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Corporations & Agency
Tennessee Bar Exam
90
Law
Post-Graduate
02/05/2016

Additional Law Flashcards

 


 

Cards

Term
Corporate Formation

What is a Promoter? Explain their Relationship to the corporation and any issues with liability.
Definition
A promoter is a person acting on behalf of an unformed corporation - entering into contracts, raising capital, locating space to enter into leases, etc.

Corporation will be liable for the actions of the promoter, but only once the corp. adopts the promoter's contracts by express adoption (requires Board of Director approval) or implied adoption (knows of the contract and accepts the benefits).

Until there is a novation, the promoter is personally liable on the contracts, and will be held solely liable if the corporation never forms.
Term
Corporate Formation

What are a Promoter's duties?
Definition
A promoter's duty is a fiduciary duty - there can be no secret profits.

If property is acquired before formation and sold to the corporation it is recoverable if sold for more than market value.

If property is acquired after formation and sold to the corporation, any profit is recoverable.
Term
Corporate Formation

What is a Subscription Agreement? What are its limitations?
Definition
A subscription agreement is a written agreement to purchase stock from an unformed corporation.

A subscription agreement is irrevocable for six months.
Term
Corporate Formation

What is required to form a De Jure Corporation?
Definition
Pnemonic: A PAIN

Authorized Shares (number, classes, & series);
Purpose (general or specific purpose for existence is fine);
Agent (and address of registered office);
Incorporators (names & addresses);
Name (of corporation, w/ indicia of status, i.e. corp. or inc.)
Term
Corporate Formation

What is a De Jure Corporation vs. a De Facto Corporation?
Definition
A De Jure corporation is complete legitimate corporation in that is has complied with all the requirements of formation and therefore can act, sue, be held liable, contract, etc.

A De Facto Corporation is a corporation which has gone through the filing formalities, but not completely, and can be treated as a corporation if its organizers (i) have made a good faith, colorable attempt to comply with the corporate formalities, and (ii) have no knowledge of the lack of corporate status.
Term
Corporate Formation

De Jure Corporation: What purpose is required for formation?
Definition
Any purpose. General purpose with perpetual duration is valid and presumed, unless a specific statement of purpose or limited duration are expressed.

If there is a specific purpose, activities beyond the scope of that purpose are Ultra Vires activities.
Term
What are ultra vires acts and what is their result?
Definition
An ultra vires act is a corporate act which falls outside the scope of the corporation. These acts are valid, however shareholders can seek an injunction.

The corporation can sue the responsible directors and officers for any losses resulting because of ultra vires acts.
Term
What is the legal significance of a corporation after it has been formed?
Definition
It is treated as a separate legal purpose for liability and taxation. Shareholders are not liable for the debts of the corporation because of their limited liability.

A shareholder is only liable for the price of their stock.
Term
A corporate shareholder is only liable for what one thing?
Definition
The price of their stock.
Term
A shareholder liable for only the price of his/her stock unless what happens?
Definition
An opponent successfully pierces the veil.
Term
Piercing the Corporate Veil - what is it and what are it's requirements?
Definition
Piercing the corporate veil is the act of holding shareholders liable for third party victim's harm caused by the shareholders' corporation. Limited Liability is the thing that is pierced.

In order to pierce the veil, an opponent must show:
(i) the Shareholders treated the corporation as their alter ego by failing to observe corporate formalities; OR
(ii) the corporation is undercapitalized by failing to maintain sufficient funds to cover foreseeable liabilities.

Courts are more willing to pierce for a tort victim than a contract claimant.
Term
Who is liable when the corporate veil is pierced?
Definition
Shareholders active in the operation of the corporation; OR

Directors and Officers.
Term
How does a foreign corporation become "legal" in the state?
Definition
A corporation formed outside the state engaging in intrastate business must file a certificate of authority, including all information required for de jure corporations.
Term
What types of consideration are permitted for the exchange of stock?
Definition
Money;
Binding obligation to perform future services w/ an agreed value;
Tangible/intangible property;
Services already performed.
Term
What is a stock's "par value?"
Definition
Par Value is the minimum issuance price. No par value is any valid consideration the board of directors deems adequate.
Term
What is "treasury stock?"
Definition
Treasury stock is stock previously issued and reacquired. This is re-sold as no-par stock.
Term
Is it acceptable to acquire property with par value stock?
Definition
Yes, if the board of directors values property in good faith as at least par value.
Term
What consequences exist regarding the consideration used for the issuance of stock?
Definition
If stock is sold for less than par value, the director is liable for signing off on below par issuance.

The purchase is also liable because shareholders must pay full consideration for shares.
Term
What are preemptive rights w/r/t the issuance of stock?
Definition
Preemptive rights are the right to maintain a specified percent ownership each time new issuances are released.

Must be expressly granted in the articles.

(Yes, you still have to purchase - this is treated as a right of first refusal.)
Term
What statutory requirements exist regarding the board of directors, shareholders, and directors and officers?
Definition
1. The Board of Directors must have at least one member.

2. The Shareholders elect the Directors.

3. The shareholders can remove Directors for any reason.
Term
What is required for valid board of directors actions?
Definition
There must be a valid meeting of the Board of Directors Unless there is unanimous director consent to the action in writing to act without the meeting.

Notice can be set in the by laws - no proxies or voting agreements.

Quorum
Term
What is a quorum?
Definition
A quorum is necessary for any act taken at a board of directors meeting to be valid. A quorum is an attendance requirement and states that a meeting will not be valid unless a majority of the members eligible to vote are present.

Each Director is presumed to concur w/ the board of directors action unless they dissent/abstain in writing.
Term
Action and Liability of Directors and Officers

What are the duties and liabilities of the directors?
Definition
Directors have a duty to manage the corporation, but are protected from liability due to the "business judgment rule."

Directors owe a fiduciary duty as well as a duty of care and loyalty.
Term
Action and Liability of Directors and Officers

What is the business judgment rule?
Definition
The business judgment rule limits a directors liability for decisions made in the course of business by inserting a presumption that directors manage the corporation in good faith and in the best interest of the corporation.
Term
Action and Liability of Directors and Officers

What is the duty of care? Who owes it?
Definition
Directors owe the duty of care towards the corporation.

The duty of care states that the director must act with the care a prudent person would use w/r/t his/her own business, unless the articles have limited the director's liability for breach.
Term
Action and Liability of Directors and Officers

What is the duty of loyalty? Who owes it?
Definition
Directors owe this duty.

The director may not receive an unfair benefit to the detriment of the corporation or its shareholders, unless there has been: (i) material disclosure and (ii) independent ratification.
Term
Action and Liability of Directors and Officers

Define "self dealing" and "usurping corporate opportunities."
Definition
Self Dealing occurs when a director receives an unfair benefit in a transaction with the corporation.

Usurping corporate opportunities occurs when a director receives an unfair benefit by taking an opportunity that the corporation could have pursued.
Term
Action and Liability of Directors and Officers

Can the corporation permit a director to take an unfair benefit? How?
Definition
Yes. By ratifying the unfair benefit. The corporation defends the claim by:
(a) a majority vote of independent directors;
(b) a majority vote of a committee of at least two independent directors;
(c) a majority vote of shares held by independent shareholders.

Remember the interested director doctrine.
Term
Action and Liability of Directors and Officers

What is the interested director doctrine?
Definition
Common Law: A transaction with an interested director is voidable at the corporation's option.

Modern Law: A contract is invalid unless
(i) the board of director approves the transaction after disclosure and the director doesn't vote;
(ii) The shareholders approve the contract after disclosure; or
(iii) the contract is fair.
Term
Action and Liability of Directors and Officers

What are the duties of officers?
Definition
Duties of Care and Loyalty
Term
Action and Liability of Directors and Officers

What rights/abilities do officers hold?
Definition
Officers are agents of the corporation. Can bind the corporation by authoritative acts.
Term
Action and Liability of Directors and Officers

What officers are required?
Definition
President, Secretary, Treasurer.

Selected and removed by directors.
Term
Action and Liability of Directors and Officers

What can a corporation indemnify officers/directors for? What 4 rules exist for indemnifying officers/directors?
Who decides to indemnify?
Definition
Costs, Attorney fees, fines, judgment, or settlement in the course of corporate business.

1. Never indemnify when D&O loses the suit.
2. Always indemnify if D&O wins the suit.
3. May indemnify if (i) liable to third parties or there is a settlement with the corporation and D&O shows their action was in good faith and in the best interest of the corporation.

Majority of Independent Directors; Majority of a committee of independent directors; Majority of independent shareholders; the Board pursuant to independent legal counsel's recommendation.
Term
h
Definition
Term
Shareholder Rights

When does a shareholder have a direct cause of action against a director?
Definition
When the Director breaches his fiduciary duty to the individual as a shareholder.
Term
Shareholder Rights

What is a derivative suit?
Definition
A derivative suit involves a shareholder suing to enforce the corporation's own cause of action. It requires:
(i) contemporaneous stock ownership when the claim arose and throughout the litigation; and
(ii) demand on the board of directors that they cause the corporation to bring the suit.
(iii) The demand must have lapsed 90 days or been rejected.
Term
Shareholder Rights

Who can vote at meetings?
Definition
Any owner on record date as determined by the board of directors, up to 70 days prior to the meeting date.
Term
Shareholder Rights

What are the requirements for voting by proxy?
Definition
(i) a writing;
(ii) signed by the record shareholder;
(iii) directed to the corporate secretary;
(iv) authorizing another to vote their shares;
(v) and is valid for 11 months.

This is revocable unless the proxy says it's irrevocable and the shareholder passed some interest along with the proxy.
Term
Shareholder Rights

Shareholder meeting requirements
Definition
There must be an Annual Meeting. At least one Director slot must be an elected position, and this occurs at that annual meeting.

There can also be a specially noticed meeting called by the board of directors, president, or 10% of the voting shares and it must regard a fundamental corporate change or proposal. Special meetings are limited to their stated purpose (as stated in the notice).
Term
Shareholder Rights

What is a quorum?
Definition
A quorum is a majority of the outstanding shares at the meeting's beginning. If there is a quorum, the meeting is valid and only requires a majority vote of the quorum.
Term
Shareholder Rights

What is a "pooled" or "block" voting trust?
Definition
This is a formal delegation of voting power to a voting trustee enforceable for 10 years. Requirements:
(i) written trust agreement;
(ii) filed with the corporation;
(iii) transfer of shares to the voting trustee;
(iv) shareholders receive trust certificates; and
(v) the shareholders retain all rights except for voting.
Term
Shareholder Rights

What is a "Shareholder Voting Agreement?"
Definition
This is a written agreement to vote shares as required in the agreement. This is binding and enforceable and there is no time limit or filing requirement.
Term
Shareholder Rights

What is "cumulative voting?"
Definition
Cumulative voting must be expressly granted in the Articles and is only available when voting for Directors.
Term
Shareholder Rights

Under what circumstances/how does a Shareholder bring an action to close the corporation?
Definition
The shareholder can bring an action for involuntary dissolution by asking the court for liquidation if the directors are deadlocked and the corporation is threatened with:
(i) irreparable injury
(ii) oppression; or
(iii) waste is occurring.
Term
Shareholder Rights

What are a shareholder's rights w/r/t the corporate record books?
Definition
A shareholder may demand to examine the record books upon notice and for a proper period of time.
Term
Shareholder Rights

Dividends - Requirements, generally
Definition
Dividends are declared solely at the BOD's discretion;
Limited only if the corporation is insolvent.
BOD is personally liable for any unlawful distributions, unless there was a good faith reliance on the financial officer's report as to solvency.
Term
Shareholder Rights

Dividend Priorities
Definition
Preferred Shares first (the dollar dividend preference is payable at the dollar amount stated);
Participating Preferred next (paid as a preferred and common share);
Cumulative Preferred (paid at the rate of preferred each year); and
Common (paid last and equally).
Term
Shareholder Rights

Dividends are paid out of?
Definition
Earned Surplus - not Capital
Term
Shareholder Rights

Repurchased and Redemptions w/r/t shares
Definition
The decision to repurchase or redeem shares lies solely with the BOD. Shareholder can't force the corporation to repurchase the shares.

At common law, shares could only be repurchased using surplus/retained earnings.

Today, repurchase is not permitted if the corporation is insolvent.
Term
Shareholder Rights

What is a "closely held corporation?"
Definition
It is an agreement among shareholders to eliminate the corporate formalities. Requires:
(i) unanimous shareholder agreement in the articles, by-laws, or a filed, written agreement;
(ii) there must be a reasonable share transfer restriction.
Term
Shareholder Rights

What is the result of running a "closely held corporation?"
Definition
Cannot pierce the corporate veil.

It may be considered an S-corporation.

Will receive partnership tax treatment if there are less than 100 shareholders who are individuals, are U.S. residents, and there is only one class of stock.
Term
Shareholder Rights

What is a Professional Corporation?
Definition
A group of licensed professionals. Requires:
(i) organizers file with the name as PC;
(ii) shareholders must be licensed professionals who only practice once designated profession;
(iii) professionals are liable for their own malpractice, but for other malpractice or obligations.
Term
Shareholder Rights

What duties to shareholders owe to other shareholders?
Definition
Generally, none.

A controlling shareholder has a duty not to unfairly prejudice the minority. If selling to a looter, the corporation will be liable for damages unless reasonable measures were taken to investigate the buyer.

There is liability for selling at a premium in exchange for the corporation office.
Term
Fundamental Corporate Changes

What are the types of fundamental corporate changes?
Definition
Merger
Consolidation
Dissolution
Fundamental Amendments to the Articles
Sale of Substantially all of the Corporate Assets
Term
Fundamental Corporate Changes

What steps are required to enact a fundamental corporate change?
Definition
Board of Directors resolution;
Notice of Special Meeting of Shareholders;
Approval by a majority of all shares entitled to vote AND by a majority of any voting group adversely affected;
File notice with the State

One Exception: No shareholder approval for a short form merger (where the parent company owns 90% of sub).
Term
Fundamental Corporate Changes

What are Appraisal Rights?
Definition
A dissenting Shareholder (during the course of a fundamental change negotiation) can force the corporation to purchase her shares at fair value.
Term
Fundamental Corporate Changes

What are the requirements to utilize a shareholder's appraisal rights?
Definition
1. Must occur before the vote;
2. Must file written notice of the objection and an intent to demand payment;
3. Must vote objecting to the change;
4. Must promptly provide written demand to be bought out.

The court can appoint an expert appraiser to determine the value.
Term
Fundamental Corporate Changes

A sale of substantially all the corporate assets has particular consequences:
Definition
Could be considered a de facto merger and trigger rescission and appraisal rights. Must follow those procedural steps if it occurs.
Term
Fundamental Corporate Changes

How does a corporation enact a dissolution or liquidation?
Definition
Requires approval by a majority of the directors and shares entitled to vote.
Term
Federal Securities Laws

What is Rule 10(b)(5), and what are its elements?
Definition
Anti-Fraud Rule. Elements:
1. Interstate commerce/Use of National Exchange;
2. Scienter (the intent to deceive);
3. Deception (material misrepresentation or misappropriation of material non-public information; and
4. Must be in connection with the actual purchase or sale of securities.
Term
Federal Securities Laws

What are the rules regarding Insider Trading?
Definition
Requires:
1. Tipper: improper purpose + benefit.
2. Tippee: Tipper Breach and Tippee had knowledge
3. Misappropriation

The Government will prosecute for trading on market info in breach of your duty of trust/confidence owed to the source of the information.
Term
Federal Securities Laws

Section 16(b) - what is it? Requirements?
Definition
Short Swing Trading Profits. Requires:
1. Reporting Corporation (the trade must be on a corporation listed on the national exchange or has more than 500 shareholders and at least $10m in assets.
2. Defendant must be a director or officer or own more than 10% of the shares.
3. Are prevented from buying and then selling stock within a single 6 month period.

To determine: look to see the sell point and buy point w/in a 6 month period.

If the director/officer does this, they are liable for the profits earned.
Term
Federal Securities Laws

What is Sarbanes Oxley?
Definition
A CEO/CFO of a reporting corporation must certify that a filing doesn't contain any material misrepresentations or omissions and fairly presents the corporations financial position.

A willfully false report brings a $5m fine and 20 years. If the false report is restated, the corporation may recover from the CEO/CFO profits from trading w/in 12 months after filing + the incentive based compensation.

There is also recovery from trades during "black out" of at least three days when 50% of employees are prohibited from trading in retirement plans.
Term
Agency

What is the rule regarding a principal's liability for the tort of an agent?
Definition
The principal will be liable for torts committed by an agent if:
(i) the principal-agent relationship exists;and
(ii) the tort was committed by an agent w/in the scope of the relationship.
Term
Agency

Principal/Agent Relationship is determined how?
Definition
Assent - voluntary, informal agreement where the principal has capacity;

Benefit - the agent's conduct must be for the principal's benefit; and

Control - the principal has the right to control the agent by having supervisory power.
Term
Agency

Sub-Agents, Borrowed Agents; and Independent Contractors
Definition
Sub-Agent: no vicarious liability unless there was Assent, Benefit, and Control

Borrowed Agent: No vicarious liability unless there was Assent, Benefit, and Control

Independent Contract: No vicarious liability because there is no power to supervise performance, except in great ultra-hazardous activities in which the principal will be estopped from holding the I.C. out - they will be an agent.
Term
Agency

How to determine the scope of agency?
Definition
Was the conduct that caused the harm of the type the agent was hired to perform? Did the tort occur on the job? Did the agent intend to benefit the principal?

Frolic v. Detour: Whether the tort occurred on the job. Frolic is a new and independent journey (outside the scope). A detour is a mere departure from the employee's assigned task (within scope).
Term
Agency

Intentional Tort
Definition
An intentional tort is generally outside the scope of vicarious liability unless:
(i) the tort was specifically authorized by the principal;
(ii) it is natural from the type of employment; or
(iii) it was motivated by a desire to serve the principal.
Term
Agency

When is a principal liable on a contract entered into by its agent?
Definition
A principal is liable for a contact entered into by the agent if the principal authorized the agent to enter into the contact.
Term
Agency

What types of authority exist for an agent to enter into a contract?
Definition
Actual Express
Actual Implied
Apparent
Ratification
Term
Agency

Actual Express Authority
Definition
Exists for an agent to enter into a contract with a third party on behalf of the principal. The authority is granted if:

The principal used words (oral or private) to express the authority to the agent.
Term
Agency

What is the equal dignity doctrine?
Definition
If the contract must be in writing, then the grant of authority must be in writing.
Term
Agency

When is actual express authority revoked?
Definition
by unilateral act or the death or incapacity of the principal, unless the principal gives the agent a durable power of attorney (in writing with conspicuous survival language).
Term
What is a durable power of attorney?
Definition
A written expression of authority with conspicuous survival language.
Term
Agency

What is Actual Implied Authority?
Definition
Authority which an agent reasonably believes the principal has given because of the necessity of authority in order to accomplish an assigned goal or task.

Can also be granted through custom or through prior dealings.
Term
Agency

What is apparent authority? Are there any particularities?
Definition
Occurs when the principal "cloaks" an agent with the appearance of authority and a 3rd party reasonably relies on the appearance of authority.

Secret Limiting Instruction: if the agent has actual authority, but the principal secretly limited authority and the agent goes beyond the scope, the principal is still liable.

Lingering Authority - if actual authority is terminated, but the agent continues to act on the principal's behalf, the principal will be liable until the customer receives notice of the termination.
Term
Agency

Ratification of Authority
Definition
Authority granted after the contract is entered if:
* Principal has knowledge of all material facts regarding the contract and
* Principal has accepted the benefits.

Ratification must be complete - there can be no alteration of terms.
Term
Agency

Extent of Liability for contract
Definition
No authority - principal is not liable and the agent is fully liable.

Authority - Principal is liable and the agent is not.

However, if the principal is partially disclosed or undisclosed, the authorized agent may be liable at the election of a third party.
Term
What duties does an agent owe to his principal?
Definition
Reasonable care

Obedience to reasonable instructions;

Loyalty (no self-dealing aka no benefit to the detriment of the principal; no usurpation of the principal's opportunity, and no secret profits)

What is the remedy for breach of these duties? losses caused by the breach and profits to the principal.
Term
Partnership

How does a partnership arise?
Definition
Generally, the partnership can arise solely from conduct.

A general partnership is an association of two or more people carrying on as co-owners a business for profit.

Sharing a profit creates a presumption of a partnership. Lending agreements, wages, or commission do not.
Term
Partnership

How are partnerships liable to third parties?
Definition
Agency: principles apply same as agency with torts/contracts

Personal Liability for Debts: incoming partner is not liable for pre-existing debt, but funds from incoming payments can be used to satisfy prior debt. A dissociating partner retains liability for future debts until actual notice is given to creditors or 90 days after filing notice of dissociation with the state.

Liability by Estoppel: A person who represents to a third party that a general partnership exists is liable as if one does exist.
Term
Partnerships

What are other forms of partnerships?
Definition
Limited Partnership (LP)

Registered Limited Liability Partnership (LLP)

Limited Liability Corporation (LLC)
Term
Partnerships

Limited Partnership
Definition
At least one general partner, and one limited partner. Requires a Limited Partnership Certificate w/ names of all general partners.

General partner is liable personally for all limited partnership obligations, including torts and contracts. GP has the right to manage the Limited Partner.
Term
Partnerships

What is a registered Limited Liability Partnership?
Definition
A partnership with no underlying obligations of the partner, but partners are liable for their own wrongdoing.

Required to register a Statement of Qualification and Annual Reports.
Term
Partnerships

What is a limited liability corporation?
Definition
Members are owners w/ limited liability for all debts/obligations of the business. LLCs also have the benefit of Personal Taxation. Requires:
* Articles of Organization
* Operating Agreement
* Members control, but the articles can delegate to managers.
* Limited Liquidity - The members can't free transfer their interests.
* Limited Life.
Term
Partnerships

What are the rights and liabilities between partners?
Definition
Fiduciaries - duty of loyalty (if breached, other partners can bring action for accounting and recover losses for breach and disgorge profits)

Property - no transfer of specific partnership assets w/o partnership authority (land/leases/equip). Personal Prop - can transfer profits/surplus owed by individual partners to 3rd party. GPs have right to share management, but may not transfer property.

Each Partner entitled to equal control and vote (absent agreement otherwise).

Partners don't get a salary unless winding up (absent agreement otherwise)

Profits/Losses: Absent agreement, profits shared equally, losses shared like profit.
Term
Partnerships

How does dissolution occur?
Definition
Begins at the end of the partnership.

At will - dissolution automatic upon notice of the express will of any one general partner to dissociate.

Not at wil - dissolution occurs upon the happening of an event specified in the partnership agreement OR by a majority vote of partners to dissolve w/in 90 days of the dissociation of a single partner.
Term
Partnerships: Dissolution

Termination and Winding Up - defined
Definition
Termination: The actual end of the partnership

Winding Down: The time between decision of dissolution and termination
Term
Partnerships

Dissolution Compensation
Definition
Partners are compensated during the winding up.

GPs retain liability on transactions entered into to wind up old business with creditors. Also retain liability on new transactions until actual notice of dissolution is given to creditors or 90 days after filing the Statement of Dissolution.
Term
Partnerships

Dissolution - taking Priority
Definition
Creditors first - outside non-partner trade creditors AND inside partners who loaned to the partnership.

Capital Contributions by Partners second.

All remainder is profits and is shared equally absent an agreement. Losses are shared like profits.
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