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MEE Subjects > Partnerships > Flashcards

Partnerships Flashcards

1
Q

Types of Partnerships

A
  1. General partnership - any association of two or more people as co-owners of a for-profit business
    • Formation - no formal agreement required; parties’ intent to associate as co-owners can be inferred from their conduct.
    • Liability - all partners are liable, personally and jointly, for all partnership debts
  2. Limited liability partnership (“LLP”) - partnership in which partners’ potential for personal liability is limited
  3. Limited partnership - partnership with different levels of partners (A general partner exist with other partners, management is different)
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2
Q

When is a partnership formed?

A

A partnership is formed when two or more people associate to carry on a for-profit business as co-owners

  • No formalities required - no formal agreement is required; parties’ intent to associate as co-owners can be inferred from their conduct.
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3
Q

what a court would look in order to determine that a partnership exist?

A

Factors to determine the existence of a Partnership:

  • Parties’ intent controls - where parties intended to carry on a business as co-owners, a partnership is formed regardless of whether they intended to be in a partnership.
  • Other factors - where parties’ intent is unclear, courts look at:
    • Profit-sharing - persons who receive a share of a business’s profits are presumed to be partners in the business
      • Exception - profits received as payment of a debt, rent, wages, services rendered, etc. (i.e., payment is for a partnership expense, not a profit distribution)
    • Lesser factors - the following factors may also be examined, but their existence does not create a presumption of partnership formation:
      • a) sharing of control, capital investment, and investment; and
      • b) joint ownership of property
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4
Q

Can a partnership be created by estoppel?

A

Where no partnership exists, parties may be held liable to third parties as a partnership if they actively held themselves or others out as partners or consented to being held out as partners

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5
Q

What are the rights of partners? What are the rights on the property?

A
  1. Partnership Property - Consists of capital contributed by each partner and all property owned by the partnership; all else is individual property.
  2. Partner’s interests in partnership property - partners have no individual interest in partnership property (i.e., a partner’s creditors cannot get to partnership property to satisfy a personal debt)
  3. Partner’s right to manage - Absent an alternative agreement, partners have equal rights in the management of the partnership business
  4. Partnership book and information - Every partner has the right to inspect and copy partnership financial information
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6
Q

How do you determine partnership vs. separate property

A

Guidelines

  • Property deemed the partnership’s - anything titled in the partnership name or in the name of one or more partners in their capacity as partnership members
  • Property presumed to be the partnership’s - property purchased with property funds, regardless of who has title
  • Other factors - in the absence of the above, courts may look at: use of property by partnership; entry of property in partnership books; improvement and maintenance of property with partnership funds
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7
Q

Share of profits

A

Each partner has a transferable interest consisting of her share of profits and losses and her right to receive distributions

  • Each partners’ share is equal absent an alternative agreement
  • Each partner must contribute to partnership losses in proportion to their share in profits
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8
Q

Fiduciary Duties of the Partners

A

Partners owe the partnership and fellow partners the following duties:

  1. Loyalty
  2. Care
  3. Obedience
  4. COmplete and acurrate information
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9
Q

Duty of Loyalty (Partners)

A

Loyalty - each partner must:

  1. Account for property, profits, or benefits derived in connection with the partnership business; and
  2. Refrain from:
    1. Competing with the partnership; and
    2. Dealing with the partnership as, or on behalf of, a party with an adverse interest to the partnership
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10
Q

Duty of Care (Partners)

A

Care - each partner must refrain from engaging in misconduct, specifically:

  1. Grossly negligent or reckless conduct,
  2. Intentional misconduct, or
  3. Knowing violations of the law
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11
Q

Duty of Obedience (Partners)

A

Obedience - partners are agents of the partnership and, as such, must obey all reasonable directions from the partnership

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12
Q

What is the duty of complete and accurate information by Partners?

A

partners must provide each other and the partnership complete and accurate information concerning the partnership

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13
Q

Are partners liable for the acts of the partnership?

Is the partnership liable for the acts of the partners?

A

Partners liability: All partners are liable on Ks they expressly authorize and Ks made by a partner in the scope of the partnership

Partnership Liability: The partnership is liable to the acts of the partners when:

Power to bind - individual partner can bind the partnership, unless:

  1. Partner has no authority to act on behalf of partnership; and
  2. Other side has knowledge or notice that partner lacks authority
  • Acts outside ordinary partnership business - acts by individual partners outside partnership business do not bind the partnership unless all partners authorize the act.
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14
Q

Torts Liability of Partners and the Partnership

A

Tort liability - partners are liable for torts committed by a partner or employee if the tort is committed either:

  • a. In the ordinary course of partnership business, or
  • b. With authority of the partnership
    • E.g., Partner A can be liable for fraud committed by Partner Bin the course of partnership business, even though A had no knowledge or participation in the fraud
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15
Q

Can you recover all the damages caused by the partnership from a single partner?

A

All partners are jointly and severally liable

  • I.e., action can be brought against any one or several of the partners as individuals or against the partnership
  • Each partner is personally and individually liable for the entire amount of all partnership obligations (but is entitled to indemnification if compelled to pay or satisfy partnership’s entire obligation)

NOTE: Limited partners & LLPs have limited liability

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16
Q

Partnership Dissociation

A

Dissociation = any partner ceasing to be associated in carrying on the partnership business

  • Cause - can be due to departing partner’s desire to withdraw, the happening of an agreed-upon event. valid expulsion of the partner, bankruptcy of the partner, etc.
  • Effect - terminates dissociated partner’s legal relationship with partnership, including rights to profits and management rights
    • Dissociating partner’s fiduciary duties terminate except regarding matters occurring prior to the dissociation
    • Buyin out - if partnership continues, it must purchase the dissociated partner’s interest
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17
Q

Partnership Dissolution

A

Dissolution = termination of partnership

  • Cause - happening of an agreed-upon event, expiration of a term in the partnership agreement, issuance of judicial decree, etc.
    • In an at-will partnership ( i.e., one formed with no specific undertaking or definite term), any partner can dissolve at any time by providing a notice of dissolution
    • Winding up - upon dissolution, partnership must wind up business activities and distribute assets
      • Partnership continues until winding up is complete
      • Distributing assets - once assets are reduced to cash, liabilities are paid first to creditors, then partners individually
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18
Q

Limited Liability Partnerships (LLP S)

A

A limited liability partnership (“LLP”) limits a partner’s personal liability for the partnership’s obligations and actions

Rights & obligations - financial rights and obligations of LLP partners is the same as a standard general partnership

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19
Q

Formation LLP

A

Formation - any partnership can become an LLP upon:

  1. Approval - approval of partners by vote; and
  2. Filing - filing a statement of qualification with the state containing partner names, addresses, LLP election, and effective date
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20
Q

Liability LLP

A

Liability - a partner in an LLP is not personally liable for partnership obligations of any sort

  • But every partner remains liable for her own acts or acts that she supervises or directs
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21
Q

Limited Partnership

A

A limited partnership contains two types of partners - general and limited partners - and contains one or more of each type

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22
Q

Rights, duties, & obligations (LP)

A

Rights, duties, & obligations:

  • General Partners - manage and control day-to-day operations
    • Owe the same fiduciary duties as partners in a general partnership
  • Limited partners - usually passive investors with limited authority
    • No fiduciary duties owed to partnership
    • Unless partnership agreement provides otherwise, may compete and/or have interests adverse to partnerships’
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23
Q

Liability (Limited Partnership)

A

Liability - general and limited partners have differing liability:

  • General partners - personally, jointly, and severally liable for all partnership obligations
    • Incoming partners are not liable for obligations the partnership incurred before they became general partners
  • Limited partners - liable only to the extent of their investment
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24
Q

Formation (Limited Partnership)

A

Formation - filing a certificate of limited partnership with the state

  • Certificate must generally contain names and addresses of each general partner and their
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25
Q

Characteristics (Corporations)

A

A corporation (“corp”) is a legal entity that is separate from its owners

  • Corps have the following general characteristics:
    • Centralized management
    • Limited liability
    • Transferability of ownership
    • Continuity
    • Personhood
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26
Q

Characteristics (Corporations): Central Management and Limited Liability

A
  • Centralized management - management rights are centralized in a board of directors (“BoD”) who delegate day-to-day management to corporate officers
    • Unlike partnerships, management is generally not spread among owners (i.e., shareholders)
  • Limited liability - only the corp itself can be liable for its obligations
    • Shareholders, board members, and officers are generally not liable for corp’s obligations, although note exceptions
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27
Q

Characteristics (Corporations): Transferability of ownership - Continuity - Personhood

A
  • Transferability of ownership - shareholders can freely transfer their ownership interests (i.e., shares) unless prohibited by articles or bylaws
  • Continuity - corps can exist in perpetuity; changes in ownership do not affect the carp’s existence
  • Personhood - corps are considered “people” for most intents and purposes and are entitled to certain constitutional protections
    • E.g., corps are entitled to due process and equal protection
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28
Q

Formation (Corporations)

A

A corp is formed when articles of incorporation are filed with the state

  • Corp formed in accordance with applicable laws = “de jure” corp
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29
Q

Articles of incorporations (what do they include?)

A

Articles of incorporation - must include:

  1. Name - corp name
  2. Shares - max number of shares the corp is authorized to issue
  3. Incorporators - names and addresses of each incorporator (i.e., people who are forming the corp)
  4. Registered office and agent - name and address of initial registered agent and office
  5. Optional provisions - articles can include any other provisions regarding management, as long as they are legal
30
Q

Statement of purpose (Article of incorporations)

A

Statement of purpose - some states require a statement regarding the corp’s purpose; most corps use boilerplate language allowing it to take any action necessary to carry out its business or affairs

  • A corp that includes a narrow purpose cannot take action unrelated to that purpose
31
Q

Bylaws (Corporation)

A

Bylaws - written rules for managing the corp, which provide for ordinary business conduct (e.g., election of board members, meeting times, etc.)

  • Must be adopted by incorporators or BoD
  • Can contain any provision for managing and regulating the corp’s affairs as long as it is legal
  • Conflicts with article of incorporation - articles control
32
Q

Pre-Incorporation Transaction & Liability: Promoter

A

Promoter - acts on behalf of a not-yet-formed corp to get capital commitments (i.e., funding), usually by forming Ks with parties interested in becoming shareholders upon corp formation

  • Promoters may also work on corp planning and formation and usually become incorporators
    • Promoter liability - promoter is personally liable for Ks he enters into on behalf of the corp and remains liable after formation
      • Exceptions - promoter is not personally liable where:
        • a. Novation - agreement between parties releasing promoter and substituting the corp (i.e., third party releases promoter), or
        • b. indemnification - promoter may be indemnified by the corp if he is held liable on the K after formation
33
Q

Corporation Liability

A

corp generally has no liability based on pre-incorporation Ks entered into by promoters

  • Exception - corp will be liable if it adopts the K
34
Q

Subscription Agreement

A

Subscription agreement - agreement whereby one agrees to buy a specified number of shares from a corp at a given price

35
Q

Ultra vires acts

A

Ultra vires acts - where a corp acts outside of its stated purpose (as stated in articles of incorporation - see card 20), it takes ultra vires acts

  • Consequences of ultra vires acts - three possibilities:
  1. Shareholder suit - shareholders may sue corp to enjoin the ultra vires act
  2. Corp suit - corp may sue an officer or director responsible for the ultra vires act for resulting damages
  3. State action - state may bring action to dissolve the corp
36
Q

De facto corp

A

De facto corp - where a corp’s formation fails to adhere to proper formalities but it carries itself on as a corp; it may still be treated as a properly formed corp

  • Requirements:
  1. A law exists under which the entity could have become legally incorporated;
  2. The entity made a good faith effort to comply with the state’s incorporation laws; and
  3. The entity acted like a corp (e.g., conducting business in its corp name)
37
Q

Corp by estoppel

A

Corp by estoppel - persons who treat an entity as a corp are estopped from denying the entity is a corp, particularly in order to avoid liability

38
Q

Piercing the Corporate Veil

A

Generally shareholders, directors, and officers are not personally liable for corp obligations, but they can be held liable under the doctrine of piercing the corp veil

  • Consequence - when the corp veil is pierced, the corp entity is disregarded in order to hold shareholders, officers, directors, etc. liable
39
Q

Acts that pierce the veil

A
  1. Ignoring corp formalities - where a shareholder dominates the corp to the extent that the corp is not being treated as a separate entity
    • I.e ., the corp entity is being used as an alter ego or “mere instrumentality” of the shareholder(s), resulting in some basic injustice
  2. Inadequate capitalization - corp was undercapitalized (i.e., underfunded) at the time of incorporation
    • Not established by virtue of insolvency alone, but insolvency that occurs shortly after formation is a prime indicator of inadequate capitalization
  3. Fraud or illegality - corp entity may be disregarded if there is fraud or other illegality, to prevent fraud or other illegality, or to prevent a shareholder from using the corp to avoid existing personal liabilities
40
Q

Liability (Piercing the corporate veil)

A

Liability - once the corp veil is pierced, all persons composing the corp (i.e. all shareholders) may be held personally liable, but usually only those involved in active management will be held liable

41
Q

Capital Structure of Corporations

A

Corps get funding through issuing securities, of which there are two main types: debt and equity

Debt securities (bonds) - corp borrows funds from an outside creditor and promises to repay creditor

  • Holders of debt securities have no ownership interest

Equity securities (stocks) - instrument that represents investment in the corp; holders ( i.e., shareholders) become part owners of the corp

  • Authorized shares - max number of shares the corp may issue, as prescribed in the articles of incorporation
  • Issued/outstanding shares - shares that have been sold to investors
  • Reacquired shares (i.e., those that the corp buys back) revert from being issued/ outstanding to authorized
42
Q

Classes of shares

A

Classes of shares - corps may choose to issue different classes of stock shares; each class of shares can have different series within a class

  • Articles must authorize each class and set forth:
  1. Number of shares of each class;
  2. Name or distinguishing designation for each class; and
  3. Describe the rights, preferences, and/or limitation afforded to each class of shares
43
Q

Rights in shares

A

Shares authorized by a corp can have different rights, preferences, and limitations depending on the class of shares

  • Articles can define almost any kind of differentiation between share classes; differences between share classes often involve:
    • Rights to distributions and/or dividends
    • Nature of voting rights
    • Preference with regard to distributions
44
Q

Distribution Rights

A

Distribution rights - corp can distribute assets in the form of dividends, redemption of shares, or liquidating distributions upon dissolution

  • At least one class of shares must be entitled to receive the corp’s net assets upon dissolution
  • Board discretion - decision as to whether or not to declare a distribution is within the BoD’s sole discretion, even where the articles authorize distributions
    • Shareholders have no general right to demand a distribution
45
Q

Consideration for shares

A

Consideration for shares - shares can be issued by the corp in exchange for any tangible or intangible property or benefit to the corp

  • I.e., corp can issue shares in exchange for anything of value, whether payment or services
46
Q

Shareholder authority

A

Shareholder authority - shareholders exert control over the corp through their power to elect directors, amend bylaws, and approve fundamental changes

  • Directors - shareholders can remove and elect directors
  • Bylaws - shareholders can adopt. amend, or repeal bylaws
  • Fundamental changes - shareholders must approve of fundamental changes to the corp structure, which includes:
    • Mergers
    • Sale of assets outside ordinary business
    • Dissolution
47
Q

Inspection Rights

A

Inspection rights - shareholders may inspect the corp’s books and records for any proper purpose upon written notice

  • Proper purpose - purpose is proper if reasonably related to a person’s interest as a shareholder
  • Notice - five days’ written notice must be provided to the corp
    • Notice must state the proper purpose
  • Inspection without proper purpose - Certain records may be inspected by shareholder regardless of proper purpose, including:
    • Articles and bylaws
    • Annual reports and meeting minutes
    • BoD resolutions regarding share classifications
    • Corp communciations to shareholder
48
Q

Shareholder Meetings

A

Meetings - annual and special meetings

  • Annual - corp must hold annual meetings for electing directors and other special matters
  • Special meetings - may be called to conduct business requiring shareholder approval
  • Notice required - notice of a meeting must be sent to shareholders eligible to vote
49
Q

Voting (Shareholder)

A

Voting - unless the articles provide otherwise, each issued share is entitled to one vote

  • Quorum required - quorum must be present for a vote to be cast
  • Majority rule - actions are approved by a majority vote unless the articles provide otherwise
  • BoD elections - directors are elected by plurality; cumulative voting may be used if allowed by the articles
    • Cumulative voting = each share can cast as many votes as there are BoD vacancies and multiple votes can be cast for one seat (e.g., if five vacancies exist, each share gets five votes)
50
Q

Proxies (Shareholders)

A

Shareholders can vote their shares executed in writing (i.e. allowing someone else to take their vote)

  • Revocability - appointment of a proxy is generally revocable
    • Exception - proxy appointment is irrevocable if it coupled with an interest and clearly states that it is irrevocable
51
Q

Shareholder Lawsuits Types

A

Shareholders may bring suit against the corp, either directly or through a derivative action (to enforce the corp’s rights)

Note - derivative suits often arise as essay questions that present a wrong committed by an officer or director and ask you to identify whether a breach has occurred and what shareholder remedies are available

52
Q

Direct Suit (Shareholder)

A

Direct suit - rare, but can occur where a corp, its officer, or director caused harm to, or breached a duty owed to, a particular shareholder

  • Note - if the duty breached is owed to the corp, as opposed to an individual shareholder, the proper avenue is a derivative suit
  • Recovery is for the benefit of the shareholder or shareholder class
53
Q

Derivative Suit

A

Derivative suit - shareholder sues to enforce the corp’s rights when the corp has a cause of action but fails to pursue it ( i.e., suit brought by shareholder, on behalf of the corp, against the corp)

  • Often arises where a director or officer breaches a duty owed to corp, but corp has not taken action
  • Standing - shareholders bringing suit must have been shareholders at the time of the alleged wrong
  • Recovery - goes to corp, but shareholders may recoup legal expenses
  • Written demand required - shareholder must make a written demand on the corp and wait 90 days before filing suit, unless:
  1. Corp has already rejected shareholder’s demand, or
  2. Irreparable injury to corp will result by waiting the full 90 days
54
Q

BoD Characteristics

A

Corp’s BoD is generally responsible for corp affairs and management

BoD characteristics:

  • Number of directors - provided for in bylaws or articles; can be a variable range, but there must be at least one director
  • Election - elected at annual shareholder meeting
  • Removal - may be removed with or without cause by shareholders unless articles provide for removal only with cause
55
Q

BoD meeting

A

BoD meetings - board may hold regular or special meetings

  • Can be held in person or through any means by which all participating directors can simultaneously hear one another (e.g., videoconference)
  • Notice - regular meetings may be held without notice, but special meetings require two-day notice
  • Quorum - set by articles, but must be at least 1/3 of al l directors
  • Action without meeting - BoD can take action without a meeting if all directors provide written consent describing the action taken
56
Q

Delegating Authority (Corp)

A

BoD does not run the day-to-day of the corp, but rather delegates management to officers and executives

  • Committees - BOD may create committees, each compromised of one or more BoD members, with power to oversee corp affairs
    • Limitation - cannot make major corp decision requiring full BoD consent
57
Q

Duty of Care (Corp)

A

Directors and officers owe the corp a fiduciary duty of care; in determining whether that duty was breached, courts apply the Business Judgment Rule

  • I.e., a director/officer act that fails to pass scrutiny under the Business Judgment Rule will be deemed a breach of the duty of care
58
Q

Business Judgment Rule (BJR)

A

Business Judgment Rule - courts will not second guess a poor or erroneous decision made by a director or officer if the decision was made:

  1. In good faith;
  2. With the care that an ordinarily prudent person in a like position would exercise under similar circumstances; and
  3. In a manner the director/officer reasonably believed to be in the best interests of the corp
59
Q

Breach of Duty of Care (Corp)

A

Liability - if a director/officer breaches their duty of care, they can be held personally liable for damages

  • Articles can limit directors/officers’ personal liability
  • Exceptions - articles cannot limit director/ officer liability for:
  1. Intentional violations of law,
  2. Unlawful corp distributions,
  3. Receiving unentitled financial benefits, or
  4. Intentional Iv inflicted harm on the corp or its shareholders
60
Q

Duty of Loyalty

A

Directors and officers owe a duty of loyalty to the corp, which prohibits them from profiting at the expense of the corp

  • Arises with conflicts of interest or usurpation of a corp opportunity
61
Q

Conflict of Interest

A

Conflict of Interest - officer/director has a personal interest in some transaction in which the corp is a party

  • Occurs if: officer/director knows that he and/ or a family member is:
    1. A party to the transaction,
    2. Has a beneficial financial interest or is closely linked to the transaction such that it could reasonably be expected to influence how the director/officer votes on the transaction, or
    3. Is affiliated with another entity that is party to the transaction
      • >> E.g., is an agent, employee, etc. of the other entity
62
Q

Conflict of Interests (Safe Harbors)

A

Safe harbors - officer/director with a potential conflict of interest in a transaction will not be personally liable if the transaction is either:

  1. Fair to the corp given circumstances existing at the time, or
  2. Approved, after material facts have been disclosed, by either:
    1. Disinterested shareholders, or
    2. A majority of disinterested board members
63
Q

Corporate opportunities

A

Corporate opportunities - fiduciary duties prevent officers/directors from diverting a business opportunity to themselves where:

  1. Corp would have an interest or expectancy in the opportunity; and
  2. Officer/director does not give corp an opportunity to act first
64
Q

Mergers (Effect) (Short Form) (Dissenters’ rights)

A

A merger occurs where two or more corps blend into a new corp; often arises where one corp absorbs another

  • Effect - surviving corp owns all property and assumes all obligations of prior separate entities
  • Short-form merger - where a parent corp owns at least 90% stock of a subsidiary, the subsidiary can be merged into the parent corp without approval of either carp’s shareholders
  • Dissenters’ rights - dissenting shareholders can challenge the merger or demand payment for their shares at a fair market value
65
Q

Merger - Requirments for approval

A

Requirements - Mergers are considered fundamental corp changes and, as such, generally require each corp to get approval of:

  1. Board - majority approval required
  2. Shareholders - majority approval required
  • » Exception - no significant change to surviving corp
    • Surviving carp’s shareholders need not approve of a merger where the surviving corp has no significant changes (e.g., articles do not differ post-merger, shareholders’ shares and rights do not change, etc.)
66
Q

Dissolution (Effect)

A

Dissolution - termination of the corp’s existence

  • Effect - corp continues to exist while it winds up and liquidates its affairs, but no other business may be carried out
  • Types
    • Voluntary
    • Administrative
    • Judicial
67
Q

Voluntary and Administrative Dissolution

A
  • Voluntary dissolution - considered a fundamental change and requires both board and shareholder approval
  • Administrative dissolution - action brought by state to dissolve corp
    • Usually occurs due to failure to adhere to statutory requirements or formalities, but can be remedied by corp
68
Q

Judicial Dissolution

A

Judicial dissolution - action by attorney general or shareholders

  • Attorney general - can act to dissolve a corp on the ground that it abused its authority, committed fraud, etc.
  • Shareholders - can seek judicial dissolution where:
    1. Deadlock among BoD or shareholders threatens irreparable injury to corp,
    2. Corp has abandoned its business and failed to dissolve, or
    3. Carp’s assets are wasted/misused for non-corp purpose
69
Q

Disposition of Corporate Property (Corp)

A

Disposition of property - Where corp sells, leases, or otherwise disposes of all or substantially all property outside the regular course of business

  • Deemed a fundamental change requiring shareholder/board approval
  • “Substantially all” = sale or disposition leaves corp without significant continuing business activities
  • “outside regular course of business” = disposition is not considered a normal business activity for the corp
70
Q

LLC - Operating Agreement

A

Operating agreement - governing document, similar to a carp’s bylaws

  • Governs relations between members, rights and duties of members and managers, conditions for amending the operating agreement, etc.
  • Management - presumption is that all members manage, but LLCs may also have one or several managers and members
  • Voting - members or managers may have equal voting rights or may vote in proportion to ownership depending on operating agreement
  • Distribution rights - similar to corp in that operating agreement dictates how LLC will be managed and profits will be distributed
71
Q

LLC - Duties

A

Duties - depends on whether members or manager(s) manage

  • Member-managed - all members owe duties of care and loyalty to each other and the LLC
  • Manager-managed - only managers owe duties of loyalty and care
    • » Only members can ratify a manager’s act that would violate duty of loyalty
  • Good faith & fair dealing - all members and managers have an obligation of good faith and fair dealing
72
Q

Limited Liability Companies (LLC S) and Formation

A

LLC - An LLC is an entity that allows for taxation for its owners like a partnership, but has limited liability similar to that of a corp

  • Owners are considered members and/or manager

Formation - Certificate of formation filed with the state

  • Analogous to corp’s articles of incorporation and must contain similar identifying information about LLC members

MEE Subjects (4 decks)

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