Term
| Normative perspective on law |
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Definition
| expressing value judgements or prescriptions as contrasted w stating facts |
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Term
| Descriptive perspective on law |
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Definition
| characterized by or containing description (a representation in words of the natire and characteristics of a thing) |
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Term
| The basic legal forms of business organizations |
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Definition
| Sole proprietership, partnership, corporation, and limited liability company |
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Term
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Definition
| not a seperate entity; the individual and the business are one and the same for tax and legal liabiliy purposes |
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Term
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Definition
General partnership- business consisting of 2+ owners, but treated like a sole propr. for tax AND legal liability purposes (joint and several liability)
Limited partnership- same as above but like a corporation for liability purposes |
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Term
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Definition
the corp. is a seperate legal entity; the owners (stockholders) are protected from personal liability, but the corporation must pay taxes (i.e. double taxation issues)
"s-corporation"- legal liability protection but partnership tax status
"non-profit corp."- exempt from taxes and donations are deductible |
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Term
| limited liability company (llc) |
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Definition
| provides owners protection from liability like a corporation, but treated like a partnership for federal tax purposes |
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Term
| what two main factors must be considered when advising a client about which type of company to create |
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Definition
1. tax treatment
2. liability exposure |
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Term
| core questions to ask a client: |
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Definition
1. who will own business?
2. who will manage it?
3. who will reap any profit?
4. who will bear the risk of any loss, and
5.who will pay income tax on any business profit |
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Term
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Definition
| an act beyond the company's scope of authority |
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Term
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Definition
| an act taken within a corporations scope of authority |
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Term
| certificate of corporation |
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Definition
| the basic paperwork needed to form a corporation |
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Term
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Definition
simplest business structure, no legal docs, nothing to file
-default business structure for bus w one owner, unless something filed to affirmatively choose a diff struct.
-no legal seperation of the business from the person who owns/ manages it. Sole proprieter solely liable
-pro: easy to establish/ con: all of sole proprietor's personal assets are at risk |
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Term
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Definition
| created by manifestations from the P to the A that A reasonably believes creates authority |
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Term
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Definition
| P expressly gave A the power to undertake the act on her behalf |
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Term
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Definition
| A has authority to do what is reasonably necessary to get an assigned task done. even if P did not spell out every constituant act in detail |
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Term
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Definition
created by manifestations by P to a TP. the manifestation must be (1) attributable to P, 2)must get to TP and 3) must lead TP reasonably to conclude that A is an agent of P.
-***P does not actually authorize A to act on her behalf, may have privately forbidden A to act; P is bound just the same per apparent authority
-The P must make the manifestation to the third party, the agent cannot just present themselves as an agent |
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Term
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Definition
| the power of A to ind P to deal with TP. Arises from agency relationship itself. the power to do so just goes w the territory of the agency created (e.g. corporate officers) |
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Term
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Definition
| P can be vicariously liable to a TP for the negligence of A if P and A have a "master and servent" relationship |
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Term
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Definition
a subset in the genre of P and A relationships:
-master has the right to control the details of how the servant does the job
-this day to day control goes beyond the basic control inherent in all agency relat.
-master is liable for torts of the servant only if the tort is committed within the scop of the employment
-but the master has no liablity for torts committed by the employee during a "frolic" |
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Term
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Definition
someone hired to do a job, but not told specifically how to do it
-her torts are not attributable to the person who hires her |
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Term
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Definition
| servants, at least for Business Associations class |
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Term
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Definition
| business assoc of two or more persons to carry on as a business for profit |
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Term
| aggregate v. Entity theory |
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Definition
UPA embodied an "aggregate theory" of partnership: partnership is an aggregate of its partners
-RUPA later adopted the "entity theory" of partership: a partenrship is considerd an entity distinct from its partners: seperate legal person |
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Term
| For tax purposes, the partership is viewed as: |
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Definition
an aggregate of its parters
-there is not a seperate layer of tax imposed on the partership: no "double taxation"
-the tax repurcussins if the parterships activiities are reported by the partners on their own returns. "flow through" taxation |
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Term
| For liability purposes, the partnership is viewed as an... |
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Definition
entity
-the partnership can be sued for contracts entered by its agents and for the torts committed by its agents
-however the parters are jointly and severally liable for all obligations of the partership |
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Term
| For this class RUPA or UPA |
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Definition
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Term
| The partnership agreement is the primary legal authority to: |
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Definition
govern parters' relationship
-partership statutes provide fall back provisions when the partership agreement does not provide a rule on a given issue
-common law fills the gaps when neither a partnership agreement, nor the relevant statute provides a rule on a given issue |
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Term
| because the partership agreement trumps other law... |
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Definition
| the partership structure provides great flexibility for its owners |
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Term
| a partership is the defult business structure... |
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Definition
when there is more than one owner and no step is taken to affirmatively choose a different business structure
-nothing has to be filed to create a partnership
-a written partnership agreement is not REQUIRED, but is extremely important in the real world |
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Term
"extraordinary" course of business
ROPA 401J |
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Definition
| narrow: high level modifications to the partership |
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Term
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Definition
RUPA 401(i)
-all existing partners must approve a new partner
-RUPA 306(b)-default rule, a new partner is not personally liable for all of the partnerships existing debt |
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Term
| dissassociation/ withdrawal of a partnership (not dissolution- something different) |
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Definition
-RUPA 602 any partner has the power to dissasociate/ withdraw at any time
-the dissassociation is WRONGFUL if it:
a. violates the partnership agreement
b.occurs before the expiration of the partership term
c. or satisfies other circumstances in RUPA 602(b)
-If a dissassociation withdrawal is wrongful, the withdrawing partner could be paid
-less than otherwise for her partnership interst
-later in time
-unless the partnership agreement says otherwise, a partner in a "partnership at will" can quit at any time without it being wrongful |
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Term
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Definition
| partnership with neither a specified end date nor a specific undertaking to complete |
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Term
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Definition
| the commencement of the winding up process. first phase of process |
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Term
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Definition
| i nvolves selling partnership assets, paying partnership debts, distributing the net balance (if any) to partners. second phase of process |
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Term
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Definition
| occurs only when the winding up of the partnership is completed. final step of process |
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Term
| partners share responsibility for partnership... |
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Definition
losses(if any).
-each partners share of losses is determined by reference to his partnership account |
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Term
| a partners partnership account is... |
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Definition
...an accounting device to track how muc a partner contributes to and takes out of the partnership
-add the partner's investment in money or property (but not labor contributed)
-minus and distributions to the partner
-add an equal share of whatever value remains in the partnership (after paying creditors and each partners investment) (wont have to solve one of these on the exam |
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Term
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Definition
if a partner's balance in her partnership account is POSITIVE. the partnership must pay that partner the amount of that positive balance
-if a partner's balance in her partnership account is NEGATIVE, the partner must contribute additional funds to the partnership to restore the negative balance |
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Term
| see p5 in blue spiral, pink handwritting) for partnership account problem solved from p. 96. see this for simple formula |
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Definition
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Term
| liability of shareholders, GR |
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Definition
| GR shareholders are not personally resp. for corp liability |
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Term
| liability of shareholder, exception |
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Definition
Piercing the corporate veil exception
-judicially created excdeption
-the rule is articulated differently by different courts
-the standard requires fact intensive inquiry
-hard to predict outcomes
-applies predominantly to close corporations and corporate groups, not public corps |
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Term
| corporations as shareholders in other corporations |
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Definition
Parent v. subsidiary corporations
-a subsidiary is a corporation whose stock is owned by another corp.
-a parent is the corp. who owns either all the stock or a majority of the stock of another corp. |
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Term
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Definition
| note that there are not alot of hard rules so it is hard to articulate the law here, ambiguous. Analyze as many factors as relevant on exam |
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Term
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Definition
the owners of the corp. have little control
-in exchange for limited liability, theor role is relatively passive
-they elect remove the directors
-they can decide whether and when to sell their stock |
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Term
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Definition
-appoints the CEO and other corporate officers
-determines general corporate policies
-oversees the work of the officers
-in a general way manages the corporation or supervises the management of ots affairs |
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Term
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Definition
-are agents of the corporation and can legally bind the corporation
-hire and monitor lower level employees
-make day to day business decisions |
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Term
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Definition
| have no formal role in the traditional view of corporate decision making |
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Term
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Definition
3 major avenues for achieving a PCV and getting the exception to the GR
1. fraud
2. undercapitalization
3. alter-ego/ instrumentality theory-must have "substantial" ownership
-dont need all three, bc separate avenues |
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Term
| In tort actions against corporations, a plaintiff needs to show that the corporation is...(from In Re Silicone Gel breast implants case, p. 138) |
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Definition
| ...an instrument of the stockholder, but there is no burden to prove fraud. |
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Term
Straight Voting:
shareholder voting for directors |
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Definition
-there is a seperate election for each seat on the board
-each shareholder can cast her number of shares in any way she wants in wach of these sep. elections
-REsult: a majority shareholder will be able to elect every director |
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Term
cummulative voting:
Shareholder voting for directors |
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Definition
-directors are not elected by seat
-there is one at-large election, in which the shareholders cast votes and the top vote-getters are elected to the BoD
-shareholders are able to "cumulate" theior votes, i.e. each can multiply the number of shares she owns times the number of directors to be elected
-RESULT: minority shareholders may still have a voice in the composition of the BoD
-applies only to voting to elect remove directors, not other matters
-depending on the state, some corporations may be able to opt not to use cumulative voting |
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Term
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Definition
| cumulative voting is not the default |
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Term
| Shareholder voting beyond election/ removal of directors |
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Definition
Shareholder approval is also required for "fundamental corporate changes"-
-amendment of the articles of incorporation
-dissolution
-merger w another corp.
-sale of all or substantially all of the assets of the corporation |
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Term
| logistics of shareholder voting |
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Definition
-annual meetings v. special meetings
-omly record owners have the legal right to vote at meetings
-shareholders do not have to attend a meeting to vote if able to vote by proxy
-although a voting agreeemnet among DIRECTORS is not generally enforceable. courts may uphold voting agreements among SHAREHOLDERS |
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Term
| cumulative voting formula |
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Definition
[(NxS) / (D+1)]+ 1
N: number of directors the shareholder wants to elect
S: Total number of shares voting
D: total number of directors to be chosen at the election |
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Term
| three main legal responsibilities of Directors |
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Definition
1. duty of care
2. duty of loyalty
3. requirement to act in good faith |
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Term
| officers are held to "__" standards of conduct as imposed upon directors under MCBA sec. 8.30.- from official comment to MBCA sec. 8.42 |
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Definition
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Term
| MBCA sec. 8.30(b) codifies the rule- |
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Definition
-duty applies "when becoming informed in connection with their decision-making function or devoting attention to their oversight function"
-standard is "the care that a person in a like position would reasonably believe... |
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Term
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Definition
-judicially created rule used to evaluate directors' standards of conduct
-shlensky v. wrigley: the judgement if the directors of corporations enjoys the benefit of the presumption that it was formed in good faith and was designated to promote the best interest of the corporation they serve
-Smith v. Van Gorkom: there is a presumption that in making a business decision, the directors acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company
-a P attacking a board decisioin must rebutt the presumption |
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Term
| official comment to MBCA 8.31 recognizes the deeply rooted judicial rule: |
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Definition
there is a presumption that "absent self dealing or other breach of the duty of loyalty, directors decision ,aking satisfies the applicable legal requirements."
-a P has the "burden of overcoming that presumption of regularity. |
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Term
| consequences of derivitive suit |
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Definition
If a shareholder loses:
-the Ds are permitted per some statutes to recover their atty's fees if the court finds the suit was "without reasonable cause"
-the loss is res judicada for other shareholders
IF shareholder wins:
-any recovery goes to the corporation
-but shareholders typically can recover costs and atty's fees
Even if they lose, directors may not pay anything:
-corp. can limit eliminate director liability for brech of the duty of care MBCA 2.02(b)(4)
-indemnification from the corporation is required in some contexts and is permissible in others. MCBA 8.53, 8.51
-corporations often take out "D& O" insurance policies. MBCA 8.57 |
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Term
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Definition
i.e. money
-can come from debt or equity |
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Term
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Definition
physical assets of the corporation
-can be owned or leased
-e.g. machines, factories, offices |
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Term
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Definition
i.e. employees
-obviously not owned by the corp. but invaluable in contributing to the generation of revnues |
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Term
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Definition
money invested in exchange for stock
-investors
-have less protections than lenders--more risk of loss
-but possibility of greater returns |
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Term
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Definition
Must be paid back by the borrower
1. lenders
-have more protections than investors--less risk of loss, modest returns
2. borrowing corporations
-suffer a drop in cash flow (due to the interest expense)
-but return on equity (annual cash flow, equity investment) is higher
-bottom line: debt can help a corporation look like a strong investment in good times, but can make it difficult for a corporation to survive in downturns
3. tax impact:
-corporations can deduct interest pahyments
-lenders must include interest payments in income
-bottom line: there is a tax incentive for corp. to use debt in their capital structure |
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Term
| Rate of Return on Equity, formula |
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Definition
| Annual Cash flow divided by equity investment |
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Term
| rate of return on total capital, formula: |
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Definition
| annual cash flow divided by amount of total capital (i.e. equity v. debt) |
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Term
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Definition
| gross profit minus expenses |
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Term
| 3 ways owners of a corp. make money |
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Definition
1. recieving all or part of the money that the corporation eans via dividends
2. selling her stock at a profit
3. working for salary |
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Term
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Definition
| -particularly important in close corporations, less important in public |
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Term
| salaries, tax implications |
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Definition
CORPORATIONS
-can deduct the cost of salaries
-but salary must be reasonable
-$1Mil limit for certain executives in public corporations
-cannot deduct dividends
recipients must include both in income
-bottom line: there is a tax incentive to characterize payments as salary
Bottom line: no corporate law limitations on salary, but tax law restrictions to deductibility |
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Term
| buying and selling stock at a profit |
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Definition
statute: sec. 10b of the 1934 act
-The Securities Exhange Act of 1934
-est. the SEC and governs secondary trading of securities
Sec. 10b addresses "manipulative and deceptive devices" |
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Term
| Buying and selling stock for a profit, admninistrative rule |
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Definition
Rule 10b-5
-pursuant to its authority under the 1934 Act, the SEC promulgated Rule 10b-5: "to make an untrue statement of material fact...or to omit to state a material fact necessary"
-such administrative rules do not have the same legal weight as a statute enacted by tge legislative branch of govt |
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Term
| Statute: sec. 10(b) of the 1934 Act |
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Definition
| addresses "manipulative and deceptive devices" |
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Term
| traditional/ classic theory of insider trading |
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Definition
-violation of sec. 10(b) and rule 10b-5 when a corporate insider trades in the securities of his corporation on the basis of material, non public information
-this is a "deceptive device" due to the relationship of trust and confidence between the corporations shareholders and the insiders
-insiders have a duty to disclose or abstain from trading on the corporations stock |
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Term
| misappropriation theory of insider trading |
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Definition
| violation of sec. 10(b) and RUles 10b-5 when a person misappropriates confidetial information for securities trading purposes in breach of a duty owed to the source of the information |
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Term
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Definition
requires certain disclosures to be filed:
-directors, officers, principal stockholdres (persons who are directly or indirectly the beneficial stockholdres of >10% |
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Term
| sec. 16(b) permits a corporation to... |
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Definition
...recover profits on certain stock transactions:
-for the purpose of preventing the unfair use of information by insiders
-"any purchase and sale" or any sale and purchase within any period of less than six months
-must be a director, officer or principal stockholder at the time of both the purchase and the sale triggering a profit
-a profit is achieved when sale price is > purchase price |
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Term
| limited partnerships, overview |
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Definition
-an attempt to meld the most favorable traits of previous business structures: favorable flow through tax treatment of partnerships; the limited liability of owners from the corporate form
-of waning importance due to the ascendancy of the LLC
-limited parterships have limited partners and must have at least one general partenr
--the general partenr has the same rights and duties as partenrs in a general partnership
-but of key significance: the limited partner is not personally liable for the debts of the LP
- an LP is an entity; is subjct to federal securities laws (10b-5 |
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Term
| documentation of limited partnership |
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Definition
-a limited partnership does not come into existance until there has been a public filing
-a LP agreement is not required by RULPA; is of critical practical importance to define roles, rights and responsibilities of the partenrs and governance rules |
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Term
| making money in a limited partership |
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Definition
salary from employment with the limited partership (contract law)
-sharing in distributions of the earnings of the business (contract law)
-selling the ownership interest for more than the or\iginal cost: RULPA limits third party buyers of a limited partenrship interest to distribution rights; unless the LP agreement provides otherwise, a third party buyer cannot acquire... |
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Term
| the legal vulnerability of the General Partner: |
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Definition
-a GP has liability exposure to: third parties for liabilities to the imited partership; and to the limited partnershiip and limited parters for breach of fiduciary duties
-the limited partership agreement can alter a general parters liabilities to the limited partnership and the other partners, but cannot alter rights to third parties. RULPA 403b
-the GP of a LP is rarely a human being: a corp. is usually designated; the limited partners may be shareholders of the corporate general partner
-traditionally, limited partners had to be careful to not exercise "control" of the business for fear of being deemed to be general partners: RULPA 303 provides safe harbors |
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Term
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Definition
Limited Liability COMPANY! Company!
-Like limited partnerships, LLCs meld the favorable tax treatment of partnerships with the limited liability benefits of corporations
-Most new businesses today are formed as LLC |
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Term
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Definition
an LLC is a legal entity, but it is an open question whether interests in LLCs are subject to securities laws
-Owners of an LLC are generally refered to as "members" DO NOT SAY THE WORD SHAREHOLDER w LLC (all members enjoy limited liability from the business' debts
-Per ULLCA sec. 202(b), the LLC does not exist until the "articles of organization" are filed
-the operating agreement of an LLC is criticalto define the rules governing the LLC
-State LLC laws are default rules that govern if and only if there is no contrary provision in the operating agreement |
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Term
| 2 types of management structures: |
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Definition
member managed companies
manager managed company
*hot legal topics: 1. piercing the veil of the LLC to hold members liable for LLC liabilities; 2) members selling interests to outsiders & compelling the LLC to purchase a member's interest |
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Term
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Definition
-decision making authority similar to a general partnership
-operating agreement will determine how many votes each member gets, how to determine which matters will require more than a majority vote
-,members owe the fiduciary duties |
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Term
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Definition
-decision making autority similar to a corporation
-operating agreement will determine how members elect and remove managers, which issues require a member vote
-managers owe the company fiduciary duties
-members generally do not owe fiduciary duties to the companyb |
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