Business Law: Shareholders and Corporate Governance
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Questions and Answers

What is a key characteristic of limited liability in business ownership?

  • Ownership is shared between partners without any risk.
  • Owners can lose personal assets in case of business debts.
  • All business partners must share equal liability for debts.
  • Owners are only liable up to their investment in the business. (correct)

    • Which factor does NOT typically contribute to unfairness in corporate conduct?

  • Protection of minority shareholders' interests. (correct)
  • Unequal distribution of profits among shareholders.
  • Guaranteed salaries for all partners, regardless of profits.
  • Lack of transparency in financial reporting.

    • In the context of quasi-partnerships, what constitutes a legitimate expectation?

  • Access to personal assets for business use without restrictions.
  • Expectation of shared decision-making in business operations. (correct)
  • Guarantee of personal liability protection for all partners.
  • Assurance of unlimited profit-sharing irrespective of contributions.

    • What distinguishes financial prejudice from non-financial prejudice within a corporate framework?

    <p>Financial prejudice considers loss of profits, while non-financial involves reputational harm.</p> Signup and view all the answers

    How can shareholders' rights impact management within a business?

    <p>Increased shareholder rights can diminish the authority of management to make decisions.</p> Signup and view all the answers

    Which of the following best describes how the concept of separate legal personality impacts shareholders' rights in a corporation?

    <p>The entity owns the property, assets, and debts, protecting shareholders from personal liability.</p> Signup and view all the answers

    In the context of unfair prejudice, which factor is most likely to be considered when determining if shareholders are treated unfairly?

    <p>The degree to which shareholders' legitimate expectations are met.</p> Signup and view all the answers

    What is a potential consequence of unfairness in corporate conduct for minority shareholders?

    <p>Financial prejudice leading to reduced investment opportunities.</p> Signup and view all the answers

    When evaluating financial versus non-financial prejudice in corporate governance, which of the following scenarios exemplifies non-financial prejudice?

    <p>Exclusion from important corporate meetings and decision-making processes.</p> Signup and view all the answers

    How can shareholder rights impact management decision-making in a corporation?

    <p>Empowered shareholders can demand changes in management strategies or practices.</p> Signup and view all the answers

    Match the following business structures with their characteristics:

    <p>Sole Trader = Personal liability for debts and no distinction between personal and business assets Partnership = Minimum of 2 partners with joint and several liability for debts Limited Liability = Owners are only liable up to their investment in the business Company = Separate legal identity distinct from its shareholders</p> Signup and view all the answers

    Match the following concepts with their definitions:

    <p>Agency = A relationship where one party acts on behalf of another Partnership Act 1890 = Defines the relationship between business partners aiming for profit Unlimited Liability = Personal assets at risk for business debts Limited Partnership = A partnership where some partners have limited liability</p> Signup and view all the answers

    Match the following terms with their implications:

    <p>Joint Liability = All partners are responsible for the partnership's debts Severally Liability = Any single partner can be held liable for the entire debt Personal Savings = Common source of capital for sole traders Contractual Agreement = Establishes terms of a partnership to avoid dissolution on partner exit</p> Signup and view all the answers

    Match the following advantages or disadvantages to the corresponding business structure:

    <p>Sole Trader = No formal structure required with all profits going to the owner Partnership = Dissolution upon a partner's death without an agreement Company = Protection from personal liability but involves regulatory requirements Limited Liability = Encourages investment by protecting personal assets</p> Signup and view all the answers

    Match the following statements with the correct business structure:

    <p>Sole Trader = Operates under the individual’s name with no legal filing requirements Partnership = Can be formed through verbal agreements and has profit sharing Company = Independently liable for its debts and separate from shareholders Limited Liability = Enables business owners to limit personal financial risk</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Agency = A relationship where one party acts on behalf of another Limited Liability = Protection that prevents personal assets from being used to satisfy business debts General Partnership = A partnership where all partners have equal responsibilities and liabilities Sole Tradership = A business structure where one person owns and manages the business</p> Signup and view all the answers

    Match the following aspects of business organizations with their concerns:

    <p>Capital = Ability to raise funds for business operations Risk = Exposure to personal liability and business debts Set Up Costs = Expenses related to legally establishing a business entity Confidentiality = The need to protect sensitive business information</p> Signup and view all the answers

    Match the following agency concepts with their implications:

    <p>Authority = The power of an agent to act on behalf of the principal Third Party = An entity that is not directly involved in a contract but may be affected Representation = The act of an agent communicating authority of the principal Liability = The responsibility for debts and obligations of the business</p> Signup and view all the answers

    Match the following types of partnerships with their characteristics:

    <p>General Partnership = Partners share equal responsibility and liability for debts Limited Partnership = Includes general partners with full liability and limited partners with liability protection Limited Liability Partnership = Partners have limited liability for the actions of other partners Joint Venture = A temporary partnership for a specific project or goal</p> Signup and view all the answers

    A partnership can continue to operate even after the death of one of its partners if there is a contract in place.

    <p>True</p> Signup and view all the answers

    In a sole trader structure, the owner's personal assets are completely protected from business debts.

    <p>False</p> Signup and view all the answers

    Limited liability means that owners of a business are responsible for all liabilities incurred by the business.

    <p>False</p> Signup and view all the answers

    One of the disadvantages of a partnership is the joint and several liability, which holds each partner accountable for the actions of the others.

    <p>True</p> Signup and view all the answers

    A partnership requires a formal legal structure and filing requirements to be considered valid.

    <p>False</p> Signup and view all the answers

    Stefanos is an agent of Garros Ltd in the discussed scenario.

    <p>False</p> Signup and view all the answers

    A corporation allows for personal assets of the owners to be at risk in case of business debts.

    <p>False</p> Signup and view all the answers

    In a limited partnership, personal liability for business debts remains a possibility for all partners.

    <p>False</p> Signup and view all the answers

    Confidentiality in a business means that all information must always be shared with investors.

    <p>False</p> Signup and view all the answers

    Raising capital by issuing shares is not an option for a sole trader.

    <p>True</p> Signup and view all the answers

    Study Notes

    Indicia of Partnership and s24 (for Exam)

    • Agency is a relationship where a person (agent) has authority to act on behalf of another person (principal) in legal matters.
    • Agency is often created by contract where the principal instruct the agent.
    • The agent's actions are legally binding on the principal.
    • One person acts on behalf of another. The act is attributed to the principal.

    Visual Representation of Agency

    • Charlie (principal) - Kevin (agent) - Cynthia (Third party)
    • Charlie and Kevin have a principal-agent relationship.
    • Kevin facilitates a transaction with Cynthia, however no direct contractual relationship unless something goes wrong.
    • Charlie, not Kevin is in the legal contractual relationship with Cynthia.
    • The agent is responsible for making the contract between the principle and third party.
    • The agent is not a party to that contract (unless something goes wrong.)
    • The agent has a separate contract with principal (contract of agency).

    Forming Agency Relationships

    • Express
    • Implied
    • Holding out
    • Ratification
    • Agency of necessity (doctrine of negotiorum gestio)
    • Operation of law

    Capacity

    • Principal must have capacity to contract
    • Agent does not need capacity (only facilitates transaction)

    Types of Agents

    • Universal agents – unlimited authority
    • General agents – wide range of activities
    • Limited agent/ad hoc – engaged for a specific task
    • Del credere agent – acts as guarantor of a third party's solvency

    Agency: Regulation by Common Law

    • Agency is regulated by both common law and legislation.
    • Legislation applies to commercial agents only.
    • Distinguish between commercial and non-commercial agents.

    What can Agents Do?

    • Contract on behalf of the principal
    • Sign legal documents
    • Perform legal acts
    • Transfer property
    • Take action in a court of law
    • Accept payment

    Why Have Agents?

    • Practical and efficient
    • Special knowledge or expertise
    • Geographical restrictions or benefits (e.g., foreign transactions)
    • Companies need agents to act

    Capacity of a Principal and Agent

    • A principal must have capacity to be bound by a contract; an agent does not.
    • A person can act as an agent even if they do not have legal capacity.

    Capacity of an Agent

    • Whether or not an agent has capacity does not affect whether a principal is bound by an agent's actions.

    Types of Principals

    • Disclosed
    • Undisclosed
    • Partially disclosed

    Agency Relationships: Issues

    • Ratification
    • Continuing authority
    • Capacity
    • Authority
    • Agents without authority
    • Breach of warranty of authority
    • Types of authority

    Forming Agency

    • Express Authority
    • Implied Authority
    • Apparent Authority
    • Agency of Necessity
    • Ratification
    • Operation of law

    Agency Relationships: Breach

    • Duty to act in good faith
    • Duty to exercise care
    • Duty to exercise reasonable care, skill, and diligence

    Breach of Warranty of Authority

    • Essentially, an agent warrants that he has the authority do the transaction
    • If the agent does not have authority breach is irrelevance if he believed they had the authority
    • The agent is liable to the third party
    • The agent is liable for the benefit given to the third party

    Breach of Duty to Exercise Reasonable Care, Skill and Diligence

    • Duty is the same for all duty types
    • Directors must act in the manner of a reasonable person
    • Consider the objective standard for the duty

    How to determine if an Agent Has Apparent Authority

    • The principal has created the appearance that the agent has the right to act.
    • Third party must rely on the representation of authority to have a claim with the principal.
    • If a person held out as an agent did something that was outside of actual authority and the person dealing with the agent relied on that appearance they could also hold the principal liable.

    Ratification

    • Ratification is a retrospective approval of an agent's act when the agent originally acted outside their apparent authority.
    • A contract won't be formed unless the actions of the agent are ratified (a retro active approval).

    Who the Right Person Is and What They Have the Right To Do

    • If the third party is relying on the principal being the one who is liable, to have the authority then is the one who is liable.
    • The principal can be liable if the member of the company did an unlawful act in regards to the company.

    Duties of Agents to Principals

    • Duty to follow instructions
    • Duty to avoid conflicts of interest
    • Duty not to accept benefits from third parties
    • Duty to communicate benefits to the principal
    • Duty to account
    • Duty not to delegate
    • Duty to avoid conflict of interests

    Authority vs. Duty

    • Authority covers the legal limitations in a given situation
    • Duty is a broad fiduciary concept
    • Directors have to follow the articles of associations so this is more than just contractual duty

    Statutory Treatment of Breach

    • Consequences of breach may be similar to common law remedies but they also have legal or equitable remedies
    • Can result in injunction
    • Compensation can be paid to the company
    • Directors have no right to compensation for a breach
    • Directors are personally liable for contracts and their actions
    • Directors are liable for acts and omissions that cause the company to suffer losses or if the company is insolvent.

    Different Types of Directors & Their Duties

    • De jure directors: Those appointed in line with the articles of association.
    • De facto directors: Those who act as directors without being formally appointed.
    • Shadow directors: Those who direct the actions of de jure directors (often in practice they aren't directors).
    • Directors can be held liable for the breach of their duty owed to the company, in the same manner that a principal is usually expected to held an agent accountable for any mistakes they might make.

    Company Insolvency and Directors' Duties

    • Directors have duties to the company even if the company is approaching insolvency; so the breaches aren't limited to the times when the company was trading well.
    • At the point of insolvency these duties need to be followed with diligence and care.
    • The duties of directors to exercise reasonable care, skill and diligence do not require a director to make certain decisions within a certain time frame

    Misapplication of Money or Property

    • If a partner misapplies the money or property of third parties, the firm is liable to make good the loss.
    • The firm is liable for misapplication, in the course of the business of the firm, by a partner
    • In the cases when a partner misapplies the money or property in the course of the business, the third party will hold the partner personally liable. (no relief)

    Duty to Prevent Wrongful Trading

    • A director of a company who knows or is aware that a company will be insolvent, even if the company is not insolvent at that point in time.
    • In cases where it has been determined that the director was aware that the company had no reasonable chance of avoiding insolvency, a claim could be brought by the liquidator to hold the director or directors liable for wrongful trading
    • If there were factors such as misusing funds that is considered unlawful act and that has caused the company to become insolvent.

    Statutory Options for Companies in Trouble

    • Winding-up (liquidation)
    • Administration
    • Moratorium
    • Restructuring plan

    Company Secretary

    • Necessary for the official correspondence of the company.
    • Statutory requirement for registered companies.
    • Often a director

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    Description

    This quiz explores key concepts in business law, particularly focusing on shareholders' rights, limited liability, and corporate conduct. It aims to clarify distinctions between financial and non-financial prejudice and the implications of unfair treatment in a corporate context. Test your understanding of how these factors influence management decisions and shareholder expectations.

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