Business Entities- prior exam questions

conspicuously

Easily seen or noticed

What type of vote is required by members of a limited liability company to sell substantially all property owned by the company? explain any assumptions pertinent to your answer.

Unless the articles of organization or a written operating agreement provides otherwise, the alienation, lease, or encumbrance of immovable property can be authorized by a majority vote of the members, whether or not the LLC is member-managed or manager-managed. [Matters requiring a majority vote of members regardless of the type of management structure are: (i) dissolution and winding up of the LLC; (ii) disposal or encumbrance of all or substantially all of the LLC's assets; (iii) mergers or consolidations; (iv) extraordinary debt incurrence; (v) alienation, lease, or encumbrance of any immovables; and (vi) amending the articles or operating agreement.]

If a stockholder who is also a directer votes against authorizing dividends rendering the company insolvent, will she have any exposure upon accepting her share of the dividend distribution? explain why or why not.

Yes. A shareholder, whether or not he is a director or is liable as a director for an unlawful dividend, and whether or not he is even aware that the dividend received was unlawful, is liable in indemnity to any director who is held liable for the payment of an unlawful dividend for the proportionate amount of the unlawful distribution received by the shareholder.

Does a partner in a partnership, acting alone, have the authority to sign contracts on behalf of the partnership and thereby binding the partnership?

A partner, acting alone, does not have the authority to act as a mandatary of the partnership and thus may bind the partnership to contracts, but only with respect to all matters in the ordinary course of the partnership's business except the alienation, lease, or encumbrance of its immovables. A partner does not have the authority, however, to sign contracts binding the partnership with respect to matters not in the ordinary course of business or, even if in the ordinary course of business, matters that involve the alienation, lease, or encumbrance of its immovables.

Regarding a Louisiana corporation that was validly formed after January 1, 2015: (a) What is a voting trust? (b) How is a voting trust formed? (c) What is the maximum permissible term of the voting trust?

(a) A voting trust is a trust established by shareholders of a corporation into which they place their shares of stock. The voting rights of those shares are exercised by the trustee of the voting trust. The original shareholders retain the economic rights in the shares. (b) A voting trust is formed by shareholders signing an agreement setting out the provisions of the trust. When a voting trust agreement is signed, the trustee then prepares a list of the names and addresses of all voting trust beneficial owners, together with the number and class of shares each transferred to the trust, and delivers copies of the list and agreement to the corporation's principal office. (c) For a voting trust formed after January 1, 2015, there is no limit on the maximum permissible term of the trust. The statute merely states that limits on duration of the trust "shall be set forth in the voting trust." For voting trusts established before January 1, 2015, the maximum duration is 15 years, which term can be extended for an additional 10 years.

Regarding a validly formed Louisiana corporation: (a) What qualifies as an "emergency" for the board of directors to exercise emergency powers under the LBCA? (b) What powers can the board of directors exercise when there is an "emergency"? (c) What two elements must a corporate director, officer, or employee satisfy to avoid personal liability for an action during an emergency?

(a) An emergency exists when a catastrophic event makes it impracticable to attain a quorum of the corporation's directors when and as necessary to carry out the functions of the board of directors. (b) During an emergency, the board of directors of a Louisiana corporation can: --(1) modify lines of succession to accommodate the incapacity of any director, officer, employee, or agent; --(2) relocate to principal office, designate alternative principal offices or registered offices, or authorize the officers to do so; and --(3) conduct meeting in accordance with more lax rules of notice and procedure. (c) In order to avoid personal liability for actions taken during an emergency, the actions of a director, officer, or employee must be both (1) in good faith, and (2) taken to further the ordinary business affairs of the corporation.

In a member-managed limited liability company: (a) By what vote do members make decisions? (b) Is their vote counted by heads or their respective percentage membership interests? (c) In what manner may the voting approval requirements and/or method of calculating votes be changed?

(a) Generally speaking, members of a LLC make decisions by a majority vote. (b) Unless otherwise provided in the articles of organization or a written operating agreement, each member receives one vote. (That is, the default rule is that votes are counted by head.) (c) The approval/counting requirements can be changed by the members by amending the articles of organization or including the appropriate provision in a written operating agreement.

The LBCA specifies the types of rights, preferences, or limitations that may be used to vary classes and series. The articles may authorize shares that:

(i) have special, conditional, or limited voting rights, or no right to vote; (ii) can be redeemed or converted for cash, indebtedness, securities, or other property (the redemption or conversion can take place at the option of the corporation or the shareholder, or on the occurrence of a specified event); (iii) entitle the holders to distributions, including dividends; or (iv) have preference over any other class of shares with respect to distributions, including on dissolution of the corporation.

Acme Corporation is a properly formed Louisiana corporation. Its articles of incorporation provide in part that "This Corporation shall have authority to issue an aggregate of 4,000 shares of no par value common stock." To date, 2,000 shares of stock have already been issued by Acme. The articles do no address bylaws one way or the other. Feeling that the corporation required considerably more capital, the BOD met last month and unanimously adopted a single bylaw, stating "This Corporation shall have authority to issue an aggregate of 5,000 shares of no par value common stock." Last week at a properly convened meeting, the shareholders disagreed with the board's action and thus unanimously amended the single bylaw to read "This Corporation shall have authority to issue an aggregate of 2,000 shares of no par value common stock; the board of directors has no authority to amend this bylaw." The shareholders also unanimously signed (and filed with Acme) a shareholders' agreement providing the same thing. No other corporate bylaws have ever been adopted. No attempt has yet been made to issue any further shares of stock. 1.1 Did the board of directors have the authority to adopt its single bylaw? Discuss. 1.2 Did the shareholders of Acme have the authority to adopt their amendment to the single bylaw adopted by the board of directors of Acme? Discuss. 1.3 After the passage of the single bylaw by the BOD and its subsequent amendment by the shareholders, how many further shares of stock in the aggregate does the board now have the power to issue? Discuss. 1.4 What other actions can the shareholders of Acme take to ensure that Acme cannot issue any further shares of stock and to bind future shareholders to such a limitation? For each action, also describe any limitations as the effectiveness of such action. Discuss.

1.1 - A board of directors has the power to adopt, amend, and repeal bylaws. Generally speaking, a bylaw unanimously adopted by the board would be valid. However, in this instance, the bylaw conflicts with the articles of incorporation, raising the number of authorized shares from 4000 to 5000. If a corporation wishes to amend a provision of its articles, it would need to go through the amendment process, which includes shareholder approval. Therefore, because of its subject matter, the board does not have the authority to adopt this particular bylaw. 1.2 Shareholders do have the power to amend and repeal bylaws adopted by the board. Again, generally speaking, a shareholder amendment to a board-adopted bylaw would be valid. In particular, the statute authorizes the shareholders to include a provision in its bylaw amendment prohibiting the board from further amendments, allowing shareholders to have the final say in a dispute over the bylaws. However, the subject matter of the bylaw amendment is troubling. This shareholder bylaw also attempts to revise a provision in the corporation's AOI. A bylaw amendment is not a proper vehicle for amending the articles and would not be considered valid. 1.3 The board likely still has the power to issue 2000 additional shares, but that power may have been taken away, depending upon details of the shareholders' agreement that are not provided in the question. The articles of incorporation authorize the corporation to issue 4000 shares. 2000 have been issued. Both attempts at bylaw revision should fail, leaving the corporation (which acts through its board) 2000 shares to issue. It is possible to change that 4000 share number in two relevant ways. First, the articles can be amended, which they have not in this case. Second, the shareholders can do so by entering a unanimous governance agreement. To be valid, the agreement must: (i) not be set forth in the articles or bylaws, (ii) be set forth in a written agreement signed by all persons who are shareholders at the time of the agreement, (iii) state that it is a unanimous governance agreement, and (iv) be filed with the corporation. Here, it does say that the shareholders signed an agreement lowering the number of authorized shares to 2000, meeting the first and second requirements of validity. It also says the agreement was filed with the corporation, meeting the fourth requirement. However, it is not disclosed whether the shareholders' agreement states explicitly that it is a unanimous governance agreement, which would meet the third requirement and render the shareholders' agreement valid. If the shareholders' agreement qualifies as a unanimous governance agreement, it should be effective in limiting the board's authority to issue additional shares, meaning that the board would have no authority to issue shares in addition to the 2000 shares already outstanding. 1.4 First, the shareholders could amend the articles of incorporation to reduce the number of authorized shares to 2000. An amendment to the articles requires the majority of votes entitled to cast in order to be approved. This option would be effective in limiting the authority of the board to issue additional shares. However, it would not bind future shareholders will because shareholders holding a majority of votes entitled to be cast could amend the articles in the future, raising the authorized share limit. This action should be very effective as long as the 2000 share limit remains in place, but would not limit a simple majority from changing the lower share threshold. Additionally, the shareholders could adopt a unanimous governance agreement limiting the ability of the board to issue additional shares without shareholder approval, or placing the power to issue additional shares directly into the shareholder hands. A UGA needs to be a writing separate from the articles or bylaws, signed by all persons who are shareholders at the time of the agreement, state that it is a unanimous governance agreement, and be filed with the corporation. This method would be more effective in binding future shareholders, as the agreement is only subject to amendment by the assent of all signatories. It might not bind future shareholders indefinitely, as the default term for a UGA is twenty years. One limitation of this method is that it cannot be put into place if even a single shareholder objects. As its name implies, it must be unanimous. A final possibility is that a majority of shareholders could agree amongst themselves (through a method such as a shareholders' agreement or a voting trust) that they will only support the election of directors who commit to refrain from additional share issuances. This method would have a similar strength to the first option--only a majority is needed to implement it. It would have the added advantage of potentially being more durable, because the obligation of a majority to elect directors can be specifically even if a shareholder changes his or her mind and would prefer to raise the limit. It has a real limitation on its effectiveness in that the directors, once elected, must use their judgment and act as fiduciaries. If they determine that issuing additional shares is in the best interest of the corporation, shareholders might not be able to stop them.

Identify two circumstances that would cause a certificate of authority for a foreign limited liability company to be revoked.

A certificate of authority may be revoked by the Secretary of State for any of nine reasons set forth in Louisiana's statutory provision, which are [select any two of the following]: (1) the LLC has failed to pay any fees, taxes, or penalties prescribed by law when they have become due and payable; (2) the LLC has failed to maintain a registered agent or registered office in Louisiana or failed to maintain any legally required records; (3) the LLC has failed to file a notice that its registered office or agent has changed name or address; (4) the LLC has failed to file any certificate of name change or amendment of its certificate of authority; (5) the LLC has made a material misrepresentation in any filed application, report, or other document; (6) the LLC has exercised authority not conferred upon it or has abused authority conferred upon it; (7) the LLC has done or omitted any act that amounts to a surrender of its rights to do business; (8) the LLC has dissolved; or (9) the LLC is delinquent in filing its annual report. Before revoking, the Secretary of State must give the LLC at least 60 days' notice, in writing, of the grounds on which the proposed revocation is based. The LLC then has a chance to correct the flaw within that 60-day period.

Name three activities that limited partner of a partnership in commendam must avoid to maintain the status as a limited partner.

A commendam partner will lose protection from limited liability if she: (1) permits her name to be used in the business dealings of the partnership, (2) participates in the management or administration of the partnership, or (3) conducts business with third parties on behalf of the partnership (although she will then only be personally liable to those person with whom she conducted business who reasonably believed she was a general partner).

Describe the business records that a corporation is required to maintain at its office for inspection by shareholders.

A corporation is required to maintain at a minimum: (i) minutes of all shareholder and board meetings and a record of all actions taken at the meetings or taken by a committee in place of a board meeting; (ii) appropriate accounting records; and (iiI) a record of the corporation's shareholders, in a form that permits preparation of a list of the names and addresses of all shareholders, in alphabetical order by class of shares showing the number and class of shares held by each.

What are the differences between a direct action and a derivative action by a shareholder against the directors of a corporation?

A direct action is a personal action of a shareholder for individual harm caused to that shareholder personally. Direct actions are brought according to the applicable rules of procedure governing the claim alleged. A derivative suit may be brought by a shareholder for harm caused to the corporation itself by the director. Because a derivative suit is attempting to redress harm that impacts all shareholders, there are a number of particular rules that govern derivative suits. Those rules include the requirement to make demand on the board before filing suit, and the ability of a committee of qualified directors to pursue dismissal of the suit. [more specifically, the shareholder must make a written demand on the corporation to take suitable action. A derivative proceeding may not be commenced until 90 days after the date of demand, unless: (i) the shareholder has earlier been notified that the corporation has rejected the demand; or (ii) irreparable injury to the corporation would result by waiting for the 90 days to pass. . . . . also the corporation is named as a party defendant]

can a partner in a partnership withdraw? if so, under what circumstances?

A partner may withdraw from the partnership constituted for a term only if either (1) she gets the consent of the other partners, or (2) there is "just cause" for withdrawal arising out of another member's failure to perform a material obligation. If a partnership is not constituted for a term, a partner may withdraw for any reason at any time provided adequate notice is given to the LLC/partnership in good faith at a time that is not unfavorable to the partnership.

If a lawsuit is brought be a third party against a partner of a general partnership on account of his/her status as a partner, and the partner successfully defends the suit, is the partner automatically entitled to reimbursement from the partnership for the reasonable attorneys' fees incurred in defending the suit? Explain.

A partner sued in her capacity as a partner is not specifically entitled to reimbursement for expenses incurred in defending the suit. This is true regardless of whether the partner is successful in defense of the action. This result is contrary to the rights of directors in corporate law, where there is specific statutory authority entitling the director to reimbursement for amounts spent in defense of claims where she was successful on the merits or otherwise. However, indemnification might be required by mandate law under the Civil Code if the costs of defending the suit could be characterized as a loss suffered by the partner, without his own fault, as mandatary (agent at common law) of the partnership (as principal).

July 2019 Question 2 -Part 2(A) 2.1 Was there a partnership between Amanda and Christopher? Explain fully.

A partnership is a juridical person, distinct from its partners, and may be created orally and even inadvertently simply by two or more persons combining their efforts or resources for mutual risk and benefit. Importantly, there is no form requirements (i.e., writing requirement) to create a partnership, rather the parties must only intend the relationship to exist. Under these facts, Amanda and Christopher appear to clearly have created a partnership. They have been operating a natural foods business for a number of years under which Amanda contributes management services and Christopher contributes capital. They split the profits from the business and cover any business losses equally. Therefore, they exhibit all of the characteristics of an unwritten, but legally valid, partnership. Furthermore, there is evidence in the that the creation of the partnership may not even have been inadvertent, since the facts state that the two "tried to purchase the building for the partnership," and Amanda's email to Christopher stated that she was "leaving our partnership." Both of these facts reinforce the argument that a partnership existed between Amanda and Christopher.

Identify three circumstances causing the termination of a partnership under Louisiana law?

A partnership is terminated by: (1) unanimous consent of its partners; (2) a judgment of termination; (3) the granting of an order for relief to the partnership under Chapter 7 of the Bankruptcy Code; (4) the reduction of its membership to one person; (5) the expiration of its term; (6) the attainment of, or the impossibility of attainment of the object of the partnership; or (7) in accordance with provisions of the contract of partnership.

Can partners by expelled from a partnership, and, if so, under what circumstances and by what vote?

A partnership may, by majority vote of the partners, expel a partner for just cause.

[July 2019] Question 1- Part 1(A) 1.4 Were the proxies valid for the rescheduled shareholder meeting? Did the 10 dissenting shareholders have the legal right to revoke their proxies? Explain fully.

A shareholder may vote his shares either in person or by proxy executed in writing or via electronic transmission by the shareholder. A proxy appointment is effective when it is received by the inspector of elections, the secretary, or other officer or agent of the corporation authorized to tabulate votes. An appointment is valid for eleven months unless a longer period is otherwise expressly provided. If the name signed on a proxy appointment corresponds to that of a shareholder, the corporation is entitled to accept the vote of said proxy, provided that the corporation is acting in good faith. Generally, the appointment of a proxy is revocable by a shareholder. Revocation is usually accomplished in writing, by the shareholder's presence at the meeting to vote for him or herself, or by the subsequent appointment of another proxy. A proxy will be irrevocable only if the appointment form conspicuously states that it is irrevocable, and the appointment is coupled with an interest. Under the facts here, shareholders validly appointed Jack as their proxy. The appointments were accomplished in writing, since the electronic transmissions (the e-mails) contained information from which one could determine that the shareholders authorized the transmissions (they included electronic signatures). Further, these emails were handed over to the corporate secretary for Acme, thereby completing the process and making them valid. As to revocation, regardless of whether the appointments were potentially coupled with an interest, none of the facts indicate that the emails conspicuously stated that the proxy appointments were irrevocable. Therefore, the 10 dissenting shareholders most certainly had the legal right to revoke their proxies.

Why might a shareholder want cumulative voting?

A shareholder might want cumulative voting if he owns a significant minority stake in the corporation. In that circumstance, the shareholder would not be able to elect any directors under the default plurality system, but would be entitled to some board representation using cumulative voting.

What is a voting trust? When would it be used by shareholders?

A voting trust is a trust created by one or more shareholders of a corporation into which shares of stock in the corporation are donated. The ownership of the shares (both the certificates and record title) are transferred to a trustee who exercises all of the rights of a shareholder (right to vote, right to inspect the corporate books, right to petition for a special shareholders' meeting, dissenters' rights, preemptive rights, right to bring a derivative suit, etc.). When dividends are distributed, the trustee receives them and then distributes them to the one or more beneficial owners of the trust shares in accordance with the trust document. Thus, the legal and beneficial ownership of the shares are separated. A voting trust created prior to January 1, 2015 is valid for a maximum of 15 years from the date of creation or for any period stated in the trust document that does not exceed 15 years, although the trust agreement may contain a provision permitting the trust creator(s) by majority vote to extend the trust beyond its original term beyond the fifteenth year up to an additional ten years. A voting trust created after 2014 is not subject to these durational limitations. This device would be used by a shareholder whenever the shareholder wanted to give the beneficial interest in his shares to someone but, for whatever reason, wanted the shares to be managed by someone other than the person(s) owning the beneficial interest (e.g., when the owner of the beneficial interest is a minor child, an incompetent, someone unavailable to monitor the shares, or someone the shareholder believes does not have the good judgment to manage the shares).

Alice and Betty started their new business in January of this year (2014). Purporting to act on behalf of their Company, A & B, Inc. (the "Company"), they signed a purchase agreement in January with Office Supply Co. to buy office furniture. The purchase is on credit with monthly payments due over the next three years. The office equipment was delivered shortly after the purchase agreement was signed. None of the monthly payments due to Office Supply Co. has been made. Alice and Betty did not file the Company's articles of incorporation with the secretary of state until April of this year. A. Will Office Supply Co. be successful in an action against the Company for breaching the monthly payment agreement for office equipment?

A. Liability of the Corporation: As an initial matter, the corporation would not be liable for breach of the contract. A corporation is a distinct juridical person that comes into being upon the effectiveness of the filing of proper incorporation documents with the secretary of state. That process occurred in April, meaning that the corporation did not exist and could not contract in the previous January. However, there are three ways that the corporation could become liable for the contract after the fact, and is likely that it has become liable. The first possibility is that the corporation has ratified the contract. Ratification can be done explicitly (for example, by the board adopting a resolution agreeing to be bound by the agreement). There is not evidence of explicit ratification here. Ratification can also be implied through conduct, specifically by accepting the benefits of the agreement. In this situation, A&B, Inc. continues to use the office furniture that was delivered under the contract. The use of the furniture by A&B will likely result in a finding of implied ratification and therefore liability for A&B, Inc. The court may also use two equitable doctrines to find A&B liable. These are the de facto corporation doctrine and the corporation be estoppel doctrine. We do not have enough facts to know whether these two doctrines apply. For the de facto corporation doctrine to apply, we would need to find that Alice and Betty made a good faith effort to incorporate before signing the contract in January (unknown/unlikely on these facts), and that they exercised only corporate authority in purporting to bind the entity (likely under these facts). Under the corporation by estoppel doctrine, we would focus on the conduct of Office Supply Co. If it relied only on the name and assets of A&B, Inc., and not those of Alice and Betty, in entering into the agreement, then the court could allow it to recover from the entity. We have no information from the question on why Office Supply Co. entered into this contract, only that Alice and Betty were "purporting to act on behalf of their company."

who may be held liable for unlawful dividends issued by a corporation?

All directors who knowingly or without due care vote in favor of an unlawful dividend are jointly and severally liable to the corporation for the amount of the dividend that was paid unlawfully. Any director who is held liable for an amount of an unlawfully paid dividend may then seek to be repaid (i.e., be indemnified) that amount from the shareholders who received the unlawful dividend, whether they received it knowing it was unlawful or not, for the proportionate amount of the unlawful dividend received by each shareholder.

July 2019 Question 2 -Part 2(A) 2.3 What duties, if any, did Amanda breach by purchasing the building? Explain fully.

All partners owe each other and the partnership itself a fiduciary duty. This means that a partner may not appropriate any partnership asset, including a prospective business opportunity, for his own personal benefit or act as a partner in a manner contrary to what he perceives to be in the best interest of the partnership. Having failed to effectuate a withdrawal (as discussed in response to Question 2.2), Amanda remains a partner and the partnership remains in existence. This means she has and continues to owe the fiduciary duty described above. As such, Amanda will be liable to the partnership for any damages caused by her attempted wrongful withdrawal. In this case, Amanda and Christopher (as partners) intended to purchase the building in which the business operated from the landlord. When the landlord contacted Amanda and he/she was ready to sell, this became a business opportunity for the partnership. Amanda, as a partner, then had a duty not to take or otherwise deprive the partnership of this opportunity--particularly for her own gain. Yet, this is exactly what she did when she attempted to withdraw or otherwise dissolve the partnership in her favor and then entered into a purchase agreement to acquire the building herself. Having so breached her duty, the partnership can recover damages from Amanda for the harm the entity suffered, as well as any profits that Amanda acquired from her wrongdoing.

List the information that is required to be included on the annual report for a LLC.

An LLC's annual report must include: (i) the municipal address of its registered office; (ii) the name and municipal address of its registered agent(s); and (iii) the name and municipal address of each of its managers (if manager-managed) or members (if member-managed).

Explain the legal duty owed by an officer of a corporation.

An officer of a corporation is required to act in good faith, with the care that a person in a like position would reasonably exercise under similar circumstances, in a manner the officer reasonably believes is in the best interest of the corporation. An officer is also an agent of the corporation and would owe the duties of a mandatary under the Civil Code.

Who can file a shareholder derivative action and under what circumstances?

Any shareholder who owned at least one share of stock at the time a liability to the corporation arose (or acquired the share since by will, inheritance, or operation of law) and still owns the share (or has a beneficial interest in the share) at the time the lawsuit is filed, may be the plaintiff in filing a shareholder derivative action against any person against who the corporation has a legitimate cause of action, provided the corporation is unwilling to bring the suit itself.

Is a member in a limited liability company automatically entitled to reimbursement from the company for the reasonable attorney's fees he/she incurs in successfully defending a lawsuit brought against him/her (another exam adds: for stealing corporate secrets of a former employer) ? is a director or officer of a corporation so entitled?

As to LLC members, No. There is no provision in the LLC statute in Title 12 that is comparable to the indemnification provisions in the corporations statute mentioned below, an thus there is no statutory requirement automatically requiring an LLC to reimburse a member (or a manager) for costs associated with successfully defending a lawsuit brought against her by a third party for her conduct on behalf of the LLC or because of her status as a member (probably because Title 12 says that member/managers are not proper parties in such suits). However, if such situation were to arise, it is probable that mandate law would require the member to be reimbursed for such costs. As to corporate directors or officers, Yes. Such reimbursement is expressly provided in the LBCA. [for exam question that added "for stealing corporate secrets of a former employee"] All the same as above, but: "This assumes, however, that the accused LLC member could persuade the court that her alleged stealing of corporate secrets from a former employee was done on behalf of the LLC or because of her status as a member of the LLC. If the alleged stealing of the secrets was unrelated to her membership in the LLC or her conduct on behalf of the LLC, then even mandate law would be unlikely to apply and no reimbursement of expenses would be available."

Chuck, Bill, and Sam decide to lease an office space near campus where they can tutor students. They sign a one-year lease and the monthly rent is $1000. Chuck has the most clients but no money to contribute, Bill and Sam each contribute $5,000 for start-up capital. Chuck, Bill, and Sam agree to split their profits as follows: Chuck 20%, Bill 40%, and Sam 40%. What type of business entity, if any, have they formed? Discuss fully.

Chuck, Bill, and Sam have created a partnership. This question makes no mention of any written document memorializing Chuck, Bill, and Sam's agreements. Thus, their agreements and understanding have created an oral contract. Since every form of business entity except the ordinary partnership requires some formal writing, by default the three have formed an ordinary partnership, which is defined as a written or oral contract between two or more persons to combine their efforts or resources in determined proportions and to collaborate at mutual risk for their common profit or commercial benefit. Furthermore, partners must make a contribution that has economic value, and there is no restrictions on the type of property or services that may be contributed. Here, since Chuck has no money to contribute, it appear that he has agreed to provide the partnership with clients, and this type of contribution is proper. Additionally, partners in a partnership may agree to share disproportionately in profits, losses, and distribution of assets. This is exactly what Chuck, Bill, and Sam have done here, with Chuck receiving 20% of the profits and Bill and Sam each receiving 40%. Since the oral partnership agreement does not indicate how losses and assets will be shared, they will be shared in the same proportions as the profits. Thus, the actions of Chuck, Bill, and Same indicate that they have created a partnership.

[July 2019] Question 1- Part 1(A) 1.1 Was the calling of the originally scheduled shareholder meeting valid? Explain.

Corporate law requires that shareholders have an annual meeting where they elect the board of directors and decide on any of the other matters requiring shareholder approval (including major changes to the corporate structure, such as a sale of the corporation's substantial assets). The board of directors calls the shareholder meeting, and such a call requires notice. The law provides that notice must be at least 10-days but no more than 60-days before the date of the meeting. The notice has to contain three things: the date, the time, and the place. If the meeting is a special meeting (rather than an annual meeting), then the purpose of the meeting must be included in the notice as well. If the notice is not proper, then the meeting and any decisions made at the meeting may be voided, unless the notice requirement is waived. Under these facts, notice was initially given at the beginning of May for a meeting to occur at the beginning of June. This period (roughly 30-days) is more than 10-days but less than 60-days, thus it is sufficient. As to the substance of the notice, the facts indicate that the notice contained the date, time, and place of the meeting. The lack of purpose is not relevant because the was the annual meeting. Thus, the calling of the meeting was valid.

What is cumulative voting? When do shareholders have cumulative voting rights?

Cumulative voting is a method for electing corporate directors (or in theory LLC managers) with the following characteristics: (i) all of the directors' seats up for election at any given time are determined from a single slate of all candidates running for the B.O.D., (ii) each share of stock is entitled to a number of votes equal to the number of board seats up for election at that time, (iii) a shareholder may cast all the votes he holds for his shares for one candidate or distribute those votes among any two or more candidates in whatever manner he wishes (i.e., he may if he chooses "cumulate" his votes for a candidate), and (iv) when all votes are counted the candidates are ranked according to the number of votes they received and the top vote-getters up to the number of seats to be elected are then elected. However, cumulative voting is only available if that method is expressly provided for in the articles of incorporation because the statute provides that directors are to be elected "by plurality vote" with each seat voted on separately (i.e., by so-called "straight voting") unless the articles expressly provide for cumulative voting.

July 2019 Question 1- Part 1 (B) Summary - Joe owns 100 shares of Wildcat Drilling Company (WDC), a Louisiana Corporation. Joe's 100 shares were a given to him 2 years ago as a gift. WDC has 10,000 shares outstanding. Joe recently read in a newspaper that WDC intends to start drilling wells and injecting hazardous waste into the wells. Newspaper also reported WDC may have bribed certain local officials in order to get the required permits. Joe wants to inspect, sends written demand. WDC's corporate secretary responds rejecting his demand for access, and that the BOD will not investigate or take any further action regarding the matters raised in his letter because doing so WOULD NOT BE IN THE BEST INTEREST OF THE CORPORATION. Joe filed a lawsuit against WDC (1) seeking inspection of the documents previously requested and (2) asserting derivative claim against all WDC directors alleging a breach of their fiduciary duties for failing to investigate and take action concerning the alleged injection wells and alleged bribes. 1.6 Is the board likely to obtain dismissal of the shareholder's derivative claim if the board concludes that it is not in the best interest to continue the lawsuit? explain fully.

Derivative actions are representative actions, as the shareholders are enforcing the rights of the corporation where the corporation's governing authority refuses to take action. Recovery in a derivative action generally goes to the corporation rather than to the lawsuit commencing shareholder. However, if (i) majority of the directors (but not less than two) (ii) with no personal interest in the controversy, (iii) acting in good faith, and (iv) after making a reasonable inquiry, determine that the derivative suit is not in the corporation's best interests, then a court may dismiss the suit on a motion by the corporation. Legitimate business reasons for the directors' refusal could include a weak probability of prevailing in court or a determination that damage to the corporation from litigating would outweigh any possible recovery. [To avoid dismissal, in most cases the shareholder bringing the suit bears the burden of proving to the court that the decision was not made in good faith after reasonable inquiry. However, if a majority of the directors had a personal interest in the controversy, the corporation will have the burden of proving that the decision was made in good faith after reasonable inquiry.] In this case, it depends on the facts and circumstances. The question would be whether litigating the injection of hazardous waste into the ground and participating in bribery of local government officials would ultimately be in the best interest of the corporation. Causing the corporation to cease engaging in what constitutes, at the very least, criminal behavior if proven true would certainly be in the best interest of the corporation. Also, an injunction that prevents or halts the injection of hazardous waste into the ground--which could result in civil damages-- would also arguably be in the best interest of the corporation.

Investor, Inc. is a company owned solely by Wilma. Investor, Inc. wants to buy a tract of land from a real estate development company, RST, Inc., owned by Wilma's husband, Ron, and his two friends, Steve and Tom. Investor, Inc. offered a substantial premium over fair market value for the land. Ron, Steve, and Tom are equal one-third owners of RST, Inc., and they are the three board members. A board meeting is properly called amongst them to vote on the proposal by Investor, Inc. to purchase the tract of land. All three attend the meeting and vote in favor of accepting Investor, Inc.'s proposal. Did Ron violate any duties he owed as a board member of RST, Inc.? If so, what steps should Ron have taken? exam answered prior to enactment of the LBCA (so modifications are made)

Did Ron violate any duties owed as a board member?: It is unlikely that Ron will be found to have violated any duties as a corporate director in a conflict of interest transaction. A director has a conflicting interest with respect to a transaction or proposed transaction if the director knows that he or a related person (e.g., a spouse, parent, child, grandchild, etc.): (i) is a party to the transaction; or (ii) has a material financial interest in the transaction. Here, the proposed sale of corporate property would be identified as a director's conflicting interest transaction because Ron's spouse, Wilma, has a material financial interest as the sole owner of the potential buyer-entity, Investor, Inc. [A conflicting interest transaction will not be enjoined or give rise to an award of damages due to the director's interest in the transaction if: (i) the transaction was approved by a majority of the directors (but at least two) without a conflicting interest after all material facts have been disclosed to the board; (ii) the transaction was approved by a majority of the votes entitled to be cast by shareholders without a conflicting interest in the transaction after all material facts have been disclosed to the shareholders (notice of the meeting must describe the conflicting interest transaction); OR (iii) the transaction, judged according to circumstances at the time of commitment, was fair to the corporation.] Ron is one of three directors of RST, Inc. As such, he owes duties of care and loyalty to the shareholders and the corporation. [DUTY OF CARE: Directors are vested with the duty to manage the corporation to the best of their ability; they are not insurers of corporate success, but rather are merely required to discharge their duties: (i) in good faith; (ii) with the care that a person in a like position would reasonably believe appropriate under similar circumstance; and in a manner the directors reasonably believe to be in the best interest of the corporation.] Here, there is no evidence of a lack of care. However, his duty of loyalty is called into question. RST is selling land to Investor, Inc., which is wholly owned by Ron's wife, Wilma, meaning that Ron and Wilma will receive a benefit (RST money from the sale) to the exclusion and potential detriment of fellow RST shareholders. Because of this conflict, Ron will not receive deference under the "business judgment rule," but rather will need to prove that the proposed transaction is fair. Based on the facts given, there is a good chance that Ron will be able to prove the fairness of this conflicting interest transaction. Therefore, even though Ron has a conflict of interest, the conflict has not led to a breach of the duty of loyalty. The most important piece of evidence is the fact that Investor, Inc. is offering a substantial premium over the fair market value of the land. Because RST is benefitting from Investor, Inc.'s willingness to overpay for the property, it is unlikely that the sale will be considered a breach. For example, if Ron knows of another buyer who was willing to pay even more for the land, but kept it a secret from Steve and Tom to help his wife, Ron would be in breach of his duty of loyalty. Unless some unknown fact like that emerges, Ron has lived up to his fiduciary duties in this instance. If so, what steps should he have taken? The second half of this question assumes that Ron violated a duty (most likely of loyalty because of the conflicting interest transaction involved). Assuming his actual course of conduct was a breach, Ron could have taken steps to ratify the transaction. First, Ron would need to make sure that he discloses all material facts about the transaction to Steve and Ron. Full and fair disclosure is necessary for ratification to be effective. Next, after this information has been disclosed, Ron could present the decision to Steve and Tom, and those two can decide whether to sell the property to Investor, Inc. This ratification by Steve and Tom is effective whether they are acting in their capacity as independent directors or as independent shareholders. Upon ratification, the decision to sell will be given deference by courts under the business judgment rule, and the mere fact of Ron's conflict will not be sufficient to show a breach of duty or nullify the transaction.

July 2019 Question 1- Part 1 (B) Summary - Joe owns 100 shares of Wildcat Drilling Company (WDC), a Louisiana Corporation. Joe's 100 shares were a given to him 2 years ago as a gift. WDC has 10,000 shares outstanding. Joe recently read in a newspaper that WDC intends to start drilling wells and injecting hazardous waste into the wells. Newspaper also reported WDC may have bribed certain local officials in order to get the required permits. Joe wants to inspect, sends written demand. WDC's corporate secretary responds rejecting his demand for access, and that the BOD will not investigate or take any further action regarding the matters raised in his letter because doing so WOULD NOT BE IN THE BEST INTEREST OF THE CORPORATION. Joe filed a lawsuit against WDC (1) seeking inspection of the documents previously requested and (2) asserting derivative claim against all WDC directors alleging a breach of their fiduciary duties for failing to investigate and take action concerning the alleged injection wells and alleged bribes. 1.7 Is the board's decision not to investigate or take further action with respect to the alleged illegal bribes consistent with the director's duty to act in good faith, and are the directors protected from liability by Louisiana law? Explain fully.

Directors are vested with the duty to manage the corporation to the best of their ability. This is called the duty of care, which requires directors to discharge their duties in good faith, with the care that a person in a like position would reasonably believe appropriate in similar circumstances, and in a manner the directors reasonably believe to be in the best interests of the corporation. Directors who meet this standard of conduct will not be liable for corporate decisions that, in hindsight, turn out to be poor or erroneous. The person challenging the directors' action has the burden of proving that the statutory standard was not met. Also, unless stated otherwise in the corporation's articles of incorporation, Louisiana law relieves directors from personal liability for money damages to the corporation or shareholders for action taken, or failure to take action, as a director. However, the exculpation by operation of law does not eliminate or limit a director's liability for, among other things, an intentional violation of criminal law. If the directors were bribing local government officials, then this constitutes the intentional commission of a crime and would therefore expose them to liability as a breach of their fiduciary duty to act in good faith without the benefit of legal exculpation.

If a corporation files its annual report 150 days after it is due, (a) does this have an effect on the corporation's existence; and (b) if so, what steps must be taken to remedy the situation?

Failing to file an annual report may have an effect on the corporation's existence. The LBCA directs the secretary of state to terminate the existence of a corporation that has failed to file its annual report for 90 days. It must give the corporation notice of its intent to terminate, and 30 days to cure the defect. Upon the expiration of those 30 days (now 120 total), the secretary of state is then directed to file a certificate of termination. It is the filing of this certificate, not the mere passage of time, that ends the corporation's separate legal existence. If a certificate of termination has been filed, a corporation may remedy the situation by seeking reinstatement. A corporation that has been administratively terminated may apply for reinstatement within three years of the date of the certificate of termination. To do so, a corporation must deliver to the secretary of state articles of reinstatement and an annual report. Once accepted, the reinstated corporation's existence will resume, effective retroactively as if the corporation had never been terminated.

Does each partner in a real estate investment general partnership, have the authority to bind the partnership in borrowing money from banks for purchasing partnership property? discuss why or why not.

In a general partnership, each partner is a mandatary (agent at common law) of the partnership for all matters in the ordinary course of partnership business. This means the law of mandate controls the extent of the partner's authority to bind the partnership. Under the law of mandate, one must have express authority from the principal in order to, among other things, contract a loan or make a promissory note. In this case, the partnership (as principal) would have to expressly authorize a partner (as mandatary) to borrow money from a bank in the partnership's name in order for he or she to do so in a representative capacity (whether for purchasing property or otherwise). Incidentally, even the mere act of acquiring property (movable or immovable) requires express authority. Additionally, under the equal dignities doctrine, the express authority so given would have to be in whatever form (act under private signature or otherwise) that the law demands of the underlying transaction. Thus, a partner in a real estate investment general partnership, absent other facts, does not have the authority to bind the partnership in borrowing money from banks for purchasing partnership property.

To form a corporation under Louisiana law, what document or documents must be filed, and where must such document or documents be filed?

In order to form a Louisiana corporation, a person must file articles of incorporation and a written consent to appointment by the corporation's agent. The documents must be filed with the secretary of state. [The articles of incorporation must set forth: (i) the name of the corporation (name must contain the word or proper abbreviation of the word "corporation," "incorporated," "company," or "limited."); (ii) the number of shares the corporation is authorized to issue; (iii) the street addresses of the corporation's initial registered office and, if different, the street address of the corporation's initial principal office; (iv) the name and street address of the corporation's initial registered agent; (v) whether the corporation accepts, rejects, or limits Louisiana's limited liability for directors and officers; and (vi) the name and address of each incorporator. ] [OPTIONAL PROVISIONS: the articles may set forth other provisions not inconsistent with law regarding managing the business and regulating the affairs of the corporation. However, it should be noted that the LBCA includes a number of features that a corporation need not adopt, but if they are adopted they must be provided for in the articles. Examples of such mandatory conditional provisions are: (ex#1) under the LBCA, a shareholder does not have any preemptive rights unless the articles of incorporation so provide. (ex#2) CUMULATIVE VOTING is only available if expressly provided for in the AOI because the statute provides that directors are to be elected by plurality vote" with each seat voted on separately unless the articles expressly provide for cumulative voting; (ex#3) A corporation may choose to issue only one type of shares, giving each shareholder an equal ownership right (in which case the shares are called "common shares"), or it may divide shares into classes or series within a class having varying rights, as long as one or more classes together have a right to receive the corporation's net assets on dissolution. The LBCA allows rights to be varied even among shares of the same class, as long as the variations are set forth in the articles. If shares are to be divided into classes, the articles must: (i) prescribe the number of shares of each class, (ii) prescribe a distinguishing designation for each class (e.g., "Class A preferred," "Class B preferred," etc.), and (iii) either describe the rights, preferences, and limitations of each class or provide that the rights, preferences, and limitations of any class or series within the class shall be determined by the board prior to issuance.]

July 2019 Question 2 -Part 2(A) 2.4 (solely for the purpose of question 2.4, assume that Amanda's withdrawal from the partnership was not wrongful) What was the legal effect of Amanda's withdrawal from the partnership? Explain fully.

In terms of the effects of withdrawal on the partnership, a partnership does not cease to exist unless there is only one partner left, in which case the partnership automatically becomes a sole proprietorship of the remaining partner). With respect to the effects of withdrawal on Amanda, she is entitled to be paid the value of her interest in the partnership. Unless otherwise agreed upon, the amount must be paid in money if the partnership continues to exist. Since the partnership will not continue to exist (because only Christopher will be left, thus turning it into a sole proprietorship), then payment to Amanda may be made through the partitioning of partnership assets or else in liquidation of the business. Because the circumstances surrounding withdrawal of a partner can vary so greatly, a "one size fits all" rule for valuation would not be fair. Therefore, Amanda's partnership share may be determined by several different valuation techniques, depending on the circumstances requiring the valuation. The partners can agree ahead of time or at the time of the withdrawal as to the value to be paid, but it does not appear that Amanda and Christopher have reached or will reach such an agreement under these facts. As such, either party may seek judicial determination as to the amount to be paid.

In an action against a corporate director for conduct in his official capacity as a director, describe the differences between indemnity and advance of expenses.

Indemnity is the commitment of the corporation to pay for any liability incurred by the corporate director in his or her official capacity. It can be either permissive or mandatory. A corporation can also agree to provide for advancement of director expenses. Advancement of expenses only commits the corporation to pay those expenses contingent on the determination of whether indemnification is warranted. If it is not, the director would be obligated to repay those advanced expenses to the corporation.

Discuss the legal duty owed by members of a LLC to the company and to its members.

Members of an LLC, when acting in their capacity as members, have no legal duty to the LLC or to the other members (just as corporate shareholders have no legal duty to the corporation). However, members who are entrusted with management authority stand in a fiduciary relationship to the LLC when exercising that management authority and thus have a legal duty to act in good faith, with the diligence, care, judgment, and skill that an ordinary prudent person in a like position would exercise and to act in the manner he reasonably believes to be in the best interests of the LLC. In effect, this legal duty is identical to the duty owed by directors and officers to a corporation.

Does a director of a corporation, acting alone, have authority to sign contracts on behalf of the corporation and thereby bind the corporation?

No. A corporate director, acting as a directors, only has a vote when the board of directors acts. Directors, acting as directors, do not have agency authority to transact business with third parties or enter into contracts that bind the corporation. Only officers and other employees of the corporation entrusted with such agency authority may act to bind the corporation.

If the articles of incorporation do not provide otherwise, how are the officers and directors of a corporation elected and by what vote?

Officers are not elected at any particular time or by any particular vote, but rather officers are appointed by the board of directors of the corporation. The only corporate officer required by the LBCA is a secretary, but corporations may have other officers in their discretion. To the extent a "vote" is required, it would be by the approval of the majority of the board present at a duly called meeting of the board with a quorum (a quorum being at least a majority of the total number of directors). The default rule under the LBCA is that all corporate directors are elected at each annual shareholders meeting by a plurality vote (i.e., by so-called "straight voting"). Because we are told the articles of incorporation do not provide for another method such as cumulative voting, or that a majority of votes in favor of electing a director are required, directors are elected by a plurality of the votes cast at a meeting at which there is a quorum. In other words, as long as there is a quorum (quorum being at least a majority of the total number of shareholders) is present, the candidates receiving the most votes--even if not a majority--will win.

B. Will Office Supply Co. be successful in suing Alice and Betty personally for the debt instead of the Company?

Personal Liability of the Promoters: Alice and Betty will likely be personally liable for the contract. Promoters who knowingly enter into contracts on behalf of a corporation before the corporate existence commences remain personally liable for the contract. The ability of the two promoters to contest personal liability will depend on whether they were aware that the corporation had not been formed when they entered into the contract. As a factual matter, it is unclear but unlikely that the two promoters were unaware of the failure to file incorporation documents. Alice and Betty are the only two parties to act on behalf of A&B, Inc. There is no evidence of other parties, and no reason to think that Alice and Betty would have relied on other parties to form their corporation of to assume that they were unaware of their own failure to file papers in January, when the contract was signed. The three alternatives mentioned above (ratification, de facto corporation doctrine, and corporation by estoppel doctrine) that could impose liability on A&B, Inc. are unlikely to relieve Alice and Betty of their own personal liability. The mere fact of corporate ratification does no relieve personal liability of promoters. Alice and Betty would need to be discharged by Office Supply Co., and there is no evidence of that here. Also, for the de facto corporation doctrine or the corporation by estoppel doctrine to relieve Alice and Betty of personal liability, they must show that they entered into the contract under the mistaken belief that the corporation was in existence at the time. For the reasons discussed in the preceding paragraph, it is unlikely that they will be able to do so. Thus, Office Supply Co. is likely to be successful in suing Alice and Betty personally for the debt.

What are preemptive rights? under what circumstances will one have preemptive rights?

Preemptive rights, if they exist, are the rights of a corporate shareholder to purchase the same percentage of any newly issued stock as the shareholder currently holds of the current outstanding voting shares. Shareholders do not have preemptive rights unless the corporate articles expressly grant them. It should be noted that there are many circumstances under which a generic preemptive right created in the articles will not apply, so if shareholders do not want these exceptions to apply, the statement of preemptive rights in the articles must expressly indicate that the unwanted exceptions do not apply.

What is shareholder oppression, and what remedies are available to a shareholder who is subject to shareholder oppression?

Shareholder oppression is defined by Louisiana statute as a situation where the corporation's distribution, compensation, governance, or other practices, considered as a whole over an appropriate period of time, are plainly incompatible with a genuine effort on the part of the corporation to deal fairly and in good faith with the shareholder. An oppressed shareholder has the right to withdraw from the corporation and require it to buy his or her shares at fair value.

[July 2019] Question 1- Part 1(A) 1.3 Could the 10 dissenting shareholders have successfully objected to the rescheduled meeting they attended? Explain fully.

Shareholders can waive the requirement of notice of annual and special meetings by doing so in writing either before or after the meeting OR by merely showing up at the meeting and not objecting to the lack of proper notice. Under these facts, the ten dissenting shareholders never provided a written waiver, but they did attend the actual meeting in August. In so attending, however, they only revoked their proxies in favor of Jack and announced their intention to vote against the asset sale. They did not, as would have been required, object to the meeting for want of proper notice. In failing to do so, they waived their right to complain of lack of notice--thereby making the rescheduled meeting proper.

In a four-member LLC engaged in landscape and yard maintenance for residential customers, what percentage of the members must vote in favor of selling the lawn equipment, vehicles and other physical assets. How is the voting calculated--by ownership percentage or by the number of members?

Since presumably, selling all of the lawn equipment, vehicles, and other physical assets constitutes a disposal of all or substantially all of the LLC's assets, a majority of the members, voting as members (whether the LLC is member-managed or manager-managed), must approve. For such votes, unless the articles or a written operating agreement provides otherwise, each member has one vote regardless of the amount of capital contributed or ownership percentage. Thus, in this case, three of the four members would have to vote in favor of this liquidation of the LLC's assets.

What minimum information must be contained on a stock certificate? Which types of business entities are required to issue stock certificates?

Stock certificates at a minimum must state: (1) the name of the corporation and the fact that it is organized under Louisiana law; (2) the name of the person to whom the stock is issued; and (3) the number and class of shares (and the series, if any) the certificate represents. Only corporations are required to issue stock certificates since no other type of business entity's ownership shares are represented by stock. However, corporations are not required to issue stock certificates if the issuing corporation is a participant in the Direct Registration System of the Depository Trust & Clearing Corporation or of a similar book-entry system used in the trading of shares of public corporations.

Once shares have been issued, what amendments to the articles of incorporation may the board make without shareholder approval?

The B.O.D. (or incorporators, if there is no board) may make amendments to the articles before any shares are issued. Once shares have been issued, the board may make the following amendments without approval by the shareholders: (i) to extend the corporation's duration if the corporation was formed when the law required a limited duration; (ii) to delete the names and/or addresses of the initial directors or registered agent or office; (iii) to change the authorized number of shares to implement a share split, as long as there is only one class of shares outstanding; (iv) to change the company name by substituting a different word or abbreviation than the one currently indicating the corporation's corporate status (e.g., "Co." in place of "Inc.") or changing a geographical attribute (e.g., "X Corp. of Louisiana" in place of "X Corp."); AND (v) any other change permitted by the LBCA without shareholder approval.

What is piercing the corporate veil, and what are the elements necessary to establish entitlement to piercing of the veil in a suit?

The LBCA states that a shareholder of a corporation is not personally liable for the debts of the corporation. Piercing the corporate veil is a doctrine by which courts depart from this general rule, disregard the corporate entity, and impose personal liability on shareholders for corporate debts. Courts use a multi-factor balancing test to determine whether the totality of the circumstances make it appropriate for the corporate veil to be pierced. In order for a prevail in a suit, a plaintiff must show that (i) the corporation owes it a debt, and (ii) circumstances exist that would make it fair and just to hold the shareholder personally responsible for that debt. Common factors include failure to follow corporate formalities, undercapitalization, thinly capitalized where the vast majority of money shareholders put into the corporation has been characterized as debt rather than paid equity, and use of corporate assets as the shareholder's own (or commingled with his personal assets, leaving creditors uncertain as to which properties and transactions are those of the corporation). (who may pierce: creditors of a corporation are the most likely persons to pierce the corporate veil, and the cases involving disregard of corporateness primarily involve creditors. Generally, those who choose to conduct business in the corporate form may not disregard the corporate entity at their will to serve their own purposes. Courts virtually never pierce the corporate veil at the request of the shareholder.)

Mark, Greg, and Randy validly formed a limited liability company to operate a charter fishing service. Greg signed a contract on behalf of the LLC with Boat Builders, Inc., to purchase three fishing boats for a total cost of $300,000, with payment due upon delivery. One week later, Greg was seriously injured. Because of this, there is no money available to pay Boat Builders, Inc., when the three boats arrive. It is not clear whether Mark and Randy knew that Greg purchased the boats. Is the contract with Boat Builders, Inc. enforceable against the LLC? explain fully.

The contract is unenforceable against the LLC. Unless the articles of organization provide for management by managers, an LLC is presumed to be managed by members. In this case, the facts are silent as to whether the LLC's articles of organization delegate management to managers. Thus, it is presumed that this LLC is run by its members, Mark, Greg, and Randy. Each member is a mandatary (i.e., agent) of the LLC for all matters in the ordinary course of its business, meaning that the members have authority to bind the LLC in such matters. Any incurrence of debt other than in the ordinary course of business must be approved by a majority of the members. Here, Greg contracted to buy three fishing boats, which is a purchase outside the ordinary course of business. Moreover, Greg apparently entered the contract without the majority vote of the members. Therefore, Greg did not have authority to bind the LLC, and the contract is not enforceable against the LLC.

Discuss the legal duty owed by directors and officers to a corporation?

The directors and officers of a corporation owe the corporation and its shareholders a fiduciary duty of both loyalty and reasonable care. (1) The duty of loyalty requires that a director or officer always act in the best interest of the corporation as he sees it and thus to put the interests of the corporation before his own--i.e., to act in good faith. (2) The duty of reasonable care requires that a director or officer discharge the duties of his position with the diligence, care, judgment, and skill which ordinary prudent persons would exercise under similar circumstances in like position, but a director or officer will not be found to have violated this duty unless he acted in a grossly negligent or worse manner.

Name all of the activities of a foreign LLC that are NOT considered transacting business in Louisiana.

The following actions by foreign LLCs are not considered transacting business in Louisiana: (i) defending or settling a lawsuit in Louisiana; (ii) holding a director's or shareholder's meeting in Louisiana; (iii) maintaining bank accounts in Louisiana; (iv) maintaining offices or trustees in Louisiana for the transfer, exchange, and registration of securities; (v) soliciting or procuring orders, whether or by mail or otherwise, if such orders require acceptance outside of Louisiana before becoming binding contracts; (vi) creating evidences of, securing, or collecting debts, mortgages, or liens within Louisiana; (vii) transacting any business in interstate or foreign commerce; (viii) conducting an isolated transaction completed with 30 days; and (ix) acquiring and disposing of property in Louisiana, not as a part of any regular business activity.

List three actions of a Louisiana corporation that might involve authorization or approval by qualified directors under the LBCA?

The following situations allow for or require approval by qualified directors: (1) dismissal of a derivative proceeding [explanation: if a majority of the directors (but at least two) who have no personal interest in the controversy, i.e., qualified directors, found in good faith after reasonable inquiry that the suit is not in the corporation's best interests, but the shareholder brings the suit anyway, the suit may be dismissed on the corporation's motion]; (2) authorizing advancement of expenses; (3) determining the permissibility of indemnification; (4) approving a director's conflicting interest transaction; (5) assessing the corporation's interest in a business opportunity; and (6) authorizing the elimination of personal liability for an officer.

List the information that should be contained on an application for authority by a foreign limited liability company.

The information that must be contained in an application for a certificate of authority by a foreign LLC is: (a) the name of the LLC and its state of legal organization; (b) any word, abbreviation or distinguishing term that the LLC will use in Louisiana in order to conform with Louisiana law concerning company names; (c) the date of organization and period of duration of the LLC; (d) the address of the LLC's registered office in the jurisdiction where it is organized, and address of its principal place of business; (e) the address of the LLC's principal business address, its registered office, and the name and address of its registered agent in Louisiana; (f) the nature of the business that the LLC proposes to transact in Louisiana and a statement that it is empowered to transact such business under the laws in the jurisdiction in which it is organized; and (g) any other information necessary for the Louisiana Secretary of State to determine if the LLC is entitled to a certificate of authority.

List the minimum information that must be included in a partnership agreement for a partnership in commendam.

The partnership contract creating a commendam partnership, which must be in writing and filed with the Secretary of State's office, must at a minimum: contain the name of the partnership, which must identify it as a commendam partnership, the names of the commendam partners and what each is to contribute, and its value, in exchange for the partnership interest (which contribution must not be managerial services or else the commendam partner loses protection from personal liability).

Al and Bert want to form a partnership. Assume that prior to the preparation and execution of their partnership agreement, a piece of immovable property was purchased in the partnership's name for the purpose of constructing an office building for the business. The partnership agreement was subsequently written up, executed by each of the partners, and recorded with the secretary of state. Who or what owns the immovable property? Discuss fully.

The partnership owns the immovable property. For the partnership to own immovable property, the partnership agreement must be in writing at the time of the acquisition. Otherwise, the property is owned in indivision (i.e., jointly) by the partners. The partnership does not own immovables with respect to the rights of third parties unless the partnership agreement is filed with the secretary of state. If the agreement is not filed, third parties can treat partnership immovables as the partners' individual property. If immovable property is acquired in the name of a partnership that has not yet been created and and that partnership subsequently is created (and presumably the partnership agreement is in writing and filed with the secretary of state), the partnership's existence will be deemed to be retroactive to the date of the acquisition of the immovable property. However, such retroactive effect will not prejudice the rights of any third party that validly acquired rights in that property between the date of acquisition of the property and the actual creation of the partnership. In this case, Al and Bert acquired immovable property in the partnership's name and subsequently filed their written partnership agreement with the secretary of state. The partnership's existence is deemed to be the date of the acquisition of the property. Thus, the Al and Bert partnership owns the immovable property. Note, however, that the retroactive effect will not affect the rights of third parties who have acquired rights in the property prior to the actual date the partnership was created by filing the written partnership agreement with the secretary of state.

Sam wants to set up an entity to hold a number of business investments. He wants his two children and wife to be the owners of the entity along with him. He intends to make all the management decisions and does not want any of the owners to have personal liability for the debts of the entity. Which business entity or entities would best suit Sam's needs and how would they be formed? Discuss fully.

The possible entities that would accomplish all of Sam's goals are: (i) a corporation and (ii) a limited liability company ("LLC"). Corporation: One option is a corporation in which Sam is the sole member of the board of directors as well as the secretary (the only officer required in Louisiana). If Sam wants to make sure his wife and children don't oust him as the sole director, he would need to give himself a majority of the stock and divide the remainder of the stock among the others, or he could own all of the voting stock and create a nonvoting class of preferred stock for his wife and children. This corporation would be formed by filing the articles of incorporation with the secretary of state (as well as filing them with the mortgage office of the parish in which the corporation's registered office is located), and an Affidavit of Acceptance by the corporation's registered agent. Limited Liability Company: In the alternative, he could form an LLC designated as manager-managed with Sam being the sole manager. If Sam wants to make sure his wife and children don't oust him as the company's manager, he would need to create unequal member equity shares with himself holding a majority of the voting power. This LLC would be formed by filing the articles of organization and an initial report with the secretary of state. The initial report must contain an Affidavit of Acceptance by the LLC's registered agent. The best option is the LLC simply because of its operational simplicity and flexibility.

[July 2019] Question 1- Part 1(A) 1.2 Was the shareholder meeting properly rescheduled? explain fully.

The same rules for scheduling meetings apply to rescheduling meetings. Under the facts, "no notice of the scheduled annual meeting was sent to the shareholders." This means that the subsequent August 2018 meeting, as an initial matter, was invalid. It is possible to avoid giving a second notice relative to a rescheduled meeting if the rescheduling happens at a meeting already convened, but that rule is not applicable here. The meeting never occurred, so there's no opportunity to reschedule because there was no ability to adjourn.

In a validly formed Louisiana corporation, what qualifications must a director have to be considered a "qualified director"?

The term "qualified director" is defined in by Louisiana statute, and its definition changes slightly depending on the situation where the qualified director is seeking to take action. In general, a qualified director is one who is not a party to a transaction with the corporation, does not have a material interest in the transaction, and does not have a material relationship with someone who does.

What are the required votes and procedure for a corporation to dissolve?

There are three types of corporate dissolution: voluntary dissolution, administrative termination, and judicial dissolution. Only voluntary dissolution requires "votes and procedures," so the remainder of this answer will discuss the required votes and procedures for a voluntary dissolution. The board must propose and recommend voluntary dissolution to the shareholders, and this requires the affirmative vote of the majority of directors present at a duly called meeting of the board. If the board determines that because of a conflict or other special circumstance it cannot make a reasonable recommendation, it may proceed with the proposal, accompanied with a communication of the basis for its declining to make a recommendation. The board must notify each shareholder of the proposed meeting to consider the dissolution proposal, regardless of whether the shareholder is entitled to vote. At the meeting, the shareholders must approve the proposal to dissolve by a majority of votes entitled to be cast, unless a greater proportion is required by the articles or the board.

For a validly formed Louisiana corporation, what is a proxy, and what are the requirements for a valid proxy under Louisiana law?

There are two types of proxy under Louisiana corporate law, and the requirements for a valid proxy differ depending upon which type of proxy the question is referring to. In general, a proxy is a representative of another party who is authorized to exercise the power that the original party possesses. Under the LCBA, both shareholders and directors may appoint a proxy. For shareholder proxies, the proxy is valid if the shareholder either signs an "appointment form" (which should be simply a written document declaring the proxy appointment) or sends an electronic transmission that contain information allowing the recipient to determine that the sender is in fact the shareholder. In either case, the proxy appointment must be sent to the corporation's inspector of election, secretary, or other officer or agent authorized to tabulate votes. For director proxies, the proxy is only valid if (1) the corporation's articles of incorporation allow for the director voting by proxy, and (2) the proxy appointed by the absent director is another member of the board. The proxy may be made only by means of a signed writing that is delivered to the person who is presiding at the meeting at which the proxy seeks to cast the absent director's vote.

Under what circumstances may shareholders inspect the books and records of the company?

To be eligible to demand an inspection of the corporation's records, the LBCA provides that a shareholder, or shareholders collectively, must be and have been the holder(s) of record of at least 5% of any class of the issued shares of a corporation for at least the preceding six months may inspect the corporation's books, papers, accounting records, shareholder records, etc. To exercise this right, the shareholder must give the corporation at least five-days' written notice of his request, stating a proper purpose for the inspection. The shareholder need not personally conduct the inspection; he may send an attorney, accountant, or other agent. The LBCA also includes an exception to this general rule, providing that any shareholder may inspect the following records regardless of purpose: (i) the corporation's articles and bylaws, (ii) board resolutions regarding classification of shares, (iii) minutes of shareholders' meetings from the past three years, (iv) communications sent by the corporation to shareholders over the past three years, (v) a list of the names and BUSINESS (not personal) addresses of the corporation's current directors and officers, and (vi) a copy of the corporation's most recent annual report.

Name three activities of a foreign limited liability company that are considered transacting business in Louisiana which then requires the company to obtain a certificate of authority from the secretary of state.

Three types of activities that are considered transacting business in Louisiana are (a) selling or offering to sell goods to person in Louisiana; (b) providing or offering to provide services to persons in Louisiana; (c) employing persons to engage regularly in productive activities in Louisiana. [Note: There is no statutory provisions defining what constitutes transacting business in Louisiana, only the statutory provision that sets forth activities that do not constitute transacting business.]

Larry and Joe decided to form a LLC to be known as New Age Software Company, LLC (the "Company"). They filled out the proper forms and filed them with the secretary of state in order to form the Company. After the Company had been in operation for several years, Larry died. His son, Junior who has been placed into possession of all of Larry's assets by a proper judgment in Larry's succession proceedings, wants to become a member of the Company. The organizational documents of the Company contain only the minimum requirements for formation. Is Junior entitled to be admitted as a member of the Company?

Transfer of LLC Interests--Source of Authority: The threshold question is where one should look to determine the rights of the parties when a member dies and the member's heir seeks to clarify his ownership position. Here, the Louisiana Limited Liability Company Act emphasizes freedom of contract and gives wide latitude for parties to depart from statutory rules, either by including provisions in their articles of organization or in their written operating agreement. The facts state that the "organizational documents of the Company contain only the minimum requirements for formation." This means that the ability of a member's heir to become a member is not addressed in the articles. However, there is some ambiguity as to whether an operating agreement could be considered an "organizational document." If it is, then there is no operating agreement at all, as having such a document goes beyond the minimum requirements for formation. However, if there is an operating agreement, and that agreement addresses the transfer of interests upon the death of a member, then the provisions of the agreement would control. If there is no operating agreement, the provisions of the statute govern. Death of a Member Under the LLC Act: The Louisiana LLC Act provides that, upon the death of a member (or when a member becomes legally incompetent), his heir will become an ASSIGNEE of his membership interest. Therefore, Junior will be an assignee of Larry's interest in the Company. An assignee is entitled to receive distributions that the assignor would have been entitled to, but is not granted other rights of members. For example, an assignee may not bind the company, inspect its books, or participate or vote in meetings of the members. However, Joe, the other member of the LLC, may approve Junior and admit him as a member. Joe has no obligation to admit Junior as a member, but the LLC Act does provide for consequences if he does not do so. If Joe does not admit Junior as a member, he must offer to buy Junior's interest in the Company. The statute places conditions on this potential purchase. First, it requires that the purchase be completed in a reasonable time. Second, the statute directs the parties on how to value the interest. An assignee's interest should be valued at the fair market value calculated at the time of Larry's death. Since there is no indication that Joe has approved Junior as a member, Junior is not entitled to be admitted as a member of the Company.

What percentage vote of the shareholders is necessary to amend the articles of incorporation?

Unless the articles of incorporation require a greater vote, approval of an amendment to the corporation's articles of incorporation requires the approval of at least a majority of the votes entitled to be cast on the amendment, and, if any class or series is entitled to vote as a separate group on the amendment, the approval of at least a majority of the votes entitled to be cast on the amendment by each separate voting group. For example, if a corporation has a single class of 1000 shares outstanding, it will need the approval of shareholders holding 501 shares in order to amend its articles, no matter how many shares are present at the meeting. This standard is more rigorous than the majority of votes cast standard used for regular matters that come before the shareholders.

July 2019 Question 2 -Part 2(A) 2.2 Did Amanda properly withdraw from the partnership? Explain fully.

While it is possible for one to withdraw from a partnership under certain circumstances, Amanda did not legally accomplish such an endeavor. The process of withdrawing differs depending on whether the partnership is created for a term or without a term. If the partnership is without a term (meaning the partners do not intend for the entity to terminate at a given point in time), then any partner may withdraw at a time of his or her choosing, provided that such withdrawing partner gives notice of withdrawal both (1) in good faith and (ii) at a time that is not unfavorable to the partnership. Nothing in the facts suggest that Amanda and Christopher intended for their partnership to be for a term. Therefore, Amanda could have withdrawn under the non-term partnership rule, but she failed to do this correctly. First, although she contacted Christopher (via email), it is not clear that this constituted a notice to withdraw. She said she was "leaving the partnership" and that she would "wind up the business," but then she also said she would send him a check for his half of the company. Rather than a withdrawal, it appears that she is trying to terminate the partnership (which would happen anyways since the partnership is reduced to just one person). Nevertheless, the phrasing is ambiguous, particularly since she does not thereafter act as one who is withdrawing but, instead, behaves as if to evidence that the business continues (signing the purchase agreement, continuing to operate the store in the same place, using the same employee, etc.). But, even if this could be considered a notice of withdrawal, she is clearly not acting in good faith. Good faith here is tied to the duty of good faith owed by partners generally--acting in the best interests of the partnership. Here, Amanda is clearly acting only in her best interest. She is not actually trying to leave the partnership but is instead trying to steal the business from Christopher. She seeks to purchase the building, although she is aware that both she and Christopher have desired to do so for the partnership on multiple occasions in the past, and she is continuing to operate the business in materially the same manner as before. With respect to the timeliness of the notice, it must be given within a reasonable period of time. This determination depends on the facts and circumstances--in some cases a few days or weeks is sufficient notice, while in others several months may be needed. In this case, however, Amanda seems to indicate that her withdrawal is immediate, which practically amounts to no notice at all. Thus, she likely fails this prong of the withdrawal process as well. The statute is silent as to the effect of a "wrongful" withdrawal, implying that there is no such thing and an attempt to withdraw improperly is simply not effective.

How can a member in a liability company withdraw and what does the member receive for his interest in the company?

[Note: It must be assumed that the question is asking about withdrawal from a "limited liability company," not simply a "liability company" as the question states. The omission of the word "limited" must be a type since there is no such thing as a "liability company."] If the LLC is constituted for a term, a member may withdraw only if either (1) she gets the approval of a majority of the other members, or (2) there is "just cause" for withdrawal arising out of another member's failure to perform a material obligation. If the LLC is not constituted for a term, a member may withdraw for any reason at any time provided that 30-days' written notice of withdrawal is given to the LLC or immediately without prior notice upon the occurrence of an event specified in the articles of organization or written operating agreement that triggers the right to withdraw. A member who withdraws is entitled to continue to receive her share of the profits until the LLC pays her the fair market value of her membership interest as of the date of the withdrawal, which must be done within a reasonable period of time.