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Bus Org
Business Organization
| Question | Answer |
|---|---|
| agency | by mutual consent one person or entity (called the agent) undertakes to act on behalf of nother person or entity (called the principal) is subject to principals control |
| types of authority to bind the parties | actual authority apparent authority estoppel inherent power and ratification |
| actual authority | is established by (i) an objective manifestation by the principal, (ii) followed by the agent’s reasonable interpretation of that manifestation (iii) which leads the agent to believe that it is authorized to act for the principal. |
| apparent authority | is established by manifestation from one party (apparent principal, which somehow reaches a 3rd party, and which causes the 3rd party to reasonably believe that anther party (apparent agent) is authorized to act for the 1st party |
| estoppel/inherent power/ratification | Estoppel/Inherent Power/Ratification all stem out of actual and apparent authority and are akin to policy considerations to ensure that an unknowing third party does not bear the burden as a result of an agent gone wild. |
| actual authority can be express or implied | express is when P states exactly what they want done, step by step implied authority can be inferred from the grant of authority [if acting with actual authority both parties are bound, with small exception of non-disclosed principals] |
| Binding the Principal in Tort: | A person must be a servant in order for tort to pass to the Principal |
| Servant: | An agent is a servant if the principle controls or has the right to control the agent’s physical conduct in the performance of the agency services. |
| Independent Contractor: | is an agent who the principal has no control over. (This is where most litigation occurs) |
| Duties and Obligations of Agents and Principals to Each Other and to Third Parties | A owes a duty of loyalty to p. p ALWAYS has right to control actions of a. A is not liable to 3rd party when they disclose p. P owes duty of indemnification to A for any claims brought by 3rd parties as a result of their “employment." P can be liable to a |
| An agents duty of loyalty to the principal | must not disclose any confidential information, nor compete using such info.The restmt allows the agent and principal to contractually limit or expand this duty. An agent acting outside of scope of authority will be liable to the principal |
| A principal controls agents actions | this duty can’t be contracted away. The agent must resign if they don’t want to comply. principal can sue agent for damages based on a violation of this duty. They can also sue for any profits/benefits the agent received as a result of their violation. |
| agents are not liable to 3rd parties upon disclosure | Rationale: the third party entered into the contract with the principal NOT the agent. This is a default rule, if the agent makes personal guarantees then they can become liable. |
| A principal owes the duty of indemnification to its agents for any claims brought by third parties as a result of their “employment.” | This duty only extends to acts that were within the agents authority (direct, inherent, etc..) and will not cover acts by the agent that were outside of the scope or illegal. |
| A principal can be liable to a third party for acts done by non-servant agents. | This is called the duty to properly select and use agents. It is tough to prove, and negligence alone will not give rise, the principal must KNOW that the agent is going to be negligent when they give them the task. |
| Termination of the Agency Relationship | 1Express will 2expiration terms unless continue 3ccomplishment of the Agency’s purpose unless another 4occurrence of an event 5end of the principal’s legal interest in the property 6Death, bankruptcy, or mental incapacity of the agent or principal. |
| If the authority of the agent is terminated, will only impact 3rd parties once made aware of the change in status. If the agency is terminated, the ex-agent can be held liable to the principal for any damages from being bound to 3rd parties. | This exception only applies if the conduct by the ex-agent is reasonable so as to not make the third party aware. |
| Agent’s right to compete with Principal: | Once the agency relationship is terminated. agent is free to compete with the principal w/ 3 limitations: a prohibition against using the former principal’s confidential info, duty to “get out clean”; and obligation to abide by any valid “non-compete” |
| Distinguishing Agency from Other Relationships | Constructive Agency: Cargill Case: When a creditor takes over most of the management and control of the debtor corporation, that act can cause them to be responsible for the repayment of other creditors. |
| PARTNERSHIPS AND LLCs | Rules governing the relationship between the partners are default rules, where rules that govern relationships with third parties are mandatory. However, third parties can contract those mandatory rights away with the partnership if they wish. |
| Partnership | = two or more persons manifest an intention to associate as co-owners in a business for profit. o This also means that two individuals may not realize that they have formed a partnership. There needs to be no formal agreement to be partners, and so lon |
| partnerships for Profit is KEY. | The two people must have a right to share in the profits of the business. The right to receive revenue is NOT the same as the right to share profits. |
| The majority rule states that unless otherwise agreed, partners agree to share losses at the same proportion that they are to receive profits. | Profits come after expenses are paid, and revenue is due regardless |
| Partnership types | management rights and personal liability wil depend on which of three modern partnership forms the business takes: general partnership, limited partnership, or limited liability partnership (LLP). |
| Joint Ventures: | common purpose, a community of financial interest in a purpose, and an equal right to a voice confusion as to what it is, UPA=partnership both an aggregate of the individuals + a separate entity RUPA=apartnership is an entity distinct from partners |
| Exhaustion: | UPA jurisdictions state that a creditor must first exhaust all the assets of the partnership prior to going after a partner’s personal assets. RUPA, makes this mandatory. |
| Joint and Joint and Several Liability: Same concept as Tort Law | Relationship of partners liability to third parties and partners’ inter se loss sharing: The partners agreement as to how they will split losses has no effect on the amount they owe to third parties. |
| So, why do people form partnerships? | 1) tax advantages (mostly gone at this point); (ii) greater flexibility in structuring the deal (not really that more flexible over newer forms of businesses); (iii) legal restrictions on the business forms (not really existent anymore); (iv) inadvertence |
| The Character of the Profit Sharing | right to share profits is a prerequisite to partnership unless received as payment- debt,independent contractor/wages, rent, annuity, interest/charge on loan, sale of goodwill |
| Five Factors which tend to influence courts to find that a partnership exist: | Control- how much mgmt party holds Agreemnts share losses- indicatrs ownership Contributions of proprty to bus-bus. intrst Extent profits constitute the only remuneration from bus Parties characterization of relation- matters in intraprtnrshp dispute |
| Partnership by Estoppel: | person represents to be partner 3rd party reasonably relies and does business then person is personally liable reliance-- must believe misrep and must cause 3rd party to act Liabliity- on true partner if they knew or where silent |
| Financial Aspects of a Partnership. | Default rule: a partner has (1) a right to share in the profits of the partnership, if any, and (2) a right, when the partnership ends, to receive the value of any property that the partner contributed to the parthership. |
| Profits in Partnership | Default rule states that unless otherwise stipulated partners agree to split profits. |
| Losses. | Default rule is that partners share losses in the same proportion as they receive profits. No impact on third party claims. Joint and several liability still exist regardless of the above. |
| Partners can contract to state how indemnification will work should one partner be hit with a suit. | If no provision, then the default is that the partner will be repaid by the partnership. all hinges on a court determining that the reason for the suit was a result of the partner carrying on in the ordinary and proper conduct of the business. |
| Wages. | Unless provided for by contract, partners will receive no wages of any kind other than profits. |
| Contribution v. Furnishing property. | Question of fact for the jury – this will determine if the partner is reimbursed ford the property. UPA used a factor test, and RUPA uses a title test. Contribution of property enables the partner to receive money back for his contribution. |
| Partner’s Property Rights in the Partnership. | UPA § 24. three property rights in the partnership: “(1) his rights in specific partnership property, (2) his interest in the partnership, and (3) his right to participate in the management.” t reiterate that a partner gets to share everything. |
| Partner’s Property Rights in the Partnership. | RUPA §§ 401, 502. “A partner is not a co-owner of partnership property and has no interst in partnership property to transfer, either voluntarily or involuntarily.” “A partner may use or possess partnership property only on behalf of the partnership.” |
| Assigning Rights: | A partner can only assign what is his...i.e. right to receive profits. They can’t allow for additional partners, or to allow someone else to manage unless all partners agree to it. |
| Creditors Rights | In a personal suit against a partner,can only reach what the partner could have assigned.a creditor can only go after the partners profits and is not partnership property. only done with a charging order saying required to turn over those funds |
| Management Issues and Fiduciary Duties. | •Right to Know •Right to be Involved in business affairs •Right to bind Partnership •Right to Participate in Decision Making and Veto: not expressly listed - implied req. of unanimity. •Right to change rights: •duty of care. |
| Fiduciary Duty of Loyalty: | “Joint adventures, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. |
| Meinhard v. Salmon: | conduct permissible in a workday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter. the punctilio of an honor the most sensitive, is then the standard of behavior. |
| Partner v. Partnership Duty of loyalty: | a partner is prohibited from: (1) competing, (2) taking business opportunities where partnership might have benefitted or, (3) using partnership property for personal gain, or (4) conflict-of-interest transactions. Remedies include the giving up profits |
| Binding the Partnership in Contract UPA | UPA §9:if the partner doesn’t have actual authority to bind the partnership, then they can only bind the partnership by satisfying the “apparently/usually” empowering rule. Ratification works here |
| Binding the Partnership in Contract RUPA | RUPA §301: Replaces the “apparently/usually” requirement with a more manageable “for apparently carrying on in ordinary business |
| Binding the Partnership through Information Known: | UPA states that actual knowledge of the partnership in context with the transaction must be present to bind the partnership. Under RUPA, if one partner knows then everyone knows. Actually reading the notice is irrelevant. |
| Elements of Articles of Incorporation: | Name of corporation Registered office and Agent Capital Structure – shares, etc... Purpose and Powers Size/Composition of Board Optional Provisions: voting, membership requirements, mgmt. & indemnification provisions |
| Promoter; also called the organizer. | Before a corporation comes into being normally need to get financial backing. Can be held personally liable for any actions made prior to the corporation becoming a true entity. Creditors can go after the promoters for breach of any fiduciary duties. |
| De Facto Corporations / De Jure Corporations / Corporations by Estoppel | are all hybrids of each other. They are ways that a court can hold individuals or Corporations liable even if corporate structure was not in place prior to entering into the deal. Knowledge is key: Courts are split as to what the rule should be. |
| Piercing the Corporate Veil | to pierce MUST find(i) fraud, (ii) misrep, or (iii) illegality. will not be able to pierce if voluntary creditor. many tests with no real emphasis on particular aspect. The court will step in when clear person set up corp shield, but not acting like corp. |
| Reverse Piercing | Cargill case – owner of a farm corp. wanted the court to disregard the corp. so he could keep his home under the homestead act. |
| Piercing the Parent: | To prevail on an alter ego claim under Delaware law, a plaintiff must show (1) that the parent and the subsidiary operated as a single economic entity and (2) that an overall element of injustice or unfairness is present if the parent isn’t held liable. |
| Successor Liability: When should liability extend to a successor? | Courts are split, but the general rule is that successors do not assume liability for the obligations of the companies they purchase. Another way to differentiate: Acquisition of company = no liability. Merger of companies = liability still exists. |
| Deep Rock Doctrine: | The claim of a stockholder, especially a stockholder with controlling interest who makes a loan to own corp. will be subordinated to claims of outside creditors if corp. is deemed undercapitalized. (Fraudulent scheme to impair the rights of creditors). |
| How do you extinguish Corporate Liabilities | Shareholders must vote for dissolution •Corp. must file articles of dissolution, legally dissolved on the date of filing •Once dissolved, the corp. may ONLY carry on business associated with winding up •notifying its creditors that they are dissolving, |
| Debt: | is borrowed, and must at some point be paid back. |
| Equity | Is synonymous with ownership. It could be getting money, but instead of having to pay back the contributor retains a piece of the corporation. |
| Shares: | There can be multiple classes of shares. |
| Preferred shareholders have rights: | which are “preferential” to common shares in that they get a right to dividends before common shareholders. These shares are normally non-voting though. |
| Special Rights of preferred stockholders include: | Cumulate % of dividends paid per yr allowed vote if havent been paid dividends set $ paid on liquidation b4 assets split right to redeem back shares time convert preferred stock to common $ set aside to protect shares **creature of contract |
| Issuance of Stock: | MBCA allows for any number of shares to be issued for a set price, Only constraint is the same class must be sold at the same price. |
| Par Value: | an artificial dollar amount for which the stock cannot be sold less than |
| Payment for Shares: | you can pay for shares in $, services rendered, property. Future services can’t be used to pay for stock, unless they are contracted for AND you can show that such a future service is beneficial to the stockholders. |
| Nominal Value: | set a par value of the stock to be $1. This is the modern trend, and in no way reflects the price per share issued. You can still collect any amount you want, the nominal par value only indicates the floor at which the stock price can be. |
| Debt Financing: | debenture is an unsecured corporate debt obligation. Bond is a a secured corporate debt obligation, by lien or mortgage on corporate property. Debt financing is widely used by corporations. |
| Zero Coupon bonds: | pay no interest but are sold at a discounted rate. |
| Junk bonds: | used in takeovers, are below investment-grade debt instruments. |
| Common shareholders have the following rights: | vote for directors; are entitled to distributions (if made) and $ through liquidations; inspect books and records; sue on behalf of the corporation to right a wrong committed against it; financial information. |
| Watered Stock: | when you state your stock is worth X, but issue it for basically nothing. A creditor could hold you liable for their debts prior to the investor collecting if no consideration was actually given. |
| What is debt v. equity? | Slappey Drive: IRS says loans are equity payments. Ct looks at substance over form of the agreement to determine. No due dates payments-- $ treated as non-deductible equity. |
| Debt Planning; Obre v. Alban Tractor: | owner loans $ to corp but when Co. failed,tried to have ct. not recognize debt but court refused saying the creditor would have looked to the corporate tax filings, which were public knowledge, they would have found the debt owed. |
| Public Offerings: | IPO’s are the traditional route. closely held corporation can go public, and the small number of shareholders sell their interest in the company to thousands of individual shareholders. Benefits and draw-backs for doing so are abundant |
| Shareholders: | all the rights listed above |
| Directors: | corp. must have a board of directors, term is set at a min. of 1 yr. yearly elections, board members are staggered, giving longer terms so won’t be completly turnover of board members at any given election. in charge of selecting, and removing Officers. |
| Officers: | Offcers are considered legal agents of the corporation, and are given inherent authority to conduct the day-to-day affairs. No Officer has the authority to bind the corporation to major transactions (like merger etc...) without approval of the Board. |
| Modern view on the role of directors: | The Sui Generis Theory, which holds that directors are not agensts, they are fiduciaries who duties run to the corporation but their relationship with the corporation is sui generis since they are not trustees. |
| *Clark v. Dodge: | when Directors are the sole shareholders, the Courts will hold them to their contracts with each other as to voting in one of the parties as an officer. |
| Idle Gesture Rule: | In Delaware, corporate statutes state that you do not have to call a meeting if it is clear that the proposed reason for the meeting will fail. |
| Director Action: Meeting: no notice is needed for regular meetings, and two day notice for special meetings. If notice is required, and not followed, then any action is invalid. However, directors may waive the notice requirement at will and if no ob | Meeting, Quorum, voting and committees |
| Meeting: | no notice is needed for regular meetings, and two day notice for special meetings. If notice is required, and not followed, then any action is invalid. However, directors may waive the notice requirement at will |
| Quorum: | Requires a majority of directors unless bylaws specify a larger amount. Allows for reduced quorum, but sets the floor at 1/3 of directors. A quorum is required for all votes. |
| Voting: | directors act as one unit, to ensure that no one director is held responsible for voting a particular way. Simple majority wins, unless a super majority has been established for certain actions in the bylaws. |
| Committees: | allows large boards to create smaller committees of board members to take actions on their respective responsibilities. Certain responsibilities MAY NOT be delegated to a committee and require full board participation. |
| Corporate Authority: | borrows from the law of agency, treating the board as the corporate principal and the officers and employees as its agents. most action is done by the officers, it depends on what type of authority they have to determine if the Company is bound. |
| Express Actual Authority: | this power could come from statute, articles of incorporation, bylaws, and board resolutions giving them authority. |
| Apparent Authority: | When in the normal course of business an officer would have the authority to conduct that business. Can only be invoked if the third party did not have knowledge that the officer had no authority. |
| Inherent Authority: | similar to apparent authority, but arises solely from the status of a corporate officer being an officer of the company. A third party need not show that the CXO stated that they had authority, but just assumed they did |
| Implied actual authority: | grants of express implied authority by not ruling on how to conduct the officers role, or by allowing an officer to do so in the past. This could be a form of ratification. |
| Annual shareholder meetings: | mandated by statute, but failure to observe will not invalidate corporate action |
| Special shareholder Meetings: | can be called by the board, authorized by bylaws, or 10% of voting shares |
| Notice of shareholder Meetings: | No more than 60, but at least 10 days prior. Special meetings require an agenda to be included with notice. Notice requirements are deemed to be waived if not objected to at the meeting. If objected, then any action at the meeting is invalid. |
| Shareholders of Record & Record dates: | 70 days prior to the meeting a record of all active shareholders is compiled and notice is sent to them. Newer shareholders will not receive notice. |
| Shareholder Quorum: | simple majority must be present, unless amended by the bylaws. For any action to pass you only need to receive a majority of votes cast, NOT a majority of total voters. |
| Proxy: | You may vote by proxy appointment, which must be in writing and signed. This creates an agency relationship, and they must follow the voters requests. Proxy power is freely revocable |
| Who votes: | publically traded companies must follow a one share/one vote rule. An actual owner, may direct the record voter as to how to vote. Written consent on shareholder actions are valid in lieu of actual votes at the meeting |
| Straight Voting: | default method for electing directors. Directors with the most votes win. Each shareholder can vote their total number of shares in each of the open director spots. This means that the majority shareholder will essentially pick the entire board. |
| Cumulative Voting: | alternative to straight voting, and must be included in the articles of inc. Some states are now requiring cumulative voting. In cumulative voting, you are given all of your votes up front and vote for directors as you please. This allows a minority ow |
| Pooling Agreements: | MBCA permits two or more shareholders to enter into a pooling agreement providing for the manner in which they will vote their shares. The agreement must be in writing, and signed by both parties. These agreements are enforced by specific performance. |
| Stock Transfers: | Shares must be freely transferrable, BUT, the MBCA allows for restrictions to be put in place on the sale. States will hold these to be valid so long as it is clear on the stock certificate, and in the bylaws, that such restrictions are conspicuous. |
| stock transfer restrictions include | Flat prohibitions • Prior Approval • First-Purchase option • First-Refusal option • Mandatory buy/sell agreement. |
| Deadlocks: | not mere disagreements, but fractions within the ranks such that a company isn’t able to function effectively. |
| Judicial deadlock remedies: | Court appointed custodians Court appointed receivers Court supervision Court ordered involuntary dissolution Other court ordered relief |
| Duty of Care: | the attentiveness and prudence of managers in performing their decision-making and supervisory functions. The Board manages and oversees the corporations’ business affairs. is defined by the business judgment rule. |
| Statutory/Common Law standards of duty of care: | A plaintiff must show that a director failed to act: (1) in good faith; (2) in the honest belief that the action taken was in the best interest of the company; and (3) on in informed basis. |
| Business judgment rule: | “judicial hands off” philosophy. It is a rebuttable presumption that directors, in performing their functions, are honest and well-meaning, and that their decisions are informed and rationally undertaken. |
| Van Gorkom: | Case involving gross negligence. The Board approved an acquisition deal and asked no questions. Court held Directors personally liable for violating their fiduciary duty to the stockholders and especially because they profited |
| `Duty of Loyalty: | put the corporation’s interest ahead of their own. They breach this duty when they divert (1) corporate assets, (2) opportunities, or (3) information for personal gain. |
| General Categories of Diversion | Flagrant •Self-dealing •Squeeze-out •Executive Compensation •Usurping Corporate opportunity •Disclosure to Shareholders •Insider trading •Selling out •Entrenchment |
| Corporate Opportunity Doctrine: | A corporate manager (director or CXO) cannot usurp corporate opportunities for his own benefit unless the corporation consents. |
| How do courts define corporate consent? | 1. Existing Corporate Interest – Expectancy Test 2. Corporation’s Existing Business, Line of Business Test – This is broader than the expectancy test. 3. Hybrid approach – ALI principle: |
| Corporate Rejection & Incapacity: | Just because something is a corporate opportunity doesn’t mean that a director or officer may never pursue the opportunity; just need to have the company decline to pursue. |
| Duty to Preferred stock holders: | Much the same duties owed to common stock holders. Courts will rarely say that they are owed a higher duty of care. |
| Convertible Securities holders: | Are only owed the duty of disclosure when their securities are called. This allows them to make a reasonable choice about taking stock, or a cash out. |
| Creditors: | Only owe a duty to a creditor when the company becomes insolvent. Protect value. |
| Fairness Test: | Originally was voidable if there was any self-interest found, regardless of whether the transaction was fair or not. Modern corporate law allows this so long as it is found to be a fair deal for the company. |
| Self-Dealing: | Self-dealing on unfair terms is much like embezzlement. |
| Indirect Interest: | If a transaction is between a family/friend, or outside business that the director has an interest in and the company itself. |
| Direct Self Interest: | A transaction in which the director and the company are the parties to the corporation |
| Executive Compensation: | The board approves executive compensation, and is thought to be fair. The only way to overturn the compensation is to show that the Board was either uniformed or it is corporate waste. |
| Preemptive stock rates: | allows current stock holders the first right to acquire stock when it is first issued. he MBCA has a default rule of opt-in; so unless the company specially states that they follow preemptive rights then they don’t exist. |
| Radical Rules: | The decisions should be based on the interests of the stockholders, NOT of the community |
| Fiduciary Duty & Payments of Dividends: | The payment of dividends is up to the Board, and they are protected by the Business Judgment rule when deciding whether to issue them or not. |
| Legal Restrictions on Distributions: | Corporate distributions transfer corporate assets to shareholders. The tests are: • Equity Insolvency Test: • Balance Sheet Test: |
| Freeze Out / Force Out: | a majority has the right to force minorities to sell their shares, but must pay them a fair price for the shares. |
| Shareholder Actions: | 1. Direct Action 2. Class Action 3. Derivative Action |
| Demand Requirement: | The SH has to tell the corporation of its plan to sue, and the Board gets 90 days to respond. |
| Foreign Corrupt Practices Act: | Makes giving bribes to foreign officials a federal crime, subject to civil fines. In addition, it requires companies to keep stringent records of all funds paid to foreign government officials and companies |
| Indemnification: | Corporate statutes permit a corporation to indemnify directors and officers against liability arising from their corporate position. |
| Mandatory indemnification exists if the Director defendant is successful. | If the Director is found liable, the company may indemnify the director if the suit was brought by an outsider. If the suit is brought by the shareholders then no indemnification is allowed. DON’T SUE its a Corporate waste. |
| Insurance: | Corporation can purchase insurance for itself to fund indemnification costs. . |
| Two types of Policies: | (1) Claims Occurring Policy: gives coverage for a specific period of time no matter when the suit is brought (more expensive); and (2) Claims Made Policy: only covers claims made while you have the policy active. |
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