Business Organizations Flashcards
Business types:
Pros:
Owner in complete control
Owner gets all profits
Cons:
Owners personal finances and business finances the same
Sole proprietorship
Two types of partners in a limited partnership?
- Limited
- General
Limited partnerships:
________ partner: No involvement, no daily responsibilities, and no liability.
Limited partner
Limited partnerships:
______ partner: Oversees daily company activity and responsible for it. Full liability.
General Partner
T/F) Both limited & general partners, in a limited partnership, own part of the company.
True
This course covers 4 entity types. What are they?
- Partnership
- Limited Partnership
- Corporation
- LLC
________: An artificial legal person that can own property, owe debts, sue, and be sued.
Entity
Owners of corporation?
Investors/Shareholders
Owners of an LLC?
Members
Owners of a partnership?
Partners
_____ rule: A rule of law that requires or prohibits some act.
“A director SHALL be a natural person.”
Mandatory rule
______ rule: A rule that applies only when the K among the parties does not provide otherwise.
Default rules
________ rule: A rule of law that enables or entitles an entity to do something they could not do in its absence. “Stunts”
“Any 2 or more corporations of this state MAY merge into a single corporation.”
Enabling rule
Stunts:
1st
2nd
3rd
4th
- Form.
- Get investors, elect managers, buy assets
- Parent-subsidiary relationship
- Merger
What happens if parent entity distributes the subsidiary stock to investors?
Investors of entity A now own entity B directly.
Stock dividend, where Entity A distributes entity B stock to original investors is known as….
Spin off . The investors separate into owners of A and B shares.
When Entity A merges with Entity B, all shareholders receive entity ____ shares.
Entity C
Who votes on merger?
Investors of the two entities
After merger, entities file a certificate of _____ with the SOS.
Certificate of merger
A wants to merge. B refuses. What can A do?
Buy B investors shares and elect managers who want to merge.
“tender offer”
When Entity A makes offer to buy majority shares of Entity. B. This is a ____ offer.
Tender offer
The ________ deal: The deal by which the investors and managers associate. Contained in the statutes and fundamental documents.
Business deal
4 main issues of a business deal?
- Money
- Decision making
- Transfers
- Fiduciary duties
What is the only entity that requires 2 or more persons to form?
Partnership
T/F) The business itself is not an entity.
True
____ can own property, owe debts, enter Ks. A ____ can do none of this.
Entity v. Business
_____ owns the business that sells the food.
Entity
3 roles of individuals in an entity? “IMO”
Investors, Managers, Officers
IMO:
Who makes the entity’s decisions?
Who puts the decisions into effect?
Managers
Officers
The legal term for roles in a company is ______. The same person can participate in an entity in several _______.
Capacities
____________: This contains the fundamental documents for a corporation.
Articles of incorporation
Fundamental docs:
- Corporation = Articles of Incorporation
- LLC =
- LP =
- Operating agreement
- Certificate of LP
Fundamental doc for LLC?
Operating agreement / Articles of Organization, filed with SOS and one person must become member.
Fundamental doc for LP?
Certificate of LP
Shares of stock enable shareholders to vote on what?
Election of directors [managers]
Fundamental docs for partnership?
Partnership agreement
______ _____ doctrine: Is a conflict of laws rule that provides that the law of the formation state applies. For Hammond, this means the laws of Costa Rico will govern JP93.
Internal affairs doctrine
_____ ordering: The default rule is that a corporation is governed by a Board of Directors. But, may be governed by anyone or anything it chooses.
Private ordering
_________ companies: are entities whose debt or equity securities are publicly traded on stock exchanges or other public platforms. Public companies are usually corporate groups.
Public companies
Formation:
Where does an entity start?
File articles of corporation [corp], or operating agreement [LLC] or Certificate of LP [LP] or Partnership agreement [P]
__________ : The persons who formally initiate a corporation.
Incorporators
Articles of Incorporation typically name directors. What if it does not?
Incorporators may select them.
Roles of directors /managers in a corporation?
- Issue stock for investments
- Adopt bylaws
- Hire officers [employees]
Case name?
“A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law.”
Dartmouth v. Woodward
T/F) Sole Proprietorship does not met the definition of an entity. If T, why?
True. The single owner is not distinguishable from the business. Pass through tax/liability to the owner.
T/F) SP is pass through. Meaning, taxes & profits reported on personal income of the single owner.
True
T/F) In a partnership, not all persons wear equal ownership hats.
True. You have LP and GPs.
T/F) Both SP and Partnerships are pass through.
True, so is an LLC.
Difference between LP and GP in a partnership?
GP puts it all on the line. [You must have one of each] GP has unlimited liability and oversees daily operations of the company.
While LPs have limited liability, they have full control, like a GP, of the company. [T/F]
False. Limited liability = limited control.
Corporations are proper for those pursuing a “_______” model. They are meant to grow, get big.
Growth model
T/F) Some owners in a corporation benefit from Limited liability.
False. All owners benefit.
Who are the owners of a corporation?
Shareholders/Investors
LLCs default tax structure?
Pass through
LLCs: Do the owners have limited liability?
Yes, it is in the name.
T/F) Entities may choose their own terminology.
True
________ are contract rights entitling investors to participate in entities decision making in specified ways, receive dividends, etc.
Shares
___________ doctrine: Is a conflict of laws rule that the formation state applies to entity internal affairs. [States choose where they form]
Internal affairs doctrine
Entity law = _____ law
State law
T/F) SP does not met definition of entity.
True
Owners of LLC called?
Members
__________: Termination of an entity’s existence.
Dissolution
Under the default rules, how may a partner dissolve a partnership?
Giving notice to the partnership
___________: Is a process in which a dissolved entity sells its assets, pays its debts, and distributes proceeds to investors.
Winding up
________ : The process by which an Entity can acquire another by buying the majority shares.
Acquisition
The agreement of co-owners in the “fundamental documents” is also known as what?
The Business Deal
What if co-owners don’t have Business deal / fundamental documents?
Default rules apply
Business deal addresses 4 issues.
- Decision making
- Fiduciary duties
- Transferability of investor shares
- Resources investors contribute and receive
Voting:
Alice 60 shares [Vote A]
Bob has 20 shares [Vote B]
Joe has 30 shares [Vote B]
Who wins by person? Assume Bob and Joe vote together.
Who wins by share?
Person = Bob and Joe
Shares = Alice
Example of an enabling rule?
Mergers
How does a company get shareholders?
Selling shares / receiving investments
Who elects the managers of a company?
Investors / Shareholders
Entity finances:
Investors make ___ ____ as equity into the company.
Capital contributions
When investors make their CCs, they can receive what?
Shares
Interests [percent]
or Units
T/F) Debt has absolute priority over equity.
True
Entity owes 80 debt and has 100 for distribution. Where does it go?
80 > Debt
20 > Equity
Preferred vs commons shares. Which has preference?
Preferred, it is in the name.
Two preference share types?
- Annual: Specified dividend each yr.
- On Dissolution: First payout on dissolution.
Joe can give 70 shares to 3 candidates of his choice. Cannot stack his shares though.
What voting system?
Straight voting
Joe can add up his 3 votes of 70 into one big vote.
What voting system?
Cumalative voting
What tells us if an investor can sell / transfer their shares to another?
Fundamental documents
Managers have important fiduciary duties to the Entity and managers. What are they?
- Duty of loyalty,
- Duty of care, and
- Good faith
_____ relationship: Legal arrangement where one person [principal] authorizes another person [agent] to act on their behalf.
Agency relationship
T/F) Whether parties label the relationship “agency” is not controlling.
True
3 types of agent authority?
- Actual
- Apparent
- Inherent
______ authority is the authority principal confers on agent. May be express or implied. Actions are binding & have legal consequences for the principal.
Actual authority
_________ authority: is authority agent purported to have b/c agent appears to 3rd party to have it. Assessed from 3rd party POV.
Apparent authority
T/F) Apparent authority needs to be shown by the principal, not the agent.
True
______ authority is the authority to do acts that usually accompany or are incidental to transactions agent is authorized to conduct.
IE: Law School Dean has ____ authority to do incidental things such as negotiating terms on faculty hiring.
Inherent authority
When agent acts on behalf of principal w/o authority but later, the principal affirms the act, ______ occurs. Is now binding.
Ratification
3 types of principals?
- Disclosed
- Undisclosed
- Unidentified
____ principal: One whose existence and identity are known to 3rd party at time of transaction.
Disclosed principal
_____ principal: One whose existence is not known to 3rd party at time of transaction.
Undisclosed principal
____ principal: One whose existence, but not the identity, is known to 3rd party at time of transaction.
Unidentified principal
A person who purports [agent] to enter K on behalf of principal, warrants the person’s authority to do so.
What does this mean?
If the purported principal is not bound by K, agent may be liable to 3rd party for damages. Agent beware.
When do fiduciary duties rise between Principal and agent? IE: When does relationship start?
Principal manifests assent to agent and agent manifests assent to do so.
- Interview at law firm. Is there a binding contract for over the phone offer?
- What about for DOJ?
- Maybe. If person “reasonably believes” person has authority [apparent] to make that offer then yes.
- No one has apparent authority to act for the US gov.
Is SubK contracts with VP of company [Verizon] and VP backs out. Is Verizon liable? [You don’t know what the actual authority level is.]
Without knowing actual, it is apparent authority to K which requires that the principal must be the one to convey that level of authority on VP from SubK POV.
IE: VP can’t just say she has been vested by Principal with the app. authority to act.
Can an agent of company just tell a subK that they have been vested with app. authority?
No. This must be conveyed by Principal > agent from 3rd party POV.
_____ of authority: A person who purports to enter a contract on behalf of a principal warrants the person’s authority to do so. Restatement (Third) of Agency §6.10. If the purported principal is not bound by the contract and does not ratify it, the agent is liable to the third party for damages, including loss of the benefits expected from the contract.
Warrant of authority
Under what theory can you sue Principal if the agent of Principal makes a deal, then disappears leaving 3rd party in shit? [3rd party is unaware of Principal existence]
Undisclosed Principal Theory
2 times agent is liable to 3rd party?
- Unidentified Principal
- Breach of warranty [SL]
Agent fiduciary duties?
- No secret income
- No competing
- Don’t help competition
- Loyalty / Confidentiality
Principal fiduciary duties
- Indemnify for loss [compensate]
- Deal w/ agent in GF
Generally, who has “managerial” capacities in an entity?
Directors, Officers
Who has authority to act for a Corporation? What type of rule is this?
BODs. Mandatory.
T/F) Individual members of a board have no authority, the authority rests with the Bd acting together.
True
Can board members wear multiple hats? IE: Director + employee of corp.
Yup.
T/F) General rule for board members is that they can take action without formal meeting.
False.
T/F) If not a legal board meeting, then the corporation may still be bound depending on specific circumstances.
False, must be a legal board meeting.
Can the Board authority be delegated?
Only if noted in the articles of incorporation. [Fundamental documents]
3 ways Bd can delegate decision making authority? [Meta Bd > CEO Mark]
- Bylaws
- Resolution
- Articles of Incorporation
If you see “CEO” in a hypo, what argument should you make, authority wise?
- Apparent authority binds the corporation.
- See if authority has been delegated from Bd > CEO.
T/F) Only some partners can bind a partnership as an agent.
False. All partners.
Partner = BINDING
In a limited partnership, who are the binding agents?
GPs only
2 types of “managed” LLCs?
- Member managed [binds as a group]
- Manager managed [Single manager may bind]
How do members of LLC bind the LLC?
Making decisions as a group. Individually, default entity laws for LLC say one member is not an agent soley be reason of being member.
T/F) Default entity laws for LLC say one member is not an agent only because of them being member. Exceptions if true?
- True. Group of members must make decisions together to bind the LLC. [Default rule]
- Single manager of manager managed LLC has actual authority to bind.
T/F) In contrast to the default rule, a single manager of “Manager-managed” LLC can bind the LLC.
True.
Relationship of agency contemplates three parties. Who?
This creates ______ relationship.
- Principal
- Agent
- 3rd party
Fiduciary relationship created
“Who acts through another, acts himself.” Describes what?
Agency relationship
3RST requirements for agency relationship?
- Principal manifests assent
- That agent act on his behalf
- Subject to Principal control
- Agent manifests assent to do so
When there is a valid agency relationship between Principal and agent, who has liability for the properly authorized act?
Principal is liable to 3rd party
An agent is also an employee when?
When the principal has the right to control the physical details of the work.
When is principal VL for an act of nonemployee agent?
Only when principal authorized or intended the result or manner of performance of the act.
Torts in employment.
General rule?
Employee liable for his or her own negligence and employer is also VL.
When is “non-employer” liable for the torts of an independent contractor?
- Abnormally dangerous activity
- Non-employer is negligent [hiring / supervising]
- Apparent agency [3rd party reasonably believes the non-employer controls manner in which I99e works.]
Five theories for holding principals liable?
- Actual A
- Apparent A
- Inherent A
- Ratification
- Estoppel
Difference between apparent and actual authority? Meaning, whom’s POV controls?
Its all POV.
1. Actual = Agent reasonably believes he has the authority to act.
2. App = 3rd party reasonably believes the agent has authority to act.
Liability:
1. Actual A
2. Apparent A
Principal
T/F) An agent may not manifest its own authority to act.
True.
AA is judged from “RE” of 3rd party and must be traceble to manifestations from the principal.
[Scenario]
T/F) P tells A “you are not authorized to sign the K, but you may tell 3rd party you are.”
3rd party signs. Is principal liable?
Yes. “Secret limitations” are ineffective in cutting off liability.
T/F) Secret limitations set by principal are effective at cutting off liability.
False
Authority stemming from the [position] or [title] given to the agent/employee represents _____ authority.
Inherent authority
Where does liability rest for [inherent] authority acts?
With the Principal.
Dean of CSOL tells faculty recruit: “You will be able to teach Business Associations.” Recruit takes job in reliance.
Later, “You must now teach tax.” Did the Dean have [inherent] authority?
Yes if the recruit “reasonably believed.”
_________ is the affirmance of a prior act done by another, whereby the act is given effect as if done by an agent acting with authority.
Ratification
T/F) A person may ratify an act [only] if the actor had acted as an agent on the person’s behalf.
True
T/F) Agents do not have authority to manifest their own authority.
True!
If principal tells agent, “You are not authorized to sign the K, but you may tell 3rd party. you are…”
Principal will be liable, agent has demonstrated “Manifestation of Authority.”
______ is the affirmance of a prior act done by another, whereby the act is given effect as if done by agent acting with authority.
Ratification
When can person with authority ratify act of prior person who didnt actually have authority?
Only when the actor purported to act as an agent on persons behalf.
When is Principal liable under theory of estoppel?
IE: Person induced to rely to their detriment.
1.
2.
- Principal intentionally or carelessly caused such reliance/belief; or
- Having noticed persons reliance, did not take reasonable steps to notify them of facts.
Clark v. Verizon is example of what theory at play and why?
- Estoppel
- Verizon didn’t authorize agent to K. Ks are signed. Verizon knows this and does nothing. If reliance on K detrimentally, Verizon may be estopped!
When an agent acting with actual or apparent authority makes K on behalf of DISCLOSED principal, who is liable / in k?
Principal & 3rd party.
Agent not party unless agent & 3rd party agree otherwise.
Parties to K for disclosed principal?
Principal & 3rd party
Party to K for UNIDENTIFIED principal?
Principal and 3rd party. Unidentified and/or undisclosed Principal creates liablity for agent. [Winer v. Valentino]
Parties to K for UNDISCLOSED principal?
Unless excluded in the K, principal IS A PARTY + agent + 3rd party. [Everyone]
Case: Winer v. Valentino
It is well settled that an individual who signs K as an agent for an UNDISCLOSED entity will be held liable on K as well. Case?
Winer v. Valentino
Best practice signature to avoid liability issues when agents contract on behalf of principals?
- Principal name & Unique Identifier
- Agent name, signature, and capacity
Best practice signature allows you to draw 3 inferences…
- Parties intend for principal to be liable.
- Parties intend for agent to be not liable.
- Agent warrants his authority to bind the corporation.
2 times agent may face liability?
- Undisclosed Principal
- Breach of warranty of authority [SL]
Agent fiduciary duties?
- No secret income
- Don’t help competition
- Loyalty & Confidentiality
Principal fiduciary duties?
- Indemnify for payment made and losses
- Good faith
T/F) Unlike directors of a corporation, partners have the authority to act individually on behalf of the entity.
True
Where can you find a “recorded statement” of authority?
Statement of Authority filed by entity with the Secretary of State
Can an agent act for more than one principal?
Yes, Coprincipals.
Example: RE transaction whereas broker serves buyer & seller.
What if coprinicpal interests come into conflict?
Agent may withdraw.
When may a parent corporation be held liable for actions of subsidiary?
When parent exercised significant control over the facility.
A parent corporation is not normally liable for a subsidiary’s actions unless the corporate veil can be pierced, but direct liability may arise if the parent directly operates the facility. [T/F]
True
Can Directors & Officers hold positions with both the parent and subsidiary?
Yes.
T/F) Any partner can bind a partnership.
True
T/F) Individual directors have authority to bind the corporation.
False
T/F) Individual members of LLC [member managed] have capacity to bind the LLC.
False, this is the rule for [manager-managed] LLCs.
T/F) Any partner in a LP can bind the LP.
False, only GP can bind.
Can the corporation give the BOD additional authority / more hats?
Yes
T/F) LLCS must have specific lawful purpose at inception and must be not for profit.
False. LLCs can be established for “any lawful purpose” and can be for profit or non-profit.
T/F) Member is not an “agent” of the LLC soley by reason of being a member. [exam mcq]
True, this is the minority but also the default rule.
Default rules: Who can bind in the “ordinary course of business?”
- Corp.
- Partnership
- Member mg LLC
- Limited partnership
- CEO [apparent authority]
- Any partner
- No one [only group]
- General Partner only
What do we look at with regard to actual authority within an organization?
Hint: We look at the “___ ___” of the 3rd party.
“Reasonable expectation”
___ ___ : Is the document issued by a law firm addressing the legitimacy of a transaction with an entity.
Legal Opinion
T/F) If in your dealings with an entity, you are suspicious of the legitimacy of the transaction, you can ask for a “legal opinion”from their in house counsel.
True
The ___ ____ is helpful to ask before because it reduces the arms length nature of the transaction.
Legal Opinon
What’s even better to ask for than a “legal Opinion?”
Certified copy of minutes from the actual corp. secretary.
Investor starts selling her shares off. How do we know that she can do this?
Look to fundamental documents to see if her ownership stake is freely transferable.
The _______ _______ rule is a legal principle that protects corporate directors from personal liability for decisions they make in good faith, with reasonable care, and believing they are acting in the best interests of the company, even if those decisions turn out to be unsuccessful;
Business Judgement rule
When does the business judgment rule protect managers from shareholders?
- Acted with care
- Acted with loyalty
- Acted in good faith
- Not wasteful [rational]
- Business related
T/F) Entity investors are not liable for their capacities as investors.
True. Without this rule, regular consumers could be held liable for owning shares in shitty company.
Fundamental documents vs default rule. Which prevails?
Fundamental documents, so long as in keeping with any mandatory statutes.
T/F) Property purchased by a partnership is “presumed” to be property of the partnership, not individual partners.
True, so long as purchased with partnership assets. [Even if not acquired in name of partnership]
T/F) If 2 or more person associate as co-owners of a business for profit, it is a partnership, even if they did not intend to form one.
True.
T/F) Property acquired by. a partnership is property of the partnership and not of the partners individually.
True!
Partnership rules turn to ____ statutes.
“RUPA”
RUPA stands for what?
Revised Uniform Partnership Act
T/F) A partnership is an entity but NOT one that is distinct from its partners.
False. RUPA 201 says otherwise.
Your clients by chance, formed a partnership. They wish to form an LLC. Steps?
- File articles of organization with secretary of state.
- Effective when SOS files and at least one person has become a “member.”
When forming an LLC, the Certificate of Organization must contain what?
- Name of LLC, complying with §112.
- Street / Mailing address of principal office; and
- Name / Street / Mailing address of LLC’s agent in the state.
What is required for LLC creation to become final?
- At least one person becomes member
- SOS files the COO.
Like a partnership, can you, on accident, create an LLC?
No.
1. requires filing Articles of organziation with SOS.
2. + At least one person become member to become “effective.”
How to transfer from the old partnership to newly created LLC without transferring physical assets?
Conversion
How to convert Partnership > LLC
- Approve plan of conversion
- Plan of conversion signed and delivered to SOS
When is a plan of conversion effective?
When it is organized under and subject to the organic law of the converted entity.
What must be included in the plan of conversion?
- Name of converting partnership
- Name, J, and type of entity of converted entity
- Manner of converting interests
- Organic records of the converted entity
Do directors of a corporation owe fiduciary duties [care and loyalty] to the corporation AND the persons whom appointed them from the board?
No. To the entity only.
What fiduciary duties owed to an entity?
- Care
- Loyalty
- Good faith
Can you have an LLC similar to the governing structure of a board? IE: Established board of directors.
Yes. This is a “manager-managed” LLC.
________ is the fiduciary relationship that arises when principal manifests assent to agent that the agent shall act on principals behalf and agent manifests assent to do so.
Agency
Five theories for holding principals liable? [All render principal liable]
- Actual
- Apparent
- Inherent
- Ratification
- Estoppel
T/F) Whether the parties label the relationship agency is NOT controlling.
True. Manifestations of mutual assent that one person will act on another’s behalf and subject to the others control are what creates principal-agent relationship.
Under this case, “an agency relationship is formed when two people agree that one will act for the other and under the other’s control.” [Wife signing ADR for hubby at nursing home]
“BATZ” - Northern Health facilities v. Batz
Agent acts with ________ authority when, at time of taking action that has legal consequences for the principal, the agent reasonably believes that the principal wishes the agent to act.
Actual
T/F) Actual authority may be express or implied.
True
Actual authority, which may be conferred intentionally [or not] by the principal, is assessed from whom’s perspective?
Agent’s perspective
This authority is authority a purported agent has because the agent appears to the third party to have it.
Apparent
Apparent authority is assessed from whom’s standpoint?
The 3rd party
_______ authority is the power held by an agent or other actor to affect a principal’s legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations.
Apparent authority
___________ are “written or spoken words or other conduct.”
Manifestations
“Apparent authority, which allows an agent to act for a principal, needs to be shown by the principal, not the agent.” [Case?]
Clark v. Verizon
What authority did person in Verizon actually have?
Inherent authority
____________ authority is the authority to do acts that “usually accompany or are incidental to transactions which the agent is authorized to conduct.” Inherent authority does not require any manifestation from the principal to the third party.
Inherent authority
T/F) Inherent authority does not require any manifestation from principal to the 3rd party.
True
The doctrine applies in situations where an agent or other person purports to act on behalf of a principal, but does not have authority to do so.
The principal is not bound. But if the principal later affirms the act, _________ occurs.
Ratification
If a person is not the principal of someone who purports to be its agent, but (1) the person intentionally or carelessly causes a third party to justifiably believe the person is the principal, or (2) knowing that a third party has such a belief, does not take reasonable steps to notify the third party that its belief is wrong, and (3) the third party detrimentally relies on its belief, then the person is estopped to deny the agency and is liable to the third party.
Estoppel
3 types of principals?
- disclosed
- undisclosed
- unidentified
_______ principal: One whose existence and identity are known to 3rd party at time of transaction.
Disclosed principal
_______ principal: One whose existence, but not its identity, is known to 3rd party.
Unidentified
_________: One whose existence is not known to 3rd party.
Undisclosed
Meta Platforms, Inc. wants to buy Tim’s property, but doesn’t want Tim to know he is selling to Meta Platforms. (If Tim knows he’s dealing with a fat cat, he might want more money.) Meta hires Annika as its agent and instructs her to buy the property without disclosing that she is buying for Meta Platforms. Meta Platforms is an ___________ principal.
Undisclosed principal
“__________________” is for forming a new business, while “________________” is for changing an existing business’s legal structure
- Articles of organization
- Conversion
A person who purports to enter a K on behalf of a principal _____ the persons authority to do so.
Warrants
ROL: “Employees and agents have a duty of loyalty to their employers. This means they can’t work for competitors or get extra benefits from others when doing business for their employer.”
Wall Systems Inc. v. [Pompa]
Is the waiter in a restaurant an agent of the customer?
Probably not. Agency manifests when Principal manifests assent for Agent to act on their behalf and Agent then manifests willingess to do so. Therefore, [Waiters are agents of the resteraunt.]
When do fiduciary duties arise between Principal and Agent?
When we have a “manifestation of agency” between them.
Would you likely have a binding relationship with a law-firm regarding over the phone job offer?
Prob not. However, if you “reasonably believe” that the person has the authority to make that offer, then maybe yes under theory of Apparrant authority.
T/F) Nobody has apparant or inherent authority to bind the DOJ.
True! [badass]
T/F) Ticket agents have NO authority to bind the airline. [Including under theory of apparant authority]
True
Warranty of ___________ A person who purports to enter a contract on behalf of a principal warrants the person’s authority to do so. Restatement (Third) of Agency §6.10. If the purported principal is not bound by the contract and does not ratify it, the agent is liable to the third party for damages, including loss of the benefits expected from the contract.
Authority
In the fact pattern for Verizon v. Clark, would Verizon be liable if VP had written agreement down with subk?
Prob not. Under the theory of apparant authority, it must be conveyed by principal to third party. This act itself is only serving to “stack authority.”
When can you sue the agent himself for breach of contract?
Breach of warranty when there is an undisclosed principal. [Winer v. Valentio] Shitty as construction worker in 2014 signing for company without telling buyer about company.
This case showed the fiduciary duties employee / agent owes to his employer.
1. GF
2. Care
3. Loyalty
4. No side hustles
5. Dont help competition
Pompa
The rule of this case is that a person who signs a contract for someone else is still responsible for that contract unless the other person involved in the contract knows that the signer is acting for someone else. [Undisclosed principal theory case]
Winer v. Valentino
What case demonstrates liability for agent under theory of a undisclosed principal.
Winer v. Valentino
Who has managerial capacity?
Directors and Officers
Perspective for binding the entity will be from who’s view?
The 3rd party to determine if entity is bound.
The ____ has authority to act for a Corporation.
Board. Both the DGCL and the MBCA say as much.
According to what case do individual board members have no authority to act individually?
Baldwin v. Canfield
In _____, it was determined that individual board members have no authority to act.
Baldwin
Can a board act without meeting?
Maybe… but it will require unanimous consent of all members. [Baldwin]
What case said individual board members have no authority?
Baldwin
T/F) If in the articles of incorporation, board authority may be delegated.
True
Multiple ways to delegate board authority?
- Board adopts bylaws
- Board passes resolution
- Articles of incorporation
Meta bylaws…. Board authority delegated to CEO. Then CEO of meta has the Board authority and this is binding on Meta. What sort of authority?
Actual authority, delegated by the bylaws of Meta.
Absent delegation, only the Board has actual authority to bind a corporation BUT CEOs have ________ authority to bind the corporation regarding matters in the ordinary course of business.
Apparent authority
T/F) Every partner can bind the partnership as an agent in the “ordinary course of business.”
True
Partner = binding [T/F]
True
In a limited partnership, who are the binding agents?
General partners
In manager managed LLCs, who are the binding agents?
Each member.
In member managed LLCs, who are the binding agents?
Members only when acting as a group.
Default entity laws for LLC say a member is not an agent of LLC solely by reason of being a member. T/F
True
T/F) Single manager of manager managed LLC has actually authority of LLC to bind.
True
“A corporate officer has the authority to bind the corporation only to the extent specified in governing corporate instruments unless the corporation gives the officer additional apparent authority or ratifies the officer’s acts.”
Sienna at Old Orchard [Sienna]
Case review:
1. Undisclosed principal =
2. Individual bd. mbrs. have no authority =
3. Corporate officer may not bind UNLESS given more authority =
4. Fiduciary duties owed to employer =
5. Agency relationship requirements =
6. Each partner can bind partnership if not a LP. [Its General P]
7. Parent may be held liable for subsidary if exercise “significant control.”
8. 2 cases for franchises
9. SC endorses I.A. Doctrine
10. Consequenes of not following I.A. Doctrine
11. DFMD for cashouts
12. Partnership 4 rules
13. Estoppel & Apparent agency
- Winer v. Valentino
- Baldwin
- Sienna
- Pompa
- Batz
- National Biscuit
- US v. Bestfoods
- Franchises = eTeam v. Hilton and Mobil Oil v. Bransford
- CTS v. Dynamic
- McDermitt v. Lewis
- Farris v. Glen Alden
- McArthur v. Stein
- Verizon
Undisclosed principal case?
Winer v. Valentino
Individual board members have no authority case?
Unless given more authority case?
- Baldwin
- Sienna
Fiduciary duties owed to employer case?
Pompa
Agency relationship establishment case?
Batz
T/F) Partners have the authority to act individually on behalf of the entity.
True
“In a general partnership with two partners, each party has the power to bind the partnership in matters pertaining to the partnership’s business.”
National Biscuit co v. Stroud
What is something a partnership can deliver to SOS that is conclusive in favor of that person have authority to act for the partnership.
Statement of partnership authority
What is something a LLC can deliver to SOS that is conclusive in favor of what persons have authority [or do not] to act for the LLC?
Statement of LLC company authority.
Can an agent have more than one principal?
Yes, “Dual agency.” Owes fiduciary duties to both and may withdraw when conflict between them.
Example: RE transaction whereas Broker serves buyer and seller.
Case? “Parent company may be held directly liable if the parent itself exercised ‘significant control’ over the facility.”
US v. Bestfoods
What case shows us that parent companies are liable when exercising “significant control” over subsidiary?
Bestfoods
“A parent corporation is not normally liable for a subsidiary’s actions unless the corporate veil can be pierced, but direct liability may arise if the parent directly operates the facility. “ T/F
True. Bestfoods.
To “pierce the _____ _____” means to legally hold the owners of a company personally liable for the company’s debts and actions by proving that the company and its owners are so intertwined that the business is essentially an extension of the owner, typically requiring evidence of serious misconduct like commingling personal and corporate assets, undercapitalization, or blatant fraud;
Pierce the Corporate Veil
Examples of piercing the corporate veil?
Commingling assets, blatant fraud, serious misconduct, etc.
Directors and officers holding positions with a parent and its subsidiary can and do change hats… to present the two corps.
True. And, when acting for Subsidiary courts presume they are wearing their subsidiary hat… unless “plainly contrary” to the interests of the company.
Courts generally presume that the directors are wearing their subsidiary hats and not their parent hats when acting for the subsidiary. T/F
True
A. What is the court presumption when a a Director acting for subsidiary also is a director in the parent company?
B. When rebutted?
A. Presumption is that acting for the subsidiary when wearing subsidiary hat
B. (1) Action by dual officer plainly contrary to interests of the other. (2) Action by an officer who had no capacity to act. [hat]
Should your client accept the authority of Cox to bind his company which is a partnership? You may assume Cox is a partner.
Yes. Any partner may bind a partnership. RUPA 301.
Should your client accept the authority of Cox to bind his company which is a corporation? You may assume Cox is a Director.
No. Individual Directors may not bind.
Should your client accept the authority of Cox to bind his company which is LLC? You may assume Cox is a member.
- If member managed, no.
- If manager-managed, maybe yes.
Should your client accept the authority of Cox to bind his company which is a Limited partnership? You may assume Cox is a GP.
What if Cox was an LP?
- Yes
- No
T/F) For CEOs, most courts say CEOS – even absent actual authority – have the apparent authority to bind a corporation.
True
Is LLC member an “agent” for the LLC soley by reason of being a member?
Nope! [This is minority, default rule, which controls for exam purposes.]
Can a CEO bind in the “ordinary course of business?
Presumption by the courts is yes, under Apparrent authority.
For determining level of authority, what do we ALWAYS look at?
The “reasonable expectation” of the 3rd party.
This document is issued by law firm addressing a transaction. You can ask for this from the entity you are having transaction with to ensure legitimacy or just check it.
[You are reducing arm’s length nature of the transaction.]
Legal opinion
[Ascertaining authority]
1. Certified Board minutes; or
2. Legal opinion?
Both are great but certified minutes is best. Ask for both!
MBCA §. _ requires that “[a] corporate name . . . must contain the word ‘corporation,’ ‘incorporated,’ ‘company,’ or ‘limited,’ or the abbreviation ‘corp.,’ ‘inc.,’ ‘co.,’ or ‘ltd.,’ or words or abbreviations of like import in another language
MBCA $ 4.01
T/F) LLCs are generally required to have names that contain the words “limited liability company” or the abbreviations “LLC” or “L.L.C.”
True
Limited partnerships are generally required to have names that contain the words “limited partnership” or the abbreviation “LP” or “L.P.” [T/F]
True
The ____ _____rule is a standard of judicial review employed by courts when they are asked to evaluate the business decisions made by corporate boards of directors.
Business Judgment rule
T/F) If the agent has not received the principal’s manifestation revoking the earlier authority, the agent would be in a position to continue to reasonably interpret the earlier manifestations of consent.
True
T/F) It is possible to have apparent authority without having actual authority.
True. For example, an agents authority is revoked but agent has not received the news yet and the 3rd party with whom he is negotiating reasonably believes he has authority.
- Agent has actual authority revoked.
- Principal unable to comm. this in time to agent.
- Apparrent authority to K reasonably believed by 3rd party.
- Binding?
Yes, apparent authority can bind. Agent will be liable to principal but as between principal and innocent 3rd party, principal is liable for the K.
- P owns cafe.
- P tells A dont hire anymore ppl.
- Worker quits. A hires T.
- T works and P refuses to pay.
Liable?
Yes. T gets paid. Apparent authority stemming from “Power of position.” [Watteau v. Fenwick]
T/F) An undisclosed principal who employs an agent to run a business is liable to third parties who contract with the agent for transactions typical in the line of business, even if the agent’s actions violate an agreement between the agent and principal.
True. Watteau v. Fenwick
Is there a “uniqueness” requirement for entity names?
Yes.
“Commodore Corporation, A Georgia Corporation.”
What does this imply?
Commodore Corp. is incorporated in GA but doing business in another state as a “foreign” entity.
T/F) Partnerships are NOT required to register with the state.
GPs are not. If LmtP it must register.
T/F) LPs are not required to register with the state.
False.
What abbreviation must partnership that elects limited liability use?
LLP
L.L.P.
Limited Liability Partnership
The general public knows a business by its ___ name.
Trade name
________ is a contractual relationship whereas the franchisor authorizes operation of independent business.
Franchisee
Does Franchisee own the business?
No
Firehouse subs is an example of what type business?
Franchise
When is franchisor liable under the theory of actual agency liability?
Only when they exercise significant levels of control over franchisee operations. [Mobil oil v. Bransford, eTeam v. Hilton]
Case?
“In today’s world, it is well understood that the mere use of franchise logos and related advertisements does not necessarily indicate that the franchisor has actual or apparent control over any substantial aspect of the franchisee’s business or employment decisions.”
Mobil Oil v. Bransford
In this case, the franchisor incurred liability for the franchisee’s errors by exercising too much control over the franchisee’s operations.
eTeam v. Hilton
In eTeam v. Hilton, the franchisor was liable b/c it exercised too much control over franchisee operations. [T/F]
True
Ltd. is a common abbreviator for what?
Limited Corporation
T/F) Most Js now hold that an entity that employs a physician is subject to VL for that physican’s malpractice.
True if committed in the course of employment.
Can hospitals be held liable for I99 contract physicans?
Yes. Look at degree of control over the employee.
Is a hosptial listing a I99 physican’s name on the employee board in lobby enough for liability?
No look at degree of control
_____ doctrine: applies to amend/correct inconsequential deficiencies or technicalities in the naming of parties. IE: You sued the correct entity but used the wrong name, this allows you to amend it.
Misdomer Doctrine
What should you counsel friend who says he will lease one building to multiple companies?
Be aware of apparent agency relationships to avoid cross liability.
In ___ ____, CJ Souter provided that “A parent can be liable if it directly operates the polluted site or if the corporate veil can be pierced.”
US v. Bestfoods
___ ___ Test: The presumption… an act is taken of behalf of a subsidiary wanes as the distance from – the norms of corporate behavior – approaches the point of action by a dual officer plainly contrary to the interests of the subsidiary yet nonetheless advantageous to the parent.
Plainly Contrary test
If client wants to sue Starbacks, does your complaint name “Starbucks?”
No this is the trade name. I will need to find the entity name behind it to properly serve.
T/F) Franchise requires certain control from Franchisor, that’s a given, that in itself is not enough for liability
True. Mobil Corp v. Bransford. The control must go BEYOND the expected level of control.
Whats the difference between Mobil Oil Corp. v. Bransfrod and eTeam v. Hilton?
eTeam case found liability because of degree of control.
“Privilege” doctors are today simply ___ workers.
I99 workers
Hypo:
1. Incorporated in Delaware
2. HQ in Summerville.
What laws apply to internal affairs? Could you sue in SC?
- Low of formation state governs internal affairs.
- Yes, HQ here and SC applies IAD so it would apply Delaware law.
What rules?
1. The rules that apply when fundamental docs don’t change anything.
- The rules the fundamental docs cannot change.
- The rules that enable a company to do something in absence of a rule on it.
- Default
- Mandatory
- Enabling
Which MBCA rule is the required rules for corporations?
MBCA 7.32(a)
MBCA 7.32 is what?
Required rules for corporations
Can an LLC change the Internal affairs rule?
Cannot eliminate completely but they can modify it, add more detail to operating agreement to go beyond default rules.
T/F) Partnerships are not permitted to specify different procedures for adding new GPs.
False
When can a Corporation eliminate the MBCA fiduciary requirment?
Only if in a state that has not adopted the MBCA.
T/F) Law of formation state applies to Internal affairs.
True
Steps for general entity formation? What will Hammond do first?
Hammond will need to:
- Pick what entity JP is and decide what state JP will be incorporated in. [CR]
- Reserve the name “Jurassic Park” - If partnership can be any name you want. If other entity must be legally distinct.
- Hire agents and find office [on island]
- File the fundamental docs w/ SOS for Costa Rica
- Buy entity kit
- Org. meeting to elect directors then issue shares
eTeam v. Hilton
Mobil oil v. Bransford
Which one was liable?
Hilton because of the degree of control exercised over franchisee.
“A boss is responsible for the actions of a worker who does things that are usually part of their job, even if the boss told them not to do those things.”
Ex: Hammond instructed Nedry NOT to leave his desk. Nedry left his desk to steal IP from JP93.
Case?
Watteau v. Fenwick
Where / to whom does an entity pay “formation & registration” fees?
- Formation state fees
- States doing business in is registration fees
[Usually same amounts]
When you register an entity, are you required to have a registered office in state where formed?
Yes. “300K businesses have registered at same address in Delaware but not physically there. How? They hired an agent to receive shit there, such as papers of service.”
This is something that makes corp. tangible.
IE: Actual charter doc,
Articles of incorp, or
Stock register.
What is described?
A corporate kit
Example of a “corporate kit?” This is something Hammond would keep on file after formally incorporating JP in 93.
Stock register
Charter documents
Articles of Incorporation
Who calls the very first Organizational meeting?
Typically the person who filed AOI
What should Hammond accomplish at his first organziatinal meeting?
Hammond will need to call to order the organization as person whom filed articles of Incorporation. Then:
- Select directors of JP
- Directs appoint officers/agents for JP
- Adopt corporate seal of JP
- Directors authorize bank account for JP by Bd resolution
- Directors issue stock certificates
When is corporation birthdate?
Date stamped on AOI time stamp.
When did entity come into existance?
1. Corp.
2. LLC
3. LP
4. GP
- AOI filed
- COO filed + 1 person become mbr
- CLP filed + 1 person GP +1 person LP
- Doesnt file
T/F) No such thing as non-profit partnership
True
In both mergers & acquisitions, shareholders “may” be entitled to 4 protections.
The right to:
1.
2.
3.
4.
- Vote against merger
- Appraisal rights
- Sell 2 3rd party
- Sue to prevent illegal transactions
[Merger]
_____ _____ : Right of [dissenting] investor to be paid the pre-transaction value of shares by surviving entity of merger.
Appraisal Rights
T/F) To utilize appraisal right, the SH must have voted no to the merger in the first place.
True
What is the rationale behind appraisal rights?
The merger is fundamentally changing the nature of SH investment.
Partnerships & LLCs do not give appraisal rights to SHs when merging. Why?
Merge requires UNANIMOUS assent. [default rule]
T/F) Publicly traded corp. still offers appraisal rights.
False. B/C Sh can sell their shares at any time and very quickly on public market.
What is the share # cutoff for appraisal rights?
2000 shares [you only have a slim portion of overall shares anyways]
Statutory merger process?
- Red & Blue adopt plan to merge.
- Boards put plan before SHs for vote. [Absolute majority required]
- Merge
- Purple entity files with certificate of merger with SOS
- Dissenting SH paid out [app. rights]
**Creditors for both dragged along.
Define the statutory merger process.
- Red & Blue create merger plan.
- Red & Blue boards put plan to SHs to vote on. [Absolute majority]
- Merger
- Purple files COM with SOS
- Dissenting SHs paid [app. rights]
Creditors dragged along for the ride
2 types of mergers?
- Stock for stock merger
- Cash out merger
[Merger]
Red gets blue stock.
Blue gets red stock.
What merger type?
Stock for stock
Red gets cash instead of stock/shares, breaking ownership chain. Red has been bought out and Blue gets the resulting purple stock.
What merger?
Cash out [asset sale for cash]
De Facto merger doctrine applies in most states [not DL] to prevent company from doing this to merge so they dont have to follow merger protections.
Farris v. Glen Alden
T/F) Cash out mergers break ownership chain.
True b/c the compay sells its assets for cash not stock. Sometimes, this process is used for mergers to avoid typical merger protections. [De Facto Merger Doctrine used to prevent that]
Stock for stock merger.
What do red & blue own in purple?
Both own smaller piece of bigger entity.
Walgreen shareholders need not vote when Walgreens buys small local pharmacy. Only the smaller pharmacy votes.
What merger is this?
Small-scale
“Pacman.” [Big eating little]
For small scale “pacman” type merger, does the larger entity vote on merger?
No.
” Think parent-subsidiary and parent absorbs subsidiary if it owns at least 90% of just by filing a piece of paper.” No SHs vote on this.
What style merger?
Short form.
T/F) Short form mergers require no SH vote.
True. Parent can absorb subsidiary just by filing paperwork if parent owns at least 90% of the subs.
In a short-form merger, does the subs. SHs have any protections?
No. They represent only 10%.
[Acquisitions]
If Board decides to sell “____ ____” assets at one time, then SHs entitled to vote on that.
Substantially all
Selling 4/5 factories requires shareholder approval. Why?
The company is selling “substantially all” assets.
Example: A cashout requires voting b/c selling substantially all assets.
T/F) A shareholder can have the right to assess the value of their shares even if two companies combine through a contract and not the usual merger process.
True. [Farris v. Glen Alden]This is the De Facto Merger doctrine. Typically invoked when a company atttempts what is essentially a merger through “cash for assets” to avoid merger protections.
De Facto Merger doctrine is what case?
Farris v. Glen Alden. Treats a cash out as merger, returning formal rights and protections to the SHs, such as appraisal rights. [Not followed in DL]
Farris v. Glen Alden = what doctrine?
De Facto merger doctrine
Does Deleware follow the De Facto Merger Doctrine? If no, what does this mean?
No. Entities in DL may merge by [cashout] which circumvents the typical merger protections.
IE: No appraisal rights in Deleware.
The “___ ____ ______ doctrine” is a legal concept that applies when a transaction, typically structured as an asset sale, is essentially a merger in substance, meaning that even though the deal isn’t formally a merger, a court may treat it as such to prevent a company from avoiding liabilities by not following proper merger procedures;
De Facto Merger Doctrine.
Farris v. Glen Alden. We treat the cash out as a merger and give protections back to SHs.
DL does not follow.
2 methods of reincorporation?
Conversion and Domestication
________: Is the process of moving a business’s legal registration from one state to another. It allows a business to maintain its identity while moving to a new state.
Domestication
_________ : the legal process of converting your current business entity into another business entity, without having to form a new entity or dissolve your current entity.
Conversion
Entity can reincorporate in 3 ways:
1.
2.
3.
- Merge into shell entity
- Asset sale for stock
- Conversion and domestication
___ ____ : One company becomes two.
Spin off
