law school outline: business organizations




  1. Introduction

  1. Bus org is prospective, designed to anticipate problems and avoid litigation. Role of business attorney is to translate, remain detached, present a prospective viewpoint, be a skilled drafter, find a way to accomplish the true goals of the client, be conservative in taking risk, and function with the client as a colleague.
  2. Exam: Multi-choice with supporting short answer justifying reason

  1. read questions PRECISELY, whole nature of question is for you to have to think through all of the possibilities and then make some determination
  2. won�t receive credit if don�t answer why, but explanation limited to one sentence, unless none/all of the above, in which case it needs to be explained.
  3. 40 questions. Don�t have to remember � numbers.
  4. Sample questions: #3 is none of the above.

  1. The Baumer:  This is not an official "Baumer outline" - this is just my outline.  I did not find the Baumer outline to be terribly helpful, as it is somewhat out of date, but it was a good reference.

  1. Planning

  1. Business plan
  2. Investment:  Source, return
  3. Management and control

  1. Who makes decisions:  Participatory vs. centralized
  2. Voting:  Who can vote, distribution of votes, how many votes required to pass?
  3. Liability

  1. Tax consequences
  2. Exit strategy

  1. Agency

  1. Creation: Agent is a person who, by mutual assent, acts on behalf of another and subject to the other�s control. Intent of parties is not a factor.  Liability

  1. P to TP for A�s actions within the reasonable scope of the authority given to A.

  1. Actual authority: Express, implied, or incidental to authorized acts.
  2. Apparent authority:  TP reasonably believes P authorized A to act.
  3. Inherent authority: Reasonable P should have foreseen that A would act, regardless of instructions that P gave to A.
  4. Ratification: P can waive A�s lack of authority by knowingly and expressly affirming A�s conduct or engaging in conduct justifiable only if P intended to authorize A�s acts. P must have had knowledge of material facts.
  5. Torts

  1. P liable for servant�s acts within scope of employment.
  2. P not liable for IC�s activities unless inherently dangerous or P negligent in selecting IC.
TP to P: If P is liable to TP, vice versa applies. No liability if P undisclosed.  A to P: A liable to P for unauthorized acts that bind P due to apparent authority.

  1. A has very high fiduciary duty to P.

  1. All profits made by A as a result of agency belong to P.
  2. P indemnified by A for losses.
P to A: P must indemnify A for necessary acts within actual authority.  A to TP

  1. No liability if P disclosed at the time of act and P authorized the act.
  2. Liable if P is partially disclosed, undisclosed, or act unauthorized, because A appears to TP as a P.
Termination: P has irrevocable authority to terminate agency. K provision to the contrary effective only to create damages for wrongful termination (breach of K).  P should notify TP of revocation.Sole proprietorship

  1. Control: One person owns, controls and profits.  Legal identity of business and owner are the same.
  2. Owner has unlimited liability, including vicarious. Can be reduced through insurance or contract.
  3. No formalities nor filings needed, although ficticious name registration is required if used.
Partnerships

  1. General

  1. Distinct entity (�16201)

  1. Taxable as corporation or via owners - very attractive.
  2. Owns partnership property distinctly from the partners.

  1. Voluntarily created by two or more persons

  1. No formalities required. Writing is only evidentiary, but essential.
  2. Implied agreement to share management and profits creates a partnership without any writings and without any intent to form a partnership.

  1. As co-owners

  1. Very high fiduciary duty to the partnership.

  1. Business judgment rule: 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 was taken in the best interests of the company.
  2. Partner must disclose all partnership opportunities arising out of partner�s agency.  All profits made from partnership funds by scheming partner belong to the partnership. Losses outside of partnership with partnership funds belong 100% to the scheming partner.
  3. Affirmative duty to make informed decisions.
  4. Gross negligence is proper standard of review.

  1. A partner may be bought out when a partner retires, resigns, or dies. Dissociated partner is not liable for partnership obligations incurred after dissociation.   Partnership shoudl notify TP of dissociation via filing with secretary of state.
  2. A partner may transfer or assign their financial interest to a third party, but not the management and control (without a vote).  Creditor can get a lien and foreclose interest and judicial sale, necessitating partners to buy him out.

  1. Equally sharing management and control

  1. Agency: Every partner is an agent of the partnership for business purposes. Acts by a partner for apparently carrying on the usual business binds partnership, unless acting partner has no authority and TP knew acting partner had no authority (�16301).

  1. Agency can be restricted upon unanimous vote and notice to TP's.

  1. Voting

  1. Only a partner has a right to vote, each having one vote.
  2. Majority (>50%) vote needed for normal business decisions (problem if only 2 partners).  Unanimous vote needed for major decisions not in the course of normal business.

  1. Loans often carry restrictions which can approach the level of management and control over the partnership that a partner would have. Test is if the level of control exceeds common business practices or profits are being shared with the bank, then a partnership probably exists.

  1. For the purpose of a business for profit

  1. Need for additional capital contributions after start-up is a major issue. Important to have agreement in advance regarding additional capital.
  2. Contributor compares contribution with current value of firm, not with initial contribution.
  3. Information costs (difficulty in learning about new company) is high.
  4. New money being contributed or loaned may present problems re giving investor share of partnership, profits, or control (which may create implied agreement for partnership); Liability to new person, reduces share of existing partners, etc.

  1. And sharing the profits and liabilities

  1. Profits do not include payment of a debt, wages, rent, interest; joint tenancy.
  2. Liabilities

  1. Joint and several liability for costs within the scope of business.

  1. Willful and malicious torts and breaches of trust are exempted, and only the tortfeasor is liable.

  1. Partners are only liable for liabilities incurred after their admission to the partnership (�16306).
  2. Generally liable in accordance with his share (%) of the contribution.
  3. Partners are indemnified by the partnership for reasonable expenses in the course of business (�16401).
  4. Misrepresentation:  Partnership is not liable for non-consensual representations made by a non-partner, but is liable for consensual representations.

  1. Partners are not entitled to remuneration for services unless agreed to in the agreement.

  1. Removal of partner

  1. Causes

  1. At will
  2. Termination with good faith and unanimous vote of remaining partners
  3. Fixed-term specified in agreement

  1. Partner must be bought out, but wrongful dissociation will result in damages, and cannot get payment until expiration of term or completion of undertaking.

  1. Dissolution

  1. Occurs when (�16801)

  1. Express will of at least half the partners.
  2. Expiration of term or completion of undertaking.
  3. Event agreed to in partnership agreement.
  4. The identity of the partnership changes, unless partners agree to continue.
  5. The partnerships is unlawful.
  6. Decree of dissolution (judicial determination) can be granted by court for many reasons, including inability of partner to perform, frustration of purpose, and other equitable reasons.

  1. Winding up: Closing down the business. Usually forces liquidation and division of profits/liabilities.

  1. Partner with authority to wind-up can still bind partnership after dissolution unless agreement for dissolution date.
  2. Partners who are at-fault in the dissolution have no right to carry winding up process
  3. Partners with negative values must pay to the partnership, therefore losses of a partner can exceed capital contribution

  1. Capital contribution

  1. Services dont' count.
  2. No interest paid unless repayment not made on time or if partner loans additional capital beyond initial agreement.

  1. Plus property of partnership
  2. Plus profits, divided per:

  1. Equally (default)
  2. Capital contribution (usual)
  3. Other percentage agreed upon

  1. Minus losses, divided per:

  1. Method of profit distribution (default)
  2. Capital contribution
  3. Other percentage agreed upon
  4. Partners are jointly and severally liable to creditors regardless of agreements.

  1. Limited

  1. Formation

  1. One or more general partners, plus one or more limited partners
  2. Firm name must include "L.P." or "limited partnership," and may not contain Corporation or Incorporated.
  3. Certificate must be filed

  1. Limited partner who believes in good faith that certificate has been filed is protected against TPs if he acts to file upon discovering problem, unless TP reasonably believed LP was a GP at time of transaction.
  2. Represents conclusive evidence of formation of limited partnership.
  3. Public disclosure filing contains bare bones contact information.
  4. False statement in certificate creates liability to knowing signer.
  5. Certificate must be updated when any changes are made to the makeup of the partnership, or change in character of business.

  1. Partnership agreements are not required, but are essential. Document is private and not filed. Can vary the effects of the Partnership Act (�15618).
  2. Any business is ok except banking or insurance (�15616).

  1. General Partners

  1. Same relationship as in a general partnership.
  2. Unlimited liability
  3. Change in identity of GPs terminates partnership, unless agreement provides otherwise
  4. Cannot harm the business or admit new partner without consent of all limited partners (�15509).

  1. Limited Partners

  1. Not bound by the obligations of the partnership
  2. Unless LP takes control of the business, then liable to TP�s who have actual knowledge of his control and reasonable belief based on conduct that LP is GP at time of transaction

  1. Exceptions:

  1. Employee
  2. Consulting with general partner on major issues
  3. Surety
  4. Requesting or attending meeting of partners
  5. Voting in accordance with partnership agreement and on certain important, fundamental and structural issues.
  6. Winding-up partnership, by decree of court (�15510).
  7. Dis/approval of amendment to partnership agreement
  8. Right to examine books, have information of things affecting partnership (�15634).

  1. Contributes cash or property, but not services (�15504).

  1. Limited partner is liable for difference between actual contribution and stated contribution. (�15517)

  1. Interest is assignable, but assignee has no right to require any information or account of partnership transactions, books. Cannot vote. All partners can consent to empowering assignor as a substituted limited partner, and thus giving him those rights. Certificate must be amended. (�15674)
  2. Name may be in name of firm.  Previous rule was contrary.
  3. Change in identity of LPs does not affect continuance of partnership.
  4. Can withdraw contribution only after liabilities have been paid, consent of other partners, certificate amended. Can demand withdraw with six months notice. (�15516)

  1. Judicial dissolution available if business is no longer practicable or if fraud or abuse of authority exists (�15682).
  2. Winding up: Creditors get paid first, then partners (�15684).

  1. General partner can bind partnership after dissolution if prior client who had extended credit to partnership prior to dissolution had no knowledge or notice of dissolution, and certificate of dissolution not filed. (�15685)

  1. Limited Liability

  1. Can only be created for an accountancy or legal LLP (other states allow LLP for more purposes).

  1. Must maintain security for claims (�16956) either through insurance or maintaining many millions of dollars in assets.

  1. Partner is not liable or accountable for contractual or tortious liabilities of other partner�s actions, or acts of partnership as a whole.
  2. Individual partners have limitless liability for their own acts.
  3. Name must include "LLP" or "Limited Liability Partnership" (�16952)
  4. Must be registered with the state (�16953)

  1. Foreign LLP must file and comply with state�s requirements (�16959). Must have an agent for service of process, although a court can make an order that service be made on the Secretary of State (�16962).

  1. A partnership is related to an LLP if a majority of the partners are partners in another LLP, or if an agreement exists between two partnerships, one an LLP, to provide services (?) (�16101).
  2. No distribution can be made if assets < liabilities (�16957)

  1. Joint venture: Business organized to complete a specific project.
Professional Responsibility

  1. Full disclosure of conflict of interest must be made and waived by client in order for attorney to represent multiple potentially conflicting interests.

  1. In-house attorney being asked personal legal question by officer of company.
  2. Being asked to represent multiple partners in a corporation.

Corporations

  1. Introduction

  1. Separate entity, like a legal person, and is liable for its own debts and taxes.
  2. Creation

  1. Articles of Incorporation and Bylaws (below)
  2. Organizational meeting (soon after filing)
  3. Raising money through stocks and bonds
  4. Promoter: One who identifies opportunities and participates in formation of business. Duty of disclosure.

  1. Commercial services will create a corporation for you same-day; you can also do it by filling in the forms on a computer disk, etc.
  2. Liable for his pre-incorporation contracts, unless novation by TP to look only to corporation.
  3. Corporation is liable to TP if corporation adopts or ratifies P�s Ks.

  1. Express or implied by acts.
  2. Similarly, corporation can collect from TP if corporation has ratified or adopted K.

  1. Fundamental changes require both board and outstanding shareholder approval:   Amendments to articles of incorporation, merger, dissolution.

  1. Special Types

  1. Close

  1. Basically an incorporated partnership.
  2. Everyone has fiduciary duty to everyone else.
  3. Stockholders limited to 35; statement in articles saying "This corporation is a close corporation." (�158)

  1. Can be created via amendment to charter, with unanimous vote of all shares; terminated by two-thirds majority. (�158)
  2. Loose "close" status if # of shareholders exceeds 35 (or number specified in articles) (�158e)
  3. Inter vivos transfer of shares that would cause corporation to loose "close" status is void. (�418) Each shareholder agrees and consents to this so long as the corporation is a close corporation. (�421)

  1. Shareholder agreement varying the norms of control of corporation is ok (�300b) but only with unanimous agreement of the shareholders (�186).

  1. If the shareholders take over the role of directors, the shareholders should be given notice that they will be liable as directors for fiduciary duty, Piercing the Corporate Veil, etc. Directors then relieved of that liability. (�300d)
  2. If "close" status is lost, shareholder agreement is terminated, unless agreement provides for survival of agreement (�300b)
  3. New shareholder acquiring fresh stock who refuses agreement terminates the agreement (unless agreement otherwise provides), but transferee purchasing "old" stock is bound by transferor�s agreement. (�300b)

  1. Key man life insurance: Company may purchase insurance on the lives of key employees, so that when they die, the families can be assured that their stock will be bought back by the company.
  2. Closely held: Few stockholders, but no statutory "close" provisions.

  1. Limited Liability Company (LLC)

  1. Combination of corporation and partnership; no double taxation � taxed as a partnership is taxed.
  2. Not available to professionals
  3. Two or more members (owners), who manage the company and who are treated as shareholders for liability purposes (not personally liable for corporation's debt).

  1. Wide flexibility in management, including simple majority to dissolve, transferable, any internal structure so long as 100% of the members agree.

  1. Company must carry insurance.
  2. Every member is an agent and can bind the company, unless agency is restricted by articles of incorporation or other restriction of authority. Agent binds the company unless agent had no actual authority and TP knew of the restriction.
  3. Articles of Organization give standard information, including names of all members.
  4. Profits and losses allocated by contribution %.
  5. Dissociation of a member causes dissolution.

  1. Articles of Incorporation are filed and open to the public

  1. Limited information: Name, purpose, agent for service of process, authorized shares and rights and restrictions of each class of shares. (�202) May include details such as duration of existance, quorum, right to vote, etc. (�204).
  2. Formerly specified scope of business, and exceeding that scope (ultra vires) means stockholders can object.

  1. No longer applicable because corporations can now do anything a natural person can do in carrying out its business activities (�207).
  2. If don�t want to permit such transactions, make it clear in articles (�207).
  3. Ultra vires argument cannot be claimed if TP consents to scope (�208). Outragiously exceeding scope of business may be ultra vires even today, and shareholder can file suit against Board to limit scope of corporate power.
Defective Incorporation: Officer can be personally liable unless

  1. de jure: Corporation is formed with at least substantial compliance with laws.  de facto: Sufficient steps to treat enterprise as corporation to protect investors in dealing with TPs.

  1. Existence of law authorizing incorporation
  2. Effort in good faith to incorporate under existing law. Certificate of incorporation must be filed (�200c)
  3. Actual use or exercise of corporate powers
Estoppel: Permits existance of corporation for purpose of K cause of action if D represented corporation and p reasonably relied to p �s detriment.Bylaws (�212)

  1. Sets number of directors (min. 1 if close company, 3 if public)
  2. Sets role of directors and shareholders
  3. Sets details about voting
  4. Quorum
  5. Can vary the effect of the statute, such as role of shareholders, duration of corporation existance, quorum, limit permissive business, approval required, liability of directors (�309), etc.

  1. Members may be indemnified by company, but bylaws cannot eliminate liability of directors in certain areas (illegal acts, misconduct, etc.)

  1. Board can amend.
Stockholders

  1. Selling stock

  1. Shares, options or securities can be offered by the board without first offering them to existing shareholders (�406).
  2. Preferred stock

  1. Rights limited to those assigned to the stock in the Articles of Incorporation
  2. Often has first dibs on dividend, liquidation, etc.

  1. Common stock: Residual rights after sale of preferred stock.
  2. Stock certificate is only a formality and not required
  3. Freely transferable

  1. Except close corporation, which can limit transferability by right of first refusal, first option, consent restraints and buyback provisions.
  2. Restrictions must appear on the certificate or statements and be reasonable, otherwise shareholder not bound. (�418)

  1. Preemptive rights (�224)

  1. Enable shareholders to maintain proportionate ownership when company issues more stock. Preexisting holders have option to buy more shares.
  2. Important for closely held corporation for holders to maintain control and interest.
  3. Complicated for large corporation, and during merger/acquisition.
  4. Corporation must opt-in to this plan by including it in the articles.

  1. Shareholders are the owners of the corporation, but do not individually own the property.
  2. Liability limited to amount of investment, but corporate veil can be pierced under certain circumstances.

  1. Limited liability encourages investment.
  2. Veil can be pierced when p should have a remedy against active owners, despite corporate shell.

  1. When:  Fraud; inadequate capitalization; or corporate formalities ignored with resulting injustice.
  2. Torts - easy to pierce
  3. K � look to see if p assumed risk.  Difficult to pierce

  1. Limited to closely held (1-3 shareholders) corporations and corporate parent/subsidiary relationships where parent had active involvement in subsidiary.
  2. Test

  1. Unity of owners and interest between corporation and owners (alter ego); and
  2. Inequitable result unless pierced (unjust enrichment).

  1. Corporate structure may be disregarded if the structure was created simply to defraud someone.
  2. Bankrupcy Deep Rock doctrine:  Loan from parent company or shareholders to undersubsidized child company is subordinated to outside claims. Based on the theory that "loan" was actually a capital contribution. Usually requires some misconduct by parent/owner.

  1. Shareholder agreements: Only shareholders in a "close" corporation can enter into shareholder agreements varrying the governance norms. Must be unanimous. (�186) See "Close Corporations" above for details.
  2. Authority

  1. No right to participate or limit management and decision making, unless close corporation (see above under Close Corporation) (�300).
  2. Powers limited to those specifically given to them. Generally elect or remove directors and approve fundamental, organic changes in corporation.
  3. Right to inspect corporate records, if proper purpose germane to bona fide interest as stockholder and business interest.
  4. "Approval by the outstanding shares" means majority of outstanding shares is required for approval (�152).
  5. "Approval by the shareholders" means approval by majority of shares represented and voting at a meeting where quorum is present (�153)

  1. Shareholder meetings

  1. Annual to elect directors, enforceable by court (�600).
  2. Special meetings can be requested by 10% of the shareholders, or the board of directors.
  3. Quorum (majority of shares entitled to vote) must be initially present. Minimum of � of the shares entitled to vote. (�602)

  1. Proxy (power of attorney) votes OK. Requires:

  1. Disclosure
  2. Anti-fraud provisions
  3. Access by shareholder to proxy machinery

  1. One vote per share.

  1. Notice (10 days) of meeting required (�118), or waiver of notice.
  2. Action can be taken in lieu of a meeting with consent by outstanding shareholders for specific action. Requires notice upon taking action, unless unanimous consent. (�603)

  1. Must receive annual financial statements.
  2. Insider information (�16)

  1. Only applies to large, publicly traded corporations.
  2. Buying or selling of securities, by those having some duty at either the purchase or sale not to do so (officer, director, 10% holder at both purchase and sale), on the basis of information not publicly available.
  3. Must account to the principle for profits (lowest buy � highest sale; losses ignored, maximzing profit) derived from purchases/sales in a 6 month window.

  1. Fraud (�10b-5)

  1. Intentional fraud (nondisclosure of material, nonpublic information or false disclosure) in connection with purchase or sale of a security; or
  2. Breach of fuduciary obligation between corporate insider and shareholders

  1. Extends to temporary insiders and tippees who knows or should have known origination of information. Tipper liable if improper purpose.
  2. Anyone trading on misappropriated market information (supply/demand) is prohibited, even w/o duty.
  3. Requires disclosure or abstention

  1. Reliance and causation of damages

  1. Typical legal issues

  1. Ability for shareholders to vote on an issue
  2. When quorum of shareholders are available to do something but quorum of directors are not.

  1. Voting

  1. Quorum:  Simple majority of outstanding shares entitled to vote; or unanimous written consent.
  2. Ordinary matters can be approved by simple majority of votes cast.
  3. Fundamental change requires 2/3rds approval of outstanding shares.
  4. Election of directors

  1. Straight:  Each shareholder gets one vote per share per vacancy, maximum one vote per candidate.
  2. Cumulative: Each shareholder gets x votes per share, where x is the number of directors being elected.  Votes can be divided in any manner.

  1. Notice required if cumulative voting is to be used.

  1. Stock may be divided into classes, each class being able to elect certain directors. Equality of voting power among stockholders of the same class is a basic concept in corporate law.
  2. The Charter can freely arrange control of voting.
  3. Supermajority: 80-90% needed to pass.  Requirement for supermajority can itself be modified only by a supermajority. Only allowed in close corporation
  4. Voting Trust (�706)

  1. Owner irrevokably transfers legal ownership of shares to trustee for the purpose of giving the trustee the full right to vote, but no financial rights (retains beneficial ownership).
  2. Maximum duration of ten years, with option to extend
  3. Copy of agreement must be filed with secretary of corporation

  1. Pooling agreements

  1. Not subject to ten year duration limit on voting trusts.
  2. No trust created.
  3. Upheld as a contract so long as written and signed by participating shareholders.

  1. Proxies

  1. Proxy (�705): Any person entitled to vote can authorize another person to vote by proxy. Revocable, and expires after 11 months, unless otherwise provided in the proxy.

  1. S14 requires full and detailed disclosure anytime proxies are solicited.  Prohibits materially false or misleading statements or material omissions (including predictions, estimates or opinions).

  1. Company must file preliminary copy of proxy soliciting material with SEC

  1. Shareholder�s proposals included in proxies if shareholder will present at meeting. Company can exclude if good cause.
  2. Proxy Contest:  Solicit proxies for use at meeting

  1. Shareholder Derivative Suit

  1. Lawsuit on behalf of the corporation, brought by the shareholders, against the directors, for breach of fiduciary duty to corporation.
  2. Legal fees paid by corporation (contingency). Recovery to corporation. Individual investors don�t stand to gain a lot.
  3. Controlled by lawyers, not p . Abuse is checked by extensive judicial control, including fees, settlement and dismissal.
  4. Plantiff

  1. Ownership of shares contemporanious with time of lawsuit and time of complained of act. Court has discretion to waive.
  2. Must fairly and adequately represent the interests of the shareholders.
  3. In CA, p must put up $50k security for expenses and to prevent frivilous and strike lawsuits.

  1. Demand

  1. Shareholder must make demand on corporation to comply with action shareholder desires, and the demand bust be reused.
  2. Board must make good faith, independent and reasonable investigation.
  3. Demand not necessary when futile, i.e. all directors interested, nonindependent, or wrongdoers.
  4. When (due to merger), the board in control wasn�t the board who made the decision to act, the test is whether the board addressing the demand can properly exercise its independent and disinterested business judgment in responding to the demand.

  1. Interested = will receive personal financial benefit or detrimental impact from transaction, not equally shared by stockholders.

  1. Dismissal upon approval of court if

  1. Cause of action will not benefit corporation or shareholders
  2. Corporation was not a participant in the transaction complained of.

  1. Majority shareholders have fiduciary duty to refrain from unfairly prejudicing minority shareholders.

  1. Self-dealing

  1. Control of corporation to his own benefit to the detriment of minority.
  2. When members of the Board are also shareholders, that person cannot use his office for his own benefit to the detriment of the minority shareholders. He can vote his own shares to his own benefit.
  3. Business judgment rule: Court will not interfere with the judgment unless there is a showing of gross disregard for fiduciary duty.

  1. Majority control over minority by "freezing out" minority or illegal, fraudulent or oppressive conduct.
  2. All shareholders must be treated fairly, but not equally.

  1. Company cannot offer to buy back a certain shareholder�s shares without making the same offer to everyone. Violates fiduciary duty.
Board of Directors

  1. Exclusive representatives of the corporation (�300), except close corporation which can create shareholder agreements to alter management.
  2. Responsibility for oversight, managing corporation, and policy decisions (�300).
  3. Elected at each annual meeting of shareholders by a majority of shareholders, for a one year term until next annual meeting. May be elected in classes or series to stagger the terms. (�301)

  1. The fewer directors that are elected at a particular meeting the less chance of a minority group getting control. Accomplished by staggering the board.  Minimum 1 director, but 2 classes require 6, 3 classes require 9.

  1. Vacancy replaced by majority of voting members of the board, or majority of outstanding shares.
  2. Can be removed without cause by approval of majority of outstanding shares (�303).   Replacement elected by shareholders.

  1. No removal if cumulative votes cast against removal would be sufficient to elect director if voted cumulatively at an election in which the same total number of votes was cast with the same number of directors then authorized.

  1. No requirement that they hold stock.
  2. Power is collective only and only while assembled.

  1. Written consent (�307) and committee action (�311) ok.

  1. A director must be on the committee.
  2. Management flexibility allows delegation, but may confuse TP as to who has authorization to make binding decisions. Cannot delegate to committees or officers the filling of vacancies, amend bylaws, act as shareholders, make a distribution, or appoint other committees.

  1. Participation can be by phone so long as everyone can hear everyone else (�307).
  2. No proxy voting allowed.
  3. Board meetings (�307)

  1. Can be called by any officer or any two directors
  2. Regular meetings require no notice, but special meetings must have notice to all board members (4 days), unless waiver or consent (before or after the meeting).
  3. Can be held anywhere
  4. Quorum = not less than a majority of authorized number of directors must be present to do business.

  1. Suggestions for governance: Separation of chariman and CEO, outside evaluation of CEO, majority of outside directors, smaller boards, dedicated CEO, term limits and mandatory retirement age, performance standards, annual evaluations.
  2. If deadlock in voting, court can appoint provisional director until deadlock is broken. (�308, �1802)
  3. Members of the board have fiduciary duty to shareholders and corporation.

  1. Duty of care (negligence / reasonable person standard)

  1. Monitor and be reasonably informed of all information reasonably available to them and relevant to their decisions.
  2. Attend board meetings.
  3. No duty to inquire unless cause for suspicion. Members are entitled to rely on information from trustworthy employees and agents.
  4. Liability imposed when lack of good faith combined with sustained or systematic failure of reasonable oversight. Can be waived in bylaws (�204).

  1. Duty of loyalty

  1. Directors cannot profit at the expense of the corporation, unless:

  1. Full disclosure of material facts to directors, with their approval; or
  2. Transaction was fair

  1. Ability desire of corp. to take opportunity
  2. Creation of competition
  3. Presented to fiduciary in his independent capacity
  4. No misuse of propriatary information

  1. Board members with conflicts of interest (board/board or board/ownership) can still act, so long as there is full disclosure to the shareholders with approval; or full disclosure to board of directors with approval, PLUS the decision is just and reasonable at the time it was authorized or approved (�310).

  1. This provision cannot be waived in the articles (�204).
  2. Burden on interested party to demonstrate the transaction was fair and reasonable.
  3. Interested director cannot vote
  4. Test of fairness is objective. The procedural (decisionmaking process) and substantive (terms of transaction) process must be within the "range of reasonableness". Measured by comparison with arm�s-length transaction with unrelated third party, and whether transaction affirmatively will be in corporation�s best interest, as in a transaction with an unrelated party.

  1. Business judgment rule:  No liability if exercised due care, in good faith, and had a rational basis.

  1. Liability requires existance of duty, breach, causation and damages.
  2. Does not apply to illegal conduct or when the director is an "interested" party, and does not give full disclosure and right of first refusal.
Officers

  1. Elected by Board of Directors to implement policy

  1. Corporate role should be well defined in functional terms.

  1. Can be removed at will by Directors.
  2. Supervise day to day operations.
  3. CEO plays important role in selecting board members.
  4. Employment contract may provide for liquidated damages, so that if they are fired, damages for breach are predetermined.
Dissolution

  1. Involuntary (�1800)

  1. Standing

  1. 33.3% of outstanding shares, excluding shares owned by control group in case of fraud
  2. Any shareholder(s) of a close corporation
  3. 50% of the directors
  4. Attorney General
  5. Judiciary

  1. Grounds

  1. Abandoned business
  2. Deadlocked
  3. Fraud, mismanagement, abuse of authority
  4. Termination of time period in charter

  1. Voluntary (�1900)

  1. Majority of both board and outstanding shares consent
  2. 50% of the shares consent
  3. Approval of the board, when:

  1. Bankruptcy;
  2. Ceased conducting business for prior five years; or
  3. No shares issued.

  1. In closely held corporation (fewer than 35 shareholders, even if not registered as such), it only takes 1 shareholder, if p can show that the liquidation is reasonably necessary for the rights or interests of the liquidating shareholder
  2. Judicially ordered dissolution at the behest of the minority interests.
  3. Dissolution is subject to the majority buying out the complaining minority. (�2000)

Exam Review

  1. Agency

  1. Actual or implied
  2. High fiduciary duty between P and A

  1. General Partnership

  1. Act supplies default norms, which can be changed by Agreement
  2. Association of two or more persons voluntarily organized to carry on a business for a profit. No formalities required
  3. In absence of agreement, each partner shares equally in decision making.

  1. Majority vote required for ordinary decisions
  2. 100% vote required for major decisions

  1. Profits / Losses

  1. Sharing is prima facie evidence of a partnership, unless other relationship (debtor/creditor, employee, etc.).
  2. Partners share profits equally, per capita, not in relation to their contributions.
  3. Losses are shared in the same way as profits.

  1. Partner by estoppel: Person represents themselves or affirmatively consents to representation of himself as a partner. Reliance by TP necessary.
  2. Every partner is an agent of the partnership for usual business purposes, and can bind the partnership. Except if partner actually has no authority and TP knows that.
  3. Old dissolution rule: Dissolution of the partnership was the only way for a partner to exit, unless someone wants to buy the partner�s interest.
  4. New dissolution rule: Dissociation allows partner to exit partnership at will. Remaining partners can continue partnership and purchase dissociating partner�s interest, or decide to dissolve the partnership.

  1. Limited Partnerships

  1. Document must be filed (bare bones)
  2. Partnership Agreement
  3. Partnership of two or more persons, having at least one general partner and one limited partner.
  4. Limited partner prohibited from participating in the management and control of the business. Participation does not include being an employee, etc. Liability attaches only when TP has actual knowledge of LP�s participation and reasonably believed LP was a GP at the time of the transaction.
  5. If person eroniously believes and acts, in good faith, that they are a LP, but they are not, they will not be held liable to TP�s as long as they file the proper documents upon discovering problem. Liable if TP reasonably believed LP was a GP at the time of the transaction.
  6. Public policy: Limited liability for LP�s encourages investment.

  1. Limited Liability Partnerships

  1. Only used by accountants and attorneys.
  2. Partnership itself is liable for liabilities (tort or contract) of any and all of the partners.
  3. Individual partner liable for their own torts.
  4. Partner is not individually liable for other partner�s torts and contracts.

  1. Corporations

  1. Promoters

  1. Promoters act as agents for the not-yet-formed corporation.
  2. To what extent can they bind the corporation? Corporation bound only if corporation ratifies promoter�s acts.
  3. TP must sign novation (waive liability) of promoter, and promise to go after corporation only.

  1. Defective incorporation

  1. De facto: No longer in existance in California. Protects individuals who thought they incorporated. Requires (1) statute, (2) good faith attempt to comply with statute, (3) act as if they were incorporated.
  2. Corporation by estoppel: TP�s dealing with entity as if the entity was a corporation are estopped from denying the corporation exists, thus giving the entity�s members liability protection.

  1. Ultra vires

  1. No longer relevant, because in California the articles can say "this corporation can do anything" and you�re covered.
  2. State or shareholders can go against the corporation and limit their acts, but TP�s can�t.

  1. Close

  1. < 35 shareholders
  2. Identified as close in the agreement
  3. Allows shareholder agreement
  4. New shareholders must sign on shareholders agreement otherwise agreement is void.
  5. Agreement will terminate, unless otherwise provided, if corporation looses its "close" corporation status, such as > 35 shareholders caused by testimentary transfer. Inter vivos transfers that would put number of shareholders > 35 are void.

  1. Tri-level structure, centralizing management away from the owners

  1. Owners / Shareholders

  1. Preemptive rights: Option for corporation, must be included in Articles (not just bylaws). Right of a shareholder to purchase newly issued stock on a porportionate basis to their current ownership. Exception if management believes it is necessary to get specific property, then they can issue special stock to acquire that property. Courts may equitably give preemptive rights even if not included in Articles, if offered at a price substantially below fair value.
  2. Cumulative voting of directors: Promotes minority representation. Mandatory for corporations that are not huge publicly listed companies. Lowering the number of directors and stagaring the board thwarts the effects of cumulative voting. No staggard boards allowed in CA unless publicly held corporation.
  3. Pooling agreements are legal.
  4. Voting trusts have a max of 10 years. Creates a trust agreement, giving only the voting rights to the trustee.
  5. Supermajority can be required for a vote, but not a quorum. Risk of deadlock.
  6. Proxies are irrevocable only if identified as such. Proxy given to secure the performance of a duty can be made irrevocable.
  7. Restriction on transfer of shares: Can�t totally prohibit transfer (alienation of property), but can restrict so long as reasonable, such as a right of first refusal. Consent restriction is usually invalid.
  8. Shareholder agreements cut into domain of Board. The directors are not mere agents of the shareholders, and once they are elected they should be free and independent to exercise their judgment. Recourse is through removal. Shareholder agreements are therefore valid only when unanimous consent and no harm to TPs, or when there is a statutory close corporation with unanimous consent to agreement.
  9. Oppression of minorities: Majority of the shareholders cannot control corporation to the disadvantage of the minority.
  10. Piercing the corporate veil

  1. Shareholders generally liable only for their investment
  2. Increased liability if

  1. Alter ego: Shareholders disregard corporate entity and act as if corporation isn�t there.
  2. Instrumentality: Corporation operated by owners, to owners benefit, but not to the best interest of corporation.
  3. Inadequate capitalization at beginning of corporation.
  4. Bankruptcy court can use Deep Rock Doctrine to subordinate other claims to the claims of your client. Requires owners to have loaned money to company, as a way of hiding capital.

  1. Acts must be to the detriment of a TP for damages to exist.

  1. Proxy

  1. Material false statement actionable only when vote of the complaining party was needed to pass.
  2. Shareholder proposals can be put into management proxy, but corporation can exlude for good cause (broad). No exclusion if public policy reasons for inclusion.
  3. Looser pays for the proxy expenses.

  1. Insider trading I

  1. Doesn�t just apply to large or publicly held corporations.
  2. Face-to-face transaction where insider buys from his own shareholders requires reliance if affirmative misstatement.
  3. Market transaction: No reliance required.
  4. Must disclose or abstain.
  5. P must be purchaser or seller
  6. D can be anyone given the information in confidence, including insiders, temporary insiders, tippees. Person must have had a fiduciary duty.
  7. Information must be material.

  1. Insider trading II: Officers, directors, 10% shareholders must turn over short swing profits to large, publicly held corporation. Includes shares traded in kind if potential for abuse.
  2. Fraud: Material information must be truthful. Safe harbor if speaker doesn�t have actual knowledge of falsity of statement, or if disclaimer language for estimates.
  3. Shareholder derivitave suit: Shareholder with contemporanious ownership bringing suit for the corporation. Must make demand of the Board, unless excused as futile. Board has some say in whether the lawsuit should proceed.

  1. Board of Directors

  1. Elected by shareholders
  2. In charge of management of business and setting policy
  3. All directors can be eliminated, as a whole, for any reason, at any time, by shareholders. Individual directors can be eliminated for any reason, so long as there is no reverse cumulative voting problem.
  4. Proper management requires joint deliberation, therefore all acts must take place at a meeting, with notice given. Notice can be waived before or after the meeting. No meeting required if unanimous written consent.
  5. Corporation can be bound by apparent authority, but it is very unusual.
  6. Supermajority can be required for a quorum or a vote. Risk of deadlock.
  7. Fiduciary obligations

  1. Duty of care

  1. Low standard requires good faith, in the best interest of the shareholders, with reasonable inquiry.
  2. Business judgment rule: Decision made in good faith without conflict of interest, fraud or illegality, on a rational basis.
  3. Takeover requires higher standard of care.
  4. Shareholders can eliminate or restrict dollar damage liability of the directors for their negligence.

  1. Duty of loyalty

  1. Good faith, fair dealing, undivided loyalty
  2. Steeling opportunity presented to corporation. OK only if first disclosed and offered to corporation.
  3. Outside opportunity in the same line of business as the corporation must first be offered to the corporation. Financial ability of corporation to take opportunity is a very samll factor.
  4. Conflict of interest

  1. If director has financial interest (including stock ownership), he must fully and completely disclose to uninterested shareholders, who then approve, that�s fine.
  2. If director does not have a financial interest, he�s ok as long as he makes a full and complete disclosure to uninterested directors, who then approve, AND the transaction must be just and reasonable to the corporation (burden on P).
  3. Common directorship, with no financial interest, requires disclosure to board or shareholders.
  4. Even if no disclosure, transaction is ok so long as it was just and reasonable to the corporation at the time of the transaction, but burden is on D.

  1. Officers

  1. Appointed by the Board
  2. Implements policies set by the Board

  1. Dissolution

  1. Voluntary

  1. 50% of outstanding shares

  1. Involuntary

  1. Court approval required, which requires standing + grounds
  2. Standing (does not include wrongdoers)

  1. Half of the directors; or
  2. 33% of outstanding shares; or
  3. Any shareholder of a close corporation

  1. Grounds

  1. Freezing of the ability of the corporation to act
  2. Fraud
  3. Protection of shareholder rights or interests

  1. If less than 50% of shareholders want dissolution, majority shareholders have the right to buy out the minority complaining shareholders.

  1. Limited Liability Company

  1. Corporation + Partnership
  2. All owners have protection from liability
  3. No double taxation.
  4. Complete freedom as to make-up of ownership and management.
  5. Formalities require Articles of Organization and unanimous agreement for Operating Agreement.
  6. Cannot be used to carry on professional activity (lawyers).
  7. Useful for corporations to get together for a joint venture.
 

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