Business associations

Question 1

How is agency conferred by express authority?

Answer 1

There is an express/deliberate appointment by the principal. Scope could be general or specific (And also scope of liability may be limited) And - possible that the Statute of Frauds require a writing (Real estate/land, Obligation over one year, state statute requires)

Question 2

How is agency conferred by implied or inherent authority?

Answer 2

1. Ask: Was the conduct in question “necessary or usual” to carrying out functions of an expressly-authorized agency? (then okay)
2. Is the agent one of the following (then implied authority):
   a. Business manager?
   b. Salesperson?
   c. Delivery person?
   d. Purchase agent?

Question 3

How is agency conferred by apparent authority?

Answer 3

Ask: Did the principal take actions that would lead a reasonable person to believe the agent had authority?

Question 4

How is agency conferred by estoppel?

Answer 4

Ask: Did the principal’s omissions lead a third party to mistakenly believe the agent had authority? Then estopped from avoiding liability… (ex: agency terminated but principal didn’t tell 3rd parties)

Question 5

How is agency conferred via contract ratification?

Answer 5

Agent entered into a contract w/3rd party without authority, BUT

a. Agent represented that (s)he was acting on principal’s behalf
b. Principal either expressly ratified the K or accepted its benefits
c. Principal has knowledge of the K and all its material terms

Question 6

How might agency be conferred by necessity?

Answer 6

Rare - in emergency situations like a family member contracting for medical aid

Question 7

When might a principal avoid contract liability for contracts entered into by its agent (assume authorization by agent)?

Answer 7

(1) Did the aggrieved party know that the principal limited agent’s authority? Then no liability for what the agent did beyond the scope (2) Is the principal under 18? Then can avoid liability unless agency was securing necessities for him (3) principal lacked capacity, (4) undisclosed principal and 3rd party relies on apparent authority (not possible b/c didn’t know there WAS a principal)

Question 8

What two ways can a principal be held liable for torts committed by the agent?

Answer 8

(1) Respondeat superior liability (but not independent contractors unless inherently dangerous (nondelegable) activity), (2) negligent supervision/selection

Question 9

When might a principal be liable for criminal acts by her agent?

Answer 9

ONLY if she participated in the crime!

Question 10

How might an agent be held liable under contracts entered into for her principal?

Answer 10

(1) Was (s)he a del credere agent (personally guarantees payment to principal) (2) Did (s)he exceed her authority? (3) Was the principal undisclosed (agent doesn’t reveal that she is acting for a principal at all)? Then agent becomes personally liable (4) Was the principal unidentified (agent reveals that she is an agent but not for whom) (5) Did the principal lack capacity? Agent personally liable

Question 11

How is an agent held liable for torts committed during the course of her agency?

Answer 11

Agents are ALWAYS liable for torts they commit!

Question 12

How might an agency relationship be terminated?

Answer 12

i. Job completed
ii. Breach of contract
iii. Voluntary termination by agreement
iv. Revocation by principal
v. Renunciation by agent (remember no specific performance mandate possible for personal services)
vi. Involuntarily terminated? ISIS
1. Incapacity/death of principal
2. Source of agency supply destroyed
3. Illegality (subsequent to agreement)
4. Subject matter of agency destroyed

Question 13

When is an agency irrevocable?

Answer 13

When it is coupled with a property interest: for example, a mortgage

Question 14

What is a partnership?

Answer 14

A partnership is an association of two or more persons to carry on and manage as co-owners a business for profit. Express intent to form a partnership is not required.

Question 15

What is agency?

Answer 15

Agency is the fiduciary relationship created when an agent acts on behalf of a principal in a manner that effects the principal’s legal relationships with third parties

Question 16

How can a partner by dissociated from a partnership?

Answer 16

i. At will (so long as partnership agreement doesn’t preclude this)
ii. Expulsion by partners/court
iii. By insolvency
iv. By death/incapacity

Question 17

What are they key duties of partners in a partnership?

Answer 17

1. Fiduciary duties
   a. Loyalty: CAP
   i. Competition prohibited
   ii. Avoiding adverse interests
   iii. Partnership accounting for bennies
   b. Reasonable care, good faith
2. Liable to other partners for breaching these duties
3. Liable for share of losses
4. If wrongfully dissociated, may create damages for other members

Question 18

What are the key rights of partners in a partnership?

Answer 18

1. Share of profits
2. Equal rights in day-to-day management
3. Right to books/records w/prior notice
4. Transfer partnership (and individually-held) property
   a. BUT if transfer entity-owned property w/o authorization, entity may recover

Question 19

How might a partnership be formed?

Answer 19

1. Expressly (SOF may be triggered)
2. By implication:
   a. Profit sharing = prima facie evidence of partnership
3. Estoppel: person represents himself by word/conduct as a partner (to protect 3rd parties)

Question 20

What’s the difference between partnership dissociation and dissolution?

Answer 20

Dissociation: partners leaving the partnership, dissolution: terminating the entity itself

Question 21

After a partner dissociates, what potential outcomes?

Answer 21

1. Only two partners to begin with? Dissolution and wind-up!
2. Partnership at-will? Automatically dissolves w/dissociation
3. If NOT dissolved, other partners must purchase the dissociated partner’s ownership interest!

Question 22

What happens to the rights of a dissociated partner as they relate to a still-existing partnership entity?

Answer 22

a. Former partner loses authority w/in entity
b. BUT can bind third parties who reasonably believe still in partnership (for 2 years)
c. Entity and/or the former partner can file a statement of dissociation w/Sec of State and that provides constructive notice 90 days after filing

Question 23

What are the main duties an incorporator owes to the corporation she seeks to incorporate/promote?

Answer 23

The three C’s: Needs to be Competent, maintain Confidentiality, and avoid Conflicts of interest

Question 24

What is required of a corporation’s Articles of Incorporation?

Answer 24

1. Filed w/Sec. of State

2. Requires RINS: Registered agent, Incorporators, Name, Stock details

Question 25

What are the essentials for a properly incorporated corporation?

Answer 25

Incorporated by an incorporator/promoter?

1. Acts as agent in initiating the corporation
2. Owes a fiduciary duty
3. Needs to be Competent, maintain Confidentiality, and avoid Conflicts of interest
   ii. Articles of Incorporation
4. Filed w/Sec. of State
5. Requires RINS
   a. Registered agent, Incorporators, Name, Stock details
6. Art.’s of I can be amended by board of directors
   iii. Has an organizational meeting taken place?
7. Adopt bylaws, reports

Question 26

How might an entity be treated as a corporation despite a lack of proper traditional incorporation?

Answer 26

It could be considered de facto corporation if the entity acts in good faith as if it were a corporation, or shareholders could be protected by estoppel

Question 27

What is the hierarchy of applicable law to corporations?

Answer 27

1. State statute
2. Articles of incorporation
3. Bylaws
4. Corp resolutions, minutes

Question 28

What does it mean for a corporation to be “transacting business” in a state?

Answer 28

The corporation has permanent, substantial, continuous activities in the state (must be a nexus). For example, building a fixed structure somewhere in the state.

Question 29

What happens if a corporation transacts business in a state w/o registration or authorization?

Answer 29

If transacting business in a state w/o authorization/registration, may have to pay a fee and may be UNABLE to defend its own rights in that state

Question 30

What are the key rights of shareholders in a corporation?

Answer 30

a. Vote for board of directors, resolutions
b. Inspect relevant books, records (with written demand)
c. Right to receive annual financial statements each fiscal year
d. Right to sue the corp’s directors/officers for gross negligence, fraud, breach of fiduciary duty
e. Shareholder’s derivative action: if board fails to enforce corporate right, shareholders can do so w/written notice
f. Approve fundamental corporate decisions (And, if dissenting from those decisions, the right to appraisal (fair cash value of their shares))

Question 31

What are the main ways that statutes impose liability to shareholders (general rule is no shareholder liability for the corporation’s debts)?

Answer 31

1. Liable for amount specified in subscription agreement
2. Equitable insolvency – shareholders may have to defend liability to creditors if corp becomes insolvent
3. Distribution exceeds the liabilities – shareholders become liable for the off-balance debt

Question 32

What are key duties of members of a corporation’s board of directors?

Answer 32

a. Fiduciary duty – good faith, reasonably prudent business person
b. Duty to stay informed about corporation’s financial condition
c. Loyalty/avoid conflicts of interest: CUT
i. Competing w/corp
ii. Usurp corp opportunity
iii. Trade secret appropriation

Question 33

When might the common law/court consider a shareholder liable because the corporate veil was “pierced?”

Answer 33

1. If position as a shareholder is a “mere sham” (treating corporation as ‘alter ego’
2. Shareholder fraudulently & intentionally misleads a 3rd party to believe the entity was a partnership (estoppel)
3. Disregard/abuse of the corporate form

Question 34

Under what circumstances might a court order dissolution of a corporation?

Answer 34

Subject to a shareholder suit where one of the FOWD factors appears:

a. Fraud
b. Oppression (maj shareholders to minority shareholder)
c. Waste of assets
d. Deadlock

Question 35

What is the RMBCA?

Answer 35

The Revised Model Business Corporations Act

Question 36

How might a close corporation operate?

Answer 36

A close corporation (usually less than 36 shareholders) may opt to run like a partnership.

Question 37

What restriction exists for majority shareholders?

Answer 37

They may not use their power to oppress the interests of minority shareholders.

Question 38

Pre-incorporation of a corporation, but after a promoter/incorporator is identified, can the entity be held liable for contracts entered into?

Answer 38

Pre-incorporation, the corporation is not a legal entity and therefore cannot be entered into contracts. Even though we treat pre-incorporated corporations as a general partnership, this does not mean the incorporator acts as agent for the entity: rather the incorporator becomes personally liable for those contracts.

Question 39

What standard of care do directors owe their corporations?

Answer 39

Due care – same degree of care/ prudence a self-interested person would exercise in own affairs

Question 40

How does the business judgment rule operate?

Answer 40

Business Judgment Rule – Courts PRESUME directors act with adequate care in making decisions; burden of proof to show negligence on plaintiff.
Relevant factors to determine good faith business judgment – whether obtained adequate information, spent sufficient time, and exercised diligence (high burden to disprove its application).