Business Organizations Flashcards

Question

Partnership v. Joint Venture

Answer 1

Partnership: Uncertain or undefined period of time; and/or Uncertain number of transactions Joint Venture: Certain period of time; or Single transaction

Answer 2

Intent Intent to form partnership is not required, but intent to carry on as co-owners is.

Answer 3

Financial contribution Participation in management Profit-sharing creates a presumption of partnership.

Answer 4

The question of whether a partnership has been formed is a totality of the circumstances inquiry. Profit sharing and control tend to be the most important factors in this inquiry. Capital contribution is another important inquiry. However, a person need not make a capital contribution to become a partner.

Answer 5

In a general partnership, the default rule is that no one may be admitted as a new partner without the consent of all existing partners. However, this rule may be changed by the governing partnership agreement.

Answer 6

Property acquired by partnership is property of the partnership and not of the partners individually.

Answer 7

If acquired in the partnership’s name

Answer 8

If purchased using partnership assets (even if not in the partnership’s name)

Answer 9

If acquired by a partner w/o an indication in the instrument transferring title that the property belongs to the partnership, even if used for partnership purposes. Caveat: if however you make a purchase of equipment; large purchases where you have to sign contract, if I sign in my capacity as partner, then it is partnership property.

Answer 10

Default Rules: Ordinary course of business decisions-Simple majority controls Non-ordinary course decisions or amendments to the partnership agreement- Unanimity required

Answer 11

loyalty and care

Answer 12

* Taking a business opportunity away from the partnership * Using partnership property for private profit * Competing with the partnership * Conflicts of interests

Answer 13

“There exists no real distinction between a partnership and a joint venture.” “partnership law is applicable to joint ventures.”

Answer 14

The partnership agreement governs the relations among the partners and the partnership, not the relationship among the partners and the outside world.

Answer 15

Flow-through taxation (contrary to corporations that has double taxation)

Answer 16

-Creature of state law -Requires filing documents with the Department of State (or similar government entity) -One of several business structures that allow certain participants to limit the legal liability that would otherwise flow from their participation in the enterprise.

Answer 17

Public - Characterized by a public secondary market in which shares of the company are listed or traded. E.g. Microsoft Close - Characterized by absence of a secondary market for its stock. Often (but not always) a relatively small number of shareholders who actively participate in the firm’s management. E.g. SpaceX

Answer 18

1. Legal personality 2. Limited liability 3. Separation of ownership and control 4. Liquidity 5. Flexible capital structure

Answer 19

Because in the corporation, unlike the partnership, the owners of the business are not personally liable for business debts. The entity itself is liable.

Answer 20

Non-conflicting name Principal place of business and mailing address Registered office and registered agent within the state of Florida Purpose for which corporation is organized Number of authorized shares Name and street address (and signature) of initial registered agent Name and street address (and signature) of incorporator

Answer 21

-Limitations on purpose (otherwise, corporation exists for any legal purpose) -Shareholder preemptive rights (otherwise, none) -Share transfer restrictions (otherwise, none) -Initial directors (if not listed, then the initial directors named by the incorporator) -Initial officers (if not listed, the initial officers usually elected by the board at an organizational meeting -Limitations on directors authority to amend bylaws (otherwise, directors retain authority) -Notice of regular BoD meetings (otherwise, no notice of regular meetings required) -Notice of special BoD meetings (otherwise, 2 days’ notice required) -Notice to non-voting shareholders (otherwise, only shareholders entitled to vote on a matter are also entitled to notice) -S status selection (otherwise, C status is the default)

Answer 22

A “promoter” is someone acting on a corporation’s behalf pre-incorporation.

Answer 23

1. Appoint initial officers 2. Adopt bylaws

Answer 24

No. The principal does not yet exist. Thus, the promoters are liable.

Answer 25

No, but the corporation can become liable by express or implied adoption.

Answer 26

Yes, unless the corporation executes a novation with the promoter. Novation-the substitution of a new contract in place of an old one.

Answer 27

A de jure corporation is formed in accordance with all filing requirements. If a de jure corporation has not been formed, then the promoters are presumed personally liable. 2 exceptions: de facto, corporation by estoppel

Answer 28

Applicable to contract and torts. If promoters come close to forming a De Jure corporation, acting in good faith and reasonably believed they formed a corporation, a court may find the existence of a de facto corporation and hold only the corporation liable.

Answer 29

Only applicable to contract issues (not torts) When a third party deals with a person (or persons) believing they are a corporation, the third party may be estopped from later denying the existence of the corporation. Raised by the promoter as a defense.

Answer 30

The units of ownership in a corporation.

Answer 31

“Shares” means the units into which the proprietary interests in a corporation are divided. A share represents an equity or ownership interest in the corporation

Answer 32

A corporation’s sale of its own stock is a stock “issuance.”

Answer 33

A corporation’s articles of incorporation must provide the number of shares a corporation MAY issue, i.e., “authorized shares.”

Answer 34

Shares a corporation actually issues are “issued shares.”

Answer 35

Issued shares that a corporation has not reacquired are issued and “outstanding shares.”

Answer 36

Corporations can have more than one type or "class" of stock: Preferred stock Common stock

Answer 37

A class of stock treated more favorably than another class of stock Typically has no voting rights! Must be authorized in the articles of incorporation. Generally, preferred stock entitles holders to: -Dividend rights; -Liquidation rights; or -Redemption rights

Answer 38

Stock treated NOT more favorably than another class of stock

Answer 39

A sum of money paid by a corporation to its shareholders -Can be expressed as a dollar amount -Can be expressed as a percentage of profits -Can be expressed as a ratio to another class of stock’s dividends

Answer 40

New businesses High-risk enterprises Businesses saddled with debt

Answer 41

A shareholder’s right to be paid first in the event of company liquidation.

Answer 42

The minimum price for which a corporation can issue its shares. Par value is a price “floor” Shares may be issued at a price exceeding the par value Not required under the FBCA or Delaware Law

Answer 43

FBCA: The board of directors may authorize shares to be issued for consideration consisting of any tangible or intangible property or benefit to the corporation, including cash, promissory notes, services performed, promises to perform services evidenced by a written contract, or other securities of the corporation. Before the corporation issues shares, the board of directors must determine that the consideration received or to be received for shares to be issued is adequate.

Answer 44

If the board makes a determination that consideration is “adequate,” the determination is conclusive as to the validity of the share issuance. This does not mean that the directors can’t be held liable for a careless determination. It just means that an adequacy determination establishes that shares were validly issued.

Answer 45

Any party with a legal or equitable claim against the business (i.e., the debtor)

Answer 46

Creditors may recover from the corporation’s assets.  A creditor may garnish (seize of money) the corporation’s bank account(s).  A creditor may levy (seizure of property) on a corporation’s assets.

Answer 47

Shareholders are not personally liable to the corporation’s creditors.

Answer 48

Contractual exception: * Personal guarantees Judicial (equitable) exceptions: * Piercing the corporate veil (and alter ego theory) * Enterprise liability

Answer 49

A shareholder may agree to be personally responsible for the liabilities of a corporation. This is known as a “personal guaranty.”

Answer 50

The corporate structure with its attendant limited liability of stockholders may be disregarded and personal liability imposed on stockholders, officers and directors in the case of fraud or other wrongful acts done in name of corporation. Not a common remedy; every case is to be regarded as "sui generis" (decided with its own underlying facts)

Answer 51

* Undercapitalization * Concentrated ownership * Failure to observe corporate formalities * Insolvency of the corporate debtor at the time of the transaction in question * Siphoning of funds * Non-functioning of corporate officers or directors * Absence of corporate records * No payment of dividends to shareholders * Corporation is mere façade of a dominant shareholder (alter ego theory) * Fraud veil piercing determination cannot be made based on a single factor

Answer 52

Undercapitalization usually is said to mean something like “the shareholders did not put enough funding into the corporation to cover prospective liabilities.”

Answer 53

c) Most courts focus on capitalization at the outset of the venture.

Answer 54

A corporation that owns a controlling interest in another

Answer 55

A corporation that is majority-owned or wholly-owned by another corporation

Answer 56

Courts apply the same analysis as if it was a natural person.

Answer 57

Disregarding the corporate form to permit a creditor to collect from a corporate affiliate Sometimes called horizontal veil piercing

Answer 58

A shareholder, also known as a stockholder, is a person or institution that owns stock in a corporation in exchange for a share of ownership..

Answer 59

-Own the company -Participate in the profits of the enterprise. -Elect the board of directors -Approve by-laws and changes -Residual interest -Vote on fundamental corporate changes such as changes to the company's constitution, declaring dividends, or reducing capital.

Answer 60

-Elected by shareholders -Manage business and affairs of the corporation

Answer 61

-Select, evaluate, replace senior management. -Oversee: Strategies, management of corporate resources. -Review, approve major plans and actions. -Other functions prescribed by law.

Answer 62

-Appointed by the board of directors - Key management executives who carry out the daily work of the business (CEO, CFO, etc.) -Hire managers and employees

Answer 63

- 1 or more NATURAL persons “The number of directors may be increased or decreased from time to time by amendment to, or in the manner provided in, the articles of incorporation or the bylaws.” FBCA §607.0803

Answer 64

Yes -But owning shares in the corporation may create a conflict of interest (a breach of the fiduciary duty of loyalty). -And directors with significant holdings may be deemed a “controlling shareholder” (more about this later in the course)

Answer 65

Yes -But serving as an officer may create a conflict of interest (a breach of the fiduciary duty of loyalty). -A director who is also an officer is not an “independent director” and certain decisions should (or in some cases must) be approved by independent directors. -Other factors may render a director not independent, but serving as an officer is perhaps the most common factor.

Answer 66

Can be located anywhere Directors can participate remotely, unless restricted in the Articles of Incorporation or bylaws, and their presence will be counted for purposes of quorum

Answer 67

Unless restricted in the AOI or bylaws, action may be taken by UNANIMOUS signed, written consent describing the action to be taken and delivered to the corporation.

Answer 68

Yes, unless restricted in the AOI or bylaws.

Answer 69

Special meetings must be noticed, and such notice must include the date, time, and place of the special meeting. The purpose need not be included in the special meeting notice, unless required by the AOI or bylaws. Unless restricted in the AOI or bylaws, special meetings require 2 days’ notice.

Answer 70

Unless restricted in the AOI or bylaws, quorum = simple majority of all directors. Quorum may not consist of less than 1/3 of directors. If no quorum, the BOD cannot act. Majority of directors present rules! If acting without a meeting (i.e., by written consent), all directors must participate.

Answer 71

FBCA: At least one class with unlimited voting rights At least one class with residual claim May be the same — but need not be! Non-voting stock is okay!

Answer 72

A residual claim entitles shareholders to the proceeds of a liquidation. Example: Delta Corp. files bankruptcy and liquidates all of its assets. After the corporation’s creditors are paid, at least one class of Delta shareholders must be entitled to the residual proceeds, i.e., the proceeds left over after creditors are paid.

Answer 73

Election of directors Fundamental corporate changes Anything a shareholder is entitled to vote on by virtue of the stock she holds

Answer 74

Annual meeting of shareholders is required! Can be anywhere May be affixed in the AOI or bylaws, or stated in the notice of annual meeting, if not inconsistent with the AOI or bylaws. If no place is stated in or fixed in accordance with the bylaws, or stated in the notice of the annual meeting, annual meetings shall be held at the corporation’s principal office.

Answer 75

Elect directors

Answer 76

May be called by Board of Directors or other persons authorized by AOI or bylaws. May be called by shareholders holding at least 10% of all votes entitled to be cast on the matter, if such holders deliver a written, signed, and dated demand on the corporation.

Answer 77

“no fewer than 10 or more than 60 days before the meeting date” Notice only required to those shareholders entitled to vote on a matter, unless the FBCA or AOI require otherwise Notice must include “record date” Notice need not describe purpose, unless AOI state otherwise

Answer 78

Same as Annual Meeting Notice requirements with the exception that: Notice must describe purpose.

Answer 79

Only those shareholders who are “record owners” on the “record date” The directors will fix the record date prior to a meeting, and only those shareholders holding shares on that date may vote. Record date may be fixed in the bylaws. May not be more than 70 days before the meeting or action.

Answer 80

A shareholder may authorize another person to vote her shares. This practice is known as proxy voting. Directors cannot delegate their voting power.

Answer 81

For the term provided in the proxy appointment form If no form provided, then 11 months

Answer 82

Generally, yes, even if revocability not addressed in the proxy form. *However, a proxy may be made irrevocable if “coupled with an interest.”

Answer 83

Being coupled with an interest means that the owner gives the proxy to the proxy holder to benefit the proxy holder, not just for the convenience of the owner. For example, suppose that the stockholder appoints a proxy because she has a conflict so that she could not attend the shareholder meeting. The stockholder could revoke the proxy, even if the proxy stated that it were irrevocable. This is because the proxy is for the benefit of the stockholder, not for the benefit of the proxy-holder.

Answer 84

1-Board must approve (watch out for duty of care and loyalty!) 2-Board notifies shareholders of recommendation 3-Special meeting noticed and held to conduct shareholder vote. 4-If fundamental change approved, some shareholders who voted “no” may have buyout rights (dissenting shareholders) 5-File documents with the Department of State

Answer 85

Each member of the board of directors, must discharge their duties in good faith; and in a manner he or she reasonably believes to be in the best interests of the corporation. They shall discharge their duties with the care that an ordinary prudent person in a like position would reasonably believe appropriate under similar circumstances. Directors must act on an informed basis, taking into account reasonably available information and alternatives. They are held to Gross negligence standard. (extreme departure from ordinary care)

Answer 86

3 steps: 1. plaintiff-shareholders proves that a fiduciary duty exists. 2. plaintiff-shareholders shows that a director (or directors) failed to engage in a deliberative decision-making process by failing to take into account all reasonably available information. 3. plaintiff-shareholder shows that the harm suffered by the corporation was proximately caused by the defendant-director’s conduct. If the plaintiff-shareholder fails; business judgment rule; it’s over. If plaintiff-shareholder meets initial burden; burden shifts to director-defendant: fairness review (plaintiff most likely wins)

Answer 87

The business-judgment rule is a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company.

Answer 88

-The court will not substitute its views for the board’s. -Decision upheld if the board’s decision has any rational business purpose. -The court will almost always leave the challenged transaction undisturbed.

Answer 89

Whether directors obtained and considered reports from management and guidance from outside advisors. The FBCA Authorizes (see FBCA §607.0830(2)): Reliance on information, opinions, and reports provided by corporate officers and employees and legal counsel, public accountant, and other experts, so long as the directors reasonably and in good faith believe them to be reliable and competent.

Answer 90

Directors owe an affirmative duty to implement and monitor corporate information or reporting systems (a.k.a. corporate oversight systems). The duty to implement and monitor corporate oversight systems is often referred to as Caremark duty, which is a subset of the fiduciary duty of loyalty. A director breaches his Caremark duty when the director (a) utterly fails to implement any reporting or information system; or (b) having implemented such a system, consciously fails to monitor or oversee its operations.

Answer 91

If Caremark means anything, it is that a corporate board must make a good faith effort to exercise its duty of care. A failure to make that effort constitutes a breach of duty of loyalty. Marchand v. Barnhill, 212 A.3d 805, 824 (Del. 2019)

Answer 92

A director breaches the duty of loyalty when she puts her own financial interests ahead of the corporation’s. A director is likely NOT acting in the best interests of the corporation when she:  Competes with the corporation;  Takes an opportunity that rightfully belongs to the corporation; and/or  Sits on both sides of a transaction (self-dealing)

Answer 93

Forbidden, unless:  Authorized in advance or ratified following disclosure by the disinterested directors  If a senior executive is involved, then authorization by disinterested superior required.  Or may be authorized or ratified disinterested shareholders

Answer 94

No financial interest or familial ties to the challenged transaction.

Answer 95

 Any profits owing to the improper competition may be recoverable (constructive trust).  Injunctive relief may also be available to stop the competition.  Damages may also be available if the corporation suffered injury.

Answer 96

Directors and officers may not usurp a business opportunity that belongs to the corporation.  To take a corporate opportunity for herself, a director must first present it to the corporation and wait for the corporation to reject it.

Answer 97

1. Corporation is financially able to take the opportunity 2. Opportunity is in the corporation's line of business 3. Corporation has an interest or expectancy in the opportunity 4. Embracing the opportunity would create a conflict between director’s self-interest and that of the corporation.

Answer 98

-The corporation may claim all of the benefits of the transaction for itself. -This holds true whether the officer or director spent his personal money or corporate money. -However, the officer or director “is entitled to the costs of acquiring the property. -If the property has been sold, the officer or director’s profit is delivered to the corporation.

Answer 99

Buying / selling stock is within a public corporation’s line of business.

Answer 100

Sitting on both sides of a transaction. Self-dealing occurs when a fiduciary puts their own interests above those of the entity.

Answer 101

Sitting on both sides of a transaction authorized if: (1) The material facts known / disclosed to the BoD or the committee + authorization by majority of disinterested Ds (even if disinterested Ds do not constitute quorum); or (2) The material facts known / disclosed to the Shareholders + authorization by majority of disinterested Shareholders **Safe Harbor only applies to self-dealing**

Answer 102

Shareholder-plaintiff has the burden of proving the entire fairness of the transaction if either of the two safe harbors are present: 1. P must prove existence of duty and that D owes the duty 2. P must allege and produce evidence showing that a director breached her duty of care or loyalty 3. If P succeeds, D must prove entire fairness of transaction or if the D is conflicted, ask whether any “Safe Harbors” apply 4. If D can establish a Safe Harbor, then P must prove that transaction not entirely fair

Answer 103

1. Fair dealing 2. Fair Price

Answer 104

Derivative: Lawsuit brought by a shareholder on corporation’s behalf. The cause of action belongs to the corporation as an entity and arises out of an injury done to the corporation. Direct: Lawsuit brought by the shareholder in his or her own name in her individual capacity. Arises from an injury directly to the shareholder.

Answer 105

An action may be brought directly only if: (1)Direct harm to the shareholder, and (2)Special harm distinct from harm sustained by other shareholders

Answer 106

To bring a derivative action: 1. The Plaintiff-Shareholder must have standing to bring the action, and 2. The Plaintiff-Shareholder must make a written demand on the corporation and wait 90 days for the corporation to investigate the matter OR explain why making such a demand would be futile or waiting 90 days would cause material injury to the corporation.

Answer 107

1. Plaintiff must be a shareholder at the time the action is commenced; and a) Plaintiff was a shareholder when the challenged transaction/conduct occurred; or b) Plaintiff became a shareholder by operation of law from one who was a shareholder when the challenged transaction/conduct occurred.

Answer 108

 Inheritance  Divorce settlements

Answer 109

Must be: -In writing -Served on the Corporation -Identify alleged wrongdoers, factual basis of wrongful acts, harm caused to corporation and request of remedial relief.

Answer 110

Demand deemed futile = No purpose, if: -Majority of directors share a familial tie, or -Majority of directors lack independence Plaintiff may bring the action w/o a demand if it's futile.

Answer 111

-Articles of Incorporation -Bylaws -Shareholder Notices

Answer 112

-Demand is made in good faith and for a proper purpose (no fishing expeditions) -Demand describes with reasonable particularity the shareholders purpose and the records the shareholder desires to inspect; and -Records are directly connected with the shareholder's purpose.