Business Associations Flashcards
What is a promoter?
A person acting on behalf of a yet unformed corporation.
What is a formed corporation’s liability for K’s executed by a promoter?
When the corporation adopts by express adoption through a Board of Directors resolution, or Implied Adoption (when corp. has knowledge and accepts the benefits of the K).
What liability does a promoter have?
They are solely liable if a corporation never forms.
If the Board adopts, promoter is jointly and severally liable, until and unless there is a novation amongst the third party, the corporation, and the promoter to release the promoter and substitute the corporation.
What duty does a Promoter have?
A promoter is a fiduciary, no secret profits allowed. If Property is acquired before formation and sold to corporation - profit is recoverable if sold for more than fair market value.
If property is acquired after and sold to corporation - any profit is recoverable.
What are subscribers?
People with a written offer to buy stock from a corporation
What are the limitations on subscribers?
Preincorporation: The subscription agreement is irrevocable for 6 months. Can’t back out and say you don’t want it.
Post-incorporation: Offer is revocable until the Boards accepts the offer, at which time the agreement is formed.
What are the 3 requirements to form an agency relationship?
Assent
Benefit
Control
Does an agency relationship require consideration?
No.
Who does not have the capacity to be a principal?
A minor or a non legal entity.
In a partnership, who is often the principal?
The partnership itself is the principal
What are the characteristics of an independent contractor?
i) Bears the risk and benefits from good management;
ii) Maintains a high level of independence;
iii) Is free to work for others;
iv) Agrees to be paid a fixed fee;
v) Receives payment based on results;
vi) Is liable for work performed; and
vii) Accepts responsibility to remedy defects at her own expense.
What is a gratuitous agent?
A gratuitous agent is an agent who does not receive compensation.
This does not prevent the creation of an agency relationship, but it generally does prevent the formation of an enforceable contract between an agent and a principal due to the lack of consideration.
Is a trustee an agent?
Yes,
A trustee is an agent and is subject to the control of the settlor of the trust or one or more of its beneficiaries. A trustee maintains a fiduciary relationship with and holds property for the benefit of the settlor. Restatement (Third) of Agency § 1.04(10) (2006).
What is a subagent?
Example: Employees of an advertising firm working on the account of a customer of the firm are presumed to be subagents of the firm.
Who does a subagent owe a duty to?
A subagent owes a duty of loyalty to the principal as well as to the appointing agent.
What can happen if a subagent fucks up?
The agent is responsible to the principal for the subagent’s conduct. Thus, the agent may be liable for a loss incurred by the principal as a consequence of the subagent’s misconduct.
Who can terminate an agency agreement?
Note that termination of an agency relationship may be unilateral. The principal or agent may terminate the agency without the other’s consent.
What is the Equal Dignities Rule?
Many states require agency agreements to be in writing when the agent is to enter into certain contracts within the SoF or when the agency agreement itself falls under the SoF.
The authorization must be of equal dignity to the underlying transaction. The equal-dignities rule operates to protect the principal against third-party actions.
Therefore, a principal can raise the lack of written authorization as a defense.
It does not apply in a contract action brought by a principal against a third party or in an action brought by an agent against the principal. Restatement (Third) of Agency § 3.02, cmt. b (2006).
What is actual authority?
- Actual Authority
Actual authority may be either express or implied.
a. Express actual authority
Express actual authority can be created via:
i) Oral or written words;
ii) Clear, direct, and definite language; or
iii) Specific detailed terms and instructions.
What are the two requirements for actual authority to exist?
For express (actual) authority to exist, the principal’s manifestation must cause the agent to believe that the agent is doing what the principal wants (subjective standard), and the agent’s belief must be reasonable (objective standard).
What is implied actual authority?
Authority the agent reasonably believes they have based on the principal’s words or actions (manifestations).
Implied actual authority allows an agent to take whatever actions (designated or implied in the principal’s manifestations) are properly necessary to achieve the principal’s objectives, based on the agent’s reasonable understanding of the manifestations and objectives of the principal. Restatement (Third) of Agency.
Example: The authority to interview is implied in the agent’s authority to hire.
For express (actual) authority to exist, what two things must exist?
- ) The principals manifestation must cause the agent to believe that the agent is doing what the principal wants (subjective standard)
- ) and the agents belief must be reasonable (objective standard)
Is a principals unexpressed subjective intent regarding an agents authority effective?
No
Must the principals manifestation reach the agent to create actual authority?
Yes, such as through another agent of the principal.
Does the awareness of the agent’s authority by a third party determine the nature or extent of the authority?
No
Can agents delegate either express or implied actual authority to a third person?
Only with the principals express authority.
What does apparent authority focus on?
Hint: which actor
Apparent authority focuses on the reasonable belief of the third party.
What are the factors for the reasonable belief of a third party?
i) Past dealings between the principal and the agent of which the third party is aware;
ii) Trade customs regarding how a similar transaction is normally accomplished;
iii) Relevant industry standards;
iv) The principal’s written statements of authority;
v) Transactions that do not benefit the principal; or
vi) Extraordinary or novel transactions for the principal or similar types of principals.
How may an agents actual authority be terminated?
i) The principal’s revocation;
ii) The principal’s agreement with the agent;
iii) A change of circumstances;
iv) The passage of time;
v) The principal’s death or suspension of powers;
vi) The agent’s death or suspension of powers;
vii) The principal’s loss of capacity; or
viii) A statutorily mandated termination.
In Agency law, how do we deal with a Secret Limiting Instruction?
Agent has actual authority, but the principal secretly limited authority, and agent goes beyond the scope - the principal is still liable.
What are the duties of an agent to a principal?
Reasonable care; obey reasonable instructions; loyalty - no self dealing.
What is required for the formation of a general partnership?
It can arise from conduct, no formalities required.
Sharing profit creates the presumption of a general partnership, except for lending agents, wages, and commissions.
A promoter is personally liable, but what are the two exceptions?
- ) Novation - the corporation and the 3rd party contract agree to substitute the corporation for the promoter.
- ) Adoption - the corporation takes the benefit of the contract.
What is the “Ultra Vires Act”?
Occurs when a corporation has a narrow purpose and acts outside the scope of that purpose.
A shareholder can file suit to enjoin the action or take action against the officer, director, or employee who engaged in the act.
What is a De Jure Corporation?
Exists when the statutory requirements for incorporation are met
Person: Incorporators
Paper: Draft Articles of Incorporation stating the name of corp, the names and addresses of incorporators, the registered agent, and stock information.
Act: Must file the Articles with the Sec. of State.
What is a De Facto Corporation?
Good faith, colorable attempt to incorporate and directors ran business using corporate privileges believing it was incorporated.
Largely abolished.
What is a Corporation by Estoppel?
A third party entered into a contract with the corporation treating it as though it was properly incorporated; the third party is estopped from asserting that the corporation was not formed appropriately and backing out of contracts.
Largely abolished.
Agency by Ratification
Agency relationship is created by ratification when an agent purports to act on behalf of a principal without any authority at all, but the principal subsequently validates the act and becomes bound.
Express Ratification: oral or written affirmation
Implied Ratification: Principal accepts the benefits of the transaction or is silence when there was a duty to disaffirm.
No ratification if it would alter rights of 3rd/intervening parties or P didn’t have contractual capacity at time of transaction.
Requirements for Ratification
Principal must:
* have knowledge of/reason to know of all material facts regarding the contract
* accept the entire transaction (not just a portion)
* have capacity (competent/legal age)
Agent is liable when:
- When existence and identity of the principal are not disclosed
- when agent did not have authority to enter K, then liable to 3rd party for damages for breaching an implied Warranty of Authority
- no respondeat superior – tort committed by agent outside scope of employment, on a frolic/major deviation
- intentional torts not viewed as within scope of employment
General Partnership
Two or more persons as co-owners operating a business for profit.
Subjective intent to form a “general partnership” irrelevant.
No documentation needs to be filed. Usually a default when another bus org is not properly formed.
Sharing of profits (or losses) is presumptive of partnership (most important factor for consideration)
* can rebut with evidence of no right to control or no sharing of losses
Debt Securities
Equity Securities
Traditional approach to consideration for stock
Par Value
MCBA approach to consideration for stock
Board determines value, conclusive if made in good faith
Preemptive Rights
Right of shareholders to maintain percentage of owenship.
Limitations: no preemptive rights if:
* shares issues for consideration other than cash
* shares issued within 6 months after incorporation
* shares issued without voting rights but with a distribution preference
Under MCBA, preemptive rights must be provided for in the Articles. If the Articles are silent, no preemptive rights.
Statutory Requirements for Board of Directors
Duties and privileges of a Director (of Board)
Liability of a Director
Duties and Role of an Officer
Indemnification of Directors, Officers, and Employees
No Indemnification:
Mandatory Indemnification:
Permissive Indemnification:
Special Fiduciary Duty in Close Corporations
Justifications for Piercing the Corporate Veil
Alter Ego (Identity of Interests)
Undercapitalization
Fraud, Avoidance of Existing Obligations, or Evasion of Statutory Provisions
Direct Action vs. Derivative Actions
Standing for Derivative Suit
Voting Trust
Voting Agreement
Straight Voting vs. Cumulative Voting vs. Class Voting
Stock Transfer Restrictions
Shareholder Inspection Rights
Qualified
Unqualified
Rights to distribution
Unlawful Distribution
Procedure for Fundamental Corporate Change
Dissenter’s Rights / Right of Appraisal
Procedure for Amending Articles of Inc.
Procedure and Effect: Mergers and Consolidations
Procedure: Transfer of all/substantially all assets + Share Exchanges
Succesor Liability
Procedure: Conversion
Successor Liability
Voluntary vs. Involuntary Dissolution
Business Judgment Rule
Presumption that a director’s decision may not be challenged if the director:
* acted in good faith
* with the care that a person would exercise in a like position, and
* in a manner the director reasonably believed to be in the best interest of the corporation
directors can reasonably rely on the opinions of experts and corporate insiders in making decisions
Director involved in a self-interested transaction
A transaction cannot be set aside merely because a director had a personal interest in the transaction if:
* the director disclosed the material facts of the transaction to disinterested members of the board or the shareholders + they approved the transaction, OR
* the transaction was fair to the corporation.
Exceptions to provisions in Articles limiting/eliminating Directors’ personal liability
A corporation’s Articles of Inc. may limit/eliminate directors’ personal liability for money damages to the shareholders or corporation for actions taken, except when the director:
* receives a benefit to which they were not entitled
* intentially inflicts harm on the corporation/shareholders
* approves unlawful distributions, OR
* intentionall committed a crime
Negligence will not be enough to preclude the application of an exculpatory provision
