South Carolina - Agency, Partnerships, Corporations Flashcards

1
Q

AGENCY > VICARIOUS LIABILITY > “Agency” Definition/Elements

A

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

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2
Q

AGENCY > VICARIOUS LIABILITY > When is a Principal Vicariously Liable for an Agent’s Torts?

A

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

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3
Q

AGENCY > VICARIOUS LIABILITY >

When is a Principal Liable for a sub-agent’s torts?

Liability

A

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

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4
Q

AGENCY > VICARIOUS LIABILITY > When is a Principal Liable for a borrowed employee’s torts?

A

A principal-agent relationship must exist

*usually no right to control

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5
Q

AGENCY > VICARIOUS LIABILITY > Independent Contractors

Difference between an independent contractor and an agent

When is there vicarious liability for an independent contractor?

A

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

  1. Inherently Dangerous Activities- tort committed during such activity
  2. KNOWINGLY (not neg’ly) Selecting an Incompetent Independent Contractor, or
  3. Nondelegable Duties

[possibly estoppel: “holding out” that Independent contractor with appearance of agency]]

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6
Q

AGENCY > VICARIOUS LIABILITY > Scope of Employment Factors

A
  1. Conduct was “of the kind” agent was hired to perform
  2. 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
  3. Did agent intend to benefit the principal (even in part)?
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7
Q

AGENCY > VICARIOUS LIABILITY > Scope > Frolic vs. Detour

Factors to distinguish frolic and detour

A
  1. ADVANCED the employer’s interest
  2. Accident occurred BEFORE/AFTER employer’s objective was served
  3. deviation was in keeping with TYPE of employment
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8
Q

AGENCY > VICARIOUS LIABILITY > Intentional Torts

General Rule

Exception

A

GENERAL RULE
Intentional torts are generally outside the scope of principal-agent relationship

EXCEPTIONS:

  1. authorized/ratified by principal,
  2. natural from the nature of the employment, or
  3. motivated by a desire to serve (benefit) the principal
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9
Q

AGENCY > AUTHORITY > When is a Principal bound to contracts entered into by its agent?

A

Only when the Principal AUTHORIZED the agent to enter the contract. Four types of authority:

  1. Actual Express
  2. Actual Implied
  3. Apparent, and
  4. Ratification
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10
Q

AGENCY > AUTHORITY > Actual Express Authority

Creation

A

Principal uses words to authorize agent to enter contract

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11
Q

AGENCY > AUTHORITY > Actual Express Authority > Equal Dignity Rule

A

If contract itself must be in writing (i.e., within the SOF), then express authority must be in writing, too.

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12
Q

AGENCY > AUTHORITY > Actual Express Authority

Revocation/Termination of Actual Express Authority

A
  1. Unilateral act of either party, or

2. Death/incapacity of principal (even if agent doesn’t know of death/incapacity)

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13
Q

AGENCY > AUTHORITY > Actual Express Authority > Durable Power of Attorney

A

Written expression of authority to act on Principal’s behalf. Must contain “clear, survival language.”

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14
Q

AGENCY > AUTHORITY > Actual Implied Authority

Creation

A

Given through conduct or circumstance:

  1. Necessity: implied authority to do all tasks necessary to accomplish an expressly authorized task
  2. Custom: implied authority to do all tasks, which are customarily performed by persons with the agent’s title or position
  3. Prior Dealings Between Principal and Agent: Implied authority to do all tasks which agent believes to be authorized from prior acquiescence from the Principal
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15
Q

AGENCY > AUTHORITY > Apparent Authority

Creation

A

(1) Principal (directly/indirectly) “CLOAKED” agent with the APPEARANCE of authority, and
(2) third party REASONABLY RELIES on appearance of authority

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16
Q

AGENCY > AUTHORITY > Ratification

Definition

Creation

Nuance

A

DEFINITION: Principal grants authority after contract is entered by agent.

CREATION

  1. Principal knows (or has reason to know) of ALL MATERIAL FACTS regarding the contract, and
  2. Principal ACCEPTS BENEFITS (of ENTIRE transaction)

Nuance: Ratification cannot alter terms of the contract

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17
Q

AGENCY > AUTHORITY > Liability on the Contract

Who is liable on authorized contracts

A

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.

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18
Q

AGENCY > DUTIES > Duties Agents Owe to Principals

A

Duty of Care

Duty to Obey Reasonable Instructions (no duty to lie/break law)

Duty of Loyalty

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19
Q

AGENCY > DUTIES > Duties Agents Owe to Principals > Duty of Loyalty

A
  1. Self-Dealing: Agent cannot receive a benefit to the detriment of the principal.
  2. Usurping the Principal’s Opportunity.
  3. Secret Profits: making a profit at the principal’s expense without disclosure.
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20
Q

AGENCY > DUTIES > Duties Agents Owe to Principals

Principal’s Remedies for a Agent’s Breach of Duty

A

Action for Secret Profits
Accounting
Disgorgement of Profits

Breach of Contract (if agency by K)

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21
Q

AGENCY > DUTIES > Duties Principal Owes to Agent

A

Compensate
Reimburse
Indemnify

Good Faith and Fair Dealing
Due Care

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22
Q

PARTNERSHIP > Definition of Partnership

A

A General Partnership is an association of two or more persons carrying on as co-owners of a business for profit

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23
Q

PARTNERSHIP > Test for Creation

A

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)

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24
Q

PARTNERSHIP > Liability of Incoming/Dissociating Partners

A

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

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25
Q

PARTNERSHIP > Partnership by Estoppel

A

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

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26
Q

PARTNERSHIP > Duties of Partners

A

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]]

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27
Q

PARTNERSHIP > Duties of Partners > Duty of Care

A

duty to avoid gross negligence, intentional misconduct, or knowing violation of law

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28
Q

PARTNERSHIP > Duties of Partners > Duty of Loyalty

A
  1. Self-Dealing: Partner cannot receive a benefit to the detriment of the Partnership.
  2. Usurping the Partnership Opportunity.
  3. Secret Profits: making a profit at the Partnership’s expense without disclosure.
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29
Q

PARTNERSHIP > Duties of Partners > Action for Accounting

A

Partnership may RECOVER LOSSES that are caused by the breach and also may DISGORGE profits made by the breaching partner.

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30
Q

PARTNERSHIP > Partnership Property > Partner’s Ability to Transfer…

Property in the Partnership
Share in Profits
Share in Management

A

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

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31
Q

PARTNERSHIP > Management of Partnership

A

Absent agreement, each partner is entitled to EQUAL control (vote)

Ordinary Matters: governed by majority vote

Extraordinary Matters: governed by unanimous vote

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32
Q

PARTNERSHIP > Salary of Partners

A

Absent agreement, partners get NO SALARY

Exception: salary for winding up partnership business

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33
Q

PARTNERSHIP > Partners’ Shares of Profits and Losses

A

PROFITS: Absent agreement, profits shared EQUALLY

LOSSES: Absent agreement, losses shared LIKE PROFITS

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34
Q

PARTNERSHIP

Dissolution Definition

A

Commencement of winding up process

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35
Q

PARTNERSHIP >

Winding Up Definition

A

Partnership settles partnership affairs: liquidating assets, satisfying partnership’s creditors, and distributing remainder to partners

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36
Q

PARTNERSHIP >

Termination Definition

A

All Partnership affairs wound up

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37
Q

PARTNERSHIP > Causes of Dissolution

A
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

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38
Q

PARTNERSHIP > Winding Up > Liability on Business

A

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

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39
Q

PARTNERSHIP > Winding Up > Priority of Distribution

A

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)

  1. Profits/Surplus, if any. (u.o.a., equal shares)

^denotes LIABILITY–must pay these. Partners are personally liable for them.

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40
Q

PARTNERSHIP > LIMITED PARTNERSHIP >

Definition

A

A limited Partnership is a partnership with at least one general partner and at least one limited partner

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41
Q

PARTNERSHIP > LIMITED PARTNERSHIP >

Formation Requirements

A

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.”)

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42
Q

LIMITED LIABILITY COMPANIES >

Definition

A

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

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43
Q

LIMITED LIABILITY COMPANIES > Formation Requirements

A

Organizers must file articles of ORGANIZATION

Includes:

  • name of the LLC (LLC designation)
  • address of registered office
  • name of registered agent
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44
Q

LIMITED LIABILITY COMPANIES > Control

A

Owners “members” may manage, or

they may delegate control to a team of managers

45
Q

LIMITED LIABILITY COMPANIES > Limited Aspects of an LLC

A

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

46
Q

CORPORATIONS > S Corporations

Benefit

Requirements

A

Taxed Like a partnership

100 or less shareholders; No foreign shareholders

47
Q

CORPORATIONS > How to Restrict Transferability of Shares in A Corporation

A
  1. Restriction is CONSPICUOUSLY noted on the share certificates or OTHERWISE KNOWN by the purchaser,
  2. Restriction is for a REASONABLE PURPOSE, and
  3. 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)
48
Q

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?

A

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

49
Q

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.

A
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).

50
Q

CORPORATIONS > Definition of a Pre-Incorporation Subscription Agreement

A

PRE-INCORPORATION SUBSCRIPTION AGREEMENT: Offer to purchase shares once corporation is formed

51
Q

CORPORATIONS > Remedies for failure to register pre-incorporation subscription agreement

A

SUBSCRIBER: rescind agreement (b/c it was illegal)

ATTORNEY GENERAL:
Fine
Injunction
Disgorgement of proceeds
Any other appropriate relief
52
Q

CORPORATIONS > Rules for Pre-incorporation Subscription AGreements

A

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

53
Q

CORPORATIONS > Remedies for subscriber’s failure to pay under a subscription agreement

A
  1. corporation may collect as it would any other debt
  2. Forfeiture: rescind the agreement and keep whatever subscriber has already paid:
    - corporation must send notice of default to the subscriber, and
  3. corporation gives subscriber at least 20 days to cure
54
Q

CORPORATIONS > De Facto Corporation Doctrine

A

Parties will be treated as if a corporation existed if parties

  1. COLORABLY comply with incorporation statute, and
  2. act in GOOD FAITH,
55
Q

CORPORATIONS > Estoppel Doctrine

A

Persons (including 3Ps) acting as though a corporation exists will be estopped from denying corporation’s existence.

56
Q

CORPORATIONS > Contents of Articles of Incorporation

A
  1. Name of the Corporation (including company/corporate/incorporated designation)
  2. Number of Shares authorized to be issued
  3. Street address of Corporation’s registered agent
  4. Name, address, and signature of each incorporator.
57
Q

CORPORATIONS > Cumulative Voting

A

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:

  1. the meeting notice must CONSPICUOUSLY state that cumulative voting is authorized; OR
  2. 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.
58
Q

CORPORATIONS > How May Directors be removed?

A

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.
59
Q

CORPORATIONS > Director’s Meetings > Notice Requirement

A

REGULAR MEETINGS: No notice required

SPECIAL MEETINGS: 2 days notice required. Must include day, time place of meeting.

60
Q

CORPORATIONS > Director’s Meetings> Quorum

A

A MAJORITY of the directors, unless AOI provide otherwise

But never less than 1/3

Quorum can be broken by walking out

61
Q

CORPORATIONS > Director’s Meetings > Approval of Action

A

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

62
Q

CORPORATIONS > Removal of Officers

A

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

63
Q

CORPORATIONS > Declaring Distributions

Rule for Declaring Distributions

When is Corporation Unable to declare distributions

A

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

64
Q

CORPORATIONS > Director’s Duties > Duty of Care

A

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

  1. In good faith;
  2. with the care that an ordinarily prudent person would exercise in a like position; and
  3. In a manner the director reasonably believes to be in the best interest of the corporation
65
Q

CORPORATIONS > Director’s Duties > Duty of Care

Director’s relying on others for information

A

In discharging duties, a director is entitled to rely on information from

  1. Corporate officers/employees the director reasonably believes to be reliable and competent;
  2. Outside experts as to matters the director believes to be in their competencies;
  3. A committee of the board if the director believed the committee merits competence
66
Q

CORPORATIONS > Director’s Duties > Duty of Care

Doctrine of Waste

A

Directors have a duty not to waste corporate assets by OVERPAYING for property or employment services

67
Q

CORPORATIONS > Director’s Duties > Duty of Care

Protections provided to directors in the AOI

A

AOI can limit/eliminate BOD personal liability.

But NO provision can limit/eliminate liability for the following:

  1. Breach of duty of loyalty;
  2. Acts/omissions not in good faith (or which involve gross negligence, intentional misconduct, or a knowing violation of law);
  3. Unlawful distributions;
  4. Transactions giving director an improper personal benefit
68
Q

CORPORATIONS > Director’s Duties > Duty of Loyalty > Conflict of Interest Transactions

A

When director (or person/entity close to director) buys from or sells to the corporation

69
Q

CORPORATIONS > Director’s Duties > Duty of Loyalty

Types of issues pertaining to the duty of loyalty

A
  1. Conflict-of-Interest transactions

2. Usurpation of Corporate Oportunities

70
Q

CORPORATIONS > Director’s Duties > Duty of Loyalty > Conflict-of-Interest Transactions

Safe Harbors for conflict-of-interest transactions

A
  1. Transactions approved by MAJORITY of the directors, without conflicting interests in the transaction, after all material facts have been disclosed;
  2. 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
  3. The transaction was FAIR to the corporation, in light of all circumstances
71
Q

CORPORATIONS > Director’s Duties > Duty of Loyalty > Usurpation of Corporate Opportunity

General Rule

What is a “corporate opportunity”

A

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.

72
Q

CORPORATIONS > Director’s Duties > Duty of Loyalty > Usurpation of Corporate Opportunity

Defenses

A

“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…)

73
Q

CORPORATIONS > Director’s Duties > Duty of Loyalty > Usurpation of Corporate Opportunity

Remedies for Breach

A

The Corporation may

  1. Recover profits that the director made from the transaction; or
  2. Force director to convey the opportunity to the corporation (constructive trust) for whatever consideration the director used to purchase the opportunity
74
Q

CORPORATIONS > Indemnification of Directors/Officers

When is indemnification mandatory?

When is indemnification discretionary?

When is indemnification unavailable?

A

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

75
Q

CORPORATIONS >

Similarities and Differences between the roles of directors and the roles of officers

A

SIMILARITIES
1. Fiduciary: Fiduciary who owes corporation duties of care and loyalty

  1. Liability: Not personally liable for corporation’s debts
  2. Removal: Can be removed with or without cause

DIFFERENCES
1. Election/Removal: Directors elected/removed by SHs. Officers elected/removed by Directors

  1. Role: Directors make overarching decisions about the corporation. Officers carry out corporate policies and operate the corporation on a day-to-day basis
  2. Agency: Directors are not agents of the corporation. Officers are agents of the corporation (have actual/apparent authority)
76
Q

CORPORATIONS > Statutory Close Corporation

Governance

Liability of SHs

Special Requirements

Right of First Refusal

A

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

77
Q

CORPORATIONS > Voting Rights of Shareholders

What do SHs vote on?

A

Elect directors

extraordinary corporate acts

78
Q

CORPORATIONS > Voting Rights of Shareholders > Record Date

What is the importance of the record date

When must the record date be held

A

Only SHs who own shares on record date may vote.

Record date may not be more than 70 days before meeting

79
Q

CORPORATIONS > Voting Rights of Shareholders > Notice

Timing

Substance

A

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

80
Q

CORPORATIONS > Voting Rights of Shareholders > Proxy Voting

Requirement

A

Must be in writing

81
Q

CORPORATIONS > Voting Rights of Shareholders > Proxy Voting > Validity of Agreement

Duration

Revocability

Death/Incapacity

A

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

82
Q

CORPORATIONS > Voting Rights of Shareholders > Voting Mechanics

Quorum

Approval of Action

Fundamental (Extraordinary) Changes

A

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

83
Q

CORPORATIONS > SH’s Inspection Rights

A

SH may inspect corporate documents (books, papers, accounting records shareholder records) if

  1. Five (5) days written notice, and
  2. Notice states proper purpose

(no proper purpose necessary for AOI, bylaws, minutes of SHs meetings, etc)

84
Q

CORPORATIONS > SH’s Preemptive Rights

Applicability

Unavailability

A

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))

85
Q

CORPORATIONS > Suits Brought By Shareholders

Right to bring direct action

A

only if director/officer breaches duty owed only to the SH bringing the suit (e.g., wrongful denial of inspection rights)

86
Q

CORPORATIONS > Suits Brought By Shareholders

Definition of Derivative Suit

A

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

87
Q

CORPORATIONS > Suits Brought By Shareholders > Derivative Suit

Standing

Demand Requirements

Recovery

A

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.

  1. 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

88
Q

CORPORATIONS > Duties owed by SHs in a close corporation

A

Same duty owed by partners in a PARTNERSHIP:

Duty of Loyalty

Duty of Good faith

89
Q

CORPORATIONS > Remedies available to minority shareholders

A
  1. Judicial Dissolution: if directors have acted or will act in a manner that is ILLEGAL, OPPRESSIVE, or FRAUDULENT
  2. 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
90
Q

CORPORATIONS > Piercing the Corporate Veil

Situations where court will PCV

A

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

91
Q

CORPORATIONS > Piercing the Corporate Veil

Alter Ego

A

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
92
Q

CORPORATIONS > Piercing the Corporate Veil

Inadequate Capitalization

A

Inadequate Capitalization at TIME OF FORMATION

SHs must contribute sufficient capital for the corporation to cover prospective liabilities

93
Q

CORPORATIONS > Piercing the Corporate Veil

Avoidance of _____________

A

Avoidance of CURRENT (personal) obligations, fraud, or evasion of statutory provisions

Note: there’s nothing wrong with incorporating to avoid possible FUTURE personal liability

94
Q

CORPORATIONS > Fundamental Changes in Corporate Structure

General Procedure

A
  1. BOD adopts resolution recommending the change
  2. Written notice of SH’s meeting is sent to SHs explaining the change to be voted on;
  3. SHs approve changes by at least 2/3 majority of votes entitled to be cast (i.e., all issued votes in corporation); and
  4. The changes in the form of the articles are filed with the state
95
Q

CORPORATIONS > Fundamental Changes in Corporate Structure

What are the “fundamental changes” to a corporation

A
  1. Amendment of Articles
  2. Merger, Share Exchange, and Conversion
  3. Sale of Substantially All Assets
  4. Dissolution & Liquidation
96
Q

CORPORATIONS > Fundamental Changes in Corporate Structure

Who must approve a merger

A

SHAREHOLDERS OF DISSOLVING CORPORATION

SHAREHOLDERS OF SURVIVING CORPORATION, Unless:

  1. Its articles will not change after the merger;
  2. Its SHs’ rights will not differ after the merger and they will hold the same number of shares;
  3. 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
97
Q

CORPORATIONS > Fundamental Changes in Corporate Structure

Short-Form Merger of a Subsidiary

A

A parent corporation may merge a subsidiary into itself without the approval of the subsidiary’s shareholders, if

  1. parent corporation owns at least 90% of the outstanding shares of each class of subsidiary’s stock; and
  2. parent mails a copy of the plan of merger to each SH of the subsidiary
98
Q

CORPORATIONS > Fundamental Changes in Corporate Structure

Sale, Lease, or Exchange of Substantially All Property

A

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

99
Q

CORPORATIONS > Fundamental Changes in Corporate Structure

Dissolution & Liquidation

A

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

100
Q

CORPORATIONS > Fundamental Changes in Corporate Structure

Appraisal Remedy–Dissenter’s rights

A

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

  1. Notice of meeting includes SHs right to dissent
  2. SH gives notice before meeting of intention to exercise the right AND can’t vote in favor of the change
  3. Corporation must give SH notice of approval within 10 days of the approval of the change
  4. SH must demand payment
  5. Corporation must pay corporation’s estimate of fair value
  6. SH has 30 days to submit her own estimate of fair value
  7. 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)
101
Q

AGENCY > Determination of an “employee”

A

*Single overriding factor is RIGHT TO CONTROL: also consider (Charlotte Capers South Carolina PFD)

  1. characterization by parties
  2. distinct business/occupation
  3. Custom regarding supervision
  4. Skill required
  5. Tools and facilities
  6. Period of Employment
  7. Basis of compensation
102
Q

PARTNERSHIP >

For what partner actions is a partnership liable?

A

Partners are agents of the partnership (for the carrying on of usual partnership business); therefore, the partnership is liable for

authorized contracts; and
torts

103
Q

PARTNERSHIP >

For what are partners personally liable?

A

All Partnership Debts

Co-Partner’s Torts

104
Q

PARTNERSHIP >

Rules for binding the partnership

A

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

105
Q

PARTNERSHIP > Dissolution

How to terminate apparent authority of partners to bind the partnership after dissolution

A

To terminate the apparent authority

106
Q

LIMITED LIABILITY PARTNERSHIP >

Requirement

Liability

A

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

107
Q

LIMITED PARTNERSHIP >

How may a limited partner lose limited liability status

A

LIABILITY: up to contribution

LOSING LIABILITY

  1. LP’r is also a General Partner
  2. Conducts day-to-day control and 3P reasonably believes LP’r is a general partner; OR
  3. knowingly permits name to be used improperly in the name of the P’Ship
108
Q

LIMITED PARTNERSHIP >

How are profits and losses allocated

A

u.,o.,a., to all partners (general/limited), IN PROPORTION TO THEIR CONTRIBUTIONS

109
Q

LIMITED LIABILITY COMPANIES >

How are losses/profits distributed in an LLC

A

in proportion to contribution