BA Flashcards
(105 cards)
1
Q
What is a principal/agent relationship?
A
employer employs agent to perform service in his affairs and who controls/right to control physical conduct of other in the performance of the services
2
Q
How is a principal agent relationship formed?
A
(1) Principal consents to have agent to act on their behalf
(2) Agent consents to act on Principal’s behalf and subject to Principal’s control
3
Q
What kind of liability does a principal get from agency relationship?
A
Principal liable for torts committed by employee within scope of employment. Employee is employed and conduct controlled.
4
Q
Is a principal liable for torts committed by an independent contractor?
A
No. Principal not liable for torts committed by an Independent Contractor. Independent Contractor = physical conduct not controlled or subject to control by Principal
5
Q
What is a general partnership?
A
A business association.
A. UPA: a GP is an association of two or more to carry on as co-owners a business for profit.
B. RUPA: GP may be created expressly or implied. A GP is assumed unless specified otherwise. Every partner is an agent of the partnership for purpose of its business
6
Q
Is profit sharing evidence of a GP?
A
- Profit sharing is prima facie evidence of being party of a partnership, unless received in payment of a debt, wages/rent, or interest on a loan. But sharing of gross returns does not of itself establish a partnership.
7
Q
How is management and operation of a GP handled?
A
Both UPA and RUPA:
Ordinary Business Decisions requires majority vote of partners
o Summers Trash – hiring additional employee an ordinary business decision so needed majority)
o National Biscuit: liable b/c valid business debt since partner who ordered bread had authority to do so.
* Major business Decisions requires consent of all partners (applies to all acts in contravention of any agreement between the parties)
8
Q
How are profits/losses shared in a GP?
A
Unless otherwise agreed, Partners must repay all contributions of money but not labor and share equally in the profits/loses. Kessler: written capital/labor partnership that did not address losses. Sold house at loss and capital partner not liable for labor partners losses.
9
Q
Are GPs personally liable?
A
Yes. Unlimited personal liability for debts of business including Contract and Tort. Partners cannot contract their way around liability to Third Party, but can contract around liability to each other i.e. contribution.
10
Q
How are partners liable under UPA?
A
Partners are J/SL for Torts but only JL for contracts.
11
Q
How are GPs liable under RUPA?
A
Partners are J/SL for ALL obligations whether contracts or torts
12
Q
Is there indemnification in a GP?
A
Yes, Partnership must indemnify a partner for expenses incurred by the partner in the ordinary course of partnership business
13
Q
Do partners have help make ends meet for the GP?
A
Yes, Partners must contribute to partnership if partnership unable to satisfy its obligations like indemnification
14
Q
What is the effect of a partner leaving a GP under UPA?
A
Dissolution of one partner led to entire partnership dissolving but remaining partners can choose to rise from the ashes
15
Q
What is the effect of a partner leaving a GP under RUPA?
A
Now uses term disassociation if one partner disassociating does not interfere with the continuance of the entire partnership
16
Q
What happens if a GP begins to dissolve/dissassociate?
A
Winding Up: fiduciary duty remains while shutting down
17
Q
What is a partnership for a term and what is its effect for dissolution?
A
- Term = specified duration of time and then dissolves. A partner does not have legal right to force dissolution of term partnership if other partner fulfills his or her duties. (Collins)
18
Q
At-will?
A
- At-Will = can leave whenever want (default) and keeps going
19
Q
What is an LLP?
A
A GP that provides limited liability for the firms debt obligation, offered only to professional services. Each partner has LL for debts of the business. Arises by statute and protections depend on if statute is partial or full shield. Partial shield statutes provide LL for firms Tort/Malpractice debt obligations. Full shield statutes provide for both Tort/Malpractice and Contract debt obligations.
20
Q
Can all partners manage in an LLP?
A
Yes
21
Q
What happens of a partner in an LLP does not work there?
A
It defaults to a GP
22
Q
What are the 4 requirements for forming an LLP?
A
- File with sec of state w/ name and LLP notice in name (CSY LLP)
- Insurance or pool of segregated funds
- Register every year
- Have to be a professional service (lawyer, doctor, accountants, architects)
23
Q
When are limited partners not personally liable for the misconduct of another partner?
A
1) no personal knowledge of misconduct,
(2) no benefit from the misconduct, and
(3) no direct supervision or control over the other partner
24
Q
What is an LP
A
A partnership comprised of limited partners and general partners. Allow investors as Limited Partners w/o liability for debts of the business. General partners in LP have full liability for debts of the LP, but get full management and control. There needs to be at least one general partner and one limited partner. GP statutes apply.
25
How is an LP foremed?
(1) Must file certificate of LP with sec of state or equivalent official
(2) Name of LP with “LP” (3P notice) and identity of general partners
26
What happens of a LP tries to manage?
o Traditional Control Rule
If a limited partner does anything that looks like management and control (a veto is enough) they have lost their shield of liability.
o Modern Control Rule loosened by statutes seeking to reign it in
Modern era rules have changed and limited partners can engage in management and control and still remain limited partners. General partners are still liable for debts of business.
27
What is an LLC?
o Non-corporate business structure that provides members a number of benefits like
Limited liability even if member participates in control
Pass through taxation
Freedom of choice about management
* Member managed = every member has authority and are agents of business
* Manager Managed = only managers have authority as agents, not members
(Key is flexibility, answer usually YES!)
28
What does an LLC not protect against?
Agreed contributions ($ you put in)
Members own wrongs (torts)
Personal K promises
Debts members agree to assume
29
How is the corporate veil pierced in either LLC or Corp?
o Piercing corporate veil applies to LLC’s (Kaycee Land) requires
(1) alter ego/instrumentality (required) - need one of 3
* (a) Commingling funds and assets
* (b) Failure to observe corp formalities like AOO, operating agreement, filing taxes
* (c) Undercapitalization to meet known and expected business risks
(2) deception, misrepresentation, fraud (required)
30
What is a corporation?
A legal entity that is separate and distinct from its owners.
31
What are the disadvantages of a Corp?
cost money to form/maintain and formalities like structure, formal meetings in minutes, separate bank accounts
32
How is a Corp formed?
o Corp existence starts when AOI filed. Filed AOI is conclusive proof that incorporators satisfied all conditions of incorporation.
33
What must the AOI of a corp included?
(a) Name of corp
(b) Number of shares authorized
(c) Street address for corp office and name of registered agent at that office
(d) Name and address of each incorporator
34
What is the structure of a corp?
(a) Board of Directors: managers and agents of corp
(b) Officers (CEO, COO): actors carrying out decisions of managers and agents of corps
(c) Shareholders: owners not agents
35
What is the ultra vires doctrine?
(a) Describes actions taken by corp that exceed scope of power given to them by corp charters. Actions by corp that goes “beyond its powers” are void.
36
Who can bring a ultra vires claim?
* Shareholder against corp
* Corp against Director
* Attorney General
37
What is a promoter?
o A promoter is a person who takes the initiative in founding/organizing a business. Promoters owe fiduciary duties to the corp and its SH. Scope of fiduciary duty extends to general creditors, co-promoters, and future SH.
38
Are promoters liable for pre-incorporation contracts?
(a) As a default rule, Promoter is usually personally liable for pre-inc. contracts unless you can show contrary intent that parties did not expect promoter to be liable. Corporations have no liability prior to incorporation for contracts made on behalf of promoters.
* Pre-inc K In name of promoter = promoter liable (unless novation)
* In name of Corp = promoter liable (unless novation)
* In name of corp not yet formed = depends on what court finds to be parties intent.Boss.
39
How is a contract adopted by a corp?
* Corp not required to adopt pre-incorp contracts but they can adopt promoter contracts after corp formed in writing or implied through actions. Adoption does not release promoter from liability so a 3P can sue corp or promoter unless novation
40
How does Novation occur?
* Corp adopting k only releases promoter from liability if there is novation. Novation requires corp, promoter, and third party to agree in writing to take promoter off the K. If successful, corp assumes promoter’s liability
41
What is a dejure corp?
one that is properly filed
42
What is a de facto corp?
Corp arising from the good faith attempt to comply with the statutory requirements of establishing a corp. Factors:
* Valid law under which corp could be organized
* Attempt to organize
* Actual use of corporate franchise
43
What happens of a de facto corp or corp by estoppel is not found?
then default to GP and members now partners, liable
44
What happens if one acts on behalf of a corp knowing there is not one?
(a) All persons purposing to act on behalf of a corp, knowing there was no incorporation, are J/SL for liability created while so acting (Robertson; Frontier Refining Company)
45
How do corporations raise money?
o (1) Debt capital: loans that requires terms of repayment, regular interest payments, repaid at some point
o (2) Equity Capital
46
How is equity capital raised?
) Equity Capital
(a) Capital (cash or assets) in exchange for stock/ a proprietary interest in the company
(b) Elements
* (1) Initial contribution by original entrepreneurs
* (2) Capital contributed by subsequent investors in exchange for ownership interest (equity securities)
* (3) Retained earnings of the company (income earned but not yet spent/allocated)
47
What are the two types of equity securities?
Common Shares, Preferred Shares
48
What is a characteristic of common shares?
* fundamental right to vote for directors and receiving net assets of the corp (distribution)
49
What is a characteristic of preferred shares?
* Preferred right to distributions over common shareholders but no right to vote
50
What are the 7 rights equity securities may have?
(a) Cumulative v. Noncumulative
(b) Participating vs. Non-participating
(c) Liquidation preferences
(d) Redemption rights
(e) Protective provisions
(f) Conversion rights (not upstream)
(g) Authorized but unissued shares
51
What is watered stock liability?
(a) Watered stock is stock issued for less than par value or ineligible consideration. SH who purchase watered stock are liable for difference between amount paid and what should have been paid (par value). If watered stock, shares cannot be issued but remain authorized.
52
What is valid consideration for shares?
(a) MBCA 1969
* Only money, personal property, labor/services are valid consideration. No future labor/services to be performed or promissory notes.
(b) MBCA 6.21 2002
* Stocks for services and promissory notes allowed. Basically anything
53
What is a SH preemptive right?
o SH right to purchase new issuance of stock proportionate to their existing stock before that stock is offered to the public.
o MBCA 1984 6.30: SH do not have preemptive rights unless in the AOI. Majority including CA are opt in statutes. Minority are opt out statues.
54
Can distributions always be made to shareholders?
No. Paying out a dividend when company has no money is bad for creditors so they limit directors from doing this. Directors can declare distributions if corp passes one of two tests: equity insolvency test or balance sheet test. Board picks one/both test to use in AOI. Generally, Directors can rely on accountants that use reasonable accounting methods to make these determinations, but large publicly traded corp must use Generally Accepted Accounting Practices (GAAP).
55
What is a distribution?
dividends or liquidations, and a way company distributes money to its SH.
56
57
What is the equity insolvency test?
* No distributions if corp would not be able to pay its debts as they become due in the usual course of business at least 6 months out
58
What is the balance sheet test?
* No distribution if assets less than liability plus sum needed to pay PSH. (able to pay off your liabilities and PSH)
* Assets = liability plus equity
59
What happens if a distribution is made without passing the required test?
director personally liable for difference between amount of distribution that exceeds what could have been distributed without violating the test. SH may be liable too if knew it was illegal.
60
Who manages a corp? can it be contracted out?
o All corp powers shall be exercised by and under authority of and the business and affairs of the corp managed by or under the direction of the board of directors
(a) Mcquade: K requiring directors not to change officers, salaries, or policies without consent of k parties is void. MBCA 8.01 says All corp powers are exercised by and corp managed by board
61
What are two shareholder rights?
(a) Vote for directors or big corporate changes like merger, change in state of incorp or amendment to AOI. (one vote per share)
(b) Right to inspect books and records
62
What can shareholders not do?
(a) Make ordinary business decisions
(b) Set dividends or compensation
(c) Select officers or hire employees
63
What is required for a shareholder vote?
(a) Meetings: SH vote at formal meetings, including annual and regular meetings, date and time specified in bylaws. 48 hr notice required
(b) Quorum: Shares generally must be present to vote, certain number of shares must be present for it to be a valid meeting, usually a majority of shares
(c) Proxy: SH have to be at the meeting, but if you cannot be there you can send a proxy, a person authorized to vote someone else’s shares. Can give full discretion or tell them how want to vote. This is an agency relationship with fiduciary duties that lasts 11 months
64
What are two kinds of voting for directors?
(a) Straight voting = one share, one vote. 51% to win. MSH always win
(b) Cumulative voting = gather and allocate, votes equalshares times open board seats. MSH benefit but staggered boards reducing number of elected positions every year makes more difficult. 48hr notice.
65
What is vote pooling?
Contract among SH to vote specific way, enforceable as a breach of K. Cannot pool to set compensation of officers
66
What is a voting trust?
SH transfer legal title of shares and voting power to trustee for voting trust certificate. SH retains economic attributes
67
What is a revocable/irrevocable proxy?
(a) Proxies are usually revocable but they are irrevocable if in writing and coupled with an interest in the corp (financial/employment/voting).
68
Will deadlock lead to dissolution?
Court has discretion to issue dissolution. Will look to shareholders and publics wellbeing. Courts are reluctant to issue dissolution when the business is still functioning.
69
What is oppression?
(a) SH have fiduciary duties to other SH. Majority SH must offer Minority SH equal opportunity for stock buybacks of the same amount of shares at equivalent price or else this is breach of fiduciary duty (Donahue Equal Opportunity Test). Majority SH cannot offer stock below fair market value to minority SH without valid business reason.
70
Who must register under the SEC section 12?
(1) Publicly traded companies (securities trade on national securities exchange) OR
(2) Large Private Corps
o Corp with > $10M in assets (within 120 days of last day of fiscal year) AND
o Either more than 2,000 SH (accredited + unaccredited), OR
o More than 500 unaccredited investors
71
How can a corporation leave the section 12 umbrella?
* File certification with SEC that
o Less than 300 record shareholders, or
o Less than 500 record holders if assets <10M for last three fiscal years
* Registration terminated 90 days after issuer files
* Exception: Publicly traded companies cannot terminate Section 12 registration even if they meet the criteria above
72
What is proxy solicitation?
o Proxy solicitation is the act of asking SH for their vote or proxy authorization to act on their behalf at SH meeting. Simply explaining how you intend to vote or what you would do with your votes is not considered solicitation.
73
What is exempt from proxy soliciation?
(a) Speeches, press releases, or published statements stating how shareholder intends to vote
(b) Solicitation that does not seek the power to act as a proxy and does not furnish physical proxy
(c) Solicitation where the number of persons solicited is less than ten (Thanksgiving dinner rule)
74
What does the SEC require for proxy soliciations?
(a) Proxy statement and proxy card.
* Proxy statement must include annual report and MD&A. MD&A disclosure of forward-looking information and allowed to say what they project.
o Safe harbor provisions: no liability if make false statement but did not know it was false
(b) Form of proxy documents includes who is solicitor, why are they soliciting proxy, what are their plans for company
75
What types of lawsuits can be brought for breach of fiduciary duty?
(a) Direct SH lawsuit: Corp directly caused the SH harm through a breach of fiduciary duty
(b) Derivative SH lawsuit: SH bring suit on behalf of corp for a breach of fiduciary duty (money will go back to corporation and hopefully some will go to shareholders)
76
What duty of care do directors/officers owe a corp?
(a) Directors/officers of corp must make decisions that pursue that corps interests with reasonable diligence and prudence (due care).
77
What is the MBCA duty of care?
o Directors must act
In good faith
In manner director reasonably believes to be in best interest of the corporation
With care that a person in a like position would reasonably believe appropriate under similar conditions (Ex. Every bank doing the same bad thing so okay)
78
What is the common law duty of care for directors/officers?
* Decisions must be made on informed basis, otherwise violation of Van Gorkom duty of care. Van Gorkom: Took only 2 hrs to decide merge with no evidence of price, no study of value and no Q’s violated duty of care presumption which is hard to overcome and held personally liable
79
What is the business judgment rule?
* Evidentiary presumption that directors in making a decision have acted on an informed basis, in good faith, and in a manner they believe to be in the best interest of shareholders
80
How do you analyze a potential breach of fiduciary duty by officers/directors?
Standard of Conduct; Common Law; BJR
81
What is indemnification in corps?
* Corps promise to reimburse director for litigation expenses to defend a suit/settle a suit/satisfy a judgment if director is sued because they were a director.
* Mandatory indemnification is when director is successful on merits and corp statutorily must indemnify. Permissive means corp may choose and will specify in the bylaws.
82
What is D&O Insurance?
* Provides meaningful protection to directors in the form of payments for indemnification even if corp not financially able to pay and claims not covered by corps indemnification provision
83
What are the two duties of loyalty of a director?
1. Self Dealing
2. Corporate opportunity
84
What is duty of loyalty?
(a) Directors owe a duty of loyalty to the corp. It requires directors to exercise their powers in the interests of the corp, and not in the directors’ own interest or in the interest of another person (including a family member) or organization. Directors should not use their corporate position to make a personal profit or gain or for other personal advantage
85
What is the duty of self dealing?
* Transactions between one or more directors and corp are no longer per se void. To determine if a valid transaction statutorily apply Sec 144. At common law, apply sec 144 coupled with intrinsic fairness test.
* Section 144: not void if
o (1) disclosure + board/board committee authorization by majority vote of disinterested directors or
o (2) disclosure + shareholders authorize or
o (3) contract/transaction is fair at the time it is authorized by board/board committee/shareholders
86
What is a corporate opportunity?
Occurs when a fiduciary (officer/director) appropriates a business opportunity for themselves that belongs to the corp. Not all business opportunities are corporate opportunity. Corporate opportunity is one in which
87
When does a corp opp arise?
o Director/senior executive becomes aware of in their corporate capacity or that they should know the other party is offering to the corporation or
o Director/senior executive who became aware of through the use of corporate information, should know the corp would be interested in, or
o Senior executive knows is closely related to the corps current or expected business.
88
When can officers take advantage of a corp opp?
o Opportunity is offered to the corporation AND
o Disclosure concerning the conflict of interest is made AND
o Opportunity is rejected by corporation AND
Rejection is fair OR
Opportunity is rejected in advance by disinterested directors/superiors following disclosure OR
Rejection is authorized or ratified by shareholders (and not a waste of corporate assets)
89
What is SEC Section 10 and Rule 10b5?
All insider trading is a violation of 10b5, but not all 10b5 violations are insider trading (1) By the use of any means or instrumentality (2) In connection with purchase/sale of any security (3) Any manipulative or deceptive device (4) In the public interest or for the protection of investors (5) Scienter (intent to deceive) (Ernst)
90
What are the 4 kinds of insider trading we learned about?
1. Classic Insider Trading
2. Chiarella Mere Possession
3. 14e3 Tender Offer
4. O'Hagan Misappropriation
5. Dirks Tipper-Tippee Liability
91
Classic insider trading?
* When a corp insider buys/sells shares of their corp using material, nonpublic info obtained through the insiders corp position.
92
Chairella Mere Possession?
Duty to disclose under 10b does not arise from mere possession of nonpublic market info. Need some other duty. Duty to disclose nonpublic info before trading only arises when one has a fiduciary relationship or duty of trust and confidence to the corp whose stock the insider was trading.
93
Rule 14e3?
* Issue Spot: tender offer knowing stock price will go up
* Imposes duty to disclose/abstain upon any person possessing material nonpublic info who trades securities related to tender offer (cash for shares). Requires scienter.
94
O'Hagan misapp?
* A person violates 10b and 10b5 when they misappropriate confidential info for securities trading purposes, in breach of a duty owed to the source of the info.
* Remedy is to disclose to the source plan to trade or use of info is not in connection with the purchase or sale of a security (abstain from trading on info)
* 10b5-2
95
What is 10b5-2?
o Broadens the reach of 10b5. So these are people that do not have a fiduciary duty to but should not be insider trading with
o Three non-exclusive situations in which person has duty of trust and confidence
Promise to keep confidential (ex. “don’t tell anyone”
Pattern or practice of sharing confidences with someone such that they knew should keep confidential
Brightline rule of confidentiality (spouse, parent, child, or siblings)
96
Dirks tipper-tippee liability?
* General
o Tip: info not available to general public passed by one person to another as a basis for a decision to buy/sell security
o Tipper: insider and outsider with a confidentiality duty who knowingly make improper tips
o Tippees: those without confidentiality duty who knowingly trade on improper tips
* Whether a tippee violates rule 10b5 will depend on whether the tipper violated a fiduciary duty in giving the tip, and whether the tippee knew (or should have known) of the breach. In this context, a breach of fiduciary duty occurs only where a tipper earns a personal benefit from the tip.
97
What is a benefit under dirks?
* Either a friend/family relationship OR the receipt of a pecuniary or non-pecuniary gift is sufficient to satisfy the Dirks Personal Benefit Test.
* Lawyers, accountants, and other professionals can be deemed temporary insiders for purposes of tipping liability (footnote 55)
98
When does dirks fail?
* At some point in chain, illegal tip becomes rumor b/c tippee no longer knows or should have known original tipper gained personal benefit from tip. (original tipper still liable if owed fiduciary duty to source). SEC will generally only go after the original tipper.
99
what is short swing trading?
* A private cause of action brought by derivative shareholders against specified insiders. Prevents big corp insiders from manipulating market. Differs from 10b5 because only applicable to corps registered under sec 12 rather than all corps, only applies to offsetting transactions rather than any purchase made on basis of insider info, no scienter requirement (so strict liability), and is specified persons. Authorizes corp to recover from specified insiders any profits made on transactions in 6 month period. 6 and a day okay. If guilty money goes back to corp
100
Does short swing trading only apply to publicly traded corps?
* (1) JDX: company registered under sec 12 (publicly traded)
o Corps whose securities traded on national securities exchange OR Corps with 10M in assets and shares of a class held by more than 2k shareholders
101
Who is a specified insider?
* (2) specified insider: (director/officer/10% shareholder)
102
How is short swing profit calculated?
* (3) short swing profit: profit determined by matching highest sale and lowest purchase in 6 month period
103
what is contemoraneous traders?
* Liability to contemporaneous traders. Everyone trading at same time as insider trader has private right to sue them b/c manipulation of markets harms everyone.
104
What does the Williams Act require for cash tender offers?
(b) Procedures for bidding
* Minimum period tender offer has to stay open
* Tendering SH Right to withdraw
* Tendering SH must get Highest price paid
* Shares purchased proportionally
105
