You are on page 1of 10

Chapter 18

Question 1:
In general, officers and directors of a corporation are required to devote themselves to
the affairs of the corporation with a view to promoting its interests rather than their
own. They may not utilize their position in the corporation to obtain any personal
profit or advantage beyond that enjoyed by its shareholders. Bird Coal and Iron Co. v.
Humes, 157 Pa. 278, *512 27 A. 750, 752 (1893); Porter v. Healy, 244 Pa. 427, 91 A.
428, 431 (1914).
An officer or director is required to provide the corporation his undivided loyalty. If a
business opportunity which lies within the scope of the corporation's business
activities and which is of potential advantage to it is presented, an officer or director is
not permitted to avail himself of that opportunity and to seize it for himself. Bailey v.
Jacobs, 325 Pa. 187, 189 A. 320, 324 (1937).
As is the case with virtually every legal principle, there are exceptions to this one. An
officer may take personal advantage of a corporate business opportunity if the
shareholders consent after full disclosure and it is not detrimental to creditors of the
corporation. Hill v. Hill, 279 Pa.Super. 154, 420 A.2d 1078, 1081 (1980). Also, an
officer or director may seize a corporate business opportunity if the corporation is
incapable of taking advantage of the opportunity for itself. Robinson v. Brier, 412 Pa.
255, 194 A.2d 204, 207 (1963).
The totality of the circumstances presented in this case compel the conclusion that
Richard Gailey utilized debtor's assets to pay his personal debts. In addition, he
usurped a business opportunity belonging to Gailey, Inc. when he incorporated
Universal Labs and placed ownership thereof in his name as opposed to that of debtor.
As has been indicated, the corporate purposes of Gailey, Inc. and Universal Labs,
although generally interrelated, were somewhat different. Gailey, Inc. was in the
business of removing asbestos and mechanical insulation on jobs that required union
labor. Universal Labs was in the business of analyzing asbestos and air samples and of
providing general laboratory work.
This admitted difference does not, however, compel the conclusion that Richard
Gailey did not usurp a business opportunity belonging to Gailey, Inc. when he
incorporated Universal Labs. There was nothing to indicate that Gailey, Inc. was
incapable of expanding the scope of its activities so as to include analyzing asbestos
and air samples. This could have been done as easily as forming a separate
corporation to perform such functions.
Moreover, Richard Gailey's decision to incorporate Universal Labs to perform these
functions instead of enlarging the scope of Gailey, Inc.'s activities was never formally
approved by the shareholders of Gailey, Inc. His dominion over the affairs of Gailey,

Inc. was so absolute that Richard Gailey readily accepted the benefits of the corporate
fiction while refusing to comply with its requirements.
Additionally, his decision to incorporate Universal Labs was detrimental to Gailey,
Inc. and its creditors. It was detrimental to Gailey, Inc. in that it expended its own
funds on behalf of Universal Labs without receiving any obvious benefit in return.
The decision was detrimental to Gailey, Inc.'s creditors for much the same reason.
If an officer or director has usurped a corporate business opportunity, the aggrieved
corporation may recover all damages suffered by it as a result thereof. CST, Inc. v.
Mark, 360 Pa.Super. 303, 520 A.2d 469, 472 (1987). Debtor sustained proven
damages in the amount of $14,500.00 when it paid Universal's start-up costs and
expenses. The trustee therefore is entitled to recover this amount from Richard
Gailey

Question 2:
The doctrine of disregarding the corporate entity or piercing the corporate veil is an
equitable remedy imposed to rectify an abuse of the corporate privilege.
The informality with which Aztec may have been operated neither prejudiced nor
misled Truckweld in its consideration of Aztec's credit application. Nor does plaintiff
challenge the trial court's finding that Olson intended that the formalities be observed
and that Burns failed to carry out instructions. In any event, we cannot see how
Truckweld's position would be different had Aztec meticulously documented its
corporate actions. Frigidaire Sales Corp. v. Union Properties, Inc., 88 Wn.2d 400,
562 P.2d 244 (1977); Block v. Olympic Health Spa, Inc., 24 Wn.App. 938, 604 P.2d
1317 (1979); Soderberg Advertising, Inc. v. Kent-Moore Corp., 11 Wn.App. 721, 524
P.2d 1355 (1974); Sirmons v. Arnold Lumber Co., 167 So.2d 588 (Fla. 1964).2
Moreover, we see no injustice to Truckweld from the mere fact that Aztec was unable
eventually to pay for the assembly and modifications. The limited liability afforded a
stockholder of an otherwise legitimate corporate enterprise does not, without more,
justify invocation of the disregard theory. Personal liability on that basis alone would
undermine the very foundation of the entity concept. See 1 W. Fletcher at 41.2.
Typically, the injustice which dictates a piercing of the corporate veil is one involving
fraud, misrepresentation, or some form of manipulation of the corporation to the
stockholder's benefit and creditor's detriment. Morgan v. Burks, 93 Wn.2d 580, 611
P.2d 751 (1980). The trial court found no such wrongful conduct in the case at bar,
and that finding is supported by the substantial evidence we have outlined.
Although there may be situations in which a corporation is so thinly capitalized that it
manifests a fraudulent intent, we do not find such to be true in the case at bar. See

Frigidaire Sales Corp. v. Union Properties, Inc., supra at 404. Olson acquired Aztec
when it was financially troubled; he was not the original incorporator and he sought
only to improve Aztec's profit picture.3 Despite gross sales of over $800,000 it appears
a combination of unfortunate timing and persistent working capital problems sounded
Aztec's death knell. We know of no rule of law requiring a corporate stockholder to
commit additional private funds to an already faltering corporation.4 See Sutton v.
Reagan & Gee, 405 S.W.2d 828, 837 (Tex. Civ. App. 1966) (wherein the court
recognized that a new stockholder's unsuccessful efforts to save a dying corporation
did not justify disregarding the corporate entity). Nor is this a case where Olson
induced Truckweld to deal with Aztec by representing that he would infuse the
company with further capital. Soderberg Advertising, Inc. v. Kent-Moore Corp.,
supra. Again, the evidence supports the trial court's finding that, because of his
reliance on Burns, Olson was not aware of the dire straits into which the corporation
had fallen until Burns left the company.
The law provides adequate safeguards with which Truckweld could have protected its
interests in light of what it knew about Aztec and Olson. Yet, Truckweld made no
effort to obtain Olson's personal guaranty prior to extending credit nor did it file
timely chattel liens when Aztec's payment became questionable. It was Truckweld's
failure to utilize these safeguards which contributed to its loss, not any misconduct or
abuse of the corporate form by Olson. See Culinary Workers & Bartenders Union
Local 596 v. Gateway Cafe, Inc., 91 Wn.2d 353, 588 P.2d 1334 (1979); Soderberg
Advertising, Inc. v. Kent-Moore Corp., supra; Notes, Disregard of the Corporate
Entity, 4 Wm. Mitchell L. Rev. 333 (1978).
We find this argument to be without factual support. Barnes v. Treece, 15 Wn.App.
437, 549 P.2d 1152 (1976), cited as authority by Truckweld, concerns ratification of a
contract made by an agent acting in excess of his authority. Truckweld points to no
evidence indicating that Olson made Aztec his agent for personal business. Aztec's
contract with Truckweld was formed by Aztec's agent for the benefit of Aztec.
Question 4:
(a) A partnership may be established either by a writing or by parol (Code Ann.
75-101 (Code 75-101)), or as to third persons such as Triangle and BVC, a
joint interest in profits and losses of the business, but a common interest in
profits alone would not. Code Ann. 75-102 (Code 75-102). "The issue of
partnership or no partnership, raised by the pleading[s] [and evidence] in this
case, was broad enough to authorize proof by the plaintiff of either a
partnership in fact or an ostensible partnership." Reliance Fertilizer Co. v.
Perry, 23 Ga.App. 580, supra. "An ostensible partner is one whose name

appears to the world as such, and he shall be bound, though he has no interest
in the firm." Code Ann. 75-104 (Code 75-104).
An actual contract by which a partnership is formed is not always essential to support
the liability of one person as the partner of another. "As to third persons, he may
assume such a liability by inducing them to extend a credit upon the faith of his
representations made by him, either express or implied, to the effect that he was a
partner and as such liable." Carlton v. Grissom & Co., 98 Ga. 118, 121 (2) (26 SE 77).
"Whatever may be the interest of the parties, and whether they be, in fact, partners
under the bargain or not, they will be liable, as such, if they so act as to hold
themselves out to the world as such." Sankey & Shorter v. Columbus Iron Works, 44
Ga. 228 (2). Thus, "[c]redit extended to a firm on the faith of representations by a
person that he is interested in the same, will create a debt against him as a partner."
Carmichael v. Greer, Lake & Co., 55 Ga. 116 (3); accord, Southern Cotton Oil Co. v.
Brownlee, 26 Ga.App. 782 (1) (107 SE 355).
"Partnership or no partnership is generally a mixed question of law and fact, and can
not be resolved as a matter of law unless the verdict one way or the other is demanded
by the evidence." Miraglia v. Gose, 17 Ga.App. 639 (2) (87 SE 906). Whether a
person has held himself out as a partner, and whether a third person has relied upon
such acts, is a question of fact for the jury. Chambliss v. Hall, 113 Ga.App. 96, 99 (2)
(147 S.E.2d 334). Verdict was not demanded for the defendant and the issue was
properly reserved for the jury as the evidence was in conflict. Accordingly, it was not
error to deny defendant's motions for directed verdict. Young v. Wiggins, 229 Ga. 392
(1) (191 S.E.2d 863); Kamensky v. Stacey, 134 Ga.App. 530 (2) (215 S.E.2d 294); see
also Mims v. Brook & Co., 3 Ga.App. 247, 249 (59 SE 711); Meinhard &c. Co. v.
Bedingfield Mercantile Co., 4 Ga.App. 176, 181 (61 SE 34); Mitchell v. Craig & Co.,
11 Ga.App. 79 (1) (74 SE 716); Elliot v. Floyd, 85 Ga.App. 416, 421 (69 S.E.2d 620).
(b) Defendant's reliance upon the Statute of Frauds is not well founded. The
Statute does provide that a promise to answer for the debt of another must be in
writing to be enforceable. Code Ann. 20-401 (2), supra. However, the
promise required by this section to be in writing does not include an original
undertaking. Moate v. H. L. Green Co., 95 Ga.App. 493, 504 (98 S.E.2d 185);
see also Cordray v. James, 19 Ga.App. 156 (1) (91 SE 239); Maddox v. Pierce,
74 Ga. 838; Crowder v. Keys, 91 Ga. 180, 181 (16 SE 986); Easterling v. Bell,
29 Ga.App. 465 (1) (116 SE 50). Thus, where the promiser "guarantees"
another's debt with additional qualifying words such as he would see that the
creditor gets paid, and that he is responsible for the bill, and credit is extended
in reliance upon such words, the jury would be authorized to find that this was

an original undertaking. Chastain-Roberts Co. v. Better Brands, 141 Ga.App.


186, 190 (233 S.E.2d 5).
Whether or not a person who holds himself out to the world as an ostensible partner in
a partnership of which he is not a member is bound to another person by virtue of this
ostensible relation, he can not, by virtue of this relation, become bound for a
partnership debt which he himself did not contract for, unless the creditor, when
extending the credit, had notice of the ostensible relation, and believed that the person
holding himself out as a partner was in fact a member of the partnership.
Question 5:
We also determined that as corporate director and counsel, Ham was under a duty not
only to inform GNI of the circumstances of the transaction, but also to advise GNI of
its legal rights regarding the lease from Shupe.
THE ADDITIONAL EXERCISES:
Case 1:
Tim sets up Barbie shop under the form of a sole proprietorship.
1. May Barbie shop hire some sales assistants? Yes, even the shop is owned and
run by Jim as a natural person, it can hire employees to provide some kinds of
work.
2. Who will responsible for the business decisions of Barbie shop? As a sole
proprietor, Jim is ultimately responsible for the business decisions.
3. To assume, Barbie shop owes its supplier $30,000 that is in excess of its
fund, can the supplier require Tim to pay the debt? The sole proprietor is
personally liable for the debts incurred to his business. He is therefore under
obligation to pay such debt.

Case 2: A partnership namely Joe & partners has one general partner (Joe) and three
limited partners.
1. Who takes part in management of the partnership? As indicated by the rule of
law, the general partner has the right to take part in management of the
partnership. Therefore, as a general partner, Joe manages the partnership.
2. If the partnership has a debt which it cannot pay by its own property, who will
pay the debt? Accordingly the law, general partner has unlimited liability for

the partnerships debt. In this case, Joe is the general partner. Therefore, he is
personally liable for the partnerships unpaid debts.
Question 3: What is the similarity and difference between general partnerships and
limited partnerships?
Similarities: Both are unincorporated entities (giving the definition of a partnership).
Both are applied the flow-through treatment in taxation.
Differences: The members of a general partnership are all general partners. Whereas, a
limited partnership includes one general partner and one limited partner at least. There
is no need to file the articles of general partnership with the state agency. By contrast,
it is required to file the articles of limited partnership with the state agency or
otherwise it will be treated as a general partnership.
Question 4: Who is a stockholder of a corporation? A person who owns one share of
stock of the corporation at least.
Question 5: Charlie has only one stock certificate. Does it mean that Charlie has only
one share of stock? No, a stock certificate may present more than one share of stock.
Case 6: Jim owns 10,000 shares of preferred stock.
-

May Jim have the right to vote? In almost cases, Jim will be deprived of the
right to vote because he is entitled to the privilege over other class of
stockholders.

May Jim have the right to vote accordingly the law of Vietnam? He may have
the right to vote if the shares of stock are the voting preference ones.

Case 7: James holds no certificate of stock, however, his name is printed in Knight
Corporations record book as a stockholder who holds 10 shares of common stock. Is
it sufficient to prove that James is a stockholder? The corporations record book
records the names of stockholders, the number and the class of shares of stock held by
the stockholders. So, it can be used as the alternative evidence to prove Jamess
capacity of stockholder.
Question 8: According to the law of Vietnam, which of the shareholders have the right
to vote? A shareholder who holds common shares and voting preference shares.
Question 9: Does a board of management have right to distribute the dividends to
shareholders accordingly the law of Vietnam? No, accordingly Vietnams current law
on enterprise, the shareholders has to power to distribute the dividends to each
shareholder.

Case 11: Mine Corporation has the capital stock of $100,000.


a. May Mines board of directors distribute dividend to Mines stockholders out
of the capital stock? No, maintenance of capital stock is the fundamental rule to
ensure the existence of a corporation and protect its creditors.
b. Mine Corporation invests $10,000 to purchase shares of stock issued by Bank
Corporation (the invested stock) and invests $99,000 to purchase a coal mine.
The invested stock increased up to $50,000. Mine Corporation earns $20,000 of
net profit from the coal mine. Which earnings may Mines board of director
decide to pay out of to distribute the dividends to Mines stockholders?
Retained earnings can be used to distribute the dividends to the shareholders.
Question 12: May a stockholder who cannot attend the stockholders meeting
authorize another person to represent him to attend and vote at the stockholders
meeting? Yes, taking part in the shareholders meeting is the right of a
shareholder. So, if he cannot attend the meeting, he can authorize another one to
present and vote by proxy at the shareholders meeting.
Case 13: Joseph is a major shareholder of Best Food Corporation.
a. Can Joseph take part in management of Best Food as a major shareholder?
Under the corporate law, the power of management is vested in the board of
directors, not shareholders. Therefore, Joseph cannot take part in the
management of the corporation as a majority shareholder.
b. Best Foods debtor fails to pay the debt as promised. Who can sue debtor to
collect the debt? Best Food can sue the debtor because it enjoys the separate
personality. The authorized agent will bring the debtor before the court on
behalf of the corporation. In case no one initiates the lawsuit, the stockholder
will require the board of directors to sue the debtors on behalf of the
corporation. If after a period of time, the board fails to do what requested by
the shareholder, the shareholder will take the derivative action.
c. Assume at the end of fiscal year, Best Food gets no profit. Can Joseph be
paid dividend? Typically, No profit as retained earnings, no dividend
Question 14: A director must own at least one share in a corporation of which he is a
director. True or False? Why? Under the prevailing law, a person who is not a
shareholder can be elected as a director.
Question 15: May the board of directors remove a director accordingly U.S. law? In
some jurisdictions in US, the board can removed a director in some special
circumstances.
Case 16: MNM Corporations board of directors elects James as a president. James
appoints Laura as a human resource assistant. Must the letter of appointment be

approved by the board of directors? Typically, there is no need to obtain the approval
of the board unless otherwise provided by the by-laws.
Question 17: May a director authorize another person to attend and vote on behalf of
him/her at the meeting of the board of directors? No, presenting at the boards meeting
is the personal service of the director. It means that he is under the obligation to
present at the meeting by himself; he must research the documents, consider the
information and do other work by himself. Traditionally, personal service cannot be
delegated to others. Furthermore, failure to present at the boards meeting may
commit the breach of the duty of care unless he can raise the justification.
Case 18: Well Corporation has the capital stock of $ 10,000. The par-value of each
outstanding share of stock is $1.
a. To assume, Well Corporations stockholders vote for approval of increasing
capital stock. How many are the maximum total votes? One share equals to
one vote.
b. To assume, there are the number of stockholders representing 51% the
outstanding shares of stock at the meeting of stockholder. Is the meeting
legitimate accordingly U.S. law? Is the meeting legitimate accordingly
Vietnamese law? In US: the rule of simple majority rule (more than 50%)
c. To assume, Well Corporations stockholders vote for election of the board
of directors including three directors out of five candidates. How many are
the maximum total votes? The votes = the number of voting shares x the
number of directors being elected
d. May Well Corporations stockholders elect the chief agents of Well
Corporation? No, this authority is given in the hands of the board of
directors.
Case 19: There is an announcement publicized by a famous credit agency: Jet
Corporation has recently downgraded from Baa to C. It means that Jet Corporations
payment default is highly possible. Two thirds of the board of directors of Well
Corporation votes for investment in the bonds issued by Jet Corporation. The
remaining directors dissent the investment. The directors assent and dissent are
recorded. The investment is still approved by the rule of majority which causes the
loss of $10,000 to Well Corporation. Because, Jet Corporation is insolvent and
bankrupt. Who is held personal liability for the loss of Well Corporation?
In practice, investors are unable to make ex ante prediction of financial capacity of
bond issuers. Thus, they rely on credit ratings to make decisions on investment in
proposed bonds. There is the current credit rating issued by a famous credit agency

that indicates that Jets payment obligation is at default risk. However, the majority of
directors of Well Corp still vote for investment in the bonds issued by Jet. Their
decision is blind. They make the investment decision without any due care and
diligence. It means that they breach the duty of care. Therefore, they will be held
personally liable for Wells loss. The minority of directors whose dissents are
recorded will be isolated from the personal liability.

Case 20: ABC Corp., have 09 directors, but four of them are absent from the regular
meeting of the board. Director Jim, making full disclosure of all pertinent facts, offers
to sell office building to ABC. Jims offer is accepted by a three to- two vote, with
Jim voting in favor.
a. Was Jim property counted toward a quorum?Yes, most jurisdictions in U.S.A
have permitted an interested director to be counted toward a quorum. We find
no reason to avoid him from taking part in the board meeting.
b. Was Jims vote properly counted on the sale? No, neither at common law nor
under most statutes, the interested director can have seats on both sides.
c. Same facts as above. Assume ABC buys the building from Jim, after full
disclosure to the board, a proper quorum, and the disinterested majority vote of
the board. Can the Corporation rescind the contract on the ground that it was
made with an interested director? No if there is no evidence of fact giving
indication of unfairness to the corporation.
d. Same fact as above. Assume the contracts had been unfair, and ABC sought
damages, could Jim be liable for more than the difference between the price
paid by ABC and the fair market value of the building? The difference between
price and fair market value would be the usual measure of damage. Subject to
each case, the disinterested director may be ordered to repay his salary during
the breach period, pay the punitive damages and/or other alternative measures
of damages.
Case 21: Joe is a director of Tailor Corp. The owner of a patent having offered to sell
it to Tailor, also offers to sell it to Joe.
a. May Joe buy the patent for his own business while Tailor is still considering
the offer? No. Because the corporation had been already considering the offer.
It was the corporate opportunity which Joe could not usurp.
b. If Joe knows that Tailor is in financial trouble so it cannot meet the owners
proposed price, may he buy the patent? There are two alternative solutions

subject to each jurisdiction. Some courts hold that where the corporation is
unable to take the opportunity, the directors and officers can take advantage of
the opportunity. In contrast, some courts bar the directors and officers from
taking the corporate opportunity on the rationale that they owe the duty to find
necessary financing for the corporation.
c. What is the legal result if Joe buys the patent for his own business while Tailor
is still considering the offer? Tailor Corp may compel a transfer of the patent
and an accounting for any interim income or profit. If Joe buys the patent while
the offer is considering the offer and then sells it to Tailor Corp, Tailor Corp
may recover Joes entire profit.