FIL 375 - Chapter 21

In Order To Bring a Derivative Lawsuit 3 Things

1. Have been a shareholder at the time of the act complained of. 2. Fairly and adequately represent the interests of the corporation, and 3. Make a written demand that the corporation take adequate action.

3 Requirements of Duty of Care

1. In good faith 2. With reasonable care in the circumstances, and 3. Reasonably believed to be in the corporation's best interest.

Reliance of Reports of 3 People

1. Officers and Employees 2. Lawyers, Accountants, and Other Professionals 3. Committees of the Board of Directors on Which the Officer or Director Does Not Serve.

Voting Requirements

1. One Share One Vote 2. Record Date 3. Quorum 4. Majority is Based on Shares Present 5. Director Elections 6. Supramajority Voting Requirement 7. Voting Agreements

4 Violations of Duty of Loyalty

1. Self Dealing 2. Usurping a Corporate Opportunity 3. Competing with the Corporation 4. Secret Profits

Special Shareholders' Meetings Can Be Held By the Following

1. The Board of Directors 2. Shareholders Owning at Least 10 Percent of the Voting Shares 3. Anyone Else Authorized in the Articles of Incorporation

In Order To Be Legal, Payment of Cash Dividend Must Meet These Requirements

1. The corporation must be solvent after payment. 2. The payment must come from retained earnings. 3. The payment must not violate any other limitation. - If these requirements are met, the dividend can be declared, and at that point becomes a liability of the corporation.

2 Primary Situations to Pierce the Corporate Veil

1. Thin Capitalization 2. Failure to Follow Corporate Formalities

Business Judgement Rule

A defense available to a director or officer against a claim of violating the duty of care. - This rule provides that a director or officer will not be liable for honest errors in business judgment if the decision was made with care.

Duty of Loyalty

A general duty to act in the corporation's best interest in all matters related to the business of the corporation.

Quorum

A majority of the board constitutes a quorum unless the articles provide otherwise. - So long as quorum is present, a MAJORITY vote of the members present will result in approval of the item.

Record Date

A record date will be determined for each meeting. - The party who owns the stock on the record date is the party entitled to vote those shares.

Proxies

A shareholder can appoint someone else as her proxy to vote her shares. - The proxy can be directed how to vote, or directed to vote as the proxy sees fit.

Voting Agreement

A voting agreement is a contract among two or more shareholders to vote according to the terms of the contract.

Inside Director

An officer of the corporation.

Written Consent

Any action that could be taken at a shareholders' meeting can be accomplished by all shareholders signing a written consent to the action.

Proxies Not Allowed

Board members cannot vote by proxy.

Liability of Officers and Directors

Both directors and officers have fiduciary duties to the corporation.

Indemnification of Directors and Officers

Corporations can indemnify (not recover from them for losses they cause, and reimburse them for any losses they incur) directors and officers or can purchase insurance coverage to cover such losses.

Self Dealing

Director or officer cannot simultaneously be on both sides of a transaction, one on her own behalf and the other as agent for the corporation. - Could not sell her own land to the corporation unless the fact that she has an interest in the land was disclosed to the corporation.

One Share, One Vote

Each share of common stock usually is entitled to one vote.

Majority is Based on Shares Present

If a quorum is present, a majority of the shares present will pass an item.

Derivative Lawsuits

If a shareholder believes that the board of directors has a valid claim against another party, but is not bring the suit for some reason, the shareholder can file a derivative lawsuit on behalf of the corporation. - Any recovery in the lawsuit belongs to the corporation.

Annual Shareholder Meeting

Must be held within 15 months of the prior annual meeting or 6 months of year end, whichever is sooner. - If the meeting is not held, a shareholder can petition the courts for an order that it be held. - Directors are elected at the annual meeting, and other actions are taken as needed.

Notice

Notice of all meetings, annual or special, must be given between 10 and 50 days in advance of the meeting. - For special meetings, the notice must state the purpose, and only matter identified in the notice can be discussed at the special meeting.

Reliance on Others

Officers and directors cannot investigate ever matter themselves, and thus are allowed to rely on the reports and opinions of 3 people.

Duty of Obedience

Officers and directors must comply with laws affecting the corporation and with the articles, bylaws, and resolutions of the board. - An officer would violate this duty by not complying with a board resolution or policy.

Agency Authority

Officers are not liable on contracts so long as their signature indicates their agent capacity. - Ex) We borrow money: When signing loan document we sign it as an agent capacity. - Limits liability - Sign as President Dylan Nein

Outside Director

One who is not also an officer.

Regular Meeting

Regular meetings are held as determined in the bylaws and do not require notice.

Duty of Care

Requires that directors and officers carry out their duties with reasonable care.

Board of Directors Meetings

Separate From Shareholder's Meetings 1. Regular Meeting 2. Special Meeting 3. Written Consent 4. Quorum 5. Proxies Not Allowed

No Shareholder Fiduciary Duty

Shareholders generally do not have a fiduciary duty to the corporation. - Thus a Coca Cola shareholder does not violate the duty by drinking Pepsi products.

Liability of Shareholders

Shareholders generally have a personal liability only for the amount of their investment in the corporation.

Special Meetings

Special meetings can be held as the bylaws provide and require at least two days notice unless this is waived.

Supramajority Voting Requirement

The articles or bylaws can impose a supramajority voting requirement which could raise the required passage from 50% to 75%

Written Consent

The board can take action without a meeting if all members sign written consent to the action.

Right to Declare Dividends

The directors have discretion to declare dividends, so long as certain requirements are met.

Rights of Directors

The directors' role is to oversee the operation of the corporation, and thus directors can make decisions regarding capital structure, can select and terminate officers, etc.

Failure to Follow Corporate Formalities

The failure to maintain corporate finances separate from those of the shareholders would result in the veil being pierced. - Likewise, a failure to hold shareholder and board director meetings could result in the veil being pierced.

Rights of Officers

The officers are elected by the board and hired by the corporation to perform broad management duties for the corporation.

Preemptive Right

The preemptive right is shareholder's rights to maintain her percentage ownership in the corporation. - The shareholder has a right of first refusal any time the corporation issues additional shares.

Piercing the Corporate Veil

This means that the imaginary "veil" protecting the shareholder from creditors of the corporation will be ignored, causing the shareholder to lose the limited liability protection that a corporation usually provides.

Cumulative Voting

Under cumulative voting, the shareholder could allocate the votes in any manner desired, including casting all 5,000 votes for one candidate. - Can allow certain minority shareholders to be assured of electing at least one person to the board.

Straight Voting

Under straight voting, the shareholder could cast no more than 1,000 votes for any one candidate or seat on the board.

Quorum

Unless otherwise stated in the articles, a majority of the shares entitled to vote must be represented at the meeting for a quorum to exist. - 400 Shares outstanding - 201 quorum

Thin Capitalization

When a corporation has inadequate capital for its purposes, the corporation is said to be thinly capitalized, and the corporate veil will be pierced. - Ex) Where the sole shareholder of a corporation holds title to the major operating assets used by the business and leases them to the corporation, there might be almost no corporate assets. - If the assets actually owned by the corporation are really insufficient for that type of business, a court might pierce the veil.

Usurping a Corporate Opportunity

When a director or officer locates an opportunity for the corporation, the director or officer cannot take the opportunity for themselves.

Director Elections

When electing directors, a shareholder is entitled to cast one vote for each share owned for each seat to be filled. - Ex) A shareholder owning 1,000 shares at a meeting where 5 director positions were being filled would have 5,000 votes to cast.

Voting Trust

With a voting trust, the shares are transferred to a trustee who then has the right to vote them.