Corporations Flashcards
what are the three fiduciary duties of directors and officers
- business judgment rule
- duty of care
- duty of loyalty
What is the business judgment rule
a rebuttable presumption that when the directors make a business decision they act on an informed basis, in good faith and in the honest belief that the action was in the best interest of the company so the court will uphold their decision absent evidence of fraud, illegality or self dealing.
Protects a director from liability for breaching duty of care if he acted in good faith
Explain the Duty of Care
director/officer must act as ordinary reasonable person
-> duty to investigate and ask questions
–> can rely on reports and outside experts
If director has special skills, he is obligated to use them
Explain the Duty of Loyalty
Directors and officers must act in the best interest of the corporation.
Violated if the director engages in 1) self dealing or 2) usurping a corporate opportunity
How can a director avoid liability from self-dealing transaction or usurping corporate opportunity- SAFE HARBOR RULES
By getting 1) approval of disinterested board members, 2) approval of disinterested shareholders or 3) a court deciding the transaction was fair
what is a distribution and who can authorize it
distribution is when a corp removes profit from corp and gives it to shareholder
Authorized by board of directors
distributions can not be authorized if the co is insolvent or issuing the dividend would make the co insolvent.
If a dividend is unlawfully authorized - the directors who voted for it would be personally jointly and severally liable to the corp in amt of excess of lawful amt
what is the record date
to determine what shareholders are eligible to vote, directors fix a record date not more than 70 days before mtg. Only shareholders who actually hold shares ON THAT DATE are eligible to vote.
who is a promoter and what is their liability
Promotoer enters contracts to secure capital to bring the corporation into existence. Promoters are PERSONALLY LIABLE for contracts entered into pre-incorporation unless there is a novation or adoption by the corporation
How is a corporation incorporated
Must file articles of incorporation with the state.
Generally the purpose of corp in articles = any legal actions but if there is a narrow purpose states- look for Ultra Vires (actions by corp outside scope of purpose)
What is a De Facto Corporation and how can they be liable for actions
De Facto Corp is when the corporation attempted to incorporate in good faith but fucked up and then ran the business believing it was incorporated.
If they then default on a loan, a creditor can’t go after the personally and claim they are not a corporation b/c they fucked up the paperwork- they are a corp by estoppel and get the liability of a corp
What determines initial stock valuation
the board of directors.
They can set Par Value (minimum value for the stock). Then if it sold below par value, board is liable or stockholders can be liable if they knowingly bought stock below par
What rights do shareholders have
Right to elect directors at annual meeting
Right to inspect books for a purpose
Right to vote on fundamental corporate changes- merger, sale of corp
power to amend bylaws
How can a shareholder sue the corporation
- direct action: suing corp for their own benefit- i.e when a shareholder is denied voting rights or a dividend. Shareholder gets benefit
- Derivative action: suing on behalf of the corporation for action of director. Recovery goest to corporation
who can file a derivative lawsuit against a corp and how?
Anyone who is a shareholder at the the time the board committed the bad act can file a derivative suit
1.You must make DEMAND on the board- to demand action- then the board has 90 days to act.
2. if board doesn’t act after 90 days, can file derivative lawsuit.
What is the futility exception
You don’t need to make a demand on the board if it would be futile- ie. if you are accusing the board of wrongdoing, it would be futile to demand the board bring a suit against itself.
When would shareholders be liable for actions of the board- ie. when would the court allow “piercing the corporate veil” to get to the $ of the shareholders?
- alter ego: disregard of corporate formalities, use of corporate assets as shareholder’s own, shareholder and corp are one and the same
- under capitalization of the corp at time of formation
-fraud- siphoning corporate funds or assets, self dealing
what are the two key fiduciary duties of directors (and what must be discussed with one of them)
- Duty of care + business judgment rule
- Duty of loyalty
what protects the director from liability for a breach of duty of care
The business judgment rule- b/c presumes the director acted in best interest of the corporation if he acted in GF
How can you overcome the presumption of the business judgment rule and show that the director violated the duty of care
prove:
- the director did not act in good faith
-the director was not informed enough
- the director did not investigate after being alerted to a significant matter
- the director failed to act reasonably
how can a director avoid liability for usurping a corporate opportunity
- must present opportunity to corporation first
if the corp declines the opportunity, the direct may take it w/o violating the duty of loyalty
Do officers have power to bind the corporation
YES- the act as agents- so go thru express actual authority, implied actual authority and apparent authority issues
LLC- benefits?
has tax advantages of partnership but liability of corp
members NOT liable for LLC obligations
Still have duty of care, duty of loyalty
Can still have direct and derivative suits
Requirements for directors meetings
Need a quorum of all the directors - i.e majority of total number of directors.
Directors can call in but they are not considered legally present unless they can hear and speak to everyone
For an affirmative vote- most have a majority of those present at the meeting
Requirements for shareholders vote
Need a quorum of corporation’s outstanding SHARES (not shareholders) to be represented at meeting
Vote passes if votes in favor exceed votes against the proposal.
Can have cumulative voting- for election of directors- where shareholders get # of votes = # of shares x # of director positions being voted on.
