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Agency, Partnerships, Corporations Flashcards

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1
Q

Agency

A

Fiduciary relationship that arises when one person (principal) appoints the other person (agent) to act on principal’s behalf and subject to his control with consent from both parties

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2
Q

Capacity

A

Principal must have contractual capacity, but agent does not

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3
Q

Formalities for creation of agency

A

1) consent of both parties
2) in writing, if the agent is to enter into Ks within SOFs
3) no consideration required

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4
Q

Agent’s duties to principal

A

Agent = fiduciary owing:
1) duty of care
- must carry out agency with reasonable care
2) duty of loyalty
- undivided loyalty to principal
- nothing remotely “unfair” to P
3) duty of obedience
- must obey all reasonable directions of P
- aspect of duty of loyalty, but separate obligation

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5
Q

Principal’s duties to agents

A
  • not fiduciary in nature, but still owe obligations

1) all duties imposed in K
2) reasonable compensation
3) reimbursement for expenses
4) not unreasonably interfere with A’s performance

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6
Q

Main questions for agency law

A

1) Does the A entering into K bind the P?
2) Is a P liable for torts committed by the agent?

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7
Q

Actual authority

A

Authority A reasonably believes they possess based on P’s dealings with them
- express = actually in agency agreement
- implied = agent reasonably believes they have authority, inferred from P’s actions, acquiescence or customs

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8
Q

Irrevocable agencies

A

1) Either:
- agency coupled with an interest
- agency power given as security
2) to protect agent’s rights AND
3) supported by consideration
= irrevocable

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8
Q

Termination of actual authority

A

A must have authority at the moment of entering into the K

Termination or revocation occurs by:
1) specified time
2) specified event
3) reasonable time
4) change of circumstances
5) breach of fiduciary duty
6) unilateral act by either party
7) death of either party

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9
Q

Apparent authority

A

Based on third party’s reasonable belief that A is acting on P’s behalf
- protects innocent third parties who rely on P’s hold out of a person as their agent

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10
Q

Types of apparent authority

A

1) A exceeds actual authority but P is still bound
- prior act permitting A to exceed
- power of position = based on agent’s title or position

2) A has no actual authority
- unilateral agent representations
- imposters (P negligent)
- lingering apparent authority = after actual authority ends

3) inherent authority
- respondeat superior
- conduct similar to that authorized

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11
Q

Ratification (authority after the fact)

A

Agency created when A purports to act on behalf of P without any authority but P subsequently validates the act and becomes bound

  • Express = oral or written affirmation of K
  • Implied = P accepts benefits of the K
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12
Q

Requirements for ratification

A

P must:
1) have knowledge of all material facts
2) accept entire transaction AND
3) have capacity to K

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13
Q

Who is bound by the K?

A

1) actual, apparent, ratification = P bound and agent not liable

2) undisclosed or partially disclosed P = P and A bound
- third party has no knowledge A is acting on behalf of P

3) third party liable only to P when P was disclosed
- third party liable to either P or A when P undisclosed

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14
Q

P may be vicariously liable for torts of A under two theories:

A

1) respondeat superior
2) apparent authority

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15
Q

P’s direct liability

A

1) for P’s own negligence in retaining agent
2) for an A’s tort if they gave A actual authority to commit tort

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16
Q

Respondeat superior (employer-employee)

A

P (employer) is liable for torts of an A (employee) if the tort was committed within the scope of employment

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17
Q

Independent contractor

A

P is NOT liable for the torts of an independent contractor

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18
Q

Employee vs independent contractor

A

Employee = P retains right to control manner in which A performs work
- Control over HOW a task should be done

IC = P does not retain right to control manner in which IC performs work
- Control over ONLY that the task should be done

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19
Q

Uncertainty whether an employee or IC

A

Overriding question = right to control and manner/method by which agent conducts tasks:
- degree of skill required
- whose tools and facilities are used
- period of employment
- basis of compensation
- business purposes
- whether person has distinct business
- characterization and understanding of parties
- customs of locality regarding supervision of work

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20
Q

Scope of employment

A

1) conduct was of the kind A was hired to perform
2) tort was performed “on the job”
- detour vs frolic
3) conduct was done at least in part to benefit principal

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21
Q

Frolic and detour

A

Frolic = substantial deviation from employer’s direction

Detour = minor deviation from employer’s directions

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22
Q

Intentional tort liability of employers

A

General rule = Employer not liable for employee’s intentional torts (not normally within scope of employment)
- exception = conduct natural from nature of job (e.g., bouncers)

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23
Q

Liability for acts of borrowed employees

A

Borrowed = employee of one employer doing service for another

Liability = who has the primary right of control over the employee

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24
Q

Liability for acts of independent contractors

A

P will be liable for acts of IC where:
1) inherently dangerous activities are involved
2) nondelegable duties have been delegated or
3) principal knowingly selected an incompetent IC
- if merely negligent, P is liable for their own negligence, but not IC’s

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25
Q

Analysis of P’s liability to a third party on a K entered into by A

A

Did agent have actual or apparent authority at time or K, or did principal ratify K later?
- If yes, P is liable (A usually is not)

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26
Q

Analysis of P’s liability for a tort committed by A

A

Was the tort committed by an employee in the scope of employment?
- If yes, P and A are jointly and severally liable to third party

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27
Q

Partnership

A

2 or more persons associate to carry on as co-owners a business for profit
- no formalities or state filings
- regardless of subjective intent –> only matters that they intended to carry on as co-owners a business for profit

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28
Q

Partnership formation factors

A

1) sharing profits raises presumption of partnership
2) right to participate in control of business
3) loss sharing = something owners typically bear

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29
Q

Evidence of partnership

A

Evidence but no presumption raised:
1) joint tenancy or tenancy in common
2) parties designate as partnership
3) venture requires extensive activity
4) sharing of gross returns

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30
Q

Partnership by estoppel

A

No partnership in fact, but parties are treated like partners to protect reasonable reliance by third parties

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31
Q

Partnership agreement

A

No agreement required to form partnership
- if no agreement, fall back on statutory default rules

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32
Q

Entity status of partnership

A

Legal entity distinct from its partners

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33
Q

Additional formation requirements

A

1) capacity
2) legal purpose
3) consent of all partners
4) statement of partnership authority (optional)

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34
Q

Default rules for voting in partnerships

A

1) one partner, one vote
2) ordinary business decision = majority vote by number
3) extraordinary business decision = unanimous vote

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35
Q

Default rules for rights of partners

A

Management = equal right to participate

Distributions = profits and losses shared equally

Salary/compensation = no right except for winding up business

Indemnification = Right to be indemnified by other partners for expenses incurred

Contribution = right to contribution from other partners if more than fair share of liability paid

Inspection = right to inspect and copy books

Lawsuits = may sue or be sued by partnership

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36
Q

Profit/loss sharing default rules

A

1) Profits shared equally among partners by number
2) losses shared in same manner as profits

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37
Q

Liability to third parties in partnerships

A

Each partner acts as an agent of the partnership for purposes of business
- authority = agency law

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38
Q

Actual authority in partnerships

A

statement of partnership authority = document filed publicly granting or limiting partner’s authority to enter into transactions on behalf of partnership
- gives constructive notice of partner’s authority to transact = binds third parties
- can cut off apparent authority for land transactions ONLY

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39
Q

Apparent authority in partnerships

A

Partner is an agent and has apparent authority to bind the partnership in transactions within ordinary course of partnership’s business
- must be business of the kind by partnership
- limited by third party’s actual or notice knowledge of partner’s authority
- NOT waivable

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40
Q

Liability of partners

A

Each partner is jointly and severally liable for all obligations of partnership in tort and contract

Plaintiff must exhaust all partnership resources before seeking to collect from individual partners

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41
Q

Admitting new partners (and liability of admitted partners)

A

Requires unanimous vote

Liability = not personally liable for obligations arising before their admission

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42
Q

Liabilities of dissociating partners

A

Outgoing partner remains liable for obligations arising while they were a partner unless there has been payment, release or novation

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43
Q

Criminal liability of partners

A

Partners are not criminally liable for crimes of other partners committed within scope of business, unless they participated in some way

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44
Q

Fiduciary duties owed by partners

A

Partners owe four duties to the partnership and each other:
1) duty of loyalty
2) duty of care

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45
Q

Duty of loyalty

A

acting with other partners’ and partnership’s interest first and with utmost fairness
- account to partnership for any benefit taken
- no taking adverse positions to partnership
- no competing with partnership

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46
Q

Duty of care

A
  • no grossly negligent or reckless conduct
  • regular negligence excused
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47
Q

Duty of disclosure

A

Statutory duty to provide information without demand and on demand

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48
Q

Duty of obedience

A

Requires partner to obey all reasonable directions of partnership and not act outside of scope of authority

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49
Q

Elimination of duties in partnership agreement

A

Duties of loyalty and care are fiduciary and can NOT be eliminated

Duty of disclosure is statutory and may be eliminated

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50
Q

Partnership capital and partnership property

A

Capital = property or money contributed by each partner for purpose of carrying on business

Property = everything the partnership owns, both capital and subsequently acquired in transactions

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51
Q

Determining partnership property

A

Partnership property is property:
1) acquired in partnership’s name
2) acquired in partner’s name who was acting for partnership
3) purchased with partnership funds (rebuttable presumption)

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52
Q

Determining partner’s separate property

A

Property is rebuttably presumed to be partner’s if:
1) it’s held in the name of one or more partners
2) instrument transferring title gives no sign that they’re acting for a partnership
3) partnership funds were not used to acquire it

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53
Q

Partnership’s rights in partnership property

A

Rights are totally unrestricted = partnership owns it

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54
Q

Partner’s rights in partnership property

A
  • partner is NOT a co-owner of P-ship property
  • no interest to transfer
  • can use it for P-ship purposes
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55
Q

Partner’s ownership interest in P-ship

A

P-ship interest = personal property of partner, but there are restrictions:

1) management rights = right to participate in business’s management
- NO unilateral transfer of these rights
- requires unanimous vote of existing partners

2) financial rights = rights to receive profits
- unilateral transfer of these rights is allowed –> transferee gets profits that would have gone to partner
- transferee is NOT the partner

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56
Q

Dissociation

A

Partner’s withdrawal from partnership - occurs by:
1) oral or written notice of P’s express will to withdraw (voluntary)
2) happening of an agreed event
3) valid expulsion of P
4) P’s bankruptcy or appointment of receiver
5) P’s death or incapacity
6) decision of court that P is incapable of performing duties
7) termination of business entity that is a P

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57
Q

Notice of P’s express will to withdraw from a P-ship at will

A

automatically triggers dissolution of the p-ship

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58
Q

At will partnership

A

no agreement to remain partners and no definitive end point or specific undertaking
- default form of p-ship

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59
Q

Term partnership

A

agreement to remain partners for amount of time or until completion of project

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60
Q

Consequences of dissociation for P-ship

A

1) P-ship is dissolved and business must be wound up
- business is liquidated (sold off)

2) P-ship continues to exist and other Ps buy out the dissociating P

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61
Q

Dissolution when P dissociates

A

Required when:
1) P dissociates by express will in an at-will P-ship
2) in term P-ship, one P wrongfully dissociates or dissociation occurs because of P’s death or bankruptcy

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62
Q

Buyout

A

Dissociation of one P does not result in dissolution –> P is entitled to buyout of his P-ship interest by other Ps

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63
Q

Liability of dissociated partner

A

Pre-dissociation = remains liable for these obligations

Post-dissociation = may be liable for obligations incurred within 2 years after dissociation if:
1) other party reasonably believed dissociated partner was still a P and
2) other party had no notice of dissociation
- apparent authority continues for 2 years if no notice!

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64
Q

Dissociated P can cut off liability by

A

1) notifying creditors directly of dissociation OR
2) filing a public notice of dissociation which becomes effective 90 days after filing

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65
Q

Dissolution of partnership

A

Selling off assets and paying off P-ship liabilities and debts
- not enough assets to cover debts = Ps must contribute according to their loss shares
- surplus assets = distributed to Ps according to profit shares

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66
Q

Events causing dissolution

A

1) dissociation by express will of P in P-ship at will
2) expiration of definite term or undertaking
3) happening of agreed upon event in p-ship agreement
4) illegality
5) issuance of judicial decree
6) passage of 90 consecutive days without at least 2 partners

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67
Q

Distribution of p-ship assets

A

1) creditors, including Ps who loaned money to firm
2) reimburse Ps for capital contributions
3) Ps based on profit sharing (or loss if there is a deficit)

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68
Q

Ps right to wind up

A

All living Ps have a right to participate in winding up except those that wrongfully dissolved or are bankrupt

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69
Q

Limited partnerships

A

Partnership with at least one general partner and at least one limited partner
- distinct entity and perpetual duration unless otherwise provided

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70
Q

Formation of LP

A

1) certificate of LP filed with Sec of State, including names and addresses of partners/p-ship
2) must maintain records office
3) must have registered agent = person designated to receive official mail from the state or to receive service of process
4) name must contain the phrase “LP”

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71
Q

LP agreement

A

Contains detail on the operation and governance of LP
- may be written, oral or implied
- can displace most statutory provisions

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72
Q

Management and operation of LPs

A
  • GPs are managers of LP
  • each GP has equal rights
  • majority vote of GPs required for ordinary business
  • Limited Ps usually have no management rights unless LP agreement grants them rights
  • all limited Ps do is put in money
  • vote of LPs and GPs required for certain extraordinary activities
73
Q

Financial rights in LPs

A

Distributions made on basis of partners’ contributions

74
Q

Liability for general partners

A

Same as liability for general partnership

75
Q

Liability for Limited partners

A

limited liability = not personally liable
- can only lose value of their investments

76
Q

Fiduciary duties of general partners

A

Same duties of care and loyalty owed in a general partnership
- BUT GP does NOT automatically violate duty of loyalty merely because GP’s conduct furthers his own interests

77
Q

Fiduciary duties for limited partners

A

Limited P owes no fiduciary duty to partnership or other partners

78
Q

Limited liability partnerships

A

General partnership where all partners have limited liability
- General partnership rules apply

79
Q

Limited liability limited partnership

A

limited partnership rules, but everyone has limited liability

80
Q

Formation of LLP

A

P-ship must file statement of qualification with the secretary of state including:
1) name, ending with LLP
2) statement electing LLP designation
3) deferred effective day, if any

81
Q

Liability in LLPs

A

An LLP partner is not personally liable for obligations of LLP

82
Q

Limited liability companies

A

NOT CORPORATIONS or partnerships

Hybrid of corporation and p-ship where owners have limited liability and p-ship tax treatment

Members = owners of an LLC

83
Q

Formation of LLC

A

File public certificate of organization with state
- name of LLC, including “LLC”
- address of LLC’s registered office
- name and address of registered agent

84
Q

LLC operating agreement

A

Details operation and governance of LLC
- can displace most statutory provisions
- may alter duties owed by members, such as duties of loyalty and care

85
Q

Management and operation of LLC

A

Management presumed to be by all members unless otherwise agreed
- majority vote for ordinary business
- unanimous vote for extraordinary business

86
Q

Member-managed LLC

A

LLC where members handle management themselves

87
Q

Manager-managed LLC

A

LLC where managers, who may or may not be members, handle management

88
Q

Financial rights of LLC members

A

Profits and losses are based on contributions

89
Q

Liability of LLC members

A

Members are not personally liable for LLC’s obligations
- limited liability = can only lose amount of their investments

90
Q

Fiduciary duties for LLC members

A

1) duty of loyalty
2) duty of care

91
Q

Transferability of LLC ownership interests

A

Partnership rules apply
- financial rights are transferrable
- management rights are not

92
Q

LLC dissolution events

A

1) upon happening of event in operation agreement
2) consent of all members
3) 90 consecutive days where there are no members
4) judicial dissolution
5) administrative dissolution

93
Q

taxation of LLC

A

Pass-through tax = business entity does not pay taxes as an entity
- instead, owners pay tax on personal income tax return
- must declare on tax return EVEN IF proceeds were not distributed

94
Q

Best vehicles for closely held businesses

A

LLPs and LLCs

95
Q

Corporation

A

legal entity distinct from its owners that may be created only by filing certain documents with state

96
Q

Key players in corporations

A

1) shareholders = owners of corp
2) board of directors = group in charge of management of corp
3) officers = agents of corp appointed to carry out corp’s policy

97
Q

Limited liability for corporations

A

Only corp itself is liable for corp obligations
- owners only risk investment in corp to purchase ownership interest

98
Q

Requirements to form a corporation

A

1) person = incorporator
- executes articles and delivers to secretary of state
2) paper = articles of incorporation
- name of corp
- name and address of incorporator
- name of registered agent and address of registered office
- information regarding stock
3) act = deliver articles to sec of state with required fees
- once accepted, corp is formed

99
Q

Final step to organizing corporation

A

Hold an organizational meeting to:
1) adopt initial bylaws
- bylaws = internal document
- operating manual for corp
- articles govern if there’s a conflict
- board or shareholders can amend, repeal and adopt bylaws

2) appoint officers

100
Q

Internal affairs doctrine

A

Internal affairs of corp are governed by law of the state of incorporation

101
Q

Entity status

A

corp is a legal person = it can sue, be sued, be partner in p-ship, invest, and hold property

102
Q

Benefit corporation

A

one formed for profit and to pursue a benefit to a broader social policy cause
- files annual benefit report
- advantage = decision makers can consider shareholders AND broader community/environment

103
Q

Limited liability of corporation

A

shareholders are liable only for their stock, not for corp debts
- corp itself is liable for corp debts

104
Q

Defective incorporation

A

incorporators thought they formed corp but did not –> this makes them partners and liable for business debts

To escape liability, one of two doctrine must apply:
1) de facto corporation
2) corporation by estoppel

105
Q

De facto corporation

A

must meet these requirements:
1) relevant incorporation statute (every state has one)
2) good faith, colorable attempt to comply (came close to forming corp)
3) acted as thought it was a corp
- must be unaware they did not form a corp

106
Q

Corporation by estoppel

A

Persons who have dealt with entity as if it were a corp will be estopped from denying corp’s existence
- applies only in K cases, not torts

107
Q

Promoter

A

person acting on behalf of a corp not yet formed
- procure commitments for capital, etc used by corp after formation

108
Q

Liability for pre-incorporation agreements

A

Corporation liability = only bound by K entered into by promoter if it expressly or impliedly adopts the K

Promoter liability = unless K clearly says otherwise, liable until novation
- promoter still liable, even if corp adopts K
- liability not relieved until novation by corp

109
Q

Foreign corporations

A

If a corp is transacting business in a foreign state from incorporation, must qualify and pay prescribed fees
- qualify = register to do business in state
- must appoint registered agent and maintain registered office in state

110
Q

Corp operating in foreign state without registering

A

Corp will be subject to civil fine and cannot assert a claim in that state
- can be sued in state though
- once it has registered and paid back fees and fines, it can assert a claim

111
Q

Raising money to start and operate a corporation

A

1) debt securities = corp borrows money (bonds) –> person holding bond is a creditor

2) equity securities = corp sells ownership interest (stocks) –> person holding stock is an owner

3) issuance = corp sells its own stock

112
Q

Subscriptions

A

written offers to buy stock from a corp

Preincorp subscription = irrevocable for six months unless otherwise agreed
- payment due upon demand of the board

Postincorp subscription = revocable until accepted by corp

113
Q

Consideration for issuance of stocks

A

1) form = any tangible or intangible property to benefit to corp
2) amount = par or determined by board
a) par (traditional view) = minimum issuance price
- no par = no minimum price, board can issue stock for any price it sets
- watered stock = occurs when par value stock is issued for less than par value

b) board determines value (modern view) = allows corp to issue shares for whatever consideration directors deem appropriate
- board’s valuation is conclusive if made in good faith

114
Q

Preemptive rights for owners

A

right of existing shareholder to maintain percentage of ownership by buying stock if there is a new issuance for money
- share won’t be diluted if preempted rights are exercised
- right must be stated in articles
- silent articles = no rights
- rights only attach for issuance of money

115
Q

Statutory requirements for directors

A

Directors = responsible for management of business and affairs of corp

1) adult natural persons
2) one or more
3) initial directors named in articles or elected by incorporators at org meeting
4) shareholders elect directors thereafter
5) elected each year unless it is a staggered board

116
Q

Removal of directors and vacancies

A

Removable with or without case
- exception = staggered board can only be removed with cause

Vacancy = board of shareholders select replacement

117
Q

Board must act as a group

A

1) individual directors have no authority to speak for or bind corp
2) methods of board action:
a) unanimous agreement in writing
b) at a meeting

118
Q

Notice for Board meetings

A
  • regular meeting = none required
  • special meeting = must give at least 2 days’ notice of date, time and place
  • failure to give notice = voidable meeting, unless waived
  • no proxies for voting
  • quorum = majority of all directors
  • majority of those present required to pass resolution
  • broken quorum = people leave and no action can be taken that meeting
119
Q

Actual authority to bind corp in a K only exists if:

A

1) proper notice was given for directors’ meeting AND
- quorum was present and a majority approved the action OR
2) unanimous written consent of directors

120
Q

board of directors’ role

A

Manages corp = sets policy, supervises officers, declares distributions, determines when stock will be issued, etc.
- can delegate roles to committees of directors

121
Q

Non-delegable fiduciary duties of directors to corp

A

1) discharge duties in good faith and reasonable belief that actions are in best interest of corp (duty of loyalty)
2) use care that person in like position would reasonably believe appropriate under circumstances (duty of care)

122
Q

Duty of care owed to corp

A
  • burden is on person challenging director’s action
  • two common scenarios:
    1) nonfeasance = director does nothing (lazy)
  • liable only if breach causes a loss to corp
    2) misfeasance = board makes decision that hurts corp
  • Business judgment rule applies to determine liability
123
Q

Business judgment rule (duty of care)

A

Court will not second guess business decision if was made in good faith, informed, and had a rational basis
- if board was reasonably prudent in making the decision (did proper homework first) = not liable
- burden is on challenger of decision

124
Q

Duty of loyalty to corp

A
  • Burden is on D to prove loyalty
  • common scenarios:
    1) self-dealing
    2) competing ventures
    3) corporate oppty
125
Q

Conflicting transactions/ self-dealing

A

Conflicting transaction = between corp and:
1) a director; 2) director’s close relative or 3) director’s other business

Transaction upheld if:
1) approved by majority of disinterested directors
2) approve by majority of votes by disinterested shareholders OR
3) overall fair to corp when entered into

126
Q

Competing ventures

A

Directors may engage in unrelated businesses, but engaging in a directly competing business raises serious duty of loyalty problems

127
Q

Corporate opportunity

A

Directors prohibited from diverting business oppty from corp to themselves without first giving corp oppty to act
- only arises in an oppty in which corp would have interest or expectancy
- lack of financial ability of corp not a defense

128
Q

Loans to directors

A

Corp can make a loan to a director if it is reasonably expected to benefit the corp

129
Q

Directors are liable for

A

1) breaches of fiduciary duties
2) improper loans
3) improper distributions

130
Q

Determining which directors are liable for board activity

A

Director is presumed to concur with board action unless her dissent is noted in writing in corp records
- oral dissent by itself is not enough
- exception:
1) not liable if absent from meeting
2) good faith reliance on information

131
Q

Officers of corporation

A

Officers = agents of corp
- owe same duties of care and loyalty as directors
- binding corp depends on actual/apparent authority to do so
- one person can hold multiple offices simultaneously

132
Q

Compensation and selection and removal of officers

A

Compensation set by board

Selected and removed by board (with or without cause at any time)

Officers can also resign at any time with notice to corp

133
Q

Hiring and firing of directors vs officers

A

Director = by shareholders

Officers = by board of directors

134
Q

Indemnification of officers/directors

A

1) none = corp cannot indemnify if D/O held liable to corp or received improper benefit

2) mandatory = corp must indemnify if D/O successful in defending on the merits or otherwise

3) permissive = corp may indemnify if D/O was unsuccessful in defending, but shows they acted in good faith and reasonably believed they were acting in best interests of corp (duty of loyalty standard)

135
Q

Limitations of liability for directors

A

Articles can eliminate director (and sometimes officer) liability for damages only for duty of care cases
- NOT for intentional misconduct

136
Q

Shareholders’ management of corporation

A

Shareholders do not manage corporation unless it is closely held

137
Q

Close corporation

A

Small numbers of shareholders and stock not publicly traded
- shareholders can manage directly

138
Q

Shareholder management agreements

A

Set up alternative management for a close corp:
1) in the articles and approved by all shareholders or
2) by unanimous written shareholder agreement

Without this agreement, power to manage corp remains with board of directors

139
Q

Special fiduciary duty in close corps

A

Shareholders owe a duty of utmost good faith to other shareholders
- like P-ships
- horizontal duty

  • controlling shareholders cannot use their power to benefit at expense of minority shareholders
  • oppression of minority shareholders = breach of special duty
140
Q

Professional corps

A

Corp where directors, officers, shareholders must all be licensed professionals
- advantage = shareholders are generally not liable for corp obligations OR each other’s malpractice

141
Q

Shareholder liability for corp debts

A

Shareholders are NOT liable for corp debts
- BUT may be liable if court pierces the corporate veil

142
Q

Piercing the corporate viel

A

Doctrine that allows shareholders to be sued for debts of corp
- only available for close corps
- must show:
1) shareholders have privilege of incorporating
2) fairness requires holding them liable

143
Q

Two common PCV fact patterns

A

1) alter ego (identity of interests) = shareholders ignore corp formalities such that corp is just the “alter ego” of the shareholders and some basic injustice arises
- treat corp assets as their own
- commingle their money with corp money

2) Undercapitalization = corp is inadequately capitalized, so at the time of formation there is not enough unencumbered capital to reasonable cover prospective liabilities

144
Q

Liability and PCV

A

only shareholders who are active in operation of business will be personally liable with PCV

145
Q

Derivative suits

A

Shareholder sues to enforce the corp’s claim, not her personal claim
- shareholder as plaintiff if she believes corp as been wronged but directors have not done anything to enforce its rights
- if corp could have brought suit = derivative

146
Q

Shareholder direct action

A

Breach of duty against shareholder by officer or director
- recovery is for benefit of individual shareholder

147
Q

Derivative suit outcomes

A

1) P shareholder wins = money from judgment goes to corp
- P recovers costs and fees only

2) P shareholder loses = liable for D’s fees if P sued without reasonable cause
- not entitled to costs and fees
- other shareholders barred from suing on same transaction again

148
Q

Requirements for derivative suits

A

1) stock ownership when claim arose
2) adequate representation of corp’s interests
3) P makes written demand on corp that it brings the suit
- unless directors will be Ds
4) corp is joined as a D because it did not assert the claim

149
Q

Settling/dismissing a derivative suit

A

Requires court approval to settle or dismiss

Standard to dismiss = independent investigation concludes that suit is not in corp’s best interest

150
Q

Types of stock

A

1) authorized stock = max number of shares a corp can sell

2) issued stock = number of shares corp actually sold

3) outstanding stock = shares issued and not reacquired

151
Q

Record shareholders and record date

A

Shareholders of record on the record date may vote at the meeting
- each outstanding share is entitled to one vote

  • Record shareholder = person shown as a stock owner in corp records
  • record date = voter eligibility cut off
152
Q

Exceptions to record shareholders voting rule

A

1) treasury stock = corp reacquires stock before the record date (no vote because no outstanding stock)

2) shareholder dies = executor can vote the shares

3) voting by proxy = writing authorizing another to vote the shares

153
Q

Revocable and irrevocable proxies

A

Proxy revoked by:
1) writing to corp secretary or
2) attending meeting and voting
3) appointing new proxy

Irrevocable proxy:
1) must state that it is irrevocable AND
2) must be combined with an interest in shares

154
Q

Shareholder voting trust

A

Written agreement of shareholders under which all shares owned by parties to agreement are transferred to a trustee who votes the shares and distributes dividends according to agreement
- ten year max but renewable

1) written agreement controlling how shares will be voted
2) give copy of agreement to corp
3) transfer legal title of shares to voting trustee
4) give original shareholders trust certificates

155
Q

Shareholder voting agreement

A

Shareholders can enter into voting agreements providing for how they’ll vote their shares
- can be perpetual

1) in writing and signed

156
Q

Where shareholders vote

A

1) at meeting or
2) by unanimous written consent

Annual meetings = required
- elect directors in this meeting

Special meetings

157
Q

Meeting notice

A

Must be in writing and delivered 10-60 days before meeting
- must state date time and place of meeting
- special meetings = must state purpose of the meeting, and that is the only matter than can be dealt with at the meeting

158
Q

failure to give meeting notice

A

action taken at meeting is voidable or void unless those not sent notice waive the defect

  • Express waiver = in writing and signed
  • implied waiver = attend meeting and make no objection at outset
159
Q

What shareholders vote on and quorum

A
  • elect directors
  • remove directors
  • fundamental corp changes

quorum = majority of outstanding shares represented, not number of shareholders

160
Q

Cumulative voting

A

method to give small shareholders better chance of electing someone to the board
- only for election of directors
- only in close corps
- don’t vote for each seat individually, but one at large election
- multiply number of shares by number of directors to be elected
- articles must provide for - otherwise straight voting

161
Q

Straight voting

A

separate election for each seat on the board being elected

162
Q

Right of first refusal

A

Shareholder must offer to sell stock to corporation before an outsider

163
Q

Restrictions on stock transfer

A

Allowed if not absolute restraint on alienation

164
Q

Right to inspect (shareholders)

A

Shareholder has right to review corp’s books and records on written demand
- noncontroversial things = 5 days notice in writing and no purpose required
- controversial = demand must state proper purpose for inspection (one related to shareholder’s interest)

165
Q

Right to inspect (directors)

A

Unfettered access to corp books and records - no procedure to access materials

166
Q

Distributions

A

Payments by corp to shareholders
- dividend
- repurchase
- redemption = forced sale to corp at price set in articles

  • within board’s discretion alone = no right to distribution until board declares
167
Q

Corp’s ability to make distributions

A

Corp cannot make any distribution if it is insolvent or distribution would render is insolvent

Insolvent = unable to pay debts as they come due OR total assets are less than total liabilities

168
Q

Liability for unlawful distributions

A

Directors are jointly and severally liable for improper distributions, unless good faith reliance on reasonable accounting information

Shareholders are only liable if they knew distribution was improper when they received it

169
Q

Requirements for fundamental corp changes

A

1) board action
2) written notice to shareholders of proposal
3) shareholder approval
- majority of shares entitled to vote
4) delivery document of changes to state

170
Q

Dissenting shareholder’s right of appraisal

A

Right to force corp to buy their stock at FMV
- right to force a buy out
- only applies to certain changes:
1) merging or consolidating
2) transferring substantially all assets
3) stock being acquired in a share exchange
4) converting to another form of business

ONLY applies in close corps:
- not listed on a national exchange
- less than 2,000 shareholders

171
Q

Exclusive remedy if shareholder dissents to fundamental change

A

Right of appraisal

172
Q

Amending articles of incorporation

A

Requires majority of shares entitled to vote
- no right of appraisal

173
Q

mergers and consolidations

A

Merger = one corp is absorbed into another

Consolidation = two corps become one corp

Successor liability = corp’s creditors can sue surviving corp

174
Q

Transfer of all or substantially all assets and share exchange

A

Fundamental change only for selling corp, not buying corp
- requires transfer of at least 75% of assets
- rights of appraisal for selling corp only
- no successor liability –> selling corp still exists, unless buyer is mere continuation of seller (same management, shareholders, etc.)

175
Q

Conversion

A

Corp converts into another business entity
- right of appraisal

176
Q

Voluntary dissolution

A

Requires board action and shareholder approval
- corp stays in existence only to wind up business

177
Q

Involuntary dissolution

A

Requires court order and can be requested by:
1) shareholder because of director abuse, deadlock, failure to fill vacancy
2) creditor because corp is insolvent and creditor has judgment

178
Q

Winding up corp at dissolution

A

1) provide written notice
- to know creditors
- in newspaper in county of PPB
2) gather cash
3) liquidate assets
4) pay creditors
5) distribute remaining sums to shareholders pro rate by share unless there is a liquidation preference

179
Q

Liquidation preference

A

“Pay first”

  • works like a dividend preference

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