BA - Final Study

Question 1

Agency authority types

Answer 1

1. Actual - express or implied, agent reasonably believes he is acting in principal’s best interests. Flows from principal to agent;
2. Apparent - manifestations from princpal to third party;
3. Inherent - judicial doctrine that corporate officers may bind corporation for acts in usual course of business (only if no actual or apparent, and would be unfair not to hold P liable due to public policy).
4. Estoppel - P intentionally or negligently caused 3P to believe A has authority, and fails to correct mistaken belief to detriment of 3P (reliance damages only - similar to Ks)

Question 2

Disclosed princpals

Answer 2

1. third party knows principal’s identity;
2. understands that agent is contracting on behalf of princpal;
3. Agent NEVER liable for contract.

Question 3

Partially disclosed principal

Answer 3

1. Third party knows Agent is contracting on behalf of princpal; but
2. Does not know Principal’s identity;
3. Agent may be liable.

Question 4

Undisclosed principal

Answer 4

1. Third party has NO NOTICE that Agent is acting for Principal;
2. Does not know of Princpal’s identity;
3. Third party may ELECT to hold Agent OR Principal liable.

Question 5

Fiduciary duty

Answer 5

1. Officers and directors;
2. Utmost loyalty, putting corporation’s interest before their own;
3. Owed to shareholders collectively;
4. Source of duty is articles, bylaws, and contracts for employment.

Question 6

De jure, de facto, estoppel

Answer 6

1. De jure - substantial compliance as a matter of law;
2. De facto - good faith but defective attempt, presenting itself as a corporation (treated as de jure, applies to Ks and torts, except government (quo warranto));
3. Estoppel - good faith, no effort to incorporate, valid if third pary treats as corporation and is estopped from denying, applies only on transaction by transaction basis.

Question 7

Premature commencement

Answer 7

1. Contracts for future corporations valid only against promoters;
2. Corporation can adopt; or
3. Novation.

Question 8

Liability of officer

Answer 8

1. Can prevail against in tort only where negligent+

Question 9

Pros and cons of general partnership

Answer 9

1. Created as a matter of law when two or more people associate to carry on for-profit;
2. no need to file documents, so lower administrative cost;
3. Passthrough taxation (pro but also phantom income);
4. All partners have equal rights in management and control and can bind;
5. Joint and several liability for all partners;
6. Consent of all partners needed to transfer interest.

Question 10

Limited partnership (LP) pros and cons

Answer 10

Def: Specific type of GP created by state statute, to limit the personal liability of innocent GPs for partnership tort and/or contract liability.

1. Limited partners losses limited to initial investment;
2. Passthrough taxation;
3. Written agreement filed with SoS, so there are organizational costs;
4. General partners jointly and severally liable.

Question 11

LLP pros and cons

Answer 11

1. Limited liability to all partners;
2. Passthrough taxation;
3. Written agreement and filing costs;
4. General partners protected from contracts but not negligence;
5. Could be limited to professionals only for professional partnership;
6. Ownership requires unanimous approval from other partners.

Question 12

LLLP pros and cons

Answer 12

1. Limited liabilty for all partners;
2. Can have managers and passive;
3. Passthrough taxation;
4. Ownership requires unanimous approval from other partners.

Question 13

LLC pros and cons

Answer 13

1. Limited liability for debts and tortious acts of others;
2. Passthrough taxation;
3. S-corp can be elected;
4. Management flexible;
5. Filing costs;
6. Freely transferable;
7. Costly drafting of documents;
8. Can be manager or member managed;
9. Continues indefinitely.

Question 14

C-corporation pros and cons

Answer 14

1. No contract or tort liability to shareholders;
2. Continued until dissolution;
3. Multiple classes of stock;
4. Can participate in §368 mergers;
5. Can make S-election where applicable;
6. Otherwise double taxation;;
7. Decentralized management;
8. Well-established governance law;
9. Freely transferable unless otherwise agreed upon;
10. State filing formalities and costs.

Question 15

Key factors to consider for entity selection

Answer 15

MCLiTT
1. Management;
2. Costs of formation, compliance, and formalities;
3. Liability;
4. Transferability;
5. Taxation.

Question 16

Piercing corporate veil factors

Answer 16

2 for contract, 1 for tort:
1. Basic formalities not followed;
2. Undercapitalized at formation;
3. Commingling assets;
4. Domination or control by one individual or corporation;
5. Alter ego theory;
6. Formed to commit fraud.

FUCCAF

Question 17

Piercing the corporate veil theories

Answer 17

1. Instrumentality - Total domination and control in all aspects or used to commit fraud + causation;
2. Alter ego - Unity of ownership and interests between controlling owner and corporation, no separate existence, inequitable result if not disregarded;
3. Identity - Unity of interest and ownership such that independence has ended, defeat justice to maintain fiction of separate entity.

Question 18

Ultra vires

Answer 18

1. “Beyond the powers,”
2. Exceeding scope - statute, articles, bylaws, board resolutions;
3. Depends upon context.
4. Common law, could assert as defense to contractual obligation;
5. Modernly, limited defense due to liberal statutes;
6. Shareholders can sue to prevent entering unauthorized transaction;

So basically, there are three basic scenarios where ultra vires could apply: 1) corporation seeking to avoid obligation with third party; 2) third party seeking to hold corporation liable; and 3) shareholders seek to hold corporation liable.

Question 19

Close corporation (CA)

Answer 19

1. Shareholders are key employees;
2. Operates like partnership;
3. 35 shareholders max;
4. No professional corporation in CA;
5. Single class of stock;
6. Elect S-status;
7. Shareholder participation in governance;
8. Fiduciary duties owed as board member;
9. Limited resale value and transferability.

Question 20

Issuance of shares

Answer 20

1. Authorized - total universe of share, set by articles;
2. Issued - sold by corporation, can only be issued ONCE;
3. Treasury - repurchased and owned by corporation;
4. Outstanding - issued but not treasury.

Question 21

Preemptive rights

Answer 21

1. Seprate right to buy before public;
2. Not when shares offered for consideration or property (only cash);
3. Right, but not obligation;
4. Prevent dilution;

Question 22

Recapitalization

Answer 22

1. Change in corporation’s balance of debt and equity;
2. Lowering leverage (decrease debt to equity ratio) - long-term increase but short-term decrease in EPS.

Question 23

Shareholder voting required for

Answer 23

1. Amending articles;
2. Mergers and consolidations;
3. Voluntary dissolution;
4. Sale or lease of substantially all corporate assets;
5. Declaring bankruptcy;
6. NOT changing agent for service or other minor things (can be done by board).

Question 24

Russian roulette

Answer 24

1. Shareholders name value;
2. Receiving shareholder must buy or sell.

Question 25

Texas shoot-out

Answer 25

1. Each shareholder sends sealed bid to third party setting price; 2. Highest bid can purchase at price in THEIR OWN bid.

Question 26

Dutch auction

Answer 26

1. Each shareholder submits minimum bid to third party; 2. Highest bidder can purchase at price in OTHER shareholder's bid.

Question 27

Duty of care

Answer 27

1. Applies to directors; 2. Ordinarily prudent person, similar circumstances; 3. Attentive to corporate business (attend meetings, active participation); 4. Reasonably informed on matters before board (learn about voting matters); 5. Rational basis for decisions (good faith, reliable information). DOARI

Question 28

Business judgement rule

Answer 28

1. Burden of proof on plaintiff to show duty of care was breached. 2. Officers and directors; 3. Presumes attentive, reasonably informed, rational basis;

Question 29

Duty of loyalty

Answer 29

1. Directors and officers; 2. Conflicts of interest, financial, self-dealing; 3. Traditional rule - ratification by shareholders, otherwise voidable; 4. Modern - Ratified by board if fair and honest. 5. Purpose to protect corporation from insider abuse. 6. Once ratified, presumption that transaction was fair and honest; 7. Requires independent committee of disinterested majority and quorum (interested can count toward quorum but not vote); 8. NOT voidable at corporation's option.

Question 30

Duty to disclose relevant information

Answer 30

1. Director or officer; 2. Has relevant facts to transaction (casual or official); 3. Failure to disclose is breach of duty of loyalty. 4. Applies even if disinterested

Question 31

Duty of agent to principal

Answer 31

1. Obedience - act in accordance with promise; 2. Loyalty (no conflicts/secret profits) - protect Principal's interests, not to compete; 3. Confidentiality - not to use or communicate confidential information; 4. Full disclosure/notification - disclose every act known or should know will be imputed to Principal; 5. Account - no comingling - account for all money and legitimate expenses; 6. Due care - execute duties with skill and diligence of reasonably purdent person.

Question 32

Duty of principal to agent

Answer 32

1. Indemnify/reimburse - authorized payments, legitimate expenses, litigation; 2. Compensate; 3. Protect - avoid negligence; 4. Cooperate.

Question 33

Termination of agency relationship

Answer 33

1. By act of parties; 2. Automatic - subject to effect of condition; 3. Operation of law - death, insanity, bankruptcy (automatic), 4. Irrevocable when coupled with interest.

Question 34

Actual authority

Answer 34

1. Creates RIGHT and POWER in Agent to bind principal; 2. Will NOT create directly liability for Agent.

Question 35

Apparent authority

Answer 35

1. Creates appearance of actual authority to third party;