Ch. 19 Corporate Powers, The corporate Veil, and Directors and Officers

Three most important rights of directors:

Right to participate

Factors that lead courts to piece the corporate veil:

1. a party is tricked or misled into dealing with the corporation rather than the individual. 2. the corporation is set up never to make a profit or always to be insolvent. or it is too thinly capitalized 3. the corporation is formed to evade an existing obligation 4. statutory corporate formalities, such as holding required corporation meetings, are not followed 5. personal and corporate interests are mixed together, or comingled(to put funds or goods together into one mass so that the funds or goods are so mixed that they no longer have separate identities) to such extent that the corporation has no separate identify.

Cases Dealing with the Duty of Loyalty Typically involve one or more of the following:

1. competing with the corporation. 2. usurping (taking personal advantage of) a corporate opportunity. 3. pursuing an interest that conflicts with that of the corporation. 4. using information that is not available to the public to make a profit trading securities. 5. authorizing a corporate transaction that is detrimental to minority shareholders. 6. selling control over the corporation.

Liability of directors and officers:

1. corporate directors and officers are personally liable for their own torts and crimes (when not protected under the business judgment rule). 2. They may be held personally liable for the torts and crimes committed by corporate personnel under their direct supervision. 3. They may also be held personally liable for violating certain statutes, such as, environmental and consumer protection laws. 4. Directors and officers can sometimes be sued by shareholders for mismanaging the corporation.

Three of the situations in which courts will ignore the corporate structure and pierce the corporate veil

1. owners use the corporate entity to perpetuate fraud. 2. owners use the corporate entity to circumvent the law. 3. owners use the corporate entity to accomplish an illegitimate objective.

When a corporation is not operated as a separate entity, this is called the

alter-ego theory

Arianna is an officer of New Stage, a theater production company. Without asking any other officers, she decides that New Stage should sell gardening tools over the Internet. She makes contracts with suppliers and an order-fulfillment company. The only action that may NOT be taken is that: a. she can file a lawsuit against the corporation if it refuses to reimburse her for her expenses. b. shareholders can files a lawsuit on behalf of the corporation. c. the corporation can file a lawsuit against her.

not c Arianna may not file a lawsuit against the corporation; she is the one at fault here. Arianna committed an ultra vires act against the corporation and may not file a lawsuit against a corporation for reimbursement.

quorum

number of members of a decision-making body that must be present before business may be transacted

outside director

person on the board of directors who does NOT hold a management position at the corporation.

Generally, the Duty of Care of Directors and Officers Requires that a director or officer:

1. act in good faith(honestly) 2. Exercise the care that an ordinarily prudent (careful) person would exercise in similar circumstances. 3. Do what she or he believes is in the best interests of the corporation.

Those Practices that Invite Trouble for One-Person or Family-Owned Corporations that May Lead to Piercing the Corporate Veil:

1. the comingling of corporate and personal funds. 2. the failure to hold board of directors' meetings and record the minutes. 3. the shareholders' continuous personal use of corporate property (ex. company owned vehicle).

Correct order of priority used if a conflict arises among the various documents involving a corporation.

1.The U.S. constitution 2. state constitutions 3. state statutes 4. articles of incorporation 5. bylaws 6. resolutions of the board of directors

Any corporate director who sits on more than one board is engaging in illegal activity. T or F

False

The business judgment rule states that: a. directors and officers are immune from liability for exercising poor business judgment in certain circumstances. b. directors and officers are never immune from liability for exercising poor business judgment, regardless of the circumstances. c. directors may never be held liable for corporate harms or losses so long as they have attended board meetings and agreed to corporate actions.

a. directors and officers are immune from liability for exercising poor business judgment in certain circumstances.

Genève is a member of the board of directors and the chief financial officer of the corporation. Under the duty of care that she owes that corporation, she does NOT need to: a. attend board meetings and oversee the corporation's employees and other officers. b. attend presentations and make a careful study of business choices before making decisions. c. oversee every aspect of the business, including such things as ordering merchandise and arranging for janitorial services.

c. oversee every aspect of the business, including such things as ordering merchandise and arranging for janitorial services.

inside director

person on the board of directors who is also an officer of the corporation