Business Law Class Notes Essay Sample
A manager plays a critical function in a corporate organisation. They manage the concern. design concern policies and select the officers. Liability of the managers is a important facet where a manager is expected to be honest. vigilant and protect the stockholders trust in him. Stockholders own the corporation and elect the board of managers whose blessing is required for major corporate actions. Liability comes into image when managers or officers tend to do fiscal injury to the corporation. perpetrate a offense or seek to transgress their responsibility of attention to the corporation. The managers frequently forget that they are elected or appointed to the place of the manager by the stockholders based on their makings and with the duty and trust to protect the stockholders involvement and maximise their addition. However. they start puting their ain involvement in forepart of the involvement of the stockholders and the company. Hence the unity and trueness of the managers is questioned on continues footing in the concern universe. Directors are found to be apt when they deliberately or negligently do injury to the 3rd parties. A twosome of times they fraudulently induce the association to transgress the contract. terminate employees on false evidences or slander them. Section 21. 401 of Texas codification. does supply the board of managers of Texas corporations with freedom to pull off and maneuver the company every bit long as the manager do non mistreat that freedom and power.
Duty of Care:
In the Duty of Care. the managers owe a fiducial responsibility to the company. stockholders. clients and 3rd party. A manager is held apt under the undermentioned fortunes: * If he does non work in religion and involvement of the company. stockholders and client. * Transgressing the responsibility to supervise and oversee the company. * Laxity in supervising company’s activities. concern or activities of the direction. * Failure to halt error activities of the direction or managers of the company. * Failure to take action or forestall the misconduct consequences in aching stockholders and clients. which should be avoided. * Even if the director’s are non actively involved or cognize about a misconduct they are yet held apt to stockholders and clients. because they trust the managers and anticipate them to be supervising the company’s activities protecting the assets of the company. * If he/she makes a determination on a capable affair that he/she has a fiscal or other involvement ; hence. the manager should do an informed concern judgement determination after sing and analyzing all facets and for the improvement of the company and all involved. * If he/she is grossly negligent in company concern activities. capable affair or determination devising procedure. * The manager is besides apt for neglecting to exert good concern judgement and doing good religion efforts to carry through his/her fiducial responsibilities of geting sufficient cognition and acquisition before doing any determinations for the involvement and improvement of the company. stockholders and clients.
There have been several cases where the managers have violated their rights which resulted in catastrophes and have affected the investors. Let us look into a twosome of instances that manifest the managers holding breached the responsibility of attention and trueness.
Case 1: Perlman v. Feldman
ACT OF BREACHING FIDUCIARY DUTY:
Incident:
This is a derivative action brought by minority shareholders of Newport Steel Corporation to oblige accounting for. and damages of allegedly illegal additions which accrued to suspects as a consequence of the sale in August. 1950. of their controlling involvement in the corporation. Feldman was the president. president of the board. and bulk stockholder of Newport Steel. Newport had operated under the benefit of the “Feldman Plan”—which required buyers of steel to progress the monetary value of the steel before bringing ( basically an involvement free loan ) . He sold his portions to Wilport. a mob of steel purchasers. and procured the surrender of his ain Board of Directors. The tribunal held that the ‘Feldman Plan” was a corporate plus that belonged to all stockholders. In selling control. Feldman deprived the minority stockholders of the benefit of that plus and therefore improperly appropriated it to himself. Burden of turn outing no breach of fiducial responsibility is on the suspect. Court’s determination:
The tribunal held that Feldman must portion command premium with minority stockholders.
Case2: Lewis v. S. L. & A ; E. . Inc.
LAXITY IN MONITORING COMPANY’S BUSINESS AND CORPORATE ACTIVITIES: Incident: This instance arises out of an intra household difference over the direction of two closely-held attached corporations. Plaintiff Donald E. Lewis. a stockholder of S. L. & A ; E. ( “SLE” ) . Inc. . filed a case against Alan E. Lewis. Leon L. Lewis. and Richard E. Lewis. managers of SLE and officers. managers and stockholders of Lewis General Tires. Inc. ( “LGT” ) . They are brothers of Donald. He charged that his brothers had wasted the assets of SLE by doing SLE to rent concern premises to LGT at unreasonably low lease. SLE had owned a edifice. which it leased to LGT. All six of the kids entered into a “shareholders’ agreement” with LGT. under which each kid who was non a stockholder of LGT on June 1. 1972 would be required to sell his or her SLE portions to LGT at a monetary value equal to the book value of the SLE stock.
When the day of the month to sell the portions approached. Donald refused to make that because he believed that SLE’s book value was lower that it should hold been. The territory tribunal held that Donald had failed to turn out waste by the suspect managers. On entreaty. Donald argued that the territory tribunal had made a incorrect determination. He said that he was entitled to judgement since suspects failed to turn out that the minutess in inquiry were fail and sensible. The appeal tribunal turned to the inquiry of load of cogent evidence. Because the managers of SLE were besides officers. managers and/or stockholders of LGT. the load was on the suspect managers to show that the minutess between SLE and LGT were just and sensible. However. the suspects failed to transport their load. Evidence showed that the rent was below the market value. The suspects breached responsibility of trueness to SLE. Court’s determination:
On entreaty. Donald argues that the territory tribunal improperly allocated to him the load of turn outing his claims of waste. and that since suspects failed to turn out that the minutess in inquiry were just and sensible. he was entitled to judgement. The District tribunal later filed lengthy and elaborate findings of fact and decisions of jurisprudence. Many of the tribunals findings went to the cogency and probatory value of the testimony given by plaintiff’s expert informant and the tribunal finally declined to recognition that testimony. On this footing. the tribunal held that Donald had failed to set up the rental value of the Property during the period at issue. and that suspects were hence entitled to judgment on the derivative claims. Contract between Cookies and Herrig was just and sensible to the corporation. Case3: Cookies Food Products v. Lakes Warehouse
BREACHING DUTY OF LOYALTY BY FRAUDLENTY MANIPULATING AND CONVERTING CORPORATE Fundss: Incident:
This is a shareholder’s derivative suit brought by the minority stockholders of a closely held Iowa corporation specialising in barbecue sauce. cookies nutrient merchandises. The mark of the case is the bulk stockholder. Duane “speed” Herrig and two of his household –owned corporations. Lakes Warehouse distributing and Speed’s Automotive company. Plaintiff’s all edged that herrig. by geting control of cookies and put to deathing self-dealing contracts breached his fiducial responsibility to the company and fraudently misappropriated and converted corporate financess. In 1975. L. D. Cook organized Cookies Food Products. Inc. as a barbeque sauce fabrication and distributorship. The company was non really successful until. Duane “Speed” Herrig began administering the barbeque sauce to retail mercantile establishments. Over the old ages. Herrig’s distributorship understanding spurred important growing in barbeque sauce gross. In 1981. Herrig acquired a bulk interest in Cookies and in 1982 ; Herrig even developed his ain greaser sauce! Herrig received royalties for the greaser sauce and his distribution understanding with Cookies increased subsequent to his acquisition of a bulk involvement. The complainant alleges that Herrig was involved in self-dealing. Court’s determination:
The tribunal held that no contract or other dealing between a corporation and one or more of its managers or any other corporation. house. association or entity in which one or more of its managers are managers or officers or are financially interested. shall be either invalidate or rescindable because of such relationship or involvement. If any of the undermentioned occur: a. The fact of such relationship or involvement is disclosed or known to the board of managers or commission which authorizes. approves. or ratifies the contract or dealing without numbering the ballots of such interested manager. B. The fact of such relationship or involvement is disclosed or known to the stockholders entitled to vote [ on the dealing ] and they authorize such contract or dealing by ballot or written consent. c. The contract or dealing is just and sensible to the corporation. The tribunal found that there was no revelation issue and that the contract between Cookies and Herrig was just and sensible to the corporation.
Case 4: Sinclair Oil Corporation v. Levien.
NEGLIGENCE OF CORPORATE ACTIVITES:
Incident:
This is an entreaty by the suspect. Sinclair Oil Corporation. in a derivative action necessitating Sinclair to account for amendss sustained by its subordinate. Sinclair Venezuelan Oil Company ( hereinafter Sinven ) . organized by Sinclair for the intent of operating in Venezuela. as a consequence of dividends paid by Sinven. the denial to Sinven of industrial development. and a breach of contract between Sinclair’s wholly-owned subordinate. Sinclair International Oil Company. and Sinven. Sinclair USA is a large oil company. It owned about 93 % of Sinclair Venezuela. The latter was. itself. a public company with several hundred stockholders. The managers and officers of Sinclair Venezuela were all managers. officers. or employees of Sinclair USA. Sinclair USA needed money. The managers of Sinclair Venezuela declared really good dividends over a figure of old ages so that the parent corporation could refill its bank history. It is non a suit to coerce declaration of dividends. but instead a suit by the minority stockholders that the payment of these dividends hurt Sinclair Venezuela because they had concern chances that they could hold taken advantage of if non for the dividend policy.
The threshold inquiry was whether the instance should be judged under struggle of involvement analysis. If you do. Sinclair USA must turn out overall rationality. On the other manus. is the instance to be judged under the concern judgement regulation where the complainant. in order to remain in tribunal. would hold to demo fraud. extremist viries. illegality. arbitrary action. or gross carelessness to “shred the shield” . The tribunal pointed out that the dividends did non go against any bank loan understanding or the Delaware limitations on dividends. so the payment of dividends was non a breach of fiducial responsibility because all stockholders benefited every bit. The tribunal held that doing Sinclair Intl. to transgress its contract with Sinven was overreaching and caused the load to switch to Sinclair to turn out “intrinsic fairness”—a load it failed to run into. The regulation is that when a parent controls a subordinate and receives a benefit at the disbursal of the subsidiary’s minority stockholders. the intrinsic fairness trial applies and load is on parent. Court’s determination:
The Chancellor of the Exchequer found as a fact that the managers were non independent of Sinclair. The Chancellor of the Exchequer held that because of Sinclair’s fiducial responsibility and its control over Sinven. its relationship with Sinven must run into the trial of intrinsic equity. The criterion of intrinsic equity involves both a high grade of equity and a displacement in the load of cogent evidence. Under this criterion the load is on Sinclair to turn out. topic to careful judicial examination. that its minutess with Sinven were objectively just.
Case 5: Talbot v. James.
VIOLATING FIDUCIARY RELATIONSHIP TO THE COPORATION:
Incident:
This just action was brought by C. N Talbot and Lula E. Talbot. plaintiff in errors herein. against W. A James. separately and as President of Chicora Apartments. Inc and Chicora flats Inc. C. N. Talbot and Lula E. Talbot sued W. A. James avering that W. A. James. as an officer and manager of the Corporation. violated his fiducial relationship to the Corporation and the complainants as stockholders by deviating specific financess to himself. Lula E. Talbot owned a piece of land of land. James offered to utilize that piece of land of land for the hard-on of an flat composite. The parties formed a Corporation. known as Chicora Apartments. Inc. . to concept and run an flat composite. On November 6. 1963. James Construction Company entered into a building contract with Chicora Apartments. Inc. The contract amount was the existent cost of building plus a fee of $ 20. 000. Lula Talbot demanded to analyze the corporate records. but she was refused by James. The record showed that James. as president of Chicora Apartments. Inc. . entered into a contract with himself as exclusive owner of James Construction Company without doing full revelation of his individuality of involvement to the other officers and stockholders of the corporations. hence he breached fiducial responsibility to other officers and stockholder. Court’s determination:
This is a clear instance that James violated the responsibility of trueness to the company and other managers and stockholders. After the a reexamining the accounting. testimonies and grounds the tribunal ordered a judgement in favour of Chicora Apartments in the sum of $ 25. 025. 31 from W. A. James.
Statutory Liabilitiess:
Some statute law provides quasi–criminal liability if the manager authorizes. directs. participates or acquiesces in defence. 1. Awareness of liability: This arises when a manager acts beyond the corporation’s authorization. This consciousness ensures that the manager knows the range of the corporation’s authorization. as defined by its corporate paperss. and that the corporation is required to curtail its activities to that peculiar authorization. This is conducted yearly by the managers. in audience with board and executive managers. 2. Awareness of contractual liability: This is to guarantee that the corporate paperss provide for authorization to subscribe contracts and to edify the manager about the ways in which personal liability arises. This occurs yearly and is conducted by manager in audience. board of co-workers and executive officer. 3. Awareness of liability in civil wrong: This is to allow the manager know in what manner personal liability arises from claims of deleterious behavior. He should be cognizant that carelessness in mismanagement consequences in claims. This is conducted yearly by the manager and executive officers. 4. Awareness originating from statue: Personal liabilities besides arise under legislative acts which the manager is supposed to cognize.
This occurs yearly between the manager. co-workers and executive manager. 5. Statutory liability associating to integrating statute law ( including filings ) . rewards. revenue enhancements – income. goods & A ; services. gross revenues. beginning tax write-offs. employment. environmental protection. The concern here is about the manager knowing and understanding the demands stemming from each of these issues. and the duty on managers to guarantee that these demands are met. 6. Awareness of liability originating from common jurisprudence responsibilities: Does the manager know that he or she is apt to the corporation for losingss suffered as a consequence of failure to run into his or her ‘fiduciary duties’ ? Does the manager understand the range of these fiducial responsibilities? 7. Appraisal of statutory liability originating from the specific authorization or activities of the corporation: Has a reappraisal been prepared. either internally or though seeking external legal advice. placing regulative demands that the corporation is required to run into? This occurs every two old ages. or more often if the regulative environment is altering quickly and the full board is present.
Decision:
The managers are required to execute their responsibilities in good religion and act as ordinary attention individuals in respects to the activities or operation of the company. Director must besides hold at least basic apprehension of the concern of the company. Director must continually supervise the company’s activities. personal businesss. policies. fiscal place and fiscal statement on regular footing to guarantee that all concern activities are fare and nil is leery. “The managers are under a go oning duty to maintain informed about the activities of the corporation. ” ( Eisenberg. 2005. pp. 389 ) Furthermore. a manager must besides confer with with legal advocate from clip to clip to have advise on leery activities or concern traffics. Furthermore. in State of Texas the managers have a occupation under responsibility of attention to remain informed and do everything possible to move for the improvement of the company and non be portion of the cause to harm the company. A manager must hold the ability to utilize sound concern judgement associating to the personal businesss of the company.
DISREGARD OFFFF CORPORATE Activity:
The neglect of corporate activity refers to state of affairs when one abuses corporate privileges i. e. when the stockholders treat the assets of the corporation as their ain and take out financess whenever they desire for their individual usage hence supplying unequal capitalisation. By and large. the corporate signifier isolates Auxiliary Corporation from liability for corporate misbehaviors. However. the tribunals will disregard the corporate entity and deprive the organisers and directors of the corporation of the limited liability that they normally enjoy when. for illustration. the incorporation itself was accomplished to commit a fraud. One of the biggest advantages to integrating a concern is that stockholders of the corporation bask wide protection from being held personally responsible for the debts and liabilities of the corporation. Creditors can make the corporation’s assets. but one time those assets are exhausted they can non by and large reach the personal assets of the stockholders or proprietors of the corporation. Formation of subordinates can likewise protect parent companies from the liabilities of their subordinates. However. in certain fortunes. tribunals will “pierce the corporate head covering. ” significance that the corporate entity will be disregarded such that personal liability for the corporation’s debts and duties can attach to the corporation’s proprietors and stockholders. What is “pierce the corporate veil” :
Many times. a creditor will inquire a tribunal to disregard the liability protection offered by the corporation or LLC position of a concern. In making so. the creditor is inquiring the tribunal to pierce the corporate head covering and do the concern proprietors personally apt for the debts. liabilities and duties of the concern itself ( which they by and large would non be apt for. due to the limited liability protection afforded to corporations and LLCs ) . This is by and large a redress which the tribunal will see where the proprietors of the company in inquiry used their concern to victimize the concern creditors. or do some other unlawful and illegal act. This sometimes occurs. for illustration. where proprietors are utilizing the concern as a shell and a tribunal determines that the concern is truly merely an alter self-importance of the proprietors ( this is known as alter self-importance liability. and while there are some proficient differences. it boils down to fundamentally the same thing as piercing the corporate head covering ) . Courts are besides willing to pierce the corporate head covering where notdoing so would take to some type of fraud or unfairness. The chief thought here is that proprietors who abuse the company entity in some manner which harms others will happen themselves personally apt. For illustration. if a corporation takes on huge debt that far exceeds its assets. so that it’s obvious from the start that the concern could ne’er trust to refund these debts. the tribunal may pierce the corporate head covering so that the creditors are non unjustly out-of- pocket for all of the money they loaned. The precise factors that a tribunal looks at in finding whether to pierce the corporate veil really from province to province. as each province has developed its ain trial and criterions.
