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Corporate bargain--limited liability
A.PRINCIPAL CHARACTERISTICS OF A CORPORATION
a)Entity Status--a corporation is a legal entity
created under the authority of legislature
b)Limited Liability--as a legal entity, a corp
is responsible for its own debts; its sh’s liability is limited to their
investment;
c)Free Transferability of Interest--shares,
representing ownership interests, are freely transferable;
d)Centralized Management and Control--a corp’s
management is centralized in a board of dirs and officers. Shs have no direct
control over the board’s activities;
e)Duration--Continuity of Existence--a corp is
capable of perpetual existence;
f)Taxation--a corp, as an entity, pays taxes on
its own income; shs are taxed only on dividends;
g)Remember Attributes of the Corporation--CLIFF:
4)Freely alienable (shares can be sold).
B.CORPORATIONS DISTINGUISHED FROM OTHER FORMS OF
BUSINESS ASSOCIATIONS.
1.GENERAL PARTNERSHIPS--in most states, p’ships
are governed by the Uniform Partnership Act (UPA). However, the Revised UPA
(RUPA) has been adopted by a few states
a)Aggregate Status--a p’ship is an aggregation
of two or more persons who are engaged in business as co-owners. Although not a
legal entity, a p’ship is treated as one for certain purposes, e.g., ownership
and transfer of property. RUPA confers entity status on p’ships;
b)Unlimited Liability--every partner is subject
to unlimited personal liability on p’ship debts;
c)Transferability of Interests--a partner cannot
make a transferee a member of the p’ship. She can, however, assign his interest
in the p’ship, thus permitting the assignee to receive distributions of
profits. Because the assignee does not become a member of the p’ship, he is not
entitled to participate in p’ship business or management.
d)Duration and Dissolution--a p’ship cannot have
perpetual existence. It is terminable at will unless a definite term is
expressed or implied, and is also dissolved by death, incapacity, or withdrawal
of any partner.
 1)Wrongful dissolution--p’ships can also be dissolved in
contravention of the p’ship agreement, by the express will of any partner, by a
court or by a partner’s conduct. Upon wrongful dissolution, nonbreaching
partners may seek damages for breach and, if they choose to do so, may continue
the p’ship upon payment to the breaching partner of the value of his interest.
1)Compare--dissociation under RUPA--termination
results in either the winding up of the p’ship or buyout of the dissociating
partner, depending on the event triggering the termination. A buyout may be
reduced by damages if dissociation was wrongful.
e)Management and Control--absent a contrary
agreement, every partner has a right to participate equally in the partnership
management.
f)Autority--each partner, as an agent of the
firm, may bind the p’ship by acts done for the carrying on, in the usual way,
the business of the p’ship.
1)RUPA--a p’ship is bound by a partner’s act for
carrying on in the usual way either the actual p’ship business or a business of
the kind carried on by the p’ship.
g)Ownership of Property--title may be held in
the name of the p’ship, but property is owned by the individual partners as
tenants in p’ship. There is no tenancy in p’ship under RUPA, which provides
that property acquired by p’ship is owned by p’ship, not individual partners.
h)Capacity to Sue and be Sued--under the UPA, a
lawsuit may be brought by or against individual partners, rather than p’ship.
Partners are jointly and severally liable for wrongful acts and breaches of
trust; they are only jointly liable for debts and obligations of the p’ship.
1)Statutory reforms--many state statutes
specifically allow a p’ship to be sued in its own name. Other states make all
p’ship liabilities joint and several. Other reforms provide that not all joint
obligors need to be joined in a suit.
2)RUPA--a p’ship may sue and be sued in its own
name, and partners are jointly and severally liable for all p’ship obligations.
A claim against the p’ship cannot be satisfied from a partner’s personal assets
unless p’ship assets have been exhausted.
2.JOINT VENTURE--a p’ship formed for some
limited investment or operation, as opposed to a continued business enterprise.
Joint ventures are governed by the rules applicable to p’ships
3.LIMITED PARTNERSHIP--this is a p’ship
consisting of two classes of partners: general partners (with rights and
obligations as in an ordinary p’ship) and limited partners (with no control and
limited liability).
4.LIMITED LIABILITY PARTNERSHIPS--in a LLP, a
general partner is NOT personally liable for all p’ship obligations arising
from negligence, wrongful acts, and misconduct absent his involvement in the
misconduct. There is no exclusion for liability for contractual obligations.
5.LIMITED LIABILITY COMPANIES--LLC is a
non-corporate business entity whose owners (members) have limited liability and
can participate actively in its management. An LLC may be either for a term or
at will. It can be managed either by its members or nonmember managers.
Depending on the statute, distributions are made either equally to each member
or in proportion to each member’s contribution.
 a)Withdrawal and Dissolution--some statutes provide that any event
that terminates a member’s membership (death, resignation) causes dissolution.
Other statutes distinguish between fault events(member misconduct...) and
non-fault events (death, bankruptcy), and some provide that dissolution can be
avoided by paying the withdrawing member fair value for his interest.
b)Advantages of LLCs--An LLC for a business
association, not publicly held, has strong advantages: partnership taxation,
virtually no restrictions in structuring ownership interests and management,
limited liability for owners and managers, and no limitations on the number or
nature of owners.
C.DISREGARD OF CORPORATE ENTITY--since a corp is
a distinct legal entity, shs are normally shielded from corporate obligations.
In certain instances, however, the corporate entity will be disregarded.
1.PIERCING THE CORPORATE VEIL--(Suits by
corporate creditors against shs)--it’s more common in contract claims than in
tort claims. The most important elements considered by the courts:
a)Commingling of Assets--commingling of corp
assets and personal assets of shs (e.g., paying private debts with corp funds)
may lead to piercing of the corporate veil;
b)Lack of Corporate Formalities--whether basic
corp formalities (e.g., regular meetings, corporate records maintained,
issuance of stock) were followed is also relevant. Statutory close corps are
permitted more flexibility regarding corp formalities;
c)Undercapitalization--if the corp was organized
without sufficient capital or liability insurance to meet obligations
reasonably expected to arise, the corp veil may be pierced;
d)Domination and Control By Shareholder--the
corp veil is often pierced when an individual or other corp owns most or all of
the stock, so that it completely dominates policy or business decisions.
e)”Alter Ego,” “Instrumentality,” “Unity of
Interest”--when no separate entity exists and the corp is merely the alter ego
or instrumentality of its shs (could be a corporate shareholder), or when there
is a unity of interest between the corp and its shs, the corp veil is often
pierced. These terms are usually applied only if other grounds are present;
f)Fraud, Wrong, Dishonesty, or
Injustice--generally, the veil will be pierced only if one of these elements is
available, e.g., no piercing of veil if there is a lack of corp formalities
without resultant injustice. Piercing the veil usually involves corps with a
small number of shs.
2.PIERCING HAPPENS MOST OFTEN WHEN:
1)The number of shs is small--the chance of one
sh dominating the corp is greater;
2)Deception--There is some kind of deception;
3)Agency--individual is a “principal” and corp
is his “agent”
4)Estoppel--outsider was led to believe that he
was dealing with an individual, while in fact he was dealing with the
corporation.
5)Direct tort--individual and corp acted
together and should be jointly/severally liable
6)Instrumentality requirement is satisfied:
I)control of a subsidiary by parent
3.PIERCING THE WALL BETWEEN AFFILIATED
CORPORATIONS--this occurs when a P with a claim against one corp attempts to
satisfy the claim against the assets of an affiliated corp under common
ownership. This type of aggregation is permitted only when each affiliated corp
is NOT a free-standing enterprise but merely a fragment of an entity composed
of affiliated corps.
4.USE OF CORPORATE FORM TO EVADE STATUTORY OR
CONTRACT OBLIGATIONS--the corp form may be ignored when it is used to evade a
statutory or contractual obligation. The issue is whether the contract or
statute was intended to apply to the shs as well as the corporation. Only third
parties, not the corp or its shs, are generally allowed to disregard the corp
entity.
5.TWO EXTREMES TO AVOID IN PIERCING THE
CORPORATE WALL:
a)Old model--Superman (sh) used corp as his
puppet;
b)New Model--Superman (sh) and corp are
inseparable (alter ego)
D.SUBORDINATION OF SHAREHOLDER DEBTS--”DEEP
ROCK” DOCTRINE--if a corp goes into bankruptcy, debts to its controlling shs
may be subordinated to claims of other creditors. When subordination occurs,
shareholder loans are treated as if they were invested capital (stock). Major
factors in determining whether to subordinate include fraud, mismanagement,
undercapitalization, commingling, excessive control, etc.
II.ORGANIZING THE CORPORATION--generally, corps
are created under and according to statutory provisions of the state in which
formation is sought.
A.FORMALITIES IN ORGANIZING CORPORATION:
1.CERTIFICATE OR ARTICLES OF
INCORPORATION--state law governs the content of the articles, which are filed
with the secretary of the state. Usually, the articles must specify the corp
name, number of shares and classes of stock authorized, address of the corp’s
initial registered office, name of initial registered agent, and the name and
address of each incorporator.
a)Purpose Clause--under most statutes, no
elaborate purpose clause is needed. It is sufficient to state that the purpose
of the corp is to engage in any lawful business activity.
b)State of Incorporation--incorporators need to
consider how flexible the state’s corporate law is versus the costs associating
with incorporating in that state
 2.ORGANIZATIONAL MEETING--filling the articles in proper form
creates the corporation, after which an organizational meeting is held by
either the incorporators or dirs named in the articles. Matters determined at
meeting:
1)Incorporators elect directors, if no dirs are
named in the articles;
3)Directors ratify pre-incorporation
transactions;
4)Directors authorize issuance of shares
5)Directors adopt by-laws (if necessary),
corporate seal and stock certificate
B.DEFECTS IN FORMATION PROCESS--”DE JURE” AND
“DE FACTO” CORPS--when there is a defect or irregularity in formation, the
question is whether the corp exists “de jure,” “de facto,” “by estoppel,” or
not at all. This issue usually arises when a third party seeks to impose
personal liability on would-be shs. Another method of challenging corporate
status, used only by the state, is a quo warranto proceeding. Note: where there
has not been compliance with the statute, we apply principles of de facto, de
jure and corp by estoppel. Where there has been compliance with the statute, we
apply principles of disregard of corporate fiction, a/k/a “piercing the
corporate veil,” which is an exception, rather than a rule.
1.DE JURE CORPORATION--this exists when the corp
is organized in compliance with the statute. Its status cannot be attacked by
anyone--not even the state. Most courts require only “substantial compliance”;
others require exact compliance with the mandatory requirements.
2.DE FACTO CORPORATION (substantially
abolished)--this exists when there is insufficient compliance as to the state
(i.e., state can attack in quo warranto proceeding), but the steps taken are
sufficient to treat the enterprise as a corp with respect to its dealings with
third parties. Requirements:
3)Some use of corporate franchise; Then ct will
recognize status as to all but state
a)Definition--estoppel is an equitable
evidentiary rule which prevents a party from denying the existence of a fact
notwithstanding that he fact is not true. Thus, certain parties are estopped
from asserting defective incorporation when they have dealt with the corp as though
properly formed.
b)Example--shs who claimed corp status in an
earlier transaction are estopped to deny that status in a suit brought against
the corp. The estoppel theory normally does NOT apply to bar suits against
would-be shs by tort claimants or other involuntary creditors.
c)Overlap With De Facto--many of the facts which
we would point to support a claim of de facto status are the same ones we point
for estoppel. However, substantial abolition of de facto concept doesn’t
necessarily abolish estoppel.
d)De Facto is For All; Estoppel is For
One--estoppel depends on relationship between party and corp.
 4.WHO
MAY BE HELD LIABLE--when a would-be corp is not a de jure or de facto or a corp
by estoppel, the modern trend imposes personal liability against only those
owners who actively participated in management of the enterprise.
a)On De Facto Doctrine--states following the
prior version of the Model Act have abolished the de facto doctrine, thus
making all purported “shs” jointly and severally liable for all liabilities
incurred as a result of the purported “incorporation.” However, statutes based
on Revised Model Business Corporation Act require a person acting on behalf of
the enterprise to know that there was no incorporation before liability
attaches.
b)On Estoppel Doctrine--the effect of both acts
is an unsettled issue.
c)On Liability--under the prior Model Act,
liability extends to investors who also exercise control or actively
participate in policy and operational decisions. It is expected that the
Revised Model Act will be interpreted in the same manner.
III.LIABILITIES FOR TRANSACTIONS BEFORE
INCORPORATION.
A.PROMOTERS--a promoter participates in the
formation of the corp, usually arranging compliance with the legal requirements
of formation, securing initial capital, and entering into necessary contracts
on behalf of the corp during the time it’s being formed.
a)Fiduciary Duties to Each Other--Full
disclosure and fair dealing are required between the promoters and the corp and
among promoters themselves.
B.CONTRACTS MADE BY PROMOTERS ON CORP’S BEHALF
1.RIGHTS AND LIABILITIES OF CORPORATION:
a)English Rule--the corp is not directly liable
on pre-incorporation contracts even if later ratified. Rationale: the corp was
not yet in existence at the time the promoter was acting.
b)American Rule--the corp is liable if it later
ratifies or adopts pre-incorporation K.
c)Corporation’s Right to Enforce Contract--under
either rule, the corp may enforce the contract against the party with whom the
promoter contracted, if it chooses to do so.
2.RIGHTS AND LIABILITIES OF PROMOTERS.
a)Liability on Pre-incorporation
Contract--generally, promoters are liable if the corp rejects the
pre-incorporation contract, fails to incorporate, or adopts a contract but
fails to perform, unless the contracting party clearly intended to contract
with the corporation only and not with the promoters individually.
b)Right to Enforce Against the Other Party--if a
corp is not formed, the promoter may still enforce the contract.
C.OBLIGATIONS OF PREDECESSOR BUSINESS--a
corporation that acquires all of the assets of a predecessor business does not
ordinarily succeed to its liabilities, with exceptions:
 a)Exceptions--the successor corp may be liable for its predecessor
liabilities if:
1)the new corp expressly or impliedly assumes
the predecessor obligations (the creditors of the old corp may hold the new
corp liable as third-party beneficiaries);
2)the sale was an attempted fraud on the
creditors; or
3)the predecessor is merged into or absorbed by
the successor.
A.CORPORATE POWERS--generally, corporate
purposes and powers are those expressly set forth in the corporation’s
articles, those conferred by the statute, and the implied powers necessary to
carry out the express powers. Transactions beyond the purposes and powers of
the corporation are ultra vires.
1.TRADITIONAL PROBLEM AREAS--the following three
powers are particularly significant express powers, since older statutes did not
specifically confer them:
a)Guarantees--modern statutes confer the power
to guarantee the debts of others if it is in furtherance of the corporate
business;
b)Participation in a Partnership--present-day
statutes explicitly allow the corp to participate with others in any corp,
partnership, or other association;
c)Donations--because the general rule is that
the objective of a business corporation is to conduct business activity with a
view to profit, early cases held that charitable contributions were ultra
vires; the modern view permits reasonable donations without showing the
probability of a direct benefit to the corp.
1.DEFINITION--agency is the fiduciary relation
which results from the manifestation of consent by one person to another that
the other shall act on his behalf and subject to his control, and consent by
the other to so act." Rest2dAg
a)Parties to an agency relationship--Principal
& Agent. Thus, three essential elements of an agency relationship:
1)Manifestation by principal that agent shall
act for him in some undertaking;
3)Understanding that the principal is in control
of the undertaking.
I)Note that these are factual issues; if they
are satisfied, then the relationship is one of agency, regardless of what the
parties themselves call it (but the parties' labels may provide evidence of
their intent)
a)Actual Express Authority--authority is the
power of the agent to affect the legal relations of the principal by acts done
in accordance with the principal's manifestations of consent to him." Rest
§7. Operative word is "manifestation" . If he says, do something,
it's express -- but the manifestation may include implied assent to
other things as well, which is--b)Actual Implied Authority--unless otherwise
agreed, authority to conduct a transaction includes authority to do acts which
are incidental to it, usually accompany it, or are reasonably necessary to
accomplish it." Rest § 35
c)Apparent Authority -- a.k.a.
"ostensible authority"--apparent authority is the power to affect the
legal relationships of another person by transactions with third persons,
professedly as agent for the other, arising from and in accordance with the
other's manifestations to such third persons." Rest §8. But note that the
manifestation includes allowing the agent to represent accurately his own
authority.
d)Inherent Authority--this is the authority that
inheres in an office. General agent (agent authorized to conduct a series of
transactions involving continuity of service): P is bound if A is acting in the
interests of P and A does an act usual or necessary with respect to the
authorized transactions ;
1)Unusual activities--depositing corporate
checks on a personal account is an unusual activity, and the bank should make
inquiry if the person is authorized to do that; otherwise, the bank is liable
to the principal for lost money (Mohr)
e)Ratification--ratification is the affirmance
by a person of a prior act which did not bind him but which was done or
professedly done on his account, whereby the act, as to some or all persons, is
given effect as if originally authorized by him." Rest § 82. The principal
can affirm by words, or by deeds. This includes the failure to repudiate the
subject matter when presented, suing to enforce the obligation, retaining the
benefits of the transaction. Note several things:
1)Ratification assumes that the principal was
not previously bound. If the principal had been previously bound, then the
liability would be based on another agency theory.
2)It doesn't matter to whom the affirmance is
made. It could be to the agent, to the third party, or anyone else or nobody at
all. Why? Because what was lacking in the original contract was merely his
expression of assent to the relationship of agency. The terms are fixed, the
third party believes he has an agreement, all that's missing is the opposite
party. So the President of the firm's note to himself that the affirms may be
sufficient. If there are some formalities required to authorize an act --e.g.,
sealed instruments, deeds -- then there might be additional
formality required for affirmance.
f)Estoppel--purported principal either (a)
intentionally or carelessly causes the belief that a purported agent is acting
on his behalf, or (b) sits silently knowing that such belief exists without
taking reasonable steps, and the third party relies detrimentally.
C.ULTRA VIRES TRANSACTIONS--those beyond the
purposes and powers, express and implied, of the corporation. Under common law,
shareholder ratification of an ultra vires transaction nullified the use of an
ultra vires defense by the corporation.
1.TORT ACTIONS--ultra vires is NO defense to
tort liability.
2.CRIMINAL ACTIONS--claims that a corporate act
was beyond the corp’s authorized powers are NO defense to criminal liability.
 3.CONTRACT ACTIONS--at common law, a purely executory ultra vires
contracts were NOT enforceable against either party; fully performed contracts
could NOT be rescinded by either party; and, under the majority rule, partially
performed contracts were generally enforceable by the performing party, since
the nonperforming party was estopped to assert an ultra vires defense.
4.STATUTES--most states now have statutes that
preclude the use of ultra vires as a defense in a suit between the contracting
parties, but permit ultra vires to be raised in certain other contexts:
a)Suits Against Officers or Directors--if
performance of an ultra vires contract results in a loss to the corp, it can
sue the officers or dirs for damages for exceeding their authority.
b)Suit By State--these limiting statutes do NOT
bar the state from suing to enjoin a corp from transacting unauthorized
business.
c)Broad Certificate Provisions--when the
certificate of incorporation states that the purpose is to engage in any lawful
activity for which corp may be organized, ultra vires is unlikely to arise.
A.ALLOCATION OF POWERS BETWEEN DIRECTORS AND
SHAREHOLDERS
1.MANAGEMENT OF CORPORATION’S BUSINESS--corporate
statutes vest the power to manage in the board of directors, except as provided
by valid agreement in a close corp. He board’s power is limited to proper
purposes.
2.SHAREHOLDER APPROVAL OF FUNDAMENTAL
CHANGES--shs must approve certain fundamental changes in the corp, e.g.,
amendment of articles, merger, sale of substantially all assets, and
dissolution.
3.POWER TO ELECT DIRECTORS--shs have the power
to elect dirs and to remove them for cause, absent provisions for removal
without cause in the certificate, bylaws, or in statutes. Some statutes also
permit the board or the courts to remove a dir for certain specific reasons
(e.g., felony conviction).
4.POWER TO RATIFY MANAGEMENT TRANSACTIONS--shs
have the power to ratify certain management transactions and insulate the
transactions against a claim that managers lacked authority, or shift the
burden on the issue of self-interest.
5.POWER TO ADOPT PRECATORY RESOLUTIONS--shs may
also adopt advisory but nonbinding (precatory) resolutions on proper subjects
of their concern.
6.BYLAWS--shs usually have the power to adopt
and amend bylaws, although some statutes give the board of dirs the concurrent
power to do this.
 7.CLOSE
CORPORATION--this is a corp owned by a small number of shs who may actively
manage; it has no general market for its stock, and it has some limitations
regarding transferability of stock.
8.STATUTORY CLOSE CORPORATION STATUS--the basic
requirements to qualify for special treatment under the statutes are that, in
its cert of incorp’n, a statutory close corp must identify itself as such, and
must include certain limitations as to the number of shs, transferability of
shares, or both.
a)Functioning As a Close Corporation--there may
be sh agreements relating to any phase of the corp affairs.
1.APPOINTMENT OF DIRECTORS--initial dirs are
either designated in the articles of incorporation or elected at a meeting of
incorporators. Subsequent elections are by shs at their annual meetings. The
number of dirs is usually set by the articles or bylaws.
a)Qualifications--absent a contrary provision in
the articles or bylaws, dirs need not be shs of the corp or residents of the
state of incorporation.
b)Vacancies--statutes vary, but under Model Act,
a vacancy may be filled by either the shs or dirs.
1)Compare--removal: some statutes require that
vacancies created by removal of a dir be filled by the shs unless the articles
or bylaws provide otherwise.
a)Term of Appointment--under most statutes, office
is held until the next meeting, although on a classified board, dirs may serve
staggered multi year terms.
b)Power to Bind Corporation Beyond Term--unless
limited by the articles, the board has the power to make contracts biding the
corp beyond the dirs’ term of office.
c)Removal of Director During Term--at common
law, shs can remove a dir for cause (e.g., fraud, incompetence, dishonesty)
unless an article or bylaw provision permits removal without cause. a dir being
removed for cause is entitled to a hearing by shs before a vote to remove. a
number of statutes permit removal without cause.
1)Removal by Board--board can NEVER remove a dir
unless authorized by statute;
2)Removal by Court--there is a split authority
as to whether a court can remove a dir for cause.
I)Statutes--some statutes permit courts to
remove a dir for specified reasons. Usually, a petition for removal can be
brought only by a certain percentage of shs or the attorney general.
a)Meetings--absent a statute, dirs can act only
at a duly convened meeting consisting of a quorum. In most jurisdictions, a
meeting can be conducted by telephone or other means whereby participants can
hear each other simultaneously. Most statutes also allow board action by
unanimous written consent without a meeting.
 1)Notice--although formal notice is unnecessary for a regular
meeting, special meetings require notice to every dir of date, time, and place.
Usually, notice can be waived in writing before or after a meeting. Attendance
waives notice unless the dir attends only to protest the meeting.
2)Quorum--a majority of the authorized number of
dirs constitutes a quorum. Many statutes permit the articles or bylaws to
require more than simple majority or less than that.
3)Voting--absent a contrary provision, an
affirmative vote of a majority of those present, not a majority of those
voting, is required for board action.
b)Effect of Noncompliance With
Formalities--today, most courts hold that informal but unanimous approval of a
transaction is effective, as is a matter receiving the explicit approval by a
majority of dirs without a meeting, plus acquiescence by the remaining dirs.
c)Delegation of Authority--the board has the
power to appoint committees of its own members to act for it either in
particular matters or to handle day-to-day management between board meetings.
Typically, these committees cannot amend the articles or bylaws, adopt or
recommend major corporate changes (e.g., merger), recommend dissolution,
declare a dividend, or authorize issuance of stock unless permitted by the
articles or bylaws. Note that while the board may delegate operation of the
business to an officer or management company, the ultimate control must be
retained by the board.
d)Provisional Directors--some statutes allow
them to be appointed by court if the board is deadlocked and corporate business
is endangered. a provisional dir serves until the deadlock is broken or until
removed by a court order or by majority of shs.
e)Voting Agreements--an agreement in advance
among dirs as to how they will vote is void as contrary to public policy. There
are certain exceptions for statutory close corps.
4.COMPENSATION--dirs are NOT entitled to
compensation unless they render extraordinary services or such compensation is
otherwise provided for. Officers are entitled to reasonable compensation for
services.
5.DIRECTORS’ RIGHTS, DUTIES, AND LIABILITIES
a)Right to Inspect Corporate Records--if done in
good faith for purposes germane to his position as dir, this right is absolute.
b)Duty of Care--dirs must exercise the care of
an ordinarily prudent and diligent person in a like position, under similar
circumstances. There is no liability (absent a conflict of interest, bad faith,
illegality, or gross negligence) for errors of judgment (business judgment
rule--the rebuttable presumption that action was taken on an informed basis, in
good faith and exercising reasonable care), but the dir must have been
reasonably diligent before the rule can be invoked (Shlensky)
I)Education--a dir should acquire at least a
rudimentary understanding of the business of the corporation;
ii)Information--a dir is under a continuing
obligation to keep informed about the activities of the corp;
iii)Participation--dirs must “generally monitor”
corporate affairs, but need NOT involve themselves in the day-to-day
operations; (i.e. they should attend board of dirs meetings with reasonable
regularity).
iiii)Inquiry--a dir has a duty to inquire when
circumstances would alert a reasonable person for the need of inquiry.
 iiiii)Action--where wrongdoing is revealed, a dir should object,
correct, or resign. Object to the course of conduct, steer toward correction,
and resign if it isn’t corrected.
2)Extent of liability--dirs are personally
liable for corporate losses directly resulting from their breach of duty or
negligence in falling to discover wrongdoing. a director may seek to avoid
being held personally liable for acts of the board by recording his dissent.
I)
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