Business Associations Flashcards
All TX corporations are governed by the:
Texas Business Organizations Code
What do you need to form a corporation in TX?
- Organizer - Executes certificate and delivers to SoS
- Certificate of Formation
- Delivery of signed CoF to SoS and payment of required fee
Once the SoS files and sends acknowledgement, the corporate existence begins
What must be included in the Certificate of Formation?
- Name of corporation (name can be reserved with SoS for 120 days)
- Name and address of each organizer
- Number of initial directors
- Name and address of each initial director (or manager if no Board)
- Name of the corporate agent
- Statement of purpose
- Capital Structure
a) Authorized stock
b) Number of shares per class
c) Info on par value, voting rights, and preferences of each class
Perpetual duration assumed if no duration specified.
Ultra Vires Activities
Activities outside the scope of the corp.’s statement of purpose.
Ultra vires contracts are valid, but shareholders can sue for injunction and responsible managers are liable to corp. for ultra vires loses
Assumed Name Certificate
Must be filed with SoS and county clerk if the corporation will do business under a different name. Cannot sue in TX until filed
Organizational Meeting
Board of Directors will:
- Select officers
- Adopt any bylaws, and
- May transact other company business
Should give 3-days’ notice of meeting
ByLaws
Internal document comprising an operating manual (i.e. record dates, methods of giving notice, etc.).
Can be adopted or repealed by the board or shareholders.
Corporations must have bylaws unless a close corp.
Benefit Corp.
Must say it is a B-Corp. in its Article and file annual report assessing how it pursued its stated social mission.
Double Taxation
Corporations are taxed on profits, then shareholders are taxed on distributions.
S-Corps can avoid tax at the corporate level (must have 100 or fewer shareholders, all of whom are human US citizens or residents, and only one class of stock, which is not publicly traded)
De Facto Corporation Requirements
- Relevant incorporation statute (automatic–TBOC)
- Parties made good faith, colorable attempt to comply with it
- Some exercise of corporate privileges
***This doctrine may be abolished in TX
Corporation by Estoppel
Prevents one who treats a business as a corporation from denying that it is one.
Generally applies only in contract cases.
May be abolished in TX
Promoter
Acts on behalf of a corporation not yet formed (e.g. contracting with third parties)
Corporation not liable for pre-incorporation contracts until adopted either expressly or impliedly by accepting a benefit of the contract.
However, promoter remains liable on the contract until there is a novation (agreement between all three parties that corp. will replace promoter in the contract)
Foreign Corporations
Any corp. incorporated anywhere outside of TX
If transacting business (regularly, not merely sporadically) in TX, must qualify and pay fees in the state.
Must get cert. of authority from TX SoS and prove good standing in home state.
Otherwise, subject to civil fine and unable to sue in TX on claims arising from business in TX
Issuance of Stock
When a corporation sells its own stock
Subscriptions
Signed offers to buy stock from a corporation.
If signed pre-incorporation, irrevocable for 6 months.
Post-incorporation subscriptions revocable until accepted by the corp. and subscriber notified in writing
Subscriber does not become a shareholder until he pays for the stock.
Form of Consideration for Stock
Stock may be issued for any tangible or intangible benefit to the corporation
Amount of Consideration for Stock
Par is the minimum issuance price (note: only applies to issuance not sales by shareholders)
No par stock can be sold at any price set by the Board
Treasury Stock has been reacquired by the corp. (authorized and issued but not outstanding). Treat as no-par stock.
Board’s valuation of a property or service granted in exchange for stock is conclusive, absent fraud
Watered Stock
Deficit between par value and amount received fore stock.
Directors liable for water if they knowingly authorized the issuance.
Buyer liable–no defense
Third-party purchaser not liable if she did not know about the water.
Pre-Emptive Right
Right of an existing shareholder of common stock to maintain her percentage of ownership by buying stock FOR MONEY whenever there is a new issuance (including issuance of treasury stock)
No pre-emptive rights unless the CoF says so and none within 6 months of formation unless specified by the CoF
Election of Directors
Number of directors set in CoF or bylaws
Elected by shareholders at annual meeting
Entire board elected each year unless bylaws provide for a classified board (1/2 or 1/3 elected each year)
Shareholders can remove directors before terms expire with or without cause
If there is a vacancy the Board or the shareholders will decide who serves the remainder of that term.
Directors are not agents of the corporation and have no authority to speak for or bind the corp.
How may the Board take action?
Either by unanimous written consent or at a meeting that satisfies quorum and voting requirements
Directors cannot vote by proxy
Special Meetings
Notice is required and must state the date/time/place of the meeting.
Otherwise actions at the meeting are voidable (or void) unless the unnotified directors waive the notice defect either in writing or by attending the meeting without objecting at the outset
Quorum and Voting
Any meeting of the board requires a majority of all directors for a quorum
To pass a resolution only requires a majority of those present
Duty of Care
Directors owe a duty of care to the corporation. Must act in good faith and exercise ordinary care and prudence.
Non-feasance violates the duty of care, but director will only be liable if his breach caused a loss to the corp.
Misfeasance can violate the DoC, but directors are protected by the Business Judgment Rule
Business Judgment Rule
Presumption that the board acted prudently if its business decision was made in good faith, was informed, and had a rational basis.
Duty of Loyalty
Directors owe the corp. a duty of loyalty. Must act in good faith and with a reasonable belief that actions are in the best interests of the corp.
NO BJR FOR DUTY OF LOYALTY
Interested Director Transactions (self dealing)
Any deal between the corp. and one of its directors (or the director’s relative or other business) will be set aside unless the director shows:
- The deal was fair to the corp. when approved, OR
- Her interest and the material facts were disclosed or known and the deal was approved in good faith by either the shareholders or a majority of disinterested directors
Competing Venture
Directors cannot compete without the approval of a majority of disinterested directors
Remedy: Constructive trust on profits (to corp.)
Corporate Opportunity
Director cannot usurp a corporate opportunity. In order to take advantage of the opportunity, directors must first:
- Tell the board
- Wait for the board to reject the opportunity
Which directors may be liable?
Directors may be liable to the corp. for improper distributions, improper loans (not reasonably expected to benefit the corp.), ultra vires acts, and breaches of fiduciary duties.
Directors are presumed to have concurred with a board action unless dissent or abstention is noted in writing in corporate records (e.g. in minutes, sending note to corp. secretary at the meeting, or sending registered letter to corp. secretary immediately after the meeting)
Not liable if absent from the meeting or agreed based on good faith reliance represented as correct by a competent professional or officer
Officers
Selected and removed by the board.
Act as agents of the corporation.
Must have at least a president and a secretary
Indemnification of D&O
Reimbursement prohibited: Where D&O held liable for willful or intentional misconduct in performing a duty to the corp.
Reimbursement required: When she wins a judgment on the entire case.
Reimbursement permitted: In any other situation. BUT if held liable to the corp. or received improper personal benefit, can only get expenses and attorney’s fees
Indemnification decided by a majority vote of disinterested directors , a disinterested committee, disinterested shares, or independent legal counsel
Company can advance litigation expenses if D&O provides an affidavit of good faith that she complied with the duties of care and loyalty and a written undertaking to repay expenses if determined she did not.
CoF can eliminate D&O liability for damages, but never for willful or intentional misconduct
Shareholder Management Agreement
Sets up alternative management in a close corporation
Can be in the certificate or bylaws if approved by all shareholders or by written agreement of all shareholders.
Each shareholder should receive a copy (but still valid if not) and stock certificates should denote management structure and close corp. status.
Filing copy of SMA with SoS makes it a matter of record and binds all transferees
Do shareholders owe duties to each other in TX?
No.
But the court may find a fiduciary duty where a shareholder is being treated extremely unfairly.
When are shareholders liable for corp. debts?
When the court “pierces the corporate veil.” 2 requirements:
1) Shareholders abused the privilege of incorporating, and
2) Limited liability would be unfair
Classic PCV scenarios:
a. Alter ego theory (treating corp. assets as one’s own to the detriment of creditors)
b. Undercapitalization
Requirements for a Shareholder Derivative Suit
Stock Ownership at the time the claim arose (or received it by operation of law from someone who did)
Must fairly and adequately represent corp. interests throughout the litigation
Must make demand on directors that the corp. bring suit and give directors 90 days to respond to demand. Demand must set forth the nature of the claim with particularity.
Court must approve any settlement or dismissal.
Court MUST dismiss if determination that the suit is not in the corp.’s best interests is made in good faith by independent and disinterested directors.
Shareholder Voting
General Rule: You vote if you are the record shareholder as of the record date
Exceptions:
1. Corporation reacquires stock (shares do not vote)
- If shareholder dies, executor can vote his shares
- Proxy
Proxies
A proxy is a writing signed by the record shareholder, directed to the secretary of the corp., that authorizes another to vote his shares
Can be revoked in writing to the secretary of corp. or by attending the meeting and voting
Proxies can always be revoked unless the proxy says it is irrevocable and it is coupled with an interest
Voting Trusts: Requirements
- Written trust agreement controlling how the shares will be voted
- File a copy with the corp.
- Transfer legal title of shares to voting trustee
- Original shareholders receive trust certificates and retain all shareholder rights other than voting
Voting (Pooling) Agreement
Written agreements entered into by shareholders with copy delivered to corp.
Binding on transferees if conspicuously noted on stock certificate
Must be for a proper shareholder purpose.
How can shareholders take a valid corporate act?
- Unanimous consent in writing and signed by holders of all voting shares
- At a meeting that satisfies voting and quorum rules.
Two kinds of shareholder meetings
Annual: Must be held at least every 13 months or shareholder can petition court to order one.
Special: Can be called by the Board, the president, holders of at least 10% of shares entitled to vote, or anyone else permitted by the certificate (must be for proper shareholder purpose)
Notice of Shareholder Meeting
Must be given in writing to every shareholder entitled to vote between 10 and 60 days before the meeting (21 to 60 days if meeting is to consider fundamental change.
Notice must state: When, where, and purpose of meeting.
Cannot do anything outside the stated purpose
Absent proper notice, actions taken at meeting may be voidable (or void). Notice can be waived.
Shareholder Voting
Can generally vote on: 1) to elect or remove directors, 2) on fundamental corporate changes, and 3) on miscellaneous things like amending bylaws.
Shareholder vote requires a quorum of a majority of outstanding shares. Quorum cannot be lost.
Shareholder Action Thresholds
- To elect a director - plurality
- To remove a director - majority of the shares entitled to vote
- For fundamental corp. change - 2/3 of shares entitled to vote
- Miscellaneous matters - majority of shares that actually vote
Cumulative Voting
Allows smaller shareholders a better chance at electing directors in one, at-large vote rather than voting for each seat.
Must be specified in the Cert. of Formation.
At least one shareholder must give written notice of intent to vote cumulatively no later than the day before the meeting.
Stock Transfer Restrictions
Must be set up in CoF, bylaws, or by agreement.
OK if they are not an undue restraint on alienation.
Even a valid restriction cannot be invoked against the transferee unless either (a) it is conspicuously noted on the stock certificate or (b) the transferee had actual knowledge of the restriction
Right to INspect the Books and Records
Shareholders entitled to inspect if they have owned stock for at least 6 months or own at least 5% of outstanding shares.
Must provide written demand stating a proper purpose (any purpose related to your interest as a shareholder)
Corp. has burden of showing purpose was improper and must reimburse for expenses and attorney’s fees if it loses
Directors have unfettered access to books and records.
Distributions
Payments from corp. to shareholders. Can be dividend, repurchase of shares, or to redeem shares.
Made when Board declares it.
Preferred stock paid first, but not more.
Cannot be made if company is insolvent or would be made insolvent.
Directors J&S liable for unlawful distributions
What funds can be used for a distribution?
Surplus (Assets - Liabilities - Stated Capital)
Fundamental Corporate Change
Includes things like selling off all assets or merging.
- Board takes an action adopting a resolution of a FCC
- Board submits proposal to shareholders with written notice
- FCC must be approved by 2/3 of shares entitled to vote
- Document delivered to SoS for filing
Right of Appraisal
Gives dissenting shareholders to force corp. to buy your stock for fair value
Right applies only to holders of shares in a close corp.
Triggered by:
- Merger
- Sale of shares in share exchange
- Transfer of substantially all assets
- Conversion
Shareholder Actions to Perfect Right of Appraisal
- Before vote, file written notice of objection and intent to demand payment
- Abstain or vote against change
- After the vote, within 20 days of notification by the corp., make written demand to be bought out
If parties cannot agree on fair value shareholder may sue to determine the value
Amending the Cert. of Formation
Requires Board of Directors action and 2/3 shareholder approval.
Amended CoF must be sent to SoS for filing.
Mergers
- Board action for both corporations
- Approval of 2/3 of shares in disappearing company
- No shareholder approval required if 90%+ owned subsidiary merging into parent (short-form merger)
- If approved, deliver cert. of merger to SoS for filing
Right of appraisal available to shareholders of disappearing co. in regular merger and the subsidiary in short-form merger - Surviving company takes o all rights and liabilities of former company
Conversion
Converts corporation to another form of business organization.
Requires Board action and approval by 2/3 of shares entitled to vote.
Dissenting shareholders can demand appraisal rights.
Transfer of all or substantially all of the corporation’s assets
Requires Board action and 2/3 of shares entitled to vote
Transfer will not be “of substantially all” assets if corp. continues to engage in same business after the transfer
Voluntary Corporate Termination
Voluntary:
- Written consent of all shareholders or
- Board action and approval by 2/3 voting shares
- Notice of intent to wind up sent to creditors
- Follow liquidation process
- Can be revoked by court if termination was fraudulent
Involuntary Corporate Termination
Can be ordered by the AG for fraudulent procurement of cert., ultra vires activities, misrepresentation in required reports, public interest requires it.
Creditors can seek immediate termination based on irreparable harm to unsecured creditors or appointment of a receiver because corp. is insolvent
Shareholders can seek appointment of a receiver for insolvency; waste of assets; director deadlock causing irreparable harm to the company; shareholders deadlocked and have failed at two annual meetings to fill a vacant board position; or illegal, oppressive, or fraudulent acts by directors
Shareholder rights: Remove directors for cause, shareholder derivative suit, request appointment of receiver
Administrative Termination
SoS may issue a cert. of termination for failure to pay fees or maintain registered agent or file reports.
Must give directors 90 days notice
Liquidation Process
Termination triggers the liquidation process:
- Give notice to creditors
- Gather all assets
- Convert to cash
- Pay creditors, and
- Distribute remainder to shareholders (pro-rata by share unless there is a liquidation preference)
Process managed by Board unless court decides to supervise
After Winding Up….
Corp. must deliver cert. of termination to SoS, including statement that debts have been paid, with any remaining sums having been distributed.
This ends the corporate existence.
Claims can be asserted against corp. within 3 years after termination.
Agency: Liability in Contract
Principal becomes liable to third party through actions of his agent if both A and P consent and A is subject to P’s control
P must have contractual capacity, but A does not
Agency law requires no writing but statute of frauds may
Consideration is not required
Actual Authority
Created expressly or implied by Principal’s conduct
Termination of Actual Authority
- After specified time/event or a reasonable time
- By change of circumstances
- If agent acquires adverse interest
- When agent says so (agency is consensual)
- When Principal says so
- By death/incapacity/bankruptcy unless coupled with an interest
Is a fee or commission a sufficient interest to make an agency revocable?
No
Delegation
Requires principal’s consent (express or implied)
Apparent Authority
Principal leads Third Party to mistakenly believe Agent has authority
Reasonable belief must be created by P, not A alone
Can linger long after actual authority ends
Ratification
Even if Agent had no authority, Principal can ratify contract by expressly affirming the contract, accepting benefit of it, or suing on it.
Requirements:
- Knowledge of all material facts
- All or nothing acceptance
- Capacity at the time of ratification and the time of original contract
Since ratification is retroactive, intervening rights of a BFP must be protected
Difference between Ratification and Adoption
Adoption has no retroactive effect
Principal-Agent Relationship
Agent is a fiduciary (owes duty of loyalty, care, and obedience)
Principal must pay, reimburse, and indemnify A
Principal-Third Party
Principal is always liable to third party
Third-party liable to principal unless A has special skills and T does not know P exists
Third Party-Agent
No liability since A is just a go-between
Liability In Tort
Vicarious liability to protect an innocent third party
Test: Was tort committed by servant acting within the scope of employment? If so, master and servant are jointly and severally liable
In TX, releasing Servant from liability does not automatically release Master
Scope of Employment
Master only liable for Servant’s torts if S was acting within the scope of employment
Usual Task - Within scope of employment
Deviation - Issue is how substantial was the deviation
Detour - Minor deviation usually within scope
Frolic - Substantial deviation usually outside scope
Intentional Torts
Outside the scope unless force is used to further Master’s business, M ratifies use of force, or M authorized S to commit tort
Servant or Independent Contractor?
Ask: Did employer have right to control how job was done? Who supplied the tools/workplace? Was the job part of the employer’s regular business? Long term? How much skill was required? Was payment made in regular intervals, like a salary, or by the job?
Direct Liability
Master liable for own negligence if he fails to properly train or supervise employees, check employee’s criminal record, or job history
General Partnership: Formation
Association of two or more persons to carry on as co-owners of a business for profit, whether they intended to form a partnership or not.
To determine who is a partner, look to:
- Capital - Although capital contribution not required to be a partner
- Control - Right to control may be enough even if never exercised
- Sharing Profits - Just one factor, does not raise presumption of partnership
Partnership law does not require a writing but Statute of Frauds may
Joint Venture
Treated like a partnership, but requires express agreement on how losses will be shared
Estoppel
If no partnership was formed, parties may still be liable as if they are partners to protect reasonable reliance by third party
Rules for Determining Partnership Property
IS PARTNERSHIP PROPERTY: If acquired in partnership’s name or in partner’s name where it is apparent from the document he’s acting for partnership
PRESUMED TO BE PARTNERSHIP PROPERTY: If partnership funds are used
PRESUMED TO BE PARTNER’S PROPERTY: If acquired in his name without partnership funds and there’s no sign he’s acting for a partnership
Rights in Partnership Property
Partnership: Totally unrestricted rights
Partner: Can use partnership property only for partnership purposes. Right is non-transferrable
Partner’s Economic Interest in Partnership
Interest = Share of the profits
Transferrable
Relations Among Partners
Statute supplies the default rules, but partners may contract around them so partnership agreement usually governs in this area.
UOA, profits will be split equally. Not in proportion to capital contribution.
UOA losses will be shared in same proportion as profits.
UOA no right to compensation
UOA partners have equal management rights. Ordinary business decided by a majority in interest, not a majority in number.
Duties of Partners
Care, loyalty, and good faith. But Care and Good Faith can be eliminated via partnership agreement.
Admission of New Partners
UOA, requires unanimous consent
New partner can be liable for existing debts, but not for more than the amount of his economic interest in the partnership
Relations Between Partners and Third Parties
Use Agency Law
Contract: Partnership is principal, partner is agent
Actual Authority: Created by partnership agreement, majority vote of partners, or statute, which by default makes every partner an agent for carrying on business in the usual way
Apparent Authority: Look at partner’s title and prior conduct
Ratification/Adoption possible if no authority at time of contract
Partner’s Tort
Only issue is whether it was committed in the ordinary course of the partnership’s business
Conveying Real Property Without Authority
Partnership can get the property back from the initial transferee but not from a subsequent BFP
Partners’ Liability for Partnership Obligations
J&S, but plaintiff must first exhaust partnership resources (exception for LLP)
LLP
Exactly like a general partnership except for vicarious liability.
File a certificate of formation with SoS and pay a fee of $200 per partner
Name must include phrase or abbreviation for LLP to provide notice to third parties
Withdrawal of a Partner
Event of Withdrawal: Notice of express will to withdraw; an agreed upon event; a partner’s expulsion, death, bankruptcy, or incapacity; appointment of a trustee, receiver, or liquidator for a partner; or redemption of a transferee’s interest
Or partnership buys out withdrawing partner and continues without him
Most partnerships are at-will
Withdrawing partner may have apparent authority to bind partnership to innocent creditor for one year, but partnership can protect itself by notifying creditors
Liability of a Withdrawn Partner
To Existing Creditors: Unless released expressly or impliedly
To Subsequent Creditors: Who were aware of the withdrawal (can protect self by providing notice of withdrawal)
To Other Partners: If she withdraws before the term is up or specific task is completed (“wrongful withdrawal”)
Winding Up a Partnership
Triggering Events: Business becomes illegal; all assets sold outside the usual course of business; entry of judicial decree; term is up or task complete; all partners consent; or majority in interest consent in a partnership at will
Partners who have not wrongfully withdrawn have right to wind up
Possible Apparent Authority
To bind partnership to an innocent third party on new business even after winding up, but partnership can protect itself by notifying potential creditors
Distribution of Partnership Assets on Winding Up
- To creditors (including partners who are creditors)
2. To partners for what is in their capital accounts (contributions + profits - losses)
When Partnership Assets Are Insufficient To Cover Liabilities
Creditors split assets pro rata
Partnership creditors have priority over a partner’s creditors on partnership property and equal claims on a partner’s separate property
Limited Partnership
Partnership with one or more general partners (generally liable) and one or more limited partners (liability limited to their investment)
Must file a certificate of formation with SoS along with a fee and must have a written limited partnership agreement
Name Must include “limited Partnership” or “Limited” (abbreviation ok)
General partnership law governs except where LP statute is inconsistent
Exception to LP Limited LIability
Where limited partner takes part in control. Statute doesn’t say what that is but provides certain safe harbors. No bright line test
If partner holds self out as having authority to control, can be held liable.
Rights and Obligations of Limited Partners
Promise to Contribute - Must be in a signed writing to be enforceable
May withdraw only if agreement permits
General partners jointly and severally liable (Exception: LLLP)
Limited Liability Company
Provides Limited Liability and Pass-through taxation
“Members” not “partners”
Must file cert. of formation with SoS and pay $300 fee
Name must include LLC or Limited Company
Profits/Losses split in proportion to capital contributions unless otherwise provided in company agreement
LLC Management
Flexible Management: Can be structured like a corporation or a partnership, but managers run the LLC unless otherwise provided in the certificate
Series LLC: Can partition assets/liabilities among separate (independent) series. Designed for asset protection (shields assets of one series from creditors of another)
LLC Tort Liability
No liability for members other than the tortfeasor
