Agency, Partnerships, Corporations Flashcards
Agency
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
Capacity
Principal must have contractual capacity, but agent does not
Formalities for creation of agency
1) consent of both parties
2) in writing, if the agent is to enter into Ks within SOFs
3) no consideration required
Agent’s duties to principal
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
Principal’s duties to agents
- 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
Main questions for agency law
1) Does the A entering into K bind the P?
2) Is a P liable for torts committed by the agent?
Actual authority
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
Irrevocable agencies
1) Either:
- agency coupled with an interest
- agency power given as security
2) to protect agent’s rights AND
3) supported by consideration
= irrevocable
Termination of actual authority
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
Apparent authority
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
Types of apparent authority
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
Ratification (authority after the fact)
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
Requirements for ratification
P must:
1) have knowledge of all material facts
2) accept entire transaction AND
3) have capacity to K
Who is bound by the K?
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
P may be vicariously liable for torts of A under two theories:
1) respondeat superior
2) apparent authority
P’s direct liability
1) for P’s own negligence in retaining agent
2) for an A’s tort if they gave A actual authority to commit tort
Respondeat superior (employer-employee)
P (employer) is liable for torts of an A (employee) if the tort was committed within the scope of employment
Independent contractor
P is NOT liable for the torts of an independent contractor
Employee vs independent contractor
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
Uncertainty whether an employee or IC
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
Scope of employment
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
Frolic and detour
Frolic = substantial deviation from employer’s direction
Detour = minor deviation from employer’s directions
Intentional tort liability of employers
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)
Liability for acts of borrowed employees
Borrowed = employee of one employer doing service for another
Liability = who has the primary right of control over the employee
Liability for acts of independent contractors
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
Analysis of P’s liability to a third party on a K entered into by 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)
Analysis of P’s liability for a tort committed by 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
Partnership
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
Partnership formation factors
1) sharing profits raises presumption of partnership
2) right to participate in control of business
3) loss sharing = something owners typically bear
Evidence of partnership
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
Partnership by estoppel
No partnership in fact, but parties are treated like partners to protect reasonable reliance by third parties
Partnership agreement
No agreement required to form partnership
- if no agreement, fall back on statutory default rules
Entity status of partnership
Legal entity distinct from its partners
Additional formation requirements
1) capacity
2) legal purpose
3) consent of all partners
4) statement of partnership authority (optional)
Default rules for voting in partnerships
1) one partner, one vote
2) ordinary business decision = majority vote by number
3) extraordinary business decision = unanimous vote
Default rules for rights of partners
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
Profit/loss sharing default rules
1) Profits shared equally among partners by number
2) losses shared in same manner as profits
Liability to third parties in partnerships
Each partner acts as an agent of the partnership for purposes of business
- authority = agency law
Actual authority in partnerships
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
Apparent authority in partnerships
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
Liability of partners
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
Admitting new partners (and liability of admitted partners)
Requires unanimous vote
Liability = not personally liable for obligations arising before their admission
Liabilities of dissociating partners
Outgoing partner remains liable for obligations arising while they were a partner unless there has been payment, release or novation
Criminal liability of partners
Partners are not criminally liable for crimes of other partners committed within scope of business, unless they participated in some way
Fiduciary duties owed by partners
Partners owe four duties to the partnership and each other:
1) duty of loyalty
2) duty of care
Duty of loyalty
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
Duty of care
- no grossly negligent or reckless conduct
- regular negligence excused
Duty of disclosure
Statutory duty to provide information without demand and on demand
Duty of obedience
Requires partner to obey all reasonable directions of partnership and not act outside of scope of authority
Elimination of duties in partnership agreement
Duties of loyalty and care are fiduciary and can NOT be eliminated
Duty of disclosure is statutory and may be eliminated
Partnership capital and partnership property
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
Determining partnership property
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)
Determining partner’s separate property
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
Partnership’s rights in partnership property
Rights are totally unrestricted = partnership owns it
Partner’s rights in partnership property
- partner is NOT a co-owner of P-ship property
- no interest to transfer
- can use it for P-ship purposes
Partner’s ownership interest in P-ship
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
Dissociation
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
Notice of P’s express will to withdraw from a P-ship at will
automatically triggers dissolution of the p-ship
At will partnership
no agreement to remain partners and no definitive end point or specific undertaking
- default form of p-ship
Term partnership
agreement to remain partners for amount of time or until completion of project
Consequences of dissociation for P-ship
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
Dissolution when P dissociates
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
Buyout
Dissociation of one P does not result in dissolution –> P is entitled to buyout of his P-ship interest by other Ps
Liability of dissociated partner
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!
Dissociated P can cut off liability by
1) notifying creditors directly of dissociation OR
2) filing a public notice of dissociation which becomes effective 90 days after filing
Dissolution of partnership
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
Events causing dissolution
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
Distribution of p-ship assets
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)
Ps right to wind up
All living Ps have a right to participate in winding up except those that wrongfully dissolved or are bankrupt
Limited partnerships
Partnership with at least one general partner and at least one limited partner
- distinct entity and perpetual duration unless otherwise provided
Formation of LP
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”
LP agreement
Contains detail on the operation and governance of LP
- may be written, oral or implied
- can displace most statutory provisions
Management and operation of LPs
- 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
Financial rights in LPs
Distributions made on basis of partners’ contributions
Liability for general partners
Same as liability for general partnership
Liability for Limited partners
limited liability = not personally liable
- can only lose value of their investments
Fiduciary duties of general partners
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
Fiduciary duties for limited partners
Limited P owes no fiduciary duty to partnership or other partners
Limited liability partnerships
General partnership where all partners have limited liability
- General partnership rules apply
Limited liability limited partnership
limited partnership rules, but everyone has limited liability
Formation of LLP
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
Liability in LLPs
An LLP partner is not personally liable for obligations of LLP
Limited liability companies
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
Formation of LLC
File public certificate of organization with state
- name of LLC, including “LLC”
- address of LLC’s registered office
- name and address of registered agent
LLC operating agreement
Details operation and governance of LLC
- can displace most statutory provisions
- may alter duties owed by members, such as duties of loyalty and care
Management and operation of LLC
Management presumed to be by all members unless otherwise agreed
- majority vote for ordinary business
- unanimous vote for extraordinary business
Member-managed LLC
LLC where members handle management themselves
Manager-managed LLC
LLC where managers, who may or may not be members, handle management
Financial rights of LLC members
Profits and losses are based on contributions
Liability of LLC members
Members are not personally liable for LLC’s obligations
- limited liability = can only lose amount of their investments
Fiduciary duties for LLC members
1) duty of loyalty
2) duty of care
Transferability of LLC ownership interests
Partnership rules apply
- financial rights are transferrable
- management rights are not
LLC dissolution events
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
taxation of LLC
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
Best vehicles for closely held businesses
LLPs and LLCs
Corporation
legal entity distinct from its owners that may be created only by filing certain documents with state
Key players in corporations
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
Limited liability for corporations
Only corp itself is liable for corp obligations
- owners only risk investment in corp to purchase ownership interest
Requirements to form a corporation
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
Final step to organizing corporation
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
Internal affairs doctrine
Internal affairs of corp are governed by law of the state of incorporation
Entity status
corp is a legal person = it can sue, be sued, be partner in p-ship, invest, and hold property
Benefit corporation
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
Limited liability of corporation
shareholders are liable only for their stock, not for corp debts
- corp itself is liable for corp debts
Defective incorporation
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
De facto corporation
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
Corporation by estoppel
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
Promoter
person acting on behalf of a corp not yet formed
- procure commitments for capital, etc used by corp after formation
Liability for pre-incorporation agreements
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
Foreign corporations
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
Corp operating in foreign state without registering
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
Raising money to start and operate a corporation
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
Subscriptions
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
Consideration for issuance of stocks
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
Preemptive rights for owners
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
Statutory requirements for directors
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
Removal of directors and vacancies
Removable with or without case
- exception = staggered board can only be removed with cause
Vacancy = board of shareholders select replacement
Board must act as a group
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
Notice for Board meetings
- 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
Actual authority to bind corp in a K only exists if:
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
board of directors’ role
Manages corp = sets policy, supervises officers, declares distributions, determines when stock will be issued, etc.
- can delegate roles to committees of directors
Non-delegable fiduciary duties of directors to corp
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)
Duty of care owed to corp
- 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
Business judgment rule (duty of care)
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
Duty of loyalty to corp
- Burden is on D to prove loyalty
- common scenarios:
1) self-dealing
2) competing ventures
3) corporate oppty
Conflicting transactions/ self-dealing
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
Competing ventures
Directors may engage in unrelated businesses, but engaging in a directly competing business raises serious duty of loyalty problems
Corporate opportunity
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
Loans to directors
Corp can make a loan to a director if it is reasonably expected to benefit the corp
Directors are liable for
1) breaches of fiduciary duties
2) improper loans
3) improper distributions
Determining which directors are liable for board activity
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
Officers of corporation
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
Compensation and selection and removal of officers
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
Hiring and firing of directors vs officers
Director = by shareholders
Officers = by board of directors
Indemnification of officers/directors
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)
Limitations of liability for directors
Articles can eliminate director (and sometimes officer) liability for damages only for duty of care cases
- NOT for intentional misconduct
Shareholders’ management of corporation
Shareholders do not manage corporation unless it is closely held
Close corporation
Small numbers of shareholders and stock not publicly traded
- shareholders can manage directly
Shareholder management agreements
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
Special fiduciary duty in close corps
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
Professional corps
Corp where directors, officers, shareholders must all be licensed professionals
- advantage = shareholders are generally not liable for corp obligations OR each other’s malpractice
Shareholder liability for corp debts
Shareholders are NOT liable for corp debts
- BUT may be liable if court pierces the corporate veil
Piercing the corporate viel
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
Two common PCV fact patterns
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
Liability and PCV
only shareholders who are active in operation of business will be personally liable with PCV
Derivative suits
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
Shareholder direct action
Breach of duty against shareholder by officer or director
- recovery is for benefit of individual shareholder
Derivative suit outcomes
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
Requirements for derivative suits
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
Settling/dismissing a derivative suit
Requires court approval to settle or dismiss
Standard to dismiss = independent investigation concludes that suit is not in corp’s best interest
Types of stock
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
Record shareholders and record date
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
Exceptions to record shareholders voting rule
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
Revocable and irrevocable proxies
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
Shareholder voting trust
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
Shareholder voting agreement
Shareholders can enter into voting agreements providing for how they’ll vote their shares
- can be perpetual
1) in writing and signed
Where shareholders vote
1) at meeting or
2) by unanimous written consent
Annual meetings = required
- elect directors in this meeting
Special meetings
Meeting notice
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
failure to give meeting notice
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
What shareholders vote on and quorum
- elect directors
- remove directors
- fundamental corp changes
quorum = majority of outstanding shares represented, not number of shareholders
Cumulative voting
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
Straight voting
separate election for each seat on the board being elected
Right of first refusal
Shareholder must offer to sell stock to corporation before an outsider
Restrictions on stock transfer
Allowed if not absolute restraint on alienation
Right to inspect (shareholders)
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)
Right to inspect (directors)
Unfettered access to corp books and records - no procedure to access materials
Distributions
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
Corp’s ability to make distributions
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
Liability for unlawful distributions
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
Requirements for fundamental corp changes
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
Dissenting shareholder’s right of appraisal
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
Exclusive remedy if shareholder dissents to fundamental change
Right of appraisal
Amending articles of incorporation
Requires majority of shares entitled to vote
- no right of appraisal
mergers and consolidations
Merger = one corp is absorbed into another
Consolidation = two corps become one corp
Successor liability = corp’s creditors can sue surviving corp
Transfer of all or substantially all assets and share exchange
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.)
Conversion
Corp converts into another business entity
- right of appraisal
Voluntary dissolution
Requires board action and shareholder approval
- corp stays in existence only to wind up business
Involuntary dissolution
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
Winding up corp at dissolution
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
Liquidation preference
“Pay first”
- works like a dividend preference
