BLAW 441 - FINAL

When is the Corporate Entity Disregarded?

"Piercing the Corporate Veil" occurs when: -a court, in the interest of justice or fairness -holds shareholders personally liable for corporate debts or obligations. Court concludes that shareholders used corporation as a "shield" from illegal activity.

Committees of the Board of Directors

A board of directors may create committees of the board and delegate certain powers to those committees. All members of these committees must be directors. What are some of the committees commonly created?

What is a Joint Stock Company?

A company which has some features of a corporation and some features of a partnership. Formed by agreement and company is not treated as separate legal entity during lawsuits. The company sells fully transferable stock, but all shareholders have unlimited personal liability. Shareholders are not considered agents of each other.

Constitutional Rights of Corporations

A corporation enjoys rights and privileges under the Bill of Rights. Major rights are: 1. Right of access to the courts. 2. Due process rights. 3. Freedom of speech. 4. Fifth Amendment right against self-incrimination (officers and employees in limited circumstances only).

The Corporation as aSeparate Legal Entity

A corporation is a separate legal entity (an artificial person) created by statute that can: 1. Sue or be sued in its own name; 2. Enter into and enforce contracts; 3. Hold title to and transfer property 4. Be found liable (civil and criminal) for violations of the law. The corporation substitutes itself for the natural persons in conducting corporate business and incurring liability.

Corporate Responsibility for the Torts of Its Agents

A corporation is liable for the torts committed by its agents or officers within the course and scope of their employment. Apply the doctrine of respondeatsuperior liability. What type of evidence indicates that an agent or officer is acting within the course and scope of his employment?

Closely Held Corporation

A corporation whose shares are held by members of a small group. Characteristics: 1. Members often know each other personally 2. Share not tradedon national capital/stock markets. 3. Management of corporation resembles that of a partnership. What happens if a member want to give up his/her ownership interest in the corporation?

What are the Rights of Directors?

A director has the right to: 1. Participate in corporate decisions; 2. Inspect corporate books and records; 3. Receive compensation (usually a nominal sum); and 4. Obtain indemnification if s/he is sued for actions as director.

The Business Judgment Rule

A director or officer is not liable to the corporation or its shareholders for honest mistakes in judgment or poor business decisions. - Court will not require directors or officers to manage "in hindsight." As long as decision was reasonable, informed, made in good faith and in the best interests of the corporation, the BJR will apply. BJR does not apply in instances of fraud, dishonesty or other intentional or reckless misconduct.

Benefit Corporations

A for-profit corporation that has been created to have a material, positive impact on society and the environment. Characteristics 1. Purpose-Corporate decisions must benefit society as a whole. 2. Accountability-Shareholders empowered to enforce corporate purpose. 3. Transparency-Annual benefit report published according to third-party standards of assessment.

What is an LLC?

A limited liability company (LLC) is a hybrid business entity that combines: 1. The limited liability of a corporation; and 2. The tax advantages of a partnership Why is the LC business form becoming the choice for entrepreneurs?

What Is A Novation?

A three-part agreement among the corporation, the promoter and third-party. Four requirements: 1. Existence of previous, valid obligation; 2. Agreement of all parties to new contract; 3. The discharge of the promoter's obligations; 4. A new, valid contract.

Advantages and Disadvantages of the LLC

Advantages: - Members liability limited to the amount of his/her investment - Members may choose to be taxed as either a partnership or corporation. If taxed as a partnership, members avoid "double taxation." Members who reinvest profits in LLC may choose to be taxed at lower corporate rate. - Foresign investors may participate in an LLC Disadvantages: - State statutes are not uniform with respect to limited liability of members - Not all states recognize LLCs (use law of state of incorporation) - Lack of case law as to how to seek LLCs. Some states may seek guidance from principles of partnership law; others may look at principles of corporate law

Liability of Directors and Officers

Always liable for one's own torts and crimes. -May be liable for torts and crimes committed by corporate employee under their supervision (statute specific). May be subjected to a shareholder's derivative suit. May be held personally liable under certain statutes, such as those that protect consumers or the environment (public welfare statutes).

Tort Liability of the LLC

An LLC is liable for: - any third party's loss, - caused as a result of a wrongful act by a member, manager, agent or employee of the LLC, - if the act is committed while acting in the ordinary course of business.

What is a Cooperative?

An association organized to provide an economic service to its members. Profits distributed to members based upon their transactions with cooperative, rather than on basis of capital contribution. Liability: - Incorporated cooperatives: limited liability. - Unincorporated cooperatives: joint liability for cooperative's acts (like partnership).

What is a Syndicate?

An investment group of persons or entities who together finance a particular project. What are examples of projects that are funded? May exist as a corporation, or as a general or limited partnership.

What Are Articles of Incorporation?

Articles of Incorporation: primary enabling document filed with the Secretary of State that includes basic information about the corporation. What basic information is necessary for the articles of incorporation? 1. Corporate Name 2. Nature and Purpose 3. Duration 4. Capital Structure 5. Internal Organization 6. Registered Office and Agent 7. Incorporators (Promoters)

Formation of an LLC

Articles of Organization require: - name of business - principal address - name and address of registered agent - names of the owners - how the LLC will be managed Business name must include LLC or Limited Liability Company

Professional Corporations

Available for professional-class workers. Significant differences in liability: 1. Each shareholder is liable for any malpractice that occurs during scope of corporate business. 2. Each shareholder is liable for negligence and wrongful corporate conduct of corporate agents under his/her direct supervision. 3. Limited protection from contractual liability and other professionals' liability which are unrelated to malpractice or breach of a duty to clients/patients.

What Are Promotional Activities?

Before corporation is formed, promoters are the persons who: - take the preliminary steps of organizing the venture; and - attracting investors via subscription agreements. Is the promoter personally liable to third parties for pre-incorporation contracts?

Guthv. Loft, Inc. Duty of Loyalty

Charles Guth was the President of Loft, Inc. (made candies, syrups, and beverages). - Loft's capital, credit, facilities and employees secretly used for Pepsi enterprise. - Loft employee made Pepsi concentrate for syrup and sold it to Grace. - Loft paid for Pepsi's ads. - Loft switched from Coke to Pepsi for its soda syrup. He also owned a family business called Grace Company (made soft drink syrups) - Grace made syrup and sold it to Loft and other Pepsi customers. - Roy Megargel and Charles Guth secretly acquired Pepsi formula and trademark - Pepsi Cola Corporation (RM and CG) incorporators

Forms of Corporate Existence Due To Improper Incorporation

De Jure: substantial statutory requirements are met; neither the state nor a 3rd party, may challenge corporate status. De Facto (Some States): statutory requirements notmet, but promoters made good faith effort to comply with corporate law; state, but not 3rd party, may challenge corporate status. By Estoppel: if it acts like a corporation, cannot avoid liability by claiming that no corporation exists.

What are the Fiduciary Duties of Directors and Officers?

Directors and officers owe ethical and legal duties to the corporation and shareholders: 1. Duty of Care: expected to act in good faith, act prudently, and the best interests of the corporation. 2. Duty of Loyalty: must subordinate their personal interests to the welfare of the corporation.

What is a Directors' Meeting?

Directors conduct business by holding formal meetings with recorded minutes. - How often do they hold regular meetings? - What are special meetings? Meetings require a QUORUM. - How many votes does each director generally have? - May a director vote by proxy?

Dissociation of LLCs

Dissociation occurs in the same manner as general partnerships (one member ceases to be associated with the business of LLC). - Breach of operating agreement may trigger wrongful dissociation cause of action. Events that trigger member dissociation are similar to those of partnerships. - Member loses the right to participate in LLC business and right to be agent of LLC. - Same problem with apparent authority and estoppel as occurs in general partnerships. A dissociating member has no right to trigger dissolution of the LLC. Members may agree to conditions that trigger dissolution in the LLC operating agreement. Courts may order an LLC dissolved in certain circumstances. - Illegal or oppressive conduct of members. - Impracticable or not feasible to carry on business activities of the LLC.

How is the Duty of Care Applied?

Duty of Care: 1. Make informed and reasonable decisions. - May rely on competent consultants and experts. 2. Exercise reasonable supervision. How does a director disagree with actions under consideration by the board? Is a dissenting director held individually liable for mis-management of corporate affairs?

How is the Duty of Loyalty Applied?

Duty of Loyalty: subordination of personal interests to the welfare of the corporation. - No competition with corporation. - No taking of "corporate opportunity." - No conflict of interests. - No insider trading. - No transaction that is detrimental to minority shareholders - No sale of one's control over the corporation.

The Role of Directors

Every corporation is governed by a board of directors. May a director also be a shareholder? What is an inside director? What is an outside director? The board of directors can act as a "super-agent" and bind the corporation. May an individual director bind the corporation?

Member's Limited Liability

Liability limited to capital contribution No personal liability for company debts Partners are called members

Corporate Officer and Directors Guidelines for Duty of Loyalty

May nottake a business opportunity if: 1. The corp. is financially able to exploit the opportunity; 2. The opportunity is within the corp.'s line of business; 3. The corp. has an interest or expectancy in the opportunity; and 4. By taking the opportunity, the corporate fiduciary will be placed in conflict with duties owed to the corporation. May take a business opportunity if: 1. The opportunity is presented to corp. fiduciary in his individual and not in his corp. capacity; 2. The opportunity is not essential to the corp.; 3. The corp. holds no interest or expectancy in the opportunity; and 4. The officer or director has not wrongfully employed the resources of the corp. in pursuing the opportunity.

Limited Liability of Members

Members are shielded from personal liability - liability of members limited to their capital contributions (investment) Exceptions to shield of personal liability: 1. Member has significantly contributed to the LLC's tortious conduct 2. Member acts as a guarantor of debt of LLC 3. Member fails to follow statutory formalities, such as commingling personal and business frauds 4. Member engages in fraud of malfeasance - a flagrant disregard of LLC formalities

Restrictions on Contracting Authority

Members' and managers' authority to bind the LLC may be restricted in either: 1. The articles of organization, or 2. The operating agreement. Articles of Organization: considered effective against 3rd parties because of public notice. Operating Agreement: only effective against 3rdparties who are personally given notice of the restrictions.

Conflicts of Interest

No Conflicts of Interest: - Directors/officers must make full disclosure of any potential conflicts of interest. - Are they allowed to vote on any transaction that may benefit the director/officer personally? Contract will notbe voidable if: 1. If transaction was fair and reasonable; 2. There was full disclosure of interest of officers'or directors'involvement; and 3. Transaction is approved by majority of disinterested directors or shareholders.

What are the Rights of Officers and Executive Employees?

Officers and executive employees serve at the pleasure of the board of directors. The board of directors may terminate officers or executive employees without liability if there is cause. Officer or executive employees employment relationships are generally governed by contract law and employment law. Owe fiduciary duties to company as well.

LLC Operating Agreement

Operating agreement is similar to a corporation's bylaws. Operating agreements may be oral and contain provisions relating to management, dividends, meetings, dissociation of a member, voting rights, transfer of membership interests, and other significant issues. Is the operating agreement is silent on a certain issue, how is that issue resolved? If an issue is not covered by either an operating agreement or the state's LLC statute, how is the issue resolved?

Promoter's Liability

Personal liability on pre-incorporation contracts. Promoters may not act as an agent of proposed corporation. How may promoters avoid personal liability before incorporation? The promoter is released from personal liability when the corporation assumes the pre-incorporation contract by novation.

Perforation Contracts

Persons who form LLCs (promoters) often enter into preformation contracts, which are made before the LLC becomes a statutory legal person. - Promoters are personally liable for preformation contracts. The LLC once duly formed may adopt the preformation contracts through a process knows as a novation. - A successful novation means that the promoters are no longer personally liable, the LLC is the party to be charged, and is able to enforce the contracts in its name.

Spotlight on Closely Held Corporations

Potential for misuse of assets of a closely-held corporation is great. The separate status of the entity and its owners must be carefully preserved. Commingling of corporate and personal assets, or the shareholders' continuous personal use of corporate property could result in piercing the corporate veil.

Joint Ventures

Relationship among 2 or more persons or business entities who combine business efforts towards a single project or transaction, or towards a related series of projects or transactions. How does one determine whether a joint venture was created?

Limited Liability of Shareholders

Shareholders not personally liable for obligations of the corporation. Corporate authority and liability are separate and apart from the shareholders. When can shareholders be held personally liable for obligations of the corporation?

First Organizational Meeting

Shareholders should have the first organizational meeting afterthe charter is granted to: - approve the bylaws, - elect directors, - hire officers, and - adopt pre-incorporation contracts and activities. Must the corporate by-laws be filed with the Secretary of State?

Joint Ventures and Partnerships Similarities and Dissimilarities

Similarities: - member profits are taxed like a partnership - each member owes the other fiduciary duties of care and loyalty - equal rights to manage the activities of the enterprise (through an agreement, management control may be given to one member) Dissimilarities: - members of joint venture have less implied and apparent authority than partners - members of joint venture have less powers to bind their co-members - joint ventures typically created for a single project or series of transactions

In Which State should A Business Incorporate?

State Chartering: Select state - Delaware allows a business to incorporate in Delaware and carry out its business and locate its headquarters in another state. Where do closely held businesses generally incorporate?

Express Corporate Powers

The express powers of a corporation are those powers given to it by: 1. Federal Constitution; 2. State Constitutions; 3. State statutes; 4. The corporation's articles of incorporation; 5. The corporation's by-laws; and 6. The resolutions of the board of directors. Can you identify examples of the express powers of a corporation?

Implied Corporate Powers

The implied powers of a corporation are those acts beyond express powers that are necessary to accomplish the corporation's purpose. Examples of the implied powers of a corporation are the corporation's ability to:

How is a corporate created?

The process of incorporation generally involves two steps: 1. Preliminary and Promotional Activities; and - Promotion - Name Search - Subscribers 2. The Legal Process of Incorporation. - File Articles of Incorporation - State Charter - First Organizational Meeting

How are Directors Elected?

The required number of directors is set forth in the articles of incorporation or bylaws: Directors appointed at the first organizational meeting. - What is the smallest board that a corporation may have? - For how long do directors generally serve? - How may directors be removed from the board? In closely held companies, directors are generally the incorporators and/or the shareholders. Directors may be removed for cause. Vacancies are filled according to state law or the bylaws.

Management of LLC

There are two options for management, generally set forth in the operating agreement: Member-managed: - all members participate - majority vote controls - most LLC's statutes assume that LLC will be member-managed, unless the articles state otherwise - all of the members participate in management, like a partnership. Manager- managed: - members designate members or non-members to manage LLC - members designate LLC as manager-managed in the LLC's articles of organization - members are elected to manage the LLC. Is the authority of managers limited in any way? Do members who own a majority of the interests in a member-managed LLC owe fiduciary duties to minority members?

What is a Special Business Form?

These are organizations that have similarities with partnerships or corporations, or combine features of both. Examples of special business forms are: 1. Joint Ventures 2. Syndicates 3. Joint Stock Companies 4. Business Trusts 5. Cooperatives

What is An Ultra Vires Act?

Ultra Vires Act is an act by a corporation that is beyond the express orimplied powers of the corporation. What are the remedies for an ultra vires act? 1. Shareholders may sue to enjoin (stop) the act, or to obtain damages caused by the act. 2. Corporation may sue officers and directors responsible for the act to obtain damages. 3. Attorney general of state of incorporation may sue to enjoin (stop) the act or to dissolve the corporation.

Winding Up of the LLC

Winding up involves collecting, liquidating and distributing LLC assets. - Member who wrongly dissociated is barred from participation. Proceeds distributed: 1. Creditors, including member-creditors. 2. Capital contributions to members. 3. Remaining assets according to the LLC operating agreement, or ratio of capital contribution if no LLC agreement.

Unique Characteristics of Corporations

1. Limited liability of shareholders 2. Free transferability of shares 3. Perpetual existence 4. Centralized management

What Are the Procedures for Incorporation?

1. Select a state in which to incorporate. 2. Create articles of incorporation. 3. Obtain certificate of incorporation (corporate charter). 4. Hold first organizational meeting once the corporate charter has been granted.

Corporate Taxation

Corporate profits are taxed by various levels of government. What are the tax consequences if profits are retained by corporation? What are the tax consequences if profits are distributed to shareholders? What happens if a corporation fails to pay its taxes?

Corporate Responsibility for the Crimes of Its Agents

Corporation may be convicted if: 1. Agent's criminal act is within scope of employment andthe statute imposes liability upon the corporation. 2. Agent failed to perform a duty imposed on the corporation as a matter of law. 3. Corporation's high managerial agents authorized, requested or recklessly tolerated acts of lower level employees or agents. How is the corporation punished for criminal conduct?

Classification of Corporations

Corporations are classified based on their location, purpose or owners. - Profit and Non-Profit Corporations - Public and Private Corporations - Publicly Held and Closely Held Corporations - Professional Corporations - Domestic, Foreign and Alien Corporations

The Nature of the Corporation

Corporations are the most dominant form of business organization in the USA. Corporations generate over 85 percent of the gross business receipts of the USA. Corporations are legal entities created by state laws of incorporation. Which state has the best laws for incorporation?

The Relationship Among Corporate Personnel

Corporations work with Shareholders, Board of Directors, Officers and employees Shareholders and Employees work for each other Shareholders work for Board of Directors Board of Doctors work for officers Officers work for employees What is the relationship between the four individual groups and the corp.?

What is a Business Trust?

Created by investors (beneficiaries) who transfer cash or property to be managed by trustees. Beneficiaries hold trust certificates (like stock certificates), which represents their interest in the trust's assets and income. Advantage: Beneficiaries have no personal liability for debts and obligations of trust; and taxation only upon distribution of proportionate share of assets or income.

What is improper incorporation?

Improper incorporation refers to errors that occur in the incorporation procedures. How does improper incorporation affect the personal liability of "would-be" shareholders?

Factors For Piercing the Corporate Veil

Factors a court considers: 1. 3rd party tricked into dealing with a corporation rather than the individual. 2. Corporation is set up never to make a profit or remain insolvent, or is under capitalized. 3. Statutory formalities are not followed. 4. Personal and corporate interests are mixed together.

Purdue Pharma: Corporate Criminal Charges

Felony criminal charges for false or misleading information (misbranding) of the safety of OxyContin, a time-released, narcotic pain-killer. From 1995 to mid-2001, Purdue Pharma marketed OxyContin as posing a lower threat of abuse and addiction than traditional painkillers (Percocet or Vicodin). Impact: rising crime rates; teen drug addition and death.

What are the Directors'Responsibilities to the Corporation?

General areas are: 1. Declaring and paying corporate dividends. 2. Authorizing major policy decisions. - What are some examples? 3. Hiring and firing of corporate officers and executive employees. 4. Making financial decisions.