Business Associations Flashcards
INTRODUCTION: BUSINESS ENTITIES GENERALLY
A. Business Using an Assumed Name Must Be Registered – with the Office of Secretary of State
1. Assumed Names – any name used to identify a biz other than a person’s own and true name
2. Requirements – NAB – for registration applications
a. Name – of the assumed business and the real and true names of people and their personal representatives intending to carry on business
b. Address – of the business, people intending to carry on business, and their personal reps
c. Business Activity – conducted by the applicant entity
B. Registration Status
1. Refusal and Revocation – SOS can reject application if not distinguishable from another active registered or reserved business name, or from name of a person, or if fraudulent representation by applicant
2. Cancellation – if only registrant of assumed business name is a domestic corporation that has been dissolved, or foreign corporation whose authority to transact has been revoked
3. Amendments
a. Changes in Identity, Names, or Addresses
b. Changes in Location
CREATION OF AGENCY
A. Express Authority – most common form of agency creation; actual affirmative appointment of A by P
1. General or Special Agency – general appointment or for a specific purpose
2. Statute of Frauds – may require some agent appointments to be in writing to be enforceable
a. Real Estate
b. Over One Year
c. At Will Contract
d. Sales Representative
3. Factor – commercial agent w/possession of goods and authority to sell them as if her own
4. Del Credere Agent – personally guarantees that his customers will pay the principal
5. Express Authority Limitations – if 3d party knows agent has limited authority and is acting beyond, no recovery is allowed beyond that restriction
B. Implied or Inherent Authority – authority arises by virtue of kind of agency the agent is fulfilling; whether the act/contract is necessary or usual in carrying out functions that were expressly authorized
1. Business Manager
2. Salesperson
3. Delivery Person
4. Purchase Agent
C. Apparent or Ostensible Authority – may create P’s liability to 3d parties
1. Implied Authority Lacking – but P’s action would lead an ordinarily prudent person to reasonably believe the A has authority to commit the act, then P may be liable for A’s actions
2. Exam Facts
D. Estoppel – when P’s omissions cause a 3d party to mistakenly conclude that an agent had authority to deal; if P fails to correct error, P is estopped from denying liability; often arises when agency relationship is terminated, but P fails to inform 3d parties former A no longer authorized to act
E. Ratification – cures lack of express, implied, or apparent authority and relates back to original K date
1. Representation Necessary – A must have represented to 3d party she was acting on behalf of P
2. Material Facts – A must disclose to P all material facts concerning K, ratify whole K
3. In Existence at Contract Date – P in existence at K date, 3d party may w/draw or rescind prior to ratification
4. Express or Implied – P expressly ratifies K or impliedly by receiving benefits of A’s K
F. Necessity – creates agency in emergency situation, medical aid, hospital, etc.
G. Miscellaneous
1. Capacity
a. Infant Agent – can bind adult P to 3d parties, even though infant could avoid agency K w/P
b. Infant Principal – can avoid A’s K, unless agency created to secure necessities
c. Nondisclosure of Principal’s Incapacity – A who doesn’t disclose may be liable to 3d parties
2. Business Entities – all general partners are agents for partnership P
LIABILITY TO THIRD PARTIES
2nd Question: If an agency relationship exists, how is P liable?
Contract Liability
- Liability and Enforcement Rights of the Principal – imputed to the P if A had express, implied, or apparent authority, or if the K was later ratified by P
2. Liability of the Agent
a. When an Agent is Not Liable – she fully discloses to 3d party that she is acting as A and IDs P
b. When an Agent is Liable – if P undisclosed, unidentified, or lacked capacity; if A misrepresents scope of authority, represented she was dealing w/own account, or guaranteed performance of K (del credere agency)
3. Undisclosed, Partially Disclosed, and Disclosed Principals – (undisclosed) A does not reveal that he is acting on behalf of other P; (unidentified) A says acting on behalf of P, but doesn’t name P; (disclosed) A says acting on behalf of P and identifies P
a. Liability of Agent and Undisclosed or Partially Disclosed Principal – A and P both liable under K to 3d parties; 3d party can enforce against both but limited to 1 recovery
b. Enforcement Power of an Undisclosed or Partially Disclosed Principal – generally, undisclosed P can enforce a K against a 3d party, even if 3d party would not have contracted if they knew the ID of P; but A can’t intentionally conceal P’s identity w/knowledge that ID material
c. Apparent Authority – impossible if P is undisclosed
Tort Liability
- Liability of the Principal – respondeat superior; can implead A for indemnification and contribution
a. Employment Nexus – P is liable if A commits tort while acting in normal course and scope of agency or employment
b. Independent Contractors – P not liable for torts of independent contractor (As who are not subject to P’s control or supervision as to the means, manner, or detail of how the work must be done)
(1) Characteristics – work for more than 1 P, have own tools, set own hours, may be paid on piece-work basis
(2) Non-Delegable Activities – dangerous activities, duty of care owed to public
c. Negligent Selection or Appointment – P liable if reason to believe A poses some danger, but fails to terminate relationship or hires anyway; also potentially liable for lack of supervision
2. Liability of the Agent – always liable to 3d party for their own torts
Criminal Liability
not imputed to P unless she participated in crime
AGENT’S DUTIES
Q #3: Has the A breached her duty to P? If so, enumerate specific ways breach occurred, or could also have occurred.
A. Fiduciary Duties – many As deemed fiduciaries of Ps, w/duty of good faith
1. Basic Standard – HOLT – honest dealing, obedience, loyalty, and trust
2. Full Disclosure – to the P by A
3. Conflict of Interest – A cannot deal for own account, take secret profit, or commingle funds; only possible to rep competing Ps w/disclosure and informed consent from both parties
4. Delegation of Duties – A cannot usually delegate agency duties w/out permission of P, unless authority to sub-delegate expressly authorized or clearly implied; both A and sub-A potentially liable
B. Standard of Care – reasonable care in the performance of his duties
1. Obey Instructions – all reasonable orders from P and liable to P for damages from breach
2. Inform Principal – of all relevant facts and failure to inform is breach; A’s knowledge is imputed to P if information at issue is w/in agent’s authority to acquire
3. Gratuitous Agent – not obligated to perform, but if she begins, she cannot be negligent
C. Exceeding Express Authority – A liable to 3d party for breach of warranty of authority; also liable to P for damages = 3d party’s claims paid by P – benefits P received from A’s actions
D. Shop Rights – allows both P and A non-exclusive right to use an invention or improvement created in ER’s workplace
PRINCIPAL’S DUTIES
Q#4: Has the P breached her duty to A? focus on sections A-C
A. Reimbursement and Indemnification
1. Reimburse Business Expenses – incurred by A
2. Indemnify for Liability – flowing from duties performed under the P’s direction
B. Safe Work Place – for employee As
C. Compensation – for authorized services performed
D. Assumption of Risk Abolished – P is liable for A’s personal injuries suffered in performance of work
E. Fellow Servant Rule – extends workers’ compensation coverage to injuries caused by another EE; must be authorized by management or part of management for liability to attach
TERMINATION
Q#5: Has the agency relationship ended? If so, how?
A. Voluntary
1. Completion, Agreement, or Breach – of K
2. Revocation or Renunciation – P can revoke authority; A can renounce authority; reasonable notice must be given to other party; damages can be brought for improper renunciation
3. At-Will Employee – A can be terminated or quit at any time
B. Involuntary − ISIS – doctrine of “excusable nonperformance” may allow involuntary termination
1. Incapacity or Death of Principal – terminates agency, except as to 3d parties who relied on written authority and have no notice of incapacity
2. Source of Agency Supply Destroyed – e.g., property to be managed
3. Illegality of Agency Agreement – resulting from subsequent legislation making agreement illegal
4. Subject Matter of Agency Destroyed – e.g., winter freezes crop from property
C. Agency Coupled with an Interest – written agency + interest in agency property is irrevocable unless P pays debt
D. Notice to Creditors or Customers – to avoid future liability to 3d parties arising from actions taken under A’s apparent authority
1. Actual Notice to Past Customers
2. Constructive Notice to Third Parties
PARTNERSHIP INTRODUCTION
A. RUPA In General – Revised Uniform Partnership Act (ALI)
B. Definition – A general partnership is an association of two or more persons who intend to carry on and manage as co-owners a business for profit. [Memorize]
1. Types of Partnerships – may be 1) full for a definite term; 2) for a particular undertaking (joint venture, discrete biz projects); 3) or at will (default rule) w/no time limit
2. Co-Owner Requirement – share business profits
3. No Presumption – of partnership from joint tenancy, tenancy in common, or community property
4. Share of Profits – presumptive evidence of partnership status and potential personal liability
5. Capital and Profit – all partners have same % interest in capital, profit and loss allocations, and distributions unless agreed to the contrary
PARTNERSHIP ENTITY ORGANIZATION
A. Requirements – no filing requirement for general partnership
1. Statement of Partnership Authority – not usually required, but partnership may file written statement of authority; effective for five years
2. Statement of Denial – of authority or status of a partner; tells the entire world who is authorized
3. Fictitious Name – of partnership requires registration w/department of licensing in the state
4. Non-waivable Provisions – cannot restrict partner access to financial statements, right to inspect books or records, eliminate obligation of good faith in dealings between partners, or restrict rights of 3d parties
B. Capacity – common law rules apply (e.g., infants can disaffirm partnership interest but can’t w/draw contributed capital to detriment of creditors
C. Formation Methods
1. Express
a. Statute of Frauds – must be written if > 1 yr; “at will” only requires oral agreement
b. Contributions – what is contributed by partners in return for a partnership interest; services or promissory notes qualify
c. Equal Capital Accounts – created by partner contributions, all partners own same % of equity capital interest and share profits equally
2. Implied
a. Sharing Profits – prima facie evidence which establishes a rebuttable presumption of J&S liability; BOP shifts to alleged partner to show he was not a partner
b. Other Situations – liability may also extend for sharing management, contribution to capital, etc
3. Estoppel – partnership by estoppel maybe available where person represents himself by words or conduct as a partner or knowingly allows name to be used in partnership trademark
PARTNERSHIP PROPERTY RIGHTS
A. Definition – partners have property rights in their ownership interest in the partnership as an entity and the right to participate in management
1. Entity Ownership – property owned by partnership as an entity
2. Presumptions – property acquired w/partnership assets is partnership property, even if not held in partnership name; property acquired in partners’ individual names is presumed separate, even if used for partnership purposes; rebuttable presumptions
B. Partners’ Ownership Interest – is her share of profits and losses and right to receive distributions; treated as personal property
1. Common Law – conveyance of partnership ownership interest dissolved partnership
2. Modern Conveyance – under RUPA, partner can convey her share of profits and losses to assignee; assignee only has right to income stream, but not right to manage partnership
C. Charging Orders – judgment creditor of an individual partner can request a court order charging interest of partner for unsatisfied amount of judgment; all profits due to debtor partner paid directly to judgment creditor
PARTNERSHIP RIGHTS AND RELATIONSHIPS
A. Fiduciaries – under RUPA all partners owe duty of care and loyalty in dealings w/each other and partnership
1. General Standards and Duties
a. Loyalty – DINA
(1) Due Care
(2) In Good Faith and Fair Dealings
(3) Not Compete – w/partnership as a party or on behalf of a party that has an interest adverse to partnership
(4) Account to Partnership Benefits and Property – derived by the partner in the conduct and winding up of partnership business, or from use of partnership property
b. Reasonable Care Required – partners can’t engage in grossly negligent or reckless conduct, intentional misconduct, violation of the law
c. Good Faith and Fair Dealing – w/respect to the partnership
d. Partnership Transactions
2. Liability of Partner –if partner breaches duty, partnership has COA against partner for breach of fiduciary duty
B. Profit and Loss Sharing
1. Partner Compensation – equal share unless provided otherwise in K
2. Tax Treatment -
C. Management Rule
1. Majority Rule – all partners have equal rights to day-to-day management; decisions made by vote
2. Unanimous Approval – for admission/expulsion of general partners, changing partnership K
3. Outside Ordinary Course – decisions falling outside the ordinary course of the partnership require unanimous approval of the partners for the increase in potential legal exposure
D. Right to Books and Records – each partner has access to; kept at CEO
E. Information – partnership must render true and full information about its business affairs to all partners; partner may demand access to other reasonable, proper information
F. Action by Partnership and Partners – partnership can sue partner for breach of K or violation of duty; courts can resolve disputes in equity or at law w/out resorting to dissolution of the partnership
PARTNERSHIP LIABILITY TO THIRD PARTIES
A. General Liability – partners are personally liable for all partnership debts
B. Agency Rules – every partner is agent for partnership principal, making partnership liable under normal principles of agency law
1. Contract Liability
a. Ordinary Course – apparent or inherent authority of partner in carrying out ordinary course of partnership can bind partnership
b. Not in Ordinary Course – no partnership liability if express, implied, apparent authority absent; actual authority required for acts by partners that appear to be outside ordinary course and scope of partnership
2. Tort Liability – vicarious liability may be present if the partner was acting in the ordinary scope and course of the partnership business
C. Joint and Several Liability – for partnership entity obligations to 3d parties; successful P first tries to satisfy judgment from partnership assets; if not satisfied, can go after individual partners for the full remaining amount (e.g., if 2 partners are insolvent, other partner will have to pay whole amount and then bring contribution claim v other two partners)
D. Transfer of Partnership Property
1. Property Held in Partnership’s Name – if 3d party had reason to believe transferring partner not authorized, strong argument partnership can recover; recovery not allowed if grantee re-conveyed property to subsequent transferee w/out knowledge original conveyance unauthorized
2. Property Held in Individual Partner’s Name – partner may transfer and partnership may recover if the transferee knew the property was owned by partnership and that person who made transfer lacked authority
3. Real Property Transfers – RUPE includes real and personal property in transfer rules
PARTNERSHIP DISSOCIATION
A. Dissociation Events – partner leaves partnership; disassociated partner should receive value of ownership interest; if only 2 partners = dissolution and winding up
1. Express Will – partner can w/draw at any time absent K to contrary
2. Expulsion
a. By Partners – by unanimous vote, w/or w/out cause, so long as provided for in agreement; otherwise hard to expel, only for limited reasons (unlawful to carry on biz w/partner, transfer of ownership interest)
b. Judicial – court may expel partner who engages in wrongful conduct or conduct making it impracticable to carry on the partnership business with that partner
3. Insolvency – will disassociate unless vacated or stayed w/in 90 days
4. Death or Incapacity of Partner – disassociates partnership
B. Wrongful Dissociation – if partner disassociates in violation of agreement, or if partner disassociates by express will
C. Dissociation Effect – does not necessarily terminate the partnership; RUPA exception: if partner disassociates by express will and partnership is at-will, disassociation will dissolve partnership as a matter of law
D. Purchase of Dissociated Interest – if entity is not dissolved, partnership shall purchase disassociated partner’s ownership interest
1. Price – buyout price is pro rata share of partnership net assets on a going concern basis or asset liquidation basis; damages for wrongful disassociation are set off against buyout price
2. Non-Agreement – if no buyout price agreement w/in 120 days, partnership will tender cash estimate of buyout price to disassociating partner
E. Dissociating Partner’s Ongoing Liability
1. Authority Terminates – partner loses actual authority to bind partnership upon disassociation but does not cancel lingering apparent authority to 3d parties
2. Two-Year Window – partnership still bound by actions of disassociated partner if 3d party reasonably believed that the disassociated partner was still partner
3. Statement of Dissociation – filed w/secretary of state, operates to cut off two-year window
4. Prior Obligations – not discharged upon disassociation; partnership will indemnify disassociated partner for future-create liabilities, but 3d party rights not extinguished
5. Partner’s Name Use – continued use by partnership does not necessarily make disassociated partner liable for partnership obligations
PARTNERSHIP DISSOLUTION AND WINDUP
A. Events Causing Dissolution – if at least half of remaining partners decides to dissolve; business must be wound up
1. Partnership Agreement – may specify terminating event or expiration
2. Illegality – making business unlawful (e.g., banning online gambling)
3. Judicial Determination – upon showing economic frustration, partner’s conduct making business impractical, showing equitable to wind up partnership
B. Partnership Continues After Dissolution
1. Purpose – only to wind up business and distribute remaining assets
2. Participation – by all partners who have not wrongfully disassociated
3. Liability – partner who creates unauthorized partnership liability during dissolution liable to partnership and other partners for any damages
4. Statement of Dissolution – informs world that partnership has dissolved and is in wind up process
C. Liquidation Distribution Priority – CPU
• Creditors, including partners who are creditors
• Partners for capital account contributions
• Undistributed profits to partners
D. Settlement and Contribution Right – partners required to contribute $ if needed to pay of creditors, satisfy other partner’s contributions
PARTNERSHIP CONVERSION AND MERGERS
RUPA: conversion of partnership to limited partnership, or merger w/another partnership, must be approved by partners; dissenters have appraisal rights to receive the fair value of their partnership interest; conversion requires filing certificate of limited partnership
LIMITED PARTNERSHIPS
A. Requirements – governed by Uniform Limited Partnership Act 2001 (ULPA) in ½ states; other ½ Revised Uniform Limited Partnership Act 1976
1. Certificate of Limited Partnership – if written must be delivered to secretary of state’s office for filing; otherwise LP fails and general partnership results
2. Name – must contain “limited partnership” or LP
3. Office for Records and Registered Agent – LP’s office address identified, and LP must keep record of contributions of every partner, financial statements, and tax returns for last 3 years; registered agent must be appointed for service of process
4. General Partner – at least one required for LP, may be corporation or another entity
5. Foreign Limited Partnerships – must register w/secretary of state before transacting business
6. Annual Reporting – ULPA: all LPs must file an annual report; RULPA: not required
7. Advantages – limited partners are only liable to the amount of their contributed capital; similar to corporate shareholders but w/advantages of partnership taxation and special allocations
B. Prohibited Functions
1. Management and Name – RULPA 1976: limited partner cannot actively participate in control of partnership or allow name to be used in the partnership trade name; ULPA: limited partner can be named in entity’s tradename
2. Approved Functions - RULPA 1976: limited partner liable to 3d parties if it is also a general partner or participates “in the control of the business”
a. Safe Harbor – limited partner not considered to participate in such control
b. New Rule – ULPA 2001: limited partner not personally liable for an obligation of limited partnership solely by reason of being a limited partner, no matter what
3. Service Contributions – can be in the form of cash, notes, or past or future personal services
C. Liability to Third Parties – two exceptions to generally limited exposure for partners:
1. Named in Tradename – liable to 3d parties who extend credit to the entity; 3d party must lack knowledge that limited partner is not general partner
2. Holding Out – limited partner who holds self out as general partner estopped from later denying liability of general partner to 3d parties
D. Ownership Interests
1. General Partner Changes – requires written consent of all existing parties
2. New Limited Partners – LPs can sell or assign interests w/out causing dissolution, unless otherwise provided in partnership agreement
3. Partner Bankruptcy – creates w/drawl or dissociation of that partner, may subject entity to claims by partner’s individual creditors to extent of general partner’s ownership interest
4. Allocations – profits and losses and distributions allocated according to capital contribution values as stated in LP certificate
5. Fiduciary Duty – general partners have fiduciary duty to limited partners
6. Derivative Action – can be brought by limited partner if general partner w/authority refuses to initiate such an action after demand
7. Dissenter Rights – limited partners can dissent from merger of entity and entitled to receive fair value of partnership interests
8. Other Partner’s Rights – mostly the same as general partner rights
E. LP Dissolution – when last general partner dies or w/draws, unless w/in 90 days all partners agree to continue the business and appoint another general partner
LIMITED LIABILITY PARTNERSHIPS
partners are treated as shareholders; no distinction between general/limited partners; partners are insulated from liability of other partners’ acts, but not from own torts, nor those of directly supervised subordinates
A. Formation and Tradename – file an application to be designated as LLP
B. Contributions and Allocations – no restrictions on contributions; allocation of profit and loss determined by agreed value of partner’s contributions
C. Professional Practices – usually available to all persons authorized to practice under professional incorporation rules of a jdx
D. Partner’s Liability – malpractice insurance typically required if partners want to escape liability
CORPORATIONS FORMATION PROCESS
if L involved in forming corporate entity, consider Competency, Confidentiality, and Conflicts of Interest
A. Incorporator / Promoter – the moving force putting together the business plan
1. Fiduciary Status – promoter owes corporation duty of good faith, no secret profits/conflicts
2. Personal Liability – attaches if promoter entered into K on behalf of corporation, knowing not yet incorporated, promoter is J&S liable
3. Undisclosed Principal – promoter potentially personally liable if planned corp not disclosed
4. Compensation – no absolute right for promoter; Board of Directors may approve
Articles of Incorporation
must be delivered to Secretary of State; SOS’s filing creates legal entity
1. Contents a. Required Information − RINS (1) Registered Office and Agent – street address; agent must affirmatively agree to serve and accept service of process (2) Incorporator(s) – name and address of each (3) Name – must contain corporation, incorporated, company, or limited (4) Stock Information – number of authorized shares (votes) per class; distinguishing description for each class required (classes based on voting, distribution priority, etc.) b. Optional Information – may not indemnify a director for FICE – Fiduciary duty breach, Intentional wrongdoing, Criminal act, or Excess distributions to shareholders c. Compliance – SOS’s filing conclusive evidence that entity has complied w/all legal conditions 2. Article Amendments – board can amend minor ministerial matters, otherwise shareholders must approve all amendments that significantly affect shareholder rights by a majority vote
De Facto and De Jure Status
- De Facto Corporations – corp that fails to become de jure corp, but acts in good faith as if it is a corp; court may shield purported shareholders from liability
2. De Jure Corporations – substantially complies w/statute; shareholders insulated from liability
Corporation by Estoppel
if creditor treats entity as corporation, estopped from treating as partnership in future if discovered not really corporation
Organizational Meeting
board of directors elected, stock distributed, bylaws adopted
Bylaws and Special Agreements
- Bylaws – define day-to-day corporate governance rules and determine number of directors
2. Close Corporations – private corporations owned by less than 10-50 owners; no shares, but members’ interest expressed as % of total ownership
3. Initial Report – corporation must usually file w/SOS, specifying officers, directors, registered agents, and description of nature of business
Annual Report
corporations must file w/state and pay annual license fee
Hierarchy of Authority
1) State corporate law; 2) Article of incorporation; 3) Bylaws; 4) Resolutions adopted by directors and shareholders; 5) Minutes of ongoing corporate meetings
DOMESTIC OR FOREIGN STATUS
corporations as “domestic” in state of incorporation; laws of the state control internal corporate governance; foreign in all other states until registers w/SOS
A. Nexus to State – “transacting business” in a state if in-state activities are permanent, substantial, and continuous; must exceed isolated transactions, sales by mail, activities through independent contractors
B. Consequences of “Transacting Business” – foreign corporation must incorporate or register as foreign corporation by obtaining certificate of authority
C. Effect on Legal Actions – non-registration deprives corp right to sue in state courts; Ks legally unenforceable; still have right to defend suit under Constitution
D. Long-Arm Statutes – foreign corps may be subject to suit if event causing damages arose in that state; e.g., car accident caused by authorized corporate agent
CORPORATE LIABILITY
A. Registered Agent – serve a corporation properly by serving registered agent; serve SOS if corporation doesn’t have registered agent in state
B. General Liability - corporation liable for entered into by officers and agents; vicariously liable for torts under respondeat superior
C. Purpose and Powers
1. Any Lawful Purpose – corporation can engage in any lawful business unless limited by articles of incorporation to specific purpose
2. “Ultra Vires” – activity that goes beyond the stated purpose of a corporation as provided in articles of incorporation, bylaws, corporate statute; incapacity defense asserted by shareholder seeking to enjoin or set aside corporate act, corporation in suit v director or agent, or by attorney general
a. Application – frequent example: corporate act violates a statute
b. Third Parties – cannot avoid K on basis that corp was w/out authority to make; corp can raise ultra vires as a defense unless 3d party knew was acting outside scope of authority
Board of Directors
exercises all corporate powers, makes tactical decisions, and manages officers to assure long-term success and profitability to shareholders
1. Elections − Appointment – elected by shareholders a. Cumulative Voting Rule – gives minority shareholders representation on board of directors if articles of incorporation affirmatively provide for the rule; shareholder can cumulate her total votes (shares X open board seats) and cast for one director/nominee; default rule in WA b. Removal – directors can be removed by shareholders, w/or w/out cause, upon special meeting and prior notice; court can also remove if it finds director committed fraud, gross abuse of position, or intentional infliction of harm upon corporation 2. Dividends – board has sole power to declare dividends and distributions to shareholders; dividend may not be paid if the corporation will be rendered insolvent; directors who approve such dividends are personally liable 3. Board Meetings – board actions can only be official if taken during valid meeting; directors can protest form of notice of meeting a. Regular Meetings – no notice required; director can also waive notice by showing up after she has protested and participating in discussion of substance of meeting b. Special Meetings – two days’ notice required for special meeting c. Voting Proxy – directors can’t give to another director, must attend personally or by phone/video conference; directors can be liable for breach of fiduciary duty, so it’s important to know when a director has agreed/disagreed w/corporate action or decision; assent presumed unless: 1) dissent/object at beginning of meeting, 2) ask that dissent be entered into meeting, or 3) deliver written notice of dissent after meeting d. Action Without Meeting – OK w/unanimous written consent of directors e. Electronic Transmissions – now OK to provide notice if director or shareholder has consented; otherwise notice must be in writing
Fiduciary Duties
directors, officers, senior executives are fiduciaries w/1) duty of care, 2) duty of loyalty, and 3) duty of good faith; director held to standard of care that a prudent director would exercise under similar circumstances (considered to be a gross negligence standard)
a. Member Duties – duty of care is that of a reasonably prudent person managing their own financial affairs
b. Conflicts of Interest – CUT
(1) Competing With Corporation
(2) Usurp a Corporate Opportunity
(3) Trade Secret Appropriation
• Remedy – transactions set aside and/or profits disgorged; damages recoverable
c. Interested Transactions – occurs when director has personal interest in a corporation’s transaction; in order for transaction to be proper, must be 1) fully disclosed by interested directors and recorded in corporate minutes; 2) approved by disinterested parties; 3) terms must be at market and fair w/reasonable terms (not too favorable)
d. Close Corporations – members subject to all fiduciary duties above; member ownership can be restricted by non-competes, transaction restrictions; majority owners have heightened duty to minority owners
Officers
authority to carry out everyday business operations as enumerated by corporate bylaws
1. Corporate Positions – prez, vice-prez, etc. 2. Dismissal and Fiduciary Duties – officers are at-will employees; held to same duty as directors
Business Judgment Rule Defense
RIS – rebuttable presumption that directors and officers have acted in good faith and with due care; rebut w/evidence that director acted recklessly or grossly negligent, but liability does not attach for good faith errors in judgment; business decision must have been Reasonable at the time; In good faith; Supported by a rational basis after an investigation
1. Reasonable Reliance – by officers and directors on information and assurances from officers, employees, committed, legal counsel, accountant 2. Criteria Applied – whether an ordinary prudent business person under similar circumstances could have reasonably reached the same conclusion; must have been reasonable investigation
Indemnification Agreements
require the corporation to pay for damages, legal costs, and attorney fees incurred by directors, officers, or employees personally named as party to a suit; in shareholder action, corporation required to indemnify prevailing director wholly successful (merits or procedure)
STOCK SHARES
A. Stock Subscriptions and Options – subscription: future shareholder’s promise to purchase stock; generally irrevocable for 6 months unless specified otherwise; COA against subscriber if they decide not to purchase share; options: no purchase required
B. Payment for Shares – may be in cash, promissory notes, property, benefits, past or future services performed for corporation; board’s determination of adequacy of consideration is conclusive
C. Negotiable Securities – stock shares are negotiable; endorsement by named stockholder necessary for transfer of ownership
D. Preemptive Rights – entitle shareholders right to purchase more shares pro rata to maintain proportional ownership interest; automatic in WA; on exam, note if not mentioned, would be available if provided by statute or articles of incorporation
E. Preferred Shares – may have superior rights to dividends, but usually no voting rights
F. Other Definitions
1. Authorized Shares – incorporation articles must specify # and classes of share permitted
2. Outstanding Shares – issued by unredeemed
3. Redeemed Shares – corporation can repurchase or redeem own shares
Meetings and Voting
shareholders have right to vote for directors and resolutions at annual meeting
1. Shareholder Meetings – corporation shall hold regular meeting annually; board or at least 10% of stockholders making written demand may call special meeting 2. Court-Ordered Meeting – upon showing that annual meeting not held, or demand for special meeting disregarded by board 3. Notice of Meetings a. Time Requirements – at least 10 days for regular meetings; at least 20 days if meeting includes action on fundamental changes b. Notice Waiver – defects in notice waived if shareholder attends and doesn’t object at beginning of meeting 4. Resolutions and Obtaining Shareholder Lists – shareholders owning 1% of shares valued at minimum $1k may submit business resolutions 5. Voting – do in person or by proxy; proxy given in writing, valid for 11 months; company has to disclose all relevant information before proxy valid 6. Quorum Requirements – simple majority of shares entitled to vote is sufficient to form a quorum unless articles call for higher % 7. Electronic Transmissions – OK for notice, proxies, and consent 8. Action Without Meeting – OK if written consent obtained by all shareholders; common in wholly owned subsidiary 9. Voting Trusts and Agreements – written voting trust confers power to vote on behalf of all beneficial interests of members of stock-block group 10. Other Rights – vote on amendments, bylaws affecting rights; Dodd-Frank requires enhanced shareholder disclosure of “golden parachute” in merger proxy solicitation; voluntary say on executive compensation
Records and Financial Statements
- Corporate Records
2. Financial Statements
3. Inspection Right – shareholder has right to inspect and copy relevant books, records, and shareholder lists for a proper purpose
4. Corporate Refusal – if corporation refuses shareholder access to records, court may compel; corporation may refuse if shareholder intends to use for wrongful purpose
