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114 Cards in this Set
- Front
- Back
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What are the 7 major topics to remember about a partnership?
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1. written agreement
2. sharing profits/losses 3. managment 4. duties to each other 5. partnership property 6. accounting 7. dissolution |
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What is prima facie evidence of a partnership?
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sharing profits and losses
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What is a partnership?
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association of 2 or more people to carry on business for profit
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How can profits be allocated?
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return on capital (interest)
return for services (salary) |
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Are partners who contribute service entitled to compensation?
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General rule: partners entitled to compensation are not so entitled until winding up partnership affairs
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How are profits shared by partners?
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if there is no written agreement, profits and losses are shared equally
if a written agreement refers to the sharing of profits, losses are shared according to the amount of profits shared |
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How are losses shared if one of the partners is insolvent?
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other partners contribute their share of the losses and an additional amount in proportion to their share of the profits
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What restrictions can be placed on equal partners?
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all partners have equal rights and no restrictions can be placed on ability of partner to act within the scope of business
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What factors determine whether a partner had apparent authority to act?
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-other firms usually transact business in same way
-the particular partnership usually transacts business in same way |
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What duty do partners owe each other?
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high standard and duty of finest loyalty - punctilio of an honor most sensitive
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What property rights does a partner have in a partnership?
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-specific partnership property - possession of property for partnership purposes
-share of profits and surplus -right to equal participation in management |
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In the event of a partner's death, what happens to the share of property?
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-the specific partnership property vests in any surviving partners
-estate of partner is entitled to partner's proportion of FMV of business and interest OR protion of FMV of business and profits attributable to use of right of property |
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Is a partnership terminated at dissolution?
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No, the partnership continues until winding up is completed
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What are the 6 causes of dissolution?
(Would Carl UnDo Beth's Dress?) |
1. without violation of agreement
2. contravention of agreement 3. unlawful for business to continue 4. death of any partner 5. bankruptcy of any partner or partnership 6. decree of court |
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What are the 6 reasons for a court to decree dissolution?
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1. lunatic
2. incapable of performing partnership 3. conduct prejudicially affects carrying on business 4. willfully/persistently breached partnership agreement 5. business can only be carried on at a loss 6. othe equitable circumstances |
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What special factor should be remembered about relief in contravention of an agreement?
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finding a partner in contravention of an agreement makes the partner subject to damages
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What are the 4 ways to dissolve a partnership without contravention of an agreement?
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1. termination of terms or understanding
2. express will of any partner 3. express will of all partners 4. expulsion of a partner from the partnership |
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What are the 3 major concerns that led to creation of limited partnerships?
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investors wanted:
-limited liability -single tax -management/control |
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What were the problems limited partnerships sought to solve?
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-general partnerships had potential for unlimited liability
-corporations presented a double taxation problem |
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What is the major difference between a limited partnership and a general partnership?
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in a limited partnership, a partner is only liable if participates in control of the business
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What is the major difference between limited liability partnerships and limited partnerships?
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a limited liability partnership limits liability for co-partner negligence
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What are the Check the Box rules for taxation?
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-taxed as corporation
-with 2 or more members -> choose tax as corporation or partnership -with 1 member -> tax as corporation or "nothing" |
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What are the significant characteristics of a limited liability company?
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-taxed as partnership
-member management -liability similar to corporation |
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What information is mandatory to include in the articles of incorporation reported to the state?
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-name of the corporation (which must contain "corporation" or similar form and not mislead as to purpose)
-number of shares authorized to issue (including distinguishing classes) -street address of initial registered office -name and address of each incorporator |
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What information may be included in articles of incorporation, but is not mandatory to include?
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-initial directors
-purposes of corporation -managing business -powers of the corporation, directors, shareholders -par value of shares -any provision required or permitted by bylaws |
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What important fact should be remembered regarding including non-mandatory information in the articles of incorporation?
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any information included in the articles is public information
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When does a corporation come into existence?
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when the articles of incorporation are filed by the secretary of state
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What information do the bylaws hold?
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any and all provisions for managing the business and regulating the affairs of the corporation
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What is the doctrine of ultra vires?
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ultra vires - "outside the life" referred to a corporation performing an action outside the purposes stated in the articles
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What is the modern rule about ultra vires?
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the only thing recognized by ultra vires is illegal activity
*the default purpose of a corporation is any lawful business purpose for a perpetual duration |
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Who can challenge the power of the corporation to act?
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-shareholders can bring action to enjoin
-corporation against director, agent, employee -attorney general |
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What liability do promoters have to others?
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liable to both corporation and third parties
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What is required to eliminate liability of a promoter to a corporation?
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disclosure
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What is required to eliminate liability of a promoter to a third party?
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the promoter will be personally liable unless agreement clear intent otherwise
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What are the 3 ways a corporation may be defectively incorporated?
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-de jure corporation (corporation under law)
-de facto corporation (corporation under fact) -corporation by estoppel |
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What are the characteristics of a de facto corporation?
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-a valid law exists
-good faith attempt to organize under the law -the corporate shield protects from persons (does not protect from quo warranto proceedings by state) |
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What are the characteristics of a de jure corporation?
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-conformity with mandatory requirements
-the corporate shield protects the corporation from the state and persons |
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Who has the burden of proving de facto or estoppel corporation?
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the shareholder has the burden of proof
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What are the common law doctrines (or tests) for piercing the corporate veil?
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-fraud
-alter ego |
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What is the alter ego theory for piercing the corporate veil?
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-treat the corporation as "agent" and the shareholders are principals
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What factors should be considered in disregarding the corporate entity under alter ego or fraud doctrines?
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MOST IMPORTANT:
-undercapitalization -failure to follow formalities Other considerations: -involvency at time of act -non-payment of dividends -absence of corporate records |
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What is the theory of enterprise entity liability?
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the corporation is treated as one giant organization for purposes of liability
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What is the participation theory for piercing the corporate veil?
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direct liability for a parent corporation participation as a tortfeasor (such as officer or director) requiring misfeasance
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What is the difference between piercing the corporate veil and reverse piercing?
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NOTE: NEVER use "reverse piercing" on Ricci exam!
-reverse piercing is for the benefit of the shareholder |
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What is the Deep Rock Doctrine?
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-where limited funds are available for the payment of debts
-outside creditors are elevated for payment first |
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What is statutory disregard for a corporation?
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disregard some aspect of corporation to follow a policy of a statute or law for shareholder benefit
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What are the types of equity securities available?
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-common stock (greatest risk)
-preferred stock (moderate risk) -debt |
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What are the rights of common stock?
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-right to vote
-right to dividends (residue) -right to liquidating distribution (residue) *all rights are ABSOLUTE and PROPORTIONAL **common stock is required for incorporation ***residue amount is unlimited |
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What are the rights of preferred stock?
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-dividend payment before common stock
-liquidation before common stock *preferred stock has NO right to vote **preferred stock is not required for incorporation ***dividend amount is a fixed number |
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What are the rights of debt?
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-earnings preference over other stock
-liquidation preference over other stock *good for investors on fixed income **interest amount fixed by contract |
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What are authorized, issued, outstanding, and treasury shares?
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AUTHORIZED - amount of shares set in articles of incorporation
ISSUED - shares sold to shareholders OUTSTANDING - shares currently held by the public TREASURY - status of authorized or unissued shares *if there are NO treasury shares, the issued and outstanding amount of shares should be the same number |
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What is par value?
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-represents the $ amount for liquidation
-significant for preferred stock |
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What is stated capital?
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par x number of shares
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What is capital surplus?
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amount $ greater than par paid for shares
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What is earned surplus?
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undistributed earnings
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What is the difference between bonus stock, watered stock, and discount shares?
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-BONUS STOCK - nothing paid for shares
-WATERED STOCK - shares issued for property less than par -DISCOUNT SHARES - issued for cash less than par |
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What is proper consideration for shares?
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tangible or intangible property, money, promissory notes, services performed or future services, escrow
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What are the important debt/equity ratios to remember?
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total debt/total equity should be < 10:1
shareholder debt/total equity should be < 3:1 |
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What is an investment contract?
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a scheme that involves INVESTMENT OF MONEY in a COMMON ENTERPRISE with profits coming SOLELY FROM EFFORTS OF OTHERS
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What are the 4 exemptions for registration of corporation under the Securities Exchange Act of 1934?
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-intrastate offering
-small offering -private placement -accredited investor |
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What are pre-emptive rights?
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-shareholder may buy proportional shares of newly issued stock to maintain same proportion of control
*an "opt in" provision and stated in articles of incorporation |
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What are the significant characteristics of close corporations?
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-small number of shareholders
-no ready market for stock -substantial majority stockholder participation in the corporation |
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What is the traditional approach toward minority claims in close corporations?
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-total discretion
-business judgment rule where the plaintiff must show a decision was motivated by personal motives and not best interests of corporation |
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What is the modern approach to minority claims in close corporations?
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-no discretion
-duty of utmost good faith -"per se equal opportunity" or strict good faith test - equal opportunity to minority shareholders as to majority shareholders for distribution |
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What is the compromise approach to minority claims in close corporations?
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-the controlling group can demonstrate a legitimate business purpose for an action
-the minority can rebut by showing an alternative course of action would be less harmful |
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What are the 4 methods of distribution?
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1. earned surplus
2. earned surplus plus capital surplus 3. impairment of capital 4. MBCA 2 part test |
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How are distributions made using the earned surplus method?
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dividends are paid only out of the undistributed earnings of the corporation
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How are distributions made using the earned surplus plus capital surplus method?
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dividends are paid from undistributed earnings and amount more than par paid of corporation
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How are distributions made using the impairment of capital method?
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dividends are paid from "surplus" (which everything but stated capital)
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How are distributions made under the 2-part MBCA test?
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-equity insolvency test: no distribution can be made if the corporation is unable to pay debts as they become due
-balance sheet test: dividends may not be paid if total assets would be less than sum of total liabilities plus amount needed to satisfy preferential rights of shareholders |
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What are the traditional roles of shareholders and directors?
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SHAREHOLDERS - elect board
DIRECTORS - elect officers, decides payment of dividends, manages and directs corporation |
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What is the rule pertaining to shareholders notice of meetings?
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-shareholders are entitled to notice of meeting no less 60 days before the meeting
-all shareholders must waive notice...if 1 shareholder does not waive, formalities must be followed |
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What are the rules regarding quorum for a shareholder meeting?
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-quorum is half of shareholders able to attend the meeting + 1
-once a share is represented, the share is deemed present for the rest of the meeting |
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How are directors elected?
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-directors elected by plurality vote
-straight voting - majority will always elect entire board -cumulative voting - (not default rule) allows minority to elect a director |
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What are the different types of shareholder agreements?
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-voting trusts
-pooling agreements -proxy -special class of stock -shareholder restrictive agreements |
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What is a voting trust?
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shareholder gives a trustee the right to vote by signing an agreement and transferring shares
-valid for 10 years -originally only type of valid shareholder agreement |
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What is a pooling agreement?
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2 or more shareholders sign an agreement that is specifically enforceable
-used by shareholders in small corporations -default rule if not formal voting trust |
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What is a proxy?
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shareholder appoints another individual to vote or act by signing appointment form or electronic transmission
-effective for 11 months -revocable unless otherwise stated -subject to special rules under S14 |
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What are modern remedies to deadlock, dissension and oppression?
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-court ordered buyout
-statutory buyout -provision director -custodian/receiver -arbitration -close corporation statutes -special class of stock to break ties |
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What are the sources of director authority?
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-statute
-articles of incorporation -bylaws -board resolutions -implied authority -inherent authority -apparent authority |
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What are the 2 duties of care owed by a director to a corporation?
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-duty of care
-duty of loyalty |
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What are the standards for director breach of a duty of care?
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-negligence (45 of 50 states use this standard)
-fraud or illegality -gross negligence (Smith v. Van Gorkom) |
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What must a party establish against a director for breach of a duty of care?
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-articles of incorporation does not preclude liability
-the action was not in good faith or reasonably believed best interests -failure to devote appropriate attention -director received a financial benefit not entitled to -appropriate relief sought |
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What methods are used to evaluate the problem of a Special Committee of review of a breach of duty of care?
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-BUSINESS JUDGMENT APPROACH: independence of Special Committee and total deference to board
-STRUCTURAL BIAS APPROACH: test independence and good faith of Special Committee and court applies own independent business judgment -ABSOLUTE PROHIBITION: court appoints committee and no deference given to board |
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What are the two types of self dealing/conflict of interest situations?
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-director and corporation (decision set aside if director discloses to board or shareholders or fair to corporation)
-related corporations (intrinsic fairness test) |
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What are the tests for corporate opportunity breach of duty of loyalty problems?
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-line of business test (financially able to undertake, in line of corporation business, reasonable expectations)
-line of business + fairness -statutory |
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What are the causes of action for a plaintiff injured shareholder for inside information?
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-state - special facts doctrine
-federal - 10b-5 |
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What are the causes of action for a plaintiff injured corporation for inside information?
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state - secret profit doctrine
-federal - S16 |
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What are the 5 basic rules to remember about 10b-5?
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1. "unlawful"
2. interstate jurisdiction 3. "purchase or sale of any security" 4. registered or not registered 5. Commission creates appropriate rules *plaintiffs must actually purchase or sell securities **defendant must have intent to deceive or defraud |
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What are the 5 tests for insider trading?
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-classic insider: relationship or pre-existing duty
-tippee test: insider personally benefit and tippee knows or should know breach -constructive insider: information given in confidence -misappropriation theory: fiduciary relationship and information given in confidence -violaton of 14e-3: information regarding tender offer |
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When is information considered material?
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substantial likelihood a reasonable shareholder would consider the information important in deciding to buy or sell stock
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What are the 3 key things to remember for insider trading?
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1. do not lie
2. there is generally no duty to disclose 3. if an individual falls under any of the 5 insider trading categories, the person must disclose the information or abstain from trading |
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What is the rule concerning S16?
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-only applies to registered companies
-beneficial owners, directors, officers -any profit realized within 6 months of purchase/sale is recoverable by corporation |
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What are the 4 arguments for a plaintiff in a transaction of controlling shares action?
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1. economic freedom (duty of care)
2. corporate opportunity (duty of loyalty) 3. effective control (sale of office) 4. absolute duty (PA is the only state to adopt this!) |
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What are the legs of the 3-legged stool of protection for directors?
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1. statutory limits of liability
2. director and officer insurance (D & O insurance) 3. indemnification |
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What are the 2 types of indemnification?
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permissive - if individual acted in good faith and in best interests of company
-mandatory - if successful on merits or any result other than conviction for charges |
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What are the procedural limitations developed for derivative lawsuits?
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-less than 5% of outstanding stock
-less than $200,000 value |
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What are the 3 major areas where shareholders have appraisal rights?
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-merger
-share exchange (tender offer) -disposition of assets |
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What are the advantages and disadvantages of a merger for stock or $?
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advantages
-inexpensive -information available to acquiring board disadvantage: -assume liabilities -not possible if target board is hostile |
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What are the advantages of acquiring stock for stock or $?
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advantages:
-acquiring corp. can ignore board of target corp. -liabilities not assumed by acquiring corp. -if acquire more than 50%, cash out remaining shareholders |
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What are the disadvantages of acquiring stock for stock or $?
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-information may not be available in voluntary acquisition
-"front-end loading" -most hostile offers require cash |
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What are advantages and disadvantages for acquiring assets for stock or $?
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advantages:
-no assumption of liabilities -only purchase assets wanted disadvantages: -need for good relationship -unable to negotiate hostile acquisition |
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What are the 2 exceptions for voting requirements?
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-de minimis exception - surviving corporation; no significant change and not giving more than 20% stock voting power
-merger between parent/subsidiary - where the parent owns 90% or more of shares |
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What is the market exception to appraisal rights?
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-listed on national stock exchange
OR -at least 2,000 shareholders AND market value of at least $20 million |
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What are the tests regarding false or misleading statements in connection with proxy solicitations?
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-materiality - whether a reasonable shareholder would consider the information material in deciding vote
-causation - proxy solicitation was essential link in accomplishment of transaction |
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What are the major rules regarding shareholder proposals?
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-eligible shareholder ($2,000 or 1% of stocks for 1 year)
-not less than 120 days before date of proxy mailing date -personal appearance or representative required |
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What are the major grounds for exclusion of a shareholder proposal?
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-management of functions
-relates to election |
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What records must be KEPT without a required location?
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-minutes of meetings
-actions taken by shareholders or board without a meeting -actions taken by committee |
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What records must be KEPT at principal office?
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-articles and amendments
-bylaws -resolutions adopted by the board -minutes of all shareholder meetings and written communications within past 3 years -names/addresses of all current directors/officers -most recent annual report |
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What records must be MAINTAINED?
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-accounting records
-records of shareholders |
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What are shareholders rights regarding inspection of kept records?
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-entitled to inspect all records at principal office
-regular business hours -notice of 5 business days |
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What are shareholders rights regarding inspection of maintained records?
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-good faith and proper purpose (investment value of stock, care or loyalty issues)
-documents directly connected to purpose |
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What is the formula for cumulative voting?
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[S/(D+1)]+1
*S = shares voting **D = directors to be elected |
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What are pre-emptive rights meant to protect?
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-protection against dilution of equity in corporation
-protection against dilution of proportionate voting control |
