Business Associations Flashcards
Authority of Agent to Bind Principal (24%)
An agent may bind a principal to a contract if…
An agent may bind a principal to a contract if the agent is acting within his actual or apparent authority, or inherent agency power. Once a principal is validly bound to a contract by his agent, the principal is liable under the terms of the contract.
Actual Authority (10%)
a) An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes him (the agent) to act.
b) Actual authority can be express or implied:
(1) Actual express authority exists when the principal directs the agent to engage
in the precise task in question.
(2) Actual implied authority exists when the agent believes, based on a reasonable interpretation of the principal’s words or conduct, that the principal wishes him (the agent) to act on the principal’s behalf.
(a) Incidental authority. The agent’s authority to conduct a transaction includes the authority to engage in actions that are incidental to it, usually accompany it, or are reasonably necessary to accomplish it.
(b) For Example: Principal tells Agent, “Sell my car.” Agent has the authority to take actions that are reasonably necessary to sell the car (e.g., placing advertisements in the newspaper, listing the car for sale on auto trader websites, etc.).
An agent acts with apparent authority when (24%)
(1) The principal holds the agent out as having authority to act on the principal’s
behalf; AND
(2) The principal’s conduct, when reasonably interpreted, causes a third party to rely on the agent’s appearance of authority when dealing with the agent.
Apparent authority does NOT exist if the third party has knowledge that the agent does not have actual authority.
When an employer may be liable for torts committed by an employee agent
(Respondeat Superior (24%))
a) Under the doctrine of respondeat superior, an employer (principal) may be liable for torts committed by an employee (agent) if:
(1) An employer-employee relationship exists (NOT an independent contractor relationship); AND
(a) In determining whether an employer-employee relationship exists, the most important consideration is the extent of control that the principal exercises over the details of the agent’s work (the more control the principal exercises over the agent, the higher the likelihood that the agent will be considered an employee as opposed to an independent contractor).
(2) The employee’s commission of the tort occurs within the scope of employment.
(a) Activity is within the scope of employment when the employee’s conduct is of the same general nature as that authorized, or incidental to the conduct authorized by the employer. In making this determination, courts examine whether the employee’s conduct was:
(i) A function for which the employee was hired to perform;
(ii) Within the employer’s authorized time and space limits;
(iii) Conducted to serve the employer; AND
(iv) Foreseeable to the employer.
b) The employer remains liable during an employee’s detour (i.e., a minor deviation from the scope of employment), even if the detour is mainly for the employee’s own personal reasons. However, the employer does NOT remain liable during an employee’s frolic (i.e., a major deviation from the scope of employment).
c) Generally, employers are NOT liable for the intentional torts of employees UNLESS:
(1) The intentional tort was authorized by the employer; OR
(2) Force is within the scope of employment in the employee’s work (e.g., security guards).
General Partnership Formation (14%)
a) A general partnership is a type of partnership that has NO limited personal liability (i.e., general partners remain personally, jointly and severally liable for ALL debts of the partnership).
A general partnership is formed when:
(1) 2 or more persons; (2) Associate as co-workers; (3) to carry on a business for profit
b) In determining whether a general partnership exists, it is irrelevant whether the parties intended to form a partnership. However, courts may consider the following:
(1) Sharing of Profits. A person who receives a share of the profits of a business is presumed to be a partner in the business unless the partner receives the profits as payment of debt, rent, wages, or for services rendered.
(2) Joint Ownership. Joint ownership of property tends to show that the parties associated as co-owners; however, it does not necessarily establish a partnership in and of itself.
(3) Sharing of Control. Sharing of control, capital investment, and labor tends to show that the parties associated as co-owners; however, it does not necessarily establish a partnership in and of itself.
General Partnership: Tort Liability of the Partners (10%)
a) General Partners. General partners are jointly and severally liable for ALL obligations of the partnership arising from any wrongful act or omission of any partner acting:
(1) Within the ordinary course of the partnership’s business; OR
(2) With the authority of ALL other partners.
b) Limited Partners. Limited partners are NOT personally liable for obligations of the limited partnership arising from the wrongful acts or omissions of other partners. However, limited partners are always liable for their OWN misconduct.
Contract Liability of the Partnership (22%)
a) Each partner is an agent of the partnership. Therefore, the actions of every partner that are made within the ordinary course of business to carry on the partnership’s business (e.g., entering into contracts in the partnership’s name), bind the partnership, UNLESS the partner taking the action:
(1) Has NO authority to act on behalf of the partnership; AND
(2) The other side has knowledge or notice that the partner lacks authority.
b) Actions taken by a partner that are OUTSIDE the ordinary course of the partnership’s business do NOT bind the partnership UNLESS the other partners unanimously authorize the action with actual or apparent authority.
Contract Liability of the Partners (10%)
a) General Partners. General partners are jointly and severally liable for ALL debts and obligations of the partnership.
b) Limited Partners. Limited partners are personally liable for the debts of the limited partnership ONLY to the extent of their investment in the limited partnership. However, limited partners are always liable for their OWN misconduct.
Duty of Loyalty: Partnerships (14%)
a) Each partner owes a fiduciary duty of loyalty to the partnership and other partners, which requires that each partner:
(1) Act in good faith and fairly toward the other partners;
(2) Account for any property, profit, or benefit derived by the partner from the
partnership business or property; AND
(3) REFRAIN from:
(a) Competing with the partnership within the scope of the business (even during dissolution); AND
(b) Usurping a business opportunity that properly belongs to the partnership.
b) If a partner breaches the duty of loyalty, he may be held personally liable for damages (the duty of loyalty may be eliminated in the partnership agreement if reasonable).
Dissolution: Generally (20%)
a) Dissolution of a partnership does NOT immediately terminate the partnership. Rather, the partnership enters a “winding up” phase, which continues until the winding up of the partnership’s affairs is completed (i.e., dissolution triggers the wind up and termination of the partnership).
b) Dissolution Causes. There are three main causes of dissolution:
(1) Actions taken by the partners (e.g., disassociation, partners agree to certain
causes for dissolution, etc.);
(2) Operation of law (e.g., it becomes illegal to continue the business of the
partnership); OR
(3) Court order (e.g., a court may grant a judicial dissolution if it is no longer
reasonably practicable to continue operation of the partnership business).
Dissolution: Uniform Partnership Act (UPA) (20%)
Uniform Partnership Act (UPA). Under the UPA, any change in partner membership automatically triggers dissolution of the partnership UNLESS there is an agreement to the contrary. Thus, absent an agreement to the contrary, every partner generally has the power to dissolve the partnership at any time by withdrawing from the partnership. However, if the dissolution is wrongful, the remaining partners may hold the dissolving partner liable for damages.
Dissolution: Revised Uniform Partnership Act (RUPA) (20%)
Revised Uniform Partnership Act (RUPA). RUPA provides a basis for continuing the partnership despite a partner’s withdrawal from the partnership where the remaining partners may buy out the withdrawn partner’s interest instead of winding up the partnership business. Under RUPA, absent an agreement to the contrary, the “disassociation” (occurs when a partner ceases his association with carrying on the partnership business) of a partner does NOT automatically trigger dissolution UNLESS either of the following exceptions apply:
(1) At-Will Partnerships. Any member of an at-will partnership can disassociate at any time automatically triggering dissolution and liquidation. (2) Will of the Parties. A partnership will automatically dissolve upon the occurrence of an event that the partners specified would cause dissolution in the partnership agreement (e.g., a partnership created for a specific term or undertaking).
Dissolution: Term Partnerships (20%)
Term Partnerships. A term partnership is a partnership that exists for a specified duration of time or until a specified event occurs. Under RUPA, a term partnership may be dissolved before its term expires if:
(1) At least half of the partner’s express their will to wind up the business within 90 days after a partner’s disassociation by death, declaring bankruptcy, becoming incapacitated, or wrongful disassociation; OR (2) ALL of the partners agree to amend the partnership agreement by expressly agreeing to dissolve the partnership.
Shareholder Liability: Piercing the Corporate Veil (12%)
a) General Rule. Generally, shareholders of a corporation are NOT personally liable for the debts of the corporation. However, the major exception to this rule is the doctrine of piercing the corporate veil.
b) Piercing the Corporate Veil. Courts will allow a creditor to pierce the corporate veil and hold a shareholder personally liable for the debts of a corporation when:
(1) The shareholder has dominated the corporation to the extent that the corporation may be considered the shareholder’s alter ego (e.g., a shareholder utilizes the corporate form for personal reasons);
(2) The shareholder failed to follow corporate formalities;
(3) The corporation was undercapitalized (i.e., inadequately funded at its inception
to cover debts and prospective liabilities); OR
(4) There is fraud or illegality present.
c) Passive Investor Liability. Once the corporate veil has been pierced, courts generally hold ALL the shareholders liable. However, some courts do not extend liability to passive investors.
Shareholders: Vote by Proxy and Revocation (10%)
a) A vote by proxy allows a shareholder to vote without physically attending the shareholder’s meeting by authorizing another person to vote her shares on her behalf. A valid proxy must exist in the form of a verifiable electronic transmission or a signed written appointment form.
b) A proxy is freely revocable by the shareholder UNLESS the recipient of the proxy has an economic interest in the shares.
