Business Associations Flashcards
Agency Formation
A relationship that arises when one person (principal) manifests an intention that another person (agent) act on principal’s behalf
Agency Formation Elements
1) Capacity
2) Consent
3) Control
4) Agent isn’t otherwise disqualified to be an agent
Actual Authority - Express
Agent has the express authority from the principal to act
Actual Authority - Implied
Nature of agent’s position implies authority to act in a particular matter, either from custom/usage, acquiescence, or because of emergency or necessity
Apparent Authority
Principal communicates by some statement or act to a 3rd party that the agent’s apparent authority to act on principal’s behalf with respect to that 3rd party
Ratification
Principal agrees to be bound by the unauthorized acts of the agent after the fact
Agent’s Duties to Principal
1) Undivided loyalty
2) Obedience to principal’s instructions
3) Reasonable care (in light of local community standards & taking into account any special skill of the agent)
Principal’s Remedies for Agent’s Breach
Damages, disgorgement of secret profits, withholding of compensation
Principal’s Duties to Agent
1) Reasonably compensate and reimburse
2) Contract duties
3) Cooperate in carrying out the agency’s purpose
Agent’s Remedies for Principal’s Breach
Damages for K breach, agent’s lien in any property agent holds
Termination of Agency Relationship
Lapse of time, happening of an event, change of circumstances, breach of fiduciary duty, unilateral act, death/incapacity
Termination of Authority
Actual authority terminates when agent knows or should’ve known of the termination
Principal can’t unilaterally terminate if
1) Agency coupled with an interest, or
2) Power given as a security
Vicarious Liability - Intentional Torts
Vicariously liable if agency authorizes the force, friction generated, or the tort furthers principal’s business
Vicarious Liability - Negligence
If 1) employee or 2) IC involved in inherently dangerous activity or non-delegable duty, vicariously liable if negligence occurred during activity within course and scope of employment
Disclosed Principal
3rd party knows principal’s identity
Agent not liable
Principal liable even when agent acts for an improper purpose unless 3rd party knows agent is acting contrary to principal’s interest
Partially Disclosed Principal
3rd party knows that principal exists, but not identity
Agent and principal liable
Undisclosed Principal
3rd party thinks agent is the contracting party
Agent liable
Principal liable unless agent acts for an improper purpose
Secret Limiting Instructions
Principal bound even if agent acts beyond the instruction’s scope
Agency and Partner Liability
Partnership liable for the acts and omissions of a partner acting in the ordinary course of the partnership or with authority of the other partners
Agency and Corporate Liability
When considering the authority of a corporate officer to bind the corp, analyze all 3 authority types
General Partnership Formation
1) An agreement among two or more persons 2) to carry on as co-owners a business 3) for profit
General Provisions of a General Partnership
Partners have equal rights in management and conduct of partnership
Unless agreed otherwise, profits and losses are divided equally
Any partner can bind the partnership
All partners are jointly and severally liable for all partnership obligations
Partner’s Fiduciary Duty of Loyalty
Requires partners to act in good faith and fairly toward each other
Limited Partnership
Only general partner can bind the LP and make management decisions
Only general partner is personally liable for all partnership obligations
Limited partner only liable up to contribution into LP (determines profit share), but can vote on major issues
Partnership Dissociation - Voluntarily
Partner voluntarily withdraws
Partnership Dissociation - Involuntarily
Partner dies, becomes adjudged incompetent, or is expelled from the partnership
Limited Liability Company
Taxed like a partnership but members enjoy limited liability
LLC Formation
Formed by filing articles of organization with state
Includes statement that entity is an LLC, name, street address of office and registered agent for service of process, and names of all members
LLC Management
Management is presumed to be by all members, and profits/losses are allocated based on contribution
Member can assign right to profits/losses, but not management
Three Methods of Corporation Formation
De jure
De facto
Corporation by Estoppel
De Jure Formation
In accord with the formation statutes
De Facto Formation
1) Available incorporation statute, 2) colorable compliance and good faith, 3) corp. must act like a corp.
Corporation by Estoppel
Person who treats an entity like a corp. is estopped from later claiming it wasn’t
Ultra Vires
Corp. is presumed to be formed for a lawful purpose, and any business outside the corp.’s stated purpose is deemed ultra vires
Remedies for Ultra Vires Activities
1) S/h can sue officers and directors for damages
2) State may seek dissolution of the corp.
3) S/h can sue to enjoin the ultra vires act
Can’t remove directors
Piercing the Corporate Veil
1) Corp is the alter ego of the s/h - failure to observe corporate formalities and a basic injustice
2) Inadequate capitalization at time of incorporation
3) Avoidance of existing obligations at time of incorporation
Equitable Subordination
Where a corp. is insolvent and at least one s/h has a claim as a creditor of the corp., court has discretion to subordinate s/h’s claims to any class of creditor
Insolvent when
1) Corp. unable to pay debts as they come due; or
2) Equity is negative
Liability for Promoter’s Pre-incorporation Acts
Corp. isn’t liable on promoter’s pre-incorporation Ks unless the corp. adopts the K
Promoter is liable on pre-incorporation Ks unless there’s a novation
Shareholder Voting Agreement/Voting Trust
Agreement can involve any aspect of the exercise of corp. power or management
Must be set out in AoI or bylaws, or in a written agreement signed by all s/h
Transfer Restrictions on Shares
Can restrict transfer of shares if done for a reasonable purpose
Binds transferee with knowledge of restrictions, or if restrictions conspicuously noted on certificate
Direct Suits
Breach of duty directly owed to s/h
Derivative Suits
S/h sues on behalf of corp. for breaches of duties of loyalty and care
1) Standing, 2) written demand and inaction for 90 days unless demand futile, 3) corp. is a nominal D
Duty of Care
Directors must act 1) in good faith 2) with the care an ordinarily prudent person in a like position would exercise under similar circumstances 3) in a manner director reasonably believes is in corp.’s best interest
Business Judgment Rule
If duty of care complied with, directors not liable for erroneous decisions
Duty of Loyalty Defenses
Approval by majority of disinterested board
Approval by majority of disinterested s/h
Fair to corp. at time
Usurpation of Corporate Opportunities
If corp. has an interest or expectancy in the business opportunity, a director officer can’t take that opportunity for himself without first telling the corp.
Voluntary Dissolution
S/h and directors both vote to dissolve
Administrative Dissolution
Brought by State for failure to 1) pay fees or penalties for 60 days after their due date; 2) deliver annual statement of domestic stock corp. listing officers, directors place of business, agent for service of process; 3) maintain an agent for service of process; or 4) notify the state of a change in the agent for service of process for 60 days
Judicial Dissolution
1) By A.G. for fraud or ultra vires act
2) Deadlocked directors & irreparable harm to corp. is threatened
3) Directors acting/will act fraudulently, illegally, or oppressively
4) S/h deadlocked and failed to elect directors for two consecutive annual meetings
5) Waste of corporate assets
Rule 10b-5 Fraud
It’s unlawful, in conjunction with purchase or sale of a security, to use interstate commerce, the mail, or a 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; or 3) engage in any act or business practice that would operate as a fraud or deceit
Rule 10b-5 Insider Trading
The purchase/sale of stock on basis of material inside info breaches a duty of trust & confidence owed to the issuer, s/h, or another person who is the source of the nonpublic info
Rule 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 or sale within a period of less than 6 months, must be disgorged to corp.
Sarbanes-Oxley Act of 2002
Qualifying corp. must establish an audit committee made up of independent bd members
Audit committee oversees the appointment, compensation, & work performed by the registered public accounting firm it employs to perform its audits
