Advanced Blaw ch 29

Factors That Lead Courts to Pierce the Corporate Veil

1. A party is tricked or misled into dealing with the corporation rather than the individual. 2. The corporation is set up never to make a profit or always to be insolvent, or it is too thinly capitalized. 3. Statutory corporate formalities, such as holding required corporation meetings, are not followed. 4. Personal and corporate interests are commingled (mi) such that corporation has no separate identity.

Cases dealing with the duty of loyalty typically involve at least one of the following

1. Competing with the corporation. 2. Usurping a corporate opportunity. 3. Having an interest that conflicts with the interest of the corporation. 4. Engaging in insider trading. 5. Authorizing a corporate transaction that is detrimental to minority shareholders. 6. Selling control over the corporation

Why did a court accept a stockholder vote to increase the salary of a Tesla executive even though fewer than half of all eligible shares voted "yes" on the matter? A. If the majority of those shares vote "yes," the result is valid. B. States permit, and some require, shareholders to elect directors by cumulative voting. C. More than a simple majority vote is required. D. A shareholder cannot give more than one vote per share to any single nominee.

A. If the majority of those shares vote "yes," the result is valid.

Shareholder's Derivative Suit

A suit brought by a shareholder to enforce a corporate cause of action against a third person. • Written demand required • Damages recovered go into corporate funds

How will a court evaluate whether a restriction on a shareholder's ability to transfer his shares is permitted? A. The court must determine that the restraint is reasonable B. The court will look at profits and losses and how they're shared among all shareholders C. The court will determine the taxation levels post-transfer D. None of the above

A. The court must determine that the restraint is reasonable

S Corporations

Corporations automatically taxed as C-Corp unless elects S-Corp status. Important Requirements 1. Domestic corporation 2. Not be member of affiliated group of corporations 3. Shareholders must be individuals, estates, or certain trusts 4. No more than 100 shareholders 5. Only one class of stock 6. No shareholder may be a nonresident alien S corporations are taxed like partnerships

Which of the following factors are evaluated by a court that "pierces the corporate veil"? A. Whether personal and corporate bank accounts are co-mingled B. Whether an owner follows all corporate formalities C. Whether an owner buys equipment and materials with his own name or the corporation's name D. All of the above

D. All of the above

The C corporation, the classic corporation, offers many advantages, but ____________ is NOT one of them. A. having an unlimited number of shareholders B. raising money through the sale of shares of stock C. providing flexibility in planning D. avoiding double-taxation

D. avoiding double-taxation

LLC Taxation Issue

Pros of Corporate Taxation: • Owner does not have to take all the business income on personal tax return. • Corporation taxed at a flat rate (21%) • Owner does not have to pay self-employment tax on income as an owner from the corporation. The main disadvantage is double taxation.

Credibility

S corporations help companies establish credibility as a corporation since they have more oversight. S corps must have a board of directors who oversee the management of the company

Shareholders

S corps can have 100 shareholders and pay them dividends or cash payments from the company's profits. These cannot be foreign investors!

Sarbanes Oxley

ll publicly held corporations must have an audit committee that oversees compensation and conducts oversight of the independent public accountant

De Jure Corporations

substantial compliance; minor defect

De Facto Corporations

substantial defect, but legally a corp if: 1. State statute exists under which corporation can be validly incorporated 2. Parties have made good faith attempt to comply with statute 3. Parties have undertaken to do business as a corporation

Preemptive rights

the right of a shareholder in a corporation to have the first opportunity to purchase a new issue of that corporation's stock in proportion to the amount of stock already owned by the shareholder

Torts and Criminal Acts

• A corporation may be held liable for the criminal acts of its agents and employee under the doctrine of Respondeat Superior.

Shareholders' Powers

• Approve fundamental changes affecting the corporation before the changes can be implemented • Elect or remove members of the board of directors

Promotional Activities

• Businesspersons are personally liable for any pre-incorporation contracts made with investors, accountants, or others on behalf of the future corporation • Liability continues until the corporation is formed and explicitly assumes the contract by novation.

Corporate Earnings and Taxation

• Corporations can pay out profits to shareholders (dividends) or retain them (retained earnings). • Federal Government taxes corporate income at a flat rate of 21%

Directors and officers Duty of Care

• Duty to make informed and reasonable decisions • Duty to exercise reasonable supervision • Business Judgment Rule -A corporate director or officer is not liable to the corporation or to its shareholders for honest mistakes of judgment (or bad business decisions made in good faith) The rule provides broad protections • Most courts will apply the rule unless there is evidence of bad faith, fraud, or a clear breach of fiduciary duties

Directors

• Election of Directors • Number of directors is set forth in the corporation's articles or bylaws .• Compensation of Directors • Board of Directors' Meetings • Committees of the Board of Directors

Dividends

• Illegal dividends: payouts that are improperly paid from an unauthorized account, or that cause the corporation to become insolvent • Directors' failure to declare a dividend

A Potential Problem for Close Corporations corporate veil

• Potential for corporate assets to be used for personal benefit is especially great in a close corporation. • Certain practices invite trouble for a close corporation, such as the commingling of corporate and personal funds or the shareholders' continuous personal use of corporate property (for instance, vehicles).

Shareholders' Meetings

• Proxies • Shareholder proposals • Rules for proxies and shareholder proposals

Rights of Directors

• Right to participation • Right of inspection • Right to indemnification -company has your back if you do your job and will pay fees

Incorporation Procedures

• Select the state of incorporation • Secure an appropriate corporate name • Prepare the articles of incorporation. Generally, the articles must include: 1. The corporation's name 2. Number of shares of stock that the corporation is authorized to issue 3. Name and street address of the corporation's initial registered agent and registered office 4. The name and address of each incorporator • Prepare the articles of incorporation: A corporation can be formed for any lawful purpose, and no specific statement of purpose is required. • File the articles of incorporation: Once prepared and signed by the incorporators, the articles are sent to the appropriate state official (often the secretary of state). • First Organizational Meeting to Adopt Bylaws

Inspection Rights

• The RMBCA provides that every shareholder is entitled to examine specified corporate records for a proper purpose, provided the request is made in advance

Corporate Officers and Executives

• The board of directors hires corporate officers and other executive employees. It can normally remove corporate officers at any time with or without cause.

Duty of Loyalty

• The duty of loyalty requires directors and officers to subordinate their personal interests to the welfare of the corporation.

Corporate Personnel

•A board of directors handles the overall management of the firm.•Corporate officers and employees run the corporation's dailybusiness operations.

Disclosure of Conflicts of Interest

•A director's fiduciary duty requires him or her to make a full disclosure of any potential conflicts of interest that might arise in any corporate transaction.

Express Powers

•A firm's express powers are found in its articles of incorporation,in the law of the state of incorporation, in the state and federal constitutions, and the corporation's bylaws

Benefit Corporations

•A for-profit corporation that seeks to have a material positive impact on society and the environment. It differs from traditional corporations in the following ways: 1. Purpose 2. Accountability 3. Transparency

Professional Corporations

•An entity used by physicians, lawyers, dentists, and accountants to incorporate

The Limited Liability of Shareholders

•Corporate shareholders' liability is limited to the amount of their investments.

Implied Powers

•Corporations have the implied power to perform all acts reasonably appropriate and necessary to accomplish their corporate purposes (barring express constitutional, statutory, or other prohibitions).

Liability of Directors and Officers

•Directors and officers are liable for their own crimes and torts. •They may also be held liable for the crimes and torts committed by corporate employees under their supervision.

Duties of Majority Shareholders

•In some instances, a majority shareholder may have a fiduciary duty to the corporation and to the minority shareholders. In these situations, majority shareholders owe a fiduciary duty to the minority shareholders. •When a majority shareholder breaches her or his fiduciary duty to a minority shareholder, the minority shareholder can sue for damages.

Business Judgment Rule Applies if director or officer

1. Took reasonable steps to become informed about matter 2. Had a rational basis for the decision 3. Did not have a conflict between personal interests and corporate interests.

Quorum Requirements

A quorum must be present for shareholders to act (vote) during a meeting

Personal Asset Protection

An S corporation's structure also protects business owners' personal assets from any corporate liability.

Inside Director

An officer of corporation

Which of the following characteristics do both C corporations and S corporations share? A. Both are subject to pass-through taxation B. Both can limit liability for all shareholders and directors C. Both can have an unlimited number of shareholders D. Both require all shareholders to be U.S. citizens or permanent residents

B. Both can limit liability for all shareholders and directors

______ is an advantage of corporations and allows for it to continue even if a shareholder or owner leaves the partnership. A. Immediate termination B. Perpetual existence C. Pass-through taxation D. Limited liability

B. perpetual existence

Which of the following will the shareholder agreement NOT do? A. Detail the shareholders' relationship to one another B. Describe how the company will be operated C. Specify how the corporate veil is pierced D. Allocate ownership of corporate shares

C. Specify how the corporate veil is pierced

Improper Incorporation

De Jure Corporations De Facto Corporations Corporation by Estoppel

Outside Director

Does not hold a management position

Classification of Corporations

Domestic- created within the state. May need certificate of authority to operate in other states, including the solicitation of business via the Internet.Most states do not require certificate of authority to sell over Internet or mail. Foreign- created outside of the state in which its operating Alien Corporations-created outside of the country Public & Private Corporations-Public Corporation: one formed by the government to meet some political or governmental purpose. Ex. U.S. PostalService, AMTRAK. NOT Publicly Held Corporation: any corporation whose shares are publicly traded in securities markets Nonprofit Corporations-Corporations that are formed without a profit-making purpose. Examples include hospitals, educational institutions, and charities.

Transfer of Shares

Generally, stock can be transferred to another person unless there are valid restrictions on its transferability

Voting Requirements

If a state statute requires specific voting procedures, the corporation's articles or bylaws must be consistent with the statute

LLC vs. S-Corp

LLC (Limited Liability Company) and an S corporation are both corporate structures that, in the United States, allow pass-through taxation. The main differences between an S corp. and LLC are: • S corporations are more restrictive on who the shareholders (owners) ofthe company can be. • S corporations are required to pay a salary to those owners who work for the company and own more than 2% of the company. In contrast, LLCs are not obligated to pay a salary to its members (owners). This has tax implications for some companies like single-person ventures. • S corporations are required to maintain and file formal records for the board and shareholder meetings. • S corporations are allowed to have only one class of stock. • It is a little easier to set up employee stock option plans for S corporationsthan for LLCs.

Close Corporations

One whose shares are held by relatively few persons, often members of a family • Management of Close Corporations: The management of a close corporation resembles a sole proprietorship or partnership, but the firm must meet all specific legal requirements in state statutes.• Transfer of Shares in Close Corporations: The transfer of one shareholder's shares to someone else can cause serious management problems. Some states prohibit transfer of shares unless shareholders, family, and the corp given first right of refusal. • Misappropriation of Close Corporation Funds

Pass Through Income

Passes through income, usually in the form of dividends, to avoid double corporate and personal taxation

S Corps Benefits

Personal Asset Protection Pass Through Income Credibility Shareholders

Stock certificate

a certificate issued by a corporation evidencing the ownership of a specified number of shares in the corporation

Ultra Vires Doctrine

acts of a corporation that are beyond its express and implied powers to undertake. • Cases that allege ultra vires usually involve nonprofit corporations ormunicipal (public) corporations. • Shareholders can seek an injunction from a court to prevent (or stop) the corporation from engaging in ultra vires acts.

Corporation by Estoppel

claims corporation but no efforts to incorporate. Corporate status limited to case at hand •Case TY Bldrs. II, Inc. v. 55 Day Spa, Inc. (2018)