South Carolina - Agency, Partnerships, Corporations Flashcards
AGENCY > VICARIOUS LIABILITY > “Agency” Definition/Elements
Principal manifests assent to an agent that the agent shall act on the Principal’s behalf, be subject to the principal’s control, and the agent manifests assent to so act.
A- Assent of parties
B- Benefit to Principal
Control- Principal must have the right to control the agent by having the POWER TO SUPERVISE the manner of the agent’s performance
AGENCY > VICARIOUS LIABILITY > When is a Principal Vicariously Liable for an Agent’s Torts?
RESPONDEAT SUPERIOR
(1) existence of an employer-employee relationship, and
(2) the tort was committed by the agent within the scope of the employer-employee relationship
APPARENT AUTHORITY
If above doesn’t apply, can still be liable if agent acted with apparent authority
AGENCY > VICARIOUS LIABILITY >
When is a Principal Liable for a sub-agent’s torts?
Liability
A principal-agent relationship must exist
*usually no assent
However, a principal may be liable for a subagent’s torts if the agent had implied/express AUTHORITY to hire the subagent
LIABILITY
Subagent is still liable to the Agent (if agency ret’l exists between them).
Agent is liable for subagent’s actions
AGENCY > VICARIOUS LIABILITY > When is a Principal Liable for a borrowed employee’s torts?
A principal-agent relationship must exist
*usually no right to control
AGENCY > VICARIOUS LIABILITY > Independent Contractors
Difference between an independent contractor and an agent
When is there vicarious liability for an independent contractor?
INDEPENDENT CONTRACTOR VS. AGENT
No right to control the independent contractor because there is no power to supervise the manner of the subcontractor’s performance
VICARIOUS LIABILITY
No vicarious liability, unless
- Inherently Dangerous Activities- tort committed during such activity
- KNOWINGLY (not neg’ly) Selecting an Incompetent Independent Contractor, or
- Nondelegable Duties
[possibly estoppel: “holding out” that Independent contractor with appearance of agency]]
AGENCY > VICARIOUS LIABILITY > Scope of Employment Factors
- Conduct was “of the kind” agent was hired to perform
- Tort occurred while agent was “on the job.”
- Frolic: Employee substantially deviates from employer’s directions
- Detour: Employee slightly deviates from employer’s directions
- Reentry: Employee returns to scope of employment following a frolic - Did agent intend to benefit the principal (even in part)?
AGENCY > VICARIOUS LIABILITY > Scope > Frolic vs. Detour
Factors to distinguish frolic and detour
- ADVANCED the employer’s interest
- Accident occurred BEFORE/AFTER employer’s objective was served
- deviation was in keeping with TYPE of employment
AGENCY > VICARIOUS LIABILITY > Intentional Torts
General Rule
Exception
GENERAL RULE
Intentional torts are generally outside the scope of principal-agent relationship
EXCEPTIONS:
- authorized/ratified by principal,
- natural from the nature of the employment, or
- motivated by a desire to serve (benefit) the principal
AGENCY > AUTHORITY > When is a Principal bound to contracts entered into by its agent?
Only when the Principal AUTHORIZED the agent to enter the contract. Four types of authority:
- Actual Express
- Actual Implied
- Apparent, and
- Ratification
AGENCY > AUTHORITY > Actual Express Authority
Creation
Principal uses words to authorize agent to enter contract
AGENCY > AUTHORITY > Actual Express Authority > Equal Dignity Rule
If contract itself must be in writing (i.e., within the SOF), then express authority must be in writing, too.
AGENCY > AUTHORITY > Actual Express Authority
Revocation/Termination of Actual Express Authority
- Unilateral act of either party, or
2. Death/incapacity of principal (even if agent doesn’t know of death/incapacity)
AGENCY > AUTHORITY > Actual Express Authority > Durable Power of Attorney
Written expression of authority to act on Principal’s behalf. Must contain “clear, survival language.”
AGENCY > AUTHORITY > Actual Implied Authority
Creation
Given through conduct or circumstance:
- Necessity: implied authority to do all tasks necessary to accomplish an expressly authorized task
- Custom: implied authority to do all tasks, which are customarily performed by persons with the agent’s title or position
- Prior Dealings Between Principal and Agent: Implied authority to do all tasks which agent believes to be authorized from prior acquiescence from the Principal
AGENCY > AUTHORITY > Apparent Authority
Creation
(1) Principal (directly/indirectly) “CLOAKED” agent with the APPEARANCE of authority, and
(2) third party REASONABLY RELIES on appearance of authority
AGENCY > AUTHORITY > Ratification
Definition
Creation
Nuance
DEFINITION: Principal grants authority after contract is entered by agent.
CREATION
- Principal knows (or has reason to know) of ALL MATERIAL FACTS regarding the contract, and
- Principal ACCEPTS BENEFITS (of ENTIRE transaction)
Nuance: Ratification cannot alter terms of the contract
AGENCY > AUTHORITY > Liability on the Contract
Who is liable on authorized contracts
Only the principal, and NOT the agent, is liable on authorized contracts
Nuance: If principal is partially disclosed or undisclosed, either the Principal or the authorized agent may be liable at the ELECTION of the third party.
AGENCY > DUTIES > Duties Agents Owe to Principals
Duty of Care
Duty to Obey Reasonable Instructions (no duty to lie/break law)
Duty of Loyalty
AGENCY > DUTIES > Duties Agents Owe to Principals > Duty of Loyalty
- Self-Dealing: Agent cannot receive a benefit to the detriment of the principal.
- Usurping the Principal’s Opportunity.
- Secret Profits: making a profit at the principal’s expense without disclosure.
AGENCY > DUTIES > Duties Agents Owe to Principals
Principal’s Remedies for a Agent’s Breach of Duty
Action for Secret Profits
Accounting
Disgorgement of Profits
Breach of Contract (if agency by K)
AGENCY > DUTIES > Duties Principal Owes to Agent
Compensate
Reimburse
Indemnify
Good Faith and Fair Dealing
Due Care
PARTNERSHIP > Definition of Partnership
A General Partnership is an association of two or more persons carrying on as co-owners of a business for profit
PARTNERSHIP > Test for Creation
Key test is INTENT to enter into a partnership
Express Partnership Agreement is best evidence of intent
*Key factor of intent is sharing of PROFITS (prima facie evidence)
PARTNERSHIP > Liability of Incoming/Dissociating Partners
INCOMING PARTNERS: Not liable for obligations incurred before she became a partner (capital paid into P’p can be used for such obligations though)
OUTGOING/DISSOCIATING PARTNERS
Liable for obligations incurred during partner’s term.
Remains liable until actual notice of dissociation is given to all known creditors; and publication notice is given to all potential creditors
PARTNERSHIP > Partnership by Estoppel
Even if P’p doesn’t exist, liability may be imposed on a person who allows others to think person is a partner
Purported Personal liability to person purporting to be a partner (and J&S liability for others consenting to representation)
Partnership liable if all partners consent to the representation
PARTNERSHIP > Duties of Partners
Each Partner is a fiduciary and owes a fiduciary duty to the partnership and all other partners
Duty of Care
Duty of Loyalty
[[Duty of Good Faith and Fair Dealing
Duty to Disclose (material info)
Duty to keep books; right of inspection]]
PARTNERSHIP > Duties of Partners > Duty of Care
duty to avoid gross negligence, intentional misconduct, or knowing violation of law
PARTNERSHIP > Duties of Partners > Duty of Loyalty
- Self-Dealing: Partner cannot receive a benefit to the detriment of the Partnership.
- Usurping the Partnership Opportunity.
- Secret Profits: making a profit at the Partnership’s expense without disclosure.
PARTNERSHIP > Duties of Partners > Action for Accounting
Partnership may RECOVER LOSSES that are caused by the breach and also may DISGORGE profits made by the breaching partner.
PARTNERSHIP > Partnership Property > Partner’s Ability to Transfer…
Property in the Partnership
Share in Profits
Share in Management
PROPERTY
If personal money is used to buy the property: personal property: transferable to 3Ps
If partnership money is used to buy the property, it is partnership property: non-transferable to 3Ps
SHARE IN PROFITS
share of profits is personal property owned by individual partners: transferable to 3Ps
SHARE IN MANAGEMENT:
Management is owned by partnership itself: non-transferable to 3Ps
PARTNERSHIP > Management of Partnership
Absent agreement, each partner is entitled to EQUAL control (vote)
Ordinary Matters: governed by majority vote
Extraordinary Matters: governed by unanimous vote
PARTNERSHIP > Salary of Partners
Absent agreement, partners get NO SALARY
Exception: salary for winding up partnership business
PARTNERSHIP > Partners’ Shares of Profits and Losses
PROFITS: Absent agreement, profits shared EQUALLY
LOSSES: Absent agreement, losses shared LIKE PROFITS
PARTNERSHIP
Dissolution Definition
Commencement of winding up process
PARTNERSHIP >
Winding Up Definition
Partnership settles partnership affairs: liquidating assets, satisfying partnership’s creditors, and distributing remainder to partners
PARTNERSHIP >
Termination Definition
All Partnership affairs wound up
PARTNERSHIP > Causes of Dissolution
ACT OF THE PARTIES Per Partnership Agreement Mutual Assent of Partners Expulsion of Partner By the will of a partner
OPERATION OF LAW
Illegality
Death of a Partner
Bankruptcy of Partner or Partnership
DECREE OF COURT
Breach of Partnership agreement by partner
Unprofitability of partnership
Misconduct of Partner
Incompetency of Partner
Incapability of Partner
Circumstances rendering dissolution equitable
PARTNERSHIP > Winding Up > Liability on Business
After dissolution, partners have authority to wind up partnership’s affairs. This includes only
“old business.”
Old Business: Transactions designed to terminate business
New Business: Partner will be held individually liable
PARTNERSHIP > Winding Up > Priority of Distribution
Each level must be fully satisfied before beginning the next level. Order of Priority:
^1. Outside creditors must be paid (non-partner trade creditors)
^2. Inside creditors must be paid (partners who have loaned money to the partnership and have become creditors to it)
^3. Capital Contribution by Partners must be paid (money given to p’p, but not as a loan–instead, money paid for a profit share)
- Profits/Surplus, if any. (u.o.a., equal shares)
^denotes LIABILITY–must pay these. Partners are personally liable for them.
PARTNERSHIP > LIMITED PARTNERSHIP >
Definition
A limited Partnership is a partnership with at least one general partner and at least one limited partner
PARTNERSHIP > LIMITED PARTNERSHIP >
Formation Requirements
must file a limited partnership certificate, which includes the names of all general partners
Must include the words “limited partnership” (NOT “LP” or “L.P.”)
LIMITED LIABILITY COMPANIES >
Definition
Hybrid between a corporation and a partnership: owners “members” have the same limited liability as shareholders in a corporation plus the benefits of partnership tax status
LIMITED LIABILITY COMPANIES > Formation Requirements
Organizers must file articles of ORGANIZATION
Includes:
- name of the LLC (LLC designation)
- address of registered office
- name of registered agent
LIMITED LIABILITY COMPANIES > Control
Owners “members” may manage, or
they may delegate control to a team of managers
LIMITED LIABILITY COMPANIES > Limited Aspects of an LLC
LIMITED LIABILITY: Same limited liability as shareholders in a corporation
LIMITED LIQUIDITY: u.o.a., full membership interest cannot be transferred without unanimous consent of the members
LIMITED LIFE: u.o.a., LLC dissolves upon unanimous consent of the members
LIMITED TAX: Same limited tax benefits of a partnership
CORPORATIONS > S Corporations
Benefit
Requirements
Taxed Like a partnership
100 or less shareholders; No foreign shareholders
CORPORATIONS > How to Restrict Transferability of Shares in A Corporation
- Restriction is CONSPICUOUSLY noted on the share certificates or OTHERWISE KNOWN by the purchaser,
- Restriction is for a REASONABLE PURPOSE, and
- right of first refusal; requires corporation/other to approve sale/purchase the shares; or prohibition to transfer to a designated class of persons (e.g., foreigners to maintain S status)
CORPORATIONS > Promoters
Who is a promoter
To whom does a promotor owe a fiduciary relationship.
What duty do they owe?
What is the remedy for a breach of the duty?
DEFINITION
A Promoter is a person who procures commitments for capital and other instrumentalities that the corporation will use after it’s formed.
TO WHOM DUTY IS OWED
Promoters owe a fiduciary duty to each other, the corporation, and the investors.
DUTY OWED
This entails a duty of good faith and fair dealing (can’t secretly profit)
REMEDY
Turnover unfair profit or rescind the transaction
CORPORATIONS > Promoters > Liability for acting on behalf of corporation
Promoter’s Liability
When and how does a Corporation become Liable for a promoter’s contract?
When is a Promoter relieved of liability.
PROMOTER'S LIABILITY A person (promoter) who acts on behalf of a corporation, KNOWING there has been no incorporation, is personally liable for any obligations incurred
CORPORATION’S LIABILITY
Corporation incurs liability on a promoter’s contract when it adopts the contract.
Adoption can be express (resolution of the BOD), or
Adoption can be implied (willingly and knowingly accepting the benefits of the contract)
PROMOTER RELIEVED OF LIABILITY
Promoter is liable even if corporation adopts contract. Promoter is relieved of liability only if NOVATION- agreement among all parties that the corporation shall be substituted for the promoter).
CORPORATIONS > Definition of a Pre-Incorporation Subscription Agreement
PRE-INCORPORATION SUBSCRIPTION AGREEMENT: Offer to purchase shares once corporation is formed
CORPORATIONS > Remedies for failure to register pre-incorporation subscription agreement
SUBSCRIBER: rescind agreement (b/c it was illegal)
ATTORNEY GENERAL: Fine Injunction Disgorgement of proceeds Any other appropriate relief
CORPORATIONS > Rules for Pre-incorporation Subscription AGreements
Corporation does not have to accept the offer once the corporation is formed
subscriber’s offer is irrevocable for six months (unless subscription agreement provides or consent of other subscribers)
subscription agreement must be registered as a sale of a security with the attorney general
CORPORATIONS > Remedies for subscriber’s failure to pay under a subscription agreement
- corporation may collect as it would any other debt
- Forfeiture: rescind the agreement and keep whatever subscriber has already paid:
- corporation must send notice of default to the subscriber, and - corporation gives subscriber at least 20 days to cure
CORPORATIONS > De Facto Corporation Doctrine
Parties will be treated as if a corporation existed if parties
- COLORABLY comply with incorporation statute, and
- act in GOOD FAITH,
CORPORATIONS > Estoppel Doctrine
Persons (including 3Ps) acting as though a corporation exists will be estopped from denying corporation’s existence.
CORPORATIONS > Contents of Articles of Incorporation
- Name of the Corporation (including company/corporate/incorporated designation)
- Number of Shares authorized to be issued
- Street address of Corporation’s registered agent
- Name, address, and signature of each incorporator.
CORPORATIONS > Cumulative Voting
Each share gets as many votes as there are positions to be elected.
This is the default unless AOI provides otherwise. However, to cumulatively vote:
- the meeting notice must CONSPICUOUSLY state that cumulative voting is authorized; OR
- a shareholder gives written notice to the corporation not less than 48 hours before the meeting OR announces his intention to vote cumulatively at the beginning of the meeting.
CORPORATIONS > How May Directors be removed?
Directors may be removed with or without cause.
Shareholders may remove directors.
- If director elected by a group, only members of that group may vote on removal.
- If director elected by cumulative voting, the director cannot be removed if votes cast against removal would be sufficient to elect director through cumulative voting.
CORPORATIONS > Director’s Meetings > Notice Requirement
REGULAR MEETINGS: No notice required
SPECIAL MEETINGS: 2 days notice required. Must include day, time place of meeting.
CORPORATIONS > Director’s Meetings> Quorum
A MAJORITY of the directors, unless AOI provide otherwise
But never less than 1/3
Quorum can be broken by walking out
CORPORATIONS > Director’s Meetings > Approval of Action
Actions are approved by a MAJORITY of the directors present at a meeting at which a quorum is present
Director deemed to have assented to action taken unless his or her dissent/abstention is entered into the minutes of the meeting
CORPORATIONS > Removal of Officers
Officers can be removed with or without cause by BOD. Officers can only be removed by the BOD
if in violation of a contract, normal contract remedies apply
CORPORATIONS > Declaring Distributions
Rule for Declaring Distributions
When is Corporation Unable to declare distributions
RULE
Declaration of distributions is in the discretion of the BOD
SOLVENCY LIMITATION: Can’t declare distributions when
Corporation is unable to pay its debts as they become due; or
Corporation’s liabilities exceed the corporation’s assets plus any preferential rights of shares above the distribution
CORPORATIONS > Director’s Duties > Duty of Care
Directors are fiduciaries of their corporation and owe the corporation a duty of care. Pursuant to this, in making decisions for the corporation, directors must act
- In good faith;
- with the care that an ordinarily prudent person would exercise in a like position; and
- In a manner the director reasonably believes to be in the best interest of the corporation
CORPORATIONS > Director’s Duties > Duty of Care
Director’s relying on others for information
In discharging duties, a director is entitled to rely on information from
- Corporate officers/employees the director reasonably believes to be reliable and competent;
- Outside experts as to matters the director believes to be in their competencies;
- A committee of the board if the director believed the committee merits competence
CORPORATIONS > Director’s Duties > Duty of Care
Doctrine of Waste
Directors have a duty not to waste corporate assets by OVERPAYING for property or employment services
CORPORATIONS > Director’s Duties > Duty of Care
Protections provided to directors in the AOI
AOI can limit/eliminate BOD personal liability.
But NO provision can limit/eliminate liability for the following:
- Breach of duty of loyalty;
- Acts/omissions not in good faith (or which involve gross negligence, intentional misconduct, or a knowing violation of law);
- Unlawful distributions;
- Transactions giving director an improper personal benefit
CORPORATIONS > Director’s Duties > Duty of Loyalty > Conflict of Interest Transactions
When director (or person/entity close to director) buys from or sells to the corporation
CORPORATIONS > Director’s Duties > Duty of Loyalty
Types of issues pertaining to the duty of loyalty
- Conflict-of-Interest transactions
2. Usurpation of Corporate Oportunities
CORPORATIONS > Director’s Duties > Duty of Loyalty > Conflict-of-Interest Transactions
Safe Harbors for conflict-of-interest transactions
- Transactions approved by MAJORITY of the directors, without conflicting interests in the transaction, after all material facts have been disclosed;
- Transactions was approved by a majority of votes entitled to be case by SHs, without conflicting interests in the transaction, after all material facts have been disclosed; or
- The transaction was FAIR to the corporation, in light of all circumstances
CORPORATIONS > Director’s Duties > Duty of Loyalty > Usurpation of Corporate Opportunity
General Rule
What is a “corporate opportunity”
Directors and officers may not usurp a business opportunity from the corporation without first giving their corporation an opportunity to act. (does not apply to SHs)
The business must have an INTEREST OR EXPECTANCY in the opportunity. The closer the opportunity is to the corporation’s line of business, the more likely a court will find it to be a corporate opportunity.
CORPORATIONS > Director’s Duties > Duty of Loyalty > Usurpation of Corporate Opportunity
Defenses
“No It Aint”: Factual argument that opportunity is too far removed from the corporation’s line of business (*only real viable defense)
“Can’t afford it”: Corporation can’t afford to take advantage of the opportunity (will usually fail)
“I Quit”: Director/Officer quits after opportunity is made. (Doesn’t really help…)
CORPORATIONS > Director’s Duties > Duty of Loyalty > Usurpation of Corporate Opportunity
Remedies for Breach
The Corporation may
- Recover profits that the director made from the transaction; or
- Force director to convey the opportunity to the corporation (constructive trust) for whatever consideration the director used to purchase the opportunity
CORPORATIONS > Indemnification of Directors/Officers
When is indemnification mandatory?
When is indemnification discretionary?
When is indemnification unavailable?
MANDATORY
Director/Officer successfully defends a proceeding
DISCRETIONARY Director/officer 1. acted in good faith 2. in the best interest of the corporation, and 3. not unlawfully
UNAVAILABLE
Director/officer found liable to the corporation; or
director/officer received an improper benefit
CORPORATIONS >
Similarities and Differences between the roles of directors and the roles of officers
SIMILARITIES
1. Fiduciary: Fiduciary who owes corporation duties of care and loyalty
- Liability: Not personally liable for corporation’s debts
- Removal: Can be removed with or without cause
DIFFERENCES
1. Election/Removal: Directors elected/removed by SHs. Officers elected/removed by Directors
- Role: Directors make overarching decisions about the corporation. Officers carry out corporate policies and operate the corporation on a day-to-day basis
- Agency: Directors are not agents of the corporation. Officers are agents of the corporation (have actual/apparent authority)
CORPORATIONS > Statutory Close Corporation
Governance
Liability of SHs
Special Requirements
Right of First Refusal
GOVERNANCE: SHs can elect any governance style
LIABILITY OF SHS: SHs cannot be personally liable
SPECIAL REQUIREMENTS:
- must state corporation is a statutory close corporation in the AOI
- Each share certificate must conspicuously state that the corporation is a statutory close corporation
RIGHT OF FIRST REFUSAL: each share subject to right of first refusal. SHs must first offer shares to corporation before selling to 3P
CORPORATIONS > Voting Rights of Shareholders
What do SHs vote on?
Elect directors
extraordinary corporate acts
CORPORATIONS > Voting Rights of Shareholders > Record Date
What is the importance of the record date
When must the record date be held
Only SHs who own shares on record date may vote.
Record date may not be more than 70 days before meeting
CORPORATIONS > Voting Rights of Shareholders > Notice
Timing
Substance
Not less than 10 days nor more than 70 days before a meeting
Must include time, date, place, and if applicable, special purpose of meeting
CORPORATIONS > Voting Rights of Shareholders > Proxy Voting
Requirement
Must be in writing
CORPORATIONS > Voting Rights of Shareholders > Proxy Voting > Validity of Agreement
Duration
Revocability
Death/Incapacity
DURATION: Valid for 11 months
REVOCABILITY
Normally freely revocable by grantor
Not freely revocable if writing states it is irrevocable and it is coupled with an interest.
DEATH/INCAPACITY
Death/Incapacity of grantor does not revoke proxy unless corporation
(1) receives notice of death/incapacity, and
(2) has time to act on it
CORPORATIONS > Voting Rights of Shareholders > Voting Mechanics
Quorum
Approval of Action
Fundamental (Extraordinary) Changes
QUORUM: Majority of votes entitled to be cast (cannot break quorum by walking out)
APPROVAL OF ACTION: Votes cast in favor exceed votes cast against
FUNDAMENTAL (EXTRAORDINARY) CHANGES: approved by 2/3 of all outstanding shares entitled to be voted
CORPORATIONS > SH’s Inspection Rights
SH may inspect corporate documents (books, papers, accounting records shareholder records) if
- Five (5) days written notice, and
- Notice states proper purpose
(no proper purpose necessary for AOI, bylaws, minutes of SHs meetings, etc)
CORPORATIONS > SH’s Preemptive Rights
Applicability
Unavailability
APPLICABILITY
To newly issued shares issued for money
UNAVAILABILITY
Shares issued within 6 months after incorporation
Shares issued without general voting rights
((Holders of nonpreferential voting shares have no preemptive rights in any class of preferred shares unless the preferred shares are convertible into shares without preferential rights))
CORPORATIONS > Suits Brought By Shareholders
Right to bring direct action
only if director/officer breaches duty owed only to the SH bringing the suit (e.g., wrongful denial of inspection rights)
CORPORATIONS > Suits Brought By Shareholders
Definition of Derivative Suit
When a director, officer, or third party breaches duty owed to the corporation, and corporation has not vindicated its own rights: SH can bring an action on behalf of the corporation seeking to vindicate the corporation’s rights
CORPORATIONS > Suits Brought By Shareholders > Derivative Suit
Standing
Demand Requirements
Recovery
STANDING
1. SH must have been a SH at the time of the action/inaction complained of OR must have become an SH through transfer by operation of law from one who was a SH at such time.
- SH must be able to FAIRLY and ADEQUATELY represent the interests of the corporation
DEMAND REQUIREMENTS
SH must allege with particularity any efforts made to obtain the action he desires from the directors, OR
state the reason for his failure to obtain the action or for not making the effort
Pre-suit demand is excused if demand made to the alleged wrongdoers would be futile
RECOVERY
Goes to the corporation (unless this would result in wrongdoers reaping a windfall).
SH may recover attorney’s fees if successful
CORPORATIONS > Duties owed by SHs in a close corporation
Same duty owed by partners in a PARTNERSHIP:
Duty of Loyalty
Duty of Good faith
CORPORATIONS > Remedies available to minority shareholders
- Judicial Dissolution: if directors have acted or will act in a manner that is ILLEGAL, OPPRESSIVE, or FRAUDULENT
- REARRANGEMENT: Court can rearrange the legal status of the corporation if the directors act UNFAIRLY or OPPRESSIVELY. For example
- removing officers
- ordering payments of dividends or damages; or
- ordering purchase of the shares of the oppressed SH
CORPORATIONS > Piercing the Corporate Veil
Situations where court will PCV
Three situations in which court will pierce the corporate veil of limited liability and reach the shareholder’s personal assets:
Alter Ego
Inadequate Capitalization
Avoidance of CURRENT Obligations, Fraud, or Evasion of Statutory Provisions
CORPORATIONS > Piercing the Corporate Veil
Alter Ego
Corporation ignores corporate formalities, such that it may be considered the “alter ego” of a shareholder (human/other corporation). Look for
a. COMMINGLING of personal assets with corporate assets
b. failure to observe corporate FORMALITIES (no board meetings, elections, etc.)
Nuances:
- Not applicable to statutory close corporations
- Sloppy Administration, without injustice, is not enough to PCV
CORPORATIONS > Piercing the Corporate Veil
Inadequate Capitalization
Inadequate Capitalization at TIME OF FORMATION
SHs must contribute sufficient capital for the corporation to cover prospective liabilities
CORPORATIONS > Piercing the Corporate Veil
Avoidance of _____________
Avoidance of CURRENT (personal) obligations, fraud, or evasion of statutory provisions
Note: there’s nothing wrong with incorporating to avoid possible FUTURE personal liability
CORPORATIONS > Fundamental Changes in Corporate Structure
General Procedure
- BOD adopts resolution recommending the change
- Written notice of SH’s meeting is sent to SHs explaining the change to be voted on;
- SHs approve changes by at least 2/3 majority of votes entitled to be cast (i.e., all issued votes in corporation); and
- The changes in the form of the articles are filed with the state
CORPORATIONS > Fundamental Changes in Corporate Structure
What are the “fundamental changes” to a corporation
- Amendment of Articles
- Merger, Share Exchange, and Conversion
- Sale of Substantially All Assets
- Dissolution & Liquidation
CORPORATIONS > Fundamental Changes in Corporate Structure
Who must approve a merger
SHAREHOLDERS OF DISSOLVING CORPORATION
SHAREHOLDERS OF SURVIVING CORPORATION, Unless:
- Its articles will not change after the merger;
- Its SHs’ rights will not differ after the merger and they will hold the same number of shares;
- Shares issued as a result of the merger (to new SHs, usually) will comprise no more than 20% of the voting power of the corporation
CORPORATIONS > Fundamental Changes in Corporate Structure
Short-Form Merger of a Subsidiary
A parent corporation may merge a subsidiary into itself without the approval of the subsidiary’s shareholders, if
- parent corporation owns at least 90% of the outstanding shares of each class of subsidiary’s stock; and
- parent mails a copy of the plan of merger to each SH of the subsidiary
CORPORATIONS > Fundamental Changes in Corporate Structure
Sale, Lease, or Exchange of Substantially All Property
Constitutes Fundamental Change if outside the ordinary course of business.
Generally, sale of 75% of corporation’s assets that also account for at least 75% of corporation’s revenues.
Mortgages/security interests and pledge’s don’t count
CORPORATIONS > Fundamental Changes in Corporate Structure
Dissolution & Liquidation
SHARES NOT ISSUED/BUSINESS NOT YET COMMENCED
can be dissolved by a majority of the incorporators
DISSOLUTION BY CORPORATE ACT
Follow approve fundamental change procedure
CORPORATIONS > Fundamental Changes in Corporate Structure
Appraisal Remedy–Dissenter’s rights
For SHs who vote against fundamental corporate change: right to have shares appraised and purchased by the corporation at a fair price
MARKET-OUT EXCEPTION: publicly held corporations with at least 2000 SHs and the shares have mkt value of at least $20M
PROCEDURE
- Notice of meeting includes SHs right to dissent
- SH gives notice before meeting of intention to exercise the right AND can’t vote in favor of the change
- Corporation must give SH notice of approval within 10 days of the approval of the change
- SH must demand payment
- Corporation must pay corporation’s estimate of fair value
- SH has 30 days to submit her own estimate of fair value
- If Corporation disagrees, it must file an action in court within 60 DAYS of receiving SH’s demand (if not, Corp is stuck paying SH’s estimate)
AGENCY > Determination of an “employee”
*Single overriding factor is RIGHT TO CONTROL: also consider (Charlotte Capers South Carolina PFD)
- characterization by parties
- distinct business/occupation
- Custom regarding supervision
- Skill required
- Tools and facilities
- Period of Employment
- Basis of compensation
PARTNERSHIP >
For what partner actions is a partnership liable?
Partners are agents of the partnership (for the carrying on of usual partnership business); therefore, the partnership is liable for
authorized contracts; and
torts
PARTNERSHIP >
For what are partners personally liable?
All Partnership Debts
Co-Partner’s Torts
PARTNERSHIP >
Rules for binding the partnership
ACTS IN THE ORDINARY COURSE OF BUSINESS [automatic apparent authority]: Binds the partnership and thereby binds other partners
ACTS OUTSIDE THE ORDINARY COURSE OF BUSINESS [require actual authority]: Partnership will not be bound unless partner has ACTUAL AUTHORITY
PARTNERSHIP > Dissolution
How to terminate apparent authority of partners to bind the partnership after dissolution
To terminate the apparent authority
LIMITED LIABILITY PARTNERSHIP >
Requirement
Liability
REQUIREMENT:
- register with state
- business name includes LLP
LIABILITY
Partner in LLP NOT PERSONALLY LIABLE for debts and obligations of partnership arising from TORTS committed by co-partners.
Still liable for her own torts and those of someone she supervises
LIMITED PARTNERSHIP >
How may a limited partner lose limited liability status
LIABILITY: up to contribution
LOSING LIABILITY
- LP’r is also a General Partner
- Conducts day-to-day control and 3P reasonably believes LP’r is a general partner; OR
- knowingly permits name to be used improperly in the name of the P’Ship
LIMITED PARTNERSHIP >
How are profits and losses allocated
u.,o.,a., to all partners (general/limited), IN PROPORTION TO THEIR CONTRIBUTIONS
LIMITED LIABILITY COMPANIES >
How are losses/profits distributed in an LLC
in proportion to contribution
