BUS LAW II Notes PDF

BUS LAW II 1/23 CHAPTER 23: The Agency Relationship – Creation, Duties, and Termination Agency Relationships -​ An agent acts on behalf of a principal -​ An agent is under the principal’s direction -​ Agency relationships are usually formed by contract -​ The agreement...

BUS LAW II 1/23 CHAPTER 23: The Agency Relationship – Creation, Duties, and Termination Agency Relationships -​ An agent acts on behalf of a principal -​ An agent is under the principal’s direction -​ Agency relationships are usually formed by contract -​ The agreement does not have to be written -​ The agent is not required to be compensated -​ An agreement can be formed even if the parties expressly do not intend to create one Capacity -​ Capacity to be Principal -​ A person can do anything through an agent that he could legally do personally (but nothing more) -​ The legal effect of the agent’s actions is the same as if the principal himself had acted -​ Business organizations and groups can act through an agent -​ Capacity to be an Agent -​ A person can be an agent even if he does not have legal capacity to contract Creation of an Agency Test - Is one party (agent) acting: 1.​ For the benefit of and 2.​ Under the control of another (principal)? Evidence -​ Look at the parties’ words, actions, and the surrounding circumstances Formalities -​ Generally, none are required: 1.​ No contract is necessary 2.​ Agreement may be oral 3.​ Agent need not be compensated Capacity -​ No legal capacity necessary to serve as an agent (some regulatory exception) -​ (incapacitated agent may avoid agency agreement) -​ Any “person” with legal capacity may be a principal Power -​ Agent may do anything that the principal could do (with some exceptions) Types of Agents Commercial Agents -​ Agents don’t usually maintain their own inventory of goods -​ Agents take orders on behalf of the principal  -​ Agents are usually compensated on commission after a sale -​ Agents don’t usually bear the risk of nonpayment -​ Agents often have authority to contract on the principal’s behalf Employees -​ Employees (dependent agents) are under the control of the principal on both objective of work and means to achieve it -​ Employers give detailed instructions on day-to-day activities: -​ Most nations closely regulate employer/employee relationship -​ Cannot contract Independent Contractors -​ Independent contractors work according to their own methods -​ The principal controls the results to be achieved but not the means used to accomplish it -​ Principals often structure agreements to maintain an independent agency -​ Principals are less likely to be responsible for torts and crimes when they have little control over their agent’s daily activities Duty of Agents to Principals Duty of Loyalty -​ Fiduciary: trusted to act in the best interests of another -​ Agents must avoid conflicts of interest and appearance of impropriety -​ Moonlighting may be allowed -​ Duty of Confidentiality Duty to obey instructions -​ Agents cannot substitute personal judgment for the judgment and lawful instructions of the principal -​ An agent must act with reasonable ordinary care and common skills -​ Gratuitous agents have a lower standard of care Duty to communicate -​ An agent must share with principal timely information obtained Duty to account for funds/property -​ Express or implied duty to provide accurate record of receipts and expenditures -​ Commingling is not allowed and agents are liable for loss caused by commingling -​ Agents who take property are liable for embezzlement and/or conversion 1/15 Duty of Principals to Agents Duty to compensate -​ An obligation to pay the agent is usually implied -​ Compensation may be contingent on results -​ Procuring clause may entitle agents to commission on transactions that occur after agency relationship is terminated  -​ When the agent incurs expenses, a court may hold that the principal cannot terminate the agency until the agent has had time to earn expected commissions Duty to reimburse and indemnify -​ Agents may make advances in conducting the principal’s business -​ The principal must reimburse agents acting within the scope of authority Duty to keep accounts -​ The principal must keep records necessary to determine the compensation due an agent Liabilities Between Principals and Agents Breach of Duty by Agent -​ The principal may deduct losses from amount due to the agent if the agent’s breach of duty causes -​ The principal can bring an action in court Breach of Duty by Principal -​ An agent in lawful possession of the principal’s property usually has a lien on it for compensation owed the agent -​ Agents may bring a lawsuit to recover compensation -​ Specific Performance: notion that if you violate a non-compete you get an injunction that tells you you can no longer compete Termination of Agent’s Powers Termination by Will of Parties -​ The agency agreement should discuss how, when and by what means the agency ends; mutual assent, act(s) of parties Agency at Will -​ Notwithstanding agency agreements, either party has the power to terminate the agency at any time -​ Agency coupled with interest is an exception that arises when the agency power is given as security -​ The law restricts termination of agency based on race, sex, religion, national origin and age discrimination [in some states other protected classes apply as a matter of public policy] Termination by Operation of Law The law terminates an agency agreement if certain events occur: \ -​ Death or insanity of either party -​ Bankruptcy of either party (in some cases) -​ The objective of the agency becomes impossible or illegal or achieved -​ The subject matter of the agency is lost or destroyed; occurrence of stated events -​ Time lapse; or act of parties Notice of Third Persons An agent can bind the principal in contracts -​ Can bind the principal unless the third party is aware of the end of the agency  -​ The principal must give actual notice to avoid being bound by the acts of agent’s -​ Constructive notice is sufficient for those who knew of the agency but did not deal with it CHAPTER 24: Liability of Principals and Agents to Third Parties An Agent’s Authority to Bind Principal on Contracts Principal is bound on a contract an agent enters into on his behalf if the agent had authority to act for the principal -​ Authority can be actual or apparent -​ Actual authority can be express or implied A principal can be held liable if he/she ratifies the agent’s acts AUTHORITY Actual Authority REASONABLE BELIEF OF THE AGENT Express Authority -​ The principal describes the extent of the agent’s specific powers -​ Can be oral description -​ Some states require a written description of agent’s authority for land sales -​ Attorney-in-fact is the name given to agents whose authority is in writing -​ Power-of-attorney ​ Implied Authority -​ Express authority is often incomplete and agent’s may react to contingencies -​ Agents have implied authority to do what is reasonably necessary -​ Test: Justifiable belief of the agent -​ Inherent agency power to act in emergencies -​ General vs. Specific agent Apparent Authority REASONABLE BELIEF OF THE THIRD PARTY -​ Apparent authority is created by the conduct of the principal or by trade customs -​ A third party reasonably believes the “agent” is allowed to act for the principal -​ Test is justifiable belief of a third party -​ People who deal with agents have a duty to determine agent’s authority; duty to inquire -​ Apparent agent: “Agent” has authority because the principal fails to inform third parties the relationship isn’t what it seems Ratification -​ Ratification can create liability for unauthorized acts of an agent -​ Ratification is a question of intent -​ Ratification may be implied by acts or failure to act -​ The agent must have acted in behalf of the principal -​ The principal must have had the capacity to act at the time when ratification occurs  -​ Only the entire act may be ratified -​ Ratification releases the agent of liability (to PR and third parties) Principal’s Liability for Agent’s Representations -​ The principal is bound by: -​ Representations the agent is expressly authorized to make -​ Representations reasonably necessary for the agent to accomplish the agency’s purpose -​ Representations, usual and customary in the business being transacted -​ Exculpatory clauses may give notice (in printed form) of agent’s lack of authority Principal’s Liability for Notice and Payments to the Agent -​ Effect of notice [Imputation Doctrine]: -​ Notice to the agent is notice to the principal if related to the business of the agency -​ Agents have a duty to inform the principal of knowledge gained -​ Payments to the Agents -​ Paying an authorized agent discharges debts owed to the principal -​ A principal is not bound if an agent colludes with a third party to withhold knowledge or money Contract Liability of the Agent -​ An agency represents the principal in contracts -​ Generally, the agreement binds only the principal (disclosed status) and third party and the agent is not liable -​ Exceptions exist under certain circumstances -​ Partially disclosed PR (agent held liable) an undisclosed PR (no liability to PR) An Agent is Personally Liable for a Contract if: -​ He acts without authorization -​ Liability is imposed on agents who exceed authority based on implied warranty of authority -​ Intent, knowledge, and good faith of the agent are immaterial -​ The principal is incompetent or doesn’t exist -​ Ex: an agent that acts for a corporation not yet formed becomes personally liable -​ An agent who acts for an insane or incapacitated person or a minor is liable -​ The agent agrees to assume liability -​ Agents may make contracts in their own name or guaranty contracts made for principal -​ An agent should disclose that principal’s identity and his capacity to act as an agent to avoid personal liability -​ The principal is undisclosed -​ Principals are usually know but not an undisclosed principal -​ The agent is liable because the third party assumes the agent is contracting (teh agent can recover from the principal) -​ The principal is partially disclosed -​ A third party knows they are dealing with an agent but doesn’t know the principal’s identity -​ Rights and duties are the same as with undisclosed principals Liability for Torts and Crimes -​ Agents are personally liable for crimes or torts committed when acting for principal -​ Principals may be liable for torts and crimes committed by agents under: -​ Respondeat superior: Let the master answer -​ Vicarious liability: a principal is responsible regardless of personal fault -​ Was the act committed within the limits of the agency? -​ Was the action of the same nature as the agent’s authorized responsibilities? -​ Was the agent acting to benefit the principal? -​ Did the principal order the tort or criminal act? Principal Liability -​ Direct Liability -​ A principal is liable because of its own tort -​ Negligent hiring or supervision -​ Criminal Liability -​ An agent does not have to commit a crime even if directed by a principal Chapter 25: Employment Laws Historical Background -​ Early laws controlled and restricted workers -​ Wage maximum set; not minimums  -​ The Industrial Revolution changed work, nature and conditions. Many workers were killed -​ Contract laws were interpreted to protect employers, not workers -​ The 20th Century brought socio-political movements pressing for mor0e and better worker protections Workers’ Compensation: State No Fault Laws (early 1900s) -​ Employers are liable for injuries within the scope of employment without regard to fault -​ Employer gives up he right to negligence defenses -​ Limited payments (no pain and suffering/punitive damages) -​ Employers must provide disability income, medical treatments and scheduled amounts for specific injuries or death -​ Only employees are covered and only for proven work-related injuries -​ Small employers (usually with 3 or fewer employees) may be exempt OSHA: Occupational Safety and Health Act of 1970 -​ OSHA -​ Applies to all types of businesses -​ Seeks to protect the health and safety of employees -​ Imposes a general duty on employers to prevent workplace hazards that may cause death or serious physical harm -​ Employers must record fatalities and injuries requiring hospitalization. Large employers must keep injury logs -​ The Secretary of Labor may establish detailed regulatory standards -​ The Occupational Safety and Health Administration (US Dept of Labor) enforces Family and Medical Leave Act (1993) -​ Provides job security to employees with serious health conditions -​ Employers with 50 or more employees must provide up to 12 weeks unpaid leave for: -​ A serious illness -​ Care of a spouse or parent with a serious illness the birth or adoption of a child -​ Qualifying exigency for military family members -​ An employee’s job is protected during leave Health Insurance -​ Public Law 99-272 (1986) (COBRA) -​ Continues availability of health insurance at group rates to certain terminated employees -​ Affordable Care Act (2010) “ObamaCare” -​ Adults up to age 26 may stay on their parent’s health insurance plan -​ People cannot be denied coverage for pre-existing conditions -​ Establishes both individual and employer health care mandates -​ Other complex provisions, taxes and fees Fair Labor Standards Act (1938)  -​ Establishes a minimum wage and overtime requirements -​ Time and a half for hours in excess of 40 per week -​ Certain employees are exempt including, sales people, professionals and executives (higher paid workers) -​ Time worked includes time an employee is “suffered or permitted” to work -​ States have their own minimum wage laws that may exceed federal standards and may limit garnishment of wages -​ Oppressive child labor is prohibited Employee Retirement Income Security Act “ERISA” (1974) -​ Designed to prevent pension fund abuses and injustices -​ Defined Benefit Pension funds vest and cannot be taken away -​ Both employer and union pension plans are covered -​ Pension Protection Act (2006) reformed rules for funding defined benefit pension plans Collective Bargaining and Union Activities 1.​ Norris-LaGuardia Act (1932) (offset advantage to explorers) -​ Prohibits “Yellow Dog Contracts” and court strike injunctions 2.​ “Wagner Act”: National Labor Relations Act (1935) -​ Protects the rights of worker to organize -​ NLRB conducts elections for employees on union representation and hears charges of unfair labor practices -​ Bargaining unit: A union certified as the exclusive representative after winning a majority vote 3.​ “Taft-Hartley Act”: Labor Management Relations Act -​ (1947) Passed to more equalize excessive power of unions 4.​ “Landrum-Griffin Act”: Labor Management Reporting and Disclosure Act (1959) -​ A further check on the unions Unfair Labor Practices Employer -​ Interfering with right to join union -​ Discriminate due to union membership -​ Refusal to bargain Employees -​ Coercing employees to join -​ Coercing employer to only hire employees in union -​ Refusing to bargain -​ Cannot strike for illegal purpose Employment Discrimination -​ Equal Pay Act of 1963 -​ Prohibits gender discrimination in pay -​ Title VII of the Civil Rights Act of 1964 (amended 1972)  -​ Prohibits discrimination on the basis of race, color, religion, sex or national original -​ Intentional and disparate impact discrimination -​ Sexual harassment is a for of discrimination -​ QPQ -​ Quid Pro Quo sexual harassment -​ “This for that” -​ Hostile Work Environment -​ Creating an environment where people do not feel comfortable at work -​ Established EEOC to enforce and process of complaint -​ (BFOQ) in very narrow circumstances you may be able to hire for a job based on certain things, never permitted in connection with race -​ The Civil Rights Act of 1991 -​ Expanded remedies and reversed decisions limiting employee rights (reach overseas employees) -​ Age Discrimination in Employment Act (1967) -​ Employers with 20 or more employees cannot discriminate on the basis of age. Covers workers over 40 -​ Americans with Disabilities Act (1990) (Amended 2008) -​ Extended comprehensive federal coverage against discrimination on the basis of disability -​ Protects a qualified individual with a physical or mental impairment -​ ADAA overturned decisions limiting ADA protections -​ Genetic Information Nondiscrimination Act (2008) -​ Prohibits the collection of genetic information from employees and applicants 1/29 + 2/3 Employment at Will -​ Employers can fire most employees for any reason or no reason -​ Exceptions to employment at will based on: -​ Public Policy -​ Implied or express terms of an employment contract -​ The implied covenant of good faith Employee Privacy -​ Employees have a right to privacy -​ Employee Polygraph Protection (1988) prohibits private employers from using lie detector tests outside of specific investigations -​ Use of drug tests involving public employees and applicants protected by the 4th Amendment may be violations of privacy rights  -​ Private employees have limited protection but may respond by alleging a tort or by alleging wrongful termination Which Form of Business Organization? Legal Form of a Business -​ Sole Proprietorship -​ Partnerships (general, limited) -​ Corporations -​ Limited Liability Companies (corps.) -​ Limited Liability Partnerships -​ Franchising Sole Proprietorship -​ A business operated by a person on his own personal property -​ An extension of the individual owner -​ The owner has all responsibility for profits and losses; unlimited liability -​ Owners may hire employees -​ The business may have a different name than the owner Partnership -​ A voluntary association (2 or more persons) designed to carry on a business for profit -​ General Partnership -​ No express agreement is required -​ Each partner is an owner with the right to share in the profits and with responsibility for losses -​ Partners are not usually employees or paid wages -​ Limited Partnership (LLLP) -​ Has all attributes of a personal partnership but limits liability to all partners Corporations -​ Separate and distinct “artificial persons” for actual owners -​ Corporations may acquire; hold and convey property in their own name -​ Corporations can sue and be sued -​ Publicly held and close corporations: -​ Publicly held: Shares are sold on the open market to investors as investment; little interest in managing -​ Close corporations: Stock is owned by family members or people who know each other, not traded on the open market Choosing a Business Structure -​ Factors Relevant in Choosing a Business Structure: -​ Taxation -​ Limited Liability -​ Life of Business -​ Management  -​ Financing -​ Formalities -​ Liquidity of Investment Limited Liability -​ Business structures that limit liability risk to owners -​ Sole proprietors and general partners have unlimited liability -​ Corporate shareholders only risk theri investment -​ Piercing the corporate veil -​ Ultra vires acts Taxation -​ Business investment decisions greatly affected by tax laws -​ A corporation is a taxable entity and is taxed on its own income -​ Shareholders pay tax on dividends -​ S-Corporations are an exception and are taxed as a partnership -​ Tax strategies can minimize double taxation -​ Sole proprietorships and partnerships pass through profits and losses to wonders (schedule C for sole p/; p-ship must file separate return, gov’t compare to partner return Formalities -​ Sole proprietorships and partnerships: -​ May be formed and terminated with no or fewer formal requirements -​ May operate in multiple states with fewer requirements -​ Corporations must file state articles of incorporation and comply with many regulations; both states and federal Financing and Management -​ Corporations often can secure financing more easily than other business forms  -​ Corporations can be more flexible in management arrangements -​ Freeze-outs- Minority partners in close corporations have little power and can be frozen out of decision making Life of the Business -​ Continued life of a corporation is not affected by the death or insolvency of a shareholder -​ A valuable shareholder’s death may create transition problems -​ Goodwill may be preserved more easily when a corporation changes hands rather than a partnership or sole proprietorship Liquidity of Investment -​ Investments in publicly held corporations can be sold easily exchanged in market -​ Easy sales are ones of the major advantages -​ Minority shareholders in close corporations may be able to sell their shares -​ General partners may sell their shares but a buyer becomes a partner only if he is accepted by the other owners into a new partnership Limited Liability Companies -​ Enjoy the tax benefits of partnerships and the limited liability of corporations -​ No restrictions on number of members as in S Corporations -​ All investors can share in management, unlike limited partnerships -​ LLCs are formed by filing state articles or organization -​ The name must include llc; persons defined as “members” -​ An LLC is a separate entity and operates separately from members, like corporation -​ Transferable but transferee are not guaranteed to become members -​ Often required to have stated duration Limited Partnerships -​ Easy to organize around existing partnerships -​ An LLP form must be filed with the state and sufficient liability insurance maintained -​ Personal assets of members not involved in wrongdoing maybe sheltered from malpractice claims -​ All partners have an equal say in management -​ Taxed as general partnership​ -​ Pass through taxation Franchises -​ A franchisor develops a product or service and a franchisor becomes a “brand” outlet -​ Franchising is based on contract -​ Franchising benefits -​ Combines the advantage of a small business and large firms with more resources and marketing impact -​ Standard methods are often used to operate -​ Turnkey operation possible  -​ Franchising complaints -​ Adhesion Contracts and possible antitrust violations -​ Termination clauses may give the brand discretion -​ Disputes over contract terms/interpretation Franchising Regulations -​ Federal and state governments regulate franchising -​ Federal laws protect automobile service station franchises -​ States have comprehensive laws governing the franchisee-franchisor business relationship -​ Franchising in foreign countries may be permitted but presents challenges 2/5 Chapter 27: Creation of a Partnership Disputes on the Existence of a Partnership -​ Factors (2 most important) when deciding whether co-ownership exists -​ Share of Profits: Absent other evidence, shared profits are presumptive evidence of a partnership -​ Sharing of partnership management -​ Purported partnerships -​ You can be liable as a partner without being a partner -​ Articles of Partnerships -​ Not required but desirable -​ Joint ventures may be distinct from partnership Authority of Partners -​ Voice in Management -​ Each partner normally has an equal voice -​ Majority rules in disputes among partners -​ Unanimous agreement is required to act outside the ordinary course of business or contrary to the partnership agreement -​ Authority to act for a partnership can be: -​ Express -​ Implied -​ Apparent -​ Partners may become liable for ratified contracts Partnership Property -​ Property belongs to the partnership if title or possession was transferred: -​ To the partnership in its name -​ To a partner by a transfer document naming the partnership -​ To any partner by a transfer document indicating the partner’s status or the existence of a partnership -​ Partners have a “partnership interest” in property  -​ It cannot be used for personal use -​ Creditors cannot attach partnership property but may have an interest in it or a charging order against it Rights and Duties -​ Right to compensation -​ A partner is not ordinarily entitled to a salary or wage -​ Compensation = partner’s share of profits -​ Duty of Loyalty & Good Faith -​ Partners must be honest and not put self interest before their duty to the partnership -​ Duty of Care in Business -​ Partners must exercise reasonable care and skill in transacting business for the partnership -​ Partners cannot exceed their authority -​ Partners are liable for their negligence -​ Duty to Inform -​ Partners have a duty to timely disclose important information received that could impact the partnership -​ Duty to Account -​ Partners must account for any expenditure of partnership funds -​ One partner usually keeps the account books and must be accurate Enforcing Partnership Rights and Liabilities -​ Liability on Contracts -​ RUPA [ Revised Uniform Partnership Act]: The Firm is primarily liable for contracts -​ If a partnership doesn’t pay, the partners are jointly liable -​ Liability for Torts -​ Respondeat superior: The partnership is liable for torts committed while doing business -​ Liability for Crimes -​ The partnership and individual partners are liable for fines -​ Partners will not be imprisoned for a crime committed by one partner even if it was done in the name of the business Disassociation of the Partnership Disassociation and Winding Up -​ Partners usually wind up/liquidate assets -​ A party who wrongfully dissociates loses the right to demand dissolution and winding up -​ A court may appoint a receiver if the dissolution is court ordered -​ Winding up involves liquidating assets at the highest value -​ Partners may need to complete contracts or assign contracts -​ Parties have fiduciary duties when winding up -​ Under RUPA, partners may be paid for winding up Continuation -​ There is generally no right to continue a partnership beyond its original term -​ Continuation without winding -​ Partnership agreements may specify that there will be no dissolution upon death of a partner -​ Buyout agreements may be permitted -​ Liability for Obligations -​ A continuing partnership is liable for debts incurred by the original partnership former partners may become liable for new obligations of a continuing partnership Distribution of Assets -​ Distribution of assets is the final act of winding up a dissolved partnership -​ When there are losses, all creditors are paid first -​ If assets remain, the proceeds from the sale are distributed pro rata among partners -​ If a partner’s net capital account is negative, he must pay the partnership the deficiency -​ Termination -​ The winding up process is complete when all assets are distributed and creditors satisfied Limited Partnerships -​ Allow some partners to have limited liability -​ There must be both general partners and limited liability partners -​ Limited liability partners are not responsible for partnership debts -​ Certificates must be filed with the state to form limited partnerships -​ Statutory formalities must be kept in legal compliance -​ The certificate must describe the business, its location and its assets -​ Partnership laws and regulations apply Rights and Liabilities -​ Limited partners are not fiduciaries -​ All partners may become personally liable if the limited partnership failed to complete the formalities -​ Limited partners cannot take control of the business -​ Limited partnerships may be dissolved and wound up Chapter 28: Formation and Termination of Corporations Nature of a Corporation -​ Corporations are an intangible “artificial person” with a life separate from owners -​ Corporations can: -​ Hold property for long periods of time hold and convey property in their own name -​ Sue and be sued in their own name -​ Make bylaws to govern relations among shareholders Types of Corporations -​ Government Corporations -​ Also called municipal corporations -​ Examples include a school, city, and sewage district -​ Government corporations may have the power to tax -​ Government corporations normally do not seek to make profit -​ Federal corporations include: U.S. Postal Service, Amtrak, U.S. Mint -​ For-Profit -​ The most common type of corporation -​ The goal is to make a profit that is distributed to shareholders as dividends -​ Profits can be reinvested -​ Shareholders may sell stock -​ Can be publicly held or private-closely held -​ Non-Profit Corporations  -​ Similar to non-taxing government corporations except formed and operated by private persons or groups -​ Examples include hospitals, clubs and large organizations such as Blue-Cross Blue Shield -​ Founders and shareholders cannot make a profit from the operation of business. Officers and members may be paid a salary Regulation of Corporations -​ Model Business Corporation Act (MBCA) is the basis for the majority of statutes regulating corporations in most states -​ The MBCA was completely revised in 1984 The Pre Incorporation Process -​ Promoters bring a corporation into being -​ Promoters may start with an idea or convert an existing sole proprietorship or partnership into corporate form -​ Corporations are not automatically liable for contracts made by promoters and not required to compensate promoters -​ Promoters are not agents of the corporation or of persons interested in the business venture -​ Promoters owe a fiduciary duty to the corporation -​ Promoters are generally liable for contracts made on behalf of an unformed corporation -​ A corporation may assume liability for contracts after it comes into existence Promoter and Corporation Liability The Incorporation Process -​ Business corporations derive their existence from state law where they are incorporated -​ General incorporation laws make incorporating a right, not a legislative privilege -​ A business can incorporate by preparing and filing articles of incorporation as required by state statute  -​ Delaware and Ohio, most popular to incorporate (business friendly) -​ A corporation may be formed in any state where the company does business or where the laws are most favorable to the corporation -​ Promoters consider tax benefits, corporate law and judicial decisions Steps in Incorporation -​ States can vary slightly, but the steps according to MBCA include the following: 1.​ Preparation of the articles of incorporation (charter) 2.​ Signing and authenticating the articles by one or more of the incorporators 3.​ Filing the articles with the secretary of state and paying all required fees 4.​ Issuance of the certificate of incorporation by the secretary of state 5.​ Holding an initial organizational meeting Contents of the Articles of Incorporation -​ Mandatory Contents for Articles of Incorporation Under MBCA -​ The name of the corporation, which must not be deceptively similar to other registered corporations -​ The number of shares of capital stock the corporation has the authority to issue -​ The address of initial registered office of the corporation and the name and address of its registered agent -​ The name and address of each incorporator -​ Optional Contents for Articles of Incorporation under MBCA -​ The duration of the corporation, which usually is perpetual -​ The purpose of the corporation (often broadly stated as “any lawful activity”) -​ The par value of the shares of the corporation -​ The number and names of the initial board of directors -​ Additional provisions consistent with the state’s laws of incorporation such as dividend rights Incorporating Requirements -​ Who can Incorporate? -​ States sometimes require at least three natural adult persons to serve as incorporators. MBCA relaxed this requirement to 1 person (Single, p-ship, uninc., Assoc., corp.) -​ The Certificate of Incorporation -​ A state’s secretary of state certifies the articles of incorporation compiled with all legal requirements -​ Organizational Meeting -​ The Board of Directors must conduct a meeting after the articles of incorporation are approved -​ Corporations generally adopt a corporate seal, but he says this isn’t true ByLaws -​ Bylaws establish the rules for the conduct of a corporation’s internal affairs  -​ Bylaws set the duties and authority of officers and the conduct of meetings -​ Bylaws set rules for the transfer of shares, for dividends and for stock records -​ Some of these rules are included in articles of incorporation for closely held companies -​ Bylaws must be consistent with state and federal laws Ultra Vires Doctrine -​ A corporation obtains legal powers from the state in which it is incorporated -​ MBCA eliminated ultra vires as a defense to enforcement of a contract Consequences of Failure to Incorporate -​ Historically, when defective incorporation occurred, courts made decisions on liability based on the party’s intent and whether the business was a: -​ De Jure Corporation -​ Promoters substantially complied with all mandatory provisions -​ Business is treated as a corporation in all instances except a quo warranto proceeding -​ De Facto Corporation -​ An honest but failed attempt was made to comply with mandatory provisions of the corporate statute -​ The corporation could not deny its existence or be challenged by a third party -​ Corporation by Estoppel -​ People hold themselves out as corporations without attempting to comply with incorporating requirements -​ Courts do not allow parties to a contract to avoid liability Piercing the Corporate Veil -​ Shareholders are not usually personally liable for corporate debt. Their losses are limited [to investment (share ownership)] -​ Creditors may persuade the court to pierce the corporate veil and hold shareholders liable -​ Undercapitalization: If the objectives to incorporating appear to involve operating a risky business and avoiding creditor claims, the veil may be pierced -​ Alter-ego: If shareholders mix personal dealings and corporate transactions, the veil may be pierced -​ A court will pierce the corporate veil when -​ One or more shareholders dominates the corporation -​ The domination results in an improper purpose -​ If allowed by specific statute  -​ Undercapitalization -​ Alter Ego -​ Shareholder domination -​ Improper Purpose Close Corporations -​ Most incorporated businesses are close corporations; original form and then “go public” -​ Common traits of close corporations: -​ Fewer shareholders -​ Shareholders may live near each other and/or know each other (many times family and/or relatives) -​ All or most shareholders are active in the business -​ There is no established market for the stock Transferability of Shares -​ Shares of close corporations are seldom intended for public sale -​ Transfer restrictions -​ Right of first refusal stipulates that the corporation or shareholders must be given the option to buy shares before outsiders are allowed -​ Buy-sell agreements can set an agreed-upon price at which shareholders must sell and corporations must buy -​ Consent restraint requires a seller to get permission from the company’s board of directors Governance Issues -​ Courts may impose a fiduciary duty on corporate officers and majority shareholders to treat minority shareholder fairly -​ The judiciary may intervene to protect minority shareholders in conflicts without statutory authority if: -​ Officers or majority shareholders are guilty of fraud, gross mismanagement or oppressing minority shareholders  -​ A deadlock among shareholders results in failure to hold corporate meetings, or some shareholders have taken control and excluded others -​ A business cannot be carried on properly because of deadlock or dissension Termination of the Corporation -​ Dissolution By Agreement: Corporations need state’s consent to dissolve since they are created by the state -​ Corporations automatically terminate if they are created for a limited duration -​ Written consent and vote by shareholders -​ Involuntary Dissolution: A court may order the corporation dissolved for: -​ Failure to pay franchise taxes -​ Failure to file the corporation’s annual report -​ Shareholder request (Disagreement among shareholders) -​ Creditors providing insolvency 2/12 Chapter 29: Management of the Corporate Business The Board of Directors -​ Most incorporation statutes declare that a board of directors must manage the business of a corporation -​ Board members may have other jobs -​ The MBCA recognizes this and says: “ All corporate powers shall be exercised by or under the authority of, and the business and affairs of a corporation shall be managed under the direction of, a board of directors” Power of the Board -​ The board of directors may act alone to take certain corporate actions as per its articles and bylaws. According to MCBA, boards can: -​ Declare a dividend -​ Fill vacancies on the board -​ Sell, lease, and mortgage assets within the normal course of business -​ Some actions require board initiative (shareholder approval) -​ Fundamental changes in the corporation Directors on Corporate Boards -​ Directors are not agents of the corporation; set policy -​ Can act only as part of the board, not as individuals -​ MBCA permits directors to fix their own compensation -​ Election of directors -​ Some states require a minimum number of directors, otherwise set by corporate articles and bylaws -​ Directors may be required to be shareholders -​ Directors are elected at annual shareholder meeting, usually hold one year terms to next annual meeting  -​ Vacancies may be filled by board of director votes until next shareholder meeting -​ Directors may be removed with cause per its bylaws -​ Directors meet regularly as required by law Corporate Officers -​ The MBCA requires a president; vice president; a secretary and a treasurer -​ One person may hold multiple offices President -​ Has authority to bind the corporation -​ Has express and implied authority and may have ex officio authority Vice President -​ Has no authority by virtue of the VP’s office -​ May have considerable apparent authority when acting as the principal officer of an area of business Secretary -​ Keeps the official corporate board minutes of meetings -​ Has no express authority to bind the corporate seal on documents, which are then considered authorized Treasurer -​ Has charge of the funds of the corporation -​ Has the power to pay out corporate funds for proper purposes -​ Binds the corporation on receipts, checks and endorsements Duties of Directors and Officers -​ The duty to act within one’s authority and the power of the corporation -​ Directors or officers may be liable if the corporation is damaged by acts outside their scope of authority -​ Not held liable for Ultra vires transactions -​ Corporations may ratify unauthorized acts -​ The duty to act diligently and with due care inn conducting corporate affairs -​ The MBCA requires “such care as an ordinarily prudent person in a like position would exhibit under the circumstances” -​ Not liable if they act with common sense, wisdom and informed judgement -​ Must act in good faith and under the reasonable belief they are acting in the corporation’s best interests -​ Business judgement rule: Directors aren’t liable for mistakes in judgement “Prudent Person Standard” “Arms Length” Transaction -​ Corporation entering into business transaction with board member who is able to provide that service -​ Terms are the same as they would be with third party -​ The duty to act with loyalty and good faith for the benefit of the corporation  -​ Forbidden from trying to personally profit at the expense of the corporation -​ Directors and officers cannot enter into transactions with the corporation Director and Officer Duty Expectations -​ Business Judgment Rule -​ Duty of Loyalty and Good Faith -​ Prohibition of Self Dealing -​ Prohibition of Usurping Corporate Opportunity -​ No Freeze-Outs, Oppression, Bad Faith -​ No Insider Trading of Stock -​ Directors Right to Dissent Liability for Crimes and Torts -​ Tort liability: A corporation is liable under agency doctrine of Respondent superior for all torts committed by employees acting within the scope of employment -​ Alien Tort Statute -​ Crimes: Responsible Corporate Officer: Courts may find liability when high level officials request or authorize illegal acts Contracts to Commit Illegal Acts -​ Agreements to Commit Crimes -​ A contract that requires committing a crime is illegal -​ An agreement can be illegal if its net effect is criminal -​ Agreements to Commit Torts -​ A contract that requires committing a tort is illegal Liability of Officers and Directors -​ Modern courts are more willing to hold directors and board members liable for negligence (torts) -​ Responsible Corporate Officers may be criminally liable for illegal behavior if: -​ They knew or should have known of the illegal act -​ They failed to take reasonable measures to prevent it -​ Sarbanes-Oxley -​ CEOs and CFOs must certify to the best of their knowledge, annual and quarterly reports are not misleading -​ Indemnification -​ Corporations may pay legal fees for officers and directors Indemnification of Officers and Directors