Business Associations Flashcards
de facto corporation
- actual use of corporate power
- good faith attempt to incorporate
corporation by estoppel
a person who deals with a business entity believing it to be a corporation may be estopped from denying its corporate status
4 ways to pierce the corporate veil
- Alter ego
- Undercapitalization
- Fraud
- Estoppel
Define, liability, duties
Promoters
- Persons acting on behalf of a corporation that has not yet formed
- Promoters are personally liable until there has been a novation
- Promoters have a fiduciary relationship (care and loyalty)
Duties of directors and officers
- Duty of care - to act in good faith as a reasonably prudent person in a manner he reasonably believes is in the best interest of the corporation
- Duty of loyalty - director must put the interests of the corporation above his own interests
- Duty to disclose relevant material information to board members.
Self-dealing, usurping a corporate opportunity, unfair competion
- Self dealing is when a director has a benifical interest in a contract with the corporation - presumed unfair and voidable unless authorized by board members, approved by shareholders, or fair to corporation
- Usurping a corporate opportunity - A director may not act on a business opportunity without first offering it to the corporation
- A director may not unfairly compete with the corporation.
Rights of directors and officers
- compensation - fair
- indemnification - mandatory vs discretionary, may idemnify if believed in good faith for the best interest of corp.
- inspection - reasonable
Voting by proxy
shareholder votes by signed writing authorizing another to cast a vote on her behalf
Cumulative voting
Shareholder multiplies number of shares held by number of directors to be elected and then cast all votes for one member
Shareholder inspection
shareholder has right to inspect upon showing of proper purpose with 5 days written notice
Shareholder suits
- Direct suit - shareholder may sue for breach of fiduciary duty owed to the shareholder
- Derivative - shareholder may sue on behalf of the corporation, corp recieves recovery and shareholder reimbursed
Shareholder must:
1. Own stock
2. Adequately represent the corp
3. Make a demand on directors to bring suit or redress injury and demand is rejected (corp has 90 days unless waiting would cause irreprable injury)
Shareholder duty
Controlling shareholders (substantial) owe a fiduciary duty
* Sale of shares to looter - may not sell if buyer if buyer intends to harm co.
* Sale of shares at a premium - ok if good faith and fair, HOWEVER, may not also recieve a personal benefit for the sale of a corp assest or office
Fed sec laws 16(b) - Short swing profits
16(b) short swing profits - profits in a 6 month period by corporate insider must be disgorged to the corporation.
1. corp listed on natl exchange or 10 mil in assets and at least 2k shareholders (or 500 if not high income individuals or directors)
2. corp insiders are officers/directors and shareholders that hold at least 10%
a. officers/directors must be in position at either purchase or sale
b. 10% holders must be at both purchase or sale
look out for 10b-5 insider trading
Fed sec laws 10b-5
Insider trading
trading securities based on nonpublic corporate information is prohibitted must have:
1. intent to defraud
2. material misrepresentation
3. pla actual reliance on misrepresentation
4. purchase or sale of securities
5. Uses interstate commerce (securities exchange, phone, email etc.)
6. Damages - Profits disgourged to company
look out for 16(b) short swing profits
10b-5 violations
- Direct trading by an insider
a. insiders are holders of material nonpublic corp info.
b. insiders have a duty to disclose info or refrain from trading. - Tippers are liable for any personal gain
- Tippees are liable if:
a. tipper breached fiduciary duty
b. tippee knew duty was breached
c. tipper personally benifited - Misappropriators - those that are not insiders but get the information somehow
Single individual may have multiple violations
Sarbanes-Oxley Act
Creates board that oversees public accounting firms
1. Audit board est by each corp.
2. Senior excecs take responsibility for accuracy of financial supports
3. If filing is inaccurate CEO and CFO must reumburse corporation for 12 month of incentive based compensation
criminal penalties for fraud
Fundamental corporate changes
Must be approved by majority shareholder vote.
Agency
An agency relationship exists when a principal authorizes an agent to act on her behalf and represent the principal in dealings with third parties. Requires an agreement between both parties that the agents conduct is for the principal’s benefit and the principal has the right to control the agent.
contrast with independant contractor where no control over method/manner
Capacity of agents
a. principal must have capacity to contract
b. agent must have minimal capacity (may be a minor)
Agent duties
Subagent duties
The agent owes the principal fiduciary duties
1. Duty of care
2. Duty of loyalty
3. Duty of obedience
4. Duty to communicate
subagents owe duties to principle if authorized or to agent if not
Principal liability for agent’s contracts
The agent’s actions will bind the principal if the agent was acting under the actual or apparent authority to act for the principal. Types of authority:
1. Actual express authority
2. Actual implied authority - agent reasonably believes he has authority because of necessity, custom, or prior dealings
3. Apparent authority - survives termination until third parties recieve actual or constructive notice.
4. Ratification
5. No auth no liability
Principal liability for torts of agent
A principal is liable for an agent’s torts if they are committed within the scope of the principal-agent relationship. An act is in the scope of the relationship when the conduct was what the agent was hired to do, the tort occurred on the job, or the agent intended his action to benefit the principal. A principal is not liable for torts committed by an agent when the agent is substantially deviating from the planned conduct for her own purposes (frolic), however is liable for small deviations (detours).
Principal liability for torts of independant contractor
Principal is generally not liable EXCEPT
1. Ultrahazardous activity
2. Nondelegable duties
3. Negligent hiring of independant contractor
4. Estoppel (Principal held out independant contractor as agent)
Principal liability for intentional torts
Generally not liable unless
1. specifically authorized
2. Nature of employment (bouncer)
3. Tort was to serve principal
