Business Associations

Question 1

Partnership

Answer 1

A relationship between persons carrying on a business in common for profit. Characteristics:
1. Informal - No strict requirements or formalities to form a partnership
2. Registration - state registration only required prior to dissolving or filing a statement of authority
3. Exception: Limited Partnerships require the filing of a certificate with the Department of State

Question 2

Partnership Liability to 3rd Parties

Answer 2

Agency Principles Apply - Partners are agents of the partnership and are liable for torts committed by other partners within the scope of the partnership.

Exception: the partner so acting has in fact no authority to act for the firm in the particular matter and the person with whom he/she is dealing either knows that the partner has no authority (or does not believe them to be a partner)

Partnerships are bound by valid contracts entered into by other partners.
Partners are jointly and severally liable for debts of the partnership.
Creditors must deplete partnership assets before going after an individual partner.
A limited partner is only liable to the extent of their contribution.

Question 3

Partnership by Estoppel

Answer 3

Partner that represents that partnership exists will be liable regardless of whether it exists.

Question 4

Relationship Between Partners

Answer 4

Partners are fiduciaries of each other, owe a duty of loyalty (no self dealing), duty of good faith and fair dealing, and duty of care.

Question 5

Partnership Prop.

Answer 5

Property acquired in the name of the partnership constitutes the prop. of the partnership.

Property acquired in the name of partner is partnership prop. if instrument transferring the title suggest being acquired for partnership.

Property purchased with partnership assets are presumed to be partnership property, although the presumption can be rebutted.

Question 6

Partner’s Rights

Answer 6

Partners must approve of any transfer of partnership property
Without an agreement, each partner is entitled to equal control
Without an agreement otherwise, partners get no salary
Without an agreement otherwise, profits and losses are shared equally

The addition of a new partner require unanimous consent from all existing partners

Question 7

Dissolution of Partnership

Answer 7

1. If entered into for a set term, by expiration of that term
2. If entered into for a single venture or undertaking, by the termination of that venture/undertaking
3. If entered into for an indefinite time, by any partner giving notice to the others of his or her intention to dissolve the partnership
4. On death or bankruptcy of a partner
5. By power of Court

Assets after dissolution are first applied to pay partnership debts, then distributed among the partners

Question 8

Limited Partnership

Answer 8

Consists of one or more persons who are general partners,. and one or more persons who are limited partners.

Formed when a certificate is filed with the registrar, signed by each person who is , on formation, to be a general partner.

A limited partner may contribute money and other prop. to the partnership but not services

A limited partner is not liable for obligations or liabilities of the partnership except in respect to the amount of prop. they contribute.

Question 9

Limited Liability Partnerships

Answer 9

Formed by filing a registration statement with the State.

A partner in an LLP (1) is not personally liable for a partnership obligation merely because they are a partner and (2) is not personally liable for an obligation under an agreement between the partnership and another person.

Partners can still be liable for (1) their own negligent/wrongful act/omission or (2) for the negligent/wrongful act/omission of another partner or an employee of the LLP if the partner knew of the act and did not trey to prevent it.

Partners in an LLP are personally liable for a partnership obligation to the same extent they would be liable for the obligation if (1) the obligation was that of a corporation and (2) they were directors of that corporation

Dissolved by form filing with registrar of the state.

Question 10

Pre-Incorporation Contracts

Answer 10

Made by a Promoter (a person who is acting on behalf of a corporation yet to be formed).

Corporation is not liable on a pre-incorporation K until it adopts the K (either expressly through BOD action or impliedly through accepting its benefit).

Promoter remains liable on a pre-incorporation K until Novation (an agreement between the Promoter, corp., and 3rd party to release their liability).

Promoters are fiduciaries of each other and of the corp., cannot make secret profit in dealing with them.

Subscribers are persons or entities who make written offers to buy stock from a corporation not yet formed. A pre-incorporation offer to buy stock is irrevocable for 6 months.

Question 11

De Jure Corporation - Articles of Incorporation

Answer 11

Serve as a K between corp. and shareholders and a K between the corp. and the State.

Must include:
1. Corporate Name, Name and Address of each incorporator, Name and Address of Registered Agent/ Legal Representative
2. Statement of Duration
3. Statement of Purpose (can be general or specific, SH can initiate ultra vires actions for exceeding specific)
4. Capital Structure (Stock) - including authorized stock and # of shares per class

Must file articles with SOS and pay fee which is conclusive proof of valid formation.
Board may adopts bylaws, but if they conflict with the Articles then the Articles control.

Question 12

Corporation by Estoppel

Answer 12

If you deal with a business as a corporation, you might be estopped from denying its corporate status at a later date.

Question 13

De Facto Corporation

Answer 13

If you fail to achieve de jure status but made a good faith, colorable attempt to comply with the formalities and had no knowledge of lack of corporate statute, the law treats you as a corporation. Many states have abolished this.

Question 14

Legal Significance of Corporate Form

Answer 14

Corporation is a separate legal person. Generally shareholders are not personally liable for a corporation’s debts.

Question 15

Directors

Answer 15

Generally the BOD manages the business of the corp.
There must be at least one member of the BOD.
SH elect directors and can remove them with or without cause.

Question 16

Board Actions and Meetings

Answer 16

A BOD action requires (1) Unanimous Written Consent or (2) a Meeting.

Valid BOD meeting requires:
1. Notice be given (can be in bylaws)
2. Proxies are not allowed, nor voting agreements
3. Quorum for Meeting: majority of all Directors must be present
4. Voting: to pass resolution, need only majority of those Directors present
5. Each Director presumed to concur in board action unless dissent/abstention recorded in writing

Question 17

Officers

Answer 17

As agents, they may bind the corporation by their authorized activities. Authority can be either:

1. Actual Authority - Given in the articles, bylaws, or by BOD action
2. Apparent Authority - Where the corp. holds the officer out as having the authority to bind them and 3rd party relies on that representation
3. Inherent (Implied) Authority - by virtue of the office held (“an officer would usually have this power”)

Directors have virtually unlimited power to select and remove officers.

Question 18

Liability of Directors & Officers to Corporation & SH

Answer 18

Duty of Care - Must act with care as a prudent person would use in managing his own business in like circumstances, unless AOI have limited liability for lack of care

Duty to Manage - May delegate to committee of one or more directors that recommend actions

Duty to Disclose - Material corporate information to other directors

Duty of Loyalty - May not receive an unfair benefit to the detriment of corp. or SH (conflicted/interested transactions breach this duty unless their material terms are fully disclosed and the transaction was fair to the corporation)

Self-Dealing- Receipt of unfair benefit in transaction with corp. (transaction can be enjoined, set aside, or damages sought equal to profit)

Question 19

Business Judgment Rule

Answer 19

Presumption that directors manage the corp. in good faith and in best interest of the corp. and its SH.

Under this rule, Directors are not liable for innocent mistakes of business judgment.

Question 20

Usurping Corporate Opportunity

Answer 20

A Director may not divert a corporate business opportunity to himself without first fiving the corp. an opportunity to act.

Corp. must have interest or expectancy in opportunity, but lack of financial ability is not a defense.

Remedy - Recovery of profits or compel transfer of opportunity to corp. under constructive trust theory.

Question 21

Indemnification of Directors/Officers

Answer 21

A person sued in their capacity as D or O can get reimbursed for costs incurred in defending a lawsuit.

Not if they lose a lawsuit brought by the crop against them.

Mandatory if D/O wins lawsuit.

Permissive if D/O loses suit brought by another or settles with the Corp. and they were acting in corp.’s best interest/ with good faith. May be granted by (1) majority vote of independent Directors, (2) majority vote of committee of at least 2 independent Directors, (3) majority vote of shares held, (4) special lawyer’s opinion recommending.

Question 22

Major Corporate Change

Answer 22

Generally requires (1) BOD action and (2) Approval by a majority of shares entitled to vote.

Question 23

Small Corp. Changes

Answer 23

Sale of Assets - Approval from Directors and majority of SH’s entitled to vote

Amending AOI - BOD action approval by a majority of shares entitled to vote

Mergers/Consolidation - Requires BOD adopt a resolution setting forth the propose action and submit it for SH vote at SH meeting. Need majority of shares entitled to vote. Dissenting SH may receive appraisal if they (1) object in writing before the meeting, (2) vote against merger or abstain, and (3) file written demands for purchase.

Question 24

Dissolution of Corp.

Answer 24

Voluntary - Requires BOD action and approval by a majority of shares entitled to vote or unanimous written SH agreement.

Involuntary - Court order via SH petition because of BOD abuse, waste of assets, misconduct, deadlock that harms the company, or SH deadlock and failure for at least 2 annual meetings to fill a vacant BOD position. (Court can alternatively order that the SH be bought out).

After either of the above, the corp. exists to wind up its business only (pay creditors and distribute remainder of assets to SH).

Question 25

Stock Issuance - Forms of Consideration

Answer 25

All states allow (1) money, (2) tangible or intangible prop., (3) services already performed for the corp. Traditionally, could not acquire stock through future services or promissory note Modernly, any tangible or intangible prop. or benefit to the corp. including future services and promissory notes.

Question 26

Stock Issuance - Amount of Consideration

Answer 26

BOD are responsible for putting good faith value on the consideration received for an issuance. Par Stock - Minimum issuance price,. Cash or other consideration board values to be at least par value. Non Par Stock - No minimum issuance price - BOD sets price. For this stock need only get consideration deemed adequate by BOD. Treasury Stock (Reacquired Stock) - Stock that was previously issued and has been reacquired by the corp. Upon resale, deemed no par stock. Watered Stock - issuing par stock for less than par value. Directors will be liable if they knowingly authorized an issuance. Buyer will be liable since charged with notice of the par value. If buyer transferred to someone who didn't know the status, that person is not liable if acting in good faith.

Question 27

SH Preemptive Right

Answer 27

Right of SH to maintain her percentage ownership by buying stock whenever there is an issuance of new common stock for money. Does not exists unless granted in AOI.

Question 28

SH Liability - Piercing the Corporate Veil

Answer 28

While a SH is generally not liable for the acts or debts of a crop., a court could pierce the corp. veil and hold SH liable if (1) SH abused the privilege of incorporating and (2) fairness requires it. This is more likely to occur for tort victims than for contract claims (persons contracting with corp. are presumably on notice of their financial situation). Usually Court will pierce if it finds the corp. was undercapitalized at the time of formation or the SH treated the corp. as his alter-ego (via commingling funds, using the corporate form to shield himself from creditors).

Question 29

SH Voting - General Rule

Answer 29

Record SH as of record date has the right to vote. A SH may authorize another to vote his shares (Proxy). Proxies are good for 11 months unless otherwise stated and are revocable at any time save for when the proxy is coupled with an interest in the corp.

Question 30

SH Voting - Practice and Meetings

Answer 30

SH can take a valid corporate action when: 1. Unanimous written consent of the holders of all voting shares, or 2. A meeting satisfies quorum and voting rules. Annual Meeting - held to elect directors Special Meeting - can be called by BOD, the president, holders of at least 10% of voting shares, or anyone AOI provide for.

Question 31

SH Voting - Notice Requirement

Answer 31

Notice must be given of a SH meeting by written notice to every SH entitled to vote, for every meeting. failure to give notice to all SH means action taken at a meeting is void unless those not sent the notice waive the defective notice. Waiver must be express (in writing and signed) or implied (attends meeting anyway and doesn't object)

Question 32

SH Voting - Quorum

Answer 32

For Meetings - Usually a majority of outstanding shares, but not less than 1/3 of shares entitled to vote. For Resolutions - Either (1) a majority of shares represented at the meeting OR (2) majority of shares actually voting.

Question 33

SH Voting - Voting Trusts and Agreements

Answer 33

Trust - written agreement controlling how shares will be voted (10 year maximum). Pooling Agreement - must be in writing and signed. Split on whether voting agreements are specifically enforceable.

Question 34

SH Derivative Suits (SH Acting as Plaintiff)

Answer 34

An action whereby a SH seeks to enforce the corporation's claim, not his own personal claim. Requires: 1. SH must have been a SH at time of conduct giving rise to suit 2. SH must adequately represent the Corp. 3. SH must make a written demands of the Corp. prior to suit unless doing so is futile Recovery goes to the corp. but SH can get legal costs and atty fees if successful. Corp. can move to dismiss if a committee of disinterested SH determines the suit not in corp.'s best interest.

Question 35

SH Right to Inspect

Answer 35

Traditionally SH must have owned stock for at least 6 months or own at least 5% of outstanding shares to have standing for an inspection action. Modernly, and SH can initiate an inspection action.

Question 36

Distributions - When they Happen

Answer 36

BOS has discretion to declare distributions. To force distribution, SH must make a very strong showing that BOD abused its discretion.

Question 37

Distributions - Who Gets Paid and How

Answer 37

Payments to SH can be made by : (1) dividends, (2) repurchase , or (3) redemption (force sale of corp. at price set in AOI). Preferred SH always get paid, General SH only get paid sometimes. Cumulative dividends issue if the BOD suspends dividends for Preferred and General (if they are not doing so hot). The amount will be cumulative of all dividends suspended.

Question 38

Distribution - Funds

Answer 38

Earned Surplus - All earnings minus losses minus dividends/distributions already paid. Capital Surplus - income generated by stock over par value. Never Stated Capital.

Question 39

Limited Liability Company (LLC)

Answer 39

Features: 1. Membership interest can be transferred if approved by majority consent. 2. Gives investors both limited liability and pass through taxes. 3. Members/managers are generally not personally liable for debts. 4. Dissolution same to Corp. 5. Can be dissolved by unanimous written consent of all members or upon death, retirement, resignation, expulsion, or bankruptcy of any member. 6. Each member entitled to vote in proportion to membership percentage 7. Individual members have apparent authority to bind company contractually.

Question 40

Securities - Common Law Liabilities

Answer 40

Securities are investments. Generally, a SH may act in their own personal interest and have no fiduciary duty to the corp. or other SH. A SH who has a controlling interest must not act in a way that unfairly prejudices minority SH. Meaning they cannot (1) sell their shares to "looters" and must make a reasonable investigation of the buyer, (2) sell corporate assets, or (3) sell BOD positions.

Question 41

Securities - Special Facts Doctrine

Answer 41

Many courts impose an affirmative duty on officers and Directors to disclose special facts during securities transactions with a SH. Special Facts are those that a reasonable investor would consider important in making an investment decision. Failure to disclose may entitle a SH to recover the difference between the price paid and the value of the stock after public disclosure.

Question 42

Securities - Misrepresentation

Answer 42

Misrepresentation in securities means (1) a misrepresentation of a material fact, (2) that D knew/believed to be false or made with reckless disregard to its truth, (3) with intent to induce reliance on the misrepresentation, and (4) that the investor actually relied on.

Question 43

SEC Rule 10b-5 - Anti-Fraud Rule

Answer 43

Makes it illegal to use any fraudulent scheme in connection with the purchase or sale of any security. Requires: 1. Scienter (intent to deceive) 2. Deception 3. Actual purchase or sale of securities For Money Damages must also show 4. Reliance 5. Loss causation

Question 44

SEC Rule 10b-5 - Deception

Answer 44

Misrepresentation/Omission of a Material Fact. Where an insider gives a tip of inside info (1) the Tipper can be liable if the tip was made for an improper purpose and (2) the Tipee can be liable if the Tipper breached a duty and the Tipee knew he was doing so. Damages: the difference between the price paid and the price a reasonable time after public disclosure.

Question 45

Fed Rule 16b - Strict Liability for Shorting

Answer 45

Applies to officers, directors, or SH with more than 10% of a reporting corporation (listed on national exchange or with at least 500 SH and $10 mil in assets). May not profit from buying and selling corporation's stock within any 6-month period. No Fraud required. Corporation recovers the profit.

Question 46

Sarbanes Oxley

Answer 46

CEOS and CFOS of reporting companies (listed on national exchange or with at least 500 SH and $10 mil in assets) must certify that based on their knowledge, reports filed with the SEC are true. Willful violation punishable by up to $5 million and 20 years in prison.