Corporations, Partnerships, LLCs, Agency

President in a Corporation

The president is an agent of the corporation and has whatever actual authority the corporation grants him. Generally, a president has the authority to enter into contracts involving day-to-day operations, and can enter into extraordinary transactions if authorized by the BOD.

How can a fundamental corporate change be implemented?

Only if the BOD first passes a resolution to implement the plan and the plan is then approved by the shareholders.

Appraisal Remedy

Shareholders must (1) file an objection to the transfer before or at the shareholders’ meeting at which the vote is taken; (2) not vote in favor of the plan; and (3) send the corporation a written demand for the fair value of their shares.

Promoter

A person who procures commitments for capital and instrumentalities on behalf of a corporation that will be formed in the future. Generally, promoters are personally liable for all contracts, and that liability continues even after the corporation is formed unless there is a novation releasing the promoter and substituting the corporation in their place.

How else can a promoter not be liable on a pre-incorporation contract?

If the agreement between the parties expressly indicates the promoter is not to be bound.

Corporation’s liability for a promoter contract with a third party

A corporation is not liable for a promoter’s contract unless they adopt it either expressly (by BOD with knowledge of material facts) or implied (by acquiescence or conduct normally constituting estoppel)

What is a partnership?

An association of 2 or more persons to carry on as co-owners a business for profit.

Profit sharing between partners creates what?

A presumption of partnership.

When can a partner enter into a contract on behalf of the corporation?

When it occurs in the scope of the business, and the partner had actual or apparent authority.

Who is liable in a general partnership?

Each partner is jointly and severally liable for all obligations, but the plaintiff must first exhaust partnership resources before seeking to collect from an individual partner’s assets.

What happens when one partner pays the whole of a partnership debt?

The partner may require the other partner to contribute their pro rata share of the payment because each partner is jointly and severally liable for the obligations of the partnership. In the absence of an agreement, partners share profit equally, and losses are split the same way.

Dissociation in Partnerships

Change in the relationship of the partners caused by an partner ceasing to be associated with the carrying on of the business. A partner is dissociated from the partnership upon notice of his express will to withdraw as a partner.

When must a partnership dissolve?

A partnership is dissolved and its business must be wound up when a partner in the partnership at will notifies the partnership of his intent to withdraw.

When is a partnership bound by a partner’s act after dissolution?

If the act is appropriate for winding up the partnership business. A partnership will also be bound by a partner’s post-dissolution act—even if not appropriate for winding up the partnership—where the party with whom the partner dealt didn’t have notice of the dissolution and the act would have bound the partnership before the dissolution.

Agency

A fiduciary relationship which results from manifestation of consent by both parties that the other shall act on his behalf and subject to his control with consent by the other so to act.

Actual Authority

Based on the agent’s reasonable belief they have authority to act on the principal’s behalf. Can be express or implied.

Apparent Authority

Based on a third party’s reasonable belief the agent has the authority to act on behalf of the principal.

Ratification

Occurs after-the-fact. The principal must have knowledge of all material facts regarding the contract; accept the entire transaction; and have capacity

If the principal is undisclosed or only partially disclosed, who is liable for contracts entered into by the agent?

Both the principal and the agent.

Scope of Employment

1. Was the conduct “of the kind” the agent was hired to perform?

2. Did the tort occur “on the job”?

3. Was the conduct actuated at least in part to benefit the principal?

Voting decisions in partnerships

Each partner gets one vote. Any ordinary business decision requires a majority vote, and any extraordinary business decision requires a unanimous vote

Partners can get _____, but they don’t get _______.

Profits; salaries

When is a partnership liable for torts of partners?

When the partner is acting in the ordinary course of the partnership or with the authority of the partnership

What duties does a partner have to a partnership?

Duty of care, loyalty, and disclosure

What is the duty of disclosure?

Providing complete and accurate information on or without demand by the partnership

Partnership Property

Titled property is partnership property if acquired in the partnership’s name or purchased with partnership funds, or if it is purchased in a partner’s name where they are acting for the partnership.

A partner can transfer their ______ rights, but they can’t transfer their _____ rights.

Financial; management

At-Will Partnership

No agreement to remain partners. Default rule

Term Partnership

Agreement to remain partners for a certain amount of tim or until the completion of a project.

When a partner dissociates, either

The partnership dissolves or the partnership buys out the dissociating partner

True or False. Limited partners have no fiduciary duties to the partnership.

True

Limited Partnership vs. Limited Liability Partnership

Limited partnership is a partnership with at least one partner with limited liability. A limited liability partnership is when all partners have limited liability.

You can limit vicarious liability, but not

for partner’s own tortious conduct

Articles of incorporation vs. Bylaws, who wins?

Articles of incorporation control

What are bylaws of a corporation?

The operating manual for a corporation. Not filed with the state.

How are directors elected?

Initial directors are named in the articles of incorporation or elected by the incorporators. Shareholders elect thereafter. Shareholders can hire and fire directors for any reason at any time.

When must you give notice for a BOD meeting?

For special meetings, and the failure to give notice makes the meeting voidable unless there is a further waiver in writing or the director attends the meeting and does not object at the outset.

BOD Meeting Requirements

Must have quorum (majority of all directors), and the majority of those present are required to pass the resolution

Duty of loyalty

Discharge duties in good faith and with a reasonable belief that the actions are in the best interest of the corporation

Duty of care

Use care that a person in a like position would reasonably believe is appropriate under the circumstances

Business Judgment Rule

Only applies to breaches of the duty of care. The court will not second guess a business decision if it was made in good faith, informed, and had a rational basis.

Specific ways duty of care applies to BOD in corporation

Self-dealing; setting reasonable compensation in good faith; usurp corporate opportunity

Self-Dealing

To avoid damages, a director must show that either the deal was fair to the corporation when it was entered into or that their interest and all relevant facts were disclosed and the deal was approved by either (1) a majority of disinterested directors or (2) a majority of disinterested shares.

Piercing the corporate veil

Doctrine that allows shareholders to be sued for the debts of a corporation. Only available in close corporations.

Derivative Suits

Shareholder sues to enforce the corporation’s claim. If shareholder wins, they get their costs covered and damages go to the corporation. If shareholder loses, they are liable for the defendant’s fees and don’t get costs covered.

Requirements to bring a derivative suit

1. Stock ownership when the claim arose or by operation of law

2. Adequate representation of the corporation’s interest

3. Written demand on the corporation

Record Date

Whoever owns the stock on this date gets to vote

Proxy

Writing authorizing another person to vote for the shareholder. The writing must be signed by the record shareholder and directed to the secretary of the corporation.

How can a proxy be revoked?

Either the shareholder attends the meeting and votes or they put it in writing to the corporation’s secretary

How many shareholders do you need to elect a director?

A plurality

How many shareholders do you need to approve anything other than electing a director?

A majority of shares entitled to vote

Cumulative Voting

Number of shares multiplied by the number of directors to be elected. To use cumulative voting, it must be explicitly mentioned

What types of things are considered fundamental corporate changes?

Amending articles, mergers and consolidations, transfer of all or substantially all assets, conversion, or voluntary dissolution

What is required for a corporation’s dissolution?

If it’s voluntary, BOD action and shareholder approval. If it isn’t voluntary, a court order.

What is an LLC

A hybrid between a corporation and partnership where owners have limited liability and partnership tax treatment

What are the owners of an LLC called

Members

What is the document used to control an LLC’s operations called?

Operating Agreement

Member-Managed LLC

LLC where members handle management of the LLC themselves

Manager-Managed LLC

LLC where the managers, who may or may not be members, handle the management

How are financial rights allocated in an LLC?

Based on contributions