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112 Cards in this Set

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What are the three things that must be present to have an agency relationship?
1) consent: the principal must consent to the relationship with the agent
2) expect benefit: the principal must expect to receive some benefit from the services provided
3) control: the principal must control or have a right to control the manner and method in which agent performs on his behalf
How might a principal be held liable?
Tort liability
Contract liability
Agency liability
What is tort liability?
A principal may be held liable to a 3rd party under respondeat superiori
Must show that
1) master servant relationship
2) wrongful conduct committed within the scope of employment
What is contract liability?
No contract liability for an agent of an undisclosed principal.
What is agency liability?
The principal can be liable for the acts of an agent as long as the three requirements of an agency relationship are met.
Can a principal be held liable for a contract if her name does not appear on it?
Yes. Under the undisclosed principal doctrine, as long as the plaintiff can prove that an agency relationship existed between the undisclosed principal and the party who signed the contract.
Actual or Inherent Authority
Principal cannot be held liable for the unauthorized acts of A
Principal can be held liable if
1) A had actual apparent or inherent authority;
2) A was an agent by estoppel; OR
3) if P ratified the act
What is prima facie evidence for determining the existence of a partnership?
UPA sec.7(4)
Receipt of the share of profits. This can be rebutted if the profits were received in payment as a debt by installments, wages of an employer, rent to a landlord, a widdow's annunity, interest on a loan or
Corporation Existence
Articles of incorporation need to be filed and approved by the applicable state gov't agency.
Board of Directors
make major decisions and are elected by shareholders
must ensure that they are managing the corporation to make a profit
have a fiduciary duty to make a profit for the shareholders
Appoint executive officers to run the day to day business
Corporations Authority
Corporations have to authorize individuals to enter into contracts on behalf of the corporation
Differences between Partnership Law and Corporation Law
Right to Manage
Agency Authority
Profit Distribution
Transferability of Ownership
Fiduciary Duty
Taxation Profit Distribution and Deductibility of Losses
Organizational Features desired by owners of small start-up businesses
1) Managment control
2) Limited liability
3) Flow through Taxation
4) Recouping Investment when leaving
5) Ability to veto admission of new members
Limited Liability Partnerships
Limited liability partners receive limited liability in exchange for being passive investors
Limited Liability Company
Hybrid between general partnership and corporation
Owner/members can take part in the management of the business, have limited liability, taxed as a GP, can keep new people from coming in
What must closely held corporations do to have the 5 desired features?
1) incorporate under a close corporation statute
2) have detailed shareholders control agreement
3) Apply to the IRS for recognition as a subchapter S corporation for flow-through taxation
What are the Ten Control Devisces for closely-held corporations?
1) Pooling agreements
2) voting trusts
3) cumulative voting
4) classified stock and weighted voting
5) control agreement to stipulate who will serve on the board of directors
6) control agreement to stipulate that shareholders who are parties to the agreement will vote each other to be the directors and executive officers
7) Supermajority voting provisions
8) provisions making dissolution easy
9) Restrictions on ability to sell equity interest to non-owner
10) Preemtive rights in the owners
What is a promoter?
One who undertakes to form a corporation
What is a promoter's liability?
Liable on pre-incorporation contract where both parties are aware that no corporation exists and the other party has not clearly agreed to look soley to nonexistent corporation for performance
What are two escape devices that are available to defective incorporators?
Defacto doctrine
corporation by estoppel
as long as both parties were ignorant that the corporation did not come into existence; these doctrines have been overruled by legislation
What are the elements of the defacto doctrine?
Both parties to the contract were ignorant that the corporation was not in existence.
The defendant acted like a corporation
The defendant made a bona fide effort to comply with the requirement of incorporation.
What are the elements of the corporation by estoppel?
Both parties to the contract were ignorant that the corporation was not in existence.
Plaintiff never intended to contract with anything other than the corporation.
Other party acted in good faith.
There was no corporation because of an administrative glitch
Defendant cannot be held personally liable.
What is the ultra vires doctrine?
The corporation has acted beyond its purposes. The contract for the services would be unenforceable by or against the corporation.
What is Delaware statute sec. 124?
It is the anti-ultra vires statute. It provides that no act of a corporation is invalid because it lacked capacity or power.
Who can bring claims under the Delaware statute sec. 124?
1. Shareholders (equitable injunction only)
2. Corporation (to recover damages against officer for loss or damage from the ultra vires act)
3. The State Attorney General (to dissolve the corporation or enjoin it from performing ultra vires acts)
What powers do shareholders have in the corporation?
1) They can initiate changes in the corporation's by-laws,
2) vote who will sit on the board of directors
3) approve structural changes (Amend, join, sell, end)
4) see corp books and shareholders list with good cause
What are the four structural changes that shareholders must approve?
1) Amend: amendments to the articles of incorporation
2) Join: Mergers
3) Sell: The sale of all or substantially all of the corporation's assets
4) End: dissolution of the corporation
What powers to shareholders not have?
1)Cannot act in relation to the ordinary business of the corporation.
2)Cannot control the directors in the exercise of justment.
3) Do not manage the corporation.
4) Not agents of the corporation
5) Do not owe a fiduciary duty to each other.
What do directors not have the power to do?
They cannot inequitably manipulate the by-laws to perpetuate themselves by attempting to frustrate the SH's vote. (_Schell_)
Under Delaware law, what are the powers of Directors?
1) can initiate proposals with amendment to the articles of incorporation.
2) can initiate and mage changes go into full effect except for the 4 structural changes.
3) Can unilaterally amend by-laws without taking it to the share holders.
Under Delaware law, what are the powers of Shareholders?
1) can vote to prevent amendment to articles of incorporation
2) can vote on the 4 structural changes
What are the shareholder's informational rights?
Shareholders have the right to inspect corporation books and records and view a list of shareholders for a proper purpose.
What are the burdens of proof under shareholders informational rights?
Shareholder must show that there is a credible basis for corporate wrongdoing by a preponderance of the evidence to look at books.
Burden is on the corporation to show that the demand for a shareholder's list is being done for an improper purpose.
What are appraisal rights?
If a shareholder votes no to a merger, she has the right to bring a claim that she is entitled to get more for her share. Does not apply to acquisitions.
What is the difference between a merger and an acquisition?
A merger is a total buy-out of another corporation. An acquisition is less than an entire by out.
What is a proxy?
A proxy is an agent of the shareholder for purposes of voting the shares at the annual meeting. She comes to the meeting with agency consent/authorization.
What is straight voting?
For each board of directors position, the shareholder may cast the number of votes equal to the number of shares she possesses.
What is cumulative voting?
A shareholder can use all of its votes on any single candidate.
Under cumulative voting, how many shares does one shareholder get?
Number of votes = number of shares x the number of directors to be elected
What is a primary market?
The original sale of securities by a government or corporation by public offering or private placement.
What is a secondary market?
Where securities are bought and sold after the original sale.
What are the two types of secondary markets?
1) dealer markets
2) auction markets
What is a dealer market?
It is an over the counter market where buying and selling is done by the dealer. There is no physical location. NASDAQ is the biggest OTC.
What is an Auction Market?
A market that has a physical location (Wall Street). The primary purpose is to match those who wish to sell with those who wish to buy.
Who does the Securities Exchange Act of 1934 apply to?
Big, publicly held corporations whos shares trade on any national exchange or who trade in the OTC with at least 500 shareholders and assets in excess of $50mil.
What does applicability under the SEA of 1934 mean?
The company must comply with five regulations:
1) duty to register in any class of its equity securities with SEC
2) duty to file reports with the SEC periodically
3) must have proxy provisions
4) must have short swing profit provisions
5) must have tender offer provisions
What are the reports that need to be filed according to the SEA of 1934 and when do they need to be filed?
1) 10K (annual)
2) 10Q (quarterly
3) 8K (within a specific # of days from a certain event)
What is the 10K report?
Need to be filed annually.
It includes an audited financial statement, discussion of corps financial condition and results of operations, disclosure of legal proceedings, development in the corporation's business, executive compensation and conflict of interest transactions
What is the 10Q report?
Filed quarterly and includes quarterly financial data, management report, disclosure of legal proceedings.
What is the 8K report?
A report filed to the SEC in accordance with the SEA of '34 detailing change in control of the corporation, acquisition of significant amount in assets and/or a change in accountants. Must be filed within a specific amount of days from the event.
What are the proxy provisions under the SEA of '34?
Company must issue a proxy statement before any vote on amendments, mergers, sale of assets or dissolution.
Must be given to the shareholders and must be true with respect to all material facts.
What is the proxy rules purpose?
To require full disclosure in conection with the transactions that shareholders are being asked to approve (mergers, amendments, election of directors)
What is Rule 14a-11?
It is a SEA of '34 rule that regulates a proxy contest where insurgents try to oust incumbent directors.
What is Rule 14a-2?
An SEA of '34 rule that applies to every solicition of a proxy with respect to securities registered pursuant to § 12 w/ certain exceptions.
What is Rule 14a-7?
Rule under SEA of '34 that provides a mechanism by which shareholders can communicate with one another specifically to have social policy or corporate governance proposals be included in the corporation proxy statement.
Under what conditions can managment exclude a shareholder's proposal under the SEA of '37?
1) matter of ordinary business
2) improper subject for action by the shareholder under state law
3) requiring the company to violate laws
4) contrary to SEC proxy rules
5) a personal claim of greivance
6) an operation that accounts for less than 5% of the company's business.
7) beyond the company's power to effectuate
8) an election to office
9) being counter to a management proposal
10) duplicates another proposal in the proxy statement
11) substantially similar to a proposal submitted in the last 5 years.
When is an omitted fact standard material information?
An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider the information important in deciding how to vote.
What recourse is available to a shareholder that receives materially false information in a proxy statement?
The shareholder has a cause of action under Rule 14a-9 in federal court. Also, there can have appraisal proceedings in state court if there is a difference in share price.

_Virginia Bankshares_ held that a cause of action exists under fed. securities law, however since the shareholder did not give a proxy vote he had no causation. However, he could file for an appraisal proceeding in state court.
What are short-swing profits?
A profit from matching a higher sale price with a lower purchase price within a 6 month period. It is irrelevant if there was an actual loss or which comes first.
Who is subject to short-swing profits?
It covers directors, officers and more than 10% owners of equity stock.
What does §16(a) of the SEA of 1934 provide?
Anytime a director, officer, or more than 10% owner of equity stock buys or sells stock in the company they must file a statement with the SEC.
What does §16(b) of the SEA of 1934 provide?
If those who are subject to short-swing profits buy/sell or sell/buy within 6 months, the corporation can recover the profits.
How can one avoid §16?
If the exec. officer, director or more than 10% owner if they hold onto shares for more than 6 months.
Who can recover under §16?
The Corporation.
What is insider trading?
Using information that executive officers, directors or corporate shareholders have that is not public knowledge for one's benefit
What federal provisions govern insider trading?
1934 SEA §10(B) and Rule 10(B)-5.
Under what conditions can a corporate insider trade?
Corporate insiders have a duty to disclose the material non-public information or they must abstain from trading on that information.
How do you determine if speculative information is material.
Employ a balancing test:
1) probability that the event will occur
2) anticipated magnitude of the event
What is the standard for materiality?
An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would considerit important information in deciding how to vote.
Who can be held liable for insider trading?
1) Corporate insiders: officers, directors, controlling shareholders
2) Constructive insiders: outsiders who work for the corporation and are privy to confidential information
3) Outsiders under certain conditions
Under what conditions can an outsider be held liable for insider trading?
If they improperly receive material information from an insider.
What is the misappropriation theory?
An ousider who has no connection to the company is liable under §10(b) and Rule 10(B)-5 of the 1934 SEA if he misappropriated/stole the material non-public information and the employer has a rule against disclosure.
How can a potential misappropriator avoid liability?
As long as an employer has a rule against disclosure an employee must disclose that you are about to brake the rule and trade on the basis of material non-public information. The employer has the right to take the profits.
Under what conditions can tipees be held liable?
Because they inherit the duty to disclose or abstain from trading from the insider if the tip was given to receive a personal benefit (including reputation)
What is the corporate veil?
When the corporate entity is used to shield directors or shareholders from personal liability.
How is the corporate veil validated?
1) separate bank account
2) official corporate letterhead
3) by-laws
4) shareholder meetings
When will the corporate veil be pierced?
It is pierced to prevent fraud or acheive equity.
Who can be held liable if the corporate veil is pierced?
1) a shareholder who is really the alter ego of inadequately capitalized corporations)
2) a parent corporation who owns the stock of the inadequately capatalized corporation
3) an affiliated corporation owned by the shareholder of the inadequately capitalized corporation
What is the alter ego theory?
Owners are personally liable if they 1) treat assets of a corporation as their own and add/withdraw capital at will; 2) hold themselves personally liable for the debts of the corporation; OR
3) provide inadequate capitalization and actively participate in the conduct of corporate affairs.
What 2 factors will a court look at disregard the corporate veil?
There must be such a unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist.
2) Circumstances must be such that adherence to the fiction of separate corporate existence would sanction fraud or promote injustice.
How will a court determine that there is unity of interest and ownership?
1) failure to maintain corporate formalities or keep an adequate corporate record
2) co-mingling of funds or assets
3) under capitalization
4) one corporation treating the assets of another as its own
What are the two fidicuary duties?
Duty of Loyalty
Duty of Care
What is the duty of care?
It is the duty to avoid managerial negligence.
Who has the burden to show a breach of duty of care?
The plaintiff must show managerial negligence (gross negligence review standard)
What is the business judgment rule?
A defense of directors against managerial negligence.
What are the elements of the business judgment rule?
1) good faith
2) no conflict of interest
3) kept themselves properly informed of the business and of the particular matter
4) the decision was not so unreasonable to be irrational.
What is the duty of loyalty?
The duty to avoid self-interested transactions.
Who has the burden to show a duty of loyalty?
The burden is on the defendant fiduciary.
What must the defendant in a duty of loyalty case show?
1) disclosed the conflict to disinterested members of the BoD and or SH AND
2) the dealing was fair to the corporation or minor shareholder because the dealing was objectively fair to the corporation or it was entirely fair to the shareholder.
What is the ultimate standard in duty of loyalty cases?
Whether the transaction between the interested directors and the corporation was fair to the corporation regardless of disclosure.
What can a defendant in a duty of loyalty case do to shift the burden of proof to the plaintiff?
Must show that they went through the proper procedures to disclose and that an informed majority of shareholders voted to approve the transaction.
What are the proper procedures necessary to burden shift to the plaintiff in a duty of loyalty case?
Appoint a group of outside directors or set up an independent committee of the corporation and let them approve the transaction at the price they deem
2) present the transaction and let the minority shareholders vote on it. If an informed majority of minority shareholders approves it, the burden shifts.
What is the corporate opportunity doctrine?
It is a breach of duty of loyalty to divest or steal a business opportunity from the corporation in order to personally take advantage of them.
How can one avoid liability under the corporate opportunity doctrine?
The director must give the corporation first opportunity to take advantage of the opportunity and the corporation must reject the offer on rational grounds.
What does the 1933 Securities Act govern?
Selling securities to potential investors.
What are the exemptions to the 1933 Securities Act?
1) Private offering exemption
2) Regulation D exemption 504, 505, 506
3) Regulation A exemption
4) Intrastate exemption
What must you file under the 1933 Securities act?
1) Part I: Prospectus
2) Part II: additional information available at the SEC for inspection by the public
Under the 1933 Securities Act what is a security?
A promissory note, investment contract, bond, stock, debenture, certificate of interest or participation in any profit sharing agreement, certificate of deposit, option
What are the filing periods under the 1933 Securities Act?
1) pre-filing period (can't sell anything)
2) post-filing/pre-approval (can make offers to sell)
3) post-effective period (can sell securities)
What is a private offering exemption?
The investor must have
1)sufficient knowledge and experience in financial and business matters to evaluate risks for himself
2) access to the types of information that would be in a prospectus
3) must agree not to resell the securities
4) must not have been approached through general advertising or public solicitation
What is a Regulation D 504 exemption?
Business can offer and sell not more than $1mil of its securities during a 12-mo period. Issuer can be held liable under general anti-fraud provisions for making any misleading statements in connection to the offering.
What is a Regulation D 505 exemption?
Business can sell up to $5mil of its securities in a 12-mo period to an unlimited amount of accredited investors and up to 35 non-accredited investors.
No general advertising or solicitation.
What is a SCOR exemption?
A small Corporate Offering Registration. Allows companies to raise up to $1mil over a 12-mont period by selling stock directly to the public or through IPO. Minimum stock price is $5/share.
Simpler and less expensive.
What is a Regulation A exemption?
Allows a company to raise $5mil over 12-mo period.
Must not be a public company, investment company, oil or gas company.
No restriction on types of investors.
Business required to make the same disclosures as a registration but financial statements do not need to be audited.
What are shareholder derivative action suits?
Suits brought on behalf of the corporation by a shareholder claiming that corporate managers have breached their duty of care and/or loyalty to the corporation resulting in financial or other harm to the corporation.
What are the requirements to bring a derivative action suit?
1) must be a shareholder.
2) must remain a shareholder during the pendency of the action
3) Contemporary ownership rule: must be a shareholder at the time the breach of the fiduciary duty occurred.
Who is the beneficiary of derivative action suits?
The corporation. Any recovery is supposed to go to the corporation.
What are the execeptions to the Contemporary ownership rule?
1) if you obtain the shares by operatio of law (through inheritance)
2) continuing wrong theory: the wrong continued after become shareholder but the act began before became shareholder.
What is demand/futility?
A shareholder must make a demand upon the BoD before filing a deriviative action suit, except where the demand would be futile.
What is the Unocal standard?
Target directors may attempt to thwart hostile takeover attempts through defenseive mechanisms provided that
1) direcotrs have reasonable grounds for believe that a danger to corporate policy and effectiveness exists
2) the defenseive measure is reasonable in relation to the threat posed.
What is the Revlon standard?
A target corporation may use defensive mechanisms to avoid a hostile tender offer until the break-up of the target becomes inevitable and abandon defensive measures to get the highest price for its shareholders.
What are the frequently used defensive mechanisms used in hostile tender offers?
Crown Jewels
Fair-price provisions
Poison pills