Biz Org Flashcards
1
Q
What are the three primary types of business organizations?
A
Corporations, partnerships, LLCs.
2
Q
Where can individuals and entities incorporate?
A
Both individuals and corporations may incorporate in any state they choose.
3
Q
Why is Delaware important to corporations?
A
more than 50% of Fortune 500 are incorporated in Delaware.
4
Q
What are shares? How are they different from stocks?
A
“Shares” means the units into which the proprietary interests in a corporation are divided. Share is the term used in the MBCA. Stock is used in the DGCL.
5
Q
What is an outstanding share?
A
Authorized shares that have been issued. Only outstanding shares get to exercise the rights associated with the shares.
6
Q
What is the default rule under the MBCA about what rights are associated with shares?
A
shares have voting rights. There is no general rule about the rights that shares entail.
7
Q
What are the two types of rights typically associated with shares?
A
right to vote, cash flow rights.
Right to vote = vote in the general assembly, or other voting rights given with shares
Cash flow rights (dividend rights) = entitlement to a percentage of the corporation’s profits
8
Q
Who decides the distribution of dividends?
A
The board of directors.
9
Q
What is a beneficial shareholder (MBCA)?
A
a person who is the beneficial owner of shares held in a voting trust or by a nominee on the beneficial owner’s behalf.
10
Q
What is a distribution (MBCA)?
A
a direct or indirect transfer of money or other property (except its own shares) or incurrence of indebtedness by a corporation to or for the benefit of its shareholders
11
Q
What is an employee (MBCA)?
A
includes an officer but not a director. A director may accept duties that make him also an employee.
12
Q
What is an entity (MBCA)?
A
includes domestic and foreign business corporation; domestic and foreign nonprofit corporation; estate; trust; domestic and foreign unincorporated entity; and state, United States, and foreign government
13
Q
What is an individual (MBCA)?
A
A natural person.
14
Q
What is a person (MBCA)?
A
Includes an individual and an entity.
15
Q
What is a record shareholder (MBCA)?
A
he person in whose name shares are registered in the records of the corporation or the beneficial owner of shares
16
Q
What business organizations are unincorporated entities?
A
The term includes a general partnership, limited liability company, limited partnership, business trust, joint stock association and incorporated nonprofit association.
17
Q
What is voting power (MBCA)?
A
means the current power to vote in the election of directors.
18
Q
What happens if more shares are issued than are authorized?
A
it’s like the over-issued shares don’t exist. The corporation did not have the legal authority to issue the over-issued shares. ultra vires
19
Q
What are the two constitutional documents of a corporation?
A
articles of incorporation (charter) and the bylaws.
20
Q
What are the types of corporations held?
A
closely held———-publicly traded———-publicly traded with controlling shareholder
21
Q
What is a controlling shareholder?
A
Publicly traded corporation but one shareholder owns a lot of shares (usually majority), like Mark Zuckerberg
22
Q
What is the usual voting threshold for corporations?
A
A majority.
23
Q
Break down the independent legal personality of a corporation.
A
Corporations are recognized as distinct entities by law
Corporations should be automatically authorized to engage in all acts and have all powers that an individual may have
A corporation without the corporation would be a series of complex contracts; corporations create a contractual nexus.
Corporations provide entity shielding.
24
Q
Break down entity shielding.
A
Corporation debt creditors looking to collect can’t go after the individual, have to go after corporation
When no corporation, debt creditors can go after business assets for personal debts
Without a corporation, both business and personal creditors have priority to either asset
Does not exclude shares, since individual owns that like property
25
Break down limited liability of corporations.
Limited liability means that the liability of the owners of the corporation is limited to the money they invested (or promised to invest).
Default rule is to provide limited liability to all investors.
Limited liability enables diversification.
26
Break down transferable shares and capital lock-in of corporations.
Any partner can dissolve at will, taking their capital with them. Dissolution of a corporation is more difficult. As a default, no one has the veto power to bring the corporation’s life to an end, or take away his money from the corporation. What you can do is sell your shares to a potential investor to get money.
27
Break down delegated board management of corporations.
Decision making costs= costs associated with communicating with investors on how to run business. The larger the group, the higher the decision-making costs.
Final word has to go to some select delegated group (board of directors)
Rational apathy - don’t think your votes matter in the course of the business, becomes apathetic
28
What does the MBCA require in the articles of incorporation?
1. Name
2. Authorized shares (maximum)
3. Registered agent (and registered office, which must be located in the state of incorporation.)
4. Incorporators (names and addresses)
29
What are some of the more common and important optional provisions for articles of incorporation under the MBCA?
Statement of purpose
Classes and series of shares (where one or more classes of shares have certain preferential rights, those rights must be spelled out)
Director and officer indemnification and liability limitation
30
How may the articles of incorporation be amended?
Articles of incorporation may be amended at any time.
First, board of directors must recommend amendment to shareholders.
Second, shareholders must approve the amendment.
Third, the amendment must be filed with the secretary of state’s office.
31
What are bylaws, and how are they different from the articles of incorporation?
Bylaws are rules a corporation adopts to govern its internal affairs.
Bylaws don’t have to be filed with the state so they aren’t public record
Bylaws are more easily amended than articles of incorporation
Officers and directors tend to be more familiar with bylaws than with the articles
32
What is a subsidiary?
a corporation whose shareholders are corporations
33
What is the purpose of diversification?
It decreases the risk of investment.
34
What will sophisticated contractual creditors do in response to default rules?
Sophisticated contractual creditors will contract around default rules, like requesting a personal guarantee, or requiring collateral.
35
What is the default rule for ending a corporation's existence?
corporations exist until dissolution, which can only be initiated via a lengthy procedure
36
How are partnerships formed?
```
6(1) = partnerships --no requirement of constitutional documents
7(4) = Receipt of profit of a business leads to a default assumption that that person is a partner, whether they intended to or not.
```
37
What power do partners have in relation to one another and to their partnership?
```
9(1) = Every partner is the agent of the partnership. Partners have the power to bind the partnership in contract.
13 = Partners have the power to bind the partnership in tort.
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38
How do partnerships dissolve?
```
29 = default rule: any partner can dissolve the partnership at will.
31 = dissolution is caused by the express will of any partner
38 = partnership’s property is used to payoff whatever partnership debt there is, the remainder goes to the partners.
```
39
What power do agents have in a partnership?
An agent has the power to bind the principal. This extends into tort liability.
40
What are agency costs?
describes what happens when there’s a misalignment of incentives between the ultimate beneficiary and the people making the decisions
41
What are controlling shareholder agency costs?
Agency costs associated with having a controlling shareholder.
42
What is capital?
the permanent and long-term contingent claims on the corporation’s assets and future earnings issued pursuant to formal contractual instruments called securities (money that goes into the corporation)
43
What are the two types of capital?
```
Debt = creates a fixed claim
Equity = contingent and residual claim
```
44
How are equity investors owners of a corporation?
Equity investors are “owners” of the corporation, but this does not mean they run the business. It gives them control rights.
Corporate law gives first ranking to equity investors. Theory = this type of ownership promotes risk taking, and risk taking is good for the economy
45
What are stakeholders?
environment, society, anything/anyone not equity investors but still interacts with the corporation
46
What is the minimum number of initial shareholders for a newly formed corporation?
1 legal person.
47
What is an incorporator?
An incorporator is someone who acts on behalf of the corporation that has not been formed yet. Sometimes called a promotor.
48
What are incorporators allowed to do before the corporation is formed?
Incorporators are allowed to sign contracts on behalf of corporations that have not been formed yet; they will sometimes be held liable for the contract.
49
How are partnerships created? Do they enjoy limited liability for this?
Partnerships do not require any formalities to be created; partners do not enjoy limited liability for spontaneous partnerships.
It is possible to have limited liability for partners, but that is not the default rule.
50
How does creating a corporation compare to a partnership? Dissolving?
Corporations are more difficult to create than partnerships; they are also more difficult to dissolve.
51
What are share options?
giving board members the right to purchase a share at a specific price to bridge the misalignment gap from agency costs
52
How is debt and equity treated in terms of repayment?
Debt gets paid first, whatever is left over goes to equity.
53
What are negative control rights?
veto power over certain acts.
54
What is pro rata distribution?
Proportionate allocation. For example, profit is generally divided among several stockholders (shareholders) on the basis of the amount of stock (number of shares) held by each.
55
What are hybrid examples of debt/equity classes?
```
Junior bonds,
- Lower priority than senior bonds
- Higher priority than all shares
- Specified return
- Contractual (negative) control rights
convertible bonds,
- A bond that may be converted into shares
preferred shares,
warrants
```
56
How many classes of shares may a corporation have?
A firm may have several classes of shares and bonds, each conveying different rights
57
What is the traditional and modern view of equity ownership?
Equity ownership (shareholder); traditional view → defacto constituency that the corporation is supposed to make better, corporation is supposed to make profits for the shareholder
Other view → Shareholders are not the only parties in interest. Consider employees, environment, etc.
58
How does a corporation determine it's voting rights?
Share’s voting rights can be specified in the bylaws/articles, it’s like a contract
59
What are monitoring costs?
monitoring costs: shareholders will be spending time monitoring the corporation if they don’t have limited liability.
60
What are enforcement costs?
Enforcement costs - the costs of efforts in collecting debt or enforcing an agreement
61
What is the compensation for risk/legislative regulation balance?
Compensation for risk/legislative intervention: A certain type of creditor is able to protect themselves from the risk of liability. (Sophisticated contractual creditor). For non contractual creditors (like injured party in tort) they are protected by legislative intervention allowing for compensation of risk.
62
What is the dark side of limited liability?
Dark side of limited liability - tort law is meant to prevent torts by internalizing the costs of committing a tort. By having limited liability, the tortfeasors themselves are not held liable for the torts committed.
63
What is the doctrine of respondeat superior?
Respondeat superior (agency) = not really a corporate law doctrine, tort doctrine. An employee in the scope of employment commits a tort, the employer is liable. Usually invoked to have parent corporation liable for a subsidiary. Corporations are not employees or agents of the shareholders.
64
What is veil piercing?
Veil piercing (piercing the corporate veil): holding shareholders responsible for the debt of the corporation. An exception to limited liability.
65
What is enterprise liability?
Enterprise liability: entities can be held jointly liable for some action on the basis of being part of a shared enterprise. Holds entities liable when they try to cabin away liability into a shared enterprise. To prove enterprise liability you must prove a common enterprise - that management, sales, assets, etc. of the same enterprise are in various corporations.
66
What is the Van Dorn Test for piercing the corporate veil?
Van Dorn Test:
Such unity of interest between debtor and defendant that their separate personalities no longer exist; AND
Adherence to fiction of separate corporate existence would sanction fraud or promote injustice.
To determine if there is a unity of interest, the following factors apply:
Failure to maintain corporate records or comply with corporate formalities;
Commingling of funds or assets
Undercapitalization
Domination by parent’shareholder
67
How is legal capital like an equity cushion?
the more legal capital a corporation has, the less risk for an equity owner to invest, or the more likelihood of receiving a return(being paid back).
68
What are externalities? How are they created?
Limited liability creates externalities. Externalities → a side effect or consequence of an industrial or commercial activity that affects other parties without this being reflected in the cost of the goods or services involved
69
What alone does not satisfy the Van Dorn test?
Evidence of an unsatisfied judgment--alone--is not enough for the Van Dorn test.
70
What is reverse veil piercing, after one has successfully veil pierced?
Reverse veil piercing gives the piercer(Sea Land) the shares of subsidiaries of the shareholder (Marchese), thereby competing with other creditors of the subsidiaries.
71
How is injustice a difficult standard to measure in tests like Van Dorn?
The context of justice blurs the line in tests that use injustice in the standard.
72
What is Par Value?
Par value - minimum amount paid for the share; corporation may not distribute that money as a dividend.
73
What is legal capital?
Money shareholders pay for their shares is legal capital.
74
What is the Amfaq test of veil piercing?
Amfaq Test:
The debtor corporation was under actual control of the shareholder; AND
The plaintiff’s inability to collect resultedfrom shareholder’s improper conduct.
Causation: The shareholder’s control either caused the plaintiff to entertransaction or caused the defalut; and the improper conduct was in relation to plaintiff’s entering the contract or interfering with the corporation’s performance.
Examples of improper conduct:
Inadequate capitalization
Milking = shareholders syphoning profits or assets
Misrepresentation or commingling
Violation of a statute
75
What is odd about undercapitalization?
There is no legal requirement for capitalization at a specific or certain amount, despite undercapitalization as a factor in many tests, including both Amfaq and Van Dorn
76
What is equitable subordination?
Equitable subordination = in bankruptcy, shareholders are treated as second coming creditors after first creditors.
77
Why would a corporation want to avoid undercapitalization?
If you under capitalize, you’re just funding the corporation with debt.
78
How are contractual creditors indicated?
Either explicitly, or by means of loans.
79
What is the single business enterprise doctrine?
Single business enterprise doctrine: when corporations are not operated as separate entities, but integrate their resources to achieve a common business purpose, each constituent corporation may be held liable for the debts incurred in pursuit of that business purpose.
The single business enterprise doctrine is an equitable remedy which applies when the corporate form is used as part of an unfair device to achieve an inequitable result.
80
What is reverse veil piercing?
Reverse veil piercing - when a shareholder’s personal creditor wants direct access to the assets of a corporation
81
What is attribution?
Attribution: if a shareholder is the subject of a legal norm, that legal norm does not automatically attach to the corporation (and vice versa), it must be attributed. Unrelated to limited liability, related to independent legal personality. Attribution occurs when they say the legal norm does apply to the other. In order to attribute, there must be an underlying policy that controls the norm, and then determine if the power of that policy overcomes the legal independent personality.
82
What is the homestead exemption?
Homestead exemption → creditors cannot take a family’s homestead farm
83
What is a limited partnership and how is it different from a partnership?
Limited partnership - requires a general partner, the general partner does not enjoy limited liability. The limited partners enjoy limited liability if they are passive, and don’t participate in the management of the limited partnership.
84
What other actions are treated the same as dividends?
In the eyes of the law, a repurchase, buyback, or redemption of shares is the same thing as a dividend.
85
What are 4 ways creditors are protected despite limited liability?
1. Distribution rules setting aside money that cannot be distributed (par value).
2. Distribution rules banning distributions that cause it to be unable to repay its debt.
3. Fraudulent conveyance making it liable for transfers made with intent to hinder, delay or defraud.
4. Direct liability for shareholder’s own acts or conduct
86
What is an LLC and how is it different from a corporation? How is its limited liability different from a corporation?
Limited Liability Company - very similar to regular corporation. Requires formal acts to incorporate, default structure is similar. Main difference is in the way it is taxed. Regular corporations are taxed on two levels; the corporation is taxed and the shareholders are taxed. LLC, the profit or loss is attributed directly to the individual members (owners).
Lack of formalities is not enough to hold a LLC member accountable.
87
What is the hierarchy of constitutional corporate documents?
Hierarchy: Law → Charter (AOI) → Bylaws
| So the bylaws cannot be inconsistent from the charter or the law, the charter cannot be inconsistent with the law.
88
What are the bylaws meant to govern? Who may amend them?
The bylaws are supposed to be functional in nature (how many members on the board, how often should they meet, etc.)
The board of directors has the power to amend bylaws.
89
What was the holding of boilermakers?
Boilermakers holding: forum selection bylaws relate to the rights of stockholders as stockholders, because they regulate where stockholders can exercise their right to bring certain internal affairs claims against the corporation and its directors and officers.
The forum selection bylaws plainly relate to the conduct of the corporation by channeling internal affairs cases into the courts of the state of incorporation.
90
How did Sciabacucchi refine the boilermakers holding?
Sciabacucchi differs from Boilermakers because it deals with an external matter. AOI and Bylaws can only regulate internal affairs of the corporation. That does not include external causes of action.
91
What was the holding of CA v. AFSCME?
Bylaws can deal with procedure but cannot take away discretion of the board of directors.
92
How are the board of directors restrained in amending the bylaws?
There is an equitable restraint on the authority of the board of directors to amend the bylaws.
93
What is a quorum?
minimum number of participants that need to be present in order for the action to be legal. (If two shareholders go to the meeting but there are 1000 shareholders, they can’t bind the others).
94
What rights are required for classes of shares? What is the default rule for each share's rights? What is the default rule for dividend rights?
MBCA 6.01(b) requires that at least one class has unlimited voting rights and at least one class has residual claims. It is legitimate to have one class with all voting rights and one class with all residual claims.
Default rule: Unless stated otherwise in the articles of incorporation, each share has one vote.
Generally, the dividend rights are in proportion to par value. (if it’s par value is $1, the dividend is $1 per share)
95
What is a stock split? Why would a corporation do one?
Stock split = A resolution taking shares and splitting them into other shares
The reason why you would do a stock split is so more shares will be purchased because it cuts the cost of the share. It usually happens for publicly traded corporations that for whatever reason their shares are not trading as frequently as they might.
96
What is a reverse split?
Reverse split = like a bundling of shares, takes shares and bundles them into fewer shares
97
What are preferred shares? What are its qualifications?
Preferred shares: a class of shares that has priority over other shares in receiving dividends and/or rights to the corporation’s assets upon liquidation
Similar to but subordinate to bonds
Because it has priority, its return needs to be specified
Often have limited voting rights
98
What is the difference between participating and nonparticipating preferred shares?
Participating preferred shares: they get their preference cut, then they also get regular dividend
Non-participating preferred shares: they only get the cut of their preference
Example: if preferred cut is $3, and regular dividend is $1, if they are participating they get $4, if they are non-participating they only get $3.
99
What is the difference between cumulative and noncumulative preferred shares?
Cumulative preferred shares: if there is no dividend in the year, the next dividend goes out as if it were two years.
Noncumulative preferred shares: they only get it per dividend rather than per year
Example: if preferred cut is $3, and they skip a year of dividend, if they are cumulative they get $6, if they are noncumulative they only get the $3.
100
How may preferred shares be created?
It must be in the articles of incorporation.
101
How are bonds and preferred shares different?
Bonds cannot be suspended, but preferred shares can be suspended.
102
What was the holding of Hartford? How does the MBCA impact this holding?
```
Holding of Hartford:
The relative position of one class of shares in the scheme of capitalization is not to be confused with rights incident to that class as compared with other classes of shares.
(The fact that they’re burdened by the changing of someone else’s rights, that is not an adverse affect on their rights)
```
10.04(6) changes the holding of Hartford. This section says a class is entitled to voting as a separate voting group if the amendment would increase the rights, preferences, or number of shares of a class that have rights or preferences superior or prior to the class.
103
How to divide remaining dividend after preferred shares have been distributed:
Each type of share will receive its proportion of the par value outstanding
Par value outstanding becomes the denominator.
(If there is 200 outstanding par value, and 50 shares, 50/200 multiplied by remaining dividend amount.)
104
How may shareholders act as shareholders?
Shareholders as shareholders do not have the authority to act in the name of the corporation.
105
How may shareholders act as a group?
Shareholders as a group are granted specific powers:
Electing directors
Adopting, amending or repealing bylaws
Amending the certificate of incorporation
Approving the merger of the corporation
Approving the conversion of the corporation to another entity
Selling, leasing, or exchanging all or substantially all of the corporation’s property and assets
Approving the dissolution of the corporation
106
How do shareholders acting as a group act?
Shareholders as a group act via resolutions:
Written consent or
Meeting (call summoning the meeting, quorum sufficient shares present at the meeting, vote sufficient shares support the resolution.)
107
What is the theory of annual shareholder meetings?
Theory of annual shareholder meetings: it creates a forum to exchange ideas
108
What are the types of shareholder meetings?
Annual meeting MBCA 7.01(a)
| Special meeting MBCA 7.02
109
Who has the authority to call a special meeting?
The board of directors or as state in the AoI/bylaws
Written demand of 10% of voters
The default of 10% under MBCA 7.02 can be changed, it has to be in the articles of incorporation, and it can’t be greater than 25%.
110
Where is proper notice for shareholder meetings outlined?
MBCA 7.05
111
What must be included in special meeting notice that isn't required for annual meeting notice?
Annual meetings don’t have to provide a description of the purpose but special meetings do.
112
Can you waive the requirement of notice?
Yes. Waiver of notice is outlined in MBCA 7.06
You can waive the requirement of notice and go to the meeting even if the notice didn’t comply with the bylaws.
113
What is the default quorum?
majority of shares entitled to vote
114
What is the record date?
the date on which the owner is considered entitled to vote and receive notice of an upcoming shareholder meeting.
115
What is the default for the record date? How may this be changed?
The default is that the notice date and record date are the same.
The board of directors has the power to alter the record date, so long as it is not more than 70 days before the meeting.
116
What is the MBCA default voting rule? What is the DGCL default?
MBCA default voting rule: A matter is approved if the votes cast in favor > votes cast against.
DGCL default voting rule: decisions must be approved by the vote of a majority of the shares present.
117
What is the default for electing directors?
Plurality of votes.
118
What is a plurality?
excess of votes cast for one candidate over those cast for any other candidate (not more than 50%, but still the most votes)
119
What is cumulative voting?
Cumulative voting: each shareholder gets a number of votes that equals the number of shares owned times the number of vacancies.
(Example: 50 votes, times 4 vacancies, gives 200 votes. If they care most about electing person 1, can do 160 votes to person 1 and 15 votes to person 2, 3, and 4.)
120
What is a voting trust? How is it enacted?
Voting trust = an agreement among shareholders where they transfer shares to a trustee. The trustee then votes all the shares in accordance with instructions in the document establishing the trust.
A copy of the trust must be filed with the corporation’s principal office.
121
What is a closely held corporation? How do they relate to shareholder agreements in corporate function?
Closely held corporation: they usually are smaller, the shareholder are on the BOD- limited number of shareholders no public traded- this makes it impossible to get rid of your shares.
122
What was the outcome of McQuade?
NY Ct. App. Puts out a bright line rule and says that shareholders are allowed to enter into agreements and can even specify how they vote as shareholder, but you can’t constrain the judgement of the directors in any way. They ruled the whole agreement voidable
- The default is that the board elects the corporate officers so shareholder agreements can’t include that.
- Shareholder agreements can’t include specified salaries
- Shareholder agreements can’t include mandates in corporate governance.
123
What is the Clark exception?
An exception to the McQuade rule. Agreements among all shareholders will be upheld because no minority shareholder is hurt so shareholders can limit the discretion of the BoD.
124
what was the holding in Galler v. Galler?
courts enforce contracts among shareholders that limits the discretion of the board even when not all shareholders are aware or agreeing, if it is a closed corporation
125
What is MBCA 7.32?
MBCA 7.32 reflects the modern rule about shareholder agreements.
126
What was the holding in Ramos v. Estrada?
Vote-pooling can be used in all forms of corporations.
127
What is the default rule of LLC membership transfer?
Default rule for LLCs is non-transferable membership. This can be changed in agreement or by unanimous consent of all members.
128
What does the MBCA default require for board of directors?
MBCA default requires a board of directors.
MBCA default requires the board of directors consists of at least 1 natural person, with the size specified in the AoI or bylaws.
129
What are the qualifications required to be on the board of directors?
MBCA 8.02 sets out qualifications for directors, with a general requirement of reasonableness.
130
What is an independent director? When are they required?
Independent directors = director that is not employed or affiliated with the corporation or controlling shareholder
Stock exchange listing rules requires majority of independent directors.
131
When is the board elected? What is the exception? What about when a vacancy is left?
By default, directors are elected in each annual meeting. The exception is that the AoI may create a staggered board, where one group is elected each year.
MBCA 8.10 governs filling vacancies.
132
How applicable is removal without cause of a director?
Barely any corporations allow directors to be removed without cause.
133
What is required when a director is elected by a specific voting group?
If a specific director is elected by a voting group, they can only be removed by that voting group.
134
What does MBCA 7.32(b)(1) require?
MBCA requires unanimous agreements amongst all shareholders for a shareholder agreement to be binding on the corporation. They can agree among themselves and that will still be enforceable, but not binding on the corporation. This makes unanimous the default, that can be contracted around.
135
What was the outcome of White?
Be aware of procedure (set rules for how interactions should be governed): MBCA, bylaws
Exceptions: necessity, third party
Justification for holding: this corporation is closer to a closely held corporation. For these types of corporations, procedures don’t have to be rigid and the corporation habitually followed their own customs.
136
What rule governs board of director committees? What additional limitations are imposed beyond this rule?
Board of Director Committees - MBCA 8.25
Directors cannot send proxy’s to vote
Committees should be expedient
For publicly traded corporations, stock exchange rules mandate an auditing and nomination committee
137
What was the holding of Steigerwald?
- Committees must only consist of directors because directors are held accountable by shareholders
- Committees must be created by the whole board, the whole board cannot give power to another to create the committee.
138
What is agency law?
Agency law governs situations in which one person (A) acts on behalf of another (P), including interacting with third parties (T)
139
How does the restatement define agency?
Restatement of Agency, §1.01: Agency is the fiduciary relationship that arises when:
P manifests assent to A that A shall act:
On P’s behalf
Subject to P’s control
A manifests assent to so act
Restatement of Agency, §1.02: Parties’ labeling & popular usage do not control
140
What is a manifestation?
Outward or perceptible indication; materialization
141
Who is a principal? Who is an agent? Who is a third party?
Principal: person for whom action is to be taken
Agent: Person who is to act
Third Party: Person who deals with agent
142
What is actual authority?
§ 2.01 Actual Authority: An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act.
§ 2.02: An agent has actual authority to take action designated or implied … and acts necessary or incidental to achieving the principal’s objectives, as the agent reasonably understands
143
How is actual authority created?
§ 3.01 Creation of Actual Authority: Actual authority is created by a principal’s manifestation to an agent that, as reasonably understood by the agent, expresses the principal’s assent that the agent take action on the principal’s behalf.
144
How does custom affect authority?
If a principal states the agent's authority in terms that contemplate agent discretion, it is ordinarily reasonable for the agent to believe that following usage and custom will be acceptable to the principal.
If a principal's express statement of authority is highly detailed, it is not reasonable for the agent to believe the principal intended that the agent should follow a custom or usage that is at odds with the terms of the principal's express authorization.
145
What is apparent authority?
§ 2.03 Apparent Authority: when a third party reasonably believes the agent has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations.
146
How is apparent authority created?
§ 3.03 Creation of Apparent Authority: Apparent authority is created by a principal’s manifestation that another has authority to act with legal consequences for the principal, when a third party reasonably believes the actor to be authorized and the belief is traceable to the manifestation.
147
What authority do officers have?
Officers have the authority to perform functions set forth in the bylaws, or functions prescribed by the board consistent with the bylaws
148
What is an audit committee?
committees mandated by new york stock exchange and NASDAQ, job is to audit the corporation’s financial state. Often comprised of independent directors.
149
What result when an agent acting with actual or apparent authority makes a contract on behalf of a disclosed principal?
The principal and the third party are parties to the contract and
The agent is not a party to the contract unless the agent and third party agree otherwise.
150
How is actual authority terminated? How is apparent authority terminated?
The principal has the power to terminate actual authority.
Apparent authority ends when it is no longer reasonable for T to believe that the agent continues to act with actual authority.
Authority is terminated when the third party has notice.
151
When is a principal disclosed?
A principal is disclosed if, when an agent and a third party interact, the third party has notice that the agent is acting for a principal and has notice of the principal’s identity.
152
What result when an agent acting with actual or apparent authority makes a contract on behalf of an unidentified principal?
The principal and the third party are parties to the contract AND
The agent is a party to the contract unless the agent and third party agree otherwise.
153
When is a principal unidentified?
A principal is unidentified if, when an agent and a third party interact, the third party has notice that the agent is acting for a principal but does not have notice of the principal’s identity.
154
What result when an agent acting with actual authority makes a contract on behalf of an undisclosed principal?
Unless excluded by the contract, the principal is party to the contract
The agent and the third party are parties to the contract, AND
The principal, if a party to the contract, and the third party have the same rights, liabilities, and defenses against each other as if the principal made the contracts personally.
155
When is a principal undisclosed?
A principal is undisclosed if, when an agent and a third party interact, the third party has no notice that the agent is acting for a principal.
156
How is there further liability for undisclosed principals?
(1) An undisclosed principal is subject to liability to a third party who is justifiably induced to make a detrimental change in position by an agent acting on the principal’s behalf and without actual authority if the principal, having notice of the agent’s conduct and that it might induce others to change their positions, did not take reasonable steps to notify them of the facts.
(2) An undisclosed principal may not rely on instructions given an agent’s authority to less than the authority a third party would reasonably believe the agent to have under the same circumstances if the principal had been disclosed.
157
What is ratification?
Ratification is the affirmance of a prior act done by another, whereby the act is given effect as if done by an agent acting with actual authority.
158
How does ratification affect the agency relationship?
If the agent was not the principal’s agent, ratification of the contract also creates an agency relationship by ratification.
159
How does a person ratify an act?
A person ratifies an act by
(1) Manifesting assent that the act shall affect the person’s legal relations (express ratification) OR
(2) Conduct that justifies a reasonable assumption that the person consents (implied ratification).
160
How does timing impact ratification?
A ratification of a transaction is not effective unless it precedes the occurrence of circumstances that would cause the ratification to have adverse and inequitable effects on the rights of third parties. These circumstances include:
(1) any manifestation of intention to withdraw from the transaction made by the third party
(2) any material change in circumstances that would make it inequitable to bind the third party, unless the third party chooses to be bound; AND
(3) a specific time that determines whether a third party is deprived of a right or subjected to a liability.
161
What is the default with a disclosed principal?
the agent is not a party
162
How is an agent liable to a third party for tortious acts?
An agent is subject to liability to a third party harmed by the agent’s tortious conduct. Unless an applicable statute provides otherwise, an actor remains subject to liability although the actor acts as an agent or an employee, with actual or apparent authority, or within the scope of employment.
163
How is a principal liable to a third party for tortious acts of the agent?
A principal is subject to direct liability to a third party harmed by an agent's conduct when
(a) the agent acts with actual authority or the principal ratifies the agent’s conduct and
(i) the agent's conduct is tortious, or
(ii) the agent’s conduct, if that of the principal, would subject the principal to tort liability.
(b) the principal is negligent in selecting, supervising, or otherwise controlling the agent
(c) the principal delegates performance of a duty to use care to protect other persons or their property to an agent who fails to perform the duty.
164
What is the difference in vicarious liability for employees, nonemployee agents, and nonagent service providers?
Employee: principal is liable of the agent was within the scope of employment
Nonemployee agent: the principal is not liable except in the special cases under 7.05 and 7.08
Nonagent service provider: principal is not liable in agency law.
165
When is an agent an employee?
For purposes of respondeat superior, an agent is an employee only when the principal controls or has the right to control the manner and means through which the agent performs work.
166
What rules emerged from Bushey?
If some harm is foreseeable→ liability, even if the particular type of harm was unforseeable
Conduct by the servant which does not create risks different from those attendant on the activities of the community in general will not give rise to liability
The conduct must relate to the employment
167
What was the rule from Grimsley?
liability for intentional torts committed in response to conduct that presently interferes with the agent’s ability to carry out the assigned task.
168
How does estoppel work in agency relationships?
Estoppel allows a 3rd party to force principal into a contract. Estoppel only works one-way.
169
What are the two distinct fiduciary duties?
Duty of care
| Duty of loyalty
170
What is the duty of care?
Duty of care (MBCA 8.30)
(a) Each member of the board of directors, when discharging the duties of a director, shall act: (i) in good faith, and (ii) in a manner the director reasonably believes to be in the best interests of the corporation.
(b) The members of the board of directors or board committee, when becoming informed in connection with their decision-making function or devoting attention to their oversight function, shall discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances.
171
What appropriate care is required for the duty of care according to Francis v. United Jersey Bank?
Directors are under a continuing obligation to keep informed about the activities of the corporation.
Directorial management does not require a detailed inspection of day-to-day activities, but rather a general monitoring of corporate affairs and policies.
At least a rudimentary understanding of the business of the corporation.
Should become familiar with the fundamentals of the business in which the corporation is enaged.
Knowledge needed to exercise the requisite degree of care.
Directors should maintain familiarity with the financial status of the corporation.
Review of financial statements may give rise to a duty to inquire further into matters revealed by those statements.
172
What duties to directors have upon discovering illegal actions?
Upon discovery of illegal acts, a director has a duty to object, and if the corporation does not correct the conduct, to resign. In addition, sometimes a director may be required to seek the advice of counsel. A director may have a duty to take responsible means to prevent illegal conduct by co-directors.
173
What is the business judgment rule? What is its effect?
Business Judgment Rule: A presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.
Effect of the business judgment rule: directors are insulated from potential liability arising from breach of the duty of care.
174
What MBCA rule encapsulates the business judgment rule?
MBCA 8.31
175
What are the BJR limits (or when it does not apply?)
The acts are not in the best interest of the corporation
| Director did not act on an informed basis
176
What was the holding of Dodge v. Ford?
Dodge v. Ford = a business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end.
177
To whom do directors owe their fiduciary duties?
Only shareholders get to try and enforce fiduciary duties (derivative litigation)
178
What is the Walt Disney rule of BJR?
The business judgment rule protects director decisions even when the information and decisionmaking process by which that decision was made was not so tidy as would have been the case had the directors followed a best practices or best case scenario and falls short of what best practices would have counseled.
179
What is the outer boundary of the business judgment rule? What is an example?
Irrationality is the outer boundary of the business judgment rule. (For example waste, which is an exchange so one-sided that no business person of ordinary sound judgment could conclude that the corporation has received adequate consideration.)
180
How may the articles of incorporation limit the director's liability? What can't it limit?
The articles of incorporation may set forth a provision eliminating or limiting the liability of a director to the corporation or its shareholders for money damages for any action taken, or failure to take any action, as directors, except for liability for:
(i) unentitled financial benefit
(ii) an intentional infliction of harm
(iii) a violation of 8.32 (unlawful distribution)
(iv) an intentional violation of criminal law.
181
What are the Caremark duties?
only a sustained or systematic failure of the board to exercise oversight will establish the lack of good faith necessary that is a necessary condition to liability
182
What duty is breached by lack of oversight?
Lack of oversight is characterized as a breach of duty of care.
183
What are the Stone v. Ritter 2 prongs for liability?
(1) utter failure to implement any reporting or information system or controls or
(2) having implemented such a system or controls, conscoius failure to monitor or oversee its operation.
184
What duty does a breach of the duty of good faith fall under? What effect?
Duty of good faith has been subsumed by the duty of loyalty. If breached, no exculpation provision.
185
What breach results from a conscious disregard for the law?
Conscious disregard for the law is a basis for breach of duty of good faith.
186
What is the corporate opportunity doctrine?
Objective is to deter appropriations of new business prospects belonging to the corporation
Targets officers, directors and dominant shareholders of the corporation
A breach implicates the duty of loyalty
187
When does corporate opportunity exist?
1. Corporation is financially able to take the opportunity
2. Opportunity is in the corporation’s line of business
3. Corporation has an interest or expectancy in the opportunity
4. Embracing the opportunity would create a conflict between director’s self-interest and that of the corporation.
No single factor is dispositive.
Interest: something to which the firm has a better right
Expectancy: something which, in the ordinary course of things, would come to the corporation
188
How can shareholders "ratify" a conflict of interest?
Shareholders have a financial interest, so if they approve an action despite potential harm, the breach of loyalty has been essentially ratified.
189
What's the difference between a direct suit and a derivative suit?
Direct suit:
Brought by the shareholder in his or her own name
Cause of action belonging to the shareholder in his or her individual capacity
Arises from an injury directly to the shareholder
Derivative suit:
Brought by a shareholder on a corporation’s behalf
Cause of action belongs to the corporation as an entity
Arises out of an injury done to the corporation as an entity
190
What is the Oregon demand requirement?
A complaint in a proceeding brought in the right of a corporation must allege with particularity the demand made, if any, to obtain action by the board of directors and either that the demand was refused or ignored or why a demand was not made. Whether or not a demand for action was made, if the corporation commences an investigation of the charges made in the demand or complaint, the court may stay any proceeding until the investigation is completed.
191
How can one demonstrate demand futility? When can't you argue futility?
Plaintiff must allege particularized facts creating a reasonable doubt that the board is capable of making a good faith decision on suit, such as:
Majority of board has a material financial or familial interest
Majority of the board lacks independence (domination and control by wrongdoers)
Challenged transaction not product of valid exercise of business judgment.
By sending a demand, you cannot argue that demand is futile.
