Themis Rule Statements for MEE Essays

Creation of a Corporation through the Filing of Articles of Incorporation

In order to form a corporation, articles of incorporation must be filed with the state.  The articles must include certain basic information, including the number of shares the corporation is authorized to issue.  Unless a delayed date is specified in the articles, the corporate existence begins when the articles are filed.

De Facto Corporation and Corporation By Estoppel

When a person makes an unsuccessful effort to comply with the incorporation requirements, that person may be able to escape personal liability under either the de facto corporation doctrine or the corporation by estoppel doctrine.  Under either doctrine, the owner must make a good-faith effort to comply with the incorporation requirements and must operate the business as a corporation without knowing that the requirements have not been met.  If the owner has done so, then the business entity is treated as a de facto corporation, and the owner, as a de facto shareholder, is not personally liable for obligations incurred in the purported corporation’s name.

Alternatively, under corporation by estoppel, a person who deals with an entity as if it were a corporation is estopped from denying its existence and is thereby prevented from seeking the personal liability of the business owner.  This doctrine is limited to contractual agreements.  Here, the solar-panel installer entered into the agreement with the woman as President of Solar Inc. expecting to be employed by the corporation, not by the woman personally.  Thus, he will likely be estopped from denying the existence of the corporation and seeking personal liability against the woman.

Notice for Directors of Special Meetings

Directors are entitled to notice of a special meeting.  Unless the articles of incorporation or bylaws provide otherwise, notice must be provided at least two days prior to the meeting and should state the date, time, and place of the meeting.  The notice need not describe the purpose of the special meeting.

Waiver of a Special Meeting By Directors

Directors are entitled to notice of a special meeting, but a director’s attendance waives notice of that meeting unless the director promptly objects to lack of notice.

Quorum for Board of Directors

For the board of directors’ acts at a meeting to be valid, a quorum of directors must be present at the meeting.  A majority of all directors in office constitutes a quorum, unless the articles of incorporation or bylaws require a higher or lower number.  A director must be present at the time that the vote is taken in order to be counted for quorum purposes, but presence includes appearances made through communications equipment that allows all persons participating in the meeting to hear and speak to one another. 

Requisite Votes for Approval at a Board of Directors Meeting

Typically, the assent of a majority of the directors present at the time the vote takes place is necessary for board approval.  However, the articles of incorporation or bylaws may specify a higher level of approval. 

Duties of Controlling Shareholders, when not self dealing

A controlling shareholder, such as a parent corporation, generally does not owe fiduciary duties to the corporation or other shareholders.  However, decisions by a majority shareholder or control group may be reviewable by a court for good faith and fair dealing toward the minority shareholders under the court’s inherent equity power.  Business dealings between a controlling shareholder and the controlled corporation that do not involve self-dealing are analyzed using the business judgment standard.  The business judgment rule is a rebuttable presumption that the controlling shareholder reasonably believed that his actions were in the best interests of the corporation.  A typical decision protected by the business judgment rule includes whether to declare a dividend and the amount of any dividend.

Parent and Subsidiary Corporation, wherein the parent corporation has an advantage over the subsidiary

If a parent corporation causes its subsidiary to participate in a business transaction that prefers the parent at the expense of the subsidiary, it can involve self-dealing and a breach of loyalty.  A parent corporation that engages in a conflict-of-interest transaction with its own corporation, also known as “self-dealing,” has violated the duty of loyalty unless the transaction is protected under the safe-harbor rule. The business judgment rule does not apply in a conflict-of-interest transaction.  There are three safe harbors by which a conflict-of-interest transaction may enjoy protection: (i) disclosure of all material facts to, and approval by a majority of, the board of directors without a conflicting interest; (ii) disclosure of all material facts to, and approval by a majority of, the votes entitled to be cast by the shareholders without a conflicting interest; and (iii) fairness of the transaction to the corporation at the time of commencement.  The fairness test looks at the substance and procedure of the transaction.  With regard to a parent corporation engaged in self-dealing, the main concern under the fairness test is whether the benefit is comparable to what might have been obtained in an arm’s length transaction.  Procedural fairness is generally not at issue unless there has been a change in control.

Director’s Duty of Loyalty to its Corporation

A director may violate his duty of loyalty by usurping a corporate opportunity rather than first offering the opportunity to the corporation.  In determining whether the opportunity is one that must first be offered to the corporation, courts have applied the “interest or expectancy” test or the “line of business” test.  Under the “interest or expectancy” test, the key is whether the corporation has an existing interest or an expectancy arising from an existing right in the opportunity.  An expectancy can also exist when the corporation is actively seeking a similar opportunity.  Under the broader “line of business” test, the key is whether the opportunity is within the corporation’s current or prospective line of business.  Whether an opportunity satisfies this test frequently turns on how expansively the corporation’s line of business is characterized.