FIDUCIARY DUTIES - CHAPTER 10

Fiduciary Duties of Directors - How analyze?

-Corporate law imposes two broad fiduciary duties on directors: (1) the duty of care, and (2) the duty of loyalty (but there are more than just these two). -These duties are judge-made under Delaware law and statutory under the MBCA (so can analyze under any of the two on an exam) -In the analysis, begin with whether the duty of care was breached. -State the duty (use MBCA 8.30 (a), (b)) to set out the standard required. -Due care requires that directors be informed and deliberate when making a decision. -Was it breached? -Apply the BJR to determine whether the duty of care has been violated. -In fiduciary duty cases, both duties are often implicated. -There is a sliding scale between the duties of care and loyalty -Depending on where the transaction or action falls on the scale, courts will apply the different standards. -So, in an exam setting, you would want to analyze the transaction or action taken under both a duty of care and a duty of loyalty analysis

Shareholder Voting

-Corporate law statutes provide shareholders a vote on the following matters only: 1 Election and removal of directors; 2 Amendments to the corporation's charter; 3 Shareholder (as opposed to board) initiated amendments to the corporation's bylaws; 4 Dissolution of the corporation; 5 A merger of the corporation; and 6 A sale of all (or substantially all) of the corporation's assets.

BJR - cont'd.

-Courts may sometimes look at substance if the complaint alleges sufficient facts to make the BJR inapplicable. -Ultra vires acts -Decision had no business purpose -Irrational decision making -Waste -Conflict of interest claims -Directors no independent because under the control of the interested party -Lack of good faith with actual intent to harm the corporation -An intentional dereliction of duty -Nonfeasance -Prolonged failure to exercise supervision -Fraud, bad faith or illegality in the decision. -If negligence is shown, then must show causation or proximate cause. Proof of negligence just shifts the burden to directors. They can still prove that the decision taken was fair. -In malfeasance cases, easier to show causation. For nonfeasance cases, question is whether the failure to act was a substantial factor in producing a particular result.

FIDUCIARY DUTIES:

-DUTY OF CARE -THE BUSINESS JUDGMENT RULE -DUTY OF LOYALTY -INTERESTED DIRECTOR TRANSACTIONS.

Interested Director Transactions - MBCA rule - 8.60 (1) (read the comments to this section)

-Definition: "Director's conflicting interest transaction" means a transaction effected or proposed to be effected by the corporation (or by an entity controlled by the corporation) i. to which, at the relevant time, the director is a party; or ii. Respecting which, at the relevant time, the director had knowledge and a material financial interest known to the director; or iii. Respecting which, at the relevant time, the director knew that a related person was a party or had a material financial interest.

Duty Of Loyalty (DOL)

-Implicated by lack of good faith. -Requires a fiduciary to act in the best interests of the corporation. -Greater judicial scrutiny -No BJR protection -No Del. 102 (b) (7) protection -Policy seeks to prevent directors from self-dealing in a way to reap personal benefits that are unavailable to other shareholders -Contrast duty of care -Involves poor decision making -DOL is stricter than DOC -Cannot be contracted around by amending articles of incorporation.

The Duty of Loyalty and Conflicts of Interest

-Includes: -Interested director transactions -Usurpation of corporate opportunities -Executive compensation, etc. -Old rules focused on: gain incurred while director sought the best interest of a competition or himself/herself. -Non-shareholder constitutency statutes - Some states' statutes permit directors to consider interests other than shareholder interests in decision making. Allows consideration of: -Interests of suppliers, employees, customers, local communities and state, regional and national economies

Interested Director Transactions -Rule Application

-Interested director transactions will not be void solely because of a conflict of interest, or the voting and presence of an interested director, if: -The transaction was approved by the disinterested directors with disclosure of the conflicting interest; or -Disclosure was followed by shareholder approval; or -The contract was just and reasonable at the time of approval (i.e. fair). -A fair contract must be: -In the best interests of the corporation -Courts look to factors such as: -Market value; -the value of the bargain compared to what it could have -obtained from others; -The quality of the disclosure -The possibility for the directors for personal gain.

Interested Director Transactions

-MBCA: 8.60, 8.61(b), DGCL 144 (1), (2), (3) (Safe harbor provisions) -No per se prohibition but in cases of self-dealing, the duty of loyalty is triggered. -Examples: -Self-dealing -Director sells personal property to the corp. -Buys corporate property, -Director's corporation contracts with another corporation or business entity in which the director has a significant financial interest.

The Duty of Care

-Requirement: The duty of care requires directors to perform their duties with the diligence of a reasonable person in similar ciurcumstances. -RULES: MBCA 8.30, 8.31 -Duty of Care: that amount of care exercised by like persons in similar circumstances -Inter alia, requires a board to be adequately informed when making a decision -Focus is on the decision-making process as opposed to the substance of the decision itself.

Duty of Loyalty (DOL)

-Requires a director to act in the best interests of the corporation and in good faith. -A lack of good faith is a DOL violatin -Implicated in four situations 1 conflicting interest transactions, 2 failure to provide adequate oversight, 3 failure to act in good faith, and 4 usurpation of a corporate opportunity. Can also be triggered in executive compensation claims.

Duty of Loyalty

-State ex Rel Hayes Oyster Company - 2 principles: -Lack of disclosure by a fiduciary is per se unfair -Absent a fiduciary duty, the seller need only refrain from -telling material truths. -No duty to disclose all facts if no fiduciary relationship -Here, Hayes was required to divulge his interest in Keypoint because he is a fiduciary. -Duty of care violation require damage or harm or harm to the corporation. However, where the duty of loyalty is violated, no such requirement exists. -A gain incurred while serving the best interests of a competitor or of one's self may be sufficient to ground an action for breach of the duty of loyalty. -See notes on page 571-73

Business Judgment Rule

-The BJR is a tool of judicial review. -The duty of care sets a standard of conduct. -The BJR limits judicial review into business decisions and protects diretors who are not negligent in the decision-making process. -Most decisions involving the duty of care is protected under the BJR -Creates a presumption (safe harbor) that limits courts in questioning business decisions. -The focus of the inquiry will be on the decision making process not the decision. -Plaintiff has the burden of proof on the issue of the breach of the duty of care -The BJR does not protect nonfeasance, lack of good faith, conflicts of interest, or an irrational or wasteful decision.

BJR - cont'd

-The BJR provides a presumption that in making a decision, directors were informed, acted in good faith and honestly believed that the decision was in the best interests of the corporation. -The BJR is both procedural and substantive -Procedurally - rule of evidence placing the initial burden of proof on the plaintiff to prove why the BJR does not apply. -If the plaintiff fails to establish that the BJR does not apply to the director's actions, then the court will not review the decision. -If the plaintiff rebuts the BJR, then the burden shifts to the director to prove that the action was fair (entire fairness, which entails fair dealing and fair price). -Plaintiffs can rebut by showing negligence in the decision making (malfeasance)

Board of Directors

-Ultimate managerial authority resides in the board of directors -Board size typically specified in bylaws -A board acts through (1) voting at a board meeting, and (2) written consent

Bylaws example

A board of directors adopts bylaws providing that litigation relating to the corporation's internal affairs should be conducted in the state where the business is incorporated. Some of the shareholders seek to invalidate the bylaws in court, arguing that the bylaws are unrelated to the corporate business, the conduct of corporate affairs, or the rights of shareholders. However, the bylaws: (1) only contain provisions clearly involving the internal affairs of the corporation and (2) are not inconsistent with the directors' fiduciary duties or state law. The bylaws are valid. [See Boilermakers Local 154 Ret. Fund v. Chevron Corp

BJR Example:

A board of directors establishes a special committee to investigate large contributions made by a corporate subsidiary to international political parties. The special committee of directors concludes that legal action against any corporate director or officer is not in the interests of the corporation or shareholders. Under the business judgment rule, the court will not hold the special committee members liable for deciding against legal action unless there are allegations of fraud, collusion, self-interest, dishonesty, or other violations of trust or business judgment. [See Gall v. Exxon Corp.,

Incorporation

A business that meets all of the requirements for legal incorporation becomes a de jure corporation and may begin conducting business with limited liability for the owners and managers. In some states, there may be limited liability even if the business is defectively incorporated.

Undercapitalization example

A defendant forms a corporation but does not hold any organizational meetings or elect officers. Subsequently, the defendant subleases a building from a plaintiff for the corporation. However, the corporation does not have any assets, income, bank accounts, or stock. The defendant's failure to carry out corporate formalities, combined with the gross undercapitalization of the corporation, allows the plaintiff to pierce the corporate veil. The defendant is individually liable for the corporation's debt to the plaintiff. [See Kinney Shoe Corp. v. Polan

Duty of care Example:

A director fails to prevent the misappropriation of trust funds by the other directors of the corporation by not reading and understanding the financial statements or reasonably attempting to detect and prevent the illegal conduct. In failing to meet these obligations, the director has breached the duty of care and may be held liable for the loss caused by the breach.

Avoiding Liability

A director may avoid liability for certain breaches of fiduciary duties under the business judgment rule or by independent ratification. Additionally, the articles of incorporation may also limit director liability.

Corporation by Estoppel Example:

A partner submits articles of incorporation for his company to the state. However, the articles of incorporation are not in accordance with statutory law. The company nonetheless enters into contracts for lease and rental agreements while the company is defectively incorporated. A party to one of the contracts brings action against the partners, attempting to hold the partners individually liable for the contract. If there is evidence that the other party believed that the company was a corporation at the time of the contract, the partners may not be held individually liable under the doctrine of corporation by estoppel.

Ultra Vires example

A plaintiff-corporation leases property to a defendant-corporation under a written lease agreement providing that the property must be used as a movie theater. However, the purposes of the defendant-corporation are restricted to marine activities, which do not include the operation of a movie theater. Seeking to invalidate the lease, the plaintiff-corporation argues that the defendant-corporation is violating the ultra vires doctrine by exceeding its scope of permitted activities. However, statutory law prohibits application of the ultra vires doctrine unless the action is brought by a shareholder, a corporation against its incumbent or former officer or director, or the attorney general. Because the plaintiff-corporation does not fall within any of these exceptions, the ultra vires doctrine does not apply to invalidate the defendant-corporation's contract. [See 711 Kings Highway Corp. v. F.I.M.'s Marine Repair Serv., Inc.,

Pre-Incorporation example

A promoter enters into a contract for architectural services on behalf of a business that the promoter intends to incorporate. Eventually, the business is incorporated and adopts the contract. However, without a novation, both the promoter and corporation remain liable for the contract. The promoter is liable for the amount that the corporation owes to the architect under the pre-incorporation contract. [See Stanley J. How & Assoc., Inc. v. Boss,

Pre-Incorporation (1)

A promoter is an agent who actively participates in the formation of a corporation and acts on behalf of the prospective corporation during a pre-incorporation transaction. Typically, promoters are fiduciaries with the duties of care, disclosure, and loyalty, as well as the duty to act in good faith. Note, however, that promoters do not have all of the duties of corporate directors and officers, such as self-dealing, because as yet the corporation has no shareholders. [See Merriam-Webster's Dictionary of Law (Kindle ed. 2011), fiduciary, promoter] Under the MBCA, a promoter may be held jointly and severally liable for any obligation created during a pre-incorporation transaction. [See Model Business Corporation Act § 2.04 (2003)]

Bylaws

After incorporation, the incorporators or board of directors must adopt initial bylaws for the corporation that may later be amended if necessary. Generally, the bylaws may contain any provision for managing the business and regulating corporate affairs that is not inconsistent with state law or the articles of incorporation. [See Model Business Corporation Act § 2.06 (2003)] The board of directors may also adopt emergency bylaws to become effective in the case of a catastrophic event that prevents the corporation from readily assembling a quorum of directors. [See id. § 2.07]

Defective Incorporation

An incorporation is considered defective when the incorporators fail to meet the necessary requirements for filing the articles of incorporation. In such cases, no de jure corporation is created. However, a business that has been defectively incorporated may nonetheless act with limited liability for the owners and managers as a de facto corporation or a corporation by estoppel under equitable remedies in some states. Note that the Model Business Corporation Act and many states do not recognize these doctrines.

De Facto Corp. Example:

An incorporator submits articles of incorporation to the state in order to create a corporation for the purpose of purchasing and operating a business. However, the articles of incorporation are rejected by the state. The incorporator begins to operate the business and make installment payments to the previous owner, even though the business has been defectively incorporated. When the business fails without any remaining assets, the previous owner brings suit against the incorporator for the remaining installment payments. If the state recognizes the doctrine of de facto corporations, the incorporator will not be held individually liable for the business's debts.

Voting

At a meeting of the board of directors, there must be a quorum when a vote is taken. If there is a quorum, then an affirmative vote of a majority of the directors who are present will constitute an act of the entire board of directors. All directors who are present at the meeting are presumed to have assented to the action. [See Model Business Corporation Act § 8.24 (2003)]

Voting

At a shareholders' meeting, only the shareholders who held stock as of the record date are entitled to vote. Each of these shareholders, including the corporation, is entitled to one vote per share on each matter (i.e., "straight voting") when a quorum is present at the meeting, unless the articles of incorporation have provided for cumulative voting. [See Model Business Corporation Act § 7.21 (2003); Merriam-Webster's Dictionary of Law (Kindle ed. 2011), record date, straight voting] It is also possible for shareholders to vote indirectly through a voting trust, voting agreement, or proxy system.

Piercing the Corporate Veil

Courts may pierce the corporate veil by setting aside the principle of limited liability and disregarding the corporate entity in the interests of justice. The officers, directors, or shareholders of the corporation may be held individually liable for the actions or debts of the corporation due to their wrongful acts. It is also possible to pierce the corporate veil of a subsidiary corporation to hold a parent corporation liable for the acts of the subsidiary. However, courts will typically only pierce the corporate veil if there has been serious misconduct under the alter ego theory or undercapitalization. Note also that courts are generally more likely to pierce the corporate veil for tort liability than contract liability.

Fiduciary Duties

Each director owes the duties of care, candor, and loyalty, as well as the duty to act in good faith and in a manner that the director reasonably believes to be in the best interests of the corporation. Typically, a director who breaches these duties may be subject to personal liability.

Directors

Every corporation must have a board of directors that consists of one or more members, unless the shareholders agree to eliminate the requirement. [See Model Business Corporation Act §§ 7.32, 8.01(a), 8.03 (2003)] The board of directors has the authority to exercise all corporate powers, as well as to direct and manage the business and affairs of the corporation. This management authority belongs solely to the board of directors acting together, not the individual directors. However, a shareholder agreement or the articles of incorporation may limit the authority of the board of directors.

Duties and Liability

Every member of the board of directors is a fiduciary who may be held liable to the corporation, shareholders, and third parties for violating certain duties. If held liable, a director may seek indemnification by the corporation in some situations.

Formation

Generally, a corporation is formed by incorporating a business under state law. Statutory formalities must typically be complied with for valid incorporation to occur. To conduct business in another state, a corporation must meet the requirements for a foreign corporation in that state.

Pre-Incorporation (2)

In particular, promoters are individually liable for pre-incorporation contracts until the obligations are extinguished through a novation substituting the corporation as the responsible party, regardless of whether incorporation does or does not occur. [See generally, Merriam-Webster's Dictionary of Law (Kindle ed. 2011), novation] The corporation itself may be held liable for a pre-incorporation contract that is adopted expressly by the board of directors or implicitly through the acceptance of benefits. [See Cornell University Law School, Legal Information Institute, Promoter, https://www.law.cornell.edu/wex/promoter]

Corporations

In the United States, a corporation is a separate and distinct legal entity created by the law. Corporations consist of associations of individuals but have most of the rights and duties of natural persons, as well as limited liability for the owners and managers, and perpetual existence. Because a corporate entity exists separately from its owners and managers, the typical structure of a corporation allows for management by officers and directors, rather than shareholders. This portion of the outline is primarily based on the Model Business Corporation Act (the MCBA) promulgated by the American Bar Association. However, it is important to note that not all states have adopted the MCBA in its entirety. [See Model Business Corporation Act (2003); Merriam-Webster's Dictionary of Law (Kindle ed. 2011), corporation] In particular, over half of all publicly traded companies in the United States are incorporated in the State of Delaware, which has enacted a very flexible and business-friendly corporations code. As a result, the Delaware General Corporation Law and relevant case law contain a number of significant distinctions from the MCBA. [See State of Delaware, Department of State, About Agency, http://www.corp.delaware.gov/aboutagency.shtml] For instance, the Delaware corporations code allows for short-form mergers, in which a parent corporation holding a majority of shares may absorb a subsidiary corporation without shareholder approval.

Election and Removal (2)

Note that some states may also require additional qualifications for directors, such as age or natural personhood. A director may resign at any time with written notice and is subject to removal by a shareholder vote with or without cause, though the articles of incorporation or statutory law may provide that directors may only be removed for cause. [See id. §§ 8.07-08] A director may also be removed by a judicial proceeding that finds that: (1) the director engaged in fraudulent conduct regarding the corporation or shareholders, grossly abused the position of director, or intentionally inflicted harm on the corporation, and (2) removal is in the best interest of the corporation based on the director's conduct and the inadequacy of other available remedies. [See id. § 8.09] Unless the articles of incorporation provide otherwise, a vacancy on the board of directors may be filled by the shareholders or the other directors.

Requirements for Incorporation

One or more persons, called incorporators, may form a corporation by filing articles of incorporation, sometimes called a certificate of incorporation, with the state in which they wish to incorporate. Note that the state of incorporation does not have to be the same state in which the corporation's office or principal place of business is located. Additionally, incorporators may generally be natural persons or other business entities. The existence of the corporation begins on the date when the articles of incorporation are filed, unless a later effective date is specified. After filing the articles of incorporation, the incorporators or initial directors must adopt bylaws that govern the corporation. [See Model Business Corporation Act §§ 2.01, 2.03 (2003)]

Alter Ego example

Plaintiffs bring suit against the sole shareholder of a corporation, claiming that the corporation has manufactured keyboards that cause repetitive stress injuries and arguing that the shareholder is merely using the corporation as an alter ego. However, the corporation adhered to corporate formalities and regularly held board meetings, maintained appropriate financial records and other files, filed its own tax returns and paid its own taxes, and had employees and management executives who were responsible for the day-to-day business of the corporation. Because the corporation and shareholder are separate economic entities, the alter ego theory does not apply to pierce the corporate veil. The shareholder is not personally liable for the harms caused by the corporation's keyboards. [See Fletcher v. Atex, Inc.,

Quorum

Quorum refers to the number of directors that must be present to conduct corporate business. [See Merriam-Webster's Dictionary of Law (Kindle ed. 2011), quorum] Under the Model Business Corporation Act, a quorum consists of: (1) a majority of the fixed number of directors, if the corporation has a fixed board size or (2) a majority of the prescribed number of directors or (if none is prescribed) the number of directors in office immediately before the meeting begins, if the corporation has a variable board size. The articles of incorporation or bylaws may also authorize an alternate quorum of no fewer than one-third of the fixed or prescribed number of directors. [See Model Business Corporation Act § 8.24 (2003)]

Notice

Regular meetings do not require any advance notice. However, special meetings must be preceded by at least two days' notice of the date, time, and place of the meeting to all directors. [See Model Business Corporation Act § 8.22 (2003)] Note also that a director may waive a required notice in a signed writing or by attending or participating in the meeting. [See id. § 8.23]

Meetings

Shareholders act by voting in annual and special meetings. Every corporation is required to annually hold a shareholders' meeting at a place and time in accordance with the relevant bylaws. Typically, shareholders will elect directors and discuss other corporate business at the annual meeting. [See Model Business Corporation Act § 7.01 (2003)] There may also be special meetings called by the board of directors or other authorized persons for a vote on some extraordinary measure, as well as court-ordered meetings upon the application of a shareholder, such as when the corporation fails to hold an annual meeting. [See id. §§ 7.02-03] At each shareholders' meeting, a chair appointed by the bylaws or board of directors will preside and determine the order of business, as well as establish fair rules for the conduct of the meeting.

Notice

Shareholders are entitled to advance notice of the date, time, and place of each annual and special shareholders' meeting between 10 and 60 days before the meeting date. Typically, the notice for a special meeting must also indicate the purpose of the meeting. [See Model Business Corporation Act § 7.05 (2003)] However, a corporation is only required to notify the shareholders who are entitled to vote at the meeting. Additionally, a shareholder may waive the required notice in a signed writing or by attending the meeting without objection.

Shareholders

Shareholders, also referred to as stockholders, own a portion of the corporation through their ownership of shares of corporate stock. Despite their ownership of the corporation, shareholders generally do not have management authority over the business, which is vested in the board of directors. After incorporation, shareholders may elect directors during annual meetings. Typically, any person who purchases at least one share of a corporation's stock is considered a shareholder

Board of Directors

The board of directors is entrusted with the overall management and control of the corporation. The directors are initially named in the articles of incorporation or elected by the incorporators but are subsequently elected by the shareholders at an annual meeting. After incorporation, the initial board of directors must appoint officers, adopt bylaws, and conduct any other relevant business at an organizational meeting. [See Model Business Corporation Act § 2.05 (2003); Merriam-Webster's Dictionary of Law (Kindle ed. 2011), director]

Election and Removal

The board of directors is typically elected annually at a shareholders' meeting, by the class or classes of shareholders entitled to vote. The articles of incorporation or bylaws may set fixed terms for directors, prescribe certain qualifications for directors, specify the number of directors that may be elected, and provide for the election of a classified board. [See Model Business Corporation Act § 8.03 (2003)] A classified board is structured so that elections are staggered; thus only a portion of the directors on the board are up for election each year, rather than the entire board.

Meetings

The board of directors may hold regular or special meetings to vote to act on behalf of the corporation. Unless the articles of incorporation or bylaws provide otherwise, the directors may also consent in a signed writing to act without a meeting. [See Model Business Corporation Act § 8.21 (2003)]

Business Judgment Rule

The business judgment rule protects directors from being held liable for informed decisions that were not intended to harm the corporation or shareholders. This rule recognizes that shareholders voluntarily undertake the risk of bad business judgment and that profitability often requires directors to avoid being overly cautious and to act with speed despite a certain amount of risk. [See Joy v. North, 692 F. 2d 880 (2d Cir. 1982)]

Quorum Example:

The bylaws of a corporation require the board of directors to consist of four members. At a meeting, only two of the directors are present, which is less than a majority of the fixed number of directors. Because a quorum is not present, the two directors may not vote to take action on behalf of the corporation or conduct any other corporate business.

Corporation by Estoppel

The corporation by estoppel doctrine grants limited liability in the interest of fairness. A business may be treated as a corporation with limited liability for its owners and managers if the business acted as a corporation while dealing with a third party, who believed that the business was indeed a corporation. [See Merriam-Webster's Dictionary of Law (Kindle ed. 2011), estoppel] This is because the third party had no expectation that the owners and managers would be personally liable for the transaction. Courts typically apply the doctrine of corporation by estoppel when one of the parties attempts to argue that the business does not have limited liability, based solely on the fact that it is defectively incorporated. Under this doctrine, the parties are estopped from denying the existence of a legal corporation. Again, keep in mind that not all states recognize this doctrine. [See, e.g., Timberline Equip. Co., Inc. v. Davenport,

De Facto Corporation

The de facto corporation doctrine grants limited liability to a corporation that has substantially complied with statutory requirements for incorporation. A business may be recognized as a de facto corporation with limited liability for the owners and managers if: (1) the incorporators have made a good faith attempt to comply with the state's incorporation requirements, and (2) there is evidence that the business is being run as a corporation. The de facto corporation will be treated as a legal corporation. But remember, this doctrine is not recognized in all states.

Duty of Loyalty example

The directors of a corporation decide to disseminate information to its shareholders that contains overstatements of the corporation's earnings, financial performance, and shareholders' equity. The directors have violated their fiduciary duties of loyalty and good faith by deliberately misinforming its shareholders about the corporate business. [See Malone v. Brincat

Ultra Vires

The doctrine of ultra vires invalidates any corporate action that is beyond the scope of the corporation's powers. Historically, this doctrine was very important due to the specific and limited powers of corporations. However, many states have eliminated the ultra vires doctrine under modern statutes with the expansion of corporate power. Rather than voiding corporate action, the ultra vires doctrine may instead be used to subject directors to personal liability in some states. [See, e.g., N.Y. Bus. Corp. Law § 203] The Model Business Corporation Act provides that the validity of corporate action may not be challenged on the ground that the corporation lacks or lacked the power to act, with the exception of a proceeding by: (1) a shareholder who is seeking to enjoin corporate action; (2) a corporation that is proceeding against an incumbent or former director, officer, employee, or other corporate agent; or (3) the attorney general based on grounds of judicial dissolution.

Duty of Care

The duty of care requires directors to act in the same manner as a reasonably prudent person in their position would, which typically involves the exercise of due care and the avoidance of unnecessary risk of harm. When making decisions or conducting oversight, a director must exercise the care that a person in a like position would reasonably believe to be appropriate under similar circumstances. In particular, a director must devote timely attention to the ongoing oversight of the business and affairs of the corporation. Additionally, a director with special knowledge or skill is obligated to use such knowledge or skill when acting on behalf of the corporation.

Duty of Loyalty

The duty of loyalty requires directors to refrain from using their positions to further their own interests, rather than the interests of the corporation and shareholders, particularly by self-dealing or violating the corporate opportunities doctrine. Note, however, that the business judgment rule does not apply to a breach of the duty of loyalty.

Officers

The officers are entrusted with the daily administration of the corporation. Typically, officers are appointed by the board of directors and subject to its supervision. Examples of officers include the chief executive officer (CEO), chief financial officer (CFO), and chief operating officer (COO). [See Merriam-Webster's Dictionary of Law (Kindle ed. 2011), officer]

Structure and Organization

The traditional structure of a corporation consists of a board of directors, officers, and shareholders. However, keep in mind that this structure may be modified as necessary for particularly small or large corporations if permitted by state law. Some corporations may also have employees who receive wages but do not have any control or ownership of the corporation.

Directors and Officers

Typically, a corporation is managed by its directors and operated on a daily basis by its officers.

Shareholder Rights

Typically, shareholders have the right to vote at meetings, elect and remove directors, and receive dividends, as well as the right of inspection and appraisal rights. Additionally, shareholders may enter into shareholder agreements that govern their relationship with the corporation.

Articles of Incorporation

Typically, the articles of incorporation must set forth: (1) a corporate name that indicates the business's corporate status (e.g., including the words "incorporated," "company," or "limited"), (2) the number and classes of authorized shares that may be issued by the corporation, (3) the registered office and agent of the corporation, and (4) the name and address of each incorporator. [See Model Business Corporation Act §§ 2.02(a), 4.01 (2003)] Note that some states may also require additional information, such as the purposes and powers of the corporation, as well as additional provisions relating to the rights and liabilities of the officers, directors, and shareholders. [See id. § 2.02(b)]

Alter Ego

Under the alter ego theory, also known as the instrumentality doctrine, a court may pierce the corporate veil when the corporation is a mere instrumentality, or alter ego, of a controlling shareholder. In other words, a shareholder may be held individually liable for abusing the corporate form if the corporate entity lacks a separate identity and exists only to shield the shareholder from creditors. Typically, there must be commingling of the assets of the shareholder and the corporation, as well as wrongdoing by the shareholder (e.g., fraud or a failure to carry out corporate formalities).

Business Judgment Rule (2)

Under the business judgment rule, courts will presume that a director is not liable if the director acted: (1) in good faith, (2) with the care that a reasonably prudent person would use, and (3) with the reasonable belief that the action was in the best interests of the corporation. Additionally, a court will generally defer to the business judgment of the directors by declining to make a hindsight evaluation of the reasonableness or prudence of their business decisions or to substitute its judgment for that of the board without evidence of misconduct. [See, e.g., In re Citigroup Inc. Shareholder Derivative Litigation, 2009 WL 481906 (Del. Ch. Feb. 24, 2009)] Note also that a director is generally entitled to rely on the performance of officers, employees, delegees, retained experts, and committees, as well as the information and data provided by such persons.

Limited Liability

Under the principle of limited liability, the corporate entity is solely liable for the actions or debts of the corporation due to its status as a legal person. As a result, the individual liability of the shareholders is typically limited to the amount of their respective capital contributions. However, creditors may pierce the corporate veil to reach the personal assets of officers, directors, and shareholders who have committed wrongful acts, as well as hold promoters liable for contracts that were formed before incorporation.

Undercapitalization

Undercapitalization occurs when a corporation does not have enough capital to operate efficiently or avoid liabilities. Typically, a court may pierce the corporate veil when the corporation is severely undercapitalized and a shareholder has committed wrongdoing (e.g., fraud or a failure to carry out corporate formalities).

Exculpation Provisions

o The DGCL Allows a corporation to opt-out of director personal liability for breach of the duty of care (see §102(b)(7)). Read in the entirety. No director of the corporation shall be personally liable to the corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director o Note that an exculpation provision does not foreclose equitable relief for a duty of care breach

Rebutting the BJR

o To rebut the business judgment rule with respect to a board decision, a plaintiff must plead and prove that a majority of directors: were interested, (had an interest in the conflicted entity or transaction) lacked independence, were inadequately informed, or acted in bad faith.