BusLaw-Chapter 19

Case. 18.3 Guth v. Loft, Inc. (DE 1939) (p. 457).

"Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests." Established test for breach of duty of loyalty: (i) was the opportunity related to the corp.'s line of business, and (ii) did the corp. have the finances to undertake it.

Person(s) who execute the articles are the

"incorporators" (typically, the owners or their attorney).

Directors can make decisions at meetings or by

"written consent."

Directors have general responsibility for all management decisions:

All major corporate policies Appointment and removal of all corporate officers and setting their compensation. Financial decisions; whether to distribute dividends, and if so, in what amount.

Case 19.2, Schultz v. GE Healthcare Fin. Services (KY, 2010)

Appeals court affirmed a decision to hold the sole shareholder personally liable for a debt of the corporation where the shareholder used corporate assets and funds for his individual purposes, resulting in the corporation's inability to pay a judgment for unpaid lease payments owed to the plaintiff.

Shareholders elect

BoD to manage corp

Corporate Formation

Choose a state in which to incorporate. Note: A corporation only incorporates in one state; if it operates in other states, it will have to "register to do business" in those states—but this is different than incorporating. Choose and reserve a Corporate Name. Name must have the proper suffix: "Corporation," "Corp.," "Incorporated," Inc." File "Articles of Incorporation" ( a "Charter" in TN) with the Secretary of State in the state of incorporation. Articles of Incorporation includes basic information about the corporation.

Duty of Care

Directors/officers are expected to act in good faith, using prudent business judgment, and in the best interests of the corporation. Failure to exercise due care may subject individual directors or officers to personal liability for negligence

Dividends

Distribution of corporate profits or income Distributed only if ordered ("declared") by the board of directors. Growth companies often do not distribute dividends (e.g., Google).

Bylaws:

Each corporation also adopts (usually at the first organizational meeting) the bylaws, a written set of rules that govern the internal operations of the corporation (election of directors, meetings, etc.). Bylaws do not have to be filed with the state.

Duty of Care (continued)

Make informed and reasonable decisions; Rely on competent consultants and experts; Exercise reasonable supervision for work delegated to officers and employees; and Attend meetings.

Rights of Directors

Participate in corporate decisions and inspect corporate books and records. Compensation (directors fees) Indemnification. If a director is sued for acts as director, the corporation should guarantee reimbursement (indemnification) and/or purchase liability insurance to protect the board from personal liability.

"domestic corporation"

is one that was incorporated there (the state of incorporation is the company's home state).

Role of Directors

The first set of directors is typically elected by the incorporators; thereafter, shareholders elect the directors. Term of office is generally for one year. Directors can be removed for cause (for failing to perform a required duty).

Directors and officers are fiduciaries of the corporation meaning

They owe ethical and legal duties to the corporation and shareholders.

Some factors a court considers when piercing a corp veil

Third party was misled into dealing with a corporation rather than the individual. Corporation was never meant to make a profit or be solvent, or is under-capitalized. Statutory formalities (e.g., meetings, elections, resolutions, records) are not followed. Personal and corporate interests are commingled so that there is no corporate identity.

"foreign corporation"

a company doing business in a state other than its home state. Corporations must register to do business as a foreign corporation (by getting a "certificate of authority") in any state in which they conduct business other than their state of incorporation.

"Piercing the corporate veil" occurs when

a court, in the interest of justice or fairness, holds shareholders personally liable for corporate acts and/or debts.

Meetings require that

a quorum of directors be present (minimum number of directors to conduct official corporate business, usually majority

An "S Corporation" is

a regular for-profit corporation that makes a special IRS election that lets it be taxed like a partnership. This election lets the corporation avoid "double taxation" at the federal level.

Key advantages

ability to raise capital via sale of stock; continuity of life; and limited liability of owners.

Officers act as _____ for their corporation

agents

Professional Corporations ("PC")

all shareholders are required to be members of the same profession. This legal form does not limit a shareholder's liability for his/her own malpractice.

Many companies incorporate in Delaware because

its favorable corporation laws—even if the companies do not plan to operate in DE.

Every corporation is governed by a

board of directors elected by the shareholders (votes based on number of voting shares owned).

The "business judgment rule" is a

common law legal doctrine that immunizes (protects) a director or officer from liabilityfrom consequences of a good-faith business decision that turned out to be harmful or unprofitable for the corporation.

"Double taxation" occurs because

corporate earnings are taxed at the corporation level and again at the shareholder level when dividends are distributed.

Corporate profits ("net income") can either be

kept by the corporation and used in the business (as retained earnings) or distributed to the shareholders (as dividends).

Key disadvantages

double taxation of business income; cost and complexity of formation and compliance; management constraints.

Officers (e.g., CEO, President, CFO) are

employees of the corporation hired by the board of directors.

Their employment relationships are generally governed by

employment contracts.

The number of directors is set forth

in a corporation's bylaws

. Shareholders may be

individuals, trusts, corporations, or any other entity. Stock may be purchased directly from the company or from other shareholders who want to sell their shares. Shareholders may be subject to restrictions in a "Shareholders Agreement" on when (and to whom) they can sell their shares.

No conflicts of interest:

must fully disclose any potential conflicts of interest and abstain from voting on any transaction that may benefit the director/officer personally

Shareholders are generally ______ for the debts, contracts or torts of the corporation

not liable

In most states, a person can be both an

officer and director

Board of directors hires

officers to run the corporation on a daily basis.

Shareholders are taxed

on the dividends they receive from corporations.

Shareholders of S-corps report their share of corporate income on

on their individual tax returns

Each director generally has ____ vote(s)

one

State laws control the sources of funds available for the payment of dividends, which typically must be

paid from retained earnings, net profits, and surplus.

Most corporations are

private, for-profit corporations. Other types of corporations include: Public corporations are organized by governments to meet governmental purposes (e.g., TVA, AMTRAK). Nonprofit corporations are typically formed operated for educational, health, or charitable purposes (e.g., colleges, hospitals, charities).

Duty of Loyalty:

putting the welfare of the corporation before personal interests. No competition with corporation. No taking of a "corporate opportunity." No conflict of interests. No insider trading. No transaction that is detrimental to minority shareholders.

A corporation's authority to act and liability for its actions are _________ from its owners ("shareholders")

separate and apart

A director can also be a

shareholder and/or an officer (officers on the board are "inside directors").

Ownership of a corporation is represented by

shares of stock A corporation can have one or many shareholders. The body of shareholders can change constantly without affecting the continued existence of the corporation ("continuity of life").

Registered Agent/Office

specific person in the state authorized to receive any legal notice and documents from state and/or 3rd parties.

govern the formation and operation of corporations.

state statutes

Dividends can be:

stock, cash, property, stock of other corporations.

; limited liability for shareholders means

that all they can lose is their investment in the stock. In certain situations, however, the corporate "veil" of limited liability can be pierced, holding the shareholders personally liable. Shareholders will be liable for any corporation debts they personally guarantee.

Most U.S. corporations are closely held corporations (also called "privately held corporations"), meaning

that their stock is not publicly traded. Typically, shares are held by a few shareholders, often family members, More informal management, similar to a partnership. Shareholder agreements restricting transfer of shares are common. Subject to general corporation laws of the state, unless the state has adopted statutes that relax certain formalities (such as required annual shareholder meeting).

Directors hold meetings pursuant to

the bylaws

The corporate veil may be pierced when

the corporation is the "alter ego" of majority shareholders, and personal and corporate interests are commingled such that the corporation has no separate identity. Typically, only occurs with closely held corporations (ones that have only a few owners).

The business judgment rule will apply to protect the director or officer from liability as long as

the director or officer took reasonable steps to become informed about the matter; had a rational basis for his decision; and did not have a conflict of interest.

Minutes of meetings and written consents are kept in

the minute book (the official record of the corp.).

Shareholders own the corporation through

their ownership of stock

Corporations are taxed on

their profits by federal and state governments.

A corporation is a creature of state statute;

viewed as an artificial person

Officers may be terminated with or without cause, but

will likely be entitled to compensation if terminated without cause ("golden parachute").