All Flashcards
Issue spots for duty of loyalty violation
1.Interested director transaction
- Competition with corporation
- Usurping corporate opportunity
Duty of loyalty standard
A director owes the corporation a duty of loyalty. She must act in good faith and with the reasonable belief that what she does is in the corporation’s best interest.
Corporate opportunity defined
(1) An opportunity that is one that concerns something in the corporation’s line of business OR
(2) An opportunity that the company has an interest or expectancy in OR
(3) An opportunity the director found while on company time and using company resources.
A COMPANY’S FINANCIAL ABILITY TO PAY IS NOT A DEFENSE. NEED TO LET THE CORP MAKE THAT DECISION ON THEIR OWN.
Limited purpose provision
A corporation has the power to engage in any lawful business. A corporation may limit the business in which it may engage in by having a narrow purpose provision in its articles of incorporation. If it does not have a provision, then it is presumed that the corporation can engage in any lawful activity. A corporation may not engage in activities outside its stated purpose. Business outside the scope of the stated purpose is ultra vires.
Effect of ultra vires act
Common law, an ultra vires contract was said to be illegal and unenforceable.
Modern, (1) the shareholders can seek an injunction to stop the ultra vires act, (2) the corporation can sue the directors, officers, or employees for damages that stem from approving or engaging in the ultra vires act, and (3) the state can dissolve the corporation for its ultra vires activity (likely only if the action is against a regulatory rule)
ultra vires Ks are valid and enforceable as to third parites/corporate actors cannot undermine the contract just because it’s ultra vires
Special shareholder meeting
Can be called by the BOD, anyone authorized under the bylaws, or a SH with more than 10% voting;
purpose of the meeting must be specified in a NOTICE and it must be a proper purpose; notice for any meeting must be given no less than 10 days and no more than 60 days in advance of meeting date; state time and place of meeting
if no notice, action is void unless those not given notice waive defect in writing or attend meeting without objection
Pre-incorporation contracts
Pre-incorporation contracts are contracts that the promoter, someone who is acting on behalf of the corporation not yet formed, entered into a K with a third-party before the date of incorporation. A corporation is not liable on pre-incorporation Ks unless they adopt the K once they are a corporation (express or implied). The promoter is liable for the K unless the K expressly indicates the promoter is not bound by the K or the contracting parties agree that there will be a novation so the corporation will replace the promoter on the K.
Kind of like assuming a mortgage, even if the corporation adopts the contract, the promoter will still be liable unless contrary or novation.
Creation of actual authority in partnership
- Partnership agreement that allocates authority among partners
- Requisite vote of the partners
- Filing a statement of partnership authority with the secretary of state
Limited Partnership
-A limited partnership is composed of one or more general partners and at least one or more limited partners
-General partners are personally liable for partnership obligations; limited partners generally do not have any liability beyond their contributions
-REQUIRES a certificate of limited partnership to be filed with SOC
-Name of LP must include limited partnership or LP
-Limited partners usually have no management rights unless the partnerships agreement states otherwise
-Distributions are made on the basis of partner contributions
-Limited partners do not have fiduciary duties to the LP or partners
Limited Liability Partnership
-A partnership where all partners have limited liability
-REQUIRES the name to have LLP designation in some way
-A partner in an LLP is not personally liable for the obligations of the LLP no matter who they arise (contract, tort, etc.)
Limited Liability Companies (LLC)
-Hybrid between corporations and partnerships in which its owners (members) have limited liability and partnership tax treatment
-Certificate or article of organization with SOC
-REQUIRES indication of LLC or other similar label
-Operating agreement dictates operation and governance of the LLC
-Member managed (default where LLC is managed by members) or manager managed (can hire people who are not members to manage)
-Ordinary business decisions- majority vote of members
-Extraordinary business decisions- unanimous member or manager approval
-Profits and losses are allocated on the basis of contributions
Voting in General Partnerships
Unless otherwise agreed upon, all partners have equal rights in management of business and have equal votes. The amount of capital they invest does does not determine the amount of control.
-Decisions in ordinary court of partnership- majority vote of partners
-Decisions outside of ordinary course of business- require consent of all partners
Sharing profits and losses in general partnership
Default for sharing profits- profits are shared equally among the partners
Default for sharing losses- unless otherwise agreed, losses are shared in the same manner as profits
(losses follow profits but profits do not follow losses)
General partnership liability of the partnership
A partnership may be sue or be sued in the name of individual partners or in the name of the partnership itself
-Tort- a partnership is liable for loss or injury caused to a person as the result of the tortious conduct of a partner acting in the ordinary course of business of the partnership, or with authority of the partnership
-Contract- a partnership is liable for the contracts entered into on behalf of its partners with actual or apparent authority to enter into such contracts
General partnership liability of the partners (individual partner liability)
Each partner is jointly and severally liable for all the obligations of the partnership, whether arising in tort or K; an action can be brought against any one or more of the partners or the partnership
-HOWEVER, before going after the partner’s individual asserts, the P must first exhaust the partnership resources
-If a partner is compelled to pay or satisfy the whole of a partnership obligations, they are indemnified from the partnership; if no indemnification from partnership, then seek contribution from partners
General partnership limiting liability to third-parties
Partners cannot limit third party rights without their consent, but an agreement limiting the liability of a partner is effective between partners
(partner would not escape liability from third parties, but can seek indemnification from other partners if they were supposed to be insulated from liability)
General partnership liabilities of admitted partners
if a partnership admits a new partner, the new partner is not liable for the debts incurred before the partner joined the partnership; can only lose the amount of his investment in partnership
General partnership criminal liability
Partners are not criminally liable for crimes committed by a co-partner unless the partner participated in the commission of the crime as an accessory or a principle, but different rule from torts
Agency- general rule
A principal is labile to a third party on a contract that is entered into by an agent if:
(1) The agent had ACTUAL AUTHORITY to enter into the contract OR
(2) The agent had APPARENT AUTHORITY to enter into the contract OR
(3) The principal ratified the contract later (if P is undisclosed or partially disclosed, then BOTH P and A are liable)
Actual authority
Actual authority is based on whether a reasonable agent would think they had authority based on the principle’s action. An agent has actual authority can be express (oral or written words of P) or implied (result of P’s action). If P gives A express authority to do something, then A has implied authority to do other reasonable things to perform the task for P.
Apparent Authority
An agent possesses apparent authority when the principal’s words or conduct to a third-party would lead a reasonable third party to think that the agent has authority to act on the principal’s behalf.
Ratification (agency)
Even if the agent lacks authority to enter into the contract at the time it was entered into, P will still be liable for the agent’s actions if P ratifies the K. Ratification can be express (oral or written affirmation of the K) or implied (when P accepts the benefit of the K)
Requirements for ratification (agency)
(1) Principal had knowledge of all material facts of the K
(2) P accepted the entire transaction (cannot ratify just a portion of it)
(3) Ratification is not being used to alter the rights of intervening parties
Liability of P for torts of agent
An employer is jointly and severally liable to the third party for a tort committed by an employee if:
(1) the tort was committed by a servant/employee (not IC) and
(2) the tort was committed by the employee during the scope of employment
Independent contractor v. employee
An IC is a person who contracts with another to do something, but they are not controlled by the other or subject to the other’s right of control with respect to his physical conduct in the performance of undertaking
An employee is subject to to the control of another as to the means used to achieve a particular result
Relevant issues for right to control- skills required, tools and facilities, period of employment, basis of compensation, business purpose, whether agent owns district business
Scope of employment
- was the conduct the type that the agent was performed to do?
- did the tort occur on the job (time and space limits)
- was the conduct done at least in part for the benefit of the employer?
Formation of a general partnership
A partnership is formed as soon as two or more people associate to carry on as co-owners a business for profit, regardless of whether the parties intended to create a partnership. No formalities are required. Courts will look to the intent of the parties to determine if a partnership exists. 2 big factors to look at: sharing profits= presumption of partnership and rights to participation and control in the business
Requirements to form a corporation
People, Paper, Act
People- any legal person or an entity can form a corporation
Paper- name and address of agent, corporate name and designation, incorporator’s name and address, initial director’s name and address, statement of purpose (ultra vires issue), and capital structure
Act- de jure corporation formed upon delivery of notarized articles to the Secretary of state, then hold organization meeting
Internal affairs doctrine
the internal affairs of the corporation are governed by the law of the state in which they corporation is formed. The law of incorporation state governs even if the corporation does not do business there.
Corporation taxation (double taxation)
Double taxation
A corporation is taxed based on its profits. If the corporation choose to distribute these profits to the shareholders, then this would a dividend and the shareholders would be taxed as if the divided were their income (second tax on the profits).
UNLESS S CORP (no more than 100 SH that are US citizens and only have one class of stock that is not publicly traded)
Corporation by estoppel
If an individual or entity holds the entity out as a corporation to third parties then the individual/entity and third parties will be estopped from denying that the entity is a corporation (third parties will not be able to sue owners personally for satisfaction of the corporation’s debts and the “corporation” cannot avoid liability by saying that it was not properly formed)
ONLY APPLIES TO K CLAIMS, NOT TORT CLAIMS
De facto corporation
A business will be treated as a corporation even if the steps for formation of a de jure corporation are not met if:
(1) there is a relevant incorporation statute
(2) the incorporators made a good faith attempt to comply with the statute, and
(3) there was some exercise of corporate privilege (the incorporators have been acting like they formed a corporation)
