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26 Cards in this Set

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Business Judgment Rule
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?
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.
Corporate Formalities

* 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)
Piercing the Corporate Veil
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?
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.
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.
Duty of Loyalty
Directors cannot place themselves in a position where personal interests would conflict with the interests of the corp.

General ways to breach?
* 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
Corporate Opportunity
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?
Closely related to Corp's biz or any opportunity learned of while conducting Corp's biz
Duty of Care
Requires good faith and reasonable care. (See BJR!)
What should you do when you find out inside info?
Publicly announce or abstain from trading
Who elects and removes directors?
Shareholders! by majority vote

(Min) If director engages in fraud, dishonesty or gross abuse of discretion, a court can remove a director.
Ultra Vires
Beyond scope of what corporation is permitted to do (limited to intra-corporation disputes)
Common Law Fraud (in secondary sale of shares)
Plaintiff: must be a buyer or seller of securities in privity with defendant who sells/buys.

Defendant: insider, buyer, or seller of securities

--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
Rule 10-b-5
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

* omission or misrepresentation
* scienter
* materiality
* reliance (presumed if omission)
* use of interstate commerce (use of mail/internet sufficient)
Rule 16-b
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)
Insider who tips for personal benefit
Liability If tipper had a duty to publicly disclose and tippee had reason to know info was material and non-public.
Formation of a General Partnership
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
General Partnership - Intent for partnership property?
Factors for intent for property to be p/s property?
--Source of funds
Agency - Types of authority to bind Principal to a K?
* Actual (express or implied)
* Apparent
* Estoppel
Partner by Estoppel
Party who represents himself as a partner to a creditor who extends credit in reliance is estopped to deny liability for contract.
Limited Liability Company (LLC)
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.
Operating Agreement
An operating agreement is a contract between the members of an LLC wherein they may specify what LLC actions are authorized.
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
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.
General BA Intro Statement
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.
Mere Instrumentality
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!)
Fraud requires an intentional or reckless misrepresentation of a material fact that was relied upon to the detriment of another.