Business Associations

Question 1

General Applicable Law:

Answer 1

Generally, an agency relationship is created when one person (the principal) manifests an intent that another person (the agent) act on his behalf and both parties consent to the agreement. A principal is contractually bound to the acts of the agent if the agent acted with actual or apparent authority.

Question 2

Authority of Agent to Bind Principal

Answer 2

• Actual authority is authority that the agent reasonably think he possesses based on the principal’s dealings with him. Actual authority can be express or implied form the actions of the principal.
• Apparent authority arises when the principal “holds out” the agent has having certain authority, causing third parties to reasonably believe the agent has such authority.
• Even if the agent did not have authority to enter into a transaction, the principal can ratify the acts (and thus become liable) by expressly or impliedly affirming or accepting the benefit of the acts, so long as the principal knew the material facts and had capacity.

Question 3

• General Partnership Formation:

Answer 3

A partnership is formed when two or more persons to carry on as co-owners a business for profit.
- There is no requirement that parties have a written agreement; intent of the parties to carry on as co-owners can be implied from their conduct. A person who receives a share of the profits from a business is presumed to be a partner.

Question 4

Authority of Partner to bind Partnership:

Answer 4

• Each partner is an agent of the partnership for the purposes of its business. A partnership can be bound on a contract entered into by a partner with actual or apparent authority.
  
  • Actual authority is authority that the partner reasonably think he possesses based on his communications with the partnership. Actual authority can be express or implied through custom, necessity, or prior acquiescence. Actual authority to enter into transactions regarding matters **within the ordinary course of business requires a majority vote of the partners, **and actual authority to enter matters **outside the ordinary course of business requires unanimous consent of all partners.
  • Apparent authority: the act of any partner apparently carrying on in the ordinary course of the partnership business or business of the kind carried out by the partnership will bind the partnership unless the partner had no authority to act for the partnership and the third party with whom the partner dealt knew that the partner lacked authority.

Question 5

Contract Liability:

Answer 5

Partners are liable on contracts made by a partner in the scope of the partnership business and on any other contracts expressly authorized by the partners.

Question 6

Partners’ Liability

Answer 6

All partners are jointly and severally liable for all obligations of the partnership, which means that each partner is personally liable for the entire amount of such obligations. However, to recover from the partners individually, a plaintiff must secure a judgment against the partnership and the partners individually. Also, a judgement creditor must first seek satisfaction of any judgement from the partnership, and then fore the partners personally to the extent not covered by partnerships assets.

Question 7

Dissolution of the Partnership (3 steps)

Answer 7

• Step one—dissociation: Dissociation is a change in the relationship of the partners cause by any partner ceasing to be associated with the carrying on of the business. A partner is dissociated from the partnership upon notice of his express will to withdraw as a partner. A partnership is dissolved and its business must be wound up when a partner in a partnership at will notifies the partnership of his intent to withdraw. ****
  
  • A partnership will be bound by a partner’s post dissolution act where the party with whom the partner dealt did not have notice of the dissolution and the act would have bound the partnership before dissolution (partner had authority to act).
• Step two—winding up: partnership assets are liquidated and creditors are paid. Note that partners are still liable for any liabilities that occur during the winding up phase.
• Step three—termination: this is when the partnership actually ends.

Question 8

Business Judgement/Duty of Care

Answer 8

Business judgement rule is a presumption that a director’s decision may not be challenged if in making a business decision, the directors acted in good faith, with the care that a person would exercise in a like position, and in the honest belief that the action taken was in the best interest of the company.

Question 9

Duty of loyalty:

Answer 9

A director must act in good faith and with a reasonable belief that what he does is in the corporation’s best interest. The business-judgment rule presumption does not apply if there is a duty of loyalty issue.

Question 10

A duty of loyalty issue arises in three ways (mnemonic=BCC) and directors will not be protected if:

Answer 10

• Director is on both sides of a transaction: a director has a material financial interest in a contract, as well as knowledge of that interest, yet still votes to approve the contract.
• Director Competes with corporation: a director may not compete with his corporation.
• Director takes a Corporate opportunity: a corporate officer may not usurp a corporate opportunity.

Question 11

Defenses to liability for breach of the duty of loyalty: However, director’s conflicting interest transaction will not be set aside if

Answer 11

• (1) approval by disinterested (without a conflicting material interest.) directors (if all relevant information is disclosed),
• (2) approval by disinterested (without a conflicting material interest.) shareholders, or
• (3) if the transaction is judged to be fair to the corporation at the time it was entered into.