1.

FD of loyalty
A director must put and protect the corporation interest above his own, he must not take
corporate opportunities or engage in conflicting interest transactions.

Conflicting Interest Transaction

A conflicting interest transaction is one that the director knows or should know would benefit
himself, if he or his family, 1) is a party to the transaction, 2) has a financial interest in the
transaction, 3) is an employee, director, with whom the corporation is transacting with it.

However, it will not be a conflicting interest transaction if a majority of the board or shs vote
to approve the transaction, or was fair to the corporation.

Usurping a corporate opportunity

A director cannot take an opportunity if the corporation has an interest or expectancy in the
opportunity without first giving the corporation the opportunity to act. The financial ability to
take the opportunity does not matter, and if the director takes the opportunity, the corporation
can recover the profits.

2. FD of Care
A director must act in good faith, in the best interest of the corporation, with care that an
ordinary person would exercise for own business.
Under the duty of care, a director making decisions for the corporation has the protection of
the Business judgment rule, which gives protection when making a losing deal for the
corporation if the decision was in the best interest of the corporation. Directors may rely on
reports or information from professionals, committee he is not part of, corporate officers
when making business decisions. The BJR is intended to protect directors when they are
making decisions for a corporation because it is better for the economy to allow them to
make losing deals than making no deals at all for fear of liability.

3. Formation of a corporation
A corporation is formed by naming it, and filing documents with the secretary of the state.
The filing document must include names and addresses of all incorporators, name and
address of agent of service, number of shares. A corporation can be listed as a corporation for
the purpose of a particular thing, however, if no purpose, it is for any lawful purpose.

Ultra Vires Acts

UVA are acts are acts done by the corporation that are different than the purpose of the
corporation. A shareholder, creditor, or state can bring suit due to ultra vires acts.
A SHS can sue a corporation to enjoin a corporation from committing an ultra vires acts.
A creditor can sue a corporation for damages resulting from ultra vires acts.
The state can dissolve the corporation for ultra vires acts.
A corporation may be liable for committing acts outside their stated purpose, and they can be
liable to creditors for losses stemming from ultra vires acts.
Generally, a court will grant damages for ultra vires acts.
 De Facto Corporation – Recognizing a corporation when formation is defective
When a corporation is meant to be formed and the formation was defective, but it carried out
as and acted as a corporation, it will be treated like a valid corporation if 1) there was a law
that the corporation could have been established under, 2) there is a good faith attempt to
comply with the law, and 3) there is business like activities.

Corporation by estoppel
Equitable remedy which estops a person and the corporation from claiming it is not a
corporation if the person dealt with it like it was a corporation.

4. Promoter liability
A promoter is generally liable on all pre-incorporated corporation contracts. A corporation
does not become liable on promoter/pre incorporation contracts unless it adopts, expressly or
impliedly, the contract. A promoter remains liable on the K unless there is a novation
(agreement between three parties releasing the Promoter of the K).

5. Fundamental corporate changes

For a fundamental corporate change, selling substantially all stocks by a majority shs, or
merging, dissolution, etc, 1) board must adopt the change, 2) send the change to the shs with
notice of special meeting, 3) the shs vote to approve the change (quorum, majority of shares
present vote for), 4) SHS right of appraisal in closely held corporations (shs must have voted
against/abstained from voting change), and 5) the record the change to the secretary of state.

SHS appraisal rights

1. Written notice, before vote, of objection and demand payment
2. Vote against or abstain
3. Make prompt demand to be bought out

6. Derivative Suits
A shs may bring a derivative suit against the corporation if the harm occurred to the
corporation and not to the shs personally. Any recovery of this suit will go directly to the
corporation. To bring this action, the shs must have 1) made a demand and waited 90-days or
refusal by the board; 2) shs holds stock at the time of the breach, and continues to do so
throughout the derivative action; 3) the shs can represent the corporation’s interest; and 4) the
shs joins the corporation as a defendant to the suit.

In some instances, the court may allow a derivative suit without a demand, if a demand
would be futile. A demand will be futile if the shs can show the directors are unlikely to sue
the directors.

In a derivative action, when the shs is successful, the corporation will get the reward, and the
shs will be indemnified for costs and fees. However, if the shs is unsuccessful, he will be
liable for own fees and to reimburse other party if so ordered.
 If the corporation can prove that the actions were in the best interest of the corporation, by
approval by independent committed, or outside advisors they can have the suit dismissed,
however this does not happen often, and is a high burden to bear.

Adequately represents
Insert facts about how shs can represent properly, she is a shs

Shs holds stock at time of breach, and continues to do so

Insert facts about how shs holding stock and continues to hold stock

Demand – either futile, or can make it

Insert facts about how she did or can make demand, or how demand will be futile because
interested directors, related, or they approved the initial transaction.

Conclude as to a derivative action

7. Personal Suit by SHS

Generally, shs are not liable to one another, however in a closely held corporation, a majority
shs has a duty not to unduly prejudice the minority shs. Additionally, it could be held that a
majority shs owes a duty of care and loyalty to a minority shs.

Duty of Loyalty
Duty of care

8. Piercing the corporate veil

Corporation

Corporations provide limited liability for its shareholders (SHS), and regularly, they only
going to lose their capital investment in the corporation. Additionally, shs are not liable for
the liabilities and obligations of a corporation.

However, a court may pierce the corporate veil (PCV) to invalidate a fraud or abuse, if it
would be unfair to allow the shs to hide from liability, and generally occurs in close
corporations (small amount of shares not publicly traded). When PCV is ordered, shs
involved in the action will be held personally liable for the corporation’s liabilities.

Insert Facts Re This is a corporation and PCV if actions prove it is 1) Unfair not to, 2) is it
required to perpetrate fraud or abuse.

Conclude if PCV is likely.

If not, still go to elements of PCV.

 Pierce the Corporate Veil
To pierce the corporate veil there must be 1) undercapitalization at time of formation, 2) use
of the corporation as an alter ego, or 3) to prevent fraud.

Alter ego
PCV can occur where the shs have sought to benefit from the protections of incorporating,
but ignoring the corporate formalities, commingling funds, using the corporation’s assets as
their own, and self-dealing.

Insert Facts here about how they used the corporation and ignored the formalities, used the
assets for selves, and engaged in self-dealing.

Conclude if it’s alter ego

Undercapitalization
PCV can occur where the initial capital contributions of the shs at the time of inception of the
corporation were clearly insufficient to meet the corporation’s future liabilities.

Insert facts here about how when they started the corporation they only put X amount of
money and paid X amount of money for the stock.

Conclude as to Undercapitalization

Fraud
PCV can occur where the shs have been using the corporation merely as a shield against their
existing liability and for the sole purpose of defrauding existing creditors.

Insert facts here about how they used the corporation to defraud creditors, or if there are no
facts.

Conclude

Unfairness
In all cases, the proponent of PCV must show that it would be unfair not to PCV.

Facts
- how much liability is remaining versus how much money is remaining in the corporation.
- How the shs is the reason the corporation is dissolved/insolvent.

Conclude as to the fairness/unfairness of not piercing the corporate veil. The actions
taken by the SHS were in the normal course of business.

Conclusion
As to piercing the corporate veil in general.
9. Rule 16(b) – buying and selling w/in 6 month period
Section 16(b) of the SEC requires a SHS, Officer, or Director who owns more than 10% of
stock in a company, before the purchase and sale (must own 10% before this purchase),
surrender to the corporation of any profits gained from the buy and sale, sale and buy, of any
equity security of his within a period of less than 6-months. This applies to corporations
traded on the national exchange 1) with at least 2000 shs, and 2) more than 10 million dollars
in assets. The purpose of Rule 16(b) is to prevent unfair use of inside information and
internal manipulation of price. This imposes strict liability even if inside information is not
used.

10. Rule 10b-5 makes it illegal for any person to use any means or instrumentality of interstate
commerce to 1) employ any scheme to defraud, 2) make an untrue statement or omit of
material fact, or 3) engage in any practice that operates as a fraud in connection with the
purchase or sale of any security. This requires a showing of 1) fraudulent conduct, 2) in
connection with the purchase or sale of stock, 3) use of a means of interstate commerce
(phone, internet, etc.). 4) reliance on the other person, and 5) damages in a private cause of
action.

11. Insider Tipping

Insider tipping is also prohibited by rule 10b-5. 10b-5 prohibits anyone with inside
information, and a duty of trust and confidence to the corporation, from giving anyone
information for their benefit. A fact of materiality would be if a reasonable investor would
rely on the information when buying or selling stock. Conduct will be fraudulent if there is
scienter, or an intent to deceive. Insiders are generally, officers, directors, or shareholders,
and they owe a duty of trust and confidence to the corporation.

A tipper-tippee relationship is present when an insider who owes a duty of confidence and
trust to the corp gives information to an outsider. A tippee acquires a duty of trust from a
tipper when the tipper is a friend or relative. Liability is imposed on the tipper and the tippee
for giving and using inside information for personal benefit. However, the Tippee does not
breach his duty if he did not know that the tipper was breaching his duty.

Supreme court has held that one can be held liable of 10b-5 for trading inside market
information in breach of a duty of trust and confidence owed to the source of the information.