Agency, Partnership and Corps Flashcards
What are the two key requirements for an agency relationship?
(1) consent by both the principal and the agent that the agent will act for the principal’s benefit and
(2) that the agent is subject to the principal’s
control.
How can authority to act for the principal terminate?
Authority to act for the principal can terminate in several ways, including the principal manifesting a desire to the agent to discontinue the relationship.
What binds a principal on a contract entered into by an agent?
The principal is bound on a contract entered into by an agent if the agent had authority to enter into the contract.
Define actual authority.
Actual authority can be express, where the agent is expressly given authority to act for the principal.
What is implied authority?
Implied authority is present when the principal’s conduct leads the agent to believe it has authority. This authority can be implied by custom, past course of conduct by the principal, necessity, or an emergency circumstance. This authority terminates after a reasonable time or following a change in circumstances, death, or incapacity of the principal, etc
What are the elements of apparent authority?
(1) the person dealing with the agent must do so with a reasonable belief in the agent’s authority and
(2) the belief must be generated by some act or neglect on the part of the principal.
What is ratification in the context of agency?
Even if the agent did not have authority to enter into a transaction, the principal can
ratify the acts (and thus become liable) by expressly or impliedly affirming or accepting the benefit of the acts, so long as the principal knew the material facts and had capacity.
True or False: The agent is bound to a third party on a contract he enters into with the third party if the agent had no actual or apparent authority to enter into the contract.
True.
In what other circumstances is the agent liable?
Key principle #3
The agent is also liable if the principal is undisclosed (i.e., the third party does not know the agent is acting on another’s behalf) or if the principal is “partially disclosed” (i.e., the third party knows the agent is acting on behalf of another but does not know the identity of the principal). The agent is bound to the principal for breach of contract if the agent acts beyond his authority.
What is vicarious liability?
A principal can be vicariously or directly liable for the torts committed by his agent. The agent is always liable for his own torts
What are the conditions under which an employer is liable for an agent’s torts?
Respondeat superior
SMI
▪ was acting in the Scope of employment;
▪ made a Minor deviation (a detour) from employment (rather than a frolic); or
▪ committed an Intentional tort only if it was (mnemonic=BAN) for the principal’s Benefit, because the principal Authorized it, or one that arose naturally due to the nature of employment. The agent is liable too under a theory of joint and several liability.
What is indemnification in agency law?
The principal can recover against the agent for indemnification if the agent acts beyond his authority.
What are the principal’s direct liabilities?
The principal is directly liable for his own negligence if he negligently hired the agent, failed to fire the agent, or failed to properly supervise the agent.
What duties does an agent owe to the principal?
The agent owes a duty of care and a duty of loyalty (not to engage in self-dealing, not to profit without disclosure, and a duty to follow instructions). The principal may recover losses from and profits made by the breaching agent.
What is the general definition of a partnership?
A partnership is ‘the association of two or more persons to carry on as co-owners, a business for profit . . . whether or not the persons intended to form the partnership.’
What is the presumption created by profit sharing in a partnership?
Profit sharing creates a presumption that a person is a partner unless the profits were received in payment of a debt, rent to a landlord, wages, etc. Other indicia of a partnership include capital contributions and mutual agency. Neither a writing nor a certificate needs to be filed for a general partnership to be formed. Note that a general partnership is the default form; sometimes a general partnership is formed because a limited partnership was improperly formed (e.g., the paperwork was not filed correctly).
True or False: A partner is entitled to separate payment for services rendered.
False. A partner is not entitled to separate payment for services because a partner is compensted by the profits.
There are some exceptions—e.g., if agreed-upon, or a partner may be reimbursed reasonable compensation if it assists in winding up the business of the partnership.
How work the rights of the partners?
Partners have equal rights to comanage ordinary affairs (e.g., signing a lease) (even if profits are not shared equally). A majority vote wins if there’s disagreement.
What is required for extraordinary matters in a partnership?
Extraordinary matters require a unanimous vote (e.g., admitting a new partner or selling land).
What is the liability of partners in a general partnership for partnership debts?
Partners are jointly and severally liable for partnership debts.
Which partners are liable for which debts?
An incoming partner is not personally liable for prior debts of the partnership (although his capital contributions can be used to satisfy such debts). Outgoing partners are personally liable for debts incurred during their time at the partnership.
What fiduciary duties do partners owe each other?
Partners are in a fiduciary relationship with one another and must act in good faith. They are charged with the duty of loyalty (i.e., they may not usurp corporate opportunities for a personal advantage, engage in self-dealing, or compete with the partnership), the duty of care, and the duty to account (they must account for any profits).
What does dissolution of a partnership entail?
The dissolution of a partnership is the change in the relation of the partners. Prior creditors are entitled to personal notice of the dissolution of the partnership. Others who knew of the partnership are entitled to newspaper notice.
Note that a partner can withdraw from a partnership by giving notice at any time. This will trigger dissolution in an at will partnership.
What is the process following the dissolution of a partnership?
- Dissociation.
- Winding up
- Termination: this is the true end of the partnership!
What must partners do during the winding up phase?
This is where partnership assets are liquidated and creditors are paid.
What can a creditor obtain if they have a claim against a partner?
If a creditor has a claim against a partner, the creditor can obtain an interest in the partnership. This includes profits but not management or voting rights.
What are partners liable for during the winding up phase?
Partners are still liable for any liabilities that occur during the winding up phase.
This includes obligations incurred before the partnership is fully dissolved.
What can a creditor obtain if they have a claim against the partnership?
If a creditor has a claim against the partnership, the creditor can try to collect from the individual partners.
These principles are heavily tested!
What is the liability of partners in a partnership?
Partners are jointly and severally liable for the obligations of the partnership. Even if a partner enters a contract without actual authority to do so, the partnership and partners are bound (so long as the partner had apparent authority).
This means each partner can be held responsible for the entire amount of the partnership’s debts.
How should a creditor attack a partnership?
The creditor must obtain a judgment against the partners personally to go after each partner’s personal assets. The creditor should try to collect from the partnership before seeking partners’ personal assets.
What must partnerships other than general partnerships do to be properly formed?
Partnerships other than general partnerships must file a certificate with the state to be properly formed. Liability is limited.
This is a requirement for limited liability partnerships and limited partnerships.
What is a Limited Liability Partnership (LLP)?
An LLP is a partnership where no partner is personally liable for the obligations of the partnership (but partners are liable for their personal torts).
This structure limits personal liability for business debts.
What are the characteristics of a Limited partnership (LP)?
At least one general partner must be listed on the certificate filed with the state. Limited partners have limited liability (limited to their capital contributions). General partners are liable for all partnership obligations and manage control of the business. If a general partnership converts into an LLP, then partners remain jointly and severally liable for actions that took place before the conversion.
What is required for a corporation to be formed?
The articles of incorporation must be filed with the state, and, if in conflict with bylaws,
the articles control. A corporation is not generally liable for a contract entered into prior to incorporation unless it expressly or impliedly adopts (ratifies) the contract. The promoter (person entering the contract on behalf of the to be formed corporation) is liable.
These articles govern the corporation and take precedence over bylaws in case of conflict.
What is the role of shareholders in a corporation?
Shareholders are only owners and do not manage the corporation. Thus, they
generally just have annual meetings. Written notice of meetings is required 10−60 days prior and must state the time, place, and purpose of the meeting. Shareholders can vote by proxy (have someone vote their shares for them) or by voting agreement. Generally, a quorum (majority of all outstanding shares required to vote) must be present to hold a vote.
What is the role of the director in the corporation?
Directors manage the corporation and (like shareholders) act as a body by voting.
Directors may exercise all corporate powers that are not limited by the articles of incorporation or a shareholders’ agreement, including the power to form contracts and acquire liabilities. Shareholders hire and fire directors. Directors cannot vote by proxy or agreement. A quorum (majority of directors) needs to be present for a vote to take place, but unlike shareholders, directors can “break quorum” by leaving. Notice is required only for special meetings.
What is the business-judgment rule?
Duty of care
There is a presumption that “in making a business decision, the directors acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company.” Directors must be informed to an extent that they reasonably believe is appropriate. They are entitled to rely upon information, opinions, reports, or statements of corporate officers, legal counsel, public accountants, etc., in making a decision.
A party claiming that the directors breached their duty of care has the burden of proof.
What is the duty of loyalty for a director?
A director must act in good faith and with a reasonable belief that what he does is in the corporation’s best interest. The business-judgment rule presumption does not apply if there is a duty of loyalty issue.
What are the three ways a duty of loyalty issue can arise?
- Director is on Both sides of a transaction: a director has a material financial interest in a contract, as well as knowledge of that interest, yet still votes to approve the contract.
- Competes with corporation: a director may not compete with his corporation.
- Corporate opportunity: a corporate officer may not usurp a corporate opportunity.
These are summarized using the mnemonic BCC.
Which are the defenses to liability for breach of the duty of loyalty?
(1) approval by disinterested (qualified) directors (if all relevant information is disclosed),
(2) approval by disinterested (qualified) shareholders, or
(3) if the transaction is judged to be fair to the corporation at the time it was entered into. A qualified director is a director without a conflicting material interest. Qualified shares are those not held by a conflicted director or related person.
What is needed for an LLC to waive the duty of loyalty?
An LLC operating agreement may waive the duty of loyalty (e.g., allow members to open competing businesses) so long as it is not “manifestly unreasonable.”
What is required for a resolution to pass in a shareholder vote?
In order for a resolution to pass, there needs to be a quorum present, and more votes must be cast in favor of the resolution than against it.
A quorum typically means a majority of outstanding shares.
What is the requirement for a proxy to vote on behalf of a shareholder?
A shareholder can appoint a proxy in writing by signing an appointment form or making a verifiable electronic transmission.
Explain the intricacies of revoking a proxy.
A proxy is generally revocable (even if it states it’s irrevocable), and any action inconsistent with the grant of a proxy
works to revoke it. Thus, when 2 or more revocable proxies are given, the last given proxy revokes all previous.
Exception: A proxy is not revocable if it explicitly states it’s irrevocable and is coupled with an interest (e.g., sale of shares). Many states say a proxy is valid for 11 months unless otherwise stated.
For what reasons a shareholder may file a lawsuit against the corporation?
A shareholder may file an action to establish
that the acts of the directors are illegal, fraudulent, or willfully unfair and oppressive to either the corporation or the shareholder. Whether a suit is appropriately brought as a direct or derivative action depends on the injury.
What is a direct suit in the context of shareholder lawsuits?
A direct suit is appropriate when the wrong done amounts to a breach of duty owed to the individual personally. (E.g., shareholder sues for denial of preemptive rights, payment of a dividend, or oppression in a close corporation.)
Recovery from a derivative lawsuit goes to the corporation, not the shareholder.
What is a derivative suit?
A derivative suit is appropriate when the injury is caused to the corporation and a shareholder is trying to enforce the corporation’s rights.
This type of suit is also applicable to LLCs.
What are the three requirements for filing a derivative lawsuit?
- The shareholder must have been a shareholder at the time of the act.
- The shareholder must have made a demand on the board of directors.
- The shareholder must not have been able to obtain adequate relief from the corporation.
This is summarized with the mnemonic SAD.
What are the three requirements a shareholder must meet to file a derivative lawsuit?
SAD
(1) Standing to bring a lawsuit,
(2) Adequacy (the shareholder represents the interests of the corporation), and
(3) Demand (generally, the shareholder should file a written demand and wait 90 days before filing suit unless irreparable injury would result or demand would be futile).
What does ‘standing’ require in the context of a derivative lawsuit?
Standing requires the shareholder to be a contemporaneous owner at the time of the alleged act or omission.
Under what circumstances can a derivative suit be dismissed?
A derivative suit can be dismissed with court approval if it’s not in the best interest of the corporation to continue it.
What is ‘piercing the corporate veil’?
Lawsuits against shareholders
Generally, the law treats a corporation as an entity separate from its shareholders, even where one individual owns all the corporate stock. In some (very limited) circumstances, courts will disregard the LLC form and hold a shareholder personally liable for corporate debt.
It is only allowed in close corporations and LLCs.
What must a plaintiff show to pierce the corporate veil?
Generally, a plaintiff must show that shareholders of the corporation or members of an LLC abused the privilege of incorporating and fairness requires holding them liable. One generally needs to show undercapitalization of the business, failing to follow formalities, commingling of assets, confusion of business affairs, or deception of creditors. Only the shareholders or members who participated in the wrong are personally liable.
What is the shareholder’s right regarding corporate books and records?
A shareholder has a right to inspect corporate books and records as long as his demand is made in good faith and for a proper purpose.
What constitutes a ‘proper purpose’ for inspecting corporate records?
A purpose reasonably related to a person’s
interest as a shareholder (e.g., shareholder articulates a purpose to address “economic risks” to the corporation).
What must a shareholder state when demanding to inspect records?
A shareholder must state (1) his purpose, (2) the records he desires to inspect, and (3) that the records are directly connected to his purpose.
What is required to form an LLC?
Articles of organization must be filed.
Since LLCs are a relatively new form of business association, courts tend to analyze them in the context of corporate or partnership law.
What are the duties of members of an LLC?
Members of an LLC have fiduciary duties. Members of an LLC in a member-managed LLC are treated as agents of the LCC (with actual and apparent authority to bind the LLC in ordinary—but not extraordinary—affairs).
What happens to an LLC if a member leaves?
It leads to dissociation of that member, but it does not lead to winding up or dissolution unless the other members unanimously agree to dissolve the LLC.
Are individual members of an LLC generally liable for losses?
Generally, individual members are not liable for losses. They are liable if the court decides to pierce the LLC veil or if proper procedures for dissolution and winding up have not been followed.
What can creditors do if the proper procedures for an LLC’s dissolution are not followed?
Creditors may enforce claims against each of the LLC members. However, a member’s total liability may not exceed the total value of assets distributed to the member in dissolution.
True or False: Piercing the corporate veil applies to all corporations regardless of circumstances.
False
