FL Bus Orgs

Question 1

Partnership (Defined)

Partnerships

Answer 1

A partnership = an association of two or more people to carry on as a co-owners of a business for profit.

1. “Person” can mean individuals, partnerships, or other organizations.
2. Distinguish from “joint ownership” such as joint tenants who own a house together.
3. Distinguish from “joint ventures” (a contractual agreement between two parties to complete a specific transaction) as opposed to a partnership (ongoing business)
4. NO STATE FILING REQUIRED.

Question 2

Factors to Form a Partnership

(HEAVILY TESTED)

Partnerships

Answer 2

1. Sharing of Profits (NOTE: Assignment of profits to pay debt / repay loan = NO PRESUMPTION OF A PARTNERSHIP) (NOTE: Profits = Gross returns - expenses)
2. Contribution: Person’s contribution of capital (money or property) or labor.
3. Right of Control
4. Intent (NOTE: Intent to form a partnership is important, but NOT required)

Question 3

Partnership Agreement

(HEAVILY TESTED)

Partnerships

Answer 3

1. **Writing usually not required. (EXCEPTION: Statute of Frauds if partnership has a definite term that can not be completed in 1 year.
2. Capacity to Contract: Potential partner must have capacity to contract (minors as partners = partnership agreement can be voided)
3. *Amending P Agreement: Can amend P agreement by unanimous consent of all partners.
4. **Default Rules: RUPA acts as gap filler to all terms not agreed on or included in agreement.
5. **Mandatory Rules: Some provisions of RUPA apply regardless of what thew P agreement provides. (See next slide)

Question 4

RUPA: Mandatory Rules

(HEAVILY TESTED)

Partnerships

Answer 4

Some rules of RUPA apply regardless of what the partnership agreement states.

The P agreement CANNOT:

1. Unreasonably restrict the access to books and records;
2. Eliminate the duty of loyalty (however P agreement can provide what doesn’t violate the duty off loyalty);
3. Unreasonably reduce the duty of care;
4. Eliminate the obligation foo good faith and fair dealing; and
5. Restrict the rights of 3rd parties.

• Ex. P agreement can allocate debt to partners (A responsible for 40%, B responsible for 60%) however, this cannot be enforced against a debt collector. Partners are jointly and severally liable.

Question 5

Partnership Property

(HEAVILY TESTED)

Partnerships

Answer 5

1. Property acquired by the partnership is property of the partnership and not the partners individually. Includes:

• Property acquired in the P’s name;
• Property acquired individually by a partner if that partner is acting in capacity as a partner.
• Property acquired using P funds is presumed P property.

2. Presumed Partner Personal Property: If acquired in the partner’s name and NOT in his capacity as a partner = presumed separate property, EVEN IF HE LETS THE P USE IT.
3. Partner has no right to use P property for personal reasons UNLESS he has consent of all partners.

Question 6

Transfer of Partnership Interest

Partnerships

Answer 6

A partner has an interest in the partnership and no direct interest in the partnership property.

1. Partner’s economic interest = transferable.
   * NOTE: DOES NOT make transferee a partner unless other partners consent. Transferor remains partner.

Question 7

Creditors of a Partner

(Charging Order)

Partnership

Answer 7

1. A judgment creditor of a partner may not attach judgment to partnership property.
2. Instead, creditor can get a charging order against the partner’s economic interest in the partnership (ie, creditor is treated as a transferee and receives profits.)

Question 8

Power of a Partner

Partnerships

Answer 8

1. Authority to Bind: A partner had the authority to bind P to third parties as provided in the P agreement; AND during acts in the ordinary course of business unless:

• P had no authority, AND
• 3rd party had notice that P had not authority.

2. A partner has no authority to bind P during acts outside of the ordinary course of business unless:

• All partners consent, authorizing it, OR
• the act is authorized in a written P agreement.

Question 9

Statement of Partnership Authority (Filing)

Partnerships

Answer 9

A partnership MAY file a Statement of Partnership authority w/ the Dept. of State concerning a partner’s authority to bind the partnership.

• If filed, MUST include: Partnership name AND names of all partners authorized to execute an instrument transferring real property held in the name of the partnership.
• NOTE: If filed** and **properly recorded, the Statement of Partnership Authority acts as constructive notice to 3rd parties.
• NOTE: For all other transactions that are NOT the transfer of real party, the Statement of Partnership Authority does NOT act as constructive notice.

Question 10

Statement of Denial

Partnerships

Answer 10

A partner named in a registration statement or the Statement of Partnership Authority can file a Statement of Denial denying his status as partner or his authority.

Question 11

Liability of Partnership for Acts of Partners

Partnerships

Answer 11

A partnership is liable for any loss or wrongful acts by a partner:

1. Done in the ordinary course of business, or
2. Done with the authorization of the partnership (authorized, either by consent of other partners or authorized via the partnership agreement)

Question 12

Liability of PARTNERS for PARTNERSHIP Debts

Partnerships

Answer 12

1. Joint and Several Liability: Partners are jointly and severally liable for all partnership obligations.
2. New partners are NOT personally liable for obligations that inccurred before he joined partnership. New partner’s contribution CAN however be used to satisfy old obligations.

• Judgment against Partnership: Is not on its own a judgment against the partners and cannot be satisfied from a partner’s personal assets unless there is a judgment against the partner.
• Tortfeasor Partner: Creditor can execute judgment directly against the tortfeasor partner as well as the partnership.
• Non-tortfeasor Partner: Must exhaust partnerships assets first before collecting from a non-tortfeasor partner.
• Ex. Partnership is liable for tortfeasor Gabe’s malpractice for a judgment in amount of $100k. Partnership has $75k in assets. Creditor can go after toortfeasor Gabe personally for the $100k, but cannot go after the other partners personally without first exhausting the $75k in partnership assets.

Question 13

Liability of New Partners

Partnerships

Answer 13

New partners are NOT personally liable for obligations that inccurred before he joined partnership. New partner’s contribution CAN however be used to satisfy old obligations.

Question 14

Liability of Purported Partner (AKA Partnership by Estoppel)

(HEAVILY TESTED)

Partnerships

Answer 14

When a person (by words or conduct) purports to be a partner or consents to being held out by another as a partner, he is liable to 3rd parties who transact with the partnership in reliance on that representation.

Question 15

Partner’s Rights

(HEAVILY TESTED)

Partnerships

Answer 15

1. **Equal right of management and control:
   * **By default, ordinary matters decided by majority vote, extraordinary matters decided by unanimous vote.
2. **No rights to salary:
   * *Exception for winding up: Partner is entitled to reasonable compensation when winding up partnership.
3. **Profits and losses shared equally:

• By default, profits and losses equally regardless of their capital contribution.
• **If partners agree on profit sharing but not loss sharing, l_osses are shared in same proportion as contributions_.

4. *Right to indemnification and contribution:

• Each partner is only liable for his share of partnership debt (unless P agreement provides otherwise.)
• If partner pays more than his share of P debt, he is entitled to indemnification plus interest, or if no indemnification, is entitled to contribution from other partners.

5. Right to information:
   * Partner is entitled to access all of the P’s records.

Question 16

Partner’s Duties

Partnerships

Answer 16

1. Duty of Care: Partner has a duty to refrain from grossly negligent conduct (Gross Negligence Standard) NOTE: Partnership agreement can increase this standard to ordinary negligence standard, but cannot unreasonably reduce it.)
2. Duty of Loyalty:

• Account for Profits: Must account for profits from use of partnership property.
• Adverse Parties: Must refrain from dealings on behalf oof the partnership with parties having an interest adverse to the partnership.
• Competition: Must not compete with the partnership.

Exceptions to Duty of Loyalty:

A. Partnership agreement allows it (it cannot eliminate duty of loyalty, but can outline activities that don’t violate the duty)

B. Others partners consent to act (must have full disclosure of material facts too be valid)

C. Loans and transacting business (can loan and transact business with the partnership in same way as non-partner.)

Question 17

Dissociation

(HEAVILY TESTED)

Partnerships

Answer 17

= when a partner is no longer associated with the partnership.

1. Express will of partner (whether wrongful or rightful) (“I quit!”)
2. Event specified in P agreement
3. Expulsion (by judicial determination or by unanimous vote if it is unlawful to be associated with partner, or partner has transferred entire interest)
4. Partner is an entity that has dissolved
5. Bankruptcy, death, or incapacity.

NOTE: Duty of loyalty ends when dissociated (by default; can be subject to non-compete clause if in P agreement.)

Question 18

Rightful vs. Wrongful Dissociation

(HEAVILY TESTED)

Partnerships

Answer 18

1. Partner always has the power to dissociate, but not always the right.
2. Dissociation is wrongful if:

• Breach of express term in P agreement
• Definite term or particular undertaking: P is to last for a definite term or particular undertaking and partner either quits or is expelled before completion.
  
  • NOTE: Exception = Partner can quit before completion if within 90 days of another partner’s death, incapacity, bankruptcy, or wrongful dissociation.
• Bankruptcy before completion
• Entity partner dissolves before completion

**Any other dissociation is rightful.

Question 19

Negative Consequences of Wrongful Dissociation

(HEAVILY TESTED)

Partnerships

Answer 19

1. Liable to P for damages
2. No right to wind up
3. Offset in damages and delay in buy-out (if P buys out partner, it may offset damages that the partner caused and may wait to pay partner until term for undertaking for a particular purpose is complete.

Question 20

Two Outcomes to Dissociation

Partnerships

Answer 20

Only two options:

1. Buy-out dissociated partner; or
2. Dissolve partnership (dissolution)

Question 21

Dissolution Process

(HEAVILY TESTED)

Partnerships

Answer 21

1. Stage 1: Dissolution: Partners cease t carry on business together.
2. Stage 2: Winding Up: Settling partnership affairs.
3. Stage 3: Termination (liquidation): Creditors are paid and liquidating distributions are made to partners.

Question 22

Events Causing Dissolution

(Stage One)

Partnerships

Answer 22

Dissolution only occurs if one of the following happens (otherwise, partnership must buy out partner & partnership continues):

1. **At-will partnership dissolves if partner expressly quits.
   * **“At-will partnership = no definite term or particular undertaking.
2. Partnership with a definite term or particular undertaking dissolves if:

• Definite term or particular undertaking is completed
• Unanimous consent of partners to dissolve
• Agreed-to event in the P agreement occurs
• Vote of remaining partners - at least half of remaining partners agree t dissolve within 90 days of a partner’s death or dissociation otherwise.
• Partnership becomes unlawful to operate
• Court orders dissolution.

Question 23

**Winding-Up Stage of Dissolution

(Stage Two)

Partnerships

Answer 23

1. Partnership continues solely for the purpose of winding up. CANNOT take on new business.
2. Wrongfully dissociated partner has no right to participate.
3. Partner is entitled to reasonable compensation.
4. Partner has right to bind P to contracts appropriate to winding up. Partner has power to bind P you any contracts unless 3rd party has actual or constructive notice

Question 24

**Termination and Settlement off Accounts

(Stage Three)

(Heavily Tested)

Partnerships

Answer 24

1. **Pay creditors first (before making distributions to partners) NOTE: Partner who is a creditor is treated as other creditors, but must be paid after other creditors)
2. **Contributions paid second.
3. **Distributions paid third:

• If P has profits after paying creditors and contributions, profits are paid to partners in the same proportion that they shared profits (equally by default).
• If P has losses (no remaining money after paying creditors and contribution), partners must contribute too pay lost in same proportion that they shared losses (equally by default)

Question 25

Buy-Out of Dissociated Partner in Lieu of Dissolution

Partnerships

Answer 25

If P does not dissolve, P must buy out dissociated partner.

1. Dissociated partner remains liable for debts incurred before dissociation (unless creditor and remaining partners agree to release)
2. **Can be liable after dissociation up to one year after dissociation if 3rd party reasonably believed that dissociated partner was a partner and had no notice fo dissociation. NOTE: Can see compensation directly from dissociated partner.
3. Dissociated partner may file a Statement of Dissociation (effective 90 days after filed.)
4. Right to Indemnity: P must indemnify bought out partner against all P liabilities regardless if occurred before or after dissociation.

Question 26

Question:

X and Y form a partnership. X contributes $6,000 in cash, and Y contributes services worth $3,000. X also loans $5,000 to the partnership. Upon dissolution, the partnership has $10,000 in assets.

How are the partnership assets distributed and what are the other rights and obligations of the partners?

Partnerships

Answer 26

Step 1: $10,000 assets - $5,000 loan to X = $5,000.

Step 2: $5,000 remaining assets - $6,000 capital to X = -$1,000, which is a loss.

Step 3: The $1,000 loss is shared equally ($500 each) between X and Y. Because X’s capital cannot be repaid in full, X is entitled to $500 contribution from Y.

Question 27

Conversion / Merger

Partnerships

Answer 27

1. A P may convert to or merge with another entity.
2. Requires unanimous consent.
3. Conversion requires a filing of a Certificate of Conversion.
4. Merger requires a Certificate of Merger.
5. Effect: Partners remain jointly and severally reliable for all P debts incurred before conversion / merger.

Question 28

Limited Liability Partnerships (Defined)

LLPs (Limited Liability Partnerships)

Answer 28

1. An LLC is a partnership governed by RUPA.
2. **Identical to general partnership except liability.

• Partners are NOT personally liable for partnership debts simply because they are partners (unlike general P’s, where partners are jointly and severally liable.)

Question 29

Creation of LLPs

LLPs (Limited Liability Partnerships)

Answer 29

1. Any general partnership can become an LLP. (To approve the change, same rules apply that apply to Partnership Agreement amending (unanimous vote by default.)
2. Requires Statement of Qualification filing with dept. of state.
3. Name of LLP must end with “LLP” (LLP, RLLP, Limited lLiability Partnership, or Registered Limited liability Partnership)
4. Requires filing of annual report (must include name & address of CEO, name and address of agent, and Federal Employer ID #, if any.

• Failure to file annual report = Dept. of State MAY revoke Statement of Qualification.
• Revocation does NOT mean dissolution; only affects status as an LLP.
• LLP has two years to apply for reinstatement; effect is retroactive (as if never revoked).

Question 30

LP’s (Limited Partnerships) Defined

LPs (Limited Partnerships)

Answer 30

= a partnership of two or more persons with at least one general and one limited partner.

1. General Partner: Same as a general partner in a general partnership.
2. Limited Partner: Passive investors with limited liability, do not participate in management, and not an agent.

Question 31

Creation of an Limited Partnership

LPs (Limited Partnerships)

Answer 31

1. Mandatory filing of Certificate of Limited Partnership with Dept. of State. (NOTE: Unlike GP, an LP cannot be filed informally)

• If not filed, only a general partnership exists.
• Must contain: Name of LP, name and business address of every GENERAL partner, office address, and the name and address and written acceptance of registered agent.
• Must be signed by all GENERAL partners (limited partners not required to sign or even be named in any LP filings).

3. Name of LP must include “LP” identifier.
4. Name of LP must be distinguishable from all other registered LPs.
5. Annual report filing is MANDATORY.

Question 32

LP General Partners

LPs (Limited Partnerships)

Answer 32

1. Joint and several liability (just like GP)
2. Dual capacity - can be both a general and limited partner.
3. Dissociation: Same as GP, except:

• A general partner cannot rightfully dissociate expressly before LP is terminated.
• General partner can be expelled by unanimous vote by all
• General partners cannot be brought out. Only economic interest is transferred.

Question 33

LP Limited Partners

LPs (Limited Partnerships)

Answer 33

1. Not personally liable, but may lose contribution if LP fails.
2. No personal liability even if limited partner’s name used in LP name.
3. No personal liability, even if they participate in management.
4. IMPORTANT: Limited partners have NO VOTING RIGHTS ON ORDINARY BUSINESS MATTERS (matters involving management).
5. NO POWER OR RIGHT TO BIND.
6. Not duty of care or duty off loyalty. Only obligation of good faith and fair dealing.
7. Right to Information: Can inspect all required information upon demand for any purpose. Must be granted within 10 days.

• For all other (not required) information, such as financial records, limited partner must show a purpose reasonably related to this interest as a limited partner and describe info sought with particularity.
  7. Approval Rights: Limited partners have approval rights in the following cases:
• Amending partnership agreement
• Admission of new partners (must be unanimous by default)
• Dissolution (must be unanimous by default)

Question 34

**LP Profit / Loss Sharing

LPs (Limited Partnerships)

Answer 34

1. IMPORTANT: LP partners share in profits and losses in proportion t other contributions (unlike GP’s, where it is shared equally by default).

Question 35

Dissociation of Partners in LPs

LPs (Limited Partnerships)

Answer 35

General Partners:

• A general partner has power, but no right to expressly before LP is terminated.
• General partner can be expelled by unanimous vote by all
• General partners cannot be brought out. Only economic interest is transferred.
• After dissociation generally not liable, except liable to creditor who reasonably believed w/o notice still partner for up tp two years

Limited Partners:

• Can dissociate by express will (power, but not the right)
• No right to buy out, only transfer economic rights

Question 36

Dissolution of an LP

LPs (Limited Partnerships)

Answer 36

Dissolves upon event in partnership agreement for upon consent of all general and limited partners, or:

• General partner dissociates, no general partner remains and a new one is not been admitted by unanimous consent after 90 days.
• No more limited partners remain after 90 days of dissociation.

Question 37

Limited Liability Limited Partnership (defined)

Answer 37

• Identical to limited partnership EXCEPT general partners also have limited liability.
• LLLP must simply be identified as such on certificate.
• Name of LLLP must include LLLP.

Question 38

LLC (Limited Liability Company) (Defined)

Answer 38

An LLC is a hybrid entity that is neither a partnership nor corporation, but combined features of both.

1. Owners are called “members”. Can have only one member unlike partnerships.
2. Can be member-managed (default) or manager-managed (if stated in articles of organization or operating agreement).
3. Member-managed operates like an LLP; Manager-managed operates like an LP with manager members [like general partners] and members [limited partners].)

Question 39

Formation of LLC

LLCs (Limited Liability Companies)

Answer 39

1. Mandatory filing- MUST filed Articles of Organization

• LLC name (must contain “LLC”, be distinguishable from other LLCs, and not imply connection to government.)
• Name and address of principle officer
• Name, address and written acceptance of registered agent
• Signature of at least one member.

2. Operating Agreement: Not required to be filed. Similar to Partnership Agreement. Can be oral, written or implied.

Question 40

Liability of Members and Managers

(Heavily Tested)

LLC (Limited Liability Company)

Answer 40

1. Members and managers are not personally liable for LLC debts simply for being a member or manager.

Question 41

Grounds for Judicial Dissolution

LLC (Limited Liability Company)

Answer 41

Any manager or member may petition the court t dissolve the LLC due to assets be misapplied or wasted, or members for managers are acting unlawfully or fraudulently.

Question 42

Corporations (Defined)

(HEAVILY TESTED)

Answer 42

= A separate legal business entity with a perpetual duration formed under a state statute.

1. Can engage in any lawful purpose and has the same powers as an individual to carry out all things necessary to carry out its business affairs.
2. Has freely transferable shares.
3. Owners of corporation = shareholders.
4. Shareholders: Vote on certain major corp actions (such as mergers) and elect directors. Shareholder do NOT manage corp.
5. Directors: Make policy decisions and manage corp business affairs together as a board for directors.
6. Officers: Board elects officers to manage day-to-day operations and implement its policies.
7. Corp’s internal affairs are governed by state statute in state it is incorporated.

Question 43

Foreign Corps Doing Business in FL

Corps

Answer 43

Foreign corps MUST qualify first before transacting business in FL by:

1. Obtaining a Certificate of Authority from the Dept. of State, and
2. Maintaining a registered office and agent in FL.
3. NOTE: “Transacting business” means intrastate business in Florida. More than just min. contacts. The following do NOT constitute transacting business:

• Handling court proceedings
• Occasional, short-term business
• Holding a board for shareholder meeting in FL
• Owning a FL subsidiary

4. CONSEQUENCES:

• Liable for taxes, fees and fines for all years in state without authority
• Does not effect validity of contracts entered into in FL
• Cannot sue/maintain any FL court proceeding
• Can still be sued in FL

Question 44

Question:

Bama Home Goods, Inc. (“Bama”), is an Alabama corporation that seeks to expand its business into Florida and has acquired land near Pensacola, Florida, where it plans to open a new store. Its directors visit the new land and hold a board meeting while in Florida. Before leaving Florida, the board realizes that a manufacturing plant located on an adjacent tract of land has been dumping waste products on its land. Can Bama file an action against the manufacturing plant in Florida court without a certificate of authority?

Corps

Answer 44

Yes, because at this point Bama hasn’t transacted business in Florida. Owning land in Florida, without more, is not transacting business. Holding a board meeting in Florida is not transacting business.

Question 45

Corp Formation: Articles of Incorporation

Corps

Answer 45

Mandatory Provisions: MUST CONTAIN:

1. Name/address of corp
2. Name/address of each incorporator
3. Name/address of registered agent
4. Number of shares the corp is authorized to issue

Optional Provisions:

1. Names of initial board members
2. Par value of authorized shares
3. Purpose of corp
4. Any other provisions relating to internal affairs

Question 46

Ulta Vires Act (Defined)

Corps

Answer 46

Corporations may conduct any lawful purpose subject to any limitations in its articles of incorporation.

• An ultra vires act is one outside the corps powers or purpose as set forth in its articles.
• If committed, a shareholder or attorney general may seek an injunction.
• DOES NOT AFFECT VALIDITY OF A CONTRACT ENTERED INTO BY CORP.

Question 47

Question:

Build Co. develops real estate. Its articles provide that its business is limited to developing commercial buildings for sale. The articles specifically prohibit the corporation from leasing any of its buildings or developed properties. Despite this prohibition, Build Co.’s board of directors approves a lease of one of its buildings to Lease Co. Two weeks later, Lease Co. seeks to avoid the lease on the grounds that Build Co.’s act is ultra vires?

Corps

Question 48

Organizational Meeting

Corps

Answer 48

Either the incorporators or directors (if named in the articles) must hold a meeting to elect directors (if not named in the articles), appoint officers and adopt bylaws.

Question 49

Pre-Incorporation Contracts

Corps

Answer 49

A promoter for promoters (i.e. whoever entered into contract on behalf of the corp) is liable jointly and severally if more than one promoter) for the contract entered into before the articles of incorporation were filed UNLESS:

• 3rd party enters into novation (new K) with the corp. after incorporated and releases promoter.
• Corp does not automatically become liable once incorporated. Only becomes liable upon adoption or ratification.
• Even upon ratification or adoption, promoter STILL reliable as well until novation.

Question 50

Question:

Ariana, Bianca, and Camila wish to form Queso Blanco Co. to operate a Mexican restaurant. Ariana finds a perfect location for the restaurant.

On September 1, Ariana leases the location and signs the lease, “Ariana, agent for Queso Blanco Co.” On September 2, Ariana, Bianca, and Camila properly file articles of incorporation for Queso Blanco Co. with the state. At this point, who is liable to the landlord on the lease?

Corps

Answer 50

Ariana only. Ariana is a promoter, as she entered into the lease before Queso Blanco Co. was formed. Queso Blanco Co. isn’t liable at this point because it hasn’t adopted the lease either expressly or impliedly. While Bianca and Camila acted as incorporators, they did not act as promoters.

Question 51

De jure and De facto Corporations

Corps

Answer 51

1. De Jure: Fancy way of saying that a corporation exists and was properly formed.
2. De Facto: Common law defense that protects a shareholder from liability where defective corporation prevents a de jure corp from being formed. Exists when:

• There was a good faith attempt to incorporate; and
• There has been actual use of corporate powers.

Question 52

Question:

John and James intend to start a business selling antiques. They draft articles of incorporation together and John thinks that James filed the articles and the fee with the Department of State and James thinks that John filed the articles and the fee with the Department of State. John and James begin conducting business as a corporation. The corporation is

a. a de jure corporation, in that all of the statutory requisites for formation have been met.
b. a de jure corporation, in that there has been substantial, but not complete, compliance with the statutory requisites for formation.
c. a de facto corporation, in that they have carried on business openly as a corporation.
d. a de facto corporation, in that there has been a good faith attempt to comply with the statutory requisites for formation and some actual use of the purported corporate existence.

Corps

Answer 52

Answer D accurately states the rule for de facto corporation. Need both a good faith attempt (John and James drafted articles) AND actual use of corporate powers.

Question 53

Equity (Shares)

(Heavily Tested)

Corps

Answer 53

1. Authorized Shares: Articles must state number of shares authorized to be issued (sold) without amending articles. Must amend if it wants to issue more.
2. Issued Shares: Once authorized shares are sold, they are issued.
3. Outstanding Shares: once shares are issued and not reacquired by the corp, they are outstanding.
4. Corp Acquisition of its Own Shares: A corp may buy back its own shares.

• If privately held = authorized but unissued (or “cancelled shares”)
• If publicly traded = shares remained issued but NOT outstanding (or “treasury shares”)

Question 54

Par Value (Defined)

Corps

Answer 54

= an arbitrary minimum price for which a corp can issue its shares.

• NOT the default rule; the question must state that the shares have a par value, otherwise they do not.
• Can always sell shares for an amount higher than par value.

Question 55

Preemptive Rights (Shares)

Corps

Answer 55

Preemptive rights give shareholders the right to buy proportional amount of the corp’s unissued shares upon the board’s decision to issue them.

• Purpose is to avoid dilution.
• NOT a default rule; preemptive rights MUST be provided in articles.
• Must be issued for money. Cannot be issued to directors, officers for employees as compensation, or to shares issued for services. (Ex. Beyonce has no preemptive rights to buy uber shares in exchange for doing a commercial.)

Question 56

Question:

Eduardo owns 3,000 of the 10,000 outstanding shares of a social media company called Visage Livre, Inc. Visage Livre’s articles are silent on preemptive rights. The board of Visage Livre seeks to issue an additional 10,000 shares to raise cash. Must the board offer Eduardo the right to buy a proportional amount of the new shares so that he won’t be diluted?

Corps

Answer 56

No, Eduardo has no preemptive right to buy a proportional amount of new shares because preemptive rights are not specifically provided for in the articles.

If Visage Livre’s articles do provide preemptive rights, how many shares is Eduardo entitled to buy?

He may buy 3,000 of the 10,000 newly issued shares. Eduardo owns 30% of the outstanding shares (3,000 out of 10,000 shares outstanding), so he has a preemptive right to buy 30% of the new issue (i.e., 3,000 out of the 10,000 newly issued shares).

Question 57

Classes of Shares

Corps

Answer 57

A corp may have different classes of shares with different voting rights, dividend rights, and rights upon liquidation. NOTE: MUST BE STATED IN ARTICLES.

1. Common Shares: Corp MUST have at least one class of voting common stock.

• Common shareholders receive dividends (if any) after preferred shareholders.
• Common shareholders receive whatever is left after preferred shareholders upon liquidation.

2. Preferred Shares: Have a preference before common shares to dividends and upon liquidation.

Question 58

Board of Directors

Corps

Answer 58

1. Directors have power to manage the corp.
2. NOT AGENTS OF CORP.
3. Must be natural persons, 18 years or older.
4. By default, board sets its own compensation. MUST NOT BE EXCESSIVE (see Duty of Loyalty)
5. Board must have one or more directors. (NOTE: Non-profits requires 3)
6. One year term by default.
7. Initial directors named in Articles. After that, directors are elected by shareholders every annual shareholder’s meeting. (Can be staggered, meaning ⅓ are elected by shareholders at a time to prevent the entire board turning over at once.)
8. Shareholder may remove directors with or without cause unless articles provide otherwise.
9. Board vacancy may be filled by shareholders, or by majority vote of directors.

Question 59

Board Meetings

(HEAVILY TESTED)

Corps

Answer 59

Two types: regular or special.

• Can be called by the chair of the board, for the president.
• No notice required for regular meeting.
• Special meeting requires two days notice of date, time, and place (PURPOSE NTO REQUIRED IN NOTICE)
• Directors waive notice if they attend, UNLESS they object at beginning and don’t vote.
• Quorum required (majority board attendance) for votes to be taken. Must be actually present when vote is taken.
• Vote = majority
• Directors CANNOT vote by proxy.

Question 60

Officers

Corps

Answer 60

• = Agents of the corp.
• May resign at any time by giving notice to the board.
• Board may remove officer at any time with or without cause.

Question 61

Shareholders

(Heavily Tested)

Corps

Answer 61

• Limited liability - not liable for corp’s debt
• Piercing the corporate veil: Court will pierce the veil and hold a shareholder personally liable if he is acting as a corporation. Plaintiff must show:
  
  • Alter ego (shareholders control the corp in a way that the court lacks independence.)
  • Shareholder used the corp for improper conduct.
  • Applies to parent-subsidiary relationships (piecing the veil of the subsidiary to hold parent company liable)

Question 62

Shareholder Meetings

(HEAVILY TESTED)

Corps

Answer 62

1. Corp MUST have an annual shareholders meeting
2. Main purpose is to elect directors.
3. Not required if directors elected by written consent in lieu of annual meeting.
4. Special Shareholder’s Meeting: Special matters needing vote, such as merger, removal of director.
5. Notice Required: Date, time, and place; 10 - 60 days (no less than 10, no more than 60). Purpose not required in notice UNLESS special meeting.
6. Quorum: Measured at start of meeting (counts even if shareholder leaves during meeting); Unless stated otherwise = majority of the shares entitled to vote.
7. Voting by proxy allowed.

Question 63

Shareholder Voting

Corps

Answer 63

1. Matters other than voting directors require plurality voting (votes cast = more yes’s than no’s, abstentions are neutral)
2. Certain matters (such as merger, dissolution, selling fo assets) requires absolute majority voting (majority of outstanding shares)
3. Voting for Directors: Straight Voting (Default) - Number of votes = number of shares, director with more votes wins.
4. Cumulative Voting: Shareholders can allocate votes (split votes depending on number of shares) towards candidates. Must be in articles.

Question 64

Difference Between a C Corp and an S Corp

Answer 64

C Corp: Corporations that do not elect other wise are taxed pursuant to Chapter C of the IRS code. (NOTE: “Corporations Come In as C Corps.”) - C corps are taxed twice; the corporation’s net income is taxed, and the shareholder’s distributions (dividends) are taxed as well. S Corp: S corps are taxed once; corporation itself pays no income tax. All corporate income is deemed to be earned by the shareholders who, based on the number of shares owned, pay a proportional amount of the corporation’s income. -The net income of the corp is added to the shareholder’s personal income and taxed.

Question 65

Requirements of S Corp Status

Answer 65

1. Be closely held corp (not publicly held); 2. Have no more than 100 individual shareholders who are also not nonresident aliens; 3. Not issued more than one class of stock (except for classes of common stock that differ only in voting rights)

Question 66

What is Florida’s State Corporation Statute?

Answer 66

FL Business Corporation Act (“FBCA”)

Question 67

Ultra Vires Acts

Answer 67

= acts that the corporation, through its board of directors) is not permitted to take because it is beyond the corp’s authority or beyond limitations set forth in its Articles of Incorporation

Question 68

Three Elements Required to Pierce the Corporate Veil

Answer 68

1. Alter Ego (shareholder controlled the corp to the extent that the corp had no independent existence and the shareholder acted as the alter ego of the corp) 2. Improper Conduct (corporation was used fraudulently or for an improper purpose); and 3. Improper use was the Proximate Cause of injury to claimant.

Question 69

Types of Preferred Stock

Answer 69

Preferred Stock = receives dividends as well as liquidation assets before common stock. Straight Preferred Stock: Basic preferred stock. Participating Preferred Stock: same benefits as straight preferred owners, but with a bonus. After the preferred and common stockholders receive their dividend, participating preferred stock holders are entitled to an additional amount equal to the dividend paid to common stock. Cumulative Preferred Stock: Also same benefits as straight preferred stock, except entitled to dividends during years when the corp does not issue dividends as all. Entitled to amount equal from years prior dividends.

Question 70

Payment of Dividends

Answer 70

Within the discretion of the board Can only be payed out of the corporation’s SURPLUS (difference between the corp’s NET ASSETS (total assets minus total liabilities) minus it’s stated capital (the value of the corp’s stock multiplied by # of outstanding shares)

Question 71

Record Date

Answer 71

Date used by the board to determine which shareholders are entitled to dividends Default: Date that the board authorized the distribution of dividends.

Question 72

Improper Dividends

Answer 72

Directors who issue dividends in bad faith (failure to exercise reasonable business judgment) are jointly and severally liable to shareholders. Shareholder who are unaware that dividends were issued improperly have no liability for that distribution to corp’s creditors. HOWEVER, creditors may recover from shareholders dividends what rendered the corp insolvent.

Question 73

Promoters

Answer 73

= party who, prior to the corp’s formation, helped prepare the corp for commencing business and compliance for coming into existence. = partners prior to formation, therefore they owe a fiduciary duty to full disclosure to the corp and may not engage in self-dealing to the corp’s detriment. Corp is not liable for K’s entered into by promoter’s before corp’s existence unless the corp EXPRESSLY OR IMPLIEDLY RATIFIES THE K.

Question 74

Notice for Board Meeting

Answer 74

2 days notice is proper notice for special meetings, unless stated otherwise in articles of incorporation. Notice can be waived before or after meeting. Board members who were not properly provided notice but attend the meeting are deemed to have waived UNLESS they object at beginning of meeting and do not vote.

Question 75

Business Judgment Rule

Answer 75

= a rebuttable presumption that directors and officers are better equipped than courts to make business judgments because they are more intimately familiar with the corporation’s affairs. Mere errors in business judgment are not actionable in themselves. Directors and officers who are disinterested and act with reasonable diligence and in good faith are shielded from personal liability and judicial review. Not protected by business judgment rule if their actions are: Fraudulent, illegal, or motivated by personal interest; Lack a rational business purpose; or Are grossly negligent and uninformed.

Question 76

Corporate Opportunity Rule

Answer 76

= directors and officers may not exploit information or opportunities acquired or made available as a consequence of their corporate position (even if obtained in their individual capacity) for personal gain, UNLESS: 1. The corp declines to pursue the opportunity after full disclosure; OR 2. The corp is, and will continue to be, unable to exploit the opportunity.

Question 77

Shareholders: Notice of Annual Meetings

Answer 77

MUST BE BETWEEN 10 AND 60 DAYS PRIOR TO MEETING Must contain time, place, date, record date. Special meetings notice must indicate matters to be voted on No notice required for annual meetings because it is provided in the articles or bylaws.

Question 78

Types of Shareholder Voting

Answer 78

1. Straight Voting: Allows shareholders to vote his or her number of shares for each candidate. 2. Cumulative Voting: Grants each share as many votes as there are directors to be elected, and allows the shareholder to allocate his votes as he chooses. (NOTE: allows for better representation for minority shareholders.) 3. Default Voting (by statute): Shareholders vote in proportion to their shares held. Formula for Cum. Voting: # of total shares voting / (# of directors to be voted +1) +1 = how many votes needed to elect a director

Question 79

Shareholder Preemptive Rights

Answer 79

No preemptive rights under FBCA. Must be provided for in the articles of incorporation. Shares given to directors, officers, employees, etc. cannot have preemptive rights. When violated, court may award to shareholders: - equitable relief by ordering the corp to not sell the shares, or ordering the new purchaser to transfer the shares to the aggrieved shareholder; or -damages equal to the difference between the market value of the shares he would have received and the issuance price.

Question 80

Transferring Shares

Answer 80

May transfer or sell freely, subject to reasonable restrictions. -Reasonable to require the corporation to have right of first refusal -prohibiting the sale to particular types of persons, such as competitors. -Unreasonable to require majority shareholder or board vote before sale. -prohibiting the sale to certain racial or ethnic groups.

Question 81

Affiliated Transactions

Answer 81

= any transactions between the corporation and an interest shareholder (10% or more of stock) - includes transactions when: -fundamental corporate changes such as consolidations or mergers) - any sale or lease, mortgage or other disposition of assets worth 10% or more of the fair market value of the corp’s assets or the outstanding shares . Affiliated transactions can be approved by majority vote of disinterested directors, or affirmative vote of the shareholders of 2/3 of voting shares (NOTE: Does NOT count shares held by interested shareholders)

Question 82

Derivative Actions

Answer 82

1. Shareholder suing the corporate fiduciaries on behalf of the corporation. 2. Claims where harm was done to the corp. instead of the shareholder individually. 3. Recovery / damages go to the corporation itself. 4. NOTE: Differs from direct actions, where shareholder is suing the fiduciaries either as individuals or as part of a class action, with the recovery going to the suing shareholders. 5. Shareholder must ordinarily demand that the board of directors commence the action to redress the alleged wrong; Board may refuse. If they agree, they take charge of the litigation, and the plaintiff may no longer bring a suit. 6. Settlement or dismissal of a derivative action must be approved by the court, and notice given to affected shareholders.

Question 83

Amending the Articles of Incorp.

Answer 83

1. Board recommends the amendment to shareholders. 2. Shareholder approval needed; majority vote. 3. Board may adopt amendments without shareholder approval: - to extend duration of corp. - delete names and address of initial directors or the initial registered agent for service; - to delete the authorization of a class of shares if they haven’t been issued; - to change the par value of a class of shares; A

Question 84

Tender Offers

Answer 84

= offers to shareholders to buy their shares at a premium over the market price. Can be friendly or unfriendly. 1. No secret purchases. 5% or more ownership of a corporation requires disclosure within 10 days of the party’s identity and number of shares held, and their purpose in acquiring. 2. Defenses: Poison Pill = corp can issue rights and options to certain shareholder to buy additional shares.