Business Associations Flashcards
includes agency, partnerships, corporations etc
Agency Definition
Fiduciary relationship results from manifestation of consent by one party to another that the other shall act on his behalf subject to his control
Requirements for Agency
(1) consent
(2) control
(3) principal capacity
(4) check if underlying agreement SOF
Duties of Agent to Principal
Duty of Care
Duty of Loyalty (vibe check)
Duty of Obedience
Agent Duty of Care
Carry out the agency with reasonable care - sliding scale depending on heightened skills of agent (Baseline and heightened)
Duties of Principal Agency
Not fiduciary
(1) indemnify
(2) compensate
Contracts: Principal liability for actions of agent
If actual authority, apparent authority, or ratification, then P is bound to K and agent is not UNLESS undisclosed or partially disclosed then both agent and principal are bounf
Actual authors definition
Because of P actions, agent thinks they possess this - would reasonably expect
Express: conveyed in words
Implied: A reasonably thinks this exists bc of custom or behavior (“office management”
Termination of actual authority
End upon specified time
Changed circumstances
Agent breach
Unilateral act
Death effective upon notice
Etc
Apparent authority definition
Exists when P holds another out as having authority and 3P reasonably believes the authority exists
If words or conduct would lead reasonable person in 3P then 3P protection
Can be established by title or position if title given by principal
Always starts w something P did unless acquiescence
Lingering apparent authority
Even after actual authority ends, apparent authority continues and binds P unless companies had noticr
Ratification (definition and requirements)
Even if agent had no authority when entering into K, p is bound if ratified. Implied if you accept the benefits
(1) knowledge of all material terms
(2) accept entire transaction
(3) not alter rights of intervening parties
Factors for Right to Control
Skill required (more skill then IC)
Tools and facilities (employees)
Period of employment (longer then employee)
Basic compensation (time then employee, task then IC)
Business purpose (in furtherance then employee, distinct business then IC)
Termination of Actual Authority
end on specified time or event
change of circumstances
breach
death and notice of death
Liability for Independent Contractors
only if
(1) inherently dangerous activity
(2) non delegable duty
(3) P knowingly selected an incompetent IC
Partnership
when two or more people intend to carry on as co-owners of a business for profit. subjective intent irrelevant
Factors to Determine whether Partnership
Profit Sharing (most important factor - presumption you’re a partner unless received as payment of debt as a one time deal)
Right to Control
Loss Sharing
Default Partnership Rules
equal management rights and equal voting
ordinary business decisions = majority vote by numbers’ extraordinary = unanimous
no compensation
Partnership Rights
right to share in profits and losses
losses follow profits
profits shared equally among partners by number
Partnership Obligations
partnership and contract liability same as agency
partner is agent of partnership w authority to bind
Liability of Partners
each is joint and severally liable but P needs to first exhaust partnership resources first
To admit a new partner
need a unanimous vote bc pick your partner rule and they’re not liable for partnership obligations which arose before they were a partner
Partnership Fiduciary Duties
Duty of Loyalty - no adverse positions, no competing etc.
Duty of Care - refrain from gross negligence
Duty of Disclosure - each partner shall furnish without demand any info about partnership reasonably related to exercising partnerhsip rights; disclose on demand any other inco concerning partnership unless unreasonable or improper under circumstances
cannot eliminate duties of loyalty and care but you can get rid of duty to disclsoe
Partnership Property IF
(1) in partnership name
(2) bought with partnership funds
(3) in party’s name but it’s clear from the document it’s for the partnership use/she’s acting for the partnership
BUT: not presumed partnership property if in party name, bought with own funds and no document suggests partenrship useP
Partnership Property RIghts
totally unrestricted, but partner is not part owner of the property
Partner Personal Ownership interest in partnership
partnership interest is personal property and he can freely assign financial interest, but not management interest
Partnership Dissassociation
withdraw when party bows out of partnership for any reason
dissassociation by express will/notice
expelled
death
bankruptcy of partner
court decision
terminatino business entity
Wrongful Dissassociation
occurs if partnership is in breach of express term in partnership agreement
OR
partner withdraws, expelled, becomes bankrupt before the end of a term - liable to partnership for damages
Two Options if Partner Dissassociates
(1) Dissolution of Entity (pay inside/outside creditors, then capital contributions of partners, then split losses and profits)
(2) Continues and Buyout
Impact on Disassociated Partner
still liable for any pre-disassociation obligations and remains liable/apparent authority (unless dissolution) for 2 years after disassociation unless notice (takes effect in 90 days)
Limited Partnership
at least one limited liability partner and one general partner
Form Limited Partnership
File with secretary of state
Name of entity + LP
Name/Address general partner
registered agent/office
Limited Partnership Management Rights
General Partners manage, limited partners have no management rights
Limited Partnership Financial Rights
distributed based on contribution
Limited Partnership Liability
general partners = general partnership principles
limited partners = no liability for partnership debt, but liability for own torts and debts
Fiduciary Duties of Limited Partnership
limited partners have no fiduciary duties - that only applies to people with management rights
Limited Liability Partnership Definition
all partners have limited liability - apply partnership rules except no general liability
Limited Liability Partnership Formation
(1) file w secretary of state
(2) name and address of entity + LLP
(3) deferred effective date if any
Limited Liability Company (LLC) definition
hybrid - owners have limited liability and partnership tax treatment
LLC Formation
(1) registered agent SOP
(2) name of entity + LLC
(3) address LLC office
Operating Agreement
detail operation and governance
managed by all LLC members unless otherwise agreed
majority vote for ordinary business decisions; unanimous for extraordinary
LLC Membership Types
Membership Managed (the owners all manage)
Manager Managed (owners have no management rights, give decisions to delegates)
LLC Liability
no personal liability but can lose initial investment and retain liability for own torts and debts
LLC Fiduciary Duties
BJR + Duty of Loyalty
(only for those w management powers)
Rights under Member Managed LLC
all members owe duties of care and loyalty to each other and members
Member has right to inspect and copy any record concerning LLC activity/financial record;
(1) automatically furnish info if material to exercise member rights and duties unless reasonably believe requesting member already knows
(2) must furnish other info on demand unless unreasonable or improper
Manager-Managed Rights LLC
only managers owe duties of care and loyalty to LLC and members
managers same right to infor and duty to furnish info as members would in member-managed
Members have right to inspect and copy if (1) seeks for proepr purpose (2) directly related to membership interest (3) describes with particularity
Dissolution LLC
(1) event of circumstance that the operating agreement states causes dissolution
(2) by consent of all members
(3) passage of 90 consecutive days during which the LLC has no members
(4) judicial dissolution (see factors)
(5) adminstrative dissolution by sec. of state for failure to submit fee or report (can apply for re-instatement)
Judicial Dissolution of LLC
(1) conduct substantially unlawful
(2) controlling members acting or willing to act illegally/fraudulently
(3) not reasonably practicable to carry on company’s activities in conformity with operating agreement or certificate organization
(4) controlling members oppressive and directly harmful to member applying for dissolution
LLC Taxes
pass through basis not at entity level - may pay phantom tax even if they never actually distribute the cash
Formation of Corporation
(1) file w secretary of state
(2) name of entity + Corp
(3) registered agent for SOP + address
(4) name of incorporator
(5) info re authorized stock
bylaws
operating maual for corporation not filed w state; if ever in conflict w articles of incorporation, the articles win
Benefit Corp
formed for profit but to pursue some broader benefit - must state beneficial purpose in the articles and file an annual benefit report
To Avoid Double Taxation as Corp + Factors
S - Corp
(1) fewer than 100 (all human) members
(2) US citizens or residents
(3) no stock preferences/levels
(4) not publicly traded
De-Facto Corporation
(1) relevant incorporation statute - always met
(2) parties made a good faith colorable attempt to form corporation
(3) some exercise of corporate privilege
treated like a corporation unless state comes after you
Corporation by estoppel
someone who treats you like a corporation is estopped from denying corporation statue (Except tort)
Pre-Incorporation
Promoter - remains liable on any contracts even after corporation formed (they’re just both liable) until novation
Corporation liable on pre-incorporation K only if it adopted the contract
Foreign Corps
if not properly registered then civil fine and can’t file suit there, but can defend there
not just sporadic activity or owning property there - have to register if you’re doing intrastate business
Issuance Definition
when corporation sells its own stock
Subscription Definition
written offers to purchase stock
Pre-incorporation - irrevocable for 6 moths (unless otherwise agreed)
Post-Incorporation - revocable until corp has accepted
Treasury Stock
corporation issues stock and then reacquires it
Watered Stock
up to board to put price on stock - conclusive if in good faith
recover for lower value stock - directors are liable if they knowingly authorized the issuance (!!!!!)
Whoever buys the watered stock is also liable
third party liable for watered stock if not purchased in good faith
Pre-emptive right
does not exist unless expressly written
grants stock holders right to maintain % ownership interest by buying stock any time there’s a new issuance of stock with money
Directors requirements
(1) adult natural person
(2) one or more
(3) initial directors named in articles or voted in at organization meeting
(4) subsequently elected by SH
Director Removal
Removable for any reason (with or without cause) unless staggered board in some states, then need cause
Board Acts by
(1) unanimous agreement in writing OR
(2) at a meeting satisfying quorum and voting
CANNOT agree to take action without either of these unless later ratified
individual director not an agent and cannot bind
BOD Meetings
Regular meeting - no notice req
Special meeting - at least 2 days notice but no need to state purpose (failure to alert nullifies action taken at meeting unless director attends meeting and doesn’t object or later ratifies)
BOD Meeting Voting
Quorum = majority of all directors (can break if people leave)
passing resolution requires majority of all those PRESENT
BOD Committess
cannot issue dividend
fill board vacancy
or recommend fundamental change to SH
Director Fiduciary Duties
Directors must discharge their duties in good faith and with reasonable belief that their actions are in the best interest of the corporation (Duty of Loyalty). Directors must also act with the reasonable care that a reasonable person in like circumstances would reasonably believe appropriate under the circumstances (Duty of care)
Self-Dealing Corporations
any deal between the corporation and director or relative of direct is set aside unless
(1) D shows deal with fair to corp when entered
OR
(2) that interests were disclosed and ratified by a majority of disinterested members of the board OR majority disinterested SH
PLUS general showing of fairness
Usurping Corporate Opportunity/Expectancy
Director cannot usurp corporate opportunity unless
(1) tells the board about it and
(2) waits for board to reject
Corporate opportunity = something corp reasonably interested in or something D found using corp time/resources
financial inability to pay is irrelevant
remedies - D sells to corp or gives profit
Director Liable for:
improper distributions
improper loans
breaches of fiduciary duties
directors are presumed to consent unless (1) written - not oral - objection or (2) absent from meeting or (3) good faith reliance on info/professional presented
Officer Indemnification
Category 1: cannot indemnify if D/O held liable to corporation or received improper benefit (need HOLDING)
Category 2: corp MUST D/O if they were successful in defending on the merits (not a settlement)
Category 3: corp MAY indemnify D/O if they acted in good faith with reasonable belief in corp’s best interest
Eligibility for Indemnification Determined by
(1) independent legal counsel
(2) disinterested board
(3) disinterested SH
Closely Held Corp
few shareholders, not traded publicly - SH can manage directly or set up different management/eliminate BOD or appt. manager
Professional Corporation/Association (defined, requirements, and liability)
article must state that the purpose is this profession; directors must be licensed professionals, may employ nonprofessionals but not to perform the profession
always liable for own malpractice and torts but the shareholders are not liable for other professional’s malpractice
Piercing the Corporate Veil Test
hold shareholders personally liable if
(1) shareholders have abused the privilege of incorporating
AND
(2) fairness requires
LOOK FOR: (1) alter ego - commingling of assets and failure to pay bills OR (2) underutilization (failed to invest enough to cover prospective liabilities
Direct Suit
regular litigation - forcing dividends or oppression in CHC
Derivative Suit
shareholder is suing to enforce corporation’s claim - if the corporation could’ve brought it (See breach of fiduciary duties)
if shareholder wins - recovered money distributed to corporation and recover cost and fees; if sue without reasonable cause and lose, liable for own attorney’s fees and everyone’s barred from trying that claim again
How to Bring Derivative Suit
(1) own stock at the time of grievance and continue to hold it throughout
(2) adequate representation of corporate interest
(3) written demand on corporation unless futile (i.e. problem is with directors themselves)
(4) join corporation as D
(5) can only settle or dismiss with court approval - court may give notice/input SH
Standard to Dismiss Derivative Suit
(1) independent investigation by independent directors or special litigation committee
(2) concluding suit is not in corp’s best interest
Who Votes in SH
Assume each outstanding stock has a vote
(1) Record shareholder
(2) on the record date (unless reacquired by the corp or SH dies, then executor votes it)
SH Proxy Voting
11 month lifespan, directed to secretary of corp
can revoke (1) in writing OR (2) by showing up and voting yourself
never irrevocable unless coupled w an interest in shares
Voting Trust
10 years, written trust agreement controlling, give copy to corporation, transfer legal title to voting trustee, OG shareholders trust certificates
Voting Agreements
must be signed, in writing, majority enforceable
SH Meeting Types
Required Annual - can petition the court to call one if you haven’t had one in 15 months
Special - need 10-60 days notice and state special purpose (that’s all you can talk about); failure to notify nullifies meeting action (unless waiver by ratification or showing up and not objecting); can be called by board, president, or at least 10% of outstanding SH or whatever the bylaws state
What can SH Vote on
electing and removing directors
fundamental corporate changes
whatever the BOD asks them to vote on
SH Quorum requirements
need majority of outstanding shares (not people)
need plurality unless Fundamental corporate change
Cumulative Voting
typically only CHC - doesn’t exist unless stated in articles
only for electing directors
one at large election - multiply number of shares x directors to be elected
Straight Voting
separate elections for each seat selected
Stock Transfers
restrictions okay as long as no absolute restraint on alienation or undue restrictions (right of first refusal doesn’t count)
Right of First Refusal
offer it first to the corporation; can be enforced against the transferee if:
(1) conspicuously noted on stock certificate
OR
(2) transferee had actual knowledge of the restriction
SH Right to Inspect
SH has a right to inspect corproation’s books and records on written demand
noncontroversial: 5 business days in advance and no need to state a purpose (SH meeting minutes, addresses or names or directors)
Controversial: state a proper purpose related to interest as a SH (i.e. excerpts of board meeting minutes, accounting records, record of SH)
Distribution Limitations
corp cannot make any distribution if it’s insolvent or if making the distribution would render it insolvent
Improper Distributions
directors are jointly and severally liable but good faith reliance defends
SH liable only if they knew it was improper when they received it
Redemption
forced sale to corporation at price set in the articles
Force a Distribution
need strong showing of abuse of discretion (Direct suit)
How to Accomplish Fundamental Corporate Change
(1) Board votes
(2) written notice of resolution SH
(3) SH Votes (BY MAJORITY ENTITLED to vote, not majority of those voting)
(4) notice to secretary of state
Right of Appraisal
dissenting SH in fundamental corporate change can force corporation to buy back stock at fair market value (if they can’t agree, then corp hires an independent appraiser)
Which events trigger right of appraisal
merging/consolidating
transferring
acquired in stock exchange
conversion
NO appraisal is more than 2000 SH (so just CHC allowed)
To perfect right of appraisal
(1) written notice w corp or dissent and intent to demand payment
(2) SH must abstain or vote against change
(3) make written demand to be bought out and deposit your stock
(4) corp will hire independent appraiser if can’t agree fair market value
Amending Articles
(1) requires majority of shares entitled to vote
(2) if approved, deliver amended articles to sec of state
(3) no right of appraisal
Merger/Consolidation Definitions
Merger: one corporation is absolved into another
Consolidation: two corporations become one new corporation
How Merger/Consolidation
(1) SH approval from both corporations
(2) Short form merger - no SH approval required if 90% owned subsidiary being merged into parent
(3) deliver to secretary of state
(4) right of appraisal for any merger/consolidation even the subsidiary
Transfer of all or substantially all assets
Rule: transfer at least 75% of the assets. this is a fundamental change only for the corp selling not buying
(1) BOD from both corp’s approve and tell Selling SH
(2) approval by SH by majority of entitled votes
(3) deliver articles
(4) no successor liability for assets unless “mere continuation of seller” or disguised/de facto merger
(5) right or appraisal for selling corp only
Conversion
(1) BOD approval
(2) notice to SH
(3) SH approval by majority entitled to vote
(4) Deliver to secretary of state
(5) Right of Appraisal
voluntary corporation dissolution
(1) board action
(2) SH approval
(3) notice of intent to dissolve w secretary state
(4) corporation exists to wind up
(5) notify creditors so they can make their claims
Involuntary Dissolution Corproation
court ordered
SH can petition if: (1) abuse (2) waste of assets (3) misconduct or (4) director deadlock or failure to fill BOD vacancy
Creditor can petition if (1) corporation is insolvent AND (2) creditor has an unsatisfied judgement against them OR (3) corporation admits debt in writing
How to Wind up for Corporate Dissolution
(1) written notice to known creditors and publish notice in PPB
(2) gather all assets
(3) liquidate assets (turn to cash)
(4) pay creditor (first in line)
(5) distribute remaining sums to shareholders pro rate by share unless liquidation preference
