BA Flashcards
LLP
An LLP, by design, was created by professionals who wish to incorporate but will share limited liability in debts of the partnership; they may share in some profits, but they are generally shielded from each other’s torts and contract liabilities
General Partnership Formation
A general partnership is created when 2 or more people conduct a business for profit (generally split equally)
Presumed if sharing profits
No need for intent to form
Just need agreement, does not have to be in writing
SH Derivative Suit
A derivative suit is a suit by a SH brought against the directors of the corporation on behalf of the corporation. Go into breach of loyalty, fiduciary, care
For a plaintiff SH to bring suit, he must be a SH and own stock in the corp
In order to bring a derivative suit, the plaintiff must have standing, must make a written demand and no action w\for 90 days, and corp must be named as defendant
Business Judgment Rule
Generally, it is presumed that directors and officers acted in the best interest of the corporation and they can escape liability if it can be shown that they acted in the best interest of the corporation
To overcome BJR, one of the following must be shown:
1. The director did not act in good faith
2. The director was not informed to the extent reasonably necessary before making a decision
3. The director did not show objectivity and had a material interest in the decision
4. The director failed to timely investigate after being alerted to a significant matter
5. Any other failure to act as a reasonable director
Fundamental Corporate Change
FCC such as mergers, acquisitions, or dissolution, require a vote of approval from the SH. A quorum is required, which is just that there needs to be a majority of votes
Appraisal of Stock Remedy
If a SH disagrees with a corporate decision, it may demand that an expert value his shares and he may force the corporation to buy back his stock
Par Value is the minimum value a share may have. If the share is distributed under PV, the directors will be liable to the SHs
Disgorgement of Profits
If a director is found to have violated the duty of loyalty, it will be liable to the corp and must disgorge all profits to the corp
SH: PCV
Generally, SHs not personally liable for obligations of a corporation. However, creditors may pierce the corporate veil in order to seek recovery from a SH and hold them personally liable for the corporation’s obligations.
3 theories:
1) alter ego (SH fails to maintain corp formalities)
2) Undercap at time of incorp
3) evasion of existing obligations or fraud on third parties
SH Direct Suit/Action
In a direct action to enforce a shareholder’s rights, the shareholder sues the corporation for breach of a fiduciary duty owed to the shareholder by a director or an officer. Any recovery goes to the shareholder.
Deep Rock Doctrine
The DRD is a rare form of PCV. If a corporation is insolvent, obligations to SH creditors will be equitably subordinated to all other classes of creditors, even unsecured creditors
When asking what type of business formed
Go through all
Corp
LLC
LLP
GP
Corporation Formation
To form a corporation, a document (articles of incorporation) must be filed with the state.
The articles must include a statement of the corporation’s purposes; a broad statement is acceptable.
The advantage of operating as a corporation is that the shareholders are shielded from personally liability for the corporation’s obligations.
Not proper: talk about de facto/corp by estoppel
LLC
Must file documentation with SOS
LLP Formation
Must be at least one general partner and one limited parter
Statement filed with SOS
GP
A GP is formed when 2 or more persons run as co-owners of a business for profit
Subjective intent of the parties is irrelevant, GP presumed as long as intent to run business for profit
Partner Managing Rights
Absent an agreement, every partner in a partnership has the authority to act on behalf of the partnership
Partners are agents of a partnership
Discuss managing authority, bonuses (consistent umber = partner, fluctuates = employee)
Employees
An individual is considered an employee when they are subject to the control and management of another. Further, the courts will look at how they are paid on order to determine whether they are employees or partners
Actual Authority
A partner has the authority to bind the partnership absent an agreement stating otherwise. May be express or implied
Actual express authority
Express authority is defined by the by laws or set by the board of directors.
Actual implied authority
Exists when partner:
-Reasonably believes their actions were necessary to carry out the purpose of the partnership
- the partner believed he has authority to act bc of prior dealings
- customary for partner to engage in such conduct
Apparent authority
The actions of the agent will bind the partnership when the principal makes it seem that the individual has the authority to act on his behalf and a 3P reasonably relies on that authority
Reasonable: court will consider trade customs, industry standards, agent’s position in the company
Vicarious Liability
Respondeat Superior
Partners are also vicariously liable for the actions of their employees when they are acting within the ordinary scope of business
Analyze:
Agent
Scope of employment
Any intentional torts
Work-Related Travel
Traveling between work/home is usually not within the scope of employment. Travel for work purposes (business trips, visiting clients) is within the scope of employment.
Joint and Several Liability
Partners are personally jointly and severally liable for any obligations that arise to the partnership
Voting in a corp
The board of directors in a corporation are instilled with the authority to make important decisions for the corporation
Directors are elected by the SHS
Corps hold meetings wherein their board of directors made decisions with regards to the corporation’s business endeavors
Quorum - corp
In order for the board of directors to make decisions relating to the corp, a quorum is required
Majority vote
Board of Directors - Duty of Care
A DOC is owed to the SHs of a corporation by the board of directors. Directors must act in a
Reasonable Prudent Manner in handling investments
In such a manner that they would handling their own capital
Reliance: A director is entitled to rely on the performance of other officers, employees,
and outside experts. This includes reliance on the information, reports, and opinions provided by these people.
Duty of Loyalty
The duty of loyalty requires a director to act in a manner that the director reasonably believes is in the best interest of the corporation. Self-dealing and usurping corporate opportunities are violations of the duty of loyalty.
COI defenses: maj approval of disinterested shareholders, majority approval disinterest board, transaction was fair to corp at the time
SH Inspection of Documents
A SH generally does not have a right to inspect records relating to the board. However, if the SH makes a request with notice and reasonable explanation for his desire to insepct then often times this request is granted
Proper purpose: A proper purpose is one that relates to the shareholder’s interest in the corporation
Written notice
Timely notice
Dividends
A corp is not required to pay dividends to its SHs. That is up to the discretion of the board of directors
Promoter
A promoter is a person who, prior to the formation of a corporation, procures capital and enters
into contracts to bring the corporation into existence.
Liability for pre-incorporation ks + exceptions
A promoter is personally liable for a contract entered into pre-incorporation, even after the corporation comes into existence. A corporation is not liable for a pre-incorporation contract entered into by a promoter unless a novation occurs, or it adopts the contract.
a. Novation: If the corporation and the other party to the contract agree to substitute the
corporation for the promoter in the contract, the promoter will no longer be liable.
b. Adoption: If the corporation adopts the contract (expressly or by using the benefits of
the contract) and agrees to accept sole liability on the contract, the promoter may no
longer be liable.
Ultra Vires Act
If a corporation has a narrow business purpose in its articles of incorporation and engages in activities outside the purpose, it has engaged in an ultra vires act. If an ultra vires act occurs, a shareholder can file a suit to enjoin the action, and/or the corporation can take action against a director, officer, or employee who engaged in the act.
De Jure Corp
When the statutory requirements for incorporation are met, a “de jure” corporation has
been formed. The corporation is then liable for activities (not the individuals).
Failure to meet formation requirements (2)
De facto: If the owner made a good faith effort to incorporate and operates the business without
knowing that the requirements were not met, the business will be treated as a “de facto” corporation by the court. The individual owner will not be individually liable.
Corporation by Estoppel: A party who deals with an entity as if it were a corporation is estopped from denying its existence and is thereby prevented from seeking personal liability against the business
owner. This is limited to contractual agreements. The owner must have made a good-faith effort to incorporate and operate the business without knowing that the requirements were not met
Stock Valuation
The board of directors must authorize and determine that the consideration (for example, money) paid for the stock is adequate.
Par Value
Sale of Stock below par value
Par Value
Par Value is the minimum value a share may have. If the share is distributed under PV, the directors will be liable to the SHs
If the board of directors issues (sells, trades) par value stock for below par value, the board
of directors is liable to the corporation for the difference between the par value and amount
actually received. A shareholder that knowingly received par stock for below par value is
also liable to the corporation
Federal COA for Improper Sale of Securities
Rule 10(b)(5)
Section 16(b)
SH Meetings
An annual meeting of shareholders is required. The primary purpose is to elect directors.
SH Voting
The primary issue upon which shareholders are entitled to vote is the selection of the board of
directors. Shareholder approval is also required for fundamental corporate changes (frequently
tested issue), such as structural changes to the corporation (sale/merger of corporation).
SH Voting by Proxy
A proxy is a written agreement by a shareholder to allow a person (can be another shareholder
or a representative of the original shareholder) to vote for them. The proxy is valid for 11
months unless otherwise stated and is generally revocable. To be irrevocable, the proxy must
state it is irrevocable and the person who is receiving the shareholder’s right to vote must
provide something of value in exchange to the shareholder.
SH Agreements
Shareholders may enter into a binding voting agreement which governs how they will vote their
shares. The agreement is a contract and may be enforced; there is no time limit.
Controlling SHs Fiduciary Duty
Controlling shareholder: Anyone with more than 50% of a corporation’s shares is a controlling
shareholder. If a shareholder otherwise holds enough shares to enact changes through the voting process, s/he will be considered a controlling shareholder.
A controlling shareholder owes a fiduciary duty to minority shareholders to not use his/her
power in a way to disadvantage them.
Board of Directors Selection
The board of directors manages and directs the management of the corporation’s business and affairs.
Directors are selected by the shareholders at the annual shareholder’s meeting.
Board of Directors Removal
Shareholders may remove a director for breach of fiduciary duty (common law) or without cause
(modern trend)
Board of Directors Voting
For the board of directors’ acts at a meeting to be valid, a quorum of directors must be present
at the meeting. A majority of all directors constitutes a quorum unless otherwise stated in the bylaws
Director Duties (general)
A director owes two basic duties: a duty of care and a duty of loyalty
DOL: Self-dealing
A director that engages in a transaction with a corporation that benefits himself or a closely
related family member will be considered to have engaged in self-dealing. If the transaction benefits another corporation or partnership that the director is associated with or his closely related family member is associated with, this will also be self-dealing. Self-dealing violates the duty of loyalty unless the transaction is protected under the safe-harbor rule. The business judgment rule does not apply to a self-dealing transaction.
DOL: Self-dealing: Safe-harbor rules + remedies
Safe Harbor Rules: There are three ways that a self-dealing transaction can be protected and avoid violating the duty of loyalty:
* The interested director discloses all material facts to the board of directors and receives approval by a majority of the disinterested board of directors; or
- The interested director discloses all material facts to shareholders and receives approval by a majority of disinterested shareholder votes; or
- The transaction is fair to the corporation at the time of the deal. The fairness test asks if the substance of the transaction was fair and burden is on the interested director to show fairness.
Remedies: A self-dealing transaction that is not protected by the safe harbor provisions
can be enjoined or rescinded and the corporation can seek damages from the interested
director.
DOL: Usurping Corp Opportunities
A director may violate the duty of loyalty by “usurping” a corporate opportunity for business and taking the opportunity for himself rather than offering it to the corporation first.
a. Corporate Opportunity: To determine whether a business opportunity is one that must first be offered to the corporation, a court will ask if the corporation is seeking the opportunity or if the opportunity is within the corporation’s current or prospective line
of business.
b. If the opportunity is a corporate opportunity, the director must present it to the corporation first and it must be declined by the corporation. At that time, the director can take/accept the opportunity for himself without violating the duty of loyalty.
Corp Officers
A typical corporation’s officers are president, secretary, and treasurer. They are elected by the board of
directors.
Corp Officer Authority
An officer’s authority to act on behalf of a corporation is governed by agency law. The corporation is the principal and the officer is the agent. Authority can be actual (express or implied) or apparent.
Dissolution + Winding up
Dissolution: A corporation may voluntarily terminate its status.
Winding Up: A dissolved corporation may continue to exist for the limited purpose of winding up its affairs and liquidating its business.
Distribution:
Upon dissolution, corporate assets must be distributed in the following order:
a. Creditors of the corporation
b. Shareholders of stock with preferences in liquidation
c. Other remaining shareholders of stock
Valid Board Action
For a board of directors’ acts at a meeting to be valid, a quorum of directors must be present at the meeting. Absent a higher level specified in the articles of incorporation or bylaws, the assent of a majority of the directors present at the time the vote takes place is necessary for board approval. There is no rule that gives directors with positions within the company more voting power than directors who are non-employees (i.e., outside directors). Therefore, a valid board action requires a quorum to be present and a majority vote.
Creation of Agency Relationship
Agency law addresses the legal consequences of one person (the agent) acting on behalf of, and subject
to the control of, another person (the principal).
Identify:
Principal - The principal is typically an employer, such as a corporation or a partnership.
Agent - The agent of a corporation is typically a director, officer, or other employee. The agent of a partnership is typically a partner or employee. Independent Contractors can be agents if they are subject to control over their physical conduct by the principal.
Contractual Liability of Principal
Agency
A principal is subject to liability on a contract that the agent enters into on the principal’s behalf if the agent has the power to bind the principal to the contract. An agent has the power to bind the principal to the contract when the agent has actual authority or apparent authority.
Talk about all 3 types of authority
Implied Authority by Position in Company
If the agent is placed in a position that customarily has certain authority, such as treasurer, the agent will have implied authority to carry out the duties of a treasurer.
Ratification
Agency
A principal can ratify (affirm/approve) an act performed by an agent, even if the agent did not have authority to act, and therefore be bound to a contract with a third party.
Ratification requires:
o The principal ratifies the entire contract or transaction by express assent or conduct that indicates affirmation;
o The ratification must be timely (before the third party withdraws from the contract); and
o The principal must have knowledge of the material facts involved in the original act.
Principal’s Tort Liability in general
Agency
A principal can be vicariously liable and directly liable to a third party who is harmed by a tort committed by an agent.
Principal’s Direct Liability to 3Ps
Agency
A principal may also be directly liable to a third party harmed by an agent’s conduct if
the principal authorizes or ratifies the agent’s conduct;
is negligent in hiring/supervising the agent;
delegates a non-delegable duty to the agent.
Partner Fiduciary Duties
To other partners and to partnership
DOL (usurp), DOC
DOL
Partnerships
A partner is required to refrain from competing with the partnership business, advancing an interest adverse to the partnership; and usurping a partnership opportunity or using partnership property or business to derive a profit, without notifying the partnership.
(usurping biz opportunities)
DOL: Usurping Business Opportunites
Partnerships
If a business opportunity is presented to a partner that is the type of the business the partnership engages in, the partner must present the opportunity to the partnership; he cannot take the opportunity for himself without first informing the other partners and receiving their permission to do so
DOC
Partnerships
A partner is required to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.
Profits and Losses
Partnerships
The partnership agreement controls a partner’s rights to share in the partnership’s profits and losses. If there is no agreement, each partner is entitled to an equal share of profits and losses.
Management Rights
Partnerships
Each partner has equal rights in the management and conduct of the partnership. A majority of the partners can make a decision as to an ordinary matter of business. All partners must consent to a matter outside the course of ordinary business.
Partner as Agent for Partnership
Partnerships into Agency analysis
A partner is an agent of the partnership (the principal) for business purposes and can contractually bind the partnership when the partner acts with actual (express or implied) or apparent authority. As an agent, the partner can commit the partnership to binding contracts
with third parties.
Go into agency/authority analysis
Creditor Rights
Partnerships
A partnership creditor must exhaust the partnership’s assets before taking the partner’s individual assets.
Liability to 3Ps
Partnerships
As a separate entity, a partnership is subject to a lawsuit for its obligations. A partner is jointly and severally liable for all partnership obligations.
Depends on type of partnership: general, LLP, etc.
Dissolution and Winding UP
Partnerships
Dissolution: a partnership at will is an open-ended partnership that does not have a fixed termination date or event. It is dissolved when a partner chooses to dissociate from the partnership by giving notice (90 days)
Winding Up: a partnership that is dissolved only continues to exist to “wind up” its business
-assets: creditors have priority over partners to the partnerships’ assets
-obligations: partnership assets are first applied to pay off obligations to creditors (creditors may include partners who made loans to the partnership) before being distributed to the partners.
Partner vs Employee
Partnerships
In order to be a partner in a GP, one must agree with at least one other to carry on as co-owners a business for profit. A person who receives a share of the profits of a business is presumed to be a partner unless the profits were received in payment of wages. An employee in general is someone who is hired by a company, paid a salary or wages to perform services, and work at the behest and direction of an owner of a business.
Do they have managerial authority? –> partner
Members - definition
LLC
Owners of an LLC
Was an LLC formed?
Shareholders - definition
Owners of a corporation
Was a corporation formed?
