Business Associations Flashcards
Characteristics of corporations
(1) perpetual or continuous existence
(2) centralized management of its assets through board of directors
(3) limited liability for its owners, who are generally shielded from personal liability
(4) free transferability of ownership interests
Corporate structure
Shareholders elect board of directors. Board has responsibility for governing corporation and appoints officers. Officers are delegated responsibility for managing conduct of corporate business.
One person can fit each role
Promoters
Promoters take preliminary steps for creating corporation (i.e., contracts for benefits of future corporation) but are not agents. No power to bind, and promoters are personally liable unless contract specifically disclaims liability or circumstances demonstrate that other party agreed to look only to corporation for performance.
If more than one promoter, there is mutual agency (partnership type relationship), who are jointly and severally liable.
Corporation liability on pre-incorporation contract
Corporation only liable if it assumes liability through adoption or novation.
Adoption: Express occurs through resolution. Implied occurs when corporation accepts or acknowledges benefits of contract. Promoter remains liable but entitled to indemnification.
Novation: All parties agree to substitute corporation as party in place of promoter. Promoter released from all liability.
Requirements for incorporation
Must execute and file articles of incorporation, signed by incorporator and delivered to secretary of state.
Must contain: Name/address of incorporator, address of initial registered office and name of initial registered agent, number of shares corporation is authorized to issue, corporate name (distinguishable from others).
Secretary of state’s filing is conclusive proof that all conditions satisfied
Completing corporate organization
After incorporation, corp. must be properly organized, otherwise personal liability can result. Organization occurs at organizational meeting called by incorporators or initial directors (if named). Must name/elect directors, appoint officers, and adopt bylaws (i.e., record date).
Act of board of directors
Board acts in collective capacity, so all board action require quorum–majority unless provided otherwise. Act of board occurs upon affirmative vote of majority of directors. In absence of meeting, board can transact business as long as there is written consent to action signed by all members.
Board meeting
Regular meetings may be held without notice. Special meetings require at least two days notice of date, time, and place. No notice of purpose required unless removal of director is to be considered.
Waiver of notice occurs if director does not make prompt objection to meeting, or by means of signed writing.
Authority of corporate officers
Officer has powers of an agent–may enter into any transaction for which they have been expressly or implicitly authorized under articles, bylaws, employment contract, or board resolution. Board has discretion to decide whether to declare dividend (unless refusal amounts to fraud, bad faith, or abuse of discretion)
Doctrine of ultra vires
Corporation cannot be obliged to undertake contract or activity beyond scope of its powers. Limits of authority may be challenged in proceeding by (1) shareholder to enjoin act (2), or the corporation against director, officer, employee, or agent; or AG if articles obtained through fraud or corporation has continued to exceed or abuse authority.
Fiduciary duty of directors and officers
Duty of care: Discharge of duty in good faith, with care of an ordinary prudent person in a like position under similar circumstances, in manner reasonably believed to be in best interest of corporation.
Duty of loyalty: Must be loyal to corporation and not promote own interests in a manner injurious–i.e., self dealing, usurpation, direct competion
Conflicting interest transaction
Transaction between director or officer and corp., where director or officer had knowledge and a material financial interest. Voidable unless interested person can prove, that (1) material facts were disclosed and transaction approved by majority of disinterested board or shareholders, or (2) court determines transaction was fair and reasonable to corporation, based on what might have been obtained in arms-length transaction
Corporate management liability
Directors and officers liable for violation of fiduciary duties, and authorized actions
Business judgment rule
Rebuttable presumption that, when making business decision, directors and officers have acted on informed basis, in good faith, with honest belief. Applies to LLCs and corporations
Corporation by estoppel
When contractual dispute arises between third party and an entity believed to be a corporation, a court may estop (1) third party from alleging that corporation is defectively incorporated if that would unjustly expose principles to liability, or (2) business entity from alleging that it is not legally a corporation liable on the contract if that would unjustly deprive third party of relief.
De facto corporation
If statutory compliance is insufficient for de jure status, a de facto corporation may exist if (1) a good faith, colorable attempt was made to comply with incorporation, and (2) corporate principles in good faith acted as if they were a corporation.
Power of shareholders
Shareholders in collective capacity have power to elect/remove directors, amend bylaws, and approve fundamental changes in corporation (amendments to articles, dissolution, sale of corporate assets). Shareholder action occurs at shareholder meetings, must have timely notice. Shareholder resolutions generally recognized as fundamental right under common law.
Cumulative voting
Shareholder may allocate all their votes to any candidate when there are multiple openings on the board. Default is “straight” voting, where shareholders may not give more than one vote per share to any single nominee.
For removal, no director can be removed if votes against removal would be sufficient to elect him under cumulative voting)
Mergers
Shareholder meeting to vote on merger must provide notice that the plan is being considered. Quorum must vote to consider merger then approve merger.
Exception if (1) corporation will survive merger, articles won’t change, merger will not change number of chares or rights of those shares, and issuance of shares does not otherwise require shareholder approval; or (2) for parent corporation and subsidiary, no approval from subsidiary if parent owns at least 90% of voting power of subsidiary.
Shareholder rights
Vote, sell, sue
Voting: Proxy agreement valid if written and signed or electronically transmitted. Expires after 11 months unless otherwise provided. Shareholders can arrange votes in voting agreements/trusts, which bind each other to vote a certain way.
Right to information: articles, bylaws, minutes, accounting books
Appraisal rights: When fundamental change is put to vote, dissenting shareholders have right to payment of fair value of shares.
Shareholder direct suit
Brought in response to direct harm or wrong to shareholder.
Suit to compel dividends if refusal amounted to fraud, bad faith, or abuse of discretion. Considers (1) hostility of controlling faction, (2) exclusion of minority from employment, (3) high salaries, bonuses, or corporate loans, (4) if majority group would be subject to high personal taxes, (5) desire by controlling directors to acquire minority stock cheaply as possible.
Derivative suit
Equitable demand by shareholder on behalf of corporation for corporation’s benefits. Typically involves breach of fiduciary duty.
Requires that shareholder was shareholder when complained of transaction occurred. Shareholder must make written demand of directors and allow at least 90 days to pass unless irreparable injury would result.
Board of directors can seek dismissal when majority of uninterested directors conclude in good faith that suit would not be in best interests.
Duties of controlling shareholders
Good faith: Must refrain from exercising control so to obtain benefit from corporation not proportionately shared with minority holders.
No duty of loyalty (right of selfish ownership)
Piercing the corporate veil
Court may hold shareholders liable on corporate obligations when necessary to avoid a grave injustice. Factors: (1) corporation undercapitalized, (2) corporate formalities not observed, (3) corporate and personal funds comingled, (4) corporate entity is no more than alter ego of shareholders.
P must prove (1) shareholder control that effective renders corporate form a facade, (2) corporate form used to obtain improper or fraudulent purpose, and (3) injury or unjust loss from wrongful use.
LLC characteristics
Unincorporated association with one or more members organized and operated pursuant to state LLC statutes. Has attributes of partnership for federal income tax companies.
LLC owner liability
No member, manager, or agent has personal obligations for liabilities. But, can pierce veil based on alter ego liability or inadequate capitalization (generally not failure to comply with formalities).
Direct suits: Members may sue when injured personally
Derivative: Member must make demand on other members (or managers) asking to bring an action to enforce the right, unless demand would be futile based on others’ financial interest or bias
Types of principles
Disclosed: Third party has notice that agent is acting for principal and principal’s identity (no agent liability)
Undisclosed: Third party has no knowledge of principal’s identity.
Partially disclosed: Third party knows of principal but not identity.
LLC dissolution
LLC dissolves upon occurrence of (1) agreed-upon event, (2) consent of all members, (3) passage of 90 consecutive days where LLC has no members, (4) upon application of a member and entry of court order (based on unlawfulness, impracticality to carry on activities, etc.) or (5) signed filing of statement of administrative dissolution by secretary of state.
Must provide notice of dissolution to creditors. If winding up procedure is not followed, court can enforce creditor’s claim against each member’s proportionate share of claim, up to amount of assets distributed to member during dissolution.
Apparent authority
A manifestation by P leads a third party to reasonably believe that A has authority to act as an agent.
Consequences of agency
Duties between principal and agent, agent’s power to bind principal, liability on principal for agent’s torts, and agent’s knowledge imputed to principal.
Duties of agent to principal
Duty of care
Duty of loyalty: Self-dealing, usurpation of business opportunity, duty of confidentiality, duty not to compete
Duty to account
Duty of candor
Agent’s authority
Actual authority: Created by manifestation of P to A of P’s request for A to act in a particular way and for P to be bound by those actions.
Apparent authority: P’s behavior causes third party to believe that agent is acting with P’s authority
Ratification
P grants retroactive authority for A’s earlier actions. Occurs through manifestation of assent or through conduct justifiable only on assumption that person so consents.
Employer v. independent contractor
(a) amount of control exerted by P
(b) whether A is engaged in distinct occupation
(c) whether A’s work is customarily done under supervision of P
(d) skill required in A’s occupation
(e) who supplies the tools,
(f) length of A’s engagement
(g) whether is paid by the job or by the our
(h) whether parties intended to create employment relationship
(f) whether principal is in business
Frolic and detour
Employer is not liable if employee has substantially deviated from authorized route (frolic) but is responsible if deviation is slight (detour). Factors: (1) advancement of employer’s interest, (2) whether deviation occured before or after employer’s objective was served; (3) scope of deviation in terms of time and distance, (3) whether deviation was in keeping with type of employment.
Tort liability for employees
Tort liability for independent contractors
General partnership
Limited partnership
Limited liability partnership
Unincorporated association with one or members, with members not personally liable for partnership. Requires filing of articles of organization with secretary of state. Governed by operating agreement. State can pierce corporate veil under similar circumstances to corporation.
Member-managed: Each member has equal rights in management unless otherwise provided (more like partnership). Members owe duties of loyalty and care
Manager-managed: Members appoint one or more managers to operate LLC. Managers owe duties of loyalty and care, and may not engage in grossly negligent or reckless conduct.
Uniform Partnership Act
Rights of general partners
Rights of limited partners
Duties of general partners
Duties of limited partners
Partner liability to third parties
Partner dissociation
General partnership:
Limited partnership
Causes of partnership dissolution
General causes:
Define term or particular undertaking partnership:
Limited partnership:
Consequences of partnership dissolution
