Business Associations

Question 1

Agency - AGENCY RULE

Answer 1

Relationship that arises when 1 person manifests an intention that another acts on his behalf. Such relationship requires:

1) capacity - P’s contractual; A’s minimum mental
2) consent - voluntarily given by both parties
3) control - P has the RIGHT to control A’s conduct

Question 2

Agency - TYPES OF LIABILITY

Answer 2

NEGLIGENCE

• P’s own negligence in selecting, training, etc
• VL for EE acting in course and scope of employment
• VL for IC engaged in inherently dangerous activity or performing a non-delegable duty

INTENTIONAL TORTS

1) Agency authorizes force
2) Friction is generated
3) A is furthering P’s purpose

CONTRACT
If A had any auth’y to bind P

Question 3

Agency - TYPES OF AUTHORITY

Answer 3

EXPRESS - direction or permission from P for A to act

IMPLIED - nature of P’s position implies auth’y to act in particular manner based on custom and usage, acquiescence, or emergency

APPARENT - P communicates, by some act of statement, to a 3P the apparent auth’y for A to act on his behalf w/ respect to that 3P

RATIFICATION - P has knowledge of all material facts and agrees to be bound by A’s prior unauth’d act

Question 4

Agency - A’s DUTIES TO P

Answer 4

1) Undivided Loyalty - don’t compete, self-deal, or usurp opportunities
2) Obedience to Instructions
3) Reasonable Care - light of local community standards and taking into account any special skills of A

Question 5

Agency - P’s REMEDIES FOR A’s BREACH

Answer 5

1) Damages
2) Accounting for Secret Profits
3) Withholding Compensation Still Owed

Question 6

Agency - P’s DUTIES TO A

Answer 6

1) Reasonable Compensation
2) Reimburse for expenses or losses reasonably incurred in discharging auth’d duties
3) Cooperate in carrying out purpose of agency

Question 7

Agency - A’s REMEDIES FOR P’s BREACH

Answer 7

1) Damages for breach of K

2) Agent’s lien on P’s property held by A

Question 8

Agency - TERMINATION OF AGENCY RELATIONSHIP

Answer 8

1) Lapse of time
2) Happening of an event
3) Change of circumstances
4) Breach of fiduciary duty
5) Unilateral act
6) Operation of law

Question 9

Agency - TERMINATION OF A’s AUTHORITY

Answer 9

ACTUAL - when A knows/should know of the termination

APPARENT - if there is a writing by P giving to A manifesting auth’y and meant to be show to 3Ps, apparent auth’y continues w/ respect to 3Ps who see and rely on it

ALL - upon death or incapacity, whether known or not

Question 10

Agency - IRREVOCABLE AGENCIES

Answer 10

1) Coupled w/ an interest - immediately exercisable right in the object of the agency
2) Power given as security - exercisable only on default

Question 11

Agency - A’s LIABILITY TO 3Ps

Answer 11

NOT liable on K when acting for disclosed P.

Personally liable on K when acting for partially disclosed or undisclosed P.

Question 12

Agency - AGENCY AND ENTITY LIABILITY

Answer 12

• P’ship liable for act or omission for any p’r acting in the ordinary course of business OR w/ auth’y of other p’rs
• GP - all p’rs JSL for all p’ship obligations
• LP/LLP - p’rs liability is limited to capital account unless he acts inconsistency w/ limitations on control
• Corp bound by d/o acting w/in his positional auth’y

Question 13

P’ship - GP FORMATION

Answer 13

Agreement among two or more persons to carry on as co-owners a business for profit.

Profit sharing is prima facie evidence of p’ship UNLESS (1) loan repayment, (2) rent, or (3) wages

Question 14

P’ship - GP MANAGEMENT

Answer 14

• All pr’s have equal rights in the mgt and conduct of p’ship business
• Ordinary matters connected w/ p’ship business may be decided by a MAJORITY of p’rs
• No act in contravention of p’ship agreement is valid w/o UNANIMOUS consent of p’rs

Question 15

P’ship - GP’s DUTIES

Answer 15

CARE
In the conduct of p’ship business, p’rs must not engage in grossly negligent, reckless, or intentional misconduct or otherwise act in violation of the law

LOYALTY
P’rs must act in good faith and fairly to each other and the p’ship.
1) Refrain from dealing w/ p’ship as or on behalf of an adverse party
2) Refrain from competing w/ p’ship
3) Account for profits, property, opportunities, or other benefits from p’ship business

Question 16

P’ship - LPs

Answer 16

FORMATION
Must file Certificate of LP signed by all GPs w/ the Secretary of State

MANAGEMENT

• Only GP has auth’y to bind and make management decisions
• LP can vote on MAJOR issues - dissolution or asset sale

Question 17

P’ship - DISSOCIATION

Answer 17

The change in relationship among p’rs caused by any p’r ceasing to be associated in the carrying on of the business.

• Voluntary
• Involuntary - death, BK, incompetence, expulsion
• Wrongful - breach of express provision

Does NOT cause dissolution IF remaining p’rs vote to continue and file w/ SOS w/in 90 days then buy out dissociating p’r at GREATER of liquidated value OR value as ongoing business w/o him.

Question 18

P’ship - DISSOLUTION

Answer 18

1) 90 days after dissociation absent vote and filing of continuance
2) Express will of at least half of the remaining p’rs
3) Expiration of term

Question 19

P’ship - WINDING UP

Answer 19

ORDER OF ASSET DISTRIBUTION

1) Outside creditors
2) Inside creditors
3) Return of capital contributions
4) Surplus

OUTSTANDING DEBT
GPs are JSL for entire obligation, but can seek contribution from p’rs who haven’t paid their share

Question 20

P’ship - LLCs

Answer 20

• Taxed like p’ship but members enjoy limited liability
• Primarily governed by operating agreements
• Profits and losses allocated on basis of contribution

Question 21

Corps - FORMATION

Answer 21

Requires: (1) issuance of securities + (2) filing of Articles w/ SOS

DE JURE = in accord w/ formation statute

DE FACTO = colorable compliance w/ statute in good faith and conducting business as a corp

BY ESTOPPEL = 3P who treats entity as a corp may be estopped from later claiming it was not one

Question 22

Corps - ULTRA VIRES

Answer 22

Corp is presumed to be formed for a lawful purpose and any business outside the stated purpose is deemed ultra vires, and:

• S/hs can sue to enjoin the act
• Corp can sue d/o for damages arising from act
• State may seek dissolution of corp

Question 23

Corps - PIERCING THE CORP VEIL

Answer 23

S/h can be held personally liable for corp obligations IF:

1) corp is ALTER EGO of s/hs as shown by: failure to observe corp formalities AND basic injustice such that equity req’s s/hs be liable for the damages caused
2) INADEQUATE CAPITALIZATION at time of incorporation
3) Avoidance of EXISTING OBLIGATIONS at time of incorporation or fraud on creditors/3Ps

Question 24

Corps - DEEP ROCK DOCTRINE

Answer 24

Where a corp is insolvent and a s/h also has a claim as a creditor, the court has discretion to subordinate his claim to any class of creditors, including unsecured.

Insolvent:

1) inability to pay debts as come due OR
2) liabilities exceed assets

Question 25

Corps - PROMOTER LIABILITY

Answer 25

Promotor = one who acts on behalf of the corp in formation. Upon incorporation, promoter owes fiduciary duties to the corp AND s/hs - fair disclosure and good faith. If promoter acts on behalf of corp, knowing none has been formed, he is JSL for any liabilities, even after incorporation, absent an express novation. Corp is NOT bound by any pre-incorporation acts absent an express assumption.

Question 26

Corps - POWERS OF S/Hs

Answer 26

VOTE 1) elect directors 2) amend Articles or bylaws 3) approve fundamental corp changes Can vote by written PROXY - Valid up to 11 months max - Revocable unless expressly irrevocable and coupled w/ an interest to (1) a pledge, (2) share purchaser, (3) creditor, or (4) party to a voting agreement

Question 27

Corps - S/H AGREEMENTS AND VOTING TRUSTS

Answer 27

- Can involve any aspect of exercise of corp mgt powers - Must be either set out in Articles or in a written agreement signed by ALL s/hs - Does NOT impose personal liability on s/hs - CANNOT override statutory requirements

Question 28

Corps - TRANSFER RESTRICTIONS

Answer 28

Corp may restrict transfer of share for any reasonable purpose including: 1) right of first refusal 2) buy-back 3) transfer approval 4) prohibition on transfer to particular people/group Transferee is bound if he has knowledge of restriction OR it is conspicuously noted on the Certificate

Question 29

Corps - DISTRIBUTIONS

Answer 29

Dividend, redemption, repurchase, or liquidation -W/in bd's discretion; ct cannot compel absent abuse of discretion - NOT permitted if: 1) Corp would become insolvent OR 2) restricted in Articles

Question 30

Corps - DIRECT SUIT

Answer 30

Breach of duty owed directly to s/h by an officer, director, or controlling s/h 1) freeze out 2) duty not to sell to looters 4) duty not to sell corp offices

Question 31

Corps - DERIVATIVE SUIT

Answer 31

Breach of duty owed to corp by d/o Requires: 1) standing - ownership of stock at time of wrong 2) written demand and inaction for 90 days OR showing that such demand would be futile 3) corp named as nominal ∆

Question 32

Corps - DIRECTOR'S RIGHTS

Answer 32

1) VOTE on general direction of corp, approve significant action or incurring of liabilities, elect officers - -if quorum present, only need majority of disinterested vote to approve 2) INDEMNIFICATION for expenses incurred in defending a lawsuit in which he prevails

Question 33

Corps - DUTY OF CARE

Answer 33

Directors must act: 1) in good faith 2) w/ the care an ordinarily prudent person in a like position would exercise under similar circ's 3) in a manner he reasonably believes to be in the best interest of the corp If he does, BJR applies and he will not be liable for decisions that, in hindsight, turn out to be erroneous

Question 34

Corps - DUTY OF LOYALTY

Answer 34

AVOID CONFLICTS OF INTEREST 1) he or related person is a party to the transaction, 2) has a beneficial interest in the transaction, OR 3) is a d/o, agent, or employee of an entity w/ which corp is doing business and the transaction is of such importance that it would ordinarily require bd approval AVOID USURPATION OF OPPORTUNITIES that corp has an interest or expectancy in AVOID INSIDER TRADING Common law duty not to purchase/sell stock w/ undisclosed knowledge of special circ's significantly impacting stock value

Question 35

Corps - VOLUNTARY DISSOLUTION

Answer 35

Vote of s/hs AND bd to dissolve ends carrying on of business. Claims can be asserted against dissolved corp to extent of undistributed assets and against s/hs for pro rata share to the extent of assets distributed to them. To bar claims sooner, corp must: - notify known creditors in writing and set deadline no less than 120 days to receive claims - notify unknown creditors by publication in a newspaper in the county of the corp's PPOB, which will bar claims not asserted w/in 5 years.

Question 36

Corps - ADMINISTRATIVE DISSOLUTION

Answer 36

Brought by state for failure to: 1) Pay corp fee/penalties for 60 days after due OR 2) Deliver annual statement by domestic corp listing d/os, place of business, and agent for service of process for 60 days - Corp has 60 additional days to correct failure after notice from the state - Can apply for reinstatement w/in 2 years - relates back to date of dissolution

Question 37

Corps - JUDICIAL DISSOLUTION

Answer 37

-AG can seek on grounds of fraud or ultra vires act - S/h may seek on grounds that: 1) directors are deadlocked and irreparable injury to corp is threatened, 2) directors or s/hs have acted or will act fraudulently, illegally, or w/ oppression 3) S/hs are deadlocked and failed to elect one or more directors for 2 consecutive annual meetings, or 4) corp assets are being wasted - Creditors can seek if claim is reduced to judgment and remains unpaid OR corp admits claim is due and corp is insolvent - Corp can seek ct supervision of what began as voluntary dissolution

Question 38

Corps - RULE 10b-5 FRAUD

Answer 38

It is unlawful in connection w/ the purchase or sale of a security to employ interstate commerce, the mails, or a national exchange to: 1) employ and device/scheme to defraud, 2) make an untrue statement or omission of material fact, or 3) engage in any act or business practice that would operate as a fraud or deceit on any person

Question 39

Corps - RULE 10b-5 INSIDER TRADING

Answer 39

Where a person purchases or sells stock w/ knowledge of undisclosed, non-public info and breaches a duty of trust and confidence owed to the issuer, s/h of issuer, or source of info: 1) the buyer/seller can seek rescission or damages equal to the difference between the price paid and the average share price in the 90 days after corrective information is disseminated 2) gov't can criminally prosecute misappropriators

Question 40

Corps - RULE 10b-5 LIABLE PERSONS

Answer 40

INSIDER - Person connected to issuer - Liable only if he buys or sell on inside info TIPPER - Discloses inside info to another who trades on it - Liable only if disclosure was for an improper purpose TIPPEE - Trades on info from tipper - Liable if he knew tipper breached a duty of nondisclosure MISAPPROPRIATOR - Trades in breach of duty of confidentiality owed to the source - can be criminally prosecuted

Question 41

Corps - §16(b) SHORT SWING PROFITS

Answer 41

Any profit realized by a 10%+ s/h, director, or officer from any purchase and sale or sale and purchase w/in 6 months must be disgorged to the corporation. Profit = highest sale price - lowest sale price during the six month period

Question 42

Corps - SARBANES-OXLEY

Answer 42

-Corp must establish an audit committee of independent board members to oversee the appointment, compensation, and work of the register public accounting firm employed to perform its audits - CEO/CFO must review the filed audit report and certify: 1) it is true and doesn't contain material omissions 2) it fairly presents the financial position of the company, and 3) he established internal accounting controls and evaluated them within the prior 90 days. -Corp cannot make personal loans to any d/o UNLESS it is (1) made in the ordinary course of business and (2) on the same terms available to everyone else