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Law & Public Policy > Class 6-7: Business Associations & Corporate Governance > Flashcards

Class 6-7: Business Associations & Corporate Governance Flashcards

1
Q

These are the key factors in choosing _______:

  1. Ease of Establishment and Maintenance
  2. Ease of Capital Formation (tradability)
  3. Limiting Liability
  4. Tax implications
A

Form of Business organization

Note: Choose wisely because changing forms can be a costly headache.

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2
Q

Name the Business Form:

  • Created without state filings or formal agreements
  • Business Income or losses on personal income tax
  • Proprietor bears personal liability for losses
  • Hard to form capital (i.e., no equity to sell, so must generally rely on personal funds & loans)
  • Terminates on death of the proprietor
A

Sole Proprietorship

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3
Q

Registering a sole proprietorship as a “DBA” (Doing Business As) ______ insulate from personal liability.

A

DOES NOT

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4
Q

Name the Business Form:

  • Express or implied agreement between 2 or more people to contribute to a business and share in profits and losses (not just salary).
  • Unless agreed otherwise, each partner controls the business and has authority to bind the partnership w/r/t 3rd parties.
  • It’s a separate entity, so the Partnership may own property in its own right, if it is listed as a party on the contract or the title refers to person taking title as a partner or refers to existence of a partnership.
  • Big Tax Advantage: Pass-through entity for tax purposes; so 1 level of tax only.
  • Not automatically terminated upon death or withdrawal of partner; rather majority partners may elect to continue.
  • General partners face joint and several personal liability for obligations (i.e., judgment can be satisfied in full from any individual GP); so if partnership cannot satisfy its own debts, the general partners are personally on the hook!
A

General Partnership

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5
Q

Name the Business Form:

  • One time partnership for specific purpose (e.g., constructing a power plant).
  • Terminates after project is complete.
  • Like a partnership, each ___ partner contributes, has rights to govern, and shares in profits and losses.
  • Partners in ___ have more limited authority to bind the ___ than in a general partnership.
A

Joint Venture

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6
Q

Name the Business Form:

  • To form, must file with State. But, fairly easy to convert from existing General Partnership to ___. Often used by Accts & Lawyers.
  • ___ is separate legal entity, which insulates partners from vicarious liability for malpractice of other partners.
  • But, partners still bear their own personal liability for torts and malpractice, including liability for failure to supervise other partners (~ negligent entrustment)
  • Pass-through tax treatment
A

Limited Liability Partnership (LLP)

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7
Q

When a partners bear personal liability for failure to supervise other partners. Even when they are in an LLP

A

Negligent Entrustment

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8
Q

Name the Business Form:

  • General partners (manage partnership and full J&S liability for partnership obligations) and limited partners (no liability for partnership obligations above their capital contribution and no right to participate in management– like corporate shareholders)
  • Used to raise capital from others.
  • More difficult to create than general partnership; must file Certificate of Limited Partnership with S.o.S.
A

Limited Partnership (LP)

Note: if strict certificate requirements are not met, court will assume it is a general partnership

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9
Q

Name the Business Form:

  • Formed by filing articles of organization / certificate of formation with Sec’y of State, and business name must include “___”.
  • It’s a separate legal person, so it can own property, enter K’s, etc
  • Operating Agreement controls rights & duties of members
  • Many states provide that managing members owe fiduciary duties to the ___ and other members (in the same way Directors owe duties to the Corporation and its Shareholders).
  • may be taxed as a partnership (pass through)
  • No limit on number of members, who may be members, or different classes of securities
A

Limited Liability Companies (LLC)

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10
Q

Operating Agreement (with in LLC) controls rights & duties of members including:

(Three things)

A
  1. Can flexibly allocate profits & losses.
  2. Some members are elected managers (like Board Directors).
  3. Fiduciary duties to other members and to the LLC generally may be limited/expanded under OA, except for the implied contractual duty of good faith & fair dealing.
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11
Q

IF YOU ARE A MEMBER-MANAGER IN AN LLC, YOU EXPRESSLY SIGN K’s ___________

A

ON BEHALF OF THE CORPORATION , AS ITS AGENT!

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12
Q

Name the Business Form:

  • Separate Legal Entity from its owners (SHs).
  • Stockholders (Usually) Not Personally Liable beyond their capital contribution.
  • Ease of Capital Accumulation because ownership rights easily transferred.
  • Perpetual Life, even if owners/directors/officers die.
    Separation of Ownership and Management
  • Two Classes of Stock are Allowed
A

Corporation

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13
Q

(C Corp or S Corp)

Subject to double taxation on business income and dividend income

A

C Corp

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14
Q

(C Corp or S Corp)

Certain domestic corporations can opt for Pass-through tax treatment, if:

  • 100 shareholders or less (who are US citizens or residents subject to tax, or are tax-exempt entities)
  • One class of stock only
  • File timely election for ____ treatment
A

S Corp

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15
Q

(Close Corporations or Closely-Held Corporations)

Benefits:

  • Shareholders may directly manage
  • Non-observance of formalities won’t destroy limited liability of SHs, by allowing “piercing of corporate veil”

Requirements:

  • Must elect to be treated as close corp in charter
  • 30 or less shareholders
A

Close Corporations

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16
Q

(Close Corporations or Closely-Held Corporations)

  • Refers to private companies where there is a lack of a liquid market for stock
  • This leads to Greater imposition of fiduciary duties upon SHs to each other.
A

Closely-Held Corporations

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17
Q

Name the type of Corporation:

  • A for-profit corporation that uses corporate power to solve social and environmental problems
  • No general duty to maximize SH value, or prioritize SH over other stakeholders when there is a change of control (no Revlon duties)
  • SH get increased rights to demand social performance.
A

B Corp

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18
Q

Name the type of Corporation:

-Low profit LLC

A

L3C

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19
Q

These are the 5 steps for what..

  1. Select state of incorporation
  2. Secure the Corporate name
  3. Select agent for service of process
  4. Draft Articles of Incorporation (including Name, Capital structure incl. # of shares authorized to issue, Address of registered agent and office, Name/address of each “incorporator”)
  5. File Articles of Incorporation & Pay fee w/ S.o.S.
A

Incorporation

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20
Q

Early in the life of a corporation, an incorporator or a director will usually _____ amongst incorporators after written notice, or unanimous written consent.

Topics covered:

  • Elect directors (if not already decided)
  • Approve By-Laws
  • Elect Officers
  • Establish bank account under Corporate name.
  • Adopt pre-incorporation promoters contracts by “novation”
  • Set share price, authorize issuance of shares
A

First Organizational Meeting

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21
Q

_____ insinuates that Corporations can generally engage in any act and enter into any contract open to a natural person in order to accomplish the purpose for which it was formed (look at A of I):

  • Form contracts
  • Borrow, lend and spend funds
  • Donate to charity or politics
A

Corporate Powers

22
Q

As separate persons, Corporations are subject to:

  • Civil Liability (Torts (personal injuries), Breaches of Contracts, Regulatory violations)
  • Criminal Liability
  • Tax Liability

These are known as _____

A

Corporate Liability

23
Q

____ provide capital (e.g., money) to corporation in exchange for part ownership of the company which is known as a “share” or a “stock”.

  • Usually not liable for the debts or actions of the company and can’t lose more than investment.
  • May be entitled to “dividend” if Board distributes surplus profit.
  • Do not have direct control over management of the corporation, but may vote, inspect, make resolutions.
  • May sue Corporation directly, and sometimes on behalf of it (___’s derivative suit).
A

Shareholders

24
Q

Voting Rights of a shareholder

A

Notice rights and voting rights at annual or extraordinary meetings about:

(1) Board membership
(2) fundamental corporate changes, e.g., mergers

25
Q

As a _____ stock holder, voting rights are included

A

Common

26
Q

As a _____ stock holder, no voting rights included, but higher return

A

Preffered

27
Q

______ gives each shareholder a total number of votes equal to the number of board members, multiplied by the number of voting shares owned, all of which can be put to any one candidate.

A

Shareholder cumulative voting

28
Q

Which right to a share holder is this:

Distributions of corporate profits paid to SH in proportion to their shares.
- Only certain funds can be used for _____ (to avoid defrauding creditors).
- Shareholders can ask a court to compel a ___ but wide latitude given to Directors.
Directors may reasonably choose to reinvest profits.

A

Dividend Rights

29
Q

Which right to a share holder is this:

First chance to purchase a prorated share of a new stock issue in order to prevent dilution of power.

A

Preemptive Rights

30
Q

Which right to a share holder is this:

Shareholders have some rights to information, corporate books and records in order to facilitate voting, but most States require the SH to have a “proper purpose

A

SH Info & Inspection Rights

31
Q

What are the rights of a shareholder?

A

Voting
Dividend
Preemptive
Information and Inspection

32
Q

_____ are proposals submitted by shareholders for a vote at the company’s annual meeting.

SEC requires public companies to include certain shareholder proposals in proxy statement issued to SH in advance of election.

SH resolutions may serve social, political goals:

  1. Divest in Apartheid regimes
  2. Say on Pay
  3. Disclose corporate political spending
A

Shareholder Resolutions

Note: Corp generally not obligated to accept SH resolutions

33
Q

When can shareholders be held viable for actions of the corporation, its Board, officers or employees?

(Three things)

A
  • Piercing the corporate veil
  • Receipt of known illegal dividend or watered stock
  • If majority/controlling shareholder, breach of duty to minority shareholder through oppressive conduct
34
Q

Sometimes plaintiffs will seek to “pierce the corporate veil” according to the ______ Theory when:

  • Corporation is dominated by one shareholder
  • Comingled assets and failure to follow corporate formalities
A

Alter Ego Theory

35
Q

Sometimes plaintiffs will seek to “pierce the corporate veil” according to the ______ Theory when:

  • The corp fails to reasonably anticipate liabilities
  • Prevent fraud on public
A

Undercapitalization Theory

36
Q

Corporations are managed by their agents, which are called _____

Elected by shareholders, typically for 1-3 year staggered terms.

A

Board of Directors

37
Q

Board hires ______, typically delegates day-to-day management power to them and can fire them.

A

Officers (e.g., CEO, CFO, etc.)

38
Q

As “fiduciaries” (i.e., persons in a position of trust), the Directors and Officers owe ___1____ and a ____2____ to the Corporation but not individual shareholders:

A
  1. Duty of Loyalty

2. Duty of Care

39
Q

In a corporation the ______ have rights of participation, inspection, and indemnification.

They also make the big policy decisions such as Determining capital structure, when/if to issue dividends, etc.

A

Board of Directors

40
Q

What type of Board committee does this describe?

handles interim management decisions between meetings

A

Executive Committee

41
Q

What type of Board committee does this describe?

selection, compensation and oversight of “independent” public accounts. Required by SOX

A

Audit Committee

42
Q

What type of Board committee does this describe?

chooses Board candidates for shareholder election

A

Nominating Committee

43
Q

What type of Board committee does this describe?

reviews and decides salaries, bonuses & benefits to Directors and top officers

A

Compensation Committee

44
Q

What type of Board committee does this describe?

handles employee requests to sue on behalf of corporation, investigate allegations

A

Litigation Committee

45
Q

The following describes which duty of D&O’s:

Must act in good-faith
Must act as reasonably prudent person would in same situation.

Must make informed decisions
Must conduct “due diligence” (i.e., research)
-Must attend meetings and presentations
-Entitled to reasonably rely on info from other professionals; but not blindly.

A

Duty of Care

46
Q

_____ insulates Directors from personal liability for bad choices and Shields Board decisions from judicial review, if:

  • Board took reasonable steps to become informed
  • Had rational basis for decision
  • No conflict of interest, no fraud, no bad faith
A

Business Judgment Rule

47
Q

To satisfy duty of ____, must engage investment banking firm to prepare valuation study and fairness report

To rely on the IB report, it must be in writing and reasoned

A

Care

48
Q

To fulfill duty of ____, Board members must make disinterested decisions.

E.g., if inside director helps sets officer compensation, they may be required to prove it is fair and reasonable or that a majority of disinterested directors approved it.

A

loyalty

49
Q

The following describes which duty of D&O’s:

D&O’s must put their personal interests behind corporation/shareholders.

In practice, this means they must avoid self-dealing

A

Duty of Loyalty

50
Q

What is considered self dealing? (4 things)

A
  1. Competing with the corporation
  2. Usurping corporate opportunity
  3. undisclosed conflicts of interest
  4. insider trading

Interested transactions are voidable unless fair and reasonable.

Law & Public Policy (8 decks)

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