Business Association

Judicial Dissolution on Request of a Corporate Creditor

1) Claim Reduced to Judgment 2) Corporation's Admission of Creditor's Debt and Its Own Insolvency

Bylaws Generally Example

A board of directors adopted bylaws providing that litigation relating to the corporation's internal affairs had to be conducted in the state where the business was incorporated. Some of the shareholders sought to invalidate the bylaws in court, arguing that the bylaws were unrelated to the corporate business, the conduct of corporate affairs, or the rights of shareholders. However, the bylaws (1) contained only provisions clearly involving the internal affairs of the corporation and (2) were not inconsistent with the directors' fiduciary duties or state law. The bylaws were thus valid

c. Convertible Bonds

A bond is convertible if the holder has the right to relinquish the underlying indebtedness in exchange for a different type of security, usually stock in the issuing corporation. In that event, the holder effectively offsets her debt against the purchase price of the stock. Convertible bonds typically offer lower interest rates than nonconvertible bonds, owing to the possibility of a windfall upon conversion if the corporation's stock greatly increases in value.

Judicial Remedies for Deadlock Example

A brother and his sister were the only two shareholders in a close corporation. By a shareholder agreement, the brother and sister managed the corporation's business and affairs directly, all matters requiring approval of both shareholders. A valid sharetransfer restriction prohibited either shareholder from selling corporate stock to anyone except the corporation or the other shareholder. Initially, the corporation was successful. Eventually, the brother and sister came to disagree fundamentally about the corporation's future direction. This led to pervasive acrimony and distrust between the two, so that they could not agree on even the most fundamental corporate decisions. The corporation was effectively paralyzed. As this threatened irreparable harm to the corporation, a court, on petition by the sister, implemented the remedy of appointing an impartial director

Relationship to Apparent Authority Example

A brother and sister worked for a retailer. The sister negotiated a contract with a construction firm for the retailer. The sister truthfully told the firm that she lacked authorization to execute the agreement, but she falsely claimed that the brother had authority. The retailer had in fact forbidden both brother and sister from executing contracts. The retailer learned of the misrepresentations and could have phoned the firm to correct them, but chose not to. The brother executed the contract, and the firm spent large sums on materials to perform the contract. The retailer was bound by the contract. The retailer knew that the firm believed the brother had authority to execute the contract and did nothing to correct the belief. The firm reasonably, detrimentally relied on the contract by buying materials. This established agency by estoppel.

Implied Authority Example

A business owner told one of her workers that the business's commercial storage facility had been experiencing petty theft. The owner wanted to have a new alarm system installed. The owner instructed her worker to buy a new alarm system for approximately $5,000. The worker made the purchase. Commercial businesses in that county needed a permit to operate an alarm. Without consulting the owner, the worker filed the necessary paperwork with the county office to order the permit. The owner received the permit and a bill for $500 from the county the following month. The owner was liable for this bill. The owner had expressly instructed the worker to buy an alarm system. Per the governing law, this required a permit, so acquiring the permit was reasonably necessary to carry out the principal's express instructions. The agent acted with implied (here, incidental) authority, making the owner liable for the bill

Buy-Sell Agreements

A buy-sell agreement is a legally binding commitment between the corporation and its shareholders, or among the shareholders, that the corporation or other shareholders will purchase a particular shareholder's shares if a specified event occurs—such as irreconcilable deadlock. For instance, if a shareholder dissents from a corporate measure, producing irreconcilable deadlock, the shareholder may have the right to compel the corporation to purchase her shares or to compel other shareholders to sell their shares to her.

Good Conduct Example

A church hired a minister to serve as its director of youth ministry. The minister was also a bodybuilder. The church did not know that the minister illegally abused anabolic steroids to gain an advantage at bodybuilding competitions. Police arrested the minister in the church's parking lot for receiving a shipment of the steroids on church property. A local newspaper reported on the incident and mentioned that the church employed the minister. The minister breached his duty of good conduct to the church. His crimes on church property brought the church, his principal, into disrepute. He should have known that this would happen if his actions ever came to light.

Discharging Unknown Claims

A claim will be treated as an unknown claim if: • the claimant did not receive written notice from the corporation as required for known claims, likely because the corporation was unaware of the claim; • the claimant timely sent the claim in writing to the corporation, but the corporation never acted on it; or • the claim is contingent or dependent on events to occur after dissolution, even if actually known to the corporation.

Indemnity Examples

A company hired a marketing firm to improve the company's reputation and increase business. To promote the company, the marketing firm acted within its actual authority to produce several television commercials. However, the company refused to reimburse the marketing agency for the cost of producing the television commercials. The company violated its duties to the marketing agency by failing to reimburse the payment the agency made under actual authority.

Agency by Estoppel

A concept closely related to apparent authority is agency by estoppel. Under this doctrine, a purported principal may be bound by a purported agent's acts (even without actual or apparent authority) if, due to the purported principal's failure to exercise reasonable care, a third party (1) reasonably believes that the purported agent is acting with actual authority and (2) foreseeably, reasonably, and detrimentally changes position in reliance on the authority. This often occurs if the purported principal (1) negligently or intentionally induces the belief, or (2) fails to use reasonable care to correct the belief upon receiving notice of it.

Shareholder Approval or Ratification for Conflicting-Interest Transaction

A conflicting-interest transaction is valid if a majority of qualified or disinterested shares votes on the transaction, constituting a quorum, and the majority of qualified or disinterested shares voted are voted to approve the transaction. Under the MBCA, a share is qualified or disinterested, unless the official tabulating votes knows or has been informed that the share held by (1) a conflicted director or (2) a related person to a conflicted director (except a natural person, other than a spouse or close relative, residing in the director's household). Other authority would deem shares not disinterested if the holder is a party to the transaction, has a close family relationship with a party, or has a business or similar relationship with a party that could reasonably be expected to color the shareholder's objective judgment.

Objective Fairness to the Corporation

A conflicting-interest transaction is valid if it is objectively fair to the corporation, even if the board of directors and shareholders do not approve it. A transaction is fair to the corporation, in turn, if it produces a net benefit to the corporation, considering whether (1) the conflicted director dealt fairly with the corporation and (2) the benefit was comparable to what the corporation might have gotten in an arm's-length transaction with a third party, considering any consideration the corporation either received or paid out.

Consolidation

A consolidation is very much like a merger, with one key difference. In a merger, two corporations combine, one ceases to exist, and the other survives with the combined assets and liabilities of both. In a consolidation, neither corporation continues to exist; a new entity emerges and succeeds to the combined assets and liabilities of both. Shareholders in the dissolving entities effectively exchange their shares for shares in the new entity. A consolidation requires approval from the shareholders of both dissolving entities, just as a merger requires approval from the shareholders of both the dissolving and surviving corporations

Fiduciary Duties of Controlling Shareholders

A controlling majority shareholder, or a group of shareholders together constituting a controlling majority, can exert great control and influence over a corporation. Controlling shareholders have large incentive to safeguard their own interests and disregard the interests of minority shareholders. To protect minority shareholders from oppressive tactics by controlling shareholders, many courts have acknowledged fiduciary duties of care and loyalty on the part of controlling shareholders. To the extent that controlling shareholders actively exercise their ability to control or influence the corporation, as by overtly influencing directors that they appointed, they assume duties of care and loyalty to the corporation and minority shareholders that resemble those of a director or officer. If controlling shareholders do not actually use their influence to direct corporate actions, though, then they are generally under no fiduciary duties.

Conflicting-Interest Transactions

A cornerstone of the duty of loyalty is the obligation to abstain from conflictinginterest transactions. Broadly speaking, a conflicting-interest transaction is one in which a director has a meaningful incentive to act contrary to the corporation's best interests. More specifically, a transaction is a conflicting-interest transaction if the corporation is a party to it, and at the time: • the director, individually, is also a party; • the director knows of the transaction and knows that she has a material financial interest in it; or • the director knows that a related person either is a party or has a material financial interest in the transaction.

Preemptive Right Example

A corporation had 10,000 shares outstanding. A particular shareholder with a preemptive right owned 2,000 of those shares, giving her a 20 percent ownership interest in the corporation. To raise capital, the corporation's board of directors decided to issue an additional 1,000 shares of stock. The shareholder's preemptive right entitled her to buy 200 shares, or 20 percent, of the newly issued stock to maintain her 20 percent ownership interest

Cumulative Voting for Directors Example

A corporation had only one class of shares, in which there were 100 total shares outstanding. Of these, a brother owned 51, and his sister owned 49. At an annual shareholders' meeting, three seats on the board of directors were up for election, with five candidates seeking election. In a system of cumulative voting, the brother could cast a total of 153 votes (51 x 3) and distribute those votes among the candidates however he might choose. The sister could cast a total of 147 votes (49 x 3), distributing them however she liked. The sister cast all 147 of her votes in favor of one candidate, which guaranteed that candidate election to the board. Thus, the sister, though a minority shareholder, could appoint at least one director of her own choosing

Straight Voting for Directors Example

A corporation had only one class of shares, in which there were 100 total shares outstanding. Of these, a brother owned 51, and his sister owned 49. At an annual shareholders' meeting, three seats on the board of directors were up for election, with five candidates seeking election. The brother could cast 51 votes for the first seat, 51 for the second, and 51 for the third. The sister could cast 49 votes each for the first, second, and third seats. Thus, the brother had unilateral power to appoint a director to each seat; the sister was powerless to choose a director to represent her own interests.

Quorum at a Shareholders' Meeting Example

A corporation had three classes of shares, classes A, B, and C. There were 1,000 shares in each respective class. At a shareholders' meeting, the board of directors proposed amending the articles. For the amendment to take effect, both class A and class C shares had to approve it separately; shares in class B were not entitled to vote on the amendment. At the meeting, 600 shares of class A stock were represented, but only 480 shares of class C stock were represented. Class A stock could vote to approve or disapprove the amendment at this meeting. Because it lacked a quorum, Class C stock could not vote on the matter at this meeting. Class C stock could act at a later meeting, though, if it had a quorum then. If both groups voted to approve the amendment, whether at the same meeting or at separate meetings, then the amendment would take effect.

Votes Needed to Approve Most Matters at a Shareholders' Meeting by a Given Voting Group Example

A corporation had two classes of shares, classes A and B. Each class had 1,000 shares. At a shareholders' meeting, the board of directors proposed amending the articles of incorporation. For the amendment to take effect, class A and class B shareholders had to approve it separately. At the meeting, 600 shares of class A stock and 600 of class B stock were represented, creating a quorum in each class. Within class A, 280 shares voted to approve the amendment, 225 voted against it, and 95 abstained. Within class B, 302 shares voted to approve the amendment, 200 voted against it, and 88 abstained. Under the MBCA, the amendment would take effect; in both classes, more shares were voted for than against approval. Under the alternative approach, the amendment would not take effect; less than a majority of class A's 600 represented shares voted to approve

Duty to Avoid Dealing with Principal as an Adverse Party Example

A corporation manufactured smartphones. The corporation hired a new marketing director to coordinate its various advertising campaigns and product promotions. Unbeknownst to the corporation, the marketing director owned a majority stake in the corporation's primary supplier of microchips used in the smartphones. This situation was a breach of the marketing director's duty to avoid treating the corporation as an adverse party. The corporation's and supplier's respective interests as buyer and seller were adverse. The corporation wanted to purchase the microchips—a key facet of its business—at the lowest possible price, and the supplier wanted to sell them at the highest possible price. The marketing director's stake in the supplier thus made him an adverse party to the corporation with regard to the microchips

Discharging Known Claims

A corporation may dispose of claims of which it is aware by sending written notice of the dissolution to claimants. The notice must: • instruct claimants to send their claims in writing to a specific address set forth in the notice; • include a deadline by which the corporation must receive the written claim, which must be no earlier than 120 days after the notice becomes effective; • describe the information that must appear in the written claim; and • state that the claim will be barred if not received by the deadline. If the claim is received timely, then it is enforceable unless (1) the corporation sends the claimant notice that the corporation has rejected the claim, and (2) the claimant does not sue to enforce the claim within 90 days after the rejection notice is effective

Form of Published Notice for Unknown Claims

A corporation may dispose of unknown claims by publishing constructive notice of the dissolution (1) once, in a newspaper of general circulation in the county where the corporation's principal office or registered office in the state is located, or (2) for at least 30 days on the corporation's website, provided the notice is conspicuous

Newly Issued Stock

A corporation may issue new stock either before or after incorporation a. Pre-Incorporation Subscriptions b. Issuing Shares after Incorporation

Repurchasing Stock

A corporation may reacquire its own outstanding shares, usually at market price, to increase the amount of stock that it holds, to reissue the stock to raise capital, or as a preliminary step to becoming a private corporation. Reacquired shares are often referred to as treasury shares. Typically, the shareholder and corporation will enter into a sharerepurchase agreement for the reacquisition. However, the articles of incorporation or a relevant statute may restrict a corporation's repurchase and reissuance of shares. In particular, the MBCA includes a repurchase within the definition of a distribution to shareholders. Distributions to shareholders are subject to various restrictions designed to protect the corporation and its creditors.

Duty to Avoid Competing with the Principal Example

A corporation produced, marketed, and sold a course to help law graduates prepare for the bar exam. The corporation hired a full-time staff writer to write materials for the bar course. On the side, and without the corporation's knowledge, the staff writer owned and operated a small paper company whose principal customer was a partnership that marketed and sold its own bar course. The paper company did not compete directly with the corporation, as selling paper was not in the corporation's line of business. However, in supplying paper to the partnership, the paper company (and, by extension, the staff writer) materially assisted the corporation's direct competitor. The staff writer thus breached his duty to avoid competing with the corporation

Par Value Example

A corporation was authorized by its articles of incorporation to issue "100 shares of common stock with a par value of $1,000 per share." The corporation issued 50 shares of stock to the president and 50 shares of stock to the secretary-treasurer. However, the corporation did not receive any payment in labor, services, money, or property for the issued stock. The president and secretary-treasurer were liable for the unpaid shares of stock.

Limitation of Liability, Corporations

A corporation's shareholders generally are not liable for the corporation's acts or debts beyond their capital contributions or the cost to acquire their shares. In exceptional cases, though, the corporate veil may be pierced and liability imposed on individual shareholders for corporate obligations.

Other Private Remedies

A corporation's stakeholders may invent any number of private remedies for deadlock. For instance, the articles of incorporation may designate a special class of shares entitling the holder to cast the tiebreaking vote in case of deadlock.

2) Corporation's Admission of Creditor's Debt and Its Own Insolvency

A court may dissolve a corporation on a creditor's request if the corporation admits, in writing, that (1) the creditor's debt is matured (due and owing), and (2) the corporation is insolvent.

1) Claim Reduced to Judgment

A court may dissolve an insolvent corporation upon request by a creditor if the creditor has reduced its claim to judgment, execution on which has been returned unsatisfied.

Corporation by Estoppel

A court may, in the interest of fairness, prevent a party from denying that a de jure corporation exists (and, thus, that the shareholders have limited liability) under the doctrine of corporation by estoppel. - a party dealt with an association as though it were a de jure corporation; - the party apparently believed the association was a de jure corporation, without fraud by the person representing the association; and - at the time, the association held itself out as a de jure corporation Courts typically apply corporation by estoppel if a party to the transaction attempts to hold the shareholders personally liable, based solely on defective incorporation. Courts may also apply the doctrine to prevent the association itself from denying its corporate existence if a third party reasonably relied to her detriment on the association's status as a de jure corporation.

Court-Ordered Indemnification or Advancement

A court must order indemnification or advancement (as applicable) on a director's application if (1) the director is entitled to mandatory indemnification, (2) the operating agreement validly entitles the director to indemnification or advancement in a manner consistent with governing law, or (3) the court finds that indemnification or advancement would be fair and reasonable. If the proceeding is one to recover damages for the corporation, or if the director is found liable for receiving a financial benefit to which she was not entitled, then court-ordered indemnification must be limited to reimbursing expenses.

Inherent Authority Example

A developer offered to buy land from a corporation. The corporation's president accepted the offer, even though the board had expressly forbidden him to sell this land. Previously, the president had managed the corporation largely without board oversight and acquired land for the corporation. The buyer had no reason to know that the board had forbidden the transaction. The board refused to consummate the sale. Nevertheless, the president had inherent authority, so the corporation was bound to consummate the sale. A corporation's president is typically its top executive officer, with inherent authority to bind the corporation as to transactions within the usual course of business. Here, the president had engaged in similar transactions with little oversight, and the buyer did not know that the board had forbidden the transaction. Thus, the buyer reasonably believed the president could enter it

Circumstances under Which a Director May Exploit a Corporate Opportunity Example

A director in a corporation operating a country club was approached by a party seeking to sell a large parcel of land next to the country club's golf course. The director decided to purchase the land herself instead of telling the full board about the opportunity. The seller had approached the director solely because of her position in the corporation, believing that the director would offer the purchase opportunity to the full board. By failing to disclose this corporate opportunity to the board and instead purchasing the property herself, the director wrongfully usurped a corporate opportunity.

Board Approval for Conflicting-Interest Transaction

A director is not liable for a conflicting-interest transaction if a majority of qualified or disinterested directors (at least two) voting on the transaction approves it, in a manner comporting with the qualified directors' own fiduciary duties to the corporation

2) Qualified or Disinterested Director

A director is qualified or disinterested if, as to the director, the transaction is not a conflicting-interest transaction. The MBCA also requires that the director not have a material relationship with another director as to whom the transaction is a conflicting-interest transaction. A material relationship is a business, family, professional, financial, or other relationship that could reasonably be expected to impair the director's objective judgment concerning the transaction

Validating Conflicting-Interest Transactions

A director may escape liability for a conflicting-interest transaction if: • the board of directors properly approves it, • the shareholders properly approve it, or • it is objectively fair to the corporation.

Disclosure Requirement and the Duty of Candor

A director may know (1) of facts that are material or relevant to the other directors' duties and (2) that the other directors are unaware of the facts. If so, then the director with knowledge must disclose the facts to the others, except insofar as disclosure would violate some overriding legal obligation, such as a professional duty of confidentiality. Further, the duty of candor requires directors to disclose all known, material facts when seeking shareholder approval of a transaction. Note: If a director withholds information due to some overriding obligation of confidentiality, she should inform the other directors of the duty's existence and nature. Also, the confidentiality obligation may very well create a conflict of interest requiring the director to abstain or recuse herself from the matter or even resign from the board.

a. Director Resignation

A director may resign at any time. To accomplish the resignation, the director must deliver written notice to the board, the board's chairperson, or the corporation's secretary. A resignation may be set to take effect at a future date, or it may be conditioned on a future event, such as a failure to attain a specific percentage of the vote at a shareholders' meeting.

Prerogative to Rely on Information from Others

A director need not necessarily undertake extensive personal investigation of every matter within the board's province. Except insofar as a director knows reliance is not warranted, she may reasonably rely on director committees and on the corporation's officers, managers, and employees to perform their duties and to provide trustworthy information, reports, opinions, and assertions. The director must reasonably believe that the particular employee is reliable and competent or that the committee deserves confidence. Similarly, unless a director knows reliance is unwarranted, she may rely on information, reports, opinions, and assertions by third-party professionals, such as lawyers and accountants. The director must reasonably believe that the matter falls within the person's professional expertise or, if not, that the particular person warrants confidence on the matter. [

Directors' Fiduciary Duties

A director's overarching fiduciary obligation in discharging her responsibilities to the corporation is to act in good faith and in a manner the director reasonably believes to be in the best interests of the corporation, its business, and its shareholders . Out of this general obligation flow the fiduciary duties of care, disclosure, candor, and loyalty

Partners' Consent to Acts Violating Duty of Loyalty

A discrete act or transaction that would otherwise violate the duty of loyalty is not wrongful if all the partners authorize or ratify it upon full disclosure of all material facts. The partnership agreement may provide for a specified percentage of the partners to authorize or ratify a breach.

Dissociated Partner's Rights and Duties

A dissociated partner is no longer a partner. Even so, the dissociated partner may owe certain duties and exercise certain rights toward the partnership

Discharging Creditors' Claims in Corporate Dissolution

A dissolved corporation's directors must cause the corporation to discharge creditors' claims against the corporation, or at least reasonably provide for those claims' discharge. If directors fail to do this, they may be personally liable on the claims. Directors may fulfill this duty by following generally straightforward statutory procedures.

Distribution Rendering Corporation Insolvent

A distribution is improper if, upon its consummation, either (1) the corporation would be unable to pay its debts as they mature in the ordinary course of business, or (2) the aggregate value of the corporation's assets would be less than the sum of its liabilities. For this purpose, the sum of the corporation's liabilities includes the right of any shareholder to receive the corporation's assets in dissolution ahead of those shareholders who got the distribution

Distributions to Shareholders

A distribution to shareholders includes any transfer of cash or other property, excluding shares in the corporation itself, or any incurrence of debt, made (1) by the corporation, (2) to or for the benefit of shareholders, (3) concerning any of the corporation's shares. Examples include dividends, stock repurchases or redemptions, liquidating distributions, and so on.

4) Other Relevant Factors Example

A fast-food company hired hourly employees to prepare food and interact with customers. The employees followed detailed procedures set out in the company handbook. The handbook governed virtually every aspect of the employees' duties, including timekeeping, handling cash receipts, washing dishes, hygiene, preparing food, cleaning the restaurants, and speaking with customers. The company provided workspaces, uniforms, training, and all the tools and inventory the employees needed to do their jobs effective ly. Under these circumstances, a master-servant relationship existed between the company and its employees. The company controlled virtually every aspect of the employees' duties, and the employees were highly dependent on the company for the facilities, training, inventory, and equipment needed to do their work.

Duty to Exercise Attentive Oversight Example

A financial corporation controlling tens of millions of dollars in assets had four directors: two sons and their mother and father. Though the mother was a director, she made virtually no effort to monitor the corporation or participate in its affairs. Had she reviewed the corporation's records, it would have been obvious to her that her sons were embezzling funds from the corporation's clients. The father, on his deathbed, warned the mother of the sons' embezzling, but she still did nothing. The mother thus breached her duty of care by failing to actively monitor the corporation and participate in its affairs. As a result, she faced personal liability.

Partners' Shares of Profits and Losses Example

A founding partner agreed to contribute $100,000 to a partnership intending to build and sell a home. The other partner was a general contractor who contributed no capital to the partnership but agreed to manage construction. Under the partnership agreement, 60 percent of profits were to go to the founding partner and 40 percent were to go to the general contractor. The partnership agreement did not address allocation of losses. After three years, the constructed home was sold for a $100,000 loss. Because the partnership agreement did not specify otherwise, each partner bore a portion of partnership losses equal to his share of the profits, without regard to capital contribution. The general contractor's share of profits was 40 percent. Thus, he owed the partnership $40,000, 40 percent of the $100,000 loss.

2) Frolic

A frolic occurs if the agent's actions depart substantially from the principal's business. An agent on a frolic is no longer acting with any significant motive to serve the employer. A frolic generally exists if the agent significantly departs from the principal's authorized time and space constraints—that is, if the agent is not where he is supposed to be when he is supposed to be there. But this is not required. For example, an employee might be on a frolic while sitting at his desk surfing the Internet and pretending to work. Conduct during a frolic is generally not within the scope of employment, although an agent may leave a frolic and resume acting within the scope of employment

Partnership Property

A general partnership may own property in its own name. Property that the partnership acquires is property of the partnership, not of any partner individually. Partners are not generally considered to be co-owners of partnership property. Thus, no partner has an interest in specific partnership property that can be transferred, voluntarily or involuntarily. Partnership property includes property transferred to (1) the partnership in its name or to (2) one or more partners in their names, if the instrument transferring title indicates the partners' status as partners or that a partnership exists, even if the partnership's name is not mentioned. Property is partnership property if transferred to one or more partners in their capacity as partners, provided the partnership's name is mentioned in the instrument transferring title

General Partnership's Liability for Partners' Misconduct

A general partnership may sue and be sued in its own name. In that vein, a general partnership (along with, hence, the partners themselves) is liable for harm arising from the partners' torts and other wrongful acts committed (1) with actual authority or (2) in the ordinary course of the partnership's business

Carrying on Partnership Business in the Ordinary Course Example

A general partnership owned and operated a grocery store selling groceries, including bread. The partners were an older sister, a younger sister, and their brother. Per the partnership agreement, only the older sister was authorized to acquire inventory. The brother placed a large order for bread with a local baker, who neither knew nor had reason to know of the partnership agreement or its contents. When the baker delivered the order, the sisters refused to allow the partnership to pay for it, contending that the brother lacked authority to place the order. The partnership was liable for the bread. The brother lacked authority to buy the bread, but selling bread and, thus, buying bread to sell were usual partnership business activities. The baker was unaware of the limit on the brother's authority. Accordingly, the order bound the partnership.

Exceptions to Requirement to Exhaust Partnership Assets Example

A general partnership's business was to deliver packages. One of the partners negligently struck a pedestrian while using a partnership truck to make deliveries for the partnership. The pedestrian sued and obtained judgments for her injuries against the partnership and each individual partner. The pedestrian could proceed immediately against the personal assets of the partner who struck her, without needing first to exhaust partnership assets. The partner who struck her was liable for reasons other than his mere status as a partner, as he was the primary tortfeasor. However, the pedestrian would have to exhaust partnership assets before proceeding against the other partners' personal property

General Partnership's Liability for Partners' Misconduct Example

A general partnership's business was to deliver packages. One of the partners negligently struck a pedestrian while using a partnership truck to make deliveries for the partnership. This tort was committed in the ordinary course of the partnership's business. The partnership and the other partners were thus liable for the pedestrian's injuries.

Material, Nonpublic Information Defined

A key concept underlying insider trading is material, nonpublic information. Information is material if a reasonable investor would want to know and consider it in deciding whether to trade, usually because the information bears on the value of the securities. Nonpublic information is information that is not generally available to the investing public, meaning the information has not yet affected the value of the securities.

Ultra Vires Example

A landlord leased property to a corporation under a written agreement providing that the property must be used as a movie theater. However, the purposes of the corporation were restricted to marine activities, which did not include operating a movie theater. Seeking to invalidate the lease, the landlord argued that the corporation was violating the ultra vires doctrine by exceeding its scope of permitted activities. However, statutory law provided that a corporate act could not be voided on ultra vires grounds except in an action by a shareholder, a corporation against a current or former officer or director, or the attorney general. Because the landlord did not fall within any of these categories, the ultra vires doctrine did not invalidate the contract.

Example of Agency by Mutual Assent

A large corporation lent money to a small grain company, which did not in itself create an agency relationship. The corporation later started managing the company's operations by exerting control over the company's financial affairs. The company complied with the corporation's direction. In addition, the company started using the corporation's financing to procure grain for the corporation. The fact that the company followed the corporation's directions and secured grain for it indicated that the company agreed to act for the corporation and subject to its control. The corporation's exerting control and receiving the grain showed that the corporation assented to the company's acting that way. Thus, there was an agency relationship between the corporation and the grain company

3) Relevance of Compensation

A master-servant relationship can exist even if the agent receives no compensation from the principal. For example, a nonprofit can be held vicariously liable for the negligence of its volunteers

Knowledge of Material Facts

A material fact is any fact that a reasonable person in the principal's position would deem important or worth considering in deciding whether to ratify the act. A principal will be deemed to know of a material fact, even if she did not in fact know of it, if she knows other facts that would lead a reasonable person in her position to investigate further

Material Financial Interest Defined

A material financial interest is (1) a pecuniary interest (as opposed to an emotional or sentimental one) that (2) one could reasonably expect to impair or influence the director's objective judgment regarding the transaction.

3) Mere Detour

A mere detour is a minor deviation from the principal's business, including the time and place designated for work, during a course of conduct that is otherwise substantially devoted to serving the principal. Conduct during a mere detour generally is within the scope of employment.

b. Mortgage Bonds

A mortgage bond is, true to its name, a bond secured by an interest in real property belonging to the issuing corporation.

iii. Partner's Expulsion

A partner is dissociated if she is rightfully expelled from the partnership. 1) Expulsion under Partnership Agreement 2) Expulsion if Not Provided for in Partnership Agreement 3) Judicial Expulsion

i. Partner's Volitional Withdrawal

A partner may dissociate at any time by providing notice to the other partners of her express will to withdraw, whether or not the withdrawal breaches the partnership agreement. If the dissociation breaches the partnership agreement, then it is wrongful, and the dissociating partner will be liable to the partnership for any resulting damages. Even so, a dissociation is not void or ineffective simply because it breaches the partnership agreement.

Transacting with the Partnership

A partner may generally transact with the general partnership in his individual capacity, as by lending money to the partnership. The partner's rights and duties with respect to these transactions are the same as if the partnership had entered the same transaction with a third party, except as applicable law provides otherwise.

Partners' Financial Rights as Transferable Personal Property

A partner may transfer, as personal property, her share of partnership profits and losses and her right to receive distributions. This alone does not affect the transferor's status as a partner or right to participate in managing and controlling the business, and it does not make the transferee a partner. That is, if a partner transfers her share of profits and losses or right to receive distribution, she is still a partner, and the transferee is not a partner. This is because all partners must generally consent to admit a new partner into the partnership.

Partners' Rights to Use Partnership Property

A partner may use and possess partnership property, but only on the partnership's behalf

Liability of Dissociating Partner

A partner who leaves, or dissociates from, a partnership that does not then dissolve and wind up remains personally liable for partnership obligations incurred before dissociation. The dissociating partner is also personally liable for partnership obligations incurred within two years after dissociation if, at the time of the transaction, the creditor (1) reasonably believed that the dissociated partner was still a partner and (2) did not know or have actual or constructive notice of the dissociation. A dissociated partner may be released from liability for a partnership obligation by agreement with the creditor and the continuing partners. A dissociated partner is released from a partnership obligation if, without the dissociated partner's consent but with notice of the dissociation, the creditor agrees to materially alter the nature or time of payment. Note: To cut off lingering liability, a partner may file a statement of dissociation with the appropriate state office. Starting 90 days after the filing, the statement will be deemed to provide constructive notice that the partner has withdrawn.

Termination of Fiduciary Duties and Right to Participate in Management

A partner's fiduciary duties of loyalty and care generally terminate on dissociation, except for matters arising (1) before the dissociation or (2) in the course of winding up the partnership business, if winding up occurs. The partner's right to participate in managing and conducting the business also terminates, except insofar as the partner rightfully participates in winding up the business.

Modifying Fiduciary Duties through the Partnership Agreement

A partnership agreement may not eliminate the duties of loyalty, care, or good faith and fair dealing. However, the partnership agreement may modify these duties in appropriate cases. As to the duty of loyalty, a partnership agreement may identify specific types or categories of activities that do not violate the duty, as long as it is not manifestly unreasonable. Further, the partnership agreement may diminish the duty of care, if not unreasonable. Finally, the partnership agreement may prescribe standards, not manifestly unreasonable, by which to measure whether a partner has fulfilled the duty of good faith and fair dealing.

Partner's Withdrawal in a Partnership at Will

A partnership at will (that is, a partnership that is not for a definite term or a particular undertaking) is dissolved if a partner provides the partnership notice of her express will to withdraw from the partnership or to dissolve the partnership.

Exceptions to Requirement to Exhaust Partnership Assets

A partnership creditor need not exhaust partnership assets before moving against a partner's personal assets if: - a writ of execution on a judgment based on the same claim against the partnership has been returned wholly or partially unsatisfied; - there is a bankruptcy case in which the partnership is a debtor; - the partner agrees that the creditor need not exhaust partnership assets; - a court allows the creditor to proceed against a partner's assets, predicated on a finding that partnership assets are not sufficient to satisfy the judgment, exhausting partnership assets is excessively burdensome, or granting permission is equitable; or - the partner is liable on the claim, by law or contract, for reasons other than mere status as a partner.

Distribution of Partnership Assets in Winding Up Example

A partnership dissolved with $100,000 in assets after liquidation. The partnership also had a $10,000 debt to a third party, a loan of $10,000 from a partner, and capital contributions of $20,000 each from the two partners. Under the RUPA, the partnership had to pay the $10,000 debt and $10,000 loan before paying $40,000 to each of the two partners ($20,000 each in return of the partners ' capital contributions and $20,000 each in the remaining partnership assets).

Partnerships

A partnership is an association of two or more persons or entities carrying on, as co-owners, a business for profit. The co-owners themselves are called partners. This portion of the outline is based upon the Revised Uniform Partnership Act (the RUPA) promulgated by the Uniform Law Commission. However, not all states have adopted the RUPA.

Liability for Trading Profitably or Avoiding a Loss

A person may be liable for insider trading by trading to avoid a loss based on material, nonpublic information, if all the general requirements for liability are satisfied.

Partnership by Estoppel

A person who is not a partner may nonetheless represent herself through words or conduct to be a partner, or she may consent for someone else to represent her as a partner, in an existing or merely purported partnership. If so, the purported partner is liable to anyone (1) to whom the representation is made and (2) who relies on the purported partnership to enter the transaction. If the representation is made publicly, though, the purported partner is liable to anyone who entered a transaction with the purported partnership in reliance on the representation—even if the purported partner is not aware that anyone has held her out as a partner to the specific claimant. Any partner (or alleged partner) consenting to the representation is also liable as though in a partnership with the purported partner. If the representation relates to an existing partnership, and all partners consent to the representation, then a partnership liability results. If fewer than all partners consent, then those consenting are jointly and severally liable with the purported partner.

Factors Considered in Deciding Whether to Pierce the Corporate Veil Example

A physician formed a professional corporation to practice medicine, naming himself the corporation's sole director and shareholder. The corporation leased office space from a landlord but repeatedly failed to pay its rent. Just before the landlord filed a lawsuit to collect the unpaid rent and evict the corporation, the physician, without observing corporate formalities, caused the corporation to transfer all the money in its bank accounts to his personal bank account. This left the corporation without any assets to satisfy the judgment the landlord obtained for the overdue rent. The court pierced the veil and held the physician personally liable for the rent. The physician had emptied the corporation's bank account intending to defeat the landlord's efforts to collect the rent from the corporation, the nominal debtor. Without piercing the veil, the landlord would be unfairly left without a remedy.

i. Power Given as Security

A power given as security is actual authority to affect the principal's legal relations. A power given as security is not a true agency relationship, because the power is given for the benefit of either the holder or a third party, not just the principal. For instance, powers given as security often secure payment or performance of obligations. A power given to secure an obligation must be given in exchange for consideration, or return value

Preemptive Right

A preemptive right is a shareholder's right to buy a percentage of newly issued stock equal to the shareholder's current percentage ownership in the corporation before the corporation offers it to the public. This allows shareholders to keep their percentage ownership interest in the corporation from being diluted upon issuance of new stock. Under the MBCA, shareholders have preemptive rights only if the articles of incorporation expressly provide them. Preemptive rights must generally be exercised, if at all, within a specified period of time, often 30 or 60 days.

Tort Liability of Principal and Agent

A principal and an agent may be liable to third parties in tort for the agent's conduct.

i. Direct Liability

A principal is directly liable to a third party harmed by an agent's conduct if (1) the conduct is tortious (or would be, if done by the principal) and is within the scope of the agent's actual authority or ratified by the principal, or (2) the principal is negligent in selecting, retaining, or managing the agent, and that negligence contributes to the injury.

Disclosed Principal

A principal is disclosed if a third party dealing with an agent knows or has reason to know of (1) the agency relationship and (2) the principal's identity. A principal is disclosed if the third party can reasonably infer the principal's identity based on any available information, even if the principal's identity is not overtly disclosed. If an agent enters a contract with actual or apparent authority, then the disclosed principal is liable, but the agent is not personally liable unless she agrees to be

Unidentified Principal

A principal is unidentified if a third party dealing with an agent knows or has reason to know that the agent is acting on a principal's behalf but does not know the principal's identity. For this reason, an unidentified principal is sometimes called a partially disclosed principal. Both an unidentified principal and, unless the third party agrees otherwise, her agent are liable on a contract within the scope of the agent's actual or apparent authority. The third party is liable to both, as both are deemed parties to the contract

ii. Vicarious Liability

A principal is vicariously liable to a third party harmed by an agent's conduct if the agent's conduct (1) is either tortious or enables the agent to conceal a tort's commission and (2) is within the agent's apparent authority. More commonly, though, the principal is vicariously liable under the doctrine of respondeat superior if (1) the agency relationship is a master-servant relationship (usually, an employer-employee relationship), and (2) the agent commits the tort within the scope of employment.

Tort Liability of Principal

A principal may be directly or vicariously liable to a third party harmed by an agent's tortious conduct

Principal's Consent to Breach of Duty of Loyalty

A principal's effective consent may absolve what would otherwise be the agent's breach of the duty of loyalty. In obtaining the principal's consent, the agent must: -act in good faith; -disclose all material facts that, to a reasonable person in the agent's position, could foreseeably affect the principal's judgment, provided the agent knows, should know, or has reason to know of them; and -deal fairly with the principal. The consent must concern a specific act, transaction, or series of acts or transactions that one could reasonably expect to arise in the agency relationship. Broad grants of consent to breach the duty of loyalty are ineffective. A principal may generally consent to breaches of the duties to avoid competition, avoid dealing with the principal as an adverse party, avoid acquiring a material benefit, or misusing the principal's property or confidential information.

Promoter Liability for Pre-incorporation Transactions

A promoter is a person who participates in forming a corporation, often by procuring capital and entering into business transactions on the prospective corporation's behalf. Very often, promoters will enter into various contracts on the corporation's behalf before the corporation is formed. As the corporation does not yet exist, the promoters must necessarily enter these contracts in their personal capacities. This means that, as a general rule, the promoters are personally liable on these contracts. Absent further action by the corporation and the parties, this liability continues even after the corporation is formed. The MBCA limits promoter liability for pre-incorporation transactions to those promoters who know the corporation is not yet formed.

ii. Irrevocable Proxy to Vote Securities

A proxy to vote securities is authority to exercise another's voting rights with respect to securities, usually corporate stock. Proxies are generally revocable. A proxy may be irrevocable, however, if (1) it is irrevocable by its terms, and (2) the proxy's holder has some personal interest in the securities themselves or the entity to which they relate. What constitutes a sufficient interest varies among the states; typical examples include a holder who: - Has agreed to buy sercurities - Holds the securities as collateral for some debt - Holds teh power under the terms of a loan, or - Has an employment contract with the entity requiring the power

c. Quorum and Voting

A quorum is the minimum number of directors who must participate in a meeting for the board to take any official action. If there is a quorum, then an affirmative vote of a majority of the directors participating in the meeting will constitute an act of the entire board of directors. If directors leave during the meeting, then those present may continue to conduct business so long as a quorum remains. If a quorum does not remain, then the board may no longer conduct business at the meeting.

Material Benefits in Connection with the Agency or the Agent's Position Example

A racehorse owner hired a jockey to ride the horse in competitive races, for a fee of $1,000 per race plus expenses. A gambler bet $50,000 on the owner's horse to win an upcoming race. Without the owner's knowledge, the gambler offered to pay the jockey $5,000 to ride the owner's horse to victory in the race. The jockey accepted the offer without informing the owner. The jockey won the race with the owner's horse and accepted the $5,000 from the gambler. By doing this, the jockey violated his duty of loyalty to the owner. The gambler's $5,000 payment was a material benefit from a third party in connection with the jockey's racing on the owner's behalf. That the result comported with the owner's interest was irrelevant; the jockey had to relinquish the $5,000 to the owner.

Determining Who Is a Partner in a General Partnership Example

A receptionist at a salon threatened to quit her job. To retain the receptionist, the salon's owner offered to pay her 8 percent of the salon's profits in addition to her current hourly wage. The receptionist agreed. The owner and the receptionist memorialized their understanding in a so-called partnership agreement. In the agreement, the parties referred to themselves as partners. However, the salon's owner retained full control over the business and full responsibility for its liabilities and losses, and the receptionist simply continued to perform her previous duties. Despite the agreement, the salon owner and receptionist were not partners. The receptionist's share of the profits was, in substance, employee compensation. The receptionist lacked any control over the business. Without that, the receptionist could not be said to carry on the salon's business as a co-owner

General Types of Share-Transfer Restrictions Example

A regional shoe manufacturer had a share-transfer restriction in its articles of incorporation that provided: "No shareholder may sell her shares to any officer employed by a competing shoe manufacturer." The restriction was not noted on any of the manufacturer's stock certificates, but every potential shareholder received a letter prior to tender of shares that delineated the restriction, and the shareholder knew of the restriction. A shareholder attempted to sell her shares to an officer employed by a competitor. The restriction was valid and enforceable against the shareholder. The restriction was designed to prevent someone involved in managing a competitor from gaining access to the manufacturer's ownership group, which was a reasonable purpose. In addition, the restriction appeared in the articles of incorporation, and the shareholder knew of it.

i. Power Given as Security Example

A restaurateur obtained a loan from a bank to acquire new kitchen equipment. To secure the loan, the restaurateur executed an agreement giving the bank irrevocable authority to transfer a specific parcel of land belonging to the restaurateur if the restaurateur defaulted on the loan. This was a power given as security. The restaurateur gave the bank actual authority to affect his legal relations—not for his own benefit, but for the bank's—to secure an obligation owing to the bank. Thus, the restaurateur could not revoke the power.

Manifesting Assent Examples

A sales representative for an advertising company, acting without authorization, entered into a contract on the company's behalf. The contract required the company to develop a comprehensive marketing campaign for a beer distributor. The company never expressly assented to the contract. However, the company accepted an advance payment on the contract and deposited the payment into its own bank account, knowing the contract's terms and that the representative had entered the contract without authorization. The company thus ratified the contract by accepting its benefits. It was bound to produce the marketing campaign or face liability for breach of contract

Shareholders

A share is a portion of ownership in a corporation. Shareholders, then, are the corporation's owners. The general rule is that a shareholder does not have management authority over the business, unless the particular shareholder is also a director, an officer, or both. This is because management authority is vested in the board of directors and any officers it appoints, not in the shareholders. But shareholders do have certain rights—for instance, to elect the board of directors at annual shareholder meetings and to vote on specific major or unusual corporate transactions.

Restriction's Effect on Preexisting Shares

A share-transfer restriction will affect shares issued before the restriction only if the holders either voted for the restriction or were parties to any agreement imposing the restriction.

Shareholder Agreements Regarding Corporate Governance

A shareholder agreement may affect the corporation's governance, management, and affairs in ways inconsistent with the usual rules allocating power between the directors and shareholders. Shareholder agreements are common in close corporations, which often employ them to enable the shareholders to run the corporation's direction without creating or involving a board of directors.

Permissible Scope of Shareholder Agreement

A shareholder agreement may: • eliminate the board of directors or restrict its powers; • govern authorizing or making distributions; • govern the selection, removal, and terms officers and directors; • allocate voting power among shareholders and among directors, or between shareholders and directors; • transfer to any person or persons to exercise the corporation's powers or manage its business and affairs, including authority to break a deadlock among directors or shareholders; • require corporate dissolution if a shareholder requests it, or on the occurrence of a specific event; or • otherwise provide for exercising the corporation's powers or managing its business and affairs, provided the terms are not contrary to public policy (as by totally eliminating directors' fiduciary duties).

Implementing Shareholder Agreements

A shareholder agreement must be set forth in either (1) the articles of incorporation or bylaws and approved by all shareholders at the time of the agreement or (2) a written agreement that is signed by all shareholders at the time of the agreement, provided the agreement is made known to the corporation. The latest revisions to the MBCA set no upper limit on how long a shareholder agreement may remain valid. States following older versions of the MBCA may limit validity to 10 years, unless the agreement provides otherwise.

Shareholders' Inspection Rights

A shareholder has a right, upon sufficient advance, to make a written demand (5 days under the MBCA) to inspect and copy the corporation's books and records. The shareholder must make the demand in good faith and for a proper purpose (that is, a purpose reasonably related to the shareholder's interest as an equity stakeholder in the corporation). The demand must describe, with reasonable particularity, both the purpose and the relevant records. The records sought to be inspected or copied must be directly related to the purpose. Even if these requirements are met, the corporation may reasonably restrict the records' confidentiality, use, and distribution.

Amendments to the Articles of Incorporation Implementing a Reverse Stock Split

A shareholder may rightly demand appraisal if it is proposed to amend the articles of incorporation, insofar as: • the amendment would reduce the shares in a series or class to fractions of shares, • the shareholder owns shares in that series or class, and • the corporation is entitled or obligated to buy back the fractional shares created in this way. Transactions like this are sometimes called reverse stock splits.

Waiving Notice of Shareholders' Meetings

A shareholder may waive notice of a meeting by (1) delivering a signed, written waiver to the corporation or (2) attending the meeting without promptly objecting to the lack of notice. If a matter brought up at a meeting is not within the purposes described in the meeting notice, a shareholder attending the meeting may waive any objection to considering the matter by failing to object promptly once the matter is raised.

Proxy Voting

A shareholder or her agent or attorney-in-fact may appoint a proxy to vote the shareholder's shares in her place. A proxy appointment generally must be in writing, and it becomes effective once the officer in charge of counting votes receives the written appointment. The appointment is valid for as long as its terms provide; if no time is specified, it is valid for 11 months.

Using the Principal's Property or Confidential Information Example

A stable owner employed a worker to care for the horses in the stable. The horses, like the stable, were the owner's property. While the stable owner was away, the worker permitted his friend to ride the horses for free. The worker breached his duty of loyalty to the stable owner by using the horses for his own and his friend's purposes

Pre-Incorporation Subscriptions

A subscription is a pre-incorporation agreement to buy shares in a corporation once it is formed. Under the MBCA, a pre-incorporation subscription is irrevocable for six months, unless either the subscription agreement provides otherwise, or all subscribers agree to revoke the subscriptions. If, once formed, the corporation accepts a subscription during the six-month period, then the subscription is a contract binding on both the corporation and the subscribers. If the subscription agreement does not set forth the payment terms, then the board of directors may set the terms and, subject to the agreement, must do so uniformly among all shares in a class or series, insofar as practicable.

Contracts Voidable by Third Party

A third party may void a contract by an agent acting for an undisclosed principal if (1) the agent falsely represents that she acts for no principle, and (2) either the undisclosed principal or the agent knows or has reason to know that the third party would never have had dealings with the principal.

Judicial Dissolution, Transferee's Application

A transferee of a partner's right to income and distributions may petition a court to dissolve the partnership. In this event, dissolution occurs if the court finds that winding up the business is equitable. If the partnership is one for a definite term, then the term must first have expired. If the partnership is one for a particular undertaking, then the undertaking must first have been completed.

Apparent Authority Example

A university appointed a new medical school dean and issued a press release stating that the dean had unilateral authority to appoint new medical school faculty. A physician observed that the dean had hired three of her colleagues and decided to seek a faculty position herself. Before the physician submitted her credentials, the university's president told the dean, in private, that the dean was to hire no more faculty. The president knew of the prior press release, but did not communicate publicly that the dean was n o longer authorized to hire faculty. The dean appointed the physician to the school's faculty. This appointment was binding against the university. The university had publicly represented that the dean had hiring authority and never publicly withdrew that representation. The physician reasonably relied upon it. Thus, the dean acted with apparent authority

Enforceability against Holder and Transferee

A valid share-transfer restriction is enforceable against a shareholder or her transferee, provided either (1) it is conspicuously noted on the stock certificate (or, if none, on the written statement providing the essential information contained in a stock certificate), or (2) the shareholder or transferee knows of the restriction. [

Voting Trusts and Agreements

A voting trust is an arrangement in which shareholders transfer legal ownership of their shares to a trustee but (usually) retain all beneficial incidents of ownership except the right to vote the shares. The right to vote the shares is vested in the trustee. To create a voting trust, shareholders must sign an agreement setting out the relevant terms (which must be consistent with the trust's purpose) and transferring their shares to the trustee. Once the agreement is signed, the trustee must compile a list of the subscribing shareholders, their names and addresses, and how many shares of each class that each shareholder transferred to the trust. The trustee must then deliver a copy of the trust agreement and the list to the corporation. The MBCA liberally acknowledges the validity of voting-trust arrangements and imposes very few restrictions or requirements. The most recent amendments to the MBCA set no upper limit on a voting trust's duration. Some states may set upper limits to a voting trusts duration. For instance, states following an older version of the MBCA may set the limit at 10 years.

2. Warrants

A warrant is, in essence, a stock option. A stock option, in turn, is an agreement between the corporation and the option holder that the holder may purchase corporate stock at a stated price. Corporations often issue warrants alongside bonds as additional consideration to bond purchasers. Warrants are themselves valuable and, thus, are often traded in a manner similar to stock and other securities. Indeed, federal securities law and most states' securities laws include warrants within the definition of a security, along with stocks and bonds. The MBCA authorizes corporations to issue warrants, with the board of directors to set the relevant terms, including the return consideration to the corporation.

Contracts Voidable by Third Party Example

A woman owned a small farm and supplied produce to local grocery stores. The woman was also an agent for a national produce distributor. The distributor instructed the woman to contact a local grocery store and offer to supply pumpkins for the upcoming holiday season. The woman contacted the store but falsely represented that she was not acting for the distributor. During the discussion with the woman, the store representative repeatedly told the woman that the store sold only local produce. The store representative assumed that the woman was offering local pumpkins and placed a large order. Upon learning of the woman's misrepresentation, the store could void the contract. The woman had falsely stated that she was not the distributor's agent, and she knew the store would not deal with the distributor, as the store sold only local produce

Prohibited Indemnification: Proceeding by the Corporation or in Its Name

Absent a court order, a corporation must not indemnify a director for liability (whether by settlement or judgment) in connection with a proceeding brought by the corporation or to recover damages for the corporation (e.g., a derivative proceeding), even if the requisites for permissive indemnification are satisfied. A different rule would allow for an absurd circularity: the director would pay damages to the corporation, only to have the corporation turn around and essentially refund the damages to the director. The corporation may, however, reimburse the director for expenses incurred in defending the proceeding, but only if there are grounds for permissive indemnification.

iv. Partner's Financial Distress

According to statutes in many states, a partner is dissociated if she: - becomes a debtor in a federal bankruptcy proceeding (though the United States Bankruptcy Code may preempt state law and limit expulsion on this ground); - executes an assignment for the benefit of creditors; or - seeks or allows the appointment of a trustee, receiver, or liquidator (or fails to have a nonconsensual appointment vacated within 90 days).

Actual Authority

Actual authority exists to the extent that the principal expressly or implicitly authorizes the agent to take actions with legal consequences for the principal. When the agent takes the action, she must reasonably believe, based on the principal's words or conduct, that the principal has authorized her to do so. Some states require a writing signed by the principal to prove that the agent has actual authority to enter into a binding transaction, at least in certain contexts. For instance, California law requires a written instrument to authorize an agent to enter into a contract that is itself required by law to be in writing.

Partners' Actions after Dissolution

After dissolution, a partnership may be bound by a partner's action that: (1) is appropriate for winding up the partnership business or (2) would have bound the partnership before dissolution, if the other party to the transaction lacks notice of the dissolution.

Issuing Shares after Incorporation

After incorporation, the board of directors (or shareholders, if provided in the articles of incorporation) may cause the corporation to issue additional shares of stock in exchange for consideration, or return value, to the corporation. In most states, the return value may generally consist of any tangible or intangible property or other benefit to the corporation (e.g., cash, promissory notes, services, or other corporate securities). Under the MBCA, the board must determine that the consideration is adequate, which it tacitly does by authorizing issuance in exchange for the consideration. Once a purchaser has paid the consideration, she has no further responsibility to the corporation with respect to the shares. Some states limit the types of consideration that may be provided in exchange for stock.

Bylaws Generally

After incorporation, the incorporators or board of directors must adopt initial bylaws for the corporation that may later be amended if necessary. Generally, the bylaws contain provisions for managing the business and regulating corporate affairs. That is, provisions in the bylaws must relate to the corporate business, conducting corporate affairs, or shareholder rights. What is in the bylaws must not be inconsistent with state law or the articles of incorporation. To the extent of any inconsistency, state law trumps the articles of incorporation, and the articles of incorporation trump the bylaws. The board of directors may also adopt emergency bylaws to become effective in the case of a catastrophic event that prevents the corporation from readily assembling a quorum of directors. A quorum is the minimum number or percentage of sitting directors required to take binding action. Without a quorum, no director action has any legal effect.

Establishing Agency

Agency relationships typically arise by mutual assent, but they may also arise by operation of law. Common types of principal-agent relationships include attorney-client, partnershippartner, corporation-officer, and employer-employe

Fiduciary Obligations

Agents must fulfill a variety of fiduciary obligations and other responsibilities in acting on behalf of principals, and principals have certain duties to fulfill in dealing with agents

Agency by Mutual Assent

An agency relationship arises by mutual assent if an agent and a principal manifest assent, or agreement, that the agent will act for the principal's benefit and subject to the principal's control. The agent must agree to act for the principal and subject to her control, and the principal must agree that the agent will so act. No particular formalities are required; the needed manifestations may arise from writing, orally, or even by conduct, lending a reasonable inference that the parties have agreed to enter an agency relationship

Agency by Operation of Law

An agency relationship may arise by the operation of law. For instance, many states have laws that appoint a state official as the agent of a nonresident motorist for the purpose of service of process, usually in connection with a motor-vehicle accident in the state.

Express Authority

An agent has express authority to act if the principal specifically states, orally or in writing, that the agent may take discrete action or engage in a discrete undertaking on the principal's behalf

Tort Liability of Agent

An agent is liable to a third party harmed by the agent's own tortious conduct, regardless of whether the agent acts with any type of authority. Note: An agent is not liable to a third party merely for breaching some fiduciary duty to the principal. Rather, an agent is liable to a third party only for breaching some duty owed to the third party, such as the tort duty to behave with reasonable care to avoid injury

Sub-Agents

An agent may have the authority to appoint a sub-agent, who acts for the agent on behalf of the principal. Generally, the sub-agent is considered to be in an agency relationship with both the agent and the principal. Therefore, the principal can be liable for both the agent's and sub-agent's conduct in the course of the agency, and the agent can be liable for the sub-agent's conduct

Duties of Loyalty

An agent must be loyal to the principal in anything touching the subject of the agency relationship. The essence of that duty (and of the fiduciary relationship itself) is that if the agent's and principal's interests ever conflict, and the conflict implicates the agency, then the agent must subordinate her own interests to the principal's.

Using the Principal's Property or Confidential Information

An agent must not use the principal's property for purposes personal to the agent or a third party. Similarly, an agent generally must not use or communicate the principal's confidential information for purposes personal to the agent or a third party. These acts violate the duty of loyalty regardless of whether the principal is harmed, or whether the agent profits from them.

Agent for Multiple Principals

An agent who acts for more than one principal in a transaction has a duty to deal fairly and act in good faith with each principal. The agent must disclose to each principal (1) the fact that the agent is also acting for the other principal(s) and (2) all other material facts that, to a reasonable person in the agent's position, would affect the principals' judgment, provided the agent knows, should know, or has reason to know of them. If an agent's duty of confidentiality to one principal prevents full disclosure to another, then the agent must not continue to act for the other.

Agent's Duties to Principal

An agent's general fiduciary obligation is to act for the principal's benefit, placing the principal's interests above her own, in all matters concerning the agency relationship. Out of this general obligation arise a number of specific requirements, each grouped under one of three overarching headings: - Duty of loyalty - Duty of obedience, and - Duty of case

Contract Liability of Principal and Agent

An agent, along with the principal, may be liable to third parties for any contracts the agent enters on the principal's behalf, depending on whether the principal is disclosed, unidentified, or undisclosed. The principal may also ratify an unauthorized contract.

Appraisal Right Defined

An appraisal right entitles a shareholder to compel the corporation to buy back her shares at an appraised or judicially determined fair-market value, insofar as an extraordinary corporate action will fundamentally alter those shares.

De Facto Corporation

An association may be deemed a de facto corporation if: - there is a procedural, administrative, or other defect in the process of incorporation, so that a de jure corporation does not come into being (for instance, a document getting lost in the mail, or inadvertent omission of required information); - the incorporators tried, in good faith, to comply with the statutory incorporation requirements, which in some states requires actually filing or colorably attempting to file the articles of incorporation with the appropriate state office; and - actual exercise of corporate prerogatives, or actually conducting the business as though there were a de jure corporation (for instance, entering a lease on the corporation's behalf).

Express Authority Example

An employment agency agreed to recruit and hire temporary workers for a processing plant. The oral agreement between the processing plant and the employment agency authorized the employment agency to recruit and hire workers. Consequently, the employment agency had express authority to do so

Liability of Incoming Partner

An incoming partner joining an existing partnership is not personally liable for partnership obligations incurred before her admission to the partnership.

Remote Tippees Example

An investment banker at a financial-services firm knew that the firm was preparing to acquire a health-insurance corporation, upon which the corporation's stock price would soar. This was material, nonpublic information. The banker conveyed this to his brother, who he expected to (and who did) trade profitably on it. The brother conveyed the information to his friend, who he expected to (and who did) trade profitably on it. Both the brother and the friend knew of the investment banker's relationship and obligations to the firm. Without disclosure, both were liable as tippees. The personal-benefit requirement was satisfied as to the banker and the brother; both intended to gift the material, nonpublic information. The brother and friend both knew of the banker's insider status to the firm, meaning they had reason to know that his disclosing the acquisition's pendency breached his fiduciary duties.

Indemnification or Advancement, Officers

An officer is generally entitled to indemnification or advancement on the same terms as a director.

Personal Guaranty

An officer or director is liable on any corporate contract that she personally guarantees.

3) Mere Detour Example

An oil-company employee's job was to travel among the company's oil wells to maintain equipment. As the employee was driving from one jobsite to the next, he pulled just off the road into a fast-food restaurant's drive-through lane. Doing so, he negligently damaged one of the restaurant's signs. The employee bought lunch, ate quickly, and resumed driving to the next jobsite. The stop at the restaurant was a mere detour, not a frolic. The employee went only a short distance out of the way to buy lunch, ate very quickly, and then immediately resumed traveling to the next jobsite. The deviation from the oil company's business was exceedingly minor. Because the negligent damage to the sign occurred during a mere detour, it was within the scope of employment

2) Frolic Example

An oil-company employee's job was to travel among the company's oil wells to maintain equipment. As the employee was on route from one jobsite to the next, he saw a sign advertising a new bookstore. The employee drove five miles out of the way to visit the new store. As the employee pulled into the parking lot, he negligently damaged someone's car. The employee was on a frolic. By diverting to the bookstore and driving five miles out of the way, the employee departed substantially from the oil company's time and space parameters. He was no longer acting to serve his employer's interests, but to fulfill his own desire to shop for books. Because the damage occurred while the employee was on a frolic, it was outside the scope of employment.

ii. Right to Dissent or Abstain

Any director who attends a meeting and is present when action is taken is deemed to assent to that action unless: • the director promptly objects to the meeting itself or to transacting business at it (e.g., for lack of notice), • the director's abstention or dissent is noted in the meeting minutes, or • the director delivers written notice of the abstention or dissent to the presiding officer during the meeting or to the corporation itself promptly after the meeting. By indicating dissent or abstention, the director may avoid personal liability for the action. A director who affirmatively votes in favor of an action no longer has the right to dissent or abstain from it.

Right to Participate in Winding Up

Any partner who has not wrongfully dissociated from the dissolved partnership has the right to participate in winding up the partnership business.

Property Acquired with Partnership Property

Any property acquired with partnership property is itself rebuttably presumed to be partnership property

Apparent Authority

Apparent authority exists if, based on the principal's conduct and manifestations, a third party could reasonably believe that the agent has actual authority. The agent's conduct, manifestations, and beliefs are generally irrelevant; the third party's reasonable beliefs, traceable to the principal's actions, are controlling. However, for this purpose, the agent's actions may be deemed traceable to the principal if the principal has expressly or implicitly authorized them, or if the principal fails to use reasonable care to prevent or correct the agent's misrepresentations about her own authority. Also, a third party may draw reasonable inferences based on prior patterns of interaction with (or between) the principal and agent. Finally, a principal may confer apparent authority by placing an agent in a position customarily carrying specific responsibilities or by designating an agent as the sole point of contact with a third party.

Directors' and Officers' Liability for Corporate Obligations

As a general rule, directors and officers are not personally liable for corporate obligati ons solely due to their status as directors or officers.

Corporate Dissolution

As with a partnership, dissolution does not immediately terminate a corporation's existence. Once dissolution becomes effective, the corporation may continue to do business, but only to the extent appropriate to wind up and liquidate its affairs. This means, in essence, that the corporation may finish only whatever business it had outstanding when dissolution took effect; it may not undertake any significant new business unrelated to the winding up. Examples of activities appropriate for winding up the corporation's affairs include: • collecting and disposing of assets; • taking steps to provide for or discharge creditors' claims against the corporation; • distributing assets to shareholders, once creditors' claims have been discharged; and • concluding any litigation that was pending at dissolution. The corporation's existence terminates once winding up is complete.

Record Date

At a shareholders' meeting, only shareholders who held stock as of the record date are entitled to vote. Any shareholder acquiring her shares after that date may not vote, even if she holds the shares when the meeting occurs. Under the MBCA, the record date must not be more than 70 days before the meeting or relevant shareholder action, and the record date must not be retroactive. The board of directors may fix the record date if the bylaws do not either fix the date or provide some other means to do so. The corporation must prepare a list of shareholders entitled to vote at a given meeting.

Quorum at a Shareholders' Meeting

At a shareholders' meeting, quorum is determined by voting group (or class) entitled to vote on a specific matter. With respect to a given voting group, quorum generally exists on a matter if a majority of shares in that group are represented at the meeting and on the matter. A group without a quorum at the meeting, with respect to a matter, may not act on the matter at the meeting. If multiple distinct groups' approval is required for an act, then the groups may act at separate meetings. Thus, if some but not all groups have a quorum at the meeting, then those with a quorum may act, but those without a quorum will have to act at a later time. Under the MBCA, a shareholder cannot destroy quorum by leaving and thus effectively taking her shares with her. Once shares are represented at the meeting, the MBCA deems them present for the entirety of the meeting

a. Registered Bonds

At one time, most bonds in the United States were bearer bonds, payable to whoever had physical custody of the document representing the right to payment. This made bonds similar, in many respects, to cash. Today, most bonds in the United States are registered bonds, as to which the owner's name is registered with either the issuing corporation or a third-party agent.

Termination of Apparent Authority

Because apparent authority does not require an actual agency relationship or actual authority, it follows that the termination of an actual agency relationship, or of actual authority, will not necessarily terminate apparent authority. Rather, apparent authority terminates only if it is no longer reasonable for a third party to believe that the agent (or purported agent) has actual authority. For instance, a principal might provide notice to the third party that the agency or actual authority has terminated.

Competing with the Partnership

Before the partnership's dissolution or the partner's dissociation, the duty of loyalty forbids a partner from competing with the partnership in the conduct of its business. This duty ends upon an event of dissolution.

Undisclosed Principal

Both a principal and an agent are liable for a contract within the scope of the agent's actual authority if the third party does not have notice of the fact that the agent is acting for a principal (let alone the principal's identity), meaning the third party believes that the agent is acting on her own behalf. The third party is also liable to both the agent and the principal, as both are deemed parties to the contract. Apparent authority cannot exist in this context, because apparent authority assumes a manifestation from a principal to a third party that the agent may act on the principal's behalf. The principal may not be able to enforce the contract under some circumstances, e.g., if the lack of notice is fraudulent

Articles of Incorporation

Broadly speaking, the articles of incorporation comprise the governing document establishing the corporation and setting forth the basic terms of its existence. Most states require the articles to set forth specific information, including: - the corporation's name - how many shares the corporation is authorized to issue; - each incorporator's name and address; and - the street and, if different, mailing addresses of the corporation's initial office and the name its initial registered agent at that office. The articles of incorporation may (and often do) set forth additional provisions, such as the names of the initial directors, the corporation's business purpose, various management provisions, the corporation's powers, liabilities and protections for officers and directors, and so on. Some specific types of provisions must appear, if at all, in the articles of incorporation.

Classes of Stock Generally

Capital stock is the stock issued by a corporation under its authority. Common stock and preferred stock are the two main types of capital stock. A corporation may create various classes of stock with differing features, such as different voting rights or priorities of distribution. If there are multiple classes of stock with differing rights or entitlements to distributions, the articles must clearly describe and distinguish the respective classes and their entitlements. Typically, at least one class of stock must have the right receive the corporation's net assets upon dissolution. At least one class must have unlimited rights to vote on matters requiring shareholder approval; this class may be the same class entitled to distribution of the net assets on dissolution. As long as at least one share is outstanding, there must be at least one outstanding share with full voting rights and one conferring the right to receive the corporation's net assets on dissolution, whether individually or taken together with other shares.

Common Stock

Common stock is the most prevalent type of stock. Typically, owning common stock entitles a shareholder to receive dividends from profits and to vote on important corporate matters, such as electing directors or approving a merger. Common stockholders do not receive preferential distribution of corporate assets or dividends; they are typically the last shareholders to receive anything.

Relationship to Apparent Authority

Conceptually, agency by estoppel is very similar to apparent authority. The key distinction between the two is that apparent authority requires the third party's belief to be traceable to the purported principal's actions. Agency by estoppel, by contrast, does not. Agency by estoppel may arise if the purported principal merely negligently fails to correct a third party's misapprehension, even if she does not actually contribute to it

Various Other Types of Stock

Corporations are not limited to issuing stock meeting the traditional definitions of common and preferred stock. Indeed, corporations may issue shares with all sorts of varying entitlements, provided the entitlements are clearly spelled out in the articles. For example, a corporation may issue a special class of stock that entitles a shareholder to vote as a director, should the board of directors find itself deadlocked.

iii. Master-Servant Relationship

Courts evaluate all the surrounding circumstances to determine whether a particular agency relationship qualifies as a master-servant relationship. Among the relevant factors, the most important by far is the degree of control the principal has the right to exercise over the agent's work. Most often, a master-servant relationship exists if the principal may dictate not only the end result of the agent's work, but also the manner and means to accomplish the result

Piercing the Corporate Veil

Courts may pierce the corporate veil by setting aside the principle of limited liability and disregarding the corporate entity in the interests of equity. Generally, courts do this if the corporate form has been abused such that recognizing limited liability would work unfair harm or injustice.

d. Debentures

Debentures are debt securities not backed by a mortgage or secured by a lien or other interest in specific property. Typically, debentures are administered under an indenture arrangement, in which a third-party trustee oversees the issuing corporation's compliance with the indenture's terms for the holders' benefit. Like typical secured bonds, debentures may be registered, convertible, and so on. Debentures are generally subordinated to other corporate debts.

1. Debt Securities Generally

Debt securities are generally called bonds. A bond represents a debt owing from the corporation to the holder. Thus, if a corporation issues a bond, it becomes a debtor. Whoever purchases the bond effectively lends money to the corporation. The bond itself represents the purchaser's right to repayment, which the purchaser may generally transfer to third parties, similar to stock. Bonds are typically backed by a mortgage, lien, or other interest in property.

e. Guaranteed Debt Securities

Debt securities issued by one corporation are guaranteed if another corporation has agreed to answer for the underlying obligation. Parent corporations often guarantee their subsidiaries' debt securities to induce purchasers to buy them.

Circumstances under Which a Director May Exploit a Corporate Opportunity

Despite the general rule, a director may take personal advantage of a corporate opportunity if the director properly gives the corporation the first chance to accept or reject the opportunity and the corporation rejects it. First, the director must offer the opportunity to the corporation, fully disclosing all material facts known to the director concerning both the conflict of interest and the transaction itself. Second, the corporation must reject the opportunity. In addition, at least one of the following three requirements must be satisfied: • rejecting the opportunity is fair to the corporation; • a majority of qualified directors on the full board (or on the committee appointed to consider the matter) votes in advance to reject it in a manner conforming to the directors' duties of care and loyalty; or • a majority of disinterested shareholders votes in advance to reject the opportunity or to ratify the transaction after the fact. Some authority requires that rejecting the opportunity must not be a waste of corporate assets (an expenditure of corporate assets with no or grossly inadequate return consideration).

Duty to Make Informed Decisions

Directors must take reasonable, proactive steps to become adequately informed in connection with each decision they make for the corporation. That is, directors must become sufficiently familiar with the surrounding facts and other context to make an informed judgment. This includes, for instance, attending and actively participating and paying attention in meetings; reviewing information from and consulting with officers, employees, other directors, and third-party professionals like lawyers or accountants; reviewing industry studies, market research, outside publications, and other materials; and private research. The bottom line is that before making a decision, a director must reasonably believe that she is sufficiently informed.

Making Reasonable Provision for Unknown Claims

Directors' duty to make reasonable provision for claims involves setting aside assets to pay any claims, including unknown claims. Directors may be unsure how much asset value to set aside for unknown claims. To ease this uncertainty, once the corporation has published the notice required for unknown claims, it may apply to the appropriate court to determine how much value should be set aside for unknown claims. If the corporation follows the statutory notice procedures, the court determines an amount, and the corporation sets aside that amount, then the corporation's obligations to most unknown claims will be deemed fulfilled. As a result, directors cannot be personally liable for failing to provide for the claims, and shareholders cannot be personally liable, even if they received a distribution ahead of the claims.

Liability as the Corporation's Agents

Directors—and officers in particular—are the corporation's agents in carrying out their duties. Thus, a director or officer may be liable to third parties contracting with the corporation on the same terms governing any agent's liability on a contract she enters on her principal's behalf

Partner Dissociation from a General Partnership

Dissociation means that a partner ceases to be a partner. Sometimes, but not always, dissociation may lead to dissolution, winding up, and termination of the partnership.

Dissolution of a General Partnership

Dissolution is not synonymous with terminating the partnership, but it is generally the first step toward terminating the partnership. That is, if an event causing dissolution occurs, then the partnership continues, but only for the purpose of winding up the partnership business. Once the winding up is concluded, the partnership terminates. Termination, by itself, does not in any way affect the partners' liability for partnership obligations.

Judicial Dissolution, Partner's Application

Dissolution occurs if a court finds, on application by a partner, that - the partnership's economic purpose will likely be unreasonably frustrated; - due to another partner's conduct concerning the partnership business, carrying on business with that partner is not reasonably practicable; or - for any other reason, carrying on the partnership's business is not reasonably practicable.

Partners' Management Rights

Each partner has equal rights in the management and conduct of the partnership business. If a difference arises on a matter in the ordinary course of the partnership's business, then a simple majority of the partners may decide the matter. The partners must agree unanimously to any act or transaction falling outside the ordinary course of the partnership's business. These rules are, of course, subject to any contrary provisions in the partnership agreement.

Partner's Power to Bind the Partnership as an Agent

Each partner is considered to be an agent of the partnership when conducting partnership business. This means that, generally, if a partner's act is apparently for carrying on the partnership's business (or a business of the same kind) in its ordinary course (or in the usual way), then the act binds the partnership, just as an agent's act with actual authority would bind the principal. However, if the partner does not have authority to act for the partnership in a particular matter (for instance, by the terms of the partnership agreement), and a third party with whom the partner is dealing knows that the partner lacks authority, the partnership will not be bound. By contrast, a partner's actions outside the ordinary course of business bind the partnership only if all the other partners authorize it.

Partners' Right to Access Information

Each partner is entitled to access the partnership's books and records during ordinary business hours. The books and records must be kept at the partnership's chief executive office. Without demand, the partnership and partners must provide a partner any information about the partnership's business and affairs reasonably necessary for her to exercise her rights and fulfill her duties as a partner. Upon demand, the partnership and partners must provide a partner any other information about the partnership's business and affairs, unless the demand or the information is unreasonable or improper.

Corporate Formation

Each state imposes particular statutory requirements to form a corporation. Generally, no corporation exists, and limited liability does not take effect, until these requirements are meticulously complied with. But sometimes, at least in some states , there may be limited liability even if the business is defectively incorporated.

Effect of Ratification

Effective ratification means that the principal will be bound by the ratified act, just as if the agent or purported agent had acted with actual authority. Ratification confers authority retroactively

Usefulness of Committees

Establishing director committees is often very useful; it may be necessary for the board to act if the full board could not vote on the matter. For instance, if the full board could not act because too many directors are affected by conflicting interests, a committee of disinterested directors may be able to act on the matter in its place. Very often, committees of independent directors are established to set director compensation.

Confidential Partnership Information

Even after dissociation, a partner must not use or exploit the partnership's confidential information.

2) Expulsion if Not Provided for in Partnership Agreement

Even if the partnership agreement does not provide for expulsion, a partner may be expelled by the other partners' unanimous vote if: (1) carrying on business with the partner is unlawful; (2) the partner's right to receive distributions and income from the partnership has been transferred, except for merely placing an unforeclosed lien or security interest on the right; (3) if the partner is a corporation, on 90 days' notice after the corporation has filed a certificate of dissolution, had its charter revoked, or had its right to conduct business suspended by the jurisdiction of incorporation, and the matter is not cured in 90 days; or (4) if the partner is itself a partnership, the partner has been dissolved and is winding up its business.

General Role of Corporate Officers

Every corporation must have officers who are entrusted with the daily administration of corporate affairs. Many states require a president, secretary, and treasurer. Other examples of officers include the CEO, CFO, COO, and various vice presidents. The MBCA requires that one officer be responsible for maintaining and authenticating any required records. Otherwise, a corporation has as many or as few officers as are provided in the bylaws, or as the board of directors might appoint in accordance with the bylaws.

1) Full-Disclosure Requirement, Board Approval

For board approval to be effective, the conflicted director must fully disclose all material facts known to her about both the transaction itself and the conflict of interest.

3) Quorum of Qualified or Disinterested Directors

For purposes of approving a conflicting-interest transaction, a quorum requires a majority (at least two) of the disinterested or qualified directors. Valid approval, in turn, requires that a majority of the quorum approve the transaction outside the presence and without the participation of any conflicted director.

Personal Benefit Defined

For purposes of tipper-tippee liability, the notion of a personal benefit to the tipper is conceptualized very broadly. It encompasses any personal gain to the tipper, direct or indirect, including financial gain, a reputational benefit that might result in later earnings, and more. Generally, courts will infer a personal benefit if the tipper (1) receives something of value in exchange for the information or (2) makes a gift of the information to a tippee who is a relative, associate, or friend, at least if the tippee then profits from trading on the information. In the latter case, for purposes of finding a personal benefit, courts will view the transaction as though the tipper herself had improperly traded on the material, nonpublic information herself and then gifted the proceeds to the tippee.

Full-Disclosure Requirement, Shareholder Approval

For shareholder approval to be effective, the voting shareholders must receive notice describing the action to be taken on the conflicting-interest transaction. Additionally, the voting shareholders must be informed of all material facts known to the conflicted director regarding the conflict of interest and the transaction itself. If a conflicted director knows that any shares are not qualified shares, she must communicate this fact and the impacted shareholders' identities to the officer charged with tabulating votes.

Commencing Corporate Dissolution

Generally speaking, dissolution may commence in one of three ways: (1) voluntary dissolution by the corporation, (2) judicial dissolution, or (3) administrative dissolution by the state.

Indemnification of Directors

Generally speaking, to indemnify means to fully reimburse another for losses, liabilities, or expenses. In some instances, a corporation may be permitted or required to indemnify a director for losses arising out of litigation brought against the director because of her role as a director.

Filling Vacancies on a Committee

Generally, a committee may not fill its own vacancies. The full board must do that. However, the articles of incorporation, the bylaws, or the board resolution creating the committee may empower the committee to appoint a director to act in place of an absent or disqualified member by unanimous vote of those members present and not disqualified.

The Corporation's Name

Generally, a corporation's name must include language like "incorporated," "inc.," "limited," "corporation," "corp.," or "ltd." to indicate to third parties that they are dealing with a limited-liability entity. The name must also be distinguishable from the names of most other entities incorporated or registered to do business in the state.

Determining Whether a Director is Entitled to Permissive Indemnification

Generally, a majority vote of qualified (disinterested) directors is required to decide that a director is (or is not) entitled to permissive indemnification. Alternatively, the shareholders (who are not unqualified directors) or special legal counsel appointed by the board may decide the matter.

Principal's Duties to Agent

Generally, a principal owes duties of good faith and indemnity to an agent. Additionally, a principal must obey the express and implied terms of a contract with an agent. If the contract does not address compensation, but the parties intended that the agent be compensated, then a court will imply a contractual term requiring reasonable compensation—that is, compensation reflecting the fair value of the agent's services.

Fiduciary Duties of Promoters

Generally, a promoter is a fiduciary to the prospective corporation. Thus, the promoter must act for the prospective corporation in good faith, carrying out the general fiduciary duties of care and loyalty. Particularly, promoters generally must not engage in selfdealing or profit at the prospective corporation's expense

Termination of Actual Authority

Generally, actual authority may be terminated by: - Death -Loss of capacity by the prinicipal - Revoking the relationship -No longer manifest assent: Specified event or fixed period of time - Any circumstances specified by statute However, actual authority may be irrevocable by the principal if related to: (1) a power given as security, (2) an irrevocable proxy to vote securities (usually corporate stock), or (3) an ownership interest that is irrevocable under statutory law.

Carrying on Partnership Business in the Ordinary Course

Generally, an act is apparently for carrying on the partnership's business in the ordinary course if done to further the partnership's usual business and done consistently with either (1) the way similar businesses in the locality transact or (2) the way the particular partnership transacts.

iv. Actions within the Scope of Employment Generally

Generally, an agent acts within the scope of employment if: - the agent acts primarily within the principal's authorized time and space limitations - a desire to serve the principal motivates the agent, at least in part; and - the agent does work that the principal has assigned or acts subject to the principal's control. More generally, an act may be within the scope of employment if the tort itself is a foreseeable risk arising from the principal's enterprise.

Control Defined

Generally, control means a degree of influence that could reasonably be expected to taint the director's objective judgment. Under the MBCA, control means: • having the power to remove a majority of an entity's governing body, • bearing the majority of the risk of loss from an entity's business enterprise, or • being entitled to the majority of the financial gain from the entity's business enterprise.

b. Manner of Participating in a Directors' Meeting

Generally, directors may participate in a meeting by (1) attending it in person or (2) any remote communication by which the directors can hear one another simultaneously (e.g., by conference call).

Wrongful Dissociation

Generally, dissociation is wrongful only if it breaches the partnership agreement. If the partnership is for a definite undertaking or specific term, then dissociation is also wrongful if, before expiration of the term or completion of the undertaking: - the partner withdraws by express will (with exceptions), - a court expels the partner - the partner becomes a debtor in a federal bankruptcy proceeding, or - the partner is not an individual and is expelled because it willfully dissolved or terminated.

Corporate Powers

Generally, every corporation has the same powers as an individual to do all things necessary or convenient to carry out its business and affairs, subject to any limitations in the articles of incorporation. These include the powers to: - sue and be sued in the corporation's name; - make and amend bylaws; - acquire, hold, and dispose of property, including any ownership stake in another entity; - make contracts, incur debts, and secure obligations; - lend and invest; - be a partner, associate, or manager in a different entity or association; - donate to charity; or - appoint and hire officers, directors, and employees.

Confidential Information Defined

Generally, information is confidential if the agent should reasonably expect that the principal wishes the information to be kept private. A prime example is a trade secret, customer list, or similar piece of information that affords the principle some commercial advantage in the marketplace (and, hence, would afford competitors an advantage if they obtained it). Usually, an agent must keep this information confidential and not exploit it even after the agency relationship terminates

Defective Incorporation

Generally, no corporation exists, and there is no limited liability, until articles of incorporation are properly filed with the appropriate state office. This forms a de jure corporation, a full-fledged, distinct legal entity for all purposes. In some states, though, two equitable doctrines sometimes permit limited liability even if no de jure corporation has been formed: de facto corporation and corporation by estoppel.

Extraordinary Corporate Actions Triggering Appraisal Right

Generally, state statutes enumerate exclusive lists of specific corporate actions that will trigger an appraisal right

1. Qualifications to Be a Director

Generally, the articles of incorporation or bylaws will prescribe the qualifications a person must meet to be a director. A corporation may generally prescribe any qualifications it feels appropriate, subject to overriding constitutional, statutory, and other legal limitations and to the requirement that any qualifications must be reasonable as applied to the corporation itself. Thus, a corporation may institute qualifications reasonably calculated to protect its shareholders, assure that certain classes of shares have adequate representation on the board, and advance its business interests. For example, the corporation may require that all or a minimum percentage of its directors have specific, relevant business or professional expertise, or have not been convicted of certain crimes. However, qualifications designed to favor incumbent directors and make it harder to replace them are generally deemed unreasonable and impermissible. Some states may also require additional qualifications for directors, such as age or natural personhood (meaning a corporation cannot be a director in another corporation).

Selection and Removal of Officers

Generally, the board of directors elects or appoints officers. Officers may, however, appoint other officers if the bylaws or the board of directors authorize it. An officer may resign at any time by delivering written notice to the board of directors, its chairperson, the appointing officer (if any), or the corporation's secretary. The board of directors, the appointing officer (subject to the bylaws and any board resolution), and any other officer authorized by the bylaws or board resolution may remove an officer at any time and for any reason or no reason.

Stock Issuance

Generally, the ownership of a corporation is divided into shares of stock represented by transferable certificates. Typically, corporations issue stock to raise capital. A corporation may issue new stock or repurchase stock from time to time, but the overall number and types of stock issued by the corporation must be authorized by the articles of incorporation or, alternatively, the board of directors may issue and classify stock by amending the articles of incorporation without shareholder action, if the articles provide that authority. Shares that have been issued are outstanding shares; they remain outstanding until the corporation has reacquired, redeemed, or cancelled them. Treasury stock is previously issued stock that the corporation has repurchased.

General Rules, Recovery against Partners Individually

Generally, to recover against a partner's personal assets, a partnership creditor must obtain a judgment against that specific partner, not just the partnership. Also, before proceeding against a partner's assets on a judgment attributable to partnership obligations, a partnership creditor must typically proceed first against the partnership's property. Only if the partnership's property is exhausted may the creditor then move against a partner's personal property.

Gross Negligence or Recklessnes

Gross negligence is more than mere failure to exercise reasonable care under the circumstances; it is closer to failure to exercise any appreciable care at all, even the care of an inattentive and generally incapable person. Recklessness, on the other hand, amounts to conscious disregard of a high and unjustified risk that a particular result will flow from a partner's conduct.

Ultra Vires

Historically, corporations' powers were very specific and limited. If a corporation acted beyond its powers, its act could be voided as ultra vires (Latin for beyond the power). These days, corporations are generally empowered to do any lawful act to further their businesses, subject to any limitations in their articles of incorporation. Thus, the ultra vires doctrine has become less important, so much so that some states have abolished it by statute. Even so, it remains possible for a corporation to overstep its lawful powers. In states retaining some form of ultra vires, the act itself is generally not voidable, at least by affected third parties. However, the officers or directors who undertook the act may be personally liable for it. Under the MBCA and the law of some states, the validity of corporate action may not be voided on the ground that the corporation lacks power to act, with the exception of a proceeding by: - a shareholder who is seeking to enjoin corporate action; - a corporation proceeding against an incumbent or former director, officer, employee, or other corporate agent; or - the state's attorney general proceeding to annul the corporation, dissolve it, or enjoin it from carrying on unauthorized business.

Formation of a General Partnership

If (1) two or more persons come together to carry on, as co-owners, a business for profit, and (2) the legal requirements to form some other type of association (for instance, a corporation) are not satisfied, then a general partnership is formed. This is true regardless of whether the persons subjectively intend for their association to meet the legal definition of a general partnership, and it may be true even if a relevant agreement expressly states that the association is not a general partnership.

Court-Ordered Inspection

If a corporation improperly fails to honor a shareholder's inspection rights, the shareholder may petition a court to compel inspection. If the court orders inspection, it may impose reasonable restrictions on the information's use, confidentiality, or distribution. Unless the corporation refused the inspection in good faith because it (1) had a reasonable basis to doubt the shareholder's right to inspect or (2) sought to impose reasonable restrictions, to which the shareholder would not agree, the corporation must pay the shareholder's expenses arising out of the proceeding.

Directors' and Shareholders' Personal Liability for Improper Distributions

If a director assents to or votes to authorize an improper distribution, she may be personally liable to the corporation for the amount by which the distribution exceeds what would have been proper. In jurisdictions following the MBCA, liability will attach only if the director, in deciding to authorize or assent to the distribution, breached her duty of care. If a director is held liable for an improper distribution, she may be entitled to proportionate (1) contribution from other directors who are also liable and (2) recoupment from shareholders who received the distribution knowing it was improper.

Prohibited Indemnification: Receipt of Improper Financial Benefit

If a director is adjudged liable because she received a financial benefit to which she was not entitled, the corporation must not indemnify her. This bar applies whether or not the director, at the relevant time, was acting in her official capacity.

Permissive Indemnification

If a director is sued because of her role as a director, then the corporation may indemnify her for liability incurred in the proceeding if the director behaved in good faith and certain other requirements are satisfied, depending on the nature of the proceeding. If the proceeding involves the director's conduct in her official capacity, then the director must have reasonably believed that her conduct was in the corporation's best interests. If the proceeding involves conduct outside the director's official capacity, then the director must have reasonably believed that her conduct was not opposed to the corporation's best interests. Finally, if the proceeding is criminal, then the director must have had no reason to believe that her conduct broke the law Note: The articles of incorporation may, within limits, expand the bases of permissible indemnification, but not for improper receipt of a financial benefit, intentional harm to the corporation, intentional lawbreaking, or improper distributions.

Mandatory Indemnification

If a director is sued due to her role as a director, and the director is wholly successful in defending the suit, then the corporation must indemnify the director for any expenses incurred in defending the suit. A director is wholly successful in defending the suit if the proceeding ends with no finding of liability on the director's part. If that is the outcome, then it does not matter how the proceeding was disposed of—be it on the merits, via dismissal on grounds unrelated to the merits (e.g., the claims are timebarred under an applicable statute of limitations), or otherwise.

Effect If Claim Is Barred

If a known or unknown claim is barred, then it is unenforceable against the corporation, its directors, and its shareholders—even those shareholders receiving distributions ahead of the claim

Partner's Death or Incapacity

If a partner is a natural person, then the partner is dissociated if: - She dies - Guardian or general conservator is appointed for her, or - a court determines that she is not capable of performing her duties under the partnership agreement

d. Filling a Vacancy on the Board of Directors

If a position on the board of directors becomes vacant, then, subject to the articles of incorporation, either the shareholders or the board of directors may fill the vacancy. If the board fills the vacancy, and the remaining directors are less than a quorum, then a majority of the remaining directors may fill the vacancy. If the vacancy is set to occur at a future date, then the vacancy may be filled before then, but the new director may not take office until the position actually becomes vacant.

Misleading Proxy Solicitations

If a proxy solicitation contains materially misleading statements or omissions, the soliciting party may be liable for resulting harm to the corporation or shareholders under federal and state law. Federal regulations require many proxy solicitations to contain certain information to protect shareholders.

Shareholder Appraisal Rights

If a shareholder dissents from an extraordinary corporate action that will fundamentally change the existence or nature of her particular shares, she generally has a right of appraisal.

Corporation's Remedies If a Subscriber Defaults

If a subscriber defaults, then under the MBCA, the corporation (once formed) has two remedies. First, the corporation may simply enforce the obligation as a garden-variety debt. Second, the corporation may demand payment from the subscriber in writing. If the subscriber does not pay within 20 days after the corporation delivers the demand, then, subject to the agreement, the corporation may cancel the subscription agreement and sell the stock.

Effect of Agent's False Representation on Principal's Contractual Liability

If an agent for a disclosed or an unidentified principal falsely represents her authority to a third party, the principal is not liable on the contract unless (1) the agent made the misrepresentation with actual or apparent authority, and (2) the third party does not know or have reason to know that the representation is false

Continuing Partnership Despite Dissolution

If an event of dissolution occurs, all current partners and any dissociating partner (other than a wrongfully dissociating partner) may agree unanimously to waive windup and termination and thus continue the business indefinitely. Provided this takes place before wind-up is completed, the partnership will continue, for most purposes, as though the event of dissolution had never occurred

Insufficient Assets to Satisfy Liabilities

If in wind-up, the partnership assets are insufficient to satisfy liabilities, then each partner must contribute to the deficiency in proportion to her share of partnership losses. If a partner fails or is unable to contribute her share, then the other partners must make up the difference, again in proportion to their respective shares of partnership losses, and they may recover the excess from the nonpaying partner. Of course, a partner need not contribute at all toward any debt for which she is not personally liable.

Transferring Partnership Property

If partnership property is held in the partnership's name, then generally any partner may execute an instrument, also in the partnership's name, to transfer partnership property. If partnership property is held in the name of one or more partners, and there is no indication in a relevant instrument that the property is held in the partnership's name or in a person's capacity as a partner, then the partner(s) in whose name the property is held may execute an instrument transferring the property,

1) Independent Contractor Distinguished

If the agency relationship is not a master-servant relationship, then the agent is an independent contractor. The general rule is that a principal is not vicariously liable for an independent contractor's torts. This rule admits many exceptions. Particularly, even if the agent is an independent contractor, the principal will remain vicariously liable as to matters over which the principal retains control.

ii. Voluntary Dissolution if Corporation Has Issued Shares or Conducted Business

If the corporation has issued shares or conducted business, then the board of directors must first adopt a resolution authorizing dissolution. Once that occurs, the shareholders entitled to vote must approve dissolution. In proposing dissolution to the shareholders, the board must recommend dissolution, unless either (1) the board determines that it should make no recommendation owing to conflicts of interest or other special circumstances, or (2) the corporation is contractually obligated to propose dissolution to the shareholders—for instance, in the course of a proposed merger. If the board cannot recommend dissolution, it must inform shareholders of the reason

Authority to Amend Articles Once Corporation Has Issued Shares

If the corporation has issued shares, then for most types of amendments, the board of directors must (1) adopt an amendment to the articles of incorporation and then (2) submit the amendment to shareholders for their approval. The amendment will become effective if the shareholders entitled to vote on it approve it. The board must recommend that shareholders approve the amendment, unless (1) it determines that, due to special circumstances such as conflicts of interest, the amendment should not be approved, or (2) the transaction is a merger or similar dealing for which the corporation is contractually obligated to seek shareholder approval.

i. Voluntary Dissolution if the Corporation Has Not Issued Shares or Has Not Conducted Business

If the corporation has not yet issued shares or has not conducted business, the incorporators or initial directors may dissolve the corporation by filing articles of dissolution with the state. The articles of dissolution must set forth: • the name of the corporation; • the date of incorporation; • a statement that the corporation either has not issued shares or has not conducted business • a statement that the corporation has no unpaid debts; • a statement that the net assets after winding up have been distributed to shareholders, if shares were issued; and • a statement that a majority of the incorporators or initial directors have authorized the dissolution. Any statements in the articles of dissolution must, of course, be true.

Authority to Amend Articles before Corporation Has Issued Shares

If the corporation has not yet issued shares, the board of director or, if none, the incorporators may amend the articles of incorporation

Share Exchange Involving the Corporation

If the corporation is a party to a share exchange, and its shares are to be acquired, then a shareholder may rightly demand appraisal, except insofar as her shares are not acquired in the exchange

Dissociated Partner's Authority to Bind the Partnership

If the partnership does not dissolve and wind up on dissociation, then the partnership will be bound by the dissociated partners acts for two years after dissociation if the act would have bound the partnership without the dissolution, and the other party (1) reasonably believed the dissociated partner was a partner and (2) lacked actual or constructive notice of the dissociation. The dissociated partner is responsible to the partnership for any damages resulting from this liability

De facto Corporation, Status and Powers

If the requirements for a de facto corporation are met, then the business will be treated as a de jure corporation for most purposes. This means that the shareholders enjoy limited liability, and the business may sue, be sued, acquire and hold property, and take other actions as though it were a distinct legal entity. Generally, only the state may challenge the corporate status of a de facto corporation, which is thus the equivalent of a de jure corporation as against everyone on Earth except the state. This means that people who deal with the de facto corporation as though it is a de jure corporation cannot later hold the shareholders personally liable, on the grounds that no de jure corporation was ever formed. (However, the incorporators or directors should promptly act to remedy any defective incorporation and form a de jure corporation as soon as possible after learning of the defect.)

Implied Authority

Implied authority is authority not expressly granted, but reasonably inferred from the principal's conduct. Implied authority may arise if a reasonable person in the principal's position could foresee that, based on the principal's own conduct, the agent will believe she has authority to act. (Actual authority arises if the principal intentionally or negligently causes the agent to believe she has authority.) Implied authority may include incidental authority, i.e., authority to do things reasonably necessary to carry out any express authority. For instance, if a principal expressly authorizes an agent to secure a loan, this implies authority to execute any documents necessary to complete the transaction

Subscription Formalities and Revocability in Delaware

In Delaware, a subscription agreement is irrevocable for six months unless the subscription agreement provides otherwise, or the corporation or the subscribers consent to revocation

Par Value

In a few states, corporations are compelled to set a monetary value, called the par value, below which newly issued shares may not be sold. If a par value is set, each newly issued share of stock must be issued for par value. Newly issued stock sold for less than the applicable par value is called watered stock. Without shareholder consent, a recipient of watered stock may be liable to the corporation for the difference between consideration actually paid and the par value, at least if the difference is so large that no reasonable person could conclude that the corporation valued the return consideration in good faith. Also, if a corporation issues shares for less than par but acts as though the stock was fully paid up, creditors may rely on par value to conclude that the corporation is better capitalized than it really is and extend credit on that basis. In that event, holders of watered stock may be liable to the corporation's creditors for the difference, at least insofar as the corporation is not paying its debts when due. This restriction does not apply to treasury stock, nor to shares that a purchaser might resell after issuance. Note: Even in states requiring par value for newly issued stock, the board of directors may have discretion to issue stock at less than par value if it determines that the corporation cannot obtain par value for the stock.

Partners' Fiduciary Obligations

In a general partnership, each partner owes the fiduciary duties of care and loyalty to both the partnership and the other partners. The partnership agreement may not waive these duties. The agreement may, though, supply standards to evaluate whether partners have fulfilled these duties, provided the standards are not manifestly unreasonable. In exercising partnership rights or performing partnership duties, a partner must deal fairly and act in good faith.

Rights and Liabilities of General Partners and the Partnership

In a general partnership, the partners have various rights and responsibilities relative to one another and the partnership. The general partners are also typically personally liable for partnership obligations, whether in contract, tort, or otherwise.

Partnership at Will

In a partnership at will, the duration of the partnership is not fixed by the terms of any partnership agreement. Consequently, a partner may leave the partnership at any time without facing any liability

Dissolution Events Peculiar to Partnership for a Definite Term or Particular Undertaking

In a partnership for a definite term or particular undertaking, dissolution occurs if: - a partner wrongfully dissociates or dissociates through death, bankruptcy or a similar arrangement, incapacity, appointment of a guardian or conservator, and similar events, and within 90 days, at least half the remaining partners agree expressly to wind up the business (any partner dissociating by express will is deemed to agree to wind up the business); - all the partners expressly agree to wind up the business; - the definite term expires; or - the particular undertaking is completed.

Partnership for a Definite Term

In a partnership for a definite term, the duration of the partnership is fixed by the terms of a partnership agreement and terminates when the period expires. Unless the agreement provides otherwise, a partner who leaves before the term expires faces liability for any damages stemming from her premature departure. Under the RUPA, the partners may expressly or implicitly agree to continue the partnership beyond the term with no change in their status.

Partnership for a Particular Undertaking

In a partnership for a particular undertaking, also termed a joint venture, the partnership exists solely to carry out a discrete project. Generally, the partnership terminates upon the completion or cessation of that undertaking. Under the RUPA, the partners may expressly or implicitly agree to continue the partnership even after the undertaking ceases or is completed.

Judicial Dissolution on Request by the State

In a proceeding by the state's attorney general, a court may dissolve a corporation if (1) the corporation's articles of incorporation were fraudulently obtained, or (2) the corporation has continued to transgress or abuse its lawful authority

Share Exchange

In a share exchange, one corporation acquires all securities, or all of any class or series of securities, in another corporation, in exchange for securities, cash, or other property. The shareholders in the acquiring corporation need not approve the exchange. Shareholders in the corporation whose securities are acquired must approve the transaction under the same process as a merger. [

Special Shareholders' Meetings

In addition to annual shareholders' meetings, the board of directors or some other person authorized in the articles of incorporation or bylaws (such as the president or CEO) may call a special shareholders' meeting, usually to vote on some extraordinary or urgent corporate measure requiring shareholder approval. The shareholders themselves may call a shareholders' meeting if shareholders holding at least 10 percent of the shares entitled to vote on a matter deliver a signed, written demand to the corporation describing the purpose(s) for which the meeting is to be held. The articles of corporation may set a different percentage of shareholders entitled to demand a meeting, not to exceed 25 percent. The special meeting must be held at the corporation's principal place of business unless the articles of incorporation or bylaws fix a different place. Only business relating to the purposes described in the notice of the special meeting may be considered at the meeting.

Factors Indicating De Facto Merger

In analyzing whether an asset sale is a de facto merger, courts look for these hallmarks: • one corporation sells substantially all of its assets to another; • the seller dissolves or ceases doing substantial business, and its old business continues operating under the buyer's auspices; • the purchaser agrees to assume some or all of the seller's liabilities; • the purchaser retains the seller's personnel, in substantial part, to continue the seller's business; • shareholders in the seller effectively exchange their shares for shares in the purchaser, producing a continuity of shareholder interest; and • sometimes, the purchaser expands its board of directors to admit directors from the seller. In these circumstances, the purchaser and seller have effectively become one corporation—a classic merger in all but name

Cumulative Voting for Directors

In cumulative voting for directors, a shareholder may multiply the number of eligible voting shares she holds by the number of director seats open for election. The product is the total number of votes the shareholder may cast in the election. The shareholder may aggregate those votes in favor of one candidate or distribute them among the candidates however she chooses. Cumulative voting empowers and protects minority shareholders by (in many instances) giving them a realistic chance to elect at least one director of their choosing, even if there is a monolithic majority shareholder.

Agent's Duties in Caring for the Principal's Property

In dealing with the principal's property, the agent must not (1) act to give the impression that the principal's property belongs to the agent or (2) commingle the principal's property with anyone else's, especially the agent's (e.g., by depositing the principal's money in a bank account that also contains the agent's own money). The agent must take reasonable steps to safeguard the principal's property and must account to the principal for any money or other property that the agent might receive or expend on the principal's behalf

Close Corporations

In general, a close corporation is one with fewer than a specified number of shareholders, stock in which is (1) not publicly traded and (2) subject to one or more transfer restrictions. For instance, in Delaware, a close corporation may have no more than 30 shareholders. Close corporations are typically small, family-run businesses for which traditional corporate governance would prove unduly costly and burdensome.

Amending the Bylaws

In general, a corporation's shareholders may amend or repeal its bylaws. The board of directors may also amend or repeal the bylaws, except to the extent that (1) the articles of incorporation or a relevant statute reserves that power to the shareholders, or (2) the shareholders adopt, amend, or repeal a bylaw and include a provision prohibiting the board of directors from further changing the affected portions of the bylaws.

Competing with the Corporation

In general, a director who competes with the corporation has engaged in a conflictinginterest transaction and thus breached the duty of loyalty, at least if the director actively engages in a rival business or seeks to siphon customers or goodwill from the corporation. Some authorities permit competition if either (1) there is no reasonably foreseeable resulting harm to the corporation, or (2) any reasonably foreseeable resulting harm is outweighed by the reasonably foreseeable benefit to the corporation from allowing the competition.

Improper Distributions

In general, a distribution is improper and unlawful if it would harm the corporation's creditors in specific ways. Directors who authorize and shareholders who receive improper distributions may be personally liable to the corporation.

Parents and Subsidiaries

In general, a parent corporation is one that owns a controlling percentage, usually a majority, of the stock in another corporation, termed a subsidiary. A parent may appoint its own officers, directors, or shareholders to be officers and directors of the subsidiary.

Insider Defined

In general, an insider is a director, officer, controlling shareholder, or similar fiduciary of the corporation whose stock is being traded. A third-party professional who becomes a temporary corporate fiduciary (e.g., an outside lawyer or accountant) may also be subject to insider-trading liability

Officers' Fiduciary Duties

In general, an officer (especially a principal officer like the CEO, CFO, and so on) owes the same fiduciary duties to the corporation and its shareholders that a director would owe and, thus, is liable for breach to the same extent as a director.

President or CEO

In general, courts tend to presume that a corporation's top executive, usually the president or CEO, has at least apparent or inherent authority to bind the corporation to the same extent that the board of directors itself could, insofar as the contract or act relates to the corporation's ordinary business. Courts are less likely to find apparent authority if the act falls outside the corporation's usual business.

Securities Regulation: Insider Trading

In general, insider trading is both a breach of fiduciary duty and a crime at both the state and federal levels. Section 10(b) of the Securities and Exchange Act of 1934 prohibits manipulative or deceptive practices (generally, fraud) in connection with the purchase and sale of securities if the practice violates regulations promulgated by the Securities and Exchange Commission (SEC). The SEC, in turn, promulgated its Rule 10b-5, which prohibits two things in connection with the purchase or sale of any securities: (1) any scheme, artifice, or device to defraud or (2) any act, practice, or business dealings that operate (or would operate) as a deceit or fraud on anyone. This regulation, in turn, is universally understood to ban insider trading. No statute or regulation at the federal level defines insider trading, but the courts have espoused two theories: the classical theory and the misappropriation theory.

Determining Who Is a Partner in a General Partnership

In general, the hallmarks of a partner are the rights to (1) receive a share of the profits and (2) participate in managing and controlling the business (that is, the right to participate in executive decisions affecting the business). Similarly, if a person is obligated to share in the enterprise's losses or contributes capital to the business, these are strong indications that the person is a partner. Joint or common ownership of property does not establish a partnership by itself, even if the co-owners share profits from the property. The terms of any relevant agreement are afforded weight, but they are by no means controlling. A court may find that a person is or is not a partner despite the terms in any agreement.

Fiduciary Duty to Creditors if Corporation is Insolvent

In many jurisdictions, courts hold that a corporation's officers and directors assume fiduciary duties to the corporation's creditors once the corporation becomes insolvent. In that event, creditors may assert derivative claims against the directors on the corporation's behalf for breaches of fiduciary duty. The rationale behind this rule is that if the corporation is insolvent, all equity in the corporation effectively belongs to the creditors, as all of it would go to creditors were the corporation dissolved while insolvent. Creditors lack standing, however, to bring direct claims against officers and directors, even if the corporation is insolvent.

Duty to Exercise Attentive Oversight

In overseeing the corporation's affairs, a director must take reasonable steps to identify and address problems, shortcomings, and inadequacies. That is, the director must actively and consistently monitor the corporation and participate in its affairs during her time in office. If it would be obvious to a reasonable person in like circumstances that something is amiss, then the director must take reasonable measures to address the matter, as by notifying the full board.

De Facto Merger

In some states, a sale of substantially all of a corporation's assets may be treated as a merger under the doctrine of de facto merger. If this doctrine applies, then the statutory requirements for mergers apply to the transaction. Perhaps most notably, shareholders in both the purchasing and selling corporations must approve the transaction, shareholders in both will have appraisal rights, and the purchaser will assume the seller's liabilities

Forced Buyout

In some states, the partnership must buy a dissociated partner's interest in the partnership at a price calculated under a statutory formula. Under the RUPA, the price is what the partner would receive if the partnership were either sold as a going concern or, if greater, liquidated on the date of the dissociation, less damages for wrongful dissociation and any other amounts the dissociated partner owes to the partnership.

Agent's Power to Bind the Principal

In the law of agency, authority is an agent's ability to affect the principal's legal relationships with third parties or otherwise take actions that have legal consequences for the principal. For instance, agents commonly enter into contracts that bind their principals. Generally, any action the agent takes with some type of authority will bind the principal. Authority may be actual or apparent.

Advancement

Indemnification usually occurs after a director has been found liable and paid any damages or expenses. A related but distinct concept to indemnification is advancement. Particularly, if a director is sued due to her role as a director, the corporation may, before the proceeding terminates, advance money to pay for reasonable expenses the director might incur in defending the litigation. The director must deliver a signed writing promising to repay the advancement if, ultimately, the director is not entitled to mandatory identification, the corporation does not award permissive identification, or a court does not order indemnification. A majority of disinterested directors (a majority of which is a quorum for this purpose) or the disinterested shareholders must approve advancement.

Shifting Directors' Powers

Insofar as a shareholder agreement shifts the traditional powers of directors to other persons, those persons commensurately assume the duties and liabilities of a director, except insofar as the agreement permissibly indicates otherwise.

Means of Raising Capital Other Than Issuing Stock

Issuing stock and other equity securities (securities representing ownership in the entity) is not the only way for corporations to raise capital. Corporations may also issue debt securities and warrants 1. Debt Securities Generally 2. Warrants 3. Redemption

Co-Agents and Co-Principals

It is possible for a principal to appoint, or authorize an agent to appoint, multiple co-agents for the same principal. Similarly, the same agent may serve multiple co-principals in the same transaction or matter

Shareholder Meetings

Like directors, shareholders generally act by voting at meetings. Each corporation must hold at least one annual shareholders' meeting, at least one purpose of which is to elect directors. The meeting must occur at a time and place set forth in the bylaws. If the bylaws do not specify the meeting's place, then the meeting must be held a t the corporation's principal office.

Corporations

Loosely speaking, a corporation is an association of people come together to do business . Technically speaking, a corporation is a juridical person, a distinct legal entity from its owners, directors, and managers, formed under the laws of a particular state. Corporations have most of the rights and responsibilities of natural persons and may thus sue, be sued, enter contracts, and acquire and hold property in their own names. A hallmark of the corporate form is the separation of ownership and control. Typically, a corporation's owners, or shareholders, do not manage the corporation's business. Instead, management rests with a board of directors and executive managers. Other hallmarks include limited liability for shareholders, directors, managers, and employees, as well as potentially perpetual existence.

Private Remedies for Deadlock

Many close corporations' governing documents contain mechanisms to prevent or resolve deadlock. Two of the most popular are (1) buy-sell agreements and (2) thirdparty intervention

Judicial Remedies for Deadlock

Many corporate statutes provide judicial remedies for deadlock on petition by a shareholder or the requisite number of shareholders, especially if (1) any private remedies for deadlock in the corporation's governing documents or other efforts to break the deadlock have failed, and (2) the deadlock causes or threatens irreparable harm to the corporation or makes it impossible to run the corporation for shareholders' benefit, usually because management cannot make fundamental decisions necessary for the corporation to function. Examples of judicial remedies include (1) appointing a custodian or receiver to take control of the corporation, (2) appointing an impartial person as a provisional director to help break the deadlock, and (3) dissolving the corporation. The corporation's governing documents may also provide for dissolution as one way to resolve deadlock.

Remedies for Oppressive Tactics in Close Corporations: Fiduciary Duties of Shareholders

Many courts have held that shareholders in a close corporation, especially a shareholdermanaged one, owe one another and the corporation the same fiduciary obligations that partners in a general partnership owe one another and the partnership. Thus, the majority shareholders, in dealing with or for the corporation, may not act in a way designed benefit themselves at the minority shareholders' expense, oppress minority shareholders, or deny minority shareholders their reasonably expected benefits of stock ownership. For example, the majority may refuse to declare dividends, deplete the corporate coffers on exorbitant salaries and perquisites for majority shareholders, refuse to have the corporation employ minority shareholders, and so on. In these cases, minority shareholders may be trapped, being unable to sell their shares to anyone but the majority shareholders (who may offer an inadequate price) or compel dissolution under the relevant statute Note: Buy-sell agreements may be effective remedies for minority oppression in close corporations

De Facto Merger, Adoption

Not all jurisdictions have adopted the doctrine of de facto merger. Most notably, Delaware has flatly rejected the doctrine. In these jurisdictions, a transaction that is not a merger in name is not a merger, even if it appears to be one in substance.

Remote Tippees

Not only may the tipper's immediate tippee be liable for insider trading, but tippees of the immediate tippee may also be liable, provided the more remote tippees themselves satisfy the elements of tipper-tippee liability.

Continuity of Shareholder Interest

Of the relevant hallmarks, continuity of shareholder interest may be the most important. Courts are exceedingly unlikely to find a de facto merger if the purchaser acquires the seller's assets for cash, and the seller's shareholders do not effectively exchange their shares for some equity stake in the purchaser.

Liability for Personal Misconduct

Officers and directors are, of course, liable for their personal misconduct, including any breaches of fiduciary duty. Officers and directors are also typically liable if they approve, ratify, vote for, or participate in misconduct by other corporate agents.

Officers

Officers are the corporation's senior executive leadership, entrusted with the corporation's daily administration. Typically, officers are appointed by the board of directors and subject to its supervision. A corporation's officers may include a chief executive officer (CEO) or president, chief financial officer (CFO), chief operating officer (COO), and any vice presidents. An officer may, of course, also be a director, a shareholder, or both, in addition to being an officer.

Soliciting Proxies

Often, officers and directors solicit proxies to vote favorably to them on matters submitted to the shareholders. For instance, if a group of shareholders is moving to oust a director from the board, the director may wish to solicit proxies to vote in her favor, so that she may retain her position. Soliciting proxies is permitted. Some jurisdictions permit the corporation to reimburse officers and directors for reasonable expenses incurred in soliciting proxies (including solicitation to defend their positions), at least if the solicitation is motivated by a good-faith belief that it will advance some corporate policy that is in the corporation's best interests, and not a purely personal power contest

Shareholder Deadlock as Grounds for Judicial Dissolution

On a shareholder's request, a court may dissolve a corporation if (1) the shareholders' voting power is deadlocked, and (2) for a period including at least two annual-meeting dates in a row, the shareholders have failed to elect successors to directors with expired terms

Misuse of Corporate Assets as Grounds for Judicial Dissolution

On a shareholder's request, a court may dissolve a corporation if corporate property is being wasted or misapplied

Director Misconduct as Grounds for Judicial Dissolution

On a shareholder's request, a court may dissolve a corporation if the directors (or others controlling the corporation) have acted, are acting, or will act illegally, oppressively, or fraudulently

Unresolvable Director Deadlock as Grounds for Judicial Dissolution

On a shareholder's request, a court may dissolve a corporation if: • the directors are deadlocked in managing the corporation; • the shareholders cannot break the deadlock; and • due to the deadlock, either the corporation is suffering or threatened with irreparable harm, or it is no longer possible to conduct the corporation's business to the shareholders' advantage generally.

Novation

Once a corporation comes into being, a novation will terminate a promoter's liability on a pre-incorporation agreement. A novation is a new contract, under which the promoter, the now-formed corporation, and the contract counterparty all agree to substitute the corporation in place of the promoter as a party under the original pre-incorporation agreement. When this occurs, the promoter is, from that point on, absolved of all liability and loses all rights under the pre-incorporation agreement, and the corporation assumes those rights and liabilities

Corporation's Adoption of Pre-Incorporation Contract

Once a corporation comes into being, it may adopt a pre-incorporation contract by a promoter. If the corporation adopts the contract, then it becomes liable on the contract. The promoter, however, remains individually liable. A corporation may expressly adopt a contract, as by board resolution. Alternatively, and perhaps more commonly, a corporation will adopt a pre-incorporation contract by implication. This usually takes place if the corporation accepts the benefits of or begins to perform under the agreement, fully knowing the material facts and having had an opportunity to decline to adopt the agreement.

iii. Filing Articles of Dissolution

Once dissolution is properly authorized, a corporation may formally dissolve by filing articles of dissolution with the state, containing all required information. The corporation will be deemed dissolved on the effective date of the articles of dissolution.

Sale of Substantially All Assets

One corporation may sell substantially all of its assets and goodwill to another corporation outside the usual course of business. Unless the sale is to the selling corporation's wholly owned subsidiary, this requires approval by the shareholders in the selling corporation, at least if it would leave the corporation without any substantial, continuing business activity. The board of directors must adopt a resolution approving the sale and proposing it to shareholders, after which shareholders must approve the sale. Shareholders in the selling corporation have appraisal rights. Typically, only the board of directors in the purchasing corporation, not its shareholders, need approve the transaction.

Classical Theory Example

One corporation, the acquiring corporation, was planning to acquire another corporation, the target corporation. This fact was material, nonpublic information. A director in the target corporation knew that the target corporation's stock would vastly increase in value upon the acquisition. Before the acquisition, the director bought many shares of the target corporation without making any disclosure to its shareholders. After the acquisition, the director sold the shares at a large profit. By trading in the securities of his corporation on the basis of material, nonpublic information, the director committed insider trading under the classical theory

Misappropriation Theory Example

One corporation, the acquiring corporation, was planning to acquire another corporation, the target corporation. This fact was material, nonpublic information. The acquiring corporation hired a law firm to assist with the acquisition. An attorney at the law firm knew that the target corporation's stock would become vastly more valuable upon the acquisition. Without making any disclosures, the attorney bought up as much of the target corporation's stock as he could afford. After the acquisition, the attorney sold the stock for a large profit. The attorney was liable for outsider trading under the misappropriation theory. The attorney owed his law firm and its client, the acquiring corporation, a fiduciary obligation not to disclose or personally profit from confidential information about the representation—including the acquisition's pendency. In trading on this information, the attorney breached that obligation.

Requirements for Incorporation

One or more natural or juridical persons, called incorporators, may form a corporation by filing articles of incorporation with the appropriate office (usually, the secretary of state) in the state under whose laws they wish to form the corporation. The state of incorporation does not have to be the same state in which the corporation's office or principal place of business is located, though many states require corporations formed under their laws to maintain some type of office in the state. The corporation's existence begins on the date the articles of incorporation are filed unless a later effective date is specified. After filing the articles of incorporation, the incorporators or initial directors must adopt bylaws to govern the corporation.

Authority to Make Distributions to Shareholders

Outside dissolution and windup, it is the board of directors, not the shareholders themselves, that has authority to make distributions to shareholders, subject to any constraints in the articles of incorporation or governing law.

Property Presumed to be Separate Property

Property is rebuttably presumed to be separate property, not partnership property, if acquired in the name of one or more partners without any reference to the partnership or use of partnership property. This is true even if the property is used for partnership purposes.

Ratification

Ratification occurs if one person manifests assent that another person's actions will bind her, provided the other person was acting or purporting to act on her behalf or as her agent. If the principal ratifies an act without full knowledge of all material facts and without knowing that she is unaware of any material facts, then the ratification is ineffective

3. Redemption

Redemption means to buy back. A stock repurchase is one form of redemption. Debt securities and warrants may also be redeemed. For instance, the terms governing a bond issuance may permit the corporation to buy back the bonds, essentially retiring the debt, before maturity at a stated price.

a. Notice Requirement

Regular meetings generally do not require any advance notice. However, special meetings must be preceded by at least two days' notice of the date, time, and place of the meeting to all directors. A director may waive a required notice (1) in a signed writing or (2) by attending and participating in the meeting, unless the director attends, promptly objects to the lack of notice, and does not vote on or assent to any action at the meeting. A director who did not receive notice and did not waive the notice requirement may void any action taken at the meeting. The board may, of course, later ratify the act.

Right to Participate in Winding Up Example

Several brothers formed a partnership at will that operated feed mills. One of the brothers was served with a notice of dissolution and wind-up of the partnership by the other partners. The brother argued that the other partners could not distribute the partnership assets in the winding up of the partnership business. However, the other partners had the right to dissolve the partnership with notice of their express will; they also had the right to wind up the partnership by liquidating the partnership's assets to make distributions to creditors and partners. The other partners could thus wind up the partnership business without the brother's consent.

General Types of Share-Transfer Restrictions

Share-transfer restrictions may take one of four forms. A share-transfer restriction may: • amount to giving the corporation or other persons a right of first refusal—that is, an opportunity to acquire the shares before the shareholder offers them to anyone else; • obligate the corporation or other persons to obtain the shares; • require that the corporation, a specified class or series of shareholders, or some other person approve the transfer, if not manifestly unreasonable; or • outright forbid transferring the shares to specified persons or groups, unless the ban is manifestly unreasonable.

Merger, Consolidation, or Share Exchange

Shareholder approval may be required for a merger, asset sale, consolidation, or share exchange.

Ultra Vires

Some authority holds that if an officer enters a contract for the corporation, but the contract is unenforceable against the corporation as ultra vires, and the contract counterparty has no reason to know this, then the officer or director may be personally liable on the contract. This can also occur if the contract is unenforceable against the corporation because the officer who entered it acted without actual, apparent, or other authority. A director entering a contract under similar circumstances might produce the same outcome

Types of General Partnerships

Some common types of partnerships are a partnership at will, a partnership for a definite term, and a partnership for a particular undertaking

Fundamental Corporate Changes

Some corporate actions constitute fundamental changes. These acts may require shareholder approval

Tenants in Partnership

Some states hold that specific partnership property is co-owned by the partners as tenants in partnership. A tenant in partnership may use or possess partnership property, but only for partnership purposes. No tenant in partnership may transfer her interest in specific partnership property, unless all the partners together transfer their interests in that property.

Tipper-Tippee Liability, Insider Trading

Someone who trades on the basis of material, nonpublic information may be liable as a tippee, even if she has no fiduciary relationship with either the corporation whose securities are traded or the source of the confidential information. In a tipper-tippee case, there are two key actors: the tipper and the tippee. The tipper is one who could be liable for insider trading if she traded the relevant securities on the basis of material, nonpublic information. In the usual case, the tipper does not trade in the securities directly. Instead, she conveys the material, nonpublic information to a third party—the tippee—who then trades in the securities based on the material, nonpublic information. In that event, the tippee is liable for insider trading along with the tipper, provided that (1) the tipper's disclosing the information to the tippee was a breach of the tipper's fiduciary duties, and (2) the tippee knew or had reason to know of the breach. For this purposes, the tipper's disclosure is deemed a breach of fiduciary duty if she makes the disclosure for an improper purpose—that is, for a personal benefit.

Merger Defined

Speaking broadly, a merger is a transaction in which two corporations combine. One corporation survives, and the other ceases to exist. Shareholders in the dissolving entity effectively exchange their shares for shares in the surviving entity, which now has the combined assets, powers, and liabilities of both entities. Most often, the dissolving corporation's business continues largely as before the merger, only under the auspices of the surviving corporation, with many of the dissolving corporation's officers and employees staying on to work for the surviving corporation.

Recapitalization

Speaking generally, a recapitalization is a transaction in which holders of a corporation's debt or equity securities receive, in exchange for their existing securities, new securities of a different type or amount, without substantially changing existing investments. Existing investments change in form but not in value. Examples include receiving debt securities in exchange for equity securities and receiving common stock in exchange for preferred stock. If a security holder invests new money or other consideration in exchange for the new securities, then the transaction is a purchase of securities, not a mere recapitalization. Recapitalization may require approval by any affected classes of shareholders.

Related Person Defined

Speaking generally, a related person is any person whose business, financial, family, or other relationship with the director, under the circumstances, could reasonably be expected to taint or impair the director's objective judgment concerning the transaction. Under the MBCA, a related person is • the director's spouse; • the director's or her spouse's child, stepchild, grandchild, parent, sibling, step sibling, aunt, uncle, niece, nephew, or the spouse of any of these; • an individual cohabiting with the director; • an entity, other than the corporation or its subsidiary, over which the director or a close family member has control; • any other corporation or unincorporated association in which the director serves as a director, managing partner, or other member of the governing body; • any person, trust, or estate, if the director is a trustee, guardian, personal representative, or similar fiduciary for the person, trust, or estate; or • the director's employer or an entity the director's employer controls.

Events Causing Dissolution

State partnership statutes typically set forth an exclusive list of events that cause dissolution. These events—and only these events—can cause dissolution.

Insolvency Defined

States employ one of two tests (or a combination of the two) to determine whether a corporation is insolvent. In some states, a corporation is insolvent if it is generally not paying its debts as they become due. In others, a corporation is insolvent if the sum of its liabilities exceeds the total value of its assets.

Competing Once the Agency Terminates

Subject to any valid noncompete agreement with the principal, an agent may freely compete with the principal once the agency terminates. Also, it is not a breach of duty for an agent to use skills and expertise acquired during the agency to compete with the principal after the agency. During the agency, the agent may typically prepare to compete with the principal after the agency and need not disclose the preparation to the principal, as long as the preparation itself is not be wrongful. Determining whether preparation to compete is wrongful in a given case is very difficult and fact-intensive. Generally, preparation is wrongful if it (1) is a tort or an independent breach of fiduciary duty (e.g., using the principal's own resources or confidential information to prepare to compete), or (2) it crosses the line from mere preparation to overt competition (e.g., soliciting customers or recruiting the principal's employees to work for the agent's upcoming competitive enterprise).

4. Board Action by Written Consent

Subject to the articles of incorporation and the bylaws, a corporation's board of directors may act by unanimous written consent without a meeting. An act is deemed an act of the board if all directors sign a consent that describes the action, and the signed consent is delivered to the corporation. Written consent must be unanimous. Thus, if even one director abstains or withholds consent, then the board must hold a meeting to approve the act. A director may revoke her written consent to an act, but only before all directors have submitted signed, written consent to the action.

5. Board Action by Committee

Subject to the articles of incorporation, the bylaws, and any relevant statute, a corporation's board of directors may act by committee. That is, the board may establish committees consisting of one or more but fewer than all directors to perform functions normally left to the board at large. Under the MBCA, at least a majority of directors then in office (or, if greater, a quorum of directors) must approve the committee's establishment and its members' appointment, unless the law or the articles of incorporation provide otherwise.

Partners' Rights to Compensation, Reimbursement, and Indemnity

Subject to the partnership agreement, a partner is not entitled to compensation for services rendered to the partnership, except reasonable compensation for services in winding up the partnership's business. Even so, the partnership must generally reimburse a partner who incurs an expense or indemnify a partner who incurs a personal liability (1) in the ordinary course of partnership business or (2) to preserve the partnership's business or property.

Partners' Shares of Profits and Losses

Subject to the partnership agreement, each partner is entitled to an equal share of the partnership profits and has the right to receive distributions from the partnership. Each partner must share in partnership losses in proportion to her share of the profits. These rules apply without regard to capital contributions

Acts Requiring All Partners' Consent

Subject to the partnership agreement, the consent of all partners is required for: (1) an act that is outside the ordinary course of partnership business, (2) an amendment to a partnership agreement, and (3) admitting a new partner to the partnership.

1) Conduct Violating Principal's Instructions

That the principal's own rules or instructions prohibit the agent's tortious conduct does not, by itself, remove the conduct from the scope of employment

Presumption of Partnership under the RUPA

The RUPA establishes a rebuttable presumption that a person who receives a share of the profits is a partner unless the payment is for: - Debt - Compensation to an independent contractor or employee - Rent - Annuity, retirement, or health benefits tp a deceased partner's representative; - The sale of property, including the goodwill of a business

Material Benefits in Connection with the Agency or the Agent's Position

The agent must not acquire from a third party a material benefit arising out of (1) any act or transaction for the principal's benefit or (2) use of the agent's position, regardless of whether the principal is harmed as a result. This includes personally exploiting a business opportunity that falls within the scope of the principal's business, which should be offered to the principal first. This is a form of prohibited self-dealing. The rationale for this rule is that the principal bears the risks that the agent's dealings on her behalf will prove unexpectedly harmful. Conversely, the principal should reap any unexpected benefit arising from the agent's dealings on the principal's behalf. Thus, if the agent impermissibly acquires a benefit from a third party, the agent generally must relinquish the benefit to the principal. Of course, the agent is also liable for any resulting harm to the principal.

Duty to Avoid Competing with the Principal

The agent's duty to avoid competing with the principal requires an agent to avoid competing with the principal's business. During the agency relationship, the agent must not compete with the principal, act on behalf of a competitor of the principal, assist a competitor, (e.g., by selling to a competitor), or hold a substantial stake in a competitor. This duty is a subset of the larger duty not to treat the principal as an adverse party.

Administrative Dissolution by the State

The appropriate state official, usually the secretary of state, may administratively dissolve a corporation if the corporation: • has not paid any taxes, fees, interest, or penalties within 60 days after the due date; • does not deliver its annual report within 60 days after the due date; • goes for more than 60 days without a registered agent or registered office in the state; or • does not, within 60 days, notify the secretary of state or other appropriate official that its registered agent has resigned or changed or that its registered office has changed or been discontinued. The corporation will receive notice of the grounds for dissolution and an opportunity to correct them before administrative dissolution takes effect.

General Partnerships

The basic type of partnership is a general partnership. Under the RUPA, a general partnership is considered to be a distinct entity from its partners, at least for some purposes. However, a general partnership is not a juridical person in the same sense as a corporation, so that for some purposes, the law treats the partnership as simply the aggregation of its individual partners.

Board of Directors

The board of directors is entrusted with the overall management and control of the corporation. Typically, the board of directors is the highest authority in the corporation. A corporation's first directors are often named in the articles of incorporation or elected by the incorporators. If the initial directors are named in the articles of incorporation, then the directors must hold an organizational meeting to appoint officers, adopt bylaws, and conduct other necessary business to finish organizing the corporation. If not, then the incorporators must hold an organizational meeting to appoint directors and finish organizing the corporation. In any case, later directors are typically elected by the shareholders at annual meetings. A director may, of course, also be an officer, a shareholder, or both, in addition to being a director.

2. Directors' Number and Terms

The board of directors is typically elected annually at a shareholders' meeting by any classes of shareholders entitled to vote. The articles of incorporation or bylaws may set fixed terms for directors, specify the number of directors that may be elected, and provide for a classified board. A classified board is structured so that elections are staggered; thus, only a portion of the directors on the board are up for election each year, rather than the entire board.

Rebutting the Business-Judgment Rule's Presumption

The business-judgment rule will not insulate a director from liability if: • the director did not take reasonable steps to inform herself before making a decision or did not stay sufficiently informed about the corporation's affairs; • the director breached or is alleged to have breached the duty of loyalty, as by laboring under a conflict of interest; • the act was colored by fraud or other misconduct; • the director was grossly negligent; or • the act was one that no similarly situated person could have believed reasonable.

i. Quorum Threshold Example

The bylaws of a corporation required the board of directors to consist of 11 members. At a meeting, only five of the directors were present—fewer than a majority of the fixed number of directors. Because a quorum was not present, the five directors could not vote to act on behalf of the corporation or conduct any other corporate business.

Secretary

The corporate secretary is generally the officer charged with maintaining the corporation's official seal, keeping the corporate records, properly memorializing board and shareholder meetings, and so on. The general rule is that the corporate secretary has no inherent authority to bind the corporation to most types of contracts. Of course, a secretary may have apparent or other authority as a corporate agent, depending on the circumstances

c. Director Removal by a Court

The corporation (or the shareholders in a derivative action on its behalf) may petition a court to remove a director. The court will remove the director upon finding that (1) the director committed fraud regarding the corporation or shareholders, grossly abused her position, or intentionally harmed the corporation, and (2) removal would be in the corporation's best interests, considering the director's actions and the adequacy of other remedies. Other remedies might be inadequate if it is impracticable for the shareholders to remove the director themselves—for instance, if the director owns or controls enough shares to prevent removal by shareholders.

Amending the Articles of Incorporation

The corporation may amend its articles of incorporation to include or modify any provision required or permitted to appear in them or to delete any provision not required to appear in them

Notice of Shareholders' Meetings

The corporation must provide shareholders entitled to vote at an annual or special meeting with notice of each meeting between 10 and 60 days before the meeting date. For a special meeting (or, if governing law or the articles of incorporation require, an annual meeting), the notice must indicate the meeting's purpose. If the board has authorized participation by remote communication, the meeting notice must also describe the means of remote communication to be used at the meeting. In most instances, the notice should indicate the record date

Third-Party Intervention

The corporation's governing documents may provide for a third-party facilitator or decisionmaker, such as an arbitrator or mediator, to step in and help resolve deadlock

Directors' Duty of Care

The duty of care focuses much more on the manner in which directors make decisions and act than on the results. Overall, directors must discharge their duties with the degree of care that a reasonable person in the same position would deem appropriate under the circumstances. This requires directors to (1) make informed decisions and (2) actively pay attention in overseeing the corporation's business and affairs.

Partners' Duties of Care

The duty of care requires each partner to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law related to partnership business. Ordinary negligence does not constitute a breach of the duty of care.

Agent's General Duty of Care

The duty of care requires that the agent act as diligently, carefully, and competently as a normal, reasonable agent in similar circumstances. If the agent has (or falsely claims to have) special skills, competence, or expertise, then the agent must perform at the level of a normal, reasonable agent with those special characteristics. The principal and agent may generally vary this duty by agreement

Good Conduct

The duty of good conduct requires the agent to act reasonably within the scope of the agency relationship and refrain from taking any action that is likely to damage the principal's enterprise. This means the agent must do nothing reasonably likely to bring the principal into disrepute by virtue of the principal's association with the agent. This duty extends to conduct that does not necessarily arise in the course of the agency but is somehow connected to the principal or her enterprise

Principal's Duty of Good Faith

The duty of good faith requires the principal to deal with the agent fairly and to avoid doing anything that might reasonably foreseeably harm the agent without fault on the agent's part, particularly anything likely to harm the agent's business reputation or reasonable self-respect. (This duty does not limit the principal's right to terminate the agency.) The principal must also provide the agent with information regarding any risks of physical harm or pecuniary loss that the principal knows or should know are present in the agent's work if the principal knows or should know that the risks are unknown to the agent.

Duty to Avoid Dealing with Principal as an Adverse Party

The duty of loyalty prohibits the agent from dealing with the principal as an adverse party, or on behalf of an adverse party, in any transaction related to the agency relationship. This means the agent typically may not deal with the principal on the agent's own account in a matter touching the agency, nor may she serve multiple principals with adverse interests in the same transaction. The agent must not hold a substantial stake in a party adverse to the principal. The agent's close relatives may not deal with the principal as an adverse party.

Duty of Obedience

The duty of obedience requires the agent to: - act solely within the scope of the agent's actual authority, - comply with the principal's lawful instructions in all acts or transactions on the principal's behalf, and - abide the terms of any contract with the principal. If the agent acts beyond the scope of actual authority, she may be liable for any resulting harm to the principal—even if the harm to the principal would have been greater if the agent had acted within her actual authority

Indemnity

The duty to indemnify requires the principal to compensate the agent for hurt, loss, or damage if - indemnification is required by the terms of a contract between the agent and the principal; - the agent makes a payment while acting under actual authority - the agent makes a payment that benefits the principal, unless the agent makes the payment officiously, subjecting the principal to a forced exchange; or - the agent suffers a loss that the principal should make good in the interest of fairness, considering the nature of the agency relationship.

Agent's Duty to Provide Information

The duty to provide information requires the agent to use reasonable efforts to inform the principal of any facts of which the agent knows, has reason to know, or should know if: (1) the principal would want to know the facts, or (2) the facts are material to the agent's duties. This duty generally encompasses information that a similarly situated agent would normally provide, except insofar as the principal has indicated that she wants more or less information. However, the agent must not provide information if it would violate a superior duty owed to a third party, such as an attorney's duty of confidentiality to a client.

Scope of Committee's Authority

The full board may generally confer any of its powers upon a committee. An act of a committee within the scope of its authority is equivalent to an act of the full board. However, under the MBCA, the full board may not confer upon a committee the following specific powers: • approving distributions to shareholders, except according to a formula or within limits prescribed by the full board; • approving or proposing to shareholders any act that the shareholders must approve; • filling vacancies on the full board; or • adopting, amending, or repealing bylaws.

Officers' Authority

The general rule is that a corporate officer has only that authority that the board of directors or bylaws confers upon her. As an agent of the corporation, an officer may act with actual, apparent, or inherent authority.

General Role of Directors

The general rule is that every corporation must have a board of directors with at least one member, unless the shareholders unanimously agree to waive the requirement (as is often done in close corporations in which the shareholders manage the business directly) . Subject to any limitations in the articles of incorporation or any unanimous shareholder agreement, (1) all corporate power must be exercised by the board of directors or under its authority, and (2) all corporate affairs must be managed by the board (or under to its direction) and subject to its oversight. Note: The board's powers belong to the board as a whole, not to any individual director. Thus, generally, no one director may exercise the corporation's powers unilaterally (unless, for instance, the articles specify otherwise or the director is the sole director).

Share-Transfer Restrictions

The general rule is that shareholders may freely transfer their shares, subject to any overriding legal restrictions. However, shareholders' ability to transfer their shares may be restricted in various ways if provided in: • the articles of incorporation, • the bylaws, • an agreement among shareholders, or • an agreement between shareholders and the corporation.

Shareholder Liability for Improper Distribution in Dissolution

The general rule is that, in dissolution, creditors' claims must be paid before shareholders receive any corporate assets. If a shareholder improperly receives a distribution in dissolution ahead of creditors, she may be personally liable for her proportionate share of the claims, up to the amount of the distribution.

No Judicial Second-Guessing

The gist of the business-judgment rule is that a court must not substitute its own business judgment for a director's. Thus, a court will not second-guess a director's actions or evaluate them in hindsight. In evaluating an alleged breach of the duty of care through the lens of the business-judgment rule, courts consider only the circumstances as they existed at the time of the challenged action, from the perspective of a reasonable person in the director's position. If the decision is one that a reasonable person could have made at the time, then the director will not be liable for it.

Agency

The law of agency governs the fiduciary relationship created when one party is authorized to act on behalf of another. An agent is a party acting on behalf of or in place of another. A principal is a person for whom or in place of whom the agent acts.

Remedies for Oppressive Tactics in Close Corporations: Fiduciary Duties of Shareholders Example

The majority shareholders in a close corporation caused the corporation to purchase their shares at a very favorable price. The majority did not cause the corporation to purchase or offer to purchase the minority's shares. Valid share-transfer restrictions prohibited shareholders from selling their shares to anyone but the corporation or other shareholders in it. The majority breached its fiduciary duties to the minority, because the majority has depleted the corporation's coffers to benefit itself alone, excluding the minority shareholders. To avoid the breach, the majority should have caused the corporation to offer to buy back the minority shareholders' shares at the same price.

Extent of Liability for Breach of Duty of Care: Causation Requirement

The mere fact that a director breached the duty of care is not, standing alone, enough to hold a director liable. Rather, the director is liable only insofar as the breach actually and proximately caused harm to the corporation or its shareholders. Broadly speaking his means that (1) if the director had fulfilled her duty of care, this would have been a substantial factor in averting the harm, and (2) the harm was a reasonably foreseeable result of the breach.

Disclose-or-Abstain Rule

The operative rule of insider-trading liability is the so-called disclose-or-abstain rule. This means that a person who trades on material, nonpublic information in breach of a fiduciary duty may escape liability by fully disclosing her plans to trade on the information and all material facts, ahead of time, to the object of the fiduciary duty. If the person is unable or unwilling to disclose, then she must not trade. Once disclosure is made, then, for insider-trading purposes, it does not matter whether the object of the fiduciary duty consents to the trading. With disclosure, there is no deceit or manipulation to bring the trading within the ambit of § 10(b) or Rule 10(b)(5). In that event, the trading, though a brazen breach of fiduciary duty, is not fraudulently concealed. If an insider trades her own corporation's stock on material, nonpublic information, then she must make disclosure to the corporation's shareholders. In cases of outsider-trading liability, the trader must make disclosure to the source of the information.

Corporation by Estoppel Example

The owners of a company submitted articles of incorporation for their company to the state. The articles of incorporation lacked specific information required by statute, so no de jure corporation was formed. The company nonetheless entered into several lease contracts. Having discovered that the company's incorporation was defective, a party to one of the contracts sued the company's owners to hold them individually liable for the contract. At the time the contract was formed, the party had believed that the company was a corporation. The party had contracted with the company in its supposed corporate name, without any indication that it expected the individual owners to be liable. Thus, under the doctrine of corporation by estoppel, the owners could not be held individually liable.

Partnership Agreement

The partners may enter into a partnership agreement—a written, oral, or implied contract that governs the partners and the partnership. Although no formalities are typically required, some partnership agreements may need to be in a signed writing under the statute of frauds. A partnership agreement is not necessary to form a partnership but may be invaluable to clarify the partners' rights and obligations to one another and the partnership. The partnership agreement generally governs any aspect of the partnership that it addresses. Most of the rules in the RUPA are mere default rules tha t apply absent contrary terms in a partnership agreement.

Dissolution Event Specified in Partnership Agreement

The partnership agreement may articulate specific events of dissolution. If an event of dissolution enumerated in the partnership agreement occurs, then the partnership is dissolved.

ii. Event of Dissociation Set Forth in Partnership Agreement

The partnership agreement may specify events of dissociation. If so, and a specified event of dissociation occurs with respect to a partner, then the partner is dissociated.

1) Expulsion under Partnership Agreement

The partnership may expel a partner under the terms of the partnership agreement.

3) Judicial Expulsion

The partnership or another partner may petition a court to expel a partner. The court will do so if it finds that the partner (1) engaged in wrongful conduct that materially harmed the partnership business, (2) materially and either willfully or persistently breached the partnership agreement or his fiduciary duties to the partnership or the other partners, or (3) engaged in conduct toward the partnership business making it not reasonably practicable to keep carrying on business with the partner.

Partnership Business Becoming Illegal

The partnership will dissolve if some event makes all or substantially all of its business becomes illegal to continue, unless the illegality is cured within 90 days after the partnership receives notice of the event.

2) Relevance of Agreement

The principal and agent may agree between themselves to characterize their relationship as something other than a master-servant relationship. This has some weight, but it is not dispositive. Despite the terms of any agreement, a court may find a master-servant relationship based on other factors.

Voluntary Dissolution by the Corporation

The procedure for voluntary dissolution by a corporation depends on whether the corporation has yet issued shares or conducted business. i. Voluntary Dissolution if the Corporation Has Not Issued Shares or Has Not Conducted Business ii. Voluntary Dissolution if Corporation Has Issued Shares or Conducted Business iii. Filing Articles of Dissolution

Contents of Published Notice for Unknown Claims

The published notice must: • instruct claimants to submit their claims to the corporation, • provide an address to which to send the claims, • describe the information that must appear in the claim, and • state that the claim will be barred if no lawsuit to enforce it is commenced within three years after the notice's publication.

Factors Considered in Deciding Whether to Pierce the Corporate Veil

The rules governing whether to pierce the corporate veil are notoriously difficult to reduce to a precise formula or set of bright-line principles. Even so, the cases identify a list of factors that may, depending on the circumstances, indicate that a shareholder has abused the corporate form, usually to cheat creditors. These include: • commingling a shareholder's assets with corporate assets; • severely undercapitalizing a corporation or causing it to become undercapitalized by effectively raiding its coffers; • systemic disregard for corporate formalities; • using the corporate entity for a shareholder's personal benefit or using the corporation's assets as though they were the shareholder's own; • manipulating assets and liabilities so that the liabilities rest with one entity, but the assets rest with another, nominally beyond creditors' reach; • using the corporate form to avoid satisfying a debt that should, in fairness, be the shareholder's personal obligation; • using the corporate form to facilitate fraud or crime; • gross failure to maintain adequate corporate records; or • concentrated stock ownership in the hands of one person or very few persons.

Voting Trusts and Agreements Example

The shareholders of a corporation entered into an agreement to cast their votes in the manner voted by the majority of the shareholders. The terms also provided that any shareholder who failed to adhere to the agreement had to sell his shares. A shareholder defected and voted differently from the majority of the shareholders. The voting agreement was valid and was enforced against the shareholder who failed to adhere to the agreement

Business-Judgment Rule

The so-called business-judgment rule may insulate a director from liability for some breaches of the duty of care (not the duty of loyalty). Under the business-judgment rule, if a director is sued for a bad business decision that allegedly breached the duty of care, a court will presume that the director acted (1) in good faith, (2) upon reasonable information, and (3) in the honest belief that the act was in the corporation's best interests. Unless the presumption is rebutted, a director will not be liable for honest mistakes or simple poor judgment, even if the result is catastrophic for the corporation and its shareholders.

Governing Law

This outline is based primarily on the American Bar Association's Model Business Corporation Act (MBCA), which has been adopted widely but not everywhere. Among the laws of the respective states, the law of Delaware is especially influential, as roughly half of all publicly traded corporations are incorporated in Delaware. Delaware's General Corporation Law deviates from the MBCA in places, sometimes significantly.

Rights and Responsibilities of Shareholders

Though mere status as a shareholder does not confer the right to participate in managing the corporate business and affairs, shareholders are by no means powerless. Typically, shareholders have the right to vote at meetings to elect directors and approve or disapprove certain fundamental corporate changes, to receive dividends and other distributions, to inspect the corporate books and records, and more.

4) Other Relevant Factors

Though the degree of control is the paramount factor, other factors are relevant, such as whether: -the relationship is ongoing or temporary -the engagement covers only an isolated transaction; -the principal supplies the tools and training needed for the agent's work -the agent has her own, independent business; or -the job requires specialized skill.

Capacity to Be a Principal

To be a principal in an agency relationship, a person must have the requisite capacity. Being a principal requires the legal capacity to acquire binding rights and incur binding obligations. In other words, to be a principal, one must generally have the capacity to enter into a binding contract. For that reason, unemancipated minors and incapacitated parties may not be principals.

Reasonable-Purpose Requirement

To be valid, a share-transfer restriction must have a reasonable purpose. Reasonable purposes include but are not limited to (1) preserving the corporation's status, if its status depends on its shareholders number or identity (e.g., status as a close corporation under state law or as a subchapter S corporation under federal tax law), or (2) preserving exemptions under the securities laws of the United States or any state.

Exercise of Rights

To exercise her appraisal rights, a shareholder must (1) deliver written notice of her intent to demand payment before the vote on the proposed action and (2) not vote any shares in favor of the proposed action. The corporation must pay the fair market value of the shares in cash to a shareholder within 30 days after her submission of the required appraisal form. If the shareholder properly disputes the amount of the payment with the corporation, then the corporation must commence a judicial proceeding to determine the shares' value within 60 days after receiving demand. If the corporation does not commence the proceeding, then it must pay the value that the shareholder has demanded.

Manifesting Assent

To ratify an act, the principal must manifest assent, or consent, to be bound by the act. This, in turn, requires conduct that would justify a reasonable person's concluding that the principal consents to be bound. A principal may expressly ratify an act, or she may do so implicitly by her conduct. For instance, a principal may ratify a transaction by knowingly accepting its benefits. The manifestation of assent need not be communicated to any person in particular, including the agent or any third party

Vice Presidents

Traditionally, a corporate vice president stood by to assume the functions of the president, should the president become unable or unwilling to serve. These days, the term vice president generally signifies a relatively high-ranking executive responsible for an entire division, department, or other group, answerable to a higher executive, such as the CEO or a higher-ranking vice president. For instance, a vice president might answer to a senior vice president who, in turn, answers to an executive vice president who answers to the CEO. Traditionally and in modern corporate governance, vice presidents have only that authority conferred upon them by the board or bylaws and do not necessarily have any inherent authority. Even so, vice presidents are corporate agents, so the particular circumstances may confer apparent or inherent authority beyond that.

Lawful Purpose

Traditionally, a corporation must have a lawful purpose, stated in its articles of incorporation. Under the MBCA, a corporation's purpose is presumed to be to engage in any lawful business, subject to any limitations in the articles of incorporation.

Treasurer

Traditionally, the corporate treasurer is the officer responsible for receiving, maintaining, and disbursing corporate funds. The treasurer generally has no inherent authority to bind the corporation to contracts, though each case must necessarily be evaluated on its own facts. These days, it is common for the traditional functions of a treasurer to be vested in a CFO—an officer with generally broad authority to oversee the corporation's finances and investments.

Partnership by Estoppel Example (2)

Two lawyers, who were not partners, met privately with a potential client and presented themselves as partners. This was a non-public representation. After the meeting, the potential client returned home and told his neighbor—who was also seeking legal representation—about the lawyers. The potential client said, "The lessexperienced lawyer is going to be working with you, but the more-experienced attorney is his partner and ready to clean up any problems that come up." There was a partnership by estoppel between the two lawyers, but only as to the potential client. Because the lawyers had made a non-public representation to the potential client only, they could not be held liable to the neighbor unless they repeated the representation directly to the neighbor.

Partnership by Estoppel Example

Two lawyers, who were not partners, purchased a billboard advertisement that displayed their portraits and names, seeking new clients who had been in car accidents. The billboard advertisement was a public representation strongly implying that the lawyers were partners. A client relied on that implied representation in hiring the two lawyers. There was thus a partnership by estoppel between the two lawyers.

General Corporate Structure and Organization

Typically, a corporation consist of: - Board of directors - Officers - Shareholders, and - Employees and other agents Organization may differ, however, for statutory close corporations.

Partners' Liability to the General Partnership's Creditors

Typically, all partners in a general partnership are jointly and severally liable for the partnership's obligations. This means that the partnership's tort, contract, and other creditors may be able to satisfy their claims from the partners' personal assets.

Distribution of Partnership Assets in Winding Up

Typically, for purposes of dissolution, partnership assets include partnership property at dissolution and any contributions from partners needed to satisfy partnership liabilities at dissolution. In states following the original Uniform Partnership Act, the priority of distribution is as follows: 1) to pay debts owing to third parties; 2) to pay debts owing to partners, other than profits or return of capital; 3) to return the partners' capital contributions; and 4) to pay the partners whatever is left according to their respective shares of partnership profits. The priority of distribution under the RUPA is similar. But the RUPA puts debts owing to partners (other than for capital or profits) on equal footing with debts owing to third parties, except insofar as partnership assets are insufficient to satisfy debts to third parties. Also, the RUPA abolishes the priority distinction between profits and return of capital.

Merger Involving the Corporation

Typically, if the corporation is a party to a merger, a shareholder may demand appraisal if either (1) the merger requires shareholder approval, or (2) the corporation is a subsidiary merging with either its parent or another subsidiary under a common parent. If the merger would trigger an appraisal right because it requires shareholder approval, then the shareholder may not rightly demand appraisal to the ex tent that her shares would remain outstanding after the merger.

Preferred Stock

Typically, preferred stock entitles shareholders to receive dividends or distribution of assets before the holders of common stock receive their dividends and distributions. However, preferred-stock holders typically have no voting rights.

3. Board Action by Meeting

Typically, the board of directors must act at a meeting. A regular meeting is a recurring meeting provided for in the articles of incorporation or by board resolution. A special meeting is a one-time meeting, usually called for a specific purpose.

Votes Needed to Approve Most Matters at a Shareholders' Meeting by a Given Voting Group

Under the MBCA, a matter (other than electing a director) is deemed approved if the number of shares actually voted to approve the matter in the group exceeds the number of shares actually voted against the matter. (The articles of incorporation may require a greater number of votes in favor, such as a supermajority). Under this approach, abstentions do not count one way or another toward approving or disapproving a matter. Many states follow an alternative approach, under which a matter (other than electing a director) is deemed approved by a voting group if the majority of shares in that group vote affirmatively in favor of the matter. Under this approach, an abstention is tantamount to a vote against the matter.

Shareholders' Entitlement (or Nonentitlement) to Cumulative Voting

Under the MBCA, shareholders do not have the right to cumulative voting, except insofar as the articles of incorporation provide for cumulative voting. In some jurisdictions, the rule is the opposite; shareholders must be allowed to vote cumulatively, except insofar as the articles of incorporation state otherwise.

Abolishing or Limiting a Shareholder's Right of Inspection

Under the MBCA, the articles of incorporation and bylaws may not limit or abolish the shareholder right of inspection.

Straight Voting for Directors

Under the MBCA, the default system of shareholder voting for directors is straight voting. In straight voting, each share eligible to vote may be voted in favor of one candidate for each directorship up for election. Under straight voting, if there is one majority shareholder, then that shareholder will have the power to unilaterally fill each open seat on the board; minority shareholders will have no practical ability to elect directors of their choosing

b. Director Removal by Shareholders

Under the MBCA, the shareholders may remove a director at will and for any reason or no reason, except insofar as the articles of incorporation require cause for removal. If a director is elected only by a specific class of stock, then only those shares may participate in voting to remove the director. Removal generally requires that the number of votes favoring removal exceed the number of votes against removal, unless the articles of incorporation or bylaws specify a greater number. If voting is cumulative, then a director cannot be removed if a number of votes that would be sufficient to elect the director are cast against removal. To remove a director, the shareholders must call a meeting for that specific purpose, and the notice of the meeting must indicate that voting to remove the director is one purpose of the meeting.

i. Quorum Threshold

Under the Model Business Corporation Act, a quorum consists of: (1) a majority of the fixed number of directors, if the corporation has a fixed board size or (2) a majority of the prescribed number of directors or (if none is prescribed) the number of directors in office immediately before the meeting begins, if the corporation has a variable board size. The articles of incorporation or bylaws may also authorize an alternate quorum of no fewer than one-third of the fixed or prescribed number of directors.

Factors Not Necessarily Establishing Partnership under the RUPA

Under the RUPA, a person is not deemed a partner just because the person co-owns property with another, even if the person shares in the profits from the property. Similarly, a person is not a partner just because she shares in the business's gross revenue (as opposed to profits), even if she co-owns the property that produces the revenue.

Classical Theory

Under the classical theory, a person commits insider trading if she: • buys or sells securities of her corporation on the basis of material, nonpublic information acquired in her fiduciary capacity; • does not reveal that information to the other party to the transaction; and • is under a fiduciary duty to the other party to disclose that information. This constitutes a deceit or manipulative practice because the insider is omitting to disclose the material, nonpublic information while under a fiduciary duty to do so. The presence of the fiduciary duty elevates what would otherwise be acceptable nondisclosure to the level of active fraud.

Corporate-Opportunity Doctrine

Under the corporate-opportunity doctrine, a corollary of the duty of loyalty, a director generally must not take personal advantage of a business opportunity if: • the director should reasonably believe that the other party expects the opportunity to be offered to the corporation; • the director becomes aware of the opportunity via confidential corporate information, by using corporate property, or in performing her functions as a director, and the director should reasonably expect that the corporation would be interested in the opportunity; or • the opportunity involves a line of business in which the corporation either currently engages or expects to engage in the future.

Corporate Personhood

Under the doctrine of corporate personhood, corporations are considered to be separate and distinct legal persons with many of the rights and duties of natural persons. For instance, corporations may own property, enter into contracts, make political contributions , own property, sue and be sued, and do the things a natural person could do to carry out its business. Corporations are also entitled to most of the same protections under the U.S. Constitution as natural persons.

Appropriating a Partnership Opportunity

Under the duty of loyalty, a partner must account to and hold in trust for the partnership any personal benefit the partner may derive from exploiting a partnership opportunity. In general, a partnership opportunity is an actual or potential transaction that might possibly be valuable to the partnership, provided the partnership could legally (and, perhaps, practically) engage in it, and it falls within the scope of the partnership's business

Dealing with the Partnership as an Adverse Party

Under the duty of loyalty, a partner must not deal with her partnership as an adverse party or act for the benefit of a party with interests adverse to the partnership in conducting or winding up the partnership business.

Directors' Duty of Loyalty

Under the duty of loyalty, directors must, in discharging their duties, put the interests of the corporation and its shareholders at large ahead of their own interests or those of any single shareholder, group of shareholders, or third party. More specifically, the duty of loyalty requires that directors act honestly and in good faith, avoiding conflicts of interest. [

Benefits Arising from Partnership Activities and Property

Under the duty of loyalty, if a partner derives any personal benefit from carrying on or winding up the partnership business, the partner generally must account to the partnership for the benefit and hold it in trust for the partnership. In other words, the partner must relinquish the benefit to the partnership.

Liabilities of Principal and Agent in Contract and Tort

Under the law of agency, a principal and, sometimes, an agent may be liable for contracts into which the agent enters. In addition, the principal may be liable for the agent's torts committed within the scope of the agency

Misappropriation Theory

Under the misappropriation theory, a person commits insider trading by dealing in securities on the basis of material, nonpublic information if the person's use of that information violates a fiduciary duty owed to the source of the information. The trader feigns loyalty to the source while secretly profiting by using information rightly belonging to the source. Any insider who trades in her corporation's securities based on material, nonpublic information about the corporation is liable under the misappropriation theory, as well as the classical theory, owing to the insider's status as the corporation's agent. But under the misappropriation theory, even someone without a fiduciary relationship to the corporation whose securities are traded (that is, someone who is not strictly an insider) may be liable for insider trading if the person's use of the information violates some fiduciary obligation to the source. Liability under the misappropriation theory is sometimes called liability for outsider trading.

Judicial Dissolution of a Corporation

Under the right circumstances, a court may dissolve a corporation. i. Judicial Dissolution on Request of a Shareholder ii. Judicial Dissolution on Request of a Corporate Creditor iii. Judicial Dissolution on Request by the State

Looting Doctrine

Under the so-called looting doctrine, a controlling shareholder has a fiduciary responsibility not to sell a controlling stake to a buyer if the shareholder knows or, in the exercise of reasonable care, should know that the buyer will substantially plunder, or loot, the corporation. A prime indicator that someone proposing to buy a controlling stake in a corporation intends to loot it is offering a patently excessive price in exchange for the controlling stake (i.e., a price clearly beyond any control premium a reasonable purchaser might pay).

Insider Liability for Short-Swing Profits

Under § 16(b) of the Securities and Exchange Act of 1934, and with exceptions, an officer, director, or at least 10-percent shareholder in a corporation who buys and then, within six months, sells securities in the corporation (or vice-versa) is liable to the corporation for any resulting profits. This rule applies without regard to whether the trading would independently constitute insider trading. To be liable, the person must have been an officer, director, or 10- percent shareholder both at the time of sale and at the time of purchase.

Amending Shareholder Agreements

Unless a shareholder agreement specifies otherwise, it may be amended, but only by all shareholders who hold their shares at the time of the amendment

Voting for Directors

Unless the articles of incorporation provide otherwise, a person is elected director if she earns a plurality of votes cast by shares entitled to vote for directors. The candidates who earn the largest number of votes are elected to the board, up to the maximum number of directorships voted upon at the election. Thus, for instance, if five candidates are competing for three open seats on the board, then the three highest vote-getters among the candidates will be elected to the board; the remaining two will not. There are two general systems under which shareholders vote for directors: straight voting and cumulative voting.

Apparent Authority, Role of Existing Agency Relationship

Unlike actual and inherent authority, apparent authority does not presuppose that an actual agency relationship exists. Someone merely purporting to be another's agent may exercise apparent authority, provided the purported principal's manifestations make it reasonable for a third party to conclude that the agency relationship exists, and that the alleged agent has actual authority.

Inherent Authority

Unlike actual or apparent authority, inherent authority does not arise from the principal 's manifestations to either the agent or a third party. Rather, inherent authority is authority that may be reasonably inferred from the very nature of the particular agency relationship or the position the agent holds. Specific types of agents are customarily understood to have authority to engage in specific kinds of transactions for their principals. Unless the relevant third party has reason to know otherwise, an agent's conduct within the scope of inherent authority will bind the principal, even if it contravenes the principal's explicit instructions to the agent.

Judicial Dissolution on Request of a Shareholder

Upon a shareholder's request, a court may dissolve a corporation on one of several grounds. These rules may not apply to some publicly traded corporations. 1) Unresolvable Director Deadlock as Grounds for Judicial Dissolution 2) Director Misconduct as Grounds for Judicial Dissolution 3) Shareholder Deadlock as Grounds for Judicial Dissolution 4) Misuse of Corporate Assets as Grounds for Judicial Dissolution

Managing Close Corporations

Very often, a close corporation will be subject to a shareholder agreement providing for the shareholders, or certain of the shareholders, to manage the corporation directly and thus exercise powers normally reserved to a board of directors. In many instances, the result is that the close corporation is governed much like a general partnership would be. To the extent that the shareholders assume the traditional powers of a board of director, they also assume the corresponding duties and potential liabilities.

Capacity to Be an Agent

Virtually any person may be an agent, even one without legal capacity to enter into a binding contract. Even so, an agent's capacity may affect the agent's personal liability for breach of a fiduciary duty to the principal or for some other wrongdoing toward the principal or a third party in the course of the agency relationship

Winding Up a General Partnership

Winding up refers to the process of settling the partnership's accounts and distributing its assets. Typically, the process of winding up includes: - prosecuting and defending actions and proceedings, - settling and closing the partnership business, - disposing of and transferring the partnership property, - discharging the partnership's liabilities, - distributing the assets of the partnership, and - settling disputes regarding the partnership In winding up, partners may not enter into any transactions that continue or engage in new business; they are limited to winding up old business. [

Disposition of Corporate Assets

With exceptions and limitations, a shareholder may rightly demand appraisal if the corporation disposes of assets outside of a dissolution, and the disposition would leave the corporation without substantial continuing business. The shareholder must be entitled to vote on the disposition.

Voting Agreements among Shareholders

Without following the procedures to create a voting trust, multiple shareholders may agree among themselves to vote their shares in a certain manner. Under the MBCA, an agreement like this is specifically enforceable, provided it is memorialized in a writing signed by all subscribing shareholders. [

Irrevocable Proxies

ce the underlying debt was discharged.

Resolving Deadlock

difficulty of transferring stock. Deadlock means that the directors or shareholders are so divided on a matter that the corporation cannot act, making progress impossible. A typical example is a tied vote in which equal numbers of shareholders or directors vote for and against an important corporate measure. Sometimes, a faction of directors or shareholders will deliberately engineer deadlock to wrest control of the corporation or oust or oppress another corporate stakeholder. Without a mechanism to break the tie, deadlock may make it impossible for the corporation to operate, a phenomenon sometimes called corporate paralysis.

Events Causing Dissociation

i. Partner's Volitional Withdrawal ii. Event of Dissociation Set Forth in Partnership Agreement iii. Partner's Expulsion