Business Entities & Negotiable Instruments Flashcards
- Which of the following does not have to be set forth in the articles of incorporation in order for it to be effective?
(a) shareholder preemptive rights
(b) shareholders’ right to inspect the corporation’s books
(c) limitation of director or officer personal liability for breach of the fiduciary duty of care
(d) cumulative voting rights
(e) None of the above
(b) shareholders’ right to inspect the corporation’s books
La. Rev. Stat. 12:24 sets forth the requirements of a corporation’s articles of incorporation. Any shareholder, with at least five days written demand, who has been a shareholder of record of at least five percent of all outstanding shares of the corporation for at least six months and who is not a business competitor, shall have the right to examine any and all of the corporation’s records and accounts. La. Rev. Stat. 12:103(D)(1)(a). This exists by right of the LBCL and does not have to be accounted for in the articles of incorporation. All other answer choices (A), (C) and (D) are examples of rights whose features are not operative unless in the articles. Reference the following sections of the Business Entities—Corporations outline for further information on those concepts: preemptive rights – V.A.3., cumulative voting – V.C.2.e.2), and limitations of director/officer liability – IV.I.3.b./IV.J.
- Which of the following actions can be lawfully approved by a majority vote of a corporation’s board of directors?
(a) An amendment to the corporation’s articles of incorporation
(b) A decision to sell almost all of the corporation’s non-liquid assets
(c) A decision to make a dividend payment that would reduce the corporation’s assets to less than its liabilities
(d) A resolution providing that the corporation will indemnify any director or officer for any liability or penalty incurred for his conduct engaged in on behalf of the corporation in good faith
(e) A resolution to merge the corporation with another corporation whose stock is already 75% owned by the first corporation
(d) A resolution providing that the corporation will indemnify any director or officer for any liability or penalty incurred for his conduct engaged in on behalf of the corporation in good faith
All other answer choices would be considered fundamental changes to the nature of the corporate enterprise and can be decided only by the shareholders. As to answer choice (E), the board of directors would only be able to act on the merger if the second entity is more than 90% owned by the first corporation. La. Rev. Stat. 12:112(C). As to liquidations (B), mergers (E) and amending the articles (A), the proposed action must be approved by two-thirds of the shareholder voting power present at a shareholders’ meeting, or some other percentage specified in the articles not less than a majority of the voting power present.
- A group of three investors wants to form a new business company that will buy land that will then be owned by the company, will develop apartment buildings on the land, and then will own and operate those apartment buildings. For which of the following types of business forms would these three investors not have to file a formal document with the secretary of state in order to accomplish their objectives?
(a) Ordinary partnership
(b) Partnership in commendam
(c) “S” corporation
(d) Limited liability company
(e) None of the above
(e) None of the above
Although ordinary partnership agreements may be oral (or even inadvertent), they are not required to be in writing (to the extent the law of contract would not require them to be in writing). That would seem to make (A) the correct answer choice. However, for a partnership to own immovable property, the partnership agreement must be in writing at the time of acquisition of the immovable property. La. Civ. Code art. 2806. The facts of the question indicate that the three investors are relying on a business model that will only work in their business form owns immovable property (the land and apartment buildings on the land), so (A) would not work in these circumstances. A contract of partnership in commendam must be in writing. La. Civ. Code art. 2841. Thus, (B) is incorrect. All corporate entities’ (as it is referred to in La. Rev. Stat. 12:23(B)) founding documents must be in writing — the articles of incorporation (La. Rev. Stat. 12:24), initial report and the by-laws so (C) is incorrect. (D), lastly, is incorrect because a limited liability company’s articles of organization and initial report must also be written. La. Rev. Stat. 12:1305.
- Which of the following does not require a unanimous vote?
(a) A vote of LLC members to merge the LLC with another LLC or corporation
(b) A vote of partners to terminate the partnership
(c) A vote of LLC members to admit an heir of a deceased member’s interest as a new member
(d) A vote of partners to amend the partnership agreement
(e) All of the above require a unanimous vote.
(a) A vote of LLC members to merge the LLC with another LLC or corporation
Unless otherwise provided in the LLC’s articles of organization or in a written operating agreement, a majority vote of the members is required for the merger or consolidation of an LLC with another business entity. La. Rev. Stat. 12:1318(B)(3). Answer choices (B) and (D) are incorrect because unless otherwise agreed, unanimity is required to amend the partnership agreement or to terminate the partnership. La. Civ. Code art. 2807. A deceased LLC member’s interest ceases and the heir is treated as an assignee. La. Rev. Stat. 12:1333. An assignee of an interest in an LLC shall not become a member unless the other members unanimously consent in writing. La. Rev. Stat. 12:1332(A)(1). Therefore, answer choice (C) is incorrect.
- A holder is precluded from holder in due course status if the instrument is:
(a) Purchased for less than its legal value by the holder.
(b) Negotiated as security in the regular course of business.
(c) Vested in the holder.
(d) Purchased as part of a bulk transaction not in the regular course of business.
(d) Purchased as part of a bulk transaction not in the regular course of business.
Even though the holder may satisfy the requirements that he take for value, in good faith, and without notice, he still does not become a holder in due course of an instrument if he (i) purchases the instrument at judicial sale or takes it under legal process; (ii) acquires the instrument in taking over an estate; or (iii) purchases the instrument as part of a bulk transaction not in the regular course of business of the transferor. Answer choices (A), (B), and (C) are incorrect statements of the law. Answer choice (d) is the correct answer.
- An instrument (1) is postdated, (2) states two rates of interest applicable to different periods, and (3) provides for payment “on my Father’s death.” The instrument is not negotiable because of:
(a) (1).
(b) (2).
(c) (3).
(d) The instrument is negotiable.
(c) (3).
An instrument is negotiable if it is in writing and signed by the maker or drawer, containing an unconditional promise or order to pay a sum certain, and to be payable on demand or at a definite time, to order or bearer. Answer choices (A) and (B) do not affect the negotiability of the instrument. A post-obituary note is not negotiable since the time for payment is uncertain. Therefore, answer choice (C) is the correct answer.
One year ago, on July 1, 2012, Patsy and Judy formed a partnership to start a French pastry shoppe on Magazine Street in New Orleans. Their business office was located there but they filled orders for delectable French desserts throughout the state of Louisiana with must business coming from Orleans, Jefferson and St. Bernard parishes. They did not enter into a written partnership agreement nor designate a term for their partnership. Patsy contributed $50,000, and Judy contributed $50,000 to the partnership. They participated equally in the management of the partnership, shared the profits equally and agreed to share losses equally.
While the business flourished in the latter part of 2012 and the first three months of 2013, the French dessert market started to decline in that area as of April of 2013. Their business has almost ground to a halt. On Monday, June 24, 2013, Patsy tells Judy, “I don’t want to do this anymore. I am quitting this partnership.” Patsy then left town the next morning on an extended vacation. At that time, the partnership had about 10 short-term orders to fill, one large order for a wedding reception on Saturday, June 29 (an order that Judy could no way do on her own) and the partnership owed creditors about $17,500.
The next afternoon, on Tuesday, June 25, 2013, Mindy, a major area caterer, met with Judy at the office on Magazine Street. Mindy knew about Patsy and Judy’s partnership and the general decline in the French dessert market, but she had not previously done business directly with Patsy and Judy’s partnership. For over a month (starting in mid-May 2013), Judy had been secretly soliciting a long-term contract to be Mindy’s exclusive provider of desserts for large-scale area events catered by Mindy. Without telling Mindy about Patsy’s statement the previous day, Judy, on behalf of the partnership, entered into a contract with Mindy to produce 500,000 petit fours a year for three years for all of Mindy’s events she caters within that time frame.
After Patsy’s departure, Judy, using her own funds, paid the $17,500 owed to creditors and also had to hire a short-term helper (at a cost of approximately $950) to be ready for the order for the June 29 wedding.
- Which of the following choices best represents the effect on the partnership of Patsy’s statement, “I don’t want to do this anymore. I am quitting this partnership”?
(a) The effect of the statement is to validly withdraw Patsy from the partnership as the partnership was created without a term.
(b) The effect of the statement is to not constitute a valid withdrawal of Patsy from the partnership as she gave notice at a time that would likely be considered unfavorable to the partnership.
(c) The effect of the statement is to not constitute a valid withdrawal of Patsy since she did not seek Judy’s consent.
(d) The effect of the statement is to validly withdraw Patsy from the partnership as Judy, in agreeing to the arrangement with Mindy, failed to perform a material obligation of the partnership.
(b) The effect of the statement is to not constitute a valid withdrawal of Patsy from the partnership as she gave notice at a time that would likely be considered unfavorable to the partnership.
A partner may withdraw from a partnership constituted without a term at any time provided that she gives notice in good faith at a time that is not unfavorable to the partnership. [La. Civ. Code art. 2822] Here, Patsy’s notice, while perhaps in good faith, was at a time quite unfavorable to the partnership, as it left Judy to prepare the large-scale June 29 wedding order alone (an order for which Judy incurred costs of $950 to hire extra help due to Patsy’s immediate departure). (A) is not correct because although the partnership was created without a term, the fact that Patsy left the partnership at a time unfavorable to the partnership makes her withdrawal ineffective. (C) is not correct because consent for withdrawal is only required for a partnership constituted for a term. (D) is not correct because Judy’s arrangement with Mindy, while having a bearing on Judy’s liability to the partnership, does not have a bearing on Patsy’s ability to withdraw. Further, if Judy were to be found to have failed to perform a material obligation (because of her agreement with Mindy), it would allow withdrawal by Patsy only for a partnership fixed for a term, and the facts indicate this one was not.
One year ago, on July 1, 2012, Patsy and Judy formed a partnership to start a French pastry shoppe on Magazine Street in New Orleans. Their business office was located there but they filled orders for delectable French desserts throughout the state of Louisiana with must business coming from Orleans, Jefferson and St. Bernard parishes. They did not enter into a written partnership agreement nor designate a term for their partnership. Patsy contributed $50,000, and Judy contributed $50,000 to the partnership. They participated equally in the management of the partnership, shared the profits equally and agreed to share losses equally.
While the business flourished in the latter part of 2012 and the first three months of 2013, the French dessert market started to decline in that area as of April of 2013. Their business has almost ground to a halt. On Monday, June 24, 2013, Patsy tells Judy, “I don’t want to do this anymore. I am quitting this partnership.” Patsy then left town the next morning on an extended vacation. At that time, the partnership had about 10 short-term orders to fill, one large order for a wedding reception on Saturday, June 29 (an order that Judy could no way do on her own) and the partnership owed creditors about $17,500.
The next afternoon, on Tuesday, June 25, 2013, Mindy, a major area caterer, met with Judy at the office on Magazine Street. Mindy knew about Patsy and Judy’s partnership and the general decline in the French dessert market, but she had not previously done business directly with Patsy and Judy’s partnership. For over a month (starting in mid-May 2013), Judy had been secretly soliciting a long-term contract to be Mindy’s exclusive provider of desserts for large-scale area events catered by Mindy. Without telling Mindy about Patsy’s statement the previous day, Judy, on behalf of the partnership, entered into a contract with Mindy to produce 500,000 petit fours a year for three years for all of Mindy’s events she caters within that time frame.
After Patsy’s departure, Judy, using her own funds, paid the $17,500 owed to creditors and also had to hire a short-term helper (at a cost of approximately $950) to be ready for the order for the June 29 wedding.
- Is the partnership bound by the contract with Mindy?
(a) No, because the partnership was properly dissolved based on Patsy’s withdrawal.
(b) Yes, but only if Judy contacts Patsy and informs her of the contract and Patsy ratifies it.
(c) No, because the contract involved the encumbrance of Judy and Patsy’s pastry shop and as such was an encumbrance of partnership immovable property.
(d) Yes, because Judy is a mandatary for the partnership and the contract with Mindy was in the ordinary course of partnership business.
(d) Yes, because Judy is a mandatary for the partnership and the contract with Mindy was in the ordinary course of partnership business.
Each partner is a mandatary for all matters in the ordinary course of partnership business other than the alienation, lease or encumbrance of partnership immovables. [La. Civ. Code art. 2814] Here, entering into a catering agreement to provide desserts is clearly within Patsy and Judy’s partnership’s ordinary course of business and as such, either one of them could do so. (A) is not correct because as question #7 above indicates, Patsy’s statements were not tantamount to a withdrawal. (B) is not an accurate statement of partnership rules from the Louisiana Civil Code. Assuming the existence of a valid Louisiana partnership (and here Patsy was still a partner), there is no duty to consent for contracts in the ordinary course of business unless a written partnership agreement says otherwise. There is no written agreement here so no exception to the rule applies. (C) is incorrect because it is not plausible from the facts to assume the contract with Mindy involved the immovable property of the partnership.
One year ago, on July 1, 2012, Patsy and Judy formed a partnership to start a French pastry shoppe on Magazine Street in New Orleans. Their business office was located there but they filled orders for delectable French desserts throughout the state of Louisiana with must business coming from Orleans, Jefferson and St. Bernard parishes. They did not enter into a written partnership agreement nor designate a term for their partnership. Patsy contributed $50,000, and Judy contributed $50,000 to the partnership. They participated equally in the management of the partnership, shared the profits equally and agreed to share losses equally.
While the business flourished in the latter part of 2012 and the first three months of 2013, the French dessert market started to decline in that area as of April of 2013. Their business has almost ground to a halt. On Monday, June 24, 2013, Patsy tells Judy, “I don’t want to do this anymore. I am quitting this partnership.” Patsy then left town the next morning on an extended vacation. At that time, the partnership had about 10 short-term orders to fill, one large order for a wedding reception on Saturday, June 29 (an order that Judy could no way do on her own) and the partnership owed creditors about $17,500.
The next afternoon, on Tuesday, June 25, 2013, Mindy, a major area caterer, met with Judy at the office on Magazine Street. Mindy knew about Patsy and Judy’s partnership and the general decline in the French dessert market, but she had not previously done business directly with Patsy and Judy’s partnership. For over a month (starting in mid-May 2013), Judy had been secretly soliciting a long-term contract to be Mindy’s exclusive provider of desserts for large-scale area events catered by Mindy. Without telling Mindy about Patsy’s statement the previous day, Judy, on behalf of the partnership, entered into a contract with Mindy to produce 500,000 petit fours a year for three years for all of Mindy’s events she caters within that time frame.
After Patsy’s departure, Judy, using her own funds, paid the $17,500 owed to creditors and also had to hire a short-term helper (at a cost of approximately $950) to be ready for the order for the June 29 wedding.
- What contribution, if any, can Judy claim from Patsy for Judy’s $17,500 payment to creditors?
(a) $17,500
(b) $0
(c) $8,750
(d) $17,500 plus forfeiture of Patsy’s $50,000 contribution as penalty for improper withdrawal
(c) $8,750
A partnership as principal obligor is primarily liable for its debts. [La. Civ. Code art. 2817] Each partner is secondarily liable for her virile share of the partnership’s debts. Since Judy and Patsy have contributed equally and agreed to share losses equally, Patsy would owe Judy her pro rata share of the $17,500 payment, namely half of that, or $8,750. Because of this, answer choices (A) and (B) and incorrect. (D) is an inaccurate statement of partnership law. There is no provision which would allow Judy to keep Patsy’s $50,000 contribution even if Patsy validly withdrew from the partnership. Moreover, if such a claim would be available, it is not relevant to the $17,500 claim of the creditors that Judy paid.
