My B.A. Rules

Question 1

What is a partnership?

Partnership

Answer 1

A partnership is an association of two or more persons to carry out a business for profit.

Question 2

How is a partnership created?

Partnership

Answer 2

No formal agreement or writing is required to create a partnership, merely an intent to associate as co-owners of a business, which may be implied from their conduct. Sharing of profits creates a presumption of partnership; several indicia show partnership:
* The absence of an agreement to share losses can be evidence that individuals did not intend to partner. However, there is no statutory requirement to share losses.
* The designation by the parties of their own entity as partnership is indicative of intent but not conclusive.
* The amount of extensive activity involved in the enterprise undertaken by parties is a relevant factor for partnership existence.

Question 3

Agency and partnership?

Partnership

Answer 3

A partner is an agent of the partnership for its business purposes. As an agent, the partner can commit the partnership to binding contracts with third parties.

Question 4

What is a joint venture?

Partnership

Answer 4

A joint venture is not a clearly defined legal entity. Frequently, courts use the term “joint venture” to describe a partnership for a specific, limited purpose. Courts usually apply partnership rules to a joint venture when the association has a business purpose, rather than a personal purpose.

Question 5

How do losses and profits get divided?

Partnership

Answer 5

If division of profits and losses is not included in the partnership agreement, each partner is entitled to an equal share of the partnership profits and losses. But when the agreement only addresses the division of partnership profits, a partners split the losses in proportion to their share of the profits.

Question 6

Fiduciary duties of partners?

Partnership

Answer 6

1. A duty of care is refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or knowingly violating the law.
2. A duty of loyalty includes three principles for partnership: (1) no misappropriating partnership assets or opportunities, (2) no self-dealing and (3) no competing with the partnership.
   * A partnership may prepare to compete but may not actually compete.

Question 7

What happens when fiduciary duties are breached?

Answer 7

A partnership may pursue a legal action against a partner for breach of the partnership agreement or for violating a duty owed to the partnership that caused the partnership harm.
* A partnership is vicariously liable for a partner’s tortious acts, including fraud, committed in the ordinary course of the partnership business or with partnership authority, whether actual or apparent.
* A partner is jointly and severally liable for all partnership obligations. However, a judgment against the partnership is not a judgment against a partner. To reach a partner’s personal assets, there must be a judgment against the partner personally.

Question 8

Is a partner entitled to pay for performance of partnership duties?

Partnership

Answer 8

A partner is not entitled to remuneration for services performed for the partnership, though an exception exists when the partner renders services in winding up the business of the partnership.

Question 9

How do decisions get made in a partnership?

Partnership

Answer 9

Generally, voting in a partnership is per capita, i.e., one vote per partner.
* A majority of the partners must approve a decision as to a matter in the ordinary course of the partnership’s business, such as a distribution of partnership profits.
* A decision as to a matter outside the ordinary course of the partnership’s business, such as an amendment to the partnership agreement, requires the consent of all partners.

Question 10

How does a limited partnership get formed?

Partnership

Answer 10

Formation of a limited partnership requires filing a certificate of limited partnership with the state.

Question 11

Can limited partnership rights be assigned?

Partnership

Answer 11

In general, a partnership interest in a limited partnership is personal property that can be assigned in whole or in part. Upon assignment, the partner ceases to be a partner in the limited partnership and the assignee generally has rights only to receive the distribution to which the assignor partner would otherwise be entitled. An assignee of a limited partnership interest, including a general partnership interest, may become a limited partner if the partnership agreement permits it or if all partners agree.

Question 12

Impacts of dissociation on partnership?

Partnership

Answer 12

• Any partner has the power to dissociate from the partnership at any time, even if the dissociation is wrongful. A partnership at will is an open-ended partnership that does not have a fixed termination based on a period of time or particular undertaking; it is dissolved when a partner chooses to dissociate from the partnership by giving notice of her withdrawal.
• Dissolution does not automatically terminate a partnership. The partnership is not terminated until the partnership business is wound up, which is a process that entails liquidating the assets, paying off creditors, and distributing any remaining funds to the partners.
• After dissolution, the partnership is bound by a partner’s act that is appropriate for dissolution as well as any act undertaken by a partner that would have bound the partnership before dissolution, if the other party does not have notice of the dissolution.

Question 13

What are some shareholder rights?

Corporations

Answer 13

In Virginia, shareholders have the right to inspect and copy corporate documents.
Under Virginia law, a shareholder retains her right to vote if she pledges stock for collateral unless she signs an agreement to the contrary.

Question 14

How can a shareholder exercise their rights to inspect and copy?

Corporations

Answer 14

In Virginia, shareholders have the right to inspect and copy corporate documents, so long as the shareholder sends a signed written request at least 10 business days in advance and has a proper purpose for doing so, one that relates to the shareholder’s interest in the company.
The shareholder must have a proper purpose, and the demand must describe with reasonable particularity the purpose and the records being requested. A proper purpose is one that relates to the shareholder’s interest in the corporation.
The shareholder may only inspect and copy the records at the corporation’s main office during business hours. In addition, for some corporate records (e.g., minutes of the board of directors’ meetings, corporate accounting records, and the list of shareholders of record), the shareholder must have been a shareholder for at least six months or must be the record owner or beneficial owner of at least five percent of the outstanding shares.

Question 15

What are the notice requirements for shareholder meetings?

Corporations

Answer 15

Shareholders must be given written notice of an annual or special meeting no less than 10 days and no more than 60 days before the meeting date.
A shareholder may waive notice either (1) in writing or (2) by attending the meeting. However, a shareholder may attend a meeting to object to the lack of notice or defective notice if the objection is made at the beginning of the meeting.

Question 16

What is the difference between a nonstock and a stock corporation?

Corporations

Answer 16

While a member of a nonstock corporation is generally not entitled to a distribution, a member generally enjoys the same rights as a shareholder of a stock corporation, such as the right to inspect the corporation’s books and records, and is subject to the same restrictions.

Question 17

How can a director be removed?

Corporations

Answer 17

The shareholders of a stock corporation may remove a director with or without cause.
Unless the articles of incorporation provide otherwise, a majority of the members must vote in favor of the removal of a director.

Question 18

When is a shareholder agreement valid?

Corporations

Answer 18

A shareholder agreement must be present (1) in the articles or the corporate bylaws and approved by all persons who are shareholders at the time of the agreement, or (2) in a written agreement that is signed by all persons who are shareholders at the time of the agreement and that is made known to the corporation.

Question 19

When may a director be indemnified? How does indemnification work?

Corporations

Answer 19

A corporation may generally indemnify a director in its articles of incorporation or bylaws for any judgment awarded against the director for acting in his role as a director, as well as provide for advancement and reimbursement of expenses with respect to the liability.
The director may seek a court order to compel the corporation to indemnify the director in accord with the indemnification authorization.
The only restriction on the corporation is that it cannot indemnify a director against liability for (i) willful misconduct or (ii) a knowing violation of criminal law.

Question 20

What are the fiduciares owed to corporations?

Corporations

Answer 20

Directors and managers owe fiduciary duties to their corporation, specifically the duty of loyalty and the duty of care.

Question 21

What is the duty of care?

Corporations

Answer 21

The duty of care is that the manager and directors of a corporation must refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or knowing violation the law.

Question 22

What is the duty of loyalty?

Corporations

Answer 22

The duty of loyalty on the other hand is broken into three principles: (1) no misappropriating corporation assets or opportunities, (2) no interested director transactions, and (3) no competing with the corporation.
* A corporate opportunity is a proposed activity that is reasonably incident to the corporation’s present or prospective business and in which the corporation has a capacity to engage.
* Misappropriating corporation opportunities can occur through usurping a corporate opportunity; the director must offer the opportunity to the corporation first.
* Interested director transactions are transactions between a corporation and its director where the director has a direct or indirect personal interest (e.g., the director has a material financial interest in, or is a director, officer or trustee of, the other party to the transaction).

Question 23

What is an exception to the duty of loyalty?

Corporations

Answer 23

These types of transactions may be permissible, if all three components of the safe harbor provisions are met: (1) The material facts of the transaction and the director’s interest were disclosed or known to the disinterested decision-makers who then (2) authorize, approve, or ratify the transaction by a majority vote; and (3) if the transaction is found to be fair after the transaction occurred.

Question 24

What is the business judgement rule and how does it apply to fiduciary duties?

Corporations

Answer 24

The business judgement rule, which presumes that the directors are making good-faith decisions in the best interest of the corporation, is applied to the duty of care. However, this business judgement rule does not apply to conflict of interest transactions under the duty of loyalty.
To overcome this presumption, the plaintiff bears the burden of persuasion, which generally requires a showing that the director engaged in self-dealing or fraud or acted in bad faith.

Question 25

What is a defense to the fiduciary duties?

Corporations

Answer 25

The business judgment rule.
Also, A director is entitled to rely on the performance of, as well as information, opinions, reports, and statements supplied by a committee of the board of which the director is not a member if the director believes, in good faith, the committee merits confidence.

Question 26

What are the types of dissolution?

Corporations

Answer 26

• After a corporation has issued stock, a voluntary dissolution can occur when the board of directors adopts a proposal for dissolution and two-thirds of the outstanding shares approves, or when all shareholders consent to the dissolution, even without approval of the board.
• A shareholder can seek the involuntary dissolution of a corporation if the acts of the board of directors or those in control of the corporation are illegal, oppressive, or fraudulent.

Question 27

Who can pursue a involuntary dissolution of a corporation and how does it work?

Corporations

Answer 27

A shareholder may pursue involuntarily dissolution of the corporation if (1) the shareholders are deadlocked (2) if the directors are deadlocked and the shareholders are unable to break the deadlock, and irreparable injury to the corporation is threatened; (3) the acts of the directors are oppressive, illegal, or fraudulent; or (4) the corporate assets are being wasted.
Upon termination, the property of the corporation passes automatically to its directors as trustees in liquidation. The directors discharge the liabilities and obligations, and then distribute the remainder of the corporation’s assets among its shareholders according to their respective rights and interests.

Question 28

What are the legal actions a shareholder can pursue with regards to the corporation?

Corporations

Answer 28

Shareholders have two types of legal actions they can pursue: direct suits and shareholder derivative suits.
* Direct suits are those in which shareholders seek to enforce rights arising from their share ownership, such as the requirement of holding of an annual shareholder’s meeting or the right to inspect corporate books and records
* Shareholder derivative suits on the other hand, are brought by a shareholder to enforce a corporate cause of action where the corporation for some reason has not sued to protect its own rights.

Question 29

How does a sharehold derivative suit work?

Corporations

Answer 29

The test to determine validate whether a derivative suit is properly brought is whether a recovery would benefit the corporation generally and all the shareholders, as distinguished from benefiting only an individual or a determinate group or class of individuals.
Additionally, there are some procedural steps required to effect a derivative suit: standing and demand.
* In order to have standing, the shareholder bringing the suit must have been a shareholder at the time of the wrongdoing.
* Before the shareholder can bring a derivative suit, the shareholder must ask the board of directors first, which is also known as making written demand on the corporation.

Question 30

What is the authority of a officer?

Corporations

Answer 30

An officer of a corporation is an agent of the corporation. As such, the officer has the actual authority to act on behalf of the corporation as set forth in the articles of incorporation and bylaws, granted by the board of directors, or delegated by another officer. In addition, the officer has the apparent authority to act with regards to matters that the corporation has held out the officer as possessing.

Question 31

When is a shareholder vote required?

Corporations

Answer 31

Generally, decisions requiring a shareholder vote are the selection of the board of directors and for fundamental corporate changes, such as amending the articles of incorporation or a merger.
* However, transfers of all or substantially all of a corporation’s assets generally require approval by both the board of directors and the shareholders, when the sale would leave the corporation without a significant continuing business activity.
* The mere purchasing of assets only requires the approval of the board of directors unless provided otherwise in the articles of incorporation or bylaws

Question 32

What is the liability for partnerships?

Corporations

Answer 32

TORTFEASORS ARE ALWAYS PERSONALLY LIABLE FOR THEIR OWN TORT!
For partnership, the partnership is liable for the act of any partner, committed in the ordinary course the partnership business or with partnership authority, whether actual or apparent. Partners are jointly and severally liable for the entire amount of a partnership obligation.
* Even though a partner is personally liable for a partnership obligation, a partnership creditor generally must exhaust the partnership’s assets before levying on the partners’ personal assets.

Question 33

What is the liability for limited partnerships/limited liability partnerships?

Corporations

Answer 33

TORTFEASORS ARE ALWAYS PERSONALLY LIABLE FOR THEIR OWN TORT
* For a limited partnership (LP), general partners are jointly and severally liable for the entire amount of a partnership obligation, but limited partners are only liable to the extent of their investment (not personally liable for debts of the partnership).
* For limited liability partnerships (LLP), all partners are limited partners and are not individually liable for debts, obligations, and liabilities chargeable to the partnership.

Question 34

What is the liability for corporations?

Corporations

Answer 34

TORTFEASORS ARE ALWAYS PERSONALLY LIABLE FOR THEIR OWN TORT
* Repondeat Superior: An employer is liable for her employee’s torts committed within the scope of employment, if there is (1) an employee/employer relationship and (2) the act must be within the scope of employment.
* For corporations, a director may be held liable for the corporation’s conduct if the director violated any fiduciary duties.
* For corporations, shareholders are not individually liable for the corporation’s debts.

Question 35

What is the exception for liability in corporations?

Corporations

Answer 35

A court will pierce the corporate veil only if (1) shareholders have used the corporation to commit an injustice, and (2) there is unity of interest and ownership (a.k.a. “alter ego”). There are several factors that will make the court more likely to piece the veil under the second prong of unity of interest and ownership, which are: (1) commingling corporate and personal funds, (2) siphoning corporate assets, (3) failing to follow corporate formalities, (4) undercapitalization, where shareholders are not investing any assets in the corporation, and (5) confusing the public (parent – sub).

Question 36

What is the liability for a professional corporation?

Corporations

Answer 36

For a professional corporation, which is statutorily limited to the rendering of a professional service, the employees of said corporation are not shielded from liability arising out of their own malpractice. However, they are shielded against vicarious liability for malpractice committed by other professionals in the professional corporation.

Question 37

What is the liability for a limited liability company?

Corporations

Answer 37

For limited liability companies (LLCs), investors have limited liability. Managers are subject to the same piercing exception as corporations.