Partnerships, Agency, Corporations

CA Bar - July 2025

Partnership

An association with two or more legal persons who carry on a for profit business as co-owners

• person

• no specific intent needed

• co-ownership

• sharing control

Person

• anyone or anything that has a legal capacity to contract

• corporations, LLCs, humans

• incapacitated - minors, inebriated people

Co-ownership

• Element of Partnership

• when two or more persons share profit, there is a presumption of a partnership relationship

• no presumption in payment of a debt, interest payments, rent, wages, goodwill —> because there is a payment, but NOT a division of profits

Partnership Liability

• partners are personally liable for the partnership’s obligations; no limited liability

• can be limited for their torts + contracts

Partnership Agreement

• need not be a written agreement

• if there’s none, state law will govern the partnership with default rules

• however, if there is written, it will govern

• Exception - when state laws are mandatory, (1) liability to 3P, can’t deny partners access to books & records, fiduciary duties can’t be eliminated

Duty of Loyalty - partnership

partners must not:

• compete w/ partnership biz

• advance an adverse interest to partnership

• usurp a partnership opportunity

• limitation - can’t eliminate this, but can limit it by describing it differently

• Safe Harbor - if a partner makes a full disclosure of all material facts, then a certain % of other partners may authorize or ratify the transaction

Duty of Care - Partnership

• can’t unreasonably lower this duty

• MUST NOT:

  • engage in grossly negligent or reckless conduct

  • engage in intentional misconduct

  • engage in a knowing violation of the law

Timing of Duties

duties of loyalty and care only apply to partners, not to prospective partners or future partners

Profits and Losses - partnership

• need not to be the same

• financial contributions/capital contributions need not have an effect on this division

• when there’s no partnership agreement, P divided evenly, L follow

Distributions - partnership

• Default - partners don’t have the right to demand this

• partners can agree in advance to allow this to be made accordance to the partnership agreement

Transfer of Partnership Interests

• Default - partner doesn’t have the right to do this

• partners may agree to change the default rule to require a majority vote of the partners

• in the past (no longer), doing this would have dissolved the partnerhip

New Partner

Default - when a he/she is introduced, all existing partners must consent to this

Managing Governing Relationships

• Default - every partner has equal rights in management and control of the partnership —> can be changed by agreements

• common division is to reflect the parties’ capital contribution(s) rather than an even share

Quroums - Partnerships

no default rule regarding quorums for voting

Ordinary Buisness Matters

• requires a vote of the majority of the partners

• (eg: declaring a distribution)

Extraordinary Business Matters

• require a vote of all the partners

• (eg: amending partnership agreement)

Access to Records - partnership

• must be provided to partners and their agents

• MANDATORY - can’t be abridged by agreement

Dissociation - partnership

• when a partner ceases to be associated with the partnership

• Voluntary —> partner may give notice that they want to withdrawn

• Involuntary —>

  • event triggers it, expelled due to partnership agreement, unlawful to carry on biz, court order, partner is bankrupt, partner dies, partner is incapacitated, one of the entities of the partnership dissolves

Contract Liability - partnership

• partners can enter contracts for which they have authority

• express, implied, apparent

Tort Liability - partnership

a partnership is liable for torts that are committed by partners within the scope of their partnership

Terminating a Partnership

• Requires Dissolution and Winding Up

Dissolution - partnership

• can be triggered by an event, beginning of the end

• can be brought by a partner or operation of law

• partnership at will - no fixed term, generally dissolves when this partnership chooses to

• partnership for a term or undertaking - when term expires, orundertaking compelte

• Dissolved —→ (1) any dissolving event, event makes it unlawful to continue and not cured within 90 days, judicial determination

Winding Up - Partnership

• who —> (a) any partner not wrongfully dissociated, (b) legal rep of last surviving partner, (cd) any partner, legal representative, or transferee may seek judicial supervision of winding up

• Power —> may dispose, transfer property, discharge liabilities, person can preserve partnership biz to max value

• Statement ——> filing that gives notice 3 that the partnership has been dissolved after 90 days

• Priority —> creditors, then distributors

Limited Liability Partnership

• partnership in which a partner’s liability is eliminated

• must file with state

• Formation - to transfer a gen partnership to this, vote for it

• Liabilities - not personally liable for obligation of this entity, but liable for their own personal misconduct or negligence

• terminating - can voluntarily transform & cancel this status, state can also revoke it

Limited Partnership

• a partnership formed by 2+ persons that has at least one general partner and one limited partner

• liability - limited partners have limited liability, the general partners have personal liability

• formation - file certificate, name, in-state addy, name of agent in state, name and addy of gen partners, statement of duration, signed by gen partner

• Come into existence - when filed, or effective date if include, substantial compliance is effective

Limited Partners

• type of partner

• admission - may join at creation, or w/ agreement

• voting - only under partnership agreement, limited partner doesn’t vote

• right to access records

• liability to 3P- limited partner isn’t personally liable, unless she serves as gen partner or starts to participate

  • can do these without running biz: be officer, director of gen partner, consult gen partner, act as surety, request to attend meetings, wind up, propose or prove partnership matters

• Withdrawing - limited partner must give 6 months notice

General Partners

• type of partner

• becoming - joining at beginning or admitted w/ consent

• rights & powers - same as those in gen partnership

• liability to 3P - personally liable, can form a Corp to limit liability

• termination - voluntarily withdraw, try to assign and then get removed, bankruptcy, insolvent, death, incapacitation, biz entity partner is terminated

Agency Relationship

• need agent and principal

• creation - extend the principal’s economic reach, to acquire the agent’s expertise, make money

• consideration NOT required

• 3 components

  • assent - both parties manifest assent

  • benefit - agent agrees to work for principal’s benefit

  • control - the agent agrees to work subject to control of principal

Principal

• almost any person or entity has the legal capacity to be this

• excludes minors, and anyone incapacitated by illness or intoxication

• types of entities that can be this - employer, corp, LLC, partnership, LLP

• Unincorporated associations can’t cuz they don’t have legal capacity

agent

a person or entity who has minimal capacity, minor can be this  

• To have minimal capacity, (1) agent must be able to: assent to the agency relationship, (2) perform the tasks on behalf of the principal; and (3) be subject to the principal’s control 

• Generally any type of incorporated entity may serve as an gent 

contract liability

principal is bound on a contract when: 

• (1) the principal authorizes the agent to enter into the contract, (2) the agent acted with legal authority 

• 4 types of legal authority - (1) actual express authority, (1) actual implied authority, (1) apparent authority, (1) ratification 

• Principal communicating with the agent → actual authority | principal communicating with 3P → apparent authority

Actual Express Authority

look to communication between agent and principal 

• Principal creates by using words, written or spoken, to convey authority to the agent 

• Requisite Intent -  

  • Subjective intent - the agent must believe that he is doing what the principal wants him to do 

  • Objective intent - the belief must be objectively reasonable 

• Termination by Death - Principal Death , actual express authority terminates when agent has actual knowledge of death 

  • Agent Death - Actual express authority terminates immediately

actual implied authority

look to communication between agent and principal 

• A principal creates this by using words, written or spoken, or other conduct to convey authority to the agent to take whatever steps are necessary to achieve the principal’s objectives 

• Agent has this (absent express instructions to contrary) to act within the accepted business custom or general trade usage

apparent authority

look to communication between the principal and the third party 

• The principal creates apparent authority by words, written or spoken that cause the third party to reasonably believe that the principal consents to have acts done on the principal’s behalf by the agent 

• Ask if 3P if belief was reasonable → similar dealings can help 

• Revoke - must explicitly revoke and let the third party know 

ratification

no pre-act communication to consider

Requires that (1) principal has knowledge of material terms of contract & (2) principal then accepts the contract’s benefits

disclosed principal

• type of principal disclosure …

• 3P knows (1) agent is acting on behalf of a principal and (2) principal’s identity 

  1. In these scenarios, parties to the contract are the third party and the principal 

partially disclosed principal

• type of principal disclosure …

• 3P knows the agent is working on behalf of the principal, but not the identity of the principal 

  1. Parties to the contract are the third party, principal, and the agent 

undisclosed principal

• type of principal disclosure …

• 3P knows neither agent’s status as an agent nor the principal’s identity 

  1. Parties to the contract are the third party and the agent 

  2. Whether an undisclosed principal is also a party to the K, depends on whether the agent had the authority to bind the principal to the contract 

vicarious liability

respondeat superior - principal may be liable for the tortious acts of his agent 

• Requirements - (1) principal has sufficient control over the agent's conduct such that the agency relationship is employer-employee and (2) tort committed by the agent was acting within the scope of his employment 

sufficient control

 a principal who controls, or has the right to control, the physical conduct (manner and means) of the agent's performance of work is the higher category of employer-employee status 

• Principal doesn’t have vicarious liability for torts committed by an independent contractor 

• EXCEPTION - (1) task is inherently dangerous, (2) principal was negligent in hiring the independent contract, (3) the principal retains control over certain tasks and the tort occurs within those tasks 

scope of employment

(1) did the agent intend to benefit the principal, (2) was the agent’s conduct of the kind that the agent was hired to perform?, (3) did the tort occur “on the job” 

• Frolic - a significant deviation from an assigned path, outside the scope of employment 

• Detour - a de minimus deviation from an assigned parth, within the scope of employment 

intentional torts

are outside the scope of employment, so no liability for the principal 

• Exceptions - in which a principal may be held vicariously liable for intentional torts 

  • (1) conduct occurred within the general space and time limits , (2) agent was motivated in some part to benefit the principal, (3) the act is of a kind that the agent was hired to perform 

duty of loyalty

(1) agent cannot usurp a business opportunity, (2) agent cannot take in secret profits , (3) agent cannot compete in competing business with the principal

duty owed to principals

• even if the agent is unpaid 

  • (1) Duty to exercise reasonable care, (2) Duty to obey reasonable instructions, (3) Duty of loyalty 

corporations

a distinct legal entity that can conduct biz in its own right by buying, selling, and holding property or by suing or being sued, and by lasting forever, favorable because of limited liability and promoting investment 

Corporate Law - set of state laws governing structure of corps & rights & responsibilities of participants in corporations

Parties to a Corporation

People involved - one person can wear all 3 of these hats  

• Shareholders - investors, ultimate owners of a residuary interest in a corporation 

• Directors  - elected by shareholders, responsible for major corporate decisions, appoint officers 

• Officers - run the corporation a daily basis 

Promoters

try to find investors who are willing to invest in the corporation 

• Enter into contracts on behalf of the corporation (even before it exists) (eg: buying a social media handle)

• are fiduciaries of the corporation – they can’t make secret profits (eg: buying for co, selling at inflated right)

• Corporation is NOT LIABLE for pre-incorporation agreements 

• are personally liable for any contracts entered into before the corporation exists

Novation

• special agreement that alters the default rule; it shifts liability from the promoter to the corporation 

• An agreement between the promoter, the corporation, and the third party 

• Corporation is substituted for the promoter under the agreement

Incorporators

• Must sign and file the articles of incorporation, pay a fee 

• are not liable for contracts formed by promoters → they just file the paperwork

Articles of Incorporation

 a contract between corporation & their shareholders – establishes their basic rights, INCLUDE: 

• The name of the corporation which must include "Corporation," “Company,” “Limited” “Incorporated” or abbreviation

• The agent of the corporation (name and address within the state of incorporation);

• The names and addresses of the incorporator 

• The duration of the corporation (most are perpetual) 

• The purpose of the corporation; and 

  • Ultravires - acts beyond the corporation; if the corp acts outside stated purpose, acts will be held unenforceable 

  • Shareholders can sue to enjoin an ultra vires action, Corp can take action against ultra vires directors or officers 

  • The State can initiate proceedings to enjoin such actions

  • Today – purpose is usually stated “to engage in any unlawful activity” → usually not common 

• Authorized Shares - must state max number of shares of each class of stock that the corp is authorized to issue

Timing of Incorporation

• Moment when limited liability begins

• When the Sec of State accepts the fee and files the articles, corporate existence begins

Bylaws

no obligation to file, but almost every Corp has them 

• Set forth the day-to-day rules regarding operation + management of the corporation 

• are easier to amend, board can typically change bylaws, articles can only be amended by the shareholders 

• If these and AIC conflict, the articles always win

De Jure Corporation

• when all the statutory requirements for incorporation have been satisfied

de facto corporation

• corporation will be treated as a corporation with limited liability, if the organizers:

  • make a good faith effort to comply with the incorporation process

  • have no actual knowledge of a defect in the corporate status

Piercing the Corporate Veil

1. Alter Ego - the investor or shareholder has failed to observe any corporate formalities between the person and the corp - treated the company just like itself  (eg: intermingling funds, not taking mins) 

2. Under Capitalization - failure to maintain funds sufficient to cover foreseeable liabilities; and 

3. Fraud - the parties engaged in fraud or fraud-like behavior 

Stock

 ownership is represented by shares of stock | Carries voting attributes and economic rights

• Traditionally, ownership was demonstrated by stock certificates | today - ownership generally demonstrated electronically

creditors

• hold the debt of a corporation

• entitled only to repayment of their loan + interest

stock holders

aka equity holders

• entitled to ALL of the value that remains in a corporation after the debts have been paid

preferred stock

has preference over common stock w/ respect to: 

• Dividends (payments to shareholders) and liquidation 

classes of stock

most corps usually have 1, but can have as many as they want w/ diff voting and economic rights

waterfall

(1) CREDITORS, (2) PREFERRED STOCK, (3) COMMON STOCK 

authorized shares

issuance of stock —>

• Max number of shares that the director of a corporation can sell 

• Set in the AIC and need shareholder approval to sell more 

Issued Shares

issuance of stock —>

• Number of shares from the authorized pool that the directors actually sold 

Outstanding Shares

issuance of stock —>

•  (only ones who vote)

• Shares that were once issued to shareholders & still remain in the possession of the shareholders 

• NOT reacquired by corporation 

Treasury Shares

issuance of stock —>

• Stock previously issued to shareholders, but then reacquired by the corporation 

Issuance of Stock

1. Authorized Shares

2. Issued Shares

3. Outstanding Shares

4. Treasury Shares

par value stock

 corp may, but isn’t required to issue stock at par value | if so, must sell shares for at least min par value amount

• Today par, is typically not required, if required → it will usually be set at a nominal value 

• 1. Value of Consideration - corp can receive any valid consideration that the board of directors deems adequate (labor, IP rights, etc.)  → Board of Directors have discretion

• 2. Watered Stock - corp sets a par value amount and sells the stock for less than the stated amount 

stock subscriptions

ask people to agree in advance to buy stock before corp is informed 

• Prior to incorporation - subscription agreements are irrevocable for 6 months 

preemptive rights

 right to acquire stock to maintain the percentage of ownership any time new shares are issued 

• Default rule in most jurisdictions - shareholders don’t have this unless negotiated or included in the articles 

Director’s Authority

 power to authorize divided lies w/ board of directors | Shareholders have no right to dividends  

• Board can’t declare dividends under 2 circumstances: (1) if corp is insolvent or (2) if, issuing divided, corp would be insolvent 

• Directors who vote to authorize an unlawful dividend are personally jointly and severally, to the corp for the amount in excess of the lawful amount → Defense - a director will not be liable if relied in good faith on financial statements 

Priority of Distribution

if a stock is classified as “participating” then each share in the class collects a divided as part of the preferred class & then collects an additional amount together with the common class 

• Determining dividends → look to number of shares of common stock outstanding, number of shares of preferred stock outstanding, and whether the preferred stock is cumulative or participating 

closely held corporations

(Private Restrictions on the Sale of Securities) - To prevent outsiders from becoming involved in the corporation | So the initial shareholders can retain control over the shares 

• 1. Restriction Must Be Conspicuously Noted - stock certificate must contain either a full and conspicuous statement of what the restriction is or a statement that says that there are restrictions, which will be provided upon the request  

• 2. Enforceability - generally restrictions aren’t enforceable, even a lawful restriction may not be used against someone with no knowledge of it → unless the restriction is certified and conspicuous 

• 3. Types of Restrictions - (1) Outright prohibition on transfers, (2) require company’s consent , (3) company has an option to by, (4) company has a right of first refusal 

• 4. Challenges to Restrictions - usually made on the basis of restraint on alienation, test of reasonability 

  • It’s reasonable to restrict to maintain legal status (eg: S Corp where you can only have 100 SH)

• 5. Who is Bound - anyone who agrees, almost any SH in a closely held corp agrees to these restrictions 

Rule 10b-5

• federal cause of action - involves fraudulent purchase or sale of stock or other securities

• For a private person, following must be met:

• (1) plaintiff has to have purchased or sold the security 

• (2) transaction involved interstate commerce 

• (3) Defendant engaged in fraudulent or deceptive conduct 

  • Making an untrue statement of a material fact, failing to state a material fact that’s necessary to prevent statements already made from being misleading 

    • Exception - opinions and predictions don’t count as untrue statements of material fact 

• (4) Conduct related to material information 

  • Material - if reasonable investor would find that fact important in deciding to purchase or sell security 

• (5) Defendant acted with scienter 

  • Statements must be made intentionally or recklessly 

• (6) Plaintiff relied on defendant’s conduct 

• (6) Plaintiff suffered harm 

  • A causal connection between the conduct and the harm

• DAMAGES - out of pocket - difference between stock’s value and the price the plaintiff paid or received 

  • No punitive damages are allowed

Insider Trading

Section 16(b) -

• A corporate insider can be forced to return short-swing profits to the corporation 

• The reason for buying or selling or having non-public information is irrelevant 

• Necessary elements - 

  • Available companies - only the following 

    • Corporations with securities traded on a national securities exchange, OR 

    • Corporations with assets of more than $10 million & more than 500 shareholders 

  • Corporate insiders 

    • Directors, officers, or shareholders who hold more than 10% of any class of stock 

    • Officers - president, vice president, secretary, treasurer, comptroller, etc. 

  • Transactions made before someone becomes a corporate insider are generally not subject to short-swing issues; transactions made after a corporate insider leaves office may be 

• Short swing profits - during any 6 month period, a corporate insider who both buys and sells the corporation’s stock is liable to the corporation for any profits made on those transactions 

• Reporting - corporate insiders must report changes in stock ownership to the SEC  

Shareholder Meetings

1. Annual Meetings - every corporation must hold to elect directors and conduct other SH business 

2. Special Meetings - may be called to vote upon fundamental decisions (eg: dissolution, merger)

   1. State laws typically specify who may call special meetings (eg: board, senior officer, certain % of SH, shares)

3. Notice - SH must be given notice for either meeting, no fewer than 10 days, but no more than 60 days before the meeting 

   1. Must include the time, date, location 

   2. Special meeting - notice must include the purpose of the meeting 

   3. Insufficient notice - can allow a SH to challenge any action taken at meeting 

      1. Waiver of notice - notice can be waived by actually attending the meeting 

4. Record Date - used to determine which SH are eligible to vote | The directors must fix a record date 

   1. Must be not more than 70 days before the meeting 

   2. ONLY SH who actually own shares on the record are entitled to vote

• ALTERNATIVE - SH may take action without a meeting with written unanimous consent

Proxy

llows large corp to deal with meeting logistics - Shareholders rarely attend meetings in person 

• Authorizes other to vote shares in accordance with the wishes of the shareholder 

• To be legally effective, proxy must (1) be in writing, (2) be signed by the shareholder as of record date, (3) be sent to the secretary of the corporation, (4) State that it authorizes another to vote the SH’s shares, and (5) cannot be valid for more than 11 months unless otherwise specified 

Shareholder Voting

1. Quorum - a majority of the corporation’s outstanding shares represented at the start of the meeting 

   • For vote to be effective, quorum of corp's shares (NOT SH) must be represented in meeting, in person or via proxy 

2. Necessary Vote - if a quorum is present, a SH vote is effect if the votes cast in favor of the proposal exceed the votes cast against the proposal

Cumulative Voting

applies only to the election of directors, protects SH’s right to elect directors 

• Corporations can choose to permit this in articles 

• SH given number of votes that’s equal to the number of shares , multiplied by the number of director positions being voted on 

• Votes can be spread around or put on one director

shareholder inspection rights

SH may inspect corp’s records in person or through an agent as long as SH states a proper purpose 

• Must be a SH and have a proper purpose - related to the Shareholder's financial interest in the corporation 

• Improper purpose - designed to harass the corporate officers 

Direct lawsuits

- SH is suing in the SH’s own name for damages and damages go directly to the shareholder 

• SH can sue directly if SH has been harmed directly including - interference in voting rights, misinformation about important issues, and tort injured 

Derivative lawsuits

SH is suing on behalf of the corporation, alleged harm harms the corporation - principally 

• Harm to corporation - bad business decisions (eg: disloyalty

• Claim must be made in the corporation's name  and any recovery belongs to the corporation 

• 1. Standing - must maintain contemporaneous harm 

  • Requirements - (1) must have been a shareholder at the time of harm,(1) must hold the shares throughout the litigation; and (1) must fairly and adequately represent the interests of the corporation 

• 2. Demand Requirement - plaintiff SH is generally required to first demand that the board of directors bring the lawsuit in the corporation’s name before the SH can bring the suit

  • Demand Futility Provision (Minority Juris) - demand isn't required if it would be futile  

    • Eg: directors have been named as potential defendants 

• 3. Recovery - any recovery goes to the corporation, not the SH

  • Atty Fees - if litigation produces “substantial benefit” to the Corp, plaintiff’s attorneys are entitled to have their legal fees paid for by the corporation  

Duties of a controlling shareholder

• A controlling SH may owe a fiduciary duty to minority shareholders in 2 circumstances

• Controlling SH → those who own 50% or more

• Less than 50% plus one - look to nature of the ownership of the company 

1. Sale of Stock to an Outside/Looter - controlling SH may be liable for damages caused to other SH when the controlling SH sell stock to an outsider if the stock was sold to an outsider intent on looting or destroying the company 

   1. Red flags - looter had done this before, looter had given some indication this is what they intended to do  

2. Controlling Shareholder Transacts with the Corporation - a controlling SH who receives a specific distribution or otherwise conducts major business transactions to his own benefit owes a duty of loyalty  

Board of Directors

manages and directs the management of the corporation’s, usually receive compensation 

• Main tasks - appoint officers, oversee officers, and make high level corporate decisions 

• Number and qualification - a corporation must have at least 1, Directors must be natural persons 

• Term and selection - elected by shareholders, serve for a limited term, usually 1 year 

• Removal and Replacement - SH may remove directors w/ or wo/ cause 

  • Exception - staggered board - classes of directors are elected at diff times (eg: 9 board, 3 every year)

    • May be removed for cause, only if the articles provide & 

    • Diff classes of SH may elect diff directors - only directors elected by a particular class may be removed by that class 

  • Vacancy or size of the board has increased - new director(s) can be chosen by the SH at a special meeting OR by the board of directors

voting requirements for board

1. Quorum - a majority of the total number of directors, unless the bylaws specify a higher or lower number 

2. Affirmative Vote - if quorum is present, resolution of the board will pass upon a majority vote of those present at meeting

3. Unanimous Written Consent - board may approve a proposal & avoid meeting, if agreed upon by unanimous written consent

director dissent

- to avoid potential liability for board decision for which a director disagrees, the direct must dissent by:

(1) entering dissent in the meeting minutes (2) file written dissent before the meeting is adjourned, or (3) provide written dissent by certified or registered mail to the corporation’s secretary immediately following the adjournment of the meeting

Officers

• selected by board

• run the corp on a daily basis

• usually have a prez, secretary, treasurer

• owe FD of Care and Loyalty

Duty of Care

directors and officers owe this to the corporation 

1. Business Judgement Rule - in the absence of fraud, illegality, and self-dealing courts will not disturb good faith biz decisions

   1. Directors and officers are protected from legal liability under this rule, is rebuttable 

2. Standard of care - act w/ care that a person in a like position would reasonably appropriate under similar circumstances 

   1. Special skills are expected to be used, held to the standard of people with those skills

3. Reliance Defense - a director or officer is entitled to rely on the expertise of the officers and other employees, outside experts, and committees of the board 

duty of Loyalty - Corp

may not receive an unfair benefit to the detriment of the corp without effective disclosure and ratification 

• Self-dealing Transactions - A transaction in which the director, officer, or their relative receives a substantial benefit directly from the corp (eg: salary)

• Corporate Opportunity Doctrine - usurping or stealing a corporate opportunity 

• Insulation from Liability/Ratification - a self-interested transaction may be upheld if it is disclosed and ratified by:

  • A majority of disinterested directors or a majority of disinterested shareholders 

  • Ratification doesn’t always win the case, might only shift the burden 

Fairness - if a director or officer can demonstrate that the transaction was fair, then they will win

Indemnification

Practice of corporations paying for the costs of a director’s or officer’s defense in litigation, usually by purchasing insurance

Mandatory Indemnification

• type of indemnification —>

• corporation is ALWAYS required to pay for the costs of defense if the director or officer wins the case 

Prohibited Indemnification

• type of indemnification —>  

• the corporation CANNOT indemnify a director or officer who is liable for receiving an improper benefit from the corporation or otherwise loses a lawsuit

Permissive Indemnification

• type of indemnification —>

• the corporation may, but isn’t required to indemnify a director or officer for the costs of the suit if the director or officer: acted in good faith with no intent to harm the corp, or had no reasonable cause to believe the conduct was illegal 

Fundamenta change to Corporation

Required Approval - both the Shareholders and directors must approve the fundamental changes
Merger and Consolidation - 

• Merger - combo of 2+ corporations where one corporation survives and assumes the assets and the liabilities of the other corp 

• Consolidation - the combo in which neither of the 2 corps survive -> new entity is created, new entity assumes the assets & liability of both corporations 

Dissolution - existence of a corporation is extinguished either voluntary by SH and directors OR involuntary by disgruntled parties 

• Involuntary - corp may be dissolved by creditors if creditors can show corp isn’t paying it’s debts

  • SH can have corp dissolved if SH can show: (1) corporate assets are being wasted, (2) directors are acting fraudulent, and (3) directors and shareholders are deadlocked 

Process - Board must adopt a resolution proposing the change & NOTICE must be sent to SH of special meeting Dis

Dissinters Rights

• SH doesn’t wish to participate in a duly authorized merger, asset sale, share exchange, or amendment of the articles, SH is entitled to dissenters’ or appraisal rights 

• Entitled to have their shares purchased from them by the corporation at a fair value determined by the court 

Procedural Requirements -

1. SH must send written notice to the corporation prior to the vote of her intent to dissent 

2. At the meeting, SH must abstain or vote “no” (dissent) at the meeting AND 

3. SH must make prompt written demand for fair market value after the action has been approved

Close Corporations

 term used to describe a corporation with few shareholders 

1. Characteristics - SH are often also directors & officers, typically not publicly traded, relaxation of rigid rule for corporations - its hard to get out due to the lack of a market to sell the shares 

2. Voting agreements - can form voting agreements, different from regular corporations (where its not permitted)

3. Preemptive rights - the default rule prohibiting preemptive rights may be relaxed 

S Corporation

corporation for state corporate law purposes, but it gets special treatment for tax purposes, limited on # of SH 

• Only taxed once, like a partnership | not taxed at entity level – allows “pass through” taxation 

Limited Liability Corporations

combines LLC w/ tax treatment of a partnership 

• Generally no limitations on SH, no residency requirements, and no natural person requirements (more flexible than S corps)

• Characteristics - an LLC files articles of organization and an operating agreement with the state 

  • Owners are called members , rather than shareholders 

  • Presumed to be managed by ALL of it’s members 

• LLCs are treated like corporations legally, difference in terminology, taxing features 

Shareholder Removing Director

• At CL, shareholders had inherent power to remove a director, but could only do so for cause based on substantial grounds. 

• modern trend is to allow shareholders to remove a director with or without cause unless the AOI provide otherwise.  A director may be removed only at a meeting called for the purpose of removing the director, and the meeting notice must state that removal is at least one of the purposes of the meeting.  For a decision at a shareholders' meeting to be valid, there must be a quorum of the shares eligible to vote present at the meeting and there must be a majority vote.

Interest or Expectancy Test

Test used in Duty of Loyalty - Usurping

• key is whether the corporation has an existing interest (e.g., an option to buy) or an expectancy arising from an existing right (e.g., purchase of property currently leased) in the opportunity. 

• An expectancy can also exist when the corporation is actively seeking a similar opportunity.