Partnerships and Corporations

Question 1

Duties Owed by Directors and Officers

Answer 1

Directors are responsible for the management of the business and the affairs of the corporation. They generally have limited personal liability to the corporation, but owe a DUTY OF CARE and a DUTY OF LOYALTY.

Question 2

Duty of Care

Answer 2

A fiduciary duty that requires a director to manage the corporation to the best of his/her abilities. They must discharge their duties:

1) IN GOOD FAITH,
2) as an ORDINARY PRUDENT PERSON WOULD in the same circumstances, and
3) for the BEST INTEREST OF THE CORPORATION

Question 3

Business Judgment Rule

Answer 3

Under this rule, directors who execute their duties in accordance with the duty of care are not liable for business decisions that, in HINDSIGHT, TURN OUT TO BE POOR OR ERRONEOUS.

Question 4

Duty of Loyalty

Answer 4

A fiduciary duty that requires a director to act in good faith and with a reasonable belief that what she does is in the corporation’s best interest.

Violations can appear in:

• Interested Director Transactions
• Usurping Corporate Opportunities
• Competing Ventures

Question 5

Interested Director Transactions

Answer 5

An interested director transaction occurs when a director has a PERSONAL INTEREST in a transaction in which the corporation is also a party.

Question 6

Exceptions to Interested Director Transaction

Answer 6

Interested director transactions will be upheld if:

1) a majority of DISINTERESTED DIRECTORS approve the transaction,
2) a majority of DISINTERESTED SHAREHOLDERS with voting rights approve the transaction, AND
3) the transaction was REASONABLY FAIR to the corporation.

Question 7

Usurping a Corporate Opportunity

Answer 7

A corporate opportunity is usurped by a director when she DIVERTS A BUSINESS OPPORTUNITY from the corporation to herself without giving the corp a chance to benefit first. The corporation must have a GENUINE EXPECTANCY OR INTEREST in the opportunity.

Question 8

Competing Ventures

Answer 8

Directors are not permitted to engage in any personal business that is in direct conflict with the corporation.

Question 9

10(b)5

Answer 9

Rule 10(b)5 provides that it shall be unlawful for any person to use an instrumentality of INTERSTATE COMMERCE to:

1) employ any scheme to DEFRAUD
2) make an UNTRUE STATEMENT of MATERIAL FACT, or
3) engage in any act or practice that operates as a fraud or deceit IN CONNECTION WITH THE SALE OF A SECURITY

If the plaintiff is a PRIVATE person, must also show reliance and damages.

Question 10

Materiality

Answer 10

A statement or omission of a statement is material if there is a SUBSTANTIAL LIKELIHOOD that a REASONABLE INVESTOR would consider it NECESSARY or IMPORTANT in making an investment decision.

Question 11

Scienter

Answer 11

A mental state embracing the INTENT TO DECEIVE, DEFRAUD, or MANIPULATE. Recklessness with respect to truth may also constitute scienter.

Question 12

Promoter Liability

Answer 12

A promoter (one who acts on behalf of pre-incorporated company) is liable for K’s unless a NOVATION or IMPLIED ADOPTION by the now formed Corporation.

Question 13

Formation of a Corporation

Answer 13

De Jure - a valid Article of Incorporation signed and filed with state. Must contain 1) authorized shares, 2) a general purpose, 3) name and address of agent and incorporators.

De Facto - must show a good faith effort to incorporate AND NO KNOWLEDGE of a lack of corporate status (plus acting as a corporation at a later date).

Estoppel - if held out as a corporation, court can treat as such to avoid unfairness.

Question 14

Stock Issuance

Answer 14

• Directors and Officers are liable for ‘watered’ stock (improperly valued).
• Corporation must receive CONSIDERATION in exchange for stock. Can be any tangible or intangible property or benefit.
• Shareholders have preemptive rights (to maintain % of ownership).

Question 15

Shareholder Duties and Liabilities

Answer 15

• Shareholders owe a duty to investigate a buyer of a controlling interest or a board position.
• Shareholders are not liable unless the corporate veil is pierced (only if fraud or misrepresentation).

Question 16

Shareholder Voting

Answer 16

• Proxies: written authorization for another SH to vote for them (valid for 11 months normally).
• Voting Trusts: a written trust held as such (valid for max of 10 years).
• Voting Agreements: binding and enforceable, no time limit.

Question 17

Fundamental Corporate Changes

Answer 17

-Mergers, Consolidations, Dissolutions, Fundamental changes to Articles of Incorporation, and Sale of substantially all of assets.

To make valid, must call a special meeting and receive a SUPERMAJORITY of entitled votes. Any dissenting voters can receive a RIGHT OF APPRAISAL if they file a written notice of objection (they can demand to be bought out afterwards).

Question 18

General Partnership Formation

Answer 18

Under the Revised Uniform Partnership Act, there are NO FORMALITIES needed to form. ANY ASSOCIATION of TWO OR MORE carrying on as co-owners of a business for profit (and sharing the profits) creates presumption of a partnership.

Question 19

Liabilities of General Partners to 3rd Parties

Answer 19

As agents of the partnership, any torts committed in the scope of business, and any contracts entered into by a partner, create liability for the partnership.

-General Partners are liable for debts of the partnership. Even dissociating partners retain liability on future debts, unless notice is given to creditors.

Question 20

Other Partnership Forms

Answer 20

Limited Partnership - have at least one GP and one LP, and need to file to create. limits the liability of LPs.

RLLP - groups of professions, must file annual reports as part of formation, and limits liability for PERSONAL wrongdoings of other partners (aka malpractice).

LLC - Owners have limited liability and pass through taxation (once instead of twice). Limited liability, limited liquidity, limited life, and limited tax.

Question 21

Duty of Loyalty (owed by Partners and Agents)

Answer 21

Partners and Agents may not

1) engage in self-dealing,
2) USURP partnership opportunities, or
3) Make a secret profit at the partnership’s expense.

Question 22

Share in Partnership Rights

Answer 22

MANAGEMENT: Absent Agmt, each partner entitled to EQUAL control

SHARE OF PROFITS: Absent Agmt, each partner entitled to EQUAL share of profits.

SHARE OF LOSSES: Absent Agmt, each partner shares in losses per PROFIT SHARING DIVISION (not equal unless profits shared equally).

Question 23

Dissolution/Termination of Partnership

Answer 23

If an AT WILL partnership, dissolution occurs automatically upon notice of ONE general partner’s intent to dissociate. If not at will, dissolution occurs upon stated event or majority vote of partners.

Termination is the END DATE of a partnership, after dissolution and the winding up period (where partners liquidate assets to satisfy creditors).

Question 24

Priority of Partnership Distributions (upon termination)

Answer 24

FIRST: All creditors must be paid (external AND internal, i.e. a partner that loaned money to partnership)

SECOND: All capital contributions PAID IN by partners must be fully REPAID.

THIRD: Profits and Surplus (or losses), if any.

Question 25

Tipper/Tippee

Answer 25

A TIPPER is liable if the inside tip was made for improper purposes.

A TIPPEE is liable if the tippee knew tipper breached a duty when relaying the inside information.

Question 26

Creation of an Agency Relationship

Answer 26

An agency relationship can be created by an act of the parties or operation of law (can be an agmt, holding out by the principal, ratification, estoppel, or statute).

Need:

• Capacity (contractual capacity for Principal)
• Consent
• no Consideration is needed, and usually no Writing is needed

Question 27

Contractual Liability for Agents

Answer 27

If an agent has ACTUAL or APPARENT AUTHORITY, or if the Principal later RATIFIES the contract, the Principal is liable for the contract entered into.

Actual - the agent reasonably believes she possesses based on dealings with principal (express or implied).

Apparent - the 3RD PARTY reasonably believes agent is acting with principal’s authority.

Ratified - so long as principal knows all material terms, can ratify expressly or implied through action or non-action.

Question 28

Tort Liability for Principals (Vicarious Liability)

Answer 28

RESPONDEAT SUPERIOR - if an employer-employee relationship exists (is it an independent contractor?) then principal is liable for any act WITHIN THE SCOPE OF EMPLOYMENT. If an independent contractor, principal can still be liable for inherently dangerous activity.

Always ask - was their a frolic or detour? can be a defense for the employer.

Question 29

Principal/Agent Duties

Answer 29

Principals in an Agent relationship owe duties of:

• Compensation
• Cooperation
• Indemnity/Reimbursement
• Express Contractual Duties

Agents in an Agent relationship owe duties of:

• Reasonable Care
• Loyalty
• Obedience
• Express Contractual Duties