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Business Associations
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408
Law
Graduate
12/07/2012

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Cards

Term
Rule 10b-5 Requirements
Definition
In interstate commerce:
- the fraudulent conduct must have involve the use of some type of interstate commerce (usually this requirement is usually met)
Term
Fraudulent Conduct, Misstatement of Ommission
Definition
Sufficient: Intent/Scienter (conduct must have been done with intent to deceive, manipulate or defraud)
Term
10b-5 Fraud Elements
Definition
1. material misinformation
2. scienter
3. reliance
4. causation
5. damages
Term
Scienter defined:
Definition
A mental state embracing intent to deceive, manipulate or defraud. [deliberate reckless typically seen as enough to establish]
Term
10b-5 applies to:
Definition
investors who buy and shareholders who sell
applies to publicly traded or closely held
Term
Defining material information:
Definition
if there is a substantial likelihood that a reasonable investor would consider the information important OR an omitted fact would be viewed by a reasonable investor as having significantly altered the total mix of information
Term
Court says materiality says when contingent evaluate two variables:
Definition
1. Magnitude: How big is the news
2. Likelihood: How likely is it to occur
Term
Statute of Limitations:
Definition
5 years from the action (repose) or 2 years from discovering the wrong
Term
Test to determine when the wrong should have been discovered:
Definition
1. When P Discovers the violation OR
2. when a reasonably diligent plaintiff would have discovered the facts constituting the violation
Term
Violation of 10b-5:
Definition
1. a private suit for damages
2. an SEC suit OR
3. Criminal Prosecution
Term
Private damages limitations:
Definition
1. cannot exceed actual damages
2. capped according to a formula meant to disregard post transaction price volatility
Term
Birnbaum doctrine:
Definition
only actual purchasers or sellers may recover damages in private 10b-5 actions
Term
10b-5 defendants:
Definition
any person who makes false or misleading claims and induces others to trade to their detriment can become liable "primary violator"
Term
Rule 10b-5 defined:
Definition
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange
a. employ any device, scheme or artifice to defraud
b. to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
c. to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security
Term
Rule 10b-5:
Definition
Employment of Manipulative and deceptive Devices
Term
The Formation of a Closely Held Corporation: Where to Incorporation
Definition
Two Options:
1. Delaware - most large/international/publicly traded companies
2. incorporate in the state where ou are going to operate
Term
Checklist of basic 10b-5 elements
Definition
Plaintiff must show:
1. a misrepresentation or omission
2. in connection with the purchase or sale of security
3. concerning a material fact
4. scienter
And if the plaintiff is a private plaintiff
1. loss causation
2. reliance
Term
Corporate Status
Definition
De Jure, De Facto, and estoppel
Term
De Jure method of formation
Definition
substantially follow all statutory provisions
Term
De Jure effect on personal liability
Definition
insulates against personal liability of shareholders
Term
De facto method of formation
Definition
colorable compliance with statutory provisions and exercise of corporate privileges
Term
De facto effect on personal liability
Definition
insulates agaisnt personal liability of shareholder, but corporation subject to quo warranto proceeding by state
Term
Estoppel method of formation
Definition
parties act as if there is a corporation; no requirement of following statutory provisions
Term
Estoppel effect on personal liability
Definition
insulates against personal liability
Term
Liability of owners in a corporation
Definition
shareholder generally not personally liable for corporate obligations
Term
Corporation management
Definition
generally managed by offices who are controlled by directors
Term
Corporate Taxation
Definition
firm-taxation (firm is taxable on its income)
Term
Corporation Formation requirement
Definition
must file articles of incorporation with state
Term
corporation transferability of ownership
Definition
shareholders generally free to transfer their ownership interests at will
Term
What type of liability do corporations have?
Definition
What this means is that when people conduct business by creating a corporation, if the corporation becomes insolvent, the individual shareholder will usually lose only the amount already paid for his stock
Term
Public Corp v. Closely Held
Definition
Public: a corp with widespread ownership that is actively traded

Close: has few owners, as well as stock that isn't traded on a national exchange or otherwise actively traded and has significant overlap between management and shareholders
Term
How to incorporate
Definition
file your articles of incorporation with secretary of state
Term
required information in the articles of incorporation
Definition
1.Name of corporation (should include inc, corp etc.) -- includes address
2. Total number of authorized shares
3.List class and characteristics of stock shares
4. Modification of default share structure
5. name and address of registered agent for process
Term
Optional information in articles of incorporation
Definition
1. duration of corporation
2. process for amending by-laws
3. name and number of initial directors of corporation
4. purpose/mission of corporate existence (ultra vires doctrine trigger)
5. listing powers of corporation
6. par value
7. contents of by laws
Term
A RAINS
Definition
required in the articles of incorporation

Address, Registered Agent, Incorporators, Name, Share information
Term
Limitations on Choosing a name for an incorporation:
Definition
1. similarity
2. corporateness
3. no illegal purpose
Term
What happens at initial organizational meeting ?
Definition
1. elect directors
2. read articles of incorporation into minute books
3. adopt resolutions
4. adopt bylaws
5. directors would accept 'share subscriptions"
6. adopt a corporate seal
7. set-up and authorize use of bank accounts
8. appoint and set salaries for officers
9. ratify "prior acts" or incorporators
10. adopt resolution to pay incorporator for services rendered
Term
what controls if there is conflict:
articles of incorporation or bylaws
Definition
articles of incorporation
Term
what are bylaws?
Definition
They regulate many of the corporations internal affairs
Term
are bylaws required?
Definition
No
Term
Who creates bylaws?
Definition
bylaws are adopted, amended or repealed by a majority approval of either the board of director or the shareholders entitled to vote
Term
What can be included in bylaws?
Definition
location of corporate office, meetings of shareholders, procedures for/limits of issuing and transferring of share, rules governing the boards of directors, officers, indemnification, books/record/minutes
Term
Is a statement of purpose required?
Definition
Not usually, if they do they can be very general
Term
What happens if a corporation violates their stated purpose?
Definition
Ultra vires doctrine might apply
Term
Ultra Vires defined:
Definition
beyond one's legal powers
Term
Ultra Vires at Common Law
Definition
whenever a transaction was beyond the corporation limited purposes or powers
the ultra vires doctrine allowed parties to weasal out of contracts based on corporations being involved in things outside their realm of purpose
Term
Modern Ultra Vires doctrine applies when:
Definition
1. corporation engage in activities not related to profit seeking
2. Powers and purpose of corporation were limited in articles and AND current transactions/conduct went beyond OR
3. board of directors takes action to undermine power of shareholders
Term
Who may sue on basis of n Ultra vires violation?
Definition
1. shareholder suit to enjoin corporate action
2. Suit by state attorney general
3.suit by corporation (directly or derivatively) against former officer/director/employee
Term
Business Judgment Rule:
Definition
Presumption that the actions taken are in good faith and honest belief that in the interests of the company. High risk is okay if high reward.
Term
Shareholders are the ____ of the company?
Definition
owners
Term
Purpose of a registered agent?
Definition
To receive service of process on behalf of the corporation in case its sued by anyone on any claim. Note that the registered agent's name and address must appear either in the articles of incorporation or in a separately filed form
Term
Remedies for the Ultra Vires act?
Definition
1. injunction (shareholder remedy)
2. damages (sought by the corporation in a derivative suit)
3. dissolution (the AG of the state can seek dissolution of the corporation on grounds of an ultra vires act)
Term
Issue of Premature Commencement of Business arises when:
Definition
a promoter of a corporation enters in a contract on behalf of the corporation before the entity actually comes into existence and the contract is breached
Term
What is a promoter?
Definition
It is aa person instrumental in launching a corporation, who typically remains involved with the corporation once its formed.
Term
Promoters duties:
Definition
1. locate interested investors
2. finds needed personnel and property; and
nurtures the idea or product that is the corporations focus
Term
Why is the promoter issue important?
Definition
determining who is liable for contracts in pre-incorporation
Term
Defective Corporation
Definition
A. Group of people acting like they are incorporated, then sign the documents as corporation
Term
Whose protected in a defective corporation?
Definition
investors are protected if courts find no limited liability.
Term
De facto corporation
Definition
when persons attempting to form corporation make a "good faith effort" to fulfill requirements of corporate formation but there are serious defects with filing
Term
Under what circumstances is a promoter liable for a breach of pre-incorporation contract he makes on a corporation's behalf?
Definition
depends on whether the promoter discloses that the corporation does not exist and whether he makes it clear he is contracting only on the corporations behalf
Term
When a promoter is personally liable:
Definition
1. promoter enters into contract on corporations behalf without diclosing that corporation doesn't exsits
2. promoter enters into contract on corporation's behalf, acknowledging that corporation does not yet exist and without making it clear that he's contracting on the corporation's behalf -- promoter is liable personally, especially if the contract requires performance prior to formation of the corporation
Term
when is corporation liable on behalf of promoters actions
Definition
promoter enters into a contract on corporation's behalf, acknowledging that the corporation does not yet exist under circumstances in which the other party impliedly agrees not to hold the promoter liable -- only the corporation liable
Term
Under what circumstances is a corporation liable for breach of a pre-incorporation contract made by a promoter on the corporation's behalf?
Definition
only if and when:
1. adopts the contract, expressly or impliedly; or
2. accepts a desired benefit under circumstances making it inequtiable to retain the benefit without paying for it
Term
De facto corporation requires:
Definition
1.some colorable
2. good-faith attempt to incorporate AND
3. actual use of of the coproate form, such as carrying on the business as a corporation or contracting in the corporate name
Term
Who can challenge the existence of a de facto corporation?
Definition
a state can challenge the existence of a de facto corporation

to outsiders a de facto corporation looks like a de jure corportion
Term
Corporation by estoppel:
Definition
arises when the parties have dealt with each other on the assumption a corporation existed, even though there has been no colorable attempt to incorporate
Term
Key difference between de facto and estoppel:
Definition
de facto -- made an attempt to incorporate

estoppel -- made no attempt to incorporate
Term
Defenses shareholders can use on the grounds of defective incorporation
Definition
-de facto corporation
-estoppel
Term
When a corporations formation substantially complies with the state'e corporation statue what is the corporations status?
Definition
de jure status
Term
Modern View of Defective Corporations
Definition
Most modern statues follow the MBCA, which officially abolishes de facto corporation

it does have the same effect of the de facto because it implies that anyone who cts as a corporation without knowing of a defect in incorporation can't be held liable for corporate debts
Term
Who is protected by de facto corporation defense?
Definition
protects shareholders from liability to all parties
Term
Who is protected by corporation by estoppel defense?
Definition
shareholders against only those third parties who have dealt with the corporation believing it to be proper corporation
Term
quo warranto action defined:
Definition
it is an action by a state attackign the corporate status of a business. NOte that de jure corporation are beyond attack by anyone, even the state. de facto corporations and corporations by estoppel, however, can bee attacked by the state in a quo warranto action
Term
Are owners personally liable for obligations/debts of the corporation?
Definition
No
exception: piercing the corporate veil
Term
Old Piercing the Corporate Veil Test:
Definition
Fraud/Illegality/Serious Misconduct
1. if the illegal activity gives rise to injury of 3rd party --> court will pierce
2. if the illegal activity did not cause the injury to 3rd party --> no reason to pierce
Term
Modern test:
Definition
Fraud or illegality test
Term
Fraud or illegality test:
Definition
1. Fraud
2. Alter Ego/Instrumentality Test
a. Undercapitalization
b. ignore corporate formalities
c. alter ego (treating the corp as if it is you/comminging funds
d. domination
Term
Undercapatilization defined:
Definition
did you set up business to fail OR did you sufficiently fund?
-look at capitalization at time of commencement NOT at the time of failure
-was there legitimate funding
-plaintiff must show how and why corporation was under capitalized
Term
What to look at to determine if the court should pierce
Definition
1. Tort v. Contract claims
-more likely to pierce for tort claims
2. voluntary v. involuntary relationship
-if voluntary contract claim between corporation and creditor --> unlikely to pierce
-if involuntary tort claim - no voluntary relationship = likely to pierce
Term
Ignoring Corporate Formalities defined:
Definition
1. must have total lapse --> few absues will not be enough to meet test
Key: showing respect to corporate form as separate being

Did you:
1. file articles of incorporation
2. hold share holder meetings
3. elect directors/officers
4. take minutes and keep records
5. filing corporate tax returns
Term
Alter ego (intermingling)
Definition
treating corporation as if it is you and commingling of funds
1. substantial ownership of the stock by 1 person combined with these factors
2. It is money is my. It is not a separate person. Now I can use the company car, but the company has to authorize it. That is the company showing separation. Loan-authorize a loan. the act of authorizing, signing.
Term
Domination defined:
Definition
Is the corporation doing things that are favorable to the business OR are these decisions being made for personal interests?
Can also apply to parent-subsidiary business relationship
-if you have common controller/commingle funds/filing one tax return
-plaintiff would have burden of showing how this was adverse to domination corporation
Term
Kodak-Atex Rule:
Definition
does not mean you are alter ego if these are present:
1. having same people as directors/officers for both corporations
2. borrowing money from other corporation --> as long as it has legitimate and positive business purpose
3. sharing/transferring of employees
4. group loans
5. filing group tax return
Term
Fraud/Wrongdoing defined:
Definition
The most commong type is shareholder's siphoning off company profits, leaving too little cash to satisfy corporate creditors. Others include misrepresentation of the corporations assets, or a shareholder holding himself out as liable personally for corporate debts.
Term
who is going after who in the case of piercing the corporate veil situations?
Definition
Usually looking at creditors trying to go after shareholders to satisfy corporate debts.

This makes the shareholders liable for corporate debts
Term
Whose piercing laws does the court apply?
Definition
Frequently state law of incorporation, but conflict of laws says where the corporation has greatest interest in the outcome
Term
Reverse Piercing:
Definition
debtor wants to pierce corporation --> while creditors do not want to pierce the veil
Term
Heirarchy and Control of the Corporation -->
Definition
Shareholder --> Board of Directors --> Officers ---> Employees
Term
Traditional Roles of Shareholders
Definition
1.Own the company
2. appoint directors
3. expected to be selfish
4. Where directors are the only shareholders its permissible to bind them under their agreement to vote a certain way
Term
Traditional Roles of Board of Directors
Definition
1. set policy and agenda for corporation (elect officers)
2. must have independence for management and control
3. represent shareholders interests (owe duty to shareholder)
a. contact dealing binding a director is void
b. directors decide dividends; dividends cannot be forced
Term
traditional roles of officers
Definition
1. run day to day business of corporation
2. owe duties to directors and shareholders
Term
Power of Directors:
Definition
must act as a group by voting and passing resolutions; as a director, can't act on behalf of the corporation as an individual director
Term
Power of officers
Definition
-Are agents of the company (are given powers by the articles, bylaws and the board)
-presidents do not automatically have power, unless given to them through above means; however, if president they probably have apparent authority
Term
How many directors can an organization have?
Definition
As many as they want
Term
Do directors have to be shareholders?
Definition
No unless thy bylaws or articles provide otherwise
Term
Can entities serve as a board member?
Definition
NO must be an actual person
Term
How are initial directors selected?
Definition
either named in the articles of incorporation or elected at the organization meeting by the incorporators
Term
How are subsequent directors elected?
Definition
elected by shareholders, generally on an annual basis at the annual meeting (time served can be staggered or elected at the same time)
Term
Straight voting defined
Definition
majority shareholders favored and will elect entire board
Term
formula for straight voting
Definition
number of shares owned x number of directors to be elected -- limited to that many votes total
Term
formula for cumulative voting
Definition
number of shares X number of directors to be elected PER DIRECTOR


this only appears when electing directors
Term
What is considered a properly convened meeting in relation to directors
Definition
1. a quorum and
2. notice
Term
directors Quorum defined
Definition
the number of directors who must be present at a a meeting for the board to transact business.
Term
directors notice defined
Definition
if the meeting is regular -- no notice is required unless articles or bylaws provide otherwise

special meetings require clear and timely notice of time and place to all board members
Term
What happens if there has not been proper notice for a meeting?
Definition
business at a special meeting may still be valid if a quorum of directors attends, and those who didn't receive proper notice either expressly waive he lack of notice in writing or impliedly do so by attending the meeting and taking part in discussions
Term
What happens if notice and quorum requirements are not met?
Definition
they are subject to injunction or receission
Term
What is a provisional director?
Definition
It's an impartial person a court may appoint when a corporations board of directors is deadlocked, such that the provisional director can break the deadlock and avoid an impairment of business

Power: while serving, the provisional director has all the rights and powers of a regular director

Removal: when one of the following occurs:
1. the deadlock is broken
2. court orders removed
3. majority of shareholders vote for removal
Term
What do shareholders have to show to remove a director from office?
Definition
Absolutely nothing -- directors can be removed for or no cause
Term
What happens when a board member stays away to prevent a quorum?
Definition
Nothing--the court finds it an unclean hands approach and as a result the court does not grant an injunction
Term
What do officers of a corporation do?
Definition
They implement the policy decisions of the board of directors.
Term
What can shareholders do?
Definition
1.elect new directors
2. remove directors
3. amend articles and bylaws
4. vacancy = remaining members of the board fill the vacancy
5. Fundamental change
Term
Whats considered to be fundamental change?
Definition
1. merger
2. company is going to sell its assets outside the ordinary course of business
3. dissolution: voting to end life of the company
4. directors or officers involved in conflict of interest transaction
Term
Limitations on inspecting books for the company for shareholders
Definition
there are usually ownership miniums, timing and for a proper purpose
Term
How do shareholders exercise their power?
Definition
By voting their shares on resolutions at meetings, either annual or special.
Term
What happens at annual meetings?
Definition
Most importantly, directors are elected. May also include:
1. management reports
2 amending or repealing bylaws and
3. resolutions introduced by management or shareholders
Term
Can notice for shareholders meeting be waived?
Definition
yes, either expressly (in writing) or impliedly (by attending the meeting even if you did not receive the notice)
Term
Quorum requirements at a shareholders meeting
Definition
Most states: a majority of the shars entitled to vote constitutes quorum, unless the articles or bylaws specify otherwise
Term
When quorum is calculated?
Definition
At the state of the meeting. However, if the quorum withdraws after that, courts are not sure if that will still be enough to hold a quorum
Term
Is a shareholder the only one that can case their vote?
Definition
No -- they can have a proxy
Term
What is proxy voting?
Definition
It occurs when the person owning voting shares in a corporation assigns the power to vote those shares to someone else
Term
How do shareholders create a proxy?
Definition
Proxy must be in writing, and in a few states a proy must be filed with the corporation before the proxy holder may vote the shares
Term
Types of proxies
Definition
discretionary and Specific
Term
discretionary proxy
Definition
vote for whoever you want
Term
specific proxy
Definition
designate a specific course of action
Term
Rules of Proxies:
Definition
1. you can be told how to vote
2. vote as you see fit
3. proxy is good for 11 months, unless states different duration
4. proxies are revocable
5. death does not terminate proxy.
6. you cannot sell your proxy, you cannot sell your vote
7. no proxies for directors, they have to show up for themselves
8. Proxies can be irrevocable
Term
Are proxies always revocable?
Definition
Yes unless the proxy is stated to be irrevocable and is coupled with an interest
Term
How is ownership of shares determined?
Definition
By examining the corporate stockholders list or register to determine wo the owner is
Term
When is shareholder ownership determined?
Definition
not necessarily at the time of the shareholder's meeting, that determines who may vote.

There may be a specific date a reasonable period of time before the shareholder's meeting will be entitled to attend, vote, or receive notice of the meeting

In most states cannot be more than 60 days prior to the annual meeting
Term
What is a close corporation?
Definition
A corporation with very few shareholders.
Term
Unique circumstances create unique problems for corporations
Definition
1. transferability of ownership
2. Authority
3. dissolution
Term
Two principal duties directors owe to their corporation
Definition
The duty of care and the duty of loyalty
Term
what is the business judgment rule as it applies to directors?
Definition
holds that directors judgments can't be challenged unless they are tainted by fraud, a conflict of interest or illegality, or are uninformed or wholly irrational.


combine this with the directors duty of care --- rational directors judgments can't be attacked, unless those judgment were arrived at negligently or were tainted by fraud, conflict of interest of illegality
Term
what is the directors duty of care
Definition
it requires that directors exercise the degree of skill, diligence, and care that a reasonably prudent person would exercise in similar circumstances. Simply put, the duty of care typically means that directors cannot be negligent
Term
All directors have act in a duty of good faith defined:
Definition
1. to be honest
2. to not have a conflict of interest
3. not approve wrongful activity
Term
what constitutes a disregard of corporate duties and intentional violations?
Definition
Conscious disregard of corporate duties and intentional violations of positive law violate the directors duty of good faith
Term
What must one prove to show that a board violated the duty of care?
Definition
1. they did not act in good faith
2. did not exercise due care by informing themselves
3. act grossly unsound
4. duty of candor
Term
Who is the burden on?
Definition
The burden is on the challenger to overcome the Business Judgment Presumption
Term
Due Care Defined
Definition
1. a director must have informed basis standard that relates to the process of the board
Term
How is the board determined whether or not they informed themselves?
Definition
If they used a outside expert and relied on him even if he was an idiot, you are safe
2. inside: company does an internal analysis -- may be covered but tough because you have to prove that you did a thorough enough analysis
Term
What is the definition of failure to monitor?
Definition
General RUle: unlikely that a failure to monitor will rise to a level of breaching the duty of care

Duty to Monitor: only significant decisions and a cause for suspicion
Term
If prove liability, who is liable?
Definition
ALl directors who voted or reframed from exercising a vote against
Term
How are directors liable
Definition
joint and several liability
Term
Duty of Loyalty defined:
Definition
involves directors having some type of personal benefit
Term
Two ways duty of loyalty is violated
Definition
1. self dealing
2. usurpation of corporate opportunity
Term
Self dealing is okay when:
Definition
1. disclosed and approved by disinterested shareholders
2. disclosed and approved by disinterested directors
3. deal was intrinsicaly fair (no disclosure required)
Term
Intrinsically fair defined:
Definition
the terms and the price of the transaction were fair to the corporation
Term
When the fiduciary and the corporation are counterparties, the fiduciary plays two roles - what are the two roles?
Definition
She has a personal interest as a party to the transaction and she participates in the corporate decision to approve the transaction
Term
Examples of direct self interest:
Definition
1. sales and purchases of property, including the corporation's stock
2. loans to and from the corporation
3. the furnishing of services by nonmanagement director (such as when the corporation's outside lawyer, accountant, or investment banker sits on the board)
Term
Parent/Subsidiary Self-dealing rule:
Definition
parent corporations owe fiduciary duties to those subsidiary corporations who they dominate
Term
What is the corporate opportunity?
Definition
Usurpation of corporate opportunities: a director took a business deal ot make money that the corporation would have taken; if something is a corporate opportunity
Term
Proper standard for corporate opportunity -->
Definition
1. you must disclose the oppotunity to the entity AND
2. offer it to the entity
Term
what happens if the business accepts the business deal
Definition
If the entity takes it they have it
Term
Wnat happens if the business denies it?
Definition
No usurpation -- you are free to pursue it
Term
Usurp defined:
Definition
take illegally or by force
Term
what is a corporate opportunity?
Definition
two tests:
1. line of business test (narrower)
2. american law institute approach
Term
Line of business test:
Definition
1. the business opportunity must be in the line of business and a practical advantage to it
Term
how do you determine under the line of business test if the business opportunity is in the line of the business:
Definition
consider:
1. is it really in the line of business
2. interest & expectancy
Term
What is considered to be in the line of business under the corporate opportunity?
Definition
Is it economic irrelevant -- is it a opportunity regardless of whether you can afford it unless you are insolvent OR
2. economically able -- must be able to afford the oppotunity
Term
American Law Institute Approach to whether it is a corporate opportunity
Definition
focuses on proper process -- not so much on the opportunity -- focus on what you are supposed to do
Term
Is there a requirement for equitability between shareholders?
Definition
generally have to treat equally but if you cannot then you choose the common over the preferred but it must be disclosed
Term
What is the remedy for self dealing?
Definition
generally voidable at election of shareholders

generally the remedy is recission
Term
Rescission defined:
Definition
which returns parties to prior status prior to the self dealing of the director
Term
What is an interested director
Definition
An interested director is one with a conflict of interest involving the transaction in question eg. he owns a tract of land the corporation intends to buy
Term
Interlocking directorate define:
Definition
A case where two corporations share one (or more directors). A conflict of interest problem arises when the corporations contract with each other, since the common directors has/have a duty to serve the best interests of both corporations
Term
A deal that is considered _____ will be void. Only need one shareholder
Definition
WASTE
Term
Waste defined:
Definition
waste is always void, even if disclosed and approved -- still void if found to be waste. If tehre is waste -- only takes one shareholder to complain
Term
Waste Test:
Definition
was the contract itself waste; for it to be void form the get go -- was the exchange so one sided that no business person of ordinary sound judgment could conclude the corporation got adequate consideration from the other side

if corporation got any substantial consideration back, courts will not find waste
Term
Parent/Subsidiary Self-Dealing conflict
Definition
there is no conflict of interest where one corporation is wholly owned subsidiary of another but conflicts arise where the parent owns only a majority of the subsidiary's shares
Term
Rule re Parents/Subsidiary Self-dealing
Definition
court will look at transaction and ask if the parent was essentially overreaching, favoring itself over subsidiary minority shareholders of sub OR was this made in the ordinary course of business
Term
What test is applied if parent company was self dealing?
Definition
Intrinsic fairness test
Term
Intrinsic fairness test:
Definition
if the parent is benefiting at the expense of the subsidiary:
1. subject to careful judicial scrutiny that transactions must be "objectively" fair
2. merger: director on boards of both companies
Term
What test do you apply if parent is acting in the ordinary course of business?
Definition
Business judgment rule
Term
Usurpation of corporate opportunity:
Definition
a director took a business deal to make money that the corporation would have taken; if something is a corporate opportunity
Term
Line of business test in regards to usurping corporate opportunity
Definition
the deal is not strictly in the line of business, bt in the zone of something we would be interested in getting into
Term
Who are the fiduciaries who can't exploit an opportunity that rightly belongs to the corporation:
Definition
directors
officers and
controlling shareholders
Term
What is the rule on usurpation of corporate opportunities?
Definition
simply put, if a business opportunity is the corporation's then the corporations fiduciaries -- directors, officers and controlling shareholders can't unfairly usurp the opportunity for themselves
Term
Derivative suit defined:
Definition
a lawsuit in which a shareholder pursues a claim on the corporations behalf because the directors -- whose job it is to pursue such claim -- wrongfully refuse to do so
Term
Potential issues involving derivative suits
Definition
1. is the claim direct or derivative
2. is the plaintiff qualified to bring suit on the corporations behalf
4. did he plaintiff exhaust internal corporate procedures before filing suit
4. must the plaintiff satisfy a security-for-expenses statute?
5. if the case was settled or discontinued, did the court approve?
6. who is entitled to recovery
7. who pays the plaintiff's litigation expenses
8. where corporate officers or directors are defendants, who pays their litigation expenses
Term
What kind of ownership must a shareholder have to bring a derivative suit?
Definition
contemporaneous ownership
Term
contemporaneous ownership rule:
Definition
the plaintiff/shareholder must have been a shareholder at the time the alleged wrong was committed against the corporation
Term
Can you sell shares during the derivative suit?
Definition
No -- you must continue to own the shares thru the end of the lawsuit unless shares are involuntarily ripped out of your hands then you can still continue the suit
Term
Must a shareholder tell the board of directors or officers before bringing a derivative suit
Definition
yes unless the demand was futile
Term
Futile defined:
Definition
incapable of providing any useful result, pointless
Term
WIll a corporation take over a suit?
Definition
they can but it wont happen. instead it will form a committee
Term
What kind of committee will the corporation form
Definition
an independent litigation committee
Term
What does the independent litigation committee decide?
Definition
committee decides whether to bring claim. Most of the time decides that it is not worth going forward and then files a motion to dismiss
Term
What will the court look at to determine whether a motion to dismiss will be granted?
Definition
The court will:
1. apply business judgment rule
2. court will dismiss the claim if the the committee made their decision to not move forward based on:
a. good faith
b. made reasonable investigation
c. independent business judgment
d. justify basis of conclusions
5. due care
Term
McKee Derivative Suit Rule:
Definition
a stock holder cannot be permitted to invade the discretionary field committed to the judgement of the directors and sue in the corporations behalf when the managing body refuses.

A board decision to cause a derivative suit to be dismissed as detrimental to the company after demand has been made and refused will be respected to unless it was wrongful
Term
What is the effect of a derivative suit if it is not taken and is not wrongful?
Definition
a demand, when required and refused (if not wrongful) terminates a stockholder's legal ability to initiate a derivative action
Term
If there is a committee appointed who should be sitting on the committee?
Definition
only disinterested people:
1. directors not named in the suit
2. directors who weren't directors when the wrongdoing took place; and
outsiders who are completely independent of any interested directors
Term
When will a court not dismiss a derivative action claim?
Definition
1. if committee decision was not made pursuant to business judgment rule
2. court looks toward best interests o the company --> wont automatically dismiss instead applies balancing test
Term
Balancing does if the court finds the claim to be futile:
Definition
1. bona fide stock holder power to bring corporate cause of action VS
2. corporation ability to rid itself of detrimental litigation
Term
Who covers the plaintiff's litigation costs?
Definition
1. plaintiff is successful in recovering money damages--> plaitniffs reasoanble litigation expenses are taken from the money recovered
2. plaintiff is successful in receiving a non-monetary substantial benefit for the corporation-->the corporation must pay plaintiff's reasonable litigation expenses
3.plaintiff losses --> pays own litigation expenses
Term
Difference between a direct and derivative law suit:
Definition
derivative claims are only approrpriate where the primary harm is to the corporation. usually the claims are against the directors or officers for breaching their duty of care/loyalty to the corporation
Term
Common shares defined
Definition
1. class or classes of shares that have - the fundamental rights of voting for directors and receiving the net assets of the corporation
2. can either be held together or separately among many groups
3. have non-financial rights - a right to inspect books and records, a right to sue on behalf of the corporation to right a wrong committed against it, a right to financial information
Term
Characteristics of Common Shares:
Definition
1. the right to receive dividends contingent upon an apportionment of profits
2. negotiability
3. the ability to be pledged or hypothecated
4. the conferring of voting rights in proportion to the number of shares owned
5. capacity to increase in value
Term
What is the difference between Preferred and Common stock:
Definition
preferred stock has some sort of preference over common stock, which must be spelled out in the corporations articles
Term
Preferred Shares defined:
Definition
1. usually not voting shares (usually decided in the articles
2. entitles the holders to a priority or preference in payment as against the holders of common shares
Term
Cumulative dividend rights defined:
Definition
a preferred dividend is not paid in any year, it accumulates and must be paid before any dividend may be paid on the common shares in a later year
Term
Noncumulative dividend:
Definition
not carried over from year to year, if no dividend is declared during the year, the preferred shareholder loses the right to receive the dividend for that year

so they lose out on the stock dividend that year
Term
Par Value defined:
Definition
an arbitrary dollar value assigned to shares of stock which after being assigned, represents the minimum amount for which each share should be sold
Term
The minimum price that you can sell shares for (issue shares for) -->
Definition
represents the amount that must be paid so the shares can be issued as "fully paid" and nonassessible

has nothing to do with the stock after its issued
Term
Where must the par value appear?
Definition
In the articles of incorporation
Term
acceptable forms of consideration for stock
Definition
cash, promissory notes, services performed
Term
unacceptable forms of consideration for stock:
Definition
unperformed services
Term
Dilution defined:
Definition
selling shares for different amounts
Term
when does dilution happen?
Definition
generally done when the business is going well and want to bring more people in
Term
Is there notice involved with dilution?
Definition
you MUST inform the person purchasing that they are getting diluted stock
Term
Watered Stock defined:
Definition
any stock issued by the company where the company where the company is not collecting par
Term
Tests for Watered stock
Definition
1. Original: court required the board valuation of the consideration reflecttrue value and courts imposed liability on any shareholder who paid the stock with consideration that a judge later decided had been overvalued
2. Next test: board valuation made in good faith and reflect reasonable prudence
3. Statutes: require in the absence of fraud
Term
What happens when there is no par value to a stock?
Definition
When stock is issued without par, shareholders are liable to the corporation or its creditors only to the extent they have not paid "the consideration for which the shares were authorized to be issued or specified in their subscription agreement
Term
When is stock watered?
Definition
When the corporation that could hae received par value for the stock in the form of property or services accepted less then that.
Term
Preemptive rights:
Definition
when the percentage of shares owned by a shareholder is threatened by corporation issues "new stock"

1. only applies to common share holders
2. once shareholder turns down subscription right --> losses "preemptive ratio" to shares
Term
Purpose of preemptive rights is:
Definition
to protect shareholders ownership interest from dilution
Term
Preemptive Rights defined
Definition
give existing shareholders the right to acquire new stock of the same class in proportion to their existing stock ownership when the corporation issues new shares
Term
Remedies for violation shareholders preemptive rights:
Definition
1. damages
2. specific performance
3. injunction
Term
Damages for violating shareholders preemptive rights:
Definition
damages are determined by the difference between the new shares offering price and the cost of acquiring the shares in the market (market value)
Term
Specific Performance for violating shareholders preemptive rights:
Definition
will be able to force corporation to issue the additional shares necessary for shareholder to retain ownership/voting interest
Term
Injunction for violating shareholders preemptive rights:
Definition
shareholder can sue for injunction if the shares have not been issued yet
Term
Shares with no preemptive rights:
Definition
1. given to directors/officers as part of compensation
2. purchased far below book value of stock
3. issued for anyhting other than money
4. sold within first six months of incorporation
5. treasury shares
6. one class does not have preemptive rights in another class
Term
Two approaches to permitting preemptive rights
Definition
1. opt in approach
2. opt out approach
Term
Opt in approach to preemptive rights
Definition
you ust opt in to have preemptive rights. A corporation does not have these rights unless the company elects to have them.
Term
Opt out approach to preemptive rights
Definition
a corporation has preemptive states, unless the corp opts out of them.
Term
If you turn down your preemptive right to repurchase:
Definition
the company has right to sell the shares that ou had right to, for one year at that price or any higher price
Term
Rules for declaring dividends:
Definition
directors have discretion on when to declare dividends and how much to declare
Term
dividend defined:
Definition
it is a pro rate distribution of a corporations property to its share holders
Term
pro rata defined
Definition
proportional
Term
A court will find a dividend process defective if:
Definition
1. there is no reasonable business objective justifying the dividend policy; and/or
2. the policy resulted from improper motives and harmed either the corporation or certain shareholders
Term
If there is adequate surplus available, may the directors hold the dividend?
Definition
Not in bad faith.
Term
To show directors held the dividend inappropriately you have to show that:
Definition
1. there was an adequate surplus
2. the holder was in bad faith (tough to prove because directors can usually find a good reason)
Term
Test to determine whether directors acted in good faith in relation to dividends:
Definition
determine whether policy of directors is dictated by their personal interests rather than the corporate welfare.
Term
Dodge v. Ford Motor Company test to determine whether dividends were distributed in good faith?
Definition
test 1: if adequate corporation surplus is available, the directors cannot withhold dividends in bad faith. Duty of directors is to maximize profit; fiduciary duty to corporation. trumps duty to public.

Test 2: the directors duty is to the corporation and shareholders to maximize profits
a. if you do something nice you have to do with the purpose of saving money
Term
Unique circumstances create unique problems for corporations
Definition
1. transferability of ownership
2. Authority
3. dissolution
Term
Two principal duties directors owe to their corporation
Definition
The duty of care and the duty of loyalty
Term
what is the business judgment rule as it applies to directors?
Definition
holds that directors judgments can't be challenged unless they are tainted by fraud, a conflict of interest or illegality, or are uninformed or wholly irrational.


combine this with the directors duty of care --- rational directors judgments can't be attacked, unless those judgment were arrived at negligently or were tainted by fraud, conflict of interest of illegality
Term
what is the directors duty of care
Definition
it requires that directors exercise the degree of skill, diligence, and care that a reasonably prudent person would exercise in similar circumstances. Simply put, the duty of care typically means that directors cannot be negligent
Term
All directors have act in a duty of good faith defined:
Definition
1. to be honest
2. to not have a conflict of interest
3. not approve wrongful activity
Term
what constitutes a disregard of corporate duties and intentional violations?
Definition
Conscious disregard of corporate duties and intentional violations of positive law violate the directors duty of good faith
Term
What must one prove to show that a board violated the duty of care?
Definition
1. they did not act in good faith
2. did not exercise due care by informing themselves
3. act grossly unsound
4. duty of candor
Term
Who is the burden on?
Definition
The burden is on the challenger to overcome the Business Judgment Presumption
Term
Due Care Defined
Definition
1. a director must have informed basis standard that relates to the process of the board
Term
How is the board determined whether or not they informed themselves?
Definition
If they used a outside expert and relied on him even if he was an idiot, you are safe
2. inside: company does an internal analysis -- may be covered but tough because you have to prove that you did a thorough enough analysis
Term
What is the definition of failure to monitor?
Definition
General RUle: unlikely that a failure to monitor will rise to a level of breaching the duty of care

Duty to Monitor: only significant decisions and a cause for suspicion
Term
If prove liability, who is liable?
Definition
ALl directors who voted or reframed from exercising a vote against
Term
How are directors liable
Definition
joint and several liability
Term
Duty of Loyalty defined:
Definition
involves directors having some type of personal benefit
Term
Two ways duty of loyalty is violated
Definition
1. self dealing
2. usurpation of corporate opportunity
Term
Self dealing is okay when:
Definition
1. disclosed and approved by disinterested shareholders
2. disclosed and approved by disinterested directors
3. deal was intrinsicaly fair (no disclosure required)
Term
Intrinsically fair defined:
Definition
the terms and the price of the transaction were fair to the corporation
Term
When the fiduciary and the corporation are counterparties, the fiduciary plays two roles - what are the two roles?
Definition
She has a personal interest as a party to the transaction and she participates in the corporate decision to approve the transaction
Term
Examples of direct self interest:
Definition
1. sales and purchases of property, including the corporation's stock
2. loans to and from the corporation
3. the furnishing of services by nonmanagement director (such as when the corporation's outside lawyer, accountant, or investment banker sits on the board)
Term
Parent/Subsidiary Self-dealing rule:
Definition
parent corporations owe fiduciary duties to those subsidiary corporations who they dominate
Term
What is the corporate opportunity?
Definition
Usurpation of corporate opportunities: a director took a business deal ot make money that the corporation would have taken; if something is a corporate opportunity
Term
Proper standard for corporate opportunity -->
Definition
1. you must disclose the oppotunity to the entity AND
2. offer it to the entity
Term
what happens if the business accepts the business deal
Definition
If the entity takes it they have it
Term
Wnat happens if the business denies it?
Definition
No usurpation -- you are free to pursue it
Term
Usurp defined:
Definition
take illegally or by force
Term
what is a corporate opportunity?
Definition
two tests:
1. line of business test (narrower)
2. american law institute approach
Term
Line of business test:
Definition
1. the business opportunity must be in the line of business and a practical advantage to it
Term
how do you determine under the line of business test if the business opportunity is in the line of the business:
Definition
consider:
1. is it really in the line of business
2. interest & expectancy
Term
What is considered to be in the line of business under the corporate opportunity?
Definition
Is it economic irrelevant -- is it a opportunity regardless of whether you can afford it unless you are insolvent OR
2. economically able -- must be able to afford the oppotunity
Term
American Law Institute Approach to whether it is a corporate opportunity
Definition
focuses on proper process -- not so much on the opportunity -- focus on what you are supposed to do
Term
Is there a requirement for equitability between shareholders?
Definition
generally have to treat equally but if you cannot then you choose the common over the preferred but it must be disclosed
Term
What is the remedy for self dealing?
Definition
generally voidable at election of shareholders

generally the remedy is recission
Term
Rescission defined:
Definition
which returns parties to prior status prior to the self dealing of the director
Term
What is an interested director
Definition
An interested director is one with a conflict of interest involving the transaction in question eg. he owns a tract of land the corporation intends to buy
Term
Interlocking directorate define:
Definition
A case where two corporations share one (or more directors). A conflict of interest problem arises when the corporations contract with each other, since the common directors has/have a duty to serve the best interests of both corporations
Term
A deal that is considered _____ will be void. Only need one shareholder
Definition
WASTE
Term
Waste defined:
Definition
waste is always void, even if disclosed and approved -- still void if found to be waste. If tehre is waste -- only takes one shareholder to complain
Term
Waste Test:
Definition
was the contract itself waste; for it to be void form the get go -- was the exchange so one sided that no business person of ordinary sound judgment could conclude the corporation got adequate consideration from the other side

if corporation got any substantial consideration back, courts will not find waste
Term
Parent/Subsidiary Self-Dealing conflict
Definition
there is no conflict of interest where one corporation is wholly owned subsidiary of another but conflicts arise where the parent owns only a majority of the subsidiary's shares
Term
Rule re Parents/Subsidiary Self-dealing
Definition
court will look at transaction and ask if the parent was essentially overreaching, favoring itself over subsidiary minority shareholders of sub OR was this made in the ordinary course of business
Term
What test is applied if parent company was self dealing?
Definition
Intrinsic fairness test
Term
Intrinsic fairness test:
Definition
if the parent is benefiting at the expense of the subsidiary:
1. subject to careful judicial scrutiny that transactions must be "objectively" fair
2. merger: director on boards of both companies
Term
What test do you apply if parent is acting in the ordinary course of business?
Definition
Business judgment rule
Term
Usurpation of corporate opportunity:
Definition
a director took a business deal to make money that the corporation would have taken; if something is a corporate opportunity
Term
Line of business test in regards to usurping corporate opportunity
Definition
the deal is not strictly in the line of business, bt in the zone of something we would be interested in getting into
Term
Legal Restrictions for Making Dividends test:
Definition
1. earned surplus approach
2. nonimpairment of capital approach
3. earn surplus and nonimpairment of capital approach
4. solvency
Term
Earned surplus approach
Definition
8 states use:

1. can ONLY pay dividend out of earned surplus AND
2. must be solvent before and after paying dividend
Term
Non-impairment of capital approach
Definition
can pay out of capital surplus OR earned surplus but any dividend out of capital surplus must not impair capital o corporation
Term
earned surplus plus non impairment of capital approach
Definition
always make a dividend from earned surplus or capital surplus but must remain solvant
Term
Solvency
Definition
Only in Mass.

assets must exceed liabilities
Term
debt defined:
Definition
promise to pay a fix sum at a fixed time in the future and payment of interest
Term
debentures/bonds defined:
Definition
long term indebtedness of corporation requiring an unconditional promise to repay principal at a fixed future date + periodic payment of interest at a fixed rate
Term
debenture defined:
Definition
an unsecured corporation obligation
Term
bond defined:
Definition
a secured by a lien or mortgage on corporate property
Term
Exemptions to the 1933 Act Requirements:
Definition
exempts intrastate transactions from Fed disclosure and registration requirements
Term
requirements for 1933 act exemptions
Definition
1. must be incorporated in that state
2. the offer must be in that state
3. all the buyers must be resident in that state
Term
certain transactions are exempt from the federal requirements of IPO
Definition
1. no general advertising for offering
2. no resale of the security for 1 year without following federal requirements or exemption
3. issuer must take reasonable steps to ensure that the shares are not purchased with the intent to resale
Term
Issuer can take reasonable steps to ensure that the shares are not purchased for resale by:
Definition
1. inquiring of the purchaser--> are you buying to resell
2. disclose to the purchaser that hte security can not be resold without fed registration and disclosure requirements
3. put legend on shares that they are not registered and cannot be resold without federal requirements
Term
During any 12 month period, an issuer may, without proving any information sell securities for
Definition
1. less than 1 million dollars (no limit on number of investors or Sophistication)
2. More than 1million but less than 5 million for 12 months
a. no more than 35 non-accredited investors
3. More than 5 million
a. no more than 35 non-accredited investors and accredited investors
Term
Accredited investor defined:
Definition
banks, other business entities with assets over million, directors/officers of issuing corporation, individual investors with personal net worth over one million but have yearly income of 200,000 in last two years or combined income of spouses of 300,00 over last two years
Term
Non-Accredited investor defined:
Definition
janitors, old ladies, non-sophisticated
Term
Analysis for defective incorporation
Definition
1. is this a de jure corporation
2. is this a de facto corporation
3. is this corporation by estoppel
Term
How do mergers get approved?
Definition
1. board considers the merger
2. votes on it
3. if they approve it, they send to shareholders and shareholder approval
Term
General rule regarding mergers:
Definition
board and shareholder require super majority approval
Term
Big company absorbing small company merger requirements:
Definition
small company: both levels of approval (shareholder and directors)
large company: only need board approval
Term
Shore form merger - parent absorbs subsidiary
Definition
if parent owns 90 percent of the subsidiary, and want to merge the subsidiary into the parent, all you need is board approval by the two companies
Term
Subsidiary absorbs parents:
Definition
1. Parent (major change for parent)
- board of directs and shareholders must approve
2. subsidiary only needs board approval
Term
Agency defined:
Definition
Whenever one person performs services for, or acts on behalf of, someone else, the principles of agency define the relationships and the responsibilities of both participants and of persons who deal with them
Term
Most common agency relationship
Definition
employment relationship
Term
Duties of an agent (fiduciary):
Definition
1. Duty of loyalty
2. reasonable care
3. disclosure
4. duty to act within actual authority
5. duty of care
Term
Principles duties (not fiduciary duties)
Definition
1. must perform contractual commitments to the agent
2. must not unreasonably interfere with the agent's work
3. generally act fairly and in good faith towards the agent
4. must indemnify the agent for expenses incurred
Term
An Agent defined
Definition
the person action who is acting for another
Term
Principal defined
Definition
the person for whom the agent is acting for
Term
Agency formation
Definition
1. created by mutual consent of both principal and agent
2. each party has duties to each other and agent must act within parameters and scope of their duties
Term
Manifestation of an agency relationship:
Definition
a person manifests asset or intention through written or spoken words or other conduct

--no consideration required
Term
Actual Authority defined:
Definition
an agent acts with the actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal the agent reasonably believes, in accordance with the principals manifestations to the agent, that the principal wishes the agent to act
Term
Express authority defined:
Definition
oral or written statements actually made by the principal
Term
Implied authority defined:
Definition
1. inferred from the principals prior act
2. measured of implied actual authority
a. an agent reasonably believes what do you believe is that belief reasonable
3. incidental authority
1. authority to do incidental acts that are related to the transaction that is authorized
Term
Apparent agent authority:
Definition
1. arises from the manifestation of a principal to a third party that another person is authorized to act as an agent for the principal
2. authority flows from the principal to the third party
3. creation of apparent authority -- agent cannot create apparent authority himself
4. estoppel: person intentioanlly or carelessly caused the belief AND 3rd party is induced to make a detrimental change in its position OR had notice of the belief and did not take reasonable steps to notify 3rd party of the true facts
Term
Inherent authority:
Definition
1. the power of the agent which is derived soley from the agent relation and exists for the protection of persons harmed by or dealing with a servant or other agent
2. A general agent for a disclosed or partially disclosed principal has inherent authority to conduct if the other party reasonably believes that the agent is authorized to do them and has no notice that he is not so authorized
Term
Ratification -- even if the agent acts without authority, the principal will be liable to the third party is:
Definition
1. the agent purports to act on the principals behalf AND the principal affirmatively treats the agents act as authority OR the principal engages in conduct that is justifiable only if the principal is treating the agent's act as authorized
Term
Liability of the principal
Definition
Tort, Contract and Third Party
Term
Principal liability under tort
Definition
negligence of an agent: if agent was acting within the scope of his agency
intentional tort of agent: trying to further the goals of the principal
Term
Liability under contract for principal:
Definition
Liable under contract if agent had actual or apparent authority
Term
Liability to a third party as the principal:
Definition
1. disclosed or partially disclosed: third party is liable to the principal if the agent acted with authority so long as the principal is not excluded as a party by the form or terms of the contract
2. undisclosed: liable to the principal if the agent had authority, so long as the principal is not excluded by the form or terms of the contract, the existence of the principal is not fraudulently concealed
Term
Liability of the agent to a third party
Definition
contract: disclosed (the agent is not a party to the contract and is not liable to the third party)
Term
General Partnership defined:
Definition
UPA -- association of two or more persons to carry on as co-owners of a business for profit -- no need to file anything to form a partnership
Term
what kind of liability do partnerships have?
Definition
liable for obligations of the partnership (RUPA requires exhaustion of partnership assets first)
Term
Who manages a partnership
Definition
managed by the partners
Term
What is required to form a partnership
Definition
nothing is required, it can just happen. Can be oral or written (written is better)
Term
Transfer of partnership ownership
Definition
cannot be transferred unless everyone agrees
Term
What kind of rights does each partner have in a partnership?
Definition
They have equal rights in the management and conduct of the partnership business -- All partners therefore have actual authority and apparent authority
Term
A partner has the authority to bind the partnership for act that is:
Definition
UPA -- apparently carrying on in the usual way the business of the partnership
RUPA -- apparently carrying on in the ordinary course of the partnership business or business of the kind carried on by the partnership
Term
Joint and several liability defined
Definition
can sue anyone person and collect on the full amount
Term
Joint liability defined:
Definition
bring everyone in; they are all liable. Court hold them liable -- apply comparative fault
Term
Liability under UPA
Definition
Tort obligations: joint and several liability

Contract obligations: joint liablity
Term
Liabilit Under RUPA
Definition
Joint and several liability for contract and tort obligation
Term
Fiduciary duties of a partnership
Definition
duty of loyalty and duty of care
Term
Fiduciary duty under UPA
Definition
aids in establishing a broad fiduciary duty
Term
Fiduciary duty under RUPA
Definition
imposes an obligation of good faith and fair dealing when discharging duties and exercising rights
Term
Duty of loyalty
Definition
Partners may not take advantage for themselves at the expense of the partnership
Term
Usurping an opportunity in a partnership under duty of care
Definition
you personally take for yourself a business opportunity that the court will say rightly belongs to the entity
Term
What is an opportunity that has been usurped under the duty of loyalty
Definition
A business opportunity that is close enough to the scope of business of the partnership, so that you should have offered it to the entity rather than taking it for yourself. If it is in the zone of what you are currently doing
Term
What is the duty of care in a partnership:
Definition
partners owe a duty to exercise good business judgment and to use ordinary care and prudence in the operation of the business. They must discharge their actions in good faith and in the best interest of the corporation, exercising the care an ordinary person would use under similar circumstances
Term
Can the duty of care and duty of loyalty be amended under upa?
Definition
1. UPA: every partner must account to the partnership for any benefit and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct or liquidation of the partnership or from any use by him or its property
Term
can the duty of care and the duty of loyalty be amended under RUPA
Definition
The partnership agreement may not eliminate the duty of loyalty unless:
- the partnership agreement identifies specific types of categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable; or
-- all the partners or a number or percentage specified in the partnership agreement may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty
Term
Winding up of a partnership:
Definition
a process that entails selling all the assets of a business entity, paying off creditors distributing any remaining assets to the principals and then dissolving the business
Term
Untimely winding up period under UPA
Definition
if not wound up in a timely manner --non continuing partner has two options:
1. go to court and force liquidation & capital account -- get what you were owed when you left plus interest
2. act as a partner AND share in profits/loses until liquidation has been completed and capital account satisfied
a. share of profits/losses from time of dissolution until partnership pays AND
b. entitled to amount owed
Term
Untimely winding up period under RUPA
Definition
If the business is not would up in a timely manner -- non-continuing partner has only 1 option:

go to court and force liquidation and capital account -- get what you were owed when you left plus interest
Term
Shortswing sale:
Definition
brough on by shareholder to prevent inside trading from officers/directors/beneficial owner
Term
Who can bring a 16b suit
Definition
any existing shareholder can ring a suit on behalf of the corporation if the corporation opts not to sue; contemporaneous ownership not required
Term
How long is the 16b punishment available
Definition
six months
Term
How do you determine damages for a 16b violation?
Definition
taking pairs of the highest sale price and the lowest purchase price figuring out the difference and then multiplying by the same number of shares between the two and that gives you a dollar number. you stop when you get to Zero or a negative number. Then add up all the numbers together to get a total number of damages.
Term
What happens when a creditor has debt/obligations and is sold to another company
Definition
1. stock sale
2. asset sale
3. asset sale for successful liability
Term
What happens in a stock sale in successor liability
Definition
1. corporation A stays in tact --> stock for money --> then (typically) both corporations A and B merge
Term
Asset sale defined:
Definition
Corp. A still has stock and money but NO assets, Corp b now owns all assets of corp A
Term
Asset Sale under Successor Liability
Definition
successor corporation is NOT liable for the obligations/liability arising from corporation asset sale
Term
excepts to the asset sale under successor liability
Definition
1. purchaser "expressly" or "impliedly" accepts liability
2. if transactions amount to a consolidation merger = liable
3. If the transaction is fraudulent OR Not in good faith OR without sufficient consideration
4. Successor corporation B is merely a continuation or reincarnation of the form corporation -- Do we have a continuation of the enterprise?
5. is there a continuity of purpose or enterprise
Term
what is considered a continuation of the enterprise?
Definition
1. same directors
2. same officers
3. same employees
4. same customers
Term
What is considered to be the continuity of purpose or enterprise?
Definition
(minority rule)
1. do we continually of purpose OR enterprise
Term
What is the minority view on the continuing of purpose or enterprise?
Definition
1. have different group of shareholders or officers but same business
a. same products
b. same customers
c. same employees
d. same plants
e. same people in charge
Term
To distinguish continuation v. continuity of enterprise
Definition
Continuation looks at people in chge (are in the same as last corporation)

continuity of enterprise looks at purpose of new corporation (is it the same as last business)
Term
Conversion Rights of preferred shareholders
Definition
1. Preferred shares may be made convertible at the option of the holder into common shares at a fixed ration specified in the articles of incorporation
Term
What does a conversion privilege allow?
Definition
Allows the holders of preferred shares to obtain a part of the long term appreciation of the corporations assets if the holders are willing to give up their preferred rights by converting their shares into common shares
Term
Forced conversion for preferred shareholders
Definition
when shares are called redemption at a time when the market value of the shares obtainable on conversion exceed the redemption price
Term
Protective provisions for preferred shares
Definition
Preferred shares also have certain financial protections

1. sinking fund provisions: requires the corporation to set aside a certain amount each year to redeem a specified portion of the preferred stock issue
2. convertible preferred shares usually contain elaborate provision protecting the conversion privilege from dilution in case of share dividends, share splits or the issuance of additional common shares
Term
Participating Preferred define
Definition
participating preferred: entitled to the specified dividend and after the common shares receive a specified amount, they share with the common in additional distributions on some predetermined basis
-combine some of the features of the common and preferred
-someties referred to as a 'class A common" or by a similar designation that shows that their right to participate is open-ended and therefore they have one of the major attributes of common shares
Term
Non-Participating Preferred Shares
Definition
entitled to the specified dividend payment and the specified liquidation preference and another more no matter how profitable corporation
Term
Redemption rights of preferred shares
Definition
may be made redeemable at the option of the corporation, usually at a price fixed by the articles of incorporation at the time the class of preferred shares was created
Term
What happens when a corporation elects to exercise the redemption privilege?
Definition
it calls for stock redemption

1. may be exercised only after a period of time has elapsed
2. redemption price is usually set somewhat in excess of the amount of the share's liquidation preference
Term
Authorized stock defined:
Definition
number of shares a corporation may issue included in articles

can be approved by board, stock approval and recorder
Term
What is stock referred to once it is issued?
Definition
Outstanding stock
Term
What happens when a shareholder purchases stock for what the decided amount is ->
Definition
General rule: shareholder is personally liable to corporations creditors to the extent to the difference between the par value & amount actually paid for the stock shares
Term
Is watered stock a problem for non-par articles?
Definition
no watered problem but when stock is issued without par, shareholders are liable to the corporation or its creditors only to the extent they have not paid
Term
Insiders defined:
Definition
insiders who obtain material, nonpublic information because of their corporate position -- directors, officers, employees and controlling shareholders -- have the clearest 10b-5 duty not to trade in the securities of their company
Term
Constructive (temporary) insiders defined:
Definition
constructive insiders who are retained temporarily by the company in whose securities they trade -- such as accountants, lawyers and investment bankers -- are viewed as having the same 10b-5 duties as corporate insiders. Lower courts have also inferred status as constructive insider in family settings where there are expectations of confidentiality
Term
Outsiders (with duty to source of information) defined:
Definition
outsiders with no relation to the company is whose securities they trade also have an abstain-or-disclose duty when aware of material, nonpublic information obtained in a relationship or trust and confidence with the company (or source) of that information
Term
Tippers defined:
Definition
Those with a confidentiality duty -- whether an insdier or an outside- who knowingly make improper tips are liable as participants in illegal insider trading
Term
A tipper tip is improper if:
Definition
the tipper expects the tippee will trade and anticipates reciprocal benefits -- such as wehn she sells the tip, gives it ot family or friends or expects the tippee to return the favor.
Term
Tippees defined
Definition
Those without a confidentiality duy inherit a 10b-5 abstain or disclose duty if they knowingly trade on improper tips. A tippee is liable for trading after obtaining material, nonpublic information that he knows came from a person who breached a confidentiality duty - whether an insider or n outside.
Term
Insider trading defined
Definition
a person knows something because they are inside the company, and they made money off that information off that information by selling or buying; if the other party has the knowledge as well, then there is NO insider trading
Term
Duty to abstain or disclose (old rule)
Definition
any one in possession of material, nonpublic information must abstain from trading or disclose to trading public
Term
duty to abstain or disclose (modern rule)
Definition
any person in the possession of material no public information or abstain from trading if the person obtains information in relation of trust and confidence
Term
Misappropriate theory defined
Definition
10b-5 liability arises when a person trades on confidential information in breach of a duty owed to the source of the information even if the source is a complete stranger to the traded securities
Term
When is there insider trading liability?
Definition
when there is a breach of trust and confidence

thus: a person who gains access to material, nonpublic information by other wrongful means -- such as outright theft -- would seemingly not fact 10b-5 sanctions. Moreover, a fiduciary who discloses his trading intentions or receives permission to trade from the information source would escape 10b-5 liability
Term
Remedies for insider trading
Definition
1. civil liability to contemporaneous traders
2. civil recovery by defrauded source of confidential information
3. sec enforcement action
4. civil penalties
5. watchdog penalties
6. bounty rewards
7. criminal sanctions
Term
What is the difference between 16b and 10b-5?
Definition
Section 16b is broader and narrower than the insider trading prohibitions of Rule 10b-5. Limited to trading in securities of register company during a six month window, it is narrower than Rule 10b-5 -- which applies to all companies and regardless of holding periods
Term
Limited Partnership defined:
Definition
Natural general partner and natural limited partner
Term
General partner in a limited partnership
Definition
1. run the day-to-day operations
2. agents of partnership
3. unlimited liability (tort and contract)
Term
Limited Partners in Limited partnership
Definition
1. used as passive investment vehicles --> money
2. limited liability
3. only liable to extent of capital investment in partnership (note if they participate in the operations o the company they lose limited liability)
4. do not control in operations
5. limited control over managment
Term
3 limits for limited partners
Definition
1. limited in liability (good)
2. limited in authority
3. limited in their voice
Term
Formation of a limited partnership
Definition
1. must file with secretary of state
2. mus name the entity
3. must have a designator
4. filing will designate who the general partner is
5. and the entity comes into being when the paperwork is filed and like a corporation, delayed commencement. Bu mainly comes in o being upon filing
Term
taxation of a limited partnership
Definition
1. you can be taxed if you check the box for it. ny of these other entities can choose to be taxes as a corporation, but almost all the time they wont
Term
what happens if you start business before you beomce a limited partner
Definition
you are not liable if you withdraw upon learning OR you are not liable if you cause a certificate of limited partnership post-case. they will essentially backdate your limited partnership for that purpose
Term
Rights of a limited partner
Definition
to inspect the books and to vote to specially authority to vote on almost anything
Term
Limited liability partnership is
Definition
like a general partnership
Term
who gets the benefit of limited liability?
Definition
all partners but only sort of limiting it. if you have a contract dispute you are liable a tort dispute not liable unless you committed the tort
Term
How many members in a limited liability partnership
Definition
you must have 2 or more members because it is a partnership
Term
Limited liability limited partnership
Definition
more less the limited partnership, except the general partners are shielded from tort liability (but still liable in contract)
Term
Limited liability company defined
Definition
1. provides infinite flexibility as structural form
2. limited liability for all owners against both contract and tort
3. not taxed as an entity, there is flow through taxation but you can check the box and make it taxable as with any entity
4. can't publicly trade it. Why? because we automaticaly tax any publicly traded companies like C corporation
Term
what are the two setups for the limited liability corporation
Definition
1. member managed LLCS
2. manager managed (partnership statute)
Term
Member managed LLCS defined
Definition
run by the members. If you start with a corporate structure for your statute. we have owenrs who appointed a bod and who appoint officers. You are goingot have centralized management
Term
Manager Managed (partnership statute) defined:
Definition
members do not have authority to bind. They will be like shareholders in a corporation
Term
How to analyze a LLC problem
Definition
1. wht does OP agreement say
2. what is rule for partnership
3. what is rule for corporation
4. if same, use rule
5. if different look at what is LLC most like for that issue
Term
LLC more like a corporation
Definition
1. contract
2. ownership of property
3. manager managed authority
Term
LLC more like partnership
Definition
1. financial rights
2. managment
3. member managed authority
Term
formation of an llc
Definition
must file certificate of organization with secretary of state
Term
Operating agreement
Definition
operating agreement will trump the articles if there is a conflict
Term
What is the difference between a limited partnership and a limited liability partnership
Definition
A limited partnership is managed by general partners who are personally liable for all debts and obligations of the partnership. Limited partners are merely investors in a limited partnership's business and do not have the right to participate in management of the business.

LLPs offer all partner management rights and limit partners vicarious liability for the negligence and malfeasance of their partners.
Term
How are business profits and losses of a partnership taxed?
Definition
pass through the partnership and are taxed as the personal income of the partners. The partnership itself is not taxed on its profits and losses
Term
Limited liability company:
Definition
an unincorporated entity that offers its members management rights, limited personal liability and the pass-through taxation of partnerships
Term
what are the perks to a corporation over a limited liability partnership
Definition
corporations offer continuity of life, free transferability of interests, limited personal liability and centralization of management.
Term
What kind of taxation do corporations have?
Definition
They have double taxation with the exception of an S corporation
Term
C Corporation defined:
Definition
basic business corporation owned by investors and managed by an elected board of directors and appointed officers
Term
Close corporation defined:
Definition
small corporation whose shareholders often participate in business management. Minimal formalities are required for formaiton of a close corporation however ownership is not freely transferable
Term
3 main reasons why the corporate veil may be pierced
Definition
1. failure to comply with necessary corporate formalities
2. commingling of personal and corporate assets and
3. inadequate capitalization
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