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Business Associations/Corporations
Thomas Jefferson School of Law
Desai, Anuj C.

Limited Liability
 
1)      SHs, directors, officers not liable for corp debt unless
a)      Personal guarantee
i)        Small corp.
b)      Improperly formed corps
i)        Agents for non-existing principal
2)      Piercing the corp veil
a)      Apply when equity requires it
b)      Tort creditors more sympathy from court
i)        Can’t easily protect themselves contractually
ii)       Nor do they knowingly assume the risk 
c)      K creditors may have assumed the risk, can K around
i)        Suppliers, employees, customers
d)      Enterprise liability
i)        Piercing involving a parent-subsidiary situation
(1)   When the parent dominated the subsidiary
ii)       Factors
(1)   Mixing assets
(2)   Failing to observe formalities
(3)   Having officers not identify in which capacity they are acting
(4)   Using the same trade name or stationary
e)      Factors:
i)        Ignoring corp formalities
(1)   Holding shareholders’ and directors’ meetings, issuance of stock, election of directors and officers, passing resolutions authorizing payments, keeping corp. minutes
ii)       Commingling assets and affairs
(1)   When shareholders fail to keep corporate and personal assets separate
(a)    Bank accounts
(2)   In enterprise liability
(a)    Courts often cite confusion of a subsidiary’s affairs with those of the parent corp., or among other subsidiaries
(3)   Creditors confused who they are dealing with, whose credit is on the line
iii)     Undercapitalization and purposeful insolvency
(1)   When a corp is formed or operated without capital adequate to meet expected business obligations
(2)   Purposeful insolvency
(a)    Resulting from a SHs undisclosed siphoning of whatever corp assets become available can justify piercing
iv)     Active corp participation
(1)   Shareholders who are not active in the business and have not acted to disadvantage creditors are less likely to be personally liable than those whose actions resulted in a depletion of asset
v)      Deception
(1)   If a creditor is deceived into believeing that the corp is solvent or that the creditor is otherwise protected, piercing is a near certainty
(2)   When corp participants falsely create the appearance of sufficient business assets or otherwise mislead creditors, courts refuse to enforce the “no recourse” rule
(a)    “no recourse” rule à people that do business with the corp agree to look to the business assets
 
Management and control of the corp
 
1)      5 issues
2)      Procedures
a)      Shareholder rights
b)      Control in closely held corps
c)      Fiduciary duties of officers and directors
d)      Fiduciary duties of controlling shareholder
3)      Procedures
a)      How do director, officers and shareholders accomplish their jobs
b)      Always

   Statutes don’t allow for proxies
a.       Directors are not allowed to vote by proxy
iv)     Board has to act as a group unless properly delegate their authority
(1)   Delegate to committees and the committees can act
(a)    Board approval
(2)   As long as they don’t delegate all of their authority
(a)    Must keep their authority on major issues
(i)      Dividend declarations
(ii)    Major structural changes
(iii)   Fundamental aspects of the corp
e)      Shareholder actions
i)        1 share = 1 vote
ii)       Can either take action by meeting or thru written consent in lieu of meeting
iii)     Written consent
(1)   Check state statute make sure its allowed
(2)   1 difference b/n SH and board
(a)    Can be by majority, unanimous not always needed (some states)
iv)     Meeting
(1)   Typically one per year
(a)    Statute will usually require annual meeting
(2)   Board will be elected
(3)   Directors can bring other business before the SHs
(4)   SHs typically can elect the directors
(a)    Unless there is a vacancy mid-term then the board can fill the vacancy until the next annual meeting