Business Associations

Question 1

Agency Definition

Answer 1

A relationship that arises when one person (principal) manifests an intention that another person (agent) act on the principal’s behalf

Question 2

Agency Formation Elements

Answer 2

1) Capacity;
2) Consent;
3) Control

Question 3

Agency Liability - Negligence

Answer 3

If 1) employee or 2) IC involved in inherently dangerous activity or non-delegable duty, apply vicarious liability

Question 4

Agency Liability - Intentional Tort

Answer 4

VL if employment authorizes use of force, friction generated, or tort furthers principal’s purpose

Question 5

Types of Authority

Answer 5

1) Express - agent has express permission from Principal to act
2) Implied - Nature of Agent’s position implies authority to act in a particular matter, either from custom/usage/acquiescence
3) Apparent - Principal communicates, by some statement or act, to a 3rd party the apparent authority of Agent to act on Principal’s behalf with respect to 3rd party
4) Ratification - Principal agrees to be bound by the unauthorized acts of the Agent after the fact, or there are a series of acquiescences

Question 6

Agent’s Duties

Answer 6

1) Undivided loyalty
2) Obedience to Principal’s instructions
3) Reasonable care

Question 7

Principal’s Duties

Answer 7

1) Duty to reasonably compensate and reimburse
2) Duties imposed by K
3) Duty to cooperate

Question 8

Termination of Agency Relationship

Answer 8

Actual (express/implied) authority terminates when Agent knows or should have known of the termination

Question 9

Irrevocable Agency

Answer 9

Agency coupled with an interest

Power given as a security

Question 10

Liability to 3rd Parties - Disclosed Principal

Answer 10

Disclosed - 3rd party knows Principal’s identity

Agent not liable

Principal is liable unless 3rd party knows Agent was acting contrary to Principal’s interest

Question 11

Liability to 3rd Parties - Partially Disclosed Principal

Answer 11

Partially Disclosed - the fact, but not identity, of the principal is known

Agent and Principal are liable

Question 12

Liability to 3rd Parties - Undisclosed Principal

Answer 12

Undisclosed - 3rd party has no knowledge of the principal’s existence

Agent is liable

Principal not liable when agent acts for an improper purpose

Question 13

Secret Limiting Instructions

Answer 13

Principal bound even if Agent acts beyond the scope of the instruction

Question 14

Agency and Partner Liability

Answer 14

A partnership is liable for the acts and omissions of any partner acting in the ordinary course of the partnership or with authority of the other partners

To the extent a 3rd party reasonably believes a partner is acting for the partnership, the partner can bind the partnership

Question 15

Agency and Corporate Liability

Answer 15

Depends on the authority of the officer

Question 16

General Partnership Formation

Answer 16

1) An agreement among two or more persons 2) to carry on as co-owners a business 3) for profit

Question 17

LPs, LLPs, and LLLPs require

Answer 17

Formal writing and filing of documents with Sec. of State

If improperly filed, defaults to GP (if there is one)

Question 18

How do partners share profits and losses?

Answer 18

Equally, absent an agreement to the contrary

Question 19

How are partners liable for the partnership’s obligations?

Answer 19

Jointly and severally

Question 20

Partner’s Duties

Answer 20

Duty of loyalty - requires partners to act in good faith and fairly toward each other

Refrain from dealing with the partnership as or on behalf of a party adverse to the partnership

Refrain from competing with partnership

Account for profits, property, opportunities, or other benefits derived by the partner in conjunction with the partnership

Question 21

Limited Partnership

Answer 21

Only general partner can bind the LP

Only general partner is personally liable

Limited partner only liable up to contribution into LP

Question 22

Dissociation

Answer 22

Caused by a change in who the partners are

Question 23

Partnership Dissolution

Answer 23

An at-will partnership (no definite end date) may be dissolved by any partner by his express will

Question 24

Limited Liability Companies

Answer 24

Taxed like partnership but enjoys limited liability

Formed by filing Articles of Organization with State - includes LLC statement, name (with LLC), address of the office and registered service agent, and members’ names

Question 25

Corporations - Purpose and Ultra Vires

Answer 25

Presumed to be formed for a lawful purpose and any business outside the corp.’s stated purpose is ultra vires

Question 26

Remedies for Ultra Vires

Answer 26

1) S/h can sue to enjoin the ultra vires act
2) Corp. can sue officers and directors for damages arising from the act
3) State may seek to dissolve

Question 27

Corporations - De Jure Formation

Answer 27

Formed in accord with formation statutes

Question 28

Corporations - De Facto Formation

Answer 28

Requires an available statute for valid incorporation, colorable compliance and good faith attempt, and corp. must act like a corp.

Question 29

Corporations - Estoppel Formation

Answer 29

Person who treats an entity like a corp. is estopped from later claiming it wasn’t

Question 30

Piercing the Corporate Veil

Answer 30

1) Corp. is the alter ego of the individuals - requires a failure to observe corporate formalities, and a basic injustice such that equity would require that s/h be liable
2) Inadequate capitalization at time of incorporation
3) Corp. was formed to avoid existing obligations at time of incorporation, or fraud on 3rd parties

Question 31

Deep Rock Doctrine

Answer 31

Judge, in discretion, will subordinate s/h’s debt to all other debt-holders

Requires 1) corp. insolvency and 2) s/h is a debt owner

Question 32

When is a corp. insolvent?

Answer 32

1) Corp. unable to pay its debts as they come due; or

2) Difference between assets and liabilities (“equity”) is negative

Question 33

Power of Shareholders

Answer 33

Elect directors, amend articles and bylaws, and must vote on fundamental corp. changes

For a vote, need quorum (a majority in interest of the shares)

Question 34

Shareholder Agreement/Voting Trust

Answer 34

Agreement among all s/h for how corp. will be operated

Must be set out in AoI or bylaws, or in a written agreement signed by all s/h

Question 35

Shareholder Transfer Restrictions

Answer 35

Can restrict transfer of shares if done for a reasonable purpose

Binds transferee with knowledge, or if restriction conspicuously noted on certificate

Question 36

Distribution

Answer 36

Can be in the form of dividends, redemption, repurchase, or liquidating distributions

Board decides when to distribute - can’t be compelled

Can distribute so long as doesn’t result in insolvency or violate any restrictions in AoI

Question 37

Direct Suits

Answer 37

Breach of duty directly owed to the s/h by an officer, director, or majority s/h

Duty not to sell to known looters; duty not to sell corporate office position; s/h majority has duty not to act oppressively, illegally, or fraudulently

Question 38

Derivative Suits

Answer 38

S/h sues on behalf of corp. for breach of duty directly owed to the s/h by an officer, director, or majority s/h

Requires standing, a written demand unless futile, and corp. is a nominal defendant

Question 39

Corporations - Duty of Care

Answer 39

Requires that directors act:

1) In good faith;
2) With the care that an ordinarily prudent person in a like position would exercise under similar circumstances;
3) In a manner director reasonably believes to be in the corp.’s best interest

Question 40

Business Judgment Rule

Answer 40

If duty of care complied with, directors not liable for erroneous decisions

Question 41

Corporations - Duty of Loyalty - Conflict of Interest

Answer 41

Conflict exists if direct or director’s relative is a party to the transaction, has a beneficial interest in the transaction, or is an employee of the entity with whom corp. is transacting

Defenses - approval by quoroum of disinterested s/h, quorum of disinterested directors, or fair to corp. at time

Question 42

Corporations - Duty of Loyalty - Usurpation of Corp. Opportunities

Answer 42

If corp. has an interest or expectancy in the business opportunity, a director or officer can’t take that opportunity for himself without first telling the corp.

Question 43

Corporations - Duty of Loyalty - Common Law Insider Trading

Answer 43

Can’t purchase/sell stock with undisclosed knowledge of special circumstances affecting value

Question 44

Dissolution of Corporation

Answer 44

Voluntary dissolution by corp. act (s/h and directors both vote to dissolve)

Administrative dissolution (by State)

Judicial dissolution (AG brings for fraud/ultra vires; S/h brings for deadlocked directors, directors acting fraudulently/illegally, deadlocked for failure to elect directors for two meetings, waste of corp. assets)

Question 45

Rule 10b-5 - Fraud

Answer 45

Basic Fraud - unlawful, in conjunction with actual purchase or sale of a security, to employ interstate commerce or the mail or the national securities exchange to: 1) employ any device or scheme to defraud, 2) make any untrue statement of material fact or omit to state a material fact, 3) engage in any act that would operate as a fraud or deceit on any person

Question 46

Rule 10b-5 - Insider Trading

Answer 46

The purchase or sale of stock with knowledge of nonpublic and undisclosed info breaches a duty of trust and confidence owed to the issuer, s/h, or another person who is the source of the nonpublic info

Question 47

Section 16(b) - Short Swing Sales

Answer 47

Any profit realized by a s/h of more than 10% of the stock, or any director/officer, from any purchase of sale within a period of less than 6 months, must be disgorged to the corp.

Question 48

Sarbanes-Oxley Act of 2002

Answer 48

Qualifying corp. must establish an audit committee made up of independent board members