Biz Orgs Flashcards

Question

Which law defines partnership?

Answer 1

The Uniform Partnership Act.

Answer 2

The Uniform Partnership Act defines partnership as "An association of two or more persons to carry on as co-owners a business for profit."

Answer 3

Shared control, and shared profits and losses. When both are present, a partnership is likely; however, other factors should also be assessed.

Answer 4

Someone I Loved Can't Return A determination of whether a partnership exists requires an examination and balancing test of the totality of the circumstances in a given case. These include nine factors: The mnemonic is S cubed, I, L squared, C squared, R 1. Share in profits (law assumes split equally unless specified otherwise in agreement) 2. Share in losses (law assumes split equally unless specified otherwise in agreement. Thus, if one party indemnifies a other, this weighs toward no partnership 3. Share in ownership and control of the partnership property and the business (law assumes shared equally unless otherwise specified. Who owned the capital that went in? who controls the business?) 4. Intent (determined from statements and conduct) 5. Language of the agreement (is agreement called "Partnership Agreement" or just "Agreement"? 6. Length of agreement (partnership agreements typically run for indefinite terms. Thus, the more finite the term, the less likely there is a partnership. 7. Conduct toward third parties (did parties file partnership income tax returns? Did only one party file partnership income tax returns?) 8. Community of Power in Administration 9. Rights of the parties upon dissolution (did one party not have the rights to share in capital upon dissolution)?

Answer 5

Under the Uniform Partnership Act, sharing of profits creates a prima facie presumption of partnership UNLESS the profits were received for: - a joint tenancy/property - a debt - compensation - rent - annuity or other retirement benefit - interest on a loan - sale of goodwill on a business... in which case no prima facie presumption is established and one must look at other factors. NOTE: This means that even if you get compensation money, or rent money, you can STILL be a partner, it just kills the presumption of partnership.

Answer 6

Because if they are a partner they are liable for all of the partnership's debts. NOTE: Veto power only gives creditors option to protect against bad investments but no authority to make good ones. Creditors have no authority to initiate transactions on behalf of the partnership nor do their actions bind the partnership.

Answer 7

Martin v. Peyton (partnership was not created)

Answer 8

An equitable doctrine in which a partnership is created by law when a person holds him or herself out as a partner and a third party detrimentally relies on the representation. The Defendant is estopped or precluded from denying the partnership. c. Elements of Partnership by Estoppel i. A representation of partnership with one or more persons who are not partners in fact; AND ii. Plaintiff’s reliance on the representation of partnership.

Answer 9

Joint adventures, like copartners, owe to one another the duty of the finest loyalty. In other words, share with your fellow joint venturer the opportunities you come across so long as the opportunity arises from the joint venture.

Answer 10

An Agreement Considers Partners 1. Express or implied agreement to form a JV; 2. Express or implied agreement for the sharing of profits and (usually but not necessary), losses. 3. Contribution by each party (though not necessarily in equal parts) of financial resources, property, time, skills, etc., in a common undertaking; 4. A proprietary interest and right of mutual control over the property

Answer 11

Meinhard v. Salmon where Salmon should have shared the opportunity with Meinhard as if a partner.

Answer 12

A limited purpose partnership that is shorter in duration than a partnership and has a more narrow purpose than a partnership

Answer 13

In Meinhard v. Salmon, Justice Cardozo concluded that, "Joint adventures, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty . . . Not honesty alone, but the punctilio of an honor the most sensitive, is the standard of behavior."

Answer 14

[[INSERT FROM 105 c and 105 d]] - Rules that affect third party rights cannot be changed (e.g., a rule on payment of debts cannot be changed because this would impact a third party)

Answer 15

Equal share in profits Equal share in losses Equal share in control rights

Answer 16

- Not competing with the firm - Duty of disclosure Case is Meehan v. Shaughnessy - where lawyers took customer lists and employees with them to the new firm NOTE: Associates of a law firm are agents

Answer 17

1) Purchased with partnership assets 2) Transferred to a person with indication of their capacity as a partner 3) The existence of a partnership (but without the name of the partnership) NOTE: Property acquired in the name of a partner, without any indication of the partnership or that the person is a partner, and without use of partnership assets, is presumed to be individual/separate property.

Answer 18

1) Creation of a bankruptcy estate; and 2) Dissolution of the partnership

Answer 19

All profits split equally (unless agreement states otherwise) irrespective of how much work or capital someone put in.

Answer 20

1. Outside/third party creditors 2. Partners for contributions that are not capital or profits related 3. Partners for capital contributions 4. Partners for profit-related debts

Answer 21

By a majority vote of partner (e.g., hiring or firing an employee related to the business)

Answer 22

By a unanimous vote of partners.

Answer 23

In a general partnership with two partners, each party has the power to bind the partnership in matters pertaining to the ordinary course of the partnership’s business. However, if a contract is entered into by a partner who lacks authority and the third party knows the partner lacks authority, then the contract does NOT bind the partnership. [like as if vendor had notice of dissolution] NOTE: One partner cannot restrict the powers of another partner for a matter in the course of ordinary business (e.g., write letter to vendor saying don't sell bread to my fellow partner and they run a grocery store).

Answer 24

A breach of fiduciary duty occurs when one partner advantages himself at the expense of the firm. Fiduciary duties include the duty to: Act honestly toward other partners and for the benefit of the other partners. Not compete nor make any unauthorized profit Disclose material information

Answer 25

For two years after dissolution unless partnership files a notice of dissolution with the Secretary of State which will then put the third party on constructive notice after the passing of 90 days

Answer 26

Under the old UPA, if a partner dissociated from the partnership, the partnership dissolved. Under the new UPA, if a partner dissociates, the partnership is NOT automatically dissolved.

Answer 27

Optionally file a statement of dissociation with the Secretary of State. This document limits the power to bind the dissociated partner and the personal liability following potential dissolution. The filing serves as constructive notice. After 90 days it becomes constructive notice of the facts it contains -For the first 90 days there is no protection so reach out and notify vendors.

Answer 28

1. Notice of partner's express will to quit 2. Event in partnership agreement specified as to trigger dissociation occurs. 3. Expulsion of partner. 4. Unanimous vote + unlawful to carry out business with partner, transfer of partner's interest, entity was partner and dissolved, or person was an unincorporated entity that dissolved 5. Partner expelled by judicial notice (e.g., wrongful conduct, willful breach of agreement) 6. Partner bankrupt 7. Partner dies

Answer 29

- Breach of partnership agreement - In a partnership for specific undertaking or term, if partner dissociates prior to completion of term or undertaking

Answer 30

- Liable to the other partners for damages - Liable for existing debts of the partnership even though they wrongfully “bailed out”

Answer 31

1. Death of partner + w/i90 days consent/vote of at least half of remaining partners to dissolve business 2. Fixed term partnership or goal specific partnership where complete 3. Fixed term partnership where partners decide to wind it up 4. Fixed term partnership with a wrongful dissociation and half of remaining partners or more vote to dissolve 5. Received notice under partnership at will for partner rightful dissociation 6. Inability to carry out obligations created by the partnership agreement 7. Court order (e.g., unlawful business, not reasonable to carry on partnership, partnership does not have at least two partners) 8. Only able to carry business at a loss 9. Insanity of a partner (?)

Answer 32

The winding up of the business during which partners pay off creditors and wind and partners share in profits and losses. The partnership is not terminated until after the winding up of the partnership is complete. NOTE: Judicial dissolution terminates the partnership immediately.

Answer 33

- Pay creditors (inside and outside creditors) - Return capital - Share profits

Answer 34

On application by a partner by a judicial decree that: 1. The economic purpose of the partnership is likely to be reasonably frustrated 2. Another partner has engaged in conduct relating to the partnership business that makes it not reasonably practicable to carry on the business with that partner 3. It is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement.

Answer 35

The general rule on partnerships is that losses are to be shared equally unless otherwise specified in the partnership agreement. However, in the situation described above, where one partner or joint adventurer contributes the money capital and the other contributes the skill and labor, neither party is liable to the other for contribution for any loss sustained.

Answer 36

1. No registration requirements 2. Tax advantage in that partnership is not taxed just your income as a partner is taxed 3. Flexibility in that you can define agreement as you would like so long as it is not an immutable rule (e.g., adversely impacting third party rights)

Answer 37

The partners are all individually and jointly liable for the debts of the partnership performed in furtherance of the business.

Answer 38

A LP - limited partnership.

Answer 39

General partnerships did exist in the Common Law. LPs did not.

Answer 40

A general partner and a limited partner.

Answer 41

General partners in a limited partnership 1) Run and manage the business 2) Have unlimited personal liability for the organization

Answer 42

Typically do NOT partake in managing the company. Are not personally liable for acts of partnership. Risk is only that of losing their investment in the LP.

Answer 43

Encourage people to invest by removing their personal liability to a partnerships liabilities.

Answer 44

Like a LP but the general partner AND the limited partner BOTH do NOT face personal liability for the debts of the LLP. NOTE: It is like a magical solution.

Answer 45

Anyone can form an LLP, however some states only people in certain professions can file for an LLP CA rule: ONLY lawyers, accountants and architects can become LLPs

Answer 46

May need to establish financial security by: o Insurance o a bond or o meeting a net worth requirement (CA has a net worth requirement)

Answer 47

For forming a limited partnership or a limited liability partnership.

Answer 48

Must renew LLP registration every year in states OTHER THAN LLP If forget, lose LLP shield and have formed a general partnership on default

Answer 49

LLLP is the ultimate extension of all the liability limiting exceptions. No liability for general and limited partners (same as LLP) but NOT restricted to only some professions NOTE: Some states do not recognize LLLPs.

Answer 50

limited liability company

Answer 51

An LLC is an unincorporated business association who provides its owners/members with limited liability and allows them to participate in managing the enterprise without risking any loss of that limited liability.

Answer 52

Unlike partnerships LLCs have limited liability for all their members. Also, several corporate laws apply to LLCs.

Answer 53

There is no double taxation. LLCs can choose between being taxed as a partnership or as a company.

Answer 54

A business that is a legal entity and shares in the profits of the business but whose owners are not personally liable for any debts or losses of the business.

Answer 55

1. Limited liability (e.g., in tort cases, P can only sue corporate entity unless they can pierce the corporate veil) 2. Tax benefit: Corporations do not have to distribute all of their income; income can be reinvested in the business; however business taxes have to be paid on earnings and income is taxed against at personal income tax level 3. Benefits: Employees receive benefit plans (partnerships cannot do this) 4. Safe (Board meetings, a lot of governance, organization)

Answer 56

1. Draft articles of incorporation that include requirement components 2. Deliver articles of incorporation to the Secretary of State and receive copy 3. Secretary of State accepts articles and this is point at time at which corporation is born.

Answer 57

- The corporation’s name (and some word indicating business is incorporated (ie. “inc.). - The max # of shares the corporation is authorized to issue - Names of corporation's registered agent - Address of registered office (must be located within the state of incorporation) - Name and address of each incorporator

Answer 58

- Purpose of business - Classes and number of shares of different classes of stock

Answer 59

(1) Board must recommend the amendment to the shareholders. (2) Shareholders MUST VOTE TO APPROVE the amendment. (3) Amendment must be filed with Secretary of State's office

Answer 60

The rules that a corporation adopts to govern its internal affairs.

Answer 61

Board committees, qualifications of directors, notice requirements for shareholder meetings

Answer 62

Incorporators or directors can amend or change bylaws but once shareholders pay stock, only shareholders can amend/change the bylaws. NOTE: Bylaws are not filed with the state government, they are not public record and are more easy to amend than articles of incorporation

Answer 63

Statute trumps articles of incorporation which trumps bylaws.

Answer 64

Delaware is the most influential business body of law in the USA

Answer 65

The law of the state of incorporation governs a corporation's internal decisions and actions. Does not matter where the corporation does business or is HQ--Court will apply Delaware law IF the corporation is incorporated in Delaware or CA law if incorporated in CA.

Answer 66

Protection by the corporate veil.

Answer 67

- They are collectively the Principal of the organization - They are not agents - They are elected by the shareholders - Their duty is to the corporation - They are not subjected to the corporation's control, rather the corporation is subject to the Board's control - Acting as a GROUP, the members can bind the corporation. Acting individually they have less power aka they cannot demand documents from the offices.

Answer 68

They are agents of the corporation.

Answer 69

Delaware allows corps to limit the liability of directors for a breach of duty of care BUT this must be in Certificate of Incorporation.

Answer 70

- Encourages Investment (if investors liable, would deter investment) - Encourage Management (managers would be less willing to manage if they were liable) - Makes Economy More Efficient (corporations controls investment with its expertise, can diversify investments which reduces risk on investment; separation of function where some people have the money and others have the expertise

Answer 71

Someone who purports to act as an agent of the business prior to its incorporation (e.g., sign contracts in name of corp when there is no corp)

Answer 72

Promoter is liable.

Answer 73

They are held to the standard of a general partnership in which all partners personally liable.

Answer 74

1. Is the promoter liable on the contract? 2. Is the corporation liable on the contract?

Answer 75

All persons purporting to act as or on behalf of a corp, knowing there was no incorporation are liable. NOTE: Delaware imposes a presumption that the promoter is liable.

Answer 76

Show that the third party: i. Knew the corporation does not yet exist, AND ii. Agreed to look solely to the corporation (when and if formed) for performance, AND iii. All of this must be unambiguous.

Answer 77

Yes, but not automatically. The corp must “adopt” the contract. Adoption can be a. Express (typically by a novation); or b. Implied (e.g., ratification by acceptance of benefits) NOTE: Even if corporation adopts the contract, the promoter remains liable as a guarantor unless the third party releases the promoter. Thus, if you sign contract for company when it is not in existence, there is a lifetime guarantee on that contract.

Answer 78

i. The “right” way for a corporation to sign a document is: 1. XYZ Corporation, a. By: Mona (agent’s signature and printed) b. Title: c. Date: ii. Wrong way is to handwrite without a signature and not using the word “By” or putting your name down twice (might make it seem you are trying to guarantee it personally) 1. This makes you personally liable iii. Bottom line – do not deviate from the standard form

Answer 79

First, de facto corporation. Second, corporation by estoppel. NOTE: You can raise BOTH of these defenses in a contract case. But in a tort case, you can only raise de facto.

Answer 80

i. An entity acted like a corporation; ii. Does business under a corporate name; iii. A third party reasonably believes she was dealing with a corporation; and iv. Unjust to let third party recover from owners of a firm individually (basic fairness/equity requirement) NOTE: a. Argument for Defendant b. Defendant may be a promoter and does NOT want to be liable so raises corporation defense – either corporation by estoppel or de facto if true efforts to organize c. Precludes the Plaintiff for going after individual liability; D raises this as a defense to protect his assets; there was reasonable reliance on a corporation d. You never want your incorporation to be defective because you are personally liable if things go wrong, so defendant argues corporation by estoppel – they thought they were dealing with a company and it would be unfair to hold differently

Answer 81

i. Valid incorporation statute; ii. Good faith effort to incorporate; and iii. Evidence that organizers acted as a corporation. a. Argument for Defendant – plead it along with a defense of corporation by estoppel so that you can protect your individual assets b. Defendant may be a promoter c. Looks at actions of incorporator d. For example, D does not want to be thought of as in a general partnership which is the default for ineffective incorporation (!!) b/c personally liable, so argues for de facto corporation e. Defined: corporation by fact but not necessarily by law f. Implication – D is not liable, only company is liable g. NOTE: If the above factors are fulfilled, a corporation (or LLC) instantly comes into being (even before government has filed papers) h. Thus, entity must be treated like a corporation by everyone except the State

Answer 82

This is differentiated from In re: International Cab Company, where the court found that the corporate veil could not be pierced to add the company's CEO and his other company (National) to the list of Defendants, because the plaintiff did not successfully establish the elements of the alter ego doctrine.

Answer 83

It does NOT apply to a public corporation and has never been done.

Answer 84

Two prongs - both must be fulfilled in order to pierce the corporate veil. The first prong is the Unity of Interest prong where there is such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist. The second prong is the Prevention of Fraud and Misjustice prong where adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice.

Answer 85

1. Domination & Control (appears that 1 or 2 shareholders are calling all the shots to where the corporation is the alter ego of the individual because corporation does everything the individual wants). 2. Disregard of Corporate Formalities (none or few meetings, no minutes, no shareholder meetings, etc.) 3. Disregard of Economic Separateness (comingling of funds, using company funds for your own) 4. Inadequate Capitalization (little assets and outstanding loans) 5. Insolvency at the time of the Transaction (corporation was on the ropes at time of transaction) 6. Siphoning of funds (corporation pays $30K to an officer who does $20K of work) (NOTE: That paying excess to a vendor is just a a bad deal not siphoning)

Answer 86

To prevail, a plaintiff must prove that respecting the corporate form will lead to an inequitable result. Note: that a plaintiff does not have to prove all the elements of fraud. A showing of bad faith is enough.

Answer 87

As stated, normal veil piercing occurs when the court decides to hold an individual shareholder liable for the debts of their company. Reverse piercing is the opposite. There, the court allows a third-party creditor to reach corporate assets to satisfy claims against the individual shareholder. NOTE: Reverse piercing aims to first establish the liability of the individual shareholder, THEN reach inside to the assets of the corporation - Usual case is an individual who owns 17 corporations and one of the corporations enters into a K with a CREDITOR and defaults NOTE: The board owes a duty to the corporation’s creditors because it is a Delaware corporation and when it is nearing insolvency.

Answer 88

- Enterprise liability where all of the subsidiaries can be liable for the actions of one of them (e.g., impossible to know which subsidiary had asbestos that made P sick) - Respondeat Superior (agency law) where company is liable if the agent was acting in furtherance of the business - Disregard of the Corporate Entity (Piercing the Corporate Veil) where the defendant disregarded the separateness between himself and the corporation

Answer 89

A partnership by law. NOTE: You do not need to intend to form a partnership but the court can find one.

Answer 90

Yes, a state statute permitting corporate charitable donations applies retroactively to corporations whose charters were filed before the effective date of the statute.

Answer 91

That is benefits the business in some way. This is not required. Note the other theory is morality per se where you donate because it is the moral/right thing to do. Today, per New York business law, corporations have the power to make donations irrespective of corporate benefit. NOTE that in Dodge v. Ford Motor, the reason why Ford was found liable is that in order to help humanity he stopped paying his shareholders dividend so he was actually causing them harm.

Answer 92

The duty of care is the Director's obligation to act in good faith, for the corporation's interests, and with the degree of care a reasonable director would exercise. The duty of care focuses on the process--not the outcome. The process must be reasonable. Even if in breach, both factual and proximate causation must be proved. The Business Judgment rule protects Directors in offering its rebuttable presumption that the Directors acted with reasonable care. Most directors are protected by breach of the duty of care claims given corporation's charters contain an exculpation clause under 102(b)(7).

Answer 93

No. Unless fraud or bad faith is alleged, courts will not interfere with decisions on dividend payouts.

Answer 94

NO. Gross negligence is the standard.

Answer 95

Board and shareholders of BOTH companies

Answer 96

- Market value is the share price times the number of shares outstanding - Intrinsic value is the value of assets minus liabilities

Answer 97

Yes so long as the company puts it in the charter up front.

Answer 98

Yes. However, in nonfeasance of a Director (failure to act), BJR does not apply because no decision was made by the Board, thus the standard is negligence for non feasance and stays at gross negligence for BJR.

Answer 99

Board of Directors Officers

Answer 100

Directors and officers of the company.

Answer 101

Only the corporation - NOT the shareholders.

Answer 102

1. Self dealing 2. Depriving the corporation of an opportunity that rightfully belonged to it 3. Waste

Answer 103

When a director or officer takes advantage of their position to overpay themselves or one of their friends.

Answer 104

When a director or officer makes a personal deal with the corporation (e.g., director or officer is on both sides of a transaction) E.g., Director sells their property to company; Director would vote for company to buy his personal property and is now on both sides of the transaction E.g., Director on 2 different boards which engage in transactions with one another

Answer 105

Directors who do NOT have a conflict.

Answer 106

1. Disclosure of all material facts and majority vote of disinterested directors; OR 2. Disclosure of all material facts and vote of stockholders; OR 3. Transaction is fair to the corporation at the time it was made.

Answer 107

Equitable remedy - Corporation has a right to void transaction if they would like. NO money damages available other than the D returning any gain they realized on the transaction

Answer 108

No. Never. Only duty of care.

Answer 109

Yes. Board member is disloyal and engaging self-dealing while Board failed to act reasonably to put the company's best interests first.

Answer 110

- Approve a merger - Adopt, amend, or appeal a bylaw

Answer 111

A basic unit of ownership which entitles the owner of the stock to receive a share of profits

Answer 112

Preferred stock holders enjoy a dividend preference (receive their dividend before holders of common stock do) Preferred stock holders enjoy a liquidation preference in that they receive money from a liquidation before common stock holders do Preferred stock holders enjoy better voting rights.

Answer 113

Existing stockholders can buy stocks before those who are not shareholders

Answer 114

A company which owns shares of different subsidiary businesses. The benefit is to protect the assets of the parent/holding company; holding company/parent cannot be sued directly unless veil pierced through lack of separateness of subsidiary NOTE: Each subsidiary is referred to as an operating company.

Answer 115

Leverage is the debt of the corporation including debt owed to a bond holder * High yield bonds * Junk bonds – likely never see the money again, only collect interest * Convertible bonds – convertible into common stock

Answer 116

a. Interested transactions involve a corporate insider being on both sides of a deal. Under the Common Law, such transactions were absolutely forbidden. However, courts will now permit interested transactions in two situations. The first is when the transaction was objectively fair to the corporation at the time it was entered into. The second is when the transaction was approved or ratified by a sufficient number of disinterested directors or the shareholders, provided that there was a full disclosure of material facts. b. This is analogous to Benihana Tokyo, Inc., versus Benihana, Inc, in which the parent company sued the directors of the subsidiary under an interested director transaction theory (breach of duty of loyalty) because the Benihana, Inc., director was on both sides of the deal (on the Board of Benihana, Inc., and a director for BFC which purchased the preferred stock). The court found the directors were not liable under a safe harbor provision because a majority of the disinterested directors reasonably reviewed and approved.

Answer 117

To deter misappropriation of new business that should rightfully belong to the corporation.

Answer 118

An officer or director breaches the duty of loyalty when: 1. Director of officer “usurps”/ wrongfully takes the opportunity for herself; AND 2. The opportunity should have been available to the corporation.

Answer 119

Under the Delaware balancing test, the following four factors should be considered: 1. First, did the corporation have the resources to take the opportunity? 2. Second, was the opportunity within the corporation’s line of business? (e.g., scope) 3. Third, did the corporation have an interest (e.g., legal right like an option or letter of intent) or expectancy (ordinary course of business) in the opportunity? 4. Did/would the opportunity create a conflict of interest between the insider and the corporation? (e.g., if the opportunity is presented to the director in his individual capacity less indicative of a conflict of interest) NOTE: No single factor is dispositive of a violation, court must balance all 4 factors

Answer 120

Determining whether the taking was wrongful.

Answer 121

A presumption applies that the if the opportunity belonged to the corporation then the taking WAS wrongful. Up to D to rebut the presumption. Only path to effective rebuttal is showing that the transaction was cleansed through a Safe Harbor

Answer 122

Full disclose of all material factors plus that a majority of Disinterested directors either: 1. Approved the insider’s taking the opportunity; OR 2. Rejected the opportunity for the corporation; OR 3.Fairness - taking the opportunity was fair to the corporation at the time the insider took it

Answer 123

Director or officer has to give up their profit/ill-gotten gains and hold the funds in a trust for the corporation

Answer 124

A company wants another company's shares and lines up the money to make the offer to the shareholders.

Answer 125

An initial public offering in which the first sale of stock by a company is made to the public

Answer 126

Allocating hot IPOs to the personal brokerage accounts of your clients (when you are an investment banker, in order to get better deals / aka a bribe)

Answer 127

Yes when there are parent-subsidiary dealings.

Answer 128

Self-dealing occurs when the parent, by virtue of its domination of the subsidiary, causes the subsidiary to act in such a way that the parent receives something from the subsidiary to the exclusion of, and detriment to, the minority stockholders of the subsidiary (e.g., parent forces subsidiary to pay out so much in dividends and almost dissolves subsidiary and the parent gets a lot of cash from it and the minority stakeholders of subsidiary get nothing) NOTE: Must assess improper motive (this is duty of loyalty case) and waste TEST to use is INTRINSIC FAIRNESS test - was the transaction fair to the minority stakeholders of the subsidiary business

Answer 129

1. Stockholders - Small in number - Active in day-to-day affairs - Directors ARE also shareholders (so directors are not independent guardians as usual corp structure) 2. Jobs vs. dividends - Corp is often the main source of income for each stockholder - But payout is in the form of salary, not dividends 3. Shares - Not liquid—no ready market to buy/sell shares - Shareholders are stuck where they are

Answer 130

1. Planning for control where founders want to predetermine important parts of the deal among them such as sharing of power and compensation rights 2. Abuse of control where the structure permits oppression of minority stockholders such as "freezing out" minority stockholders from participating in the firm and the rewards of the firm

Answer 131

- Context: P shareholder was not given the same option to sell at a certain price as that given to the Founder - Holding: Shareholders in a close corp have the same fiduciary duties toward each other as do partners in a partnership (quoting Meinard v. Salmon) - Remedy: Either Founder returns the money and takes back his shares or close corp must buy P’s shares at same price

Answer 132

- Context: 4 people each owned 25% of the shares in a close corp, and a bylaw states important decisions require a 80% vote. This makes it has to be unanimous vote. Three of fourth sued the fourth guy for refusing to vote to pay dividends out. - Ruling: Fourth guy determined to have breached his fiduciary duty to the other three shareholders and is liable to them for damages - Held: The fiduciary duties owed one another by shareholders in a close corp apply not only to majority shareholders but to anyone who exercises control over the firm (including MINORITY shareholders) iv. Veto power must be exercised in a manner consistent with the best interests of the corporation v. Lesson – this is deadlock

Answer 133

1. Shareholder voting agreements 2. Voting Trusts 3. Voting Proxies 4. Stock Transfer Restrictions 5. Using Different Classes of Stock 6. Sterilizing the Board

Answer 134

1. Contracts to vote shares in a specific way 2. Because they only apply to shareholders, effective only to matters property before the shareholders (e.g., election of directors, amendment of the certificate of incorporation, major organic changes (e.g., mergers)) NOTE: You cannot sell your vote aka pay me and I’ll vote this way

Answer 135

1. Require legal transfer of ownership to the trustee (unlike a voting agreement, a trust requires legal transfer). - Trust is the legal owner - Trustee owes fiduciary relationship - Stockholder has “equitable title” which includes all the economic benefits of ownership - Shareholders tell the trustee how to vote - Trusts specifically enforceable - Trustee will vote the shares as directed (not however they want)

Answer 136

- Very common in public corps - A contractual grant of the right to vote the voter’s shares - An agency relationship: I appoint you to vote my share of the election of the directors - Proxy is revocable - UNLESS it is a proxy coupled with an interest (e.g., give bank your votes in collateral for a loan. can't revoke the proxy while the lean is outstanding)

Answer 137

1. I have more business expertise so I want control of the business but you have the money that you’re putting up so you want the larger share of the profits/dividends piece of cake do that using share classes. 2. To create a class of stock you just put in the charter that each class A share has 10 votes and each class A share constitutes one fifth of a class B share E.G. a. Two people (A and B) form a corporation i. A gets 10 shares of Class A stock 1. Each Class A share has a. 10 votes (100 votes total) b. 1/5 share for dividends (equal to 2 shares) ii. B gets 10 shares of Class B stock 1. Each Class B share has a. 1 vote (10 votes total) b. A Full dividend (equal to 10 shares) c. Class B shares get five times the dividends that Class A shares get – pay back for B putting in money

Answer 138

1. Sterilizing the Board 2. Supermajority requirement 3. Transfer Restrictions (Right of First Offer, Consent, Buy-Sell Agreements)

Answer 139

A technique used by Close Corporations in which Board issues are decided by an agreement among the stockholders. NOTE: Such corporations in effect do not have boards—the stockholders decide everything NOTE: Some States require a formal filing to do so, other States do not.

Answer 140

Requires more than a majority vote. NOTE - Two key concepts 1) What is the voting base? (Is it of all outstanding shares, or outstanding plus present at meeting. Remember - it is shares votes that count not number of stockholders b/c some have more than one vote. NOTE: In Smith case: The 80% requirement gave each shareholder a veto over any item before the shareholders OR the board NOTE: Downside is deadlock where no one can agree given requirement of approval so high

Answer 141

1. Right of first offer 2. Consent 3. Buy-sell agreements

Answer 142

They must be noted on the certificate otherwise an innocent buyer does not know they exist and is not bound by them. Also, does not bind people who purchased before restriction put in place

Answer 143

You want to have control over who you go into business with. In a partnership, every partner has to agree who can be a partner but this does not exist in corporation/shareholders. You don’t want your shareholder to be in the drug cartel.

Answer 144

You must first offer the corporation the chance to buy the shares. If corp declines, can sell to another person at same price and same terms.

Answer 145

The most restrictive kind of provision. Would-be seller cannot sell unless the holder of the right gives permission Used to be prohibited as unreasonable restraints on alienation (of personal property) Today, statutes usually authorize them (Model Act unless “manifestly unreasonable”)

Answer 146

2. Contractual provision that obligates shareholder to sell back to corporation or to other shareholders a. Usually applies on retirement or termination b. AKA we open this business together; if I Die, company buys my stock from my estate for $500K and every shareholder signs an identical agreement 3. Often used as a planning device in a close corporation a. In case company does not have $500K, the corporation takes out life insurance on that shareholder to finance the purchase on the shareholder’s death b. Provides helpful liquidity for the estate

Answer 147

1. Specific performance of agreements – make them honor the shareholder agreement 2.Damages – if you can prove them (very hard to prove) 3.Dissolution – courts extremely reluctant to shut down a closed corporation – unemployment, deterring business, etc.

Answer 148

Back pay for a shareholder fired wrongfully or damages suffered by a corporation as the result of a shareholder’s wrongful veto

Answer 149

1. When a shareholder simply wants to cash out (going to court is a threat) 2. Requested when there is demonstrable deadlock (could also be a power play) 3. Requested for oppression of minority shareholders (oppression is conduct that defeats the reasonable expectation of the minority shareholders)

Answer 150

1. Direct lawsuits 2. Derivative lawsuits

Answer 151

A lawsuit that belongs to the shareholder to assert.

Answer 152

1. Brought by the shareholder in his or her own name 2. Cause of action belonging to the shareholder in their individual capacity 3. Arises from an injury directly to the shareholder

Answer 153

A lawsuit that belongs to the corporation to assert.

Answer 154

1. Brought by a shareholder on corporation’s behalf 2. Cause of action belongs to the corporation as an entity 3. Arises out of an injury done to the corporation as an entity

Answer 155

1. To whom did D’s duty run? (e.g., if corporation, suit is derivative) 2. Who suffered the most direct injury? (if corporation, suit is derivative)

Answer 156

Derivative - Every stockholder was in the same boat. Harm was done to entire corporation. NOTE: If a shareholder's rights are affected, harm is done to the shareholder, so claim is direct. NOTE: If both corporation and shareholder rights impacted, claim is both derivative and direct.

Answer 157

No. This must be a derivative suit. No contract with the shareholder was breached here. Jones breach did not injure shareholder directly. Recovery would go to the corporation.

Answer 158

No. Not enough for a shareholder to allege that challenged conduct resulted in a drop in the corporation’s stock market price. Because your loss is derivative of corporation’s loss, only the corporation can sue.

Answer 159

"A remedy born of stockholder helplessness"

Answer 160

Corporations have the power to indemnify defendants in a shareholder derivative suit so long as the director (a) acted in good faith, and (b) the decision was in the best interest of the corporation. NOTE: If these elements met, the corporation must indemnify the defendant.

Answer 161

Contemporaneous ownership

Answer 162

To have standing, a would be plaintiff must have owned stock at the time of the wrong in order to sue.

Answer 163

Courts will apply the business judgement rule which will almost certainly have the case thrown out.

Answer 164

The shareholder's role is over, and the case proceeds as an ordinary matter under the Board's control. NOTE: This never happens.

Answer 165

Shareholder makes the demand, then the corporation refuses to sue, and the corporation files a 12b6 motion to dismiss the case. The lawsuit will be over because the Board is given the benefit of the Business Judgement Rule.

Answer 166

For every derivative suit, the plaintiff must file a complaint and must state with particularity (a) what the plaintiff did to try and get the Board to sue, OR (b) the reasons for not making the effort.

Answer 167

When a majority of the directors are interested, through application of the Zuckerberg test. The court will apply the following test to each Board member 1) Does the Board member stand to gain a personal benefit from the challenged transaction? 2) Does the Board member face a substantial likelihood of liability on the claim? 3) Does the Board member lack independence from a director described in one of the two above scenarios? Should a majority of the members not pass the test above, demand will be excused, which is the only way for a derivative suit to succeed.

Answer 168

Because the plaintiff must plead the facts with particularity--with specific facts to show the director failed the Zuckerberg test. As well, the plaintiff is not afforded the benefit of discovery since the activity is taking place before a judge's decision on the motion to dismiss.

Answer 169

Media sources Government documents Corporate records that a stockholder is allowed to inspect Or a mole among the board - sometimes considered the best source of information

Answer 170

The case is dismissed for failure to make a demand (defendant files 12b6 for failure to make a demand and the court grants the motion)

Answer 171

The plaintiff can make a demand to the Board however it will only succeed if the plaintiff can show demand was wrongfully excused

Answer 172

The corporation puts in place a Special Litigation Committee (SLC)

Answer 173

The SLC is composed of NEW directors who had no role in the challenged transaction.

Answer 174

They investigate the matter and decide whether the lawsuit should proceed. NOTE: It will decide the lawsuit should not proceed.

Answer 175

They file a motion to dismiss the case.

Answer 176

The Zapata standard of review.

Answer 177

The burden is on the corporation to prove the SLC (a) is disinterested, (b) is independent, (c) acted in good faith, and (d) conducted a reasonable investigation.

Answer 178

The court denies the motion to dismiss and the litigation proceeds.

Answer 179

The court may review the reasonableness of the SLC's substantive decision and this review is not afforded the leniency/protection of the Business Judgement Rule; the court reviews it using its own judgement. NOTE: Even if the SLC did a good job, the case may STILL go forward if the judge does not agree with the substantive decision.