Essay issues

Question 1

General partnership

Answer 1

A general partnership is an association of 2 or more people to carry on a for-profit business as co-owners. No writing is required. Just a sharing of profits.

Question 2

Corporation

Answer 2

A corporation is formed when its articles of incorporation are filed with the state, stating the corporation’s purpose.

Question 3

Limited liability company

Answer 3

A limited liability company is formed when it files articles and an operating agreement with the state. An LLC is presumed to be managed by all members and is generally treated like a corporation.

Question 4

Limited partnership

Answer 4

A limited partnership is formed by 2 or more people and has at least 1 general partner and 1 limited partner. It is formed when it files a certificate w/ the state.

Question 5

Piercing the corporate veil

Answer 5

Generally, shareholders are not personally liable for corporate acts. However, courts may allow a plaintiff to “pierce the corporate veil” and sue a shareholder. To determine whether to pierce the corporate veil, the court will look the totality of the circumstances, including:

1) Under capitalization of the corporation at the time of formation.
2) Disregard of corporate formalities.
3) Use of corporate assets as a shareholder’s own assets.
4) Self-dealing w/ the corporation.
5) Siphoning corporate funds or stripping assets.

Question 6

Shareholder derivative action

Answer 6

In a derivative action, a shareholder is suing a director or officer on behalf of the corporation for a harm suffered by the corporation. Any recovery goes to the corporation. To bring an action, the shareholder must 1) have made a demand on the board to resolve the complaint, to which the board either refused or ignored, or the demand would be futile; 2) adequately represent the other shareholders; and 3) hold shares throughout the entire suit.

Question 7

What is the outline for corporate fiduciary duties?

Answer 7

Fiduciary duties

Duty of care
Business judgment rule

Duty of loyalty
Self dealing
Safe harbor rule
Usurping corporate opportunity

Question 8

Fiduciary duties (corp)

Answer 8

A director owes two duties: duty of care and duty of loyalty. If a director commits a breach, a SH may bring a direct or derivative action against the director.

Question 9

Duty of care (corp)

Answer 9

Directors owe the duty to act w/ the care of an ordinarily prudent person in a like position and similar circumstances.

Question 10

Business judgment rule

Answer 10

The business judgment rule is a rebuttable presumption that a director reasonably believed his actions were in the best interest of the corporation. BJR will protect a director from liability for breaching the duty of care if he acted in good faith.

Question 11

Duty of loyalty (corp)

Answer 11

The duty of loyalty requires a director to act in the best interest of the corporation. Self dealing and usurping corporate opportunities are violations of this duty.

Question 12

Self dealing (corp)

Answer 12

A director who engages in a transaction w/ the corporation that benefits himself or a family member will have engaged in self dealing.

Question 13

Safe harbor rule

Answer 13

There are three ways that a self dealing transaction can be protected and avoid violating the duty of loyalty: 1) the interested director disclosed it to the board and received approval by a disinterested majority; 2) the disinterested director disclosed it to the shareholders and received approval by a disinterested majority; or 3) the transaction is fair to the corporation at the time of the deal.

Remedies
A self dealing transaction can be enjoined or rescinded and the corporation can seek damages from the interested director.

Question 14

Usurping corporate opportunity

Answer 14

A director may violate the duty of loyalty by usurping a corporate opportunity for himself rather than offering it to the corporation first.

Corporate opportunity
To determine whether a business opportunity is one that should be offered to the corporation, a court will ask if the corporation is seeking the opportunity or if the opportunity is w/in the corporation’s current or prospective line of business.

If it is a corporate opportunity, the director must present it to the corporation first. If the corporation declines, then the director can take the opportunity for himself w/o violating the duty of loyalty.

Question 15

Controlling SH fiduciary duty

Answer 15

A SH w/ more than 50% of corporate shares is a controlling SH. A controlling SH owes a fiduciary duty to not use his power in a way to disadvantage minority SHs.

Question 16

Dissolution

Answer 16

A corporation may voluntarily terminate its status. Upon dissolution, a corporation may continue to exist for the limited purpose of winding up its affairs and liquidating its business.

Distribution
Upon dissolution, corporate assets must be distributed in the following order:
1. Creditors of the corporation
If SH is a creditor and acted wrongfully, his loan can be subordinated to the other creditors’ loans.
2. SHs w/ preferred stock
3. Remaining SHs

Question 17

Shareholder approval for fundamental corporate changes

Answer 17

SH approval is required for fundamental corporate changes, such as a sale or merger. The SHs must hold a meeting and have a quorum at the meeting to vote on the issue.

Question 18

Principal’s tort liability

Answer 18

A principal can be vicariously liable and directly liable to a third party who is harmed by an agent’s tort.

Question 19

Vicarious liability

Answer 19

A principal may be vicariously liable for a tort committed by an agent acting w/in the scope of employment.

Agent - An agent can be an employee, director, officer, or partner.

Scope of employment - Intentional torts may be in the scope of duty if it was during work hours; the agent was motivated to act for the principal’s benefit; and the act was w/in his assigned duties.

Question 20

De facto corporation

Answer 20

If the owner made a good faith effort to incorporate and operates the business w/o knowing the requirements were not met, the business will be treated as a de facto corporation and the owner will not be individually liable.

Question 21

De jure corporation

Answer 21

When the incorporation requirements are met, a de jure corporation is formed and the corporation is then liable for its acts (not the owners).

Question 22

Corporation by estoppel

Answer 22

A party who deals w/ an entity as if it were a corporation is estopped from denying its existence and is thereby prevented from seeking personal liability against the owner. This is limited to contractual agreements.

Question 23

Shareholder agreements

Answer 23

Shareholders may enter into a binding voting agreement that governs how they will vote their shares. The agreement is a contract and may be enforced; there is no time limit.

Question 24

Proxy voting

Answer 24

A proxy is a written agreement by a SH to allow a person to vote fore them. The proxy is valid for 11 months unless otherwise stated and is generally revocable. To be irrevocable, the proxy must state so and the person who is voting in the SH’s place must provide something of value in exchange to the SH.

Question 25

Ultra vires doctrine

Answer 25

If a corporation has a narrow purpose in its Articles of Incorporation and engages in an act outside of the purpose, then it has engaged in an ultra vires act. A SH can file a suit to enjoin the action and/or the corporation can take action against a director, officer, or employee who engaged in the act.

Question 26

Contractual liability of principal

Answer 26

A principal is subject to liability on a contract that the agent enters into on the principal’s behalf if the agent has the power to bind the principal to the contract. An agent has such power through actual authority or apparent authority.

Question 27

Actual authority - express or implied

Answer 27

Express actual authority is created via oral or written words; clear and definite language; or specific terms and instructions.

Implied actual authority allows an agent to take necessary actions to achieve the principal’s objectives.

Question 28

Apparent authority

Answer 28

Apparent authority results when a principal causes a third party to reasonably believe that the agent has authority to act. To determine whether the third party’s belief is reasonable, a court will consider industry standards and the agent’s position.

Question 29

Ratification

Answer 29

A principal can ratify an act performed by an agent, even if the agent did not have authority to act, and therefore bound itself to the contract. Ratification requires: 1) the principal to ratify the contract by express assent or conduct that indicates affirmation; 2) timely ratification; and 3) the principal must have. knowledge of the material facts of the original act.

Question 30

What is the outline for contractual liability of the principal?

Answer 30

Contractual liability of the principal
Actual authority
1. Express actual authority
2. Implied actual authority
Apparent authority
Ratification