Managing a Corporation Flashcards
(35 cards)
What is the Duty of Care regarding directors?
A director has a duty to act with the care of an ordinarily prudent person in similar circumstances.
Defenses used when someone allegedly violates their duty of care include 1) Reasonable Reliance; and 2) The Business Judgment Rule.
Is a direct required to use any additional knowledge or special skills they possess in upholding the duty of care?
Yes!
Reliance re: Duty of Care
A director in entitled to rely on the performance of other others, employees, and outsider experts.
Includes information, reports, and opinions.
What is the Business Judgment Rule, and how may it be rebutted?
BJR is a rebuttable presumption that a director reasonably believed his actions were in the best interest of the corporation.
To overcome the BJR, must demonstrate:
1) Director did not act in good faith
2) Director was not informed to extent reasonable necessary
3) Director did not show objectively and had material interest in decision
4) Director failed to timely investigate after being alerted to a significant matter
5) Any other failure to act as a reasonable director.
What is the Duty of Loyalty regarding directors?
A director has a duty to act in a manner that director reasonably believes is in the best interest of the corporation.
Violations include: 1) Self Dealing; and 2) Usurping Corporate opportunities
Self-Dealing re: Duty of Loyalty
Occurs when director engages in transaction that benefits themselves or a closely related family member.
Includes when the transaction benefits another corporation or partnership that director or family member is associated with.
What are the Safe Harbor Rules?
A method of avoiding a violation of the duty of loyalty re: self dealing. Incurs when:
1) Interested director discloses all material facts to BOD and receives approval by majority of disinterested directors
2) Interested director discloses all material facts to shareholders and receives approval by majority of disinterested shareholders; OR
3) Transaction was fair to the corporation at the time of the deal, depending on whether the substance of the transaction was fair.
Usurpation of Corporate Opportunity re: Duty of Loyalty
Occurs when a director takes a corporate opportunity for themselves, rather than offering it to the corporation first.
If so, director must present to corporation. If corporation declines, then director can take opportunity for themselves.
Corporate Vicarious Liability
A corporation can be held vicariously liable as for torts that are within the scope of the employment, even if unauthorized!
TIP: Look to see if it is a frolic or a detour!
Can a corporation be independently sued?
Yes! Because it is it’s own legal entity.
I.E. Can be vicariously liable for it’s agents!
When is a corporation bound by a contract?
Bound by any contract entered into by an employee with the power to bind the corporation.
Ask: Actual Express, Actual Implied, Apparent Authority
What is the right of inspection?
A shareholder ha the right to inspect and copy corporate documents.
1) Provided n five days written notice
2) Must have a proper purpose to investigate records
3) Usually restricted to normal business hours
What is a proper purpose re: right to inspection?
One that relates to the shareholder’s interest in the corporation.
Who are the Board of Directors?
BOD manage and direct the management of the corporation’s business and affairs.
How are directors selected?
Selected by shareholders at the annual shareholder meeting.
When may a director be removed?
Shareholders may vote to remove the director either for:
Breach of Fiduciary Duty (Common Law)
Without Cause (Modern Trend)
What are the two steps of terminating a corporation?
1) Dissolution: Voluntarily terminating status
2) Winding Up: Liquidating it’s business
How are a corporation’s assets distributed following termination?
Assigned in following order:
1) Creditors of corp
2) Shareholders of stock with preferences in liquidation
3) Other remaining shareholders of stock
What are the two tests to determine whether there is a corporate opportunity?
1) Interest or Expectancy test
2) Line of business test
What is the Interest or Expectancy test?
A corporate opportunity exists if the corporation has an existing interest or expectancy arising from existing right in the opportunity.
Can also exist when corporate is actively seeking a similar opportunity.
What is the Line of Business test?
A corporate opportunity exists if the opportunity is within the corp’s current or prospective line of business.
How may an agent-principal relationship be formed?
1) Principal manifests assent to agent
2) Agent acts on principals behalf
3) Agent’s actions are subject to principal’s control
4) Agent manifests assent or consents.
Principal = Corporation, Agent = Individual!
What is ratification?
Ratification occurs when a principal *affirms a prior act** that was done on their behalf.
This is another way to establish authority.
What are some examples of when an individual pierces the corporate veil?
(i) undercapitalization of the corporation at the time of its formation
(ii) disregard of corporate formalities;
(iii) use of corporate assets as a shareholder’s own assets; alter ego
(iv) self-dealing with the corporation;
(v) siphoning of corporate funds or stripping of corporate assets;
(vi) use of the corporate form to avoid existing statutory requirements or other legal obligations;
(vii) a shareholder’s impermissible control or domination over the corporation; and
(viii) wrongful, misleading, or fraudulent dealings with a corporate creditor.
