Corporations Flashcards
What is a corporation? And how do you create one?
Corp is a legal entity that exists separate from its owners, thus shielding the owners and managers from personal liability
A corp requires incorporators sign and file and articles of incorporation with the Secretary of State that includes names, number of shares
what is a closely held corporation?
those that have few shareholders
when can you pierce the corporate veil?
Unity of interests: alter ego (does not follow formalities, commingling of funds, etc.); or undercapitalization
Injustice or fraud
estoppel (SH says they will be personally liable)
what is a SH derivative suit? Who can bring one and what are the procedures
SH may bring derivative suit on behalf of corp for harm done to the corp. Recovery goes to the corp, not the SH
Must be brought by a contemporaneous stock owner (1+ share when claim arose and throughout litigation)
ii. Demand requirement: SH must first make written demand on corp to redress grievances, and 90 days must
have passed, unless 1) corp rejects demand or 2) irreparable injury to corp would result by waiting 90 days
- Futility EXCEPTION: Demand is excused because of futility if 1) a majority of BOD is interested
in the challenged tx, 2) BOD did not fully inform themselves about the tx to the extent reasonably
appropriate under the circumstances, or 3) tx was not a product of a valid business judgment
direct suit
Action brought for breach of fiduciary duty owed to SH by Directors and Officers for damages to SH
director’s duty of care (and BJR)
Director owes duty of care to act as a reasonably prudent person would under similar circumstances.
BJR: A business judgment is presumed to be an informed judgment. Rebutted if…
ii. In gross negligence (uninformed), in bad faith, conflict of interest (strictly scrutinized), illegal, or based on fraud
(Negligent bosses can’t involve fraud )
Director’s duty of loyalty
Director owes duty of loyalty to refrain from self-dealing, have conflicts of interest, usurp a corporate opportunity, unfairly compete with the corp
controlling SH duties
a controlling SH cannot use position to gain a personal benefit at the expense of other SH’s
what is a general partnership?
A partnership is an association of two or more persons to carry on as co-owners of a business for profit.
No formalities required; existence determined by intent
general partnership liability, debt allocation and distribution
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 corp and all partners are personally jointly and severally liable for partnership debt
Order of distribution:
(1) creditors
(2) partner loans
(3) capital contributions by partners
(4) Remainder shared among the partners or per agreement
Agency: Two kinds of authority to enter into an agreement and exceptions
Actual authority: A reasonably believes he had authority to act. Can be express or implied (to carry out necessary functions)
apparent authority: when 3P relies on apparent authority without actual knowledge that A doesn’t have authority
P can ratify
what is an agency relationship
an agency relationship exists when a principal authorizes an agent to act on her behalf and represent the principal in dealings with 3Ps
Need an agreement between the parties, to benefit the principal, and the principal has the right to control the agent
ratification
when agent takes action without proper authority, and the principal subsequently engages in conduct that approves the agent’s actions. The principal will be bound if (1) he has capacity, knowledge of tall material facts, and accepts the agent’s transaction
Agent will no longer be liable after ratification
federal securities law 16(b) short swing trading
requires insider to surrender any profit made with a short swing sale (buy/sell within 6months)
Insider is any D/O/SH of a public corp owning 10%+ of a class of security
strict liability, no defenses (e.g., good faith)
10b-5 rule for fraud and insider trading
An insider breaches 10b-5 by trading on insider information and breaching a duty of trust and confidence owed to issuer, s/h of issuer, or (for misappropriation) source of material nonpublic information (MNI)
fraud: 10b-5 imposes liability for any person who employs fraud when purchasing or selling securities
fraud:
(1) intent to defraud
(2) material misrep or omission
(3) reliance on the representation
(4) purchase or sale of securities
(5) use of interstate commerce
(6) damages
Tipee liability in insider trading
Tippee may be liable only if tipper breached duty + tippee traded on MNI knowing tipper was breaching
- Misappropriation: The gov’t can prosecute under 10b-5 for trading on market information in
breach of a duty of trust and confidence owed to the source (not necessarily corp directly)
insider trading tipper liability
if insider intentionally discloses material non public information, in a breach of his fiduciary duty and receives a personal benefit (broad: gift, money, reputational gain, etc.), he may be liable under 10b-5
agency tort liability
tort liability: principal is liable for an agent’s torts that are committed within the scope of principal-agent relationship
Within scope: if the conduct was the kind of agent was hired to perform, the tort occurred on the job, or agent intended his actions to benefit the principal
Principal not liable when agent is substantially deviating from planned conduct
quorum for board action
majority of BoD must be present for board action to be valid. but a quorum can only consist of bard members that do not have personal interest in the transaction.
To take action, majority of those present must agree to take action
D/O duty to disclose
D/O have duty to disclose material info relevant to the corp to board members
what is a limited liability partnership?
Partners not personally liable for LLP’s obligations, personally liable for own wrongful acts but not co-partner acts.
LLP is liable for K and torts (agency analysis)
LP and LLP require filing to form.
the tort and contract liability for general partnerships
- Liable for all K entered into by a partner in the scope of partnership or w/ authority of partnership
- Liable for all torts by any partner or employee w/in the ordinary business or w/ authority of partnership
- Civil liability is joint and several (1+ partner may be sued)
i. Suit against partner: Each partner is personally and individually liable for entire amount of partnership obligations. If paid more than fair share, can seek contribution /indemnification (if whole obligation paid)
ii. New partner not personally liable for obligations arising before he became a partner
iii. Outgoing partner liable for obligations arising while he was a partner, unless payment, release, or novation
d. Criminal liability: Partners are criminally liable only for their own crime or participation
What is a de facto corporation?
Good faith, colorable attempt made to comply with incorporation statute + conduct of business as if validly incorporated (unaware of invalid incorporation) (defense except v. state seeking dissolution)
How can a director defend against a claim of breach of duty of loyalty?
Ratification: D may defend a claim by obtaining ratification by
1) majority vote of independent D,
2) majority vote of committee of 2+ independent D, or
3) majority vote of shares held by independent s/h
