Business Associations Flashcards
Agency formation by act of parties
An agency relationship results from assent by one entity (principal, P) to another (agent,
A) that the agent shall represent and act on the principal’s behalf in dealing with third parties and subject to the principal’s control, and assent by the agent so to act. The principal is responsible for the acts of his agent
i. P must have contractual capacity (e.g., an appointment of an agent by a minor is voidable), but no consideration is required
Formation by estoppel
An agency may be created through estoppel, which requires third-party reliance on P’s communication
Duties owed by agent and remedy for breach
fiduciary duty of loyalty,
duty of obedience to reasonable directions,
duty of care under the circumstances (e.g., disclose all relevant information), express contractual duties
Remedies to P: K remedies if A compensated, tort remedies, action for secret profits, withholding of comp
Duties owed by principal
duty to reasonably compensate or reimburse expenses, duty to cooperate (not unreasonably interfere with A’s performance), express contractual duties
Remedies to A: K remedies, lien on for any money due from P
Agency Partnership Principal Bound by Contract Standard
To determine if P is bound by the contract, A must have had authority to enter into the contract and bind P
Actual Express Authority
Authority through express manifestations to A contained within four corners of agreement
Actual Implied Authority
Authority that A reasonably believes that A has as a result of P’s actions, e.g., incidental to express authority, customary, prior acquiescence by P, emergency measures, buy or sell goods, manage investments
Termination by Actual Authority
Termination occurs by –
breach of duty by A
lapse of a specified or reasonable time, occurrence of a specified event, change in circumstances,
unilateral termination by either A or P (subject to breach of K),
operation of law (death or incapacity unless irrevocable, or by filing a statement of authority with secretary of state to terminate P’s authority)
Apparent Authority
rises from manifestations of A’s authority due to P holding out as such via P’s words, actions, or failure to act, thereby inducing 3P to reasonably but mistakenly rely on that authority
i.
Impostors: If P negligently lets impostor appear to have agency, P is liable for impostor’s actions
ii.
Lingering apparent authority: If A’s actual authority has terminated (unless by death or incapacity), he has apparent authority to act on P’s behalf as to 3P with whom P knows he dealt with, unless 3P received notice of the termination
Ratification
If an “agent” acts for P w/o any authority but P subsequently validates the act (expr/impl), P is bound
P must 1) know or have reason to know all material facts, 2) accept the transaction, and 3) have capacity
Contract Liability for Principals
3P v. P: Any type of P is liable to 3P on the K entered into by A as long as A had valid authority to act
3P v. A: When considering A’s liability, depends on P’s identity and existence known to 3P
Disclosed P: A is generally not liable (and P is liable on the K), unless K intended A to be liable
Unidentified (partially disclosed) P: A and/or P may be liable at 3P’s election. A may avoid liability by disclosing P’s identity
Undisclosed P: A and/or P may be liable at 3P’s election
3P liability: Disclosed P may enforce K but not A. Unidentified/undisclosed P and A may enforce K (P still benefits)
Tort Liability for Principals
P is liable only for torts committed by A who is an employee, not independent contractor. If A not liable, P not liable
P may be still be liable for negligent hiring, supervision, or entrustment of employee
P may be still be liable for an independent contractor (IC) if the activity involved was inherently dangerous, duty was nondelegable, or P was negligent in hiring IC
Employee/ IC Factors
P’s control over manner and method of A’s performance, characterization by parties, customs of locality regarding supervision of work, degree of skill required on the job, whose tools or facilities are used, length of employment (short more likely to be IC, indefinite more likely to be employee), basis of compensation (project basis vs. time basis), understanding of parties, whether hired to further P’s business (nonbusiness purpose, e.g., mowing lawn, more likely IC)
Relationship by estoppel
If P creates the appearance of employer-employee relationship that 3P relies on, P is estopped from denying the relationship and will be liable under respondeat superior
Scope of employment
If employer-employee relationship exists, employer will be liable for employee’s torts if they were committed within the scope of employee’s employment
Factors: same general nature as job, proximity to time and place of authorized employment, motivation to serve employer
Intentional torts are not within the scope of employment, unless it’s a natural part of duties or a misrepresentation
Partnerships by RUPA
A general partnership (GP) is an association of 2+ entities to carry on a business for profit as co-owners
To determine whether GP exists, key test is parties’ intent. No formal agreement is required to form GP
Intent may be implied through conduct, e.g., profit sharing (raises a presumption rebuttable by evidence showing GP was not intended), joint title to property, parties’ designation as partnership
General partners have unlimited personal liability no matter what limited liability they declare
Bringing in new partners requires unanimous approval
Partnership Property
Property acquired by GP is owned by GP and not the individual partners—not freely transferrable
A partner has no right to use partnership property other than for the benefit of the partnership
Titled property is partnership property if titled in name of partnership or partner (and noted in title)
If purchased with partnership funds, rebuttably presumed to be partnership property
Otherwise, rebuttably presumed to be separate, even if used for partnership purposes
Untitled property: Look to common law criteria tending to indicate partnership property
Partnership Rights
Management
Distribution
Interest
Indemnification
Inspection
Lawsuit
Settlement of account upon dissolution
General Partnership Management Rights
All partners have an equal right to participate in the management and control of the partnership, unless there is an agreement providing otherwise
Decisions involving “ordinary course of business” are controlled by a majority of partners
Ge
Matters outside “ordinary course of business” require (unanimous) consent of all partners
GP Distribution Rights
Each GP is entitled to share equally in profits and must contribute toward losses in proportion to profit share. May agree to share profits other than equally and share the losses in the same ratio
Interest
Economic right to interest in GP is personal and transferable w/o dissolving GP (transferee is only entitled to receive distributions; transferor retains other rights and duties)
Indemnification
for payments and obligations reasonably incurred in carrying on the partnership business
Contribution from other partner for paying more than his share of partnership liability
No right to remuneration for services to GP except reasonable comp for winding up business
Inspection
A partner may inspect and copy the partnership books
Lawsuit
A partner may sue another partner (e.g., for breach of agreement or duty, or to enforce a right)
General Partner Duties
Duty of care not to engage in negligent, reckless, or unlawful conduct or intentional misconduct
Duty of loyalty
Duty of good faith and fair dealing
Duty to keep books complete and accurate and present to interested partners
GP Duty of Loyalty
to act in best interests of the partnership, including duties to 1) account for all profits and benefits derived from GP, 2) not deal with GP as one with adverse interest, and 3) not compete with GP
Must present business opportunities to GP if it is connected to the business
GP Authority
a.
Each partner is an agent of the partnership for the purpose of its business. Apply agency concepts (authority, etc.)
b.
Apparent authority: A GP who acts in the ordinary course of the partnership’s business, binds the general partnership, unless at the time of K, 1) the general partner did not have authority to act in that particular matter, and 2) the person with whom his is dealing actually knew or had notification that he lacked authority
c.
GP bound by a partner’s act if the partner has actual authority, which can come from express agreement (majority/all depending on whether ordinary biz) or partner’s reas. belief he has authority based on communication w/ other GPs
GP Liability
a. Partners are liable for all K entered into by a partner in the scope of partnership or w/ authority of partnership
b. Partners are liable for all torts by any partner or employee w/in the ordinary business or w/ authority of partnership
c. Civil liability is joint and several (1+ partner may be sued)
i. Suit against partner: Each partner is personally and individually liable for entire amount of partnership obligations. If paid more than fair share, can seek contribution/indemnification (if whole obligation paid)
ii. New partner not personally liable for obligations arising before he became a partner
iii. Outgoing partner liable for obligations arising while he was a partner, unless payment, release, or novation
d. Criminal liability: Partners are criminally liable only for their own crime or participation
Dissociation and Dissolution
a.
A GP has the power to dissociate or dissolve at any time by express will, agreed event, event that makes continuation unlawful, expulsion (unanimous vote), bankruptcy, death or incapacity, or judicial order
i. Only duties of loyalty and care regarding matters arising before the dissociation (confidentiality) continues
b. Dissolution requires the partnership business to be wound up (sell and settle GP affairs) before termination (final)
i. Partners may waive dissolution by unanimous vote of partners who have not wrongfully dissolved
c. Distribution of assets: creditors > partner creditors > non-creditor partners’ accounts (buy ins) > settlement
i. Settlement: Partners must make distribution/contribution of +/– balance in proportion to profit/loss sharing
Other Partnerships
Limited partnership (LP): Includes 1+ GP and 1+ LP. GPs are personally liable for partnership obligations. LPs have no personal liability beyond contributions.
Limited liability partnership (LLP): Partners not personally liable for LLP’s obligations, personally liable for own wrongful acts but not co-partner acts. LP and LLP require filing to form.
De jure Corporation
Incorporators must file articles of incorporation (# authorized shares, agent info, incorporator info, indicate incorporation) with secretary of state. Lawful corporate purpose and perpetual duration are presumed
i.
Substantial compliance w/ statute also qualifies, e.g., articles were filed but improperly
Ultra Vires Act
[CL] If articles include a narrow business purpose, activities beyond scope of stated business purpose may be void and unenforceable.
[RMBCA] UVAs generally enforceable, may be raised in suit by s/h (enjoin proposed UVA), corp (damages for approving), state (dissolve for committing)
De Facto Corporation
Good faith, colorable attempt made to comply with incorporation statute + conduct of business as if validly incorporated (unaware of invalid incorporation) (defense except v. state seeking dissolution)
Limited Liability Corporation
Owners (members) have limited liability, not pers. liable for LLC’s obligations
Professional corporation: Licensed professionals may incorporate as a PC. Pers. liable for own malpractice only
Corporation by Estoppel
Parties who acted as if there were a corporation are estopped from denying the corp’s existence and cannot avoid liability in K (N/A to tort victims). Piercing of corporate veil is not available to reach s/h
California only Corporation Rules
A corp can elect to become a statutory close corporation if it has 35 or fewer s/h, and files articles saying it’s a “close corporation.” May be managed by its s/h and forgo regular corporate formalities
A corporation may merge with another form of business entity, such as LP
Promoter Liability/ Pre Incorporation Contracts
A promoter acts on behalf of a corporation not yet formed. Promoters are jointly and severally liable for obligations under pre-incorporation K, even after corporation is formed
Promoters remain liable as fiduciaries of corporation, until novation (agreement to substitute new party)
Adoption of K: Corporation may become bound by promoter’s pre-incorporation K by express or implied adoption of promoter’s K (by knowing and accepting benefits)
Piercing the Corporate Veil
Creditors may disregard corp protection and hold individuals (e.g., s/h active in operation of business) jointly and severally liable for corp obligations based on unity of interest + injustice or fraud
Unity of interest: Corp is “alter ego” of person; separate personalities of corp and individual no longer exist. Shown where s/h treats corp assets as own (commingling), failure to observe corp formalities, or inadequate capital at time of formation to reas. cover foreseeable liabilities (undercapitalization)
Injustice or fraud: Necessary to prevent fraud, avoidance of existing personal obligations
Corporate stock for consideration
(both corp/agent or receiver of stock may be liable if consideration is inadequate)
Any valid consideration may be received for par value stock if BOD believes in GF it’s worth at least that
Treasury stock (no par stock – any valid consideration) is previously issued, reacquired by corp, and resold
Preemptive right (if AOI grants): Right of s/h to same % ownership by buying stock upon new issuance
DIRECTORS (“D”) & OFFICERS (“O”) Election & removal:
1+ member on board, s/h elect D, s/h may remove D w/ or w/o cause, s/h or D may fill vacancy
Requirements for Effective Action by Board
.
Meeting is required unless all D consent in writing to act without a meeting
Quorum (majority of all D) must be present for the board to be legally competent to transact business (3/5)
Majority vote (> 50%) of quorum in attendance is required to constitute a valid action by the board
Duty of Care
Under the “business judgment rule” D&O must perform their duties in good faith, with such care as an ordinarily prudent person in a like position would use under similar circumstances, in a manner reasonably believed to be in the best interests of the corporation. It concerns directors’ decision-making process, not the substance of their decisions. A business judgment is presumed to be an informed judgment.
Rebutted if…
Unadvised (uninformed, without substantial research) in gross negligence
In gross negligence, in bad faith, conflict of interest (strictly scrutinized), illegal or based on fraud
Duty of Loyalty
D&O have a duty to be loyal to the corporation, including to act in its best interest (no COI)
Self Dealing
Conflict arises where D gets unfair benefit from transaction with own corporation
1.Conflicting if: D knows that he or related person is party to the tx; has beneficial financial interest in (or is close to the tx that the interest would reasonably be expected to influence D’s judgment during vote); or is a D, partner, agent, or employee of another entity the corp is transacting with
a. UNLESS one of these happens: (i) Disclosure of material facts to BOD + majority of disinterested Ds (2+) approves transaction + [CA] reasonable to corp. (ii) Disclosure of material facts to s/h + majority of disinterested s/h approves transaction. (iii) Transaction was fair and reasonable to corp based on circumstances
- Remedies: Enjoin transaction, rescission (set aside transaction), damages
Usurping Corporate Opportunities
D must not benefit from any business opportunity that could benefit the corporation. If corp would be interested, D must first present opp to corp, disclosing all material facts. Usurpation if 1) opp is within corp’s line of business (i.e., has fundamental knowledge, practical experience), 2) corp has interest or expectancy in opp, 3) corp is financially able to take opp (not a defense alone)
- Remedies: recover profits, constructive trust (corp gets the usurped opportunity instead)
Director Competition
D must not engage in a competing business with own corporation. Remedy: damages
Director Ratification
D may defend a claim by obtaining ratification by 1) majority vote of independent D, 2) majority vote of committee of 2+ independent D, or 3) majority vote of shares held by independent s/h
Direct Suits
Action brought for breach of fiduciary duty owed to s/h by D&O for damages to s/h
Derivative Suits
Brought by s/h on behalf of corp to enforce a corporate right that D&O fail to assert
i. Must be brought by a contemporaneous stock owner (1+ share when claim arose and throughout litigation)
ii. Demand requirement: S/h must first make written demand on corp to redress grievances, and 90 days must have passed, unless 1) corp rejects demand or 2) irreparable injury to corp would result by waiting 90 days
Futility EXCEPTION: Demand is excused because of futility if 1) a majority of BOD is interested in the challenged tx, 2) BOD did not fully inform themselves about the tx to the extent reasonably appropriate under the circumstances, or 3) tx was not a product of a valid business judgment
Right to vote
in person or by proxy executing in writing
i. Proxies are valid for 11 months by default. Irrevocable only if proxy states so + coupled with interest
ii. Effective s/h action (default) → quorum of outstanding shares must be present; majority must approve
Right to inspect
Accounting records, s/h lists, etc. with proper purpose. Bylaws and minutes regardless of purpose
Shareholder Agreements
i. Voting agreement: Written agreement to vote shares as required in agreement is binding and enforceable
ii. Voting trusts: Formal written agreement delegating voting power to a trustee expires in 10 years, renewable
iii. Agreement to eliminate corporate formalities (closely held corp) – no PCV even if formalities not observed
Controlling Shareholder
must refrain from obtaining a special advantage or causing corp to prejudice minority s/h
i. Controlling s/h is treated as an “insider” under Securities Exchange Act
Fundamental Changes General Procedure
BOD adopts resolution, written notice to s/h, majority s/h approves, file changes in AOI w/ state
Amendment of AOI
Any provision lawful in original. Minor amendments (delete initial D) do not need s/h approval
Merger
D and majority s/h of both corps must approve. Parent corp owning 90% of subsidiary corp do not need approval of D or s/h of sub (short-form merger of subsidiary)
Disposition
Sale/lease/exchange of all or substantially all corporate assets must follow fundamental chg procedure
Dissoiution
A dissolved corp may not do any business except to wind up or liquidate assets
Voluntary dissolution: If shares not issued or business not yet commenced, majority of initial Ds may dissolve corp. If shares issued, any remaining assets after winding up must be distributed to s/h
Involuntary dissolution may be initiated by attorney general (e.g., if corp abused powers), business abandoned for 1 year, or business can no longer be conducted with advantage to its s/h (internal dissention)
Federal Securities Laws (three main aspects
Security: investment where there is an expectation of profits primarily from the efforts of others
Jurisdiction: Did it involve interstate commerce (ISC, crosses state lines)? Otherwise, state law governs
Insider is anyone who learns of material nonpublic information as a consequence of his corporate position or has a fiduciary relationship to the corp, e.g., directors, officers, controlling s/h, senior employees, attorneys, accountants
An insider has an obligation not to make a secret dealing by trading stock before public disclosure
Rule 10b
prohibits anyone from using interstate commerce to defraud or make an untrue statement of (or omit a) material fact in connection with purchase or sale of any security
Rule 10B elements
A private Π must show, in addition to interstate commerce (phone, mail, etc.), to create liability
- Fraudulent conduct: Misstatement, misrepresentation, or omission that breaches fiduciary duty
a. Materiality: Reas. investor would consider it important in making an investment decision
b. Scienter: Intent to deceive, manipulate, or defraud. At least recklessness as to truth
2.Causation: Π actually bought or sold the security from any source (no privity required)
a .Excludes potential buyers who do not buy and those who own shares and do not sell
3.Reliance: Π relied on Δ’s statement. Often assumed for material omissions 4. Damages
ii. Common law fraud (w/ punitive) may apply to overt misrepresentation made regarding market information
Insider Trading Under 10B
An insider breaches 10b-5 by trading on insider information and breaching a duty of trust and confidence owed to issuer, s/h of issuer, or (for misappropriation) source of material nonpublic information (MNI)
i. Tipper liability: If an insider intentionally discloses MNI in a breach of his fiduciary duty and receives a personal benefit (broad: gift, money, reputational gain, etc.), he may be liable under 10b-5
ii. Tippee may be liable only if tipper breached duty + tippee traded on MNI knowing tipper was breaching
1.Misappropriation: The gov’t can prosecute under 10b-5 for trading on market information in breach of a duty of trust and confidence owed to the source (not necessarily corp directly)
Section 16B
requires surrender of short-term profits by any director, officer, or s/h of a public corp owning 10%+ of a class of security, if he sells a security w/in 6 months of a purchase (or vice versa) while a 10%+ owner both at the time of purchase and sale. As it imposes strict liability, there are no defenses (e.g., good faith)
Sarbanes Oxley Act
SOX regulates behavior of D&O. It requires that CEO and CFOs certify that based on their knowledge, the reports filed with the SEC do not contain any material misrepresentations or omissions, and they fairly represent the financial position of the company. Only public accounting firms may issue audit reports
i. Must have indep audit committee from BOD, may recover profits during false statements or stock blackout
