CORPORATIONS - POWERS & MANAGEMENT

CORPORATE POWERS: Where do a corporation’s powers come from? (3)

• Articles of incorporation

• Bylaws

• Implied powers reasonably necessary to carry on its business.

What are implied corporate powers?

The power required to perform acts reasonably necessary to accomplish the corporation's express powers.

ULTRA VIRES TRANSACTIONS: What are ultra vires acts?

• Acts beyond the corporation’s legal powers.

How does common law treat ultra vires contracts versus Modernly?

• COMMON LAW: Corporation or third party could assert it as a defense to contractual obligation but not tort or criminal liability

• MODERNLY: Ultra Vires generally NOT a defense to contractual liability by simply claiming corporation lacked capacity.

Q: Who may still challenge an ultra vires act (i.e. sue to enjoin corporation from entering into or continuing with unauthorized transaction)?

• Shareholders (injunction)

• Corporation (against directors/officers)

Q: What remedies are available for an ultra vires act?

• Injunction

• Personal liability of directors/officers

• Damages

If you are analyzing a situation for an ultra vires act, what will happen to invalidate the analysis?

• If there is unanimous shareholder ratification thus ratifying a potential ultra vires act.

BOARD AND MANAGEMENT: Who manages the corporation?

• The board of directors, not the shareholders.

Q: How do shareholders indirectly control the corporation?

By electing directors.

Q: When may shareholders remove directors? Modernly vs Common Law

Modern rule:

By majority vote, with or without cause.

(Common law required cause.)

Q: How does the board exercise corporate authority?

By acting at a properly constituted meeting with a quorum of a simple majority (51%) of directors

Q: How does the board normally approve corporate action?

By majority vote of a quorum through board resolution.

Q: Is notice required for regular board meetings? Special board meetings?

Regular: No

Special: Yes

Q: What board powers may never be delegated?

The board is not permitted to delegate its policymaking and discretionary powers

Q: What powers may the board delegate?

Implementation of policy and day-to-day business operations.

Q: When is delegation to outsiders improper?

When it delegates critical management functions or policymaking authority.

Q: Why is improper delegation significant?

It may constitute a breach of the directors' duty of care.

Q: May directors vote by proxy?

No.

Directors may neither vote by proxy nor appoint another director to vote for them.

Q: When are directors entitled to compensation?

Only if authorized by:

• Articles,

• Bylaws, or

• Board approval.

Q: When may directors recover for extraordinary services?

When the services exceed ordinary director duties and were authorized, requested, or accepted.

Q: May a director who is also an officer receive compensation?

Yes

Q: What issue should you always spot when directors approve their own compensation?

A conflict of interest and possible breach of fiduciary duty.

A fiduciary is not permitted to charge for services rendered unless there is an express agreement in advance

DOCTRINE OF WASTE: Q: What is the Doctrine of Waste?

Even board-approved executive compensation is unenforceable if unreasonable or excessive, breaching fiduciary duty of care and possibly duty of loyalty.

INSPECTION RIGHTS: Q: What inspection rights does a current director have? Former director?

Director: An unrestricted right to inspect corporate records at reasonable times.

Former Director: Qualified right only upon good cause

DIRECTOR AS CREDITOR: When may a director also be a creditor of a corporation?

When the debt is:

• Liquidated,

• Unmatured, or

• Uncontested,

subject to fiduciary duties.

INDEMNIFICATION OF DIRECTORS: What is indemnification of directors mean?

Corporate reimbursement of litigation expenses incurred by directors or officers.

What are the three three type of claim categories for indemnification?

• Barred

• Mandatory

• Permitted

Q: When is indemnification prohibited vs when is it mandatory vs when it is only permitted?

Prohibited: When judgment is entered against the director or officer.

Mandatory: When director or officer prevails on the merits.

Permitted: When director reasonably believed conduct benefited corporation, and disinterested directors or shareholders approve

OFFICERS: Q: Who appoints and removes corporate officers?

The board of directors.

Q: What is the primary responsibility of corporate officers?

Managing the corporation's day-to-day affairs.

Q: What law governs an officer's authority?

Agency law.

Authority may be:

• Express,

• Implied,

• Apparent.

Q: When is the corporation liable for an officer's contract?

When the officer acted with actual or apparent authority, or the corporation later ratifies the act.

Q: What if an officer exceeds authority?

The corporation is generally not liable, and the officer may be liable to the third party.

Q: Why is retroactive compensation generally improper?

Because it constitutes corporate waste if paid out for services rendered in the past for which compensation has already been arranged

Memory Framework:

• Power =

• Board =

• Meeting =

• Delegation =

• Compensation =

• Officers =

• Power = ultra vires?

• Board = proper decision maker?

• Meeting = quorum and notice?

• Delegation = policy vs. implementation?

• Compensation = conflict or waste?

• Officers = authority under agency law?