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106 Cards in this Set

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What are the characteristics of a corporation?
1. free transferability of ownership
2. limited liability
3. continuity of existence
4. centralized management
5. entity status
6. taxation- corporation pays taxes on its income and distributions become personal income to the sharholders (double taxation)
What is the purpose of a corporation?
A business corporation is organied and carried on for the benefit of shareholders profit. The powers of the directors are to be employed to that end.
what is a promoter?
a person who organizes the corporation bringing together persons and assets in a pre-in-corporation contract.
Are promoters personally liable on the k contemplated for the benefit of the future corporation?
yes, unless:
1. parties agree creditor will look solely to the corporation for payment
2. substitution where agreement substitutes promoter upon formation.
3. by novation where corporation and creditor enter a new agreement.
What defenses can the promoter assert in regards to defective corporation?
To find liability there must be a finding the defendant acted as or on behalf of the inc. and knew there was no present corporation. Individual promoter/investor/shareholder will not be liable to creditor if any of the followig defenses exist.
1. de jure inc
2. de facto inc
3. inc by estoppel
What is a de jure inc?
There was sufficient compliance with statute
What is a de factor inc?
Unsuccessful attempt to inc due to technical defect.
C/L- incorporator could still be sheltered from liability from everyone but state if good faith attempt to comply made.
Modern- Generally, the defacto doctrine is abolished and personal liability imposed when knowledge of no incorporation
What is corporation by estoppel?
3rd party who deals with business, believing it to be a corporation, is estopped from denying its corp status to avoid contract.
Discuss promoter/investor liability.
While there is no effective incporporation, we treat promoter liability for defective inc as that of a partnership.
C/L rule: Any one who actively participated in management would be liable (without regard to knowing certificate of inc had not issue) (what they should have known)
Statutory Rule: All persons purporting to act on behalf of a inc are jointly and severally liable for liabilities. Further liability to shareholder maybe found based on active/passive theores- if the actively took part in management or control, may be liable as partner.
May a inc give away donations?
yes, however they should be reasonable in light of the corporations financial condition and should bear some reasonable relationship fo the corporations interest
Discuss the Ultra Vires Doctrine.
A shareholder may seek to have a corporate action declared void it if is outside the scope of declared corporation action.
Directors and officers may be liable for any losses that result.
Used as a defense to get out of transactions.
MODERNLY: it is rarely followed except for loans. Only shareholders can raise ultra Vires defense. Must be inequitable not to permit.
Discuss the allocation of power between shareholders and management.
The day to day affairs of a inc shall be managed by the board of directors subject to bylaws and votes of the inc. Shareholders cannot act in relation to the ordinary course of business, nor control the directors in the exercise of their judgment.
What is the general rule on corporate voting?
General rule is one vote per share, but weighted voting and tenured voting is allowed. Coting on ordinary matters requires an affirmative majority vote. Voting on structural changes may require 2/3 third outstanding or majority.
What is a pooling agreement?
an agreement in advace in regards to the exact way shareholders will for for team in contract. There can be no charge for this.
What is a voting trust?
Allocate votes according to the trusts purpose and assigns voting rights to trustee.
C/L these were not upheld.
MOdernly: okay for 10 years, agreement must be made for public view.
What are the three types of restrictions in regards to transferability of shares?
1. right of first refusal
2. First option
3. constent restraints
What is the right of first refusal-
shareholder must offer shares at fair market value to the corporation
what is first option
shareholder must first offer shares at previously agreed upon price, but may sell to third party if declined.
what is consent restraints?
shareholder may not sell their stock unless corporations givs approval.
Regarding restrictions on the transferability of shares, are unreasonable restrictions voic?
yes, though disparity in price is usually not enough
What is the process in proving a violation of corporate democracy?
generally, shareholders can agree to interference with their democratic rights. If all agree, and their is no harm to creditors, and no violation of public duty. Directors are liabile for breech of their fiduciary duties if they interfere with corporate democracy.
1. Shareholder must show management grossly negligent or acted in irratioal manner with purpose of interfering with shareholder democracy
2. director may defend with a complelling business justification that interfered least with shareholder democracy. If director meets their burden, then no interference.
What is the per se rule regarding violation of corporate democracy?
Some jurisdiction hold that directors are automaticly liable per se if they interfered.
What is the purpose of piercing the corporate veil?
generally, shareholders and corp managers have no liability beyond their investment. the corporate veil can be lost if it is abused.
What are the ways in which the corporate veil can be pierced?
1. Alter-ego where a inc serves as a mer instrumentality of its owner and an inequitable result or fraud would occur. This can be shown :
1. Failure to follow corporate formalities
2. Commingling of funds or assets
3. Undercapitalization
4. Treating corporate assets as their own
Can a parent corporation be held responsible by piercing the corporate veil?
it is the general rule tht a parent corporation is not liable for the acts if its subsidiaries but where the parent has used the subsidiary as a mer instrument or alter-ego and exercised complete domination over the subsidiary to commit a fraud or wrongful act, the parent may be liable and the corporate veil pierced.
How can one prove piercing the corporate veil against a parent corporation and its subsidiary?
Alter-ego theory states that if the parent and the subsidiary operated s a single economic entity, the veil may be pierced. The factors are as follows:
1. Whether corp was solvent and adequately capitalized
2. whether records kept and formalities observed
3. whether parent siphoned corporate funds
What are the characteristics of a closely held corporation?
1. few shareholders
2. no ready market for shares
3. shareholder participation in management and direction
4. restrictions on the transfer of share
5. frequently there are no dividends.
what are the characteristics of a corporation?
1. free transferability of shares
2. limited liability
3. continuity of existence
4. centralized management
5. double taxation
6. entity status
What is the purpose of a corporation?
a business corporation is organized and carried on for the benefit of shareholders profit. the powers of the directors are to be employed to that end.
what is a limited liability company?
LLC's are formed by statute and may hold property or be sued in their own name like a corporation.
what are the two types of llc's?
1. member managed- each member has the power to bind.
2. manager-managed- only managers have the power to bind.
May LLC operating agreements waive the fiduciary duties?
yes, however the entire duty of loyalty can not be waived.
How are distributions made in a LLC?
they are made pro rata, rather than per capital (default partnership rule)
May the veil of liability be pierced for violations of duty of loyalty in regards to LLC'S
yes
What is a promoter?
a person who organizes the corporation bringing together persons and assetsin a pre-incorporation contract.
Is a promoter personally liable on the K contemplated for the benefit of the future?
yes, but there are exceptions.
1. parties agree creditor will look solely to the corporation for payment
2. substitution where agreement substitutes promoter upon formation
3. by novation where corporation and creditor enter a new agreement.
Can corporations give donations?
yes, but they should be reasonable in light of the corporations financial condition and should bear some reasonable relationship to the corporations interest.
what is the ultra vires doctrine?
a shareholder may seek to have a corporate action declared void if it is outside the scope of declared corporate action. If successful, directors and officers can be liable for any losses that result.
Discuss the allocation of powers between shareholders and management
the day to day affairs of the corporation shall be managed by the board of directors subject to bylaws and votes of the corporation. Shareholders cannot act in relation to the ordinary course of business, nor control the directors in the exercise of their judgment.
What are the three types of restrictions regarding transferability of shares?
1. right of first refusal- shareholder must first offer shares at fair market value to the corporation
2. first option
3. consent restraints
What are the five steps used to determine a violation of duty concerning Corporate opportunity?
1. Ali
2. Line of business
3. Minnesota two step
4. fairness
5. Legarde
What are the characteristics of a closely held corporation?
1. few shareholders
2. no ready market for shares
3. shareholder particiapation in management and direction
4. restrictions on the transfer of shares
5. no dividents frequently
What is the difference in the creation of a CHC and a public corporation?
Common law created close corporations (judges, statutory law may limit the number of shareholders. While public corporations are rigidly formal, close corporations are often informal
What is agency?
an agent is a person who by mutual assent acts on behalf of a principal and is subject to his control.
When does a principal beoome liable for an agent?
When the agent had real, apparent, or inherent authority to act for the principal.
In regards to an agency/principal relationship, can the relationship be established by estoppel?
yes, if the third party relied on the representations of the agent and they were reasonable.
What is real authority?
it is a written or oral expression by the principal granting the agent authority to act.
What is actual authority?
it is words or conduct by the principal that would lead a reasonable agent to believe he had the authority to act.
What is inherent authority?
is the authority a reasonable principal would grant their agent even if they gave him specific command to the contrary
What are the fiduciary duties of an agent?
Duty of loyalty
duty of skill and care
duty of disclosure
What is an agents duty of loyalty?
An agent is bound to act solely for the benefit of the principal in all matters connected with his agency
What is the duty of skill and care?
Agent has the duty to exercise such skill and care as is standard for the locality for the kind of work he is in and must also exercise any special skill that he has.
What is duty of disclosure?
an agent has a duty to disclose all facts that he knows or should know would affect the principal's judgment.
What is a partnership?
an association of two or more persons who carry on a business for profit.
What are some of the subjective factors to determine if a partnership exists?
1. community of interest in the venture (intent)
2. Mutual control
3. sharing of profits or losses
4. common ownership of real property
Discuss the management of partnerships.
All partners have equal rights in the management and the conduct of the business. Decisions may be made by vote or a majority of the partners. Partners are jointly and severally liable for the acts of the parnership and are vicariously liable for debts of the partnership and each partner.
Discuss the dutys of partners
Each partner has a fiduciary duty of the utmost loyalty and good faith to his copartners and may not obtain advantage by the slighest concealment, misprepresentation, or threat.
may an explusion of a partner in bad faither be actionable?
Yes, if an advantage of violating the duty of loyalty is shown.
May a partnership be dissolved by the express will of any partner and need no justification?
Yes, however there are exceptions.
1. harm to creditors
2. futile to have public sale
3. inequitable to take business
What is winding up?
it is reducing the assets to pay creditors and distribution of any proceeds to remaining partners.
Discuss parner indemnification and contribution.
A partner who pays a debt to a third party becomes a creditor to the partnership and is entitled to be indemnified to the remaining partnership's liability Partners may be individually be required to make contribution toward a partnership debt.
If one partner causes dissolution wrongfully by making it unreasonable inpracticable to carry on the business, may the other parties continue the business?
yes, the wrongful party is not entitled to share in the goodwill of the business.
What is a limited partnership
A limited partnership is formed by at least one general partner and one limited partner.
Do general partners in a LLP owe a duty to limited partners?
yes
If a limited partnership has a corporate general partner, do the directors of the corporation owe a fiduciary duty to the limited partners?
yes
In llp's is the general partner liable for all partnership liabilities?
no, he is only liable for:
1. His own negligent or wrongful acts
2. for the negligent or wrongful acts of those under his supervision.
IN LLP, does the limited partner owe a duty to the general partner?
No, the general partner owes a duty to the limited partner, and not vice versa.
What is a LLC?
they are formed by statute and may hold property or be sued in their own name like a corporation
What are the two types of LLC'S
Member managed- each member has the power to bind
2. Manager managed- only managers have the power to bind
In a LLC, can the operating agreements waive the fiduciary duties?
yes, but not the duty of loyalty.
In a LLC, how are deistributions made?
They are made pro rata, rather than per capita (default partnership rule)
What are the characteristics of corporations?
1. free transferability of ownership
2. limited liability
3.continuity of existance
4. centralized management
5. entity status
6. double taxation
May a corporation give donations?
yes, but they should be reasonable in light of the corporations financial condition and shoudl bear some reasonable relationship to the corporations interest and not cause shareholder revolt.
What is the ultra vires doctrine?
a shareholder may seek to have a corporate action declared void if it is outside the scope of declared corporate action.
What is the corporate democracy doctrine?
Directors owe a fiduciary duty to the stockholders, employees and creditors. Directors are liable for breech of their ficuisary duties if they interfere with corporate democracy.
For a plaintiff to prove a violation of corporate democracy, how do they do it?
1. Plaintiff must show management grossly negligent or acted in irrational manner with purpose of interfering with shareholder democracy.
2. The director may defend with a compelling business justification regarding shareholder democracy. IF the director meets their burden, then there is no interference.
What is piercing the corporate veil?
a creditor seeks to reach stockholders personally.
what must be proved to pierce the corporate veil?
1. Torts courts willing to pierce because no element of voluntary dealing
2. Fraud- courts more likely to pierce
3. Inadequate Capitlization
4. Failure to folow corporate formalities
What is alter-ego?
where a corporation servies as a mere instrumentality of its owner, and an inequitable result or fraud would occur.
Discuss the alter-ego theory regarding parent/subsidiery
Alter-ego theory states that if the parent and the susidiary operating as a single economic entity, the veil may be pierced. Factors: whether corp was solvent and adequately capitalized, whether records kept and formalities observed, whether parent siphoned corporate funds, whether functioned as a lucede for dominat shareholder.
what are the four things to review to determine a corporate opportunity under the ALI approach?
1. Did the FID learn of the opp while engaged in their duties
2. Were the circumstances one in which a fid would rreasonable believe that the opp was being offered to the corp
3. did the fid learn of the corp opp through the use of corporate machinery?
4. Is the opp related to the business of the corp and one which the cop would reasonably be expected to be engaged in?
Discuss the disclosure/rejection rule under the ali method.
The general rule is that under the ALI method, disclosure is absolute. If there is no disclosure, then the defendant is guilty of breach of the duty of loyalty and the plaintiff will win.
What is a FIDCD?
FI- Fully informed
D- Disintrested
CD- Corporate decision maker.
Under the ali method, assuming that the defendant shows the corp opp was disclosed to a FIDCD, the burden moves to the plaintiff to prove what?
The plaintiff must show that the disclosure/rejection was defective.
Under the ALI Method, if the plaintiff is successful in prooving that the disclosure/rejection was defective, what happens then?
The burden then moves to the defendant to show taking the opportunity was fair to the corporation.
Under the ALI method regarding CORP OPP, if the disclosure/rejection was not defective to FIDCD, then what?
The burden switches to the plaintiff to show a violation of the business judgment rule (BJR). That being that the decision making process was grossly negoligent and that the decision was irrational.
Discuss step three ability under the ali test for corporate opportunity.
A corporations ability, including financial, is only one consideration in determining whether the defendant violated/breached the COD
Discuss step four fairness under the ALI method for corporate opportunity.
We ask whether it was fair for the defendant to take the opportunity, it is only one consideration in determining whether the defendant violated/breached the COD.
What is the line of business test?
Relates to Corp Opp
1. Is it a corp opp? It is a corp Opp if it is related to the Corp business or is one that the corp would reasonably expected to engage given its knowledge experience and expertise.
A- if the FID learned of the opp in his personal capacity, the plaintiff must prove that the FID exploited the opp though the use of corporate resources or that the corp had an expectancy interest in the opp.
b- If the fid learned of the COrp opp in his corporate capacity, he will have to prove that there was disclosure/rejection to FIDCD.
Disclosure-Will be the same as under the ALI method
Ability-
What is the minnesota 2-step?
We ask whether it is a corporate opportunity
A. Plaintiff must show facts of a self intrested transaction
b. Defendant would have to show the transaction was fair to the corporation under the entire fairness standard.
Modernly: Instead of item b, there would be a burden on the defendant to show FIDCD approval.
What is the duty of the controlling shareholder?
They have a duty to minority shareholders not to use in their own personal interest at the deteriment of minority shareholders This invokes the entire fairness standard, that the controlling shareholder will have to prove that the action taken was fair to the corporation.
What is the business judgment rule?
Generally, this is the standard used to judge business decisions/actions unless the conduct involved moves into a highter standard such as bad faith, fraud, or a self intrested transaction.
When is there a violation of the BJR?
1. the director was grossly negligent in his decision making such as rushing into a decision or being grossly uninformed.
2. when irrational decisions are made, or no reasonable person in the place of the decision maker would have made the same decision.
What is a self intrested transaction?
Generally, directors and officers owe a corporation a duty to place the corporations interests ahead of their own personal interests. A self intr3ested transaction occurs where the fiduciary sits on both sides of the transaction, both giving and receiving.
What is the commonlaw method to prove a violation by a self intrested transaction?
1. plaintiff must show facts of a SIT
a- the fiduciary is on the opposite sides of the transaction
b- the fid influenced the other party to enter into the transaction
c- the fid financial interests are at least potentially in conflict with corp's financial interests
2. the defendant will have to prove that the transaction was fair to the corporation under entire fairness standard. This would be disclosure, fairprice/interest rate, or best interest of the corporation.
What is the modern method to prove a violation of care by a self intrested transaction?
1. plaintiff must show facts of a SIT
a- the fiduciary is on the opposite sides of the transaction
b- the fid influenced the other party to enter into the transaction
c- the fid financial interests are at least potentially in conflict with corp's financial interests
2. the defendant will have to prove that the transaction was fair to the corporation under entire fairness standard. This would be disclosure, fairprice/interest rate, or best interest of the corporation.
3. Burden on the defendant to show FIDCD approval
4. Burden shirt to plaintiff to show transaction was unfair to the corporation at a heightened fairness standard, or depending on the jurisdiction, plaintiff must show that the transaction violated the BJR (deleware) or
5. plaintiff must show transaction resulted in waste.
What is the SFDCCS?
It is the special fiduciary duty that shareholders in a closely held corporation owe each other a special fiduciary duty of good faith and loyalty.
During exams, when you discuss SFDCCS, what else do you want to discuss?
Dissolution for oppression.
What is dissolution for oppression?
Occurs when the corporation ceases to exists as a legal entity. Assets are sold off and any surplus is distributed to the shareholders.
What is the process of proving dissolution for oppression?
1. it is a CHC
2. Plaintiff can prove that the controlling shareholder is guilty of fraud, illegality, mismanagement. The controlling SH has taken actions that has oppressed the minority and these actions have defeated the reasonable expectations of the minority SH
3. Reasonable expectations must be communicated/known by the controlling shareholder
4. The defendant will have the burden to show a reasonable alternative to dissolution
5. The court will decide if the minority shareholders lack of return on investment is worth the loss of jobs, goodwill of corporation.
Courts are reluctant to dissolve profitable corporations because legislatures may have created the following alternatives:
1. Parties could have agreed to arbitration ahead of time
2. provision director could be appointed
3. a custodian could be appointed
4. the court could appoint a receiver to liquidate the business
5. court could order a judicially supervised buy-out of one shareholder for another
May parties entere into a shareholder agreement that would allow them to have a 3rd party vote their shares when they are unable to agree?
yes, this is called a proxy
Proxies might be enforceablle through the states contract law, but are they free revockable?
yes, unless there it is coupled with an interest or consideration.
what is a proxie coupled with an interest?
the proxy voter has an economic interest in the action that would compel her to vote in a way that is in the best interest of the corporation.
What are the three types of partnerships?
1. term
2. specific undertaking
3. at will
In a partnership, a judicial dissolution will be ordered if what is found to be true?
1. extreme misconduct
2. continual breach of the partnership agreement
3. impractical to carry on the partnership