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Flashcards in Corporations Deck (75)
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What are the boundaries of the directors ability to set their own compensation?

Reasonable and in good faith. If excessive, it's waste of corporate assets, and a breach
of the duty of loyalty.


Sharon is a director of Ozzie's Music Co. She can also serve on the board of directors of Home Depot because it does not compete with Ozzie's. But can Sharon start her own music company?

Directors must under a duty of loyalty to act in good faith and in reasonable belief that their actions are in the corporation's best interest. Competing directly with Ozzie's would be a breach of that duty of loyalty. If Sharon goes into competition, a constructive trust on profits is created which is paid to Ozzie's.


Cheatem is a director of C Realty Corp., which develops condo projects. Cheatem learns of land that has been zoned for condos and buys it for himself as an investment. What are C's rights, if any, against Cheatem?

Directors must under a duty of loyalty to act in good faith and in reasonable belief that their actions are in the corporation's best interest. Director cannot USURP a corporate opportunity. Therefore, director cannot take it until he (1) tells the board about it and (2)
waits for the board to reject the opportunity.


Within the context of usurping corporate opportunity against a duty of loyalty what is considered a corporate opportunity?

Regardless of company's financial ability to pay for the opportunity:
1) something in the corporation’s business line
2) something company has business interest or expectancy in
3) found on company time or with company resources.


What's the remedy against a director for usurping a corporate opportunity?

A constructive trust is created to disgorge the opportunity or its value to corporation


Can a corporation loan to a director?

Yes if it is reasonably expected to benefit the corporation


All board members are responsible equally for ultra vires acts, improper distributions, and improper loans unless they do what?

1. Absent from the meeting in which the resolution was passed
2. dissent or abstention is noted in writing in corporate records
3. Good faith reliance on information presented by officer, employee, committee, or professional reasonably believed competent


What duties do officers have to the corporation?

Same as directors: care and loyalty.


When is the corporation barred from
indemnifying an officer or director?

If held liable to corporation or held to have received improper personal benefit.


When must a corporation indemnify an officer or director?

If she is successful in defending, on the merits or otherwise.


Unless indemnification is mandatory or barred from indemnification, when may a corporation exercise its permissive right to indemnify a director or officer?

Where director or officer acted in good faith and with the reasonable belief that her actions were in the company's best interests (same as duty of loyalty).


How is a close corporation created?

Shareholders can run the corporation without a Board provided its stock is not traded on a national exchange and there are "few shareholders" by either:
1) inclusion in the articles of incorporation approved by all shareholders or by
2) unanimous written shareholder agreement.
In either case stock certificates must contain legend of such.


Aside from the duty of loyalty and care, shareholders in a close corporation may owe what additional duty?

Partners’ fiduciary duties to each other: to treat each other with utmost good faith. Minority shareholders can sue the controlling
shareholders who oppress them (deny the minority any voice in corporate affairs, fire them from employment, refuse to declare dividends, and refuse to buy the minority’s stock) for breach of this fiduciary duty.

In RI, only closely held family corps.


What is the principle advantage of forming as a professional corporation or association?

Shareholders not generally liable for other professionals' malpractice.


X and Y are the only shareholders of C Corp. X commingles personal and corporate
funds, uses the corporate car as his own, and uses the corporate credit card to pay for
personal purchases. C Corp fails to pay its bills. Can a creditor of the corporation who has been unable to collect its claim from the
corporation collect from either X or Y?

Generally, shareholders are not liable for acts or debts of corporation. However, a plaintiff can pierce the corporate veil where shareholders of a close corporation abused the privilege of incorporating and fairness must require holding them liable. Here X treated corporate assets has his own and a court may find X libel (but not Y) under the theory of PCV.


S is a shareholder of Glowco, Inc., a corporation that hauls and disposes of nuclear waste. Glowco does not carry insurance. Glowco has an initial capitalization of $1,000. V is injured when one of Glowco's trucks melts down. Can V sue S?

Generally, shareholders are not liable for acts or debts of corporation. However, a plaintiff can pierce the corporate veil where shareholders of a close corporation abused the privilege of incorporating and fairness must require holding them liable. Here, abuse of corporate form may be found because corporation was undercapitalized when formed. Courts may be more willing to PCV for a tort victim than for a contract claimant. Shareholders failed to invest enough to cover perspective liabilities.


S sues board of directors of C Corp. for issuing new stock without honoring her
preemptive rights. Is this a derivative suit?

No. In a derivative suit, a shareholder is suing to enforce the corporation's claim, not her own personal claim. This is a personal claim because corporation could not have brought the suit itself, such as where there's been a breach of duties of care or loyalty.


What are the requirements for bringing a shareholder derivative suit?

1. Stock ownership (including by operation of law) when the claim arose and throughout the suit.
2. Adequate representation of corporation's interest
3. Written demand on corporation, unless it would be futile


C Corp. sets its annual meeting for July 7 and record date for June 8. S sells B
her C Corp. stock on June 25. Who is entitled to vote the shares at the meeting,
S or B?

General rule: the “record shareholder” as of the “record date” has the right to vote. S may vote because owned on June 8.


What is a proxy?

(i) writing (fax and e-mail are OK),
(ii) signed by record shareholder (e-mail OK if can identify sender),
(iii) directed to secretary of corporation,
(iv) authorizing another to vote the shares.


On February 2, 2014, S sends a letter to secretary of C Corp. authorizing Don Draper to vote her shares. Can Don vote S's shares at the 2015 annual meeting in July 2015?

No, proxy good for 11 months unless stated otherwise.


Can a proxy be revoked even though it states that it is irrevocable?

Yes unless it is a “proxy coupled with an interest.” This requires (1) the proxy says it’s irrevocable and (2) the proxy-holder has some interest in the shares other than voting. E.g., A gives B an option to buy A’s stock. A gives B an “irrevocable proxy”
to vote that stock at a meeting.


What are the Requirements for voting trust?

(10-year maximum.)
1) Written trust, controlling how the shares will be voted;
2) Copy to the corporation;
3) Transfer legal title to the voting trustee;
4) Original shareholders receive trust certificates and retain all
shareholder rights except for voting


What are the Requirements for voting ("pooling") agreement?

In writing and signed by parties.


What are the consequences if the notice, quorum and voting requirements of shareholder voting are not met?

Action taken at a meeting this void unless waves expressly or impliedly by attendance in meeting without objection.


What are the quorum rules for shareholder votes?

Majority of number of shares (not shareholders); quorum not lost if shareholders leave meeting


How many votes must be cast by shareholders to pass a resolution?

Majority of votes actually cast; not necessarily majority of all shares present


You own 1,000 shares of stock in C Corp. C Corp. has three directorships open for election. You believe that Napoleon Dynamite should be director of C Corp. How many votes can you cast for Napoleon?

If cumulative voting provided in articles of incorporation, 3000


Can restriction on transfer of stock be enforced against improper transferee?

Yes if (a) the restriction is conspicuously noted on the stock certificate or (b) the transferee had actual knowledge of the restriction.


Which funds can be used for a distribution?

1. earned surplus (earnings minus all losses minus distributions previously paid)
2. if shareholders are informed, Capital surplus (excess of issuance consideration in excess of par). In RI, no portion of issuance consideration representing liquidation preference may be allocated to capital surplus.

Stated capital never can be used

Modern view: corporation cannot make
a distribution if it is insolvent or if the distribution would render it insolvent.