Business Associations: Chapter 1 + Chapter 2

Internal affairs rule (aka choice-of-law rule) requires that the law of the state of _______ will govern all matters relating to the _______ of the corporation 

Internal affairs rule (aka choice-of-law rule) requires that the law of the state of incorporation will govern all matters relating to the internal affairs of the corporation 

Agency is a _______ relationship that arises when one person (a principal) _______ _______ to another person (an agent) that the agent shall act on the principal's behalf and is subject to the principal's _______ , and the agent _______ _______ or otherwise _______ to act

Agency is the fiduciary relationship that arises when one person (a principal) manifests assent to another person (an agent) that the agent shall act on the principal's behalf and is subject to the principal's control, and the agent manifests assent or otherwise consents to act

An agency relationship permits the agent to make the principal to incur _______ + _______

An agency relationship permits the agent to make the principal to incur obligations + liabilities

🚨DEFAULT RULE: principal will be responsible for the acts of the agents when the agent is acting _______ the scope of the agent's _______

🚨DEFAULT RULE: principal will be responsible for the acts of the agents when the agent is acting w/i the scope of the agent's authority

A de facto agency relationship can be inferred from the principal’s _______ and inferred from the parties _______, even if the principal doesn’t intend it.

A de facto agency relationship can be inferred from the principal’s conduct and inferred from the parties course of dealings, even if the principal doesn’t intend it.

Agent’s fiduciary duties = (1) _______ + (2) _______

Agent’s fiduciary duties = (1) loyalty + (2) care

Agency Duty of loyalty: Requires the agent to act for the principal's _______ in all matters connected w/the agency relationship.

• Agent ≠ acquire any material benefit + profit if they are dealing w/3rd parties on behalf of the principal

• Agent ≠ act for (or with) an adverse party to the principal in any transaction connected with the agency relationship

• Agent ≠ compete w/ principal

• Agent ≠ use confidential info provided by principal 

• Agent ≠ engage in conflict of interest (i.e. agent hires family members)

• A principal may _______ conduct by an agent that would have been a breach of fiduciary duty

Duty of loyalty: Requires the agent to act for the principal's benefit in all matters connected w/the agency relationship.

• Agent ≠ acquire any material benefit + profit if they are dealing w/3rd parties on behalf of the principal

• Agent ≠ act for (or with) an adverse party to the principal in any transaction connected with the agency relationship

• Agent ≠ compete w/ principal

• Agent ≠ use confidential info provided by principal 

• Agent ≠ engage in conflict of interest (i.e. agent hires family members)

• A principal may consent conduct by an agent that would have been a breach of fiduciary duty

Agency Duty of care: Requires the agent to act with _______ , _______ , and _______ ordinarily exercised by agents in similar circumstances. 

• Standards of the duty of care: may be agreed upon by the principal and agent; prescribed by the level of skill ordinarily expected by a certain professional (if agent is a licensed member of a profession) 

Duty of care: Requires the agent to act with care, competence, and diligence ordinarily exercised by agents in similar circumstances. 

• Standards of the duty of care: may be agreed upon by the principal and agent; prescribed by the level of skill ordinarily expected by a certain professional (if agent is a licensed member of a profession) 

Actual authority: An agent acts w/actual authority when, at the time of taking action that has legal consequences, the agent reasonably believes, in accordance with the principal's _______ to the agent, that the principal wishes the agent to act.

Actual authority: An agent acts w/actual authority when, at the time of taking action that has legal consequences, the agent reasonably believes, in accordance with the principal's manifestations to the agent, that the principal wishes the agent to act.

Apparent authority: When a _______ party _______ believes the actor has authority to act on behalf of the principal + that belief is _______ to the principal's _______ .

• An agent can have apparent authority when the individual is stripped of their power or acts _______ the scope of their power

Apparent authority: When a 3rd party reasonably believes the actor has authority to act on behalf of the principal + that belief is traceable to the principal's manifestations.

• An agent can have apparent authority when the individual is stripped of their power or acts outside the scope of their power

Partnership: an association of _______ or more persons carrying on a business for _______ as _______ .

• A general partnership ≠ provide the owners w/ limited liability.

Partnership: an association of two or more persons carrying on a business for profit as co-owners.

• A general partnership ≠ provide the owners w/ limited liability.

Partnership (like an agency relationship) may be formed _______ .

• Standard to determine whether there is a partnership = _______ of the _______ .

Partnership (like an agency relationship) may be formed _______ .

• Standard to determine whether there is a partnership = totality of the circumstances.

Partnership Duty of loyalty: Requires partners to account to the partnership for any _______ they derive in the conduct of the partnership's business.

• must refrain from dealing with _______ parties

• must disclose _______

• must refrain from _______ with the partnership

Partnership Duty of loyalty: Requires partners to account to the partnership for any benefits they derive in the conduct of the partnership's business.

• must refrain from dealing with adverse parties

• must disclose opportunities

• must refrain from competing with the partnership

Partnership Duty of care: Prohibits partners from engaging in _______ conduct/_______ negligent conduct; must be an _______ basis of acting in a particular way.

Partnership Duty of care: Prohibits partners from engaging in reckless conduct/grossly negligent conduct; must be an informed basis of acting in a particular way.

🚨DEFAULT RULES: The rights and duties of partners in the absence of a partnership agreement providing otherwise:

• All partners must _______ to the admission of a new partner.

• All partners have _______ of management.

• Each partner is entitled to an equal share of the partnership's _______ (+ _______ ) in proportion to the partner's share of profits.

🚨DEFAULT RULES: The rights and duties of partners in the absence of a partnership agreement providing otherwise:

• All partners must consent to the admission of a new partner.

• All partners have equal rights of management.

• Each partner is entitled to an equal share of the partnership's profits (+ losses) in proportion to the partner's share of profits.

🚨DEFAULT RULE: For disagreements within the ordinary course of business, disagreements shall be resolved by a _______ of the partners.

🚨DEFAULT RULE: For disagreements within the ordinary course of business, disagreements shall be resolved by a majority of the partners.

🚨DEFAULT RULE: When partners disagree as to issues outside the ordinary course of business, the partnership may only act w/ _______ of the partners' consent.

🚨DEFAULT RULE: When partners disagree as to issues outside the ordinary course of business, the partnership may only act w/ ALL of the partners' consent.

🚨DEFAULT RULE: Partners have _______ authority to sign contracts on behalf of the partnership when those agreements relate to matters that arise within the _______ course of business.

🚨DEFAULT RULE: Partners have actual authority to sign contracts on behalf of the partnership when those agreements relate to matters that arise within the ordinary course of business.

If the partnership’s assets cannot pay its obligations, partners are _______ + _______ liable (in their own capacity) for the partnership's obligations/tortious acts within the _______ course of business

If the partnership’s assets cannot pay its obligations, partners are jointly + severally liable (in their own capacity) for the partnership's obligations/tortious acts within the ordinary course of business

🚨DEFAULT RULES: If there is no express agreement (even oral) stating the partnership’s duration, it is considered _______, meaning any partner may withdraw + trigger dissolution at any time

• may be implied

🚨DEFAULT RULES: If there is no express agreement (even oral) stating the partnership’s duration, it is considered at-will, meaning any partner may withdraw + trigger dissolution at any time

• may be implied

Limited partnership: consists of (1) at least one _______ _______, who have complete _______, _______ the enterprise, and are subject to _______ liability AND (2) at least one _______ _______, who fund the enterprise, do _______ manage the enterprise, and are subject to _______ liability. 

Limited partnership: consists of (1) at least one general partner, who have complete control, manage the enterprise, and are subject to full liability AND (2) at least one limited partners, who fund the enterprise, do not manage the enterprise, and are subject to limited liability. 

UNLIKE partners in general partnerships, limited partners in a limited partnership are _______ agents to the partnership and _______ authority to bind the partnership 

UNLIKE partners in general partnerships, limited partners in a limited partnership are not agents to the partnership and lack authority to bind the partnership 

A limited partnership is formed _______ by complying with statutory requirements

• Statutory requirements are substantially complied with = limited partners enjoy limited liability; OR

• Limited partners in good faith believe themselves to be limited partners = limited liability

A limited partnership is formed ONLY by complying with statutory requirements

• Statutory requirements are substantially complied with = limited partners enjoy limited liability; OR

• Limited partners in good faith believe themselves to be limited partners = limited liability

If limited partners take on an active role in the partnership (as w/ _______ ) they also owe the same fiduciary duties as GPs + may subject themselves to _______ liability.

If limited partners take on an active role in the partnership (as w/ management) they also owe the same fiduciary duties as GPs + may subject themselves to unlimited liability.

To determine whether to hold a limited partner liable: 2 tests may be applied-

• RULPA 1976: A limited partner generally has limited liability unless they participate in controlling the business _______ the same as a _______ . 

  • If the LP DOES participate in controlling the business substantially as a GP = _______

    • Substantially less =  LP may be personally liable to a third party who _______ _______ the LP was a general partner.

• ULPA 2001: A limited partner is not personally liable for the limited partnership's obligations merely because they are a limited partner—even if they participate in management and control. 

To determine whether to hold a limited partner liable: 2 tests may be applied-

• RULPA 1976: A limited partner generally has limited liability unless they participate in controlling the business substantially the same as a GP. 

  • If the LP DOES participate in controlling the business substantially as a GP = LL

    •  LP may be personally liable to a third party who reasonably believed the LP was a general partner.

• ULPA 2001: A limited partner is not personally liable for the limited partnership's obligations merely because they are a limited partner—even if they participate in management and control. 

Two types of LLCs:

1. Member-managed LLCs: _______ partake in management of the LLC

2. Manager-managed LLCs: power to manage the LLC is given to the _______ from the members

Two types of LLCs:

1. Member-managed LLCs: members partake in management of the LLC

2. Manager-managed LLCs: power to manage the LLC is given to the manager from the members

🚨DEFAULT RULE: an LLC = member-managed LLC

• In member-managed LLCs, each member is an _______ of the LLC and has authority to bind it in the _______ course of business.

• Member-managers owe a fiduciary duty to the LLC

🚨DEFAULT RULE: an LLC = member-managed LLC

• In member-managed LLCs, each member is an agent of the LLC and has authority to bind it in the ordinary course of business.

• Member-managers owe a fiduciary duty to the LLC

Members of an LLC enter into an _______ agreement (the same as a partnership agreement for a partnership).

Members of an LLC enter into an operating agreement (the same as a partnership agreement for a partnership).

Manager-Managed LLCs: When members of the LLC opt to assign the task of _______ the LLC

• Managers owe _______ _______ to the members and may be held accountable if they operate the business in a way contrary to the best interests of the members.

  • the duty of loyalty cannot be _______ and the duty of care cannot be _______ reduced

  • 🚨CURRENT RULE: An operating agreement may lawfully eliminate/limit fiduciary duties but CANNOT eliminate/limit DGFFD (Contra Harbison) 

• Non-manager members do not owe _______ _______ (like limited partners in limited partnerships).

Manager-Managed LLCs: When members of the LLC opt to assign the task of managing the LLC

• Managers owe fiduciary duties to the members and may be held accountable if they operate the business in a way contrary to the best interests of the members.

  • the duty of loyalty cannot be eliminated and the duty of care cannot be unreasonably reduced

  • 🚨CURRENT RULE: An operating agreement may lawfully eliminate/limit fiduciary duties but CANNOT eliminate/limit DGFFD (Contra Harbison) 

• Non-manager members do not owe fiduciary duties (like limited partners in limited partnerships).

Veil perceiving when a court pierces the [corporate] veil (shield of limited liability) and hold shareholders _______ liable for the debts

Veil perceiving: a court will pierce the [corporate] veil (shield of limited liability) and hold shareholders personally liable for the debts

LLCs are subject to veil piercing, if certain factors are met: fraud, _______ capitalization, failure to observe corporate _______ , and operation of the corporation as an _______ _______ .

LLCs are subject to veil piercing, if certain factors are met: fraud, inadequate capitalization, failure to observe corporate formalities, and operation of the corporation as an alter ego.

Inadequate capitalization: A company is inadequately capitalized if it _______ sufficient assets (or fails to purchase enough insurance) to pay damages awards in lawsuits that are likely to arise in the _______ course of business.

Inadequate capitalization: A company is inadequately capitalized if it lacks sufficient assets (or fails to purchase enough insurance) to pay damages awards in lawsuits that are likely to arise in the ordinary course of business.

Promoters: those acting in behalf of a _______ _______ _______ formed corporation

🚨DEFAULT RULE: the promoter is _______ on the contract absent an _______ of the contrary

Promoters: those acting in behalf of a yet-to-be formed corporation

🚨DEFAULT RULE: the promoter is liable on the contract absent an agreement of the contrary

Five ways a promoter may escape personal liability under a contract:

1. _______ language releasing a promoter from liability

   • Example: "Promoter, in the name and solely on the credit of, a company to be incorporated"

2. The _______ offer rule: contracts made by promoters for and on behalf of a future corporation are in the nature of offers which may be accepted by the corporation when it comes into existence

   • Can only be invoked if there is express language releasing the promoter from liability

3. _______ : the substitution of one party for another party in a contract

4. _______ argument : Argue the promoter was an _______ acting on behalf of a _______ principal -> meaning the promoter/agent was NOT a party to the contract + REQUIRES the corporation to be already formed 

5. Seek _______ from the corporation

Five ways a promoter may escape personal liability under a contract:

1. Express language releasing a promoter from liability

   • Example: "Promoter, in the name and solely on the credit of, a company to be incorporated"

2. The continuing offer rule: contracts made by promoters for and on behalf of a future corporation are in the nature of offers which may be accepted by the corporation when it comes into existence

   • Can only be invoked if there is express language releasing the promoter from liability

3. Novation: the substitution of one party for another party in a contract

4. Agency argument : Argue the promoter was an agent acting on behalf of a disclosed principal -> meaning the promoter/agent was NOT a party to the contract + REQUIRES the corporation to be already formed 

5. Seek indemnification from the corporation

To adopt promoter pre-incorp contracts:

• _______ : a corporation's assent to a contract that was made in contemplation of the corporation's assuming it after organization

  • _______ by corporation does not _______ promoter from personal liability on these contracts

• _______ : the corporation's acceptance of an act purportedly made on behalf of an agent

  • Ratification is ONLY possible to _______ -incorporation contracts

To adopt promoter pre-incorp contracts:

• Adoption: a corporation's assent to a contract that was made in contemplation of the corporation's assuming it after organization

  • Adoption by corporation does not release promoter from personal liability on these contracts

• Ratification: the corporation's acceptance of an act purportedly made on behalf of an agent

  • Ratification is ONLY possible to post-incorporation contracts