BA Content Flashcards
Agency (RST Definition)
Fiduciary relationship that arises where
- One person (the Principal) manifests assent that another person (the Agent) shall act on P’s behalf and
- Subject to P’s control, and
- A consents to act in this way
6 types of agents & their definitions
Universal Agent: authorized to perform all acts that can be lawfully delegated to a representative.
General Agent: authorized by the principal to transact all business affairs of the principal at a certain place.
Special agent: authorized by the principal to handle a specific business transaction.
Agency coupled with an interest: Agent has paid for the right to have authority for a business
Gratuitous agent: No payment is made to the agent, i.e. a favor or a volunteer
Subagents: Agent appoints other agents
Types of agent authority (just the names)
Actual Express
Actual Implied
Apparent
Inherent
Ratification
Estoppel
Actual Express Authority
- P tells A to do something & A does it
- P is bound
- Look at P’s explicit instructions
Actual Implied Authority
Necessary to complete job
A does something necessary to complete P’s actual instruction, but P didn’t tell A to do this necessary thing (but it’s within the scope of A’s duties)
Look at:
P’s explicit instructions
What else might be reasonably included in those instructions to accomplish the job
Past permission regarding similar acts
The relationship between P & A
Apparent Authority
About what what a 3rd party reasonably believes P has authorized A to do
Test: (1) P must act in a way that it seems that A has authority & (2) the 3rd party must reasonably think A has authority.
Inherent Authority
Undisclosed P is liable for the acts of an agent who proceeds within the scope of authority typically given to A with similar duties, regardless of limitations the principal imposes on that agent.
only applies to apparent authority
The law will sometimes hold an undisclosed principal liable for certain unauthorized transactions of his agent when
- A 3rd party has made a detrimental change in position
- P had notice of the agent’s conduct
- The conduct might induce third parties to change their positions; AND
- P did not take reasonable steps to notify the third parties of the facts.
Elements of agency authority of estoppel
P creates (on purpose or accidentally) an appearance of authority in A
3rd party reasonably relies on the fake authority
3rd party changes their position in reliance upon the fake authority
What’s the difference between apparent authority & estoppel?
Estoppel requires a change in position by 3rd party (apparent authority doesn’t)
Apparent authority requires a manifestation by P to the 3rd party (estoppel doesn’t)
When is P directly liable to 3rd parties for A’s torts?
A has actual authority and commits a tort
A didn’t know act was a tort and P authorized it
P negligently supervised or controlled A
Test to determine if the act within the scope of employment
Was the conduct the same general nature as A’s duties?
Was the conduct substantially removed from the authorized time & space limits of the employment?
Was the conduct at least partially motived by a purpose to serve the employer?
Factors to consider to determine if it’s employee or independent contractor
a. Extent of control
b. Is the kind of job typically done under supervision of employer or not?
c. Skill required for this particular job
d. Does the employer supply the tools and place of work?
e. Length of time the person is employed
f. Method of payment (by time, by job, salary)
g. Is the work part of the regular business of the employer?
When is P liable for torts of independent contractors?
Principal retains control over the aspect of the work in which the tort occurs
Inherently dangerous activities
Negligent hiring by principal
Nondelegable duty
Factors to consider to determine if the franchisor can be vicariously liable for torts committed by franchisees
Extent of the franchisor’s involvement in the francisee’s day-to-day operations
Franchisors’ right to control the franchisee’s operations
Franchisor’s right to terminate the relationship
Duty of Care in agency
A has a duty to P to act with the care, competence, and diligence normally exercised by agents in similar circumstances
A’s special skills or knowledge are considered (If A claims to possess special skills or knowledge, A has a duty to the principal to act with the care, competence, and diligence normally exercised by agents with such skills or knowledge)
Duty of Obedience in Agency
A has duty to act only within scope of A’s actual authority, complying with P’s instructions
Duty of Accounting in Agency
A has duty to P to:
1. Not treat P’s property as A’s
2. Not to mingle P’s property with anyone else’s
3. Manage accounts properly
Duty of Loyalty in Agency
Take no advantage from acts relating to the interest of the principal without the principal’s knowledge and consent
RST definition of partnership
A partnership is an association of 2+ people to carry on as co-owners a business for profit
Rebuttable presumption that people who share the profits of a business are a partner in the business, unless the profits were received:
- Debt service
- Wages
- Rent
- Annity
- Loans
- Sale of business or other property
Partnership by estoppel elements
- Plaintiff must establish a representation, either express or implied, that one person is the partner of another
- The making of the representation by the person sought to be charged as a partner or with his consent
- A reasonable reliance in good faith by the third party upon the representation
- A change of position, with consequent injury, by the third person in reliance on the representation
Partner’s duty of care
Limited to in gross negligence or reckless conduct, intentional misconduct, or a knowing violation of law.
Capital Contributions
Amount of money or assets given to a business or partnership by one of the owners or partners.
The capital contribution increases the owner or partner’s equity interest in the entity
Capital contribution is maintained in a “capital account” that is not income to partner
UPA - The liabilities of the partnership shall rank in order of payment, as follows
Debts to creditors of the partnership other than partners;
Debts to partners for contributions other than for capital and profits (an actual loan);
Debts to partners for capital contributions;
Debts to partners for profits (meaning, any residual value
Modifying partnership rights 3 part test
Extent of an individual’s ability to control & operate the business
Extent to which an individual’s compensation is based on business profits
Extent of employment security the individual has
3 phases of dissolution of the partnership
dissolution
winding up
final termination
Non-Judicial Grounds for dissolution without breaking the agreement
When a specific time/task ends
When any partner wants to & there’s no “definite term or specified particular undertaking”
When all partners agree
When any partner gets expelled
Non-Judicial Grounds for dissolution by breaking the agreement
Where carrying on business is illegal
Death of any partner
Bankruptcy of any partner or the partnership (In re Fulton)
Decree of court
Judicial Grounds for dissolution
Partner has been declared of an unsound mind
Partner is incapable of performing his part
Partner is guilty of conduct that affect prejudicially the carrying on of the business
Partner “willfully or persistently” breaches the partnership agreement
Business can only be carried on at a loss
A partner’s dissociation is wrongful if (UPA):
It’s in breach of an express provision of the partnership agreement or
It’s before the expiration of a term partnership and:
a. Partner withdraws by express will (unless it’s within 90 days of another partner’s dissociation by death or wrongful dissociation)
b. Partner is expelled by judicial determination
c. Partner is dissociated by bankruptcy or
d. in the case of a partner who is not an individual, trust other than a business trust, or estate, the partner is expelled or otherwise dissociated because it willfully dissolved or terminated.
Rights of shareholders in corporations
Vote on a limited range of issues
Receive payment of dividends when and as declared by board
Inspect corporate books and records
Receive distribution upon termination
Purchase proportionate share of a new issuance or corporate stock to maintain current ownership percentage (Preemptive Right)
File derivative suits to redress wrong suffered by the corporation (damages recovered belong to corporation)
Free transferability of ownerships
Required provisions of Articles of Incorporation filed with state
(1) corporate name (Must have a magic word - inc. corp. lmtd. Company)
(2) # of authorized shares
(3) street address of the corporation’s initial registered office and the name of its initial registered agency at that office (Must be in state of incorporation)
(4) name & address of each incorporator
optional provisions of Articles of Incorporation filed with state
Business purposes
Initial directors
Forum for internal corporate claims
class & series of shares
Amending the articles of incorporation – 3 step process
(1) Board of directors recommends the amendment to the shareholders
(2) shareholders approve the amendment
(3) amendment is filed with the secretary of state
Sea Land Test
(1) Unity of ownership and interest (whether the corporation and individual are really separate), and
- fraud, undercapitalization, commingling of funds, disregard of corporate formalities
and (2) Whether justice demands piercing the veil (fraud or injustice)
What is reverse veil piercing
The corporation is held liable for the shareholder’s debt
Think “this person is abusing the corporate form by hiding money and assets in the corporation”
What is enterprise liability? + Analysis
A creditor claims there are several related corporations that are really part of the same corporation
- Are two+ separate sister corporations really operating as a single enterprise?
- Do they have separate accounts, books, and records?
- Are their assets intermingled for use toward a common business purpose
What can the court do if the corporation wasn’t properly formed?
Treat it as a de jure corporation or corporation by estoppel
When can a corporation’s articles not limit fiduciary duty liability?
(1) the amount of a financial benefit received by the director to which she is not entitled,
(2) an intentionally inflicted harm on the corporation or its shareholders,
(3) unlawful corporate distributions, or
(4) an intentional violation of criminal law
2 ways duty of care by corporations can be breached & what is the defense
nonfeasance
misfeasance
corporation can claim BJR
What takes away the shield of BJR?
Fraud
Illegal Conduct
Conflict of Interest (duty of loyalty analysis applies instead of duty of care)
Bad Faith
Egregious/Irrational Decisions (with no business justification)
Waste (decision with 0 business rationale)
Uninformed Decision
Affirmative Defenses to Duty of Care Violations
Board shows:
- the transaction was beneficial to the corporation
- the transaction was fair to the corporation
- there were no damages to the corporation
Corporation duty of loyalty analysis:
Is there a conflict of interest? [if no, stop]
Has the transaction been cleansed?
[if no, there’s a breach of the duty of loyalty & transaction is voidable]
[if yes, the transaction doesn’t violate the duty of loyalty & is valid]
when is a transaction cleansed?
It’s approved by a vote of a majority of the fully informed, disinterested directors.
It’s ratified by the informed shareholders or
It’s shown to be “intrinsically fair” to the corporation (fairness to price & terms)
Corporate Opportunity Doctrine def + test
The directors’ fiduciary duties prohibit them from diverting a business opportunity from their corporation to themselves without first giving their corporation an opportunity to act.
Corporation must have interest, expectancy, or necessity and
Must be within the line of business
What is intrinsic fairness?
The default
Involves the substance of the transaction
Where the price & terms of the transaction fair to the corporation & not unfair to the minority shareholders
What is entire fairness?
Whether the price, terms, process, & procedure fair to the corporation
Exculpation Statutes & fiduciary duties of corporations
You can exculpate liability for duty of care
But not for duty of loyalty or good faith
What can shareholders vote on?
major transactions
electing board members
shareholder resolutions
Proxy Card Requirements
Auditor’s Report
Management discussion
Financial statement
Financial data
What is a shareholder proposal?
Rule 14a-8 allows qualifying shareholders to submit certain proposals to their fellow shareholders for a vote by having these proposals placed on a company’s proxy statement to the shareholder and having the company bear the expenses
when must a shareholders proposal be submitted?
Must be submitted to the corporation at least 120 days before the date on which the proxy materials were mailed for the previous year’s annual shareholder’s meeting
Rule 14a-8(i)(8) now permits exclusion of proposals related to the election of directors or procedures if it:
- Would disqualify a nominee who is standing for election
- Would remove a director from office before his or her term expired
- Questions the competence, business judgment, or character of one or more nominees or directors; or
- Requires companies to include specific shareholder nominees or directors in proxy materials
Types of violations for proxy litigation?
Fraud
Soliciting without providing proxy statement
Failing to file proxy materials with SEC
Company soliciting proxies without first providing annual report
What is a voting trust?
Where 2+ holders place their shares in a “Trust”
Has a trustee who is responsible for voting the shares
Governed by a trust agreement
How do you make a proxy irrevocable?
the proxy must be defined as irrevocable and coupled with an interest
What are the typical features of a freeze out
Corporation doesn’t pay dividends (or pay minimal ones) so that 0 (or barely) any of the profits are paid in dividends
The only (or vast majority) of corporate funds that are paid out are paid in the form of a salary to the shareholders who are also employees
The frozen-out holder is prevented from holding a payed position
As a result, this frozen out holder don’t get any corporate funds and can’t profit in any way from their investment
2 grounds for involuntary dissolution
director deadlock and
shareholder buyout
What are the differences between direct & derivative suits
Only shareholders can bring derivative suits (not creditors)
Because a derivative lawsuit arises out of a “wrong” done to the corporation, any remedy or recovery goes to the corporation—not to the shareholder bringing the lawsuit.
Because a direct lawsuit arises out of a “wrong” done to the shareholder, the shareholder bringing the direct lawsuit may collect damages.
In a derivative lawsuit, the corporation is required to pay for the shareholder’s attorney fees, PROVIDED that the shareholder is successful in the suit
There are many more procedural “hurdles” to meet in a derivative suit than there are in a direct suit.
List of established securities
- Stock
- Notes
- Bonds
- Debenture
- Options
- Voting Trust Certificates
What is the Howey test
A contract, transaction, or scheme through which a person invests money;
In a common enterprise
With the expectation of profits (or some other financial benefits);
With the profits to come “solely” from the efforts of others.
Are any of these securities:
GP
LP
digital assets
Investments that aren’t securities
Circuit split over this
But generally, they’re not
Generally, not a security because there are limited control rights
It’s not clear, could either way
Initial Public Offering
First sale of a corporation’s common share to public investors
Purpose: to raise capital for the corporation
They have heavy reporting requirements
Over the Counter Market
A security that’s not traded on an exchange, usually due to an inability to meet listing requirements.
For such securities, broker/dealers negotiate directly with one another over computer networks and by phone, and their activities are monitored by the NASD.
Pink Sheets
Electronic system that displays bids & asks quotation prices of securities
Mainly used by stock brokers trading OTC securities
Registration Statements have 2 parts:
Expert portion
Non-Expert portion
Private Placement Test
Size of the offering
Number of units offered
Manner of the offering
of offerees & relationship to issuer
Rule 10b-5
May be used by the SEC and private individuals in pursuing fraud claims
Creates liability for anyone who makes a misleading representation that’s connected to the purpose or sale of a security
elements for a 10b-5 claim
CRUMI
Untrue statement of omission
Intent (Scienter)
Materiality
Reliance
Causation
what is the fraud on the market theory for 10b-5
For affirmative misrepresentations
Rebuttable presumption that even if P didn’t hear the misstatement, P still relied on it
Presumption that P relied on the integrity of the market
How do you measure materiality for 10b-5
The Basic Test:
Look at the probability that an event will happen
And the importance of the event
damage options for 10b-5
- Out of pocked damages
- Restitution
- Recession
- Benefit of the bargain
- Punitive damages
Sarbanes-Oxley Act
Effort to increase disclosure by publicly traded companies
President/CEO and CFO must sign its corporation’s financial statements, verifying that they are true
Public companies must make a code of ethics
Public companies can’t make personal loans to their officers or directors
Insider Trading general definition
The prohibition of insider trading of securities involves the concept that those with access to nonpublic information shouldn’t have an advantage over those from whom they buy from or sell to
3 main standards for state law regulating insider trading
Majority Rule
- Except when fraud is involved, officers & directors can trade in their corporation’s stock without disclosing material information
Special Circumstances Rule
- Officers & directors have a duty to disclose information before they trade with shareholders when there are so special circumstances
Minority (“Kansas”) Rule
- Officers & directors have a duty to disclose material information when buying from a shareholder (At least in face-to-face transactions)
-This probably only applies to an insider’s purchase from an existing shareholder
When is a tipper liable?
Tips someone (discloses material, nonpublic information)
The disclosure breaches a duty of loyalty by receiving a personal benefit from tipping and
Someone trades on that information
When is a tippee liable?
Receives material, nonpublic information disclosed by breach of duty by an insider at the company whose stock is being traded and
The tippee knew or should have known that the tipper was breaching a duty and
The tippee trades on that information or
They give the information to someone else (so they become a tipper)
Misappropriation Theory
Prior to O’Hagan, you had to show that D breached a duty to the company whose stock D had traded
But now, under the misappropriation theory, liability includes the people who breach a duty to the source of the information
Misappropriation Theory Analysis
Did the defendant have possession of nonpublic information?
If no - there is no 10b–5 insider trading claim under the misappropriation doctrine (or any other theory).
If yes - did defendant did have possession of nonpublic information, was that information “material”?
If yes - how the defendant acquired that information?
Fiduciary relationship? Or
A relationship of trust and confidence?
What is a short-swing profit?
Applies to any insider (who has more than 10% of the equity securities at the time of purchase and the time of sale) at a registered company who buys or sells equity securities in that company within a 6 month period
iii. Any profit that the insider makes must be paid to the company
2 general principles for issuing stock
must be for a proper form of consideration
must be for a proper amount of consideration
de facto merger doctrine & when do you do it
Even though you structured your transaction as a triangular merger or assert sale, we are going to treat it as a regular 2 party merger
When a transaction “so fundamentally changes” the nature of the business as in effect to cause the shareholder to give up his shares in one company and against his will accept shares in a different business
Freeze out merger
Where a majority shareholder forces the minority shareholders to sell their stocks in a merge with an entity owned by the majority shareholders
It enables the majority shareholders to acquire 100% control of the company
Often used following a tender offer to eliminate shareholders who didn’t tender their shares
Short Form Merger
b. Where a majority shareholder can perform a cash out merger without shareholder approval
c. Owning 90% of the stock is standard
Takeover
When an acquirer tries to acquire sufficient shares to control the Board through a tender offer
Then you replace the Board with people of the Acquirer’s choosing
Cheffe Primary Purpose Test
- Reasonable danger to corporate policy & effectiveness
- Directors not acting in self interest
- If satisfied, BJR protects
