Business Organizations

What is the definition of agency?

a fiduciary relationship where a principal manifests assent that an agent act on the principal’s behalf and subject to the principal’s control and the agent consesnts to act

What is actual authority?

authority based on the agent’s reasonable belief created by the principal’s manifestations to the agent

What is apparent authority?

authority based on a third party’s reasonable belief traceable to the principal’s manifestations 

What is inherent authority?

authority arising from the relationship itself allowing agents to bind principals in the ordinary course of business

What is ratification?

the principal’s affirmance of a prior unauthorized act, giving it retroactive effect as if authorized

When is principal bound by an agent’s contract?

when the agent has actual authority, apparent authority, or the principal ratifies the act

When is an agent personally liable on a contract?

when acting without authority or when the principal is undisclosed or partially disclosed

When is a principal liable for an agent’s torts?

when the agent is an employee and acts within the scope of employment

What is scope of employment?

conduct assigned by the employer or subject to employer’s control; not purely personal pursuits 

What is a sole proprietorship?

A business owned by a single person with unlimited personal liability and pass through taxation

How is a general partnership formed?

automatically when two or more persons carry on a business for profit as co-owners

Do general partners have limited liability?

No, they have join and several personal liability

Who manages a limited partnership?

general partners manage and have unlimited liability; limited partners are passive with limited liability

What is an LLC?

a business entity with limited liability, pass-through taxation, and flexible management structure

What is limited liability in a corporation?

shareholders are not personally liable for corporate debts beyond their investment

What must Articles of Incorporation include?

• corporate name

• authorized shares

• registered agent

• incorporator information

Who manages the corporation?

the board of directors

Who runs day to day operations in a corporation?

officers - who are agents of the corporation

What powers do shareholders have?

• elect and remove directors

• vote on fundamental changes

• limited other matters

What is needed for a shareholder quorum?

majority of shares entitled to vote (default)

How are directors elected?

by plurality of votes cast

What is cumulative voting?

a voting method allowing shareholders to concentrate votes on fewer board seats to achieve minority representation

What is a proxy?

authorization allowing another person to vote a shareholder’s shares

When is a proxy irrevocable?

when it states it is irrevocable and is coupled with an interest

Who decides dividends?

the board of directors

When are dividends prohibited?

if the corporation is insolvent or would become insolvent after the distribution

What is piercing the corporate veil?

disregarding the corporate entity to hold shareholders personally liable when maintaining the corporate form would result in injustice

What factors support veil piercing?

Undercapitalization, failure to follow formalities, commingling funds, using corporation as a façade.

What is enterprise liability?

treating related corporations as a single entity when they function as one enterprise

What is the duty of care?

directors must act with reasonable care, good faith, and in the corporation’s best interests 

What is the Business Judgment Rule?

presumption that directors acted on an informed basis, in good faith, and in the corporation’s best interest

What did Shlensky v. Wrigley hold?

courts will not interfere with director decisions if a valid business purpose exists

What did Van Gorkom require?

directors must make informed decisions; failure may be gross negligence and breach of duty of care

What is the Caremark duty?

duty of oversight requiring directors to implement monitoring and reporting systems

What is the duty of loyalty?

directors must act in the corporation’s best interest and avoids conflicts, self-dealing, and usurping opportunities

What conduct violates the duty of loyalty through competition?

planning or operating a competing business while still employed

What is a corporate opportunity?

a business opportunity closely related to the corporation that must be offered to the corporation first

What rule did Broz v. CIS apply?

A fiduciary may take an opportunity if the corporation lacks ability/interest, the opportunity was offered personally, and no corporate resources were used.

What is self-dealing?

a director is on both sides of a transaction or has a material conflicting interest

What is the safe harbor rule for self-dealing?

approval by disinterested directors or disinterested shareholders after full disclosure or proof the transaction was fair

What is a derivative suit?

a lawsuit brought by a shareholder on behalf of the corporation to enforce corporate rights

Who gets the recovery in a derivative suit?

the corporation

What is contemporaneous ownership?

Plaintiff must have been a shareholder at the time of the wrongdoing

When may shareholders inspect corporate records?

with a proper purpose for financial and sensitive documents

What is indemnification mandatory?

when the director is wholly successful on the merits or otherwise

What is a close corporation?

a corporation with few shareholders, no public market, and shareholder paticipation in management 

What special duties apply in close corporations?

heightened fiduciary duties similar to partnerships

What are preemptive rights?

rights of existing shareholders to purchase newly issued shares to prevent dilution

What is a buy-sell agreement?

a contract restricting share transfers and defining valuation and triggering events

Do partnerships require a written agreement?

No, conduct alone can form a partnership

Are partners personally liable for partnership debts?

Yes, joint and several liability

How are partnership decisions made?

majority for ordinary matters; unanimity for extraordinary matters

What fiduciary duty do partners owe one another?

duty of utmost loyalty

What is partnership property?

property acquired in the partnership name or with partnership assets

Can a partner transfer management rights?

No, only transferable interest can be transferred without consent

Is a new partner liable for preexisting partnership debts?

No, liability applies only to obligations incurred after admission