Corporations

Limited Liability Companies: Purpose and Characteristics

- A limited liability company (LLC) is an unincorporated association having one or more members, and is organized and operated pursuant to a state's LLC statute. - Can be formed to conduct any type of business. - Treated like a corporation for limited liability purposes in protecting its members, managers, and agents from liability for the obligations of the company. NOTE: If properly organized, the LLC has the attributes of a partnership for federal income tax purposes. - Professional LLC: Organized for the sole purpose of rendering professional services, and has, as its members, individuals who are licensed or otherwise duly authorized to render the professional services for which the limited liability company is organized.

Shareholders: Removal

- 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. - 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.

LLC: Owner Liability and Ownership Rights

- No member, manager, or agent of an LLC will have any personal obligation for the debts, obligations, and liabilities of the company. -- Note: Liability based on failure to comply with LLC formalities is not likely because LLCs must follow fewer formalities, and because many state statutes explicitly prohibit this as a ground for liability Suits: Members may bring direct actions against the LLC, when injured personally by the LLC, or derivative actions on behalf of the LLC. However, derivative actions in the LLC are different. - With derivative suits, we DO have demand futility. The Act provides that a member must make a demand on the other members in a member-managed LLC or the managers of a manager-managed LLC, asking that they bring an action to enforce the right - But the member need not make a demand if they can argue that demand would be futile, because the other members or managers have a financial interest or are otherwise biased.

Shareholder Rights: Right to Information & Inspection

- Shareholders have a right to information, such as annual financial statements, that are important to a shareholder's voting and investing decisions. - Shareholders have an unqualified right to examine the articles, bylaws, minutes of a shareholders' meeting, and list of shareholders of record. - Shareholders also have a qualified right to inspect (and make copies of) accounting books and the records and minutes of director meetings. - 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. -- Good faith: When a shareholder is investigating corporate wrongdoing, courts have required the shareholder present evidence establishing a "credible basis" for the belief of possible wrongdoing; mere suspicion is not enough -- A proper purpose: any purpose reasonably relevant to a shareholder's interest as a shareholder

Directors and Officers: Limits on Corp Power (The Doctrine of Ultra Vires)

- the statement of corporate purpose in the articles of incorporation authorizes the boards powers while also limiting the authority of the corporations representatives. - under the ultra vires doctrine (beyond the bounds) a corporation cannot be delegated to undertake a contract or activity that is beyond the scope of its powers, as described in the articles of incorporation or bylaws. Under the MBCA, the limits of a corp's authority may be challenged in the following instances: 1) in a proceeding by a shareholder to enjoin the act 2) in a proceeding by the corporation against a current or former Director, officer, employee, or agent of the corp; 3) in a proceeding by the attorney general based on the grounds that: - the corporation of candidates articles through fraud; or - the corporation has continued to exceed or abuse the authority conferred upon it by law

LLC: Organization

1) Articles of Organization: must file articles of organization with the secretary of state in which it is organized - The articles of organization must contain the information specified in the state's LLC statute, which generally includes: (a) a statement that the entity is an LLC; (b) the name of the LLC; and NOTE: LLC names, which must be distinguishable from the name of any other LLC organized or doing business, must contain the word "limited company" or "limited liability company," or the abbreviations "L.C." or "L.L.C." And, the name must not include any word or phrase that implies or infers association with a government entity. (c) the address of the LLC's registered office and that of its registered agent. 2) Operating Agreement: A document similar to a corporation's bylaws that governs the LLC's internal affairs. -- Permitted ownership: one or more individuals or entities are required- may add more later with consent of all members --- Assignees of membership interests may become members by consent of a majority of the remaining members unless the articles or organization or operating agreement states otherwise.

Directors and Officers: The Powers of Directors

1) Board of Directors: - subject to any limitation set forth in the articles of incorporation, the management of the corporations business and the exercise of corporate power MUST be by or under the direction of the corporate board of directors - unless otherwise authorized by the articles or prior board decisions, individual directors do not have the power to set a corporation policy or even act as an agent when entering into contracts. What constitutes an act of the board? - the board acts and it's collective capacity. As such, the prerequisite of all board action is that it requires the participation of a quorum of the board. A quorum refers to the minimal portion of the authorized number of directors required to be present for board action to occur. -- unless provider otherwise by the articles or bylaws a majority of the directors constitutes a quorum. Assuming that is present at a Dooley held meeting of the board, an act of the board occurs upon the affirmative vote of a majority of directors present. The board can transact business in the absence of a meeting so long as there is written consent to an action that is signed by all members. What constitutes a duly held meeting? - unless the articles or bylaws provide otherwise, regular meetings may be held without notice of date, time, place, or purpose of the meeting. - special meetings of the board require at least two days notice of the date, time, and place of the meeting, unless the longer or shorter period is required by the articles or bylaws

How a corporation is structured

1) Corporate directors sit on the board and are responsible for governing the corporation 2) Corporate officers are delegated the responsibility for managing the conduct of the corporate business and serve as agents of the corporation 3) Shareholders are owners of the corporation but generally will not exercise control over the management of the corporate business Model Business Corporation Act (MCBA- is governing law)

Shareholders: Right to Bring Suit

1) Direct Suits: are brought when the wrong or harm is direct to the shareholder - Compel Payment: a shareholder needs to prove that the directors' refusal to declare a dividend amounted to fraud, bad faith, or an abuse of discretion -- a court will look to see if any of the following were the motivating causes of its decision: --- intense hostility of the controlling faction against the minority; --- exclusion of the minority from employment by the corporation; --- high salaries, bonuses, or corporate loans made to the officers in control; --- the fact that the majority group may be subject to high personal income taxes if substantial dividends are paid; and --- the existence of a desire by the controlling directors to acquire the minority stock interests as cheaply as possible. 2) Derivative Suits: 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. - To bring the shareholder must have been a shareholder when the transaction occurred ** The shareholder must make a written demand of the directors to enforce the rights of a corporation - Before a derivative action can be brought, a shareholder must: (a) make written demand upon the corporation; and (b) allow at least 90 days to pass, unless irreparable injury would result by waiting 90 days. Dismissal: A board of directors can seek dismissal of a derivative suit when a majority of directors, who do not have a material interest in the derivative action determine, in good faith, and after conducting a reasonable inquiry, that continuance of the suit would not be in the best interests of the corporation.

Corporate Management: Duty of Care

1) Duty of Care: Directors and officers must discharge their duties: (a) in good faith; (b) with the care that an ordinary prudent person and a leg position would exercise under similar circumstances; and (c) in a manner they reasonably believe to be in the best interest of the corporation

Piercing the Corporate Veil Factors

1) the extent to which the corporation is undercapitalized; 2) the extent to which corporate formalities have not been observed; 3) the extent to which corporate and personal funds have been commingled; and 4) the extent to which the corporate entity is no more than the alter ego of its shareholders (use this exact term on the bar they like it). A plaintiff seeking to pierce the corporate veil must prove: 1) shareholder "control" that effectively renders the corporate form a façade (shareholder was the alter ego of the corporation); 2) use of the corporate form to obtain an improper or fraudulent purpose; and 3) injury or unjust loss resulting from this wrongful use of the corporate form.

Nature of Corporations

A corp is a legal entity distinct from its owners, the shareholders. 4 key characteristics: 1) perpetual or continuous existence; it survives the death or replacement of its owners (shareholders) 2) centralized management of its assets and business through a board of directors 3) limited liability for its owners (shareholders), who are generally shielded from personal liability for the corporation's debts and obligations; and 4) free transferability of ownership interest (shares_ Advantage: facilitates the raising of significant amounts of capital Disadvantage: subject to "double taxation;" the profits are taxed as corporate income and then, when the profits are distributed to shareholders as dividends they are taxed again as the personal income of individual shareholders as dividends, they are taxed again as the personal income of individual shareholders

Shareholders and Their Exposure to Liability

A corporate entity is distinct from its shareholders. In general, shareholders are not personally liable for the debts of the corporation in which they hold stock. Exception: Piercing the Corporate Veil o Even if a corporation is properly formed, a court may disregard its separate entity and hold shareholders or affiliated corporations liable on corporate obligations. This is known as piercing the corporate veil. o Courts may hold shareholders liable on corporate obligations when it is necessary to prevent or avoid a grave injustice (i.e., the entity is used to commit fraud or to achieve inequitable results).

LLC: Assignment

Absent a contrary provision in an operating agreement, a member may assign all or a part of his economic interest in the LLC. - Such assignment, however, will not permit the assignee to become a member or to have a voice in management of the LLC unless the assignee is admitted as a member in accordance with an operating agreement or by the consent of a majority in interest of the remaining members.

Duty of Loyalty: Competition with the Corp

Competition by a Director or officer will not necessarily be a breach of fiduciary duty if he or she acts in good faith. General rule: Directors and officers may engage in independent business, but if the independent business competes with the corporation, equitable limitations will apply. - in the absence of any contrary agreement, corporate officers are not precluded, upon the termination of their employment, from entering into competition with their corporate employer. -- However, covenants not to compete will be in forced if they are reasonable as to time an area of application.

Duty of Loyalty: Business Dealings with the Corporation (self dealing)

Conflicting Interest Transaction: a transaction between Director officer and the corporation, of which the Director or officer had knowledge and a material financial interest. For example: (a) a Director officer contracts with the corporation to buy or sell goods or services, or has a personal or financial interest in the transaction (b) a directors on the board of two corporation doing business with each other When this happens the Director involved must notify the other directors, officers or shareholders of all of the material facts regarding the conflict Search transactions are avoidable by the corporation unless the interested person can prove that: 1) the material facts of the conflict were disclosed in fully described to the board, and the transaction was valid lee approved by a majority of disinterested directors 2) the conflicts were disclosed and the transaction was validly approved by a majority of disinterested shareholders 3) a court determines the transaction was fair and reasonable to the corporation. A court will determine fairness based on:(a) whether the transaction price was comparable to what might have been obtained in an arm length transaction or (b) whether the process followed by the directors and reaching their decision was appropriate

Shareholders: Duties of Controlling Shareholders

Controlling shareholders have a duty of good faith whereby they must refrain from exercising control so as to obtain a benefit from the corporation not shared proportionately with minority shareholders. Tip: Shareholder "oppression" most commonly occurs in a close corporation. In a close corporation, the lack of a public market for the corporation's shares puts minority shareholders in a potentially vulnerable position since they cannot readily exit and escape mistreatment through the selling of their shares. Examples of improper conduct by a controlling shareholder include: o causing the board of directors to guarantee, or enter into, a loan made by or with a majority shareholder; o causing the board of directors to issue additional stock to a controlling shareholder at less than fair market value for the purpose of diluting the minority's interest; o causing the board of directors to enter into a contract with a majority shareholder, or an entity affiliated with a majority shareholder, on unfair terms; and o causing the board of directors to dissolve the corporation, merge it with a company owned by the controlling shareholders, or sell its assets, for the purpose of excluding the minority shareholders from participation in a profitable business.

Business Judgement Rule

Creates a rebuttable presumptions that, when making a business decision, directors and officers have acted: (P's initial burden) 1) on an informed basis 2) in good faith; 3) with honest belief that their decision was in the corporations best interest. A Director is liable to the corporation for decisions or failures to act not undertaken in good faith. A Director cannot act in good faith when committing or allowing the corporation to commit illegal acts.

LLC: Control and Management

Generally, LLC control w/members. - Members of LLC liable for losses up to the amount which a member contributed to LLC. -- Losses are to be paid by the LLC but if they don't have enough funds members will not be personally liable beyond the scope of their contributions unless a court pierces the veil Member Managed: If the members decide not to appoint managers through the articles or operating agreement, the LLC is member-managed. - Each member has equal rights to the management and owes duty of loyalty and care Manager Managed: Members of an LLC may agree to appoint one or more managers to operate the business, in which case the LLC is manager-managed. - Managers may or may not be members of the LLC, and have as much power and authority as given to them by the members. - Managers owe the duties of care and loyalty similar to those owed by directors to a corporation. (their duties can be altered) - o Managers owe a duty not to engage in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law. However, some states reject the gross negligence requirement, instead using the business judgment rule used by corporations.

De Facto Corporation

If statutory compliance is insufficient for de jure status a de facto corporation may still have been formed if: - a good faith, colorable attempt was made to comply with the incorporation statute - the corporate principles, in good faith, acted as if they were a corporation - insulates directors and shareholders from liability

Shareholders: Cumulative Voting

In cumulative voting, shareholders may allocate all of their votes to any candidate when there are multiple openings on the board. -- By doing so, cumulative voting is a type of voting process that helps strengthen the ability of minority shareholders to elect a director. Example: If the election is for three directors and you hold 500 shares (with one vote per share), under the straight voting method you could vote a maximum of 500 shares for any one candidate (giving you 1,500 votes total; 500 votes per each of the three candidates). With cumulative voting, you could choose to vote all 1,500 votes for one candidate, 750 each to two candidates, or otherwise divide your votes whichever way you wanted.

Shareholders: Amendments to the Articles & Other Proposals for Fundamental Change

In general, AMENDMENTS to the articles are proposed by the board and submitted to the shareholders for approval. -- 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. -- 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. In general, a plan for MERGER OR SHARE EXCHANGE must be adopted by the board and then submitted to the shareholders for approval. -- 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. -- 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. 2 exceptions to the approval requirement: 1) Approval of such a plan is NOT required of a corporation's shareholders if each of the following holds true: - corporation will survive the merger or be the acquiring corporation in a share exchange - corporation's articles of incorporation will not change - 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 - the issuance of shares as part of the merger or share exchange does not otherwise require shareholder approval 2) In the case of a parent corporation and its subsidiary, approval of a merger plan involving a subsidiary corporation does NOT require approval of subsidiary's board or shareholders if the parent corporation owns at least 90% of the voting power of each class and series of outstanding shares of the subsidiary that has voting power

Corporate Management: Its Exposure and Liability

In general, directors and officers are not personally liable for the debts and obligations of the corporation that are both liable to the corporation for damages arising from: - the violation of their fiduciary duties; or their unauthorized actions, whether the action is ultra vires or otherwise outside the scope of their authority - if a corporation opportunity has been usurped a court made word damages, order the Director or officer to convey the corporation the profit, property, or income deprive from the misappropriation. - the articles of incorporation may include provisions that in some cases play significant limits on the personal liability of a person in a corporate management role who is in violation of their fiduciary duties.

Shareholder Rights: Appraisal Rights

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. - In 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% of the voting power of each class and series of outstanding shares. - In 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.

Formation: Pre-Incorporation Transactions

Liability AFTER the Formation of the Corporation: 1) A corporation's liability on a pre-incorp contract: - A corp is not liable on any pre-incorporation agreements its promoters entered into on its behalf UNLESS, after it comes into existence, the corp assumes liability by its own act through adoption or novation. 2) Impact of adoptions and novations on a promoter's liability: - if a corporation adopts the contract of a promoter, the promoter will remain liable on the contract to the third party but will be entitled to indemnification from the newly created corp. -- Adoption can be express (board passes a resolution stating they adopt) or implied (corp accepts or acknowledges the benefits of the k) - If notation occurs, the promoters are released from all personal liability on the pre-incorp contract -- a novation occurs when three parties- the promoter, the second party to the original contract, and the corp agree to substitution of the corp as a party to the contract in place of the promoter

Formation: Pre Incorporation Transactions

Liability Before the Formation of the Corp: - Promoters are personally liable on the contracts they enter into for the benefit of a not-yet-formed corporation. - Promoters are not liable on pre-incorporation contracts if: (a) the pre-incorporation contract specifically disclaims the personal liability of the promoter; OR (b) circumstances demonstrate that the other party agreed to look only to the corporation for performance.

Directors and Officers: Authority of Corporate Officers

Powers of a corporate officer are the powers of an agent. -a corporate officer or agent may enter into any transaction for which they have been expressly or implicitly authorized -corporate officers have the implied authority to enter into transactions that are reasonably related to performing the duties for which they are responsible -subject to restrictions in the articles, the board generally has discretion to decide whether in winter the Clara dividend; the board may legitimately decide to retain corporate earnings to expand the business. Shareholders must prove that refusal to declare a dividend amounted to fraud, bad faith, or an abuse of discretion

Formation: Promoters

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 corp. - Promoters ARE NOT AGENTS of the contemplated corp. -- b/c the corp is not yet in existence it CANNOT be a principal to agency relationship w/promoter --- Consequently, promoters have no power to bind the not yet formed corp. - When there is one than one promoter, there is a mutual agency among the promoters themselves. 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.

Formation: Incorporation and Organization

Requirements for Incorporation: Execution - Incorporation requires the property execution and filing of ARTICLES OF INCORPORATION that must be signed by an incorporator and set forth the following: 1) the name and address of each incorporator; 2) the address of the corporation's initial registered office and name of its initial registered agent at this office; 3) the number of share the corporation is authorized to issue; and 4) a corporate name

Formation: Incorporation and Organization

Requirements: Filing - the articles of incorporation must be delivered by an incorporator to the secretary of state's office for filing; and its deliver should be accompanied by payment of the appropriate filing fee -- the effective date of incorp is the date of filing unless the articles set forth a delayed dad.

Formation: Incorporation and Organization

Requirements: Organization - After incorporation, a corp must be properly organized in accordance w/statutory formalities. - Failure to do so may expose shareholders to personal liability. - Organization of a corp is completed at an organization meeting that is called by the incorporators or, if initial directors are named in the articles, by either party. - 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 : by laws are internal rules and regulations to govern its actions and relations to its shareholders, directors, and officers - they may include any provision for the regulation and management of the affairs of the corp that are not inconsistent with law or with the articles of incorporation. The bylaws often specify: (a) the time and place for annual shareholders meeting; (b) the record date for determining the shareholders entitled to vote and meetings or to receive dividends; (c) the number of shareholders necessary to constitute a quorum; (d) the percentage of votes necessary to authorize corporate action; and (e) any restrictions on transferability of shares

Shareholders: Shareholder action

Shareholder action typically occurs at shareholder meetings. To ensure that the collective power of shareholders is not interfered with, water down or otherwise manipulated, each shareholder of record must be provided with timely written notice of each annual and special shareholder meeting 10 to 60 days prior to the meeting date. - for annual meetings, proper notice will state the place, date, an hour of the shareholder meeting. - for special meetings, proper notice will state the place, date, hour, and purpose. Generally, a shareholder resolution is acceptable if the proposal is a recommendation or request that the corporation or Board of Directors take a specified action; conversely, resolution seeking to mandate or bind the corporation or the board are not considered proper. (shareholders have to stay in their lane)

Duty of Loyalty: Corporate Opportunity

The duty of loyalty prohibits officers and directors from usurping for their own benefit and a business opportunity that properly belongs to the corporation. - in determining whether an opportunity belongs to the corporation courts will consider the following: 1) whether the business constituting the opportunity is closely related to that of the corporation; 2) whether the board had expressed an interest in acquiring that type of business; 3) whether the individual became aware of the opportunity while acting in his capacity as a Director or officer; 4) whether he used any corporate funds or facilities in discovering or developing the opportunity No usurpation if after full disclosure: (a) the corporation was given the opportunity to first pursue it and crying to do so; or (b) was otherwise an able to take advantage of the opportunity

Corporate Management: Duty of Loyalty

The fiduciary duty of officers, directors, and employees, requires that they be loyal to the corporation and not promote their own interest in a manner injurious to it. Conflict of interest typically arise when directors or officers: 1) transact business with a corporation (self-dealing) 2) usurp a corporate opportunity; 3) directly compete with the corporation

LLC: Dissolution

Under the ULLCA, an LLC is dissolved, and its activities and affairs must be wound up, upon: 1) the occurrence of an event that the operating agreement states will cause dissolution 2) the passage of 90 consecutive days where the LLC has no members unless, before the end of the 90 days, transferees owning the rights to receive a majority of distributions as transferees consent to admit a specified person as a member and that person becomes a member 3) upon application of a member and the entry of a court order dissolving the company on the grounds that: - the conduct of the company's activities and affairs is unlawful; - it is not reasonably practicable to carry on the company's activities in conformity with the articles of organization and the operating agreement; or - the managers or members in control of the LLC have acted (or will act) in a manner that is illegal or fraudulent or have acted in a manner that is oppressive and is directly harmful to the applicant; or 4) the signed filing of a statement of administrative dissolution by the secretary of state. An LLC generally provides limited liability to its members, unless the proper procedures have not been followed during dissolution and winding up or when a court decides to pierce the company veil. - The ULLCA requires that an LLC must provide notice of dissolution to creditors so the creditors can make claims against the dissolving entity. This notice must include an explanation of how creditors can enforce their claims. - If the LLC does not follow the proper procedure in winding up its business, a court can enforce a creditor's claim against each member, to the extent of each member's proportionate share of the claim, up to the amount of the assets distributed to the member during dissolution.

Shareholder Rights: Voting

Voting Rights of Shareholders: (a) 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. (b) Proxy Voting - 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 valid after the expiration of 11 months or otherwise provided -- in generally, freely revocable (c) Consolidating voting power: shareholders can arrange to vote their shares in concert with another by means of a voting agreement (shareholders bind each other to vote a certain way) or a voting trust (transfer legal title- strictly regulated).

Corporation by Estoppel

When a contractual dispute arises between a third-party and an entity believe to be a corporation, a court may estop: - the third-party from alleging that the corporation is the effectively incorporated if that would unjustly expose the corporate principles to liability; or - 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

Shareholders: Generally

While the day today management of the corporation is reserved for the directors and officers, shareholders in their collective capacity have the power to elect directors, remove directors with or without caused, amend the bylaws, and approve fundamental changes in the corporation. -- both aboard and the shareholders have the power to amend the bylaws however, the power is exclusively to the shareholders if the corporations articles reserve that power or a bylaw expressly provides.