What is the business judgment rule?

Directors of a corporation are generally not held personally liable for decisions they make on behalf of the corporation.

What are the 3 prerequisites for the business judgment rule to protect a director?

(1) the director acted with a reasonable belief that the decision was in the best interest of the corporation.

(2) the director acted in good faith

(3) the director acted as a reasonably prudent person would under similar circumstances.

When will board approval relieve a director's personal liability for engaging in personal transactions with the company for which they are a director?

(1) the director discloses all material facts of the transaction (and the board approves)

OR

(2) the transaction is fair to the corporation and shareholders

What is an exculpatory clause?

Exculpatory clauses in the articles of incorporation or bylaws relieve directors of personal liability to the corporation and or shareholders.

When will an exculpatory clause NOT relieve a director of personal liability?

(1) when the act of the director was illegal

(2) when the director acts to intentionally injure the corporation or its interests

(3) when the act results in illegal distributions

(4) the director improperly benefits from their own actions

What is the name for shares repurchased by the corporation?

Treasury Shares

Are treasury shares entitled to vote at shareholder meetings?

No.

What type of shares are generally entitled to vote at shareholder meetings?

Outstanding shares.

Are voting proxies allowed?

Yes, unless the proxy is irrevocable and given with a property interest or consideration.

How can voting proxies be revoked?

(1) any written instrument / notice

(2) the shareholder can also simply attend the shareholder meeting and vote their shares

What are the requirements for a valid proxy vote?

(1) authorized in writing

(2) signed by the shareholder (or a person who received the share by operation of law)

(3) proxy writing is sent to the secretary of record for the corporation

(4) the writing articulates the authorization to vote the share

What instruments define what percentage of votes is needed to pass a resolution at a shareholder meeting?

(1) articles of incorporation

Or

(2) the bylaws

Which document wins if the articles of incorporation and the bylaws conflict?

The articles of incorporation.

What is the primary limitation on the corporate president's power to act and authority?

The board of directors discretion.

A corporate president may enter into ordinary contracts.

A corporate president may not enter into extraordinary contracts (beyond the scope of normal business) without the consent of the board of directors.

What powers is the board of directors unable to bestow on the president of the corporation?

The board of directors may not give the president powers which the board itself does not have.

When is a proxy authorization irrevocable?

(1) when the proxy writing states it is irrevocable

AND

(2) the authorization is given in exchange for consideration, as a surety, or the proxy holder has an interest in the authorization.

What body of law governs the relationship between the president and the corporation?

Agency law.

What general powers is the president trusted with?

(1) the power to act as an agent for the corporation

(2) in additional capacities authorized by the board of directors

What contracts may the president enter into on behalf of the corporation without board approval?

Ordinary contracts (contracts within the scope of normal business practices).

What document authorizes the scope of acts that the board of directors may take?

The articles of incorporation.

If the articles of incorporation are silent, how many directors and what percentage of those directors must vote to pass a resolution?

(1) a meeting and decision are valid if a quorum of the directors are present (usually a majority)

(2) a resolution will pass if a majority (of the quorum) votes in favor

What is required for a fundamental change to the corporation?

Fundamental change is only valid if . . .

(1) the board passes a resolution in favor of the fundamental changed (with quorum present)

And then

(2) a majority of shareholders approve

What remaining option is available to shareholders when there is a fundamental change to the corporation that they disagree with, BUT, they don't have enough votes to prevent it?

Appraisal. Shareholders opposing a fundamental corporate change may force the corporation to buy back their shares.

What is the procedure for appraisal?

The shareholders must

(1) object to the fundamental change

(2) not vote in favor of the fundamental change

(3) demand in writing that the corporation given them market value for their shares.

What is a promoter in corporation law?

A person who organizes for a corporation which is not yet formed and obtains equipment, funding, land, capital. They also may enter into contracts.

Are promoters personally liable for contracts made on behalf of a corporation before it exists?

Yes.

Are promoters still liable for contracts adopted by the formed corporation?

Yes.

How may contracts be adopted?

(1) Express

Or

(2) Implied

When will a promoter not be liable NOT be personally liable for contracts made on behalf of the to-be corporation?

The contract expressly and definitively states that the promoter will not be personally liable.

Are corporations generally liable for the contracts entered into by promotes.

Generally no. The corporation is only bound if the contract is expressly or impliedly adopted by the corporation.

What is express adoption?

Written consent acknowledging that the corporation is liable for the contract.

What is implied adoption?

The corporation acts and accepts value from or the benefit of the contract with knowledge of the circumstances.

What is a shareholder derivative lawsuit?

A shareholder (or several) sues on behalf of a corporation against (1) 3rd party actors (2) officers of the corporation, or (3) a member or members of the board of directors for breaching duties owed to the corporation.

Who receives damages that are awarded as a result of a shareholder derivative suit?

The corporation itself.

What obligations does a shareholder have when bringing a shareholder derivative lawsuit?

(1) to fairly and adequately represent the interest of the corporation

(2) to demand in writing that the corporation cure the problem (unless the shareholder knows the demand is useless)

Who is permitted to bring a shareholder derivative lawsuit?

(1) one who owned shares at the time of that the transaction or occurrence occurred

(2) one who receives shares by operation of law from an owner who owned the shares at the time of transaction or occurrence.

What are the primary responsibilities of the board of directors?

(1) Appoint / hire officers

(2) manage the high-level affairs of the corporation

What are the 3 main duties of directors?

(1) to act in good faith

(2) to act in the best interest of the corporation

(3) to act with the care of a reasonably prudent person under similar circumstances.

Under the business decision rule, what is the legal presumption when a person alleges that a director violated their duties?

(1) the director was acting in the best interest of the corporation

(2) the decision was made in good faith

I.e., the accusers have the burden of proof.

What information may directors properly rely on when making a decision?

(1) Information provided from outside the corporation that one would reasonably believe to be competent.

(2) Information from corporate officers and employees that one would reasonably believe to be competent.

What duty is breached if a director deals personally with a corporation and improperly profits from the transaction?

The duty of loyalty.

When may a director properly have personal dealings with a corporation?

(1) all material aspects and facts of the transaction are disclosed

(2) the transaction is approved by a majority of either (a) disinterested board members or (b) shareholders

(3) the transaction is fair

For the purposes of approval, is dissolution a fundamental change of the corporation?

Yes!

What is the notice requirement for a shareholder meeting in which there will be a vote on a fundamental change?

Minimum 10 days notice.

What must be contained within the notice of a vote for fundamental change?

(1) Place

(2) When

(3) Description and purpose of the fundamental change

Can a defective notice of a meeting be waived by shareholders?

Yes, by going to the meeting and voting.

What is the effect of a defective notice that is not waived for a meeting in which a fundamental change is voted?

Any adopted resolution is considered voidable.

Who may void a resolution based on deficient notice?

Any shareholder (or anyone with the right to vote) who did not receive proper notice.