for pre-incorporation transaction even those for the benefit of C


Ultra Vires Acts

When a C that has stated a narrow business purpose in its articles subsequently engages in activities outside that stated purpose; a third party generally cannot challenge and escape liability for a transaction that is an ultra vires corporate act


Challenges to ultra vires acts

a SH and state can file suit to enjoin the act (will only be enjoined if equitable) and corporation can take action against Direct, Officer or employee who engaged in the act


De Jure corporation

when all statutory requirements for incorporation are satisfied, C is liable for C's activities


De facto corporation

the owner must make good-faith effort to comply with the incorporation requirements and operate C without knowing the requirements were not met


Corporation by estoppel

a person dealing with an entity in a contractual agreement as if it were a C is estopped from denying its existence and seeking personal liability


Derivative actions

SH sues on behalf of C for harm suffered by C; P must have been a SH at time or wrong or when action is filed, must continue to be a SH during the litigation, and must fairly and adequately represent C's interests; written demand on BD must be made unless futile; rejection of demand tested against BJR


Piercing the veil

Totality of circumstances: whether C is being used as alter ego for a dominant SH's personal dealings and whether there is a unity of interest and ownership between C and its members; P must prove that incorporation was just a formality and C neglected corporate formalities and protocols

Factors: undercapitalization, disregard of corporate formalities, using C's assets as SH's own assets, self-dealing with C, siphoning of C's funds


Controlling SH's fiduciary duty to minority SH

Duty arises if controlling SH is selling interest to an outsider, seeking to eliminate other SH from C or receiving a distribution denied to other SHs

Duty to discloser information that a reasonable person would consider important in deciding how to vote on a transaction and duty of fair dealing when purchasing a minority SH's interest


Duty of care

D has a duty to act with a care of an ordinarily prudent person in a like position and similar circumstances; and required to use any additional knowledge or special skills he possesses when deciding how to act


Reliance protection

D can rely on information and opinions of officers, employees, outside experts or committees if D reasonably believes them to be reliable and competent


Business Judgment Rule

A rebuttable presumption that D reasonably believed his actions were in the best interest of C; does not apply when D engages in a conflict of interest dealing with C


Overcoming BJR

(1) D did not act in good faith; (2) D was not informed to the extent he reasonably believed was necessary; (3) D had material interests in the challenged conduct and was not objective; (4) D failed to devote attention to C's affairs; no oversight; (5) D failed to timely investigate matters of material concern; or (6) D received financial benefits to which he was not entitled


Duty of loyalty

D must act in a manner that D reasonably believes is in the best interest of C; typically a director breaches this duty by placing his own interests before those of the corporation



D who engages in a conflict of interest transaction with his own C violates duty of loyalty unless the transaction is protected under the safe-harbor rules; D cannot profit at C's expense


Safe harbors

(1) disclosure of all material facts and majority approval by BD or SHs without a conflicting interest; or (2) fairness (comparable exchange in value) of the transaction to C at the time of commencement


Usurpation of corporate opportunity

A director may violate duty of loyalty by usurping a corporate opportunity rather than first offering it to the corporation; interest/expectancy test; line of business test

Other factors: relationship of third party to D and of D to C; how and when D acquired knowledge of the opportunity


Competition of D with C

A director who engages in a business venture that competes with C has violated DoL; but can engage in unrelated business


Right of appraisal

A SH who objects to a merger/acquisition or whose rights are materially and adversely affected by an amendment to C's articles, may be able to force C to buy his stock at fair value as determined by appraisal


Winding up

Dissolving C can continue to exist to collect assets, dispose of property not distributed to SHs, discharge liabilities, distribute property among SHs according to their interests


Corporate opportunity

Interest/expectancy tests: does C have an existing interest or an expectancy arising from an existing right in the opportunity

Line of business test: is the opportunity within C's current or prospective line of business



Fraudulent purchase/sale of stock:

(1) P purchased/sold security; (2) transaction involved use of interstate commerce; (3) D engaged in fraudulent or deceptive conduct; (4) conduct related to material information; (5) D acted intentionally/recklessly; (6) P relied on D's conduct; and (7) P suffered harm b/c of conduct



A corporate insider can be forced to return short-swing profits to corporation.

(1) public traded corporation or assets of more than $10M and more than 500 SHs; (2) only directors, officers and SHs who hold more than 10 perfect of stock; (3) during any 6 month period, a corporate insider who buys/sells stock is liable for any profits made; (4) corporate insider required to report change in stock ownership to the SEC.


Self-dealing transactions (types)

one that would normally require approval of BD and is of such financial significance to D that it would reasonably be expected to influence D’s vote on the transaction (also includes dealings with persons related to D)


Shareholder agreement

a binding voting agreement under which SHs retain legal ownership; does not need to be filed with the C; no time limit


Director agreements

cannot have agreement on how to vote; expected to exercise independent judgement; may not vote by proxy


Proxy vote

in writing; delivered to corporation/agent; valid for 11 months unless otherwise specified; revocable unless it expressly provides it's irrevocable and appointment of proxy is coupled with an interest (ppl who purchased the shares or otherwise have a business arrangment with corporation); any act inconsistent with proxy, such as attending a shareholder meeting and voting shares revokes proxy


SH voting requirement

record owners of voting stock; majority of shares entitled to vote constitute quorum; approval requires majority of votes cast (more for than against votes) on issue (fundamental changes require majority of votes eligible to vote)


Director voting requirement

for BD acts to be valid, quorum of directors must be present; majority of directors constitute quorum; approval requires majority of directors present at the time



require BD and SH approval by a majority vote at a meeting with a quorum (at least a majority of the shares entitled to vote) present for each C; required documents must be filed with the state


Asset acquisition

same as merger approval procedure except only the transferor C’s BD and SHs are entitled to vote on the transaction; transferor C remains liable for its debts


10b-5 (tipper/tipee)

Tippeee is a person given info by insider/constructive insider with expectation that the info will be used to trade stock/other securities

Tipper is liable if tipper receives personal benefit from disclosure or intends to make gift to tippee; and tippee trades

Tippee is a liable if tippee knew or should have known that the info was provided in violation of insider's duty


10b-5 (misappropriation)

a person who uses confidential info in order to trade stock/other securities in violation of duty of confidentiality owed to corporation