Corporations

Front 1

Agency Defined

Back 1

Fiduciary relationship resulting from consent of one person (principal) to another (agent) that the agent shall act on the principal's behalf and subject to the principal's control and consent by the agent so to act.

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General Application - Physical Actions (Master/Servant)

Back 2

Includes physical service - liability issues - what is the servant employed to do? If he is acting w/in the scope of his authority, he will bind the master and transfer liability to him - RESPONDEAT SUPERIOR

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General Application - Contractual Actions (Principal/Agent)

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Includes third parties - primary question - was the agent given the authority to bind the principal to the contract?

Front 4

General Application - Employment/Independent Contractor

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NOT agency - C's actions will NOT bind the employer. Employer retains control over work but exercises no control over actions of C - THIS severs the liability chain that would flow from a P/A relationship

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Distinguishing Features Between Agency and Independent Contractors:

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(1) Control over detail - greater control more likely agency;
(2) Distinct trade - IC is usually engaged in one (plumber, etc.);
(3) Length of time/method of payment - P/A is generally hourly and ongoing; IC is for a single task and paid upon completion (usually);
(4) Vicarious liability - IC torts are NOT imputable to his employer - unless the job is INHERENTLY DANGEROUS

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Three Principal Relationships Governed by Agency Law:

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(1) Principal and Agent
(2) Agent and Third Parties;
(3) Principal and Third Parties.

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Elements of Agency - Basic

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Burden on P to prove or disprove existence of relationship:
(1) Must be agreement btwn parties - no need for contract or intent;
(2) Must be manifestation by P that A will act for him;
(3) Must be A's acceptance/consent to undertaking w/ understanding that P controls relationship and A's actions.

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Types of Agents - General

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Agents authorized to conduct a series of Transactions involving continuity of service

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Types of Agents - Special

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Agents authorized to conduct a SINGLE transaction or a SERIES that does not involve continuity of service

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Types of Principals - Disclosed

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At time of transaction, third party knows and understand A is acting for P and he knows the P's identity

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Types of Principals - Partially Disclosed

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3rd party knows A is acting on behalf of P but he does not know who the P is.

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Types of Principals - Undisclosed

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At time of transaction - A purports to be acting on his own behalf.

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Authority and Control - Actual
Authority

Back 13

P's words and conduct would lead a reasonable person in A's position to believe P has authorized action
(a) Express - actual words or deeds authorizing A; or
(b) Implied - course of conduct, systematic and continuous btwn A and P that would leave A with belief he had authority to act.
(c) Incidental - custom and usage in industry or area establishes the relationship

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Authority and Control - Apparent Authority

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P's words or conduct would lead a reasonable person in 3rd party's position to believe P had authorized A to act on his behalf

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Authority and Control - Agency By Estoppel

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Where a P negligently or intentionally causes a 3rd party to believe his A has authority and 3rd party detrimentally relies on this - P is estopped from denying A's authority.

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Authority and Control - Agency By Estoppel - ELEMENTS

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(1) Principal's act or conduct;
(2)Causing 3rd party to believe A relationship exists;
(3) Reliance on relationship by 3rd party; and
(4) Damages.

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Authority and Control - Inherent

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Power derived from agency relationship itself and intended to protect those dealing w/ A (Pizanno thinks this is NUTS)

Front 18

Authority and Control - Ratification

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P will be bound to 3Pif P, w/ full knowledge of material facts, affirms A's conduct, or engages in conduct that would seem to affirm it.

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Authority and Control - Acquiescence

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Failure by P to object to A's performance could constitute this.

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Liability

Back 20

Attaches as to the P if the A is acting w/in the scope of his authority of employment

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Liability - Master/Servant

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REASONABLE FORESEEABILITY - what are these risks and how could they have been dealt w/ by the master in advance?

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Liability - Principal/Agent - General

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Type of P may be a factor as to liability - P may be liable to 3P but A may be liable to P - P may sue A for breach

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Liability - Disclosed Principal/Agent

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P is FULLY LIABLE on the transaction and A may be if expressly included - may depend on how document is executed

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Liability - Partially Disclosed Principal/Agent

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P is fully liable on T - same as Fully Disclosed P's.

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Liability Undisclosed Principal/Agent

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P remains fully liable for authorized actions of A, and A specifically binds himself on the transaction - P is the person who puts T in motion and in best position to prevent harm and bear loss

Front 26

Corporation - Defined Generally

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Framework for conducting modern business - the existence and attributes arise from state enabling statutes which give freedom to choose own organizational structure.

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Attributes of the Corporation - (1) Independent and Perpetual Existence

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C is entity distinct from those who contribute capital and those who manage the business - C owns assets and is liable for business debts and does not dissolve upon w/ drawal of an individual - the C is a LEGAL PERSON

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Attributes of the Corp - (2) Centralized Management

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Board of Directors - manages and supervises business - subject to fiduciary duties. Shareholders have limited governing role including voting power to elect directors and approving fundamental C change.

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Attributes of the Corp - (3) Hierarchical Return on Investment

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Creditors first and receive return on investment; shareholders are last and receive dividends as declared by discretion of board. Upon dissolution - creditors before shareholders.

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Attributes of the Corporation - (4) Freely Transferable Rights

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Shareholders interests are freely transferable and can sell to investors interested in acquiring financial rights. C has no obligation to repurchase these ownership interests

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Attributes of the Corporation - (5) Limited Liability for Participants

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C is liable for its obligations but C insiders are NOT personally liable to outsiders

Front 32

Theories of Corporate Law - Generally

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Premise of C is the shareholders and management cannot survive w/out the other

Front 33

Theories of Corporate Law - Allocation of Risk

Back 33

Between S and managers in attempt to minimize s-m conflicts and C's overall success

Front 34

State Corporation Statutes

Back 34

Corporate statues of each state describe basic corporate attributes including:
(1) formation of C;
(2) financial rights of S
(3) governance powers of S, D, and O;
(4) transferability rights of S;
(5) limited liability for S; and
(6) structural changes

Front 35

III. ORGANIZATIONAL FORM

Back 35

Determines legal relationship, financial rights, responsibility for business debts, and tax liability

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Organization of Corporation - Life Span

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Requires FILIING articles of incorporation w/ state official - corporate existence is perpetual, regardless of what happens to individual S, D or O.

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Organization of Corporation - Claims

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Financial rights are allocated according to shares and distributions must be approved by B of D

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Organization of Corporation - Governance

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Centralized management by B of D. Officers carry out policies of B of D. S elect the B and decide fundamental matters. Shares are freely transferable unless there are specific written restrictions.

Front 39

Organization of Corporation - Liability to Outsiders

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S have limited liability for C obligations. They can only lose what they invested unless there is fraud or inequity that "pierces the corporate veil."

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IV. INCORPORATION AND THE CORPORATE FORM

Back 40

Requires strict recognition of formalities - in place to protect public interaction w/ corp

Front 41

Factors to Look For in A of I:

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(1) Formalities of Org;
(2) Capitalization and credit;
(3) Management and control;
(4) Tax consequences.

Front 42

Sample Articles - Article I - Exact Name of Corporation

Back 42

Must designate C status (Inc.) Name cannot be in use by another C.

Front 43

Sample Articles - Article II - Purpose of Corporation

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Reason for C existence ("to engage in any lawful activity"). ULTRA VIRES comes into play - when C acts outside scope of authority

Front 44

Sample Articles - Article III - Total # of shares and par value, if any, of each class of stock authorized

Back 44

Financing of C here - (1) Debt - get a business loan (trade, bank, bonds and debentures); and (2) Stock - owner selling off ownership interest in C - right to ask questions, inspect books, vote (if granted), be consulted on fundamental changes, participate in profits.

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Article III continued - NEW STOCK

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Authorized Capital Stock - must be acquired for good consideration.

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Common Shares

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basic form of equity interest in C. Owner has no fixed claim on C and is generally subordinate to all other claims on the corp.

Front 47

Preferred Shares

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Owner enjoys preferences not available to common S. May guarantee certain rate of return, liquidation preference - slightly like bank debt and common stock combined

Front 48

Sample Articles - Article IV - If more than one class of stock authorized, state distinguishing designation for each class.

Back 48

Defines classes of S that are issued. Class A - position 1; Class B - position 2; Class C - position 3. Ex. three person board w/ three people who are responsible for incorporating business are going to issue three separate classes of stock to ensure that two members do not gang upon the third.

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Sample Articles - Article V - Restrictions, if any, imposed by the A of O upon transfer of shares of stock

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Generally for closely held corps: Restrictions must be reasonable

Front 50

Sample Articles - Article VI - Other lawful provision for th conduct and regulation of the C

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Just about anything can go here - where you would find preemptive rights - allow others to cut in line when new stocks or shares are issued.

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Sample Articles - Article VII - Effective date of organization

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If not provided - it will be the date approved and filed by secretary of state - which shall not be more than 30 days after filing.

Front 52

Sample Articles - Article VIII - Street address of C, name and address of President, Treasurer, Clerk, and Directors.

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Not a permanent part of articles - do not need to file a formal amendment when they do change.

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Sample Articles - Article IX - Certification

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Bylaws have been duly adopted and P, T, C, and D have been elected - this is before the C exists - a little strange but maybe so everything is set up and ready to go - to show that it can be set up.

Front 54

Post-Filing of A of O - Formal Amendment Process

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Required for changes up to Art. VIII - it may require votes to make the change

Front 55

Post-Filing of A of O - Approval of the A of I

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If approved - C is in existence (De Jure - following strict compliance - and corporate shield is applied).

Front 56

Post-Filing of A of O - Meeting of directors

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(a) when properly convened (notice and quorum) D may appropriately act; and (b) first meeting held to elect permanent officers and to ratify pre-incorporation K's.

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Post-Filing of A of O - Meeting of Shareholders

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Meet to approve director actions.

Front 58

Pre-Incorporation Transactions by Promoters - Definition of Promoter

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Those who undertake to form the C. They are fiduciaries of the incorporators (if not one themselves) and owe loyalty, good faith, fair dealing, full disclosure. Act as agents for one another - deals w/ Discovery, Investigation, Assembly

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Issues re: Promoters

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(a) Promoter liability and rights under the K;
(b) Corporate liability and rights under K;
(c) Intentions of the parties - this is KEY - expression of intent w/ respect to liabilites in light of transfer from promoter to C.

Front 60

Problems with Pre-Incorporation Agreements

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(1) no guarantee C will ever form;
(2) no guarantee C will form as intended;
(3) No guarantee C will accept P-I K

Front 61

Liabilities of Promoter and the Corporation

Back 61

(a) P personally liable to a K for the benefit of an intended C unless parties agree otherwise - he will be liable if the 3P doesn't know about the pre-C, he may be liable if the K states the pre-C.
(b) the C (to be) is generally NOT liable for K entered into by P b/c it is not in existence - C may become bound through ratification, adoption, novation, or other means.

Front 62

Rule of Promoter Liability

Back 62

When a promoter makes a K for the benefit of an intended C the promoter is personally liable on the K and remains liable after the C is formed. There is a presumption that the parties intended present, binding agreements between the parties w/limited liability incurred by the parties.

Front 63

Novation provision

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Provides (1) present obligation on the parties; (2) parties agree to a new K; (3) the new K extinguishes old agreement and shifts liability from P to the C; and (4) the new agreement must be valid

Front 64

Defective Incorporation - Definition

Back 64

When efforts to incorporate fall short - when parties believe there is a C but something makes that not true. Liability issue arise.

Front 65

De Jure Corporation

Back 65

C is formed in strict compliance w/ law - C status not subject to challenge - shield is effective but the court can go behind veil to hold O, D, etc personally liable for fraud or bad faith

Front 66

De Facto Corporation

Back 66

By virtue of the facts - if they made a colorable attempt to incorporation so long as there is (a) a statute permitting incorporation; (b) a colorable attempt to comply w/ that statute; and (c) actual good faith use of the corporate status and powers. Only vulnerable to attack by the state but not others. Errors occur through failure to deliver

Front 67

Corporation by Estoppel

Back 67

C DOES NOT exist but b/c of unique facts you are estopped from denying the C status.

Front 68

Ultra Vires - Classic Theory

Back 68

Powers of C are defined and limited by A of I. Classic case - someone challenges the C's act claiming it is outside the powers of the C and therefore void.

Front 69

Ultra Vires - Continued

Back 69

Applied to K cases - asserted as a D.
*Executory K - if neither party perform, both can plead UV;
*Full Execution - UV precluded if K has been fully performed
*Partial Performance - relief granted in quasi-K - fair value of goods or services

Front 70

Modern Trend - Ultra Vires

Back 70

DEAD - statutes permit incorp of ANY purpose - "established to engage in any lawful business," eliminating need for UV.

Front 71

V. The Corporate Structure

Back 71

**

Front 72

Classic Model - Pyramid

Back 72

Officers;
Directors;
Shareholders

Front 73

Officers - Defined

Back 73

Administer day-to-day affairs of C under supervision of board - may be hired and fired by board w/ or w/out cause

Front 74

Officers - Authority

Back 74

AGENT of the C and authority analyzed under agency principles - does not have auto right to bind corp

Front 75

Officers - Binding Authority - Four Doctrines

Back 75

(1)Express Actual - given in articles, bylaws, statute;
(2)Implied Actual - necessarily and reasonably implied by express Authority - acquiescence in conduct of officers;
(3)Apparaant - created by some action of the C that gives impression to 3P that agent has authority that she does not;
(4)Ratification

Front 76

Directors - Defined

Back 76

manage C's business - formulate policy and appoint officers to carry it out - always elected by S.
*Cumulative - can take all votes and vote for one candidate

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Directors - Number

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Usually fixed in A of I - statutes generally want at least three - others are flexible with the number.

Front 78

Directors - Filling Vacancies and Removal

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Vacancy - usually done by board or S. Removal - by S w/ or w/out cause - by fellow directors w/ cause.

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Directors - Act of Board

Back 79

May take action (normally) by a vote of a majority of the directors present at the meeting.

Front 80

Shareholders - Defined

Back 80

Act by electing and removing directors and approving or disapproving fundamental non-organic changes - hold power in C - it flows up from them

Front 81

Shareholder - Rights

Back 81

Certificate is E of stock ownership and will often determine rights of holder - contractual relationship - right to inspection, accounting, direct standing to challenge C activities, and right to vote

Front 82

Shareholder - Voting

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May be eligible to vote - determined in stock certificate - voting S do so on broad policy questions - must be a quorum (majority of outstanding shares) and the majority of shares ACTUALLY PRESENT vote in favor of action

Front 83

Shareholder - Removal Actions

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Most statutes allow S to remove D - generally w/ showing of cause. Must give notice, charges and defenses w/ regard to corporate rights as a whole

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Shareholders - Fundamental or Organic Changes to Corporation

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ALL S will vote on matters that will change nature of ownership - mergers, consolidation, sale of significant C assets, dissolution, terminations.

Front 85

Shareholders - ORDER OF TAKING

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(1)Secured Creditors - collateral or other security on debt;
(2)General Creditors - for every day transactions - office supplies
(3)Preferred S - provide liquidation preference or other special rights;
(4)Common S - wait until everyone gets their share

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Voting - ONE VOTE

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One vote/share of stock - for officer/board elections - one vote/share/officer or seat to be filled

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Voting - CUMULATIVE

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Formal or informal arrangement btwn S to vote their shares as a block - one way a minority can influence C activities

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Voting - Requirements for QUORUM

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Usually a majority in interest but can be defined either by statute or A of I.

Front 89

Voting - PROXY

Back 89

Employment of agent to vote on my behalf, different from traditional agency b/c the agent is often seeking MY authorization to vote for me.

Front 90

Voting - MEETINGS

Back 90

Annual meeting required by statute - if postponed - S can file WRIT OF MANDAMUS to compel. Special meetings can be held too - both require NOTICE

Front 91

Meetings - Record Date

Back 91

Generally 60 days prior to the vote - when S of record are notified - this doe NOT suspend trading of stock - closing day will - day before the S meeting - suspends stock until after the vote is made.

Front 92

Charlestown Boot & Shoe v. Dunsmore

Back 92

S voted to wind up C and elected committee to deal w/ it. B of D disagreed and continued business. - Management resides SOLELY in B of D and S unlawfully usurped B powers

Front 93

Authority Issues - Delegation of Duties

Back 93

Did B properly delegate authority to act on an issue?
(1)What did board instruct officer(agent) to do?
(2)Trace authority to the C - but C will defend as an ultra vires action in K matters - not for torts

Front 94

Sources of ACTUAL AUTHORITY

Back 94

(1)Bylaws; (2)Board resolutions; (3)Corporate status; (4)Certificate of Inc; (5)Express; (6)Implied - A performed act w/out comment from B in the past; (7)Inherent - virtue of position

Front 95

APPARENT AUTHORITY

Back 95

Holding out as possessing authority to engage in transaction - what 3P reasonably believes when entering into transaction. Normally arises w/ C's officers

Front 96

Issues to think about re: authority

Back 96

(1)Corporate waste;
(2)Fiduciary duty;
(3)Closely held C v. Publicly held C;
(4)Total C assets;
(5)Actual v. apparent authority

Front 97

Actual v. Apparent Authority

Back 97

If O is selling all or most of C's assets then 3P is on notice that the O may be acting beyond scope of authority - 3P must make reasonable inquiries - Apparent Authority is context driven

Front 98

Limitations on Liability - PIERCING THE CORPORATE VEIL

Back 98

When court holds some or all of the shareholders PERSONALLY LIABLE for the C's debts.

Front 99

Walkovsky v. Carlton - Distinguishes C from I

Back 99

C id. in relation to participants

Front 100

Minton v. Cavaney - Inadequacy of C capitalization

Back 100

Atty involved in formation of C and served as D, secretary, and treasurer. Commingling of C and I assets of D - C was undercapitalized as well.

Front 101

Inadequate Capitalization - defined

Back 101

You MUST hold sufficient capital to meet existing obligations - $2:$1 - capital:debt - critical as it provides guarantee to investor there is something to the C.

Front 102

Costello v. Fazio - Equitable subordination and DEEP ROCK DOCTRINE

Back 102

Stops short of disregarding C entity b/c facts don't support such a harsh remedy - CLAIMS OF A CONTROLLING S IN A BANKRUPT C MAY BE SUBORDINATED TO CLAIMS OF OTHERS, INCLUDING PREFERRED S, ON VARIOUS EQUITABLE GROUNDS.