Corporations (Limited Liability)

Front 1

Corporation’s Limited Liability

(General Rules)

Back 1

a.)SH’s ord. no liab 4 corp obligats.
b.)SH’s not liable b/c corps = separate legal entities
c.)Corp managers also ord. not liable for corp obligation

Front 2

Corporation’s Limited Liability

(Piercing the Corporate Veil)

Back 2

Theories for Piercing Corp Veil
i.)Instrumentality Doctrine - Focuses on control of ownership
ii.)Alter Ego Doctrine - Whether parent & subsid = acted as 1 economic entity

DE Law - pierces corp veil where there is fraud or corp =mere instrumentality or alter ego of owner
i.)Pltf must show:
-That parent & subsid operated as 1 economic entity; AND
-an overall element of injustice/unfairness present

Front 3

Corporation’s Limited Liability

(Piercing the Corporate Veil - Factors To Consider)

Back 3

i.)closely held corp
ii.)P=involuntary (e.g.tort) creditor
iii.)D = corp SH
iv.)Insiders failed to follow corp formalities
v.)Insiders commingled business w/indiv assets & affairs
vi.)Corp inadeq. capitalized
vii.)D actively partic. w/the business
viii.)Insiders deceived creditors
ix.)Note - NO reported veil piercing has EVER involved public traded corps (only w/close corps)

Front 4

Corporation’s Limited Liability

(Piercing the Corporate Veil - Failure to Observe Corp Formalities)

Back 4

Failure suggests creditors may been confused / misled re- who dealing w/&

Lack of formalities suggests SH’s systematic disregard corp oblig. & thus commingling funds

Front 5

Corporation’s Limited Liability

(Piercing the Corporate Veil - Commingling)

Back 5

i.)Failing to keep corp & personal assets sep.
ii.)Corp bank accnt to pay 4 pers. expenses
iii.)Theory=corp creditors have valid expectation business assets will meet their claims

Front 6

Corporation’s Limited Liability

(Direct Liability – Parent-Subsidiary Context)

Back 6

Parent is liable w/o piercing on ground that parent directed subsidiary’s operations = directly liable as primary wrongdoer in the course of those operations

(United States v. Bestfoods)
-parent normally not considered the owner of subsidiary’s plant, but could have direct liab for its own actions in operating plant owned by subsidiary

Front 7

Corporation’s Limited Liability

(Equitable Subordination (Deep Rock Doctrine))

Back 7

When bankrupt, claims of controlling SH may be subordinated to claims of others (i.e., preferred stock)
A.)Norm. a SH, is last in line
B.)but if parent acts bad, (i.e. tort) parent could be equitably insubordinate the loan

Test = If a inequitable conduct caused by the parent that results in injury to the sub, the parent is now the last in line

(Taylor v. Standard Gas & Electric)
Ct. subordinated parent’s claim, as a creditor of the subsidiary, to the claims of other creditors and of preferred SH’s b/c parent’s improper management of subsidiary 4 parent’s benefit &b/c subsidiary inadequately capitalized

Front 8

Corporation’s Limited Liability

(Limitations in the Certificate of Incorporation ) - Duty of Care

Back 8

Liability can be eliminated by a provision in the certificate, except for intentional misconduct and improper personal benefit.

Certificates can be amended to protect directors from the breach of duty of care

Front 9

Corporation’s Limited Liability

(Limitations in the Certificate of Incorporation ) - Duty of Loyalty

Back 9

Liability can’t be eliminated by a provision in the certificate

Certificates can’t be amended to exclude duty of loyalty

Front 10

Corporation’s Limited Liability

(Director & Officer (D&O) Insurance)

Back 10

Indemnifies D&O's for liab incurred related w/corp role

Limitations
a.)Some claims excluded - Policy may not cover certain claims
b.)Policy limits – i.e., period of time , amount
c.)Insured v. Insured Exclusion – If it is the corp. suing the D&O, no coverage of direc (no deriv. suits)
d.)Claims Made – Policy might only cover if claims are made
e.)Litigiousness – Insurers might want to go into litigation often (especially for nondisclosure)

Front 11

CORPORATIONS

Cantor v. Sunshine

Back 11

A promoter isn’t liable for K’s he signs only as president of a de facto corp

There was a de facto corp b/c there was colorable attempt to organize corp b4 consummation of K, and an exercise of corp owners by the negotiations and eventual K with D

Front 12

CORPORATIONS

Governing Law

De Facto Corporation – Promoter’s defense if sued

Back 12

a. Was there a corporation statute? (always present)

b. Was there a colorable attempt to apply? (only real factor)

c. Was there some attempt at a corporate action?

Front 13

CORPORATIONS

Governing Law

Liability for Promoter

Back 13

a.)When promoter makes K for benefit of contemplated corp, promoter personally liable for K & remains liable even after corp formed.

b.)Exception – If party contracting w/promoter knew corp not in existence & waived right to go after promoter, promoter not liable

Front 14

CORPORATIONS

Governing Law

Liability for the Corp (for K's before its existence)

Back 14

a.)corp may be bound by ratification, adoption, novation, or by continuing to accept the benefits of the K

b.)Corp & promoter may be jointly and severally liable