Corporations

Question 1

What is a corporation? And how do you create one?

Answer 1

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

Question 2

what is a closely held corporation?

Answer 2

those that have few shareholders

Question 3

when can you pierce the corporate veil?

Answer 3

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)

Question 4

what is a SH derivative suit? Who can bring one and what are the procedures

Answer 4

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

1. 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

Question 5

direct suit

Answer 5

Action brought for breach of fiduciary duty owed to SH by Directors and Officers for damages to SH

Question 6

director’s duty of care (and BJR)

Answer 6

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 )

Question 7

Director’s duty of loyalty

Answer 7

Director owes duty of loyalty to refrain from self-dealing, have conflicts of interest, usurp a corporate opportunity, unfairly compete with the corp

Question 8

controlling SH duties

Answer 8

a controlling SH cannot use position to gain a personal benefit at the expense of other SH’s

Question 9

what is a general partnership?

Answer 9

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

Question 10

general partnership liability, debt allocation and distribution

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 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

Question 11

Agency: Two kinds of authority to enter into an agreement and exceptions

Answer 11

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

Question 12

what is an agency relationship

Answer 12

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

Question 13

ratification

Answer 13

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

Question 14

federal securities law 16(b) short swing trading

Answer 14

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)

Question 15

10b-5 rule for fraud and insider trading

Answer 15

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

Question 16

Tipee liability in insider trading

Answer 16

Tippee may be liable only if tipper breached duty + tippee traded on MNI knowing tipper was breaching

1. 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)

Question 17

insider trading tipper liability

Answer 17

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

Question 18

agency tort liability

Answer 18

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

Question 19

quorum for board action

Answer 19

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

Question 20

D/O duty to disclose

Answer 20

D/O have duty to disclose material info relevant to the corp to board members

Question 21

what is a limited liability partnership?

Answer 21

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.

Question 22

the tort and contract liability for general partnerships

Answer 22

• 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

Question 23

What is a de facto corporation?

Answer 23

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)

Question 24

How can a director defend against a claim of breach of duty of loyalty?

Answer 24

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