BLAW 3312 Exam 3 Review
What is the importance of a corporation's minute book?
A corporation's minute book documents all the actions/contracts voted on by the directors that are outside of ordinary business practices. Ex: special contract to by new property, plant, or equipment. An up-to-date minute book is the best protection against a lawyer seeking to pierce the corporate veil and enter into the individual pockets of the shareholders.
What individual liability exposure will a withdrawing partner have for partnership debts incurred before and after he/she withdrew? What individual liability exposure will a new partner have for partnership debts incurred before and after his/her entry into the partnership? How will the application of principal/agent law factor into these questions and as well as in partnership law generally?
A withdrawing partner can still be held individually liable for partnership debts after he or she withdrew if they do not give constructive and actual notice. They may be held liable to debts before their withdrawal unless an agreement to that effect between the withdrawing partner and the members of the firm as newly constituted and the creditors is created. A new partner is not held individually liable for debts incurred prior to their membership. They are obviously liable to debts incurred after their entrance into the partnership. Partnership Law is a continuation of Principal/Agent Law.
Which of the following statements is true? a) A corporation cannot be a partner. b) A corporation cannot be a limited partner c) A corporation cannot be a managing general partner of a limited partnership. d) A corporation can be a partner in a partnership, a limited partner in a limited partnership, a managing general partner of a limited partnership, and a member of a limited liability company.
A) False B) False C) False D) TRUE
To what kind of business organization does each of the following apply, and what is the function of each? a) shareholder b) manager c) director d) member
A) Shareholder -- invest (sometimes vote depending on type of shares owned) in a corporation B) Manager -- oversee officers and make special contracts outside of ordinary business in a Limited Liability Company C) Director -- oversee officers and make special contracts outside of ordinary business in a corporation D) Member -- invest and vote on managers in a Limited Liability Company Shareholders = Members Directors = Managers
In a closely owned and closely held corporation, majority owners of stock can be held liable for oppressive conduct. a) True b) False
A) TRUE
What are the differences between directors and officers of a corporation and what do they have in common?
Directors are elected by the shareholders who jointly oversee the activities of the corporation, their duties are outlined in the by-laws. Their main responsibility is to act in the interest of the shareholders. Officers are appointed by the directors to manage the corporation's day-to-day activities and operations. Officers are able to act as an agent to the corporation and enter into legally binding contracts. Officers are also fiduciaries. Directors have a fiduciary duty and a duty of ordinary care (meaning I didn't know is not a valid defense). They must monitor the actions of officers, as well as decisions made on special contracts outside of ordinary business. Directors are NOT agents. However, in a closely owned and closely held corporation, directors can be officers.
In a limited partnership, what are the functions of general partners and limited partners; and what personal liability exposure will each have to partnership creditors? Under what circumstances can a limited partner be individually liable for partnership debts?
General partners have the responsibility to manage the business, and as a result, have unlimited liability exposure. Limited partners just invest. As long as they do NOT manage, they have immunity of individual liability. What is management? NOT just an employee NOT just an agent NOT just a legal or tax consultant *these are know as safe harbor functions Management consists of setting policy and making decisions on the implementation of policy.
What are the differences among merger, consolidation and sale of assets. What do mergers and consolidation have in common with each other and how do they differ from the sale of assets?
Merger: Corporation A absorbs Corporation B through a vote of both boards of directors and shareholders of both corporations. Regulated by Anti-Trust law. Shareholders in Corporation B are issued shares for Corporation A. Shareholders who voted against the merger can choose to receive fair market value for their shares instead. Corporation B goes away and Corporation A acquires its liabilities and assets. Consolidation: An entirely new corporation (Corporation C) is formed. Both Corporation A and Corporation B are absorbed into Corporation C. Same process as a merger, both board of directors vote and new shares issued. Sale of Assets: Corporation A decides to sell all their assets (inventory, equipment, land, etc.) to Corporation B. Corporation A STILL EXISTS and has completely liquid assets (cash). After the deal Corporation A may choose to dissolve, or transition into a new area of business under the same name. In a merger and consolidation, one or both corporations dissolve. In a sale of assets, neither corporation dissolves.
In an ordinary partnership, what individual liability exposure will each partner have for partnership debts? What are the distribution priorities upon termination of the partnership business? What is meant by "dissolution", "winding up", and "termination" of a partnership?
Partners in an ordinary partnership have unlimited liability exposure for partnership debts. Upon termination of the partnership business the priorities are: 1) Creditors 2) Partners (as creditors) 3) Contributions to capital 4) Profit split among partners (may be nothing) Dissolution: mostly done by agreement, can be done by lawsuit (suit for accounting), or a change partnership membership. To avoid liability need to give constructive and actual notice. Winding Up: completion of contracts currently obligated (not able to create/form new contracts upon dissolution). Done so with executory authority (limited agency authority only to extent necessary to perform wind up) Termination: distribution of assets (death of the partnership)
What do a partnership, a Chapter S corporation and a limited liability company all have in common? What do a corporation (either c-corp, or s-corp) and an LLC have in common with each other but not in common with a partnership? What advantages will an LLC have over an s-corp?
Partnerships, S-Corporations, and Limited Liability Companies all have "pass-through treatment", meaning the entity does not pay taxes but instead the profits and losses are passed on to the partners/shareholders/members. Corporations and Limited Liability Companies give shareholders/members protection against individual liability of corporate/company debt; unlike a partnership. An LLC has the advantage over an S-Corporation of not needing to meet the same requirements. S-Corp Requirements: No more than 100 shareholders, domestic to US (incorporated in US), shareholders must be individuals (no corporation or LLC shareholders), must be closely owned and closely held, no more than 20% of income from passive sources, cannot be linked to an affiliate group, only one class/type of stock (usually common stock), shareholders must be US citizens/residents.
What is the function of a promoter and what are the consequences of a promoter's pre-incorporation contracts (also known as promoter's contracts)?
Promoter is the motivation behind the formation of the corporation. They gather together the investors, contact attorney, advance money, and create promoter's contracts for the corporation prior to its formation. A promoter cannot be called an agent, since the principal does not exist yet, but they are a fiduciary. A promotional contract must be voted on for "ratification" by the board of directors following formation of the corporation. Because a promoter is a fiduciary, they are held to the same standards of duty as an agent. Seen in a court case where a promoter's contract for the sale of land from them to the corporation could be reversed b/c of the presumption of unfairness in the relationship b/w the promoter (who was also on the board of directors, also made up of his family).
Who decides on the declaration and payment of dividends? Do shareholders have an inherent right to dividends? Under what circumstances can shareholders compel the declaration and payment of dividends?
The Board of Directors decide on the declaration and payment of dividends. Shareholders do NOT have an inherent right to the declaration of dividends. Certain circumstances can compel a corporation to declare and pay dividends. The minority shareholders can bring a suit against the corporation claiming the abuse of discretion. There is a really high bar for clear proof of abuse of discrimination. Ex: Dodge v Ford Motor Co. Able to prove lots of profits and they were not earmarked for any business purposes. Won a declaration of dividends.
What circumstances can lead to "piercing the corporate veil" (that is, leading to individual shareholder liability for corporate debts, in whole or in part)? Stated another way, under what circumstances will a shareholder most likely be liable for debts of the corporation?
Watered Stock or Alter-Ego Theory Watered Stock: Purchasing initial offer of previously unissued stock for less than par value. Shareholder liable for corporate debts up to amount the stock is water. Alter-Ego Theory: Treating the corporation like an alter ego rather than a separate entity (failure to act incorporated). Ex: commingling funds and/or not keeping a minute book up-to-date.