CORPS Flashcards
(30 cards)
Fiduciary Duty
A fiduciary relationship is any relation existing between parties to a transaction wherein one of the parties is duty bound to act with the utmost good faith for the benefit of the other party
Punctilio of Honor Rule
Fiduciaries must act with loyalty and in good faith, following the “punctilio of honor”
1. Highest standard of honor
2. There must be full disclosure
3. Partners in a joint venture must adhere to strict ethical and legal standards
Current Assets (CAIP)
Items the company expects to (and can) convert to cash within a year
1. Cash and cash equivalents
2. Accounts Recoverable – money owed to the company by customers, outstanding invoices, credit sales
3. Inventory
4. Prepaid Expenses
Noncurrent Assets (TBI)
Items the company does not expect to convert to cash within a year or that take over a year to sell
1. Trademarks, patents, copyrights
2. Buildings, machinery, land (BML)
3. Investments in other companies
Parnternship Formation
UPA 2, 6, 7
Fenwick Factors
When determining whether a partnership is formed consider the following: (Iscal3d)
* intention of the parties.
* The right to share in profits
* The obligation to share in losses
* The ownership and control of the partnership property and business.
* Community of power in administration
* Language of the agreement
* Conduct of the parties towards third persons
* Rights of the parties regarding dissolution.
Partnership By Estoppel Rule
UPA 16
Partnership Dissolution
To protect yourself from liability in a partnership, you must formally dissolve the partnership and give notice to all relevant parties UPA 9, 14, 15, 18
Actual Authority
To create actual authority, a principal must make an objective manifestation of consent to an agent that the agent be entitled to act on behalf of the principal with respect to a task or goal. That agent must reasonably interpret the manifestation to entitle the agent to act for the principal. Such manifestation may reach the agent directly, indirectly, or be manifested through inaction
Apparent Authority
Apparent authority is created when a principal does something, says something, or creates a reasonable impression that indicates to a third party that the agent has authorization on behalf of the principal to conduct an activity For a reasonable inference of apparent authority to be drawn from prior dealings there must be
1. a measure of similarity to the act for which the principal is sought to be bound, and
2. a degree of repetition.
De Facto Corp
Where the parties treat a non-existent corporation as existing in fact by their words and their actions, liability will only be available against the corporation, and not the individuals. A de facto corporation defense to liability requires that an incorporator have acted in good faith, under a valid statute, for an authorized purpose, and after having signed and acknowledged articles of association pursuant to the valid purpose
Corp by Estoppel
Where somebody acts in reliance on the existence of a corporation in forming an agreement or completing a transaction, that person will be stopped from asserting the non-existence of that same corporation when trying to assert liability against the individuals acting o/b/o the corporation. You may not seek to gain a windfall from asserting a claim against an individual while you acted as if the corporation was in existence during the events of the litigation
BJR
Courts will not interfere with the business decision made by the board of directors absent a showing of fraud, conflict of interest, illegality, or if the board engages in corporate waste providing no rational basis for the decision Remember, in order to acquire BJR protection, a director must actually make a decision or judgment. BJR does not protect nonfeasance (failure to make a decision)
Enterprise Liability Rule
For a subsidiary and a parent company to be liable there must be a showing of a lack of individual identity of each company insomuch as they all truly exist as alter egos of the same company. A court will review the expense accounts, record keeping practices, and internal corporate structures of all companies when determining enterprise liability.
Piercing the Corporate Veil Rule
A cause of action will support piercing the corporate veil and holding the individual personally liable to an injured party where the plaintiff can show that the unity of interest between the corporation and the individual was such that the corporation served merely as an alter ego of the individual and that the individual used the corporate form to promote fraud and injustice by taking some strategic behavior designed to frustrate a creditors attempts to realize a judgment.
ny/illinois test - van dorn test (sea-land)
A corporate entity will be disregarded and it’s limited liability will be pierced when two requirements are met:
1. Unity of Ownership: there must be such a unity of interest and ownership that no distinction exists between the corporation and its shareholders
a. Failure to Follow Corporate Formalities: Must be followed to create separation between the corporation and its shareholders. Corporate formalities are ignored when a corporation fails to have meetings, elect directors, file a certificate of incorporation (COI), have bylaws, issue stock, keep proper books and records, and take minutes at meetings
b. Commingling of Personal funds and corporate money: If the individual uses personal funds for business or mixes both together.A corporation should have a separate bank account, which cannot be used to pay for personal expends
c. Undercapitalization: If the company doesn’t have enough money or assets to cover its debts. Treating One Company’s Assets as Another’s: If one company treats another company’s assets like they belong to it. Courts are more likely to pierce the veil when shareholders invest no money whatsoever in the corporation Moving, tapping, borrowing shareholders corporations borrowed money from each other, which left some of them completely out of capital and unable to pay bills
2. Fraud or Injustice: the shareholder used the corporate form to commit fraud or promote injustice
a. Strategic behavior used to frustrate the creditors’ ability to collect (e.g. induce creditor to take action against there detriment
Duty of Care
Directors and officers must act with the standard of care of a reasonable person in their position and must have at least a minimum level of skill and competence for the specific business
Duty of Good Faith
A fiduciary fails to act in good faith when he intentionally acts with a purpose other than that of advancing the corporation’s interests, demonstrates a conscious disregard for his duties, or intentionally violates laws. The BJR presumes that fiduciaries act in good faith
Oversight Liability
The necessary conditions for oversight liability are:
1. The directors utterly failed to implement any reporting or informational systems or controls.
2. Having implement a system, consciously failed to monitor, or oversee its operation thus disabling themselves from being informed of risks or problems requiring their attention.
Interested Directors
Where the board acts intentionally to serve some outside interest, regardless of the consequences to the company, and said action is inconsistent with the company’s interest there will be a breach of fiduciary duty. The business judgment rule will not protect the board during a conflict of interest. The court will review with rigorous scrutiny shifting the burden of proof to the board, which must demonstrate that the transaction was ultimately fair to the company, whose interests were not subverted to some outside interest.
Corporate Opportunity Doctrine
If a corporate opportunity is present to an officer of director, prior to accepting such an opportunity the corporate opportunity doctrine requires that the actor determine
1) whether the corporation is financially able to take on the opportunity,
2) if the opportunity is within the corporation’s line of business,
3) if the corporation would have an interest or expectancy in the opportunity, and
4) whether embracing the opportunity presented to the individual director or officer would create a conflict of interest between the director/officer’s self-interest and that of the corporation.
Intrinsic Fairness Test
The intrinsic fairness test is only applied where the business deal involves self-dealing, where a parent company is involved on both sides of the transaction. The deal must be fair to all parties involved. Self-dealing occurs where a parent company, by virtue of its domination of the subsidiary, causes the subsidiary to act in a way that gives a benefit to the parent company to the detriment of the minority shareholders of the subsidiary.
Howey Test
For an investment contract to qualify as a security a person, or entity, must have invested money into a common enterprise with the expectations that profits will be received as a result of their investment and the investing party must be a passive investor, relying solely on the efforts of others to generate profit. An investment contract will qualify as a security if:
1. A person (or company) is investing their money.
2. There must be a common enterprise (pooling of funds).
3. That person is led to expect a receipt of profits at the time of their investment.
4. Solely from the efforts of others.
Non-passive investors are those that exert a high degree of influence over the company and the decision-making process.
Passive Investor (Robinson v. Glynn) – A membership interest is a security only if the person holding it is a passive investor. Robinson was not a passive investor because he was a board member and treasurer of GeoPhone. Therefore, his interest in GeoPhone is not a security, and he can’t sue for securities fraud
Private Offerings
Private offerings are exempt from the registration requirements under Section 4(a)(2) of the Securities Act of 1933. To qualify the offering must be to a small number of offerees, generally under 15, whereby those offerees are provided or feel comfortable asking for relevant financial information, the number of units offered will be considered as will the valuation of the total amount of units being offered. Finally, the manner of the offering will be considered by courts when determining whether an offer is a private offer and thereby exempt under the Act.
