Business Associations Flashcards
Agency Definition
A relationship that arises when one person (principal) manifests an intention that another person (agent) act on the principal’s behalf
Agency Formation Elements
1) Capacity;
2) Consent;
3) Control
Agency Liability - Negligence
If 1) employee or 2) IC involved in inherently dangerous activity or non-delegable duty, apply vicarious liability
Agency Liability - Intentional Tort
VL if employment authorizes use of force, friction generated, or tort furthers principal’s purpose
Types of Authority
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
Agent’s Duties
1) Undivided loyalty
2) Obedience to Principal’s instructions
3) Reasonable care
Principal’s Duties
1) Duty to reasonably compensate and reimburse
2) Duties imposed by K
3) Duty to cooperate
Termination of Agency Relationship
Actual (express/implied) authority terminates when Agent knows or should have known of the termination
Irrevocable Agency
Agency coupled with an interest
Power given as a security
Liability to 3rd Parties - Disclosed Principal
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
Liability to 3rd Parties - Partially Disclosed Principal
Partially Disclosed - the fact, but not identity, of the principal is known
Agent and Principal are liable
Liability to 3rd Parties - Undisclosed Principal
Undisclosed - 3rd party has no knowledge of the principal’s existence
Agent is liable
Principal not liable when agent acts for an improper purpose
Secret Limiting Instructions
Principal bound even if Agent acts beyond the scope of the instruction
Agency and Partner Liability
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
Agency and Corporate Liability
Depends on the authority of the officer
General Partnership Formation
1) An agreement among two or more persons 2) to carry on as co-owners a business 3) for profit
LPs, LLPs, and LLLPs require
Formal writing and filing of documents with Sec. of State
If improperly filed, defaults to GP (if there is one)
How do partners share profits and losses?
Equally, absent an agreement to the contrary
How are partners liable for the partnership’s obligations?
Jointly and severally
Partner’s Duties
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
Limited Partnership
Only general partner can bind the LP
Only general partner is personally liable
Limited partner only liable up to contribution into LP
Dissociation
Caused by a change in who the partners are
Partnership Dissolution
An at-will partnership (no definite end date) may be dissolved by any partner by his express will
Limited Liability Companies
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
Corporations - Purpose and Ultra Vires
Presumed to be formed for a lawful purpose and any business outside the corp.’s stated purpose is ultra vires
Remedies for Ultra Vires
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
Corporations - De Jure Formation
Formed in accord with formation statutes
Corporations - De Facto Formation
Requires an available statute for valid incorporation, colorable compliance and good faith attempt, and corp. must act like a corp.
Corporations - Estoppel Formation
Person who treats an entity like a corp. is estopped from later claiming it wasn’t
Piercing the Corporate Veil
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
Deep Rock Doctrine
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
When is a corp. insolvent?
1) Corp. unable to pay its debts as they come due; or
2) Difference between assets and liabilities (“equity”) is negative
Power of Shareholders
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)
Shareholder Agreement/Voting Trust
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
Shareholder Transfer Restrictions
Can restrict transfer of shares if done for a reasonable purpose
Binds transferee with knowledge, or if restriction conspicuously noted on certificate
Distribution
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
Direct Suits
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
Derivative Suits
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
Corporations - Duty of Care
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
Business Judgment Rule
If duty of care complied with, directors not liable for erroneous decisions
Corporations - Duty of Loyalty - Conflict of Interest
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
Corporations - Duty of Loyalty - Usurpation of Corp. Opportunities
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.
Corporations - Duty of Loyalty - Common Law Insider Trading
Can’t purchase/sell stock with undisclosed knowledge of special circumstances affecting value
Dissolution of Corporation
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)
Rule 10b-5 - Fraud
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
Rule 10b-5 - Insider Trading
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
Section 16(b) - Short Swing Sales
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.
Sarbanes-Oxley Act of 2002
Qualifying corp. must establish an audit committee made up of independent board members
