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Select Topics Part 2 > Business Associations > Flashcards

Business Associations Flashcards

1
Q

Business Association Checklist

A
  1. Agency
  2. Partnerships
  3. LLCs
  4. Corporate Formation
  5. Corporate Governance
  6. Corporate Dissolution
  7. Securities Regulation
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2
Q

Agency

A

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

Elements:

  1. Capacity
  2. Consent
  3. Control
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3
Q

Capacity

A

Principal requires contractual capacity (age of majority and mental capacity).

Agent requires minimal mental capacity (could be a minor or incompetent)

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4
Q

Consent

A

Voluntary, generally oral or written agreement

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5
Q

Control

A

Right of principal to control the agent. Greater the control, more likely employee than independent contractor.

Factors:

  1. Control of manner of accomplishing work
  2. supply of tools
  3. explicit direction
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6
Q

Agency Liability

A

Negligence - vicarious liability for acts done within the scope of employment (detour v. frolic)

Strict liability - inherently dangerous activities and non-delegable duties

Intentional Torts - vicarious liability if employment authorizes force, friction generated, or furthers purpose of principal

Contractual - discuss express, implied, and apparent authority

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7
Q

Express Authority

A

Agent expressly has express direction or permission from Principal to act

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8
Q

Implied Authority

A

Nature of the Agent’s position implied authority to act in a particular matter - either from custom or usage, or by acquiescence (including a failure to inquire)

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9
Q

Apparent Authority

A

Principal communicated by some statement or act to a third party the apparent authority of the Agent to act on behalf of the Principal with respect to that third party

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10
Q

Ratification

A

Principal knowingly agrees to be bound by the unauthorized acts of the Agent; OR series of occasions of acquiescence

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11
Q

Agent’s Duties to Principal

A
  1. Undivided loyalty
  2. Strict Obedience to Instructions
  3. Reasonable Care (in light of local community standards and taking into account any special skills of agent)
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12
Q

Principal’s Remedies for Agent’s Breach

A
  1. Damages
  2. Accounting for Agent’s secret profits
  3. Withholding of compensation
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13
Q

Principal’s Duties to Agent

A
  1. Duty to reasonably compensate Agent and reimburse for all expenses or losses reasonably incurred in discharging any authorized duties
  2. Contractual duties
  3. Duty to Cooperate in carrying out purpose of the agency
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14
Q

Agent’s Remedies for Principal’s Breach

A
  1. Damages for breach of contract (subject to duty to mitigate)
  2. An agent’s lien in any property the agent holds
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15
Q

Termination of Agency

A
  1. Lapse of time
  2. Happening of an event
  3. Change of circumstance
  4. Breach of fiduciary duty
  5. Unilateral act; or
  6. Operation of law
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16
Q

Termination of Authority

A

Actual authority terminates when:

  1. Agent knows or should have known of the termination.
  2. Writing by principal given to Agent manifesting their authority and meant to be shown to third parties will not terminate apparent authority with respect to third parties who see and rely on such writing until Principal communicates termination
  3. Death or incompetency revokes authority, whether or not known
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17
Q

Irrevocable Agency

A

Agency coupled with an interest(broker commission) or Power given as security (Trustee under a Deed of Trust)

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18
Q

Disclosed Principal

A

Third party knows the identity of the principal

Agent not liable on contract to third party

Disclosed principal is liable on contract when his Agent acts for an improper purpose or for the third party’s purpose UNLESS third party has notice that Agent is not acting for P’s benefit

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19
Q

Partially Disclosed Principal

A

The fact, but not the identity, of principal is known

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20
Q

Undisclosed Principal

A

Third Party believes agent is the contracting party and has no knowledge of the existence of a principal

Agent IS liable on contract to third party when acting for a partially disclosed principal an undisclosed principal.

Undisclosed principal is NOT liable on contract when Agent acts for an improper purpose or for the third party’s purpose - otherwise, liable for contract properly entered into by agent

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21
Q

Partnership Liability

A

Liable for acts and omissions of any partner acting in the ordinary course of partnership business or with authority of the other Partners (apparent authority)

All partners generally jointly and severally liable for all obligations of the partnership

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22
Q

Corporate Liability

A
  1. Express Authority - Board of Directors Resolution
  2. Implied Authority - depends on office
  3. Apparent Authority - with third persons in the ordinary course of business

Officer can be sued by EITHER corporation or third party for implied warranty of authority

23
Q

Partnership

A
  1. Agreement among two or more persons;
  2. to carry on as co-owners of a business;
  3. for profit

Then decide if GP, LP, or LLLP.

LP, LLPs, and LLLPs require formalities - formal writing and filing of documents with secretary of state

24
Q

General Partnership

A
  1. All partners have equal rights to conduct management by majority rule of matters connected with ordinary business of the partnership.
  2. No act in contravention with partnership agreement may be done without consent of ALL partners
  3. All partners contribute something and profits and losses are divided equally
  4. Any partner can bind partnership for contracts in the ordinary course of partnership business in the absence of knowledge of third party of lack of authority
  5. Partnership bound by partner’s contractual or tortious acts after dissolution
25
Q

Partner Duties

A

Fiduciary duty to each other to act in good faith and act fairly toward each other

  1. refrain from dealing with partnership as or on behalf of a party adverse to partnership;
  2. refrain from competing with partnership’ and
  3. account for profits, property, opportunities, or other benefits derived by partner in conjunction with partnership business
26
Q

Dissociation

A

Change in relationship among the partners caused by any partner ceasing to be associated with the carrying on of the business

Voluntary or involuntary

Ceasing partners paid their capital account and share of profits.

Does not necessarily cause dissolution of the partnership

27
Q

Partnership Dissolution

A
  1. Express will of at least half or all of remaining partners to wind up business
  2. Expiration of term
  3. Some acts of dissociation
28
Q

Limited Liability Company

A
  1. Taxed like partnership but enjoy limited liability like shareholders and directors of corporation
  2. governed by operating agreements that control most aspects of business and management
  3. LLC is an entity distinct from its members
  4. Formed by filing Articles of Organization with the State including (a) statement that entity is LLC; and (b) name which includes LLC, address, registered agent for service, and name of all members

Defective formation = possibly general partnership

29
Q

Corporations

A
  1. File Articles with Secretary of State
  2. Presumed to be formed for a lawful purpose and any business outside of corporation’s stated purpose is deemed ultra vires
30
Q

Ultra Vires Remedies

A
  1. Shareholder can sue to enjoin ultra vires act
  2. corporation can sue officers and directors for damages arising from ultra vires act
  3. State may seek dissolution of the corporation but NOT removal of directors
31
Q

Corporate Formation

A
  1. De Jure - in accord with formation statutes
  2. De Facto - requires available statute for valid incorporation, colorable compliance and good faith (members do not know that the incorporation was defective), and corporation, must act like a corporation (conducting business in the corporate name with some exercise of corporate privileges)
  3. Corporation by Estoppel - persons who treat an entity like a corporation are estopped from later claiming it was not - apparent authority
32
Q

Piercing Corporate Veil

A

Personal liability of shareholders for corporate actions.

  1. Corporation is ALTER EGO of individuals - failure to observe corporate formalities (keeping adequate minutes, books, and records), and basic injustice such that equity requires SH to be liable for damages
  2. INADEQUATE CAPITALIZATION at the time of incorporation
  3. avoidance of existing obligations at the time of incorporation, or fraud on creditors or other third parties
33
Q

Equitable Subordination

A
  1. Corporation insolvent
  2. SH also owner of debt
  3. Judge in discretion may subordinate SHs debt to all other debt holders
34
Q

Issuance of Securities

A

Equity Securities = Common Stock

Issued for valid consideration but not promissory note or future services.

Debt securities include a bond, which is secured by corporate assets or a debenture which is unsecured - debt security is not a form of ownership

Preferred Stock = annual repayments, amounts to repay deposited into “sinking fund”

35
Q

Promoter

A

One who acts on behalf of the corporation in formation

Owes fiduciary duties to corporation and SH of fair disclosure and good faith

36
Q

Shareholder Governance Power

A
  1. Elect directors
  2. Amend articles and by-laws
  3. vote by proxy or in person for fundamental corporate changes (sale of all assets, mergers)
  4. Shareholder Agreement/voting trust - involve any aspect of the exercise of corporate powers or management, must be either be set out in the articles of incorporation or bylaws or be in a written agreement signed by all SH, no personal liability on SH
  5. Transfer restrictions - binds transferee with knowledge OR if restriction ‘conspicuously noted’ on certificate
37
Q

Proxy

A

Revocable unless coupled with an interest

Last 11 months

38
Q

Quorum

A

Majoring in interest of issued/outstanding shares

39
Q

Cumulative Voting

A

Allows minority representation on the board by allowing SH to take all votes they have for all the director positions and vote them all toward one position

40
Q

Distributions to Shareholders

A
  1. dividends to SH, redemption or repurchase of outstanding shares, or liquidating distributions after dissolution
  2. within Board’s discretion - court cannot compel
  3. limited to solvency and any restrictions in the articles of incorporation
41
Q

Shareholder Direct Suits

A

SH may file a direct suit for breach of duty directly owed to the SH by an officer or director or by a majority of SH (such as failure to declare a dividend).

42
Q

Duties of Controlling Shareholders

A
  1. Majority SH have fiduciary duty to minority SH not to act oppressively, illegally, or with fraud.
  2. Duty to not sell to looters - someone who buys stock and sells off all the assets for personal gain
  3. Duty not to sell corporate offices - sale of controlling or majority stock at above-market price and agreement to replace BoD
43
Q

Directors - Voting

A
  1. Requires quorum - majority of eligible directors

2. requires majority of disinterested directors

44
Q

Derivative Suits

A

Normally used for suits against directors/officers for breach of duties of loyalty and care

Requires:

  1. Standing
  2. Written demand and inaction for 90 days unless demand would be futile
45
Q

Directors Duty of Care

A
  1. act in good faith
  2. with care that ordinarily prudent person in a like position would exercise under similar circumstances
  3. in a manner the director reasonably believes to be in the best interest of the corporation
46
Q

Business Judgment Rule

A

If Directors meet duty of care, then no liability for erroneous decisions

47
Q

Conflict of Interest of director or related person:

A
  1. a party to transaction; or
  2. has a beneficial financial interest in transaction; or
  3. is employee of entity with whom corporation is transacting business

Defenses:

  1. approval by disinterested SH; or
  2. approval by disinterested directors; or
  3. fair to corporation
48
Q

Director’s Duty of Loyalty

A
  1. Usurpation of corporate opportunities - corporate expectancy in business opportunity / similarity to corporate business
  2. Common Law Insider Trading - purchase/sale of stock with undisclosed knowledge of special circumstances affecting value
  3. Indemnification of Directors and Officers - dependent on whether director/officer would prevail
49
Q

Corporate Dissolution

A
  1. Voluntary Dissolution by Corporate act - SH and directors both vote to dissolve
  2. Administrative dissolution - brought by state for failure to pay corporate fees or penalties for 60 days after due date
  3. Judicial Dissolution - by AG (fraud or ultra vires acts) or by SH:
    - deadlocked directors threaten irreparable harm,
    - directors acting fraudulently, illegally, or oppressively
    - deadlocked SH result in failure to elect directors for two meetings
    - waste of corporate assets
50
Q

Securities Regulation

A
  1. Rule 10b-5 - fraud, insider trading
  2. Section 16(b)
  3. Sarbanes-Oxley Act of 2002
51
Q

Rule 10b-5 - Fraud

A

Unlawful, in conjunction with the purchase or sale of a security, to employ interstate commerce or 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;
  3. Engage in any act or business practice that would operate a fraud or deceit on any person

Like common law misrepresentation, P must actually purchase or sell stock in reliance on false/misleading statement or omission

52
Q

Insider Trading

A
  1. Purchase or sale of stock with knowledge of nonpublic information and without disclosing that information
  2. Breaches duty of trust and confidence owed to issuer or another person who is the source of the nonpublic information

Liability:

  1. Insider liable only if insider buys or sells stocks using inside information
  2. Tipper liable if tip for an improper purpose
  3. Tippee liable if tippee knows tipper violated duty
  4. Misappropriator liable if trades on info from confidential info
53
Q

Section 16(b) - Short Swing Sales

A

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

10% means 10% at the time of EACH purchase and sale,

54
Q

Sarbanes - Oxley Act 2002

A

Tries to eliminate the relationship between auditor and the officers.

Qualifying corporations have to establish an audit committee made up of independent Board members - none can be otherwise employed by or affiliated with the company

Audit committee oversees the appointment, compensation, and work performed by the registered public accounting firm it employs to perform its audits

Select Topics Part 2 (7 decks)

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