Business Structure Paper 8

(b) Under the Revised Model Business Corporation Act, a corporation is authorized to indemnify its officers for expenses, attorney fees, judgments, fines and amounts paid in settlement incurred in a suit by stockholders when the liability is a result of the officer’s good faith, nonnegligent actions on behalf of the best interest of the corporation. Answer (a) is incorrect because a corporate officer may also serve as a director. Answer (c) is incorrect because officers are appointed by the directors of a corporation who are in turn elected by the shareholders. Answer (d) is incorrect because there is no requirement that an officer must own any shares of the corporation’s stock.

(a) The transaction the director wishes to have with the corporation is not a conflict of interest if any one of the following is true. (1) The transaction is fair and reasonable for the corporation. (2) The shareholders are given the relevant facts and they approve it by a majority vote. (3) The board of directors are given the relevant facts and they approve it by a majority vote of the disinterested members of the board of directors.

(c) Officers and directors are in important positions in a corporation. As such, they owe a fiduciary duty to the corporation to act in the best interests of the corporation. Courts have also recognized that because majority shareholders can exercise a lot of power in a corporation from their stockholdings and voting rights, they owe a fiduciary duty to the minority shareholders when these majority shareholders have de facto control over the corporation by virtue of their concentrated ownership.

(b) A contract between a director and his/her corporation is valid if it is reasonable to the corporation. Hogan has not breached his fiduciary duty with the corporation since he is selling the land at fair market value. Answer (a) is incorrect because a director does owe a fiduciary duty to his/her corporation to act in its best interests. Answers (c) and (d) are incorrect because since the transaction is fair and reasonable to the corporation, the shareholders need not approve it.

(c) The Articles of Incorporation may be amended by the shareholders’ vote, not by the board of directors. Answer (a) is incorrect because one of the important powers of the directors is to select the officers of the corporation. Answer (b) is incorrect because it is up to the board of directors to declare any dividends to the shareholders. Answer (d) is incorrect because answer (c) is correct.

(d) A corporation may indemnify both its directors as well as its officers against suits based on their duties for the corporation if they acted in good faith and in the best interests of the corporation. A corporation may also purchase insurance to cover the liability for lawsuits lost based on actions of its directors and also its officers.

(c) Both directors as well as officers owe a fiduciary duty to their corporation.

(c) McGarry is liable for the tort she committed. Because she was acting within the scope of her authority in the corporation, Norton corporation is also liable. Note that McGarry is not relieved of liability even though Norton Corporation is also liable because McGarry is the one who committed the tort. Therefore, answers (a), (b), and (d) are incorrect.

(d) When Acorn pays cash and buys 90% or more of Trend’s shares, it has control of the Trend stock. It can then accomplish a short-form merger of Trend Corp. into Acorn Corp. Answer (a) is incorrect because this can require the approval of Acorn shareholders. Answer (b) is incorrect because this is not a regular sale of Trend’s assets and will require shareholder approval. Answer (c) is incorrect because the entire compulsory exchange for Acorn shares to accomplish the acquisition does require Trend’s shareholder approval.

(a) Upon declaration, a cash dividend on preferred stock becomes a legal debt of the corporation, and the preferred shareholders become unsecured creditors of the corporation. However, any dividends not paid in any year concerning cumulative preferred stock are not a liability of the corporation until they are declared. Therefore, Universal will be liable to Price as an unsecured creditor for $10,000, which is the amount of the declared dividends. Answers (c) and (d) are incorrect because Price has become a general unsecured creditor for the declared dividends and will have the same priority as the debenture (unsecured) bond owners and the unsecured judgment creditors. Answer (b) is incorrect because the undeclared dividends did not become a legal liability to Universal.