Business Organizations Flashcards

Question

Are principals liable for torts of independent contractors?

Answer 1

As a general rule, a principal is **not liable** for torts of independent contractors. There are exceptions: * (1) The independent contractor is engaged in an **inherently dangerous activity** (blasting). * (2) Duty is **not delegable** (duty to use care in building a fence around excavation site). The difference between an **independent contractor** and **employee** is that with the independent contractor, the principal has no right to control the **manner and method** in which the job is performed, while with the employee, the principal has the right to such control.

Answer 2

(a) **Death** of either party (or cessation of existence) (b) Principal’s **loss of capacity** (c) **Agreement** between agent and principal (d) **Occurrence of circumstances** such that agent should reasonably conclude principal would **no longer assent** to agency (e) **Revocation** by principal or **renunciation** by agent (f) **Statute**

Answer 3

Yes. When a principal (natural person) dies, his/her agent’s actual authority terminates **when the agent has notice** of the principal’s death.

Answer 4

It terminates the agent’s actual authority. The termination becomes effective when the **agent has notice** that the principal’s loss of capacity is **permanent** or that principal has been **adjudicated to lack capacity**.

Answer 5

Yes, a written instrument may make an agent’s actual authority effective upon a principal’s loss of capacity or confer it irrevocably regardless of such loss.

Answer 6

A written designation of an attorney-in-fact expressing the principal’s intention that the **power shall not be affected** by the principal’s **subsequent loss of capacity**, or that the **power shall become effective** upon the principal’s **subsequent disability or incapacity**. The principal may revoke the power so long as the principal has capacity.

Answer 7

**Apparent authority** ends when it is no longer reasonable for the **third party** with whom an agent deals to **believe** that the agent continues to act with **actual authority**. The termination of **actual authority** does not by itself end any **apparent authority** held by an agent.

Answer 8

A principal may furnish an agent with a **writing**, such as a **power of attorney**, that states the **extent and nature** of the agent’s **actual authority**. Providing the agent with such a writing enables **third parties** to deal with the agent as to matters **within the scope of the stated authority** without confirming the agent’s authority directly with the principal. When actual authority is terminated, the agent has a **duty to return** indicia of authority to the principal. If the agent does not return the indicia to the principal, the **principal bears the risk** that the agent will **use them to deceive third parties** who do not have notice that the agent’s actual authority has been terminated.

Answer 9

**Ratification** is the **affirmance of a prior act** done by another. * Upon ratification, the prior act done by another is effective as if done by an agent acting with **actual authority**. Ratification retroactively creates the effects of actual authority, meaning it **relates back** in time to the act being ratified. A person can ratify an act by: * (a) **manifesting assent** that the act shall affect the person’s legal relations, or * (b) conduct that justifies a **reasonable assumption** that the person so consents. * This way, **failure to object** may constitute a manifestation of assent when the person has **notice** that others are likely to draw such an inference (that there is assent) from silence.

Answer 10

Yes. Ratification is not effective: * (a) in favor of a person who **causes it by misrepresentation** or other conduct that would make a **contract voidable**; * (b) in favor of an agent against a principal when the **principal ratifies to avoid a loss**; or * (c) to **diminish the rights or other interests of persons**, not parties to the transaction, that were acquired in the subject matter prior to the ratification.

Answer 11

Yes. If an agent **dupes a third party into believing the agent had authority**, it is fair to permit the third party to withdraw. Permitting the third party to withdraw prior to ratification by the principal creates an incentive for the principal to ratify **sooner rather than later**, rather than delaying to see whether the transaction itself turns out to be to the principal’s advantage. This reduces the risk created by ratification, which is that the principal will use it to speculate at the expense of the third party.

Answer 12

No. A ratification of a transaction is **not effective** unless it **precedes the occurrence** of circumstances that would cause the ratification to have **adverse and inequitable effects** on the rights of **third parties**. These circumstances include: * (a) any **manifestation of intention to withdraw** from the transaction made by the **third party**; * (b) any **material change in circumstances** that would make it inequitable to bind the **third party**, unless the third party **chooses to be bound**; and * (c) a **specific time** that determines whether a third party is deprived of a right or subjected to a liability.

Answer 13

No. A ratification is not effective unless it encompasses the **entirety** of an act, contract, or other single transaction.

Answer 14

Yes. A person can ratify the acts of another who purports to be their agent even though the person is not.

Answer 15

A notification is, (a) per **agreement** of the parties, (b) **applicable law,** or (c) when in a **reasonable manner**: * (1) a **manifestation** * (2) with the **intent to affect the legal rights/duties** of the **notifier** * (3) relative to rights/duties of the **notified**.

Answer 16

Yes. A notification given **to an agent** is effective as notice **to the principal** if the agent has actual or apparent **authority to receive** the notification, unless the person who gives the notification **knows or has reason to know** that the agent is acting **adversely to the principal**.

Answer 17

Yes. A notification given **by an agent** is effective as notification given **by the principal** if the agent has actual or apparent **authority to give** the notification, unless the person who receives the notification **knows or has reason to know** that the agent is acting **adversely to the principal**.

Answer 18

Depending on the parties’ intention and applicable law, a notification may be effective **as soon as it is received**. Alternatively, the effect of a notification **may be delayed** when the notification requires that the person notified **take further action**. In such cases, notification given to an agent is **not effective as to the principal** prior to the earlier of a **reasonable time** for **taking action** or a **diligent attempt** to take action.

Answer 19

Notice of a fact that an **agent knows or has reason to know** is imputed to the **principal** if knowledge of the fact is **material to the agent’s duties** to the principal, unless the agent * (a) **acts adversely** to the principal, or * (b) is subject to a duty to another **not to disclose the fact** to the principal.

Answer 20

It is not enough that the agent’s actions have harmed or damaged the principal. It is a **subjective** test: whether the agent acts **intending to act** solely for the **agent’s own purposes** or those of **another person**.

Answer 21

Unless an agreement between a principal and an agent indicates otherwise, a **principal has a duty to pay compensation to an agent** for services that the agent provides. An agreement that an agent will not have a right to compensation for services provided **may be implied** from the **agent’s relationship to the principal** or from the **trivial nature** of the services requested.

Answer 22

It means that if the **agent suffers any loss** as a result of the agency, the principal will **make the agent whole**. A **principal** has a duty to indemnify an **agent** in accordance with the **terms of any contract** between them, and **unless** otherwise agreed: * (a) when the agent **suffers a loss** that fairly **should be borne by the principal** in light of their relationship; or * (b) when the agent **makes a payment**: * (i) within the scope of the agent’s **actual authority**; or * (ii) that is **beneficial to the principal**, unless the agent **acts officiously** in making the payment.

Answer 23

A **principal** has a duty to deal with the agent **fairly and in good faith**, including a duty to **provide the agent with information** about **risks of physical harm or pecuniary loss** that the principal knows, has reason to know, or should know are present in the agent’s work but **unknown to the agent**.

Answer 24

A partnership is the **association** of **two or more persons** to carry on as **co-owners** a **business for profit**, whether or not the persons **intend** to form a partnership. * The idea of an **association** is one of **voluntarily coming together**—to agree to combine property, money, skill, etc. to carry out a business enterprise. * People who become co-owners other than by voluntary act (inheritance, divorce, foreclosure) are **not automatically partners**. * It does not matter whether the two persons intended to form a partnership; instead, we look at the **substance of the association**: what it does, how it acts, etc.

Answer 25

Partners: * (i) **Share equally** net profits (prima facie evidence of partnership), * (ii) **Repay capital contribution** once all liabilities are satisfied, * (iii) Are **indemnified** by partnership, * (iv) Have **equal rights in management**, * (v) Have **right to inspect** and copy any partnership records, and * (vi) Owe **fiduciary duties** to other partners. In addition, becoming a partner requires **consent of all of the partners**.

Answer 26

No. Business associations organized under other statutes are **not partnerships**. General partnership is the residual form of for-profit business association, existing **only if another form does not**.

Answer 27

No. In determining whether a partnership is formed, the following rules apply: * Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not, by itself, establish a partnership, **even if the co-owners share profits made by the use of the property**. * The **sharing of gross returns** does not, by itself, establish a partnership, even if the persons sharing them have a joint or common right or interest in property from which the returns are derived.

Answer 28

**Gross receipts** are the income before any costs/expenses are removed while **profits** are the income after all costs/expenses are removed. Receiving a **share of gross receipts** indicates that each person will **bear their own costs and risk of loss/profit**. This indicates a decision **not to carry on as partners** (who share profits/losses).

Answer 29

A person who **receives a share of the profits** of a business is **presumed to be a partner** in the business, **unless** the profits were received in payment: * (a) of a **debt** by installments or otherwise; * (b) for **services as an independent contractor** or of wages or other **compensation to an employee**; * (c) of **rent**; * (d) of an **annuity** or other **retirement benefit** to a beneficiary, representative, or designee of a deceased or retired partner; * (e) of **interest or other charge on a loan**, even if the amount of payment varies with the profits of the business, including a direct or indirect present or future ownership of the collateral, or rights to income, proceeds, or increase in value derived from the collateral; or * (f) for the **sale of the goodwill of a business** or other property by installments or otherwise.

Answer 30

When a person by words or conduct **represents himself as a partner** or **consents to being represented** by another as a partner, that person is **liable to third parties** who enter into a transaction **relying upon the purported partnership**.

Answer 31

Unless the **agreement** stipulates otherwise, the default is that the partners **share equally in the profits** and are **equally chargeable with a share of the losses**. To the extent the partnership agreement does not otherwise provide, RUPA governs relations among partners and between partners and a partnership. * Use of the term “**chargeable**” “is intended to make clear that a partner is not obligated to contribute to partnership losses before his withdrawal or the liquidation of the partnership, unless the partners agree otherwise.

Answer 32

Unless the **agreement stipulates otherwise**, the default is that the **partners are not entitled** to remuneration for services performed for the partnership, except for **reasonable compensation** for services rendered in winding up the business of the partnership. So, if there is no agreement saying so, then there is no right to a salary.

Answer 33

Absent an agreement to the contrary, a partner is entitled to payment of profits **when the partnership has dissolved** and the **winding up process is complete**.

Answer 34

A **capital account** keeps track of the capital contributed, profits, and losses accruing to each partner. Sometimes the partners agree that individual partners may remove value from those capital accounts. One mechanism of doing so is to create a “**drawing account**” that keeps track of the amount the partner has withdrawn from their capital account.

Answer 35

Sometimes a partnership needs additional resources to pay the obligations of the partnership. If that is the case, the partners may **request additional funds** from the partners. This “**capital call**” does not have a basis in RUPA, so if the partners want to allow for capital calls, they should include a provision for them in the partnership agreement.

Answer 36

A service only partner is a partner whose “capital contribution” in money or property is zero, but who contributes by **giving services to the partnership**. Because they **share equally** in a firm’s losses, they may have to pay other partners. * Under the **majority rule**, in the absence of contrary agreement, a service only partner **bears losses equally** with all other partners. * Under the **minority rule**, in the absence of contrary agreement, where one partner contributed capital and another only their services, in the event of a loss **each loses his own capital** (one money, the other labor).

Answer 37

Subject to the effect of a **statement of partnership authority**: * (1) Each partner is an **agent of the partnership** for the **purpose of its business**. An **act of a partner**, including the execution of an instrument in the partnership name, **for apparently carrying on in the ordinary course the partnership business** binds the partnership, unless the partner **had no authority to act for the partnership** in the particular matter and the person with whom the partner was dealing **knew or had received a notification** that the partner lacked authority. * (2) An act of a partner which is **not apparently for carrying on in the ordinary course the partnership business** binds the partnership only if the act was authorized **by the other partners** or is authorized **by terms of a written partnership agreement**.

Answer 38

Each partner has **equal rights in the management and conduct** of the partnership business. * A partnership shall **keep its books and records**, if any, at its **chief executive office**. A partnership shall provide **partners and their agents and attorneys** access to its books and records. Without access to information about the partnership, it is not possible for the partner to make informed decisions or to uncover problems. A difference arising as to a matter in the **ordinary course of business** of a partnership may be decided by a **majority of the partners**. An act **outside the ordinary course of business** of a partnership and an amendment to the partnership agreement may be undertaken only with the **consent of all of the partners**.

Answer 39

A statement that is filed with the division of corporations (or secretary of state), that **identifies the partnership** with name and address of the partnership, name and address of the partners, and **states the authority** (or limits on the authority) of partners.

Answer 40

(1) If property is held **in the name of partnership**, then it may be transferred by **instrument executed by a partner** in the partnership name. (2) If property is held **in the name of one or more partners** AND **transferring instrument indicates existence of partnership**, then it may be transferred by **instrument executed in the partners’ names**. (3) If property is held **in the name of one or more persons** AND **partnership is not noted on the instrument**, then it may be transferred by **instrument executed in those persons’ names**.

Answer 41

A partnership **may recover partnership property from a transferee** only if it proves that **execution of the instrument of initial transfer did not bind the partnership** and proves that the **transferee knew or had received a notification** that the person who executed the instrument of initial transfer **lacked authority to bind** the partnership. * If the instrument **indicated the existence of the partnership**, the transferee must also have known that the property was partnership property.

Answer 42

Yes. A partner’s knowledge, notice, or receipt of a notification of a fact relating to the partnership is **effective immediately** as knowledge by, notice to, or receipt of a notification by the **partnership**, except in the case of a fraud on the partnership committed by or with the consent of that partner.

Answer 43

All partners are **liable jointly and severally** for all obligations of the partnership **unless otherwise agreed** by the claimant or provided by law. A person admitted as a partner into an existing partnership is not personally liable for any partnership obligation **incurred before the person’s admission** as a partner.

Answer 44

(a) A partner’s **dissociation does not of itself discharge the partner’s liability** for a partnership obligation incurred **before dissociation**. A dissociated partner is **not liable for a partnership obligation incurred after dissociation**, except as otherwise provided in subsection (b). (b) A partner who dissociates **without resulting in a dissolution and winding up** of the partnership business is **liable as a partner** to the other party in a transaction entered into by the partnership **within two years** after the partner’s dissociation, only if the partner is **liable for the obligation** and **at the time of entering into the transaction**, the other party: * (1) **reasonably believed** that the dissociated partner was then a partner, and * (2) **did not have notice** of the **partner’s dissociation.**

Answer 45

A partnership is **liable for loss or injury** caused to a person, or for a penalty incurred, as a result of a **wrongful act or omission**, or other actionable conduct, of a partner **acting in the ordinary course of business** of the partnership or **with authority** of the partnership.

Answer 46

Partnership creditors must first execute against **partnership assets** until those assets are **fully exhausted** before executing against a **partner’s personal assets**.

Answer 47

Property acquired by a partnership is **property of the partnership** and **not of the partners individually**. This means that **among partners**, in the absence of a contrary agreement: * (a) No right to **partition**. * (b) No right to **withdraw property** or to **in-kind distribution**. * (c) No right to use for **personal purposes**.

Answer 48

Ultimately, it is the **intention of the partners** that controls whether property belongs to the partnership or to one or more of the partners in their individual capacities, at least as among the partners themselves. Additionally, there are two presumptions under RUPA: * (1) Property **purchased with partnership funds** is presumed to be partnership property, notwithstanding the name in which title is held. * (2) Property **acquired in the name of one or more of the partners**, without an indication of their capacity as partners and without use of partnership funds or credit, is presumed to be the partners’ separate property, **even if used for partnership purposes**. In effect, it is presumed in that case that only the use of the property is contributed to the partnership.

Answer 49

Dissociation is the change in the relationship caused by a **partner’s ceasing to be associated** in the carrying on of the business. The partnership **cannot eliminate the power** of a partner to dissociate by express will but **can eliminate the right** and thereby make the dissociation **wrongful**. A partner is dissociated from a partnership upon the occurrence of any of the following events: * (a) notice of the partner’s **express will to withdraw**; * (b) happening of an **agreed event**; * (c) the **valid expulsion** of a partner; * (d) the partner entering **bankruptcy**; * (e) the **partner’s death or incapacity** to perform partnership duties; * (f) for a partner that is a **trust or estate**, distribution of the trust’s or estate’s entire transferable interest in the partnership; and * (g) **termination of a business entity** that is a partner.

Answer 50

A person’s dissociation as a partner is wrongful only if the dissociation is in **breach of an express provision** of the partnership agreement or occurs **before the expiration of an agreed upon term**. A person that wrongfully dissociates as a partner is liable to the partnership and to the other partners for **damages caused by the dissociation**. The liability is in addition to any debt, obligation, or other liability of the partner to the partnership or the other partners.

Answer 51

When a partner is **removed by the partners** from the partnership and the partnership **continues in existence**, the removed partner has been expelled. Additionally, the expulsion must not violate the **duty of loyalty**. If the partnership **does not continue in existence**, there has been a **dissolution** of the partnership and the partner was not expelled.

Answer 52

A partner’s **duty of loyalty** to the partnership and the other partners is limited to the following: * (1) to **account to the partnership and hold as trustee** for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity; * (2) to **refrain from dealing with the partnership** in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership; and * (3) to **refrain from competing with the partnership** in the conduct of the partnership business before the dissolution of the partnership.

Answer 53

A partner’s duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in **grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law**.

Answer 54

(1) The partner’s **right to participate in the management and conduct** of the partnership business **terminates** (but can participate in winding up); (2) The partner’s **duty of loyalty to not compete** with the partnership **terminates**; and (3) The partner’s **duty of loyalty** (accounting/hold property as trustee and having adverse interest) and **duty of care** continue only with regard to matters arising and events occurring **before the partner’s dissociation**, unless the partner participates in winding up the partnership’s business.

Answer 55

After dissolution, a partner who has not wrongfully dissociated may **participate in winding up** the partnership’s business, but **on application** of any partner, partner’s legal representative, or transferee, the court, for good cause shown, **may order judicial supervision of the winding up**.

Answer 56

“Dissolution” is merely the **commencement of the winding up process**. Each of the following can create the dissolution of a partnership: * (1) In a partnership **at will**, notification by any partner of an **express will to withdraw**; * (2) In a partnership for a **definite term/particular undertaking**: * (a) **Expiration** of the term; * (b) **Completion** of the undertaking; * (c) **Consent of all partners** to dissolve; * (d) Within 90 days of a partner’s death, bankruptcy, or wrongful dissociation, **at least half** of the remaining partners wish to dissolve. * (3) The happening of an event that makes continuation of the partnership **illegal**; * (4) The happening of an event **listed in the partnership agreement** that requires winding up the partnership; * (5) Issuance of a **judicial decree on application** by a partner that * (a) The economic purpose of the partnership is likely to be **frustrated**, * (b) A partner has engaged in conduct making it **not reasonably practicable** to carry on the business, or * (c) The business cannot practicably be carried on **in conformity with the partnership agreement**; * (6) Issuance of a **judicial decree** on application by a transferee of a partner’s interest that it is equitable to wind up the partnership * (a) After the **term expires** or the **undertaking is completed** in a partnership for a definite term or particular undertaking, or * (b) **At any time** in a partnership **at will**.

Answer 57

Subject to a statement of dissolution, a partnership is bound by a partner’s act after dissolution that: * (a) **is appropriate for winding up** the partnership business; or * (b) **would have bound the partnership** before dissolution, if the other party to the transaction **did not have notice** of the dissolution.

Answer 58

A partner is liable to the other partners for the partner’s share of any partnership liability **incurred winding up the partnership**. A partner who, with knowledge of the dissolution, incurs a partnership liability by an act that is **not appropriate for winding up the partnership** business is liable to the partnership for any damage caused to the partnership **arising from the liability**.

Answer 59

“Winding up” the partnership business entails **selling its assets, paying its debts, and distributing the net balance**, if any, to the partners in cash according to their interests. The partnership entity continues, and the partners are associated in the winding up of the business **until winding up is completed**. When the winding up is completed, the **partnership entity terminates**. Anything that causes dissolution thereby causes winding up.

Answer 60

Yes. At **any time after the dissolution** of a partnership and **before the winding up of its business is completed**, all of the partners, including any dissociating partner other than a wrongfully dissociating partner, **may waive the right to have the partnership’s business wound up** and the partnership terminated. In that event: * (1) the partnership resumes carrying on its business **as if dissolution had never occurred**, and any liability incurred by the partnership or a partner after the dissolution and before the waiver is determined **as if dissolution had never occurred**; and * (2) the rights of a third party arising out of conduct in reliance on the dissolution before the third party knew or received a notification of the waiver **may not be adversely affected**.

Answer 61

In the following order: * (1) Partnership assets are **reduced to cash** (liquidation). * (2) Partnership **creditors** (including partners who are creditors) are paid. * (3) Any **surplus** (or **loss**) is applied to a partner’s **capital accounts**. * (4) Partners are **paid out** (or contribute) according to the amounts in the capital accounts. * (5) If a partner does not pay for losses, the other partners must contribute **per their share** of profits/losses (the partners who contributed may seek the money from the partner who did not).

Answer 62

Each **general partner**: * Has the **authority to bind** the partnership in contract, * Has **equal rights to manage** the partnership, and * Is subject to **joint and several liability** for the partnership. Each **limited partner**: * Absent agreement, has **no authority to bind** the partnership in contract, * Has **no right to manage** the partnership, and * Has **no liability for obligations** of the partnership.

Answer 63

To form a limited partnership, a person must deliver a **certificate of limited partnership** to the Department of State for filing. The certificate must contain: * (1) the **name** of the limited partnership, * (2) the **street and mailing address** of the **initial designated office** of the limited partnership, and of the **initial registered agent**, and * (3) the **name and the business address of each general partner**. If the paperwork for a limited partnership is rejected, then the partnership will be considered a **general partnership** until paperwork is properly filed and accepted for a **limited partnership**.

Answer 64

Yes, a partner who **erroneously (but in good faith)** believed he/she was a **limited partner** can avoid liability (other than for the initial investment) if, the person, on learning of the mistake: * (a) Causes an appropriate **certificate of limited partnership, amendment, or statement of correction** to be signed and delivered to the Department of State for filing; or * (b) **Withdraws from future participation** as an owner in the enterprise by signing and delivering to the Department of State for filing a **statement of withdrawal** under this section.

Answer 65

A person that becomes a general partner is **not personally liable** for a debt, obligation, or other liability of the limited partnership **incurred before the person became a general partner**.

Answer 66

A limited partner **does not have the right or the power** as a limited partner **to act for or bind** the limited partnership. The limited partners have only those **approval rights** as are described in ULPA. The **approval of all partners** (general and limited) is required to: * (a) **Amend the partnership agreement** or the certificate of limited partnership, * (b) **Admit or expel** a limited or general partner, * (c) **Compromise a partner’s obligation** to make contributions or return an improper distribution, * (d) **Redeem a transferable interest** subject to a charging order, * (e) **Dissolve** the limited partnership, * (f) Approve a plan of **conversion** or a plan of **merger**, * (g) **Sell, lease, exchange, or otherwise dispose of** all, or substantially all, of **the limited partnership’s property**, with or without good will, other than in the usual and regular course of the limited partnership’s activities.

Answer 67

A limited partnership is **dissolved**, and its activities must be **wound up**, only upon the occurrence of any of the following: * (a) The happening of an **event specified** in the partnership agreement; * (b) The **consent of all general partners** and of **all limited partners**; * (c) After the **dissociation of a person as a general partner**: * (1) If the limited partnership has at least **one remaining general partner**, the consent to dissolve the limited partnership by **all partners** at the time the consent is to be effective; or * (2) If the limited partnership **does not have a remaining general partner**, the **passage of 90 days after the dissociation**, unless before the end of the period: * (a) **Consent** to continue the activities of the limited partnership and admit at least one general partner is **given by all partners** at the time the consent is to be effective; * (b) At least one person is **admitted as a general partner** in accordance with the consent; * (d) The **passage of 90 days** after the dissociation of the limited partnership’s **last limited partner**, unless before the end of the period the limited partnership **admits at least one limited partner**; or * (e) The **signing and filing of a declaration of dissolution** by the Department of State.

Answer 68

The only fiduciary duties that a **general partner** has to the limited partnership and the other partners are the **duties of loyalty and care**. (1) Duty of **loyalty**: * (a) To **account to the limited partnership** and hold as trustee for it **any property, profit, or benefit derived** by the general partner in the conduct and winding up of the limited partnership's activities or derived from a use by the general partner of limited partnership property, **including the appropriation of a limited partnership opportunity**. * (b) To **refrain from dealing** with the limited partnership in the conduct or winding up of the limited partnership’s activities as or **on behalf of a party having an interest adverse** to the limited partnership. * (c) To **refrain from competing** with the limited partnership in the conduct of the limited partnership’s activities. (2) A general partner’s duty of **care** to the limited partnership and the other partners in the conduct and winding up of the limited partnership's activities is limited to **refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law**.

Answer 69

Yes. A general partner shall **discharge the duties** to the partnership and the other partners under this act or under the partnership agreement and **exercise any rights** consistently with the obligation of **good faith and fair dealing**.

Answer 70

No. A limited partner does **not** have any fiduciary duty to the limited partnership or to any other partner solely by reason of being a limited partner. For example, a limited partner **may compete directly** with the limited partnership.

Answer 71

In the limited partnership context, it is a lawsuit **filed by a partner on behalf of the partnership**. Because the bringing of a lawsuit is a management function, it is normally **beyond the authority of a limited partner**. But **all partners** (general and limited) have a **statutory right to file** a derivative action relating to a limited partnership. A partner may maintain a derivative action to enforce a right of a limited partnership if: * (a) The partner first **makes a demand on the general partners** requesting that they cause the limited partnership to bring an action to enforce the right and the general partners **do not bring the action within a reasonable time**; or * (b) A demand would be **futile**. The limited partnership will receive the damages from a successful derivative suit, although the plaintiff may recover reasonable expenses and attorneys’ fees.

Answer 72

A **general partner** is **dissociated** from the limited partnership upon: * (1) The **limited partnership’s notice** of express will to withdraw as a general partner; * (2) Occurrence of **event agreed to** in the partnership agreement; * (3) The person’s **expulsion as a general partner** pursuant to the **partnership agreement**; * (4) The person’s **expulsion as a general partner** by the **unanimous consent** of the other partners; * (5) The person’s **expulsion by judicial determination**; * (6) The person’s becoming a **debtor in bankruptcy**; * (7) The person **dies**, **appoints** a guardian/conservator, or has a **judicial determination of loss of capacity**.

Answer 73

A person’s dissociation as a **general partner** is wrongful only if: * (a) It is in **breach of an express provision** of the partnership agreement; or * (b) It occurs **before the termination of the limited partnership**, and: * (1) The person **withdraws** as a general partner **by express will**; * (2) The person is **expelled** as a general partner **by judicial determination**; * (3) The person is **dissociated** as a general partner by **becoming a debtor in bankruptcy**; or * (4) In the case of a person that is not an individual, trust other than a business trust, or estate, the person is expelled or otherwise dissociated as a general partner because it **willfully dissolved or terminated**.

Answer 74

A person that wrongfully dissociates as a general partner is liable to the limited partnership and to the other partners for **damages caused by the dissociation**. The liability is **in addition to any other obligation** of the general partner to the limited partnership or to the other partners.

Answer 75

Only upon **winding up**. A person does **not** have a right to **dissociate as a limited partner** before the termination of the limited partnership.

Answer 76

A person is **dissociated** from a limited partnership as a **limited partner** upon the occurrence of any of the following events: * (1) The limited partnership’s having **notice of the person’s express will** to withdraw as a limited partner or on a later date specified by the person; * (2) An **event agreed to** in the partnership agreement as causing the person’s dissociation as a limited partner; * (3) The person’s **expulsion** as a limited partner **pursuant to the partnership agreement**; * (4) The person’s **expulsion** as a limited partner by the **unanimous consent** of the other partners if: * (a) It is **unlawful** to carry on the limited partnership's activities with the person as a limited partner; * (b) There has been a **transfer of all of the person’s transferable interest** in the limited partnership, other than a transfer for security purposes, or a court order charging the person's interest, which has not been foreclosed; * (c) The person is a **corporation** and, within 90 days after the limited partnership notifies the person that the corporation will be expelled as a limited partner because the corporation has filed a certificate of dissolution or the equivalent, the corporation's charter has been revoked, or its right to conduct business has been suspended by the jurisdiction of its incorporation, and there is no revocation of the certificate of dissolution or no reinstatement of its charter or its right to conduct business; or * (d) The person is a **limited liability company** or **partnership** that has been **dissolved** and whose business is being **wound up**.

Answer 77

Yes, by **withdrawing**. But under ULPA, if the other partners want to continue (and there is **at least one** continuing general partner), the partners have **90 days** to do so.

Answer 78

In winding up a limited partnership’s activities, the assets of the limited partnership, including the contributions required by this section, must be applied to satisfy the limited partnership’s **obligations to creditors**, including, to the extent permitted by law, partners that are creditors. Any **surplus** remaining must be paid in **cash** as a **distribution**. **Profits, losses, and distributions** of a limited partnership shall be **allocated among the partners** on the basis of the **value of the contributions** the limited partnership has received **from each partner**.

Answer 79

To form a limited liability company, a person representing the company must deliver **signed articles of organization** to the **Division of Corporations**. The articles must contain: * (1) The **name** of the limited liability company. * (2) The **street and mailing addresses** of the company’s principal office. * (3) The **name**, street **address** in this state, and **written acceptance** of the company’s **initial registered agent**.

Answer 80

A person who suffers a loss by **reliance on such information** may recover damages for the loss from: * (a) A person who **signed the record**, or caused another to sign it on the person’s behalf, and **knew the information was inaccurate** at the time the record was signed; and * (b) A **member** of a **member-managed** limited liability company or a **manager** of a **manager-managed** limited liability company if: * (1) The record was delivered for filing **on behalf of the company**; and * (2) The member or manager had **notice of the inaccuracy** for a **reasonably sufficient time** before the information was relied upon so that, before the reliance, the member or manager **reasonably could have corrected it**.

Answer 81

**Manager-managed** and **member-managed**. A limited liability company is a **member-managed** limited liability company unless the operating agreement or articles of organization expressly provide that it will be a manager-managed company.

Answer 82

No. A **debt, obligation, or other liability** of a limited liability company is solely the debt, obligation, or other liability of the company. A member or manager is **not personally liable**, directly or indirectly, by way of contribution or otherwise, for a debt, obligation, or other liability of the company solely by reason of being or acting as a member or manager.

Answer 83

No. In a **manager-managed** limited liability company, a matter relating to the activities and affairs of the company is decided **exclusively by the manager**, or if there is more than one manager, by the managers.

Answer 84

Yes. In a **member-managed** limited liability company, the management and conduct of the company are vested in the **members**.

Answer 85

Each **manager** of a **manager-managed** LLC and **member** of a **member-managed** LLC owes **fiduciary duties of loyalty and care** to the LLC and to the members of it. * (a) The duty of **loyalty** includes: * (1) **Accounting** to the limited liability company and holding as trustee for it any **property, profit, or benefit** derived by the manager or member, as applicable: * (a) In the **conduct** or **winding up** of the company’s activities and affairs; * (b) From the **use by the member or manager** of the company’s property; or * (c) From the **appropriation** of a **company opportunity**; * (2) Refraining from **dealing** with the company **in the conduct or winding up** of the company’s activities and affairs **as, or on behalf of, a person having an interest adverse to the company**; and * (3) Refraining from **competing** with the company in the conduct of the company’s activities and affairs **before the dissolution** of the company. * (b) The duty of **care** in the conduct or winding up of the company’s activities and affairs is to refrain from engaging in **grossly negligent or reckless conduct, willful or intentional misconduct, or a knowing violation of law**.

Answer 86

A person is **dissociated as a member** if any of the following occur: * (1) The company has **notice of the person’s express will** to withdraw as a member, but if the person specified a withdrawal date later than the date the company had notice, on that later date. * (2) An **event stated** in the operating agreement as causing the person’s dissociation **occurs**. * (3) The person’s **entire interest is transferred** in a foreclosure sale. * (4) The person is **expelled as a member** pursuant to the **operating agreement**. * (5) The person is **expelled as a member** by the **unanimous consent** of the other members.

Answer 87

A limited liability company is **dissolved** and its activities and affairs must be **wound up** upon the occurrence of the following: * (1) An **event or circumstance** that the operating agreement states causes dissolution. * (2) The **consent** of all the members. * (3) The passage of **90 consecutive days** during which the company has **no members**. * (4) The entry of a **decree of judicial dissolution**. * (5) The **filing of a statement of administrative dissolution**.

Answer 88

If a court pierces a company’s corporate veil, the owners, shareholders, or members of a corporation or LLC can be held personally liable for corporate debts. The overall approach is to decide whether the owners have “**respected**” the company as a **separate entity**. Factors include: * (a) Whether **personal funds have been commingled** with company funds; * (b) Whether the **company’s funds have been commingled** with other entities under their control; * (c) Whether the **entity has been used for personal purposes** or to advance the interests of other entities they control; * (d) Whether the entity is **grossly undercapitalized**; and * (e) Whether they have **observed formalities in the running of its business**.

Answer 89

A person may ratify an act if: * (1) the person **existed at the time of the act**, * (2) the person **had capacity at the time of ratifying the act**, and * (3) the actor acted as the person’s **agent** or **purported to act as an agent**. This means that **undisclosed principals** can ratify acts, but a **corporation** cannot ratify acts that were taken before its existence. * However, a corporation may elect to become bound by **adopting** what was done prior to its existence. **Adoption** operates analogously to ratification but unlike ratification, adoption does not have a relation-back effect.

Answer 90

The agency cost problem occurs because the agent does not have the same motivation for engaging in action, relative to the agency, as the principal. As a result, the agent may act with less diligence or care than the principal would act (and desires the agent so to act). In addition, the agent has incentive/temptation to engage in deliberate wrongdoing contrary to the principal’s interest, while the principal does not. In response, the law imposes **fiduciary duties** of **loyalty** and **care** on all fiduciaries.

Answer 91

The duty of **loyalty** imposes an obligation to act **only in the beneficiary’s interest**. The duty of **care** imposes an obligation to act with a **specified level of caution** to protect the beneficiary’s interests.

Answer 92

A fiduciary who commits a breach of his duty as a fiduciary is guilty of tortious conduct to the person for whom he should act. Therefore, it is a **tort action**.

Answer 93

It requires the fiduciary to disclose material facts of a transaction. The duty of disclosure is simply a specific application of the duty of loyalty and the duty of care.

Answer 94

Subject to any agreement with the principal, an agent has a duty to the principal to act with the **care, competence, and diligence** normally exercised by **agents in similar circumstances**. Note: Agents who act **gratuitously** are still subject to liability for breaching the duty of care.

Answer 95

Yes. Special skills or knowledge possessed by an agent are circumstances to be taken into account in determining whether the agent acted with **due care and diligence**. If an agent **claims to possess special skills or knowledge**, the agent has a duty to the principal to act with the care, competence, and diligence **normally exercised by agents with such skills or knowledge**. Note: A higher standard can also be created by a **misrepresentation of special skills and knowledge** by an agent.

Answer 96

An agent has a duty, within the scope of the agency relationship, to act reasonably and to refrain from conduct that is likely to damage the principal’s enterprise.

Answer 97

An agent has a duty to use reasonable effort to provide the principal with facts that the agent knows, has reason to know, or should know when: * (1) subject to any **manifestation by the principal**, the agent knows or has reason to know that the principal **would wish to have the facts** or the facts are material to the agent’s duties to the principal; and * (2) the facts can be provided to the principal **without violating a superior duty** owed by the agent to another person.

Answer 98

If it: * (1) is not self-interested, * (2) is reasonably informed, * (3) is rationally related to the best interest of the corporation, and * (4) is not knowingly wrongful or illegal.

Answer 99

The plaintiff must show that the defendant owed the plaintiff a duty of loyalty and while under that duty, **the defendant acted under a conflict of interest**. If the plaintiff shows this, then the defendant is liable unless the defendant can show the **conduct was “fair”** to the plaintiff.

Answer 100

(1) Defendant had a **direct interest** in a transaction in which the defendant also acted on the beneficiary’s behalf, (2) A close **associate or relative of the defendant** had such a direct interest, or (3) The **defendant owed fiduciary duties** to two or more persons whose interests in some transaction were adverse.

Answer 101

By showing that: * (1) the beneficiary received the **same treatment** that might have been available in the **open market**, and * (2) the beneficiary was **not coerced, misled, or otherwise taken advantage of**.

Answer 102

(1) The duty not to derive **excess benefits**, (2) The duty not to take **business opportunities**, (3) The duty not to **compete** with the principal, (4) Duties with respect to the **principal’s property**, and (5) The duty not to exploit the **principal’s confidences**.

Answer 103

No. To establish that the agent is subject to liability, it is not necessary that the principal show that the agent’s acquisition of a material benefit harmed the principal.

Answer 104

* (1) Monetary relief from the agent. * (2) In appropriate circumstances, monetary relief from any third party who participated in the agent’s breach. * (3) Avoid a contract entered into by the agent with a third party who participated in the agent’s breach of duty. * (4) Recover any material benefit received by the agent through the agent’s breach, the value of the benefit, or proceeds of the benefit retained by the agent. * (5) Damages for any harm caused by the agent’s breach.

Answer 105

Throughout the duration of an agency relationship, an agent has a duty to refrain from **competing with the principal** and from taking action **on behalf of** or otherwise assisting the **principal’s competitors**. During that time, an agent **may** take action, not otherwise wrongful, **to prepare for competition** following termination of the agency relationship. Note: An agent who is planning to compete with the principal **does not have a duty to disclose** this fact to the principal.

Answer 106

An agent has a duty **not to acquire a material benefit** from a third party in connection with transactions conducted or other actions taken on behalf of the principal or otherwise through the agent’s use of the agent’s position. Moreover, **all agents**, even those whose assigned work does not involve the assessment or pursuit of **business opportunities**, have a **fiduciary duty** to the principal **not to take personal advantage of an opportunity** and **not to give the opportunity to a third person**, when either the nature of the opportunity or the circumstances under which the agent learned of it require that the agent offer the opportunity to the principal.

Answer 107

(1) **Any opportunity** to engage in a business activity of which the fiduciary becomes aware, * (a) In connection with the **performance of functions as a fiduciary**, or * (b) The fiduciary should **reasonably believe** the person offering the opportunity expects it to be offered to the beneficiary, or * (c) Through the **use of the beneficiary’s information or property**, if the resulting opportunity is one that the fiduciary should reasonably expect to believe would be of interest to the beneficiary, or (2) **Any opportunity** to engage in a business activity of which a fiduciary becomes aware and knows is **closely related** to a business in which the beneficiary is engaged or expects to engage.

Answer 108

A joint venture is generally a **less formal** relationship than a partnership. A joint venture is **not a legal entity separate from the participants** (compared to a partnership where the partnership is its own entity). While a partnership is ordinarily formed to carry on a general and continuing business, a joint venture is generally **more limited in scope and duration**. Specifically, a joint venture is usually formed for a **single business transaction**, or a single series of transactions, or for a particular, defined purpose.

Answer 109

An agent has a duty: * (1) **not to use property** of the principal for the agent’s own purposes or those of a third party; and * (2) **not to use or communicate confidential information** of the principal for the agent’s own purposes or those of a third party.

Answer 110

An agent has a **duty to use reasonable effort to provide the principal with facts** that the agent knows, has reason to know, or should know when * (1) subject to any manifestation by the principal, **the agent knows or has reason to know** that the principal would wish to have the facts or the facts are material to the agent’s duties to the principal; and * (2) the facts can be provided to the principal **without violating a superior duty** owed by the agent to another person. In essence, the agent has a **duty to disclose material facts** (which is situation dependent) to the principal unless the agent has a **higher duty to another principal** (which implicates the duty of loyalty).

Answer 111

It must be shown that the concealment or misrepresentation was **material**. Factors determining materiality include the **sophistication of the complaining partner** and **degree of access to partnership records**.

Answer 112

Yes, An agent can act in a way that would be a breach of the duty of loyalty if they get the **principal’s consent**. In doing so, the agent must act in **good faith**, disclose all **material facts**, and **deal fairly** with the principal.

Answer 113

No, the principal can only waive the duty of loyalty relative to **specific acts or transactions** or of transactions of a specified type.

Answer 114

Yes, provided the agent: * (1) deals in **good faith** with **each principal**, and * (2) **discloses** to each principal: * (i) that the agent **acts for the other principal** and * (ii) all facts that would **reasonably affect the principal’s judgment**, and * (3) deals **fairly** with **each principal**.

Answer 115

Yes and no. The restatement makes clear that it may be **modified by agreement**: “Subject to any agreement with the principal, an agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents in similar circumstances.” * A principal and an agent **may establish benchmarks** or other measures for the **effort and skill to be expected** from the agent. * If an agreement between principal and agent is otherwise enforceable, it may **define the standard of performance** applicable to the agent across the board in general terms and **without the specificity required** under the rule.

Answer 116

Breaches of fiduciary duties are usually litigated **after the fact**. Remedies include: * (1) money damages, * (2) constructive trust, * (3) punitive damages, * (4) injunction (TRO), * (5) reuse to pay compensation, * (6) contract remedies (breach of fiduciary duty is always a material breach).

Answer 117

An accounting is a special procedure in which the partner **asks the court to engage in an equitable proceeding** examining the **financial affairs of the firm** and rendering judgment as to **all debts owing among the partners**. It resolves **all issues** within the partnership. That means the court must value all assets and liabilities **including uncertain or speculative ones**. As a result, the proceeding may be drawn out, expensive, and unpredictable.

Answer 118

(1) The advantages and disadvantages of the **state’s corporate law** (both common and statutory); (2) Whether **state income taxes** will be due in both states; (3) Whether **“franchise” taxes** will be due, and the amount, to the state of incorporation; (4) The administrative and other **costs of filing as a “foreign” corporation** doing business in state; (5) That the business is **subject to the personal jurisdiction of both** the foreign and home states.

Answer 119

(1) The incorporator(s) must **file the articles of incorporation** with the Secretary of State (Division of Corporations in Florida); (2) The incorporator(s) **name the board of directors** (unless named in the articles); (3) The incorporator(s) **create the bylaws**.

Answer 120

(1) They set out the basics of the business’s **governance**; (2) They set out the **capital structure** of the business; (3) They set **out rules governing virtually any matter** within the corporation.

Answer 121

(1) Because of the **difficulty and unpredictability of amending** the bylaws particularly in large corporations (normally only after majority vote of the board of directions and shareholders). (2) To **maximize legal flexibility** to engage in transactions (because of the difficulty of knowing in advance if a particular type of transaction is one the corporation would like to engage in).

Answer 122

One or more persons may act as the **incorporator** or **incorporators** of a corporation by delivering articles of incorporation to the department for filing.

Answer 123

The articles of incorporation **must** set forth: * (1) A **corporate name** for the corporation; * (2) The **street address** of the **initial principal office** and, if different, the mailing address of the corporation; * (3) The **number of shares** the corporation is authorized to issue; * (4) The **street address** of the corporation’s **initial registered office** and the name of its **initial registered agent** at that office together with a written acceptance; and * (5) The **name and address of each incorporator**.

Answer 124

The articles of incorporation **may** set forth: * (1) The **names and addresses** of the individuals who are to serve as the **initial directors**; * (2) Provisions **not inconsistent with law** regarding: * (i) The **purpose or purposes** for which the corporation is organized; * (ii) **Managing** the business and **regulating** the affairs of the corporation; * (iii) Defining, limiting, and regulating the **powers of the corporation** and its **board of directors** and **shareholders**; * (iv) A **par value** for authorized shares or classes of shares; * (v) The imposition of **personal liability** on shareholders for the debts of the corporation to a specified extent and upon specified conditions; and * (vi) **Exclusive forum** provisions; * (3) Provisions for granting any **preemptive rights** to shareholders; and * (4) Any provision that is required or permitted to be set forth in the **bylaws**.

Answer 125

Unless a delayed effective date is specified, the corporate existence begins when the **articles of incorporation are filed** or on a **date specified** in the articles of incorporation, if such date is within 5 business days prior to the date of filing. * The department’s filing of the articles of incorporation is **conclusive proof** that the incorporators satisfied all conditions precedent to incorporation except in a proceeding by the state to cancel or revoke the incorporation or administratively dissolve the corporation.

Answer 126

All persons purporting to act as or on behalf of a corporation, knowing that there was no incorporation, are **jointly and severally liable** for all liabilities created while so acting.

Answer 127

The **incorporators** or **board of directors** of a corporation shall adopt initial bylaws for the corporation **unless** that power is reserved to the shareholders by the articles of incorporation.

Answer 128

Every corporation incorporated under this chapter has the **purpose of engaging in any lawful business** unless a more limited purpose is set forth in the articles of incorporation.

Answer 129

Unless its articles of incorporation provide otherwise, every corporation has **perpetual duration and succession** in its corporate name and has the **same powers as an individual** to do all things necessary or convenient to carry out its business and affairs, including power: * (1) **To sue and be sued**, complain, and defend in its corporate name; * (2) To have a **corporate seal**, which may be altered at will and to use it or a facsimile of it, by impressing or affixing it or in any other manner reproducing it; * (3) To purchase, receive, lease, or otherwise acquire, and own, hold, improve, use, and otherwise **deal with real or personal property** or any legal or equitable interest in property wherever located; * (4) To **sell**, convey, mortgage, pledge, create a security interest in, lease, exchange, and otherwise dispose of all or **any part of its property**; * (5) To **lend money to**, and use its credit to assist, its officers and employees; * (6) To **make contracts** and guarantees, incur liabilities, borrow money, issue its notes, bonds, and other securities and obligations; and * (7) To **make donations for the public welfare** or for charitable, scientific, or educational purposes.

Answer 130

A corporate name: * (1) **Must** contain the word “corporation,” “company,” or “incorporated” or the abbreviation “Corp.,” or “Inc.,” or “Co.,” or the designation “Corp,” or “Inc,” or “Co,” as will **clearly indicate that it is a corporation** instead of a natural person, partnership, or other eligible entity. * (2) **May not** contain language stating or implying that the corporation is organized for a purpose other than that permitted by law and its articles of incorporation. * (3) **May not** contain language stating or implying that the corporation is **connected with a state or federal government agency** or a corporation or other entity chartered under the laws of the United States. * (4) **Must be distinguishable** from the names of all other entities or filings that are on file with the department. A corporation may register under a name that is not otherwise distinguishable on the records of the department with the **written consent of the other entity** if the consent is **filed with the department** at the time of registration of such name and if such name is **not identical** to the name of the other entity.

Answer 131

A person who acts on behalf of a business before it is incorporated.

Answer 132

The later formation of the corporation and subsequent adoption of the contract by the corporation does not necessarily release a promoter from liability, but may result in **joint liability** of the promoter and corporation, absent a **novation or express release** by the other party to the contract.

Answer 133

(1) A corporate entity **does not exist** prior to incorporation. (2) A corporate entity **is not bound** on contracts entered into by the promoter before incorporation in the corporate name absent adoption of the contract. (3) A promoter is **not an agent** of the corporation prior to incorporation. (4) The corporation **may become bound** on promoter contracts **by adopting** them. (5) Adoption makes the **corporation a party** to the contract at the time it adopts. (6) Adoption of the contract does **not of itself relieve the promoter of his liability**. (7) The liability of the corporation runs from the **date of adoption**. (8) Adoption may be **express** (e.g., by board of directors’ resolution) or **implied** (e.g., by acquiescence or conduct normally constituting estoppel).

Answer 134

When the **articles** of incorporation are **filed**. If a date of coming into existence is **specified** in the articles of incorporation, then that date (but the date must be **within 5 business days** prior to the date of filing).

Answer 135

A *de facto* corporation is a corporation that was **not properly incorporated** but which will be **treated as if it was** properly incorporated if: * (1) there is **valid law** under which the corporation can be lawfully organized; * (2) there was a **good faith attempt** to organize under the law; and * (3) the entity **acts as if it is a corporation**.

Answer 136

Persons who treat an entity as a corporation will be estopped from later claiming that the entity was not a corporation.

Answer 137

Yes, but such loans must **benefit the corporation**.

Answer 138

Under the RMBCA, an ultra vires act is **enforceable** and can only be raised in three circumstances: * (1) A **shareholder may sue** the corporation to enjoin a proposed ultra vires act; * (2) The **corporation may sue** an officer or director for damages arising from the commission of an ultra vires act authorized by the officer or director; and * If found liable, the office or director may be held personally liable for damages. * (3) The **state may bring an action** against the corporation to have it dissolved for committing an ultra vires act. Note that an ultra vires act will be enjoined only if it is **equitable** to do so.

Answer 139

(1) Except as provided below, the **validity of corporate action**, including, but not limited to, any conveyance, transfer, or encumbrance of real or personal property to or by a corporation, **may not be challenged** on the ground that the corporation **lacks or lacked power** to act. (2) A corporation’s **power to act may** be challenged: * (a) In a **proceeding by a shareholder** against the corporation to enjoin the act; * (b) In a **proceeding by the corporation, directly, derivatively**, or through a receiver, trustee, or other legal representative, or through shareholders in a representative suit, against an incumbent or former director, officer, employee, or agent of the corporation; or * (c) In a proceeding by the **Department of Legal Affairs** [Attorney General’s Office] pursuant to the rules regarding articles of dissolution or to enjoin the corporation from the transaction of unauthorized business.

Answer 140

As a **person**: * (1) Corporations are entitled to **due process** of law and **equal protection** of law. * (2) A corporation is entitled to **raise the attorney-client privilege**. * (3) A corporation **cannot** invoke the privilege against **self-incrimination**. In general, **unless** the context of the statute or constitutional provision requires application **only to natural persons**, a corporation is entitled to the protection and rights afforded thereby.

Answer 141

(a) A corporation is **not** a citizen for purposes of the **Privileges and Immunities Clause** of the Constitution (which prevents a state from treating citizens of other states in a discriminatory manner). * Thus, a state may impose restrictions on a foreign corporation’s activities provided they are a **reasonable exercise** of the state’s police power. (b) For purposes of **diversity jurisdiction**: * (1) A corporation is deemed to be a citizen of any state by which it has been **incorporated** and the state where it has its **principal place of business**. * (2) The principal place of business is where the corporation’s **high-level officers direct**, control, etc. the corporation. * (3) If a corporation is incorporated in more than one state (e.g., incorporated in State A, licensed to do business is States B, C, and D), the preferred rule is to deem it a **citizen of each state of incorporation**.

Answer 142

For **residency**, corporation may be a resident of the state where it is **incorporated**, where it is **doing business**, and it is possible it is a **resident of a state** where it is merely qualified to do business. For **domicile**: * (1) A corporation’s domicile is the **state of its incorporation**. * (2) A corporation **may have multiple domiciles** for certain purposes. * E.g., for state tax purposes when the corporation has its principal place of business in a state other than that of its incorporation.

Answer 143

(1) Each **member of the board of directors**, when discharging the **duties of a director**, including in discharging his or her duties as a member of a board committee, must act: * (i) In **good faith**; and * (ii) In a manner he or she **reasonably believes to be in the best interests** of the corporation. (2) The **members of the board of directors** or a **board committee**, when **becoming informed** in connection with a **decision-making function** or devoting attention to an **oversight function**, shall discharge their duties with the care that an **ordinary prudent person in a like position** would reasonably believe appropriate under similar circumstances.

Answer 144

Shares are units of **ownership interest** in a corporation. Each share represents a **portion of the equity** in the corporation and provides for an equal distribution in any profits, if any are declared, in the form of **dividends**.

Answer 145

“Equity” typically refers to the **ownership** of a public company. Shareholders’ equity is the net amount of a company’s total **assets** and total **liabilities** as listed on the company’s balance sheet.

Answer 146

**(a) Common Stock**: * Has governance role & entitled to vote at shareholder meetings. * Right to receive residual proceeds upon dissolution and liquidation of a corporation. * No legal interest in receiving dividends. **(b) Preferred Stock**: * No voting rights. * Liquidation preference. * May receive a dividend preference (entitles owner to fixed dividend each year, if one is given, may accumulated in years not given).

Answer 147

The **articles of incorporation** must set forth any **classes** of shares and series of shares within a class, and the **number** of shares of each class and series, that the corporation is authorized to issue.

Answer 148

If more than one class or series of shares is authorized, the articles of incorporation **must prescribe a distinguishing designation** for each class or series, and **before the issuance** of shares of a class or series, **describe the terms**, including the **preferences**, **limitations**, and **relative rights** of that class or series. In designating shares, the articles of incorporation **must** also authorize: * (1) One or more classes or series of shares that together have **unlimited voting rights**, and * (2) One or more classes or series of shares (which may be the same class or classes or series as those with voting rights) that together are entitled to **receive the net assets** of the corporation **upon dissolution**.

Answer 149

**Closely held corporations** (also called “close corporations”) are corporations that normally only have a small group of shareholders (e.g., a family business). **Public corporations** sell there shares to the public at large (in an initial public offering).

Answer 150

It is the value attributed to each share in the articles of incorporation. No, it is voluntary.

Answer 151

The term “**security**” is used to describe fungible, negotiable financial instruments that hold some type of monetary value. A **debt security** represents a creditor-debtor relationship with the corporation, whereby the corporation has borrowed funds from an “outside creditor” and promises to repay the creditor (e.g., in the form of a corporate bond). An **equity security** is an instrument representing an investment in the corporation whereby its holder becomes a part owner of the business. Equity securities are shares of the corporation, and the investor is called a shareholder. The owner of the **debt security** has no ownership interest while the owner of the **equity security** has an ownership interest.

Answer 152

The over-arching policy rationale is **equity**: the valid corporate existence is ignored to serve the ends of justice. There are three primary cases in which the veil will be pierced: * (a) Alter Ego/Corporate formalities are ignored, * (b) Inadequate capitalization at the outset, and * (c) Avoidance of existing obligations, fraud.

Answer 153

When a corporation is the “alter ego” or “instrumentality” of a sole proprietor or of another corporation, its corporate form may be disregarded. * If **shareholders** treat the assets of the corporation as their own, use corporate funds to pay private debts, fail to keep separate corporate books, and fail to observe corporate formalities, the courts may find the corporate entity to be the alter ego of the shareholders. * The separate **corporate** identities of subsidiary or affiliated corporations will be ignored if the formalities of separate corporate procedures for each corporation are not observed.

Answer 154

Shareholders will be personally liable for their corporation’s obligations if at **incorporation** they fail to provide **adequate capitalization**.

Answer 155

In general, persons who were **active in the management** of the company will be held liable (not passive investors). Liability is **joint and several**.

Answer 156

A conveyance is fraudulent if the **debtor** made the transfer : * (a) With **actual intent** to hinder, delay, or defraud any **creditor** of the debtor; or * (b) Without receiving a **reasonably equivalent value** in exchange for the transfer or obligation, and the debtor was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were **unreasonably small in relation to the business** or transaction.

Answer 157

Unless the articles or a shareholder agreement provides otherwise, the board of directors shall have general responsibility for the **management of the business** and **affairs of the corporation**. At common law, shareholders have no right to directly control the day-to-day management of their corporation. The RMBCA (and Florida law) has allowed a departure from this general rule: * Shareholders may enter into agreements concerning management of the corporation including an agreement to vest the powers that the board would ordinarily have in one or more shareholders.

Answer 158

Shareholders have **indirect control** over the corporation through: * (1) **Election and removal** of directors * Shareholders have the right to elect directors. * Shareholders may remove a director at any time for any reason unless the articles limit removal for cause. * (2) Shareholders have the power to **adopt, modify, and amend** the bylaws * (3) Must **approve fundamental corporate changes** like merger, sale of corporate assets outside ordinary course of business, dissolution, etc.

Answer 159

To **elect directors**, but it may engage in any other legitimate shareholder business. Look to the bylaws, but the location can be stated in the **notice of annual meeting** provided the location is not inconsistent with the bylaws. If no place is fixed by the bylaws or stated in the notice, the annual meeting is held at the corporation’s **principal office**.

Answer 160

No, the directors simply remain in office.

Answer 161

A meeting **other than the annual meeting**, called to discuss matters stated in the notice of the meeting. A special meeting can be called by: * The board of directors, * Anyone authorized in the bylaws or articles of incorporation, * Request of some percentage (in Florida 10%) of shareholders with votes entitled to be cast on the issue, and * The court.

Answer 162

Action required or permitted to be taken at an annual or special meeting of shareholders may be taken without a **meeting**, without **prior notice**, and without a **vote** if the action is taken by the holders of **outstanding shares** sufficient to authorize or take action at a meeting in which all voting groups/shares are entitled to vote were present.

Answer 163

“Record date” means the date fixed for **determining the identity of the corporation's shareholders** and their **share holdings**. Unless another time is specified when the record date is fixed, the determination shall be made as of the close of the business at the principal office of the corporation on the date so fixed. If the bylaws state a manner of fixing the record date, follow the bylaws. If the bylaws do not, then the board may fix the date. But, if we are talking about a situation where the shareholders are **demanding** a special meeting, then the record date is the date the **first shareholder** delivered his/her demand to the corporation.

Answer 164

No fewer than **10** or more than **60** days before the meeting date.

Answer 165

Yes. A shareholder’s attendance at a meeting: * Waives objection to **lack of notice** or **defective notice** of the meeting, unless the shareholder at the **beginning of the meeting** objects to holding the meeting or transacting business at the meeting; or * Waives objection to **consideration of a particular matter** at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter **when it is presented**.

Answer 166

Only the names **appearing in the corporation’s records** on the record date are permitted to vote and receive notice.

Answer 167

It is the person who is listed in the corporate records as the owner of a given share. No, sometimes the stock is cleared through a clearinghouse which will be the record owner, but is not the true owner of the share.

Answer 168

The minimum number of shares necessary to be represented at a meeting for the results of votes at the meeting to be valid. A **simple majority** is required.

Answer 169

In general, a proxy is an agent authorized to act for another. In this context, it is a person (natural or de jure) that is **authorized to vote** on another person’s behalf at the **shareholder’s meeting**. A person being made a proxy must be done so by **writing** or **electronic submission**.

Answer 170

Typically, each shareholder is entitled to one vote per share multiplied by the number of directors to be elected—this is called “**proportional voting**.” In “**cumulative voting**” the shareholders can apply all of their votes to just one candidate.

Answer 171

There must be the same number of shareholders in each voting group entitled to vote on the matter (who vote in favor of the action) as would be necessary to vote in favor of the action were all shareholders present.

Answer 172

No, meetings of the board of directors may be held through the use of **any means of communication** by which all directors participating may **simultaneously hear each other** during the meeting.

Answer 173

Yes. The board of directors may establish an executive committee and one or more other board committees to perform functions of the board of directors. Such committees shall be composed exclusively of **one or more directors**. A board committee may not: * (a) **Authorize or approve the reacquisition of shares** unless pursuant to a formula or method, or within limits, prescribed by the board of directors. * (b) Approve, recommend to shareholders, or propose to shareholders **action that is required to be approved by shareholders**. * (c) **Fill vacancies on the board** of directors or on any board committee. * (d) Adopt, amend, or repeal **bylaws**.

Answer 174

Generally, the officers of a corporation are listed in the **charter** or **bylaws**. No, while the former MBCA provided for specific officers, the current MBCA allows every corporation to chose the officers it wants.

Answer 175

Only **one officer** is needed provided that officer is responsible for **preparing minutes** of the directors’ and shareholders’ meetings and for **authenticating records** of the corporation.

Answer 176

The duty of **loyalty** and the duty of **care**. Additionally, we hear of the duty of **good faith** and the duty to **disclose** (alternatively the duty to provide information).

Answer 177

* Must **know the business** they are directors for, * Must **become informed** about the business if they are unfamiliar with it, * Cannot willfully ignore learning about **misconduct**, * Has a continuing obligation to **keep informed about the activities of the corporation**—at the level of a general monitoring of corporate affairs and policies, * Has a duty to **monitor the financial condition** of the business, * Has a duty to **take appropriate action in light of wrongdoing** (resign, object, seek legal counsel).

Answer 178

As part of the duty of care, directors have a duty not to waste corporate assets by overpaying for property or employment services.

Answer 179

If you assert a breach of duty of **care**, you must overcome the **presumption** that the decision of the director was formed in **good faith** and was designed to promote the best interest of the corporation they serve. (Which is fairly difficult to overcome.) Violations of the duty of **loyalty** do not have such a presumption.

Answer 180

* The fiduciary has some **direct** pecuniary interest in a transaction that involves the corporation. * The fiduciary is **related to or closely associated** with a person who has a direct personal stake in a transaction that involves the corporation. * The fiduciary owes duties both to the corporation and **to another person** involved in a **transaction with the corporation**. * The fiduciary has **taken something that belongs to the corporation** and used it for the fiduciary’s own benefit.

Answer 181

The **directors/officers charged** with violating the duty. * When there is a contract between a corporation and an entity in which its directors are interested the contract may be set aside unless the **proponent of the contract** shall establish **affirmatively** that the contract was **fair and reasonable** as to the corporation at the time it was approved by the board. In duty of **care** issues, the **business judgment rule** would apply and the burden would be on the plaintiffs.

Answer 182

In breach of the duty of loyalty cases, the burden is on the defendant to prove that its transactions with the other party were **objectively fair**.

Answer 183

No. Authorization, approval, or ratification simply decreases the likelihood that the officer or director will be held liable. It does not eliminate liability.

Answer 184

The director/officer must disclose the **material facts** as to their interest to the board, and a majority of either (a) **disinterested directors** or (b) **shareholders entitled to vote** on the issue must, in **good faith**, approve the transaction.

Answer 185

It means that **disinterested** directors/shareholders have approved a transaction by a director/officer that is **potentially adverse to the corporation’s interests** or that is potentially a usurpation of a business opportunity. The following transactions can be ratified: * (1) Interested transactions between a corporation and its directors, * (2) Interested transactions between a corporation and an entity in which the directors are also directors/have a financial interest, and * (3) Transactions between a corporation and its controlling shareholder. If we have authorization, approval, or ratification of an “interested” transaction, the **burden shifts to the plaintiff** to prove the transaction **was not fair**.

Answer 186

A **corporate officer or director** may not take a **business opportunity** for his own if: * (1) The corporation is **financially able to exploit** the opportunity, * (2) The opportunity is within the **corporation’s line of business**, * (3) The corporation has an **interest or expectancy in the opportunity**, and * (4) By taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position **inimical to his duties to the corporation**.

Answer 187

A director or officer **may** take a corporate opportunity if * (1) The opportunity is presented to the director or officer in his **individual and not his corporate capacity**, * (2) The opportunity is **not essential to the corporation** * (3) The corporation holds **no interest or expectancy in the opportunity**, and * (4) The director or officer has **not wrongfully employed the resources of the corporation** in pursuing or exploiting the opportunity.

Answer 188

(1) Any opportunity to engage in a business activity of which a director or senior executive becomes aware either * (a) In connection with the performance of functions as a director or senior executive, or under circumstances that should reasonably lead the director or senior executive to believe that the person offering the opportunity expects it to be offered to the corporation or * (b) Through the use of corporate information or property, if the resulting opportunity is one that the director or senior executive should reasonably be expected to believe would be of interest to the corporation or (2) Any opportunity to engage in a business activity of which a senior executive becomes aware and knows is closely related to a business in which the corporation is engaged or expects to engage.

Answer 189

Depending on the cause of action, the duty of good faith (and the duty of disclosure) can arise either out of the duty of loyalty or the duty of care. It is not an independent (stand-alone) cause of action.

Answer 190

A failure to act in good faith may be shown where the **fiduciary** is shown: * (a) To intentionally act with a purpose other than that of advancing the best interests of the corporation * (b) With the intent to violate applicable positive law, or * (c) Where the fiduciary intentionally fails to act in the face of a known duty to act demonstrating a conscious disregard for his duties.

Answer 191

A corporation **may indemnify** an individual who is a party to a proceeding because the individual is or was a director or officer against liability incurred in the proceeding if: * (1) The director or officer acted in **good faith**; * (2) The director or officer acted in a manner he or she **reasonably believed** to be in, or not opposed to, the **best interests of the corporation**; and * (3) In the case of any **criminal proceeding**, the director or officer **had no reasonable cause to believe his or her conduct was unlawful**.

Answer 192

Directors have certain responsibilities including oversight. You cannot believe that you are acting in the corporation’s best interest if you do not perform the required duties (e.g., oversight). But acting in good faith requires that you act in way that you think is in the corporation’s best interest, so ignoring your oversight duties is not acting in good faith. And, if you are not acting in good faith (working toward the corporation’s interests), then you have violated your duty of loyalty.

Answer 193

Yes, corporations have broad rights to purchase insurance to protect board members and officers from liability arising out of their position on the board or as an officer. It is called “directors and officers” insurance ("D&O"). It covers legal expenses as well as settlments and judgments.

Answer 194

* **Shareholder suits** over company or stock performance. * **Creditor or investor suits** over mismanagement of fiduciary duties which might result in financial losses or bankruptcy. * **Misuse** of company funds. * **Misrepresentation** in your company's prospectus. * Theft of **intellectual property**. * Decisions that **exceeded the authority** granted to a company officer. * Failure to comply with **workplace laws**. * **Employment** practices and **HR** issues. * **Pollution** and other regulatory claims. * Cyber liability, including **data breaches**.

Answer 195

It is a payment made to officers and directors to cover expenses they have had in relation to a lawsuit against them arising because they were an officer or director of the company.

Answer 196

A corporation **must indemnify** an individual who is or was a director or officer who was wholly **successful**, on the merits or otherwise, in the **defense of any proceeding** to which the individual was a party because he or she is or was a director or officer of the corporation against expenses incurred by the individual in connection with the proceeding.

Answer 197

Unless ordered by a court, a corporation **may not** indemnify a director or officer or advance expenses to a director or officer if a judgment or other final adjudication establishes that his or her actions, or omissions to act, were **material to the cause of action** so adjudicated and constitute: * (a) **Willful or intentional misconduct** or a **conscious disregard for the best interests of the corporation** in a proceeding by or in the right of the corporation to procure a judgment in its favor or in a proceeding by or in the right of a shareholder; * (b) A transaction in which a director or officer derived an **improper personal benefit**; * (c) A violation of the **criminal law**, unless the director or officer had reasonable cause to believe his or her conduct was lawful or had no reasonable cause to believe his or her conduct was unlawful; or * (d) In the case of a director, a circumstance under which the liability for **unlawful distributions** are applicable.

Answer 198

A corporation **may**, **before final disposition** of a proceeding, **advance funds** to pay for or **reimburse expenses** incurred in connection with the proceeding by an individual who is a party to the proceeding because that individual is or was a director or an officer if the director or officer delivers to the corporation a signed written undertaking of the director or officer to repay any funds advanced if it is determined that the director or officer is **entitled to neither** mandatory nor permissive indemnification.

Answer 199

“Verified” means the complaint is **sworn to by the plaintiff**. One can swear to a complaint in many ways other than under oath or before an officer of the court—including using a signed, written declaration.

Answer 200

A complaint in a proceeding brought in the right of a corporation must be **verified** and allege with **particularity**: * (1) The **demand**, if any, made to obtain the action desired by the shareholder from the **board of directors**; and * (2) Either: * (a) If such a demand was made, that the demand was **refused, rejected, or ignored** by the board of directors **prior to the expiration of 90 days** from the date the demand was made; * (b) If such a demand was made, why **irreparable injury to the corporation** or misapplication or **waste of corporate assets causing material injury** to the corporation would result by waiting for the expiration of a 90-day period from the date the demand was made; or * (c) The reason or **reasons the shareholder did not make the effort** to obtain the desired action from the board of directors or comparable authority.

Answer 201

No. A shareholder may not commence a **derivative proceeding** unless the shareholder is a **shareholder at the time the action is commenced** and: * (a) Was a shareholder when the **conduct giving rise to the action** occurred; or * (b) Whose status as a shareholder devolved on the person through **transfer or by operation of law** from one who **was a shareholder** when the conduct giving rise to the action occurred.

Answer 202

* If the **gravamen of the complaint** is injury to the corporation, the suit is derivative. * If the injury is one **to the plaintiff as a stockholder** and **to him individually** (not to the corporation) the suit is individual in nature. * Where the corporation has **no right of action by reason of the transaction** complained of, the suit is representative, not derivative. * Actions to compel **dissolution of a corporation** have been held representative since the corporation **could not benefit therefrom**. * An action by **preferred stockholders** against directors is **not derivative**. * An action by a stockholder complaining that a proposed recapitalization would **unfairly benefit holders of another class** of stock was representative.

Answer 203

The stockholder’s claim must be **independent of any alleged injury to the corporation**. The stockholder must demonstrate that the **duty breached was owed to the stockholder** and that he or she can prevail **without showing an injury to the corporation**.

Answer 204

Prove that: * (1) A majority of the board has a material **financial or familial interest**; * (2) A majority of the board is **incapable of acting independently** for some other reasons such as domination or control; * (3) The underlying transaction is **not the product of a valid exercise of business judgment**.

Answer 205

That there is reason to doubt that the board acted independently or with due care in responding to the demand. The effect is that the stockholder has the right to bring the underlying action as if the demand had been excused as futile.

Answer 206

A derivative proceeding may be dismissed, in whole or in part, by the court on motion by the corporation if (a) a **majority of qualified directors** or committee members or (b) a **court appointed panel** of disinterested and independent individuals: * (1) has determined in **good faith**, * (2) after conducting a **reasonable inquiry** upon which its conclusions are based, * (3) that the maintenance of the derivative proceeding is **not in the best interests of the corporation**. In all such cases, the **corporation has the burden of proof** regarding the qualifications, good faith, and reasonable inquiry of the group making the determination.

Answer 207

Directors are liable for breach of the duty to **oversee the corporation** when: * (a) The directors utterly fail to implement any **reporting or information system or controls**, or * (b) Having implemented such a system or controls, they **consciously fail to monitor or oversee its operations** thus disabling themselves from being informed of risks or problems requiring their attention. Further, where the directors fail to act in the face of a **known duty to act**, thereby demonstrating a **conscious disregard for their responsibilities**, they breach their **duty of loyalty** by failing to discharge that fiduciary obligation in **good faith**.