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Business Organizations
w/Romano
100
Law
Graduate
05/02/2012

Additional Law Flashcards

 


 

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Term
"de jure" corporation
Definition
Corp. that has compiled strictly with all of the mandatory provisions for incorporation.
Term
"de facto" corporation (and reqs)
Definition
Corp. that has not complied with all mandatory requirements to obtain de jure status, but with enough to be given corporate status vis-a-vis third parties (though not against the state)

a) Incorporators acted in good faith; and
b) Incorporators had the legal right to incorporate; and
c) Entity acted like a corporation.
Term
corporation by estoppel (and reqs)
Definition
doctrine that when one has benefitted from dealing with what he thought was a corp. and none of his substantial rights were affected, one cannot use the fact that it turns out they weren't a corp. to escape obligations to it. (Southern Gulf Marine)

If third-party:
a) thought it was a corporation, or
b) would earn a windfall if allowed to argue the entity is not a corporation (e.g., Camcraft in Southern Gulf Marine).
Reliance and windfall

Applies to contract but not tort
Term
4 main characteristics that distinguish corps. from other organizational entities
Definition
free transferability of shares, perpetual life, limited liability, and centralized management
Term
situations where corporate veil may be pierced (3)
Definition
1. fraud or unjustice (to outside parties, such as creditors)
2. disregard of corporate requirements (where the shareholders do not maintain the corporation as a separate entity but use it for personal purposes)
3. undercapitalization (where the corp. is undercapitalized given the liabilities, desk, and risk it reasonably could be expected to incur
Term
equitable subordination
Definition
In the context of a bankrupt entity, someone who is both a creditor and an equity holder will have his credit claims subordinated to those who are only debt holders.
Term
4 main distinguishing characteristics of debt as opposed to equity
Definition
1) fixed claim
2) no control over corp (subject to restrictions imposed by particular covenants)
3) insolvency right (may force a firm into bankruptcy and demand payment if firm doesn't pay in time)
4) priority in claim (in case of bankruptcy or liquidation)
Term
debentures
Definition
debt not secured by property (cf. mortgage bonds)
Term
Systematic risk
Definition
captures the reaction of individual stocks in relation to general market movements
Term
beta
Definition
essentially a numerical description of systematic risk. comparison between the movements of an individual stock or portfolio and the movements of the market as a whole
Term
unsystematic risk
Definition
is the variability in stock prices that results from factors peculiar to the particular firm. These are the types of risks that we can diversify away by owning stock in several different companies
Term
CAPM
Definition
Capital Asset Pricing Model. Hypothesis that the only sort of risk that should command a premium on the stock market is systematic risk, since it cannot be diversified away.
Term
efficient market
Definition
one in which stock prices fully reflect available information
Term
efficient market hypothesis
Definition
predicts that the new value should be reflected in the share price immediately
Term
weak form of capital market efficiency
Definition
A capital market is said to be weakly efficient if it fully incorporates information on past stock prices. We expect all markets to be weak form efficient because this information is readily available and easy to process.
Term
semistrong form of capital market efficiency
Definition
A market is semistrong when the price reflects all of the publically available information out there. This type of efficiency implies more market sophistication.
Term
strong form of capital market efficiency
Definition
A market is strong form efficient if its prices include all information on the firm, both public and private—essentially, any and all information that is pertinent to the value of the firm that is known by at least one investor. A believer in strong form efficiency would say that insider trading couldn’t lead to any special gains.
Term
arbitrage
Definition
Occurs when buying and selling the same security simultaneously may produce a profit.
Term
value stocks
Definition
stocks with high book-value-to-price and/or earnings-to-price ratios
Term
growth stocks
Definition
stocks with low book-value-to-price and/or earnings-to-price ratios
Term
venture capital (VC) firms
Definition
finance young, new firms
Term
private equity (PE) firms
Definition
(AKA LBO - leveraged buyout firm) buys out public companies and take them private (with the goal of trying to improve the business)
Term
“growth” equity funds
Definition
companies that are funded at a later stage. They’ve been operating for some time but need capital to grow and expand
Term
distressed fund investors
Definition
subset of PE firm that focuses on growth equity funds
Term
General structure of VC fund
Definition
limited partnership where the general partners are the venture capitalists and the limited partners are investors (typically an LLC)
Term
yield
Definition
the rate of return that will be earned by a lender if the full amount of interest and principal that the borrower has agreed to pay are paid on schedule. So for a $1,000 loan where the borrower has to pay $100 interest per year and $1,000 back at the end of 10 years, the yield is 10%
Term
volatility risk
Definition
AKA variance. degree of dispersion or variation of possible outcomes
Term
two main types of "risk"
Definition
1. volatility risk (variance)
2. default risk
Term
maturity date
Definition
fixed date at which the firm must pay the principal sum of a bond debenture, or note
Term
bond vs. debenture
Definition
bond = long-term obligation secured by a mortgage on some property of the issuer
debenture = long-term unsecured obligation

"bond" often used to mean both types though
Term
face value
Definition
AKA par value. the amount that must be paid on maturity of the bond.
Term
demand requirement
Definition
plaintiff who wishes to commence a derivative action must either first make a demand on the board of directors to bring the action or demonstrate that demand was excused
Term
what most plaintiffs do wrt to the demand requirement (and why)
Definition
usually argue was excused b/c, for instance, in Del. the making of demand concedes that a BJR test applies to the board's decision to reject the demand. Also plaintiff is not allowed discovery.
Term
How plaintiff gets demand excused
Definition
Alleges that a majority of the board personally benefited from the challenged transaction or was otherwise subject to a legally disabling conflict of interest. Or else that the decision was corrupt or reckless.
Term
How Del.'s demand rule compares to others
Definition
More strict
Term
special litigation committees
Definition
can be appointed if a majority of the board is implicated in a suit (and thus demand is excused) to thoroughly investigate the claims and decide whether to continue or dismiss. Made up of remaining disinterested directors and/or newly appointed (by an expansion of the board) disinterested directors, who team up with outside counsel. Invariably decide to dismiss the suit.
Term
Standard of review of SLC's decision to dismiss a suit
Definition
Differs b/w courts. NY applies BJR and doesn't review substance, while NC reviews the merits of the substance. Del. leaves it in the discretion of the trial court whether or not to engage in substantive review of the special committee's justifications for dismissal.
Term
popular justification SLC might give for dismissal
Definition
expenses of the action would equal or exceed recovery
Term
reporting company
Definition
Under '34 Act, a corp. that has at least 500 shareholders in the U.S. and a minimal level of assets. Has to file periodic reports on both an annual (10-K) and quarterly (10-Q) basis.
Term
'33 act disclosure requirements
Definition
corp. must file a registration statement with the SEC and have it declared effective before it can make a public offering to investors. statement must contain prospectus, which must be delivered to each investor who purchases shares.
Term
Rule 10b-5
Definition
SEC rule that authorizes a defrauded buyer or seller to sue in a federal court if a material misstatement or non-disclosure is made "in connection with" a purchase or sale of a security. (case law has given "in connection with" an expansive definition)
Term
2 main ways in which compliance with fed. security laws benefits investors
Definition
1) by requiring substantial transparency
2) by protecting investors from dishonest management
Term
A-type acquisition
Definition
statutory merger
Term
traditional statutory merger
Definition
Company S merges into Company L. L's shareholders are in control, and S's shareholders are compensated with cash or L's securities (or both) for their S shares. Requires approval by vote of S's shareholders (and sometimes also L's). L absorbs all of S's assets and liabilities and S basically disappears. S's shareholders who opposed the merger get appraisal right.
Term
triangular merger and its advantages
Definition
L creates subsidiary B. B merges into S, or vice-versa (with L being shareholder or B). S shareholders given cash or L securities.

Advantages:
- insulation from liabilities of S
- avoidance of vote by, and appraisal rights for, S shareholders (because L, as B's shareholder, could approve merger of B into S?)
Term
B-type acquisition
Definition
"informal" or "practical" merger. L acquires (for cash or for its shares or some of each, though if for cash, not technically a B-type for tax purposes) enough S shares to give it control of S. S thus becomes an L subsidiary. Thus, just between shareholders of S and L, with no involvement of of S as a corp. May be followed by a dissolution of S or by a "short-form" A-type merger of S into L.
Term
"short-form" A-type merger
Definition
merger according to statutes which authorize a corp that owns some specified percentage of stock of another corp (usually 90 or 95%) to merge that company into itself without a shareholder vote, or any action at all from other company, or shareholders of parent company (all done by the board of parent)
Term
three basic merger techniques
Definition
1) statutory merger
2) purchase of stock
3) purchase of assets
Term
C-type acquisition (and advantages)
Definition
L acquires assets of S for cash or its stock or some of each (but if cash not C for purposes of tax). Most often, S then liquidates and distributes the case and/or stock it got to shareholders. No formal transaction to L and the S shareholders, although some states (inc. Del.) require vote by S shareholders for the sale of substantially all its assets)

Advantages:
- L may be able to avoid succeeding to the liabilities of S
- Depending on state law, S shareholders may not have an appraisal remedy.
Term
A-type short-form merger in D.G.C.L.
Definition
253 merger
Term
A-type long-form merger in D.G.C.L.
Definition
251 merger
Term
appraisal rights in 251 merger under D.C.G.L.
Definition
doesn't apply to 251(g) mergers (of wholly-owned subsidiaries).
section 262(b)(1).
shareholders only get rights if:
- they had the right to vote on the merger
- they voted against the merger
- there are fewer than 2,000 total shareholders and
- the stock is not traded on a public stock exchange

OR

- if shareholders were required to accept anything other than shares of stock of surviving corp, shares of stocks of any other publicly tradeable corp,
Term
appraisal rights in 253 merger under D.C.G.L.
Definition
section 262(b)(3).
minority shareholders always get them.
Term
exceptions to shareholder vote requirement of §253
Definition
§ 251(f): No shareholder vote is necessary for the surviving company if the incidents of ownership remain essentially unchanged (same charter, same shares of stock, etc.).
§ 251(g): No shareholder vote is necessary for merger with a wholly-owned subsidiary
Term
approval reqs of 251 merger
Definition
requires both boards to approve the merger, for the shareholders to vote, requires a majority (50%) of the outstanding
Term
3 main advantages of sole proprietorship
Definition
1. no allocation concerns (all profits and losses to SP)
2. simplest and cheapest forms
3. tax advantage (only get taxed once)
Term
3 main disadvantages to sole proprietorship
Definition
- unlimited liability
- limited capital
- lack of business continuity (like if owner dies)
Term
two-tier tax of corporation
Definition
1. corporation taxed on its earnings
2. shareholders taxed on any dividends they receive, which dividends are not deductible from the corp's earnings
Term
independent contractor
Definition
an individual who has agreed to work on behalf of another but is not subject to that person's/company's "physical control." no vicarious liability for IC's torts, but maybe liability under other theories, like if there are ultrahazardous conditions.
Term
3 ways of creating agency relationship
Definition
1. by agreement
2. by ratification
3. agency by estoppel
Term
agency by estoppel
Definition
a principle may act in such a way that a third person reasonably believes that someone is the principal's agent, and relies on this in good faith to their detriment
Term
agency by ratification
Definition
occurs when the principal accepts the benefits or otherwise affirms the conduct of someone purporting to act for the principal, even though no actual agency agreement exists. can be expressed or implied. all or nothing.
Term
master-servant relationship
Definition
the fiduciary relationship that results from the manifestation of consent that one person (the servant) shall act on behalf of and subject to the control of another person (the master), where "manifestation of consent" is objective (only matters what the principal says and does, and thus what the agent believed, not how the principal actually felt about it).
Term
enterprise liability
Definition
if the principal is held liable when the servant is not at fault (strict liability). Cf. vicarious liability
Term
agency
Definition
the fiduciary relationship that results from the manifestation of consent that one person (the agent) shall act on behalf of another person (the principal), where "manifestation of consent" is objective (only matters what the principal says and does, and thus what the agent believed, not how the principal actually felt about it).
Term
non-servant agent
Definition
one who agrees to act on behalf of the principal but is not subject to the principal's control over how the task is performed. E.g. independent contractor.
Term
take home from Humble and Hoover cases
Definition
risk is seen as a proxy for control in assessing whether someone was a servant or an independent contract
Term
vicarious liability: fault requirement?
Definition
yes
Term
types of authority (in agency law)
Definition
1. actual (express or implied) authority
2. apparent authority
3. inherent authority
Term
implied authority
Definition
A can do the usual things necessary to carry out X, which is what she has express authority to do, even though these things are not specified by the P.
Term
apparent authority
Definition
There is no actual authority for the agent to do X, but there’s a manifestation by the principal to the third party that the agent has authority to do X.
Term
inherent authority
Definition
a general agent binds an undisclosed principal to contract that are within the usual scope of authority of agents of the same type, even where the agent had neither actual or apparent authority
Term
type of authority in Lind
Definition
apparent authority
Term
type of authority in Watteau v. Fenwick
Definition
inherent authority
Term
type of authority in Kidd
Definition
apparent
Term
diff b/w apparent authority and estoppel
Definition
apparent authority makes the principal a contracting party with the third party, with rights and liabilities on both side, while estoppel only compensates the third party for losses arising from reliance (creates no enforcement rights)
Term
significant of Town & Country House & Home
Definition
Even after fiduciary relationship ends, agent has a duty not to use principal’s private information to compete with principal.
Term
diminishing marginal utility
Definition
the more you get the less utility you get from it
Term
agency costs
Definition
the sum of the monitoring expenditures by the principal, the bonding expenditures by the agent, and the residual loss.
Term
monitoring costs (J&M)
Definition
The principal’s expenditures to limit divergencies from his interest by establishing appropriate incentives for the agent.
Term
bonding costs (J&M)
Definition
The agent’s expenditures to guarantee that she will not harm the principal’s interest.
Term
residual loss (J&M)
Definition
the dollar equivalent of the reduction of welfare experienced by the principal due to the divergence between the agent's decisions and those decisions that would maximize his welfare
Term
decisions in partnerships (UPA)
Definition
Each partner has an equal vote, and decision altering the partnership must be made by a majority vote.
Term
Power of Partner to Bind Partnership to Third Persons After Dissolution (UPA)
Definition
Clients must be notified to avoid apparent authority. There can be no reliance after dissolution of partnership if client was unaware that partnership existed in the first place.
Term
joint and several liability
Definition
where a claimant may pursue an obligation against any one party as if they were jointly liable (liable for the entire amount( and it becomes the responsibility of the defendants to sort out their respective proportions of liability and payment.
Term
duration of partnership
Definition
if no term is specified, partnership is terminable at the will of any partner
Term
bottom line of Fenwick v. Unemployment Compensation Commission
Definition
No partnership exists where there is no shared control.
Term
bottom line of Martin v. Peyton
Definition
No partnership exists where lender has only passive control of business. A creditor may exercise some limited measure of control without becoming a partner.
Term
Bottom line of National Biscuit Co. v. Stroud
Definition
In the absence of other contractual arrangements, partners have an equal right to conduct transactions in the normal course of business on behalf of the partnership. Absent agreement to the contrary, the acts of every partner bind the partnership.
Term
Bottom line of Meinhard v. Salmon
Definition
A managing partner’s fidicuary duty is breached when he seizes a partnership opportunity for himself
Term
bottom line of Page v. Page
Definition
A partnership may be dissolved at will by any partner in the absence of an agreement specifying a definite term for the partnership
Term
Bottom Line of G&S Investments v. Belman
Definition
A partnership may be dissolved when a partner becomes incapable of performing under the partnership agreement, when a partner’s conduct tends to affect the business prejudicially, or when a partnership willfully breaches the partnership agreement’s terms, and the innocent/remaining partners get the right to continue the business
Term
amending bylaws in Del.
Definition
approval by board of directors OR shareholders (or both)
Term
amending corp charter in Del.
Definition
approved by board, then voted on by all voting shareholders, AND any nonvoting shareholders it would adversely affect. If would only affect a certain class, only that class votes. Need 50% of whatever group votes.
Term
Bottom line of Southern Gulf Marine v. Camcraft
Definition
One who benefits from dealing with what he believes is a corporation is estopped from claiming it is not a corporation.
Term
Bottom line of Walkovsky v. Carlton
Definition
Term
main factors considered in whether to pierce the veil (3)
Definition
1) observance of corporate formalities (was this really a corp, or just a person?)
2) fraud/injustice (would it be fair if we didn't pierce?)
3) undercapitalization (mostly an issue in torts cases)
Term
statutory standard for "material" (as in material omission on registration statement)
Definition
“matter[] as to which an average prudent investor ought reasonably be informed,” which the court interprets as a “matter[] which such an investor needs to know before he can make an intelligent, informed decision whether or not to buy the security.”
Term
defense to material misstatement in registration statement
Definition
due diligence

= - “[H]ad, after reasonable investigation, reasonable ground to believe and did believe, at the time such part of the registration statement became effective, that the statements therein were true and that there was no omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading.”
Term
bottom line(s) of Campell v. Loew's, Inc.
Definition
(1) Board members may be removed without cause (unless there's a staggered board). (2) Obstruction of the corporation’s normal business is legally sufficient cause, but attempting to take over the corporation is not. (3) Before Board members are removed they have a right to be heard by shareholders.
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