Corporation 2

The limits of a corporation's authority can be asserted in the following instances:

(1) Direct lawsuit brought by a shareholder to enjoin the unauthorized exercise of authority; (2) Derivative action brought by the corporation through the shareholders to enjoin the unauthorized exercise of authority.

Revocation of proxy

(1) In general, proxies are freely revocable. (2)Revocation may be effected by: o a writing delivered to the corporation, o a subsequently executed proxy presented at the shareholder meeting, or o an in-person appearance and vote at the shareholder meeting by the party who had executed or given the proxy. To be irrevocable during its term, the proxy agreement must explicitly provide that it is "irrevocable" and the proxy must be coupled with an interest. For example, a loan or a sale of stock in the company.

Amendments to the Articles and Other Proposals for Fundamental Change Merger Two Exceptions to the Approval Requirement

(1) Short form: Parent owns 90% of subsidiary. (2) Acquiring corporation does not need to vote if the following holds true: (a) The corporation will survive the merger or be the acquiring corporation in a share exchange; (b) The corporation's Articles will not change; (c) The merger or share exchange will not itself affect a change in the number of outstanding shares held by the corporation's shareholders or affect a change to the preferences, limitations, or relative rights of those shares; and (d) The issuance of shares as part of the merger or share exchange does not otherwise require shareholder approval.

Corporation by Estoppel

(1) 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. (2) When a contractual dispute arises between a third party and an entity believed to be a corporation, a court may estop 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.

Factors that go into a "piercing the corporate veil" determination include:

(a) the extent to which the corporation is undercapitalized, (b) the extent to which corporate formalities have not been honored or observed, (c) the extent to which corporate and personal funds have been commingled, and (d) the extent to which the corporate entity is no more than the alter ego of its shareholders.

LLC Derivative

. Like shareholders of a corporation, members of an LLC have a right to bring a derivative action on behalf of the LLC alleging mismanagement of the LLC by managing members or managers. .

Straight voting

. If a corporation has straight voting, and unless otherwise provided in the articles of incorporation, the entire board of directors, or any individual directors, can be removed, with or without cause, by a majority of the shares entitled to vote in the election of such directors. .

Prerequisite to Derivative Suits

. • As a prerequisite to bringing a derivative action, the shareholder must make a written demand of the directors to enforce the rights of a corporation, unless the shareholder can demonstrate that such demand would be futile. .

Waiver of notice

A Director may waive notice before or after the date and time of notice through a signed writing. A Director who makes no prompt objection to any resolution during the meeting or the meeting itself waives their participation. Even if a Director objects to the meeting, any vote thereafter during the meeting assents to action during the meeting and deems notice waived.

Meeting Presence

A Director's presence at a board meeting does not require physically presence. Presence may be through communication that allows all participants to hear each other during the meeting.

Nature of Corporations

A corporation is a legal entity distinct from its owners, the shareholders. A corporation has four key characteristics: • perpetual or continuous existence; it survives the death orreplacement of its owners (shareholders); • centralized management of its assets and business through a board of directors; • limited liability for its owners (shareholders), who are generally shielded from personal liability for the corporation's debts and obligations; and • free transferability of ownership interest (shares).

Novation

A novation occurs when three parties—the promoter, the second party to the original contract, and the corporation—agree to substitution of the corporation as a party to the contract in place of the promoter.

Piercing the Corporate Veil (3) (d)

A plaintiff seeking to pierce the corporate veil must prove: (1) the shareholder controls the corporation in such a way that the corporation is essential a façade; (2) the corporate form is being used improperly or fraudulently; (3) injury or unjust loss would result from this wrongful use. Factors that go into a "piercing the corporate veil" determination include: (a) the extent to which the corporation is undercapitalized, (b) the extent to which corporate formalities have not been honored or observed, (c) the extent to which corporate and personal funds have been commingled, and (d) the extent to which the corporate entity is no more than the alter ego of its shareholders.

Adoption

Adoption can be express or implied. Express adoption generally occurs when the board passes a resolution. Implied adoption occurs when the corporation accepts or acknowledges the benefits of the contract in some manner. If adoption of a pre-incorporation contract is at issue, your analysis should explicitly consider both of these possibilities.

Even if an "opportunity" is determined to belong to the corporation, there is no usurpation of a corporate opportunity if:

After full disclosure, the corporation was given the opportunity to pursue the opportunity and did not.

The Authority of Corporate Officers

An Officer or agent may enter into any transaction which they have been expressly or implicitly authorized under the Articles, bylaws, employment contract, or Board resolution. Implied Authority = transactions that are reasonably related to performing duties for which they are responsible. If Officer acts without authority, corporation may ratify transaction later.

The Powers of Directors The Board of Directors What constitutes an act of the board?

Board action requires the presence of a quorum of Directors at a duly held meeting of the board. Unless otherwise stated in the Articles, a quorum is a majority of the fixed directors. Unless otherwise stated in the Articles, if a quorum is present, the affirmative vote of a majority of Directors present will result in board action. Unless otherwise stated in the Articles, the board can transact business without a meeting if there is written consent signed by all Directors.

Duties of Controlling Shareholders

Controlling shareholders have a duty of good faith to minority shareholders. This prevents them from obtaining a benefit from the corporation not shared proportionately with minority shareholders. Shareholder "oppression" occurs most often in a close corporation because there is no public market for the corporation's shares where minority shareholder can sell their shares and escape mistreatment.

Corporate Management: Its Exposure to Liability

Directors and Officers are only personally liable for violation of fiduciary duties or unauthorized actions. However, the Articles of Incorporation may include provisions that limit personal liability for violation of fiduciary duties (though most states do not allow complete elimination).

Limits on Corporate Power: The Doctrine of Ultra Vires

Directors and Officers of the corporation may be limited by the statement of corporate purpose contained within the Articles of Incorporation. Third parties may not assert limits of authority against the corporation.

Duty of Care is subject to Business Judgment Rule

Directors and Officers protected by the business judgment rule, which creates a rebuttable presumption that Directors and Officers act: (1) on an informed basis, (2) in good faith, and, (3) with honest belief that their decision was in the corporation's best interest.

Amendments to the Articles and Other Proposals for Fundamental Change Merger In the case of a parent corporation and its subsidiary

Disposition occurring in the usual and regular course of the corporation's business: Approval of a merger plan between a parent and subsidiary does not require approval of subsidiary's board or shareholders if the the parent owns at least 90% of the voting power of each class and series of outstanding shares of the subsidiary that has voting power. EXCEPTION: Disposition of a corporation's assets outside the regular course of business requires shareholder approval if it would leave the corporation without significant continuing business activity. Significant business activity = Activity represents at least 25% of its assets at the end of the most recent fiscal year and 25% of either its income or revenue from that year.

Corporate Management: The Fiduciary Duties of Directors and Officers Duty of Loyalty

Duty of Loyalty requires Directors and Officers to: (1) not self-deal (transact business with the corporation), (2) not usurp a corporate opportunity, and, (3) directly compete with the corporation. Members, managing members, and manages of LLCs all owe this duty to the LLC. The allegedly disloyal director or officer carries the burden of proving that the transaction was in fact fair to the corporation.

The Collective Power of Shareholders Shareholder action typically occurs at shareholder meetings.

Each shareholder must be provided with timely written notice of each annual and special shareholder meeting. No fewer than 10 days before, no more than 60 days before the meeting. Notice must state the place, date, and hour of the shareholder meeting. Proper notice for special meeting must include the purpose of the meeting.

Conflict of Interest Transaction

If a Director or Officer may have a conflict of interest with the corporation, they must notify all other Directors, Officers, or Shareholders of all the material facts regarding the conflict. If the Director or Officer then receives approval from a majority of non-interested Directors or Shareholders to complete the transaction, they may do so without incurring liability.

Impact of Adoptions and Novations on a Promoter's Liability

If a corporation adopts the contract of a promoter, the promoters will: remain liable on the contract to the third party but will now be entitled to indemnification from the newly created corporation. If a novation occurs, the promoters are: released from all personal liability on the pre-incorporation contract.

Damages - Usurping Business

If a corporation opportunity has been usurped, a court will order damages or an order to convey any profits from the misappropriation to the corporation. .

Duty of Loyalty and Business Judgment Rule

In an action claiming a violation of a duty of loyalty, the business judgment rule is inapplicable; if the "conflict-of-interest" transaction has not been duly authorized by a vote of disinterested directors or shareholders, then the transaction is not insulated from judicial scrutiny, and the allegedly disloyal director or officer carries the burden of proving that the transaction was in fact fair to the corporation.

The Collective Power of Shareholders Cumulative Voting

In cumulative voting, shareholders may allocate all of their votes to any candidate to elect that candidate to the board of directors. If the corporation has cumulative voting and less than the entire board is to be removed, no director can be removed if: the votes against removal would be sufficient to elect him under cumulative voting rules. So pay attention to any question telling you that a certain number of votes is required to elect a director- might be cluing you in about what is needed to remove under cumulative voting.

Corporate Opportunity (d)

In determining whether an opportunity belongs to the corporation, a court will consider the following: (a) if the Director/Officer discovered the opportunity while acting in their capacity as Director/Office, (b) if the opportunity closely relates to the corporation's business or is in the line of the corporation's business, (c) whether the Board has expressed an interest in acquiring that business, (d) whether the opportunity was discovered using corporate funds or facilities.

Shareholder Rights Voting Rights of Shareholders Voting by proxy

In general, for a proxy agreement to be valid, the shareholder must provide the proxy holder with either a written, signed authorization or an electronically transmitted authorization. No proxy shall be valid after the expiration of 11 months unless otherwise provided in the proxy agreement itself.

Preincorporation Transactions: Liability Before the Formation of the Corporation

Promoters are personally liable on pre-incorporation contracts, unless: (a) the contract itself specifically disclaims promoter liability, or, (b) circumstances show the third party agreed to look to the corporation for performance. Fact-based analysis: did the third-party know and believe the corporation would be formed, and thereafter adopt the contract in question?

Promoters and Pre-Incorporation Transactions Promoters Generally

Promoters take the necessary preliminary steps for creating a corporation; these steps often involve contracts that the promoters enter into for the benefit of the not-yet-formed corporation. Promoters are not agents of the corporation -- o Because the corporation is not yet in existence, it cannot be a principal to any agency relationship with a promoter. o Consequently, promoters have no power to bind the not-yet formed corporation.

Ratification of Pre-Incorporation Contracts

Ratification requires that the principal would have been lawfully able to authorize the unauthorized act when it was done. Because the corporation does not yet exist when a pre incorporation contract is signed, the corporation cannot later ratify this contract.

Shareholders and Their Exposure to Liability

Shareholders generally do not face liability unless the corporate veil is "pierced" by the plaintiff.

Right to Information and Inspection

Shareholders have a right to information that is important to a shareholder's voting and investment decisions. Information may include: (a) annual financial statements; (b) Articles, bylaws (c) minutes of a shareholder meeting (d) list of shareholders of record (e) accounting books (f) records and minutes of a director meeting This right is exercisable upon a good faith demand made for a proper purpose and with specificity as to that purpose and the items sought to be inspected.

The Collective Power of Shareholders What can shareholders do collectively?

Shareholders in their collective capacity have to power to: (a) elect directors, (b) remove directors with or without cause, (c) amend the bylaws, and (d) approve fundamental changes in the corporation. o "Fundamental changes" refers to such things as (a) Amendments to the articles, (b) Merger, (c) Dissolution, and the (d) Sale of substantially all corporate assets.

Dividends Power to declare a dividend

Subject to restrictions in the articles, the power to declare a dividend is: reserved for the corporation's board and is exercised at its discretion.

Date of Incorporation

The Date of Incorporation is the date of the filing of the Articles. EXCEPTION: Articles set forth a delayed effective date. This can be no more than 90 days after the date of filing. Filing with the Secretary of State is generally conclusive proof that the corporation has been validly formed.

Corporate Management: The Fiduciary Duties of Directors and Officers Duty of Care

The Duty of Care requires Directors and Officers to: (a) act reasonably and in good faith in the exercise of their duties, (b) with the care that an ordinarily prudent person would exercise, and (c) in a manner they believe serves the best interests of the corporation. Directors and Officers are entitled to rely on information prepared by those deemed reliable and competent.

Corporate name

The corporate name set forth in the articles of incorporation must contain the word "corporation," "incorporated," "company," or "limited," or the abbreviation "corp.," "inc.," "co.," or "ltd." Furthermore, the corporate name must generally be distinguishable from other corporate names authorized to transact business in the state.

The Powers of Directors The Board of Directors The individual director distinguished from the collective board

Unless otherwise stated in the Articles, the Directors manage the corporation's business and exercise the corporation's power. Unless otherwise stated in the Articles, Directors may only act in their collective capacity. Individual Directors cannot set corporate policy or act as the corporation's agent. A prerequisite of all board action is the participation of a quorum of the board. Quorum = minimal portion of authorized number of Directors required to be present for board action

What constitutes a duly held meeting of the board of directors?

Unless the articles or bylaws provide otherwise, regular meetings may be held without any sort of notice. Special meetings of the board require at least two day's notice of the date, time, and place of the meeting, unless otherwise required by the articles or bylaws. Do NOT need to include notice of its purpose, except where the removal of a director is to be considered.

More than one promoter

When there is more than one promoter, there is a mutual agency (or a partnership-type relationship) among the promoters themselves. o In such a case, contracts entered into within the scope of the promotion would bind each promoter, and each promoter would become jointly and severally liable for these contracts.

Organization Distinguished from Incorporation What happens during organization?

a. After incorporation, a corporation must be properly organized in accordance with statutory formalities. b. Failure to do so may expose shareholders to personal liability for corporate debt and obligations. c. The organization of a corporation is completed at an organizational meeting that is called by the incorporators or, if initial directors are named in the articles, by either the incorporators or the initial directors. d. Completing the organization of a corporation requires: (1) the naming or election of directors, (2) the appointing of officers, and (3) the adopting of by-laws.

Incorporation and Organization Requirements for Incorporation

a. Incorporation requires the proper execution and filing of articles of incorporation. b. To be properly executed, the articles of incorporation must be prepared and signed by an incorporator (or incorporators) and contain necessary parts. c. To be properly filed, 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 Collective Power of Shareholders Quorum rules apply to shareholder meetings.

o A majority of the shares entitled to vote constitutes a quorum, unless the articles provide otherwise. o Assuming a quorum, shareholder action requires the affirmative vote of a majority of shares present at the meeting: unless the articles provide for a greater proportion

Promoters and Pre-Incorporation Transactions Promoters are not agents of the contemplated corporation

o Because the corporation is not yet in existence, it cannot be a principal to any agency relationship with a promoter. o Consequently, promoters have no power to bind the not-yet formed corporation.

To compel payment of dividends

o To compel payment of dividends, a shareholder needs to prove that: the directors' refusal to declare a dividend amounted to fraud, bad faith, or an abuse of discretion o In making a determination on whether a board acted in bad faith when refusing to declare a dividend, a court will look to see if any of the following were the motivating causes of its decision: 1. intense hostility of the controlling faction against the minority; 2. exclusion of the minority from employment by the corporation; 3. high salaries, bonuses, or corporate loans made to the officers in control; 4. the fact that the majority group may be subject to high personal income taxes if substantial dividends are paid; and 5. the existence of a desire by the controlling directors to acquire the minority stock interests as cheaply as possible.

Examples of improper conduct by a controlling shareholder include:

o causing the board to enter into or guarantee a loan made by or with a majority shareholder; o causing the board to enter into a contract on unfair terms with a majority shareholder or an entity affiliated with a majority shareholder; o causing the board to issue additional stock to a majority shareholder at less than fair market value for the purpose of diluting the interest of minority shareholders; and o causing the board to approve a structural change (dissolution, merger, or sale of substantially all of its assets) for the purpose of excluding minority shareholders from participation in a profitable business. o causing the improper or baseless termination of employment of a minority shareholder o causing the board to institute a "no dividend" policy while increasing the salary of certain shareholder-employees

What needs to be in Articles of Incorporation?

o the name and address of each incorporator; o the address of the corporation's initial registered office and name of its initial registered agent at this office; o the number of shares the corporation is authorized to issue; and o a corporate name. .

Preincorporation Transactions: Liability After the Formation of the Corporation A Corporation's Liability on a Preincorporation Contract

• A corporation is not liable on any pre-incorporation agreements its promoters entered into on its behalf unless, after it comes into existence, the corporation assumes liability by its own act through adoption or novation. NOTE: The fact that a corporation is only liable on a pre-incorporation contract if it assumes liability by its own act makes sense when we consider the following: promoters are not the agents of the not-yet formed corporation and so do not have the power to bind the corporation to contracts they enter into in anticipation of the corporation being formed.

Derivative Suits

• A derivative suit is an equitable action brought by a shareholder on behalf of the corporation and for the corporation's benefit. • Typically, it involves an alleged breach of fiduciary duty by officers and/or directors, and a request that the court enforce this duty owed to the corporation or redress the injury suffered by the corporation. So to the extent the shareholder is harmed, that harm is derivative of the harm done to the corporation.

How a corporation is structured:

• Corporate directors sit on the board and are responsible for governing the corporation. • Corporate officers are delegated the responsibility for managing the conduct of the corporate business and serve as agents of the corporation. • Shareholders are owners of the corporation but generally will not exercise control over the management of the corporate business.

Right to Bring Suit Direct suits

• Direct suits are brought when the wrong or harm is direct to the shareholder. For example, a shareholder can bring a suit against the corporation to compel the payment of dividends. o While shareholders have a right to share in the net profits of the corporation, the power to declare dividends resides with the board. Members of an LLC may bring an action against the LLC if injured personally by the actions or decisions of its managing members or managers.

Amendments to the Articles and Other Proposals for Fundamental Change Merger

• In general, a plan for merger or share exchange must be adopted by the board and then submitted to the shareholders for approval. o Notice for a shareholder meeting at which such a plan is to be considered must indicate that one of the purposes of the meeting is to consider the plan and, if the corporation is not planned to be a surviving entity, a copy or summary of the articles of the surviving or new entity must also be included as part of the meeting's notice. o The quorum requirement for a meeting to consider a merger must be at least a majority of the votes entitled to vote on the merger.

Amendments to the Articles and Other Proposals for Fundamental Change Amendment to Articles

• In general, amendments to the articles are proposed by the board and submitted to the shareholders for approval. o Notice for a shareholder meeting at which an amendment to the articles is to be considered must include a copy of the amendment and indicate that one of the purposes of the meeting is to consider the amendment. o The quorum requirement for a meeting to consider an amendment to the articles must be at least a majority of the votes entitled to vote on the amendment.

Appraisal Rights of Dissenting Shareholders

• In general, where a fundamental change has been put to a vote of the shareholders, dissenting shareholders have: the right to obtain payment of the fair value of that shareholder's shares, o In the context of a merger, this right belongs to any shareholder of a corporation that is party to the merger except for shareholders of a subsidiary corporation whose parent owns shares representing at least 90 percent of the voting power of each class and series of outstanding shares. o In the context of a share exchange, this right belongs only to those shareholders who own shares of a class or series of shares that are to be acquired or exchanged.

Consolidating voting power

• Shareholders can arrange to vote their shares in concert with another by means of a voting agreement or voting trust. • Voting trusts involve a transfer of legal title and are more strictly regulated than voting agreements. • Voting agreements are contracts whereby shareholders bind each other to vote a certain way on particular issues. o Absent fraud or other illegal objective, voting agreements are valid among shareholders even if, under some circumstances such as when all of the shareholders agree, they run counter to the discretion of the board.

Shareholder Rights Voting Rights of Shareholders

• Unless provided otherwise by statute or by the articles, each share is entitled to one vote. • Only shareholders of record on the 'record date' are eligible to vote. • Shareholders are entitled to vote by proxy.