Business Associations Flashcards
Agency - AGENCY RULE
Relationship that arises when 1 person manifests an intention that another acts on his behalf. Such relationship requires:
1) capacity - P’s contractual; A’s minimum mental
2) consent - voluntarily given by both parties
3) control - P has the RIGHT to control A’s conduct
Agency - TYPES OF LIABILITY
NEGLIGENCE
- P’s own negligence in selecting, training, etc
- VL for EE acting in course and scope of employment
- VL for IC engaged in inherently dangerous activity or performing a non-delegable duty
INTENTIONAL TORTS
1) Agency authorizes force
2) Friction is generated
3) A is furthering P’s purpose
CONTRACT
If A had any auth’y to bind P
Agency - TYPES OF AUTHORITY
EXPRESS - direction or permission from P for A to act
IMPLIED - nature of P’s position implies auth’y to act in particular manner based on custom and usage, acquiescence, or emergency
APPARENT - P communicates, by some act of statement, to a 3P the apparent auth’y for A to act on his behalf w/ respect to that 3P
RATIFICATION - P has knowledge of all material facts and agrees to be bound by A’s prior unauth’d act
Agency - A’s DUTIES TO P
1) Undivided Loyalty - don’t compete, self-deal, or usurp opportunities
2) Obedience to Instructions
3) Reasonable Care - light of local community standards and taking into account any special skills of A
Agency - P’s REMEDIES FOR A’s BREACH
1) Damages
2) Accounting for Secret Profits
3) Withholding Compensation Still Owed
Agency - P’s DUTIES TO A
1) Reasonable Compensation
2) Reimburse for expenses or losses reasonably incurred in discharging auth’d duties
3) Cooperate in carrying out purpose of agency
Agency - A’s REMEDIES FOR P’s BREACH
1) Damages for breach of K
2) Agent’s lien on P’s property held by A
Agency - TERMINATION OF AGENCY RELATIONSHIP
1) Lapse of time
2) Happening of an event
3) Change of circumstances
4) Breach of fiduciary duty
5) Unilateral act
6) Operation of law
Agency - TERMINATION OF A’s AUTHORITY
ACTUAL - when A knows/should know of the termination
APPARENT - if there is a writing by P giving to A manifesting auth’y and meant to be show to 3Ps, apparent auth’y continues w/ respect to 3Ps who see and rely on it
ALL - upon death or incapacity, whether known or not
Agency - IRREVOCABLE AGENCIES
1) Coupled w/ an interest - immediately exercisable right in the object of the agency
2) Power given as security - exercisable only on default
Agency - A’s LIABILITY TO 3Ps
NOT liable on K when acting for disclosed P.
Personally liable on K when acting for partially disclosed or undisclosed P.
Agency - AGENCY AND ENTITY LIABILITY
- P’ship liable for act or omission for any p’r acting in the ordinary course of business OR w/ auth’y of other p’rs
- GP - all p’rs JSL for all p’ship obligations
- LP/LLP - p’rs liability is limited to capital account unless he acts inconsistency w/ limitations on control
- Corp bound by d/o acting w/in his positional auth’y
P’ship - GP FORMATION
Agreement among two or more persons to carry on as co-owners a business for profit.
Profit sharing is prima facie evidence of p’ship UNLESS (1) loan repayment, (2) rent, or (3) wages
P’ship - GP MANAGEMENT
- All pr’s have equal rights in the mgt and conduct of p’ship business
- Ordinary matters connected w/ p’ship business may be decided by a MAJORITY of p’rs
- No act in contravention of p’ship agreement is valid w/o UNANIMOUS consent of p’rs
P’ship - GP’s DUTIES
CARE
In the conduct of p’ship business, p’rs must not engage in grossly negligent, reckless, or intentional misconduct or otherwise act in violation of the law
LOYALTY
P’rs must act in good faith and fairly to each other and the p’ship.
1) Refrain from dealing w/ p’ship as or on behalf of an adverse party
2) Refrain from competing w/ p’ship
3) Account for profits, property, opportunities, or other benefits from p’ship business
P’ship - LPs
FORMATION
Must file Certificate of LP signed by all GPs w/ the Secretary of State
MANAGEMENT
- Only GP has auth’y to bind and make management decisions
- LP can vote on MAJOR issues - dissolution or asset sale
P’ship - DISSOCIATION
The change in relationship among p’rs caused by any p’r ceasing to be associated in the carrying on of the business.
- Voluntary
- Involuntary - death, BK, incompetence, expulsion
- Wrongful - breach of express provision
Does NOT cause dissolution IF remaining p’rs vote to continue and file w/ SOS w/in 90 days then buy out dissociating p’r at GREATER of liquidated value OR value as ongoing business w/o him.
P’ship - DISSOLUTION
1) 90 days after dissociation absent vote and filing of continuance
2) Express will of at least half of the remaining p’rs
3) Expiration of term
P’ship - WINDING UP
ORDER OF ASSET DISTRIBUTION
1) Outside creditors
2) Inside creditors
3) Return of capital contributions
4) Surplus
OUTSTANDING DEBT
GPs are JSL for entire obligation, but can seek contribution from p’rs who haven’t paid their share
P’ship - LLCs
- Taxed like p’ship but members enjoy limited liability
- Primarily governed by operating agreements
- Profits and losses allocated on basis of contribution
Corps - FORMATION
Requires: (1) issuance of securities + (2) filing of Articles w/ SOS
DE JURE = in accord w/ formation statute
DE FACTO = colorable compliance w/ statute in good faith and conducting business as a corp
BY ESTOPPEL = 3P who treats entity as a corp may be estopped from later claiming it was not one
Corps - ULTRA VIRES
Corp is presumed to be formed for a lawful purpose and any business outside the stated purpose is deemed ultra vires, and:
- S/hs can sue to enjoin the act
- Corp can sue d/o for damages arising from act
- State may seek dissolution of corp
Corps - PIERCING THE CORP VEIL
S/h can be held personally liable for corp obligations IF:
1) corp is ALTER EGO of s/hs as shown by: failure to observe corp formalities AND basic injustice such that equity req’s s/hs be liable for the damages caused
2) INADEQUATE CAPITALIZATION at time of incorporation
3) Avoidance of EXISTING OBLIGATIONS at time of incorporation or fraud on creditors/3Ps
Corps - DEEP ROCK DOCTRINE
Where a corp is insolvent and a s/h also has a claim as a creditor, the court has discretion to subordinate his claim to any class of creditors, including unsecured.
Insolvent:
1) inability to pay debts as come due OR
2) liabilities exceed assets
Corps - PROMOTER LIABILITY
Promotor = one who acts on behalf of the corp in formation.
Upon incorporation, promoter owes fiduciary duties to the corp AND s/hs - fair disclosure and good faith.
If promoter acts on behalf of corp, knowing none has been formed, he is JSL for any liabilities, even after incorporation, absent an express novation.
Corp is NOT bound by any pre-incorporation acts absent an express assumption.
Corps - POWERS OF S/Hs
VOTE
1) elect directors
2) amend Articles or bylaws
3) approve fundamental corp changes
Can vote by written PROXY
- Valid up to 11 months max
- Revocable unless expressly irrevocable and coupled w/ an interest to (1) a pledge, (2) share purchaser, (3) creditor, or (4) party to a voting agreement
Corps - S/H AGREEMENTS AND VOTING TRUSTS
- Can involve any aspect of exercise of corp mgt powers
- Must be either set out in Articles or in a written agreement signed by ALL s/hs
- Does NOT impose personal liability on s/hs
- CANNOT override statutory requirements
Corps - TRANSFER RESTRICTIONS
Corp may restrict transfer of share for any reasonable purpose including:
1) right of first refusal
2) buy-back
3) transfer approval
4) prohibition on transfer to particular people/group
Transferee is bound if he has knowledge of restriction OR it is conspicuously noted on the Certificate
Corps - DISTRIBUTIONS
Dividend, redemption, repurchase, or liquidation
-W/in bd’s discretion; ct cannot compel absent abuse of discretion
- NOT permitted if:
1) Corp would become insolvent OR
2) restricted in Articles
Corps - DIRECT SUIT
Breach of duty owed directly to s/h by an officer, director, or controlling s/h
1) freeze out
2) duty not to sell to looters
4) duty not to sell corp offices
Corps - DERIVATIVE SUIT
Breach of duty owed to corp by d/o
Requires:
1) standing - ownership of stock at time of wrong
2) written demand and inaction for 90 days OR showing that such demand would be futile
3) corp named as nominal ∆
Corps - DIRECTOR’S RIGHTS
1) VOTE on general direction of corp, approve significant action or incurring of liabilities, elect officers
- -if quorum present, only need majority of disinterested vote to approve
2) INDEMNIFICATION for expenses incurred in defending a lawsuit in which he prevails
Corps - DUTY OF CARE
Directors must act:
1) in good faith
2) w/ the care an ordinarily prudent person in a like position would exercise under similar circ’s
3) in a manner he reasonably believes to be in the best interest of the corp
If he does, BJR applies and he will not be liable for decisions that, in hindsight, turn out to be erroneous
Corps - DUTY OF LOYALTY
AVOID CONFLICTS OF INTEREST
1) he or related person is a party to the transaction,
2) has a beneficial interest in the transaction, OR
3) is a d/o, agent, or employee of an entity w/ which corp is doing business and the transaction is of such importance that it would ordinarily require bd approval
AVOID USURPATION OF OPPORTUNITIES that corp has an interest or expectancy in
AVOID INSIDER TRADING
Common law duty not to purchase/sell stock w/ undisclosed knowledge of special circ’s significantly impacting stock value
Corps - VOLUNTARY DISSOLUTION
Vote of s/hs AND bd to dissolve ends carrying on of business.
Claims can be asserted against dissolved corp to extent of undistributed assets and against s/hs for pro rata share to the extent of assets distributed to them. To bar claims sooner, corp must:
- notify known creditors in writing and set deadline no less than 120 days to receive claims
- notify unknown creditors by publication in a newspaper in the county of the corp’s PPOB, which will bar claims not asserted w/in 5 years.
Corps - ADMINISTRATIVE DISSOLUTION
Brought by state for failure to:
1) Pay corp fee/penalties for 60 days after due OR
2) Deliver annual statement by domestic corp listing d/os, place of business, and agent for service of process for 60 days
- Corp has 60 additional days to correct failure after notice from the state
- Can apply for reinstatement w/in 2 years - relates back to date of dissolution
Corps - JUDICIAL DISSOLUTION
-AG can seek on grounds of fraud or ultra vires act
- S/h may seek on grounds that:
1) directors are deadlocked and irreparable injury to corp is threatened,
2) directors or s/hs have acted or will act fraudulently, illegally, or w/ oppression
3) S/hs are deadlocked and failed to elect one or more directors for 2 consecutive annual meetings, or
4) corp assets are being wasted - Creditors can seek if claim is reduced to judgment and remains unpaid OR corp admits claim is due and corp is insolvent
- Corp can seek ct supervision of what began as voluntary dissolution
Corps - RULE 10b-5 FRAUD
It is unlawful in connection w/ the purchase or sale of a security to employ interstate commerce, the mails, or a national exchange to:
1) employ and device/scheme to defraud,
2) make an untrue statement or omission of material fact, or
3) engage in any act or business practice that would operate as a fraud or deceit on any person
Corps - RULE 10b-5 INSIDER TRADING
Where a person purchases or sells stock w/ knowledge of undisclosed, non-public info and breaches a duty of trust and confidence owed to the issuer, s/h of issuer, or source of info:
1) the buyer/seller can seek rescission or damages equal to the difference between the price paid and the average share price in the 90 days after corrective information is disseminated
2) gov’t can criminally prosecute misappropriators
Corps - RULE 10b-5 LIABLE PERSONS
INSIDER
- Person connected to issuer
- Liable only if he buys or sell on inside info
TIPPER
- Discloses inside info to another who trades on it
- Liable only if disclosure was for an improper purpose
TIPPEE
- Trades on info from tipper
- Liable if he knew tipper breached a duty of nondisclosure
MISAPPROPRIATOR
- Trades in breach of duty of confidentiality owed to the source
- can be criminally prosecuted
Corps - §16(b) SHORT SWING PROFITS
Any profit realized by a 10%+ s/h, director, or officer from any purchase and sale or sale and purchase w/in 6 months must be disgorged to the corporation.
Profit = highest sale price - lowest sale price during the six month period
Corps - SARBANES-OXLEY
-Corp must establish an audit committee of independent board members to oversee the appointment, compensation, and work of the register public accounting firm employed to perform its audits
- CEO/CFO must review the filed audit report and certify:
1) it is true and doesn’t contain material omissions
2) it fairly presents the financial position of the company, and
3) he established internal accounting controls and evaluated them within the prior 90 days.
-Corp cannot make personal loans to any d/o UNLESS it is (1) made in the ordinary course of business and (2) on the same terms available to everyone else
