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Free flashcards to ace your Bar exam - Business Associations
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Business Associations
48 flashcards
A corporation is a legal entity separate from its owners that is created under the laws of a state and has rights, responsibilities, and liabilities distinct from those of its owners.
Key characteristics include: limited liability for shareholders, centralized management, perpetual existence, ease of transferability of ownership interests.
In a general partnership, all partners have unlimited personal liability. In a limited partnership, there are both general partners with unlimited liability and limited partners whose liability is limited to their investment.
The agency theory states that an agent (e.g. employee) acts on behalf of and is subject to the control of a principal (e.g. employer), creating duties between them such as loyalty and obedience.
An LLC is a hybrid legal entity that provides limited liability to its owners like a corporation, but is taxed differently and has more flexibility in its management structure.
The business judgment rule is a principle that courts should defer to the business decisions of directors as long as they were made in good faith, without conflicts of interest, and with a reasonable basis.
Directors owe duties of care (to be diligent and prudent) and loyalty (to act in good faith in the best interests of the corporation).
Corporate veil piercing refers to situations where courts disregard the separate legal entity of a corporation and hold shareholders personally liable, e.g. for fraud or improper commingling of assets.
Cumulative voting allows shareholders to concentrate their votes for a limited number of director candidates, helping minority shareholders get representation on the board.
The business purpose doctrine requires that corporate transactions like mergers or asset sales serve a legitimate business purpose beyond benefiting shareholders.
Default rules include equal sharing of profits/losses, joint management, mutual agency, fiduciary duties among partners, dissociation events like death/bankruptcy.
An employer is liable for torts committed by an employee while acting within the scope and course of employment under the doctrine of respondeat superior.
Provisions may cover management structure, members' voting rights, allocation of profits/losses, dissolution events, restrictions on transfers of interests, and fiduciary duties.
The board must first adopt the amendment, which is then submitted to shareholders for approval, usually by a majority or supermajority vote depending on the issue.
A shareholder derivative suit allows shareholders to sue directors/officers on behalf of the corporation itself for breaches of fiduciary duty that harmed the corporation.
Examples include charter amendments, mergers, share exchanges, asset sales, dissolution, and conversions from one entity type to another.
Anti-takeover defenses include poison pills, staggered boards, supermajority voting requirements, golden parachutes, and restructuring defenses like crown jewel options.
In a cash-out merger, target shareholders receive cash in exchange for their shares. In a stock merger, they receive shares of the acquirer's stock.
Controlling shareholders owe fiduciary duties to minority shareholders, including the duties of care, loyalty, candor, and maximizing the long-term interests of the corporation.
The internal affairs doctrine says the law of the state where a corporation is incorporated governs its internal affairs and the rights of shareholders.
The de facto merger doctrine imposes restrictions on transactions treated as mergers, even if not technically mergers, by imposing successor liability.
Other partnership types include limited liability partnerships (LLPs), limited liability limited partnerships (LLLPs), and joint ventures.
The implied duty requires parties in contractual relationships like partnerships to deal fairly and in good faith in performing their obligations.
A disregarded entity refers to how a single-member LLC is treated as a sole proprietorship for tax purposes, though it maintains liability protection.
The MBCA is a model set of laws regarding corporations that has been adopted in whole or part by a majority of states to promote uniformity.
The peppercorn theory holds that even a small amount of consideration, like paying $1, makes a shareholder's stock subscription legally binding.
Common exemptions include Rules 506(b) and 506(c) under Regulation D allowing private placements, as well as intrastate and accredited investor exemptions.
LLC members are similar to shareholders, though there may be managing members with duties akin to officers/directors, and non-managing passive members.
Joint and several liability allows creditors to collect the full claim amount from any one general partner, creating risk that one may bear liabilities of others.
The appraisal remedy allows dissenting shareholders to have their shares appraised and purchased for fair value in major corporate transactions.
Reverse veil-piercing allows creditors of an owner to pierce and reach assets of an entity the owner controls in order to satisfy claims.
Absent modification in the operating agreement, LLC members generally owe default duties of care and loyalty similar to partners in a partnership.
A special litigation committee of disinterested directors investigates and decides whether pursuing derivative claims is in the corporation's interests.
The entire fairness standard requires that conflict transactions like self-dealing be entirely fair to the corporation as to process and price.
The corporate opportunity doctrine prevents officers, directors and key employees from usurping business opportunities belonging to the corporation.
Factors include income level, net worth, institutional status, and investment experience relevant to evaluating the merits of an offering.
Limited partners usually retain rights like replacing the general partner, amending the partnership agreement, and approving asset dispositions.
A captive insurance company is often formed as a corporation, LLC, or particular cells under specialized laws to insure the risks of its owners.
The doctrine allows a corporation, after formation, to ratify pre-incorporation contracts and actions taken on its behalf to bind the entity.
Factors include inadequate capitalization, extensive commingling of assets/operations, ignoring corporate formalities, and fraudulent practices.
An interested director transaction occurs when a director has a conflicting interest, triggering additional requirements like disclosure and board approval.
The shelf system allows companies to register securities offerings in advance and take them off the 'shelf' for sale on short notice.
The Texas franchise tax led to disputes over whether LLCs must meet corporate characteristics to be taxed, or lack them to avoid corporate taxation.
A poison put allows holders of debt/preferred securities to demand cash payment upon a change in control event as an anti-takeover defense.
In addition to cash, shareholders may receive debt securities, a mix of cash/equity in the acquirer, or contingent value rights linked to performance.
Publicly traded partnerships are tax-advantaged entities that usually operate in natural resources, with limited partners/no entity-level tax.
Promoters who contract on a corporation's behalf before incorporation can be held personally liable under promoter liability if not ratified.
The Van Gorkom case raised the standard requiring directors to be reasonably informed about proposed transactions before approving them.