Business Associations Flashcards
Business Associations: Agency
Principal authorizes agent to act on a principal’s behalf
MY NOTE: (1) principal/agent formation, (2) authority, (3) fiduciary breach/K formation/tort
Agency relationship formation
(a) mutual assent, (b) by statute
- Mutual assent: (1) Agent/principal agree agent will act (2) for principal’s benefit, (3) subject to principal’s control (4) principal has capacity
– NOTE:
— no formalities required, can be oral agreement
— Principal must have legal capacity to enter K
— But anyone can be an agent
Acts of agent that bind principal
(a) actual authority, (b) apparent authority, (c) ratified acts
- Actual: (1) agent believes, based on PRINCIPALS’ representations, principal wishes agent to act on it’s behalf
- Apparent: third party believes, based on PRINCIPALS’ representations, agent has actual authority
- Ratified acts: principal manifests assent to be bound by the act
Actual authority termination: (a) principal’s death/incapacity, (b) revocation of principal/agent relationship, (c) circumstances where agent should conclude principal no longer assents, (d) statutory circumstances
Apparent authority termination: no longer reasonable for 3rd party to believe agent has actual authority
Fiduciary duties that attach when principal/agent relationship is formed
(step 1) Who owes duty and duty owed to who:
- GENERAL RULE: (a) Agents owe principals duties (duty to business itself, and its owners), AND (b) people associated with business association owe duties if they participate in managing the business
- Limited partners don’t owe duty at all, because they don’t participate in managing the business
- Shareholders don’t owe duty at all, because they don’t participate in managing the business
- members of member-managed LLC owe duty to company and other members
- members of manager-managed LLC DON’T owe duty, because they don’t participate in managing the business
- manager of manager-managed LLC owes duty to company and members
(step 2) What is the duty that is owed?
DUTY TO PRINCIPAL
(a) good faith: no knowingly illegal conduct
– (ie, establish reporting mechanisms to comply with statutory reporting requirements)
(b) loyalty: place interests of principal above agent’s, group of owners, or third party’s
– (ie, can’t improperly personally benefit from principal’s activites)
– (ie, can’t compete with principal’s business)
– (ie, can’t enter transaction where agent has meaningful incentive to act contrary to principal’s interests)
– BUT: “corporate opportunity doctrine” (agent can benefit if it first gives principal opportunity to benefit)
(c) care: reasonable person under circumstances
– (ie, be reasonably informed, but don’t need to become expert)
– “business judgment rule”: rebuttable presumption that director acted with care
(d) obedience: act solely within scope of agent’s actual authority, comply with instructions, abide by K terms
DUTY TO AGENT:
(a): good faith: deal with agent fairly, avoid doing anything that might reasonably/foreseeably harm agent, provide agent with known/should know risk information about their work if know/should know agent doesn’t know
(b) indemnity: pay for agent’s losses in course of their work
(c): obey K terms
Liability for Principal/agent acts under CONTRACT law
(a) disclosed (b) partially disclosed, (c) undisclosed
Disclosed = (1) 3rd party (2) knows or has reason to know of (3) agency relationship, and (4) KNOWS principal’s identity
- Liability for Principal for K’s agent enters with (a) actual, or (b) apparent authority
- Agent themself is not liable unless agent agrees to be liable
Partially disclosed = (1) 3rd party, (2) knows or has reason to know of (3) agency relationship, and (4) DOESN’T know principal’s identity
- Liability for Principal for K’s agent enters with (a) actual, or (b) apparent authority
- Agent themself IS liable unless agent and 3rd party agree agent isn’t liable
Undisclosed = (1) 3rd party, (2) has no notice that agent is acting on behalf of principal
- Liability for Principal for K’s agent enters only with (a) actual authority, NOT apparent authority
- Agent themself IS liable for K’s they enter
Liability for Principal/agent acts under TORT law
Agent liable for their own tortious conduct regardless of whether they were acting on behalf of principal
Principal liability:
- Direct liability: (a) agent’s act within scope of agent’s actual authority, (b) principal ratifies agent’s conduct, (c) principal negligent hiring/managing
- Vicarious liability (respndeat superior): (1) principal/agent relationship, (2) act committed within scope of employment
– (NOTE: not independent contractors)
Business Associations: General Partnerships
2 or more persons join as co-owners to carry on business venture for profit
- No formal requirements to form one
Rights of general partner: (1) receive share of profits, (2) manage/control the business
- All partners co-equals, none under control of other
- Matters IN ordinary course of business: majority vote
- Matters OUTSIDE ordinary course of business: unanimous vote
- Amending partnership agreement: unanimous vote
Acts of partners binding partnership: ARE agents of partnership
- Partners acts bind Partnership if: (a) actual authority, (b) apparent authority, (c) acts in ordinary course of business
Personal Liability of partners
- Partners are jointly and severally liable for partnership obligations UNLESS (a) claimant agrees otherwise, (b) statute, (c) new partner joins partnership AFTER claim against partnership occurred
Business Associations: Limited Partnership
One general partner, and one limited partner
- FORMAL requirements to form, such as “certificate of limited partnership” with state office
Rights of general partner: same rights as general partners from general partnership
Limited partner: typically contributes capital, but doesn’t participate in business decisions
- THEREFORE, no personal liability for obligations of limited partnership
Business Associations: Limited Liability Partnership
Particular type of general partnership that has: (1) obtained approval from required number of general partners to operate as an LLP, (2) filed statement of qualification with state office, (3) paid required fee
General Partners in LLP
- no personal liability for obligations of LLP, UNLESS liability arose before creation of LLP
Termination of partnership association
One partners withdrawal = dissociation
Rightful dissociation = DOESN’T breach partnership agreement
Wrongful dissociation = DOES breach partnership agreement
- (a) liable to other partners for damages, (b) may not participate in winding up business
Liability Time for dissociating partner:
- dissociating partner is still personally liable for partnership obligations until notice of dissociation is filed
- dissociating partner is still personally liable for partnership obligations incurred up to 2 years after dissociation if creditor (1) reasonably believed partner was still partner, (2) didn’t know, or have actual or constructive notice of dissociation
- dissociating partner may be released from liability by (1) creditor, and (2) other partners
- dissociating partner may file notice of dissociation with state office that provides constructive notice of withdrawal 90 days after filing
Liability time for remaining partnership of acts of dissociated partner:
- If partnership continues of partner’s dissociation, partnership still liable for dissociating partner’s acts for (1) 2 years, IF, (2) act would have bound partnership before dissociation, (3) other party reasonably believed dissociated partner was still partner, (4) other party lacked actual or constructive notice of dissociation
Dissolution of partnership generally
Dissolution = end of partnership’s operation except for winding up
At will partnership = lacks a defined temporal term or any particular undertaking have an end point
- Dissolves if (a) one partner’s notice of express will to withdraw or dissolve partnership, BUT dissolution can be rescinded by unanimous vote of remaining partners
Partnership for definite term or particular undertaking = exists for set period of time or for particular goal with set endpoint
- Dissolves if (a) wrongful dissociation/bankruptcy/death/incapacity and within 90 days half partners agree to wind up, (b) all of partners agree to wind up (c) definite term expires, (d) particular undertaking completed
If partnership’s assets don’t cover losses, each general partner must contribute to deficiency in proportion to their share of losses
Business Associations: Corporations
Legal person that can be liable in its own name
- owned by shareholders
- managed by directors and officers
- Doesn’t exist until articles of incorporation are filed
- Bylaws: internal rules by which corporation operates
- Hierarchy of validity if inconsistencies: (1) state law, (2) article of incorporation, (3) bylaws
- Shareholders have no personal liability for liability of corporation, UNLESS
– (a) “pierce corporate veil”,
– (b) (1) PARTICIPATE in entering K (2) while KNOWING articles of incorporation had not been filed yet
- Directors elected by majority vote of shareholders
- Board of directors act through (a) meeting, (b) written consent, (c) committee
- Board of directors meeting need quorum to act (majority of directors), UNLESS bylaws/articles give less than majority but not less than 1/3
- If quorum, then need majority vote to act
- Board act by written consent must be UNANIMOUS
- Board can form committees to do tasks, but majority of directors must approve the committee and its members
MEE corporations rules
- only shareholders (1) OF RECORD, (2) ON the “RECORD DATE”, are entitled to vote at annual shareholders meeting
– UNLESS: “proxy” given
– “proxy” can be revoked by any actions inconsistent with the proxy (aka: shareholder gives proxy, but then shows up and votes anyways)
– “proxy” cannot be revoked if “coupled with an interest” - Only “outstanding” shares can vote, therefore shares held by the corporation are not outstanding and cannot vote
- notice of special meeting of board of directors must be given at least 2 days before meeting
- notice needs to have date/time/location, but NOT the purpose
- director who DOES NOT receive proper notice but attends anyways waives the improper notice, UNLESS they (1) object, and (2) do not vote
- a quorum is needed to take action at a special meeting
- a quorum is a majority of the total number of directors
- a director can generally participate in a special meeting by phone
- a director is only “legally present” if they can HEAR each other member of the meeting
- a director who is not “legally present” cannot vote
- a shareholder acting (1) in good faith (2) with a proper purpose, (3) after 5 days, (4) and written demand, has a right to inspect corporate books
- shareholder proposals may not compel the board to take action because the “business and affairs” of the corporation are to be managed by the board, BUT shareholders may amend the corporation’s bylaws where the proposed bylaw provision relates to “procedural matters” typically included in the bylaws, such as the nomination of directors.
- Shareholders can amend (or repeal) board-approved bylaws. Further, shareholders can limit the board’s power to later amend and repeal a shareholder-approved bylaw.
- direct lawsuit = shareholder suing corporation based on THEIR OWN interests
- derivative lawsuit = claim on behalf of the corporation based on standing: (1) own stock, (2) fairly/adequately represent corporations interests, (3) demand in writing and wait 90 days for board to sue, if not then shareholder bring derivative claim
- “business judgment rule”: rebuttable presumption that director acted with care/good faith/loyalty
