Corporations Flashcards
Duty of Loyalty - Conflicts of Interest
A director’s duty of loyalty requires that he act in good faith and in the best interest of the corporation. Part of that duty requires the director to refrain from engaging in a conflicting interest transaction. A director has a conflict when 1) the director is a party to the transaction 2) a related person or spouse is a party to the transaction and 3) the director has a material financial interest in the matter.
a. A conflicting interest transaction will be upheld if 1) a majority of disinterested directors (must be two or more) vote to approve the transaction OR 3) a majority of disinterested shareholders vote to approve the transaction OR 3) the director can prove that the transaction is fair to the corporation.
b. The director must reveal all material facts before a vote is taken and the director is NOT able to vote on the matter.
Duty of Care
Every director owes a duty of care to the corporation. This duty requires a director to act 1) in good faith 2) in a manner the director reasonably believes to be in the best interest of the corporation and 3) with the care that a person in a like position would reasonably believe appropriate under similar circumstances.
a. A director who meets this standard of due care will not be personally liable for a decision that, in hindsight, turns out to be unwise or a mistake in judgment. This is known as the business judgment rule.
Business Judgment Rule
The business judgment rule protects a director for any decision made 1) in good faith 2) on an informed basis and 3) in the honest and rational belief that the action taken was in the best interest of the corporation.
Usurping Corporate Opportunity (Duty of Loyalty)
Part of a director’s duty of loyalty prevents him from diverting a business opportunity to himself which in all fairness belongs to the corporation. Thus, a director cannot usurp a business opportunity without fully disclosing all material facts and giving the corporation a chance to act.
a. To determine whether the business opportunity is one that should first be presented to the corporation, a court will consider 1) whether the opportunity is within the scope of the corporation’s interest or expectancy 2) whether the opportunity is closely related to the activities of the corporation within the corporation’s line of business 3) whether the corporation lacked the financial ability to take advantage of the opportunity and 4) whether the information came to the director in his personal or official capacity.
b. If the court finds that the director has usurped a corporate opportunity, the director is required to disgorge the profits he made on the transaction.
Piercing the Corporate Veil (Disregarding the Corporate Entity)
As a general rule, shareholders are not personally liable for the corporation’s debts. However, a court will ignore the corporate shield and pierce the corporate veil when necessary to avoid injustice.
a. Whether a court will pierce the corporate veil depends heavily on the facts of a particular case. Courts look at several factors such as: 1) failing to observe corporate formalities 2) inadequate financing 3) siphoning of corporate funds 4) attempts to defraud creditors AND 4) whether there is a tort or contract claim.
Promoter Liability
A promoter is a person who attempts to bring a corporation into existence and enters into contracts on behalf of the proposed corporation. A promoter is personally liable for any contracts she enters into absent a novation.
Adoption
A corporation may become bound on a pre-incorporation contract by adopting it. Adoption is the corporation’s assent to the contract. Express adoption results from an express agreement such as a resolution of the board of directors. Implied adoption occurs when the corporation accepts the benefits of the promoter’s contract. When the corporation adopts a pre-incorporation contract, the promoter is still liable unless there is a novation.
De Jure Corporation
A corporation is formed when the articles of incorporation are filed with the secretary of state. A de jure corporation is one which in all aspects conforms with legal requirements.
De Factor Corporation
A de facto Corporation is different that a de jure Corporation in that a de facto corporation has not complied with the statutory requires. A de facto corporation is created when there is colorable compliance with the requirements of the law. In order for a de facto corporation to exits, there must be 1) a valid law that allows for incorporation 2) a good faith attempt to comply with the law and 3) an actual exercise of corporate powers, such as conducting business in the corporate name
Corporation by Estoppel
Corporation by estoppel is an equitable doctrine that is applied when a defectively formed corporation contract with a third party where both parties assume that a corporation has been validly formed.
