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Directors: duty of loyalty rule
A director is required to act in a manner that the director reasonably believes is in the best interest of the corporation
directors: duty of loyalty: self dealing (interested director) transactions must be either 1) court approved or 2) cleansed under the interested director statute.
directors: duty of loyalty: self dealing (interested director) transactions: cleansing procees
1. disclose conflict to the board and board approves transaction by majority vote or whatever satisfies the normal board approval requirement, excluding the votes of interested directors; or
2. disclose conflict to the board, disinterested directors approve of transaction unanimously; or
3. disclose conflict to shareholders, shareholders vote to approve
directors: duty of loyalty: self dealing (interested director) transactions: court approval rule
If a transaction has not be cleansed by director or shareholder vote, court will not void
if transaction was:
- - fair and
- - reasonable to the corporation when approved
~ factor: did corporation receive
something of comparable value
in exchange for what it gave to the director?
directors: duty of loyalty: self dealing (interested director) transactions: shareholders cannot challenge an interested director transaction that has been properly cleansed through a disinterested director or shareholder vote.
directors: duty of loyalty: self dealing (interested director) transactions: burden of proof if proper cleansing has not occurred
- burden is on the interested directors to show that the transaction was fair and reasonable to the corporation at the time it was approved.
-If they can't, court will void the transaction
dissolution: close corporation: minority shareholders owning at least 20% of a corporation's stock may petition the court to dissolve corporation based on oppressive conduct towards them
dissolution: close corporation: oppressive conduct definition
conduct that substantially defeats the reasonable expectations held by minority shareholders in commiting their capital to the enterprise.
dissolution: close corporation: oppressive conduct: types of "reasonable expectations"
- 1. continued employment at the corporation
- 2. receiving a shared of corporate earnings; and/or
- 3. having a voice in corporate management, either by being a corporate officer or director
- 4. whatever else the majority shareholder knew or should have known regarding the expectations of the minority in joining the enterprise
dissolution: close corporation: oppressive conduct: resolving: controlling shareholder's buy-out right
- Within 90 days of petition, may offer to purchase minority shareholders' shares at a reasonable price to avoid corporate dissolution. If the parties can't agree on a reasonable price, the court may set one.
dissolution: close corporation: oppressive conduct: resolving: minority shareholders may sue for breach of fiduciary duty if the oppressive conduct also breaches a fiduciary duty
directors: duty of care: director must act in good faith and with a degree of care that an ordinarily prudent person in a like position would use under similar circumstance
directors: duty of care: a director is held responsible for whatever special knowledge or skills he actually possesses. (i.e. if a lawyer on a board, action measured against those of an ordinarily prudent lawyer)
directors: duty of care: in satisfying duty of care, a director is entitled to rely on information, reports, and opinions supplied by these people if director reasonably believes those persons to be reliable and competent:
1. officers and other employees of the corporation
2. outside attorneys, accountants, or other skilled or expert individuals retained by the corporation as to matter within such individuals' professional or expert competence; and
3. a committee of the board of which the director is not a member
directors: duty of care: business judgment rule: legally presumed that a director, when making a business decision, has satisfied his fiduciary duties to the corporation. So unless a demonstrable conflict of interest or bad faith exists, New York courts will not second guess the business judgment of the directors
directors: duty of care: business judgement rule: as a result of court's presumption, directors are generally protected from claims based upon an alleged violation of their duty of care so long as directors made an informed, good faith decision.
directors: duty of care: business judgment rule: focus on decision-making process, not the actual decision made
shareholders: derivative rights: who may bring a suit
-Any record or beneficial shareholder, or a holder of a voting trust certificate, can commence a derivative lawsuit
- any such holder must have standing (P must be a holder at the time the action is brought and at the time of the transaction of which he complains)
- a creditor of a corporation cannot bring a derivative action
shareholders: derivative rights: demand requirements
1. plaintiff must make a written demand upon the board for it to commence an action before P files complaint
2. the complaint must set forth with particularity the effort P made to have board initiate suit or why P didn't make such effort
shareholders: derivative rights: demand requirement exception and way around
- demand is not required if it would be futile.
- - factors:
- whether board is disinterested and independent
- whether transaction was the product of a valid exercise of directors' business judgment
- way around: allege facts with particularity indicating that the directors are self-interested in the transaction or are otherwise causing harm to the corporation
shareholders: derivative rights: a derivative action may not be discontinued or settled without the approval of the court
shareholders: preemptive rights: defintion
rights a shareholder has to maintain her percentage ownership in a corporation when that corporation issues new stock for cash.
i.e. A & B the only shareholders in a corporation, and they have 50 shares each (thus a 50% ownership interest), when Corp X, Inc. issues 20 shares of stock, A & B would be entitled to purchase 10 shares of stock each to maintain their 50% ownership interest
shareholders: preemptive rights: corporations in existence before February 22, 1998
shareholders have preemptive rights relating to new offerings of common stock unless cert. of incorporation denies preemptive rights
shareholders: preemptive rights: corporations in existence after Feb 22, 1998
shareholders do not have preemptive rights unless cert of incorporation specifically grants them
shareholders: preemptive rights: even when they exist, shareholders generally not entitled to exercise their rights when the new shares of stock are:
- given as compensation to corporate directors, officers, or employees;
- exchange for property rather than cash; and
- taken from the treasury (i.e. treasury shares)
adequate assurance may be requested if reasonable; company does not have to be insolvent for a party to request adequate assurance.
partnerships: a general release of a partnership does not, in and of itself, release individual partners in their individual capacities. Liable for any negligent or wrongful act committed by him or under his direct supervision or control.
agency: it is not enough that a tort arises during employment for employer to be vicariously liable. Only liable if the tortious act within the scope of employment (i.e. getting into a fight while on your pizza delivery run is not within the scope of employment and employer not liable)
piercing the corporate veil: may make a shareholder liable if corporation doesn't follow corporate formalities and would be just to pierce the veil
Principals are liable for their agents’ authorized actions. There are three forms of authority an agent may possess which will bind a principal, and only one form of authority needs to be present: (i) actual authority, whereby a principal expressly or impliedly authorizes an agent’s activities, (ii) apparent authority, whereby a principal’s manifestations cause a third party to reasonably believe the agent has the authority to act even if the agent does not, and (iii) inherent authority, such as when an agent performs an unauthorized action that is similar to an authorized action.
If agent has apparent authority, the principal would be liable even if the agent exceed scope of authority. But P could seek indemnification from agent
Agent's personal liability to 3rd party:
-If principal hidden or partially revealed, agent personally liable if the agent had actual or apparent authority to enter into the contract
- If principal fully revealed, agent is not personally liable.
a partner may transfer his or her financial interest (Pship profits) in the partnership to another person. This odes NOT entitle transferee to rights in management or administration of the P's business wihtout partners consent
death of a partner triggers dissolution of a partnersehip, however Pship will continue if partners made a written agreement to say what happens in the event of death.
when Pship dissolves, entitled to profits remaining from the winding up of the partnership.
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