CPCU 530 Assignment 12

Formation

State laws do not restrict the ______ of associations for any legal purpose - Only thing state laws forbid is activities that pose a clear and present danger to society

*FREE PASS*

Forms of business ownership that share some characteristics with each other but differ with respect to the owners' liability exposures: 1. Partnerships 2. Limited Partnerships 3. Limited Liability Partnerships 4. Limited Liability Corporations *FREE PASS*

Rightful; Wrongful

- A ______ dissolution occurs in accordance with the partnership agreement and is not any partner's fault. Upon a rightful dissolution, the partnership is liquidated - If dissolution is ______, the innocent partners can choose to either wind up the business and hold the at-fault partner liable for breach-of-contract damages or continue the business for the remainder of the partnership term (Remaining partners must pay the wrongful partner his/her share of assets)

Care; Loyalty

- Directors and officers have a duty of ______ to the corporation (act honestly and in good faith with a reasonable degree of care) - Directors and officers also owe a duty of ______ to the corporation that exceeds the general duty not to defraud others - A director or officer who exercises discretionary control in such a plan's management or over its assets, or who gives investment advice, is a fiduciary under ERISA with specific statutory duties and liabilities

Retired

- Dissolution does not affect existing creditors' rights against the partnership, partners, or estates of deceased partners. Those entities are liable for new contracts - A problem can arise if a partner enters into a completely new contract on the partnership's behalf after dissolution and without any authority (Unless third party should've known of dissolution) - A partner whose actions dissolve a partnership must give notice to the other partners unless the dissolution should be obvious to them - A partner who has ______ remains liable to third parties for obligations incurred while a member of the firm

Fiduciary

- Every partner has a ______ relationship with the other partners and the firm, meaning that each partner owes a duty of trust, loyalty, and good faith to the partnership - All money made must go to the business - Partners are liable to the partnership for failing to render the services they originally agreed to perform

Directors; Officers

- ______ do not serve as a corporation's agents, but the law imposes similar duties upon them - ______, in contrast, are agents of the corporation (their principal), holding related fiduciary duties to it

Joint Venture

A ______ ______ is an unincorporated association of two or more persons established to conduct a single transaction or a series of related transactions (Ex. A business established to buy a single tract of land in order to subdivide it for sale to others). THIS is extremely similar to partnership

Promoter

A ______ is a person who creates a corporation (Can be one or more persons, corporations, or paid organizations) - Ex. Shareholder - Works to recruit interest, cooperation, and financing in forming the corporation and completes the legal and practical steps required to create the corporation - Under the RMBCA, a corporation's existence begins when the articles of incorporation are filed with the state. In some states, however, corporate existence begins when the state issues the certificate of incorporation

Corporation

A ______ is a separate, legally recognized business entity organized under state law and entitled to the same rights as a person, distinct from its owners - Can sue, be sued, own property, hire EEs, and enter into contract in its own name - 3 main types: 1. Government THIS 2. Charitable/Not-for-Profit THIS 3. Business for-profit THIS - Articles of Incorporation define the corporation's reason for existence and its powers

De Jure; De Facto

A corporation formed in compliance with the law is called a ______ ______ (in law) corporation. If corporation failed to meet some minor requirement, it is a ______ ______ (in fact) corporation - If a corporation is neither de jure nor de facto, then it technically does not exist

Redemption; Treasury Stock

A corporation may reacquire issued securities by repurchasing them. This reacquisition is known as ______ - A corporation can redeem stock only if its assets exceed its liabilities, including any obligations to preferred stockholders in the event of dissolution Stock issued as fully paid to a stockholder and subsequently reacquired but not retired by the corporation is called ______ ______ (A corporate stock issued as fully paid to a stockholder and subsequently reacquired by the corporation to use for business purposes). This stock has no voting rights

Tort and Criminal

A corporation, its directors, and its officers can be liable for their actions under both ______ and ______ law - Under tort law - Corporation is liable as a principal or employer under the doctrine of respondeat superior ("let the master answer") for all torts committed by its agents or employees within the scope of their agency or employment (Officers are not liable for EE torts) - Under criminal law - Corporations can sometimes be found guilty of a crime even if they commit it without criminal intent (Absolute liability crimes like food & drug violations) - Other crimes require specific criminal intent

Consent

A partner has neither the right nor the power to contractually bind the partnership with a third party without either unanimous or majority ______ of the partners - However, any partner can make ordinary day-to-day contracts with third parties - Upon majority consent, a partner may have actual authority to bind the partnership, but even without actual authority, a partner can bind a partnership under the principles of estoppel

Transferable

A partner's share of the profits and losses and the right to receive distributions make up his or her ______ interest in the partnership - Other partners must agree before transferring financial interest but partnership status cannot be assigned

Dissolves

A partnership ______ whenever any partner ceases to be involved in carrying out the business, if it becomes unlawful to carry on the partnership, or if the partnership becomes bankrupt - Unless otherwise provided or agreed to, partnership affairs are then wound up, or liquidated, and the partnership is terminated

Common Name

A plaintiff suing a partnership would have to serve papers on each partner. Because of the burden of determining every partner's identity and then serving papers to all of them, some states passed ______ ______ statutes, permitting suits against the partnership in its name. This is a law that permits service of process on a partnership by serving any one of the partners

Involuntary

Assigned risk auto insurance plans, or FAIR plans, as well as insurance guaranty funds are ______ associations because all insurers that write applicable lines of insurance in a given state must belong to that state's association

Dissolution

Because no specific statutory provisions apply to the ______ of associations, they can be dissolved in a variety of ways: - By members' vote - By the death or withdrawal of a majority of the members - By court action on application of creditors or members, or for illegal conduct - By the expiration of a period stated in the articles - The person authorized to wind up association affairs liquidates the assets and pays all debts and obligations (That person distributes the remaining assets pro rata (proportionately) among the members)

Receiver; Receivership

Because of the public interest in an insurance company's ability to pay its claims, courts designate the state department of insurance as the ______ (Disinterested entity to account for money/property due) in the insurer dissolution process known as ______ (Type of bankruptcy an insurer enters into when a receiver is appointed to manage the insurer and its property)

Bylaws

Contract of association is embodied in the Articles of Association, Constitution, or Charter. This is the fundamental body of rules governing the association A voluntary association can adopt ______ to serve as the rules of the association and provide regulations concerning discipline, doctrine, or internal policy. Bylaws include provisions addressing these issues: 1. Qualifications, selection, and terms of directors and trustees 2. Meetings 3. Qualifications for membership 4. Acquisitions and transfer of property 5. Rights and duties of members 6. Dissolution

Tender Offer

Corporation can purchase shares of the target corporation to become eligible to vote on its board of directors - To purchase shares, the prospective acquirer will make a ______ ______ (A purchase offer made directly to the shareholders of the target, typically at an offer price greater than the current market price) - Any entity that acquires more than 5% ownership of securities must file a statement with the SEC

Debt; Equity

Corporations raise funds by issuing two principal types of securities: 1. ______ securities - AKA Bond (Long-Term debt instrument that requires the issuer to pay a set annual rate of interest and to repay the borrowed sum on a specified date) is a debt obligation 2. ______ securities - Are the corporation's capital stock and represent the stockholders' ownership of and equity, or financial interest, in the corporation - Bondholders are creditors of the corporation, while stockholders are owners of the corporation

Insurance

Differences between ______ company mergers and general corporation mergers: 1. Regulated corporations, such as insurance companies, can engage in only one type of business; insurers can merge only with companies in the same business 2. State departments of insurance must approve insurance company mergers

Insider

Directors and officers may not appropriate a business opportunity that belongs to the corporation for their own gain (Ex. Director may not purchase a business that he/she knows the corporation is seeking to purchase) - It is illegal for directors or officers of a corporation to use ______ information to their own advantage, such as to buy or sell stock to profit or to avoid loss - D&O's who use insider information for personal gain are also subject to civil penalties (The Insider Trading Sanctions Act of 1984 imposes a civil penalty on anyone who deals in securities based on "material, nonpublic" information)

Inside; Outside

Directors can be: ______ Directors - A corporate officer that serves on the corporation's board of directors OR ______ Directors - A member of a corporation's board of directors who is a corporate officer and who may not necessarily be connected with the corporation (Ex. a respected businessperson who provides perspectives on the organization) Important: Directors have no legal right to act individually on behalf of the corporation and can make decisions only when acting together in a meeting

Property

Every voluntary association member has a ______ right in its assets - Articles of association, however, can give the right to control and dispose of property solely to the board of directors

Wind Up

If the partnership dissolves, the business is liquidated. The remaining partners, or the last surviving partner's legal representative, must then ______ ______ the partnership's affairs Dissolved partnership's assets are distributed in this order: 1. Partnership creditors 2. Partners' advances 3. Each partner's capital 4. Surplus to the partners, divided in the same proportion as profits - If partnership is insolvent, the partners face unlimited liability for partnership debts If the partnership and all the partners are insolvent, the case goes through liquidation proceedings in a bankruptcy court

Share Exchange; De Facto

In a ______ ______ merger, a corporation acquires all of another corporation's outstanding shares in return for shares of the acquiring corporation. A share exchange plan must be adopted by the board of directors of the disappearing corporation and approved by that corporation's stockholders In another form of merger, a corporation sells all or most of its assets to another corporation in return for the purchasing corporation's shares, for distribution to its stockholders. In this way, two organizations are merged, but not necessarily in accordance with the statutory requirements for a merger. This transaction is known as a ______ ______ merger - a merger in fact, if not in law

Liable

Individual members can be ______ for both torts and contracts arising from the association's activities - In common law, an unincorporated association is not liable for the actions of its members because it is not a separate legal entity and cannot be sued - Members of not-for-profit associations do not have individual liability to third parties unless they join in authorizing a contract

Directors or Trustees

Individual members of the association normally do not participate in the day-to-day management of the association; that authority is usually given to the association's elected board of ______ or ______ - Association directors have no legal right to act individually on behalf of the association and can make decisions only as a group - Standard of care is not high for not-for-profit association directors

Joint; Joint and Several

Liability under partnerships: For liability under a contract with two or more people, the liability is ______, a plaintiff has to sue all of those at fault For liability under tort cases, the liability is ______ & ______. The plaintiff could choose to sue all the partners or any number of them - For torts committed by one of the partners: All partners are liable

Dissolution

Partnerships can dissolve voluntarily, or courts can declare ______ - One partner can apply for dissolution when other partner is incapable of performing duties

Interlocking

Sometimes, when beneficial, the corporation may enter into business with one of its own directors or with another corporation that shares some or all of the same directors (referred to as ______ directors)

Class Action; Derivative; Direct Action

Stockholders may file one of three types of civil lawsuits to pursue complaints: 1. ______ ______ suits - When a transaction damages many people, one or more of them can file a representative, or class action, suit on behalf of all, thus avoiding multiple suits on the same factual and legal questions 2. ______ suits - One or more stockholders may initiate a suit on behalf of the corporation for damages incurred by the corporation. For example, they might file a derivative suit if an outside auditing firm negligently audited their books 3. ______ ______ suits - The least common stockholder suit, direct action suits allow stockholders to seek remedy for direct harm

Meetings

Stockholders' ______ are held annually for the purpose of giving stockholders, as the corporation's owners, an opportunity to vote on corporate matters over which they have power - State law establishes a cutoff date to determine which stockholders are eligible to vote (Only those stockholders owning stock and holding voting rights as of the cutoff date are eligible) - Holders of a certain percentage of the outstanding shares may call special meetings when permitted by statute, articles of incorporation, or bylaws Meeting notice is provided to stockholders in writing - A quorum, established by statute, articles, or bylaws, is needed to transact business lawfully at the meeting

Commerce; Professional Corporations

The ______ Clause in the United States Constitution provides Congress with the authority to regulate commerce among the states, and most corporations are involved in interstate commerce - General business corporation laws prohibit professionals such as doctors, lawyers, and accountants from incorporating because of the personal and confidential relationships required with their clients. These entities would form ______ ______, where members are liable for their own malpractice, but they are not liable for the malpractice of other members (employees) of the corporation

Estoppel

The doctrine of partnership by ______ protects innocent third parties who have relied on the appearance of a partnership - Acts for estoppel must be within the scope of business or what similar partnerships in that area ordinarily do

Incorporation

The primary advantage of ______ is that it limits the owners' liability for the corporation's contracts and torts - Other advantages: 1. Potential tax advantages 2. Easier to sell or transfer ownership 3. Easier to raise capital 4. Perpetuity beyond the death of owners

Liability

The primary advantage of incorporation is that it limits the owners' ______ for the corporation's contracts and torts - Owners are not liable for remaining debt in a bankruptcy situation - However, in closely held (privately owned) or family-owned corporations, loan contracts may be written to bypass the stockholders' immunity from liability for corporate debts

Foreign Corporations

Those corporations incorporated and domiciled in another state are called ______ ______ - Must be admitted and recognized by a given state to do business in that state - RMBCA requires a foreign corp to obtain a certificate of authority from the secretary of state before transacting business (Insurers apply to state department of insurance) - A state can forbid or control the activities of a foreign corporation with respect to intrastate (within the state) commerce but has no jurisdiction over interstate (between the states) commerce of any corporation (Fed laws apply for that) - Long-arm statutes allow residents to sue entities that are not physically present in the state but have minimum contacts there

(Unincorporated) Associations

Types of ______ ______: 1. Trade associations 2. Labor unions 3. Benevolent and fraternal associations 4. Religious organizations 5. Clubs 6. Condominium owners' associations

Reorganization

Under Chapter 11 of the Bankruptcy Reform Act of 1978, a corporation may be placed under federal bankruptcy court supervision for ______ purposes (Proceedings may end in either a restructured organization or termination) - Chapter 11 filings are the most common way for corporations to restructure debt - Corporations will typically restructure by changing the ownership or operational structure of the organization in order to be more profitable - In the absence of a satisfactory reorganization or other plan, the bankruptcy court may convert the case to a regular bankruptcy liquidation proceeding under Chapter 7 of the federal bankruptcy laws

Equally

Unless the partnership agreement says otherwise, each partner shares ______ in profits, losses, and any surplus that remains if the partnership is dissolved - The partnership indemnifies each partner for payments made or personal liabilities incurred in the course of business when a partner has acted within the scope of his or her authority - Partner who is guilty of gross negligence is solely liable and not entitled to indemnification

Exist

Why corporations cease to ______: 1. Merger - The joining together of two or more corporations to become a new organization 2. Dissolution - A voluntary/involuntary termination of a corporation 3. Reorganization - Occurs when a corporation becomes bankrupt

Partnership

______ - A for-profit business entity jointly owned by two or more persons who share ownership and profits (or losses), although not necessarily on an equal basis - Advantage: Income is taxable at each individual partner's tax rate rather than at a corporate rate - Two or more people are presumed to be partners if they agree to work together in any line of activity and share the profits and losses, whether equally or not

Takeover

______ - The assumption of control by one corporation over another through merger, acquisition, or some other type of transaction - When one corporation wants to control or acquire another corporation against the will of that corporation's board, the acquiring company can attempt a hostile takeover - One corporation can gain control over another by bypassing the target corporation's board and acquiring sufficient proxies from the target corporation's stockholders to elect its own board of directors or to vote for a merger

Merger

______ - Two or more corporations join together to become a new, single corporation - New corporation owns all the assets and is subject to all the liabilities of the merging corporations - Both board of directors' develop a plan of merger and stockholders must approve - Stockholders are entitled to dissent to a merger, a share exchange, or the sale of all or substantially all of a corporation's assets that does not occur in the usual course of business - A corporation that owns at least 90 percent of another corporation's stock may merge that subsidiary corporation into itself without stockholder approval (Only need to send merger plan to subsidiary stockholders); Insurance statutes require 95% for insurance companies

Horizontal; Vertical; Conglomerate

______ Merger - Merger between businesses that compete with each other ______ Merger - Merger between an organization and a customer/supplier ______ Merger - Merger of two organizations that are not competitors or linked as customer/supplier

Common; Preferred

______ Stock - An ownership interest in a corporation that gives stockowners certain rights and privileges, such as the right to vote on important corporate matters and to receive dividends - Can be issued as different classes of stock, where voting rights differ according to class ______ Stock - Stock that is generally nonvoting but that has priority over common stock, usually regarding dividends and capital distribution if the corporation ends its existence

Limited Partnership

______ ______ - A form of partnership made up of one or more general partners, who have unlimited liability, and one or more limited partners, whose liability is limited to the amount of capital they have contributed to the partnership - Limited partnership has tax advantages (The partnership itself is not taxed, and the income attributable to each partner is taxed at the partner's personal tax rate) - Paper losses are attributable to each partner each taxable year to reduce their taxable income

Unincorporated Associations

______ ______ - A voluntary association of individuals acting together under a common name to accomplish a lawful purpose - Ex. Trade Associations, Labor Unions, Religious Organizations, Clubs - Sometimes called a voluntary association

Limited Liability Companies

______ ______ ______ - A form of business entity that provides its owners the limited liability of a corporation and the tax advantages of a partnership - Owners are called members. Members appoint managers to conduct business operations - Structure appeals to real estate firms, high-tech start-up companies, and other entrepreneurial businesses with small numbers of active investors (State laws generally prohibit banking, trust, and insurance industry businesses from forming THESE) - Many states have created alternative forms of ownership, such as professional corporations (PCs) and professional LLCs, to meet the needs of such professionals as accountants, lawyers, engineers, and physicians

Limited Liability Partnership (LLP)

______ ______ ______ - A partnership limiting each partner's personal liability for acts or omissions of other partners - Limits liability for EACH partner, unless for wrongful acts or agreed upon debts - States differ with respect to the extent of liability protection granted to THESE

Dividends; Management

______ are shares of corporate profits paid to stockholders (Profit for stockholders) - Once the board formally declares a dividend, the stockholders become creditors of the corporation - Some stockholders may prefer to invest these profits back into the corporation, while others may prefer to receive them as payments - Dividends are usually paid in cash, but not always Other types of dividends: Property, Stock, Extra, Liquidating - ______ decides whether to declare dividends in good faith and for a corporate purpose

Associations

______ are the most common organizational form of not-for-profit organizations - Although unincorporated, resemble corporations in their form and organization - Biggest difference in common law is an association is not a legal entity separate from its members and managers - Corporations can sue and be sued in the corporate name, but in many jurisdictions, an association cannot - An association resembles a partnership in that, because an association is not a separate legal entity like a corporation, its members may be individually liable for the association's activities

Dissolution

______ is the termination of a corporation. Can be voluntary or involuntary - Voluntary corporate dissolution begins with a board resolution to dissolve the corporation, approved by a majority of the stockholders - Involuntary dissolution occurs when the state of incorporation, the stockholders, or corporate creditors file for involuntary dissolution proceedings (State proceedings occur only in cases of gross abuse of corporate privilege)

Books

______ must be kept at the partnership's principal place of business - All partners have the right of access to the partnership's books for purposes related to the partnership

Stockholders

______ normally delegate management powers of the corporation to the board of directors (Who then have the power to create/implement business policy) - Stockholders have the power to make decisions on issues likely to fundamentally affect them - Stockholders have no fiduciary relationship to the corporation and therefore can vote in their own best interests. However, majority stockholders may not manipulate corporate affairs to the disadvantage of minority stockholders

Board of Directors; Corporate Officers

______ of ______ makes two types of decisions: 1. The corporation's structure and form (Requires stockholder approval since it would change the terms of the contract between corp and its stockholders) 2. Determines business policy (Does not require stockholder approval) - State statutes may establish the minimum number of directors required - ______ ______ implement the policies determined by the board of directors (CEO, COO, etc.)

State

______ statutes define and limit powers of corporations. Laws require corporations to file corporate charters which specify the type of business the corporation will engage in and its goals and objectives - Corporations have implied powers to do all things necessary or convenient to achieve the corporation's purpose - A corporation that exceeds its chartered powers acts Ultra Vires