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75 Cards in this Set
- Front
- Back
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Agency question about liability in contract answer:
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This is an agency question in a contract setting. The principal becomes liable to a 3d party on a contract entered into by the agent if the agent and principal both consent and agent is subject to the principal. Principal must have contractual capacity, but agent does not. Agency law requires no writing, but statute of frauds or other law may. Consideration is not required.
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What is needed to bind the principal to a contract entered into by an agent?
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An agent must have actual authority or a substitute to bind the principal to a contract. Actual authority is created either expressly by principal telling agent to act on her behalf or impliedly when the principal’s conduct leads the agent to believe he has authority.
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What substitutes for actual authority exist to bind a principal to an agent’s contract?
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Either apparent authority, which exists when the principal leads a third party to believe that the agent has the authority; ratification, if the principal expressly affirms the contract or accepts the benefits of it; or adoption, but the adopting party is only liable from adoption forward (a promoter is also liable on an adopted contract unless there is a novation).
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How is an agency relationship created?
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An agency is created by an agreement of the parties where the principal has capacity. It might have to be in writing to satisfy the statute of frauds.
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What are an agent’s duties?
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In addition to any express contractual duties, an agent owes the principal fiduciary duties of loyalty, obedience to reasonable directions, and reasonable care under the circumstances.
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What are a principal’s duties to an agent?
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A principal must compensate, unless the agency is gratuitous, reimburse, and indemnify the agent.
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What is the relationship between a principal and third party (assuming agent’s authority)?
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The principal is always liable to the third party. The third party is almost always liable to the principal. The only time that they are not is when there is an undisclosed principal and holding the third party liable would unduly burden him, the principal fraudulently concealed her identity; or third party bargained for agent’s performance.
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What is the relationship between the agent and third party?
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The third party is not liable to the agent unless the agent’s power is coupled with an interest. Agent is not liable to third party unless the principal is partially disclosed or undisclosed or agent breached her warranty of authority.
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When is the principal liable for an agent’s tort?
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This is an agency question arising in a tort context. The issue is whether the tort was committed by a servant acting within the scope of employment. If so, the master and servant are jointly and severally liable to the third party.
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How do you determine whether a tortfeasor was an employee or independent contractor?
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A person is an employer when they have the right to control the details and performance of a person’s work, whether or not they exercise the control. Evidence of employment is the principal supplying the tools and workplace, employment is long term, little skill is required, and he work is part of the regular business of the employer; and payment is made in regular intervals instead of by the job.
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When is a servant acting within the scope of employment?
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If the servant is doing what he was hired to do he is within the scope of employment. If the servant is deviating from normal tasks, the outcome will depend on how substantial the deviation. A minor deviation, (detour) is usually within the scope of employment. A substantial deviation (frolic) is usually outside the scope of employment. In a close case look for reasons to hold the master liable citing policy. A servant’s intentional torts are outside the scope of employment unless force is used to further master’s business, master ratifies the use of force, or master authorized the intentional tort.
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When is a principal liable for an independent contractor’s torts?
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When the activity involved is inherently dangerous, the duty nondelegable, or the principal is negligent in selecting the contractor.
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When does a partnership exist?
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A partnership is an association of two or more people to carry on business for a profit as owners. A partnership exist whether or not the persons intend to create a partnership and whether the association is called by some other name.
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How do you determine whether a partnership exists between parties; what factors support a finding of a partnership (5 things)?
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Receipt of or the right to receive profits; intent to be partners; participation or right to participate in control of the business; sharing or agreeing to share losses; or contributing money or other property to the business.
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What property belongs to the partnership?
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Property is partnership property if it is acquired in the partnership’s name, or in the name of one or more partners with an indication on the instrument transferring title that it’s being acquired for the partnership, even if the partnership’s name isn’t used. Property acquired with partnership funds is presumed to be partnership property. Property acquired in a partner’s name, without partnership funds, is presumed to belong to him individually, even if its used for partnership purposes.
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What rights does a partner have in partnership property?
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A partner has a non-transferable right to use the property for partnership purposes.
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What is the characterization of a partnership interest?
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A partnership interest is like any other financial asset. If acquired during marriage its community property. It can be transferred upon death, or it can be sold. If acquired by a third party a partnership interest merely an assignment of profits the partner would receive.
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How do partnerships share profits and losses?
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Unless otherwise agreed, partners split profits equally, not in proportion to capital contributions. Unless otherwise agreed, losses follow profits. A partnership agreement that absolves one party from any losses is not enforceable against a third party without their consent.
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How much are partners entitled to be paid for their service to the partnership?
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Unless otherwise agreed, a partner is not paid for his service to the partnership.
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What management rights does a partner have?
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Unless otherwise agreed, all partners have equal management rights. Majority rules.
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Are partners entitled to indemnification for money spent on the partnership?
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Yes, they have the right to be indemnified by fellow partners for expenses incurred on behalf of the partnership. A partner is entitled to contribution when he has paid more than his fair share of a partnership liability.
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What duties does a partner owe to a partnership?
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A partner owes strict fiduciary duties to the partnership. A partnership agreement can’t eliminate these duties but it can set the applicable standards if not manifestly unreasonable. These fiduciary duties include the duty of care of an ordinary prudent person in similar circumstances, a duty of loyalty, a duty to exercise good faith, and a duty to render full information about the partnership upon a reasonable request.
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How are new partners added to a partnership?
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Unless otherwise agreed, unanimous consent is required. New partners are liable for past partnership debts, but only their partnership interest is at risk.
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What is the liability of a partner for partnership obligations?
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The partnership itself is primarily liable, but there is joint and several liability for all debts and general obligations. The partnership resources must be exhausted before partners are personally liable.
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How are agency principals applicable to partnerships?
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Every partner is an agent for the partnership in carrying out its business in the usual way. Apparent authority may be created by a partner’s title, the way the partnership has conducted business in the past; or the way similar firms conduct their business. Partners have apparent authority to bind the partnership to any contract within the scope of the partnership business. A withdrawn partner may have the apparent authority to bind the partnership for 1 year. The partnership can protect itself by notifying creditors of partner’s withdrawal.
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What is the effect of a withdrawal of a partner?
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The partnership usually buys out the partner for fair value and continues without her. A withdrawing partner is liable to existing creditors unless released, for 2 years to subsequent creditors who reasonably believed that she was a partner and were unaware of the withdrawal, and to other partners if the withdrawal was wrongful.
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What events require that a partnership wind up (6 things)?
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An event that makes the business illegal; judicial decree; sale of substantially all assets; end of definite term; unanimous consent; in a partnership at will an agreement of majority in interest.
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What is the order of distribution of partnership assets upon winding up?
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First to creditors. Second to partners for capital accounts (contribution + profit – loss). If there is not enough money to pay obligations, split on a pro-rata basis. Partnership creditors have priority on partnership assets, but they are on par to general creditors against partners.
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What are the main characteristics of a limited liability partnership?
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A LLP is exactly like a GP except the partners are not vicariously liable for the partnership’s liabilities, contracts, or torts of other partners.
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How is a limited liability partnership formed?
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The partners must register annually with the SOS and pay a $200/partner fee; Must include “Registered Limited Liability Partnership” or “LLP” in its name; and must care at least $100,000 in liability insurance or segregate $100,000.
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What are the main characteristics of a limited partnership?
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A limited partnership has one or more general partners and one or more limited partners. General partners are treated just like a normal partnership. Limited partners’ liability is limited to their capital contribution unless the limited partner takes part in control of the business. Upon winding up, general partner’s capital contributions are superior.
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When can a creditor recover against a limited partner?
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When the creditor believes LP to be a GP based on LP’s conduct or if LP knowingly lets his name be included in the LP’s and the creditor didn’t know of LP status. If no certificate is filed with SOS LP is liable as a GP.
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How much control is allowed for a limited partner?
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A limited partner may work for the partnership as an employee but cannot run the day-to-day affairs of the partnership. A LP can also vote on extraordinary management matters without incurring personal liability.
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What are the main characteristics of a limited liability company?
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It can be structured like a corporation or a partnership, but managers run the company unless otherwise provided for in articles of organization. It allows pass-through tax treatment like a partnership if you check the box. Members get limited liability for all obligations except their own torts. LLC is liable itself on contracts and torts under agency principals.
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What information is required to be in the articles of incorporation?
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Name of corporation, name and address of the incorporator and the initial board, duration, purpose, capital stock structure, shareholder’s rights, a statement that corporation will not commence prior to receipt of at least $1000, if the corporation elects to be a close corporation , a provision to that effect, name and address of corporate agent and of incorporators.
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When does a corporation become liable on preincorporation contacts?
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When they adopt the contract. At that point both the promoter and the corp. are liable on the contract, unless there is a novation.
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What is the de facto corporation doctrine?
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If there is a defect in incorporation, there still may be limitation on personal liability under the de facto corporation doctrine. This is a defense to personal liability to owners who in good faith thought they were operating in corporate form. Texas may have abolished the de facto doctrine under the TBCA.
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What is corporation by estoppel?
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A doctrine that prevents a person who dealt with the corporation as if it were a corporation from denying that the entity is a corporation. Texas probably does not have this doctrine.
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When can the veil of a corporation be pierced?
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Under an alter-ego theory when a failure to respect the formalities of a corporation results in injustice for the creditors. Alter-ego can also be found with a parent-subsidiary or affiliated corporations. Another reason the veil can be pierced is when shareholders have not put at risk unencumbered capital reasonably adequate for the corporation’s prospective liabilities. The veil can also be pierced to prevent a shareholder from using the corporate entity to avoid existing personal obligations or fraud. Normally only shareholders that were active in the operation of the corporation will be held liable.
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What is the standard applied for a promoter to make a profit?
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Under the secret profit rule, a promoter must fully disclose any profit that is being made on her dealings with the corporation. Profit is figured over fair market value. Approval is necessary by a majority of disinterested directors, or all subscribers/initial shareholders approve.
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What are preemptive rights and when do they arise?
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Preemptive rights are the rights of current shareholders to maintain their proportionate stake in the corporation by allowing them a preemptive right to buy stock to maintain their share any time there is an issuance of stock by the corporation for money. Currently a shareholder only has these rights if the articles include them. Before 9/03 shareholders had the rights unless the articles disclaimed them.
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What are subscriptions and when are they valid?
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A subscription is an offer to buy a corporation’s stock. Subscriptions made before incorporation are irrevocable for 6 mos. Post-incorporation subscriptions are revocable until accepted by the directors.
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What are the statutory requirements for directors?
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There must be one or more, elected at an annual meeting; and they can be removed before term expires by the shareholders. Either the board or SH’s can fill a vacancy.
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What is required for a valid corporate act?
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Unanimous written consent of directors (no meeting), majority vote at meeting with quorum; If these formalities are not met, the act is void unless ratified by a valid corporate act. Usually proper notice must be given for a director’s meeting, a quorum must be present, and a majority of the directors approved the action.
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What is the duty of care for a director and who has burden of proof for breach?
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A director owes the corporation a duty of care. She must act in good faith and exercise ordinary care and prudence. She must do what a prudent person would do in similar circumstances. A plaintiff must prove breach.
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What is the business judgment rule?
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A court will not second guess a business decision if it was made in good faith, was informed, and had a rational basis.
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What is the duty of loyalty and who has the burden to prove a breach?
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A director owes the corporation a duty of loyalty. She must act in good faith and with a reasonable belief that her action is in the best interest of the corporation. Burden will be on the defendant. In an interested director transaction, the transaction will be set aside unless the director shows that the deal was fair to the corporation or her interest was disclosed and the deal was approved by a majority of disinterested directors. A director cannot usurp a corporate opportunity. He must let the board reject first.
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What can a director do who thinks that the board is about to take an illegal action and wants to protect himself?
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A director is presumed to have concurred with the board action unless her dissent or abstention is noted in writing in corporate records. This is done by having it put in the minutes, or sending a note to the secretary at the meeting.
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How can a director benefit from an interested transaction?
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Normally an interested transaction is a breach of the duty of loyalty. A self interested transaction can be valid with full disclosure to the board and approval, at a meeting, of a majority of disinterested directors or shareholders. Absent such approval the interested director will have the burden of proving that the deal was fair to the corporation.
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How can a director take advantage of a corporate opportunity?
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Normally usurping a corporate opportunity that the corporation may be reasonably interested in is a breach of the duty of loyalty. To take advantage of an opportunity he must wait for the board to reject the opportunity after full disclosure. At that point, he may take advantage of the opportunity.
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What officers are required in a corporation and what duty do they owe the corporation?
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A corporation is required to have a president and a secretary. These officers are selected by the directors. The officers owe the corporation the same duty of care and loyalty as do directors.
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When can a director be indemnified for reasonable expenses in a hearing against her?
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A director must be indemnified if she is “wholly successful” in a proceeding against her. If the director is found liable, settles, pleads nolo contendre, etc… the corporation may completely indemnify if the director acted in good faith and with a reasonable belief that what she was doing was in the company’s best interest. In a derivative suit where the director received a benefit, only reasonable expenses can be indemnified. A court can order indemnification upon a finding that the director is fairly and reasonably entitled thereto. No indemnification if the director is liable for willful or intentional misconduct.
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How can shareholders manage a corporation?
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Normally a shareholder has to manage a corporation by voting for directors at the annual meeting. But in a close corporation, if the articles so provide, there can be shareholder management. Managing shareholders owe a duty of care and loyalty.
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What duties do shareholders owe one another?
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Shareholders do not owe one another fiduciary duties as a matter of law. But a court may find a duty owed to prevent unreasonable control or oppression.
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What is a derivative suit?
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A derivative suit is a suit brought by a shareholder to enforce a corporation’s claim. Recovery of a successful derivative suit goes to the corporation, but shareholder gets costs and attorneys’ fees. If unsuccessful the shareholder cannot recover cost or fees. Only one shareholder can bring each claim (res judicata)
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What are the requirements for a shareholder to bring a derivative suit?
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The shareholder must have owned stock when the claim arose. Must make a written demand that the corp. bring suit and then wait 90 days unless demand is rejected or irreparable harm will ensue. Corporation may move to dismiss based on a determination by a majority of disinterested directors that the suit is not in the company’s best interest. Decision is reviewed for good faith and disinterested persons. No dismissal or settlement without court approval, sometimes notice is necessary to shareholders.
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What is different for close corporation derivative suits?
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If a company has 35 or fewer shareholders, the court may treat a derivative suit as a personal action.
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What shareholder has a right to vote in the annual meeting?
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The shareholder of record on the record date has the right to vote the shares. The corporation does not vote treasury stock. A shareholder’s executor can vote his stock. Proxies are allowed if they are in writing and signed by the shareholder. Proxies are revocable any time before the vote unless the writing conspicuously states that it is irrevocable and it is coupled with an interest.
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What is a voting trust and what are the requirements?
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A voting trust is a written agreement of shareholders which all shares are transferred to a trustee who votes the shares and distributes dividends according to the agreement. The trust must be for a proper purpose, and the agreement must be filed with the corporation.
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What is required for shareholder agreements?
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In all cases the writing must be filed with the corporation. Agreements must be for a proper shareholder purpose. Shareholder agreements are valid against future holders of the stock if the certificates conspicuously note the agreement.
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How can shareholders take a valid corporate act?
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Either by unanimous written consent or a majority vote at a meeting that satisfies the quorum and notice rules. A special meeting can be called by the board, the president, 10% of the shares, or the bylaws. Notice must be given to every shareholder between 10-60 days before meeting (20-60 for merger) and must tell when, where and the purpose.
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What is cumulative voting?
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Cumulative voting is a way to give minority shareholders the opportunity to elect a minority of directors. The shareholder wanting to use must give notice at least 1 day before vote. All shareholder’s shares will be multiplied by the # of directors to be elected. All the votes can be cast for one person, or divided in any manner. In corporations existing before 9/03 shareholders have this right unless the articles say otherwise. Now, the articles must state the right to have it.
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What is a shareholder’s right to inspect the books?
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A shareholder must own stock for 6 months or own 5% of the stock to have the right to inspect books. The shareholder must make a written demand and state a proper purpose. If the corporation disallows, the SH can get a court order and recover costs and fees.
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Who can declare dividends and can they be compelled?
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Distributions are declared at the board’s discretion. They can only be compelled with a strong showing of abuse of discretion.
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Which shareholders get dividends?
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The owner of the stock when the dividend is declared. Preferred means pay first. Participating means pay first, then pay with everyone else. Cumulative means pay for every year that no dividend was paid.
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What money can be used for distribution and what is the remedy for an improper distribution?
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Only the surplus account can be used for a distribution. A company can make a distribution from surplus even if they lost money for the year unless they are insolvent. Directors are personally jointly and severally liable for improper distributions but can seek contribution from shareholders who knew it was unlawful when they got it. Good faith reliance on a professional or financial statement is a defense.
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What is needed for a fundamental corporate change?
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A fundamental corporate change requires a majority of the board and 2/3 of the shares entitled to vote.
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When does a dissenting shareholder have a right of appraisal?
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When there is a fundamental corporate change such as a merger, sale of shares in exchange, transfer of substantially all assets, or conversion. The shareholder must perfect the right by filing written notice of objection and intent to demand payment before the vote. The shareholder must abstain or vote against the change. Within 20 days of notification of the result of the vote by the corporation, make a written demand to be bought out.
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How can the articles of the corporation be changed?
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Board action plus 2/3 shareholder approval. If approved, file the amended articles with the SOS. There are no appraisal rights but if the amendment affects a class, it must be approved by 2/3 of that class as well as 2/3 cumualtively.
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Can the corporation convert to another business type?
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Yes, a corporation can convert to another form by board action and 2/3 shareholder approval.
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Who is required to approve a merger?
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The board of both companies and the shareholders of the transferring corporation.
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How can a corporation be dissolved?
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The corporation can voluntarily dissolve with written consent of all shareholders or board action and 2/3 shareholder approval. A court can order involuntary dissolution.
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When can a receivership be sought?
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Receiver can be sought by creditors when the corporation is insolvent or there are unsatisfied judgments. A shareholder can seek receivership when there is insolvency, waste, director deadlock, or shareholder deadlock and have failed to fill a vacant director spot at 2 consecutive annual meetings of illegal, oppressive, or fraudulent acts by directors.
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Why is abandonment a bad idea?
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Because, the directors and officers remain personally liable for all debts of the corporation incurred with their knowledge including franchise taxes.
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What federal securities laws could show up on the exam?
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10b5 – which prevents fraud or misrepresentation in connection with the sale or purchase of security. 16B – prohibits insiders from profiting from short swing trading (within 6 mos. before or after)
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