BA Bar Essay

Question 1

Director’s duty to corporation

Answer 1

A director owes the corporation a duty of care. She must act in good faith and exercise ordinary care and prudence. She must do what a prudent person would do in similar circumstances. This duty is non-delegable.

A director owes the corporation a duty of loyalty. She must act in good faith and with a reasonable belief that her act is in the corporation’s best interest.

Directors can only lend director money only if it is reasonably expected to benefit the corporation.

Question 2

Reimbursement

Answer 2

If a director or officer is held liable for willful or intentional misconduct in performing a duty to the corporation, reimbursement is prohibited.

The company can advance litigation expenses if the director or officer gives an affidavit of her good faith belief that she acted accordingly with her duty of loyalty and a written undertaking to repay the expenses if it is determined that she did not.

Question 3

Shareholder liability

Answer 3

Generally shareholders are not liable for acts of the corporation, however, a court might pierce the corporate veil and hold shareholders personally liable if (1) they have abused the privilege of incorporating and (2) limited liability would be unfair.

Question 4

Derivative suit

Answer 4

Shareholder cannot file a derivative suit until 90 days after demand on the directors to bring suit unless the demand is rejected before that or waiting 90 would cause irreparable damage to the corporation.

In a derivative suit, the corporation must be joined as a defendant because it did not sue on its own.

Question 5

Revocation of voluntary termination

Answer 5

A corporation may revoke its voluntary termination any time before its corporate existence ceases

Question 6

Liquidation process

Answer 6

Steps in the liquidation process: (a) gather all assets, (b) convert to cash, (c) pay creditors, and (d) distribute remainder to shareholders, pro-rata by share unless there is a liquidation preference.

Question 7

SOL for claims against corporation

Answer 7

3 years

Question 8

Membership interest

Answer 8

A membership interest in a professional limited liability company may be assigned in whole or in part. An assignee has the right to receive any income or distribution the assignor is entitle to receive, and to inspect the company’s books and records for any proper purpose, but has no right to become a member of the company or participate in management.

Question 9

Member liability in LLC

Answer 9

Generally, a member of a professional limited liability company is not liable for the debts, obligations, or liability of a professional limited liability company. Moreover, members are not liable for another member’s tort. However, the person who committed the tort will be liable to the injured party. Furthermore, the professional limited liability company will be liable for torts committed by members in the ordinary course of business.

Question 10

Partnership

Answer 10

An association of two or more persons to carry on as co-owners a business for profit creates a partnership, regardless of whether the persons intend to form a partnership. Their desire to remain independent of one another does not preclude formation of a partnership

Partnerships may eliminate their fiduciary duties, except for the duty of loyalty.

General partners are jointly and severally liable on partnership debts.

Easy and inexpensive to form. All that is needed is an agreement. No filing required. Partners can determine by agreement how the firm is to be managed.

Not subject to federal income tax.

Question 11

Limited partners

Answer 11

Limited partners in a limited partnership are not personally liable on firm contracts as long as they do not participate in control. The TBOC does not define “control,” but contains a list of things a limited partner can do without participating in control. Acting as an agent of the limited partnership is included in that list of safe harbors.

Question 12

Partnership property

Answer 12

Property acquired in the name of one or more of the partners is partnership property if the instrument transferring title indicates the person’s capacity as a partner or the existence of a partnership.

Question 13

Partner liability

Answer 13

Unless a partner does not have authority to bind the partnership and the person with whom the partner is dealing knows that the partner lacks authority, a partner’s act binds the partnership if the act is apparently for carrying on in the ordinary course of business of the partnership. Additionally, partners themselves are jointly and severally liable, after partnership assets are exhausted, for debts of the partnership.

A partner is liable to the partnership for any breach of the breach of partnership agreement that causes harm to the partnership or other partners. A written agreement is not required.

Question 14

Distributions

Answer 14

A Texas corporation may not make a distribution if the distribution would render the corporation insolvent, or it exceeds the corporation’s surplus.

Question 15

Shareholders in merger

Answer 15

Shareholders of a corporation that is party to a merger can assert appraisal rights unless the shares are publicly traded or are part of a class held of record by more than 2,000 shareholders. Appraisal rights let a shareholder who dissents from a merger demand that the corporation pay him the fair value of his shares. To perfect his appraisal rights, a shareholder must notify the corporation before the special shareholders’ meeting of his dissent from the merger, and demand that the corporation pay him the fair value of his shares. The shareholder must vote against the merger at the shareholders’ meeting. Finally, the shareholder must submit his shares to the corporation no more than 20 days after the date on which he made his initial demand.

Question 16

Shareholder’s agreement

Answer 16

A shareholders’ agreement must be contained in the certificate of formation or bylaws if approved by all the shareholders at the time of the agreement, or in a written agreement signed by all of the shareholders at the time of the agreement and made known to the corporation.

A shareholders’ agreement may eliminate the board of directors, designate who will serve as an officer, and authorize management by one or more shareholders.

Although under the default rule a shareholders’ agreement is valid for only 10 years, the agreement may provide otherwise.

Question 17

Rescission

Answer 17

A purchaser of shares who does not know at the time of purchaser of the existence of a shareholders’ agreement is entitled to rescission. A purchaser is deemed to know of the existence of the agreement if it is noted on the share certificate. An action to rescind must be commenced by the earlier of the 90th day after the date the purchaser discovers the existence of the agreement or the second anniversary of the purchase.

Question 18

Corporation name

Answer 18

The name of a Texas business corporation must contain the word “corporation,” “company,” or “incorporated,” an abbreviation of one of those words. Furthermore, the name cannot contain any word that indicates the corporation is organized for any purpose other than the purposes contained in its certificate of formation.

If an event occurs that causes the information in an assumed name certificate to become materially misleading (including a change in the form of the business), a new certificate must be filed within 60 days. Failure does not impair the validity of any contract, but bars a person from bringing suit in a Texas court on a contract in which an assumed name was used until a new certificate is filed. The person may also be liable for the cost of locating him.

Question 19

Corporation by estoppel doctrine

Answer 19

Bars a person who dealt with what she believed to be a corporation from holding the owners personally liable.

Question 20

Piercing the corporate veil

Answer 20

Court will PVC only if the corporation is used as a sham, to perpetuate fraud, or in an unjust manner .

Question 21

Limited partnership

Answer 21

An LP consist of one or more general partners and one or more limited partners. General partners manage the firm, and are jointly and severally liable for its debts. Limited partners are essentially passive investors whose liability is limited to their capital contributions. However, a limited partner who participates in the control of the LP is liable to anyone who transacts with the LP reasonably believing baed on the limited partner’s conduct, that the limited partner is a general partner.

LP is not taxed as an entity. The income is passed through to the investors, and is taxed only once, at the investor level.

Question 22

Limited Liability Company

Answer 22

An LLC is an extremely flexible organization. An LLC combines the best aspects of a corporation with those of a partnership. Members of an LLC have limited liability for firm obligations, except in the extraordinary case where a court pierces the company veil. Moreover, members can manage a Texas LLC if provided in the certificate of formation or company agreement. Finally, an LLC will get pass-through tax treatment like a partnership unless it chooses to be as a corporation.

A member can transfer his interest in the LLC, but the transfer merely redirects the flow of profits; it does not make the transferee a member or convey any management rights.

Question 23

Corporation

Answer 23

Shareholders of a corporation have no personal liability for corporate debts, except where a court pierces the corporate veil. They can also impose reasonable limits on transferability of their interests. Corporations are generally subject to “double taxation” - income is taxed once at the corporate level and again at the shareholder level if the income is paid out as a dividend. A corporation can get pass-through tax treatment by electing to be taxed under subchapter S of the IRS code, but there are many restrictions under subchapter S.

Question 24

Forming a corporation

Answer 24

First file a certificate of formation with the secretary of state. Then, after the secretary of state issues an acknowledgement of incorporation, the directors named in the certificate of formation must hold an organizational meeting to adopt bylaws and elect officers. The meeting may be held outside Texas. The directors calling the meeting must give at least 3 days notice, stating the time and place of the meeting.

A Texas corporation is permitted to have only one director on its board. There is no requirement that a director be a shareholder of the corporation. A Texas corporation must have a president and a secretary, each elected by the board in the manner prescribed by the bylaws. The same person may hold multiple offices.

Question 25

Subscription

Answer 25

A subscription is an offer to buy shares from a corporation. Under the TBOC, a corporation may accept a subscription by notifying the subscriber in writing of its assent.

Question 26

Sale of corporate assets

Answer 26

A sale of all, or substantially all, of a corporation’s assets is a fundamental corporate change and requires 2/3 shareholder approval. But even if the sale was of substantially all of the corporation’s assets, it still would not be considered a fundamental corporate change because the TBOC provides that a sale of a corporation’s assets will not be considered to be a fundamental corporate change if the corporation continues to engage in business after the sale.

Question 27

Issuance of stock

Answer 27

The TBOC gives the board of directors the authority to issue shares of stock. A corporate president does not have the inherent power to issue stock.

Question 28

Members of LLC act without meeting

Answer 28

Members can act without a meeting if written consents are signed by not fewer than the minimum number of members that would be entitled to take action at a meeting if all the members entitled to vote on the action were present and voting.

Question 29

Withdrawn partner

Answer 29

A withdrawn partner is liable on a transaction entered into by the partnership within two years after the partner’s withdrawal if the other party to the transaction did not have notice of the withdrawal and reasonably believed that the withdrawn partner was a partner at the time of the transaction.

Question 30

Indemnification

Answer 30

A corporation is permitted to indemnify a director only if the director acted in good faith.

A provision allowing a corporation to indemnify a director may be authorized by the directors.