Business Associations Flashcards
Shareholder Inspection Rights
Shareholder has a right to inspect if:
(1) they are indeed a shareholder
(2) proper purpose
*amount of shares held is irrelevant
*propert purpose is broad, can include investigating fraud, reviewing financial statements, seeing if corp formalities were followed
Derivative Suit
lawsuit where a shareholder demands that the corporation sue the board of directors directly for some violation
Requires
(1) make a demand to BOD or show demand is futile
(2) adequately rep. all S/H
(3) S/H must hold shares throughout suit
Duty of Care (Corp)
director to act
(1) reasonably prudent director
(2) with the requisite skill, knowledge, and care of an ordinary director and employ their personal skills in their care
(3) properly informed in regard to the corporate decisions that they make.
Exception to Conflict of Interest for Duty of Loyalty (Corp)
conflicted transaction may be valid if the conflict is disclosed and either
1) a majority of disinterested directors approve OR
2) majority of disinterested directors approve or if the transaction is fair.
Equitable Subordination
General rule, shareholders who are unsecured creditors are NOT subordinate to outside unsecured creditors
However (1) court might subordinarte shareholder’s claims if any kind of wrongdoing is attributable to them - known as the DEEP ROCK doctrine
Promoter
a personwho undertakes to procure commitments for a corproation before it is formed.
Promoter Liability
Promoter who enters into a contract knowing that there has been no valid incorpation is personally liable to the contract - EVEN IF the person they enter into the contract with knows the corpriation has not been formed
Promoter Liability Exceptions
promoter is liable unless
(1) contract expressly states promoter not to be bound, in which case the agreement is considered to a revokable offer
(2) all parties have agreed to novation
Piercing the Corporate Veil
piercing happens if
(1) corp. formalities have been ignored and injustice happens
(2) corp used to perpetrate fraud
(3) alter - ego
(4) undercapitlization
Partnership
An association of two or more persons to carry on as co owner a business for profit
Partnership Formation Facts
an agreement to share profits raises a presumption parties intended to enter into a partnership
(1) no requirement that parties subjectively intend to form a partnership
(2) must determine if the parties intend to carry on as co-owners a business for profit
(3) no formalities are required to form a partnership
(4) may be formed without filling anything with the state
(5) courts generally look to the intent of th parties to see if partnership exists
Partnership Liability
(1) partners are jointly and severally liable - holding them liable to third party obligations
(2.1) partner cannot be held liable for partnership obligation unless partner was prsonally served in the lawsuit AND
(2.2) and judgement was not fully satisfied out of partnership assets
De facto corporation
(1) attempted to incorporate in good faith,
(2) is otherwise eligible to incorporate, and
(3) subsequently acted like a corporation in good faith.
Direct Suit
Alleges that the defendants breached a duty owed directly to the shareholder
Directors Fiduciary Duties
Duty runs to corporation, not the shareholders
Duty of Competance
Duty of Loyalty
Duty of Care
Derivative Suits - Proceedings
(1) may not be brought until 90 days after the deamd is made unless S/H is notified earlier that copr will not take action or irreperable injury will occur
(2) may be brough after majority of disinterested directors (but at least 2) find that demand is not in corps best interest
(3) demand in some states will be excused if futire
Duty of Loyalty (BA)
Requires director to act in good faith with reasonable belief they are acting in corp’s best interest
Minority Shareholder Remedies
(1) can try and force dividend distribution (very hard to do)
(2) if directors are oppressing minority, minority shareholder may seek dissolution
(3) can seek court order to have company purchase his share at fair value
Apparent
Arises from a princiapl manifestations which cause a 3rd party to believe the agent has authority.
As a general rule, in partnerhips, all general partners have apparent authority
Express Authority
Oral or written words with direct definite language
Typically within the four corners
providing agent with authority
De Jure Corporation
(1) File Articles of Incorporation
(2) Initial Agent’s name
(3) Street address - office
(4) Corp Name
(5) Authorized number of sahres
(6) Name and adress of incorporators
Liability of Directors and Officers (Corp)
Generally no personal liability
Corp Directors and Officers (Meetings)
(1) one annual meeting, all other meetings are special meetings
(2) Quorum required
(3) Presence by any means
(4) Withdraw can break quorum
(5) Diessent / abstention
Ultra Vires
Act outside business purpose
Very limited modernly, so hard to argue for corp to get out of contract due to it being out of scope
Corporation by Estoppel
persons who have dealt with the entity as if it were a corporation will be estopped from denying the corporation’s existence
Corp by estoppel insulates against personal liability in contract, but not in tort
Corp Director Duties (Meetings)
(1) Quorum required - majority of all directors
(2) Presence by any means
(3) Withdrawal is allowed, but may break quorum
(4) Dissent / abstention - recorded in meeting minutes
(5) No proxy voting
*Notice required for Sepcial Meeting
Business Judgement Rule
Requires showing of
(1) Good Faith
(2) Corp’s best interests
Actual Authority Given to a Director
Actual authority generally can arise only if:
(1) proper notice was given for a directors’ meeting, a quorum was present, and a majority of the directors approved the action, or
(2) there was unanimous written consent of the directors.
Rights of Directors / Officers
Right to
(1) Compensation
(2) Indemnification (mandatory vs. permissive)
(3) Inspection
Rights of Shareholders
(1) Meetings
(2) Voting (i) Right to vote by stock type, (ii) voting by proxy allowed (iii) quorum required
(3) Inspection
(4) Dividends
Voting Trust
Occurs when shareholders agree in writing to transfer their shares to a trustee who votes and distributes dividend in accordance with teh voting trust
Often seen in closely held corprations
Valid for 10 years
Shareholder Agreemenst
(1) Voting Trust
(2) Voting Agreement
(3) Management Agreement - requires the S/H to have powers set forth in bylaws
(4) Restrictions on Stock Transfers - generally upheld if reasonable e.g. right of first refusal
Shareholder Duties
General Rule: No fiduciary duty
Modern Tern: Controlling shareholders owe a duty of care and loyalty
Shareholder Liability
Generally, S/H cannot be held liable EXCEPT in Professional corps
Federal Securities Laws to be Aware of
16(b) - no short swing profits
15(b)-5 - no insider trading
Sarbanes Oxley
Fed Security Rule 16(b)
No short swing profits
- ANY short swing profit that occurs within a 6 month period, proftis must be given back to corp
Requirements of Corp
(1) $10 million or more in assets AND have over 2000 shareholders
(2) or listed on national exhange
Requirements of Actor
(1) Any officer or director
(2) Over 10% shareholder
Insider Trading Fraud Elements
(1) Intent (can be reckless) to defraud / decieve manipulate
(2) Material misrepensation / ommission
(3) Reliance
(4) Purchase or sale of security
(5) Interstate commerce
(6) Damages / remedy
4 Ways 10(b) 5 is violated
(1) Insider direct trading
(2) Tipper - giving information
(3) Tipee - receiving information
(4) Missapriorator - obtaing info through other means
Note; Can be held to be more than 1 kind of violator
Sarbanes Oxley
(1) Enhaned Corprat Reporting Requirement
(2) Enhanced Criminal Penalties
Corporate Fundamental Change
Typical Procedure
(1) board adopts resolution
(2) written notice to S/H
(3) Shareholders approvae
(4) Update articles / file with state
Corporate Fundamental Change - Types of Changes
(1) M&A
(2) Share exchange
(3) Major Asset Sale - sells all or substantially all of assets (75%)
(4) Conversion - e.g. change from corp to LLC
(5) Amend of bylaws or articles after shares have been issues requires approval
(6) Dissolution
Dissenter Appraisal Rights
S/H who dissent may have right to require corp to purchase their shares
Requires notice and intent to demand shares to be repurchase before vote is taken, and cannot hold public shares
Principal vs. Agent Capacity
requirements:
Principal must have contractual capacity
An agent need not. Just needs to be minimally competent
Thus, a minor can be an agent but not a principal.
Formation of Principal - Agent Relationship
(1) Agreement
(2) P’s Benefit
(3) P has right to control
Principal Duties
All duties owed to agent in contract
Agent Duties
(1) Duty of Care
(2) Duty of Loyalty (no self dealing, no usurp principal, no secret profits, no commingling funds)
(3) Duty of Obedience
(4) Duty to Communicate
(5) Express K duties
Agent personally liable for 3d K’s if….
(1) agent acts with no authirty
(2) P’s identity (or existance and identity) unrevealed
(3) All parties intend so
Ratification by P
Agent takes action with proper authority, P afterwards approves
P Liability for Agent torts
(1) Normal Tort - liable if tort within scope of relationships
Mere detour by agent - P still liable
Frolic - substantial deviation from the plan, P still liable
Intentional Tort - P is not liable except if: Specifically Authortize, natural result of tort from employment, or tort was motivated by desire to serve principal
P’s Liability for torts of Independent Contractors
Generally not liable UNLESS
(1) Ultrahazardous activity
(2) Non-delegable duties
(3) Negligent selection of independent contractor
(4) Estoppel
Implied Authority
Authority from when agent reasonably believes they have agency as a result of the principal’s word or actions
Does death terminate agency?
death terminates an agency unless the agency is irrevocable
Doctrine of Respondeat Superior
Under the doctrine, an employer is liable for the torts of an employee committed within the scope of the employment.
Determining Partnership Assets
Titled Property (i) Titled under partners name, (ii) use of partnerhsip funds
Untitled Property - rebuttable presumption that it is partnership prop (Property funds used, close relationship between partnership and use of property, listed as asset in book)
Partnerships Rights
(1) Ownership of Property
(2) Equal Control, can’t transfer
(3) No right to salary (except compensation in winding up (e.g. terminating) organization is allowed)
(4) Equal right to profit and losses
(5) Parternship property rights, can only use partnership prop for benefit of the partnership
Partnership Duties
Duty of Care (BJR)
Duty of Loyalty
Duty to Disclose
Duty to Account
Duty of Obedience
Duty of Good Faith / Fair Dealing
Partnership Liability to 3rd parties in regards to Debt
Partners personally liable for debts of the partnership in GP, in LP they are not.
Partnership Agency Overview
Partner is an agent of partnerhsip
Partners have apparent authority to bind the partnership to any contract within the scope of the partnership business.
If a contract is outside the scope of partnership business, the partnership generally will not be bound unless the partner has actual authority.
Actual Authority - where partner reasonably believes she ahs authority to act
Apparent Authority - may be held liable if app. authority existed EXCEPT if 3rd party knew or recieved notice that P lacked authority
Liabilty of Partners
Incoming vs Outgoing
Incoming: Not liable for anything incurred prior to joining, but money paid to join P can be used to pay prior liabilities
Outgoing: generally remains liable forP obligations incurred while they a partner, Outgoing P may also bind Paternship and still be held liable if acts taken within 2 years after leaving
Dissociation
Partner Leaves -
(1) Can terminate P if more than 2 partners
(2) can be voluntary or involuntary (e.g the force out a partner)
Dissolution of P
Partnerhip Ceases
Winding Up
Period between dissolution and termination of the P, compensation to P’s allowed
Priority of Distribution
1. Creditors
2. Partners who have loaned money
3. Cap contributions of partners
4. Surplus / profits
Limited Partnership Requirements
Requirements
(1) At least one general partner and one limited partner
(2) File certificate
(3) put “limited partnership” in name of filing
(4) Names / addresses of individuals for service of process
Limited Parternship Overview
General Partners, same as in GP, liable for debts
Limited Partners, no right to act on behalf of partnership and owed no duties, not liable beyond capital contribution
Limited Liability Partnership Requirements
Requirements
(1) Partners not personally liable
(2) must file statement of qualification
(3) provide name and address of partnership
(4) Have “LLP” in the name
LLC RIghts
Profits & Losses: based on contributions, unless agreement provides otherwise
Members typically control LLC
Transferability: Management interests are not freely transferable and members can only transfer their rights to receive profits/losses
LLC Defition
Limited Liability Company that has (1) limited liability of corp combined with (2) tax advantages of partnership
Owners are called MEMBERS
LCC Formation
(1) File articles of organization with state
(2) Identify the name of LLC
(3) provide adress of registered office and agent
(4) May also adopt operating agreement, but without it, members will have an equal right to manage and control
LLP Liability
If partnership assets are insufficient to indemnify a partner for an obligation they incurred on
behalf of the LLP, they forfeit the right to receive contributions from
other partners in exchange for being relieved of the obligation to
contribute to their personal liability.
