Bussiness Associations Flashcards
Pre-Incorporation Transactions
Promoter
* Multiple Promoters = work together as partners and owe partner duties among each other and a duty to corporation of fair disclosure and good faith
* Liability for Pre-Incorporation Agreements
Exception:
* Subsequent Novation
* Expressly says in contract, thus creating an open offer for corporation to accept
* Reimbursement: quasi contract for value of the benefit corporation received
**Corporations Liability: **Express or Implied Adoption
General Partnerships
TOP
1. 2 or more people
2. as co-owners
3. carry on a bussiness for profit
- No writing is required, unless SOF requires it
- NOT based on subjective intent of the parties,
**Since there are no formality requirements it may be difficult to determine whether or not a GP was formed, so courts look at the association between the parties to determine if the elements are met: **
MANGLED
M = managament control
A = activity needed in the venture - how extensive
N = net profit sharing is presumed a GP, but can be rebutted
G = gross revenue sharing is NOT presumed but if a factor
L = Loss sharing agreement not being there weighs against
E = equally share title in the property or tenants in common?
D = designate themselves out to the world as partners?
LLC
An LLC is formed when the
(1) formation certificate is filed AND
(2) there is at least 1 member of the company.
The operating agreement of the company will control over: internal relations, rights and duties, and how to alter the agreement.
Ultra Vires
COED
- If a limited specific purpose HAS been filed and the corportion acts OUTSIDE that purpose the corporation is acting Ultra Vires.
- If a statement of buisness purporse is NOT filed at the time of incorporation, it is presumed the corporation is being formed to conduct ANY LAWFUL BUSINESS and can take any necessary or convenient act to carry out its business affairs
C = Third party or Directors tries to get out of contract saying it was ultra vires, but this is a limited defense and the contract is likely still enforceable
O = a corporation can sue an officer or director for money damages for breach of duty of care for approving an ultra vires act
E = a shareholder can sue the corportation to enjoin them from doing an ultra vires act. Equity court will NOT enforce IF third party was innocent and unknowing of the purpose
D = the state can bring an action against a corporation to dissolve it for committing an ultra vires act. Typically, only if it violates a regulatory law.
- Aquire debt
- Issue Stock
- Classification of Shares
Aquire Debt: A corporaton can borrow money from outside sources to further their corporation purpose. It can be secured by a bond which is a promise to repay the loan with interest, BUT it does NOT give the lender an interest in the corporation.
Stock = a person can buy shares of stock within a corporation that are equity securities giving them an ownership interest within the corporation
Authorized Shares = this is the maximum number of stock shares that are available to be sold based on the number that was first supplied in the articles if incorporation
Issued and Outstanding Stock = stock that has already been sold
Authorized, but unissued = shares that have yet to be sold or shares that the corporation bought back
When filing the AIC, it can be noted the types of stock shares to be given: common or preferred:
Preferred stock MUST state the (1) classification name for each class, (2) the number of shares in each class, and (3) the rights, preferances, and limitations within each class.
Consideration of Stock
A corporation will issue stock, but must receive some form of consideration back, this includes tangible or intangible property or a benefit (cash, cancel debt owed, exchange for past services)
Traditional Par Value Approach = the consideration given for stock must be equal or more than the minimum issuance price of the stock stated in the AIC. If there is no par minimum or it is treasury stock, the board of directors can make a good faith determination of the price. Any stock given for less than par value will be considered Watered Stock. The directors authorizing the watered stock CAN be held liable.
Treasure Stock = stock that is re-purchased by a corporation is treated like there was no par minimum.
Pre-emptive Rights = Unless the AIC expressly includes the right for a shareholder to maintain their ownership percentage, they will NOT have pre-emptive rights. Never applies to: non-cash shares issued, first 6 months of incorporation, or if the person doesn’t have voting rights
Fiduciary Duties of Directors and Officers
**Directors owe a fiduciary duty of loyalty and care to the corporation. **
- The duty of care requires directors to act with the care than an ordinarily prudent person would exercise in a like position with good faith.
- the duty of loyalty requires directors to act in good faith with a reasonable belief that they are acting in the corporations bests interest. (self dealing or usurping business oppurtunites)
- Conflict of interest by self dealing: directors gains a beneficial fianncial interest in the contract or a close relative does
- Usurpring corportation oppurtunity = An agent MUST first offer a business oppurtunity to the corporation that they EXPECT to be presented with BEFORE taking the oppurtunity for himself. Corporation not having enough money to take the oppurtunity in the first place is NOT a defense.
- the duty of diligence = Must be reasonably informed on the decisions taken, however, reasonable reliance rom a qualified advisor is appropriate.
- Business Judgement Rule = if these standards are met directors cannot be held personally liable for their decisions.
- Statutory Safe Harbor rule allows a director to rectify his mistake IF the transaction is fair to the corporation OR the material facts were fully disclosed + voted on by a majority of disinterested board members or shareholders (+ before transaction was accpeted for himself)
Corporation Lawsuits
Derivative Action = LOAD = on behalf of the corporation against the directors or officers
(1) Legal claim on behalf of the corporation
(2) Own stock at the time the claim arises and throughout the suit
(3) Adequately Represent the corporation
(4) Demand Directors to take action in writing before you do. give them 90 days to respond, unless futile because majority of directors are the problem or waiting 90 days would cause irreperable harm
Recovery = goes to the corporation
- Direct Action against Director or Officer - CUSTARDS
- Ultra Vires Act – COED
- Win: damage award goes to corporation and shareholder gets attorney fees and expenses
- Lose: nothing and maybe liable for expenses if sued without cause
- Malpractice by licensed professional (lawyer, doctor) personally liable
- Against Controlling shareholder
Indemnification of Director or Officer
- Mandatory: won proceeding
- Discretionary: lost proceeding or settled, but acted in good faith + believed he was acting in best interests
- NEVER EVER: unfair financial benefit or committed intentional wrongful act
o Remedy:
- Enjoin: Compelled to Sell to the corporation at same cost or stop him
- Rescind the deal
- Constructive trust in the profit
- Seek Damages against the agent
- Power of the Shareholders
Inspecting and Copy Records
* Controversial records: PONG
* Uncontroversial records: NG
* P = Particular stated purpose
* O = obvious direct connection between purpose and record
* N = notice in writing 5 days ahead of time
* G = good faith
* Uncontroversial = articles, bylaws, minutes of SHAREHOLDER meetings, contact for directors, recent annual reports
- Electing the board of directors at the annual meeting
- Removal of the directors anytime without cause by majority vote
- Vote on fundamental corporate changes (sale or merger) – majority of total rights to votes shares
Process: VIBE; Close corporation Remedy if you disagree: CABIN
Controlling shareholder duty:
- A shareholder with enough voting strength to have a substantial impact on the corporation owes a duty of care and loyalty to minority shareholders to not use his power to disadvantage them or take an action that will unfairly prejudice them.
- No selling to buyer who intends to harm the corporation (know or should know). Selling at a premium is allowed if in good faith and fair
Proxy
* written proxy valid for 11 months
* revocable, unless it was provided for consideration
Section 10b-5
Section 16b
Trading** BAD RUM** in interstate commerce SEC SLAPS you with a MITT
10b-5
B = Buying or selling of stock was caused
A = Actual reliance on the information
D = Damages: difference of price paid and the average price of stock over the last 90 days
R = intent of recklessness, defraud, manipulate, deceive
U = use of interstate commerce to do this (phone call, using website, mail, tv press conference)
M = material misrepresentation, information, or ommission that a person would reasonably rely on
Section 16b
S = Strict Liability
L = Large company on the national exchange OR $10mil + 2000 shareholder
A - actually bought or sold stock by a director, officer, 10% shareholder
P = Profit was made within 6 months
S = six month maximum difference in stock price in that period = recovery
Missapropriator = a person who gets the information and owes a duty of trust and confidence (lawyer, eavesdropper)
Insider = permanent or temporary holder of the information (director, shareholder, employee, lawyer, accountant, underwriter)
—> NOT a person hired for independent purpose like: printing guy for the annoucements
Tipper = sharing information for improper personal gain (money, gift, reputation)
Tippee = personally gained by receiving information they KNEW tipper got from breaching a duty
Agency Relationship
SPACE
Agency is a fiduciary relationship, where the principal is authorizing the agent to act on their behalf. It is created when:
S = agent acts subject to the principals control, such supervision or assigning a task.
P = agent is acting for the primary benefit of the prinicipal
A = agreed consent of both parties either expressly or impliedly
C = Capacity: Principal = capacity to contact (not be a minor or incompetent) Agent = mentally competent, a minor is okay
Equal Dignities Rule = agreement needs to be in writing if the agent is entering into agreements that faill in the SOF or if the relationship falls within the SOF
Duty owed by agent
Communicate, Loyalty, Obedience, Care, Express Duties in K (contract)
Loyalty:
C = compeition with corporation
U = usurping business oppurtunity
S = Self dealing
T = Trading insider secrets
A = act with care
R = Bussiness Judgement Rule
D = duty of disclosure/ communicate
S = secret Profits (apart of loyalty)
Principal Remedy for agent breach
**TWICE
**
T = tort damages for intentional or negligent performance
W = Withhold compensation for breach of duty or intentional tort
I = Indemnify yourself because agent acted outside the scope of their work
C = Contract remedies if agent was being paid (constructive trust to get the profit she made, rescind the contract, compel court to give profits back)
E = Equitable Remedies for breach of duty
Subagent
A subagent is a person that the agent appoints by delegating their power to that person to perform duties that the agent consented to perform on behalf of the principal.
If principal authorized the agent to use a subagent THEN the subagent owes duty to the principal.
If agent was not authorized to use a subagent THEN the subagent ONLY owes a duty to the agent.
Either way, the AGENT has absolute liability for the subagent.
Principal Duties
PECK
P = payment based on contract, or reasonable amount if contract is silent
E = expense reimbursement while agent carrying out duty for principal
C = co-operate with agent and not interfere or get in the way
K = k contract duties
