Vicarious liability - which has 2 elements

Principal-agent relationship:

* Assent - informal agreement btwn a principal and agent

* Benefit - conduct was for principal's benefit

* Control - principal had right to control agent b/c had power to supervise manner and method of agent's conduct

     - NOT independent contractors (except ultrahazardous activity, or principal hods I.C. out as an agent)

2. Tort was committed within scope of that relationship

Three factors:

* Conduct "of the kind" agent was supposed to perform?

* Occurred "on the job" (detour, not a frolic/new and independent journey)

* Intended to benefit principal

Generally outside scope of employment, UNLESS:

1. Specifically authorized by employer/principal.

2. Natural from the nature of employment (e.g. repo man)

3. Motivated by desire to serve the principal (e.g. bouncer who illegally searches people)

State the rules regarding:

Principal's liability for an agent's contracts

The different ways this can occur

If no P-A relationship, then only the agent.

If P-A relationship, then only the principal.

HOWEVER, if principal is partially disclosed (ID concealed) or disclosed (existence concealed), then 3rd party can also sue agent

Principal-Agent relationship terminated the moment principal died, regardless of notice.

EXCEPTION: durable power of attorney given to agent (written, w/ surviving language)

Compensation

Reimbursing for expenses or losses incurred in discharging his duties.

Indemnifying agents for legal liability Rzably incurred by Agent in acting for the Principal (UNLESS it was A's own fault)

Duties agent owes a principal?

Remedy if breached?

Duty to exercise Rz care

Duty to obey Rz instructions

Duty of loyalty (no self-dealing, no usurping P's opportunity, no secret profits)

Remedy: recovery for loss, and DISGORGE profits

Contribution or services given in return for a share of profits creates a presumption

Definition:

Association of 2 more persons, carrying on as co-owners of a business for profit

Partners are agents of the partnership.

For management:

Decisions require a majority vote IF w/in the ordinary course of business of the partnership.

BUT THESE require consent of ALL partners:

Matters outside ordinary course of business (and some extraordinary exceptions)

Main characteristics of:

General partnerships

Limited partnerships

Registered Limited Liability Partnerships

Limited Liability Companies?

General partnership (default) 

Limited partnerships (at least 1 general partner, at least 1 limited partner [not liable for obligations and may not manage business])

Must file w/ state w/ names of general partners

RLLPs

File w/ state, and annual reports to state

No partners are liable for obligations

Limited Liability Companies (gives owners same limited liability of C shareholders PLUS benefits of partnership tax status)

File Articles of Organization, adopt an operating agreement

Owners not liable for company itself, and members control (may delegate to managers)

4 Ls: Limited liability, liquidity, life, tax

What duties do partners in a partnership owe?

Remedy?

In absence of agreement, what rights do they have?

In management?

For salaries?

For profit shares?

For losses?

Fiduciary duty to each other and the partnership:

Duty of loyalty (no self-dealing, no usurping partnership opportunities, no secret profits)

COVER REMEDY!:

Action for accounting (recovery, plus disgorge profits)

Management - equal control

Salary - None! (EXCEPTION: compensation for winding up business)

Profit shares: shared equally

Losses: shared like the profits are shared

Trade creditors, and inside (partner) creditors

Capital contributions by partners

Profits, if any... or Loss

(remember, in absence of agreement, profits are shared equally, and losses are shared as the profits are shared)

What is winding-up of a partnership, and what prompts it? 

Summarize the partnership-partner(s) relationship during winding-up.

WINDING-UP: Period between dissolution and termination, upon notice of dissociation by 1 general partner (leaves, dies) [in absence of agreement]

The partnership is bound by:

partner's acts appropriate to winding up (in absence of agreement)

Acts when notice wasn't given to the 3rd party (lighter notice burden than with other principal-agent relationships: if a creditor, entitled to personal notice... if dealt w/ partnership in the past, entitled to public notice)

If partner had notice of dissolution and does unauthorized act, NO right to contribution from other partners (even if partnership bound under above)

What are general partners' liability for debts of the partnership? For example, debts for torts or from contracts?

What about obligations that existed before the partner joined?

How about after?

What if someone who is not a partner represented self as one?

General partners are liable for all partnership obligations.

For pre-existing debts? No, but $ paid into partnership can be used for those.

Subsequent debts? Liable UNTIL gives actual notice to creditors OR 90 days after filing notice of dissociation w/ the state

If represented self as a partner (to now-creditor), then IS liable by ESTOPPEL.

This is ULTRA VIRES ACTIVITY.

State can enjoin

Corporation can sue for losses.

A PAIN

Authorized shares (maximum #)

Purpose

Agent (and address)

Incorporators

Name

De Facto Corporation Doctrine

Applicable if:

good faith attempt to comply w/ corporate formalities

actual lack of knowledge

What is a shareholder of a corporation liable for?

When does this change?

ONLY the price of her stock.

EXCEPTION: "piercing the corporate veil" (in equity)

FAU!!!!

* Fraud

* Alter Ego - failure to observe sufficient corporate formalities, treating C as if were themselves (e.g. commingling personal and corporate funds)

* Undercapitalization: failure to maintain sufficient funds to cover foreseeable liabilities

[preference for innocent 3rd party tort victims, AGAINST controlling shareholders]

Can take consideration in any form (including labor, future services, promissory notes)

BUT might have to be sold PAR VALUE (this is antiquated)... minimum issuance price (NO PAR = no such minimum)

EXCEPTION: treasury stock (issued and reacquired)

C's remedy if sold under par value:

C can sue directors (personally liable for authorizing it!)

Can sue shareholders who bought it!

ARTICLES MIGHT give preemptive rights to shareholders:

right to maintain % of ownership whenever there's a new issuance of stock FOR CASH, by buying % of the new shares

Corporation must not be insolvent (traditional (some states only): $ only from earned surplus (retained earnings) or other sources... might be okay if earnings from PRECEDING FISCAL YEAR cover it, even if puts C back in overall hole)

Can "repurchase" stock if shareholders agree.

BUT Articles MAY allow C to "redeem" (involuntary)

MUST have Board meeting for all board behavior.

(EXCEPTION: ALL directors give WRITTEN consent)

Quorum: majority of all directors

(NO proxies! NO voting agreements!)

Need majority of those present

(Articles can limit liability, but NOT for intentional acts, for unfair profits, unlawful corporate distributions)

(Also, director presumed to have concurred UNLESS abstention/dissent recorded in writing)

Duty of care:

(at common law, the "business judgment rule"... presumption they are acting in good faith and in best interests of C)

* in good faith

* w/ degree of care an ordinarily PRUDENT person would use w/ regard to own business

* in manner that they Rzably believe to be in best interest of C

- consider need for independent evaluation!

- doctrine of waste is part of this: Do not waste corporate assets! (this can  crossover with duty of care)

Duty to disclose: Must disclose material information to board members...

Duty of loyalty: in best interest of C, no unfair benefit to detriment of C!

* no self-dealing

* don't usurp corporate opportunities

* don't compete w/ C

EXCEPTION IF:

* fair

* OR material disclosure AND independent ratification:

     - by independent directors

     - by committee of at least 2 independent directors

     - by vote of shares by independent shareholders

Indemnification YES: won a lawsuit against any party, including C itself

Indemnification NEVER!: lost lawsuit to C or shareholder

MAY indemnify if:

* Showed good faith and believed conduct was in C's best interest, AND EITHER:

* Liability to 3rd parties OR

(some Jx) Settlement w/ C or shareholder

Decided by: (similar to "waivers" re: duty of loyalty)

* majority of independent directors, or committee of 2+ independent directors

* majority vote of shares by independent shareholders

Direct action (faces immediate and direct damage) (including actions that make C vulnerable to involuntary dissolution?)

Shareholder Derivative Suit (MUST do this when applicable!)

* affects rights of C

* must have owned stock at time of claim and throughout period of lawsuit

* FIRST make demand on directors to file suit, if not futile (and be rejected or 90 days pass)

* (some Jx) demand on shareholders to show wouldn't approve board action (better: place this burden on the directors)

Shitty directors!

Directors deadlocked in management of C

Directors committed fraud or illegal acts

C's assets are being wasted by directors

(harsh measure - need strong showing)

Shareholder meetings.

How called? Quorum? How is voting conducted?

Can be special meetings (in additional to annual meetings), called by 10% of voting shares, board, or president

Only way to approve fundamental corporate changes

10+ days notice, incl. purpose

Quorum: majority of all shares when meeting starts

Vote: simple majority (of shares)

Shareholder voting agreements (in WRITING)... (voting trusts: written, filed w/ C, have a trustee)

Cumulative voting must be granted in the Articles

Priority of distribution for corporate dividends?

Effect of having:

Preferred shares w/ dividend preference?

Preferred shares that are participating?

Preferred shares that are cumulative?

Preferred stocks before common stocks.

Preferred shares w/ dividend preference:

(paid amount of preference)

Preferred shares that are participating:

(paid twice - e.g. $2 per share, PLUS part of division w/ common shares at end)

Preferred shares that are cumulative:

(paid for this and for prior years when there were no dividends - e.g $2 per share for this year, and for previous 3 years during which there were no dividends = $8 per share)

Closely-held corporation:

Requirements?

Effect?

Need:

1. Unanimous shareholder election in writing

2. Rz restriction on share transferability

Result:

No piercing of the veil for failing to observe formalities

Can qualify for subchapter corp status (SCORP) and enjoy benefits of partnership tax status (NEED 100 or fewer shareholders, + only one class of stock)

Own a majority (or deemed to if a substantial plurality)... and owe no duties under the traditional rule! Modern: owe a fiduciary duty to minority shareholders

Personally liable, if sell shares to a party who loots the C, UNLESS Rz measures taken to investigate buyer's reputation and plans for C (notice if offered a premium and C's assets can be sold easily)

Remedy: disgorge profits

Treated as "insiders" under SEC re: insider trading, and shareholders who have 10+% are subject to rules re: short-swing profits

Merger (A becomes B)

Consolidation (A and B become C)

Dissolution (A dissolves)

FUNDAMENTAL (not ministerial) amendment of the articles 

Sale or lease of substantially all of C's assets (also, might be de facto merger and trigger rescission or appraisal rights)

Procedure (5 step process):

1. Resolution by Board at valid meeting (this is all that's required if "short-form" merger (parent C owns 90+% stock in its subsidiary and merges with it)

2. Notice of special shareholders meeting

3. Approval by majority of shares, AND by majority of each voting group adversely affected

4. Appraisal Rights of Dissenting Shareholder: if doesn't vote for change, can force C to buy their shares at fair value (YES w/ mergers... but not re: amending Articles)

To perfect the right:

     A - Before shareholder vote, WRITTEN notice of objection and intent to demand payment

     B - Don't vote for proposed change

     C - Prompt WRITTEN demand to be bought out

5. File notice w/ state

Section 10b-5 of SEA of 1934:

"It is unlawful for any person, directly or indirectly, by the use of any means of interstate commerce to (1) employ any device, scheme, or artifice to defraud, (2) make any untrue statement of a material fact or omit to state a material fact thus rendering statement misleading, or (3) engage in any act that would operate as a fraud in connection w/ the purchase or sale of any security."

Cause of action IF:

* Fraudulent conduct

     - material misstatement or omission

     - scienter: intent to defraud

* In connection w/ actual purchase or sale of securities by plaintiff

* Reliance

* Pecuniary damages

Insider trading

Who is liable?

* Insiders (duty not to use inside information for personal benefit): directors, officers, controlling shareholders (their attorneys, etc. too)

* Tippers and Tippees: inside information given to another who trades on that basis... liable if improper purpose (incl. to share profits, make a gift, or enhance one's reputation). Tippee liable if tipper breached duty, AND knew that tipper breached it.

* Misappropriators (action by govt): anyone for trading on market info in breach of a duty of trust and confidence to the source of the info (i.e. one's CEO client)

Section 16(b) of Securities Exchange Act of 1934:

Any profit (diff btwn highest sales price and lowest sales price in a 6 month period) disgorged IF:

* Interstate commerce

* Corporation who

     - shares on national exchange OR at least 500 shareholders

     - more than $10 million in assets

* Fiduciary of a corporation (director, officer, or 10+% shareholder)

* any purchase and sale, or sale and purchase w/in a period of 6 months

Sarbanes-Oxley Act of 2002:

Applies to a corporation that is:

     - on national exchange or has at least 500 shareholders AND

     - has more than $10 million in assets

Rules:

* CEO and CFO must certify that reports filed with SEC are not knowingly false or misleading

* C can recover officer's benefits made:    

     - w/in 12 months after false report

     - OR during "black out" periods (3+ days when most e'ees are prohibited from trading in their retirement plan's securities)