Business Associations Flashcards
Promoter
A promoter is someone who, prior to formation of a corporation, procures capital and enters into Ks to bring the corporation into existence. A promoter is personally liable for a K entered into pre-incorporation, even after the corporation comes into existence.
Exceptions to promoter personal liability
Novation or adoption
Novation
If there is a novation, that means the corporation and the other party to the K agree to substitute the corporation for the promoter in the K, and the promoter will no longer be liable.
Adoption
If there is an adoption, that means the corporation adopted the K (expressly or by using the benefits of the K) and agrees to accept sole liability on the K.
Incorporation requirement
To form a corporation, the articles of incorporation must be filed with the state. The articles must include a statement of the corporation’s purposes; a broad statement is acceptable.
De jure corporation
When the statutory requirements for incorporation are met, a de jure corporation has been formed. The corporation is then liable for its activities (not the individuals).
De facto corporation
If the owner made a good faith effort to incorporate and operate the business w/o knowing that the requirements were not met, the business will be treated as a de facto corporation and the individual owner will not be personally liable.
Corporation by estoppel
A party who deals with an entity as if it were a 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 w/o knowing that the requirements were not met.
Ultra vires doctrine
If a corporation has a narrow business purpose in its articles of incorporation and engages in activities outside the purpose, it has engaged in an ultra vires act. If an ultra vires act occurs, a shareholder can file a suit to enjoin the action and/or the corporation can take action against a director/officer/employee who engaged in the act. A 3rd party cannot assert ultra vires acts as a defense to escape liability.
Common stock
A corporation must issue common stock that is entitled to vote and represents ownership in the corporation.
Preferred stock
Preferred stock is stock given priority w/ dividends and during liquidation.
Who determines valuation
The BOD must determine that the consideration (e.g., money) paid for the stock is adequate.
Par value stock
In the process of incorporating, a corporation may issue par value stock. For such 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 nominal.
Watered stock
If the BOD issues (sells/trades) par value stock for below par value (watered stock), the BOD is liable to the corporation for the difference between the par value and amount actually received. A shareholder that knowingly received watered stock is also liable to the corporation.
Annual shareholder meetings are for what primary purpose
Annual shareholder meetings for the primary purpose of electing directors are required.
Special shareholder meetings are for what
Special shareholder meetings are required for approval of fundamental corporate changes (e.g., merge, sell itself, or sell substantial assets).
Proxy shareholder voting
A proxy is a written agreement by a shareholder to allow a person to vote for them. The proxy is valid for 11 months unless otherwise stated and is generally revocable. To be irrevocable, the proxy must expressly say so and the person who is receiving the shareholder’s right to vote must provide consideration to the shareholder.
Shareholder agreements relating to voting
Shareholders may enter into a binding voting agreement which governs how they will vote their shares. The agreement is a K and may be enforced; there is no time limit.
Shareholder direct action
In a direct action to enforce a shareholder’s rights, the shareholders sues the corporation for breach of fiduciary duty owed to the shareholder by a director/officers. The recovery goes to the shareholder.
Shareholder derivative action
In a derivative action against a corporation, a shareholder is suing (usually a director or officer) on behalf of the corporation for a harm suffered by the corporation. The shareholder must 1) demand on board unless futile, 2) have enough shares to adequately represent the shareholders, and 3) continue to be a shareholder through the suit. The recovery goes to the corporation.
Shareholder right to inspect records
Shareholders have a right to inspect corporate records upon 5 days’ written notice so long as it is for a proper purpose (e.g., related to the affairs of the corporations).
Piercing the corporate veil
Generally, shareholders are not personally liable for corporate acts. However, courts may allow a plaintiff to pierce the corporate veil and sue a shareholder individually depending on the totality of the circumstances including: 1) undercapitalization of corporation, 2) disregard of corporate formalities (e.g., no annual meetings or voting), and 3) fraud.
Controlling shareholder
Anyone with more than 50% of a corporation’s share or substantially more shares than anyone else is a controlling shareholder. A controlling shareholder owes a fiduciary duty to minority shareholders to not use their voting power in a way to disadvantage the minority shareholders.
Board of Directors
The BOD manages and directs the management of the corporation’s business and affairs; regular meetings are required.
Shareholder removal of a Board member
Shareholders may remove a director for breach of fiduciary duty (CL) or without cause (modern trend)
Validity of BoD voting
For the BOD’s acts at a meeting to be valid, a quorum of directors must be present at the meeting, meaning a majority of all directors.
Who has the sole power to authorize a dividend
BoD
Directors’ fiduciary duties
Duty of care
Duty of loyalty
Duty of care
Under the duty of care, directors & officers have a duty to act with the care of an ordinarily prudent person in a similar position and under similar circumstances (objective standard).
Reliance under the duty of care
Directors are entitled to rely on the performance of other officers, employees, and outside experts. This includes reliance on info, reports, and opinions provided by these people.
BJR
Under the duty of care, BJR is a rebuttable presumption where courts will not disturb good faith business decisions in the absence of fraud, illegality, or self-dealing.
Duty of loyalty
BJR is a rebuttable presumption where courts will not disturb good faith business decisions in the absence of fraud, illegality, or self-dealing.
Self-dealing
Self-dealing occurs when a director engages in a transaction with a corporation that benefits themself or a closely related family member. Self-dealing can also occur if the transaction benefits another corporation or partnership that the director is associated with or their closely related family member is associated with. Self-dealing violates the duty of loyalty unless the transaction is protected by the safe harbor rule.
Safe harbor rule
A self-dealing transaction can be protected under 3 ways: 1) interested director discloses to the BOD and receives approval by a majority of the disinterested directors, 2) interested director discloses to shareholders and receives approval by a majority of the disinterested shareholders, OR 3) the transaction is fair to the corporation at the time of the deal.
Remedies for self-dealing transaction
A self-dealing transaction not protected by the safe harbor rule can be enjoined or rescinded and the corporation can seek damages from the interest director.
Usurpation
Directors violate the duty of loyalty by usurping corporate opportunities by taking the opportunity for themself rather than offering it to the corporation first.
Corporate opportunity
A business opportunity must first be offered to the corporation if 1) the corporation is seeking such an opportunity, or 2) the opportunity is within the corporation’s current/prospective line of business. If the opportunity is a corporate opportunity, the director must present it to the corporation first and it must be denied by the corporation. Then the director may take the opportunity for themself w/o violating the duty of loyalty.
Which roles do officers generally include
Officers generally include a president, secretary, and treasurer who are elected by the BOD.
Officer authority is governed by
An officer’s authority to act on behalf of a corporation is governed by agency law. The corporation is the principal and the officer is the agent. Authority can be actual (express or implied) or apparent.
Express actual authority of officer
Express authority is defined by the by-laws or set by the BOD.
Implied actual authority of officer
An officer has implied authority to perform tasks actually necessary to carry out the duties of their position.
Apparent authority of officer
An officer has apparent authority if the corporation holds the officer out as having authority to bind the corporation to 3rd parties.
Dissolution
A corporation may voluntarily terminate its status.
Distribution order upon dissolution
Upon dissolution corporate assets must be distributed in the order of 1) corporate creditors, 2) shareholders of stock w/ preferences in liquidation, then 3) other remaining shareholders.
Dissolved corporation & winding up
A dissolved corporation may continue to exist for the limited purpose of winding up its affairs and liquidating its business.
Conflict of interest - lawyer’s duties to company/director/shareholders
Attorneys owe a duty to the corporation, so a lawyer who provides legal services/advice to an individual director or shareholders may conflict with the lawyer’s duty to the corporation. The attorney can only continue to represent the director or shareholder if 1) they reasonably believe they can competently represent both the corporation’s interests and the director/shareholder’s interests, and 2) attorney obtains informed written consent from both the corporation and the director/shareholder.
Principal
The principal is typically an employer, such as a corporation or partnership.
Corporate agent
The agent of a corporation is typically a director, officer, or other employee.
Partnership agent
The agent is a partnership is typically a partner or employee.
Independent contractors as agents
Independent contractors can be agents if they are subject to control by the principal.
Creation of agency relationship
An agency relationship is created through assent, benefit, and control. (ABC)
Assent under creation of agency relationship
Assent means the agent and principal manifests assent through words or conduct.
Benefit under creation of agency relationship
Benefit means the agent agrees to work on behalf of the principal and for the principal’s benefit.
Control under creation of agency relationship
Control means that the agent’s actions are subject to the principal’s control.
Equal dignities rule
Some states require a writing if the agency relationship relates to an interest in real property.
Termination of agency relationship
Either party in an agency relationship may unilaterally terminate the agency relationship.
K liability of a principal
The principal is contractually liable to a 3rd party (3P) for the acts of an agent with actual or apparent authority.
Implied authority by position
If the agent is placed in a position that customarily comes with certain duties, the agent will have the implied authority to carry out those duties.
How to determine the 3P’s reasonable belief of apparent authority
To determine whether a 3P’s belief was reasonable, courts will consider trade customs, industry standards, and the agent’s position if they were appointed to a specific position.
Ratification of K
Even if the agent didn’t have authority to act, a principal can ratify (approve) the act by 1) ratifying the entire K expressly or impliedly, 2) timely (before 3P withdraws), and 3) principal has knowledge of the material facts of agent’s act. In ratifying, the principal can be bound to a K with a 3P.
Estoppel of K liability
The principal may be barred from denying an agency relationship or the agent’s authority if 1) 3P detrimentally relied, and 2) the principal’s negligence caused the belief or the principal failed to correct the mistake.
Tort liability of a principal
A principal can be vicariously liable or directly liable to a 3P who is harmed by a tort committed by an agent.
Respondeat superior
A principal may be vicariously liable for a tort committed by an agent acting within the scope of their employment.
Principal liability as a result of an independent contractor’s conduct
A tort committed by an independent contractor cannot bind the principal unless 1) the task is inherently dangerous, 2) the principal was negligent in hiring, or 3) the principal retains control over specific tasks related to the injury.
Scope of employment
An agent is acting within the scope of employment if they are performing work assigned by the principal, including minor detours.
When are intentional torts within the scope of employment
Intentional torts may be within the scope if they are 1) during work hours, 2) agent was motivated to act for the principal’s benefit, and 3) act was within the agent’s assigned duties.
Is work-related travel within the scope of employment
Traveling between work/home is usually not within the scope of employment. However, travel for work purposes is within the scope.
Principal direct liability
A principal may be directly liable to a 3P harmed by an agent’s conduct if the principal 1) authorizes or ratifies the agent’s conduct, 2) is negligent in hiring/supervising the agent, or 3) delegates a non-delegable duty to the agent.
Duties of an agent
Duty of loyalty
Duty of reasonable care
Duty of obedience
Duty of notification & accounting
Duties of the principal
Duty to compensate
Duty to deal fairly and in good faith
Duty to cooperate
Duty to indemnify
Governing law of partnerships
RUPA
What is a partnership
A partnership is an association of 2 or more persons to carry on a for-profit business as co-owners.
Partnership formation
There are no required formalities (no writing), and the parties’ conduct and actions demonstrate intent.
Personal liability of partners
Partners are personally liable for the debts and obligations of the partnership.
Partner fiduciary duties
Duty of care
Duty of loyalty
Partnership duty of care
A partner is required to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.
Partnership duty of loyalty
A partner is required to refrain from 1) competing w/ the partnership business, 2) advancing an interest adverse to the partnership, 3) usurping a partnership opportunity, and 4) using partnership property/business to derive a profit w/o notifying the partnership.
Partnership management rights
Unless otherwise provided in the partnership agreement, each partner has an equal right to manage and control.
How many partners must be present to make a decision regarding ordinary matter of business
Majority of partners
How many partners must be present to make a decision regarding special business
All partners must consent
Indemnification of partners
Indemnification is required if a partner incurs liability while preserving partnership property or business.
Assignment of profits/losses in a partnership
The partnership agreement controls a partner’s right to share in the partnership’s profits and losses. If there is no agreement, by default each partner is entitled to an equal share of profits and losses.
How are partners liable for all partnership obligations?
A partner is jointly and severally liable for all partnership obligations.
Incoming partner’s liability for preexisting obligations
An incoming partner’s liability for preexisting partnership obligations is limited to their capital contribution.
Dissociated partner’s liability
A dissociated partner is liable for obligations incurred before dissociation, and after dissociation if the 3P was w/o notice of the dissociation.
Effect of judgment on partnership
A creditor of the partnership must exhaust the partnership’s assets before taking the partner’s personal assets.
Dissolution of an at-will partnership
A partnership is at will if it is an open-ended partnership that doesn’t have a fixed termination date or event. An at will partnership is dissolved when a partner chooses to dissociate from the partnership by giving notice.
Dissolution of partnership for specific term or undertaking
A partnership for a fixed term or undertaking may dissolve 1) by its terms, 2) with unanimous consent, or 3) after a partner is dissociated if at least half of the remaining partners consent.
Winding up of a dissolved partnership
A dissolved partnership only continues to exist to wind up the business e.g., liquidating assets, paying creditors, and distributing remainder to partners, in that order.
Limited liability partnership (LLP)
An LLP is created by filing with the state, and a limited partner in an LLP is not personally liable for an obligation of the LLP.
Limited Partnership (LP)
An LP is created by filing with the state, and an LP reduces a limited partner’s liability to their capital contribution.
