Business Associations Flashcards
Doctrines to treat entity as a ‘corporation’ even if not duly incorporated
(1) De facto Corp
(2) Corporation by Estoppel
De Facto Corp
Treated as corp, but not duly incorporated
(a) a relevant incorporation statute
(b) good faith colorable effort to create a corp; and
(c) some exercise of corp privilege
- Only the state can attack
Corporation by Estoppel
Hold corp and 3P’s to their K’s and deals, when they have acted as if they are incorporated.
If 3P treats itself like a corp, its estopped from saying its not a corp
Directors’ Duties to Corporation
(1) Duty of Care
(2) Duty of Loyalty
Business Judgment Rule
A court will not second guess a business decision if:
(a) made in good faith
(b) director was reasonably informed [did his homework]
(c) decision had a rational basis
- BJR only applies to duty of care because duty of loyalty [D puts his own interests over the corporation] //
burden on the plaintiff in duty of care
Duty of Loyalty
Director must NOT put his own interest ahead of the corporation.
Director must:
(a) act in good faith, and
(b) with reasonable belief that what he is doing is in the best interest of the corp
the burden is on the defendant
scenarios: USE DUTY OF LOYALTY STANDARD
(1) Self Dealing – deal between the corp & director / director’s biz
- the interested director’s transaction will be set aside (recission) or director is liable (restitution) unless director can show:
(1) the deal was fair to the corporation when entered; OR
(2) director’s interest was disclosed and deal was approved by: majority of disinterested directors; or majority of disinterested shareholders with voting power
(2) Competing Ventures [D cant compete w/ C] // D liable for constructive trust on profits.
(3) Corporate opportunity usurped
- corp opps covered: necessary to corp, in the corp’s line of business, and something in which the corp has an interest or expectancy.
Corporate Opportunity Usurped
Usurp – taking or doing w/o authority //
Director cant usurp corporate opportunity, unless:
(a) director discloses to board of director, and
(b) waits for board of director to reject opportunity.
If breached, the remedy is a constructive trust [recover / disgorge profits or force conveyance]
*explain why the opportunity would benefit the corporation
Ultra Vires
Business engagements outside the scope of the business. [acts totally unrelated to the scope of the business]
Shareholder v. director = sue to stop proposed ultra vires act
Corp v. director = sue officer / director for damages
State v. director = sue to dissolve the corporation
Voting Trust Agreement
A’s shares —–> B (trustee)
A shareholder can create a voting trust, conferring the right to vote / act for the shareholder by a written agreement.
- commonly used by creditors who are not shareholders of the corp.
[sign it and transfer the shares]
(a) written trust agreement controlling how shares will be voted,
(b) copy given to corporation
(c) transfer legal title of shares to trustee
(d) original shareholder receive trust certs and retain all shareholder rights except for voting, and
(e) general rule: 10 year max on voting trusts.
an extension can occur and you don’t need all the parties to sign it (but the parties agreeing need to sign it)
Voting Agreement
2 or more shareholders sign an agreement for the purpose of setting forth the manner in which they will vote their shares [not all shareholders need to sign it]
IN WRITING AND SIGNED = All you need.
Shareholder Agreement
In Articles or written agreement
- signed by all SH unless K says otherwise, term can be indefinite, can establish who the directors and officers will be, can restrict the powers of the board, can transfer to any person
Shareholders should not manage the corporation or bind directors, but an agreement is upheld if: (a) no minority shareholder objects, (b) no harm to public or corp creditors, and (c) agreement is regarding a minor issue.
Fed Security Law: Section 16(b)
Section 16(b) imposes strict liability on a director, officer, or shareholder who owns at least 10% or more of outstanding shares of the corporation from any purchase and sale within a period of less than 6 months– the profit must be returned to the corporation. Showing: (a) P is a reporting corporation, (b) D is a big-shot (director, officer, SH), and (c) the defendant engaged in a short-swing transaction
Fed SEC Law: Rule 10b-5
Rule 10b-5 holds it is unlawful for any person, directly or indirectly, by the use of any means of IC to (a) employ any device, scheme, or artifice to defraud, (b) make any untrue statement of material fact / or omit a material fact (c) engage in any act that would operate as fraud regarding the purchase or sale of any security.
Subsequent Ratification– Agency
An agent who acts without authority binds her principal when the principal later ratifies the agents acts when: (a) Principal is aware of the transaction and (b) the principal either accepts the benefits or otherwise affirms the transaction
Agency–Actual Implied Authority
No writing is required. If both the principal and agent consent to the agency relationship
The agent acts with implied authority when the agent reasonably believes that she has the power to bind the principal, based on the principal’s acts
Agency–Apparent Authority
An agent has the apparent authority to act when the principal leads others to believe the agent is acting with the principal’s authority.
One who reasonably relies on the agent’s apparent authority can hold the principal liable for contracts entered into by the agent.
Agency–Actual/Express Authority
An agent has the actual authority to act when the principal has granted the agent the power to bind him.
It is formed when both the principal and the agent consent to the agency relationship
Piercing the Corporate Veil–Shareholder Liability
A court can pierce the corporate veil and make a shareholder liable if: (a) shareholder abused the privilege of incorporating and (b) fairness requires it
To avoid fraud or unfairness (go to alter-ego, undercapitalization, parent/subsidiary)
more for tort victims over K victims
Duties of an Agent to the Principal
Perform responsibilities under the K, loyalty, obedience, reasonable care (community standard), notifying the principal re: important matters, and liable (sub-agent who was appointed by the agent is also liable to the principal, unless appointed without authority from principal.
Principal Remedies when Agent Breaches
(1) damages for breach of K for failure to perform,
(2) tort liability for intentional or negligent performance,
(3) recovery of profits (where agent breaches duty and secretly profits)
(4) action for accounting to seek a return of funds, or
(5) may refuse to pay agent any owed amounts or withhold compensation
Principal Duties to Agent
(a) honor the terms of the K, (b) compensate agent and reimburse for expenses incurred in carrying out the authorized duties, and (c) cooperate and not interfere w/ agents performance.
Agents remedies when Principal breaches
(1) damages for breach of K (but must mitigate) OR
(2) claim or lien against principal’s property, unless K says otherwise.
Agent Liable to 3P
Generally, a principal is liable for K with 3P if the agent acts with principals authority.
An agent is liable to 3P if:
(a) agent makes implied warranty that she has the authority to enter the K,
(b) all of the parties intend that the agent be treated as a party to the k, and
(c) principal’s identity to undisclosed or is unknown.
A P can sue a 3P to enforce a K, unless the agent fraudulent concealed Ps identity
Fraud
Fraud is the misrepresentation of a material fact known to be false with the intent to induce some action upon another where the other suffers damages
