Business Associations Flashcards
Authority of Agent to Bind Principle
A principal is liable for the contracts that an agent enters on behalf of the principal when the principal has authorized the agent to enter
into the contract and the agent acted with legal authority. An agent acts with legal authority when there is (1) actual express authority (2)
actual implied authority (3) Apparent authority (4) Ratification.
Actual and Apparent Authority Partnership
Actual: Decisions in the ordinary course of business for a partnership can be made by a majority of partners. A decision made outside of the natural course of business needs the consent of all partners.
Apparent: Each partner can bind the partnership for an act in which it seems apparent he is carrying on in the ordinary course of the partnership business. A 2-part test is applied to determine if the partner has no authority to act and if the person dealing with the partner has knowledge of that lack of power.
Contract Liability of the Partnership
A partner is jointly and severally liable for all partnership obligations. A claimant must obtain a judgment against the partnership and exhaust its assets before it can attack a partner’s personal assets.
Dissolution of Partnership
Dissolution is the process that leads to the ending of the partnership and is followed by winding up the business.
Dissolution can occur when a partner’s express will to withdraw, the death or wrongful dissociation of a partner, the occurrence of a specified event in the partnership agreement, a change in law rendering the business unlawful, or a court order stating that the business can’t continue in conformity with the partnership agreement. The partnership must follow the RUPA or state statute to properly dissolve.
During the winding-up process payments to creditors are first, then capital contributions to partners, and then profits.
Business Judgement/Duty of Care
directors have a duty to act with the care that a person in a like position would reasonably
believe appropriate under similar circumstances. The director is presumed to have the knowledge and skills of an ordinarily prudent person and is required to use any additional knowledge or special skills that he possesses. Normally, the party alleging a violation of the duty of care must rebut the business judgment rule.
The business judgment rule is a rebuttable presumption that a director reasonably believed that his actions were in the best interests of the corporation. However, the business judgment rule does not generally apply to a conflict-of-interest
transaction.
Shareholder Derivative Claims
when a shareholder brings suit on behalf of the corporation and is typically based on a breach
of fiduciary duties by the board of directors. To bring a derivative action, the shareholder must have standing and must make
a written demand upon the board of directors.
To have standing, the shareholder must have been a shareholder at the time of the wrong and at the time the
action was filed and continue to be a shareholder throughout the litigation. Requirement to make a written
demand upon the board of directors unless the demand would be futile. Not all jurisdictions recognize the futility exception,
however. In states that do not recognize the futility exception, demand must be made upon the board in all cases.
o To bring a derivative action you must bring a demand upon the board to demand action and then give 90 days for
them to take that action. If the board does not take action or remedy the action in 90 days, then the suit can be brought
on behalf of the corp. This requirement can be waived if irreparable injury would result from waiting the 90 days, then it
can be immediate.
▪ Futility exception—doesn’t have to bring the demand on the board if it would be futile
▪ The board can bring a motion to dismiss the derivative action if acting in good faith and in the best interest of
the corporation.
o Any recovery is going to go to the corporation
General Partnership Formation
A general partnership is an association of two or more persons to carry on a for-profit business as co-owners. To form
a general partnership, at least two persons must intend to carry on a business for profit as co-owners but it is not necessary that
they specifically intend to form a general partnership. Individuals can inadvertently form a general partnership unless they
express their intention to do something else.
Partner Duty of Loyalty
partner owes the partnership and the other partners two fiduciary duties—the duty of loyalty and the
duty of care. Under the duty of loyalty, a partner is prohibited from using partnership property or business to derive a personal
benefit without notifying the partnership. Under the duty of care, a partner is prohibited from engaging in grossly negligent or
reckless conduct, intentional misconduct, or a knowing violation of the law
Conflict of Interest Transactions
A director who engages in a conflict-of-interest transaction with his own corporation has violated his duty of
loyalty unless the transaction is protected under the safe-harbor rule.
(i) a majority vote of informed and disinterested
directors; (ii) a majority vote of informed and disinterested shareholders; or (iii) fairness of the transaction.
o The fairness test looks at the substance and procedure of the transaction. Substantively, the test asks whether the
corporation received something of comparable value in exchange for what it gave to the director. Procedurally, it
looks at whether the process followed by the directors in reaching their decision was appropriate. The interested
directors have the burden of establishing both the substantive and procedural fairness of the transaction. A
conflict-of-interest transaction in violation of the safe-harbor provisions may be enjoined or rescinded, and the
corporation may seek damages from the directors.
Piercing the Corporate Veil
A court may disregard its separate e and hold persons liable on corporate obligations. A plaintiff must demonstrate that the corporation status was misused or abused.
