Business Associations Flashcards
What is a corporation?
A corporation is a distinct legal entity that can conduct business in its own right. It can: buy, sell, hold property, sue/be sued, last forever
Why do people choose to form corporations?
- limit liability
- promote investment
What are the characteristics of a promoter?
A person who:
- enters into contracts on behalf of the corporation (even before the corporation exists)
- tries to find investors
- are fiduciaries of the corporation (they cannot make secret profits)
What is the general rule on liability pre-incorporation?
Corporations are not liable for (or bound to) pre-incorporation agreements. Instead, promoters are liable. This ends once a novation agreement shifting liability to the corporation exists
Promoters may have a right of reimbursement based on a quasi contract for the value of the benefit received by the corporation
What is an articles of incorporation?
A contract between the corporation and the shareholders establishing basic rights.
With regard to a contract entered into by a promoter for the benefit of the corporation, an incorporator is…
not liable
When does the limited liability protection attach?
Moment of incorporation is when limited liability begins (when the SoS accepts and files the articles)
What are bylaws?
bylaws set forth the day-to-day rules regarding the operation and management of the corporation
What happens if something goes wrong with the formation of a corporation?
Instead of a de jure corporation, there may be a de facto corporation.
A de facto corporation, with limited liability, exists if the organizers 1) made a good faith effort to comply with the incorporation process and 2) have no actual knowledge of a defect in the corporate status
When may a court “pierce the veil” of limited liability?
to avoid fraud or unfairness. Generally courts are hesitant to do this.
What are the three factors courts consider in determining whether to pierce the veil?
This is a totality of the circumstances test.
1) alter ego (failure to observe any
corporate formalities between the person and the corporation [like no votes or meetings] and personal funds are commingled)
2) under-capitalization (Failure to maintain funds sufficient to cover foreseeable liabilities)
3) fraud (to commit fraud or for shareholders to hide behind to avoid existing obligations, stripping of assets)
When are courts more likely to pierce the veil?
- in tort situations (rather than contractual)
- in corporations with few shareholders
What is the waterfall upon liquidation?
creditors get paid before preferred stockholders, then remaining stockholders get paid
What are the authorized shares?
authorized shares are the maximum number of shares that the directors can sell, as set by the articles of incorporation
Usually only outstanding shares can vote
o
What are treasury shares?
stocks that were previously issued to shareholders, but are reacquired by the corporation
What are outstanding shares?
outstanding shares are all the shares that were issued to shareholders and still remain in the possession of shareholders
What consideration is needed for stocks?
the board of directors can receive any valid consideration that it finds adequate (e.g., labor, IP rights, cash, cancellation of debt owed)
What is watered stock?
watered stock occurs when the corporation sets a par value amount and sells the stock for less than the stated amount
Under common law, the shareholders who bought the watered stock are liable to the creditors of the corporation. However, modernly courts do not recognize liability for watered stock since par value is usually priced arbitrarily.
What is the rule for stock subscription agreements prior to incorporation?
subscription agreements (a contract to buy a specified number of shares) are irrevocable for up to 6 months
What are preemptive rights?
the right to acquire stock to maintain the percentage of ownership any time new shares are issued.
By default, shareholders DO NOT have preemptive rights. They can be negotiated or included in the articles
What are the two ways to get money out of a corporation
- board can declare a dividend (usually cash) (discretionary)
- board can buy back shares of the corporation
When can the board NOT declare a dividend?
- if the corporation is insolvent
- if, by issuing the dividend, the corporation would become insolvent
What happens if the directors vote to authorize an unlawful dividend?
The directors are personally liable, jointly and severally, to the corporation for the amount in excess of the lawful amount
BUT a director will not be liable if he relied in good faith on financial statements
What happens if a stock is classified as “participating?”
Each share in the class collects a dividend as part of the preferred class and then collects an additional amount together with the common class
What are the two exceptions to the general rule that shareholders can freely sell their stock?
- closely held corporations (generally 100 or less shareholders) (must be conspicuously noted)
- federal restrictions
When a shareholder claims that the restriction on sales is an impermissible restraint on alienation, what is the test?
Is the restraint reasonable.
For example, since S corporations can only have 100 shareholders, a restraint is likely to be reasonable. But merely not wanting outsiders is less reasonable.
absolute restrictions on alienability are never reasonable
What is the cause of action for a fraudulent purchase or sale of securities?
10b-5 cause of action
What are the elements of a 10b-5 action?
[EARS think of a sketchy inside trader with big ears]
- D Engaged in fraudulent conduct relating to material information
- D Acted with scienter
- in Reliance on D’s conduct, P purchased or sold the security which involved interstate commerce
- P Suffered harm
What is fraudulent or deceptive conduct?
making an untrue statement of a material fact or failing to state a material fact that is necessary to prevent statements already made from being misleading
Opinions and predictions do not count as untrue statements of material fact
When is a statement material?
a statement is material if a reasonable investor would find that fact important in deciding to purchase or sell the security
What is scienter?
Intent or knowledge of wrongdoing
Negligence is NOT enough, but recklessness is ok.
How do you compute damages in a 10b-5 cause of action?
A plaintiff can recover his “out-of-pocket” loss, which is the difference between the stock’s value at the time of the fraud and the price that the P paid or received the stock
Punitive damages are not allowed
What corporations does section 16(B) apply to?
only:
- corporations with securities trading on a national securities exchange OR
- corporations with assets of more than $10 million and more than 500 shareholders
Who are corporate shareholders under section 16(B)
- directors and officers (president, vp, secretary, treasurer etc)
- shareholders who hold more than 10% of any class of stock
What is the sanction for a violation of section 16(B)?
During any 6 month period, a corporate insider who both buys or sells the stock is liable to the corporation for any profits made on those transactions. Any profits will be disgorged
Who elects the board of directors?
shareholders
What are the meetings in a corporation?
- mandatory annual meeting (to elect directors and conduct other shareholder business)
- special meetings (to vote on fundamental changes)
What are the notice requirements when calling a meeting?
- notice must be given to shareholders 10-60 days before the meeting
- must include the time, date, and location
- special meetings must include purpose of the meeting
What happens if a shareholder attends a meeting when there was insufficient notice?
actual attendance at a meeting waives the shareholder’s right to challenge any actions taken at the meeting
What is the record date?
When must the record date occur?
- the cut-off date to determine which shareholders are eligible to receive a dividend or vote at a shareholders’ meeting
- 70 days or less before the meeting
What is required for a proxy to be effective?
- in writing
- signed by the shareholder as of the record date
- sent to the secretary of the corporation
- states authorization of another to vote the shareholder’s shares
- cannot be valid for more than 11 months
What is required for shareholders to take action without a meeting?
there must be unanimous written consent of ALL shareholders
Practically unlikely in a large corporation
What is needed for a quorum to be met in a shareholder meeting?
A quorum is a majority of the corporation’s outstanding shares represented at the start of the meeting
When is a shareholder vote effective?
1) a quorum is present AND
2) the votes case in favor of the proposal exceed the votes against the proposal
Ex of cumulative voting (which applies only to election of directors)?
If you own 10,000 shares of a corporation and there are nine director positions up for election, you will be able to cast 90,000 votes for only one or a few candidates instead of 10,000. The effect of cumulative voting is to allow minority shareholders to elect representatives to the board.
What are a shareholder/director’s inspection rights?
A shareholder/director may inspect the corporation’s records in person or through an agent as long as the shareholder states a proper purpose (related to their financial interest in the corporation)
What is a direct lawsuit?
Shareholder is suing in the shareholder’s own name for damages and the damages go directly to the shareholder.
Harms include: Interference in voting rights or dividends, misinformation about important issues, and tort
injury.
What is a derivative lawsuit?
the shareholder is suing on behalf of the corporation because the harm principally impacts the corporation (e.g., disloyalty)
Any recovery goes to the corporation
What are the standing requirements to bring a derivative lawsuit?
- must have been a shareholder at the time of the harm and hold the shares throughout the litigation;
- must fairly and adequately represent the interests of the corporation; AND
- make a written demand to the board of directors and allow them 90 days to respond before filing suit
What must the plaintiff generally do in a derivative lawsuit?
The plaintiff shareholder is generally required to first demand that the board of directors bring the lawsuit in the corporation’s name or redress the issue before the shareholder can bring the suit.
In some jurisdictions, the “demand futility” exception negates this obligation to demand action if it would be futile (e.g., directors have been named as the potential defendants). Modernly, it is required.
What happens to the recovery in a derivative lawsuit?
any recovery goes to the corporation, NOT the shareholder
If the litigation produces a “substantial benefit” to the corporation, the P’s attorneys are entitled to have their fees paid by the corporation
What is the general rule regarding shareholder duty to fellow shareholders?
Shareholders do NOT owe a duty to fellow shareholders in the corporation.
When may a controlling shareholder owe a duty to minority shareholders?
1) sale of stock to an outsider/looter
2) controlling shareholder transacts with the corporation
Who is a controlling shareholder?
- one who owns 50% plus one of the shares
- one who controls a significant stake and the remaining shares are widely dispersed
What are the main tasks of the board of directors?
-appoint officers
-oversee officers
make high-level corporate decisions
Generally shareholders may remove directors with or without cause. What is the main exception?
Staggered boards (e.g., 3 elected year 1, 3 elected year 2). In this case the directors may only be removed for cause and only if the articles provide
Different classes of shareholders may elect different directors. Therefore, only directors elected by a particular class may be removed by that class
How are new directors selected when there is a vacancy or the size of the board increases?
shareholders at a special meeting OR by the board of directors
What are the rules for board meeting notice and waiver?
- directors must be given notice for special meetings, but not for regular meetings
- attendance waives notice, unless the director promptly objects at the meeting
Directors CANNOT vote by proxy or enter into voting agreements
o
What quorum is needed for a meeting of the board of directors?
A majority of the total number of the directors at the time of the vote, unless the bylaws specify a higher or lower number
Unlike shareholders, a director can break quorum by withdrawing before the vote is taken
When will a resolution of the board pass?
Assuming a quorum, a resolution will pass upon a majority vote of those present at the meeting
To avoid potential liability for a board decision with which a director disagrees, what are the ways the director can dissent?
- entering dissent in the meeting minutes
- file written dissent before the meeting is adjourned; OR
- provide written dissent by certified or registered mail to the corporation’s secretary immediately following the adjournment of the meeting
When must directors be notified of a meeting?
Directors must be given notice for special meetings, but not for regular meetings
What are the duties that officers owe to the corporation?
[LCD]
loyalty, care, disclose
What is the business judgment rule?
In the absence of fraud, illegality, or self-dealing, courts will not disturb good-faith business decisions. This is a rebuttable presumption.
This rule protects directors and officers because it is presumed that they will manage the corporation in good faith and in the best interest of the corporation.
What is the standard of care when judging the duty of care of an officer/director?
Ordinarily prudent person in a like position and circumstances
If someone has special skills (e.g., lawyer, accountant), they will be held to a higher standard as they are expected to use those skills.
What is the reliance defense?
A director or officer is entitled to rely on the expertise of officers and other employees, outside experts, and committees of the board
Who selects officers?
The board of directors
What is the general rule of the duty of loyalty in a corporation?
one who is under a duty of loyalty may not receive an unfair benefit to the detriment of the corporation without effective disclosure and ratification
What is the corporate opportunity doctrine?
the duty of loyalty is violated when the director, officer, or their relative usurps a corporate opportunity rather than first offering the opportunity to the corporation
The remedy is disgorgement of profits or turn over the opportunity
What is a self-dealing transaction by one who has a duty of loyalty to a corporation?
The duty of loyalty is violated when a director, officer, or their relative receives a substantial benefit directly from the corporation
When may a director/officer avoid liability for a violation of their duty of loyalty? [Safe Harbor Rule]
the transaction is disclosed and ratified by:
-a majority of disinterested directors; OR
-a majority of disinterested shareholders
[but ratification may not win the case, it may only shift the burden]
-The best option is to show that the transaction was fair
When must the corporation pay the cost of defense for a director/officer?
when the director/officer successfully defends the case
When is the corporation prohibited from paying the cost of defense for a director/officer?
when the director/officer is liable for receiving an improper benefit from the corporation OR committed intentional wrongful acts or crimes
When MAY (not must) the corporation pay the cost of defense for a director/officer?
when the director/officer:
- acted in good faith with no intent to harm the corporation; OR
- had no reasonable cause to believe the conduct was illegal
Who must approve fundamental changes?
BOTH shareholders and directors. Fundamental changes require a majority of shares entitled to vote
What is a merger?
the combination of two or more corporations where one corporation survives and assumes the assets and liabilities. The shareholders of each corporation generally must approve of the merger.
[remember: murdering the subsumed corporation]
What is a consolidation?
the combination in which neither of the two corporations survives. A new entity is created and this new entity assumes the assets and liabilities of both corporations.
[remember c for create]
What are the ways that a corporation is extinguished?
- voluntarily by the shareholders and directors
- involuntarily by disgruntled parties (creditors or shareholders)
What must shareholders show to have a corporation dissolve?
- the assets are being wasted;
- the directors are acting fraudulently; or
- the directors and shareholders are deadlocked
What happens if the shareholder does not want to participate in a fundamental change? (merger, asset sale, share exchange, amendment of the articles/bylaws, conversion, dissolution)
the shareholder is entitled to dissenters’ or appraisal rights
How does a shareholder invoke their dissenters’ rights?
[NAD because thats what it is needed to dissent]
1) send written Notice to the corporation of intent to dissent
2) at the meeting, Abstain or vote “no” AND
3) make prompt written Demand for fair market value after the action is approved
What happens if the shareholder and the corporation disagree as to fair market value of the stock?
a court can appoint an expert appraiser to issue a binding appraisal of the value
What are the unique terms used in an LLC?
rather than shareholders, LLCs have members.
rather than articles of incorporation, LLCs use articles of organization
What are some characteristics of close corporations?
- shareholders are often also directors and officers
- typically not publicly traded
- relaxation of rigid rules for corporations
- can form voting agreements
- the default rule prohibiting preemptive rights may be relaxed
What is an S corp?
An S corp is essentially a corporation for state corporate law purposes, but it gets special treatment for tax purposes (not taxed at entity level). But it is limited in the number of shareholders
What are some characteristics of LLCs?
- no limits on the number of shareholders
- -no residency requirements
- no natural person requirement
- presumed to be managed by all of its members
- treated like corporations
What are ways that a director/officer may violate their duty of loyalty?
- violation of the corporate opportunity doctrine
- self-dealing transaction
- unfair competition with the corporation
What are the requirements for INcorporation?
an articles of incorporation is signed and filed with the SoS that includes:
-Initial agent’s name for the corporation
-Street address for corporation’s registered office
-Corporation’s name
-Authorized number of shares
-Name and address of each incorporator
[I SCAN]
What is the general rule of shareholder liability?
Generally, a corporate shareholder is not liable for the debts of the corporation, except when the court pierces the corporate veil to hold shareholders liable as justice requires
What is an ultra vires act?
When a corporation has a limited stated purpose (in its articles of incorporation) and it acts outside its stated business purposes, it is acting “ultra vires”
Traditionally these acts were void or voidable by shareholder suit, corporate action, or state action. Modernly, this is rarely an issue.
Third parties CANNOT assert this to get out of a contract
All corporations must have at least one director
o
How is an officer removed?
The board may remove an officer with or without cause
What is required for an action by the directors to be taken without a meeting?
An action may be taken without a meeting if all directors sign a written consent describing the action taken and include that in the minutes or file it with corporate records
The board of directors may delegate authority to a committee or an officer
o
What are some examples of usurping a corporate opportunity?
- taking a business opportunity as a side job
- learning of a business opportunity
- family member or officer is on the other side of a deal from the corporation
What is the duty to disclose?
directors and officers have a duty to disclose material information relevant to the corporation to board members
Partners also have this duty
Licensed professionals (e.g., lawyers, doctors) can incorporate, but remain liable for malpractice
o
What are some common situations in which someone violates section 10b-5 (fraudulent purchase or sale of securities?)
- direct trading by an insider
- tippers (providing insider information for gain)
- tippees (receiving insider information for gain)
- misappropriators (e.g., eavesdropper, lawyer who received information properly but then shared it)
What is an asset sale?
when a corporation sells all or substantially all of its assets (75%) to another corporation. It is not a fundamental change for the company receiving the assets
A promoter will remain personally liable for pre-incorporation agreements unless…
1) novation occurs
2) adoption occurs
What is adoption by the corporation?
adoption occurs when the corporation adopts the contract (expressly or by using the benefits of the contract) and agrees to accept sole liability on the contract, the promoter may no longer be liable.
What is corporation by estoppel?
A party who deals with an entity as if it were corporation is estopped from denying its existence and is thereby prevented from seeking personal liability against the business owner. This is limited to contractual agreements. The owner must have made a good faith effort to incorporate and operated the business without knowing that the requirements were not met
What is an example of corporation by estoppel?
L and M improperly file articles of
incorporation. They acted in good faith and they are now operating “Data,
Inc.” as a business, believing it is incorporated. L and M obtain a business
loan from Big Bank who looks at the Data, Inc.’s business records prior to
issuing the loan. L and M’s business eventually fails and is unable to repay
the loan. Big Bank will be estopped from arguing that Data, Inc. is not a
corporation because it dealt with Data, Inc. as if it were a corporation and
had an opportunity to discover that is was not actually incorporated. Big
Bank will not be able to recover from L and M as individuals.
What is par value stock?
the corporation is required to receive at least the value assigned to the stock (the par value). The par value does not have to be market value and can be a nominal (small amount).
What happens if par value stock is sold below par value?
If the board of directors issues (sells, trades) par value stock for below par value, the board of directors is liable to the corporation for the difference between the par value and amount actually received. A shareholder that knowingly received par stock for below par value is also liable to the corporation.
When discussing duty of care always discuss the business judgment rule too
o
What happens if there is a self-dealing transaction that is not protected by the safe harbor rule?
the transaction can be enjoined or rescinded and the corporation can seek damages from the interested director
How can the officer’s authority be authorized?
- express (as defined by the laws or set by the board)
- implied (to perform tasks necessary to carry out duties) (no authority to bind the corporation to extraordinary act)
- apparent (when the corporation holds the officer out as having authority, such as through a position title)
What is winding up?
A dissolved corporation may continue to exist for the limited purpose of winding
up its affairs and liquidating its business.
Upon dissolution, what is the order of distribution of corporate assets?
1) creditors
2) shareholders with preferences in liquidation
3) other remaining shareholders
When can an attorney represent a director/shareholder AND the corporation?
if he reasonably believes he can
competently represent the corporation’s interests and the director/shareholder’s interests (Model Rules) and he obtains informed written consent from the corporation and the director/shareholder
A personal (direct) action may also be brought against a controlling shareholder
o
When can a corporation/GP be held vicariously liable?
A corporation/GP can be held vicariously liable for torts (even negligence) committed by its officers, agents, partners, or employees that are within the scope of employment, even though the corporation did not authorize the tort.
When a partner incurs a personal liability in the ordinary course of conducting partnership business, the partnership is required to indemnify the partner for such liability
o
Why create an agency relationship?
- to extend the principal’s economic reach
- to acquire the agent’s expertise
- to make money
What are the three requirements of an agency relationship?
ABC
- assent (both parties manifest assent to work with one another)
- benefit (the agent agrees to work for the principal’s benefit)
- control (the agent agrees to work subject to the control of the principal
+There is no requirement of consideration (service may be gratuitous)
+It doesn’t matter if the parties don’t think they are in an agency relationship
+no writing requirement
What do courts look to when one or more parties disclaim the creation of an agency relationship?
the court will look to manifestations of assent (e.g., a letter, spoken words, physical actions)
Who can be a principal?
Almost any person or entity that has legal capacity can be a principal.
Who cannot be a principal?
- minors
- anyone incapacitated by illness or intoxication
- unincorporated associations
Who can be an agent?
any person or entity who has minimal capacity
+includes minors
What does a court look to in determining if a potential agent has “minimal capacity?”
The potential agent must be able to:
- Assent to the agency relationship;
- perform the tasks on Behalf of the principal; AND
- be subject to the principal’s Control
What are the two types of agents?
- servants/employees
- independent contractors
What are characteristics of an independent contractor?
- maintain a high level of independence
- free to work for other people
- typically owns his own tools
- receives payment based on results
- is liable for work performed
How does an agency relationship terminate?
either party can terminate an agency relationship unilaterally
When is a principal liable for contracts that an agent enters on behalf of the principal?
The principal is bound on a contract when:
- the principal has (actual or apparent) authorized the agent to enter into the contract; AND
- the agent acted with legal authority
What are the four types of legal authority?
- actual express authority
- actual implied authority
- apparent authority
- ratification
How do you distinguish between actual and apparent authority?
actual (express or implied) authority: when the principal is communicating with the agent
apparent authority: when the principal is communicating with the third party
What is required for express (actual) authority to exist?
the principal’s manifestation must cause the agent to believe that the agent is doing what the principal wants (subjective standard), and the agent’s belief must be reasonable (objective standard).
How does an actual express agency relationship end upon death?
death of an agent: authority terminates immediately
death of the principal: authority terminates when the agent has actual knowledge of the principal’s death
What is actual implied authority?
A principal creates actual implied authority by using words, written or spoken, or other conduct to convey authority to the agent to take whatever steps are necessary to achieve the principal’s objectives
The agent is limited to acts within the accepted business custom or general trade usage
What are the requirements of ratification?
Ratification requires that (i) the principal has knowledge of the material terms of the contract and (ii) the principal then accepts the contract’s benefits
Ratification occurs when an agent takes action without proper authority
What is a disclosed principal?
The third party knows the agent is acting on behalf of a principal and the principal’s identity
What is a partially disclosed principal?
the third party knows that the agent is working on behalf of a principal, but not the identity of the principal
What are the three types of principal disclosure?
- disclosed
- partially disclosed
- undisclosed
What is required for vicarious liability (respondeat superior) to apply?
- the principal has sufficient control over the agent’s conduct such that the agency relationship is employer-employee; and
- the tort committed by the agent was committed while the agent was acting within the scope of this employment
What is needed to have “sufficient control” to establish vicarious liability?
A principal who controls, or has the right to control, the physical conduct (manner and means) of the agent’s performance of work
Generally, a principal does not have vicarious liability for torts committed by an independent contractor. What are the exceptions (i.e., when does the principal have direct liability)?
- the task is inherently dangerous
- nondelegable duties
- the principal was negligent in hiring the independent contractor
How do you analyze whether a tort occurred during the scope of employment?
1) did the agent intend to benefit the principal?
2) was the agent’s conduct of the kind that the agent was hired to perform? (consider frolic/detour)
3) did the tort occur on the job?
What is the general rule on intentional torts with respect to principals?
Generally, intentional torts are outside the scope of employment. Therefore, there would be no liability for the principal
What are the duties that all agents owe to principals?
LCD
1) duty to exercise reasonable care
2) duty of loyalty
3) duty to disclose
What are four situations in which an agent may be violating their duty of loyalty?
CUTS like they are taking a cut
- engaging in a Competing business
- Usurping a business opportunity
- Taking secret profits
- Self dealing
What is an agency relationship?
An agency relationship exists when a principal authorizes an agent to act on her behalf and represent the principal in dealings with third parties
What are the possible remedies when the principal is in breach?
- terminate the agency and refuse further performance
- seek contract damages
- seek possessory lien
What are the possible remedies when the agent is in breach?
- discharge the agent
- withhold compensation
- seek contract/tort remedies
What are a subagent’s duties?
Acting with authority: the subagent owes the principal the same duties owed by an agent
Acting without authority: the subagent only owes duties to the agent
Who is liable for a subagent’s breach?
the agent is liable for the subagent’s breach
What are the two terms for deviations from the planned conduct?
frolic and detour
When is the principal liable for the agent’s intentional torts?
- force is specifically authorized
- the intentional tort is a natural result due to the nature of the work (e.g., a bouncer)
- the intentional tort was motivated by a desire to serve the principal
What is a partnership?
a partnership is an association of two or more legal persons who carry on a for-profit business as co-owners
+there is no need to have the specific intent to form a partnership
+persons includes legal entities, but does not include humans who lack capacity
+there must be sharing of control (usually in separate areas)
*On an exam it is often a close call so argue both ways
There is a presumption that when two or more persons share profits, there is a partnership relationship. What are some exceptions?
Transactions that involve the division of payments, but not profits. Examples include:
- payment of a debt
- interest payments
- rent
- wages
- goodwill
What are the consequences of forming a partnership?
- a separate legal entity is formed (that can hold property and sue)
- partners are personally, jointly and severally, liable for the partnership’s obligations
- partnerships do not have entity-level taxation
What generally governs the partnership?
the partnership agreement generally governs
-there need not be a written agreement, in which case, state law default rules govern
What are limits on the partnership agreement that can never be revised?
- cannot limit liability to a third-party
- cannot deny partners access to the books and records
- cannot eliminate fiduciary duties
What are the fiduciary duties every partner owes to the partnership?
every partner owes a duty of care and a duty of loyalty
What are the duties encompassed in a partner’s duty of loyalty?
partners must not
- compete with the partnership business
- advance an interest that is adverse to the partnership
- usurp a partnership opportunity
- make secret profits
+This duty cannot be eliminated, but it can be defined in in a reasonable way to lower the standard
What should a partner do if they are worried about violating their duty of loyalty?
use the safe-harbor option by 1) making full disclosure of all material facts and 2) a certain percentage of the other partners may authorize the transaction
What are the duties encompassed in a partner’s duty of care?
[gik]
Partners must not:
- engage in grossly negligent or reckless conduct
- engage in intentional misconduct
- engage in a knowing violation of the law
+This duty cannot be eliminated, but it can be defined in in a reasonable way to lower the standard
+The business judgment rule may apply
What is the rule regarding timing of duties for partners?
The duties of loyalty and care only apply to partners, not to prospective partners or former partners
Ex: After a merger of a law firm partnership, the law firm can eliminate all retirement plans because there is no fiduciary duty owed to former partners
What are the rules on partnership division of profits/losses?
- the division of profits/losses can be unevenly split (financial contributions need not have an effect on the division)
- When there is no partnership agreement regarding division of profits and losses, profits/losses are divided evenly
What is the DEFAULT rule on partnership distributions?
partners do not have the right to demand a distribution
What is the DEFAULT rule on transferring a partnership interest?
a partner has the right to transfer their partnership interest
+Partners may agree to change the default rule to require a majority vote of the partners
What is the DEFAULT rule for a new partner?
when a new partner is introduced, all existing partners must consent to the new partner
What is the DEFAULT rule regarding partnership control?
Every partner has equal right in the management and control of the partnership
+Often this is changed so that control reflects capital contributions
What is the DEFAULT rule regarding votes on ordinary business in a partnership? Extraordinary business?
ordinary: majority of the partners
extraordinary: all of the partners
What is the term for when a partner ceases to be associated with the partnership?
dissociation. It can happen either voluntarily or involuntarily
What are some scenarios that may constitute involuntary dissociation?
- there may be an event triggered in the partnership agreement
- they can be expelled pursuant to the partnership agreement
- it is unlawful to carry on business with the partner
- a court may order dissociation
- a partner goes bankrupt
- a partner dies
- a partner has become incapacitated
- one of the entities of the partnership dissolves
What happens once a person is dissociated?
a former partner
- has no right to participate in management of the partnership
- has no duties to the partnership
If the partnership continues, it must buyout the dissociated person’s interest
Every partner is an agent of the partnership.
This means the partnership may be liable for a partner’s contract and tort liabilities
Where can a partner get express authority to enter into a contract?
- the partnership agreement
- a statement of authority filing
- an ad hoc authorization by the partners at a meeting
When may a partner believe they have implied authority to enter into a contract?
implied authority exists when the partner reasonably believes that an action is necessary to carry out express authority
If a partnership is liable, what is the process of recovery?
1) exhaust the partnership’s funds
2) go after the partners’ personal assets (joint and several liability applies)
What does a partner’s apparent authority depend on?
the partnership’s communication with third parties
What are the rules on incoming/outgoing partner liability?
- incoming partners are NOT liable for contract or tortious obligations incurred prior to becoming partner (but any capital contributions may be used)
- outgoing partners are liable for a partnership obligation incurred before dissociation (unless there was a novation or release of liability). They MAY be liable for partnership obligations incurred after dissociation in certain circumstances
What is the two step-process of terminating a partnership?
dissolution and winding up
What is a partnership at will?
a partnership with no fixed term tied to an undertaking or time period
generally, it is dissolved when any partner chooses to dissociate
What is a partnership for a term or undertaking?
the partnership may be dissolved when the term expires or when the undertaking is complete
What are some ways that a partnership may be dissolved?
- a dissolving event set forth in the partnership agreement occurs (ex: we make less than $10 in a year)
- any event that makes it unlawful to continue if not cured within 90 days
- judicial determination
Who may wind up a partnership?
- any remaining partner
- a legal representative of the last surviving partner
What are the powers of a person who is winding up the partnership?
- dispose of and transfer partnership property
- preserve business to maximize value
What is a statement of dissolution?
a filing that, after 90 days, gives notice to third parties that the partnership has been dissolved.
It limits the partners’ apparent authority and liability
What is a limited liability partnership (LLP)?
a partnership in which a partner’s personal liability is eliminated
What is the rule on liability for LLPs?
limited liability partners are not personally liable for the obligation of the LLP. But limited partners are personally responsible for their own personal misconduct or negligence
What is a limited partnership (LP)?
a partnership formed by two or more persons that has at least one general partner and one limited partner
The limited partners have limited liability (the amount of capital contributions) and the general partner(s) have personal liability
When does an LP come into existence?
when filed with the state, or the effective date if included
Substantial compliance is sufficient. Otherwise, it is a general partnership
How are LLPs formed?
to transform a general partnership into an LLP, there must be a vote authorizing transformation. Then file a statement of qualification with the SoS with the name and address of the partnership. Th name must end in LLP or RLLP
What are some signs that the parties intended to form a partnership?
- contributions (of $ or service) in exchange for profits
- common ownership
- sharing of gross revenue
What are the duties of a partner/director/officer?
- care
- loyalty
- disclose
What is the priority of distribution of assets of a winding up partnership/LP?
1) creditors (including partner-creditors)
2) partners who have loaned money
3) capital contributions by partners
4) anything else is shared equally among the partners unless there is an agreement that says otherwise
What must be included in the filing for a LP?
- signatures of all the general partners
- name of the partnership (with the words limited partnership)
- names and addresses of the agent for service of process and each general partner
What is an LLC?
An LLC is a business entity that has the limited liability of a corporation combined with the tax advantages of a partnership
What is the liability of LLC members?
LLC members are not personally liable for the obligations of the company itself beyond their own capital contributions. However, courts may pierce the veil
How does a LLC terminate?
-traditional rule: dissociation of any member terminates the LLC
-modern trend: an LLC is only terminated by one of the following
>an event specified in the operating agreement
>consent of all the members
>90 days with no members
>judicial decree
>administrative decree
What is the rule on liability for LPs in an LP?
A limited partner is not personally liable for the obligations of the partnership unless she serves as a general partner or starts to participate in the partnership
How does one become a limited partner or general partner in a LP?
- at the creation of the partnership
- with agreement of all the partners
What is the default rule for limited partner voting?
a limited partner does not vote
A limited partner must give 6 months written notice to withdraw
A general partner just needs to give written notice at any time
Generally, a limited partner is not personally liable for the obligations of a limited partnership unless the limited partner also serves as a general partner or participates in the control of the business. What are some things that, if done by itself, do not constitute participating in control of the business?
- being an officer, director, shareholder of a corporate general partner
- advising a general partner on the business
- acting as a surety
- requesting or attending a meeting of partners
- winding up the LP
+If multiple of these are done, this could expose the LP to liability
What are the ways in which a principal can be held liable for a tort committed by an agent?
- vicarious liability (respondeat superior)
- direct liability (ratification/authorization of conduct, negligent hiring/supervision, delegation of non-delegable duty, inherently dangerous task)
What happens if an LLP or LP is not properly filed with the state?
then it remains a GP
What is the key factor in determining whether a business arrangement is a partnership?
whether there is a sharing of profits
What happens if one partner communicates to a third party that the other partner is not allowed to contract?
this is not allowed because each partner is equal
What is required for apparent authority?
the third party reasonably believes that the agent has authority.
Consider:
- past dealings
- trade customs
- principal’s written statements
- transactions that do not benefit the principal
Rule statement of authority
A corporation/partnership will only be bound to a contract if X had authority to enter into this agreement. The three types of authority are express actual, implied actual, or apparent. In addition, even if an agent acts with no power to bind the principal, the principal can become subject to liability on the contract if the principal ratifies the contract.
Usually a shareholder that is uninvolved with the daily operations of the company will not be held liable as a result of veil piercing.
o
What is the controlling shareholder’s duty to disclose?
duty to disclose to the minority shareholders any information that it knew or should have known a reasonable person would consider important in deciding how to vote on a transaction
If there is no disclosure and it causes a loss to the shareholders, then the controlling shareholder is in breach
What are the fiduciary duties of a controlling shareholder?
- disclose
- fair dealing with minority shareholders
in general, an agreement between directors as to how to vote (i.e., a pooling agreement) is unenforceable. Each director is expected to exercise independent judgment.
But an agreement between just shareholders IS enforceable
Any act by the shareholder that is inconsistent with a proxy, such as attending a shareholder meeting and voting the shares, revokes the proxy.
o
Voting pool agreements are contracts between shareholders that do not need to be filed with the corporation and there is no time limit.
o
What is the term that needs to be in just about every corporations essay?
business judgment rule
What are the duties of a director/officer?
care
loyalty
