Texas Essay Flashcards--Corporations

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1. When does a pship exist?

Back 1

A partnership is an association of two or more people to carry on business for a profit as co-owners. A partnership exists whether or not the persons intend to create a partnership & whether the association is called by some other name. Doesn’t require a writing but SOF may.

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2. How do you determine whether someone is a partner?

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Capital (a capital contribution is NOT required); Control (the right to control may be enough, even if not exercised); Sharing profits (just a factor- no presumption of profits); Agreement (Lack or disclaimer of agreement to be partners is irrelevant, but presence of agreement tends to show pship exists)

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3. Joint Venture and Estoppel:

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JV is treated like a pship but requires an express agreement on how losses will be shared.

Estoppel is when no Pship was formed but parties still liable to protect reasonable reliance by Ts.

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4. What property belongs to the pship?

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Property is pship property if it is acquired in the partnership’s name, or in the name of one or more partners where it’s apparent from document he’s acting for the pship, even if the pship’s name isn’t used. Property acquired w/pship funds is presumed to be pship property. Property acquired in a partner’s name, w/out pship funds, is presumed to belong to him individually if there’s no sign he’s acting for the pship.

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5. What rights does the pship have/ does the partner have in pship property?

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The pship has unrestricted rights in pship property; a partner has non-transferable rights (use only for pship purposes).

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6. What is a partner’s economic interest in the PShip?

Back 6

A pship interest is like any other financial asset. It is a share of the profits. It’s transferable. If acquired during marriage its CP. It can be transferred upon death, or be sold. If acquired by a third party a pship interest merely an assignment of profits the partner would receive.
Transfer of interest does not make transferee a partner. Unless otherwise agreed (UOA) , one can become a partner only by unanimous agreement of the parties.

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7. How do pships share profits & losses?

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UOA, partners split profits equally, not in proportion to capital contributions. UOA, losses follow profits. A pship agreement that absolves one party from any losses is not enforceable against a third party w/out their consent. (enforceable in pship)

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8. How much are partners entitled to be paid for their service to the partnership?

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UOA, a partner has no right to compensation, except in winding up the partnership

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9. What management rights does a partner have?

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UOA, all partners have equal management rights. Majority rules.
UOA, matters of ordinary business are decided by profit share.

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10. 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 pship, or they incur unfair liability.

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11. What duties does a partner owe to a pship?

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A partner owes strict fiduciary duties to the pship. A pship 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, & a duty to render full information about the pship upon a reasonable request.

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12. How are new partners added to a pship?

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UOA, unanimous consent is required. New partners are liable for past pship debts, but only their pship interest is at risk. (fair balance)

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13. What is the liability of a partner for pship obligations?

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The pship itself is primarily liable, but there is joint & several liability for all debts & general obligations. The pship resources must be exhausted before partners are personally liable.

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14. How are agency principals applicable to pship?

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Every partner is an agent for the pship in carrying out its business in the usual way. Apparent authority may be created by a partner’s title, the way the pship has conducted business in the past; or the way similar firms conduct their business. Partners have apparent authority to bind the pship to any contract w/in the scope of the pship business. Pship can get back property if it was conveyed w/o authority from org transferee but not from BFP. Partners are only liable for torts committed in OCB.

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15. What is the effect of a withdrawal of a partner?

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The pship usually buys out the partner for fair value & continues w/out 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 & were unaware of the withdrawal, & to other partners if the withdrawal was wrongful. May have apparent authority to bind innocent TP for 1 year (pship can protect by notifying creditors). (express will, agreed upon event, expulsion, death, incapacity, bankruptcy)

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16. What events require that a pship 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 pship at will an agreement of majority in interest. *Partners who have not wrongfully withdrawn may wrap up.

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17. What is the order of distribution of pship assets upon winding up?

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First to creditors, including partners who are 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. Pship creditors have priority on pship assets, but they are on par to general creditors against partners.

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18. What are the main characteristics of a limited liability pship?

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A LLP is exactly like a GP except the partners are not vicariously liable for the pship’s liabilities, contracts, or torts of other partners, unless directly involved, supervising the tortfeasor, or aware and did nothing.

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19. How is a LLP formed?

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File certificate of formation and statement of business purpose with SOS & pay a fee (renewed annually); Must include “Limited Liability Partnership” or “LLP” in its name; Must provide information re: registered office and agent within state; Must include number of partners and a statement of business purpose.

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20. What are the main characteristics of a limited pship (LP)?

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An LP has one or more general partners & one or more limited partners. Must file w/ SOS & have written LP agreement. (no filing= joint/several liability). GPs are treated just like a normal pship. LP’s liability is limited to their capital contribution unless the LP takes part in control of the business. Upon winding up, GP’s capital contributions are superior.

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21. 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 & the creditor didn’t know of LP status. If no certificate is filed w/SOS LP is liable as a GP.

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22. 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 w/out incurring personal liability.

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23. What are the main characteristics of a limited liability company?

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Can be structured like a corp or pship, but managers run the company unless otherwise stated in articles of organization. It allows pass-through tax treatment like a pship if you check the box. Members get limited liability for all obligations except their own torts. LLC is liable itself on contracts & torts under agency principals.

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How is an LLC formed?

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Organizer must sign and file cert. of formation with SOS, naming a registered office and agent, pay filing fee (must be renewed annually), and listing name of the business including the entity designation of "limited liability company" or LLC and the business purpose of the LLC

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1. What is required for formation of a corporation?

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(People, Paper, Act). One+ organizers (person or entity) to execute and deliver cert; Certificate of Formation (COF); Organizers sign and deliver COF to SOS & pay filing fees.

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2. What information is required to be in the COF?

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1. Name of corp, (including Corporation, Corp. or Inc.)
2. Name & address of the
a. Organizer; b. Registered Agent; & c. initial Directors; 3. Duration;
4. Purpose;
5. Capital stock structure

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3. When does a corporation become liable on pre-incorporation contacts?

Back 27

When they adopt the contract. Conversely, the promoter (acting on behalf of Corp) is liable until there is a novation.

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4. What is the de facto corporation doctrine?

Back 28

This is a defense to personal liability to owners who in good faith thought they were operating in corporate form. To meet this, there must be a:
(1) statute (yes, TBOC),
(2) GF attempt to comply by parties, and
(3) there was some exercise of corp priv.
* TBOC may have abolished the de facto doctrine

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5. What is corporation by estoppel?

Back 29

A doctrine that prevents a person who dealt w/the corp as if it were a corp from denying that the entity is a corp.
*Again TBOC may have abolished

STATE: This may be abolished in TX… but if not, here’s how it works…

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6. When can the veil of a corporation be pierced?

Back 30

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 w/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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7. 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 w/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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8. What are preemptive rights & 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 (Opt in). Before 9/03 shareholders had the rights unless the articles disclaimed them (Opt Out).

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9. What are subscriptions & 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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10. What are the statutory requirements for directors?

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There must be one or more, elected at an annual meeting; & they can be removed before term expires by the shareholders. Either the board or SH’s can fill a vacancy.

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11. What is required for a valid corporate act?

Back 35

Unanimous written consent of directors (no meeting), majority vote at meeting w/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, & a majority of the directors approved the action.

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12. What is the duty of care for a director & 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 & exercise ordinary care & prudence. She must do what a prudent person would do in similar circumstances. A plaintiff must prove breach.

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13. What is the business judgment rule?

Back 37

The rule that a court will not second guess a business decision if it was made in good faith, was informed, & had a rational basis.

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14. What is the duty of loyalty & who has the burden of persuasion?

Back 38

A director owes the corporation a duty of loyalty. She must act in good faith & w/a reasonable belief that her action is in the best interest of the corporation. Burden will be on the defendant.
*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 & the deal was approved by a majority of disinterested directors
*Competing Ventures: Director cannot compete with corp w/o approval by disinterested directors (Rem: Cons. Trst)
*Corporate opportunity: Director cannot USURP a corp opp. must let BOD reject first (Remedy-corp purchase at cost)

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15. What can a director do who thinks that the board is about to take an illegal action & wants to protect himself?

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A director is presumed to have concurred w/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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16. How can a director benefit from an interested transaction?

Back 40

Normally an interested transaction is a breach of the duty of loyalty. A self interested transaction can be valid w/full disclosure to the board & 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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17. 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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18. What officers are required in a corporation & what duty do they owe the corporation?

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A corporation is required to have a president & a secretary. These officers are selected by the directors. The officers owe the corporation the same duty of care & loyalty as do directors.

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19. 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 & w/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 & reasonably entitled thereto. No indemnification if the director is liable for willful or intentional misconduct.

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20. How can shareholders manage a corporation?

Back 44

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 & loyalty.

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21. 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. THIS IS ESPECIALLY TRUE in close corporations.

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22. 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 & attorneys’ fees. If unsuccessful the shareholder cannot recover cost or fees. Only one shareholder can bring each claim (res judicata)

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23. 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 & 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. The decision is reviewed for good faith & disinterested persons. No dismissal or settlement w/out court approval, sometimes notice is necessary to shareholders.

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24. What is different for close corporation derivative suits?

Back 48

If a company has 35 or fewer shareholders, the court may treat a derivative suit as a personal action.

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25. What shareholder has a right to vote in the annual meeting?

Back 49

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 & signed by the shareholder. Proxies are revocable any time before the vote unless the writing conspicuously states that it is irrevocable & it is coupled w/an interest.

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26. What is a voting trust & 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 & distributes dividends according to the agreement. The trust must be for a proper purpose, & the agreement must be filed w/the corporation.

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27. What is required for shareholder agreements?

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In all cases the writing must be filed w/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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28. How can shareholders take a valid corporate act?

Back 52

Either by unanimous written consent or a majority vote at a meeting that satisfies the quorum & notice rules.
*A special meeting can be called by the board, the president, 10% of the shares, or the bylaws.
*Notice must be personally given to every shareholder b/t 10-60 days before meeting (21-60 for fund. chg.) & must tell when, where & the purpose. (mtg cannot exceed purpose stated)

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29. What is cumulative voting?

Back 53

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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30. 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 & state a proper purpose. If the corporation disallows, the SH can get a court order & recover costs & fees.

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31. Who can declare dividends & can they be compelled?

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Distributions are declared at the board’s discretion. They can only be compelled w/a strong showing of abuse of discretion.

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32. 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 w/everyone else. Cumulative means pay for every year that no dividend was paid. (Can be both preferred and participating).

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33. What money can be used for distribution & 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 & 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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34. What is needed for a fundamental corporate change?

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A fundamental corporate change requires a majority of the board & 2/3 of the shares entitled to vote.

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35. 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 & intent to demand payment before the vote. The shareholder must abstain or vote against the change. W/in 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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36. 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 w/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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37. Can the corporation convert to another business type?

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Yes, a corporation can convert to another form by board action & 2/3 shareholder approval.

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38. Who is required to approve a merger?

Back 62

The board of both companies & the shareholders of the transferring corporation.
May result in a dissenting shareholder, and a triggering of the right of appraisal

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39. How can a corporation be dissolved?

Back 63

The corporation can voluntarily dissolve w/written consent of all shareholders or board action & 2/3 shareholder approval. A court can order involuntary dissolution.

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40. When can a receivership be sought?

Back 64

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 & 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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41. Why is abandonment a bad idea?

Back 65

B/c, the directors & officers remain personally liable for all debts of the corporation incurred w/their knowledge including franchise taxes.

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42. What federal securities laws could show up on the exam?

Back 66

10b5 – which prevents fraud or misrepresentation in connection w/the sale or purchase of security. 16B – prohibits insiders from profiting from short swing trading (w/in 6 mos. before or after)

Front 67

1. Agency question about liability in contract answer:

Back 67

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 & principal both consent & 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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2. What is needed to bind the principal to a contract entered into by an agent?

Back 68

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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3. 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 (must be created by P); ratification, if the principal expressly affirms the contract, accepts the benefits of it or suing T(P must have knowledge, accept entire transaction, have capacity)(also retroactive- so protect intervening rights of BFP); or adoption (not retroactive) 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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4. How is an agency relationship created?

Back 70

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 (s.a. land sale contracts).

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5. What are an agent’s duties?

Back 71

In addition to any express contractual duties, an agent owes the principal fiduciary duties of loyalty (put Ps interests above own), obedience to reasonable directions, & reasonable care under the circumstances.

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6. What are a principal’s duties to an agent?

Back 72

A principal must compensate, unless the agency is gratuitous, reimburse, & indemnify the agent. Wide range of remedies available.

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7. What is the relationship b/t a principal & third party (assuming agent’s authority)?

Back 73

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 & 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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8. What is the relationship b/t the agent & third party?

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The third party is not liable to the agent unless the agent’s power is coupled w/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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9. How do you terminate actual authority?

Back 75

After a specified time/event or reasonable time, change of circumstances, if agent acquires adverse interest, when agent says so, when principal says so, by death, incapacity, or bankruptcy (unless coupled with interest)

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10. When is the principal liable for an agent’s tort?

Back 76

This is an agency question arising in a tort context. The issue is whether the tort was committed by a servant acting w/in the scope of employment. If so, the master & servant are jointly & severally liable to the third party.

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11. How do you determine whether a tortfeasor was an employee or independent contractor?

Back 77

A person is an employer when they have the right to control the details & performance of a person’s work, whether or not they exercise the control. Evidence of employment is the principal supplying the tools & workplace, employment is long term, little skill is required, & he work is part of the regular business of the employer; & payment is made in regular intervals instead of by the job.

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12. When is a servant acting w/in the scope of employment?

Back 78

If the servant is doing what he was hired to do he is w/in 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 w/in 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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13. When is a principal liable for an independent contractor’s torts?

Back 79

When the activity involved is inherently dangerous, the duty nondelegable, or the principal is negligent in selecting the contractor.

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What is an "ultra vires" act and what can be done to prevent its occurrence?

Back 80

An ultra vires act is one that exceeds the stated purposes of the business.
A shareholder can bring suit to enjoin ultra vires activities and agreements