Corporations Flashcards
(39 cards)
Are directors entitled to notice of a special meeting? If so, what is required for notice to be proper?
Yes.
Unless the articles of incorporation provide otherwise, notice must be provided at least two days prior to the meeting and should state the date, time, and place of the meeting.
The notice does not need to describe the purpose of the special meeting.
How does a director waive notice of a special meeting?
A director may waive notice by a signed writing.
Waiver also occurs if the director attends the meeting, unless the director promptly objects to lack of notice and does not vote in the meeting.
What is the quorum requirement for a board of directors?
A majority of the directors are necessary to constitute a quorum, unless the articles of incorporation provide otherwise.
If a quorum is not present when a vote is taken, the vote and corresponding action are invalid.
Does a board member need to be physically present to participate in a vote?
No (remote participation is acceptable), but all participating directors must be able to hear one another and be heard by one another simultaneously.
If a director cannot hear every other director, that director is not legally present and cannot vote.
If a quorum of directors is present, how many votes are necessary for an act to be approved?
Typically, an act is approved by the affirmative vote of a majority of the members present, unless the articles of incorporation or bylaws provide otherwise.
Describe a director’s duty of loyalty.
Directors of a corporation have a duty of loyalty to act without personal conflict and in a manner that the director reasonably believes is in the best interests of the corporation.
How does a director breach the duty of loyalty?
A director breaches the duty of loyalty by placing his own interests above those of the corporation.
If a director profits at the corporation’s expense, it is a breach of the duty of loyalty.
What defenses are available to a director who is alleged to have breached his duty of loyalty via a self-dealing transaction?
There are 3 “safe harbor” defenses:
- Approval by disinterested directors,
- Approval by shareholders, or
- Fairness.
If a director asserts a defense of approval by directors or shareholders, what must that director show?
- The director disclosed all material facts, and
- The majority of the board or shareholders approved the transaction.
When can a director assert fairness as a defense to an alleged breach of the duty of loyalty?
Generally, the director must prove that the transaction was fair at the time it was commenced.
Fairness exists when:
- The terms/price were comparable to what the corporation would receive in an arm’s length transaction;
- The transaction, as a whole, was beneficial to the corporation; and
- The transaction was fair in terms of the director’s dealings with the corporation.
Describe a director’s duty of care.
The director must exercise the level of care that a reasonable person would exercise under the circumstances. The duty of care in turn requires an actor to be attentive to the corporation’s affairs and to make informed decisions.
What is the business-judgment rule?
If a director, officer, etc. is alleged to have breached the duty of care, the rule creates a rebuttable presumption that the actor acted:
- in good faith,
- upon reasonable information, and
- in the honest belief that the decision was in the corporation’s best interests.
How is a corporation formed?
In order to form a corporation, articles of incorporation must be filed with the state.
Generally speaking, what kinds of information must articles of incorporation include?
The articles must include:
- the corporate name,
- the number of shares the corporation is authorized to issue,
- the address of the initial office,
- the name of the initial agent, and
- the name and address of each incorporator.
When does a corporation come into existence?
Unless a delayed date is specified in the articles of incorporation, the corporate existence begins when the articles of incorporation are properly filed.
What happens when the statutory requirements for incorporation are met?
When all of the statutory requirements for incorporatoin have been satisfied, a de jure corporation is created.
Consequently, the corporation, rather than persons associated with the corporation, is liable for any contracts or obligations.
When corporate formation is defective, what is the result?
If corporate formation is defective, the entity is treated as a general partnership. Generally speaking, the owners will be personally liable for all obligations of the patnership.
Note that this is the general rule.
When can a person escape personal liability for defective incorporation?
Under the de facto corporation doctrine, courts recognize limited corporate liability if there was a colorable, good-faith attempt to incorporate and actual use of the corporate form, such as by contracting in the corporate name.
Under the incorporation-by-estoppel doctrine, most jurisdictions recognize limited corporate liability if a third party deals solely with the purported corporation and hasn’t relied on the promoter’s personal assets.
What duties do shareholders owe?
Generally, shareholders do not owe fiduciary duties to fellow shareholders, and they can act in their own self-interest.
However, a controlling shareholder may owe fiduciary duties to the corporation and other shareholders.
How are board decisions to declare dividends reviewed?
Board decisions regarding whether to declare a dividend, as well as the amount of any dividend declared, are generally subject to the presumptions of the business-judgment rule.
When does a parent corporation business transaction involve self-dealing?
Priority: Medium
If a parent corporation causes its subsidiary to participate in a business transaction that prefers the parent at the expense of the subsidiary, it can involve self-dealing and a breach of loyalty.
When does a conflict of interest/self dealing occur?
Priority: High
A transaction is self dealing when the director/officer/majority shareholder either: (1) is a party to the transaction, (2) has a beneficial interest in the transaction, or (3) is involved with another entity that is conducting business with the corporation.
What duty is breached by engaging in a self-dealing transaction?
Priority: High
A parent corporation/officer/director that engages in a conflict-of-interest (self-dealing) transaction with its own corporation has violated the duty of loyalty unless the transaction is protected under the safe-harbor rule.
What is the safe-harbor rule for conflict of interest transactions?
Priority: High
There are three safe harbors by which a conflict-of-interest transaction may enjoy protection: (1) disclosure of all material facts to and approval by a majority of the board of directors without a conflicting interest, (2) disclosure of all material facts to and approval by a majority of the votes entitled to be cast by the shareholders without a conflicting interest, and (3) fairness of the transaction to the corporation at the time of commencement.
