Business Assocations Flashcards
Who are promoters in the context of corporate formation?
Persons acting on behalf of unformed corporation
Promoters are responsible for taking the necessary steps to form the corporation.
What is the liability of a corporation for a promoter’s contracts?
Liability arises when the corporation adopts the contract by express adoption or implied adoption
Express adoption requires a Board of Directors resolution, while implied adoption occurs when the corporation has knowledge of and accepts the benefits of the contract.
What is the promoter’s liability if the corporation is never formed?
Solely liable until novation
Novation refers to the replacement of one of the parties in an agreement, requiring consent from all parties involved.
What is the duty of a promoter?
Promoter is a fiduciary and cannot make secret profits
This includes a requirement to disclose any profits made from the sale of property to the corporation.
What is a subscriber in corporate formation?
A person who has a written agreement to buy stock from an unformed corporation
Subscription agreements are typically irrevocable for six months.
What are the formation requirements for a corporation?
- Authorized shares (number, classes, series)
- Purpose (general or specific)
- Agent & address of registered office
- Incorporators’ names & addresses
- Name of corporation with corporate status indication
Specific purpose can lead to ultra vires activities if the corporation acts beyond that purpose.
What is a de facto corporation?
A business that may be treated as a corporation despite not fulfilling filing formalities, if organizers made a good faith attempt
This typically applies when there is no knowledge of the lack of corporate status.
What is the legal significance of a corporation?
It is a separate legal person; shareholders are not liable for the corporation’s debts
Shareholders are only liable for the price of their stock.
What is ‘piercing the corporate veil’?
A legal concept that renders shareholders liable to third-party victims to avoid fraud or unfairness
This occurs if shareholders treat the corporation as their alter ego or if the corporation is undercapitalized.
What must foreign corporations do to conduct intrastate business?
File a certificate of authority including all formation information
This ensures compliance with local laws.
What is par value in the context of stock issuance?
The minimum issuance price for stock
If stock has no par value, any valid consideration deemed adequate by the Board of Directors is acceptable.
What is treasury stock?
Stock that has been previously issued and reacquired by the corporation
Treasury stock does not have voting rights.
What are preemptive rights?
Rights that allow shareholders to maintain their percentage of ownership during new stock issuances
These rights must be expressly granted in the corporation’s articles.
What are the statutory requirements for a Board of Directors?
Must have at least one member; shareholders elect directors; shareholders can remove directors for any reason
Valid meetings are required for Board actions unless there is unanimous consent.
What is the business judgment rule (BJR)?
A presumption that directors manage the corporation in good faith and in its best interest
This rule protects directors from liability for decisions made in good faith.
What is the duty of care for directors?
Directors must act with the care a prudent person would use in their own business
This duty can be limited by the corporation’s articles.
What is the duty of loyalty for directors?
Directors may not receive unfair benefits to the detriment of the corporation or shareholders
Exceptions exist if there is material disclosure and independent ratification.
What constitutes self-dealing by a director?
A transaction where the director receives an unfair benefit from the corporation
This can occur in transactions with the corporation.
What are considered types of consideration in corporate transactions?
- Money
- Binding obligation for future services
- Tangible/intangible property
- Services already performed
Consideration must have agreed value.
What are interested transactions?
Transactions between the corporation and an interested director that are not voidable if certain conditions are met
Conditions include material facts disclosed and approval by a majority of shareholders or disinterested directors.
What are the duties of corporate officers?
Duty of care and duty of loyalty
Officers are agents of the corporation and bind it through authorized acts.
What does indemnification involve for directors and officers?
Coverage for costs, attorney fees, fines, judgments, or settlements in the course of corporate business
Indemnification is not allowed when the director or officer loses a suit, but it is mandatory if they win.
What are the three conditions under which indemnification may occur?
- Liability to 3rd parties or settlement with corporation
- Directors and Officers show action in good faith
- Conduct in corporation’s best interest
How is indemnification paid?
Paid out of earned surplus, not stated capital
Who decides on repurchases and redemptions?
Board of Directors (BOD)
In closely held corporations, what is required for agreements among shareholders to eliminate corporate formalities?
Unanimous shareholder agreement in Articles, By-Laws, or written agreement
What are the requirements for a derivative suit?
- Contemporaneous stock ownership when claim arose
- Inform corporation or BOD in writing of facts of each cause of action against defendants OR provide them with a copy of the complaint
What is the definition of a direct action by shareholders?
Shareholders suing if Directors breached fiduciary duty owed to them as shareholders
What types of fundamental corporate changes are there?
- Merger
- Consolidation
- Dissolution
- Fundamental amendments to Articles
- Sale of substantially all corporate assets
What is required for a dissenting shareholder to exercise appraisal rights?
- Before vote, file written notice of objection
- Vote objecting to change
- Prompt written demand to be bought out
What are the elements of the anti-fraud rule (Rule 10b-5)?
- Use of element or instrument of Interstate Commerce/National Exchange
- Scienter – intent to deceive
- Deception – material misrepresentation or misappropriation of material non-public info
- In connection with actual purchase or sale of securities
What is insider trading?
Trading based on inside, non-public information, breaching a duty of trust and confidence
What are the requirements for proxy voting?
- A writing
- Signed by record shareholder
- Directed to corporation secretary
- Authorizing another to vote their shares
- Valid for 11 months
What is a quorum at a shareholder meeting?
Majority of outstanding shares at the meeting’s start
What is a pooled or block voting trust?
Formal delegation of voting power to a voting trustee enforceable for 10 years
What is cumulative voting?
Voting method that must be expressly granted in Articles and is only available when voting for Directors
What can shareholders ask for in case of involuntary dissolution?
Liquidation if Directors are deadlocked and corporation is threatened with irreparable injury, or oppression, or waste is occurring
How are dividends declared?
Solely at the discretion of the Board of Directors and limited if the corporation is insolvent
What is the priority order for dividend payments?
- Preferred shares
- Participating preferred
- Cumulative preferred
- Common shares
What does Section 16(B) prevent?
Insiders from short swing trading profits
It prohibits certain corporate insiders from buying and selling stock within a six-month period to prevent market manipulation.
What are the requirements for Section 16(B) to apply?
If (i) reporting corporation is listed on a national exchange or has more than 500 shareholders and $10 million in assets; and (ii) Defendant is a D&O or owns more than 10% of shares
D&O refers to Directors and Officers of the corporation.
What is the effect of Section 16(B)?
Profits recoverable
This means that profits made from short swing trades can be reclaimed.
What must CEOs and CFOs certify under the Sarbanes-Oxley Act?
That filings do not contain material misrepresentations or omissions and fairly present financial position
This is a requirement to ensure the accuracy and integrity of financial statements.
What are the penalties for willfully certifying a false report under Sarbanes-Oxley?
$5 million fine and 20 years in prison
This emphasizes the seriousness of financial misrepresentation.
What can a corporation recover if a false report is restated?
CEO/CFO profits from trading within 12 months after filing + incentive-based compensation
This holds executives accountable for their financial reporting.
What is the liability of a principal for the torts of an agent?
Principal will be liable if (i) principal-agent relationship exists and (ii) tort was committed by agent within the scope of the relationship
This establishes the conditions under which a principal is responsible for an agent’s actions.
What is lingering authority in agency law?
Actual authority terminated, but agent continues to act on principal’s behalf
The principal remains liable until the customer receives notice of termination.
What is required for a principal-agent relationship?
Assent, Benefit, Control
These elements define the relationship and the obligations involved.
What is meant by ‘frolic’ vs. ‘detour’ in agency law?
Frolic: new and independent journey; Detour: mere departure from assigned task
This distinction helps determine the scope of liability for torts.
What are the duties an agent owes to a principal?
Reasonable care, obey reasonable instructions, loyalty
Loyalty entails no self-dealing, usurpation of opportunities, or secret profits.
What is a general partnership (GP)?
An association of two or more people carrying on as co-owners of business for profit
The sharing of profits creates a presumption of a GP.
What is the liability of a principal for contracts entered by an agent?
Principal is liable if authorized agent enters into a contract
This establishes the principal’s responsibility for the actions of their agents.
What is the liability of incoming partners in a general partnership?
Not liable for pre-existing debt, but funds from incoming payments can be used to satisfy prior debt
This protects incoming partners from past obligations of the partnership.
What is a limited partnership?
At least 1 General Partner and 1 Limited Partner; requires LP Certificate
The General Partner is personally liable for all LP obligations.
What is actual express authority?
Principal used words to express authority to agent
This can include oral or written communication.
What is apparent authority?
Principal cloaked agent with appearance of authority, and third party reasonably relies on it
This can bind the principal to contracts made by the agent.
What is a Limited Liability Company (LLC)?
Members are owners with limited liability for debts and obligations of business and benefits of personal taxation.
Requires Articles of Organization and Operating Agreement.
What are the member control dynamics in an LLC?
Members control the LLC, but Articles can delegate to managers.
Limited liquidity as members can’t freely transfer interests.
What is the duty of loyalty in fiduciary relationships?
No self-dealing; usurping opportunities; secret profits.
This is a fundamental principle in partner relationships.
What is the remedy for breach of fiduciary duty?
Action for accounting – recover losses caused by breach AND disgorge profits.
This helps ensure accountability among partners.
What is the rule regarding partnership property transfer?
No transfer of specific partnership assets without partnership authority.
This includes assets like land, leases, or equipment.
Can partners transfer personal property?
Yes, they can transfer profits/surplus owned by individual partners to third parties.
This differs from partnership assets.
What rights do general partners (GPs) have in management?
GPs have the right to share management, but may not transfer this right.
Each partner is entitled to equal control and vote, absent agreement.
Do partners receive a salary?
Absent agreement, partners don’t get a salary unless winding up.
Salaries are generally not standard unless specified.
How are profits and losses shared in a partnership?
Absent agreement, profits are shared equally; losses are shared like profits.
This promotes fairness among partners.
What begins the process of partnership dissolution?
Dissolution begins at the end of the partnership.
It marks the transition towards winding up the business.
What is ‘at will’ dissolution?
Automatic upon notice of express will of any one GP to dissociate.
This allows for flexibility in partnerships.
What conditions lead to ‘not at will’ dissolution?
Dissociation occurs upon happening of an event specified in agreement OR majority vote of partners to dissolve within 90 days of dissociation of a single partner.
This requires more formal agreement among partners.
What occurs during the winding up phase?
Time in between dissolution and termination.
Partners receive compensation during this phase.
What liabilities do general partners retain during winding up?
GPs retain liability on transactions entered into to wind up old business with creditors.
They also retain liability on new transactions until notice of dissociation is given.
What is the priority of claims during winding up?
- Creditors (outside non-partner trade creditors and inside partners who loaned money to partnership)
- Capital Contributions by partners
- Remainder – Profits shared equally absent agreement.
Losses are shared like profits.
