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118 Cards in this Set

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Determinations of interest
possession of money and risk of default
who gets what's left over after credirotrs are paid
residual claimant
use of borrowed money to purchase business assets
leverage
if you are the beneficiary of leverage, what do you get from the company and when
when you get interest, not dividends, and are paid first, before creditors
rate on invested capital<interest on bonds
negative leverage
100k in stock and 100k in bonds, each paying 8% in y1. if y2 earnings are 6%, what is the drop%? what do stockhodlers get
drop 25%, bond=8%, stock=4%
rate on invested income>bond interest
positive leverage
when should you leverage
business return>interest rate
corporate conundrum
sep ownership from control
Freeze out
what kinda businesses?
what are steps?
how to do you solve
closely held companies
a b c earn salaries, dividends, a b stop divs to all, stop c salary BY FIRING, cant sell to 3d party
solve ahead of time by buy out agreement
agency costs
author
jenson and meckling
agency costs theory
agents are concerned with their own perks which is different from the owners and the differential is the agency cost. watching over them is also an agency cost.
transaction costs
relative lack of transferability of goods from a certain transaction to other uses

leads to vertical integration

ie enron
Theory on Capital markets
Malkiel
higher risk=higher reward
modern portfolio theory- diversify
capital asset pricing models- impossible to predict stock ptrices
modern portfolio theory
diversify your portfolio using different indicators
capital asset pricing model
impossible to predict stock ptrices, since they all move in relation to each other
economic justifications for PCV
lowers costs of captial to corps by not making their shareholders individually liable for losses, thus increasing investment. also corps need to induce less, since risk is paid for with higher dividends .
PCV justifications for externalizing risk of doing business

-hint-
shareholders protected from risk of loss, and can capture benefits

creditors can account for risk in interest rates
how are shareholders and creditors affected
efficient market hypothesis
stock markets reflect fully available info
efficient market hypothesis- weak form
incorp historical prices
efficient market hypothesis- semi-strong form
incorp historical prices and pub info
efficient market hypothesis- strong form
incorp historical prices, pub info, and priv info
Easterbrook and Fischel on LL and Corp
wealthy investors would not invest
creditors are compensated by charging higher interest rates, but tort are not
woodward theory of the the firm
pcv would make selling stock difficult since rich would avoid and ppor are judment proof.

limiting liability limits transaction costsfor monitoring

insurance apportioning
What is agency
fiducairy relationship arising when P manifests to A that A shall act on Ps behalf and A consents
how can agency be manifested
thru words and acts
what is the diffence betw agency and authority
agency is relationship, authority is power to act
dif betw servant and independant contractor
IC not subj to physical control of P
not servant
may or may not be an agent
when is an independent contractor a nonagent
when he enters in to arms length transactions with P and is just requested to get job done.
what is authority
power of agent to affect legal relationship of principal
respondiat superior
employer vicariously liable for actions of employee
public policy reasons for respondiat superior
employer has power of supervision, can spread costs over all consumers, induces them to deter
how do you determine whether agent or nonagent independent contractor? Cases?
amount of control P has over A, esp physicial, detail oriented control over performance. also considerations like skill of actor, occupation, length of employment, etc.
humble oil (yes) sun oil (no)
Are franchises agents of franchisors? case?
depends on amount of control. murphy v holiday inns
is actual control or right of control required to determine whether servent or independent contractor?
right to control
apparant authority
cases?
authority a 3d party reasonably believes an agent has based on dealings with principal

lind v schenley k
370 leasing k
billops v magnus tort
inherent agency
cases
P responsible to 3d parties for acts of A inherent in the job of A, regardless of actual authority
Watteau v Fenwick
agent enters in to k on behalf of undisclosed principal
3d party sues P
p is liable even if undisclosed, under inherent agency, even if contrary to intent of p
(restat 195)
fiduciary duty contains two branchs
duty of care
duty of loyalty
does fid duty end at termination of relationship?
no
duty of care cases
town & country
bancroft-whitney
sole proprietership taxes
individual
sole proprietership raises money by
borrowing only
LLC stands for
Limited Liability Company
advantages and disadvantages of LLC
limited liability
managed by members or directors (flex)
favorable taxes

dis- complicated operating agreeemnt
transferability of llc
difficult because of closlely held nature worries ppl about freezeout
mgmt of llc
members or managers
formation of llc
operating agreement, state filing
liability of LLC
limited but common law agency doctrines apply
PCV same as corps
LLC taxes
pass thru model like partnership
financing LLC

1- stock
2- borrowing
3- 1 & 2
4- neither
3. stock or borrowing
definition of pship
assoc of 2 or more persons or entities carrying on as co-owners of business for profit
what is fid duty of partners
each owns fid duty to other partner
agency and pship
each partner is agent to pship
mgmt of pship
equal unless k
ownership of pship
equal unless k
dissolution of pship
any partner can walk away and get what they put in less liability for debts, plus profits
transferability of pships
must be appoved by partners
pship taxes
pass through
file pship tax form
each p is taxed on his shares of pship income
income can be directed to different ps in dif ways
how are losses shared in pship
in same proportion as profits
liability of pship
unlimited
formation of gp
nothing, just more than 1 persn splitting proffits
mgmt of LP
GP has unlimited mgmt
what happens when a limited partner manages
he loses limited status
LP liability
Lps have limited Gps have unilimited
LLP mgmt
each partner has right unless k
how many partners in llp must determine to make ordinary decision? change pship agreement?
majority for ordinary, all for pship change
discuss limited liability in the LLP
some states protect one p from other ps in k or tort, some just malpractce or tort.

pcv same in llc
distinguish partner and employee with profit sharing
partner has management authority or co-ownership, and possible contribution

intention, profit, losses, ownership, control,
POLIC
POLIC
duty of care standard for pship
gross negligence
duty of loyalty standard for pship
punctilio of an honor most sensitive

Meinhard v Salmon
fiduciary duty to a partner after pship?
none
requirements for expulsion
ok in pship, good faith
what right do partners have to nix other partners actions in common law? if k?

Case
under common law, none, partners are agents of pship. if k, majority is required to oppose and half opposition is not a majority, so no authorty to nix
Natl Bisc Co.
what is the sharehodler relatioship with corp
they are owners
in corp, who owns property?
the corp
who owns stock in llp?
no one, there isnt any
transferability of ownership in corp?
yes, stock is freely transferabile, tho ppl may not want to buy closely held corp bec of freezeout
who appoints management in corp?
board appts mgmt, shareholder appoint board
who do board members owe a fid duty to ?
corp
if you are going to lose money, whats the best corporate form?
LLP, LLC, NOT corp
how does corp tax pass thru
it doesnt
how do corps file taxes
file on behalf of co, taking deductions, and pay taxes as corp. then 2d tax on dividends if any
what is the duty of a corp to pay dividends, what supports
no duty to pay dividends, BJR supports this
double tax on what form of corps
c corps
what forms have pass thru taxation
s, pship, llc
public policy (not econ) reasons to PCV
equitable remedy to avoid injustice
to prevent fraud and achieve equity
resident of state A injured in state B by car bought in state C sold by company incorcp in state D. if resident sues to peirce, which state determines piercing
D, state of incorp law
What is liability of corp owners
generally owners have no personal liability for corp debt
what factors determine whether PCV should occur in tort? in k?
Fraud (k)
Equity
Capitalization (Tort)
Formalities
Alter Ego
Commingling
FEC FAC
besides FEC FAC, when else would PCV occur in corp?
respondiat superior
besides FEC FAC, when else would PCV occur in corp?
respondiat superior, express assumption of liability, tort claims
PCV cases
Walkovsky (enterprise pcv for tort when many cabs held out as one, but adequete capitalization so not to O), Pepper Source (owner, fraud pcv), kinney shoe (owner, no pcv for inad cap in k)
what happened in walkovsky and what was pierced
enterprise/horizontal piercing since fraud or consumer confusion since many cabs hedl out as one, but not to O since no inadequete cpitalization
To PCV in tort, you need to show what one thing
inadequete capitalization, sometimes fraud
if you are biz owner, how do you determine adequte capitalization?
historical risk exposure < assets + insurance
to PCV in k, you must show what one othing
deception/fraud

ie kiney shoe,
distinguish betw pcv in k and tort
tort claimant did not choose to enter into relationship, k claimant could have investigated
to D argument in PCV that k claimant chose to enter into transaction with D and could have reseearched him, what justifies PCV
fraud or deception overcomes assumption of risk
parent-subsidiary PCV cases
in re silicone gel breast
is fraud helpful in tort PCV? explain.
generally no since P did not enter in to transaction voluntarily, unless that was not the case.
A sets up A inc to protect himself from getting sued, is this a basis for PCV?
without fraud, deception, inadequete capitalization, or more, no
who can waive duty of loyalty
no one, not even all shareholders
can BJR be a defense for claims of self-dealing
no, self-dealing is duty of loyalty claim and BJR is no defense to BJR claims.
if overreaching (ultra vires), does BJR defense work?
to the extent that you claim the overreaching was within the role of the corp, its okay
what are BJR requirements
good faith, rational purpose
what rebuts presumption of BJR
less than fraud, illegality, conflict of interest
what rebuts presumption of BJR, cases?
less than fraud, illegality, conflict of interest
-Kamin v Amex
gross negligence
-francis v UJB
lack of ratl biz purpose
-Dodge v Ford
what is duty of director to corp? can be sued for?
fid duty to corp, must discharge duty, must fail to respond to obvious problems
Director of corp gives lotsa corp $ to A charity, what are considerations
rational business purpose or overreaching
gross negligence
duty of loyalty?
agency costs
what is duty of one shareholder to another
nothing absent oppression
how did SPEs work in enron?
6 steps
what amount of outside capital required for SPE?
3%
5 ppl in trouble
skilling, fastow, leah fastow, kopper, glisan, causey, mordaunt
what is PCABO
oversees FASB,
Public co accounting oversight board
FASB
financial accounting oversight board
GAAP
generally accepted accounting principals
sarbanes oxley act
resp of directors,
lawyers must report
addresses duty of care and loyalty