2L Business Associations Flashcards
(306 cards)
1
Q
Sole Proprietorship
A
A proprietorship is a business owned by a single person who has the sole right to manage, is solely entitled to the profits, and has unlimited personal liability for the debts of the business.
2
Q
Independent Contractor
A
An independent contractor is an individual with authority to act without principal’s approval. Independent contractor must simply fulfill his/her duty to the principal. The independent contractor does not receive direction from the principal.
3
Q
Partnership
A
A partnership is an association of two or more persons to carry on as co-owners a business for profit.
4
Q
Limited Partnership
A
A limited partnership is a partnership formed by two or more persons under the laws of the state in which it is located, and having one or more general partners and one or more limited partners. A limited partnership requires a formal document to be filed with the state.
5
Q
Limited Liability Partnership
A
A limited liability partnership does not have a general partner; instead, every partner can participate in the management of the business. Additionally, in an LLP, every partner has limited liability for business debts.
6
Q
Limited Liability Company
A
A limited liability company is a hybrid business structure that combines the limited liability found in corporations with the tax benefits of partnerships. LLC owners are not personally liable for business debts.
7
Q
Corporation
A
A corporation is a legal entity, created in accordance with statutes, that is separate and distinct from the persons who own its stock or manage it.
8
Q
S Corporation
A
An S corporation has elected a special tax status with the IRS which allows ‘pass through’ taxation. This means individual shareholders report corporate profits and losses on their individual tax returns, avoiding the double taxation that occurs with C corporations.
9
Q
C Corporation
A
A C corporation is a standard corporation, in contrast with an S corporation. Taxation of C corporations can involve double taxation since the corporation pays taxes on profits through a corporate tax return; then shareholders pay taxes again on dividends through their individual tax returns.
10
Q
Double Taxation
A
Double taxation may result from corporate profits paid to owners as dividends.
11
Q
Agency
A
Agency is the legal relationship that involves one person (the agent) acting on behalf of another (the principal).
12
Q
Limited Liability
A
Limited liability is an attribute a Corporation’s shareholder has. Usually shareholders are not personally liable for the business debts of the corporation. A shareholder risks only what he has agreed to invest in the corporation and nothing more.
13
Q
Fiduciary
A
A person who is required to act for the benefit of another on all matters within the scope of their relationship, and who owes the duties of good faith, trust, confidence, and candor.
14
Q
Conflict of Interest
A
An incompatibility between one’s own interests and one’s duties owed to another.
15
Q
Master-Servant Relationship
A
The master must either possess actual control, or possesses the right to control, the physical conduct of a servant in the discharge of his duties. The most common example is the employer/employee relationship.
16
Q
Establishing the Agency Relationship
A
An agency relationship can be established in three ways: by agreement, by ratification and, by estoppel.
17
Q
Agency by Agreement
A
Agency by agreement requires a valid, legal purpose and both parties must exhibit a manifestation of intent to be bound. Additionally, the principal must have capacity to contract. Generally, agency agreements do not require contractual formalities nor consideration to be valid.
18
Q
Agency by Ratification
A
If the principal accepts the benefits, or confirms conduct of agent through verbal or other means, an agency relationship by ratification is created. A partial ratification of conduct by principal is considered ratification of the entire agency relationship.
19
Q
Agency by Estoppel
A
If a third party detrimentally relies upon principal’s misleading representations regarding agent, principal will be estopped from denying relationship.
20
Q
Agent’s Authority
A
A principal can be bound by agent’s actions if one finds: actual authority, apparent authority, ostensible authority or, power arising from agency relationship which does not depend upon principal’s authority.
21
Q
Agency Derived from Actual Authority
A
Actual authority is derived from duties expressly assigned to the agent by the principal. Actual authority may also be implied from customary usage of the express contract terms, or the principal’s behavior. Actual authority will exist even if the authority was fraudulently obtained by the agent.
22
Q
Actual authority
A
Authority that may be implied from customary usage of the express contract terms, or the principal’s behavior.
23
Q
Expressly assigned
A
Authority that is clearly and explicitly given to the agent.
24
Q
Implied from customary usage
A
Authority that is inferred from the common practices associated with the express contract terms.
25
Principal's behavior
Actions taken by the principal that may imply authority to the agent.
26
Agency Derived from Apparent Authority
An agency relationship that arises when a principal leads a third party to believe that another acts as her agent.
27
Principal bound
The principal is contractually obligated to the third party if the third party reasonably relies upon the statement.
28
Third party reasonably relies upon statement
The third party must have a reasonable basis for relying on the principal's representation of agency.
29
Can revoke by giving notice to third party
Apparent authority may be revoked by notifying the third party.
30
Apparent Authority derived from Apparent Ownership
Authority that allows an agent to deal with property as if they had actual ownership, based on indicia of ownership.
31
Indicia of ownership
Signs or indicators that suggest ownership, which can grant authority to the agent.
32
Deal with as if he/she has actual ownership
The agent may act with the same rights as an actual owner based on the principal's representations.
33
Possession alone is not enough
Merely possessing property does not confer apparent authority.
34
Agency Derived from Ostensible Authority
Agency that arises when a principal has misled a third party into believing that the agent has authority.
35
Intentionally and negligently misleads third party
The principal's actions that create a false impression of the agent's authority.
36
Principal estopped from denying agency relationship
The principal cannot deny the existence of the agency relationship once the third party has relied on it.
37
Must compensate for losses
The principal is required to compensate the third party for any losses incurred due to reliance on the agency.
38
Inherent Powers of Agents
Powers that agents possess which cannot be revoked by the principal.
39
Express or implied warranties
Promises made by the agent regarding the quality or nature of the goods or services.
40
Representations regarding agency subject matter
Statements made by the agent about the subject matter of the agency.
41
Scope of Agent's Authority
The extent of powers granted to an agent, which are strictly construed by the courts.
42
Powers are strictly construed
The courts interpret the agent's powers narrowly.
43
Duty to determine scope upon third party
The responsibility to ascertain the limits of the agency lies with the third party.
44
Agent has all power reasonably necessary to complete agency contract
The agent is granted implied powers necessary to fulfill the contract.
45
Protect interest of principal in time of emergency
The agent has implied authority to act in emergencies to safeguard the principal's interests.
46
Imputed Notice
A principal is not subject to imputed notice unless the agent had actual or apparent authority to receive it.
47
Agent must have actual or apparent authority to receive notice of fact
The agent needs to possess the proper authority to be considered a recipient of notice.
48
Imputed Knowledge
A principal is not subject to imputed knowledge unless the facts relate to the agency's subject matter and fall within its scope.
49
Facts must concern subject matter of the agency
The information must be relevant to the agency's purpose.
50
Facts must fall within scope of agency
The information must be within the boundaries of the agency's authority.
51
Ratification of Agent's Actions
The process by which a principal accepts an agent's unauthorized act, establishing the agency relationship and authority.
52
Ratification establishes the agency relationship and authority
The act of ratification confirms both the existence of the agency and the agent's powers.
53
Act treated as authorized at the outset
The ratified act is considered to have been authorized from the beginning.
54
No formal requirements
There are no specific formalities needed for ratification to occur.
55
Exposes principal to liability for agent's actions
Ratification makes the principal liable for the actions taken by the agent.
56
Ratification of Actions
An employer may only ratify those actions which could have been originally authorized.
57
General Limits Placed upon Ratification
When ratifying, the principal must ratify the entire act and not just a portion. An offer by a third party is considered an offer and can therefore be withdrawn at any time prior to acceptance by ratification. Death of an offering third party also ends the principal's ability to ratify.
58
Ratification Not Allowed
Neither actions violating public policy, nor actions completed on behalf of someone other than the principal, can be subject to ratification.
59
Ratification Shown by Conduct
For there to be an effective ratification, the principal must act in a fashion which displays his/her intent to ratify. Actions displaying intent include principal: voluntarily retains benefits of transaction, takes some type of legal action protecting the act in question, or her failure to repudiate the unauthorized act.
60
Principal's Knowledge of Material Facts
A ratification is deemed proper only if the principal was aware of all material facts at the time of affirmance. If the principal was not in possession of such information, or was mistaken as to the facts, he/she may rescind the ratification absent a third party's detrimental reliance.
61
Ratification Relates Back
Once an act is ratified, all liabilities and benefits relate back to the date of the original authorization. Exceptions to this general rule include: where the action is illegal, the principal lacks capacity, where rights of third parties would be prejudiced.
62
Contractual Relationship Between Agent and Principal
The principal-agent relationship is governed by the contract instituting the relationship.
63
Principal's Duty to Pay Agent
Principal has duty to pay agent, unless services are gratuitous.
64
Principal's Duty to Cooperate
The principal may not interfere with agent's discharge of duties. Conversely, the principal must aid in discharging agent's duties.
65
Principal's Liability for Agent's Injury
The principal is usually liable for injury to agent under state worker's compensation law.
66
Principal's Breach of Contract
If agent's contractual agreement is breached by the principal, the agent is allowed to recover under a theory of set off, a right of indemnification from principal, by placing a lien against principal's property, by nonperformance of remaining obligations, and by demanding an accounting.
67
Agent's Duty to Perform
Agent is obligated to use reasonable care, skill, and diligence when performing under the contract, even if the agent is providing services gratuitously.
68
Contractual Liability
Agent's failure will create contractual liability.
69
Tort Liability
Tort liability may be imposed for agent's negligent actions or performance.
70
Agent's Fiduciary Duty to Principal
The agent is bound by a fiduciary duty to the principal, which demands loyalty and notification of items material to the agency.
71
Items Acquired During Agency Relationship
Everything acquired by agent, during life of agency relationship, is property of the principal.
72
Breach of Fiduciary Duty
Remedies for breach of fiduciary duty include contractual as well as tort recovery, such as damages, imposition of a constructive trust, and rescission of agency contract.
73
Right to Indemnification
Principal has a right to indemnification for any loss resulting from agent's breach of contract.
74
Liability to Third Parties
In cases where the agent acts for an undisclosed principal, and there is no statement within the agreement indicating agency, the agent is liable to a third party.
75
Notice of Principal
If the third party has notice that the agent acts for another, extrinsic evidence will be allowed to show that the principal and agent did not intend for the agent to be bound.
76
Principal Liable when Agent Acting with Authority
If the agent acts within his/her capacity, and contracts in the name of the principal alone, only the third party and the principal will be bound by the agent's contract.
77
Form of Agreement
If the agent contracts in his/her own name or in both his/her name and the principal's name, liability depends upon the form of the agreement.
78
Principal Not Liable if Agent Acts Without Authority
If an agent acts without authority, the principal will not be held liable unless he/she ratifies.
79
Agent's Liability
The agent will be solely liable to the third party if acting without authority.
80
Intentional Misrepresentation
If agent's representations regarding authority are intentional, he/she may be held liable in tort.
81
Third Party Action
A third party who subsequently performs based upon agent's representations may be able to bring an action against principal to regain the bestowed benefit.
82
Significance of the Form of Agreement
If nothing within the agreement indicates an agency relationship, then the agent and principal will be held jointly liable.
83
Joint Liability
If there is evidence of the agent's signing in a representative capacity, then the principal will be solely liable.
84
Employer Liable for Torts of Employees
An employer will be liable for the torts of his or her employees if the employer directly authorizes, allows, or subsequently ratifies the employee's tortious action.
85
Employer Bound by Independent Duties to Third Parties
An employer may be found liable for breaching an independent duty of due care to the third party for hiring the tortious employee.
86
Fellow Servant Cannot Bring Suit Against Master
If a fellow servant is injured by another servant working in a similar capacity for the master, the injured party cannot bring action under a theory of respondeat superior.
87
Rights of Third Party
A third party has the right to bring an action against both the principal and the agent, but possesses a right to recover against only one party.
88
Right to Bring Action Against Both Parties
A third party has the right to bring an action against both the principal and the agent.
89
Right to Recover Against Only One Party
A third party possesses a right to recover against only one party.
90
Election Depends Upon Jurisdiction
Some jurisdictions hold that filing against one party releases the other party, but a majority of jurisdictions hold that the third party may file against both.
91
Rights Against Third Parties
Generally, only the principal is entitled to enforce the contract against third parties.
92
Agent May Recover If Given Power to Contract and an Interest in the Agreement
Where the agent has power to contract and an interest in the agreement, he/she is entitled to recover from a third party.
93
Agent for Two or More Principals
An agent may represent two or more principals, owing each a fiduciary duty.
94
Fiduciary Duty Owed to Each
An agent owes a fiduciary duty to each principal.
95
Consent of Each Principal Required
Multiple agency relationships require the consent of each principal.
96
Transactions of Agent Voidable
Absent consent, a principal may void any subsequent act taken by agent.
97
Subagent
A person to whom an agent has delegated the performance of an act for the principal.
98
Powers Delegated to Subagent
Agent's powers can be delegated to subagent upon consent of principal or if the delegated act is one of mechanics.
99
Mechanical Act
An act that can be delegated if the agent cannot lawfully perform it but the subagent can.
100
Necessary to Appoint Subagent
Agent's powers can be delegated if it is necessary to appoint a subagent.
101
Customary to Appoint Subagent
Agent's powers can be delegated if it is customary to appoint a subagent.
102
Subagent's Duty
A subagent, hired by agent with principal's consent, is bound by the same fiduciary duty as the agent.
103
Not Hired with Principal's Permission Results in No Duty
If a subagent is not authorized by principal, there is no fiduciary duty running between the principal and the subagent.
104
Master Servant Relationships May Extend to Subagent
If an agent is authorized to hire a subagent, the master servant relationship will run from principal to the subagent.
105
Not Authorized, Then No Liability
If the agent is not authorized to hire a subagent, the principal will not be liable for the tortious acts of subagent.
106
Independent Contractors
Generally independent contractors have the right to control their own actions and are not considered servants; therefore respondeat superior does not apply.
107
Principal's Bargain
The principal has merely bargained for the finished product and has no right to control the independent contractor's actions.
108
Liability for Dangerous Activities
If the independent contractor has been hired to conduct highly dangerous activity such as demolition, then the principal will remain liable for harm resulting from the dangerous activity.
109
Termination of Agency Relationship
Agent's authority to represent principal may be terminated by expiration of the agency term, agency's purpose has been completed, substantial change of agency's subject matter, incapacity or death of principal or the agent, or agreement or actions of the agent or principal.
110
Notice for Valid Termination
To terminate a valid agency relationship between principal and agent, the termination must be communicated to the other party, except in situations of death or incapacity.
111
Partnership by Contract
A partnership may be contractually formed by a written or oral agreement, with a writing required if the partnership is to exist for a period exceeding one year.
112
Partnership at Will
If there is no specified time period, the partnership will be presumed to be a partnership at will and terminable at any time.
113
Ability to Contract
In order to become a partner, the party must have the ability to legally contract.
114
Partnership by Estoppel
If a third party has detrimentally relied upon a party's representations regarding existence of alleged partnership, individuals may be estopped from denying existence of partnership.
115
Factors Indicating Partnership
In the absence of affirmative evidence of an agreement to create a partnership, the courts will consider joint ownership of property, contribution of capital, and the sharing of income.
116
Partnership Property
Property of a partnership includes all property originally brought into the partnership or subsequently acquired so long as the partners intended to devote property to the partnership.
117
Intent to Devote Property
Intent can be determined by clear expression of intent or the surrounding circumstances of the property ownership.
118
Partner's Interest
Each partner has a 'tenant in partnership' with the other partners in all partnership property.
119
tenant in partnership
A non-assignable equal right to possession for partnership purposes.
120
non-assignable equal right to possession
A right that cannot be transferred and allows equal possession for partnership purposes.
121
partnership purposes
The objectives or activities for which a partnership is formed.
122
right vests in surviving partners
Upon death, the right to possession transfers to the remaining partners.
123
profit derived from partnership is personal property
Each partner possesses a personal property interest in the profits of the partnership.
124
equal rights in management
Partners have the same rights in managing the partnership business.
125
equal rights in conduct of business
Partners share equal rights in the operation of the partnership.
126
unless partnership agreement holds otherwise
The default rights of partners can be altered by the partnership agreement.
127
partners owe fiduciary duties of due care, good faith, loyalty
Partners are required to act with reasonable care, honesty, and loyalty towards each other.
128
duty to account for profit and divide among partners
Partners must account for profits and distribute them according to the partnership agreement.
129
all partners have equal access to management
Each partner is entitled to equal access to the management of the partnership.
130
hold assets as trustee
Partners must manage partnership assets in a fiduciary capacity for the benefit of all partners.
131
make all books and records accessible
Partners are required to provide access to financial records and documents to all partners.
132
not to compete with partnership
Partners must refrain from engaging in activities that compete with the partnership.
133
partners can bind partnership with third parties
A partner has the authority to enter into contracts that legally bind the partnership.
134
partners can convey property if conducted in normal course of partnership business
Partners may transfer real property on behalf of the partnership during regular business activities.
135
partner can't give away partnership goodwill
A partner is prohibited from transferring the partnership's goodwill without consent.
136
submit claim to arbitration
Partners cannot agree to resolve disputes through arbitration without proper authority.
137
do anything impairing ability to conduct business
Partners cannot engage in actions that would hinder the partnership's operations.
138
third party acts as agent
If a partner misrepresents a third party, that third party may be treated as an agent.
139
partner making statement bound by actions of non-partner
A partner is legally responsible for the actions of a third party if they falsely represent them.
140
third party liable to others relying upon representations
A third party who claims to be a partner is accountable to those who rely on that claim.
141
partners jointly and severally liable for tort debt
Each partner can be held individually responsible for the partnership's tortious actions.
142
expiration of term, purpose is illegal, bankruptcy, or death
A partnership may be dissolved for these reasons.
143
voluntary dissolution requires compliance with dissolution procedure outlined in partnership agreement
Partners must follow the agreed-upon procedures for voluntarily dissolving the partnership.
144
Dissolution for insanity
UPA allows dissolution for insanity, permanent incapacity and improper conduct by partner.
145
Partnership continuation
Partnership continues until partnership business is completed.
146
Right to recover damages
If the dissolution of a partnership violates the terms of the partnership agreement, the non-dissolving partners may have a right to recover damages from dissolving partner.
147
No action for damages
If the dissolution is within the terms of the partnership agreement there will be no action for damages.
148
Dissolution resulting from death
If dissolution occurs as a result of a partner's death, the remaining partners have a right to possession of partnership property as well as a duty to complete partnership business.
149
Right to possession
Remaining partners have a right to possession of partnership property after a partner's death.
150
Duty to complete business
Remaining partners have a duty to complete partnership business after a partner's death.
151
Liability for partnership debt
Upon dissolution, the partners remain jointly liable for partnership debt.
152
New partnership assumes debt
If a new partnership emerges from the old form, the new partnership assumes debt of the old partnership.
153
Retired partner liability
The retired partner will not be liable for the debt acquired after her departure.
154
Formation of Limited Partnership
A limited partnership must be formed in compliance with formalities specified by statute in the jurisdiction, such as by filing with a designated government office or agency a certificate of limited partnership.
155
Statutory formation requirements
Compliance with statutory formation requirements, such as a certificate of limited partnership.
156
General Partner
A general partner manages the business and has unlimited personal liability for the business's debts.
157
Limited Partner
A limited partner cannot participate in managing the business, but makes an investment in the partnership and therefore has an ownership and profit-sharing interest.
158
Limited partner liability
The limited partner's liability is limited to the amount of his or her investment.
159
Formation of Limited Liability Company
A limited liability company must be formed in compliance with formalities specified by statute in the jurisdiction, such as by filing with a designated government office or agency articles of organization.
160
Close Corporation
Close Corporations are Corporations with few shareholders and no regular markets for their shares.
161
Public Corporation
A public corporation is a corporation with shares owned and traded by members of the general public.
162
Public corporations
Corporations registered under the Securities Exchange Act of 1934, with shares traded on a securities exchange or over the counter.
163
Promoter
A person who organizes or founds the corporation.
164
Formation of Corporation
A corporation must be formed in compliance with formalities specified by statute, such as filing articles of incorporation with a designated government office.
165
Articles of Incorporation
The governing document that sets forth the basic terms of a corporation's existence, including the number and classes of shares, and the purposes and duration of the corporation.
166
Bylaws
Provisions adopted by a corporation for its government, subordinate to the articles of incorporation.
167
Shareholders
Owners of the corporation who own shares of the corporation's stock.
168
Board of Directors
Elected by shareholders, the board represents them and has the legal responsibility for governing and supervising the corporation.
169
Officers
Individuals hired or appointed by the board of directors to administer the day-to-day affairs of the corporation.
170
De Facto Corporation
A defectively formed corporation treated as a valid corporation regarding the limited liability of shareholders due to a good faith attempt at proper formation.
171
Corporation by Estoppel
A doctrine preventing a third person from holding a member of a nonexistent corporation personally liable on an obligation entered into in the name of the nonexistent corporation.
172
Piercing the Corporate Veil Doctrine
The ability of creditors to reach the stockholders of a validly formed corporation and hold them personally liable for debts of the corporation.
173
Ultra Vires
An act beyond those allowed by the articles of incorporation, which is unenforceable under common law.
174
Separateness (Alter Ego) Test
A method of deciding whether the corporate veil will be pierced to hold shareholders personally liable for corporate debts.
175
piercing the corporate veil
The court's action to hold shareholders personally liable for corporate debts under certain conditions.
176
shareholders personally liable for corporate debts
The situation where shareholders are held responsible for the debts of the corporation.
177
failure to observe corporate formalities
Neglecting the required procedures and practices that govern corporate operations.
178
undercapitalization test
A method to determine if the corporate veil will be pierced based on insufficient capital to meet business needs.
179
insufficient capital to meet needs of business
The lack of adequate funds to support the foreseeable operations of a corporation.
180
Authority of Shareholders
Shareholders' power to elect and remove directors, amend articles or bylaws, and vote on fundamental corporate changes.
181
elect and remove directors
The process by which shareholders choose or dismiss members of the board of directors.
182
amend articles or bylaws
The ability to change the foundational documents that govern a corporation.
183
vote on fundamental changes in corporation
Shareholders' right to approve or disapprove significant alterations in corporate structure or operations.
184
Authority of Directors
The power of directors to manage the corporation and oversee its operations.
185
manage the corporation
The responsibility of directors to oversee the overall operations and strategy of the corporation.
186
appoint and supervise officers
The authority of directors to select and oversee corporate officers responsible for daily operations.
187
Authority of Officers
The role of officers in executing the day-to-day operations of the corporation.
188
perform day-to-day duties of the business
The responsibilities of officers to handle the routine operations of the corporation.
189
appointed and removed by board
The process by which officers are selected and dismissed by the board of directors.
190
Express Actual Authority
Authority explicitly granted to an employee or officer by corporate bylaws or board resolutions.
191
implied actual authority
Authority that can be reasonably inferred from express actual authority granted to an officer or employee.
192
Apparent Authority
Authority that third parties believe an agent possesses based on the corporation's representations.
193
Inherent Authority
Authority given to an agent by virtue of their specific position within the corporation.
194
Agency in Corporate Law
The principle that the corporation acts as the principal in agency relationships.
195
De Facto Officer
An officer who is improperly appointed but whose actions are treated as valid.
196
Respondeat Superior and corporations
The doctrine holding corporations liable for actions of their agents within the scope of their authority.
197
Ratification
The process by which the board of directors validates an unauthorized action, making it legally binding.
198
Fiduciary Duty of Care
The obligation of directors and officers to act in good faith and with the care a prudent person would exercise.
199
fiduciary duty of care imposed on directors and officers
A legal obligation requiring directors and officers to act in the best interests of the corporation.
200
good faith
The intention to act with honesty and sincerity in business decisions.
201
skill, diligence and care of reasonable prudent person
The standard of conduct expected from directors and officers in managing corporate affairs.
202
best interests of the corporation
The primary consideration for directors and officers when making business decisions.
203
Business Judgment Rule
A principle that protects directors and officers from liability if they make informed decisions in good faith that they believe are in the corporation's best interests.
204
no conflict of interest
A situation where a director or officer does not have personal interests that could improperly influence their decisions.
205
reasonably informed
Being adequately informed about the relevant facts before making a business decision.
206
rational belief that business decision is in best interest of corporation
The belief that a decision made is logically aligned with the corporation's welfare.
207
Fiduciary Duty of Loyalty
The obligation of directors and officers to act in the best interests of the corporation, avoiding self-dealing and conflicts of interest.
208
no self-dealing
A prohibition against directors and officers using their position to benefit personally at the expense of the corporation.
209
no violation of corporate opportunity doctrine
The requirement that directors and officers must not take business opportunities that rightfully belong to the corporation.
210
Corporate Opportunity Doctrine
A rule that prevents directors and officers from diverting business opportunities that should belong to the corporation.
211
bars diversion of business opportunity to officer or director
The restriction against directors or officers taking business opportunities meant for the corporation.
212
corporate expectancy, property interest, right
The legitimate interest a corporation has in a business opportunity that it expects to pursue.
213
Business Opportunity
A potential business venture that is considered a corporate opportunity if the corporation would likely be interested in it.
214
foreseeable
The ability to predict or anticipate that a business opportunity would be of interest to the corporation.
215
corporate interest
The potential benefit or advantage that a corporation could gain from a business opportunity.
216
Authorization
The formal description in the Articles of Incorporation detailing the classes of stock and their characteristics.
217
par value
An arbitrary or nominal value assigned to each share that must be received by the corporation before issuing fully paid stock.
218
Stated Value
The price set by directors for shares when no price is stated in the Articles of Incorporation.
219
No Par Stock
Shares that are issued without a par value, for consideration determined by the board of directors.
220
Bonus Stock
Par value shares issued without consideration.
221
Discount Shares
Par value shares issued for cash that is less than the par value.
222
Watered Stock
Par value shares issued for property that has been overvalued, not worth the aggregate par value of the shares.
223
Primary Stock Sales
The original issuance of shares by a corporation.
224
Secondary Stock Sales
The resale of shares by existing shareholders.
225
Outstanding Shares
Shares that have been issued and are currently held by shareholders.
226
Treasury Shares
Issued shares that have been repurchased by the corporation.
227
Debt Securities
A debt security obligates the corporation to repay the debt owed to the shareholder or outsiders who loaned money to the corporation by a specified date.
228
Registration Type of State Security Statute
A 'registration type' of state security statute requires new shares of a corporation to be registered with the appropriate state official before they are sold.
229
Fraud Type of State Security Statute
A 'fraud type' of state security statute does not require filing prior to selling stock, but penalties are imposed for fraudulent practices.
230
Registration of Broker-Realtor Type State Security Statute
A 'registration of broker-realtor type' of state security statute requires the registration of broker-dealers to help prevent fraud by those who market stock.
231
Permit Type of State Security Statute
A 'permit type' of state security statute requires the state to find that the proposed sale is fair, just, and equitable before a permit is issued and the transaction can occur.
232
Pre-Incorporation Subscriptions
A pre-incorporation subscription is a subscription for shares in a corporation yet to be formed and thus is not an enforceable contract between the corporation and the subscriber because it is only an offer.
233
Post-Incorporation Subscriptions
Post-incorporation subscriptions are stock subscriptions entered into after incorporation. They are an irrevocable contract obligating the corporation to issue and the subscriber to purchase the shares in question.
234
Dividend
A dividend is a payment to the shareholders from or out of current or past earnings.
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Straight Voting
Straight voting by a shareholder allows one vote per share.
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Cumulative Voting
Cumulative voting gives each shareholder a number of votes equal to the number of directors to be elected multiplied by the number of shares he holds.
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Right of Inspection
The right of inspection at common law gave each shareholder a qualified right to inspect corporate records at any reasonable time.
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Shareholder Agreements
Shareholder agreements are agreements between the shareholders of a corporation as a means of attaining control over corporate affairs.
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Pooling Agreement
A pooling agreement is a shareholder agreement in the form of a contract requiring the shareholder to vote her shares in a specified way for a specified period of time.
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Voting Trust
A voting trust is a shareholder agreement where each participating shareholder transfers legal title of his shares to a trustee, who then votes the shares.
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shareholder agreement
An agreement that outlines the rights and obligations of shareholders.
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transfers title
The process of legally changing ownership of an asset.
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trustee
An individual or organization that holds and manages assets for the benefit of another.
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votes shares
The act of shareholders exercising their voting rights associated with their shares.
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voting trust certificate
A document that evidences a shareholder's beneficial ownership and voting rights.
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Right of First Refusal
A right that allows existing shareholders or the corporation to purchase shares before they are sold to an outside buyer.
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sale of shares
The transaction in which ownership of shares is transferred from one party to another.
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offer
A proposal to sell or buy shares at a specified price.
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corporation or shareholders
The entities that may be granted the right of first refusal.
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proposed buyer's price
The price at which a potential buyer wishes to purchase shares.
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Equal Opportunity Doctrine
A principle requiring controlling shareholders to share premium amounts with minority shareholders.
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controlling shareholder
A shareholder who has the power to influence or control corporate decisions.
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premium
An amount paid above the market value of shares for control over a corporation.
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minority shareholders
Shareholders who own less than 50% of a corporation's shares.
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Insider
A person with a fiduciary relationship to a corporation, required to keep non-public information confidential.
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fiduciary relationship to corporation
A legal obligation of one party to act in the best interest of another.
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must keep non-public information confidential
The requirement for insiders to protect sensitive corporate information from disclosure.
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Inside Information
Confidential information about a company's financial or market situation not publicly disclosed.
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non-public information
Information that is not available to the general public.
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from source which owes duty of confidentiality
Information obtained from a source that is legally bound to keep it confidential.
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Affirmative Misrepresentation Rule
A rule holding insiders liable for fraud if they trade based on false statements made to a trading partner.
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applies to director, officer, or controlling shareholder
The scope of the Affirmative Misrepresentation Rule.
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lies or half-truths told to a trading partner
False statements made by insiders that can lead to liability for fraud.
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lies or half-truths are the basis upon which a trade is made
The condition under which the Affirmative Misrepresentation Rule applies.
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Insider's duty to disclose to shareholders
The common law principle that insiders owe no duty of disclosure to investors.
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common law: not duty to disclose to investor
The legal standard indicating insiders are not required to inform investors.
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Special Facts Doctrine
An exception to the common law rule that protects shareholders when insiders possess undisclosed special information.
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exception to common law rule providing no duty to disclose to investor
The condition under which the Special Facts Doctrine applies.
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existing shareholder in privity with insider
A situation where a shareholder has a direct relationship with an insider.
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insider possesses special information about the corporation
The insider has confidential information that could influence an investor's decision.
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information not disclosed to investor
The failure to share critical information that could affect trading decisions.
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Insider's duty to disclose to corporation
The obligation of insiders to report corporate information, which is considered the property of the corporation.
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corporate information is property of corporation
The principle that all information generated by a corporation belongs to it.
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Rule 10b-5 of the Securities Exchange Act of 1934
A regulation prohibiting fraudulent or manipulative practices in the purchase or sale of securities.
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trade uses interstate commerce, mail, national securities exchange
The scope of activities covered under Rule 10b-5.
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Abstain or Disclose Rule
One who has a fiduciary duty of trust and confidence to shareholders or to a source of confidential information and is in receipt of material non-public information has a duty to abstain from trading or to disclose the information public.
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Insider Trading and Agency Theory (Misappropriation Theory)
Under Diamond v. Oreamuno, an agent entrusted with information for the purpose of carrying on his principal's business may use the information for that purpose only. If an agent exploits, for his own benefit, knowledge or information acquired by virtue of a fiduciary relationship with the corporation, the corporation may recover the agent's profits.
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Tipper
A tipper is an insider who discloses material inside information for trading or other personal purposes, in breach of the fiduciary duty to the corporation.
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Tippee
A tippee is a non-insider who receives inside information from a tipper. A tippee who trades on the basis of the inside information is liable for misuse of that information if the tipper has breached a fiduciary duty by disclosing to the tippee and the tippee knows or should know there has been a breach.
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Section 16(b) of the Securities Exchange Act of 1934
Section 16(b) of the Securities Exchange Act of 1934 prohibits short-swing trading by specified insiders by requiring that any profits made within a six-month period through a purchase and sale (or sale and purchase) of a corporation's securities, by a director, officer, or beneficial owner of more than 10% of a class of stock, must automatically be returned to the corporation.
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Proxy
A proxy is a power of attorney given by the shareholder to someone else to vote his shares, establishing a principal to agent relationship.
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Section 14 of the Securities Exchange Act of 1934
The SEC requires in Section 14 that shareholders of a corporation whose securities are registered under Section 12 of the Securities Exchange Act of 1934 receive a proxy statement prior to a shareholder meeting, whether an annual or special meeting.
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Insolvency
Insolvency is a financial condition in which one's liabilities exceeds one's assets.
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Bankruptcy Definition of Insolvency
The bankruptcy definition of insolvency finds a corporation insolvent when the value of its assets is less than its debts.
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Equity Definition of Insolvency
The equity definition of insolvency finds a corporation insolvent if it is unable to meet current debts from current assets as the debts mature.
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Redemption of Shares
In a redemption, the corporation acquires outstanding shares pursuant to a provision in the articles applicable to an entire class of shares.
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Merger
A merger is a transfer, by operation of law, of all of the assets of the acquired corporation to an existing acquiring corporation.
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Triangular Merger
A triangular merger is a merger which involves a subsidiary of the acquiring corporation created specifically for the merger transaction.
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Direct Suit
A direct suit can be brought by an individual shareholder for harm done directly to him in his capacity as a shareholder.
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Derivative Suit
A derivative suit is a suit brought by a shareholder on behalf of the corporation for a harm done to the corporation.
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Deadlock
Deadlock in a closely held corporation arises when a control structure permits either of two or more factions of shareholders to block corporate action if they disagree with some aspect of corporate policy.
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Cash Tender Offer
A cash tender offer is a technique by which an aggressor corporation seeks to obtain control of a target corporation, by making a public purchase offer for a specified fraction (usually majority) of the target corporation's assets.
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Public Exchange Offer
A public exchange offer is a technique by which an aggressor corporation seeks to obtain control over a target corporation, by offering to exchange a package of its securities for the target corporation's voting shares.
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Provision in Articles
A clause or stipulation included in the corporate charter that governs the rights and responsibilities of shareholders.
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Operation of Law
A legal principle that dictates that certain events occur automatically as a result of existing laws.
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Acquiring Corporation
The corporation that purchases another corporation's assets or stock.
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Individual Shareholder
A person who owns shares in a corporation and has rights associated with that ownership.
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Harm to Him
Damage or injury suffered by an individual shareholder as a result of corporate actions.
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Capacity as Shareholder
The role or status of an individual as a member of a corporation through share ownership.
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Shareholder
An individual or entity that owns shares in a corporation and has a claim on part of the corporation's assets and earnings.
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Behalf of Corporation
Acting in the interest of the corporation rather than in personal interest.
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Harm to Corporation
Damage or injury suffered by the corporation as a whole, typically due to wrongful acts.
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Closely Held Corporation
A corporation that has a limited number of shareholders and is not publicly traded.
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Factions
Groups of shareholders within a corporation that may have differing interests or opinions.
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Block Action
The ability of a faction of shareholders to prevent corporate decisions from being made.
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Disagreement
A difference of opinion among shareholders that can lead to deadlock.
