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Texas Bar Exam Feb. 2024 > Corporations & LLCs > Flashcards

Corporations & LLCs Flashcards

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1
Q

Types of Corporations

A
  • de jure corporation
  • de facto corporation
  • corporation by estoppel
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2
Q

De Jure Corporation

A

created when owners properly submit articles of incorporation to the relevant state department.

effective date is the day the articles are filed unless a delayed effective date is specified in filing

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3
Q

Articles of Incorporation

A
  • corporation’s name
  • number of shares the corporation is authorized to issue
  • address of the corporation’s office and name of its registered agent within the state
  • incorporators’ names and addresses
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4
Q

Bylaws

A

required under state law. provide rules for a corporation’s internal governance and must not conflict with articles.

typical provisions:
- description of powers and duties of corporation’s primary officers
- number of directors who will serve on board
- processes the directors must follow to act
- processes the shareholders must follow to act

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5
Q

De Facto Corporation

A

protects signatories from personal liability on corporate contract with 3P, even if defectively formed. Requires that the incorporators:
- proceeded in good faith (honest and reasonable belief corporation was formed)
- under a valid incorporation statute
- for an authorized purpose
- executed and acknowledged articles pursuant to that purpose

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6
Q

Corporation by Estoppel

A

if a 3P contracts with an entity honestly believing it was a corporation, the 3P is estopped from denying the entity’s incorporation in an action that arises out of that contract or course of dealing.

protects people from personal liability who sign contracts on behalf of corporations that are nonexistent due to a mistake in the incorporation process

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7
Q

Promoter’s Liability

A

promoters liable for all transactions they sign in their own name or on behalf of the copy that does not yet exist unless
- parties agree to only hold the future entity liable or
- there is a novation (where all parties agree to substitute one party for another)

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8
Q

Promoter’s Liability: Adoption

A

if entity adopts preorganization transaction, it becomes liable under that contract, but adoption on its own will not limit the promoter’s liability

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9
Q

Promoter’s Liability: Fiduciary Duties

A

Promoters owe a duty of loyalty and care to copromoters, to-be-formed entity, and the investors in the to-be-formed entity.

Duty of Loyalty: requires promoter to put interests of these groups ahead of the promoter’s own

Duty of Care: requires due care when acting on behalf of the to-be-formed entity

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10
Q

Promoter’s Liability: Subscription Agreements

A

in many states, offers to purchase shares from corporation in exchange for a capital contribution must be in writing and are irrevocable for some specific time period unless stated otherwise.

if the investor fails to make the capital contribution, corporation may sue the investor for breach of contract

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11
Q

Issuing Stock

A

articles must state number of shares authorized to issue and board must approve.

consideration for stock can include tangible or intangible property or some other benefit.

shares are outstanding once issued until reacquired, redeemed, converted, or canceled

if reacquire shares, deemed authorized but unissued. if re-issuance not permitted, number of authorized shares reduced.

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12
Q

Types of Stock

A
  • common stock
  • preferred stock
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13
Q

Common Stock

A

each share confers the following benefits on the owner:
- right to cast one vote on any matter submitted to the stockholders for a vote
- right to receive a dividend when declared by the corporation’s board
- proportional share of corporation’s assets in liquidation

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14
Q

Preferred Stock

A

carries special rights

can be converted into another security at the holder’s options

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15
Q

Preemptive RIghts

A

articles of incorporation can grant shareholders the option to buy shares in a future issue of common stock before shares are offered for sale to the public

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16
Q

Dividends

A

directors have broad discretion over making cash distributions BUT must treat all shareholders in the same class of stock equally

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17
Q

Limitations on Dividends

A

corporation cannot make distribution if it would:
- render corporation unable to pay debts as they come due in the usual course of business OR
- result in a reduction of corporate assets to less than the sum of its total liability (including contingent and prospective liabilities)

If directors votes/assents to wrongful distribution, personally liable to corporation for amount of distribution that exceeds what was lawful

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18
Q

Repurchase Shares

A

board can choose to use corporate funds to purchase shares that belong to one or more of the corporation’s stockholders; share buybacks need not be offered to every stockholder

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19
Q

Redemption Rights

A

stockholder can enter into contract with corporation that requires corporation to repurchase stockholder’s shares in the future

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20
Q

Share Transfer Restrictions

A

can be written into articles, bylaws, agreement between shareholders, or agreement between shareholders and corporation

valid and enforceable against transferee
- with actual or constructive knowledge (must be on stock certificate or receive written notice)
- as long as they are used for reasonable purposes

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21
Q

Types of Share Transfer Restrictions

A
  • right of first refusal
  • board or shareholder approval
  • designated transferees
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22
Q

Share Transfer Restrictions: Right of First Refusal

A

requires shareholder to offer to sell the shares to the corporation or specified buyer before selling to anyone else. If they decline, restriction lifted

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23
Q

Share Transfer Restrictions: Board of Shareholder Approval

A

requires shareholder to obtain approval from board or required number of shareholders before selling shares.

enforceable unless manifestly unreasonable

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24
Q

Share Transfer Restrictions: Designated Transferees

A

requires that shareholder sell or not sell shares to certain designated buyers or classes of buyer.

enforceable unless manifestly unreasonable

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25
Q

Shareholder Rights

A
  • management: elect directors, unanimously agree to rules of management
  • inspection rights
  • right of expression
  • lawsuits
  • shareholder agreements
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26
Q

Shareholder Meetings

A

annual: corporation ordinarily required by law to have shareholder meeting once a year at place identified in bylaws or in main office

special: if shareholders don’t want to wait for annual meeting to take place, can call special meeting at place identified in bylaws or in main office

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27
Q

Four Requirements for Valid Shareholder Meeting

A
  • corporation must properly call (annual meetings called by directors; special called by directors, authorized persons, or shareholders holding at least 10% of votes entitled to be cast on issue)
  • must notify shareholders of date, time, and place within 10-60 days before meeting date. If special meeting, need description of purpose
  • minimum number of shares needed for action to be taken must be present
  • votes must be cast only by shareholders who are eligible to vote on issue (determined with reference to set record date) [generally one share = one vote]
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28
Q

Exceptions to Notice Requirement for Shareholder Meetings

A

Even if notice improper, shareholder waives right to object by:
- signing formal waiver
- attending meeting and failing to object at outset to holding of meeting
- failing to object to particular, non-noticed subject matter of meeting when that subject matter first arises

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29
Q

Shareholder Meeting: Set Record Date

A

may not be set more than 70 days before meeting

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30
Q

Voting Methods

A
  • regular voting
  • straight voting
  • cumulative voting
  • proxy voting
  • class voting
  • voting trusts
  • shareholder voting agreements
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31
Q

Regular Voting

A

when quorum present, regular action approved when number of votes cast in favor exceeds number of votes opposing action

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32
Q

Straight Voting

A

when electing directors, each seat on board treated as separate election so that slim majority of votes may win on each board seat

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33
Q

Cumulative Voting

A

when electing directors, shareholder first multiples number of shares shareholder owns by the number of contested seats.

may allocate those votes among candidates as shareholder sees fit.

director candidates who receive most votes are elected to board

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34
Q

Proxy Voting

A

shareholders can appoint someone to vote their shares for them.

sometimes gives discretion to proxy and sometimes gives specific instructions

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35
Q

Proxy Voting: Revocability

A

generally revocable unless
- appointment form states irrevocable and
- appointment coupled with interest (security for loan, shares involved in voting agreement, purchased/agreed to purchase shares, etc..)

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36
Q

Class Voting

A

each class of shares votes as a separate voting group. Shares in class may take action if:
- quorum of those shares exists and
- votes cast within voting group favor the action

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37
Q

Voting Trusts

A

shareholder may transfer shares to trustee who will vote the shares.

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38
Q

Voting Trust: Requirements

A

trustee must:
- prepare a list of names and addresses of all voting trust beneficial owners
- prepare a list of the number and class of shares each transferred to the trust and
- deliver copies of the list and agreement to the corporation at its principal office

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39
Q

Shareholder Voting Agreements

A

shareholders can enter into agreements among themselves to vote for certain individuals to serve as directors

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40
Q

Shareholder Action Without Meeting

A

can act without a meeting if all the shareholders who would be entitled to vote consent in writing to the action

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41
Q

Shareholder Inspection Rights

A

can inspect corporation’s records (bylaws, financial statements, accounting books, minutes).

Statutes may limit inspection/copying to normal business hours and upon written demand and require demand to be in good faith and for a proper purpose

Proper purpose = reasonably related to interest as a shareholder. Has burden of showing credible evidence of improper conduct

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42
Q

Right of Expression

A

in publicly traded corporation, may make proposals to be considered at annual or special shareholder meetings.

entitled to initiate proposals when they:
- meet the SEC’s eligibility requirements regarding the value and duration of their stock ownership and
- follow SEC procedures

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43
Q

Shareholder Agreements

A

alter rules relating to corporate governance and radically change structure of corporation

must:
- be unanimous
- be conspicuously noted on front or back of each outstanding stock certificate

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44
Q

Option Agreements

A

gives corporation (or another person) the right to purchase or sell shareholder’s shares upon the occurrence of a specified triggering event

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45
Q

Types of Shareholder Lawsuits

A
  • direct lawsuit
  • class-action lawsuit
  • derivative lawsuit
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46
Q

Shareholder Lawsuits: Direct Lawsuit

A

when shareholder has suffered an injury separate and apart from any injury done to corporation, that shareholder may bring a direct suit against the corporation

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47
Q

Shareholder Lawsuits: Class-Action Lawsuit

A

when many shareholders of the same corporation suffered similar direct injuries, shareholders may join together to bring a class-action lawsuit

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48
Q

Shareholder Lawsuits: Derivative Lawsuit

A

when injury to shareholder arises from injury to corporation, can bring derivative suit on corporation’s behalf

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49
Q

Derivative Lawsuit: Requirements

A
  • must have owned shares on date of wrongful conduct
  • must own shares throughout litigation
  • must fairly and adequately represent the interests of all shareholders in the corporation
  • demand: (a) must demand that the board initiate suit on behalf of corporation and board’s refusal must be improper OR (b) demand on board must be excused based on futility
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50
Q

Derivative Lawsuit: Board Refusal

A

board must:
- in good faith
- conduct a reasonable inquiry about whether it would be in the corporation’s best interest to bring suit and
- this decision must be made by disinterested directors

If fails to do this, refusal is improper

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51
Q

Derivative Lawsuit: Timing

A

may file 90 days after serving demand unless board rejects before then OR irreparable harm would result during 90-day period

52
Q

Derivative Lawsuit: Futility of Demand

A

must allege facts that, if taken as true, raise a reasonable doubt that:
- a majority of the directors are disinterested and independent or
- challenged transaction was product of valid business judgment

53
Q

Derivative Lawsuit: Dismissal

A

board cannot seek dismissal of derivative action unless
- it has determined in good faith
- after conducting a reasonable inquiry upon which its conclusions are based
- that continuance would be contrary to the corporation’s best interests

54
Q

Derivative Lawsuit: Court’s Approval

A

once initiated, a derivative proceeding may not be discontinued or settled without the court’s approval

55
Q

Derivative Lawsuit: Expenses and Attorney Fees

A

if results in substantial benefit to corporation, court may order corporation to reimburse plaintiff to litigation expenses and attorney fees.

if plaintiff brought suit without reasonable cause or for improper purpose, can order plaintiff to pay defendant’s expenses

56
Q

Shareholder Liability

A

limited liability: generally not liable for debts the business entity incurs

57
Q

Shareholder Liability: Piercing the Corporate Veil

A

can sue owners personally for company’s debts if:
- corporation is owner’s alter ego OR
- corporation is used for fraud, wrong, or unjust act

58
Q

Piercing the Corporate Veil: Alter Ego

A

factors:
- business entity’s owner dominates it to the degree that it reflects only the owner’s personal will
- entity does not hold the regular directors’ and shareholders’ meetings as required by state corporation statutes
- business entity’s owner routinely uses business funds to make personal purchases or entity routinely pays for business expenses out of owner’s personal account
- corporation possesses so little capital that it cannot adequately compensate injured parties for risks likely to arise in the industry in which it operates

59
Q

Shareholder’s Fiduciary Duties

A

do not owe fiduciary duties to directors, officers, corporation, or other shareholders UNLESS controlling majority shareholder in which case duty is owed to minority shareholders

controlling shareholders = more than 50% of corporation’s shares or otherwise has power to elect board or exert control over corporation

60
Q

Breach of Shareholder’s Fiduciary Duties

A

majority shareholder can wield control in their own strategic and financial interest but cannot systematically disfavor interests of minority shareholders.

Reasonable Expectations Test: were majority shareholder’s actions toward minority shareholder inconsistent with the latter’s reasonable expectation when invested?

Burdensome, Harsh, or Wrongful Conduct Test: if minority shareholder not an original shareholder, was majority shareholder’s conduct toward them burdensome, harsh, or wrongful?

61
Q

Remedy for Breach of Shareholder’s Fiduciary Duties

A

minority shareholder can bring suit to dissolve corporation.

court may require majority shareholder to improve minority shareholder’s position or to buy out their stake in the corporation

62
Q

Rights of Directors

A
  • management: set overall strategic vision of corporation; fire and hire officers that manage corporation
  • meetings
  • agent of corporation
63
Q

Composition of Board

A
  • must have at least one director
  • initial directors’ terms generally expire at first shareholder meeting at which directors elected. After that, all our elected by shareholders at annual meetings.

articles / bylaws set qualifications

can be compensated for serve at an amount set by board

64
Q

Director Removal

A

shareholders may generally remove with or without cause with a majority vote at a meeting called for that purpose unless articles provide otherwise

65
Q

Types of Director Meetings

A
  • regular
  • special
66
Q

Requirements for Director Meetings

A
  • call: bylaws usually identify individual(s) who can call board meeting
  • notice: regular meetings can be held without notice of date, time, place, or purpose of meeting. Special meetings require at least two days’ notice of date, time, and place of meeting
  • quorum: must be present (majority of numbers specified in or fixed in accordance with articles / bylaws)
  • voting: affirmative vote of majority of directors present
67
Q

Exceptions to Notice Requirements for Board Meetings

A

even if notice improper, director waives right to object by:
- signing a formal waiver of objection or
- attending meeting, unless director at beginning of meeting objects to holding meeting or transacting business at the meeting

68
Q

Actions by Unanimous Written Consent

A

to be valid, every director currently serving on board must sign a document describing action to be taken and that document must be delivered to corporation

69
Q

Rights of Officers

A

agents of the corporation

bylaws usually describe the powers and duties of each officer and how officers will be replaced if they die or resign from their positions

70
Q

Authority of Officers

A

can have actual or apparent authority.

act of giving an officer particular title creates apparent authority (power of position - reasonable for 3P to believe officer authorized to act for corporation)

71
Q

Officer Removal

A

board of directors can remove officer with or without cause

72
Q

Duties of Directors and Officers

A
  • duty of care
  • duty of loyalty
  • duty of good faith
73
Q

Fiduciary Duties of Directors and Officers: Duty of Care

A

requires fiduciary to act with care that a person in like position would reasonably believe appropriate under similar circumstances (objective)

74
Q

Duty of Care: Reasonable Reliance on Others

A

must utilize a reasonable decision-making process when taking actions.

They can reasonably rely on following individuals and information in performing functions:
- individual delegated to perform director’s or officer’s functions
- information, reports, and/or statements prepared by professional employed by corporation
- employee the director / officer believes to be reliable and competent
- legal counsel, accountant, or other corporate advisor

75
Q

Duty of Care: Business Judgment Rule

A

rebuttable presumption that immunizes directors / officers from liability if their decision was made by a majority in good faith and with due car - “reasonably in the corporation’s best interests, a fully informed decision without any COIs”

76
Q

Rebutting the Business Judgment Rule

A
  • was made in bad faith
  • was one the fiduciary did not reasonably believe to be in the corporation’s best interests
  • was one the fiduciary made although the fiduciary knew or should have known he was not informed to an extent appropriate in the circumstances
  • result of a lack of objectivity due to the fiduciary’s familial or business relationship with another person having a material interest in the challenged conduct
  • was the result of a lack of independence due to the fiduciary’s domination or control by another person having a material interest in the challenged conduct
  • was the result of the fiduciary’s sustained failure to devote attention to ongoing oversight of the corporation’s business and affairs
  • resulted in the fiduciary’s receipt of an unentitled financial benefit
77
Q

Fiduciary Duties of Directors and Officers: Duty of Loyalty

A

requires fiduciary to subordinate the fiduciary’s own interests to those of the corporation and to act in a manner that the fiduciary reasonably believes to be in the corporation’s best interests

78
Q

Duty of Loyalty: Impermissible Self-Dealing

A

fiduciary cannot engage in self-dealing transactions (i.e., transactions between director/officer and the corporation) that result in fiduciary unfairly profiting of the corporation’s expense

79
Q

Duty of Loyalty: Usurping a Corporate Opportunity

A

fiduciary cannot pursue a profitable business idea that belonged to the corporation, for personal gain, without first offering it to the corporation.

80
Q

Duty of Loyalty: Competing with the Corporation

A

fiduciary cannot compete with the corporation.

81
Q

Duty of Loyalty: Failing to Disclose Material Facts

A

fiduciary’s failure to disclose to the board material information concerning a transition that affects the corporation can constitute a violation of the duty of loyalty

82
Q

Duty of Loyalty: Safe Harbor

A

fiduciary might be able to avoid liability by getting the board or the shareholders to approve a transaction in good faith after disclosing the fiduciary’s interest in it, and by showing that the transaction was fair to the corporation

83
Q

Duty of Loyalty: Exculpatory Clauses

A

may shield fiduciaries from personal liability for breach of a duty, but these clauses generally do not apply to a breach of the duty of loyalty, a bad-faith act or omission, intentional misconduct, or any transaction that produced improper personal benefit

84
Q

Fiduciary Duties of Directors and Officers: Duty of Good Faith

A

prohibits fiduciary from engaging in conduct that violates spirit of either duty of care or loyalty, even if that conduct technically is allowed by law.

must act with conscious regard for responsibilities as fiduciaries.

violations: intentionally disregarding one’s duties, intentionally acting for purpose other than corporation’s benefit, intentionally violating the law

85
Q

Breach of Director’s / Officer’s Fiduciary Duties: Remedies

A

successful lawsuit against a director or officer for breach of fiduciary duty can result in the director / officer being personally liable for an award of damages or equitable relief

86
Q

Breach of Director’s / Officer’s Fiduciary Duties: Indemnification

A

fiduciary who successfully defends suit is entitled to indemnification for reasonable expenses incurred in defense.

corporation can indemnify unsuccessful defendant if fiduciary acted in good faith and reasonably believed she acted in the corporation’s best interests

87
Q

Amending the Articles of Incorporation

A

can amend articles at any time to add, change, or delete provision if:
- proposed amendment adopted by majority of the board at a proper meeting;
- proposed amendment is approved by a majority of the shareholders; and
- articles are properly filed with Secretary of State in which corporation incorporated with (a) text of each amendment adopted, (b) the date of each amendment’s adoption, and (c) a statement that each amendment was duly adopted

Exceptions: shareholder approval not required if (a) proposed amendment is routine and ministerial in nature or (b) corporation has not yet issued shares

88
Q

Merger

A

likely valid if:
- companies have a plan of merger
- both corporations’ board approve the plan
- both corporations’ shareholders (majority vote) approve the plan

89
Q

Plan of Merger

A

must include:
- name, jurisdiction of formation, and type of entity for each party to the merger and the surviving company
- merger’s terms and conditions
- manner and basis of converting the shares of each merging corporation and the eligible interests of each merging entity into shares, cash, or other property or securities
- articles of any entity created by merger or amendments to surviving company’s articles
- any other provisions required by state laws under which any party to the merger is organized / governed

90
Q

Merger: Notice

A

must provide written notice to each shareholder of shareholder meeting at which plan of merger will be submitted for approval.

Notice must:
- state purpose of meeting
- contain or be accompanied by a copy or summary of the plan
- include copy or summary of the articles and bylaws

91
Q

Approval Plan of Merger Not Needed From Acquiring Company’s Shareholders

A
  • acquiring company will survive merger
  • acquiring company’s articles will not be changed
  • each of acquiring company’s shareholders will hold same number of shares with identical rights immediately after effective date of merger and
  • merger’s issuance of shares/stock options convertible into shares does not require shareholder vote because total # of shares outstanding after merger will not exceed max number of authorized shares in articles
92
Q

Approval of Plan of Merger Not Needed From Target Company’s Shareholders

A
  • acquiring company offers to purchase any and all of the target company’s shares at a certain price, and the acquiring company becomes the owner of the majority of the target company’s shares and
  • once the acquiring company owns the majority of the target company’s shares, it proposes a merger in which each remaining target company shareholder receives the same consideration that was provided to the shareholders who sold their shares
93
Q

Approval of Plan of Merger Not Needed From Either Company’s Shareholders

A
  • short-term merger (parent company owns at least 90% of the voting power is a subsidiary and the parent merges the subsidiary into the parent or one of the parent’s other subsidiaries)
94
Q

Merger: Legal Effect

A

target company ceases to exist, acquiring company becomes new owner of target company’s assets and liabilities, and target company’s shareholders must surrender their shares in exchange for consideration for merger

95
Q

Merger: Dissenters’ Rights

A

shareholders who do not consent to merger may be entitled to sell shares to corporation for fair value if:
- before vote is taken, gives corporation written notice of intention to demand payment for shares if action approved and
- shareholder does not vote in favor of the action

96
Q

Fair Value of Stock

A

corporation determines fair value but if shareholder does not agree can ask the court to determine

97
Q

Sales of Substantially All Assets

A

must obtain approval of shareholders if sale would leave the corporation without a significant continuing business activity

significant continuing business activity: corporation would still have
- at least 25% of total assets and
- at least either (a) 25% of income from continuing operations before taxes or (b) 25% of revenues from continuing operations

98
Q

Recapitalizations

A

need shareholder approval if recapitalization:
- requires corporation to amend articles OR
- occurring through a merger

99
Q

Exchange of Securities

A

two companies must prepare plan of share exchange that must be approved by boards and shareholders of both companies

100
Q

Types of Dissolution

A
  • voluntary dissolution
  • administrative dissolution
  • judicial dissolution
101
Q

Voluntary Dissolution

A

requires:
- majority of board in favor of dissolution,
- a majority of shareholders to vote in favor of dissolution if stock was issued, and
- corporation to file article of dissolution with Secretary of State that contain (a) corporation’s name, (b) date of dissolution was authorized, and (c) a statement that proposal to dissolve was duly approved by shareholders

102
Q

Administrative Dissolution

A

Secretary of State may administratively dissolve if:
- corporation failed to pay fees, taxes, interest, or penalties imposed by state
- failed to deliver annual report to Secretary of State
- lacks a registered agent or registered office
- period of duration stated in articles has expired

103
Q

Judicial Dissolution

A

judge may dissolve corporation in action brought by state, shareholders, or creditors

104
Q

Judicial Dissolution: State Action

A

state attorney general establishes that
- corporation obtained articles through fraud or
- corporation has exceeded or abused the authority conferred upon it by law

105
Q

Judicial Dissolution: Shareholder Action

A

can order dissolution if shareholder in a close corporation establishes:
- directors are deadlocked and irreparable injury to the corporation is threatened, or corporation’s business and affairs can no longer be conducted to the advantage of the shareholders generally because of deadlock
- two consecutive annual meetings have passed, shareholders deadlocked, and failed to elect successors
- controlling shareholders / directors exercised significant abuse of power
- corporate assets misapplied or wasted

106
Q

Alternative to Deadlock Dissolution

A

one or more shareholders may elect to purchase all the petitioning shareholder’s shares at their fair value

107
Q

Judicial Dissolution: Creditor Action

A

creditor must establish:
- creditor’s claims has been reduced to judgment, execution on judgment returned unsatisfied, and corporation insolvent OR
- corporation has admitted in writing that creditor’s claim is due and owing and corporation is insolvent

108
Q

Winding Up

A

dissolved corporation continues existence for limited period of time for sole purpose of winding up and liquidating company and affairs

109
Q

Winding Up: Known Claims

A

must provide written notice of plans to dissolve to all persons to whom it currents owes money.

Notice must:
- provide mailing address where creditor’s claims may be sent
- state the deadline for submitting a claim, not fewer than 120 days after written notice is effective
- state that claim will be barred if not received by the deadline. If corporation rejects a claim, then claimant has 90 days after receipt of rejection notice to file a legal action. Failure to do this will bar claim

110
Q

Winding Up: Unknown claims

A

must also provide notice to public at large about plans to dissolve. Public notice must:
- be published in newspaper of general circulation in county where dissolving corporation’s principal office located or be conspicuously posted on dissolving corporation’s website for at least 30 days
- describe information that needs to be included in claim and provide a mailing address for claim submission and
- state that a claim against dissolving corporation will be barred unless a legal proceeding to enforce claim is commenced within three years are publication of the notice

111
Q

Winding Up: Distributions to Shareholders

A

after creditors paid in full and company wound up, any remaining assets must be distributed to shareholders in accordance with liquidation rights in articles

112
Q

Securities Regulations - Rule 10b-5

A

SEC may investigate and prosecute violations of 10b-5 and a private person may file suit to redress a violation if the person was a buyer or seller of stock affected by alleged illegal activity

113
Q

Rule 10b-5: Fraud

A

plaintiff must show by a preponderance of the evidence that:
- defendant knowingly or recklessly
- made a false statement or omission of material fact in connection with the purchase of sale of securities
- using an instrumentality of interstate commerce
- the plaintiff justifiably relied on defendant’s false statement or omission in buying or selling securities and
- misrepresentation or omission caused plaintiff to suffer damages

114
Q

Rule 10b-5: Insider Trading

A

to be liable for insider trading, defendant must
- possess material information that is not public knowledge and
- trade securities on the basis of that knowledge

115
Q

Rule 10b-5: Insider Trading - Liability

A

Insiders: directors, officers, attorneys, accountants, other employees who trade for personal gain

Tippers: insider who shares nonpublic information. Liable if share for improper purpose and person who receives information (tippee) trades securities on the basis of it

Tippees: individual who receives information from insider. Liable if know or should have known that tipper was breaching the tippee’s fiduciary duty to the company and shareholders

Persons with Duties of Trust or Confidence (Misappropriation Theory): individuals who obtain nonpublic information from a source to whom they owe a duty of confidentiality. Liable if use confidential info to trade securities

116
Q

LLC Formation

A

crated when owners file articles of organization / certificate of formation

117
Q

Articles of Organization / Certificate of Formation

A

must include:
- LLC’s name
- address of LLC’s registered office and name of registered agent within the state
- organizers’ name and addresses

118
Q

LLC Operating Agreements

A

like bylaws but more flexible and open-ended.

119
Q

LLC: Liability of Members

A

if LLC becomes indebted, obligated, or liable to outside party, no member or manager become liable on that debt, obligation, or liability solely by reason of acting as a member or manager

120
Q

LLC: Management

A

do not have preordained structure. Very flexible. Can be:

Member-managed: owners typically operate the entity on a daily basis. Each member is empowered to sign contracts and take other actions on LLC’s behalf

Manager-managed: owners typically do not operate the LLC on a daily basis. Manager is hired to operate the LLC, similar to a corporate officer. LLC members generally lack power to sign contracts or take other actions on LLC’s behalf

*managing members or managers are agents

121
Q

LLC: Fiduciary Duties

A
  • Duty of loyalty
  • Duty of Care
122
Q

LLC: Duty of Loyalty

A
  • account and hold in trust for the LLC any benefit derived in conducting the LLC’s business
  • not conduct business adverse with the LLC’s interest, including avoiding any COI between the LLC’s objectives and their own personal goals and
  • not compete with the LLC’s business, including secretly usurping the LLC’s business opportunities or amassing secret profits from LLC’s commercial activities
123
Q

LLC: Duty of Care

A

subject to business judgment rule.

requires member to act with the care that a person would reasonably exercise under similar circumstances and in a manner the member reasonably believes to be in the BIOC

124
Q

LLC: Dissociation

A

member can dissociate at any time by providing notice. will relinquish right to participate in LLC. but interests and liabilities not discharged and member may be entitled to distributions.

125
Q

LLC: Dissolution

A
  • event or circumstance that causes dissolution per operating agreement
  • affirmative vote or consent of all of its members to dissolve
  • passage of 90 consecutive days during which LLC has no members
  • administrative dissolution of the LLC by the Secretary of State or
  • legal action brought by member establishing that either: (a) conduct of all or substantially all the LLC’s activities and affairs is unlawful, not reasonably practicable to carry on LLC’s activities and affairs in conformity with articles and operating agreement, or managers (or members in control) acted in an illegal, fraudulent, or oppressive manner
126
Q

LLC: Similarities to Corporations

A
  • promoters and preorganization contracts
  • piercing the corporate veil
  • deficient filings
  • winding up
  • direct and derivative lawsuits

Texas Bar Exam Feb. 2024 (16 decks)

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