Business Law Final Exam (Ch. 11 &13)

Who does the board appoint?

"C-level" executives - chief executive officer (CEO), chief operating officer(COO), chief of staff, chief

Bankrupcy

- A sole proprietor who files for bankruptcy may discover that there is little or no legal impact on her business as a consequence of filing. - A Chapter 7 bankruptcy should never be used for a corporation unless it is going out of business because when it re-commences business after the bankruptcy is over, its pre-petition debts will be revived by law, notwithstanding any discharge order. - Partner filing a personal bankruptcy will have the effect of dissolving any partnership in which he happens to be a partner

Double taxation

- As a separate legal entity, corporations must pay federal, state, and local tax on net income - Same profit is then subject to tax again when it is returned to shareholders as a dividend, in the form of a dividend tax.

Disadvantages to LLC's

- Because an LLC is a separate entity from its members, they must deal with the LLC at arm's length because of the risk of piercing the corporate veil (just corporations). - Fundraising can be as difficult as it is for sole proprietorships. - LLC's are not the right form for taking a company public and selling stock (it is not difficult for a start up to converst from an LLC into a corporation).

The nature of law as it applies to businesses operating in the international arena

- Businesses do not sign treaties - Sovereign states have the only power to conduct foreign affairs - Businesses are required to abide by their own applicable domestic laws as well as the laws of the foreign country in which they are conducting business. When domestic laws apply to businesses operating internationally, that is a vertical legal structure, because there is a legitimate authority over the business that governs its behavior.

Businesses operating internationally face important questions:

- Consumer backlash over the use of child labor or sweat shop conditions. - Human rights issues: does a company want to place profit over human rights concerns? (Does the company owe a duty of loyalty to its domestic workforce or should it be free to subcontract work overseas?) - Environmental degradation issues: the overuse of natural resources, generation of pollution, and improper disposal of waste products.

Limited Liability Companies (LLC's)

- Corporation is best suited for large businesses - LLCs are a "hybrid" form of business organization that offer the limited liability feature of corporations but the tax benefits of partnerships

Ways to resolve international disputes

- Draft the contract to include a CHOICE OF LAW CLAUSE that specifies which law and jurisdiction will apply to disputes arising under the contract. - United Nations treaty, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, provides for the enforcement of arbitral awards among member states. The parties could agree to a predispute arbitration clause. The prevailing party in the arbitration could take the award to court in either country and convert it into a legally binding judgment under the treaty.

4. Unlimited liability

- If the debts of the business exceed its ability to pay, creditors can go after the owner's personal assets. - The owner is personally liable for all of the business' bills and if the business cannot pay, the owner is personally liable.

3. Problems raising captial

- If the entrepreneur is not wealthy, he must get money from others - If someone loans him money, that person cannot participate as a profit sharing owner of the business. - Bank loans are difficult to get because down payment requirements may be high, and typically the banks require some form of personal collateral to guarantee the loan - If the business fails, the owner who borrowed the money will still own the debt.

Officers

- Involved in day-to-day decision making - implement the Board's strategy - can bind the corporation to contracts and other legal obligations - are employees of the corporation and the Board can remove them typically without cause

With tax planning...

- It may want to be taxed as a corporation and pay corporate income tax on net income. Or it may choose instead to have income "flow through" the corporate form to the member-shareholders, who then pay personal income tax just as in a partnership.

Limited Liability Partnership (LLP)

- Just like LLC's but for professionals who do business with one another (accountants, doctors, lawyers). - Allow the partnership to pass through income for tax purposes, but retain limited liability for all partners.

Formation:

- Most LLC statutes only require the name of the LLC and contact information for the LLC's legal agent in case of a lawsuit - Unlike corporations, there is no requirement for an LLC to issue stock certificates, maintain annual filings, elect a board of directors, hold shareholder meetings, appoint officers, or engage in any regular maintenance of the entity. - Most states require LLCs to have the letters "LLC" or words "Limited Liability Company" in the official business name. Of course, LLCs can also file d.b.a. filings to assume another name - Although the articles of organization are all that is necessary to start an LLC, it is advisable for the LLC members to enter into a written LLC operating agreement. The operating agreement typically sets forth how the business will be managed and operated. It may also contain a buy/sell agreement.

Sole Proprietorships

- Most common way of doing business in the U.S. - Legally no difference between the owner and the business - If the business makes a profit, the money belongs to the owner - if the business has to pay a bill and the business doesn't have the money, the owner has to pay - If the business enters into a contract, it is the owner who is actually entering into the contract. - if the business opens a bank account to accept customer payments or to pay bills, the owner owns the account - when the business enters into a contract, it is the owner that is entering into the contract

- Common requirements

- Name of the company and whether the company is for-profit or nonprofit. The name has to be unique and distinctive, and must typically include some form of the words "Incorporated," "Company," "Corporation," or "Limited." - Identity of the founders, how long they wish the company to exist, and the company's purpose. Under older common law, shareholders could sue a company that conducted business beyond the scope of its articles (these actions are called ultra vires), but most modern statutes permit the articles to simply state the corporation can carry out "any lawful actions," effectively rendering ultra vires lawsuits obsolete in the United States. - The founders must also state how many shares the corporation will issue initially, and the par value of those shares.

Roles and duties of shareholders

- Shareholders are the owners of the corporation. Corporations can have as few as one or as many as millions. In a closely held corporation, the number of shareholders tends to be small, while in a publicly traded corporation, the body of shareholders tends to be large. - In a publicly traded corporation, the value of a share is determined by the laws of supply and demand, with various markets or exchanges providing trading space for buyers and sellers of certain shares to be traded. - Shareholders own the share or stock in the company but have no legal right to the company's assets whatsoever. As a separate legal entity, the company owns the property.

Consequences of a business filing for bankrupcy

- Sole proprietorship: little or no impact on the business because the owner and the business are the same - Corporation: should never file for Chapter 7 bankruptcy unless it is going out of business. If a corporation files for bankruptcy and then goes back into business, its pre-petition debts will be revived by law - Partnership: a partner filing for personal bankruptcy will have the effect of dissolving any partnership in which he is a partner

U.S. citizens may not business with certain persons or entities:

- The U.S. Department of the Treasury Office of Foreign Assets Control (OFAC) maintains a list of persons, businesses, and entities with which U.S. citizens are forbidden from conducting business. - U.S. citizens are not permitted to engage in trade or business dealings with those in countries in which a U.S. embargo or U.S. imposed economic sanctions exists.

Shareholders of a corporation enjoy limited liability...

- The most they can lose is the amount of their investment, whatever amount they paid for their shares of the company. - If a company seeks protection from creditors in bankruptcy court, shareholders lose the value of their stock. Shareholders' personal assets, however are not reachable by those creditors.

Corporations can be quite complicated to manage...

- They typically require attorneys and accountants to maintain corporate books - Corporate law requires ongoing annual maintenance of corporations. In addition to filing fees due at the time of incorporation, there are typically annual license fees, taxes, attorney fees, and fees related to maintaining minute books, corporate seals, stock certificates and registries, as well as out-of-state registrations. - A domestic corporation is entitled to operate in its state of incorporation but must register as a foreign corporation to do business out of state.

Export controls prohibit or restrict the export of certain types of products while limiting or restricting specific products from entering a county....

- To EXPORT simply means to transport products to another country. Tariffs or quotas - The U.S. government views exporting as a privilege and not as a right and has the authority to impose a total ban on exporting on U.S. companies for export control violations.

Alien Torts Statute (ATS) is a federal statute that allows noncitizens to bring suit in U.S. federal court against U.S. businesses or citizens that have committed torts or human rights violations.

- U.S. Supreme Court recently held that the presumption against extraterritoriality applies to the ATS. - In other words, claims under the ATS for violations of law occurring outside of the United States are barred.

Not all shareholders are equal...

- U.S. corporate law allows for the creation of different types/classes of shareholders. - Shareholders in different classes may be given preferential treatment when it comes to corporate actions such as paying dividends or voting at shareholder meetings. - Founders of a corporation may reserve a special class of stock for themselves with preemptive rights. These rights give the shareholders the right of first refusal if the company decides to issue more stock in the future, so that the shareholders maintain the same percentage ownership of the company and thus preventing dilution of their stock.

A chapter 7 debtor must attend a meeting of creditors...

- creditors are invited and permitted to question the debtor about his or her assets and liabilities. - the ch 7 trustee who has been appointed to the case examines the debtor about the information contained on the bankruptcy petition. In most cases, the debtor in a ch 7 bankruptcy does not go to court and never has to see the judge. - However, if a debtor has wrongfully transferred assets in an attempt to hinder or delay creditors, then the debtor may find that his bankruptcy discharge is in jeopardy. The trustee will challenge such actions, because the trustee will have a legal claim to that asset, so that it can be liquidated to pay pre-petition creditors. - A debtor who succeeds in ch 7 bankruptcy will receive an order of discharge, which discharges all pre-petition debts that are dischargeable. Priority debts are not dischargeable. Debts that are not dischargeable survive the bankruptcy. Once the bankruptcy is over, the automatic stay is lifted, and creditors can re-commence collection activities for non- dischargeable debts.

Shareholders elect a Board of Directors:

- its the only way someone can become a Director - Shareholders can elect anyone they want and as many as allowed in corporate documents - Most corporations have members from both inside and outside the company - Today many shareholders will fight for one Board seat to represent shareholders' interests - Some companies reserve a seat for a Union representative

A challenge to horizontal laws is the enforcement of violations because there is no "higher authority."

- many horizontal laws, like treaties, contain provisions that require the parties to the treaty to submit to a treaty-created dispute resolution panel or other neutral tribunal such as the International Court of Justice (ICJ). - In the absence of language governing the parties regarding how a dispute should be settled, the dispute may not be resolved.

Reasons a company may form subsidaries

- so that the parent company can have limited liability or advantageous tax treatment. - to hold real property so that premises liability is limited to that real estate subsidiary only, shielding the parent company and its assets from tort lawsuits. - Companies that deal in a lot of intellectual property may form subsidiaries to hold their intellectual property, which is then licensed back to the parent company so that the parent company can deduct royalty payments for those licenses from its taxes.

Import controls limit or restrict a particular product from entering a country.

- tariffs, quotas, and bans or restrictions. - The U.S. Department of Homeland Security Customs and Border Protection Agency (CBA) has a primary role in import control administration and regulation.

U.S. citizens that are working for U.S. companies overseas are protected by U.S. federal employment laws:

-Title VII of the Civil Rights Act - The Americans with Disabilities Act (ADA)

Restrictions on S corporations to insure that the "S" tax treatment is for small businesses

-can't have more than one hundred shareholders, all of whom must be U.S. citizens or resident aliens - can have only one class of stock - cannot be members of an affiliated group of companies.

The vertical nature of U.S. domestic law

1. Constitution 2. Judicial branch, Legislative branch, Executive branch 3. Precedents, Statutes, Executive orders 4. Those who are governed (people, corporations, etc.)

Advantages to partnerships

1. Easily formed. 2. Can be formed verbally or formally through ARTICLES OF INCORPORATION. These articles set forth how the partners want the business to run. Normally all general partners have an equal voice in management. 3. No state involvement in formation because legally the business and the partners are the same. 4. Easily dissolved once the agreement to share profits and losses ends. Regarding valuing the withdrawing partner's share, most partnership agreements contain a buy/sell agreement.

Disadvantages to corporations

1. Establishing a corporation is a complex process and requires registration with the central regulatory authority and listing on a stock exchange which required fulfillment of certain requirements related to the amount of capital, number of directors, etc. 2. Normally the corporations have a large number of shareholders; they delegate the governance function to a body of persons called board of directors. The board of directors hires management to look after the day to day affairs of the corporation. The management is an agent and the owners are principal. It is quite possible that the management may act to further their own interests rather than the interest of the owners of the corporation. When this happens it is called an agency problem. 3. In case of corporations there is double taxation. First corporate income is taxed at a flat rate and then the dividends paid to the shareholders are taxed.

Advantages of LLC's

1. LLC members can participate in day-to-day management of the business. 2. LLC members can be other corporations or partnerships, are not restricted in number, and may be residents of other countries. 3. Flexible tax planning because tax treatment can vary on a yearly basis

More on chapter 11 bankruptcy:

1. Like a Chapter 13 bankruptcy, a Chapter 11 bankruptcy is a reorganization bankruptcy. 2. Will allow a big business to continue to operate under a plan which must be voted on and approved by several of the debtor's largest unsecured creditors. 3. The debtor itself can act as its own trustee and becomes the debtor-in-possession. If the debtor fails to honor its obligations as the debtor-in-possession, then the court will appoint a chapter 11 trustee.

Advantages to corporations

1. The liability of the owners towards the creditors is limited to their investment in the company. In case of liquidation of the company, if the company's assets are insufficient to meet the liability, nothing is required to be contributed by the owners. Only the owners' contribution is at stake rather than their personal assets. 2. The corporation is considered a legal person with perpetual existence. It exists until it is liquidated and death or change in ownership has no effect on the corporation. 3. Additional capital can be raised easily through stock markets, etc. 4. The ownership is represented by the number of share certificates held by a person, making the transfer of ownership very easy.

Disadvantages to partnerships

1.Partnership is considered a disregarded entity so the income "flows through" to the partners who pay ordinary income on their business income. 2. Tax planning opportunities are limited. 3. Unlimited liability applies. Every partner in the partnership is jointly and severally liable for the partnership's debts and obligations. (A way to avoid unlimited liability is to form a limited partnership which has both general and limited partners. The most a limited partner can use is the amount of his investment in the business. However, under most state law limited partners cannot participate in the day-to-day management of the business)

More on chapter 13 bankruptcy: 1. A ch 13 bankruptcy a a reorganization under which the debtor will not lose his personal property provided that he is able to propose a reorganization plan that is confirmed by the court, and that he is able to maintain his reorganization plan payments during the entire course of the ch 13 bankruptcy, which could last five years 2. A reorganization bankruptcy essentially re-amortizes all secured debt in arrearage, all priority debt, and in certain cases, some or all unsecured debt, over the course of the bankruptcy plan. The debtor must make payments during the course of the bankruptcy plan to pay off the re-amortized arrearage, and he must maintain regular payments on all secured debt during the course of his bankruptcy

3. After the bankruptcy is completed, any remaining dischargeable debt is discharged, and the debtor is rehabilitated vis-à-vis his secured creditors, having satisfied all arrearages during the course of his bankruptcy 4. Meeting of creditors - Debtor's budget may become an issue if the creditors believe that the budget is too "cushioned" in favor of the debtor - A ch 13 bankruptcy folows the same classification of creditors as a ch 7 bankruptcy, with secured creditors having the "best" position, priority creditors having the second best position, and unsecured creditors placed at the greatest risk. - A ch 13 trustee manages the bankruptcy plan payments and distributes those payments to the debtor's creditors as specified in the plan.

S Corporation

A way for closely held corporations (non-publically traded) to avoid double taxation - An S corporation can choose to be taxed like a partnership or sole proprietorship. In other words, it is taxed only once, at the shareholder level when a dividend is declared, and not at the corporate level. - S corporations provide the limited liability feature of corporations but the single-level taxation benefits of sole proprietorships by not paying any corporate taxes.

2. Cannot bring in partners

Because a sole proprietorship can have only one owner, the owner cannot bring in partners. If the owner dies, the business dies with him.

Differences between the CISG and the UCC

CISG - quantity and price are essential terms - generally contracts are okay - acceptance generally must mirror offer - offer may be irrevocable in certain circumstances UCC - quantity, but not price, is an essential term - generally written contracts are required per Statute of Frauds - acceptance may include different terms than offer - offer is generally revocable unless it expressly contains language to the contrary

Preemptive rights

Give the shareholders the right of first refusal if the company decides to issue more stock in the future, so that the shareholders maintain the same percentage ownership of the company and thus preventing dilution of their stock.

Choice of law clause

If parties opt out of the CISG, then they must choose which law will apply to their contract by a choice of law clause.

The horizontal nature of international law

International laws between sovereign states are a horizontal structure because no state is in a legally dominant position over the other. NAFTA Treaty member: Canada---NAFTA Treaty member: U.S.--NAFTA Treaty member: Mexico

Creditors

Person or entity to whom money is owed

1. Compliance with state corporation law

Since corporations have a separate legal existence, they must be formed in compliance with corporate law. Corporate law is state law, and corporations are incorporated by the states. - Most corporations incorporate where their principal place of business is located, but not all do. Many companies choose to incorporate in the tiny state of Delaware. Delaware chancery courts have developed a reputation for fairly and quickly applying a very well-developed body of corporate law in Delaware. The courts also operate without a jury, meaning that disputes heard in Delaware courts are usually predictable and transparent, with well-written opinions

2. Autonomy

Since the owner is the business, he can decide what he wants to do with the business. The owner has total ownership of the business' finances, all the money that comes in belongs to the owner.

1. Have to pay ordinary income tax on the business profits

Since there is no legal distinction between the owner and the business, all the income generated by the business is treated as ordinary personal income to the owner. Ordinary personal income typically has the highest rate of taxation.

Choice of forum clause

The CISG does not limit the parties to a particular forum to resolve disputes. Therefore it is important for the parties to use a choice of forum clause to specify where complaints will be heard. --- you won't have to travel, they will come to you

Grease payments exception

The FCPA does permit grease payments, or facilitating payments, if such payments are permitted by the local government where the payments occurred - Since it is extremely rare to find a jurisdiction that legally permits grease payments (even in countries where corruption is rampant, it's probably still illegal), the grease payments exception provides little protection for those who make such payments.

2. Articles of Incorporation

The corporate founders must file the articles of incorporation with the state agency charged with managing business entities.

3. Flexibility in managing business operations

The owner calls all the shots. He alone decides how to run the business, set his own hours, determine his salary, and decide what he wants to do with the business

1. Enjoy ease of start up

There is no creation cost or time, since there is nothing to create. The entrepreneur is the a person who organizes a business and carries the risk of loss and profit with it. He/she simply starts doing business, charging money, and providing goods or services. Some sole proprietors may need to obtain permits or licenses before they can begin operating.

IPO (initial public offering)

When a business gets established, it exits with offering the sale of the business to the public though an IPO

Shareholders elect...

a board of directors, who in turn appoint corporate officers to run the company

Secured creditor

a creditor with a properly perfected security interest on a particular piece of collateral. This type of creditor is paid before the other types of creditor

Foreign Corrupt Practices Act (FCPA)

a federal statute that prohibits the payment of bribes by U.S. companies and the employees of those companies. Violation of this law is a criminal offense.

Chapter 7

a liquidation bankrupcy - Only debtors that satisfy the means test under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) can file for a Chapter 7 bankruptcy. A debtor satisfies the means test by demonstrating through a formula that he does not have the income to support any repayment to existing creditors and his income is too low to support any hope of being able to do so in the future. - The liquidation that occurs in a chapter 7 is used to pay pre-petition creditors according to the creditors' classifications.

North American Free Trade Agreement (NAFTA)

a multinational agreement between the U.S. , Canada, and Mexico that removes trade barriers to create largely duty-free and tariff-free trading zones which allow for freer flow of goods and services between these countries.

Sovereign state

a political entity that governs the affairs of its own territory without being subjected to an outside authority. Countries are sovereign states.

Chapter 13

a reorganization bankruptcy

Chapter 11

a reorganization bankruptcy used by big business that wants to stay in business after the bankruptcy

General Agreement on Tariffs and Trade (GATT)

a treaty that reduced trade barriers between countries that were parties to the GATT. GATT created the World Trade Organization (WTO)

Automatic stay

an order entered automatically by the court upon the debtor's petition being filed. This order requires all collection activities for pre-petition debts that the debtor owes to stop immediately.

Discharge order

an order entered by the bankruptcy judge to discharge all dischargeable debts of the debtors, which prohibits creditors from collecting on those debts forever.

The U.N. Convention on Contracts for the International Sale of Goods (CISG)

applies to the sale of goods between parties from countries that are signatories to this treaty. It - creates a uniform law for the parties that adopt it regarding contracts for international sale of commercial goods. - provides gap-fillers for terms that may not be expressly stated in the contract.

Bans

apply to goods that are illegal to import

Trade regulations

are important to both exporters and importers of products...

Business judgement rule

board members are generally immune from second-guessing for their decisions as long as they act in good faith and in the corporation's best interests.

Priority creditors

creditors that do not have secured collateral, but there is an important public policy reason to ensure that they are paid, rather than discharged without payment

Pre-petition debts

debts that a debtor owes to creditors prior to filing the bankruptcy petition.

Duty of loyalty

duty not to take corporate opportunities for their own purposes and a duty not to self-deal

Antidumping duty

for dumped products

Countervailing duty

for subsidized products

Private placement

how the venture capital firm initially funds the business

Who can shareholders be?

human beings or other corporate entities (such as partnerships or corporations)

Venture capitalist firms

invest in unproven or start-up businesses. Get their investment funds from institutional investors and angel investors

Domestic law

law that is applicable within the nation where it is created, some legitimate authority has the power to create, apply, and enforce a rule of law system. Best thought of as a vertical structure of law because there is some "higher authority" that imposes the law on the people. In the United States, laws are handed down by: - the legislative branch in the form of statutory law; - the judicial branch in the form of common law, and - the executive branch in the form of executive orders, rules, and regulations.

Safeguards

limited duration growth restrictions that are imposed when domestic markets are threatened or injured from imports.

Quoats

limits on quantity. A TARIFF RATE QUOTA simply provides favorable tariffs on certain quantities of particular types of imports.

Board of directors responsibilities

making major decisions that affect the corporation (ex: paying a dividend or issuing new shares and corporate bonds)

Duty of care

not a mandate not to make bad decisions but a duty to make decisions that reflect an attentive relationship to the corporation.

Members

owners of LLC's

Parent corporation

owns all the stock of a wholly owned subsidiary - A parent company that does not own all the stock of another company might call that other company an affiliate instead of a subsidiary.

Debtors

persons or businesses that owe money to another.

Subsidized imports

products produced overseas for which a government has provided financial assistance for the production. When dumping or subsidized imports materially injure or threaten, Actions the U.S. can take are...(next 3 definitions)

D & O Insurance

purchased by corporations to protect their Directors and Officers

Taffiffs

taxes on imported goods. Imposed to render the imported product more expensive and to keep the cost of nonimported products (domestic products) attractive to consumers.

Business name/DBA

the owner of a sole proprietorship can apply for a "doing business as" or d.b.a. filing in his state, so that his business can carry on under the fictitious name "Joe's Car Repair" Note, any fictitious name cannot have any words in it that suggest a separate entity, such as "Corp." or "Inc."

Unsecured creditors

those who have extended credit that is not secured or priority. Unsecured creditors are paid last of these three classifications

World Trade Organization (WTO)

uses a dispute resolution procedure to resolve trade disputes between states.

Angel investors

wealthy investors

Dumping

when a foreign producer exports products to sell at prices less than its cost of manufacturing.

Partnership

when two or more persons agree to share profits and losses in a joint business venture