All MEE Subjects Flashcards
Terms/Rules from Smart Bar Prep Sheets (Only non-MBE subjects)
Creation of Agency Relationship
An agent is a person or entity that acts on behalf of another – the principal. Agency is a fiduciary relationship,
and exists if there is: (1) assent (a formal or informal
agreement between the principal and the agent); (2) benefit
(the agent’s conduct on behalf of the principal primarily
benefits the principal); AND (3) control (the principal has
the right to control the agent by being able to supervise the
agent’s performance – the degree of control does not need
to be significant).
Types of Agency Relationships
A universal
agent has broad authority to act on behalf of the principal,
and is authorized to perform ALL acts the principal is
allowed to perform. A general agent normally has authority
to conduct a series of transactions over a period of time for
a particular purpose, business, or operation (i.e. a manager
of a restaurant). A special agent has limited authority to
conduct: (a) a specific act/transaction; OR (b) certain
actions over a specified period of time.
Termination of Agency Relationship
An agency relationship terminates and the agent no longer has
authority to act if: (a) the principal or the agent manifests to
the other that the relationship is terminated; (b) a specified
term of the agent’s authority expired; (c) upon operation of
law by the death of the principal or agent; OR (d) upon
operation of law by the incapacity of the principal or agent
(except where a durable power of attorney exists).
Apparent authority continues until the principal communicates
the termination to third parties
When does an Agent have Actual Authority?
Actual authority
may be express or implied. Express authority occurs when
the principal has explicitly told the agent (either orally
or in writing) that he is entitled to act. Implied authority
occurs when either: (a) the agent believes he is entitled to
act because the action is necessary to carry out his express
authorized duties; (b) the agent has acted similarly in prior
dealings between the principal and agent; OR (c) it is
customary for agents in that position to act in that way.
When does an agent have Apparent Authority?
Apparent
authority exists when: (1) a third-party reasonably believes
that the person/entity has authority to act on behalf of the
principal; AND (2) that belief is traceable to the principal’s
manifestations (the principal holds the agent out as having
authority).
Apparent authority is NOT APPLICABLE
if the third-party has actual knowledge that the agent did
not have authority.
Unidentified/Partially Disclosed Principal
Apparent authority
MAY exist when the principal is partially disclosed or
unidentified (when the third-party knows the agent is acting
on behalf of a principal but does not know the identity of the
principal).
Undisclosed Principal:
Apparent authority CANNOT exist
when there is an undisclosed principal (when the third-party
does not know an agent is acting on behalf of a principal).
Ratification of Agent’s Contracts
A principal’s ratification of an agent’s conduct will make the
principal liable for those contracts entered into by an agent
without authority. Ratification occurs when the principal: (1)
has knowledge of all material facts or contract terms; AND
(2) thereafter manifests assent (approves) of the same
through words or conduct.
Agent’s Contractual Liability
Generally, an agent has NO contractual liability to a thirdparty
for a contracts entered into with that party if he: (1)
fully discloses the principal he is acting on behalf of (he
provides the name of the principal to the third-party); AND
(2) acts within the scope of his authority. Conversely,
an agent will be liable on the contract if his conduct was
unauthorized.
An authorized agent will be liable to the third-party on
a contract when the principal is undisclosed (when the
third-party does not know the agent is acting on behalf of a
principal).
Employee vs. Independent Contractor
An employee is an agent whom the employer controls
(or has the right to control) the manner and means of
the agent’s performance of work.
o An independent contractor is a person who contracts
with another to do something for him, but who is not
controlled nor subject to the other’s right to control
with respect to his performance. The contractor may
or may not be an agent.
The determination of whether a person is an employee or an
independent contractor centers on whether the principal had
the right to control the manner and method in which the job
is performed.
Respondeat Superior
Under the doctrine of respondeat superior, an employer is
vicariously liable for an employee’s negligent acts if the
employee was acting within the scope of employment.
* An employee acts within the scope of employment
when: (a) performing work assigned by the employer; OR
(b) engaging in a course of conduct subject to the employer’s
control.
Frolic vs Detour
Look at magnitude of detour
An employee’s act is NOT within the scope of employment
when: (1) it occurs within an independent course of
conduct; AND (2) it is not intended by the employee to serve
any purpose of the employer.
Employer’s Liability for Intentional Torts
An employee’s intentional torts are generally NOT
within the scope of employment UNLESS the act: (a) was
specifically authorized by the employer; (b) was driven
by a desire to serve the employer; OR (c) was the result of
naturally occurring friction from the type of employment
Employer Liability for its Employees (Outside Respondeat Superior)
In certain situations, an employer may still be liable even if
the doctrine of respondeat superior (an employer/employee
relationship and conduct within the scope of employment)
is inapplicable. Such situations include when: (a) the
employer intended the conduct or consequences; (b) the
employer was negligent or reckless in selecting, training,
retaining, supervising, or controlling the employee; (c) the
conduct involved an employer’s non-delegable duty to an
injured person that it had a special relationship with; OR
(d) when (i) the employee had apparent authority, (ii)
the agent’s appearance of authority enables the agent
to commit the tort, and (iii) the third-party relied on that
authority.
Vicarious Liability for Acts of Independent Contractors
Generally, a principal is NOT vicariously liable for the torts
of an independent contractor.
* However, several exceptions exist, and a principal will be
liable for torts committed by an independent contractor
if: (a) the independent contractor is engaged in an inherently
hazardous activity; (b) the duty owed by the principal is nondelegable
(i.e. the duty of care owed to an invitee); OR (c)
through the doctrine of estoppel when (i) the principal holds
the independent contractor out as his agent to a third-party,
(ii) the third-party reasonably relied on the care and skill of
the agent, and (iii) the third-party suffered harm as a result of
the agent’s lack of care or skill.
Fiduciary Duties Owed by the Agent to the Principal
An agent owes the principal the following fiduciary duties
concerning matters within the scope of agency: (1) Duty of
Care – to use reasonable care when performing the agent’s
duties; (2) Duty of Loyalty – to act solely and loyally for
the principal’s benefit; AND (3) Duty of Obedience – to
obey all reasonable directions given by the principal and to
act in accordance with the express or implied terms of the
relationship.
Creation of a General Partnership
A General Partnership is created when (1) two or more
persons, (2) as co-owners, (3) carry on a business for
profit. No written agreement or formalities are required. A
person’s intent to form a partnership or be partners is NOT
required.
A person who receives a share of the profits of the partnership
business is presumed to be a partner of the business
UNLESS the profits were received in payment: (a) of
a debt; (b) for wages as an employee or independent
contractor; (c) of rent; (d) of an annuity or other retirement
benefit; (e) of interest/loan charges; OR (f) for the sale of
the goodwill of a business.
Formation of a Limited Partnership (LP)
A Limited Partnership is a partnership composed of
general and limited partners, and MUST have at least
one general partner. It is formed upon the filing of a
Certificate of Limited Partnership with the Secretary of
State that includes: (1) the name of the partnership; (2) the
address of the partnership; (3) name and address of each
partner; (4) whether the partnership is a Limited Liability
Partnership; AND (5) it must be signed by a general partner.
Formation of a Limited Liability Partnership (LLP)
A Limited Liability Partnership (LLP) is one in which all
partners have limited personal liability. Any partnership may
become an LLP upon: (1) approval by the same vote that is
necessary to amend the partnership agreement; AND (2)
by filing a Statement of Qualification with the Secretary of
State. Unless otherwise agreed, a unanimous vote is required
to amend a partnership agreement.
The filing of a Statement of Qualification DOES NOT
create a new partnership
Authority to Bind the Partnership
Each partner is an agent of the partnership, and generally
has authority to bind the partnership for the purpose of its
business
A partner has express actual authority to bind the
partnership upon receiving said authority from the
partners. Acts within the ordinary course of the partnership
business need only be approved by a majority of the
partners. Acts outside the ordinary course of business must
be approved unanimously.
A partner has implied actual authority (also known as
incidental authority) to take actions that are reasonably
incidental or necessary to achieve the partner’s authorized
duties.
A partner has apparent authority to bind the partnership
for all acts apparently conducted within the ordinary course
of the partnership business OR the kind carried on by the
partnership.
Authority to Bind a Partnership After Dissolution
After dissolution, a partner’s actual authority to bind the
partnership is limited only to those acts appropriate for
winding up the partnership business. However, a partner
has apparent authority to bind the partnership even after
dissolution if: (1) the partner’s acts would have normally
bound the partnership; AND (2) the third-party did not have
notice of the dissolution.
Personal Liability of General Partners & Judgment Enforcement
Personal Liability: General Partners are personally liable
for ALL obligations of the partnership UNLESS otherwise
agreed by the claimant or provided by law.
o Under the Uniform Partnership Act (1997), general
partners are jointly and severally liable for partnership
obligations
Incoming partners admitted into an
existing partnership are NOT liable for obligations incurred
prior to their admission, even if the incoming partner has
notice of a claim.
Personal Liability of Limited Partners
Generally, limited partners are NOT personally liable for
obligations of the Limited Partnership (LP).
a limited partner MAY become personally liable if
that partner participates in the management or control of
the business.
Personal Liability of Limited Liability Partners
An obligation incurred by a Limited Liability Partnership
(LLP) is solely the obligation of the LLP. Under RUPA,
a partner in an LLP is NOT liable for partnership
obligations
However, certain exceptions to this rule exist. First, partners
are ALWAYS liable for their own misconduct or when
they sign a personal guarantee for the obligation. Second,
even if a partner is not personally liable for the debts of the
partnership, he is at risk of losing any capital contributions
he made to it. Third, obligations incurred before a
partnership becomes an LLP are treated as obligations of the
prior partnership entity
Rights of Partners Among Themselves
Sharing of Profits and Losses
* Unless otherwise agreed, profits are shared equally between
partners, and losses will be shared in the same ratio as
profits.
Right to Management & Control
* Unless otherwise agreed, each partner has equal rights in
the management and control of the partnership business
Transfer of Ownership Interest in a Partnership
* A partner can only transfer: (1) his interest in the share
of the profits and losses; AND (2) his right to receive
distributions.
Right to Partnership Property
* A partnership is a distinct legal entity from its partners. All
property acquired by a partnership OR with partnership
assets is owned by the partnership
Remuneration (Payment for Partner’s Services)
* A partner is NOT entitled to remuneration (payment) for
services performed for the partnership UNLESS: (a) there is
an agreement to the contrary; OR (b) it is for the reasonable
compensation of services rendered in winding up the
business of the partnership
Special Rules of Limited Partnerships
Management & Control in a Limited Partnership
* A Limited Partnership (LP) is composed of general and
limited partners. General partners of a LP have full
management rights and control the partnership business to
the exclusion of the limited partners. Limited partners have
NO say or control as to how the partnership is run, and they
DO NOT have the right to manage or control the day-to-day
business of the partnership.
Limited Partner’s Right to Inspect Records
* Under RULPA, a limited partner has the right during normal
business hours to inspect and copy any information that
the Limited Partnership (LP) is legally required to keep
Duties Owed by Partners
Duty of Care
* A partner owes the fiduciary duty of care to the partnership
and the other partners, but this duty is limited. Under the
RUPA, a partner is only in breach of the duty of care when
he engages in: (a) grossly negligent or reckless conduct; (b)
intentional misconduct; OR (c) a knowing violation
of law.
Duty of Loyalty
* Partners owe the fiduciary duty of loyalty to the partnership
and the other partners, which requires partners to act in the
best interests of the partnership.
Duty to Provide Full Information
* Under the Uniform Partnership Act (UPA), partners
shall render, on demand by any partner, the true and full
information of all things affecting the partnership.
Dissociation (Withdraw of a Partner)
A partner becomes dissociated from the partnership upon:
(1) notice of the partner’s express will to withdraw; (2)
occurrence of an agreed upon event in the partnership
agreement; (3) expulsion pursuant to the partnership
agreement; (4) expulsion by the unanimous vote of the
other partners if it’s (a) unlawful to carry on the partnership
business with that partner, or (b) there has been a transfer
of all or substantially all of that partner’s transferable
interest in the partnership (other than a transfer for security
purposes); (5) judicial expulsion; (6) bankruptcy; (7)
incapacity or death; (8) appointment of a personal
representative or receiver; OR (9) termination of an entity
partner
Dissolution of a General Partnership
Unless there is an agreement to the contrary, dissolution
occurs upon: (a) notice of the partner’s express will to
withdraw; (b) an event agreed to in the partnership
agreement; (c) an event that makes it unlawful for all or
substantially all of the business to continue; (d) judicial
dissolution on application of a partner that (i) the economic
purpose of the partnership is likely to be unreasonably
frustrated, (ii) another partner has engaged in conduct making
it not reasonably practicable to carry on the business with that
partner, or (iii) it is not reasonably practicable to carry on the
business in conformity with the partnership agreement; OR
(e) judicial dissolution on application of a transferee
Dissolution of a Limited Partnership
A non-judicial dissolution of a Limited Partnership (LP)
occurs upon: (a) the happening of an event specified in
the partnership agreement; (b) the consent of all general
partners and of limited partners owning a majority of the
rights to receive distributions; (c) after the dissociation of a
general partner either (i) upon consent of partners owning
a majority of the rights to receive distributions as partners
(if the LP has at least one remaining general partner), or (ii)
the passage of 90 days after the dissociation if the LP does
not have a remaining general partner (unless the LP admits
at least one general partner); (d) 90 days after dissociation
of the last limited partner, unless the LP admits at least
one limited partner; OR (e) the filing of a declaration
of administrative dissolution by the Secretary of State
for the partnership’s failure to pay fees or abide by filing
requirements.
Winding Up & Termination of the Partnership
During the winding up process, partnership assets
are converted to cash and then distributed in the
following order: (1) creditors; (2) partners’ capital
contributions; and (3) profits to be distributed among the
partners.
Formation of a Corporation (Articles of Incorporation)
Under the RMBCA, a corporation’s existence begins on the
date the Articles of Incorporation are filed with the Secretary
of State, UNLESS a delayed effective date is specified. The
RMBCA DOES NOT allow for an earlier effective date to
be specified because a corporation CANNOT exist until the
Articles of Incorporation are properly filed.
* The Articles of Incorporation MUST contain: (1) the
corporate name; (2) the number of shares the corporation
is authorized to issue; (3) the address of the corporation’s
initial registered office and the name of its initial registered
agent at that office; AND (4) the name and address of each
incorporator.
Corporate Bylaws (Formation)
The Bylaws are the rules and regulations adopted by the
Board of Directors that govern the internal operations and
management of a corporation, including the roles and duties
of directors and officers. Under the RMBCA, the Bylaws
may contain any provision that is NOT inconsistent
with: (a) the Articles of Incorporation; OR (b) the law of the
jurisdiction.
* When there is a conflict between the Articles of
Incorporation and the Bylaws, the Articles of Incorporation
control.
Amending the Bylaws
The Bylaws may be amended or repealed by
shareholders. In addition, the Board of Directors may
also amend or repeal the bylaws UNLESS: (a) the Articles
of Incorporation exclusively reserves the power to the
shareholders; OR (b) the shareholders, in amending/
adopting/repealing a bylaw, expressly provide that the Board
of Directors cannot amend/repeal/reinstate that bylaw.
Powers of a Corporation
Under the RMBCA (and most states), a corporation has
the power to do all things necessary or convenient to
carry out its business and affairs
Formation of an LLC
Generally, a Limited Liability Company (LLC) is formed
when: (1) the Articles of Organization (a.k.a. Certificate of
Formation) is properly filed with the Secretary of State; AND
(2) the company has at least one member.
Liability of Promoter for Pre-Incorporation Contracts
A promoter is a person who acts on behalf of a corporation
that has not yet been formed. Under the RMBCA, a person is
personally liable for any liabilities arising from their conduct
when (1) he purports to act as or on behalf of a corporation,
(2) knowing that no corporation was formed (actual
knowledge is required). If multiple promoters are liable, then
each will be jointly and severally liable. A promoter remains
personally liable for pre-incorporation contracts even if
the corporation subsequently adopts the contract. In such a
situation, both the corporation and the promoter are liable.
* However, a promoter will NOT be liable if: (a) there is a
subsequent novation (an agreement by all parties to substitute
the corporation for the promoter and to relieve the promoter
of the contractual obligation); OR (b) the contract explicitly
provides that the promoter has no personal liability on the
contract.
Liability of Corporation for Pre-Incorporation Contracts
A corporation is NOT liable on pre-incorporation contracts
entered into by a promoter UNLESS the corporation expressly
or impliedly adopts the contract post-incorporation. A
corporation may expressly adopt a pre-incorporation
contract (i.e. by Board of Director action or by reference in
the corporation’s formation documents). Implied adoption
occurs when the corporation: (1) has reason to know or
knows the material terms of the contract; AND (2) accepts
some benefit from the contract.
Defective Incorporation & Owner Liability
If corporate formation is defective, then the owners may
be subject to personal liability for contracts or obligations
under general partnership principles (since the owners are
personally liable for ALL obligations of the partnership). If
there is only one owner, similar personal liability would arise
under sole-proprietorship principles.
De Facto Corp
Under the De Facto Corporation doctrine, a
defective corporation enjoys the same benefits
and powers of a properly formed corporation –
including limited liability. A de facto corporation
exists where the entity: (1) made a good faith
attempt to incorporate; (2) is otherwise eligible to
incorporate; AND (3) took some action indicating
that it considered itself a corporation. HOWEVER,
only a person who was unaware that the corporation
was not properly formed may assert the de facto
corporation doctrine.
Incorporation by Estoppel
any person or entity that treated a business as a
corporation may be estopped from denying that the
business is corporation, even if a valid corporation
was NOT formed. The doctrine of incorporation
by estoppel applies to BOTH: (a) third-parties that
treated the business as a corporation; and (b) an entity
that held itself out as a corporation and benefited from
that claim. HOWEVER, the incorporation by estoppel
doctrine DOES NOT apply to tort actions.
Personal Liability & Piercing the Veil
Generally, shareholders, directors, and officers are NOT
personally liable for the liabilities and obligations of the
corporation. However, courts may disregard the corporate
form and hold individual corporate shareholders, directors,
and officers personally liable for actions taken on behalf of
the corporate entity.
A court will pierce the corporate veil
and hold the shareholders personally liable in the following
situations: (1) the corporation is acting as the alter ego of the shareholders – where there is little or no separation between
the shareholder and the corporation (i.e. where an individual
utilizes the corporate form for personal reasons); (2) where
the shareholders failed to follow corporate formalities; (3)
the corporation was inadequately capitalized at its inception
to cover debts and prospective liabilities; OR (4) to prevent
fraud.
Courts will generally apply the same factors above to
pierce the veil of a Limited Liability Company and hold
members or managers personally liable, BUT the failure to
follow formalities is not a ground for piercing the LLC veil.
Corporate Finance (Common/Preferred Shares)
All shares within a class or series
must have the same rights, privileges, restrictions, and
responsibilities.
Common Shares provide shareholders with
voting rights, although they are the last in priority to be
entitled to a distribution of company assets.
Preferred Shares are generally entitled to be paid out from company assets upon dissolution before shareholders
with common shares. However, Preferred Shares usually do
not carry voting rights.
Corporate Finance (Authorized, Outstanding, & Reacquired Shares)
Authorized shares are the maximum number of shares
a corporation may issue, as set forth in the Articles of
Incorporation
Outstanding shares are the total number of shares issued
by the corporation and held by the shareholders
Reacquired shares by the corporation (also called treasury
shares) are considered authorized shares, but are not
outstanding shares of the corporation. These reacquired
shares are NOT allowed to be voted at a shareholders
meeting.
Corporate Finance (Dividends/Distributions)
Decisions to declare dividends or make distributions to
shareholders are within the discretion of the Board of
Directors, and are normally protected under the business
judgment rule. Only the Board of Directors have the power
to issue dividends (an Officer cannot). Once a distribution
is declared, the shareholder affected has a legal right to that
distribution.
Shareholder Meetings: Proxy Voting & Revocation of a Proxy
Under the RMBCA, a shareholder may vote her shares at
a shareholders meeting without physically attending the
meeting through the use of a proxy. A valid proxy must be
signed on: (a) an appointment form; OR (b) an electronic
transmission. An oral proxy appointment is invalid. A proxy
MUST be accepted if on its face there are no reasonable
grounds to deny its genuineness and authenticity.
Proxy agreements are freely revocable by the shareholder,
even if the proxy states that it is irrevocable (any
action inconsistent with the grant of the proxy acts as a
revocation). One exception to this rule is a proxy coupled
with an interest or legal right, which is irrevocable if the
proxy expressly states as such.
Shareholder Meetings: Right to Vote & Record Date
Only shareholders that are registered shareholders on record
date are entitled to vote at a shareholders meeting. Thus, the
owner of shares on the record date is entitled to vote those
shares at the upcoming shareholders meeting even if he sells
the shares before the meeting occurs (the transferee is not
entitled to vote).
Shareholder Meetings: Annual Meetings, Special
Meetings, & Notice
Annual Meetings: A corporation shall hold an annual
meeting of the shareholders at a date/time stated in the
bylaws.
Special Meetings: A special meeting is one held separate
from the annual meeting, and may be called by: (a) the Board
of Directors; (b) persons authorized under the Articles of
Incorporation or Bylaws; OR (c) by the holders of at least
10% of all votes entitled to be cast at the meeting.
special meeting requires proper notice to the
shareholders who are entitled to vote. Notice
MUST: (1) be given at least 10 days in advance of
the meeting (but not more than 60 days); (2) include a
full description of the purpose of the meeting; AND
(3) include the date, time, and place
shareholder may waive notice by: (a) delivering a signed
writing to the corporation; OR (b) attending the meeting
and not objecting at the beginning of the meeting
Shareholder Meetings: Quorum & Voting
quorum MUST be present in order for the shareholders to
take action at a meeting. Unless the Articles of Incorporation
provide a greater number, a quorum exists when a majority
of the shares entitled to vote are present.
action on a matter (other than the election
of directors) is approved if a majority of votes are cast in
favor of the action UNLESS the articles of incorporation
require a greater number of votes. Each outstanding share is
entitled to one vote
Shareholder Meetings: Election of Directors
Under the RMBCA (and most states), the candidates who
receive the most votes (a plurality vote) will be elected
as Directors at a shareholders meeting where a quorum is
present, even if the Director(s) do not receive a majority of the
votes.
Shareholder’s Right to Inspect Books and Records
Right to inspect: if: (1) the inspection is made during regular business hours
at the corporation’s principal office; (2) he provides 5-days
written notice; (3) the demand is made in good faith and
for a proper purpose; (4) he describes the purpose with
particularity; AND (5) the records are directly connected
with the purpose.
Board of Directors Meeting: Quorum
Under the RMBCA, the Board of Directors can only act if a
quorum is present. A majority of the Board of Directors is
necessary to make a quorum, UNLESS there are provisions
in the Articles of Incorporation stating that a higher or lower
number is required. However, the Articles of Incorporation
MUST require that at least one-third of the directors be
present to make a quorum.
Board of Directors Meeting: Voting & Objection to Actions
If a quorum of the Board of Directors is present when a vote
is taken at a meeting, an act is approved by the affirmative
vote of a majority of directors present UNLESS the Articles
of Incorporation or bylaws require a greater number.
Board of Directors Meeting: Notice & Waiver
Unless the Articles of Incorporation
provide otherwise, regular meetings may be held without
notice, whereas special meetings require at least two days’
notice.
Board Action by Written Consent
Generally, the Board of Directors can only take action at a
meeting. However (unless the Articles of Incorporation or
bylaws provide otherwise), action may be taken without a
meeting by the Board of Directors if: (1) each director signs a consent describing the action to be taken; AND (2) delivers
it to the corporation
Removal of Directors
Under the RMBCA (and most states), shareholders may
remove Directors with or without cause UNLESS the
Articles of Incorporation only allow removal for cause. At
common law, Directors could only be removed for
cause.
Authority of Officers
The Board of Directors may elect individuals as Officers
(i.e. President, Vice-President, Secretary) to manage the dayto-
day business of the corporation. (General Authority Rules Apply)
The President of a corporation generally has implied
authority to bind the corporation for matters within its
ordinary course of business, BUT DOES NOT have authority
to bind the corporation for extraordinary acts.
Removal of Officers
An Officer may be removed at any time with or without
cause by: (a) the Board of Directors; (b) the Officer who
appointed such Officer, unless the Bylaws or the Board of
Directors provide otherwise; OR (c) any other Officer, if
authorized by the Bylaws or the Board of Directors.
Management of an LLC
Under RULLCA, an LLC is presumed to be membermanaged
UNLESS the Operating Agreement provides
otherwise.
A manager-managed LLC is run by an elected group of
managers, who manage the business similarly to a board
of directors.
Authority of Members and Managers of an LLC
Under RULLCA and general agency principles, each
member or manager of an LLC generally has authority
to bind the LLC for the purpose of its business (including
entering into contracts).
Preemptive Rights (Close Corps)
A preemptive right is the right of an existing shareholder
to maintain her percentage of ownership in the corporation
by being offered the opportunity to purchase shares of the
corporation issued for cash before outsiders are permitted to
purchase them.
Restrictions on Share Transfers
Under the RMBCA, the Articles of Incorporation, bylaws,
and shareholder agreements may impose restrictions on
the transfer of shares of the corporation for: (a) any
reasonable purpose; (b) to preserve exemptions under
federal or state securities law; OR (c) to maintain the
corporation’s status when it is dependent on the number or
identity of its shareholders. An absolute restraint on the
transfer of shares is invalid. A restriction DOES NOT affect
shares issued before the restriction was adopted UNLESS the
holders of the shares are parties to the restriction agreement or
voted in favor of it.
Under the RMBCA, the following restrictions are expressly
allowed: (1) a right of first refusal (the shareholder must
first offer the corporation or other shareholders an opportunity
to buy the shares); (2) the obligation of the corporation
or other persons to acquire the shares; (3) to require the
corporation or certain shareholders/persons to approve the
transfer of shares, if not manifestly unreasonable; and (4)
to prohibit the transfer to designated persons or classes of
persons, if not manifestly unreasonable.
Business Judgment Rule
Directors must
discharge their duties: (1) in good faith; (2) in a manner the
Director reasonably believes to be in the best interests of
the corporation; AND (3) with the care that a person in a
like position would reasonably believe appropriate under
similar circumstances.
However, the Business Judgment Rule DOES NOT
apply or protect Directors: (i) financially interested in a
transaction (a conflict of interest); (ii) not acting in good
faith; OR (iii) who engaged in fraud or illegality.
Fiduciary Duties of Shareholders
Generally, shareholders DO NOT owe fiduciary duties to
fellow shareholders, and they can act in their own selfinterest.
However, courts have found that controlling
shareholders in close-corporations owe a fiduciary duty
of loyalty and good faith and fair dealing to minority
shareholders
Restricting/Eliminating Fiduciary Duties in a Corporation
Under the RMBCA, the Articles of Incorporation may
eliminate or limit the personal liability of a director for any
action taken or not taken EXCEPT for: (a) financial benefits
improperly received; (b) intentional infliction of harm on
the corporation or its shareholders; (c) unlawful corporate
distributions; or (d) an intentional violation of criminal law
Direct Action by Shareholder
shareholder may
bring a direct action against a director or officer, but MUST
prove an actual injury that is NOT solely the result of an
injury suffered by the corporation (i.e. an action to compel
divided). Similarly, a member of an LLC may bring a
direct action against another member, a manager, or the
LLC, and MUST prove an actual/threatened injury that is
not solely the result of an injury suffered by the LLC.
Derivative Action by Shareholder
derivative action, a shareholder is suing to enforce the
corporation’s claim, not his own personal claim. The suit
must be one in which the corporation could have brought
itself, and has harmed the corporation in some way
To commence or maintain a derivative suit under the
RMBCA, the plaintiff-shareholder must meet the
following requirements: (1) be a shareholder at the time of
the act or omission or became a shareholder by operation of
law from such a shareholder; (2) be a shareholder through
entry of judgment; (3) he must fairly and adequately
represent the interests of the corporation; AND (4) he must
make a written demand upon the corporation to take suitable
action.
o A derivative suit CANNOT be commenced until
90 days after a written demand
Derivative Actions: Dismissal by the Board of Directors
a derivative proceeding MUST be
dismissed by the court on motion by the corporation if (1) a
majority of the board’s qualified directors (directors who do
not have a material interest in the derivative action), (2) have
determined in good faith, (3) after conducting a reasonable
inquiry, (4) that the derivative proceeding is not in the best
interests of the corporation.
Derivative Action by LLC
the
elements are the same (as those above) for a corporation
EXCEPT: (1) the action may be brought within a
reasonable time after the demand; and (2) the demand
requirement may be waived if the demand is deemed
futile.
Federal Securities Law – Rule 10b-5
Rule 10b-5 prohibits the use of any means or
instrumentality of interstate commerce in any scheme to
defraud, make material misrepresentations or omissions,
or in any other way to use fraud in the purchase or sale of
securities.
In order for a plaintiff to prevail under a Rule 10b-5 claim, he
must show that: (1) the defendant engaged in a fraudulent
scheme or device; (2) which was relied upon; (3) in
connection with the purchase or sale of a security; (4)
acted with scienter (actual knowledge or recklessness); (5)
used some means of interstate commerce; AND (6) caused
damages.
Amending the Articles of Incorporation
Articles of Incorporation may
be amended at any time, BUT ONLY IF the following
procedures are followed: (1) adoption by the Board of
Directors; (2) notice to each shareholder (whether or not
entitled to vote) of a meeting to vote on the amendment –
the notice must (a) state that a purpose of the meeting is
to consider the amendment, and (b) provide a copy of the
proposed amendment; (3) adoption by the shareholders by
a majority vote
However, there are two exceptions to the above rule:
o First, the Board of Directors have the authority to
make general minor amendments to the Articles
without shareholder approval.
o Second, the Board of Directors (or its incorporators
if it has no board of directors) may adopt any
amendment to the Articles of Incorporation without
shareholder approval if a corporation has not yet
issued shares.
Mergers and Share Exchanges
the approval of a merger requires:
(1) approval by the Board of Directors of both
corporations; AND (2) shareholder approval of both
corporations by a majority vote (unless a greater number is
required by state law or the Articles of Incorporation).
* Shareholder approval by the surviving corporation is
NOT required for a merger if: (1) the corporation’s Articles
of Incorporation will not be changed; (2) the shareholders’
number of outstanding shares will not change; AND (3) the
voting power of any shares issued as a result of the merger is
20% or less of the voting power of the surviving corporation
short form merger occurs when a parent corporation
merges with its own subsidiary corporation. If the parent
corporation owns at least 90 percent of a subsidiary’s
outstanding (voting) shares, then only the Board of
Directors of the parent corporation has to approve the
merger
Sale of All or Substantially All of Corporate Assets
sale of all or substantially all of the corporation’s assets is
deemed a fundamental change if the sale is NOT in the usual
and regular course of business.
Dissenter’s Appraisal Rights for Fundamental Changes
A dissenting shareholder is entitled to appraisal rights, and to
obtain payment of the fair market value of his shares, for the
following fundamental changes: (1) when the shareholder
has the right to vote on the merger plan; (2) when he is a
shareholder of the subsidiary in a short form merger; (3)
when he is a shareholder of a corporation whose shares
are being acquired in a share exchange; (4) when the
shareholder has the right to vote on the distribution of all or
substantially all of the corporate assets; and (5) when an
amendment to the Articles of Incorporation materially and
adversely affects the shareholder’s rights.
o Appraisal rights are NOT available to shareholders
of publicly traded companies.
Judicial Dissolution of a Corporation
Under the RMBCA, a shareholder may petition the court
to dissolve the corporation if he can show: (a) a deadlock
of the Directors in the management of corporate affairs and
irreparable injury to the corporation; (b) the Directors
have acted in a manner that is illegal, oppressive, or
fraudulent; (c) the shareholders are deadlocked in voting
power and have failed to elect Directors for at least two
consecutive annual meetings; OR (d) the corporate assets
have been wasted or misapplied.
Voluntary Dissolution of a Corporation
Under the RMBCA, a corporation’s Board of Directors
may propose dissolution to the shareholders. The following
procedure MUST be followed by the corporation for the
proposal to be adopted: (1) adoption by the Board of
Directors; (2) notice to each shareholder (whether or not
entitled to vote) of a meeting to vote on the proposal – the
notice must state the purpose of the meeting; AND (3)
adoption by the shareholders by a majority vote (unless a
greater amount is required in the Articles of Incorporation or
state law).
Dissociation of a Member from an LLC
Under RULLCA, a person has the power to dissociate as a
member of the LLC at any time (rightfully or wrongfully).
* A member becomes dissociated from the LLC upon: (1)
notice of the member’s express will to withdraw; (2)
occurrence of an agreed upon event in the Operating
Agreement; (3) expulsion pursuant to the Operating
Agreement; (4) expulsion by the unanimous vote of the
other members; (5)
by judicial order for misconduct; (6) bankruptcy; (7)
incapacity or death; (8) appointment of a personal
representative or receiver; OR (9) termination of the
entity member
Dissolution & Winding Up of an LLC
Under RULLCA, an LLC is dissolved upon: (a) the
occurrence of an event in the Operating Agreement causing
dissolution; (b) the consent of all members; (c) the passage
of 90 consecutive days during which the LLC has no
members; or (d) judicial dissolution of the LLC.
* A court may grant judicial dissolution of an LLC upon an
application by a member
If proper
dissolution and winding up procedures are NOT followed,
then a creditor’s claim may be enforced against: (1) the
dissolved LLC; and (2) the members personally if the assets
Choice of Law Theories: Traditional Vested Rights Approach
Under the traditional vested rights approach, the law of
the state in which the transaction or event occurred is
applied (i.e. the place of the wrong or injury, where the
contract was formed or is to be performed, or where the
real property is located).
Choice of Law Theories: Most Significant Relationship Approach
Under the Restatement (Second) of Conflict of Laws, the
laws of the state having the most significant relationship
to the transaction and the parties will govern the
action. Under this approach, courts consider various
factors dependent on the type of action (i.e. torts)
to determine the state that has the most significant
relationship to the action.
Choice of Law Theories: Interest Analysis Approach
Under the governmental interest analysis approach,
the court weighs the interests of the states
involved. Specifically, the court (i) examines the
connections that each state has to the parties and the events of the litigation, (ii) analyzes the difference
between the state laws, (iii) pinpoints the underlying
policies behind those state laws, and (iv) then applies the
facts to the law to determine which state has a greater
interest in having its law applied.
Choice of Law Rules: Torts
Use three Main theories, depending on question. Traditional vested rights, most significant relationship, or government interest analysis approach.
Contractual Choice of Law Provision
Parties to a contract are free to choose a particular
state’s law to be applied for matters of contract
construction.
o For matters of contract validity, the parties may
only choose which state’s law applies if: (1) the
state has some connection with the contract; (2)
the contract has not been entered into under
fraud, duress, or mistake; AND (3) the choice of
law isn’t contrary to a substantial policy interest
of another state that has more of a significant
interest in the matter.
No Valid Choice of Law Provision
If a valid choice of
law provision is NOT applicable to a contract action,
then the choice of law must be analyzed under one of the
choice of law theories.
Traditional Vested includes both where it was formed/performed
Choice of Law Rules: Contractual Forum-Selection Clause
Generally, a court will enforce a contractual forumselection
clause to transfer venue UNLESS special
factors are present (i.e. significant/unusual hardships
or inequality of bargaining power). Additionally, the
Supreme Court has held that a forum-selection clause
is an important factor favoring a change of venue, even
if the forum-selection clause is unenforceable under the
applicable state law.
Choice of Law Rules: Premarital Agreements
In determining the enforceability of a premarital
agreement, states apply the law of either: (a) the state
where the agreement was executed; OR (b) the state
having the most significant relationship to the transaction
and the parties.
* Most states apply the Most Significant Relationship
Approach, where the laws of the state having the most
significant relationship to the transaction and parties
will govern.
Choice of Law Rules: Real Property Cases
In cases involving the title to real property or a contract
for the sale of real property, the laws of the state where
the real property is located will generally govern (known
as the situs rule), as states have a strong interest in actions
that affect real property located within their state.
Choice of Law Rules: Inheritance of Real & Personal Property
Inheritance of Real Property: Under the Restatement
(Second) of Conflict of Laws, the law of the state
where the real property is located (the situs) governs
its disposition under intestacy or under a last will and
testament.
o In a will, a decedent may designate a particular
state’s law to be applied for matters of
construction, BUT the validity and effect of a
will is always determined by the law of the situs
state.
* Inheritance of Personal Property: The law of the
decedent’s domicile state at the time of death governs
the disposition of decedent’s personal property. Domicile
is determined by a person’s: (1) residence (physical
presence in the state); AND (2) subjective intent to make
the state their permanent home.
Erie doctrine
Under the Erie
doctrine, a federal court sitting in diversity will apply
its own federal procedural laws, but must apply state
substantive law.
Since choice of law rules are considered substantive
law, a federal court sitting in diversity MUST apply
the forum state’s choice of law rules to determine the
applicable substantive law in the action
Law Applied by State Courts: Substance vs. Procedure
A state court will apply the law of the forum state to
procedural issues
For substantive issues, the choice of law rules of the
forum state determine which state’s substantive law is
applied.
Full Faith and Credit
A judgment is entitled to full faith and credit when: (1)
the rendering court had jurisdiction (both personal and
subject matter jurisdiction); (2) the case was decided on
the merits; AND (3) the judgment was final.
o Under the doctrine of comity, courts may, but
are not required, to give full faith and credit to
judgments from foreign countries
Full Faith and Credit: Ceremonial & Common Law Marriage
The validity of a marriage will be determined by the law
of the state that has the most significant relationship to
the spouses. A marriage that is valid where formed
is valid everywhere, UNLESS it (1) violates the strong
public policy of another state that (2) has the most
significant relationship to the spouses and the marriage.
* Most states will honor a valid common law marriage
established in another state
Full Faith and Credit: Family Law Judgments
A divorce (whether ex parte or bilateral) validly
granted in another state is entitled to full faith and
credit in all other states. An ex parte divorce (a divorce
action where only one of the spouses is before the court)
may be maintained without personal jurisdiction over the
absentee spouse when the plaintiff-spouse is a domiciliary
of the rendering state.
In a matrimonial action involving economic or child
custody/support issues (alimony, property distribution,
child support and custody) the court MUST have personal
jurisdiction over the defendant-spouse for the judgment
to be entitled to full faith and credit in other states
Marriage Requirements (State of Mind & Procedural)
A valid marriage requires: (1) consent from both parties; (2)
a marriage license; AND (3) that the marriage is solemnized
in a ceremony by a judicial officer or church.
* Courts interpret the consent requirement differently. Some
courts find consent if the parties participate in a marriage
ceremony and sought some benefits of marriage. While
other courts find consent only if the parties consented to the
obligations of marriage.
Common Law Marriage
common
law marriage generally requires that the spouses: (1) live
together for a specified amount of time; (2) be legally
able to marry; (3) have a present agreement that the two
parties are married; AND (4) hold themselves out as being
married. Once formed, a common law marriage can only be
dissolved through divorce or annulment.
Bigamous Marriage
A person CANNOT be married to more than one person
at the same time
Premarital Agreements: Enforceability
Generally,
such agreements are enforceable UNLESS procured by fraud,
duress, or coercion.
* Under the Uniform Premarital Agreement Act (UPAA), a
premarital agreement MUST be: (1) in writing; AND (2)
signed by both parties.
a premarital agreement is
NOT ENFORCEABLE if the spouse against
whom enforcement is sought proves that: (a) the
agreement was made involuntarily; OR (b) it was
unconscionable when executed and before execution
the spouse was (i) not provided fair disclosure of
the property and financial obligations of the other
spouse; (ii) did not waive disclosure in writing; and
(iii) did not have (or reasonably could
Premarital Agreements: Child Custody & Support
Provisions in a marital agreement regarding child support
or child custody are NOT binding on a court, and any
provision that adversely affects a child’s right to support is
unenforceable.
Premarital Agreements: Spousal Support
Under the Uniform Premarital Agreement Act (UPAA),
modification or elimination of spousal support by a premarital
agreement is permitted, BUT such provisions will
NOT be enforced if doing so would make the spouse eligible
for public support
Premarital Agreements: Eliminating Fundamental Marital
Duties & Allocating Financial Responsibilities
Spouses may agree to any matter (including their personal
rights and obligations) that is NOT in violation of (a) public
policy, or (b) criminal law.
Rights & Responsibilities of Spouses: Married Women’s
Property Acts
Under the common law, a woman would lose all of her
property rights upon marriage. However, ALL states have
abolished such laws. Under the Married Women’s Property
Act, a woman retains full rights to her property after
marriage.
Rights & Responsibilities of Spouses: Payment for Necessities
In most states, spouses are liable to a creditor who has
provided necessities to the other spouse
Jurisdiction: Marital/Divorce & Support Actions
State courts have subject matter jurisdiction over marital
actions (divorce, annulment, child custody and support,
spousal support).
An ex parte divorce (a divorce action where only one of
the spouses is before the court) may be maintained without
personal jurisdiction over the absentee spouse, if the plaintiffspouse
is a domiciliary of the rendering state.
In a matrimonial action involving economic or child
custody/support issues (i.e. alimony, property distribution,
child support and custody) the court MUST have personal
jurisdiction over the defendant-spouse, in order for the
judgment to be entitled to full faith and credit.
A divisible divorce allows one party to terminate the
marriage in one proceeding and reserve other issues
(i.e. property division and spousal support) for a later
proceeding.
Jurisdiction: Child Custody & Adoption Matters
In a matrimonial action involving child custody issues, the
court MUST have personal jurisdiction over the defendantspouse
in order for the judgment to be entitled to full faith and
credit.
Parental Kidnapping Prevention Act (PKPA)
a court may decide custody only if it exercises one of the
following:
o Home State Jurisdiction: When it is the child’s home
state or where the child lived with a parent for at
least 6 months immediately before the custody action
was filed.
o Significant Connection Jurisdiction: When (1) there
is no home state; AND (2) the child and at least
one parent have a significant connection with the
state. Substantial evidence in the state must exist
concerning the child’s care, protection, training, and
personal relationships.
o Emergency Jurisdiction: When the child (1) is
physically present in the state; AND (2) has been
abandoned or it’s necessary in an emergency to
protect the child.
o More Appropriate Forum Jurisdiction: When no
other state has home state, significant connection,
continuing, or emergency jurisdiction.
Uniform Child Custody Jurisdiction and Enforcement
Act (UCCJEA)
UCCJEA provides that a court has jurisdiction
when: (a) there is no home state; OR (b) the home state has
declined to exercise jurisdiction because the current state is
the more appropriate forum.
All else, same as PKPA
Annulment
An annulment invalidates a marriage, which treats
the marriage as if it did not happen. For a court to
grant an annulment, a spouse must establish one of the
following grounds: (a) lack of capacity (fraud, duress,
mental incapacity); (b) bigamy (one spouse is already
married); (c) consanguinity (marriage between close family
members); OR (d) a spouse who is underage at the time of
marriage (the marriage is voidable by the underage spouse).
An annulment by wrongfully obtaining consent to marry by
fraud exists when (1) a spouse made misrepresentations
prior to the marriage concerning an essential and vital part
of the marriage, AND (2) had the other spouse been made
aware of this, the marriage would not have been consented
to.
Divorce Grounds
In most states, there are five grounds for divorce: (1) cruel
and inhuman treatment; (2) adultery; (3) abandonment
for a set amount of time (set by statute); (4) habitual drug
addiction or drunkenness; and (5) a “no-fault” divorce
(irretrievable breakdown).
To procure a “no-fault” divorce, a party MUST show that (1)
the relationship between the spouses has irretrievably broken
down, (2) for set amount of time depending on the state’s
statute (i.e. at least 6 months).
