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What are the four elements of an agency relationship?
- 1. Agrrement between principal and agent
- 2. Principal agrees agent will act for pcincipal
- 3. Agent agrees to accept undertaking
- 4. Principal is in control of relationship
In agency, what is express and implied authority?
- Express: whatever principal has actually told the agent they have the authority to do.
- Implied: Other acts that the agent must undergo to perform their principal duties.
What is apparent authority in agency?
When a third party reasonably believes that the actions of the principal have given the agent the authority to act. Pincipal must do something to give the appearance of authority.
What is ratification in agency?
When the agent acts outside the scope of their agency and the principal, with knowledge of the facts of the contract and either affirms the agent's conduct or acts as if they affirmed the agent's conduct.
What is an agent's duty of loyalty?
Utmost good faith and fudiciary duty of loyalty.
What is the rule for receiving notice?
You have received notice when the notification comes ot your attention or is delivered to the place you hold out as the place for receiving communications, i.e. your business.
What are the different types of agency?
Fully disclosed- disclose that they are an agent, and identity of principal, partially disclosed- diclose that they are agent, not identity of principal, completely undisclosed- discloses neither agency or principal.
What are the balance sheet formulas?
- Assents - Liabilities = owner's equity
- Assets = Liabilities + owners equity
What is a balance sheet?
A list of assets and liabilities, show financial condition of the company.
What is an income statement?
A measurement of income over a period of time, summary of earnings between balance sheets.
What is a sole proprietership?
Having someone do business as an entity, nothing to create, no seperate entity, owner controls business completely, entitled to all profits, bears burden of losses, liable for torts, only one layer of tax (individual income), no formation required. Biggest drawback is liablity exposure, no protection at all.
What is a partnership?
An association of two or more people of a business for profit, distinct entity from the partners, it's present when all receive share of profits, participate in control, agree to share losses, contribute property to business.
Do you have to intend to form a partnership? When do we know when you're not a partnership?
No intent needed for partnership formation, we know you're not a partnership when you're a corporation or an LLC instead.
What is the rebuttable presumption of partnerships?
Right to share profits creates a rebuttable presumption that there's a partnership. Unless it was payment of debt or wages of employees, or a retirement benefit.
What is the only transferable interest in a partnership?
Only transferable interest in partnerships is share of profits and losses, can't transfer decision making power.
What are the rules of partnership property?
All patnership property is owned by partnership as a seperate entity, not the partners. Partners have no rights in the property except as relates to property of business. It's partnership property when titled to the partnership or bought with partnership funds.
What can a partnership agreement not do?
Unreasonabley restrict access to books, elimiate duty of loyalty, unreasoanbly reduce duty of care, eliminate obligation of good faith and fair dealing, or restrict rights of third parties.
What are the default provisions of a partnership agreement?
Equal rights to manage business, no rights of salary, ordinary course of business decisions are resolved by majority vote, decisions not in teh ordinary course are resolved by unanimous vote. Partnershp agreement can only be amended by unanimous agreement.
Who decides when partnership profits should be distrubuted?
What are the three lenghts of partnerships
- 1. Fixed number of years
- 2. time needed to complete a particular undertaking
- 3. At will
What is the liability of a partnership?
A partnership is liable for the acts of a partner acting in the ordinary course or with authority. All partners are jointly and severally liable for partnership obligations.
What does the joint and several liablity of a partnership mean?
Each partner may be held individually responsible for all partnership debt, creditor may pursue any of the partners individually, creditor may release it's claim against one partner withoutot release others. J/S liablity exists unless partnership agreement says otherwise.
What about the liablity of partners joining after the partnership was formed for preexisting debt?
Liable only up to the amount of your contribution in the partnerhsip.
What is the order of collections in a suit against a partnership?
Must sue and collect from partnership first, then when out of assets, can sue partners individually.
What causes a partner's dissociation?
Partnership notice of will to withdrawl, event agreed to in partnership agreement, explusion pursuant to partnership agreement, explusion by unanimous vote, court order.
What are the two possible outcomes of disassocaiation of a partner?
- 1. P is bought out, payment depends on whether it's a wrongful disassociation or not.
- 2. causes dissolution of the partnership, where winding up occurs.
What's the payment in the case of wrongful disassociation with no dissolution?
Buyout price paid, either value of sale of the business or price partner would get if partnership was dissolved and assets sold (whichever is higher), minus any damages caused.
What causes automatic dissolution of a partnership?
The leaving of a partner in an at will partnership.
What are the steps of winding up a partnership?
Liquidating partnership assets, payment of creditors, repay capital contribution of partners.
What is a limited partnership?
When you have one general partner liable for all debts of partnership, you can add limited partners who are not liable for debts beyond what they contribute. Must file a certificae with state.
What can't limited partners do?
Participate in the management of the partnership.
What is a limited liabilty partnership?
A partnership filed with the state, acts as a shelter of some liability, no liabiitly for other partners torts.
What is a corporation?
A seperate legal entity from the share holders/owners for which they are not personally liable. Subject to different taxation and much more complex legal rules.
What are the charateristics of a corporation?
No personal liability, stock freely transferable, perpetual existance, managed by directors, day to day business conducted by officers, seperate legal entity.
What are the steps for organizing a corporatoin?
Select a state to organize in, prepare a certificate of incorpration/charter/articles of incorporation, adopt bylaws, determine board of directors, hold organization meeting, issue stock.
What must be in the articles of incorporation?
Name, number of authorized shares, info on registered agent, name and address of incorporators, description of preferred stock.
how are corporations funded?
either through borrowing from third parties or selling stock in your corporation.
What are the two types of stock?
Common: owners entitled to dividends and voting, represents interest in corp.
Preferred: Rights to first dividends, first liquidation money, gives preferential rights compared to common stock holders.
What are cumulative rights in preferred stock?
If you have cumulative rights, then you get paid any money you weren't paid in previous dividends when the money comes in.
Explain authorized shares and issued shares
Authorized shares are maximum amount of stock allowed to be issued by corp, issued stock is stock avaliable for sale, oustanding is stock that's actually owned by outside shareholders.
What is a promoter?
The person or people who are organizigng the corp before it's existance. They are personally, jointly, and severally liable for all liabltiies created while promoters. Only eliminated via novation or corp subsequently adopting the contrct.
What is the ultra vires doctrine?
When a corp acts outside it's scope, then the corp has acted ultra vires and it's not a legal contract. Ultra vires cannot be used as a defense by either the corp or the third prty, though. Only enjoinment.
What are the powers and purpose of a corp?
Every corp has the purpose of engaging in any lawful business unless specifically limited in articles. Every corp has the power to do anything necessary to carry out business unless articles limit.
Can corps make donations?
Corps can make donations for public welfare or for charitable, scientific, or educational purposes.
What is the extent of shareholder liability?
Only liable for amount paid for shares, only can lose investment.
What is pericing the corporate veil?
A legal doctrine that allows you to perce the protections of the corporation and make the shareholders liable, only avalible in extreme situations.
What is a share holder meeting?
An annual or special meeting of shareholders to vote on issues, notice must be given, may be waived, actions can be taken without official meetings.
What are the rules of shareholder voting?
Need a quorum, voter determined by record date.
What are the types of voting processes for shareholders to select directors?
Straight- every position is voted one at a time, can use your shared to vote for every person.
Cumulative- shares can only vote for one person, people with highest total votes win.
What is the formula for numbers of shares needed to elect the director you want?
Formula = (N × S) / (D + 1) + 1
- N = # directors want to elect
- S = total number of shares voting
- D = total # of directors to be chosen
What is a voting agreement?
A legally binding agreement to combine shares to try to elect a board member.
What are the rules for changing quorum of voting requirements
If going to change the voting criteria, either higher or lower, must meet the threhold of the higher of the two numbers.
Can share holders remove directors?
Yes, can remove one or more through vote with or wihtout cause unless articles say only cause. if cululative voting, can only be removed if number of votes against his removal wouldn't be sufficient to elect him. If straight voting, must be simple majority.
What are the notice requirements for board meetings?
Regular meetings require no notice, special meetings required two days notice of time, place, and date (no purpose requriement)
What are the quorum and voting rules for board meetings?
Quorum is over 50% of all directors, voting is over 50% of present directors.
What are the two tests for distribution of dividends?
- Solvency test- Corp would not be able to pay its debts as they become due in the ordinary course
- Balance sheet test- corp's total assets would be less than sum of it's total liabitlies plus the amount needed to satisfy preference rights
- both tests must be met.
what is the rule for director liablityt in dividends?
A director is personaly liable for a distribution of assets that exceeds what could be distributed without violating. Entitled to contribution from other liable directors, and recoupment from share holders who knew it was unlawful.
What is an officer? what is it's role?
An officer is an agent that makes daily decisions about the corp's business. Usually professionals like CEO CFO, etc. Elected by the board, or appointed by other higher officers with board approval. Duties in bylaws or told by board.
What is a voting proxy?
Someone with permission by shareholder to vote his shares for them. Shareholder appoints proxy by signing appointment papers. Revocable unless otherwise stated.
What corp actions must shareholder approval be sought for?
Amending articles, dissolving, merging corp, disposing of corp assets outisde normal course of business, changing sh voting and quorum requirements.
What's a closely held corporation?
Corp with few shareholders, substantial participation by SH in management, direction, and operations of corp. Lack of market for corps stock, no public trading.
What is the equal access rule in CHCs?
If offer to buy back one SH's stock, must offer to buy back all stock. SH's owe each other duty of loyalty.
What's a buy-sell agreement in CHCs?
Agrrement to buy back stock from SH if certain event occurs, included in stock purchase agreement.
What's the rule when someone gets kicked off the board of directors by a CHC?
Majority must show legitimate business reasons or it loses, then minority must show that could have been dealt with in less harmful way to win.
What are the types of corporate dissolution?
- Voluntary: SH's vote for dissloution via at will provision
- Involuntary: Judicial dissolution, court ordered. (usually if directors acting illegally or corporate assets being wated.)
- Buyout: can purchase petitioning SH's shares for fair value to prevent dissolution.
What are alternative to dissolution?
Arbitration, provision director being appointed to break deadlock, appointment of custodian, appointment of receiver to liquidate, judicial supervised buyout.
what are the michigan and new york tests for oppressive conduct?
- NY test is that expectations were substantially defeated and disolution only means of protecing those expectations.
- MI test: look to SH agreement, no reasonable expectations.
What is an LLC?
Best of both worlds, liability protection like corp, run like partnership. no liability for debts of company, managers of LLC owe fudiciary duty, members don't. LLC does not pay taxes, instead through owners income tax. Must be filed in state. LLC bound by LLC agreement filed with state.
What are the federal tax rules for the differen tntitles?
- Sole propritership: only taxed as individual.
- LLC: only taxed as individual.
- Partnership: single level taxation, only persons each pay taxes.
- Corp: double tax, corp pays, then owners pay personal taxes.
What if flow-through taxation?
Taxes are filed with feds but not paid, happens to partnership, LP, LLP, LLC, S-Corp.
How is one eligible for s-corp status?
Less than 75 SH, one class of stock, only SHs who are individuals, estates, or truts, no non resident aliens.
Who gets double taxed at federal level?
Corps that are not S-corps, LLCs that elect double taxation.
What is a board member's duty of care?
Duty to act in good faith, in a manner reasonably beleived to be in the best interest of the corp, with the care that an ordinary prudent person would be expected to exercise in a like position under the circumstances.
What is the business judgement rule?
Presumption that directors are acting in good faith on an informed basis to the best interst of the company. can be over come by gross negligence, fraud, conflicts of interest.
What is the responsibility to monitor affairs?
board must be informed about business, attend meetings, be familiar with financial status, upon discover of illegal action, must object and take reasonable action to prevent, if no correction, must resign to escape liability.
What is the duty of loyalty in corps? what are the 3 types of sutations it comes into play?
- Can't engage in conflicts of interest with the corp you're directing. 3 types:
- Competing with corp: forming a new company and taking clients or employees.
- doctrine of waste: consideration received by corp smaller than assets given away. Creates duty to disclose to other board members.
- self-interested transactions: director has material financial interest and knowledge doing business with another person entity that you have control over.
What are the elements of entire fairness?
- Fair dealing: everything happens normally in negotiations and contracts
- Fair price: actual value given is same as fair value.
What are the ways to avoid liabity in self interested transactions?
Director: disclose fully, then majority of disinterested directors (at least 2) vote approval.
SH; fully disclose, legitimate meeting, majority of qualified shares vote yes.
Entire fairness: Fair price, fair dealings.
What is the corporate opportunity doctrine?
A director or officer may not compete with the corp where this competition is likelty to harm the corporation.
What is the ALI test for the corporate opportunity doctrine?
May not take advantage of an opportunity unless offered opportunity to the company first, disclosed all info, and it was rejected fairly by the corp, by disinterested directors, or by shareholders.
What is the test for self interested controlling share holders?
First, will the action benefit them and hurt minority shareholders? Second, was a special committe put together to decide the decision? Third, did the majority of minority holders agree with the decision? If no, burden is on the controlling share holder to prove fairness, if yes, then on complaining share holder to prove unfairness.
What is a derivative suit?
Suit brought by shareholder to enforce corporate cause of action against officers, directors, or third parties.
How do you get standing for a derivatve suit?
Must be SH at time injury occured, mainitain shares througout suit, must fairly and accrurately represent itn einterest of the corp in enforcing it's rights.
What are the three tests for derivate suit demands?
- MCBA: Written demand, if denied, BJR attaches, must then wait 90 days to sue.
- Delaware rule: must give demad or show it's futile, must rebut BJR.
- New york Ruke: Give demand or show futile, must allage with particularlity the futility. must show directors not disinterested, failed to inform themselves, or cannot be sound business judgement.
What are the 6 types of corporate reorganizations?
- Statutory: target corp disappears, assets and liabilities assumed by purchasing corp. both SH's must approve exccept for exceptions, AH's of acquired corp entitled to appraisal right if not publicly traded stock.
- Short form: Merger between parent and subsitary, applies if parent owns 90% of subsidiary already, may merge on only parent board approval, need only notify subsidiary SH's that merger occured.
Triangular: Purchasing corp forms subsidiary, target merged into parent and subsidiary, target disappears, SH's of target receive parent stock, parent/sub hold all assets and liabilities.
Purchasing of controlling block of stock elements: No corp actions, transaction between share holders of target corp and purchasing corp.
Statutory share exchange elements: all SH's in target corp must sell stock to purchasing corp, SH's of both must approve, SH's of target entitled to appraisal.
Sale of substantially all assets: contract between two corps, x agrees to buy assets of y, assumes only contractual liabilties, must be approvad by board of X and Y, SH of selling corp.
What are apprasial rights?
When you dissent to a merger, you are permitted to demand fair value of the corps stock immediately before the action to which you object.
When is a sale a sale of substantially all the assets requireing shareholder approval?
If they retain less than 25% of assets and less than 25% of income or revenue.
What is a tender offer in corporate mergers?
an offer to stockholders of publicly held corp to exchange their shares for more than they're worth, used in hostile takeovers/
What is the rule for when a corp is for sale?
Share holders must maximize share holder value and obtain teh best price, agreements that impede bidding are imporper.
when is a corp for sale?
when it initiate an active bidding process to effect reorganization, or in response to a bidder's offer, target abandons it's long term strategy and seeks anternative bidders.
What is the test for materiality in insider trading?
That which a reasonable man would attach improtance to in determinig his choice of action in a transaction is material.
When is there tipping in insider trading?
When there's a fiduciary duty owed to disclose, the info came from someone who owed a fudiciary dute and tippee was aware of the breach, tipper benefited directly or indirectly, tippee used info to advantage.
What is misappropriation in insider trading?
When you obtain info from clients you owe a fiducuary duty to, and use it for your own gain.
What is a 16(b) violation?
When insiders in a company use info to trade stock and make a short tirm profit, applies to offier, directors, owners of 10% or more of stock. Applies to all publicly traded companies. buying and selling must occur within 6 months.
What does the SEC 1933 act require?
Any corp must disclose it's value to investors with an SEC filing.