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Business Organization

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When are promoters liable during pre-incoorpatuon?

"All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this Act, are jointly and severally liable for all liabilities created while so acting. - Exception: When individuals rely on the corporate entity because they know the promoter does not bind teh corporation - Look solely to the corporation of for payment - that the promoter did not have any duty toward the plaintiff to form the corporation

Wood is a senior vice president of Soda Sales Corp., a Delaware corporation ("SSC"). Wood is offered the opportunity to buy a new soda recipe for SSC from Ivan Inventor. Wood does buy the recipe for SSC, but, unfortunately, the recipe is a flop, and SSC loses $2 million on the transaction. N. Gree, an SSC shareholder learns of Wood's actions and is upset. N. Gree sues, alleging that Wood was negligent in purchasing the recipe. Assume that N. Gree's suit against Wood for negligence is allowed to proceed. Which of the following is likely to be the most effective argument to shield Wood from liability? A. Wood should be protected by the Business Judgment Rule. BWood acted after a bus or thorough investigation (assuming this is true). C. The purchase of the recipe was approved by the fully informed, SSC board (assuming this is true). D. Even if Wood was negligent, the price SSC paid for the recipe was not unreasonable (assuming this is true).

C. The purchase of the recipe was approved by the fully informed, SSC board (assuming this is true). Correct. Since the approval by the informed SSC board would shield Wood from liability.

What is an accredited investor

An accredited investor; trust must have assets over $5 million to qualify as an accredited investor. A venture capital firm., - A vice president of the issuer who is in charge of a principal division, or - A 16 year-old with a networth over a million dollars at the time of purchasing the issuer's stock.

Hector and Hans are co-promoters working together to form H&H Corp. Before H&H Corp. is formed, Hans and Hector negotiate an agreement with Ryan to print signs for H&H Corp. Only one signature is required, so Hector does not sign the agreement, and Hans signs the agreement as "Hans, promoter for H&H Corp., a corporation to be formed." Ryan prints the signs but H&H Corp. is never formed. From whom can Ryan likely collect payment for the signs? A. No one, since H&H Corp. was never formed. B. Hans and possibly Hector as a co-promoter. C. Hans only. D. Hector only.

Hans and possibly Hector as a co-promoter. Correct. Since Ryan will be able to collect from Hans since a promoter is bound by any contract entered into on behalf of a corporation that has not yet been formed, unless there is a clear intent that the promoter not be bound or the circumstances are such that the promoter could not perform the agreement. Hector could possibly be liable as a "co-promoter" under partnership principles.

Can A principal may be held liable for the actions of an independent contractor.

In general, a principal is not held liable for the actions of an independent contractor. This is because independent contractors are generally considered to be self-employed individuals who are responsible for their own actions and liabilities. However, there are some exceptions to this rule. A principal may be held liable for the actions of an independent contractor if: The principal was directly involved in the independent contractor's work and contributed to the harm caused. The principal failed to provide proper supervision or control over the independent contractor's work, resulting in harm to a third party. The principal knew or should have known about a dangerous condition or activity being performed by the independent contractor and failed to take reasonable steps to prevent harm.

Double Taxation

Income is taxed both at the corporate level and other personal level whenever income is distributed to shareholders. corporations can avoid double taxation by not distributing income to shareholders.

What does limited liability mean for a cooperation?

Investors liability is limited to the value of their investment and doesn't extend to their personal assets

Do the articles incorporate show how much stock has been issued

Steps of Dissolution under UPA

Steps of Dissolution under UPA 1. Dissolution Events/disassociation- occurs by some actions of partners - the withdrawal may be caused in accordance with the agreement, in violation of the agreement, by operation of law ,or by court decree (partner declared lunatic, incapable of performing, willfully commits a breach, death). 2. The winding up/down of the partnership affairs - satisfying the debts and obligation of the partnerships and concluding any partnership businesses. - it must buy out the dissociated one's interest, minus damages if the dissociation was wrongful. CAN end here, but if the partners want to end the company, then dissolution 3. The termination of the partnership or dissolution - When the entity will cease to exist. Dissolution - which occurs by acts of partners, by operation of law, or by court order upon application by a partner if continuing the business has become unsustainable

What is Private Placement

The Security Act exempts from the registration requirement transactions that do not involve public offering. If Securities are offered also there's something else other than public offering, that offering is called a private placement. so long as the placement. compounds with the requirement of the Securities act such placement does not have to be registered with the SEC and those can be sold without a registration statement. So long as the top executives have access to the kind of information that would be made available to them in a registration statement, the offering would qualify as a private placement and thus be exempt from registration.

Solvency test vs Balance test

The balance test is a financial test used to determine whether a company is currently insolvent. It examines whether the company's assets are greater than its liabilities. If the company's assets are less than its liabilities, then it is considered to be insolvent. On the other hand, the solvency test is used to determine whether a company is likely to become insolvent in the future. It examines whether the company will be able to meet its financial obligations as they become due. This test looks at both the current and future financial position of the company, including its ability to generate cash flow, pay off debt, and meet other financial obligations.

BOD powers?

the board is responsible for initiation, amending, and fashioning the terms related to fundamental transactions which include the sale of substantially all of the corporation's assets, dissolution, mergers, acquisitions, and amendment to the articles. As a director, you do not have the authority to act on behalf of the corporation but can only act as part of the board. So can fire upon majority board approval etc. but usually left to officers Board is responsible for declaring and paying dividends and other distributions to shareholders. Board is responsible for nominating directors and establishing the rules associated with such nominations Budget - board must approve annual budget for the corporation and oversee the corporation;s finance affairs, including oversight of the work of the corporation's The officers of a corporation are typically hired by the board of directors

In a privately held cooperation. may sharehoders, officers, and directors work be intertwined?

yes. In a close corporation, an agreement as to the management of the corporation agreed to by the directors must be valid where there is no complaining minority interest, no fraud or apparent injury to the public or creditors, and no violation of clearly prohibitory statutory language. For a number of reasons due to the nature of close corporations, its directors need to be able to exercise their control and effectively protect their interests and this is usually done by a detailed shareholder agreement. Because this is a closely-held corporation, courts have allowed shareholders to enter into agreements that intrude on the powers of the board, including agreements related to dividends. However, such agreements must be designed to protect the corporation and its creditors

Wendy, David, Max and Talia are the only owners of Skin Care Corp., a Delaware corporation ("SCC"). Wendy owns 5 shares of SCC; David, Max and Talia each own four shares. Wendy, David, Max and Talia also each hold one of the four seats on the Skin Care Corp board of directors. In an election for president, Wendy and David vote for Wendy but Max and Talia vote for Max. Who wins, Max or Wendy? A. Max, since Wendy's vote does not count because of a conflict of interest. B. Wendy, since she has more stock than the others, and a deadlock of the board of directors is resolved by a shareholder vote. C. Delaware law provides that a corporation must have a president, so the election would be deemed to be an election of both Max and Wendy as co-presidents. D. Neither Max nor Wendy; another election will need to be held.

D. Neither Max nor Wendy; another election will need to be held. Correct. Since there was no individual who received a majority of the votes.

In a private closely held comapany, all shareholders have to agree if they were to vote fro officers and hinge on their duties

True. A group of shareholders may agree on how they will vote as shareholders, but, even if there were an understanding that Greg, Anthony and Jeff would elect each other as officers, it would be a breach of fiduciary duty for the group (at least if the group of shareholders does not include all of the corporation's shareholders) to agree on how they would vote as directors. Everyone needs to agree, its a breach if all don't agree on voting

Joint Venture

Two or more people agree to pool or join their resources to accomplish a specific task or project and the JV ends when the task is complete. All other characteristics are viewed as GP but with a limited project or purpose Treated the same as a partnership. Both lose or gain equally if there is no contract. Investment can be in the form of labor/skill. Where one contributes money and the other services, in the event of a loss each would lose his own capital, the one money and the other labor. One partner makes a capital contribution and the other partner contributes services without receiving any compensation, the capital contribution must be repaid from any profits, but neither party is liable to the other for any loss.

The Ultra Vires Doctrine,

Ultra Vires - the notion that a corporation cannot engage in actions that are not authorized by its purpose clause. If directors and officers engage in actions beyond the corporation's purpose those actions are prohibited. As a result you are personally liable. Because the corporation had no power to act, stakeholders cannot ratify such actions. Corporations are permitted to make substantial contributions to have the where gift tends reasonably to promote the Goodwill of the business of the contributing corporation. The amount can be can be deemed reasonable, it will not be deemed ultra vires. If company receive no economic benefit from the charitable donation, then it may be viewed as ultra vires. - Test is reasonableness

Ultra vires refers to a situation in which. .

Ultra vires is a situation in which a corporation engages in actions that are not authorized by its purpose clause.

How do shareholders vote?

Voting by Proxy Because shareholders tend to be widely dispersed, wherever public company shareholders vote, they vote by proxy rather than in person. Federally required that any person or entity that seeks to obtain the shareholder's vote by proxy must distribute a proxy statement. A proxy statement is a public disclosure document that includes information about the matters to be voted upon.

What can shareholders do?

Voting to approve/reject. approval - Mergers, acquisitions, sale of all the assets; Shareholder resolutions; and Amendment of the corporation's Articles of Incorporation - election and removing BOD

During dissolution, at what point is there no actual authority?

When a dissolution event occurs and a partnership begins, the winding process, the dissolution event terminates actual authority other than the actual authority necessary to wind up the partnership business. Partners continue to have apparent authority until third parties have noticed that the partnership is seeking to wind up and ultimately terminate.

If you incorporate in a state from where you are not from, you need a Registered Agent and Pay an annual fee

Yes

Globe, Inc. offered to sell its securities without registration with the Securities and Exchange Commission to all of its employees at Globe, Inc. Only the CEO and CFO of Globe, Inc. purchased the securities pursuant to the offering. It is likely that the stock offering violated Section 5 of the Securities Act?

Yes because both the offerees and the purchasers must have access to the kind of information that would be available to them in a registration statement. Since the CEO and the CFO are only the purchasers and both the offerees and the purchasers must have access to the kind of information that would be made available to them in a registration statement in order for the offering to qualify as a private placement and thus be exempt from registration.

When are promoters personally liable for a defective in-corporation

1. A defendant who acts as a corporation before the certificate of incorporation is issued can be held personally liable. 2.

How are directors removed?

A director can only be removed at a special shareholders meeting called for such purpose as removing someone from the board. Can be removed with or without cause. Must hulk a certain amount of votes to call for a meeting

Mercury, Inc., a large publicly held company, is about to sign a contract to purchase raw materials from RM Corp. Which of the following individuals (assuming that individual only holds the position listed below) may sign the contract on behalf of Mercury, Inc.? (Assume the contract was properly approved by the Mercury board of directors.) A. A Mercury, Inc. shareholder B. A Mercury, Inc. director C. A Mercury, Inc. officer D. Either a Mercury, Inc. officer or a Mercury, Inc. director.

A Mercury, Inc. officer Correct. Since officers of a corporation do have the authority to act on behalf of a corporation.

LLC

- Member - Manage LLC - Each member of the LLC has authority to manage the Affairs of the LLC and to bind the other members. Like GP - Manager-Managed LLC - LLC managed by a person or entity doesn't need it as a manager or by a group of members elected to serve as managers and referred to as the board of managers. - Centralized management Liability - LLC members and managers have limited liability and they are not personally liable for the debts and obligations of the LLC - even if they participate in the day to day. Members and managers of an LLC are responsible for their own acts or omissions and for the obligations undertaken by agreement, and they are personally responsible for the acts, omissions, and obligations of other members. - Subject. to Piercing/alter ego - - personal liability Transfer - Fully transferable unless there is an agreement. Dissolution - The directors must agree to dissolve the corporation and then the shareholders must approve by the vote of a certain percentage of shareholders, at least a majority

Dividend preference

- proffered stock has dividend preference

Can shareholders influence officers?

A contract that requires directors of a corporation to refrain from changing officers, salaries, or policies or retaining individuals in office without consent of the contracting parties is void. A director's primary duty is to the corporation and its shareholders. Shareholders may combine their votes to elect directors, but they may not extend this power to limit directors' authority to run the corporation, such as in the selection of officers or fixing salaries.

Criteria for Enterprise Liability

1. The plaintiff must show that a shareholder used the corporation as his agent to conduct business in an individual capacity. Since the theory by which related subsidiary corporations might be held liable for the obligations of one subsidiary is known as "enterprise liability."

General Partnership 1. How many people? 2. Liability? 3. Profit share? 4. Formation 5. Management and Authority 6. Tax treatment 7. Transfer

1. Two or more people - duty to each other and the business 2. Unlimited personal liability (jointly and severally)- No limited liability for business debt, taxes, or torturous claims 3. Without an agreement, they share equally in profits and losses 4. Can be formed without official filing 5. Each partner has full authority to manage the affairs and bind the other partners 6. Flow through tax treatment. - The profits or losses are "passed through" to the individual partners, who report them on their personal tax returns 7. Transfer - Full partnership interested are no transferable without connect of all partners. Monetary interests are transferable. - partners are considered agents

Fiduciary Duties in Partnership

1. Confidential information 2. Competition 3. anti-theft 4. Self - dealing 4. Cant reduce partnership

For defective incorporation, when are promoters not liable?

1. De facto copy. when promoters believed the cooperation exist ad there was good faith, they are not personally liable - The act of executing the certificate of incorporation, the bona fide effort to file it, and the dealings with plaintiffs in the name of the corporation, satisfied the requisite proof of the existence of a de facto corporation. 2. Corporation by estoppel - the person relying on the false representation is estopped. Someone contracting and dealing with a business as if it were a corporation. In so doing, it is an admission that the entity is a corporation and therefore they are estopped to deny its incorporation. Cant find promoter liable when you relied on the corporation. - Partial payment by the corporation doesn't remove personal liability.

Limited Partnership 1. How many people? 2. Liability? 3. Profit share? 4. Formation 5. Management and Authority 6. Tax treatment 7. Transfer

1. Ownership - Two or more people or entities at least one limited partner and at least one General partner. 2. Formation - LP must file a document with a state agency; official entity name must include the term LP and which partners are GP and LP 3. Management and Authority- GP has full authority to manage the affairs and LP is limited to voting on, engaging in specific fundamental matters. They can't participate in the management of the LP without potentially losing their protection against personal liability. Most times GP is a corporation. The liability of a corporation is limited to their assets and not the shareholders personal assets this way limits the GP's liability. When they get sued, they can only go after the GP corporate asset and not their personal assets. 4. Liability - Each GP partner has unlimited personal liability for all debts and obligations and LP liable to the extent of capital contribution limited partner may be liable to a third party for the debts of the Partnership if the limited partner is either a general partner or is a participant in the control of the business and that their party reasonably believes that the limited partner is a general partner. (based upon limited partner's conduct) 4. Transfer - Full general partnership interests are not transferable, partners can transfer their monetary interests but LP is transferable unless prohibited by an agreement. 5. Withdrawal and Dissolution - GP can withdraw at any time unless there is an agreement. The last GP withdrawal will cause a dislocation event, and in that case, LP has 90 days to dissolve or find a new GP. The GP has to give a 6 month notice.

what factors influence piercing?

1. Substantial stock ownership - May hold a shareholders liable for having 90% ownership - Stock ownership are not enough, you need other factors, there must be an element of injustice or fundamental unfairness such as the corporation exists merely as a façade for the operations of the dominant. 2. Undercapitalization (lack of money and resources) - that the corporation was established, organized and/or operated in a manner where it does not have sufficient capital to satisfy its expected obligations. Inability to pay dividends - Inadequate capitalization is one criterion, and it may not be sufficient grounds by itself. 3. Failure to observe corporate Formalities such as no holding meetings of directors and shareholders. corporate formalities were not followed - a corporation that observes the corporate formalities should not be subject to veil piercing - Not enough, needs to be coupled with something 4. Commingling of corporate assets and corporate identities - when there is an attempt to separate an entity, courts are reluctant to pierce. When assets, directors, and identities are intertwined, there is a greater likelihood of piercing. corporation's assets are intermingled for use toward a common business purpose - Cant if the separation of these two corporations was maintained. - Trade names are not significant - Mere control of a corporation, no matter how complete, is sufficient to trigger the veil piercing 5. Proof of Fraud unnecessary - fraud does not need to be proved to show piercing is appropriate but Evidence of Injustice or deception will increase the likelihood of piercing. require a showing of fraud-like conduct or that a failure to pierce would result in injustice. 6. Siphoning of corporate assets - The notion that a shareholder is using the resources or assets of the corporation for their own personal benefit or for a purpose it was not intended 7. Uphill battle - Courts emphasize that piercing should only be used in extreme circumstances to advance equity and fairness 8. Never distributes dividends to its shareholders.

Difference between debt and equity security

A corporation is not required to issue debt securities, while a corporation must have at least one from of equity securities ES represents interests in the corporation while DS (taking out a loan or borrowing funds) represents a promise of repayment by the company ES is not entitled to any payment from the corporation and DS are entitled. DS are governed by the contract they get into with the corporation and for ES governed by corporate law, a corporation's articles, and bylaws.

Preemptive right.

A preemptive right is a right enabling shareholders to purchase shares from the company to maintain their percentage interest in the company whenever the company issues additional shares for value.

Alan, Barry, Carl, and Diane are shareholders in a closely held corporation. Alan owns 49% of the corporation, Barry owns 10%, Carl owns 21% and Diane owns 20%. Alan, Barry, Carl, and Diane are also the only four directors of the corporation. In a vote at a validly held meeting of the company's board of directors to determine whether to approve a standard contract with a new supplier, Barry and Carl vote yes. Diane votes no. Alan is not present. Is the contract approved? A. Yes, because Barry and Carl, are a majority of the directors present. B. No, because Barry and Carl do not hold a majority of the company's shares. C. No, because only two of the four directors voted yes. D. No, because Alan was not present.

A. Yes, because Barry and Carl, are a majority of the directors present. Correct. A majority of the directors present at a valid meeting at which a quorum is present may approve an action.

Zoe decides to form a fishing business that will rent boats and equipment to local fishermen. In order to limit her liability, she forms separate corporations to own each of her 14 boats and also separate corporations to own the equipment, warehouse and other facilities, respectively. There are 17 separate corporations in all, and Zoe is the sole shareholder in each corporation. Zoe is diligent regarding corporate formalities within each corporation, but, in order to make the administration less complicated, all 17 corporations share the same bank account, warehouse, dock, scheduling, maintenance, rental, and office facilities. One day one of the boat's steering fails due to poor maintenance and the boat collides with a canoe. The two canoe paddlers, Sara and Max, are injured and want to sue to recover for their damages. However, the corporation that owned the boat (named "Zboat #6, Inc.") has assets of approximately $50,000 and Sara and Max anticipate that their damages may be closer to $100,000. If there is no wrongdoing, other than may be inferred from the statements above, from which individuals and/or entities are Sara and Max likely to be able to recover their damages? A. From all 17 corporations under a theory of enterprise liability. B. From Zboat #6, Inc. and Zoe, personally by piercing the corporate veil. C. From Zboat #6, Inc. only. D.From Zoe, personally, Zboat #6, Inc., and the other 16 corporations through piercing the corporate veil and enterprise liability, respectively.

A. From all 17 corporations under a theory of enterprise liability. Correct. Since the 17 corporations do not seem to be operated as separate entities, and the respective corporation's assets are intermingled for use toward a common business purpose.

Assume Charlotte, Candice, Greg, Patty, Chris, Ray and Matt, are all of the directors of Absolute, Inc., a Delaware corporation. When Absolute is looking to open a new factory in California, Candice suggests that Absolute purchase land in Santa Barbara. Assume, for this Question, that Charlotte, Candice, Greg, Chris, Ray and Matt, each own a part of the parcel of land in Santa Barbara. Charlotte, Candice, Greg, Chris, Ray and Matt vote to approve the sale, subject to Patty's vote. Patty then votes to approve the sale, and Charlotte, Candice, Greg, Chris, Ray and Matt, share the $9 million profit on the sale of the Santa Barbara property. The shareholders do not vote on the transaction. The Delaware Corporations code provides, in pertinent part as follows:§ 141(b): "The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors unless the certificate of incorporation or the bylaws shall require a vote of a greater number." § 144(a)(1): "[No contract or transaction between a corporation and 1 or more of its directors or officers ... shall be void or voidable solely for this reason if...] the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum" If this transaction is challenged and the corporation's Bylaws do not include any provisions which would alter the code sections above, then... A. The challenge will be subject to the Business Judgment Rule since the transaction has been cleansed. B. The transaction cannot be cleansed by only one board member. Cleansing requires a majority and without a shareholder vote, the transaction has not been cleansed. C. Although the transaction may proceed, Charlotte, Candice, Greg, Chris, Ray and Matt will still need to prove the intrinsic fairness of the deal with respect to any profit they received. D. The deal may be voided since all real estate acquisitions in Delaware that exceed $10 million are subject to shareholder approval.

A. The challenge will be subject to the Business Judgment Rule since the transaction has been cleansed. Correct. The transaction was approved by a majority of the disinterested directors. Even though there was only one disinterested director, that approval will be covered by the Business Judgment Rule.

Jennifer and Adam are engaged and are trying to save money to buy a new house. Their good friends Steve and Susie are getting married Sunday, May 27th, and Jennifer and Adam invite Susie's dad, Rex to stay at their (Jennifer and Adam's) house for the entire wedding weekend. Rex is the president of a Fortune 500, publicly traded, company called Frozen Foods, Inc., and Jennifer and Adam know this. Rex tells the bartender at the wedding, "If you make my drinks extra strong, I will give you a hot stock tip." The bartender says "ok" and then Rex tells the bartender about Frozen Food's, (extremely lucrative and highly confidential) new contract to supply to entire U.S. Army that will be announced in June. It turns out that the bartender is a good friend of Jennifer, and he tells her about the entire conversation with Rex. Jennifer tells Adam the entire conversation, and on Tuesday, May 29th, Jennifer and Adam buy 10,000 shares of Frozen Foods, Inc. at $9/share and sell on June 29th at $27/share for a profit of $180,000. Have Jennifer and Adam violated the current securities laws? A. Yes, Jennifer and Adam were tippees and traded using inside information. B. No, because the bartender did not receive a benefit by telling Jennifer, and Jennifer did not receive a benefit by telling Adam. C. No, because Rex did not provide the information to Jennifer and Adam. The bartender, who was neither an insider, nor a constructive insider of Frozen Foods, provided the information. D. No, even if Jennifer has violated the securities laws, Adam has not because the portion of SEC Rule 10b5-2, relating to communications between spouses would not apply to an engaged couple, and as a result, there would be no misappropriation here.

A. Yes, Jennifer and Adam were tippees and traded using inside information. Correct. Since Rex breached a duty by divulging material, non-public information in exchange for a personal benefit. The bartender then told Jennifer about the conversation, so Jennifer and Adam knew of the breach. Therefore, Jennifer and Adam violated Rule 10b-5 by buying shares of Frozen Foods, Inc.

Shareholder proposal and bylaws changes

Federal law allows shareholders to place a proposal on the corprraion;s proxy statement to be voted on by other shareholders. Shareholder proposals take form as recommendations and are not binding. Proposals may be excluded if it relates to an ordinary business matter, or is not relevant to the corporation's business.

What is a say on pay?

Federal laws also mandates that public companies provide the shareholders will "say on pay" an advisory vote on the executive compensation packages of their top five executives

what is rights of first refusal

Rights of first refusal are a contractual right that gives a party the option to purchase a property or asset before it can be sold to a third party. In the context of corporate law, a right of first refusal may be granted to existing shareholders, allowing them the option to purchase new shares of stock before they are offered to outside investors. For example, if a shareholder wishes to sell their shares in a corporation, the other shareholders may have the right of first refusal, giving them the option to purchase the shares before they are offered to anyone else.

LLP

Same as GP except that they are 1. All partners personally liable for there own tortious acts and may participate in management of partnership business 2. Supervisory partnership 3. There needs to be a filing.

LLLP (Limited Liability Limited Partnership)

Same as LP. Limited partners - Same as LP, Each limited partner is liable only to the extent go her capital contribution and thus no personal liability If a limited partner is found to have taken on the role of a general partner, they may become fully liable for the partnership's obligations and debts, just like a general partner. This would eliminate the limited liability protection that is typically afforded to limited partners in an LLLP. General partners (LLP)- personal liable for any tortuous claim and have supervisory liability.

How are the articles and by laws amended?

Article: a shareholder vote is required to amend the articles. But the board initiates the process. By Laws: the shareholders share their power with the board and they can amend the bylaws

At what point do BOD get elected?

At the initial meeting, After filing the articles and adopting bylaws the corporation must also elect directors and conduct other important business including opening accounts, issuing stock, and approving various form agreements such as corporate sale and the form stock certificate.

Jenny is the CFO of Epsilon Corp., a publicly traded company. During a dinner conversation, Jenny tells Aisha, her bestfriend of twenty years, material nonpublic information about Epsilon Corp. Aisha responds, "well you know I have to trade on that!" Aisha immediately sends a text to her daughter Heather telling her the information she learned from Jenny because she knows that her daugther is struggling to pay her college tuition. The next day both Aisha and Heather purchase shares in Epsilon Corp. Does Heather have any liability under Rule 10b-5? A Yes, Hester is liable because she owes a duty to her mother. B Yes, Heather is liable because the information was passed to her in order to help her pay her college tuition so long as she knows or should know that the information was passed to her in breach of a duty. C. No, Heather is not liable because her mother Aisha disclosed her intention to trade to Jenny. D. No. Heather is not liable because she did not solicit the information from her mothe

B Yes, Heather is liable because the information was passed to her in order to help her pay her college tuition so long as she knows or should know that the information was passed to her in breach of a duty. Correct. Heather is liable as a tippee if it can be proven that the tipper (her mother Aisha) is liable because she passed the information for a personal benefit. One personal benefit is a gift to a trading relative or friend and because the information was passed to her in order to help her pay her college tuition that would constitute a gift. Once the tipper is liable, the tippee (Heather) is liable so long as she knows or should know that the information was passed to her in breach of a duty. Jenny is the tipper and Aisha and Heather are tippers

Hector and Hans are co-promoters working together to form H&H Corp. Before H&H Corp. is formed, Hector and Hans sign a lease agreement with Linda Landlord. Hans and Hector sign the lease: "Hans and Hector, promoters for H&H Corp., a corporation to be formed." Once H&H is formed, it formally adopts the lease and begins making payments on the lease. Six months later, H&H suffers a financial reversal and cannot pay its lease obligations. From whom may Linda seek to recover under the lease? A. Hans and Hector, only B. H&H Corp., only C. Either from Hans and Hector or from H&H Corp. D. Linda must first proceed against H&H Corp. and then may proceed against Hans and Hector if and only if, H&H cannot pay..

C. Either from Hans and Hector or from H&H Corp. Correct. Since a party to a contract with promoters on behalf of a corporation that has not been formed at the time of the contract, may proceed either against the promoters or against the corporation that has adopted the contract.

Bob and Andrew form a corporation called Shoes and Socks, Inc. ("SSI"). SSI sells shoes and socks in its store on Main Street. Bob and Andrew are both shareholders in SSI, each owning 50% of the stock. Andrew is the president and works in the SSI store. Bob does not work for SSI; he is only a shareholder. One day, Fred comes into the SSI store looking for shoes. Andrew is working that day and suggests that Fred try on a pair of the newest shoes from Fad Footwear. When Andrew goes to get the shoes, he sees the warning on the Fad Footwear box that says: "THE SOLES OF THESE SHOES ARE COATED WITH A PROTECTIVE COVER THAT IS VERY SLIPPERY. DO NOT WEAR UNTIL YOU HAVE REMOVED THE PROTECTIVE COVER!!!!" However, Andrew gives the shoes to Fred without removing the protective cover because Andrew does not want to remove the protective cover until the shoes are actually sold. He tells Fred to put on the shoes and walk around the store and see how they feel. Andrew does not warn Fred about the protective cover or that the shoes might be slippery. Fred puts on the shoes, takes three steps, slips (because the protective cover is indeed very slippery) and breaks his ankle. Fred wants to sue. Assuming that Andrew was indeed negligent, against which parties would Fred have a claim? A. Fred will have a claim against SSI, but not against Andrew or Bob because the corporate structure will protect Andrew and Bob from any liability. B. Fred will have a claim against SSI and against Andrew but not against Bob. C. Fred will have a claim against Andrew but not against SSI or Bob, because only Andrew was negligent. D. Fred will have a claim against SSI and probably Bob and Andrew because Andrew's negligence will provide a basis for Fred to pierce SSI's corporate veil.

B. Fred will have a claim against SSI and against Andrew but not against Bob. Correct. Fred will have a claim against both SSI AND against Andrew. SSI will be liable because its agent, Andrew, acting on SSI's behalf, committed negligence. Andrew will be liable because he committed negligence, and a corporation does not protect an individual from liability for his own negligence. Bob will not be liable because he is protected by the corporate structure.

Lauren and Madison are limited partners in Choice Art, Limited Partnership. The general partners, David and Susan have run up tremendous debt, deceived creditors, and commingled their personal funds and Choice Art's funds. Furthermore, Lauren and Madison would have discovered this fraud and wrongdoing had they merely reviewed the quarterly reports, which were delivered to them on a regular basis. Now, Choice Art is insolvent, and David and Susan have no money. Given this gross neglect, Carrie, one of the Choice Art creditors, sues Lauren and Madison personally for all the debts of Choice Art. What is the likely result? A. Lauren and Madison are not liable, provided they filed a statement of "non-responsibility" with the Secretary of State. B. Lauren and Madison are not personally liable, even if not reading the quarterly reports was negligent. C. Lauren and Madison are personally liable for the debt but only to the extent of their percentage interest in Choice Art, L.P. D. Lauren and Madison might be liable, but only if Carrie can show that they knew or should have known of the lack of formalities, the commingling of funds and the fraud-like conduct AND they took no action to stop it.

B. Lauren and Madison are not personally liable, even if not reading the quarterly reports was negligent. Correct. Since limited partners are not liable for the debts and obligations of a limited partnership, even if they are negligent in reviewing the reports.

Leila is a partner in a limited liability partnership that owns and operates a restaurant. Although Leila is not involved in the day to day operations of the restaurant. Leila does have responsbility for supervising all of the waiters. Connie slips and falls on water negligently left on the restaurant floor by a waiter. If Connie sues Leila personally for her injuries, what is the likely result? A. Leila will be liable because she is a partner in the limited liability partnership. B. Leila will be liable because she has supervisory responsibility for the person who committed the negligent action. C. Leila will not be liable because she did not engage in the negligent conduct. D. Leila will not be liable so long as Connie has never met Leila.

B. Leila will be liable because she has supervisory responsibility for the person who committed the negligent action. Correct. Leila will be liable because she has supervisory responsibility for the person who committed the negligent action.

Wood is a senior vice president of Soda Sales Corp., a Delaware corporation ("SSC"). Wood is offered the opportunity to buy a new soda recipe for SSC from Ivan Inventor. Wood does buy the recipe for SSC, but, unfortunately, the recipe is a flop, and SSC loses $2 million on the transaction. Nadia, an SSC shareholder learns of Wood's actions and is upset. Without making demand on the board, Nadia sues the board, alleging that the board failed to monitor Wood who was negligent in purchasing the recipe. Assuming all of the directors on whom Nadia would have made demand are disinterested and independent, what standard will the court use to evaluate demand futility? A. Nadia must raise a reasonable doubt that Wood believed that the opportunity to buy the recipe was in SSC's best interest. . B. Nadia must raise a reasonable doubt that directors could satisfy their obligations under Caremark. C. Nadia must raise a reasonable doubt that Wood's decision to buy the recipe was informed. D. Nadia must raise a reasonable doubt that directors were reasonably informed of Wood's actions.

B. Nadia must raise a reasonable doubt that directors could satisfy their obligations under Caremark. Correct. Proving demand futility can occur in two ways, by creating a reasonable doubt about directors disinterest and independent, or by creating a reasonable doubt about the challenged transaction. Nadia's claim alleges a breach of the duty to monitor, which is governed by Caremark. Thus, Nadia must demonstrate demand futility by raising a reasonable doubt under the standards articulated in Caremark.b.

Darren and Darleen want to start a business that develops, produces and sells household appliances. Darren and Darleen form D&D Corp. to operate this business. Darren and Darleen file Articles of Incorporation for D&D Corp. D&D Corp. has an initial meeting and adopts bylaws. D&D Corp. issues a total of 100 shares of stock, 50 shares to Daren and 50 shares to Darleen, in exchange for the $100 dollars each that Daren and Darleen contribute to D&D Corp. In order to finance its operations D&D Corp. borrows $250,000 from a local bank. D&D Corp. follows some corporate formalities but, after its initial organizational meeting, does not conduct meetings. D&D does not carry liability insurance. After about 15 months in business, D&D breaches a contract with Petra, and Petra sues D&D Corp. and Darren and Darleen personally. One of Petra's justifications to support her claim against Darren and Darleen personally is that D&D Corp. was not adequately capitalized. Is Petra likely to convince a court that D&D Corp. was not adequately capitalized? A. No, because Darren and Darleen contributed a total of $200 to D&D Corp. B. Yes, because Darren and Darleen only contributed a total of $200 to D&D Corp., and D&D Corp. had $250,000 in loan obligations. C. No, because D&D Corp. borrowed $250,000 and loans are included in capitalization. D. Yes, because D&D Corp. did not buy insurance.

B. No, because D&D Corp. borrowed $250,000 and loans are included in capitalization. Since the $250,000 loan would be included in the capitalization of the corporation given that both money that is invested AND money that is borrowed may be used to satisfy obligations of the corporation.

Regina is a limited partner in Montgomery LP ("Montgomery"). Nadia and Fatima are general partners in Montgomery. On December 17, Anthony entered into a major contract with Montgomery. Two months later Anthony learns that Montgomery does not have the resources to pay its obligations under the contract. If Anthonty seeks to hold Regina liable for the contract, what is the likely result? A. Regina will be liable because she is a partner in the limited partnership. B. Regina will be liable, but only if she had contact with Anthony that led Anthony to reasonably believe that she was a general partner. C. Regina will not be liable unless she is also a general partner. D. Regina will not be liable unless supervisory liability can be established.

B. Regina will be liable, but only if she had contact with Anthony that led Anthony to reasonably believe that she was a general partner. Correct. Generally a limited partner in a limited partnership is shielded from liability. However, under the revised limited partnership acts, if a limited partner participates in control and has direct contact with a third party under circumstances in which the third party reasonably believes that the limited partner is a general partner, liability can attach.

Games, Inc. is a small company that manufactures different forms of children's games. Its annual gross revenue is about $650,000. Games' president, Finn Funn, has decided to make a contribution to the ET Association, Funn's favorite charity. The ET Association is a charity dedicated to protecting the rights of extraterrestrial beings, so that when any alien's arrive on Earth, they will be treated fairly and justly. Even though Games will need to borrow money to make the gift, the Board of Directors of Games approves the gift in the amount of $3,250,000. Mad Mabel is a Games, Inc. shareholder who sues to block the gift. A court would most likely find that... A. The gift is protected by the Business Judgment Rule. B. The gift is not allowed. C. The gift, while not protected by the Business Judgment Rule, was not negligent if it was made in good faith. D. The gift should be allowed, provided that it is not made anonymously.

B. The gift is not allowed. Correct. The gift was made to a pet charity and was excessive (five times annual gross revenue) when compared to the Games earnings. Therefore, it would probably be deemed ultra vires or waste and not allowed.

B. The gift was made to a pet charity and was excessive (five times annual gross revenue) when compared to the Games earnings. Therefore, it would probably be deemed ultra vires or waste and not allowed.

Marina owns 77% of a company known as Racing Car Parts, Inc. ("RCPI"). RCPI is a Delaware corporation. Quinn owns 4% of RCPI, Owen owns 3% and a number of other shareholders with much smaller percentages hold the balance of the shares. Marina is the chairman of RCPI's board of directors. One day, RCPI receives an offer from Even Faster Cars, LLC ("EFC") to purchase RCPI's most successful division, the "Gears and Gadgets" division for $40 million. RCPI has two other divisions, but they are far less lucrative than the Gears and Gadgets division. Following the sale, RCPI plans to issue a huge dividend to its shareholders and continue to operate the other two divisions, which have a combined value of approximately, $20 million. Marina really wants to sell the Gears and Gadgets division to EFC because she is planning to use her portion of the dividend to retire and buy a bed and breakfast in Vermont. The sale to EFC is approved by a majority of the Board. Owen sues Marina for breach of fiduciary duty, claiming that Marina is a dominant shareholder and the transaction is unfair since the Gears and Gadgets division is critical to RCPI's success. Owen asserts that without the Gears and Gadgets division, the RCPI will flounder. What standard will the court likely apply to evaluate the transaction? A. Whether the transaction was intrinsically fair. Incorrect. The transaction would be evaluated under the Business Judgment Rule since Marina does not have a conflict of interest and the other shareholders would receive a pro rata percentage of any divided arising out of the transaction. B. Whether the Board's decision satisfied the Business Judgment Rule. C. Whether the transaction was approved by a vote of the shareholders if Marina's shares are not included in such a vote. D. Whether the board of directors was appointed by Marina.

B. Whether the Board's decision satisfied the Business Judgment Rule. Correct. The transaction would be evaluated under the Business Judgment Rule because Marina does not have a conflict of interest and the other shareholders would receive a pro rata percentage of any dividend arising out of the transaction. A conflict of interest would arise if Marina stood to gain a personal benefit from the transaction that is not equally shared by all shareholders, such as if she were selling her own personal interest in the division to EFC. However, in this case, Marina's interest is aligned with that of the other shareholders, who would all benefit from the sale through the pro rata dividend. Therefore, the transaction would likely be evaluated under the Business Judgment Rule.

Before, they form XYZ Records, Inc., George, Paul, Ringo & John enter into a contract with Exploitation, Inc. on behalf of "XYZ Records, Inc., a proposed corporation." The contract provides that XYZ Records will provide Exploitation with 10 new songs per year for the next 3 years. XYZ, Records, Inc. is formed shortly after the contract is signed and ratifies the Exploitation contract. George, Paul, Ringo & John are the only shareholders. But, XYZ Records only provides 8 songs the first year and then no songs thereafter. Who is potentially liable to Exploitation for breach of the contract? A. XYZ Records, only. B. XYZ Records and George, Paul, Ringo and John. C. George, Paul, Ringo and John, would be liable, but only for any breach (or portion of the breach) that occurred prior to incorporation, and XYZ Records would be liable but only for any breach (or portion of the breach) that occurred after incorporation. D. George, Paul, Ringo and John only.

B. XYZ Records AND George, Paul, Ringo and John are potentially liable since George, Paul, Ringo and John signed the agreement as promoters, and XYZ Records ratified the agreement, and there was no novation releasing George, Paul, Ringo and John from liability to Exploitation

B. XYZ Records and George, Paul, Ringo and John. Correct. XYZ Records AND George, Paul, Ringo and John are potentially liable since George, Paul, Ringo and John signed the agreement as promoters, and XYZ Records ratified the agreement, and there was no novation releasing George, Paul, Ringo and John from liability to Exploitation.

Roger is the CEO of Acme, Inc. a publicly-held company. Acme is about to be acquired by Cable Corp. for a large premium over Acme's current stock price. There has been no public disclosure of this pending deal. Roger is having dinner with his old friend Stan, who has no information about the deal. Stan is having money problems, and Roger says, "Stan, I don't want you to give me anything for this information. This is a gift. Buy Acme stock tomorrow. We are going to announce a sale of the company next week." Based on this information, Stan buys some Acme stock and makes a substantial profit when the deal is announced. Does Roger have potential liability under Rule 10b-5? A. Yes, because Roger is liable for any trades that arise out of any information he disseminates whether or not he receives a tangible benefit. B. Yes, because the requirements for imposing "tipper liability" have been met here. C. No, because Roger gave the information as a gift and therefore, received no personal benefit for the information. D. No, because Roger will be liable under Section 14(e) and that preempts Rule 10b-5 when an acquisition is in process.

B. Yes, because the requirements for imposing "tipper liability" have been met here. Correct. Since Roger, an insider at Acme, provided Stan with material, non-public information and received a personal benefit since the law treats the gift of such information as a personal benefit.

Andrew is Sylvia's full time assistant. Sylvia instructs Andrew to order three brand new computers from Giant Computer Company, Inc. ("GCC"). Sylvia provides Andrew with her personal information and emails a letter to GCC, authorizing Andrew to make computer purchases on her behalf in amounts up to $10,000 in any calendar year. In January Andrew orders three refurbished computers from GCC in Sylvia's name, for a total purchase price of $5,000. When Andrew purchases them, he is told that all purchases of refurbished computers are nonrefundable, but Andrew is so excited to get them for half price he agrees to the deal without talking to Sylvia first. When Sylvia sees that the computers are refurbished, she is furious. She calls GCC and demands that she be allowed to return the refurbished computers. GCC says, "A deal is a deal. We will not refund your money." Sylvia fires Andrew, who leaves town and does not provide Sylvia with any contact information. Eventually, Sylvia decides to try out the refurbished computers. Two of them work fine, but one of them will not work at all. Each computer came with a 60-day warranty, and it has only been 45 days since the purchase. Sylvia asks GCC to service or exchange the broken computer under the terms of the warranty. GCC refuses. GCC says that they had no deal with Sylvia. They made their deal with Andrew, and the warranty is "nontransferable". Sylvia explains that Andrew no longer works for her, and she has no way to contact him. GCC continues to refuse to fix Sylvia's computer. Which of the following is the most accurate statement about Sylvia's rights? A. She has no personal rights to enforce the agreement; Only Andrew is authorized to enforce the agreement. B. GCC is bound to Sylvia by the agreement, and Sylvia can enforce her warranty rights. C. If Andrew had acted under actual authority, then Sylvia would be able to enforce the agreement, but since Andrew acted without express or implied authority from Sylvia, then Sylvia may not enforce the agreement with GCC. D. Sylvia may enforce the warranty, but only because she "accepted the benefits" of the deal by commencing to use the computers.

BGCC is bound to Sylvia by the agreement, and Sylvia can enforce her warranty rights. Correct. Since Andrew was acting as Sylvia's agent (whether through apparent authority or through ratification by Sylvia) and created a binding agreement between GCC and Andrew's principal, Sylvia, that may be enforced by either party.

Board Voting

Board Action: BOD by majority vote unless a higher vote is required Quorum Rules:boards acts are valid as long as they are approved by the required vote and a quorum is present. A quorum is the number of people needed to be present in order to conduct business. A quorum is usually the majority. If a quorum is present, then the affirmative vote needed is enough to pass an action. A board of directors votes on a per capita, not on a pro rata basis. Each director gets one vote. The percentage of stock they hold is not relevant.X

John and Michael are the sole partners in a general partnership that sells groceries. When the partnership began, John contributed $50,000 to the business to be used to operate the business. John and Michael agree that any profits of the business shall be split so that John receives 60% of the profits and Michael receives 40% of the profits. John and Michael also agree that Michael will be responsible for managing the day to day operations of the grocery store business, and that John will have no role in such management. After ten years, John and Michael decide to terminate the business. At that time, the business has made $40,000 in profis, but John has not been repaid his capital contribution. Assuming a court applies the rule adopted in Kovacik, what is the best argument that John can make to recover most of his capital contribution? A. As a partner, Michael is not entitled to compensation. B. John has not been repaid his capital contribution. C. Michael received compensation for his services. D. John and Michael have made an agreement about how profits will be split. .

C. Michael received compensation for his services. Correct. Since when one partner makes a capital contribution and the other partner contributes services without receiving any compensation, the capital contribution must be repaid from any profits, but neither party is liable to the other for any loss. However, when the partner who contributes services receives compensation, then such partner will be responsible for losses.

Alvin is the President of AZ Products, Inc. ("AZ"), a corporation whose stock is publicly traded. Morgan is an AZ shareholder. One evening Morgan runs into Alvin at a party. Alvin knows Morgan is an AZ shareholder. Alvin, who has had too much to drink, tells Morgan that if she will drive him home safely, he will give her confidential information about the company. Morgan drives Alvin home and at the end of the ride, Alvin says, "Thanks for the ride. As promised, I am telling you that AZ is about to announce a huge breakthrough in our research. Do not sell your stock." Morgan, who was thinking about selling her stock in AZ determines not to do so, based upon this information from Alvin. When AZ makes its big announcement, the AZ stock soars, and Morgan's AZ shares are worth $100,000 more than they would have been had she sold them as she had originally intended. Would Morgan face potential liability under Rule 10b-5? A. Morgan would face potential liability for the profit of $100,000 she made by holding on to her AZ shares, provided that it can be shown that she did not sell based upon the information she received from Alvin. B. Morgan faces potential criminal liability for violating Rule 10b-5 since she received material non-public information from an insider who received a personal benefit. C. Morgan will not be liable under Rule 10b-5 because she did not buy more AZ shares based on the information from Alvin. D. Morgan is not liable under Rule 10b-5 because giving an intoxicated person a ride home does not qualify as a personal benefit for that person.

C. Morgan will not be liable under Rule 10b-5 because she did not buy more AZ shares based on the information from Alvin. Correct. Since Morgan would be liable under Rule 10b-5 only if she either bought or sold a security based upon the information she received from Alvin, and she did neither.

Fatima is the CEO of Alpha, Inc., a publicly traded company. Fatima tells her sister Madison that she has been very busy working on a new product launch for Alpha, Inc., noting that most people at Alpha believe that the new product will "revolutionize the industry." While several news outlest have been reporting about the new product and its potential launch, none of the outlets have the specifcis about which Fatima tells Madison. In fact, Fatima confidentially tells Madison that while most people are confident that the product will be a success, there are a few who are significantly concerned that its glitches will prevent it from obtaining success. After the conversation, Madison purchases stock in Alpha, Inc. Six months later, the new product launches and Alpha's stock triples in value. If the Securities and Exchange Commission brings a lawsuit against Madison under Rule 10b-5, what is the strongest evidence Madison can present to demonstrate that the information upon which she traded was not material? A. That news outlets had been reporting about the new product and its potential launch. B. That Madison traded six months before the product launch. C. That, at the time Madison traded, people were significantly concerned that glitches would prevent the product from obtaining success. D. That most people believed that the new product would "revolutionize" the industry.

C. That, at the time Madison traded, people were significantly concerned that glitches would prevent the product from obtaining success. Correct. Since, when evalutating the materiality of contingent information, materiality depends on balancing the probability and the anticipated magnitude. Thus, evidence that the product may not launch successful could undermine the probability and magnitude and thus undermine materiality.

Sole Proprietorship

Can be formed without public or official filing 1. Do not appear to be acting as co-owners or sharing profits, the business is most likely a sole proprietorship. 2. Business profits are taxed as a sole proprietor's personal income. 3. Creditors of a sole proprietor may seek payment of business debts from assets of the sole proprietorship. Sole proprietors are personally liable for all debts and obligations of their businesses. Sole proprietors may limit their personal liability for business debts through contracts. A sole proprietorship can have more than one employee.

limited liability

Can build up the company without having the risk of personal liability 1. Even if they are responsible for supervising a negligent employee. 2. Even if they knew of the lack of formalities and fraud-like conduct by the general partners 3.

Redemption Rights

Company buying out - call options - The corporation has the right to redeem a buyback shirts out of fixed price. meaning calling their shares back from their shareholders. . This is to redeem or get rid of shares that have a special rights attached to them because such shares required a corporation to spend greater resources on it Put options - Shareholders' right to force the company to buy its years. This allows shareholders to have an exit strategy when the company is doing bad

Doug, Robin and Jake are directors in DRJ Corp., a Delaware corporation ("DRJ"). Doug and Robin become romantically involved for a year and then break up. Doug and Jake each hold 2% of DRJ's outstanding shares; Robin holds 8%. There are three other individuals who each hold 12% of DRJ's outstanding shares, and approximately 40 other individuals who hold the balance of DRJ shares. DRJ is struggling to keep costs down in a competitive marketplace. However, Robin, who is also DRJ's president, negotiates a deal with Super Supplier Co. Super Supplier will provide raw materials to DRJ at substantially reduced costs, which would lower DRJ's manufacturing costs and secure DRJ's financial success. Because of the breakup, Doug hates Robin and decides to sabotage the Super Supplier deal to make Robin look bad. At the board meeting to approve the Super Supplier deal, Robin votes to approve the deal, Jake abstains and Doug votes against it. Therefore, the Super Supplier deal never happens, and DRJ continues to struggle. A few months later, Doug sends an email to a friend bragging that he ruined the Super Supplier deal and admits that he did not care if the deal was good for DRJ; his sole motivation was to make Robin look bad. However, Doug accidentally sends the email to the entire company. What fiduciary duty, if any, did Doug likely breach? A. Doug has likely breached his duty of care. B. Doug has likely breached the separate fiduciary duty of good faith. C. Doug has likely breached his duty of loyalty. D. It is unlikely that Doug has breached any fiduciary duty, his actions must be addressed under a breach of contract claim.

Correct. Since Doug has acted in bad faith, and the Delaware Supreme Court in Stone v. Ritter explained that a showing of bad faith by a director violates that director's duty of loyalty.

GP: Do courts soley focus on agreement to determine whether it is a a general partnership?

Courts focus on the conduct, intention and relationship of the party Sharing profits and losses Ownership of partnership assets Joint management and control Joint liability to creditors Intentions of the parties Compensation Contribution of capital Loans to organization

What is Cumulative voting

Cumulative voting is a method of voting used in corporate elections that allows shareholders to cast all of their votes for a single candidate or to distribute their votes among multiple candidates. Under cumulative voting, each shareholder is entitled to a number of votes equal to the number of shares they own multiplied by the number of directors being elected. For example, if a corporation has five directors to be elected and a shareholder owns 100 shares, they would be entitled to 500 votes (100 shares x 5 directors).

Which entity should you choose if you would like to freely transfer your financial interest? A. A genenral partnership. B. A limited partnership. C. A limited liability company. D. All of the above.

D. All of the above. Correct. Since all of the entities listed in answer a., b. and c., allow for the free transfer of financial interests so the correct answer is all of the above.

Bob, a multi-millionaire, forms a corporation called Art, Inc. in order to operate an art gallery that buys and sells rare works of art. Bob contributes $5 million to Art in exchange for his shares in the corporation. Art uses most of the $5 million to purchase rare works of art. Art meticulously follows all of the corporate formalities. However, because Bob thinks that insurance is a waste of money and Bob is the President of Art, Art does not purchase any insurance. Unfortunately, an unexpected storm causes a flood, which destroys Art's gallery and all of the artwork. A few days after the storm, a curious individual named Phil, enters what is left of the gallery in an effort to see what damaged artwork looks like. While on the Art gallery premises, Phil is injured. Phil sues Art, claiming that Art should have posted caution signs. The court finds that an Art employee who was instructed to post caution signs failed to do so, and, Phil gets a judgment against Art for $75,000. Since Art has no remaining assets and Bob is rich, Phil brings a suit seeking to hold Bob personally liable for the $75,000 as the "alter ego" of Art. In a suit by Phil, should Phil be allowed to pierce Art's corporate veil? A. Phil should be allowed to pierce Art's corporate veil because Art did not have adequate insurance, and, if it had such insurance, Phil would have been able to recover. B. Phil should not be allowed to pierce Art's corporate veil because $5 million constitutes adequate capitalization, and, if a corporation is adequately capitalized, other factors are not relevant in a piercing analysis. C. Phil should be allowed to pierce Art's corporate veil because, without piercing Phil will not be able to recover his $75,000 in damages, and that constitutes injustice. Incorrect. Piercing the corporate veil requires a unity of interest. D. Phil should not be allowed to pierce Art's corporate veil because corporate formalities were observed and Art was adequately capitalized.

D. Phil should not be allowed to pierce Art's corporate veil because corporate formalities were observed and Art was adequately capitalized. Correct. Since piercing the corporate veil requires a unity of interest. Here, the facts that Art followed the corporate formalities and was adequately capitalized should withstand Phil's efforts to pierce the veil. (Note that absent a specific statutory mandate, there is no requirement that corporations carry insurance, and $5 million is more than adequate capitalization.)

Charlotte, Candice, Greg, Patty, Chris, Ray and Matt, are all of the directors of Absolute, Inc., a Delaware corporation. When Absolute, Inc. is looking to open a new factory in California, Candice suggests that Absolute purchase land that her family owns in Santa Barbara. The transaction is approved by Charlotte, Greg, Patty, Ray and Matt; Chris votes no and Candice abstains. Absolute, purchases the land for $10 million. Candice's family, who has owned the property for many years, makes a $9 million profit on the sale. The details of the Candice's connection to the land and the profit to her family had all been disclosed to the board in advance. The shareholders do not vote on the transaction. The Delaware Corporations code provides, in pertinent part as follows: § 141(b): "The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors unless the certificate of incorporation or the bylaws shall require a vote of a greater number." § 144(a)(1): "[No contract or transaction between a corporation and 1 or more of its directors or officers ... shall be void or voidable solely for this reason if...] the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum" If this transaction is challenged and the corporation's Bylaws do not include any provisions which would alter the code sections above, then... A. The Board would have to show that the transaction was fair and reasonable. B. The transaction will be void or voidable without further inquiry because it was neither approved by the unanimous board nor ratified by the shareholders. C. The Board would need to show that after a thorough investigation there were no other suitable properties available at a lower price. DThe Board's approval of the transaction will be evaluated using the Business Judgment Rule.

D. The Board's approval of the transaction will be evaluated using the Business Judgment Rule. Correct. The transaction was approved by a majority of the disinterested directors, and that approval will be evaluated under the Business Judgment Rule.

Wood is a senior vice president of Soda Sales Corp., a Delaware corporation ("SSC"). Wood is offered the opportunity to buy a new soda recipe for SSC from Ivan Inventor. Wood does buy the recipe for SSC, but, unfortunately, the recipe is a flop, and SSC loses $2 million on the transaction. Nadia, an SSC shareholder, learns of Wood's actions and is upset. Without making demand on the board, Nadia sues the board, alleging that the board failed to monitor Wood who was negligent in purchasing the recipe. The board sets up a special litigation committee that investigates the lawsuit and eventually files a motion to dismiss. Assuming Nadia has demonstrated demand futility, what standard will the court use to evaluate the motion to dismiss? A. The court must defer to the decision of the committee. B. The court must determine if the committee's decision was wrongful. C. The court must determine if members of the committee are disinterested and independent and then if the transaction at issue was a valid exercise of business judgment. D. The court must inquire into the independence and good faith of the committee and reasonableness of the investigation and then apply its own business judgment.

D. The court must inquire into the independence and good faith of the committee and reasonableness of the investigation and then apply its own business judgment. Correct. When demand is excused as futile, a court evaluates a motion to dismiss under Zapata which requires that the court inquire into the independence and good faith of the committee and reasonableness of the investigation and then apply its own business judgmen

Three friends D, E and F agree to go into business installing home insulation. They agree to share profits and properly register their partnership as HomeInsulate LLP. Despite opposition by D and E, F signs a contract to undertake an insulation project for a shopping center, a type of commercial project the business has never undertaken before. When the project falters and the shopping center sues, who is liable? A. nobody (neither the partnership nor the partners) because F acted without actual authority in signing a contract beyond the partnership's usual business B. only the partnership, because it is an LLP in which the partners have limited liability and F was acting with apparent authority C. all three partners D, E and F, because the act of any one partner binds the partnership and all partners share jointly and severally in partnership liability D. only F, because he signed the contract and lacked authority to bind the partnership given that the partnership name limits the business to residential projects

D. only F, because he signed the contract and lacked authority to bind the partnership given that the partnership name limits the business to residential projects The answer is D. Only F would be liable for signing a contract beyond the scope of the partnership's usual business. The partnership is formed as a limited liability partnership (LLP), which means that the partners generally have limited liability for the partnership's debts and obligations. However, this protection does not apply when a partner acts outside the scope of the partnership's usual business or without authority. In this case, F signed a contract to undertake a commercial project, which is beyond the partnership's usual business of installing home insulation. Therefore, F lacked authority to bind the partnership to the contract and would be personally liable for any resulting damages or obligations. D and E would not be liable because they opposed the project, and the partnership as a whole would not be liable because F acted without actual authority.

,Doug, Robin and Jake are directors in DRJ Corp., a Delaware corporation ("DRJ"). Doug and Robin become romantically involved for a year and then break up. Doug and Jake each hold 2% of DRJ's outstanding shares; Robin holds 8%. There are three other individuals who each hold 12% of DRJ's outstanding shares, and approximately 40 other individuals who hold the balance of DRJ shares. DRJ is struggling to keep costs down in a competitive marketplace. However, Robin, who is also DRJ's president, negotiates a deal with Super Supplier Co. Super Supplier will provide raw materials to DRJ at substantially reduced costs, which would lower DRJ's manufacturing costs and secure DRJ's financial success. . because of the breakup, Doug hates Robin and decides to sabotage the Super Supplier deal to make Robin look bad. At the board meeting to approve the Super Supplier deal, Robin votes to approve the deal, Jake abstains and Doug votes against it. Therefore, the Super Supplier deal never happens, and DRJ continues to struggle. A few months later, Doug sends an email to a friend bragging that he ruined the Super Supplier deal and admits that he did not care if the deal was good for DRJ; his sole motivation was to make Robin look bad. However, Doug accidentally sends the email to the entire company. Axel, an angry shareholder, sues Doug for breach of fiduciary duty. Alex's claim would be most strengthened by evidence that conclusively showed that... A. Doug is not protected by the Business Judgment Rule. B. Doug intentionally sent the email to the entire company. C. Doug believed that the Super Supplier deal was in DRJ's best interest but voted against it just to make Robin look bad. D. Doug did not believe that the Super Supplier deal was in DRJ's best interest, and he would have voted against it under any circumstances.

Doug believed that the Super Supplier deal was in DRJ's best interest but voted against it just to make Robin look bad. Correct. Since, if Doug believed that the Super Supplier deal was in DRJ's best interest but voted against it just to make Robin look bad, he would have acted intentionally with a purpose other than that of advancing the best interests of the corporation, which would establish a failure to act in good faith

Conversion Rights

Downstream conversion - Transfer and preferred stock to common stock. Ex. the common shares have appreciated and value and consistently receive dividends that are higher than the fixed dividend of preference shares Upstream conversion - Converting common to preferred stock

At a regularly scheduled meeting of the board of directors of Lemoncorp, Inc., a Delaware corporation, seven of the twelve directors are present. The directors took several votes at the meeting. All of the votes were approved by four of the seven directors. Have the matters been duly approved by the directors? A. Yes, they have been duly approved because they received an affirmative vote of a majority of the directors present. major B. No, they have not been approved because all matters required to be voted upon by the board require approval by a majority of the board. C. It can't be determined whether it was approved without knowing what, if anything, Lemoncorp's Certificate of Incorporation or Bylaws say about the necessary quorum and the percentage of votes necessary to approve actions at shareholder meetings. D. Yes, it is approved because the board can act without all members being present.

It can't be determined whether it was approved without knowing what, if anything, Lemoncorp's Certificate of Incorporation or Bylaws say about the necessary quorum and the percentage of votes necessary to approve actions at shareholder meetings. Correct. Since one must examine Lemoncorp's Certificate of Incorporation and Bylaws to determine quorum and approval requirements. Absent provisions in the Lemoncorp's Certificate or Bylaws, Delaware General Corporate Law would apply, but first, one must examine the Certificate and Bylaws.

Shareholder power is limited and defined, how come?

It would be deemed void as against public policy. Void because public policy as reflected in corporate statutes, restrict their actions to limited spheres of engagement

Limited in Partnerships

LP - GP and Limited partners have limited partnerships LLLP - Limited and general have limited liability LLP - limites perosnal liability

Blaine, Cecil, and Darleen are the sole shareholders in Target Corp., a corporation. Blaine owns 150 Target shares and Cecil and Darleen each owns 100 shares. Cecil and Darleen have entered into agreement providing that they will vote together on any matters, and in the event of a deadlook, Cecil and Darleen agree to submit the matter to Alex whose decision will be final and binding. Three years after the agreement is signed, Cecil and Darleen disagree about a decision to approve a merger and submit the matter to Alex. Although Alex instructs Cecil and Darleen to vote to approve the merger, Darleen refuses to do so. At the shareholders meeting related to the merger, Blaine and Darleen vote to reject the merger while Cecil votes to approve the merger. Cecil is furious. Cecil has brought suit seeking to enforce Alex's decision by rejecting Darleen's vote and requiring that Target Corp. recognize Alex's voting instructions. Is Cecil likely to succeed? A. Yes, Cecil and Darleen have entered into a valid pooling agreement; Darleen's vote is inconsistent with the agreement and thus cannot be reognized. B. No, Cecil and Darleen have entered into a valid pooling agreement. However, Alex does not have the right to vote Darleen's shares. C. Yes, Cecil and Darleen have entered into a valid pooling agreement; once a deadlock occurred, Alex's instructions must be recongnized as a valid vote. D. No, a pooling agreement is not enforceable unless every shareholder is a party to the agreement.

No, Cecil and Darleen have entered into a valid pooling agreement. However, Alex does not have the right to vote Darleen's shares. Correct. Since absent an additional agreement creating power in Alex to vote on behalf of Cecil or Darleen, Alex is not empowered to vote their shares. Although the pooling agreement is valid, and thus Darleen's votes will be rejected because they violated the pooling agreement, Alex's instructions cannot be recognized.

Do closely held companies share their stock on the public market?

No. Closely held companies do not have an active market

Officers Power?

Officers are granted more power because it is them and not directors who run the day to day affairs of the corporation. hire, set salary, review and if necessary fire. Vote by majority, if equal, re-voteo While officers have the authority to act on behalf of a corporation, directors do not.

Parent vs wholly subsidiary

Parents own 50% or more of the company, A company that owns the corporation 100% and the smaller company is callled wholly owned subsidiary

Annie is Paul's agent. Paul instructs Annie to enter into a contract with Toni on Paul's behalf. Annie identifies herself to Toni as Paul's agent and then enters into the contract requested by Paul, signing the contract as "Annie, agent for Paul." Who is bound to Toni?

Paul alone. Correct. Annie is acting with actual authority for a principal, so only Paul would be liable under the contract with Toni.

The Public Offering Process

Pre Filing period - Companies are supposed to limit their disclosure or remain quiet during this period. So long as they do not mention security offering. - During the pre-filing period, a company can release regularly released factual business information, including advertisements of products and services. However, such information must be materially similar to prior releases in terms of time, manner and from - During the pre-filing period, any company can release regularly released factual business information, which is factual business information similar to information that a company has previously released in the ordinary course of business. The waiting period - The prayer between filing the preliminary registration statement and the time that the SEC declares the registration effective. During the waiting period the company can make offers but cannot make any sales of it security or Make binding agreements to accept offers. The post-effective period - The time from when a company is the current effective and the company sells a security to the public until distribution end - The company must deliver a copy of the final prospectus to the purchase of every security - the company can now sell its security to the public. The company can accept both offers oral and written Within each grade contains activities that are prohibited the failure to comply with any of the prohibitions is referred to as "gun jumping".

A prospectus is.

The first part of a registration statement, which contains material information about the securities to be offered, the entity issuing the securities, and the risks associated with purchasing the securities. Since the propectus is the first part of a registration statement, which contains material information about the securities to be offered, the entity issuing the securities, and the risks associated with purchasing the securities.

Can shareholders get into an hgrement on appointing officers?

The shareholders agreement related to the election of officers is void as against public policy.

Directors do not have a duty to disclose their decisions to make charitable contributions to shareholders.

True

Pauline owns and operates the Sweet Dreams candy store on Main Street, where Abe works as a part-time employee. When Abe gets to work one day. Abe sees a Sweet Dreams' customer, Tom, whom, Abe believes has stolen a chocolate bar from Sweet Dreams. Although Sweet Dreams instructs everyone who works in the store to never use any force whatsoever with any customer, Abe follows Tom out of the store, pushes him to the ground and searches Tom's pockets. It turns out that Tom has a cell phone case that looks like a candy bar, and Tom had not taken anything from Sweet Dreams. Abe apologizes, but Tom says, "You are out of control; you injured my wrist when you pushed me down, and I am going to sue you and this store." Assuming Tom has a claim against Abe, is it likely that he can extend that claim to hold Sweet Dreams and Pauline vicariously liable for Abe's actions?

Yes, because Abe was acting within the scope of his duties. Correct. Since Abe was working for Sweet Dreams and pursued Abe with the intention of serving Sweet Dream's interests. An employer is vicariously liable for the actions of an employee who wrongfully injures someone in a mistaken effort to prevent shoplifting. Apparent authority is a concept that applies to contract entered into by an agent, not torts committed by an agent.

Ashley, Boden and Candice are the sole shareholders in Ping Pong Palace, a Delaware corporation. Ping Pong Palace provides venues that serve alcoholic beverages and allow patrons to play ping-pong, drink and socialize. Ashley, Boden and Candice are the only members of the board of Ping Pong Palance and all three work full time in the operation and management of Ping Pong Palace. Ashley, Boden and Candice have entered into a shareholders agreement providing that certain dividends will be declared by the Ping Pong Palace board and paid annually so long as a certain earned surplus is maintained. After three years of paying dividends pursuant to the shareholders agreement, Ashley and Boden (over the objection of Candice) refuse to declare and issue dividends. If Candice brings suit against Ashley and Boden seeking to enforce the terms of the agreement, is Candice likely to be successful? A. No, because dividends are paid at the discretion of the board and thus the shareholders agreement is void as against public policy. B. No, because a shareholder agreement is not enforceable once there is a shareholder objection. C. Yes, so long as the minimum earned surplus requirement is sufficient to protect the corporation and creditors. D. Yes, because a shareholders agreement signed by all of the shareholders is valid.

Yes, so long as the minimum earned surplus requirement is sufficient to protect the corporation and creditors. Correct. Because this is a closely-held corporation, courts have allowed shareholders to enter into agreements that intrude on the powers of the board, including agreements related to dividends. However, such agreements must be designed to protect the corporation and its creditors.

Reporting Company

company that is subject to regulation under the Securities Exchange Act of 1934, and thus must file periodic reports with the Securities and Exchange Commission. A reporting company is a company that is subject to regulation under the Securities Exchange Act of 1934, and thus must file periodic reports with the Securities and Exchange Commission.

Difference between corporate piercing and enterprise liability

corporate piercing relates to holding owners/shareholders of a corporation personally liable for the corporation's actions, while enterprise liability relates to holding a parent company liable for the actions or liabilities of its subsidiary companies.

Liquidation Preference

he right to receive proceeds before other shareholders upon dissolution of the company is commonly referred to as a "liquidation preference." Debts holders are entitled to repayments before equity securities. If liquidation occurs, the debt holders receive payment before Equity security holders even with liquidation preference.

When a business owner sets up multiple corporations so that the assets of each are separated from the risks of the others, this use of limited liability

is consistent with public policy, so long as the corporations comply with applicable insurance requirements and the owner doesn't siphon personal funds

What is apparent authority?

is the authority that a third party reasonably believes a partner to have based on the partner's conduct or the partnership's representations. If a partner acts in a way that would lead a third party to reasonably believe that the partner has the authority to act on behalf of the partnership, the partnership may be held liable for the partner's actions even if the partner did not have actual authority - Goes for contacts not torts

Business Organization

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