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Business Associations > Business Associations > Flashcards

Business Associations Flashcards

1
Q

Fiduciary Duties (COIL)

A
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2
Q

Partnership

A

A partnership is an unincorporated association of two or more persons acting as co-owners in a business for profit.

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3
Q

Partnership: Formation

A
  • No writing or other formalities are required to form a partnership.
  • Sharing profits creates a rebuttable presumption of partnership.
    • Note this is a rebuttable presumption—look for facts that indicate some other reason for splitting profits.
    • Ex: Employer agrees to give sales employee a bonus of 5% of weekly profits. Not a partnership.
    • Ex: Agreement to pay landlord x% of profits per month as rent. Not a partnership.
  • Co-ownership of property alone is not sufficient to form a partnership.
  • Unless otherwise agreed, no new partners without unanimous consent.
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4
Q

Partnership by Estoppel

A

When a person, by words or conduct, represents himself as a partner in an existing partnership or a partner with one or more persons with whom he is not actually partners, he is liable to anyone who has extended credit in reliance on the representation of partnership.

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5
Q

Partnership: Management

A

A partnership is typically managed by the terms fo the partnership agreement.

In the absence of any agreement to the contrary, the following default rules apply:

  • All partners have an equal say in management.
  • Decisions in the ordinary course of business are made by a majority.
  • Extraordinary decisions must be made unanimously.
  • All partners have a right to inspect all books and records of the partnership.
  • All partners are agents of the partnership.
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6
Q

Partnership: Fiduciary Duties (CL)

A
  • Duty of Care: Partners must refrain from
    • grossly negligent or reckless conduct
    • intentional misconduct
    • knowng violations of law
  • Duty of Loyalty to:
    • account for and respect property of partnership
    • refrain from competing with, or acting adversely to, the partnership.
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7
Q

Partnership: Contract Liability Issues

A

The partnership is liable for contracts entered into by partners or other agents in the ordinary course of business or with authority.

  • Every partner is an agent of the partnership and has apparent, and in most cases via the partnership agreement, actual authority.
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8
Q

Partnership: Tort Liability Issues

A
  • Partnership is liable for torts committed by partners or other agents in the ordinary course of business or with authority.
  • Partnership is liable for any misapplication of funds by partners.
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9
Q

Partner Liability

A
  • Partners are jointly and severally liable for all contract and tort obligations of the partnership.
  • Exhaustion Rule applies: creditors must exhaust the assets of partnership before seeking the personal assets of the partners.
  • Limited Liability Partnership (LLP) election may eliminate personal liability.
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10
Q

Partnership: Ecomonic Implications

A

There are no distribution requirements for partnership profits

Unless otherwise agreed, distributions are shared equally.

No right to distribution of specific partnership property.

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11
Q

Partnership: Dissociation

A
  • Every partner has an absolute right to voluntarily dissociate at any time.
  • Dissociating partner entitled to the net fair value of their partnership interest
  • Partnership agreement may specify grounds for dissociation
  • If a partner wrongfully dissociates (in violation of partnership agreement), that partner is liable for any damages caused
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12
Q

Partnership: Dissolution

A

Dissolution of a partnership occurs:

  • Upon the voluntary dissociation of any partner (unless all agree to continue)
  • By the express unanimous will of the partners
  • Court petition by any parnter or transferee of a partner’s profits interest

Upon dissolution, the assets of the partnership remainer after creditors are paid are distributed to the partners pro-rata based on the balances in their capital accounts

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13
Q

Limited Partnership (LP)

A

A limited partnership is a special type of partnership created by statute rather than the common law in which at least one partner is a general partner and one or more are limited partners.

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14
Q

Limited Partnership: Formation

A

To form an LP, the general partner(s) must file a Certificate of Limited Partnership.

  • New general partners can only be admitted with the unanimous approval of the existing general partners and the majority approval of the limited partners.
  • Unless otherwise agreed, new limited partners can be admitted only with the unanimous approval of all partners.
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15
Q

Limited Partnership: Management

A
  • An LP is managed by the general partners in accord with the partnership agreement.
  • Limited partners may not participate in management but may be employees of the LP; consult or advise the general partners on business matters; or vote on certain extraordinary transactions.
  • Only limited partners with 5% or more interest have access to the tax records of the LP and the name/address of all partners.
    • Note: does not have to be ONE partner with 5% or more interest, can be a group of partners who collectively have 5%.
  • All limited partners have the right to reasonably demand from general partners true and full information as to the financial condition and state of the LP.
  • A limited partner may bring a derivative action to enforce a right to the limited partnership, but only after first making a demand on the general partners to do so.
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16
Q

Limited Partnership: Fiduciary Duties

A

General partners have:

  • Duty of Care: Partners must refrain from
    • grossly negligent or reckless conduct
    • intentional misconduct
    • knowng violations of law
  • Duty of Loyalty to:
    • account for and respect property of partnership
    • refrain from competing with, or acting adversely to, the partnership.

Limited partners have no fiduciary duties.

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17
Q

Limited Partnership: Contract Liability

A

LP is liable for contracts entered into by general partners or other agents in the ordinary course of business or with authority.

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18
Q

Limited Partnership: Tort Liability

A

LP is liable for torts committed by general partners or other agents in the ordinary course of business or with authority.

LP is liable for any misapplication of funds by general partners.

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19
Q

**Limited Partnership **Partner Liability

A

General Partners

  • are jointly and severally liable for all contract and tort obligations of the partnership
  • Exhaustion Rule applies
  • Limited Liability Limited Partnership may eliminate personal liability of the general partners

**Limited Partners **

  • are not personally liable for the obligations of the limited partnership except:
    • the limited partner can be liable to persons who transact business with the partnership who reasonably believe the limited partner is a general partner based on his participation in control.
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20
Q

Limited Partnership: Economic Implications

A

Profits are allocated based on the relative capital contributions of each partner.

  • Note distinction from regular partnership, where profits are allocated evenly.
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21
Q

Limited Partnership: Dissociation

A

The partnership agreement may specify specific grounds for dissociation.

  • In the absence of agreement, general partners may voluntarily dissociate at any time.
  • Limited partners have no default right to voluntarily dissociate from the partnership.
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22
Q

Limited Partnership: Dissolution

A

An LP is dissolved upon the dissociation of a general partner, by the unanimous agreement of the partners, or as specified in the partnership agreement.

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23
Q

Corporation

A

A corporation is the legal entity created in compliance with the statute governing incorporation. Because there is no common law right to incorporate, all corporate rights, duties, and liabilities derive from statute

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24
Q

Corporation: Formation

A
  • A corporation is formed when Articles of Incorporation are filed and accepted by the state.
  • After the articles are accepted, an organizational meeting of the initial directors (named in the articles) must be held to adopt bylaws, elect officers, and conduct business.
  • Unless limted by the charter, the directors have the authority to issue stock.
25
Q

Preemptive Rights

A

Unless specified in the charter, existing stockholders do not have preemptive rights–the right to buy a sufficient amount of additionally issued stock to maintain the same percentage of ownership.

26
Q

Corporation: Management

A
  • A corporation is managed by the board of directors.
  • Directors must appoint officers, at minimum a president, secretary, and treasurer.
  • Shareholders must meet annually to vote for directors
  • One share=one vote, and directors are elected by a plurality.
  • As an alternative, charter may allow for cumulative voting, which allows shareholders to aggregate their votes for one director. Gives minority shareholders a voice.
  • Fundamental corporate changes must be approved by a 2/3 vote of the shares
27
Q

Corporation: Agents

A
  • Officers are agents of the corporation
  • Directors are only agents when acting as a group
  • Shareholders are not agents of the corporation
28
Q

Corporation: Shareholder Rights

A
  • Shareholders may bring a derivative action to enforce the rights of the corporation, but only after making a demand on the directors to do so–unless such a demand would be futile.
    • Contrast with direct shareholder action where shareholders sue to redress a wrong done directly against them.
  • All shareholders have a right to inspect the corporations bylaws, shareholder meeting minutes, annual statements, voting trust agreements, and statement of stock issued over the past twelve months.
  • Shareholders holding 5% or more of the stock may inspect the corporation’s accounting records and stock ledger.
29
Q

Corporation: Directors’ Duty of Care

A

**Directors owe a duty of care to **

  • act in good faith;
  • in a manner they believe is in the best interest of the corporation; and
  • with the care of an ordinarily prudent person under like circumstances

The Business Judgment Rule is a judicial presumption under which judges will presume that corporate action was done consistent with the duty of care.

30
Q

Corporatioon: Directors’ Duty of Loyalty

A

Interested Director Transactions

Corporation cannot participate in a transaction with a director unless:

  • there is complete disclosure AND the transaction is approved by a majority of non-interested directors or non-interested shareholders; OR
  • the transaction is fair to the corporation

The Corporate Opportunity Doctrine

Under the corporate opportunity doctrine, a director or officer breaches her duty of loyalty if she pursues a business opportunity for her own benefit if it was reasonably foreseeable that the corporation would be interested in it, unless she first gives corporation a chance to pursue the opportunity.

  • Question is whether the corporation could realistically expect to seize and develop the opportunity.
31
Q

Corporate Contract & Tort Liability

A
  • Corporation is liable for contracts entered into by its agents in the ordinary course of business or with authority.
  • Corporation is liable for torts committed by its agents in the ordinary course of business or with authority.
  • Directors and officers are not personally liable for corporate contract or tort obligations.
32
Q

Shareholder Liability: Piercing the Corporate Veil

A

Generally, stockholders are not personally liable for corporate contract or tort obligations, but the corporate veil can be pierced to reach shareholders personally where necessary to

  • prevent fraud OR
  • achieve a paramount equity
33
Q

Promotor Liability

A

A promotor is one who causes a corporation to be formed, organized, and financed.

Promotors are personally liable on pre-incorporation contracts, unless:

  • there is no contract
  • corporate ratification: express or implied acceptance of the benefits of the contract with knowledge of its terms.
  • novation: occurs when the corporation becomes a party to the contract and the third party expressly or impliedly releases the promotor from liability.

Promotors, once the corporation is formed, stand in a fiduciary relationship with the corp. Ex: where promotor transfers property to the corp and receives cash, notes, stock, etc., there must be fair disclosure of the transaction.

34
Q

Defective Incorporation

A

If a business tried to incorporate but was unsuccessful, or the state forfeited its charter, there is no legal (de jure) corporation, it is defective. If a corp is defective, there is no limit on shareholder liability becuase there are no legal shareholders.

There are two defenses against liability under these circumstances:

  • De Facto Corporation: a defese asserted by fake shareholders where there was a good faith and reasonable belief that there was a de jure corporation and a colorable attempt to incorporate.
    • effective against everyone
  • Corporation by Estoppel: Where a creditor deals with a defective corporation as an actual corporation, that creditor is estopped from denying that the business was in fact a corporation.
    • effective only against an individual creditor
35
Q

Corporation: Economic Implications

A
  • Dividends are distributed in the discretion of the directors.
  • Dividends cannot be distributed if, after payment of the dividend:
    • Corporation will have assets valued at less than its liabilities; _or _
    • Corporation will not be able to pay its debts as they become due
  • Preferred stock with dividend preference gets paid first
36
Q

Corporation: Redemption

A

Redemption occurs when the corporation has a right to compel a stockholder to sell his shares back to the corporation.

This right must be stated in the articles of incorporation.

Applies only if:

  • Minority stockholder of non-publicly traded company
  • Objection to merger or other fundamental corporate change
  • Request for redemption of stock
  • Appraisal if no agreement as to fair market value
37
Q

Corporation: Repurchase

A

Repurchase refers to when a corporation and a shareholder voluntarily enter into an agreement whereby the corporation buys back its own shares, either common or preferred.

Corporation has no right to repurchase its shares when insolvent.

38
Q

Corporation: Dissolution

A

Voluntary dissolution can occur upon approval of directors and 2/3 vote of stock.

Involuntary dissolution can occur by:

  • Petition of a 25% sotckholder upon any stockholder or director deadlock
  • Petition of any stockholder if
    • Stockholder deadlock for two consecutive years; OR
    • Acts of directors are illegal, oppressive, or fraudulent.
  • Petition of any stockholder or creditor if the corporation cannot pay its debts

Articles of Dissolution must be filed.

Upon dissolution, the directors become trustees of the assets.

39
Q

Corporation: Forfeiture of Charter

A
  • The state will forfeit the charter if the corporation fails to:
    • file an annual report;
    • pay taxes; OR
    • pay workers’ compensation insurance premiums
  • Corporation can reinstate charter if defect is cured within 60 days of forfeiture
  • Corporation can revive by curing defect for all intervening years and filing articles of revival
  • Upon forfeiture, the directors become trustees of the assets.
40
Q

Close Corporation Defined

A

A close corporation is a corporation that elects to be governed by the special provisions of Title 4.

  • A close corporation may elect to have no board of directors
  • Except as modified by title 4, general rules of corporate law apply.
41
Q

Close Corporation: Formation

A
  • A close corporation is formed when articles of incorporation indicating close status are filed and accepted or when an existing corporation amends its charter to indicate an election.
  • After the initial issuance of stock by the initial directors of a close corporation, no additional stock may be issued without the unanimous approval of the stockholders
42
Q

Close Corporation: Management

A
  • At least one director is required initially.
  • If no board, the corp is managed under the direction of the stockholders.
  • No annual meeting, unless a stockholder requests one.
  • May be managed according to the terms of a unanimous stockholders’ agreement.
  • Fundamental corporate changes must be approved unanimously by the stockholders
  • Three officers–president, treasurer, and secretary–are required.
  • All stockholders have full inspection rights (no 5% rule).
43
Q

Close Corporation: Fiduciary Duties

A

The stockholders of a close corporation that has elected to have no board of directors have the same fiduciary duties as the directors of a regular corporation.

44
Q

**Close Corporation: Liability **

A

Identical to regular corporation.

45
Q

Close Corporation: Economic Implications

A
  • Dividends are distributed in the discretion of the directors.
  • Dividends cannot be distributed if, after payment of the dividend:
    • Corporation will have assets valued at less than its liabilities; or
    • Corporation will not be able to pay its debts as they become due
  • Preferred stock with dividend preference gets paid first
46
Q

Close Corporation: Stockholder Exit

A

Stockholders may not transfer stock without unanimous approval.

  • A stockholder may petition for dissolution if approval is not gained.
47
Q

Close Corporation: Dissolution

A
  • Involuntary dissolution upon the petition of a stockholder whose transfer of stock is refused by the other stockholders
  • Involuntary dissolution upon the petition of a stockholder alleging internal dissension.
  • Any stockholder may avoid dissolution by paying the petitioning stockholder the fair value of her stock.
  • Corporate forfeiture and dissolution concepts are otherwise identical to regular corporations.
48
Q

Limited Liability Companies (LLC) Defined

A

An LLC is a business entity formed under state law, the owners of which are referred to as “members.”

49
Q

LLC: Formation

A
  • An LLC is formed when its articles of organization are filed and accepted.
  • New members may only be admitted with unanimous consent.
50
Q

LLC: Managment

A
  • An LLC is managed by the terms of its operating agreement
  • The LLC may hire a manager to run the LLC
  • Each member has a vote in proportion to the member’s relative capital contribution.
  • All members have a right to inspect all books and records of the partnership.
  • All members are agents for the LLC unless there is a statement to the contrary in the articles of organization. If there is a provision in AOO that says members are not agents, then agency is destroyed.
  • Members of an LLC may lend money to the LLC and be treated as ordinary creditors.
51
Q

LLC: Fiduciary Duties

A

The Maryland statute is silent on LLC fiduciary duties

52
Q

**LLC: Liability **

A
  • LLC is liable for contracts entered into by members or other agents in the ordinary course of business or with authority.
  • LLC is liable for torts committed by members or other agents in the ordinary course of business or with authority.
  • Members are not personally liable for the obligations of theLLC.
  • If there are managers of the LLC, their liability is the same as that of directors or a corporation.
53
Q

LLC: Economic Implications

A
  • There are no distribution requirements.
  • Distributions are pro-rata in accordance with the relative capital contributions.
  • Members have no right to distribution of specific LLC property.
54
Q

LLC: Member Exit

A
  • Members can freely transfer rights to profits and distributions
  • A member may withdraw by giving at least six months notice to the other members
  • Upon the withthdrawal, the LLC may elect to:
    • pay the member the fair value of the membership interest; _or _
    • treat the withdrawn member as an assignee of the interest
  • Members have the same apprasial rights as minority stockholders of a non-public corp
55
Q

LLC: Dissolution

A
  • An LLC is dissolved upon the express will of all the members.
  • Any member may petition a court for an order to dissolve the LLC.
  • Articles of Cancellation must be filed.
  • Upon dissolution, the assets of the LLC remaining after creditors have been paid are distributed to the members pro-rata based on the relative fair market values of their respective capital contributions
  • Forfeiture, reinstatement, and revival are the same for an LLC as they are for corporations.
56
Q

Acquisitions & Mergers

A
  • Merger occurs when one business merges with another and requires Articles of Merger filed with the state.
  • An Aquisition of Interest occurs when one business acquires an interest (i.e., stock, partnership interest, member interest, etc.) in another business. NO Articles of Merger filed.
  • An Aquisition of Assets occurs when one business only acquires the assets of another business. NO Articles of Merger filed.
57
Q

Acquisitions & Mergers: Successor Liability

A
  • Mergers & Consolidation: the successor is liable for all obligations of the business that ceases to exist, whether or not the obligations are known at the time of the merger.
  • Acquisition of an Interest: the acquiring business CAN be liable for debts in limited situations.
  • Acquisition of Assets Only: the acquiring business is not liable for debts and obligations of the acquired business, unless:
    • there is an express or implied assumption of liability;
    • the transaction amounts to a de facto merger;
    • the purchasing corporation is a “mere continuation” –same management and ownership–of the selling corporation; or
    • the transaction is entered into fraudulently to escape liability for debts.
58
Q

Limited Liability Partnerships (LLP)

A

An LLP is a business entity which, must like a limited partnership, provides limited liability to the partners.

  • Must file certificate with SDAT.
  • Partners are not liable for partnership debt, absent some negligent act of the partner.
59
Q

Stock Transfer Restrictions

A

Any Maryland corporation, whether widely or closely held, may impose restrictions on the transfer of securities. Such restrictions may be imposed by the articles, bylaws, or by an agreement among security holders and the corporation.

  • Such restrictions are not binding on previously issued securities unless the security holders are party to an agreement or voted for the restriction.
  • Any rights, preferences, or limitations made by a corporation on stock must be fully stated or summarized either on the stock certificate or in a statement issued to the stockholder by the corporation.

Business Associations (1 decks)

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