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What is the directors' duty of loyalty?

A conflicting interest in a corporate transaction exists if the director knows that the director or a related person to the director is a party to the transaction or if such person has a beneficial financial interest in the transaction. In addition, a conflicting interest exists if a director is also a director, general partner, agent or employee of another entity with whom the corporation is transacting business and the transaction is of such importance to the corporation that it would in the normal course of business be brought before the board.Note that these conflicting interests will not be enjoined or give rise to an award of damages if the transaction was approved by a majority of the directors (at least 2) without a conflicting interest after all material facts have been disclosed to the board or if the transaction was approved by a majority of the votes entitled to be cast by the shareholders without a conflicting interest in the transaction after all material facts have been disclosed to the shareholders. Furthermore, such a transaction will not be enjoined if the transaction, judged according to the circumstances at the time of commitment, was fair to the corporation. Factors to be considered in determining whether the transaction was fair to the corporation include the adequacy of the consideration, corporate need to enter into the transaction, the financial position of the corporation, and available alternatives had the transaction not taken place.

What is the effect of dissolution?

A corporation that has been dissolved continues its corporate existence but may not carry on any business except that which is appropriate for winding up and liquidating the firm. Claims against the dissolved corporation are allowable even if the claim does not arise until after dissolution. If assets have been distributed to shareholders then a claim can be asserted against each shareholder for a pro rata share of the claim, to the extent of assets distributed to that shareholder. A corporation can cut short the time for bringing claims by notifying claimants in writing of the dissolution and giving them a deadline of not less than 120 days in which to file their claims. In addition, the time for filing unknown claims may be limited to 5 years by publishing notice of dissolution in a newspaper in the county where the corporation's known place of business is located. A corporation may revoke a voluntary dissolution.

What is a de facto corporation?

A de facto corporation is a corporation formed even though the strict formalities required for a de jure corporation have not been satisfied. A de facto corporation has all of the rights and powers of a de jure corporation. For a de facto corporation to exist, there must have been a statute under which the entity could have been validly incorporated. In addition, there must have been colorable compliance with the statue and a good faith attempt to comply. Finally, business must have been conducted in the corporate name as further evidence that a corporation was intended. Note, however, that a person will not avoid personal liability by claiming the existence of a de facto incorporation if that person knows that no corporation actually exists. Rather, the de facto doctrine can be raised as a defense to personal liability only by a person who is unaware that there was no valid incorporation.

What is a de jure corporation?

A de jure corporation is a corporation in which the formation has complied with all applicable statutory requirements. Incorporators must file articles of incorporation with the secretary of state that includes the name of the corporation, the # of shares that the corporation is authorized to issue, the name and address of the corporation's registered agent, and the name and address of each incorporator.

How might a shareholder bring a direct action against the corporation?

A direct action may be brought by a shareholder in response to a breach of a fiduciary duty owed to a shareholder by an officer or director. In a shareholder direct action, any recovery is for the benefit of the individual shareholder, rather than for the corporation.

What are the penalties incurred by those who give a distribution in violation of the above rules?

A director who votes for or assents to a distribution that violates the above rules is personally liable to the corporation for the amount of the distribution that exceeds the amount that could have been properly distributed. A director, however, is not liable for a distribution given or approved in good faith that is based on financial statements prepared according to reasonable accounting practices or on an evaluation that is reasonable under the circumstances. A director who is held liable for an improper distribution is entitled to contribution from every other director who could be held liable for the distribution as well as from each shareholder who accepted an improper distribution with knowledgethat the distribution was improper.

What is a limited liability company?

A limited liability company is an organization that is taxed like a partnership but also offers its owners the limited liability given to shareholders of a corporation. There is no limit on the number of owners (called members) and no member has to accept full personal liability for the organization's debt. A limited liability company is governed by statute but members may adopt operating agreements to control most aspects of the business and management of the company.

How is a limited liability company formed?

A limited liability company is formed by filing articles of organization with the Secretary of State. The articles must contain a statement that the organization is a limited liability company, the name of the company, the address, registered office and registered agent, and the names of all of the members.

How is a limited liability company managed?

A limited liability company may be managed either by members or by managers. All members or managers manage the company unless the articles provide for an alternative system of management. Members and managers are not personally liable for the company's obligations. Profits and loses are allocated on the basis of contribution. Each member or manager has equal rights in the company's management and a majority vote of the members or managers is required to approve most decisions.

What is the effect of dissolution?

A limited liability company that has been dissolved continues its existence but is not allowed to carry on any business except that which is appropriate for winding up the activities of the business. A claim can be asserted against a dissolved company even if the claim does not arise until after dissolution to the extent of the company's undistributed assets. If the assets have already been distributed to the members or managers, a claim can be enforced against each member or manager to the extent of the member's or manager's proportionate share of the claim or to the extent of the assets distributed to that member or manager, whichever is less. A company can cut short the time for bringing a known claim by notifying claimants in writing of the dissolution and giving them a deadline of not less than 120 days in which to file a claim. Likewise, the time for bringing unknown claims can be limited to 5 years by publishing notice of the dissolution in a newspaper in the county where the company's known place of business is located.

What will cause a limited liability company to be dissolved?

A limited liability company will be dissolved when any of the following occur: an event or circumstance that the operating agreement claims will cause dissolution; the consent of all the members or managers; or the passage of 90 consecutive days during which the company has no members or managers.In addition, a court may grant an application for judicial dissolution if the conduct of all or substantially all of the company's activities is unlawful or if it is not reasonably practicable to carry on the company's activities in conformity with the certificate of organization and the operating agreement. A court may also dissolve the company if the controlling members or managers have acted, are acting, or will act in a manner that is illegal or if the controlling members or managers have acted or are acting in a manner that is oppressive and is directly harmful to the members or managers applying for dissolution. Finally, the Secretary of State may dissolve a limited liability company when the company fails to submit a required fee or annual report. The company may apply for reinstatement after correcting the problem.

How is the fiduciary duty of a promoter breached?

A promoter who profits by selling property to a corporation has not necessarily breached a fiduciary duty. If the transaction is disclosed to an independent board of directors and approved by such directors then the duty is not breached. Even if the board is not entirely independent, the promoters will still not be liable for breach if the subscribers knew of the promoters' profits at the time they subscribed or unanimously ratified the transaction after full disclosure.

What constitutes a quorum at a directors' meeting?

A majority of the board of directors constitutes a quorum for the meeting unless a higher or lower number is required by the articles or bylaws, but a quorum can be no fewer than 1/3 of the board members. Unlike shareholders, a director can break the quorum requirement by withdrawing from the meeting. If a quorum is present, resolutions will be deemed approved if approved by a majority of the directors present. Note also that any action required to be taken by the directors at a formal meeting may be taken by unanimous consent in writing without a meeting.

What is the difference between a merger, a share exchange, and a conversion?

A merger involves the blending of one or more corporations with another corporation. The merging corporation(s) cease to exist following the merger. A share exchange involves one corporation buying all of the outstanding shares of one or more classes or series of another corporation. A conversion involves one business entity changing its form to another business entity.

What is the process when a member desires to dissociate from the limited liability company?

A person has the power to dissociate as a member of the company at any time. Note, however, that a dissociating member who does so wrongfully may be liable to the company for damages.

What are the mechanics of voting at a meeting?

A quorum is usually a majority of outstanding shares entitled to vote unless the bylaws or articles provide that a greater number is required. Once a quorum is present, it will not be broken by withdrawal of shares from the meeting. If a quorum is present, then shareholders will be deemed to have approved the matter if the votes cast in favor of the matter exceed the votes cast against the matter. This, too, may be modified by the bylaws or articles.

What are a shareholders' rights in regards to inspection?

A shareholder may inspect the corporation's books, papers, accounting records, shareholder records, etc. Five days' written notice must be provided to the corporation stating a proper purpose for the inspection. The shareholder need not personally conduct the inspection; rather, an accountant, attorney or other agent may be sent in place of the shareholder. Under some circumstances, a shareholder may inspect regardless of the purpose. A shareholder may inspect regardless of purpose, the following: the corporation's articles and bylaws; board resolutions regarding classification of shares; minutes of shareholders' meetings from the prior 3 years; communications sent by the corporation to the shareholders throughout the prior 3 years; a list of the business addresses and names of the corporation's current directors and officers; and a copy of the corporation's most recent annual reports.

What is a proxy?

A shareholder may vote shares in person or by proxy (whereby another will vote for the shareholder). Such proxy must be executed in writing. Proxies are valid for 11 months unless they provide otherwise. A proxy is generally revocable by the shareholder and may be revoked by the shareholder attending the meeting to vote himself or by subsequent appointment of another proxy. A proxy, however, will be irrevocable if it states that it is irrevocable and if it is coupled with an interest or given as security.

What is a voting trust?

A voting trust is a written agreement of shareholders under which all of the shares owned by the parties to the agreement are transferred to a trustee who then votes the shares and distributes the dividends in accordance with the agreement. The trust must be given to the corporation to keep on record. Such a trust will not be valid for more than 10 years unless a subsequent agreement extends the trust.

What is an ultra vires act?

Activities deemed outside the scope of the stated business purpose of the corporation are called ultra-vires acts. Ultra vires acts are generally enforceable though a shareholder may sue the corporation to enjoin a proposed ultra vires act. In addition, a corporation may sue an officer or director for damages caused by the approval of an ultra vires act, and the state may bring an action to dissolve a corporation for committing ultra vires acts.

Will promoters be liable for transactions they enter into with third parties?

All promoters that act on behalf of a corporation knowing that the corporation has not yet formed are jointly and severally liable for all expenses incurred. Such promoters remain liable after the corporation is formed even if the corporation later adopts the contracts and benefits from it. The promoter will be released from these obligations only if there is an express or implied novation.

What is an administrative dissolution?

An administrative dissolution occurs when the state brings an action to dissolve a corporation. Some reasons for such a dissolution include non-payment of fees, failure to file an annual report, and failure to maintain a registered agent in the state. The state must serve the corporation with written notice of the reasons for dissolution; the corporation will then have 60 days after service of the notice to correct the grounds. A corporation that is administratively dissolved may apply for reinstatement within 2 years after the date of dissolution.

Can a member transfer his/her interest in the limited liability company?

An assignment of a member's interest in the company transfers only the member's right to receive distribution. Management rights are not transferred; one can become a member only with the consent of all members or as provided in the operating agreement.

What is the procedure for merger, share exchanges, and conversions?

Approval of a plan of merger by shareholders of the surviving corporation is not required if all of the following exist: the articles of incorporation of the surviving corporation will not differ from the articles before the merger; each shareholder of the surviving corporation whose shares were outstanding immediately prior to the effective date of the merger will hold the same number of shares with identical preferences, limitations and rights; and the voting power of the shares issued as a result of the merger will comprise no more than 20% of the voting power of the shares of the surviving corporation that were outstanding immediately prior to the merger. Note that a short-form merger occurs when a parent corporation owning at least 90% of the outstanding shares of each class of a subsidiary corporation merges the subsidiary into itself. In such a merger, approval by the shareholders or directors of the subsidiary corporation is not necessary. As for share exchanges, only the shareholders of the corporation whose shares will be acquired in the share exchange need approve a share exchange. The procedure for effecting a conversion is generally the same as the procedure for approving a merger in which the converting corporation is not the survivor.

How are corporations created?

Corporations are created by complying with the state corporate law. A corporation that complies with such laws is called a de jure corporation. If all laws are not complied with, a de facto corporation might result, or a corporation might be recognized through estoppel.

How often do the shareholders meet?

Corporations must hold annual shareholders' meetings. If such a meeting is not held within the earlier of 6 months after the end of the corporation's fiscal year or 15 months after its last annual meeting, a court may order that a meeting be held. Special meetings may be called by the board of directors, the holders of 1/10 or more of all shares entitled to be cast at the meeting, or other persons so authorized in the articles or bylaws.

What is the difference between debt securities and equity securities?

Debt securities arise where a corporation has borrowed funds from outside investors with a promise to repay the loan. Holders of debt securities do not have an ownership interest in the corporation. In contrast, equity securities give holders an ownership interest in the corporation issuing those securities. Equity securities authorized in the corporation's articles of incorporation are called authorized shares, and those shares that have been sold are issued and outstanding. If the corporation repurchases the shares then those shares are deemed authorized but unissued.

How are directors removed from the board?

Directors may be removed for cause or without cause by the shareholders. Note, however, that a director elected by cumulative voting cannot be removed if the votes cast against removal would be sufficient to elect that director. In addition, a director elected by a voting group of shares can be removed only by that class.

What is the directors' duty of care?

Directors must manage the corporation to the best of their ability. They must discharge their duties in good faith and with the care of an ordinary prudent person in a like position in a manner that the director reasonably believes to be in the best interest of the corporation. This duty of care at common law was known as the Business Judgment Rule. Note also that directors have a duty to disclose material corporate information to other members of the board.

How are directors elected at a shareholders' meeting?

Directors will be elected by a plurality of the shareholders' votes. The articles may provide for cumulative voting. Instead of each shareholder having one vote per share, under cumulative voting each shareholder is entitled to a number of votes equal to the number of his voting shares multiplied by the number of directors to be elected. These votes may be divided among the candidates in any manner that the shareholder desires including casting all for the same candidate.

Are there any limitations on the right to give distributions to shareholders?

Distributions are not allowable if after giving a distribution the corporation would not be able to pay its debts as they become due in the usual course of business or if the corporation's total assets would be less than the sum of its total liabilities plus the amount that would be needed if the corporation were to be dissolved at the time of distribution.

What types of distributions may be given to the shareholders by the corporation?

Distributions can take many forms including dividends, redemptions of shares, repurchase of shares, and distribution of assets upon liquidation. Even if the articles authorize distributions, the decision whether to declare distributions generally is solely within the discretion of the board of directors. The shareholders generally have no right to demand a distribution.

What is the procedure that a shareholder must take to obtain an appraisal remedy?

First, if a proposed corporate action will create rights in the shareholders to dissent, shareholders must be notified of the shareholders' meeting in which a vote on the action will take place and the notice must state that the shareholders will be entitled to exercise their rights to dissent. Before a vote is taken on the action, the shareholders must deliver written notice of interest to demand payment for the shareholder's shares if the proposed action is taken. If the action is approved, the corporation must notify, within 10 days, after approval, all shareholders who filed an intent to demand payment. The notice must include the time and place to submit their shares and all other terms of repurchase. Once the shareholder receives this notice, the shareholder must then demand payment in accordance with the notice provided. Finally, the corporation must pay the dissenters the amount the corporation estimates as the fair value of the shares plus accrued interest. If the shareholder is not satisfied with the determination of value, the shareholder has 30 days in which to send the corporation her own estimate of value and demand payment of that amount. And if the corporation refuses to pay this amount, the corporation must file an action in court within 60 days of receiving the shareholder's demand requesting the court to determine the fair value of the shares. If the corporation does not file this action, then it must pay the shareholder the amount demanded.

Do the shareholders in a corporation have any management power within the corporation?

Generally, no. However, management powers may be given to shareholders if they enter into an agreement to dispense with the board and instead vest management power in the shareholders.

Do shareholders have fiduciary duties to the corporation?

Generally, no. Shareholders may act in their own personal interests. However, if the shareholders enters into an agreement that vests some or all of the right to manage the corporation in one or more shareholders, the managing shareholders will incur the same duties and liabilities incurred by a director of the corporation. In addition, shareholders in a close corporation (a corporation with few shareholders) are generally held to owe each other the same duty of loyalty and good faith that is owed by partners in a partnership.

What is the appraisal remedy for a shareholder who dissents to a a fundamental corporate change?

If a corporation approves a fundamental change, shareholders who dissent from the change may have the right to have the corporation purchase their shares. This is known as an appraisal right (or appraisal remedy) and the following are entitled: any shareholder entitled to vote on a plan of merger and shareholders of the subsidiary in a short-form merger; shareholders who are entitled to vote on a disposition of all or substantially all of the corporation's property; and shareholders whose rights will be materially and adversely affected by an amendment of the corporation's articles.

What are the ways in which a corporation may voluntarily dissolve?

If shares have not yet been issued or business has not yet commenced then the corporation may be dissolved by a majority of of the incorporators or initial directors delivering articles of dissolution to the state. Note that all corporate debts must be paid before dissolution and if shares have been issued then any assets remaining after winding up must be distributed to shareholders.

What is a manager-manager limited liability company?

In a manager-managed limited liability company, the duties of loyalty and care differ for managers and members. Only the managers are subject to the duty of loyalty and duty of care. Further, only the members may authorize or ratify an act by a manager that would otherwise violate the duty of loyalty.

What are the rights to information for managers in a manager-managed limited liability company?

In a manager-managed limited liability company, the managers have the same right to information as the members have in a member-managed limited liability company. The members in such a company also have rights to inspect information that is relevant to the member's duties or obligations if the member makes a demand to the company describing with reasonable particularity the information sought and the purpose for seeking such information, and the information sought is directly connected to the member's purpose.

What are the rights to information for members in a member-managed limited liability company?

In a member-managed limited liability company, a member has the right to inspect and copy any record concerning the company's activities, financial condition, etc., material to the member's rights and duties. The company and its members must automatically furnish any information concerning the company's activities, financial condition, etc., that they know is material to the exercise of a member's rights and duties unless they reasonably believe that the member already has been informed. If a member demands information, the information must be provided unless the demand is unreasonable or improper.

What is a member-managed limited liability company?

In a member-managed limited liability company, members owe to each other and the company duties of care and loyalty. Under the duty of loyalty, a member must account to the company for any benefit derived in connection with the business of the company and must refrain from dealing adversely with the company (unless the transaction is fair to the company). In addition, members must refrain from competing directly with the company. If all material facts have been disclosed, however, a member may authorize an act that would otherwise violate the duty of loyalty. Regarding the duty of care, members must act with the care that a person in a like position would exercise under similar circumstances in the best interest of the company. Members who meet this standard will not be held liable, even if the acts in hindsight turn out to be erroneous.

consecutive days during which the company has no members or managers.

In addition, a court may grant an application for judicial dissolution if the conduct of all or substantially all of the company's activities is unlawful or if it is not reasonably practicable to carry on the company's activities in conformity with the certificate of organization and the operating agreement. A court may also dissolve the company if the controlling members or managers have acted, are acting, or will act in a manner that is illegal or if the controlling members or managers have acted or are acting in a manner that is oppressive and is directly harmful to the members or managers applying for dissolution. Finally, the Secretary of State may dissolve a limited liability company when the company fails to submit a required fee or annual report. The company may apply for reinstatement after correcting the problem.

Is notice to the directors required prior to a directors' meeting?

It depends. Regular meetings may be held without notice; special meetings require two days' written notice of the date, time, and place of the meeting.Attendance at the meeting constitutes a waiver of the notice requirement unless the director attending does so for the sole purpose of protesting the lack of notice.

What are the powers and obligations of the officers of a corporation?

It should be noted initially that it is not required that a corporation have officers. Rather, a corporation shall have the officers described in the bylaws or appointed by the board of directors. In addition, an officer may appoint other officers if authorized in the bylaws, and one officer may hold more than one office. The duties of the officers are determined by the bylaws, the board of directors, or an officer so authorized by the board. General agency rules determine the authority and powers of officers. Authority may be actual or apparent and an action by an officer may become binding on the corporation due to ratification, estoppel, etc. As a general rule, the corporation is liable for the acts of the officers that are within the scope of the officers' authority.

What procedures are in place for shareholders' meetings?

Meetings may be held within or outside the state. Shareholders must be notified of meetings not less than 10 or more than 60 days before the meeting. Notice must state the place, day, and hour of the meeting and for special meetings, the purpose. Notice, however, may be waived in writing or by attending the meeting. Shareholders of record on the record date may vote at the meeting. The record date is fixed by the board of directors but may not be more than 70 days before the meeting. If no record date is set by the board, the record date is deemed to be the day the notice of the meeting is mailed to the shareholders. Unless the articles provide otherwise, each share owned by a shareholder is entitled to 1 vote.

What does it mean to pierce the limited liability company veil?

Members and managers are not personally liable for the obligations of the limited liability company. Courts may pierce the limited liability company veil to reach the members' and managers' personal assets to satisfy the obligation of the company.

What are the standards of conduct for officers?

Officers must carry out their duties in good faith and with the care of an ordinary prudent person in a like position. An officer has the power to resign the position of officer at any time by delivering notice to the corporation and a corporation has the power to remove an officer at any time with or without cause.

What are the remedies for an improper conflicting interest transaction?

Possible remedies include enjoining the transaction, setting the transaction aside, and damages.

What are preemptive rights?

Preemptive rights provide shareholders the rights to purchase newly issued shares in order to maintain their proportional ownership interest. Such rights are not provided to shareholders unless specifically provided for in the articles of incorporation. Moreover, even if the articles do provide for such rights, preemptive rights will generally not be provided to shareholders for shares that were issued without voting rights or for consideration other than cash. In addition, shares that are issued within six months of incorporation will not allow for preemptive rights.

What is the role of the promoters of a corporation?

Prior to a corporation forming, promoters procure commitments for capital that will later be used to fund the corporation. The relationship between the promoters is that of joint venturers who occupy a fiduciary relationship with each other.

What is the Rule 10b-5 securities regulation?

Rule 10b-5 makes it illegal for any person to use any means or instrumentality of interstate commerce to employ any scheme to defraud, make an untrue statement of material fact (which also includes failure to disclose), or engage in any practice that operates as a fraud in connection with the purchase or sale of any security. A private plaintiff must prove fraudulent conduct connected to the sale or purchase of a security by the plaintiff. In addition, the fraudulent conduct must involve the use of some means of interstate commerce. A private plaintiff must further prove that he relied on the defendant's fraudulent statement, omission or conduct. Finally, damages must be proven and are limited to the difference between the price paid and the average share price in the 90-day period after corrective information is disseminated.

How does rule 10b-5 apply to insider trading?

Rule 10b-5 prohibits most instances of insider trading which is defined as trading while withholding information to the public that an investor would think is important when deciding whether or not to invest in a security. Anyone who breaches a duty not to use inside information for personal benefit can be liable under rule 10b-5. This includes directors, controlling shareholders, attorneys, bankers, etc.

What is the purpose of securities regulation section 16(b)?

Section 16b requires that any profit realized by any director, officer, or shareholder owning more than 10% of a class of the corporation's stock be surrendered to the corporation if the profit was resulted from the purchase and sale or sale and purchase of any equity security within a 6month period. This only applies to publicly held corporations with more than 10 million in assets and 500 or more shareholders in any outstanding class or corporations whose shares are traded on a national exchange.

What are stock subscriptions?

Stock subscriptions are promises from subscribers to buy stock in the corporation. When such promises are made prior to the corporation incorporating, such promises are irrevocable for six months unless otherwise provided in the subscription agreement or unless all subscribers consent to the revocation. Payment is upon demand by the board, and a subscriber who fails to pay may be penalized by sale of the shares or forfeiture of the subscription.

With what types of consideration may shares be purchased?

Shares may be paid for with any tangible or intangible property or benefit to the corporation. Further, the corporation may issue shares for whatever consideration the directors deem appropriate. Consideration need not be placed in any special account. A shareholder who fails to pay the full amount agreed upon can be held liable for any sums remaining unpaid.

What is a voting agreement?

Similar to a voting trust, this is an agreement between the shareholders as to how they will cast votes. Unlike a trust, such an agreement need not be filed with the corporation, and there is no time limit to the agreement.

Is the corporation bound by contracts entered into by promoters?

Since the corporation does not exist until the time of incorporation, the corporation will not be bound by contracts entered into by promoters prior to incorporation. The corporation may, however, become bound if the corporation later adopts (expressly or impliedly) the promoter's contract.

What is the Sarbanes-Oxley Act?

The Sarbanes-Oxley Act provides for the creation of the Public Company Accounting Oversight Board to register public accounting firms that prepare audit reports. The Board establishes rules related to the preparation of audit reports. Companies filing reports must have their CEO, CFO, or similar person certify each report. If a company is required to restate financial information because of misconduct related to the reports, then the company's CEO and CFO must reimburse the company for any bonus or other incentive-based compensation received by them during the 12-month period after the inaccurate reports were filed or made public, whichever is earlier. The officers must also turn over to the company any profit that they made from the sale of the company's securities during the same 12-month period. Note as well that the Sarbanes-Oxley Actcreates a statutory cause of action for persons who are discharged because they lawfully provided information to their supervisors of the federal government regarding any conduct that they reasonably believed to be a violation of the securities laws.

What type of liability may be incurred by directors?

The articles may limit or completely eliminate directors' personal liability for money damages to the corporation or shareholders for actions taken or for failure to take action. However personal liability may not be limited if the director receives financial benefits of which the director is not entitled, or if the director intentionally harms the corporation or its shareholders.

What is judicial dissolution?

The attorney general may seek judicial dissolution of a corporation on the ground that the corporation fraudulently obtained its articles of incorporation or that the corporation is exceeding or abusing its authority. In addition, shareholders may seek judicial dissolution if the directors are deadlocked in the management of the corporation or if the directors have acted or will act in a manner that is illegal, oppressive, or fraudulent. Similarly, the shareholders may seek dissolution if the shareholders are deadlocked in voting power and have failed to elect one or more directors for a period that includes at least 2 consecutive annual meeting dates or if corporate assets are being wasted, misapplied or diverted for non-corporate purposes. Lastly, creditors may seek judicial dissolution if the creditors' claims have been reduced to judgment, execution of the judgment has been returned unsatisfied and the corporation is insolvent or if the corporation has admitted in writing that the creditors' claims are due and the corporation is insolvent.

What are the requirements and obligations of the board of directors of a corporation?

The directors are responsible for the management of the business. In the absence or requirements in the bylaws or articles, the directors need not be shareholders in the corporations or residents of any particular state. There need not be more than one director, though the articles or bylaws may require a higher number. The directors are elected at each annual shareholders' meeting.

What is the Corporate Opportunity Doctrine?

The directors' fiduciary duty prohibits them from diverting business opportunities from the corporation to themselves without first giving the corporation an opportunity to act. If the director does not give the corporation the opportunity first, the corporation can recover the profits that the director made from the transaction or may force the director to convey the opportunity to the corporation by instituting a constructive trust.

What is the general procedure for fundamental corporate changes?

The following general procedure applies: the board adopts a resolution and written notice of that resolution is given to the shareholders. The shareholders may then approve changes by a majority of the votes entitled to be cast and if the changes are approved they are sent in the form of articles to the state to be filed.

What is corporation by estoppel?

Under this doctrine, persons who have dealt with the entity as if it were a corporation will be estopped from denying the corporation's existence.

When is indemnification from the corporation to an officer or director required?

Unless limited by the articles, a corporation must indemnify a director or officer who prevails in defending a proceeding against the officer or director for reasonable expenses, including attorneys' fees. A court may order indemnification when appropriate. A corporation may but need not indemnify a director for reasonable expenses in unsuccessfully defending a suit brought against the director if the director acted in good faith and believed that the conduct was in the best interests of the corporation. However, a corporation does not have discretion to indemnify the director who is unsuccessful in defending a direct or derivative action in which the director is found liable to the corporation or an action charging that the director received an improper benefit.

How is a director compensated?

Unless the bylaws or articles provide otherwise, the board of directors has the authority to set the director compensation. If an unreasonable compensation is fixed, such a decision may amount to a breach of the directors' fiduciary duty.

How might a shareholder bring a derivative action against the corporation?

Unlike in a direct action, in a derivative action, a shareholder is asserting the rights of the corporation rather than an individual right. Therefore, recovery goes to the corporation rather than the shareholder, even though the corporation is generally also named as defendant. To commence and maintain a derivative action, a shareholder must have been a shareholder at the time of the act or omission complained of or must have become a shareholder through the transfer by operation of law from one who was a shareholder at that time. The shareholder must make a written demand on the corporation to take suitable action. A derivative proceeding may not be commenced until 90 days after that demand unless the shareholder has earlier been notified that the corporation has rejected the demand or irreparable injury to the corporation would result if the 90-day rulewere enforced. Note that a derivative action will be dismissed if found to not be in the best interest of the corporation.

What does it mean to pierce the corporate veil?

When a court pierces the corporate veil, it disregards the corporate entity and instead holds individuals personally liable for corporate obligations. There are three situations to keep in mind as to when the corporate veil will be pierced. Where the corporation ignores formalities such that it may be considered the "alter ego" of the shareholders (for example, where shareholders treat corporate assets as their own) the corporate veil may be pierced. In addition, the corporate veil may be pierced where the corporation is inadequately capitalized, so that at the time of formation there is not enough capital to reasonably cover potential liabilities. Lastly, the corporate veil may be pierced where necessary to prevent fraud or to prevent an individual shareholder from using the entity to avoid presently existing personal obligations. If the corporate veil is pierced, shareholders who were active in the operation of the business will be personally liable on a theory of joint and several liability.

Can an agreement of the limited liability company alter the duty of care and loyalty required?

Yes, an operating agreement may eliminate or alter the duty of loyalty and care if doing so is not manifestly unreasonable. No agreement, however, may provide for the right to intentional misconduct.

Can a member or manager of a limited liability company sue the company?

Yes, and there are various avenues for doing so. A member who has been injured personally by his company can bring a direct action against the company. A member can also bring a derivative action on behalf of the company if a demand is first made on the other members (or managers) unless demand would be futile. Such a derivative action may be maintained only by a person who is a member at the time the action is commenced and who remains a member while the action continues.

Are members and managers entitled to indemnification for expenses incurred on behalf of the limited liability company?

Yes, members of a member-managed limited liability company, and managers of a manager-managed limited liability company are indemnified for debts, obligations, and other liabilities incurred in the course of their activities on behalf of the company, provided they complied with the duty of loyalty and dutyof care. Note that they are also reimbursed for expenses incurred on the company's behalf.

May the shareholders ever act without a meeting?

Yes, shareholders may take action without a meeting by the unanimous written consent of all shareholders entitled to vote on the action.


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