Rule Statements Flashcards
Promoters
Promoters are NOT agents of the contemplated corporation.
Promoters have NO power to bind the not-yet-formed corporation.
If there is more than one promoter: there is mutual agency among them. Each promoter would be jointly and severally liable for contracts formed in the scope of promotion.
Promoter Liability
In general, promoters are personally liable for contracts they enter into for the benefit of a not-yet-formed corporation.
Exception:
- the pre-incorporation contract specifically disclaims personal liability of the promoter; or
- a court may still determine that the intent of the parties was to hold only the corporation, once formed, liable on the contract.
Corporation’s Liability on a Pre-incorporation Contract
A corporation is NOT liable on any pre-incorporation agreements its promoters entered on its behalf unless, after formed, the corporation assumes liability through adoption or novation.
Adoption
If a corporation adopts the contract of the promoter, the promoter will remain liable on the contract to the third party, but will be entitled to indemnification from the newly created corporation.
Adoption can be:
(1) Express: generally occurs when the board passes a resolution stating the corporation adopts the contract; or
(2) Implied: where the corporation accepts or acknowledges the benefits of the contract in some manner.
Novation
Novation occurs when the promoter, the corporation, and the third party agree to substitution of the corporation as a party to the contract in place of the promoter.
Through novation, the promoters are released from all personal liability on the pre-incorporation contract.
Requirements for Incorporation
Incorporation requires the proper execution and filing of articles of incorporation.
-
Execution: The articles of incorporation must be prepared and signed by an incorporator (or incorporators) and set forth the following:
- the name and address of each incorporator;
- the address of the corporation’s initial registered office and name of its initial registered agent at this office;
- the number of shares the corporation is authorized to issue; and
- a corporate name that includes: “corporation,” “incorporated,” “company,” or “limited,” “corp.,” “inc.,” “co.,” or “ltd.”
Filing: The articles of incorporation must be delivered by an incorporator to the secretary of state’s office for filing; and its delivery should be accompanied by payment of the appropriate filing fee.
The effective date of incorporation is the date of filing unless the articles set forth a delayed effective date that is not more than 90 days after the date of filing.
Corporate existence begins at the moment of incorporation, and the secretary of state’s filing of the articles is generally conclusive proof that all conditions precedent to incorporation have been satisfied.
Organization
After incorporation, a corporation must be properly organized.
Failure to properly organize may expose shareholders to personal liability for corporate debt and obligations.
The organization of a corporation is completed at an organizational meeting that is called by the incorporators or initial directors if named in the articles.
Completing the organization requires:
- The naming or election of directors;
- The appointing of officers;
- The adopting of by-laws
Bylaws
The internal rules enacted by the corporation to govern its actions and relations to its shareholders, directors, and officers.
Cannot be inconsistent with law or articles of incorporation.
Bylaws often specify:
- the time and place for annual shareholder meetings;
- the record date for determining the shareholders entitled to vote at meetings or to receive dividends;
- the number of shareholders necessary to constitute a quorum;
- the percentage of votes necessary to authorize corporate action; and
- any restrictions on transferability of shares.
Corporation by Estoppel
When a contractual dispute arises between a third party and an entity believed to be a corporation, a court may estop:
- the third party from alleging that the corporation is defectively incorporated if that would unjustly expose the corporate principals to liability; or
- the business entity from alleging that it is not legally a corporation liable on the contract as a corporation if that would unjustly deprive the third party of relief from injury.
Power of Directors
Subject to any limitation set forth in the articles of incorporation, (default) the management of the corporation’s business and the exercise of corporate power must be by or under the direction of the corporation’s board of directors.
Unless otherwise authorized by the articles or prior board decisions, (default) individual directors do not have the power to set corporation policy or even to act as its agent when entering into contracts.
Subject to restrictions in the articles, the board generally has discretion to decide whether and when to declare a dividend; the board may legitimately decide to retain corporate earnings to expand the business.
Act of the Board
All board action requires the participation of a quorum of the board.
A quorum is a majority of directors (articles or bylaws can change this).
Once a quorum is present, an act requires the affirmative vote of a majority of directors present (articles or bylaws can require more).
Default Exception:
- the board can transact business in the absence of a meeting so long as there is written consent to an action that is signed by all members of the board.
Duly Held Meeting of the Board
(Default) Regular meetings may be held without notice of date, time, place, or purpose of the meeting (articles or bylaws can provide otherwise).
(Default) Special meetings require two days’ notice for date, time, and place of meeting, NOT purpose (articles or bylaws can require shorter).
Removal of directors: must have notice.
Waiver of notice:
can occur before or after the date and time stated in the notice by means of a signed writing by the director entitled to the notice
or
by a director’s attendance or participation in a meeting when the director makes no prompt objection to the meeting or the transaction of business at the meeting.
NOTE: Even if timely objection is made at the beginning of a directors’ meeting, if the objecting director thereafter votes and assents to action taken at the meeting, the notice requirement will be deemed to have been waived.
Authority of Corporate Officers
The powers of a corporate officer are the powers of an agent.
A corporate officer or agent may enter into any transaction for which they have been expressly or implicitly authorized under the articles or certificate of incorporation, the bylaws, an employment contract, or a board resolution.
Corporate officers have the implied authority to enter into transactions that are reasonably related to performing the duties for which they are responsible.
If a corporate officer who acts without or beyond their actual authority, consider whether the officer had apparent authority to act or whether the officer’s actions were later ratified by the board.
Ultra Vires Doctrine
A corporation cannot undertake a contract or activity that is beyond the scope of its powers, as described in the articles of incorporation or bylaws.
Under the MBCA, the limits of a corporation’s authority may be challenged in the following instances:
- In a proceeding by a shareholder to enjoin the act;
- In a proceeding by the corporation (directly, derivatively, or through a representative) against a current or former director, officer, employee, or agent of the corporation; and
- In a proceeding by the attorney general based on the grounds that:
- the corporation obtained its articles through fraud; or
- the corporation has continued to exceed or abuse the authority conferred upon it by law.
Duty of Care
Directors and Officers must discharge their duties:
(1) In good faith;
(2) same care of an ordinary and prudent person in a like position in similar circumstances;
(3) in a manner they reasonably believe to be in the best interests of the corporation.
Directors and Officers may rely on: information, reports, records, and financial data by those deemed reliable and competent by the board for that matter.
Business Judgement Rule
Creates a rebuttable presumption (burden on plaintiff to show otherwise) that, when making a business decision, directors and officers have acted:
- on an informed basis;
- in good faith; and
- with honest belief that their decision was in the corporation’s best interest.
A director CANNOT act in good faith when committing or allowing the corporation to commit illegal acts, even when doing so is profitable for the corporation.
Duty of Loyalty
The fiduciary duty of officers, directors, and employees requires that they be loyal to the corporation and not promote their own interests in a manner injurious to it.
Conflicts of interest typically arise when directors or officers:
(1) transact business with the corporation (self-dealing);
(2) usurp a corporate opportunity; or
(3) directly compete with the corporation.
Self-Dealing
When a director or officer is involved in a “conflict of interest transaction,” the duty of loyalty requires the director or officer to notify the other directors, officers, or shareholders of all of the material facts regarding the conflict.
Such transactions are voidable unless:
the material facts of the conflict were disclosed and fully described to the board, and the transaction was validly approved by a majority of disinterested directors or shareholders; or
a court determines the transaction was fair and reasonable to the corporation.
In an action claiming violation of a duty of loyalty: the allegedly disloyal director or officer carries the burden of proving that the transaction was in fact fair to the corporation.
Usurping Corporate Opportunity
The duty of loyalty prohibits directors and officers (and sometimes employees) from usurping for their own benefit any business opportunity that properly belongs to the corporation.
In determining whether an opportunity belongs to the corporation, courts will consider the following:
(1) Whether the business constituting the opportunity is closely related to that of the corporation;
(2) whether the board had expressed an interest in acquiring that type of business;
(3) whether the individual became aware of the opportunity while acting in his capacity as a director or officer; and
(4) whether he used any corporate funds or facilities in discovering or developing the opportunity.
Even if an “opportunity” is determined to belong to the corporation, there is no usurpation of a corporate opportunity if after full disclosure:
(1) the corporation was given the opportunity to first pursue it and declined to do so; or
(2) was otherwise unable to take advantage of the opportunity.
Competition with the Corporation
Competition by a director or officer will NOT necessarily be a breach of fiduciary duty if he or she acts in good faith.
As a general rule, directors and officers may engage in independent business, but if the independent business competes with the corporation, equitable limitations will apply.
In the absence of any contrary agreement or understanding, corporate officers are not precluded, upon the termination of their employment, from entering into competition with their corporate employer, or from using the intangible knowledge and skill they acquired while employed.
Covenants not to compete, however, will be enforced if they are reasonable as to time and area of application.
General Shareholder Power
Shareholders in their collective capacity have the power to:
(1) Elect Directors;
(2) Remove directors with or without cause;
(3) Amend bylaws; and
(4) Approve fundamental changes such as: amendments to the articles, merger, dissolution, and the sale of all or substantially all corporate assets.
Shareholder Meetings
To ensure that the collective power of shareholders is not interfered with, watered down or otherwise manipulated, each shareholder of record must be provided with timely written notice of each annual and special shareholder meeting 10 to 60 days prior to the meeting date.
For annual meetings, proper notice will state the place, date, and hour of the shareholder meeting.
For special meetings, proper notice will state the place, date, hour, and PURPOSE of the shareholder meeting.
Quorum rules apply.
Shareholder Resolutions
The MBCA does not specifically permit the submission of shareholder resolutions for shareholder action at shareholders’ meetings. Nonetheless, the practice is widespread and generally accepted under common law principles as a fundamental right.
Generally, a shareholder resolution is acceptable if the proposal is a recommendation or request that the corporation or board of directors take a specified action; conversely, resolutions seeking to mandate or bind the corporation or the board are not considered proper.
Straight vs. Cumulative Voting
When electing directors (typically at the annual shareholder meeting) each shareholder gets a number of votes equal to the number of shares they own multiplied by the number of seats up for election.
“straight” or “statutory” voting, shareholders may not give more than one vote per share to any single nominee.
In cumulative voting, shareholders may allocate all of their votes to any candidate when there are multiple openings on the board.
