Business Associations

Front 1

Business Judgment Rule

Back 1

Director and officer decisions made in good faith and based on reasonable grounds are not a breach of the duty of care.

--Directors are entitled to make good faith mistakes!

What happens if director breaches their duty of care?

Hint 1

Personal liability for all damages proximately caused thereby to the corp.

Also, a director may be held liable for harmful acts of officers and co-directors if that director was negligent in the hiring of the officer or was negligent in failing to discover and correct the wrongful acts of co-directors.

Front 2

Corporate Formalities

Back 2

A PAIN

* Articles of Incorp. (must include max # of authorized shares)
* Purpose (general purpose and perpetual duration valid)
* Agent (must register an agent for service of process)
* Incorporator (must sign Art. of Incorp. and file with state)
* Name of corp (must include "corp" or "inc" in name)

Front 3

Piercing the Corporate Veil

Back 3

Court will disregard a corp entity and hold individuals liable for corp obligations to prevent fraud or achieve a paramount equity. Either way, actual fraud is required in MD. Never been met in MD! Main ways for corp veil to be pierced: Mere instrumentality and undercapitalization.

Exception to Piercing the Veil?

Hint 3

Contract creditors may be denied piercing - since K creditor (unlike tort) can choose to loan money, extend credit to and can demand financial records and investigate before transaction.

Front 4

Undercapitalization

Back 4

When shareholders' monetary investment is inadequate in view of the ordinary capital required and risks created by the type of biz in which the corp is engaged.

Front 5

Duty of Loyalty

Back 5

Directors cannot place themselves in a position where personal interests would conflict with the interests of the corp.

General ways to breach?

Hint 5

* Conflict of interest with corp/Self-dealing
* Corp opportunity
* Duty to disclose all important information
* Duty to account of all transactions
* Director in unfair competition with corp
* Director is a creditor of the corp

Front 6

Corporate Opportunity

Back 6

Director cannot usurp a business opportunity without first offering it to the corp unless it is clear that that corp does not have the financial means to take advantage of the opportunity. Corp must deny the opportunity or there must be full disclosure and approval by other directors to take advantage.

What is a corporate opportunity?

Hint 6

Closely related to Corp's biz or any opportunity learned of while conducting Corp's biz

Front 7

Duty of Care

Back 7

Requires good faith and reasonable care. (See BJR!)

Front 8

What should you do when you find out inside info?

Back 8

Publicly announce or abstain from trading

Front 9

Who elects and removes directors?

Back 9

Shareholders! by majority vote

(Min) If director engages in fraud, dishonesty or gross abuse of discretion, a court can remove a director.

Front 10

Ultra Vires

Back 10

Beyond scope of what corporation is permitted to do (limited to intra-corporation disputes)

Front 11

Common Law Fraud (in secondary sale of shares)

Back 11

Plaintiff: must be a buyer or seller of securities in privity with defendant who sells/buys.

Defendant: insider, buyer, or seller of securities

Claim:
--Trad: no liability (caveat emptor)
--Modern (Maj): insider must disclose any "special facts" (important info)
--(Min) Duty to disclose only material info.

Note: No double recovery if also claiming private 10-b-5 action

Front 12

Rule 10-b-5

Back 12

Plaintiffs: must be buyers or sellers of securities or others (e.g. SEC or Justice Dep't)
Defendants: anyone OR must be insiders (includes tippers/tippees) if liab is based on failure to disclose
Claim: plaintiff's reliance on material misstatement or omission to state connected with interstate commerce

Elements:
* omission or misrepresentation
* scienter
* materiality
* reliance (presumed if omission)
* use of interstate commerce (use of mail/internet sufficient)

Front 13

Rule 16-b

Back 13

Plaintiff: Corporation (traded on nat'l stock exchange OR a 12g corp (at least 500 s/h or $10M in assets))
Defendant: Insider (director, officer or over 10% s/h (s/h must be over 10% s/h at time of BOTH purchase and sale))
Claim: An insider who makes a profit on a trade of his own stock within six months is liable to the corp for that profit.

Remedy: Maximum profit made from transaction must be disgorged for corporation (can explain in words or do math)

Front 14

Tipper

Back 14

Insider who tips for personal benefit

Front 15

Tippee

Back 15

Liability If tipper had a duty to publicly disclose and tippee had reason to know info was material and non-public.

Front 16

Formation of a General Partnership

Back 16

Association of 2+ people/entities who each agree to carry on a business as co-owners (share profits/losses/revenue) for a profit, whereby all the partners are jointly and severally liable for the debts and obligations of the partnership.

--ALL partners must consent (unless partnership agreement says otherwise) to addition of a new partner
--can be oral agreement/agreement by conduct
--no filing required

Front 17

General Partnership - Intent for partnership property?

Back 17

Factors for intent for property to be p/s property?
--Source of funds
--Title
--Use

Front 18

Agency - Types of authority to bind Principal to a K?

Back 18

* Actual (express or implied)
* Apparent
* Estoppel

Front 19

Partner by Estoppel

Back 19

Party who represents himself as a partner to a creditor who extends credit in reliance is estopped to deny liability for contract.

Front 20

Limited Liability Company (LLC)

Back 20

An LLC is a business entity formed under state law, the owners of which are referred to as "members," and where members are not personally liable for the obligations of the LLC.

Front 21

Operating Agreement

Back 21

An operating agreement is a contract between the members of an LLC wherein they may specify what LLC actions are authorized.

Front 22

Insider

Back 22

One who is in a confidential relationship with corporation so has access to confidential, non-public info.

OR an outsider that wrongfully obtains and knows that the info is confidential

Front 23

Ratification

Back 23

Ratification is an intentional acceptance by the principal of the unauthorized actions of an agent made with knowledge of the material facts and renders the principle liable for the agent's conduct.

Front 24

General BA Intro Statement

Back 24

Under the law of business associations, liability of persons involved in business is determined by the type of business and the person's status in the business.

Front 25

Mere Instrumentality

Back 25

If one corp is merely an instrumentality of another/ a corp used by another to improperly shield the senior corp from liability, the senior corp may be held liable for debts of the business that is a mere instrumentality under piercing the corporate veil. (Remember, must have fraud!)

Front 26

Fraud

Back 26

Fraud requires an intentional or reckless misrepresentation of a material fact that was relied upon to the detriment of another.