Business Entities PDF

# Business Entities ## Agency Relationship Requires - Mutual Agreement - The agent must be acting on behalf of the principal - The agent must act subject to the principal’s control ## 3 Forms of Agency - Relation of principal and agent - Relation of master and servant - Relation of employer and pr...

# Business Entities ## Agency Relationship Requires - Mutual Agreement - The agent must be acting on behalf of the principal - The agent must act subject to the principal’s control ## 3 Forms of Agency - Relation of principal and agent - Relation of master and servant - Relation of employer and proprietor and independent contractor ## Express Authority The Principal gives a clear and actual command and right to do a particular act ## Implied Actual Authority An agent has implied actual authority when the principal does not expressly confer authority but the principal’s words or conduct reasonably interpreted, caused the agent to believe that he has the authority ## Apparent Authority The authority an agent is believed by third parties to have because of the behavior of the principal. ## Inherent Authority The authority of an agent to perform activities that are not specifically mentioned in the agency agreement but are necessary or customary to carry out an authorized act. ## Four Rules for Agent Liability 1. If an agent contracts with a third party on behalf of a disclosed principal, the agent is not liable on the contract absent contrary agreement. 2. If an agent contracts on behalf of a partially disclosed or an undisclosed principal, the agent is normally liable on the contract. 3. An agent who purports to act on behalf of the principle impliedly warrants that he has authority unless he disclaims the existence of such a warranty or the third party knows that he lacks the authority. 4. If the agent lacks a part to bind the principle the third party may sue the agent for breach of warranty of authority or misrepresentation of the author. ## Factors to weigh for Scope of Agent's authority 1. The time, place, and purpose of the act. 2. Its similarity to acts which the servant is authorized to perform 3. Whether the acts are commonly performed by the servant 4. The extent of departure from normal methods 5. Whether the master would reasonably expect such an act to be performed. ## When can a Choice of Law Provision be struck by a court There is no substantial relationship between the state whose law is chosen and the parties or transaction at issue, and there is no reasonable basis for the parties choice. The state whose law would otherwise have applied has a materially greater interest in the controversy and has fundamental policy interest that would be contravened by the application of the chose state's law. ## Rules for Partnership 1 Every Partner has the right to perform the partnership's business and to participate in the management of the partnership. 2 Partners have equal voting power 3 Partners share equally in the profits and losses of the partnership 4. The partnership is liable for contracts entered into by partners acting with actual or apparent authority. 5. The partnership is also personally liable for the torts committed by partners acting with authority or in the ordinary course of the partnership business. Partners are personally liable to 3rd parties for the obligations of the partnership 6. It takes unanimous agreement to admit new partners 7. Every partner may dissolve an at will partnership ## When one partnership contributes only monetary capital and the other labor can the former collect from the latter during default? No ## Scope of Employment Partnership Law Rule 1. Been the kind of thing the partner does. 2. Occurred Substantially within the authorized time and geographic limits of the Partnership. 3. Been motivated in part to serve the partnership. ## Can a partner assign his interest in partnership property? No ## Can a partner use partnership property for non-partnership related activities No ## Is a partner’s interest in partnership property subject to attachment or execution on a claim against another partner. No ## What happens to partner’s interest upon that partner's death It becomes vested within the surviving partners ## Preemptive rights The right of a shareholder in a corporation to have the first opportunity to purchase a new issue of that corporation's stock in proportion to the amount of stock already owned by the shareholder. ## De facto Corporation requirements 1. An attempt to organize under the statute. 2. A valid law under which such a corporation may be legally organized. 3. Actual use of corporate franchise ## Do the parties need to be aware that they are in agency/partnership relationship? No ## When a creditor assumes control over a debtor's business what is relationship is established between the two An agency relationship ## Rule for Ratification in Agency law Ratification requires acceptance of the results of the act w/ an intent to ratify and w/ full knowledge of all material circumstances. ## Agency by estoppel rules 1. If a business creates a situation where ppl might understand someone is an agent then the principal may be liable on the basis of estoppel. 2. Duty of proprietor includes reasonable care and vigilance to protect the customer from loss occasioned by the deceptions of an apparent salesman. ## Factors in proving that a person is an employee. 1. extent of control (most important factor) 2. Distinct occupation 3. w/o supervision 4. Skill 5. Employer supplies tools/instrumentalities 6. length of time 7. Method of payment 8. part of regular business. ## When the principal is found liable for the agents misconduct can the the principal indemnify the agent Yes ## Borrowed servant doctrine The employer who is in the best position to control the employee's conduct that would have prevented injury to the third party. ## Dual purpose rule Servant combining his own business w/ that of the master or attending to both at substantially the same time the master will be held responsible. Yes (remember the case about the racist gas station attendant)(however if the tort involves force it must be related to their line of employment, thing bouncers.) ## Rule for torts of independent contractors Principals are generally not liable to employees of independent contractors for torts committed by those independent contractors while performing tasks contracted by the principal. ## The 3 duties an agent has to a principal 1. Loyalty (cannot just benefit oneself without approval) 2. Care (cannot negligently harm the principal. 3. Obedience ## If an agent receives some benefit that is outside of what the principal has given the agent what must the agent do. Give the benefit to the principal. ## 152.208 is about unanimity is required to change the partnership agreement ## 152.051 What section governs sharing of profits and losses and degree of control in a partnership ## 152.052 What duties do partners owe to each other and the partnership? ## If one partner owes money to a third party does the other partner have to pay yes ## The 3 key people in a corporation - Shareholders - Board of Directors - Officers ## Rule for estoppel in the case a partnership engaged in false representation 1. FIRST - do something fraudulent to suggest in a pship 2. SECOND - person extending credit relied on the fact that person was a partner in order to give them a line of credit ## Liabilities when the corporation goes bankrupt 1. all partners are liable if in debt and if corp goes bankrupt it is a sep entity so corp alone takes losses if goes into bankruptcy ## What section states events that would be considered a partner withdrawing 152.501 ## Which statute states what happens after a partner withdraws 152.502 ## When a partnership is making a decision with in the ordinary course of business how must it do so Via approval of the majority interest in the partnership ## When a decision is being made regarding something outside the ordinary course of business what is required to approve that decision unanimous approval by the partners. ## Capital accounts in a partnership The are claims by each partner in a partnership to how much stake hold they have in the partnership. ## If a partner gains knowledge, in his business capacity, of an opportunity that would benefit the partnership what must that partner do. He must inform the other partners otherwise he violates his fiduciary duty of loyalty. ## What if the partner is not working in his business capacity and learns of a beneficial opportunity to the parternship. He does not have to tell his partners. ## Duty of loyalty in partnership law The owners of a corporation are called shareholders ## Board of directors role in a corporation The Board of a corp can exercise or authorize the exercise of powers of the corporation and direct the management of the business and affairs of the corporation. ## Officers role in a corporation Run the corporation, but they can only act when delegated with the authority from the Board ## Closely held corporation a type of corporation that issues stock to only a few people. ## What do owners usually do in closely held corporations They often elect themselves to be on the board and they select themselves to be officers of the corp. ## Publicly held corporations A corporation owned by shareholders outside the officers and employees of the firm. Officers will control the info sent to shareholders. ## Steps to form a corp in Texas 1. file a 201 Form from the Sec of State. 2. receive a certificate of formation from Sec of State. ## 3.005 requires 1. List of things you have to include in cert of formation 2. (1) name of the corp 3. Also make sure you follow the secretary of state (you cant just go straight from the statute) ## What must follow whatever chosen name for a corporation company, corporation, incorporated or limited or an abbreviation that the name of the corporation must be easily distinguishable ## 5.053 requires. 1. You must list a registered agent for the corp 2. So if you need service of process for a corp then you give it to registered agent ## What does form 201 art 2 require It has to be a street ## Does the Registered agent's address have to be an actual street or can it be a PO Box It has to be a street ## Form 201 art 3 requires 1. Have to list BoD and so you have to put down 2. Traditionally like 3 BoD to prevent tie voting ## Form 201 art 4 requires 1. Have to list the number of shares of stock 2. Par value of the stock (utterly meaningless but can bight you in the but) ## Form 201 art 5 requires the purpose of the corporation and the corporations means of business ## Promoter someone who helps to found and organize a corporation ## Common shares 1. represent the ultimate ownership of the corp. 2. Usually when the corp earns undistributed profits it increases share value 3. posses voting rights and elect directors ## Will a promoter remain liable under a contract despite its ratification by a corporation unless a novation occurs? Yes (1. A k w/ the promoter is not one w/ the corp ABSENT some subseq corp act or agmt) ## If pre-incorp k made by a promoter is within the corp powers how can it become a valid obligation of the corp the corp may expressly or impliedly ratify the k ## Does the liability of corporate adoption end the promoter's liability to a third party. No it will not unless there is novation. ## What happens to the promoter after a novation is consented to The promoter is divested of rights and all responsibilities. However, the creditor must assent to the substitution of a new obligor. (assent can be implied) ## Can a promoter be liable for a quote or option made to a party pre incorporation Yes ## Adoption When the corp at the initial board meeting and decides they want to be a party to the k, then the board would approve it and give auth to the promoter to sign the k ## What is required of the corporation to adopt a contract the corp has to accept the benefits w/ knowledge of material aspects of the k ## Can there be an issue regarding whether a corporation can adopt a pre incorp K Yes, specifically if there is language for-bidding it ## Novation the corporation SUBSTITUTED INTO THE K in place of the promoter but it can only happen w/ agreement of other party (this is like a new k) ## Ratification vs Adoption 1. You can only ratify something if the person who acted was your agent when the person acted 2. You CANNOT use ratification when no corp in existence bc when promoter entered into k there was no corp, the promoter could nOT have any auth so instead adoption concept applies ## What is a Nuisance Per Se 1) Inherently dangerous activity 2) Peculiar risk of harm to others unless special precautions are taken 3) Distinguish from "ultra-hazardous activities (work that necessarily involves a serious risk of harm which cannot be eliminated by the utmost care and is not a matter of common usage). Liability is absolute. ## What qualifies as a trade secret? 1) if it is valuable to a business, and kept confidential, then it's a trade secret. 2) A confidential, non-apparent aspect of business that provides a significant business advantage 3) if trade secret is given to agent while still and agent, trade secret must remain confidential ## 152.203(c) gap filler regarding compensation A partner is not entitled to receive compensation for services performed for a partnership other than reasonable compensation for services rendered in winding up the business of the partnership. ## 152.002 gap filler effect of partnership agreement: non-waiveable and variabel provisions--partnership agreement controls (except in (b)) if not in agreement then provision of the Act controls the partnership ## What is a joint venture? It is a type of partnership. It describes partnerships that have a very limited scope in time and space. ## Can a partner eliminate a duty of loyalty via contract. No but he can contract to have a certain event not be a breach a duty of loyalty ## What are the general rights to books and records for a partner to access? 152.212(c) Partners have access to books and records of the partnership. 152.002(b)(1) It must be reasonable. There is no access to books outside of-fice hours. ## What are a partner's duties after the dissolution of the partnership Partners only have a fiduciary duty to other partners. Once someone is no longer a partner, the partnership does not have obligations to you. ## Can a partner be expelled via judicial decree Yes (method of last resort) ## 153.001(c): What type of debts can partnership property be used to pay? Partnership debts only in the ordinary course of business -- not individual debts. ## TX 152.304(a): What is the liability for partners regarding obligations of the partnership? All partners are jointly and severally liable for debts and obligations of partnership. ## If a partner does not have the authority to perform an act and the third party doesn't know that, what happens liability-wise. That partner can still bind a partnership under apparent authority. ## What is withdrawal? Partner ceases to remain a partner. ## What is windup? A period where you do everything necessary to terminate the business. ## What is termination? Nothing left in partnership and people are out of it. ## 152.604: what can a partnership do to set off for certain damages when a partner withdraws? Set-off for certain damages. If a partner screwed up, the partnership can withhold the costs owed to it. Plus, 152.503(c): the partnership may sue for wrongfully withdrawing partner. ## 152.505(a): To what liabilities is a withdrawn partner still subject? Partner continues to be liable for debts and obligations that were incurred while he was a partner, but not after that not in most instances unless third party had no reason to know the partner has withdrawn and had no notice. Notice is tricky because might be construed as competition and might violate non-compete duty. ## 152.504: What are the withdrawn partner's power to bind partnerships? The withdrawn partnership can bind the partnership for one year if her could've bound the partnership before and the third party didn't know he had withdrawn. ## What is the difference between a limited partner and a general partner? Limited partners cannot manage or run the business. They only contributed financial support. ## 153.102: What is the liability of limited partners to third parties? Limited partner not liable for obligations of partnership unless he is also a general partner or participated in control of business. If he does participate in control, only liable to those he transacted business with who reasonably thought he was a general partner. ## 152.802: How do you create an LLP? When you register with Secretary of State, it only lasts one year. Once that year lapses, you become a general partnership. ## 21.409: What is the process for removing a member of a corporation's board of directors? Shareholders of a corporation may remove director or entire board, with or without cause, at a meeting called for that purpose, by a vote of a majority of shareholders. ## 21.059(b): What happens at the organizational meeting of the board of directors? 1) Approve issuance of stock to shareholders 2) Approve bylaws for the incorporations; drafted by attorney 3) Select officers 4) transact with other businesses ## What is the point of "By" when making a signature block for a corporation's contract? Without the "By," the person who signed the contract may be held personally liable for it rather than having the corporation liable. ## Regarding the signature block for a corporation's contract, what happens when the signor signs the second time under "By" line? It implies that the person intends to also be personally liable under the contract. ## What are the requirements to pierce the corporate veil? 1) Such unity of interest & ownership that separate personalities of the corporation & individual no longer exist AND 2) Circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice (tough standard to meet) ## What is undercapitalization? 1. Not enough funds to sustain the business. 2. Because of this a corporation cannot pay creditors ## 1.102: What are the powers of foreign (other state's) corporations? 1) Corporations created in other states can practice here. 2) If you are a Texas court trying to pierce the veil of a Delaware corporation, you use Delaware law. 3) Law of the state or other jurisdiction in which that foreign governmental authority is located governs the formation and internal affairs of the entity. ## What is a shareholder derivative action? The shareholders may step in and sue the third party on behalf of the corporation. ## Business Judgment Rule (BJR) creates a rebuttable presumption that as long as there could be a rational basis, then there is no liability, including any rational reason, even if it's not related. 1. Fraud-cant use BJR if the directors have acted fraudulently. 2. Illegality-cant use BJR if what the director has done is illegal under another law. 3. Conflict of interest/Self Dealing [most important exception] (Key is whether or not a director is personally benefitting) 3. No business judgment/gross negligence. ## When does the BJR not apply - Bankruptcy Insolvency - Equitable Insolvency ## What is a Surplus the amount by which the net assets (net worth or shareholders equity of a corporation exceed the stated capital of the corporation. ## Surplus equation Net Assets subtracted by Stated Capital. ## What is Stated Capital the par value of all shares of the corporation with par value that have been issued. ## Par value the minimum amount of money an investor has to contribute to pay for a stock ## Straight voting voting for directors where shareholders must vote for each director separately, with each shareholder having as many votes as shares held ## Cumulative voting multiply the number of share held by shareholder by the number of directors/seats up for grabs at that time. That's how many votes they get. ## What records must a corporation keep 1. original issuance of shares by the corp. 2. each transfer of those shares 3. Names and addresses of past shareholders 4. number, class, series of shares issued by the corp. held by current and past shareholders. ## What does a director need to show to the court if the corporation does not let him inspect records 1. the person is a governing person of the entity 2. the person demanded to inspect the entity's books 3. the person's purpose is reasonably related to the person's service as a governing person. 4. the entity refused the person's good faith demand to inspect ## When an officer is removed does it prejudice his contract rights No ## Where do shareholders agreements have to be in order to be enforceable In either the corporation's bylaws or its certificate of incorporation ## Can shareholders via a shareholder agreement remove a director yes ## Will a court strike a shareholder agreement that unreasonably limits the board's power and authority Yes ## what is the percentage for a super majority in a closely held corporation 55% ## Can a closely held corporation put restrictions on the transferability of its shares yes so long as it is reasonable ## Events triggering a buy-sell 1. Death, disability, divorce 2. Termination of employment 3. Deadlock 4. Sale or other transfer of stock 5. Pledge of or lien on stock ## Ways one can restrict transferability of shares 1. Cert. of formation 2. by laws 3. an agreement between two or more holders of stock 4. an agreement between a holder of stock and the corp. ## Does a corporation liable for the acts of its sister corp? No ## Is stock held by a holding company wholly owned by a parent company liable for the debts of its subsidiaries. No (they are separate entities under the law) ## Can an individual shareholder be held liable for a corporation's contractual obligations or a failure to observe a corporate formality No (Unless there is personal guarantee) ## Factors of Piercing the Corporate Veil for closely held corporation. 1. corporate formalities (low weight given) 2. Commingling of funds (more important) 3. Undercapitalization 4. Owner promising to pay out of pocket. ## Can you pierce the corporate veil in contract cases where there is no fraud No ## What law do you apply when PCV if the corporation is a foreign corp. The law of the state where the corp was formed ## Deep Rock Doctrine the claim of a stockholder and especially stockholder with controlling interest who makes a loan to his or her own corporation will be subordinated to the claims of outside creditors if the corporation is undercapitalized ## Types of persons who are fiduciaries to a corp Officers, employees, and the board of directors ## Is shareholder a fiduciary usually to a corporation No ## Duty of care standard for directors care of ordinary prudent person in similar circumstances. (negligence standard but courts are applying a good faith standard) ## What standard applies if a business decision was made which resulted in misfeasance The business judgment rule applies and the standard shifts to gross negligence ## How can a director dissent 1. the director can dissent at the meeting 2. the director can file a written dissent 3. send a written dissent by certified mail ## Can a company take action that harms its shareholder but are however motivated soley by humanitarian concerns, not by business concerns. No (think of Henry Ford trying to give back to the community at the expense of shareholders) ## Examples of common breaches of loyalty 1. Officer or directors acts with intent to benefit himself, relative, or associate at the expense of the corp. 2. Officer or director takes a corporate opportunity himself. ## Examples of a less obvious breach of loyalty 1. Officer or director consciously acts in violation of law or governing documents. 2. Most recently, officer or director consciously disregards duty to act (lack of good faith) ## If there is a conflict of interest on a fiduciary what is the burden of the fiduciary That the decision was fair to the corporation ## How can a director self dealing transactions escape becoming voided 1. Good faith authorization of the K by the majority of disinterested directors. 2. Transaction ratified by the board of directors, committee, or shareholders=Valid Transaction; "put it to the shareholders" 3. [substantive provision] fairness to the corporation with the transaction; requires a court. ***wont use (b)(1)(A) or (B) without an attorney. ## Factors for a corporate opportunity: 1. whether the corp is financially able to take on the opportunity. 2. whether the opportunity is in the line of business or a logical extension of the line of business. 3. will it make money for the corp 4. does the corp have an interest in it (or expectation of interest) 5. will officers be placed in competition with own corporations. ## what 3 things on their own allow for a contract between a corporation and one of its interested directors to be valid 1. material facts as to relationship or interest are disclosed or known by corporation. 2. Shareholders vote and specifically approve with material facts presented 3. K or transaction is fair to the corporation when authorized, approved, or ratified by the board or shareholders ## What is a disinterested director • a person not a part to the K and no material financial interest. (an associate refers to a spouse or relative who resides with that person) ## what 3 claims can arise in closely held corporations where directors who set their own salaries in their capacity as officers (1) a duty of loyalty claim asserting that a director or officer had a conflict of interest in setting executive compensation 2) a procedural duty of care claim asserting that a board was grossly negligent in the procedures that it sued, and the information that it considered, in setting executive compensation 3) a substantive duty of care claim asserting that a board committed waste in setting executive compensation ## What is Quantum Meruit when you provide services to someone in a circumstance that seems that you should have been compensated, then a court will find that you should be compensated. ## Who sets salaries under the Texas act the board ## Take away from the Venezuelan Oil Company case Controlling shareholders have disclosure obligations when dealing with the corporation and its minority shareholders. ## What is the focus of the duties imposed on controlling share holders Fairness (not selflessness) ## Can one sell their controlling stock at a premium? Yes so long as the purchaser of the new stock doesn't try to loot the corporation? ## What are the 3 looting factors 1. did the buyer demand immediate control of the corp before completing the transaction 2. Nature of the Corps assets (liquid easier to loot) 3. sale price vs market value (does not apply to closely held) ## How to find value of stock when there is no market value equity divided by number of shares (assets minus liabilities then divide by shares) ## What is Corporate Indemnification Where the corporation pays the expenses of an employee, director, or officer. corporations must indemnify governing persons (board members) in legal matters in which they are wholly successful in defending. ## Texas Mandatory Indemnification (8.051-Mandatory Indemnification) 1. corporation may choose to indemnify certain other employees of the corporation. 2. an enterprise shall indemnify an officer to the same extent that indemnification is required under this chapter for a governing person. ## Permissive indemnification rule for Texas A corp. may choose to indemnify certain people if the person wanting to be indemnified: 1. acted in good faith (factual issue) 2. that person either reasonably believed that either his actions were in the corps best interest or not against the corps best interests 3. in criminal cases, the corp. may chose to indemnify if the person did not have reasonable cause to believe that his actions were criminal ## What are ways a corp can make permissive indemnification provisions (1) majority vote by disinterested and independent directors; (2) majority vote of a committee; (3) special legal counsel; (4) disinterested and independent owners (5) a unanimous vote of the owners. ## What are ways a corporation in texas can expand the scope of mandatory indemnification via the corp's governing documents or a resolution from a group allowed to pass resolutions. ## How much does one get from the corp from indemnification You get indemnified for the judgment and the reasonable legal fees associated with the judgment. (see 8.102 (b) for limitations) ## What is a Freeze out gives shareholder incentives to sell their shares, or not to sell their shares; the majority freezes the minority and then takes control of the board and who are officers of the corporation; then the board will not declare dividends effectively destroying the investment of minority shareholders ## Can controlling share holders use their authority to give themselves special advantages over minority shareholders No ## Shareholder agreements require 1. Must be in writing 2. Must be signed by all the shareholders 1.they were a shareholder of the corporation at the time of the act or omission (or become shareholder via an operation of law) 2. that they represent the rights of the corporation 3. ## In Texas what is sufficient for a shareholder to have standing in a derivative suit 1. must file a written demand to the corp 2. the demand is not answered after 90 days ## What must a corp do after having receiving a derivative demand or suit The corp by an affirmative vote of the majority of [either]: independent and disinterested board members, committee, or panel in deciding how to respond. ## What can stay a derivate suit proceeding If the corporation says they are looking into the matter ## How can a derivative suit proceeding be dismissed by the corp If the corp determines in good faith, after conducting a reasonable inquiry and based on factors the person or group considers appropriate under the circumstance, that continuation of the derivative proceeding is not in the best interest of the corporation. Plaintiff has the burden to show the investigation was done in bad faith. ## What burden does the Plaintiff have in trying to prevent dismissal by the corp That the dismissal was done in bad faith ## In Texas what is the maximum amount of shareholders a closely held corp can have 35 ## Can the court treat a derivative suit involving a closely held corp as a direct suit yes ## Can recovery in a direct or derivative proceeding by a shareholder be paid directly to the plaintiff or to the corporation? Yes if necessary to protect the interest of creditors or other shareholders of the corporation. ## What actions do not constitute participation in business for limited partnerships Look at 153.103 ## In a certificate of formation for an LLC requires whether the LLC will have manages or members ## What are Managers in terms of Limited Liability Entities they act like board of directors and are selected by owners. ## What are Members in terms of Limited Liability Entities Members are owners. ## De Facto LLCs require 1. Has to be an act that allows the creation of them. 2. Must have good faith effort to form. (mail the sec of state the papers 3. Use LLC/Corp. powers ## Can company agreements for LLC being oral or do they have to be written They can be both written and oral ## What do company agreements deal with 1. the relations among members, managers, and officers of the company, assignees of membership interest in the company, and the company itself 2. other internal affairs ## What things cannot be changed by a company agreement see 101.054 ## Can a limited liability company make a distribution to a member of the company if, immediately after making the distribution, the company's total liabilities exceed total assets. No, unless its a liability described in 101.206(b)