Corporations and Business Associations - Bar Review

Question 1

Agency creation

Answer 1

An agent is a person or entity that acts on behalf of a principal. Agency exists if there is: 1) Assent to act as an agent; 2) Benefit to the principal; and 3) Control of the agent by the principal.

Question 2

Actual authority

Answer 2

An agent can bind a principal to contracts if the agent has actual authority. This can be provided in writing or can be given to the agent orally. Flows from principal to agent.

Question 3

Express authority

Answer 3

Exists when the principal has clearly given and overtly told the agent that they are directed to act on the principal’s behalf.

Question 4

Implied authority

Answer 4

Exists when the agent believes the action take is required by their duties, the have acted the same previously, or if it would be normal and appropriate for the agent to serve in this capacity.

Question 5

Apparent authority

Answer 5

Exists when the principal holds out the agent as someone acting on their behalf, and a third party reasonably relies on the agent having such authority. Flows from principal to third party.

Question 6

Equal dignity rule

Answer 6

If the agent signs a contract that requires a writing, the agency agreement must also be in writing (e.g., an agent transferring a deed without written authority would be ineffective).

Question 7

Formation of a partnership

Answer 7

A partnership is created when two or more persons carry on a business for profit. The partnership is formed upon agreement, written or verbal. Sharing profits is a key indicator that a partnership has been formed.

Question 8

General partner liability

Answer 8

General partners are personally liable for liabilities of the partnership. Usually, judgements are not asserted against personal assets unless partnership assets have been depleted.

Question 9

Limited liability partnership (LLP)

Answer 9

an LLP is a partnership where the partners have limited personal liability (i.e., their personal assets may be attacked). Formation requires filing with the secretary of state. A limited partner can actively manage the partnership, which is different from a limited partnership where one partner has all of the power, and the others simply have a financial stake.

Question 10

Authority to bind

Answer 10

Each partner has the authority to bind the business contractually. A unanimous vote of all partners is required to bind the partnership if the action is beyond the normal scope of business. All partners have implied authority.

Question 11

Winding up

Answer 11

Upon the termination of the partnership, partnership assets will be distributed to: 1) Outside creditors; 2) Inside creditors; 3) Capital contributions from the partners; and 4) The remaining assets, if any, will be divided among the partners equal to their percentage of ownership. Additionally, if no assets remain and the partnership has outstanding creditors, these liabilities will be divided and assigned to each partner according to their percentage of ownership.

Question 12

Corporations

Answer 12

A corporation is established to raise capital and protect investors from liability. A corporation is a legal entity that exists separately from its owners, thus shielding the owners and managers from liability. A corporation is formed when articles are filed with the secretary of state.

Question 13

Pre-incorporation promotor liability

Answer 13

A promotor is a person who works to establish a corporation prior to formal inception. They are personally liable for pre-incorporation contracts unless a post-formation novation relieves the promotor of that obligation.

Question 14

Formation

Answer 14

A corporation is formed when their articles are filed with the secretary of state.

Question 15

Articles of incorporation

Answer 15

The articles must contain the name of the corporation, the number of shares the corporation will issue, the address of the corporation’s initial office, the name of its initial agent, and the name and address of each incorporator.

Question 16

Election of directors

Answer 16

Shareholders elect directors, and may remove them for any reason, upon a vote. The board of directors acts to assign the officers of the corporation, as well as the terms of their employment.

Question 17

Quorum

Answer 17

The board of directors must have a quorum and take a vote before they can perform an action. A quorum requires that a majority of the board of directors be present to vote.

Question 18

De jure corporation

Answer 18

A legally formed corporation, it enjoys the protections and benefits of a corporate entity, including protection of the personal assets of the shareholders.

Question 19

De facto corporation

Answer 19

A corporation that failed to be properly established. Persons or companies conducting business with a de facto corporation who know it was improperly formed will be estopped from later making claims as if the entity were a de facto corporation. E.g., a bank loaning money at a high rate of interest who knows of the defective incorporation may not later make claims against its shareholders.

Question 20

Corporation by estoppel

Answer 20

If a person treats a business as if it were a corporation, they are estopped from later claiming it was not a corporation. E.g., A third party seeking to sue the shareholders will be unsuccessful if at one time they acted as if they were dealing with a corporation.

Question 21

Limited liability company (LLC)

Answer 21

An LLC is an entity structure that protects is members from being liable for debts of the company. The default tax treatment of an LLC is that of a tax partnership.

Question 22

Ultra vires act

Answer 22

When a corporation’s activities are outside the scope of their articles, such activities are deemed ultra vires acts which can subject the corporation to derivative suits from shareholders, where they can sue to prevent the corporation from losing value due to these acts.

Question 23

Piercing the corporate veil

Answer 23

The corporate entity provides that shareholders and directors are typically not liable for debts and liabilities of the corporation. However, certain actions by the company officers may warrant “piercing the corporate veil,” thereby subjecting shareholder assets to attack from judgement creditors. This occurs when a shareholder, officer, or director uses the corporation as their alter ego; when they fail to follow corporate formalities; if the corporation is inadequately capitalized at inception; or to prevent fraud. FUCCAF (2K, 1T) 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; 7) Interests of justice.

Question 24

Business judgement rule

Answer 24

The business judgement rule is a rebuttable presumption that the director acted in good faith and that they reasonably believed their actions were in the best interests of the corporation, thereby negating a charge of breach of duty of care. This rule provides a measure of comfort to officers and directors because they can be assured that their personal assets will not be attacked so long as their actions are reasonably in the best interests of the shareholders. DOLLERS-FaDS - Directors or Officers; Are not Liable for Losses to corporation where; they Exercised good faith and Reasonable judgement; safe harbor when Fair; or approved by Disinterested directors; or Disinterested shareholders

Question 25

Duty of care

Answer 25

Directors owe a duty of good faith to act in the best interests of the corporation as an individual would when discharging their own personal affairs. They are required to be reasonably informed. DOD-SCOP-AIR - presumption that Directors and Officers owe a fiduciary duty to the corporation; must exercise duties with same degree of Diligence, Care, and Skill which an Ordinary Prudent erson would manage their own affairs. Areas include: Attentive to corporate business, Informed on voting matters, and Rational basis for decisions.

Question 26

Duty of loyalty

Answer 26

A director must not engage in a conflict of interest. This duty is established to prevent a director from entering a conflicting transaction, usurping a corporate opportunity for their own benefit, or competing with the corporation. DOFLI-CUBAS - Directors and Officers owe a Fiduciary duty of Loyalty; to promote the Interests of the Corporation without regard to personal gain; bars Usurping any legitimate Opportunities of the corporation. not Competing; not Both sides; Approval by disinterested directors or shareholders = safe harbor.

Question 27

Duty of loyalty avoidance

Answer 27

When a director is faced with a conflicting transaction, the director is not in violation of this duty if they fully disclose the details of the transaction to the board, if it was approved by a majority of disinterested directors, or if the director can show that the business transaction was fair to the corporation.

Question 28

Safe harbor rule

Answer 28

Under a statutory safe harbor rule, a transaction will not be set aside merely because a director has a personal interest in the transaction if the director can prove that the transaction was fair and reasonable to the corporation, the material facts of the transaction were disclosed to the board of directors, and the transaction was approved by a majority of the board without a personal interest in the transaction. Fairness factors - CAF-N - adequacy of proposed Consideration; availability of Alternatives; Financial position of corporation; Need to enter transaction

Question 29

Usurping of corporate opportunity

Answer 29

A corporate opportunity exists if the corporation has an interest in the opportunity or is similar to what the business would typically pursue. A director may only personally engage in this opportunity if the board declines to pursue it after receiving a full briefing and the board votes to decline it. The presenter of the opportunity must recuse themselves from a vote to decline. FULF-KEPAP-IE-FoP-SOP - Legitimate corporate opportunity; Financially able to undertake; within Line of business (Fundamental Knowledge, Experience Practical; Ability to Pursue); and Interest or Expectancy (Formalized plans, Standard Operating Procedures).

Question 30

Board meetings

Answer 30

Board action requires a quorum to be present at each vote. A majority of the board is necessary unless the articles state a higher or lower number. Additionally, a board meeting must be conducted at least annually.

Question 31

Removal of directors

Answer 31

A director may be removed from the board of directors by court order for fraud or gross abuse of authority, or by a vote of the majority of shareholders for any reason.

Question 32

Dividends

Answer 32

A dividend is a distribution of corporate profits to shareholders, typically on a quarterly basis. A dividend is not a shareholder right, but instead, the board will vote to pay a dividend or not. In the event a dividend is not paid, any profit will become retained earnings, and typically used to reinvest in the company’s expansion.

Question 33

Voting agreements

Answer 33

These are agreements between shareholders to pool their votes, thereby strengthening their voting power. They are valid if properly executed, where failure to vote subject to the agreement can be enforced by specific performance.

Question 34

Rule 10(b)(5)

Answer 34

This rule addresses the commission of fraud in the purchase or sale of securities. Usually, this involves trading on insider information. This typically arises when company insiders with access to non-public information about the corporation use such information as a basis for the purchase and sale of securities. Jurisdiction - IC or national exchange; Omission/misstatement; Material - reasonable investor; Scienter - intent or reckless; Standing - Anyone who bought or sold; Causation/ Reliance (for misrepresentation, not omission); Privity - not req’d like CL; Remedies. Jeff Once Made Some Spicy Crazy Pork Rice

Question 35

10b-5 opening paragraph

Answer 35

It is unlawful for any person, directly or indirectly, by use of any means or instrumentality of interstate commerce or the mails, to employ any fraudulent or manipulative devices in connection with the purchase or sale of any securities.

Question 36

Rule 16-B

Answer 36

The short-swing profit rule, it is established as a safeguard to prevent persons with > 10% ownership from acting on timely insider information. It requires that any director, officer, or shareholder who meets the ownership requirement surrender any profit earned from the sale or purchase of equity securities of the same class purchased and sold within a six-month period. To be subject to this rule, the corporation must be publicly traded, or the corporation must have more than $10M in assets and at least 2,000 shareholders.

Question 37

Shareholder direct suit

Answer 37

A lawsuit filed by a shareholder against a corporation for personal enforcement of rights.

Question 38

Shareholder derivative suits

Answer 38

A shareholder may file a derivative suit against a corporation to prevent the corporation from harming share value. To file a derivative suit, a person must be a shareholder, must have made a written demand upon the corporation, allowed the corporation 90 days to respond to the demand, and they must be filing suit in the best interests of the corporation. A shareholder filing a derivative suit cannot seek personal gain, but instead, is frequently used to prevent a corporation from performing an ultra vires act. (If the company is out of business, a derivative suit is futile.)

Question 39

Voluntary dissolution distribution

Answer 39

In the case of a voluntary dissolution, a corporation’s assets are distributed to: 1) Creditors of the corporation to pay debts and other obligations; 2) Preferred stock; 3) Common stock.

Question 40

Deep rock doctrine

Answer 40

A director or shareholder who makes a loan to the corporation will have their loan subordinated to the claims of outside creditors if the firm is shown to be mismanaged or undercapitalized.