Chapter 19

Guth v. Loft, Inc. (DE, 1939) (p. 448).

"Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests." Issue: Whether the defendant appropriated a corporate opportunity for his own benefit. Outcome? Guth had no right to appropriate the opportunity

Most U.S. corporations are "close corporations

(a/k/a "privately held corporations" or "closely held corporations"), meaning their stock is not publicly traded. Typically, shares are held by a small number of shareholders who know each other.

Key differences between benefit corps and other for-profit corporations:

1) purpose; 2) accountability; and 3) transparency.

Many companies incorporate in ______ because of its favorable corporation laws—even if the companies do not plan to operate in _____

Delaware

ultra vires acts.

Corporate actions that are beyond its express or implied powers

Directors have general responsibility for all management decisions:

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

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.

Officers

Hired by the Board of Directors to run the day to day activity of the corporation

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.

Duty of care includes the following obligations:

Make informed and reasonable decisions; Rely on competent consultants and experts; Exercise reasonable supervision for work delegated to officers and employees; and Attend meetings. Directors who disagree with the majority should enter their dissent in the minutes.

IRS restrictions for making an S Corp election include

No more than 100 shareholders. Only once class of stock may be issued. Cannot be part of an affiliated group. Shareholders must be individuals, estates, or trusts and certain tax-exempt organizations

"incorporators"

Person(s) who execute the articles of incorporation are the. Typically owners or their attorney

Officers act as _______ for the corporation.

agents

Articles of Incorporation

Required information filed with the Secretary of State in the State of Incorporation includes the number of authorized shares; name/addresses of incorporators and the registered agent.

________ control the sources of funds available for the payment of dividends, which typically must be paid from ______________________________

State laws retained earnings, net profits, and surplus

factors that would lead a court to pierce the 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 are not followed (e.g., shareholder meetings, election of directors, corporate resolutions, records). Personal and corporate interests are commingled to such a degree that there is no corporate identity.

Brennan's Inc. v. Colbert (LA Ct. App., 2012).

When sued for legal malpractice, a law firm claimed that the individual shareholders of its corporate client should be held liable for legal fees owed by the corporation. This opinion discusses key factors that might lead a court to pierce the corporate veil. Outcome? For Brennan's

business judgment rule

a common law legal doctrine that protects a director or officer from liability for consequences of a good-faith business decision that may turn out to be harmful or unprofitable for the corporation.

foreign corporation

a company that applies for a certificate of authority to do business in another state

A corporation is

a separate legal entity created under state law. Each state has corporation statutes that govern the formation and operation of corporations in that state.

The key advantage of a corporation

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

Bylaws

are a written set of rules that govern the internal operations of the corporation. They address such things as the number of directors, election of directors, officers, shareholder meetings, and voting procedures.

Public corporations

are organized by governments to meet governmental purposes (e.g., TVA, AMTRAK).

Publicly held corporations

are those whose shares are traded in a securities market.

Nonprofit corporations

are typically formed and operated for educational, health, or charitable purposes (e.g., colleges, hospitals, charities).

Dividends may be paid by

cash, company stock, property, or corporate assets

Professional Corporations ("PC"

corporations in which 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.

key disadvantages of corporations

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

Board of directors

elected by shareholders who manage the corporation

A corporation's powers are governed by

federal and state constitutions, statutes, its article, by laws and resolutions of its board of directors.

Directors and officers are _______ of the corporation. They owe _______ and ________ to the corporation and shareholders.

fiduciaries ethical and legal

Most corporations are _________ corporations

for profit

Benefit corporations

for-profit corporations organized under specific state statutes that permit them to intentionally operate in a way that benefits society and the environment—and not just shareholders

"Double taxation" refers to

he fact that corporations pay income tax on their earnings, and when those earnings are distributed in the form of dividends, shareholders pay income tax on the dividends they actually receive.

piercing the corporate veil

if a shareholder acts alone the shareholder can be held personally liable for certain corporate debts

An "S Corporation"

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

domestic corporation

is one that was incorporated in that state

Piercing the corporate veil

occurs when a court, in the interest of justice or fairness, ignores the corporate structure and holds shareholders personally liable for the corporation's debts.

Corporations are taxed by federal and state governments on their income

regardless of whether they distribute it to shareholders

Duty of loyalty

requires putting the welfare of the corporation before personal interests. Directors cannot use corporate funds or confidential information for personal gain

A corporation's authority to act, and its liability for those actions, are ____________ from its owners.

separate and apart

Ownership of a corporation is represented by

shares of stock, and the owners ("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.

Stock may be purchased from

the company directly or other shareholders

Corporate profits ("net income") can either be kept by the corporation for use in the business (as retained earnings) or distributed to the shareholders (as dividends).

the corporation for use in the business (as retained earnings) or distributed to the shareholders (as dividends).

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.

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

their individual tax returns.

A corporation may have _________ shareholders--or as few as _____. Shareholders can be ________.

thousands of, one, individuals, trusts, partnerships, corporations, or any other entity

A corporation is liable for torts committed by

torts and may be liable for criminal acts committed by agents and officers in the course of their employment

Officers/executives may be terminated

with or without cause, but may be entitled to compensation (severance pay) if terminated without cause pursuant to an employment agreement.