BizOrgs (Walker)

Question 1

This form of business is where 1 person owns all the assets, is not an entity outside its owner, and requires little formality.

Answer 1

In a sole proprietorship one person owns the assets and is not separate from the business. Very little formality is required for formation.

Question 2

This form of business is similar to a sole proprietorship but involves 2 or more people.

Answer 2

A partnership is similar to a sole proprietorship, except that 2 or more people own the business. All that is required to form is the intent to share profits.

Question 3

What characteristics of a separate entity do partnerships have?

Answer 3

Property may be held in the name of a partnership. Suits can be maintained in the name of the partnership. Partnerships do not generally continue beyond the lives of its owners (unless otherwise agreed in a partnership agreement.

Question 4

What business organizations are considered “pass-through” businesses?

Answer 4

Sole-proprietorships, partnerships, LPs, LLPs, LLCs, and S-corps are pass-through businesses.

Question 5

Which business organizations require some filing with the state?

Answer 5

LLPs, LLCs, and Corporations require the appropriate filing be recorded in the state.

Question 6

What filing is required to form a corporation?

Answer 6

Articles of Incorporation must be filed with the state. They must state the name of the corporation, the maximum shares authorized, the names and addresses of board members, incorporators, and a registered agent.

Question 7

What are the written rules of conduct and operation that must be adopted by the incorporators or directors?

Answer 7

The by-laws of a corporation must be first adopted by the incorporated or directors. By-laws may be modified by either the directors or the shareholders, depending on any reservations in the articles of incorporation.

Question 8

What is the meaning of “ultra vires”?

Answer 8

Corporations must have their business purpose included in the Articles. When that purpose statement is narrow, the corporation may not undertake action beyond that purpose. If it does, this is an “ultra vires” act.

Purpose statements generally include “any other lawful purpose” to prevent ultra vires acts.

Question 9

How is notice given for annual shareholder or board meetings?

Answer 9

Generally, annual meetings are required and notice is provided by the by-laws. Special meetings or emergency meetings must also provide notice to shareholders.

Question 10

Who is liable for the obligations of a corporation?

Answer 10

Generally, shareholders are not personally liable, beyond the value of their individual stocks. The exception occurs when the doctrine of Piercing the Corporate Veil applies.

Question 11

What is Piercing the Corporate Veil?

Answer 11

When the Veil is Pierced, courts allow a shareholder to be personally liable. This can occur when the shareholder has so dominated the corporation (ex. personal uses) it may be considered an alter ego of the shareholder.
It can also occur where the shareholder fails to follow corporate formalities, if there is undercapitalization, or fraud or illegal acts are present.

Question 12

What are the 2 general classes of stock?

Answer 12

Common Stock and Preferred Stock

Question 13

What is common stock?

Answer 13

Common stock is the lowest priority stock. Holders exercise ownership control by voting and electing directors.

Question 14

What is preferred stock?

Answer 14

Preferred stockholders have priority over other (common stockholders) when it comes to payment of dividends or distributions at liquidation.

Preferred stockholder do not ALWAYS have voting rights, it depends on the by-laws and articles.

Question 15

What is required for a special meeting of shareholders?

Answer 15

Persons authorized under the articles, or 10% of the shareholders may call a special meeting. the board may call a special meeting for a limited purpose.

Notice must be given to the shareholders stating the purpose of the meeting, and it must be 10-60 days prior (depending on the state).

Question 16

What is the quorum required for a special meeting?

Answer 16

Generally a majority of the shareholders entitled to vote make a quorum, unless the articles state otherwise.

Question 17

What is cumulative voting?

Answer 17

In cumulative voting, each share gets as many votes as there are seats and may use as many votes on any seat as they wish. If cumulative voting is not expressed in the articles/by-laws, voters generally have 1 vote per share (straight or direct voting).

Question 18

What is a proxy vote?

Answer 18

A proxy vote allows a shareholder to vote through another person. A proxy must be in the form of a signed or verifiable electronic form.

Question 19

When are proxies revocable?

Answer 19

A proxy is always revocable, unless the proxy holder has an economic interest in the shares represented.

Question 20

When does a shareholder not have the right to inspect the books and records?

Answer 20

A shareholder must have proper purpose to inspect, meaning the purpose must be reasonably related to the shareholder’s interest.
A written demand to inspect is required, and the inspection must occur at the principal office in regular hours.

Question 21

Who owes a corporation a Duty of Care?

Answer 21

Directors and Officers owe a fiduciary duty of care to the corporation. This includes: Reasonable steps to monitor the management; work in the corporation’s best interest; disclose material information to the board; and make reasonably informed decisions.

Question 22

What is the Business Judgment Rule?

Answer 22

Under the Business Judgment Rule, courts will not second guess decisions made in:
Good Faith;
Made with the care of an ordinarily prudent person in similar situation; AND
Made with the reasonable belief it was in the best interests of the corporation.

Question 23

How does the Duty of Loyalty apply to directors and officers?

Answer 23

Directors and Officers can not act on their personal interests when it conflicts with the corporate interest. A conflict occurs when the director or officer is a party to the transaction or has a significant beneficial interest enough to influence his judgment.

Question 24

How can a Director or Officer in a conflict of interest be protected?

Answer 24

When disinterested shareholders approve the conflicting transaction; OR when non-interested members authorize; OR based on the circumstances the transaction was fair to the corporation.

Question 25

What types of claims may a shareholder make against a corporation?

Answer 25

Shareholders may make Direct or Derivative claims against a corporation?

Question 26

What is the test to determine if a shareholder claim is direct or derivative?

Answer 26

Courts use the Tooley 2-step test to determine if a claim is direct or derivative in nature.

1. Who suffered the harm?
2. Who would benefit from a judgment?

Question 27

What is required prior to a derivative action?

Answer 27

Generally, a shareholder must make a written demand prior to initiating a derivative claim. Unless the demand is rejected, the shareholder typically must wait 90-days before filing action.

Question 28

When may a shareholder be excused from making a demand?

Answer 28

When a demand would be futile, the shareholder is excused.
A demand may also be excused when the director had a direct financial interest in the wrong, the Board failed to give notice before a decision, or the act was so egregious to not be a reasoned business judgment.

Question 29

Who can file a derivative claim?

Answer 29

Generally, the shareholder must have some significant ownership (not like .03%). The ownership must have been in place at the time of the wrong and throughout the suit to have standing (Contemporaneous Ownership Rule).

Question 30

Who can evaluate derivative claims on behalf of a corporation?

Answer 30

Independent committees may evaluate derivative claims, IF:
Disinterested, AND
Fully Informed.
Independent committees are given the benefit of the Business Judgment Rule.

Question 31

When is a defendant considered successful for purposes of indemnification?

Answer 31

A successful defendant is one who is not allocated and does not assume any liability, and who does not have to personally pay (although the corporation may settle on defendant’s behalf).

Question 32

What are 2 main types of authority?

Answer 32

Actual authority- words or conduct leads reasonable person to believe…
Apparent authority- manifestation to 3rd party leading reasonable person to believe….

Question 33

What is agency by estoppel?

Answer 33

Agency by estoppel is when the principal intentionally or recklessly caused a belief of agency, or had notice of such belief and failed to rectify.

Question 34

What is the Substantially Same test?

Answer 34

Under the Substantially Same test, limited partners may be liable for partnership obligations if they act substantially the same as a general partner (managing affairs, etc.)

Question 35

Are creditors subject to the Substantially Same test?

Answer 35

Creditors may be held liable if they act as general partners.
According to Uncle Henry, creditors must meet a higher threshold than limited partners to be liable.

Question 36

What reasons may a court decree a partnership dissolution?

Answer 36

1) The economic purpose is likely unreasonably frustrated,
2) A partner has engaged in conduct relating to the business that makes it not reasonably practicable to continue,
3) it is not otherwise reasonably practicable to carry on.

Question 37

Regarding corporations, what is the Internal Affairs doctrine?

Answer 37

The Internal Affairs doctrine states that a corporations internal documents (articles, bylaws, etc) control the affairs of the corporation.

Question 38

How can shareholders force directors to take action?

Answer 38

Shareholders have no way to force corporate directors to take an action. Shareholders may always replace directors per the corporate by-laws, or by majority vote for any reason if the by-laws are silent.

Question 39

What are 2 types of interest one may have in an LLC?

Answer 39

An economic or financial interest, often from an estate or dissociated member, AND
A non-economic or membership interest, existing based on the operating agreement.

Economic interests are generally transferrable. Membership interest may not be, depending on operating agreements, they also commonly include a right of refusal to the remaining members.

Question 40

UPA vs RUPA

Answer 40

Aggregate vs Entity