Corporation
Must Corporations provide shareholders notice of meetings?
Corporations shall notify shareholders of the date, time, and place of each annual and special shareholders' meeting no fewer than 10 or more than 60 days before the meeting date. Notice of an annual meeting need not include a description of the purpose or purposes for the meeting. Notice of a special meeting MUST include a description of the purpose or purposes for which the meeting is called.
What is Usurpation of Opportunity?
(1) Opportunity that the director learns of from their position as director, or
(2) Opportunity director acquires by using corporate information or property, or
(3) Opportunity closely related to business that company is in.
However, when a corporation sues an agent for usurpation of opportunity, relief can be granted if: (1) the failure to offer the corporate opportunity was from a good faith belief that the business activity did not constitute a corporate opportunity; and (2) a reasonable time after the suit is filed, the agent offers the corporate opportunity to the corporation and rejected in a manner that satisfies the standards of subsection.
What acts constitute bad faith?
2. Lack of due care- fiduciary action taken solely by reason of gross negligence and without any malevolent intent. Gross negligent conflict without more cannot constitute a breach of the duty of good faith.
3. Intentional dereliction of duty-conscious disregard for one's responsibilities. intentionally acting without a purpose other than that of advancing the best interest of the corporation, intentionally violating applicable law, intentionally failing to act in the fact of a known duty to act.
What are close corporations?
They are commonly identified by 3 characteristics: (1) small number of shareholders; (2) not public stock; (3) active shareholder participation in the business.
No, directors in a close-corp cannot limit the way they vote in close-corp.
What other ways can shareholder's vote?
A shareholder may vote his shares in person or by proxy. A SH may appoint one or more proxies to vote or otherwise act of the SH by signing an appointment form. A public corp. may permit a SH to appoint one or more proxies by any kind of telephonic transmission, even if not accompanied by written communication, under circumstances or together with information from which the corporation can reasonably assume that the appointment was made or authorized by the SH.
-Appt is effective when received.
- Valid for 11 moths unless a different period is expressly provided in appt form.
- Appt of proxy is revocable by SH unless appt form conspicuously states irrevocability and appt is coupled with an interest, remains irrevocable until interest extinguished.
- Death/Incapacity of SH does not effect Corp.'s right to accept proxy's authority.
Directors/Senior Execs may not advance their pecuniary interest by engaging in competition with the corporation UNLESS either: (1) no reasonably foreseeable harm; (2) the benefit of allowing the competition to take place is greater than the harm; (3) the competition was authorized in advance or ratified following full disclosure of the conflict of interest and competition by the disinterested directors; (4) same as 3 and the shareholders approval would not liquidate the corporate assets.
What can a shareholder do if a director violates their rights?
If a shareholder's rights have been personally violated - direct suit.
If the corporation's rights have been violated - DERIVATIVE SUIT. Generally a derivative suit may only be brought by a shareholder who owed stock at the time the cause of action arose and who can fairly represent the company's interest. Also, the shareholder must make a written demand for the corporation to take action before filing the suit, unless waiting for the company to respond to the demand would cause irreparable injury.
How might a shareholder lose their protection of limited liability?
Can shareholders craft agreements that govern salaries?
All agreements that govern salaries between corporate shareholders must be in writing.
What is the Standard of Conduct for Directors?
Each director must act in: (1) good faith; and (2) in a manner they reasonably believe to be in the best interest of the corporation; (3) shall disclose all material information to the other board members that is not known to them but affects their decision-making or oversight functions as long as it would not violate the law.
Agents CAN make extramural arrangements like setting up a new business, incorporating a new firm and/or arranging for space and equipment, AS LONG AS it is not on Company time or with company property.
Agents CANNOT commence doing business as a competitor or solicit customers away from the principal, WHILE EMPLOYED.
How can a corporation dismiss a derivative suit?
A corporation can file a motion to dismiss for derivative suits if findings by independent or disinterested directors show that in good faith and after conducting a reasonable inquiry that the derivative proceeding is not in the best interest of the corporation. (Burden is on D to show its met, then on P to show its not met)
A majority of quorum, majority of 2 or more qualified disinterested directors, or a motion by the corp to have the court appoint a panel of 1 or more people to conduct the investigation.
How do the Shareholders of a Close Corporation Elect Directors?
Formula: [NxS)/(D+1)]+1
N=#of directors the shareholders want to elect.
S=total # of shares voting.
D=total #of directors to be chosen at the election.
What rights does a shareholder have in purchasing new issuance of stock?
A shareholder with preemptive rights has the right to purchase the number of shares of any new issuance of shares that will enable the shareholders to maintain their percentage of ownership.
Default rule: If the articles don't state preemptive rights, then the shareholders dont have any.
What is the Duty of Care?
A director must carry out duties with care an ordinarily prudent person in a like position would exercise under similar circumstances. However, the business judgment rule protects the directors because directors' decisions are presumed to be made in corporation's best interest. The burden then shifts to shareholders to show that directors or officers were negligent in guiding the corporation because the director allegedly made bad business decisions.
What is the Guth Test/Line of Business Test?
1. the corp. is financially able to exploit the opportunity.
2. The opportunity is within the corporation's line of business.
3. The corporation has an interest or expectancy in the opportunity; and
4. by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimitable to his duties to the corporation.
However, the Court in Guth, stated that a director or officer may take a corporate opportunity if:
1. the opportunity is presented to the director/officer in his individual right and not in his corporate capacity;
2. the opportunity is not essential to the corporation;
3. the corporation holds no interest or expectancy in the opportunity; AND
4. the director/officer has not wrongfully employed the resources of the corporation in pursuing or exploiting the opportunity.
How can a defendant receive indemnification after a derivate suit?
1. Indemnification is REQUIRED when the D is wholly successful on the merits or otherwise. (any reason)
2. Indemnification is PROHIBITED when the D is adjudged liable because he did not act in good faith; did not reasonably believe his actions were in the best interest of the corporation, or his conduct was opposed by the corporation.
3. Indemnification is PERMITTED when D acted in good faith, best interest of the company, and the conduct was at least not opposed by the corporation.
4. HOWEVER, if an indemnification clause is put in Articles of Corporation, that is what governs.
How do Shareholders of a C-corp remove directors?
1. Can be removed with/without cause, unless articles provide directors be removed with cause.
2. Directors can be removed as long as the majority has voted.
How can shareholders in a c-corp protect themselves from being ousted by non-public shares?
Articles can impose restrictions on selling shares to outsiders. A restriction is valid and enforceable against the holder as long as its conspicuous on the front and the back of the stock certificate.
So in a c-corp, shareholders transfers interest ($ + management) so to avoid it or limit transfers, the other shareholders create a restriction and tells the holder about it. this is to protect the c-corp.
What is the duty of loyalty?
Directors cannot put their own financial interest ahead of a corporation's interest. Some ways a director can breach this duty is by: (1) competing-engaging in a business that corporation engages in; (2) Corporate opportunity-director takes for himself a business opportunity that properly belongs to the corporation; (3) conflict of interest-engaging in self-dealing, director entrees into business transaction with corporation (director on both sides of the deal).
What is the Entire Fairness Test?
This test applies when a director stands on both sides of the test (Self-dealing/conflict of interest), they have the burden of establishing its entire fairness, sufficient to pass the test of careful scrutiny in the courts.
When is Indemnification Insurance triggered
When the claim is made, not when the conduct occurred.
How do Shareholders make decisions in C-corps?
Voting trusts- here, one of more shareholders create a voting trust giving the authority to one person to vote on their behalf.
Voting agreements - two or more shareholders may sign the agreement to describe how they will vote. these are binding contracts.
What is a Buy-Seller Agreement and what is its purpose?
This agreement is simply a contract that requires the corporation or the majority shareholders of a corp. to purchase shares in specified situations with a specified price. The purpose is that minority shareholders are not stuck with stocks that they cannot liquidate.