Business Organizations Flashcards
What is Actual Authority?
An agent can bind a principal of they have actual authrority. This can be provided in writing or can be given to the agent orally.
What does the Alter Ego Doctrine entail?
A court may hold a shareholder personally liable if the corporation and shareholder act as one entity, typically when the corporate form is misused.
How can corporations alter their purpose?
Corporations may amend their purpose through proper shareholder and board approvals.
What is apparent authority?
Exists when the principal holds out the agenet as someone acting on their behalf, anda third party reasonably relies on the agent having such authority.
Do directors have authority to manage corporate affairs?
Directors have the authority to manage corporate affairs and make decisions on behalf of the corporation.
What does authority to bind refer to?
Authority to bind refers to an agent’s ability to legally obligate a principal in a contract or other transaction. An agent can bind a principal if the agent has actual authority, apparent authority, or if the principal later ratifies the agent’s act.
Can directors reject management recommendations?
Yes, Directors may reject recommendations from management if not in the corporation’s best interests.
What constitutes bad faith by directors?
Directors act in bad faith if they fail to address shareholder concerns or engage in decisions without a reasonable basis.
What is the Business Judgment Rule?
The Business Judgment Rule (BJR) protects corporate directors and officers from personal liability for business decisions made in good faith, with due care, and in the best interests of the corporation.
Courts will not second-guess decisions that meet these standards, even if they result in losses.
Are corporations allowed to make charitable contributions?
Corporations may make reasonable charitable contributions aligned with their business purposes.
Are transactions involving a conflict of interest permissible?
Transactions involving conflicts of interest are permissible if fully disclosed, approved by disinterested parties, and fair to the corporation.
What does the Corporate Opportunity Doctrine state?
Officers and directors must not take for themselves business opportunities belonging to the corporation unless rejected after full disclosure.
What is cumulative voting?
Shareholders may allocate their votes across candidates to enhance minority shareholder representation.
What is a derivative action in corporate law?
A shareholder may file suit against a corporation in order to prevent the corproation from harming shareholder value.
In order to file, a person must be a shareholder , must have made a written demand upon the corporation, allowed the corproation 90 days to respond, and be suing in the best interst of the corproation itself.
What is direct action in corporate law?
Shareholders may sue directly for injuries affecting their individual rights.
Is a partnership liable for the actions of partners?
A partnership is directly liable for actions of its partners if conducted in the ordinary course of business.
Do directors have discretion to issue dividends?
Yes, the board of directors has broad discretion over declaring dividends unless there is abuse of discretion.
Directors must act in good faith when deciding whether to declare dividends, ensuring no bad faith or self-dealing.
What is the director and officer’s duty of care?
Directors and officers must act diligently and prudently as a reasonably competent person in similar circumstances.
What does the director and officer’s duty of good faith require?
Directors and officers must act with honesty, integrity, and a belief that their actions serve the corporation’s best interests.
What is a director and officer’s duty of loyalty?
Directors and officers must prioritize the corporation’s interests over personal or conflicting interests.
What is the employers duty of reasonable supervision?
Employers must supervise employees to ensure compliance with policies and reduce risk.
What is a director and officer’s duty to disclose?
Directors must disclose material facts relevant to corporate governance and decision-making.
How do Employees differ from Partners?
Employees act under employer control, while partners share control, management, and profits.
What is express authority?
Occurs when the principal has clearly and overtly told the agent that they are directed to act on their behalf.
What is the difference between Frolic and Detour?
A frolic is a substantial deviation from employment duties, while a detour is a minor deviation.
When is a general partnership formed?
A partnership is formed when two or more persons carry on a business for profut. The partnership is formed upon agreement, written or verbal. Sharing profits is a key indicator that a partnership has been formed.
What is implied authority?
Exists when the agent believes the action taken is requried by their duties, they have acted the same previously, or it would be normal and appropriate for agents to serve in that capacity.
What is a Novation?
A novation replaces an old contract with a new one, releasing the original party from liability.
What is Partnership by Estoppel?
A person may be held liable as a partner if they represent themselves as one and others rely on this representation.
What does Piercing the Corporate Veil mean?
Shareholders and directors are not typically liable for the debts and liabilities of the corporation.
Certain actions by the company officers may warrant “piercing the corporate veil”. This allows creditors to attach shareholder’s assets:
- when, the shareholder, director or officer, uses the corproation as their alter ego,
- when they fail to follow corporate formalities,
- if they were inadequately capitalized at formation, or
- to prevent fraud
What is promoter liability?
Promoters are personally liable for contracts made on behalf of an unformed corporation unless the corporation adopts the contract and releases the promoter (post formation novation).
What is ratification?
A principal may retroactively authorize an agent’s unauthorized actions by knowingly accepting their benefits.
Do shareholders have a right to inspect corporate records?
Shareholders have the right to inspect corporate records upon proper notice and for a legitimate purpose.
What does the Ultra Vires Doctrine state?
The Ultra Vires Doctrine states that a corporation may not engage in activities beyond the scope of powers granted in its articles of incorporation or bylaws.
Actions taken outside this scope are considered ultra vires (beyond the corporation’s authority).
What are exceptions to the Business Judgement Rule?
Fraud, Illegality, or Bad Faith: If the decision involves dishonesty, fraud, or a violation of law, the BJR does not apply.
Self-Dealing or Conflict of Interest: Directors engaging in transactions that benefit themselves over the corporation are subject to entire fairness review instead of the BJR.
Lack of Due Care: If directors fail to make an informed decision (e.g., ignoring available material facts), they may be liable for gross negligence.
When is a director’s decision protected under the Business Judgement Rule?
A director’s decision is protected if:
Good Faith: The decision was made honestly and without fraud or self-dealing.
Informed Decision : The director exercised reasonable diligence in gathering information before making the decision.
Rational Basis : The decision had a logical connection to the corporation’s interests.
Loyalty to the Corporation : The director acted without conflicts of interest.
