ACC508 Exam 3

Shareholders

Acq of shares grants equitable oship int in a corp. SHs generally have no right to manage daily affairs of corp, but do so indirectly by electing directors. SH Powers: -approve all fundamental changes to the corp -amend articles of incorp or bylaws -approve mergers or acqs, the sale of all corp assets, or a dissolution -elect/remove BOD SH meetings must occur at least annually. Notice of a meeting must be given at least 10 days, but not >60 days, before the meeting date. Proxies are an agent's formal auth to vote the shares in a SH's absence.

Advantages and Disadvantages of the LLC

Adv: -limited liab: members liable only to amt of investmt. No personal liab. -flexibility in taxation: 2+ members can choose to be taxed as a pship or corp. A one-member LLC is auto-taxed as a sole prop unless owner wishes to be taxed as a corp. Disadv: -lack of uniformity w/ state laws. Businesses that op in multiple states may not receive consistent treatmt.

Partnerships

Arise from agreemts (express/implied) btw 2+ people to carry on a bus for profit. Partners are co-owners who have joint control over the bus' ops and the right to share in its profits. Certificate of assumed name filed w/ county register of deeds (only if diff than legal names of partners). Don't have to check whether the name is taken if it's the full names of the partners, otherwise do. Pships are governed by common law and statutory laws. Each partner is deemed an agent of the other partners and the pship (sim agency relationship). Partners have oship int in the firm where each person agrees to commit funds/assets, labor, and skills to the bus w/ the understanding that P/Ls will be shared. Pships are treated as entities by most states, so can sue/be sued, collect judgmts, and have all accting performed in the name of the pship entity.

Limited Partnerships (LPs)

Bus org form that limits the liab of some of its owners. Most states and DC have adopted laws based on Revised Uniform Limited Pship Act (RULPA). LP consists of 1+ gen partner(s) and 1+ limited partner(s). Gen partner assumes mgmt responsibility for pship and has full responsibility for pship and all its debts. Lim partner contrs cash/other prop and owns an int in the firm, but isn't involved in mgmt responsibilities. Isn't personally liable for pship debts beyond their investmt. Formation of a LP is public/formal proceeding in which partners must strictly follow stat rqmts. Partners must sign certificate of limited pship, which must incl certain info abt each gen/lim partner, like: -name -mailing address -capital contr Certificate must be filed w/ designated state official (secretary of state under RULPA).

Problem 39-1

C, O, and T are recent college grads who want to form a corp to mfg/sell tablets. P tells them he will set in motion the formation of their corp. Makes a contract w/ OW for puch of land for 20k. OW doesn't know of corp formation at time of contract. Also makes contract w/ B to build a small plant on the prop being purch'd (conditional on corp's formation). P secures all necessary subscription agreemts and capitalization, files articles of incorp. -for OW contract, both liable. For B contract, just corp liable. -Corp liable to B after novation.

Shareholder Voting

Corp bus matters are presented in the form of resolutions, which SHs vote to approve/disapprove. Each common SH gets 1 vote per SH. SHs repping >50% of shares must be present to conduct bus. Ordinarily, only persons whose voting names appear on the corp's stockholder records as owners can vote. Voting lists have SH names, addresses, and no of voting shares as shown on the corp records on a cutoff/record date. Cumulative voting allows minority SHs to be repped on the BOD. Each SH is entitled to a total no of votes equal to the no of board members to be elected x the no of voting shares the SH owns. Before a meeting, a group of SHs can make a SH voting agreemt in writing to vote together in a specific way. Can also enter into a voting trust (agreemt). Trustee is responsible for voting the shares on behalf of all SHs in the trust. SH retains all oship rights except voting power.

Liability of Directors and Officers

Corp directors/officers are liable for crimes/torts committed and for those committed by employees under their supervision. If SHs perceive that corp directors aren't acting in the best ints of the corp, may sue the directors in SH derivative suit.

Role of Directors

Corp is governed by BOD elected by SHs. Indiv directors not agents/trustees of corp, only BOD itself can bind the corp. Few qualifications are req'd to be a director, and a director can also be a SH. No of directors is set forth in articles of incorp. Directors are appointed at the 1st org meeting. Term of office is generally 1 yr. Common practice is to elect 1/3 of the board members each yr for a 3 yr term, gives greater mgmt continuity. Directors can be removed for cause. When a board vacancy occurs, SHs or BOD can fill the position, depending on state law and the bylaws. Most states permit the articles or bylaws to auth comp for directors. They also get indirect benefits (like bus contracts) and other rewards (like stock options). Inside director= also officer of corp. Outside director= doesn't hold a mgmt position in the co. Boards typically have both.

Corporate Financing

Corps are financed by the issuance/sale of corp securities. 1. stocks (equity securities): purch of oship int in bus. -C/S reps true oship of a corp. Provide pro-rata oship int reflected in voting, control, earnings, and assets. -investors who assume a residual financing position (whatever is left may go to divs to SHs). -preferred SHs usually have priority over C/S SHs as to divs and pmt on dissolution of the corp. -P/S holders often can't vote. 2. bonds (debt securities): borrowing of funds by firms (and govts). -issued by bus firms and govt at all levels. -normally have maturity date when principal returned to investor. -sometimes referred to as fixed-inc securities bc bondholders get fixed int pmts. 3. Venture Capital: -start-up bus and high-risk enterprises need start-up and expansion cap. Start-up typically gives a share of its stock to the venture capitalist providing funding. 4. Private equity capital: -obtain capital from wealthy investors. Ultimately, co may sell shares in IPO. 5. Crowdfunding: -cooperative activity where ppl network and pool funds/resources via the internet to fund a cause/venture. -new SEC rules allow cos to sell securities through this. -cos limited to raising 1M/yr via crowdfunding and are req'd to make specific disclosures.

Criminal Acts of Corporations

Corps can be liable for the criminal acts of agents/employees. Can be fined and, under responsible officer doctrine, corp officers may go to prison. Under respondeat superior doctrine, corps are also liable for torts committed by agents w/in the scope of their employmt.

Holding Companies (Parent)

Cos whose bus activity consists of holding shares in another co. Typically est offshore so inc taxed at lower rates. Profits brought onshore or paid to US SHs as divs are subj to US tax (repatriated).

Regulation of Franchises

Covered by contract law. Fed: -industry-specific stds: protect franchisee from unreasonable demands and bad faith termination. -franchise rule: reqs disclosure of mat facts (written) for informed decision by prospective franchisee. FTC administers this. State: -protects franchisees from unfair trade practices and bad faith terminations. -disclosure documentation (franchise disclosure doc), incl costs of op, recurring exps, profits earned, and substantiating of these figures. -to prevent arbitrary/bad faith terminations, state law may prohibit termination w/o good cause or req that certain procs be followed in terminating.

Piercing the Corporate Veil

Ct does this in certain situations. Holds SHs personally liable in the int of justice and fairness. Factors leading to this: -3rd party tricked into dealing w/ a corp instead of indiv. -corp set up to never make a profit, always be insolvent, or is undercapitalized. -corp is formed to evade existing legal obligation. -statutory formalities not followed. -commingling of personal/corp ints/assets This all presents a potential prob for close corps: -sep status must be preserved -lots of commingling of funds -no director meetings -SH use of corp prop

Committees of the Board of Directors

Delegating tasks can incr efficiency of BOD. Common committees incl exec and audit committees. SOX reqs all publically held corps to have an audit committee.

Private Securities Litigation Reform Act

Disclosure rqmts of rule 10b-5 deterred disclosure of fwd-looking info. To fix this, congress passed this. Says those who incl "meaningful cautionary stmts" IDing important factors that could cause actual results to differ materially from those in fwd-looking stmts are protected from liab for securities fraud.

Dissolution of a LCC

Dissociated members have no right to force LLC to dissolve - remaining members can chose to continue/dissolve. Op agreemt trigger events will cause dissolution. During winding up: -members must collect/liquidate assets -after all assets sold, proceeds distr'd to pay creditors -remaining $$$ distr'd pro rata to members

Dog House Investments, LLC v Teal Properties

Dog house op'd a dog camp. Leased the prop from Teal Props, owned by Teal, sole SH. In lease, promised to repair damages from fire or causes rendering the prop "untenantable." After a flood, Dog House told Teal prop untenantable. He said the damage was covered by ins, but he didn't repair it. Parties agreed Dog House would do the repairs and be reimbursed by Teal Props. Spent 39k on repairs, submitted invoices for reimbursement. Teal Props recovered 40k from ins co, but didn't pay Dog House. Dog House sued. Ct said Teal Props basically existed only to collect the rent for Teal. He didn't have arms-length relationship w/ corp and it was his alter ago. Ct found him personally liable (pierced corp veil).

Classification of Corporations

Domestic: corp does bus w/in its state of incorp. Foreign: corp in X state does bus in Z state. Alien: corp formed in another country.

Franchise Termination

Duration of franchise determined btw the parties. Franchise agreemt usually sets out conditions of termination. Under notice rqmts, franchisee must be given reasonable time to wind up the bus. Agreemt may grant franchisee the opp to "cure" an ord breach w/in a pd of time to prevent term. Term provisions of contracts usually more favorable to franchisor than franchisee. Franchisee may get little/nothing on term since franchisor owns trademark/bus. Often can be term'd at any time "for cause." "For cause" termination C/B -death/disability of franchisee -insolvency of franchisee -breach of franchise agreemt -failure to meet spec'd sales quotas I think this wouldn't be wrongful term bc in course of bus. Cts usually try to balance the rights of both parties. Good faith and fair dealing. If franchisor arbitrarily/unfairly terms a franchise, franchisee may be able to sue for wrongful term. Most cts won't consider term wrongful if: -franchisor's decision to term was made in normal course of bus ops -reasonable notice of term given to franchisee

Management of a LLC

Either member-managed or manager-managed. In member mgmt, all members participate in mgmt and decisions. In manager-managed LLC, managers owe fiduciary duties to the LLC and its members (duty of loyalty and duty of care). Employmt discrim lawsuits based on nature of discrim remarks, not the characteristics of the plaintiff. To reduce chances of this kind of lawsuit, don't make discrim remarks!

Resales and Safe Harbor Rules

Exemptions for resales by most persons other than issuers/underwriters. Avg investor who sells shares doesn't need to file registration stmt. Resales of 505 or 506 securities req registration unless party selling complies w/ safe harbors (144 and 144A). Rule 144: exempts restricted securities from registraton of resale if these conditions all met: -adequate public info abt issuer -person selling securities owned them for at least 6 mos if issuer subj to rqmts of 1934 act (1 yr if not) -securities sold in limited amts in unsolicited brokers' trans -SEC notified of resale Rule 144A: securities that, at time of issue, weren't same class as securities listed on national securities exchange or quoted in US auto interdealer quotation system may be resold. -sold only to qualified institutional buyer owning and investing at least 100M in securities.

Corporate Powers

Express powers: -found in the corp's articles of incorp, laws of state of incorp, and in state/fed corp statutes. -corp bylaws may also grant/limit a corp's express powers. Implied Powers: -power of corp to perform all acts reasonably necessary to accomplish corp purposes. -corp officer can bind corp in contract in matters connected w/ the ord bus affairs of the enterprise. Ultra Vires: -corp acts beyond the express/implied powers of the corp. -articles of incorp now adopt very broad purposes to prevent lawsuits against the corp, so ultra vires less important. -SHs can seek an injunction from a ct to stop a corp from doing ultra vires acts. -corp and SHs can also seek damages from officers/directors responsible for the acts.

Conflicts of Interest

Fiduciary duty of directors and officers reqs them to make a full disclosure of any potential conflicts of int that may arise in any corp trans. Must make full disclosure of nature of conflicting int and all facts related to the trans, and abstain from voting on proposed trans.

Well-Known Seasoned Issuers (WKSIs)

Firm that has issued at least 1B in securities in last 3 yrs or has outstanding stock valued at 700M+ in the hands of the public. Can file shelf registration stmts the day they announce a new offering, and aren't req'd to wait for SEC review/approval. Can also use free-writing prospectus at any time (even prefiling pd).

Professional Corporations

Formed by a group of professionals (like lawyers). Laws governing the formation/op of these are sim ord corps.

Franchise Business Premises

Franchise agreemt may specify whether premises for bus must be leased, purchased outright, or constructed to meet the terms of the agreemt. Will specify which party is responsible for supplying equip/furnishings for the premises. Franchisor usually determines the territory to be served. Some franchise contracts give franchisee exclusive/territorial rights to a certain geo area while others state that franchise's territory is nonexclusive.

Dissociation and Dissolution

Gen partners can voluntarily dissociate (withdraw) from a LP unless pship agreement specs otherwise. Under RUPLA, limited partner can withdraw by giving 6 mos notice, unless pship agreemt specs a term. Events causing dissociation: -gen partners voluntary dissociation will gen lead to dissolution unless all partners agree to continue the bus. -bankruptcy, retiremt, death, mental incompetence of gen partner will cause dissociation of that partner and dissolution of the LP unless other members agree to continue the firm. Upon dissolution, creditors' claims (incl those of partners who are creditors) take priority. After that, partners/former partners receive unpaid distrs of pship assets. Unless otherwise agreed, they're entitled to a return of their contrs in the proportions in which they share in distributions. Disputes commonly arise abt how pship assets S/B valued and distr'd and whether the bus S/B sold so use buy-sell agreemts! W/ buy-sell agreemts, partners can agree ahead of time on how pship's assets will be valued/divided if pship dissolved. Can help partners avoid disputes but don't elim all potential litigation, esp if terms open to interpretation.

Liabilities, Rights, and Duties of Partners in a LP

Gen partners personally liable to pship's creditors. This policy can be circumvented in states allowing a corp to be the gen partner in a pship. Liab of a lim partner is limited to the cap they contr/agree to contr to the pship UNLESS the creditor believes, based on lim partner's conduct (participation in mgmt), thatthe lim partner is a gen partner. Except for right to participate in mgmt, lim and gen partner have same rights/duties as reg partners.

Franchise Pricing Arrangements

Franchisor may req franchisee to purch certain supplies from franchisor at an established price but franchisor *can't* mandate the prices at which the franchisee will resell the goods (can suggest retail prices, but can't mandate them).

Franchise Business Organization

Franchisor may req that the bus use a certain organizational form, cap structure, and certain stds such as sales quotas and record-keeping agreemts. Franchisor may retain control over the training of personnel involved in the op/admin aspects of the bus.

The Securities Act of 1933

Governs *initial sales* of stock by businesses. Designed to prohibit various forms of fraud and stabilize the securities industry by reqing disclosure of certain info to investors. Provides all securities trans must be registered w/ the SEC unless they're specifically exempt from registration rqmts. Securities broadly defined, incl: -instrs/ints commonly known as securities (P/S and C/S, bonds, debentures, and stock warrants). -ints commonly known as securities (stock ops, puts, calls) that involve the right to purch a security/group of securities on a national security exchange. -notes, instrs, or other evidence of indebtedness, incl certificates of int in a profit-sharing agreemt and certificates of deposit. -any fractional undivided int in oil, gas, or other mineral rights. -investmt contracts, incl ints in limited pships and other investmt schemes. Almost any stake in oship/debt of a co can be considered a security. Investmt contracts in condos, franchises, limited pships in real estate, and oil/gas have qualified as securities.

Guth v Loft, Inc.

Guth was president of Loft, a candy/restaurant chain. Guth and fam also owned Grace co, which made soft drink syrup. Coke supplied Loft w/ cola syrup. Guth felt price was high, got trademark for Pepsi. Guth used Loft's cap/credit/facilities/employees to pay for the Pepsi thing. Loft employee made syrup concentrate, which was sent to Grace to add sugar and water. Loft charged Grace for the concentrate w/ 40 mos credit. Grace charged Pepsi for the syrup but granted substantial credit. Grace sold the syrup to Pepsi's customers, incl Loft. Loft paid Pepsi for ads. Loft's profits declined bc of switching to Pepsi, sued Guth, Grace, and Pepsi. Ct said Guth put his personal ints above corp, ruled in favor of Loft.

Note

He didn't post case answers, so the ones included are my guesses :) Oh well.

Hodge v Strong Built International, LLC

Hodge was hunting in a deer stand when its straps failed and he fell and died. Strong built was the maker/seller, and Ken Killen (unfortunate name) was the sole member/manager. Hodge's kids sued strong built and Killen. Sought damages on a theory of product liab for the injury/death of their father from the deer stand. For product liab need (1): -design defects -mfg defects -mkting defects Killen said not personally liable, summary judgmt, appeal. Killen said he isn't an engineer/licensed professional and participated in creating the deer stand, but didn't dictate/participate in design, selection of materials, manufacture of, or warnings for deer stand. Ct said he didn't breach prof duty or negligent/wrongful act. Also had no special duty of care to plaintiff, so not personally liable.

Limited Liability Partnerships (LLPs)

Hybrid form of bus designed mostly for professionals who normally do bus as partners in a pship. Allows a pship to continue as a pass-through for tax purposes, but limits personal liab of partners. LLPs must be formed/operated in compliance w/ state statutes. Approp form must be filed w/ a secretary of state (SoS) and the bus' name must incl either "limited liab pship" or "LLP." LLP must file annual report w/ state to remain qualified as an LLP. In most states, easy to convert traditional pship to LLP. All stat/common law rules governing pships apply, apart from those modified by LLP statute.

Corporation by Estoppel

If it acts like a corp, it can't avoid liab by claiming no corp exists. Applies when 3rd party contracts w/ corp but hasn't filed articles of incorp.

Business Judgment Rule

Immunizes a director/officer from liab from bad decisions. Ct won't req them to manage in hindsight. Applies as long as the decision was reasonable, informed, and made in good faith and the bests ints of the corp. This provides broad protections to corp decision makers. Most cts apply the rule unless there's evidence of bad faith, fraud, or a clear breach of fiduciary duties.

Benefit Corporations

In 31 states. For-profit corps seeking to have a mat positive impact on society. Must comply w/ certain stat rqmts. Differ from traditional corps in purpose, accountability, and transparency.

The Howey Test

In interpreting the 33 act, sup ct held that an investmt contract is any transaction in which a person (1) invests (2) in a common enterprise (3) reasonably expecting profits (4) derived primarily/substantially from others' managerial/entrepreneurial efforts.

Essential Elements of a Partnership

In the absence of a pship agreemt, Uniform Pship Act (UPA), adopted by most states, governs the pship. UPA defines a pship as an association of 2+ persons to carry on a bus for profit. Pship presumed under UPA if (essential elements): -sharing of P/Ls -joint oship of bus -equal right to be involved in the mgmt of the bus Joint oship of prop doesn't in and of itself create a pship. Parties' intentions are key. Most states treat a pship as an entity, which means it may hold the title to real/personal prop in its name.

Dissenting Directors

Indiv director may disagree w/ majority vote (becomes an act of the BOD). Unless dissent is in minutes, presumed to have assented.

Securities Exchange Act of 1934

Provides for regulation/registration of securities exchanges, brokers, dealers, and national sec associations. 33 act is one-time disclosure law. 34 act wants continuous periodic disclosures by public corps to enable SEC to regulate subseq trading. Applies to cos w/ assets >10M and 500+ SHs (called section 12 cos). Req'd to file reports annually/quarterly/sometimes monthly w/ SEC. SEC can engage in mkt surveillance to detect undesirable mkt practices (fraud, mkt manipulation, misrep). SEC can regulate proxy solicitations for voting.

Formation of Partnerships

Pship agreemts (articles of pship) can be oral, written, or implied by conduct. Can incl almost any desired terms. Duration of pship spec'd by agreemt. Pship for a term has a fixed duration. Pship at will has an indefinite duration.

Types of Corporations

Public corps are formed by the govt for some purpose (US postal service). Private corps are created either wholly/in part for private benefit (profit). Nonprofit corps are formed for purposes other than profit (private hospitals/charities). Close corp is one whose shares are held by few people. Often op'd like a pship. Statutes allow more flexibility for these. Close corps can restrict the transferability of shares via the SH agreemt. A majority SH in a close corp may misapprop co funds. The normal remedy for the injured minority SHs is to have their shares appraised and to be paid the FMV for them.

Section 10(b) and SEC Rule 10b-5

Section 10(b) prohibits use of manipulative/deceptive device in violation of SEC rules/regs. Rule 10b-5 prohibits fraud in connection w/ purch/sale of securities. Applies to all cases w/ securities trading (on exchanges, OTC, or private). Private parties can sue for securities fraud w/ this. Elements of securities fraud action: -material misrep/omission in connection w/ purch/sale of sec -scienter (wrongful state of mind) -reliance by plantiff on material misrep -economic loss -causation (connection btw misrep and loss) Major goal of these is to prevent purch/sale of securities on info not available to public (insider trading). Material facts calling for disclosure under 10b-5: -fraudulent trading in cos stock by broker-dealer -div change -contract for sale of corp assets -new discovery/process/product -sig change in firm's financial condition -potential litigation against co

Regulation of Proxy Statements

Section 14 (1) of 34 act regulates solicitation of proxies and content of proxy stmts from SHs of section 12 cos. Disclose all facts pertinent to vote. Remedies for violations range from injunctions to prevent a vote to monetary damages.

Registration Statement

Section 5 of 33 act provides that if a security doesn't qualify for an exemption, must be registered before it's offered to the public. Issuing corps must file a registration stmt w/ SEC and provide all investors w/ a prospectus. Registration stmt must be written in plan english and descr: -securities offered for sale, incl relationship to registrant's other securities -corps props and bus (incl F/S certified by independent pub accting firm) -mgmt of corp, incl managerial comp, stock ops, pensions, and other benefits. Any ints of directors/officers in any material trans w/ corp must also be disclosed -how corp intends to use sale proceeds -any pending lawsuits/special risk factors All cos (domestic/foreign) must file registration stmts electronically so that they can be posted on EDGAR database. Registration stmt doesn't become effective until it has been reviewed/approved by SEC (unless filed by well-known issuer).

Ch 39 Reviewing Case

Sharp was sole SH/manager of Chickasaw, S corp. Maintained corp checking acct but paid employees/suppliers/entertainers out of club's proceeds in cash. Owned club's prop. Rented it to the club but made mortgage pmts out of club proceeds and paid personal expenses w/ corp funds. Drunk underage girl came to club, wasn't ID'd. Drank more, was drunk when she left at 3AM w/ a beer in her hand. Lost control of her car, struck a tree, died. Her stepdad sued Chickasaw and Sharp. -might be held liable as alter ego. Commingling of assets, etc. -prob wouldn't rule personally liable if articles of incorp didn't descr corp's purpose/mgmt structure. -corp could prob extend credit to reg patrons even w/o it spec'd in articles of incorp or bylaws. -ct would say Chickasaw was domestic (bc op'd where incorp'd) and private (formed by indiv to make a profit).

Violations of 1933 Act

Intentional/negligent defrauding of investors by mirepping or omitting mat info in the registration stmt/prospectus. Incl selling securities before effective date of registration stmt or under an exemption for which the securities don't qualify. Remedies: -fined up to 10k or 5 yrs in jail (or both) -SEC auth'd to impose civil sanctions on willful violators -private parties who purch securities and suffer harm bc of false/omitted stmts may sue for damages Defenses: can avoid liab by proving: -stmt or omission wasn't material -plaintiff knew abt misrep at time stock was purch'd -defendant exercised due diligence in prepping/reviewing the registration and reasonably believed at the time that the stmts were true (available to underwriter or subseq seller, but not issuer)

Securities Fraud and Online Ponzi Schemes

Internet-related forms of sec fraud incl spam, online newsletters, chat rooms, blogs, social media, tweets, blah blah blah. Some investmt newsletters used for fraud to convince investors to buy/sell certain stocks. Ponzi schemes pay returns to investors from new cap paid to the fraudsters rather than legit investmt.

Problem 36-3

JC inc had McDonald's franchise agreemt in Ohio. Req'd monthly pmts of certain %s of gross sales. If any pmt >30 days late, McDonald's had right to term franchise. Agreemt said even if McDonalds accepted a late pmt, wouldn't constitute a waiver of any subseq breach. McDonald's sometimes accepted late pmts, but in July 2010, gave notice of 30 days to comply or surrender possession of the restaurants. JC missed deadline, so McDonald's said vacate. JC refused. McDonald's alleged JC violated franchise agreemt, JC claimed McDonald's breached implied covenant of good faith/fair dealing. McDonalds should prevail bc terms clear and even accounted for this circumstance.

Problem 38-1

John, Lesa, and Tabir form LLC. John contr 60% of cap, Lesa/Tabir each contr 20%. Nothing is decided abt how profits will be divided, so John assumes he will get 60% of the profits. Lesa/Tabir think profits will be divided equally. If dispute over profit comes up, ct will apply Uniform Limited Liab Co Act (ULLCA). In most states, prob W/B equally divided. Avoid this w/ operating agreemt!

Problem 36-5

Kubota tractor corp makes farm, industrial and outdoor equip. Franchise contracts allow Kubota to enter into dealership agreemts w/ others at any location. K motors is a Kubota dealer in 2 texas cities. The two stores op as 1 dealership w/ 2 locations. Kubota granted dealership to Hammer in a city btw the 2 other stores. K motors sued Kubota and asked for an injunction to prevent them from putting a dealership in the same mkt area. Said new location would cause it to suffer sig loss of profits. Franchisor typically determines territory served by franchisee. Implied covenant of good faith and contract laws apply here. Kubota will prob win bc in contract.

Limitied Liability Companies (LLCs)

LLC is a hybrid entity that combines the limited liab of a corp and the tax advs of a pship. Increasingly the entity of choice for businesses. Governed by state law. Owners are called "members" (not SHs) and their pship is an "int" (not shares). Other similarities to corps incl: -sep legal entity from owners -can hold prop sep -foreign designation if doing bus in state other than the one where LLC formed

Dissociation from a LLC

LLC member has power (not necessarily the right) to dissociate from the LLC at any time. Dissociation triggered by events sim dissociation of pship, incl: -voluntary notice -triggering event -unanimous vote -bankruptcy -incapacity -death Dissociating member loses right to participate in mgmt and right to act as an agent. Also has right to have their int bought out by other members.

When Liability May Be Imposed (LLC)

LLC members are shielded from personal liab in most situations and any liab of members is normally limited to the amt of their investmts. Liability can be imposed when: -indiv guarantees pmt of a bus loan to LLC -cts may hold owners of bus liable for its debts or "pierce the corp veil" to achieve justice or hold its members personally liable in circumstances that are clearly extraordinary

Operation of a LLC

LLC operating agreemt is like bylaws. Not req'd for LLC to exist, but strongly recommended to cover issues like: -mgmt and how future managers will be chosen/removed -how membership ints may be transferred -dissociation procs -whether formal meetings will be held -how voting rights will be apportioned Transferring LLC int does not = membership!

Liability in an LLP

LLP allows professionals to avoid personal liab for malpractice of other partners. Still liable for own wrongful acts. Partner who supervised the indiv who committed a wrongful act is also liable. Still personally liable for normal pship debts, just spared from others' wrongful acts. When >1 partner in an LLP commits malpractice, a gen partner is jointly/severally liable for entire result in most states. Some states provide for proportionate liab for each LLP partner, allowing for sep determinations of the negligence of the partners.

Corporations

Legal entities created/recog'd by state law. Can have 1+ SHs comprised of natural persons/businesses. Corps are legal "people" and enjoy same rights/privileges as natural people, incl: -access to ct systems -constitutional guarantees of free speech, due process, and freedom from unreasonable search/seizures Responsibility for mgmt of co rests w/ BOD (elected by SHs). BOD makes policy decisions/hires officers to run corp on a daily basis. SHs can sue the corp/be sued by the corp and bring a derivative suit on behalf of the corp in some instances. SHS are generally not personally liable for corp acts. In certain situations, corp "veil" of limited liab can be pierced, holding SHs personally liable.

Limited Liability Limited Partnership

Limited pship where liab of all partners limited to investmt. Gen partners have same limited liab as lim partners.

Piercing the Corporate Veil; Alter-Ego Theory

States corp is "alter ego" of majority SH, and personal/corp int are commingled such that the corp has no sep identity. Cts use this to avoid injustice/fraud that would result when wrongdoers are protected by lim liab.

Oliveria v Sugarman

iStar inc promised to give stock to employees for performance if the stock avg'd a certain target price/sh over a pd. Stock price rose 300%, target still missed. Board changed basis of award from performance to service, so an employee who had been w/ iStar for x time was entitled to an award. Issued shares. The Oliverias were SHs and demanded the BOD rescind the awards. Alleged misconduct and demanded BOD sue on the co's behalf and seek damages. BOD appointed Barry (outside director) to investigate, who recommended they refuse the demand. BOD acted on his recommendation. Oliverias sued Sugarman, BOD chairman, and other directors for breach of fiduciary duty. Ct dismissed. Appeal. Oliverias said Barry not experienced enough and he wasn't sufficiently disinterested. He had 40 yrs experience and hired highly respected/experienced legal counsel to help. Had no inapprop relationship w/ other BOD members or iStar. Ct also said the fact that he was paid doesn't change his independence. Ct agreed w/ BOD.

Duties of Partners

1. Fiduciary duties: Partners are fiduciaries and gen agents of each other and pship. -Duty of care limited to refraining from grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law (UPA 404(c)). -Duty of loyalty reqs a partner to acct to the phip for any prop/profit/benefit derived by the partner in the conduct of the pship's bus or from the use of its prop. Partner must also refrain from competing w/ the pship in bus or dealing w/ the firm as an adverse party (UPA 404(b)). -Fiduciary duties can't be waived. Each partner must act consistently w/ the obligation of good faith and fair dealing. Pship agreemt can specify acts violating fiduciary duty. Partner may pursue own int w/o automatically violating these duties if full disclosure! 2. Authority of partners: UPA affirms gen principles of agency law. -partner may be able to subject pship to tort liab. -partner has apparent auth when carrying out pship bus. -pship may limit a partner's capacity to act as the firm's agent or transfer prop, but limitation only effective for 3rd parties who received notice (filing stmt of pship autority in designated state office). 3. Scope of implied powers: in ord pship, partners can exercise all implied powers reasonably necessary and customary to carry on that bus.

Liabilities of Partners

1. Liab of partners: personally liable for debts of pship. In most states, the liab is essentially unlimited, bc acts of one partner subject the other partners to personal liab. 2. Joint liability: 3rd party must sue *all* partners in group, but each partner can be held liable for the full amt (exhaust pship assets first) 3. Joint and several liability: if partner sued for pship debt, has right to insist other partners be sued w/ them. 4. Indemnification: w/ joint/several liability, partner who commits a tort can be req'd to indemnify (reimburse) pship for any damages it pays. 5. Liab of incoming partners: new partner to existing pship isn't personally liable for any pship obligations incurred *before* becoming a partner.

Rights of Partners

1. Mgmt: eqaul among all partners. Each gets 1 vote, majority wins. Unanimous consent needed for some things. 2. Int in pship: each partner entitled to proportion of bus P/Ls spec'd in the pship agreemt. If not spec'd, equally divided. If apportion profits but not losses, loss ratio same as profit. 3. Comp: each partner's inc comes from distr of profits according to their share of the bus. There are some guaranteed pmts. 4. Inspection of books: each partner has the right to receive full/complete info concerning the conduct of all aspects of pship bus (UPA 403). Books must be kept at firm's principal bus office unless agreed otherwise. Right of access extends to any personal representative of deceased partner's estate. 5. Accting: an accting of pship assets/profits is req'd to determine the value of each partner's share. Can be voluntary or compelled by court order. 6. Prop: prop contr'd to/later acq'd by pship remains pship prop and not of indiv partners (UPA 203). Indiv partner not co-owner and has no right to sell/mortgage/transfer pship prop (UPA 501). Each partner can use/possess prop on behalf of pship (UPA 401(g)). Pship prop not subj to personal debts of partners, but partner's creditor can get "charging order" to attach pship int to satisfy debt (right to share of profits).

Incorporation Procedures

1. Select state of incorp 2. Secure corp name: choice of corp name subj to state approval to ensure against duplication or deception. 3. Prep articles of incorp: primary doc needed to incorp the bus that incl basic info abt the corp and serves as a primary source of auth for its future org and bus functions. Must incl this info: -name of corp -no shares of stock auth'd to issue -the name/street address of the corp's initial registered agent and registered office -name/address of each incorporator 4. File the articles w/ the SoS: when articles of incorp have been prepped/signed, sent to the approp state official, along w/ req'd filing fee. 5. First org meeting to adopt bylaws: -after the corp is chartered (created) it can do bus -SHs should approve the bylaws, elect directors, hire officers, and retify preincorp contracts and activities.

Rights of Shareholders

1. Stock certificates: few jurisdictions still req these (physically), but SHs can demand that these be issued/replaced. 2. Preemptive rights: allows each SH to maintain proportional control. 3. Stock warrants: rights to buy at a stated price by a given date. 4. Dividends: distr of corp profits/inc to SHs based in proportion to their shares. C/B cash/prop/stock -illegal divs are improperly paid from an unauth acct or cause the corp to become insolvent. -SHs can ask ct to compel directors to pay a div if they show the directors have acted so unreasonably in withholding the div that their conduct is an abuse of their discretion. 5. Inspection rights: every SH entitled to examine specific corp records, incl voting lists. -SH has right to inspect/copy corp books/records *only for proper purpose*, and the request to inspect must be made in advance. -this power has potential for abuse and the corp can protect itself. SHs can properly be denied access to prevent harassment or protect trade secrets/confidential info. 6. Transfer of shares: owner has a right to transfer stock unless there are valid restrictions on transferability. -until the corp is notified of the transfer and has updated its records, all oship rights remain w/ current record owner. 7. SH derivative suit: brought by SHs against a 3rd party that has harmed the co when the corp directors have failed to sue that party. -before suing, SHs must submit a written demand to the corp, asking BOD to take approp action. -the directors have 90 days to act. If they refuse, the suit can go fwd. Ct will dismiss it if a majority of directors/indep panel determines the suit is not in the best int of the corp. -When SHs bring a suit, they're doing it in the name of the co, not indiv. If successful, damages go to corp's treasury, not SHs personally.

The Securities Act of 1933; Restrictions During the Registration Process

33 act restricts certain types of activities at each stage of registration process. If issuer violates restrictions, investors can rescind contracts to purch securities. Prefiling pd: during this, issuer can't sell/offer to sell securities. Waiting pd: once registration stmt filed, waiting pd begins while SEC reviews it. Only certain types of offers allowed during this time. -all issuers can distr prelim prospectus -most issuers can use a free-writing prospectus during this pd Posteffective pd: once SEC has reviewed the registration stmt and the registration is effective, this pd begins. Issuer can now offer/sell securities w/o restrictions.

Improper Incorporation

A de jure corp is one that has subst complied w/ all conditions precedent to incorp. In most states, the SoS filing of the articles of incorp is conclusive proof that all mandatory stat provisions have been met. De facto corps: if the defect in formation is substantial, outcome will vary by jurisdiction. Some states recog the common law doctrine of de facto corp and their cts will treat a corp as a legal one if these rqmts are met: (a) state statute exists under which the corp can be validly incorp'd (b) parties have made a good faith attempt to comply w/ it (c) parties have already undertaken to do bus as a corp

Franchise

Arrangement in which franchisor (owner of trademark/trade name/copyright) licenses a franchisee to use trademark, trade name, or copyright in the sale of goods/services. Types: 1. Distributorship: manufacturer (franchisor) licenses a dealer (franchisee) to sell its product. Often covers exclusive territory. Keep own name/bus. Car dealership. 2. Chain style bus op: franchise ops under franchisor's trade name and is ID'd as a member of a select group of dealers that engage in franchisor's bus. McDonalds -Franchisee is generally req'd to follow standardized methods of operation. Less freedom, follow franchisor's rules/stds of performance. -franchisee must usually maintain certain stds of performance -franchisee may also be req'd to obtain materials/supplies exclusively from franchisor Read the franchise agreemt! 3. Manufacturing/processing arrangemt: franchisor transmits to the franchisee the essential ingredients/formula to make a certain product. Franchisee mkts the product at wholesale/retail in accordance w/ franchisor's stds. -like if Ford franchises plant to be mfg plant; create exactly as spec'd. Franchise contract specifies the terms/conditions of the franchise and spells out rights/duties of franchisor/franchisee. May not be very negotiable! Franchisee usually pays an initial fee/lump-sum price for franchise license. May also have to pay a % of franchisor's advertising costs and certain admin exps. Generally, franchisor gets stated % sales or volume of bus done by franchisee.

Formation of the LLC

Articles of org must be filed w/ secretary of state's office. Must usually incl: -bus name (must incl the words limited liab co or initials LLC) -its principal address -the name/address of a registered agent -members' names -how the LLC will be managed Most states permit 1 member LLCs, but some req at least 2 members. Before charter, owners of firm are called promoters. If a promoter forms a "preincorporation contract" (preformation contract), may be personally liable, but novation occurs when LLC adopts contract. Novation= substitution of new contract in place of old one. For fed diversity jurisdiction, LLC may be treated diff than a corp; citizen of every state where members citizens. This comes into play when a party sues the LLC based on diversity of citizenship.

Problem 40-2

AstroStar has ~ 500 SHs. BOD has 3 members (E, D, and M). At a reg BOD meeting, BOD selects G as president of the corp by a 2-to-1 vote, w/ E dissenting. Minutes don't register his dissenting vote. Later, audit reveals G is a former convict and has embezzled 500k from the corp that isn't covered by ins. All directors can be held liable since dissent not in minutes.

Insider Reporting and Trading; Section 16(b)

Provides for recapture by corp of all profits realized by an insider on purch/sale of the corp's stock w/in any 6 mo pd. *Irrelevant* whether insider actually used inside info! Applies to stocks, warrants, options, and securities.

Promotional Activities

Before a corp is formed, promoters are the ppl who take prelim steps of organizing the venture and attracting investors via subscription agreemts. Promoters are personally liable for pre-incorp contracts on behalf of the corp, unless 3rd party agrees to hold future corp liable.

Problem 40-6

Bill was pres and CEO of ranch. He and his bro Ron owned 36.7% of stock. Ron removed from BOD on their father's death, and wasn't auth'd to work for the co. Their mom, Gertrude, owned rest of stock (went to Bill on her death). Corp paid Gertrude's personal expenses (abt 75% of NI). Bill got regular salary incrs. Corp didn't issue dividend. They froze out Ron!

State Securities Laws

Blue sky laws, regulate offer/sale of securities w/in state borders. Article 8 of UCC also imposes rqmts for sale/purch of securities. State laws apply maintly to intrastate trans. Usually disclosure rqmt and antifraud provisions sim 10(b) and SEC rule 10b-5. Methods of registration, req'd disclosures, and exemptions from registration vary among states. Exemptions from fed laws aren't exemptions from state laws. Many duplicate regs eliminated and SEC has exclusive power to regulate most national securities activities.

Ch 40 Reviewing Case

Brock was on the BOD of firm body fitness. Owned 15% of the stock and was a tanning tech at one of its fitness clubs. After Jan fin report showed the tanning division as operating at a subst loss, BOD, led by Levinson, discussed terminating tanning. Brock convinced majority of BOD that tanning was necessary to mkt fitness package. Losses rose more. BOD hired analyst, who concluded tanning ops didn't incr membership. SH Diego discovered Brock owned stock in Sunglow, co that firm body bought its tanning equip from. Told Levinson, who privately reprimanded Brock. Brock and Vail (37% combined oship) voted to replace Levinson. -Brock owed duty of loyalty, duty of care. -It does, personal benefit from continued bus. -Might say he acted in good faith. -Breach of duty of loyalty.

Corporate Earnings and Taxation

Profits either can be kept as RE or passed on to SHs as divs. Taxed twice, 1st to corp, then to SHs as divs.

Exempt Securities and Transactions

Certain types of securities are exempt from registration rqmts and can be generally resold w/o being registered. Even when trans is exempt from registration rqmts, still subj to antifraud provisions of 33 and 34 acts. 1. Regulation A offerings: Registration exemption available for security offerings <= 50M during any 12 mo pd. Issuer must file w/ SEC a notice of the issue and an offering circular, which must also be provided to investors before sale. -cos can test waters to determine potential int w/o selling securities or reqing commitment from those expressing int before prepping offering circular -some cos sell securities on internet w/ reg A (small cos and start-ups that can't get cap from institutional investors or underwriters). 2. Regulation D: Several exemptions for registration rqmts for offers involving small amts or made in limited manner. -rule 504: for noninvestmt co offerings up to 5M in any 12 mo pd. -rule 505: repealed in late May 2017. For private, noninvestmt co offers up to 5M in any 12 mo pd. Offer may be made to unlimited no of accredited investors and up to 35 unaccredited investors. Accredited investors= banks, investmt cos, EBPs, issuer's exec officers/directors, and persons w/ large inc or net worth. Unaccredited investors get disclosure docs (same as in registered offerings). -rule 506: private placemt exemption. For private, noninvestmt co offers in unlimited amts not generally solicited/advertised. Can have unlim no of accredited investors and up to 35 unaccredited. To quality, must believe unaccredited investors have sufficient knowledge to eval investmt risks. Most common. 3. Rule 147: Intrastate exemption rqmts. -issuer incorp'd and principal office located w/in state. -80% of bus w/in state. -sold only to residents w/in state (no resales to nonres w/in 9 mos from date of last sale of issue)

Partnership Termination

Occurs in 2 stages: 1. Dissolution: legal "death" of the pship. Can generally be brought abt by acts of partners, op of law, or judicial decree. Partners can agree to dissolve any pship. -illegality/impracticality: any event that makes it unlawful for pship to continue its bus will result in dissolution. Under UPA, ct may order dissolution when it becomes obv impractical for firm to continue. 2. Winding up and distribution of assets: collecting and distributing pship assets. Partners can't create new obligations on behalf of pship, only complete trans begun at time of dissolution and to wind up bus of pship. -duties and comp: winding up incl preserving pship assets, discharging liabs, and providing an accting to each partner. UPA provides that a partner is entitled to comp for services above and apart from a share in pship profits. -creditor's claims: (a) pmt of debts, incl those owned to partner/nonpartner creditors. (b) return of cap contributions and distr of profits to partners. (c) if liabs are > assets, partners bear losses in proportion in which they shared profits, unless agreed otherwise. -pship buy-sell agreemts: before entering into a pship, partners may form buy-sell agreemt (buyout agreemt) providing for 1+ partners to buy out the other(s) should the situation warrant. Buyout price is based on amt that would have been distr'd to the partner if the pship had been wound up on the date of dissociation, offset by amts owed by the partner to the pship.

Partnership Dissociation

Occurs when 1 partner ceases to be associated in pship bus. Normally allows partner to have their int purchased by the pship and terminates authority and rights to participate. Pship can continue to do bus w/o dissociated partner. Events causing dissociation: -voluntary notice -triggering event -unanimous vote -court/arbitration order (if wrongful conduct) -partners bankruptcy, assignment of int, incapacity, or death Wrongful dissociation occurs bc partners have the *power* to dissociate from a pship at any time, but may not have the *right* to do so. If dissociation is considered wrongful under the law and a breach of the pship agreemt, partner liable for damages. Effects of dissociation: -partner's duty of loyalty ends. -duty of care continues only w/ respect to events occuring before dissociation or the winding up process. -buyout is a contract that determines how remaining partners will buy out partners' int in advance of an event. Pship is bound for 2 yrs after dissociation by acts of outgoing partner, unless proper notice is given. Dissociated partner may be liable for pship obligations entered into during the 2-yr pd following dissociation.

Partnership by Estoppel

Occurs when a 3rd person has reasonably/detrimentally relied on the representation that a nonpartner was part of a pship. Nonpartner is an agent whose acts are binding on the pship (UPA 308). In this situation, ct may impose liab (but not pship rights) on alleged partner. Pship by estoppel may also be imposed when a partner represents that a nonpartner is a member of the firm. In this situation, nonpartner may be regarded as an agent whose acts are binding on the pship (UPA 308).

Role of Officers

Officers/execs hired by BOD. Agents and employees of corp. Their rights are defined by employmt contracts, but BOD can normally remove officers at any time w/ or w/o cause.

Problem 40-1

Oxy negotiating with Wick construction for renovation of HQ. Wick, owner of Wick construction, is one of the 5 members of Oxy's BOD. Contract terms are std. Wick has informed 2 of the other 4 members of his int in the co. Oxy's BOD approved the contract by a 3-to-2 vote, w/ Wick voting w/ majority. Not binding. Wick should have disclosed to everyone and abstained from voting.

Problem 39-2

Oya Paka and 2 bus associates formed Paka corp to sell comp services. Oya owned 50% of corp shares and served as corp's president. Wished to get a personal loan from her bank for 250k, but they needed a 3rd party cosigner. She cosigned in the name of the corp. Later defaulted on note, and bank sued corp for pmt. Corp said Oya exceeded her auth when she cosigned on behalf of corp. She did.

Pantano v. Newark Museum

Pantano slipped and fell on icy steps at Newark Museum, hurt her back. She was an immigration attorney at a nonprofit, and was at the museum for work. Museum charged her law firm to use the facility. Museum is a nonprofit. She sued for negligent maintenance of grounds. Museum said Pantano was a direct beneficiary of its charitable endeavors. Pantano said not true bc there for work. Ct agreed.

Problem 37-6

Paxton asked Sacco to work w/ her interior design bus. They were dating. Sacco was involved in every aspect on the bus (bookkeeping, mkting, and design), but wasn't paid a salary. He was reimbursed for charges to his personal credit card, which Paxton also used. Sacco took no firm profits, saying he wanted to "grow the bus" and "build sweat equity." When they stopped dating, she fired him. He objected, claiming they were partners. Is he entitled to 50% profits? Yes... implied pship agreemt.

Rights of Directors

Right to participation: entitled to participate in all BOD meetings and to be notified of them. Right of inspection: right to access corp's books/records, facilities, and premises. Right of indemnification: corp should guarantee reimbursement or purch liab ins to protect BOD from personal liab.

S Corporations

Rqmts: -domestic corp -corp not a member of an affiliated group -SHs must be indivs, estates, certain trusts, and TE orgs, or (under certain circumstances) corps. -no >100 SHs -only 1 class of stock -no nonres alien SHs Election allows avoidance of fed double taxation of reg corps at the corp level, so only divs taxed to SHs as personal income.

Duties and Liabilities of Shareholders

SH can be held personally liable in rare instances relating to illegal divs and watered stock. Watered stock is shares that a corp issues for < FMV. SH who gets this must usually pay the diff to the corp. In some states, may be liable to creditors of corp for unpaid corp debts. Majority SH who engages in oppressive conduct or attempts to exclude minority SHs from receiving certain benefits can also be held personally liable. Majority SHs own enough shares to exercise de facto (actual) control over corp. Owe a fiduciary duty to corp, minority SHs, and creditors when they sell their shares bc of the possibility of transfer of control.

Violations of the 1934 Act

Scienter req'd to prove civil/criminal penalties under 10(b) and 10b-5. Can be proved by showing false stmts or wrongful failure to disclose mat facts. Isn't req'd for 16(b) violations bc strict liability (don't need negligence either!). For 10(b) and 10b-5 violations, up to 5M files or up to 20 yrs in jail. Under SOX can get up to 25 yrs for willful violation. Both SEC and private parties can bring civil sanctions against violators under Insider Trading and Securities Fraud Enforcement Act. Violation must occur through use of national securities exchange or broker/dealer. Private parties can sue for violations of 10(b) and 10b-5 for rescission or damages from all responsible parties.

Quality Control by the Franchisor

The day-to-day op of the franchise is usually left up to the franchisee but when the franchisee preps a product/provides a service, the contract often states that the franchisor will est certain stds for the facility. Typically, the contract will state that the franchisor can make periodic inspections to ensure that the stds are being maintained. Franchise agreemts also typically limit franchisee's ability to sell the franchise to another party.

Sole Proprietorships

The simplest/most common form of business. Owner is the bus and all new, single-owner bus are sole props unless another form adopted. Advantages: -proprietor owns entire bus and gets all profits -fewer legal formalities w/ set up -only pay personal taxes on bus profits -flexible (proprietor can make any decision they want for bus) Disadvantages: -unlimited personal liab for all losses/liabs incurred by the bus -bus automatically dissolves on owner death -proprietor limited to personal funds and loans they can obtain for the bus (hard to raise capital)

Duties of Directors and Officers

They're fiduciaries and owe the co ethical/legal duties. Duty of care and duty of loyalty. Duty of care: -act in good faith (honestly) -exercise the care an ordinarily prudent person would in sim circumstances -do what they believe is in the best int of the corp Duty to make informed decisions: -stay fully informed and conduct reasonable investigation on corp matters before making decisions. Duty to exercise reasonable supervision: -supervise officers/employees when work is delegated Duty of loyalty: -subordination of personal ints to the welfare of the corp. -no competition w/ corp. -no corp opportunity. -no conflict of ints. -no insider trading. -no trans that is detrimental to minority SHs. -no selling control over the corp.

Outsiders and SEC Rule 10b-5

Tipper/tippee theory says anyone who acqs outside info as a result of corp insider's breach of fiduciary duty can be liable under 10b-5. Liab extends to tippees (get tips from insiders) and remote tippees (tippees of tippees... inception). Tippee liable only if: -there's a breach of duty not to disclose inside info -disclosure made in exchange for personal benefit (warm fuzzies) -tippee knows/should know of breach and benefits from it The missappropriation theory says an indiv who wrongfully obtains inside info and trades on it for personal gain is liable.

Shareholder Prosposals

To change a co policy, SHs can submit a proposal to the BOD and ask them to incl it in the proxy materials sent out before meetings. Under SEC rule 14a-8, all SHs who own at least 1k of stock are eligible to submit proposals for inclusion in the proxy. All cos must post proxy materials online and notify SHs how to get that info.

Tax Treatment of Partnerships

Under fed/most state laws, "pass through" w/ P/Ls and taxes attributed on a pro-rata basis to partners. Pship itself pays no taxes and only has to file info return w/ IRS.

Board Meetings

Used to conduct bus by holding formal meeting w/ recorded minutes. Unless otherwise stated in articles of incorp or bylaws, a majority of the BOD constitutes a quorum. When one is present, directors transact bus and vote on issues affecting the corp. Each director present has 1 vote.

Problem 36-11

Walid bought a Dunkin Donuts in IL. 10 yrs later, Dunkin started offering breakfast sandwiches w/ pork. Walid wouldn't sell bc his Religion forbade handling pork. Opened second franchise where he also didn't sell pork. Sold meatless sandwiches at both locations. Opened 3rd location. Tried to relocate franchise, Dunkin wouldn't approve of new location and said it wouldn't renew any of his franchise agreemts bc he wouldn't carry full sandwich line. He sued. If arguing Dunkin wrongfully term'd: existing franchise before new thing, religion, etc. If arguing for Dunkin's side: need all bus same, could hire an employee who could handle pork, opened additional franchises where he didn't comply. I think Dunkin acted in good faith and shouldn't have to accomodate bc there are ways around handling the pork and it will cause confusion for customers. Also it's beyond 1 location, it's several.

General Considerations for Small Businesses

When choosing a bus entity, entrepreneurs should consider: -ease of creation -owners' liab -tax considerations -need for capital Rqmts for all bus forms incl: -bus name registration (generally don't have to for sole prop, diff btw states) -occupational licensing -state tax registration -health/environmental permits -zoning/building codes -import/export regs For protecting intellectual prop: -trademarks: can't be the same as another's mark or so sim that confusion might result. Register w/ US Patent and Trademark Office (PTO) for the most protection. -trade secrets: must be divulged to key employees. May be req'd to agree in employmt contracts never to divulge secrets. Also may be noncompete clauses in contracts. Bank loans allow the owner to retain full oship/control of the bus, but bank may restrict some future bus decisions as a condition for the loan. May also be reluctant to loan funds to businesses that aren't established. SBA loans or state grants may be available to small-bus owners.