Law 3 - Part 3

Factors a court considers when piercing the Corporate Veil

- 3rd party tricked into dealing with a corporation rather than the individual. - Corporation is set up never to make a profit or remain insolvent or is under capitalized. - Corporation is formed to evade an existing legal obligation. - Statutory formalities are not followed. - Commingling of personal and corporate interests or assets.

Roles of Directors and Officers

A corporation is governed by a board of directors elected by shareholders. - Individual directors are not agents of corporation, only the board itself can act as a "super-agent" and bind the corporation. - A director can also be a shareholder, especially in closely-held corporations.

Corporation

A creature of statute, an artificial "person." Corporations can have one or more shareholders. Owners can be natural persons or other businesses. Corporation substitutes itself for shareholders.

First Organizational Meeting to Adopt Bylaws.

After the corporation is "chartered" (created) it can do business. At meeting, shareholders should approve the bylaws, elect directors, hire officers and ratify pre-incorporation contracts and activities.

Promotional Activities

Before corporation is formed, promoters are the persons who take the preliminary steps of organizing the venture and attracting investors via subscription agreements.

UltraVires

Corporate acts beyond the express or implied powers of the corporation (by statute of articles of incorporation). Corporate articles of incorporations now adopt very broad purposes to prevent lawsuits against the corporation.

Corporate Earnings and Taxation

Corporate profits can either be kept as retained earnings or passed on to the shareholders as dividends. Corporate Taxation: corporate taxes can be taxes twice, first to the corporation, then to the shareholders via dividends

The Alter-Ego Theory.

Corporation is "alter ego" of majority shareholder and personal and corporate interest are commingled such that the corporation has no separate identity.

Torts and Criminal Acts

Corporation is liable for the torts committed by its agents or officers within the course and scope of their employment under the doctrine of respondeat superior. Corporation can be liable for criminal acts, but only fined. Responsible officers may go to prison.

What immunizes a director or officer from liability from bad decisions

Court will not require directors or officers to manage "in hindsight." As long as decision was reasonable, informed, made in good faith and in the best interests of the corporation, BJR will apply.

Improper Incorporation

De Jure De Facto Corporation by Estoppel

Articles of Incorporation

Deals with shares, the registered agent and office, incorporators, duration and purpose, and internal organization.

Liability of Directors and Officers.

Directors and officers may be liable for crimes and torts committed individually and/or those committed by employees under their supervision. Shareholder derivative suits where shareholder(s) sue directors on behalf of corporation.

Classification of Corporations

Domestic corporation does business in its state of incorporation. Foreign corporation from X state doing business in Z state. Alien Corporation: formed in another country doing business in United States. "S" Corporations

Duty of Care of Directors and Officers

Duty to Make Informed Decisions. Directors are expected to be fully informed on corporate matters. Duty to Exercise Reasonable Supervision. Directors are expected to supervise officers when delegated work. Dissenting Directors: rarely held individually liable to the corporation

How is a corporation a person?

Enjoys virtually same rights and privileges under our Constitution as a natural person: Access to court systems. Constitutional guarantees of free speech, due process, and freedom from unreasonable search and seizures.

Corporate Express Powers

Found in the corporation's articles of incorporation, the laws of the state of incorporation, and in the state and federal corporations. Corporate by-laws may also grant or limit a corporation's express powers.

Disclosure of Potential Conflicts of Interest

Full disclosure of any potential conflicts of interest and abstain from voting on any transaction that may benefit the director/officer personally. - However, if transaction was fair and reasonable, it can be approved by majority of disinterested directors.

Election of Directors

Generally, the number of directors is set forth in the articles of incorporation: - Directors appointed at the first organizational meeting. In closely held companies, directors are generally the incorporators and/or the shareholders. - Term of office is generally for one year.

Corporation by Estoppel

If it acts like a corporation, cannot avoid liability by claiming that no corporation exists.

Compensation of Directors.

Inside director (officer), vs. outside director. Often the same person is both an officer and director, and receives compensation as an officer.

Corporate Officers and Executives

Officers serve at the pleasure of the Board of Directors but have fiduciary duties to company as well. Their employment relationships are generally governed by contract law and employment law. Officers may be terminated for cause.

Limited Liability of Shareholders

One of the key advantages of corporations is the limited liability of owners (shareholders). In certain situations, the corporate "veil" of limited liability can be pierced, holding the shareholders personally liable.

Rights of Directors

Participate in corporate decisions and inspect corporate books and records. Compensation (usually a nominal sum). Corporation should guarantee reimbursement (indemnification) or purchase liability insurance to protect the board from personal liability.

Two steps of incorporation

Preliminary and Promotional Activities The Legal Process of Incorporation

Promoter's Liability

Promoter is personally liable for pre-incorporation contracts on behalf of the corporation, unless 3rd party agrees to hold future corporation liable.

Board of Directors' Meetings

Quorum must be present to conduct official business.

Corporate Personnel

Responsibility for overall management of company rests with board of directors (elected by shareholders). Board of directors makes policy decisions and hires officers to run corporation on a daily basis. Shareholders can sue corporation and be sued by corporation and bring suit for corporation in some instances

Incorporation Procedures

Select State of Incorporation. Secure the Corporate Name. Prepare the Articles of Incorporation File the Articles with State. State Charter 1st Organizational Meeting

De Facto

Statutory requirements not met, but promoters made good faith effort to comply with corporate law; can only be attacked by state.

Dity of Loyalty

Subordination of personal interests to the welfare of the corporation. - No competition with Corporation. - No "corporate opportunity." - No conflict of int`erests. - No insider trading. - No transaction that is detrimental to minority shareholders..

De Jure

Substantial statutory requirements are met; cannot be attacked by state or 3rd parties.

Corporate Implied Powers

To perform all acts reasonably necessary to accomplish its corporate purposes. A corporate officer can bind corporation in contract in matters connected with the ordinary business affairs of the enterprise.

Removal of Directors

directors can be removed for cause.

Vacancies on Board

if director dies or resigns or new position created by the articles or bylaws.

S Corporations

voids federal tax under IRS Code "Subchapter S." Avoids federal "double taxation" of regular corporations at the corporate level. Only dividends are taxed to the shareholders as personal income