California Business Organizations - Ca Bar Exam

Front 1

How should you start the CA business associations essay?

Back 1

Start with: Laws regarding agency, partnership, and corporations govern.

Front 2

In a corporation, to whom does the director owe a fiduciary duty?

Back 2

To the corporation and shareholders.

Front 3

What is the first step to incorporation?

Back 3

Filing of the Articles of Incorporation with the Secretary of State by the incorporator.

Front 4

What are Ultra Vires acts?

Back 4

Acts attempted by a corp that are beyond the scope of the purpose in Articles of Incorporation.
1) Ultra vires Ks are valid as to the third parties,
2) SHer can seek an injunction to stop an ultra vires act
3) Corp can sue the responsible managers for ultra vires losses

Front 5

What is the effect of defective incorporation?

Back 5

General Partnership, owners are personally liable.

Front 6

What is a de jure corporation?

Back 6

A corporation formed through fulfilling statutory requirements.
One or more incorporators need to file the signed and notarized Articles of Incorporation w/ the Secretary of State and pay the required fee.

Front 7

What is a de facto incorporation?

Back 7

Formation of de jure corp failed but incorporators are unaware:
1) Relevant incorporation statute (assume there is)
2) The parties made a good faith, colorable attempt to comply with the statute and
3) Some exercise of corporate privileges (acting like there is a corporation).

Front 8

What is corporation by estoppel?

Back 8

(1) If a person deals with and treats an institution like a corp they can't later deny the existence of a corp

(2) The person cannot deny it is a corp to avoid obligations

Front 9

What is a promoter and what are liabilities?

Back 9

A person acting on behalf of a corp not yet formed. According to secret profit rule cannot make selfish profits in dealings for the intended corp.
The later formed corp not liable unless Ks are later adopted. But even if adopted:
Promoters continue to be liable for their actions on behalf of a pre-incorporated corp until there is a novation (corp replaces existing contracts with the agreement of other King parties).

Front 10

How does a corporation adopt a pre-incorporation contract?

Back 10

(1) Express: Board of Directors resolution

(2) Implied: If corp accepts benefits of the contract

Front 11

Why document controls if the bylaws are inconsistent with the Articles of Incorporation?

Back 11

Articles control.

Front 12

What is a subscription of stocks?

Back 12

Written offers to buy stock from a corporation, the pre-incorporation offers are irrevocable for sixth month.

Front 13

For how long is a post-incorporation subscription of stock irrevocable?

Back 13

Can be revoked up until acceptance.

Front 14

What is valid consideration for stocks?

Back 14

Can be in the form of money, tangible or intangible property, or services already performed for the corp BUT split authority whether could be in the form of future services or promissory notes.

Front 15

What is an appropriate amount of consideration for stocks?

Back 15

Generally, consideration must be at least equal to the par value of stock (face value or min issuance price).

If the stock is no par then the Board sets a price.

Front 16

What is watered stock and what recourse does the corp have if the Board of Directors issues watered stock??

Back 16

Issuing par for less than the corp's value.
Corp can go after Board of Directors and buyers if they did it knowingly.
Corp cannot, however, go after bona fide purchasers.

Front 17

What preemptive rights of existing shareholder?

Back 17

Traditional rule: Shareholder has the right to buy stock during new issuance to maintain his/her proportion when the new issuance is for money.

Modern Trend: Preemptive rights do not exit unless mentioned in articles.

Front 18

How much may a corp's officers be compensated?

Back 18

Compensation is set by the directors.

Front 19

How much may a corp's directors be compensated?

Back 19

Directors can set their own compensation, but it must be reasonable and in good faith.

Front 20

Election or Removal of Director from BoD

Back 20

Elected at every Annual Meeting - quorum requirement - majority of outstanding shares present
SHer Removal of Director w/ or w/out cause - majority of shares entitled to vote (not just majority of shares present at the Annual Meeting). If removed, need to be elected by SHer.
Interim appointments can be done by BoD.

Front 21

BoD decision

Back 21

Regular Meeting (notice required) or Special Meeting (notice and purpose are required)
Running quorum is required,
Passing resolution requires majority of present required.
Each director is presumed to have concurred in the Board's action unless dissent or abstention is recorded in writing.

Front 22

Duties owed to Corp

Back 22

Duty of Care
Duty of Loyalty

Front 23

Duty of Care

Back 23

A director owes the corporation a duty of care. She must act in good faith and do what a prudent person would do with regard to her own business.

Front 24

Nonfeasance

Back 24

Doing nothing caused Corp loss. Causation is important.

Front 25

Misfeasance and BJR

Back 25

Director's action caused Corp loss. But director is not liable if BJR applies:
Th court will not second-guess a business decision if it:
(1) was informed,
(2) was made in good faith,
(3) was made without conflicts of interest, and
(4) had a rational basis.

Front 26

Duty of Loyalty

Back 26

A director owes the corporation a duty of loyalty. She must act in good faith and with a reasonable belief that what she does is in the corporation’s best interest. BJR does not apply. Common scenarios:
Interested Director Transaction
Competing Ventures; no defense, remedy is constructive trust on profits
Corporate Opportunity (Expectancy)

Front 27

Interested Director Transaction

Back 27

Any deal between the corporation (on the one hand) and one of its directors, or a close relative of a director, or another business of the director (on the other hand).
The transaction will be set aside (or the director will be liable in damages) UNLESS the director shows either: (1) the deal was fair to the corporation when entered, OR (2) her interest and the relevant facts were disclosed or known and the deal was approved by either: a) majority of disinterested directors or majority of disinterested shares

Front 28

Corporate Opportunity (Expectancy)

Back 28

Director cannot usurp a corporate opportunity.
That means the director cannot take it until he (1) tells the board about it and (2) waits for the board to reject the opportunity.

Opportunity could be something that company has an interest or expectancy OR something that director found on the company time or company resources.

Front 29

Officers of Corp Duties

Back 29

Same as Directors. Are also agents of Corp.

Front 30

Closely Held Corp

Back 30

1) small number of SHers
2) stock is not publicly traded
Managing SHers step into directors shoes (by unanimous election in bylaws or articles of incorporation)
No piercing of corp veil
Professional Corps shield tort liability of SHers

Front 31

When is piercing the corporate veil permitted?

Back 31

Although a corporation is generally viewed as a separate legal entity, its "veil may be pierced" if SHer abused the corporation and upholding limited liability would achieve inequitable results, OR corp was undercapitalized (usually PCV for tort liability).

Front 32

SHer Derivative Suit

Back 32

1) stock ownership when the claim arose and thru the suit,
2) adequate representation of Corp interst, and
3) demand must be made and rejected or at least 90 days must have passed since the demand was made.

Front 33

Who can vote with proxies?

Back 33

Directors cannot but SHers can:
Proxies
1) Requirements
a) written – fax or e-mail valid
b) signed by record shareholder
c) directed to corporate secretary
d) authorizing another to vote
e) valid for 11 months.
2) Revocable unless conspicuously made irrevocable and coupled with an interest.

Front 34

SHer voting agreements

Back 34

1) Pooling Agreements – written agreement to vote shares as required in agreement.
a) binding and enforceable
b) no time limit
3) Voting Trusts – formal written agreement delegating voting power to a trustee
a) on file
b) expires in 10 years

Front 35

Dissenting SHer Right of Appraisal

Back 35

SHer right to force the Corp to buy her stock for fair value. Triggered:
1) Merger or consolidation;
2) Transfer of substantially all assets not in the ordinary course of business; or
3) Transfer of shares in a share exchange.
SHer has only this right.

Front 36

What does the shareholder have to do to perfect her right of appraisal?

Back 36

1) Before shareholder vote, file with the corporation written notice of objection and intent to demand payment;
2) Abstain or vote against the proposed change; and
3) After the vote, within time set by corporation, make written demand to be bought out and deposit stock with the corporation.

Front 37

Rule 10b-5

Back 37

Does not require privity as compared to common law Fraudulent Conduct
Private Plaintiff
1. Interstate commerce
2. Materiality - misrepresentation or omission must concern a “material” fact–one a reasonable investor would consider important in making an investment decision.
3. In connection with purchase or sale of securities
a) Co issues misleading press release
b) Buyer or seller misrepresentation
c) Insider trading
d) Insider Tip
4. Scienter – intent to deceive, manipulate, or defraud by defendant
5. Reliance
6. Damages

Front 38

Who is Insider Trader and what duty does it also breach by breaching 10b-5?

Back 38

Insider Trader if:
i. Person must be an insider
ii. Bought or sold stock via inter-state commerce
iii. Based on nonpublic information

Duty of trust and confidence owed to (i) the issuer, (ii) shareholders of the issuer, or (iii) in the case of misappropriators, another person who is the source of the material nonpublic information.

Front 39

Tipping Liability

Back 39

an insider gives a tip of inside information to someone else who trades on the basis of the inside information, the tipper can be liable under 10b-5 if:
i. Tipper is an insider
ii. Tipper has an improper purpose, and
iii. Tipper receives some personal gain (monetary or reputational)

A Tippee is liable under 10(b)(5) if:
a. Tipper breached a duty
b. Tippee knew that tipper was breaching
c. Tippee bought or sold stock via inter-state commerce

Front 40

Section 16(b) Liability (speculation by managers of corp)

Back 40

a. Large corporation
(1) Traded on national exchange, or
(2) 500+ shareholders and $10 million in assets
b. Defendant is
(1) officer,
(2) director, or
(3) 10% shareholder
c. Purchase and sale of stock within six month period. (Highest sales are matched with lowest purchases to maximize recovery)

No defenses

Front 41

What is the rule for agency?

Back 41

Agency is a consensual fiduciary relationship wherein one person, the agent, agrees to act for and under the direction or control of another, the principal.

Front 42

What are different types of authorities for agent to act on behalf of principal?

Back 42

Actual Express Authority (Principal's manifestation on a reasonable agent)
If the principal words would lead a reasonable person in the agent's position to believe that the agent has authority to act on the principal’s behalf, the agent has actual authority to bind the principal.

Actual Implied Authority (Principal's manifestation on a reasonable agent)
If the principal conduct would lead a reasonable person in the agent's position to believe that the agent has authority to act on the principal’s behalf, the agent has actual authority to bind the principal.

Apparent Authority (Principal's manifestation on reasonable 3rd party)
if the principal's words or conduct would lead a reasonable person in the third party's position to believe that the agent has authority to act on the principal’s behalf, the agent has apparent authority to bind the principal.

Front 43

What is ratification?

Back 43

Principal's express (written or oral statement) or implied (by accepting benefits of the K) ratification of agent's unauthorized contract.
Requirements:
(1) The principal must have knowledge of all material facts regarding the contract;
(2) The principal must accept the entire transaction. The principal cannot merely ratify a portion of the transaction;
(3) Ratification cannot be used to alter the rights of intervening parties.

Front 44

K Liability

Back 44

Principle is liable, If agent has any of the authorities or K is ratified.

Agent is ALSO liable if principal is undisclosed (3rd party has no knowledge of agency) or partially disclosed (3rd party knows about agency but does not know the identity of the principal)

Front 45

Duties of Agent owed to Principal

Back 45

Fiduciary Duties:
DUTY OF CARE
DUTY OF LOYALTY
DUTY OF OBEDIENCE

Front 46

Agency: Duty of Care to Principal

Back 46

An agent owes a duty to her principal to carry out her agency with reasonable care (a “sliding scale” depending on any special skills that the agent may have).

Front 47

Agency: Duty of Loyalty to Principal

Back 47

The agent owes a duty of undivided loyalty to the principal. This includes the following obligations: (1) an agent must account to the principal for any profits made while carrying out the principal’s instructions;
(2) an agent must act solely for the benefit of the principal and not to benefit of agent or a third party;
(3) an agent must refrain from dealing with his principal as an adverse party or from acting on behalf of an adverse party;
(4) an agent may not compete with his principal concerning the subject matter of the agency; and
(5) an agent may not use the principal’s property (including confidential information) for the agent’s own purposes or a third party’s purposes.

Front 48

Agency: Duty of Obedience to Principal

Back 48

An agent must obey all reasonable directions of his principal. While the principal may well be liable for the agent’s acts in violation of directions (apparent authority), the agent will be liable to the principal for any loss that the principal suffers.

Front 49

Duties of Principal to Agent

Back 49

Duty to Indemnify (if agent acted on principal's instructions)
Duty to compensate

Front 50

Respondeat Superior

Back 50

Master is liable (severally and jointly with agent)
For servant's negligence if within the scope of employment (or on minor detour but not on frolic).

Master is not liable
For servant's intentional torts unless the intentional tort is within the ordinary duties or for the benefit of master.

For independent Kers.

Front 51

Independent Ker

Back 51

Independent Ker is a person who contracts with another to do something for him but who is not controlled by the other nor subject to the other’s right to control with respect to his physical conduct in the performance of the undertaking.
Factors:
(1) skill required
(2) tools and facilities
(3) period of employment; long/indef->servant
(4) basis of compensation; time->servant, job->Ker
(5) business purpose; for Master's business purpose->servant
(6) distinct business -> Ker

Front 52

What is the definition of a partnership?

Back 52

Two or more persons associate to carry on as a co-owners of a business for profits regardless of their subjective intent to form Pship.

1) May be Implied if person who receives a share of the profits is implied to be a partner unless the profits were received in payment: (1) of a debt; (2) as wages or other compensation; (3) as rent; or (4) as interest on a loan.
2) Writing may be required for more than a year to satisfy SoF
3) Pship by Estoppel - held out as partners to a 3rd party.

Front 53

What is the rule for partnership profits and losses?

Back 53

Profits are shared equally unless otherwise specified by the agreement. Losses are shared as profits. If agreement only specifies losses and not profits, profits are still shared equally.

Front 54

Liability in Torts

Back 54

Pship is liable for loss or injury caused to a person as a result of the tortious conduct of a partner (or an employee) acting in the ordinary of business of the partnership or with authority of the partnership.

Front 55

Liability in K

Back 55

Pship is liable under both apparent or actual authority for K entered on its behalf by a partner

Front 56

Liability of Pners for Pship

Back 56

Each partner is jointly and severally liable for all of the obligations of the partnership (whether arising in tort or contract). BUT: the plaintiff must first exhaust partnership resources before seeking to collect from an individual partner’s assets.

Front 57

Duties owed by Pners to Partnership

Back 57

Fiduciary Duties:
1) Duty of Care (same as agency)
2) Duty of Loyalty (same as agency)
Duty of Disclosure:
each partner and the partnership shall furnish to a partner
(1) without demand, any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties; and
(2) on demand, any other information concerning the partnership’s business and affairs

Front 58

Dissociation

Back 58

In event such as: (1) a partner giving notice to the partnership of his desire to withdraw (dissociation by “express will”); (2) a partner’s expulsion, death, or bankruptcy; (3) an agreed-upon event; and (4) the appointment of a receiver for a partner.

Wrongful Dissociation, if the dissociation is a breach of express term in Pship agreement (even if expelled or bankrupt before the end of term). The Pner is liable for any damages caused by dissociation.

Front 59

Consequences of Dissociation

Back 59

1) Wind up of Pship for dissolution
- by express will of dissociating Pner in at will partnership
- by a majority staying Pners vote in at term partnership
2) Buyout of dissociating Pner's interst

Dissociating Pner remains liable for Pship for up to 2 years after or by notifying creditor or filing a public statement of dissociation.

Front 60

Priority of Distribution in Dissolution

Back 60

1. Creditors include “outside creditors” and “inside creditors” (partners who loaned money).
2. Capital contributions paid into the partnership by partners.
3. Distribute profits or losses, if any.