CA BAR: Business Associations

Question 1

Corporation Formation

Answer 1

A corporation is a legal entity that exists separate from its owners, thus shielding the owners and managers from personal liability.

Question 2

Piercing the Corporate Veil

Answer 2

Courts will hold shareholders liable and pierce the corporate veil when:

(1) shareholders treat corp as alter ego (doesn’t follow corp formalities, commingling funds)
(2) undercapitalization (shareholder invests insufficient money at formation to foreseeably sustain company)
(3) fraud
(4) estoppel (if SH says they will be personally liable)

Question 3

Shareholder Derivative Suit

Answer 3

Shareholder may bring a derivative suit on behalf of the corporation for harm done to the corporation.

the shareholder bringing the suit must own stock, adequately represent the corp, and make a demand of the directors to redress the injury.

Recovery goes back to corp, not the shareholder directly.

Question 4

Direct Suit

Answer 4

A shareholder may bring suit for breach of fiduciary duty owed to the shareholder (not the corp)

Question 5

Director’s Duty of Care

Answer 5

A director owes the corporation a duty of care to act as a reasonably prudent person would act under the circumstances

The Business Judgment Rule protects directors who manage the corporation in good faith and in the best interests of the corporation and its shareholders.

Question 6

Director’s Duty of Loyalty

Answer 6

Director owes a duty of loyalty to the corporation.

Directors cannot self-deal, have conflicts of interests, usurp a corporate opportunity, or unfairly compete with the corporation

Question 7

Controlling Shareholder Duties

Answer 7

A controlling shareholder can’t use the position to gain a personal benefit at the expense of other shareholders

Question 8

Deep Rock Doctrine

Answer 8

When a corporation is insolvent, third party creditors may be paid off before shareholder creditors, thus subordinating the shareholder’s claims.

Question 9

General Partnership

Answer 9

A partnership is an association of 2 or more persons to carry on as co-owners of a business for profit.

No formalities are required as its existence is determined by the intent of the parties.

Question 10

Partnership Debt Allocation

Answer 10

General partners are personally liable for the debts of the partnership

Profits are shared equally and losses are shared in the same proportion as profits in the absence of a contrary agreement.

Each partner is an agent of the company and all partners are personally jointly and severally liable for the partnership debt.

Assets are distributed in the following order:

(1) creditors
(2) partner loans
(3) capital contributions by partners
(4) profits and surplus, if any remain, are shared equally among the partners unless there is an agreement stating otherwise.

Question 11

Authority to Enter into an Agreement (Partnership)

Answer 11

Each partner is an agent of the partnership for the purpose of conducting its business.

Question 12

Actual Authority

Answer 12

Exists where the partner reasonably believes he has authority to act based on the partnership agreement or vote by the partners, the partnership will be bound

Question 13

Apparent Authority

Answer 13

Allows any partner to act to carry out ordinary partnership business and doing so will bind the partnership

Unless:
If the partner has no authority to act for the partnership in the matter and the third party actually knew or received proper notice that the partner lacked such authority.

Question 14

Breach of Duty of Good Faith and Loyalty in Partnerships

Answer 14

Partners have the fiduciary duties of good faith, loyalty, and due care.

Loyalty requires a partner to put the partnership interests over his own. No self dealing, no usurping a partnership opportunity, competing with the partnership, or making secret profits is allowed.

Question 15

Agency Relationship

Answer 15

An agency relationship exists when the principal authorizes an agent to act on her behalf and represent the principal in dealings with 3rd parties.

Need an agreement between the parties, to benefit the principal, and the principal has the right to control the agent.

Question 16

Agency: Actual Express Authority

Answer 16

Authority through express manifestations to agent from prinicpal contained within the 4 corners of the agreement. It can be oral unless a writing is required for SOF.

Question 17

Agency: Actual Implied Authority

Answer 17

The agent reasonably believes the principal gave him the authority because of necessity (task was reasonably necessary to accomplish agency goals), custom, or prior dealings.

Question 18

Ratification

Answer 18

OCcurs when an agent takes action without proper authority, and the principal subsequently engages in conduct that approves the agents actions.

The principal will be bound where he has capacity, knowledge of all material facts, and accepts the agents transaction. If this occurs, agent is no longer liable.

Question 19

16(b)

Answer 19

Any short-swing trading profits received within a 6mo period by a corporate insider must be disgorged to the corporation.

Corp insiders are officers, directors, and shareholders owning 10% or more equity in stock in the corporation

Strict liability = no defenses

trading is making a profitable purchase and sale for the company equity stock within a 6 month period.

Question 20

10b-5

Answer 20

Section 10b-5 provides liability to any person who employs fraud or deception in connection with the purchase or sale of any security by means of any instrumentality of interstate commerce.

An insider is a director, officer, shareholder, or any other holder of material nonpublic corporate information

2 step analysis:

1. determine if the party is in a position to be liable under 10b-5 as a direct insider, tipper, tippee, or misappropriator.
2. establish the case – a part may be subject to 10b-5 liability in more than 1 way (like both a tipper and tippee)

Question 21

Fraud under 10b-5

Answer 21

1. intent to defraud
2. material misrepresentation or omission (one that a reasonable investor wuld consider important
3. Reliance on the representations/omissions
4. purchase of sale of securities
5. use of interstate commerce
6. damages

Question 22

Power as President

Answer 22

Corporate officers, such as the president, have authority to act on behalf of the corporation based on agency law principals

Question 23

Quorum

Answer 23

A quorum, which is a majority of the board of directors, must be present for board actions to be valid.

To take action, a majority of those present at the meeting must agree to take the proposed action

Question 24

Interested Directors

Answer 24

A quorum can only consist of board members that do not have a personal interest in the transaction

Question 25

Usurp Corporate Opportunity

Answer 25

A director or officer may not personally act on a business opportunity without first offering it to the corporation where the corporation would expect to be presented the opportunity.

If the director or officer usurps a corporate opportunity, then the corporation may compel the director/officer to turn over the opportunity or disgorge the profits

Question 26

Self-Dealing

Answer 26

A director or officer has a conflict of interest when he enters into a contract with the corporation of has a beneficial financial interest in the contract

Question 27

Duty to Disclose

Answer 27

Directors and officers have a duty to disclose material information relevant to the corporation or the board members

Question 28

Serving on the Board

Answer 28

A lawyer may serve on the board of directors so long as doing so does not violate any fiduciary duties owed to the corporation

Question 29

Ultra Vires Act

Answer 29

If articles include a narrow business purpose, activities beyond the scope of the stated business purpose may be void and unenforceable.

Question 30

De Jure Corporation

Answer 30

Meets all of the mandatory statutory requirements of proper formation.

At least 1 incorporator signs and files an articles of incorporation with the secretary of state which includes:

1. Initial agents name for the corp
2. Street address for the corp’s initial registered office
3. Corporation’s name
4. Authorized Number of Shares (max allowed)
5. Name and addresses of each incorporator

remember –> I SCAN

Question 31

Promoter Liability

Answer 31

Promoters are personally liable for pre-incorporation contracts until there has been a novation replacing the promoter’s liability with that of the corporation or there is a an agreement between the parties that expressly states the promoter is not liable.

Question 32

Promoter

Answer 32

A promoter is a person acting on behalf of a corporation that is not yet formed. It is common for a promoter to raise capital and contract for a location, business materials, equipment, etc.

Question 33

Sarbanes-Oaxley Act

Answer 33

Sets standards for publicly traded companies by creating a board that oversees public accounting firms that perform audits and create rules pertaining to corporate financial reporting.

1. must have an independent audit committee from BOD and may recover profits during false statements or stock blackout