Business Associations

  1. When is an Agency Relationship Created?
    • - Principal agrees or consents that the agent shall act on the Principals behalf
    • - Agent agrees to act on the Principals Behalf
    • - Control rests with the Principal

    (does not require a written contract & no benefit to Principal is required... can be expected benefit)
  2. Agency Relationship Rule
    When an agency relationship is properly formed, the principal generally becomes legally liable for the agent's acts as though the principal had performed the acts himself.
  3. Agent's Liability if an Agency Relationship has been properly formed
    • An AGENT may bind the PRINCIPAL in contract, However, an AGENT is not liable for the actions of her PRINCIPAL and an AGENT is
    • not bound by the contracts of her PRINCIPAL
  4. For the Principal to be liable for the agent's conduct, the injured party must show that the agent had:
    • The liability of a principal to third parties for the acts of
    • an agent may be shown by proof disclosing
    • (1) ACTUAL: express or real authority which has been definitely granted;
    • (2) implied authority, that is, to do all that is proper, customarily incidental and reasonably appropriate to the exercise of the authority granted; and
    • (3) apparent authority, such as where the principal by words, conduct, or other indicative manifestations has ‘‘held out’’ the person to be his agent. ***NOTE***
    • the Restatement of Agency states that the agent's
    • representations alone are insufficient to create apparent authority.
  5. Principal's Creation of Authority
    • There must be some manifestation of consent by the principal -- words either written or spoken or acts performed. If those manifestations of consent
    • can be reasonably interpreted by the agent as giving authority to act on the principal's behalf, then actual authority exists.
    an agent is liable on a contract entered on behalf of a principal if the principal is not fully disclosed. In other words, an agent who negotiates a contract with a third party can be sued for any breach of the contract unless the agent discloses both the fact that he or she is acting on behalf of a principal and the identity of the principal. **usually the principal indemnifies the agent**
  7. Principal's Duty to Agents
    Duty to Indemnify

    Duty to Deal Fairly and in Good Faith
  8. Doctrine of Independent Contractors & Exceptions
  9. Where a person engages a contractor, Who conducts an independent business by means of
    • his own employees, To do work not in itself a nuisance,
    • He is not liable for the negligent acts of the
    • contractor in the performance of the contract.
    • Certain exceptions:
    • (a) Where the landowner retains control of the manner
    • and means of the doing of the work which is the subject of the contract;
    • (b) Where he engages an incompetent contractor;
    • (c) the activity contracted for constitutes a nuisance per se.
  10. What is Ratification?
    Ratification is the affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account, whereby the act, as to some or all persons, is given effect as if originally authorized by him.
  11. Elements of Ratification
    1) Intent to Ratify

    • 2) know of all the material facts re
    • the unauthorized act;

    • 3) indicate affirmation of the act through
    • manifestation of consent; and/or indicate affirmation of the act by accepting the benefits of the unauthorized act. ***MUST RATIFY ALL.. NOT PART***

    Principal must have capacity to authorize the unauthorized act & is bound from the time of the act.
  12. Material Facts - Define
    Material Facts are those which substantially affect the existence or extent of the obligations involved in the transaction as distinguished from those which affect the values or inducements involved in the transaction.
    • Affirmance of a contract by one, on whose account it was purported to be made, but which did not result in ratification, as where the purported principal was incapable of contracting at the time of the original transaction.
    • (i.e. the Principal did not exist until after the act... as such ratification is not possible as the principal cannot know of the act or assent to the act when the P does not exist)
    • The principal does not need capacity to authorize & is only bound from the time of CONSENT.
  14. Partnership - Define
    A partnership is an association of two or more persons to carry on as co-owners a business for profit, whether or not the persons intend to form a partnership.

    NOTE: Must be voluntary association to form a partnership & “persons” includes any entity; Only need to agree.. no writing required.
  15. Factors to Determine if a Partnership Exists
    The capital Intends to profit & control loss.
    1- ***INTENT OF THE PARTIES?*** (did they consider themselves jointly owning a biz?.. type of biz is irrelevant)

    2- Contribution of Capital (is evidence but not required)

    3- Sharing of Profits (creates prima Facie Evidence of partnership)

    4- Sharing of Loss (exhausts the Partnership assets before individual partners personal assets are put at risk)

    5 - Right to Manage (Control the business)

    IRRELEVANT: sharing of gross return; duration;participation in other businesses; profit sharing; rent; inheriting business is not partnership until the heir agrees to continue
  16. Partnership Rights and Authority
    Each partner is an agent of the partnership for the purpose of its business and unless otherwise provided or noticed, Partners generally have the authority to bind the partners to transactions for the ordinary business of the partnership.
  17. Duties owed between Partners
    - Duty of Care requires that fiduciaries perform their duty in good faith with the care that an ordinary person in a like position would exercise and in the manner that the partner believes is in the best interest of the partnership.

    - Duty of Loyalty requires that fiduciaries act solely in the interest of the partnership, rather than in their own interest.
    for sharing of PROFITS & LOSSES
    If the partnership agreement is silent as to the sharing of profits, the default rule is that the profits are shared equally.

    If the partnership agreement is silent as to the sharing of losses, they will be shared in the same manner as profits.
  19. Partnership Competition Rule / Duty of Loyalty
    • A partner has an obligation to render on demand
    • true and full information of all things affecting the partnership to any partner.

    Partners planning to compete while still in a partnership does not violate Duty of Loyalty to partner. A partner that engages in competing while still a partner has breached his duty of loyalty.

    • The Departing Partners Standard states that the departing Partner must give:
    • 1- Reasonable Notice
    • 2- Reasonable option to Compete for Clients

    Planning is considered:obtaining Financing; Making a list of potential clients to take during the move; Locating & Leasing future partnership space.
  20. Partnership Dissolution Occurs:

    Will of Specific or Illegal
    At Will Partnership- When one partner declares the partnership dissolved

    Partnership Agreement - Definite Term or Specific Undertaking

    • Partnership Impractical/Court Order:
    • - Commercial Impracticability
    • - Legislation
    • - Intentional breaches of partnership agreement
    • - Extreme Misconduct
    A partnership that is created by a filing with the appropriate state agency that will limit the liability of the limited partners with limited involvement in the partnership business and is managed by the General partner who is individually liable for the partnership liabilities.
  22. Duties of the General Partner
    • Duty of Loyalty
    • -That the partner will act in the best interests of the partnership and not for their own interests.
    • Duty of Care
    • - That the partner must perform their duties 1)in good faith with 2) the care that an ordinarily prudent person in a like position would exercise and 3) in the manner they reasonably believe to be in the best interest of the partnership.
    • Duty of Good Faith
    • - requires the partner to discharge the duties of his position fairly and with honesty, integrity.
  23. Dissolution of General Partnership by operation of law
    • Dissolution occurs by operation of law
    • where no general partner remains following the removal/disassociation of a general partner, if there has been no unanimous approval of a substitute general partner within 90 days.
  24. LLC Creation
    Managed by
    • Created By filing Articles of Organtization
    • Managed By Managers (Member or Manager)
    • Rules set forth in: Operating agreement
  25. LLC Managers' Duties
    • Duty of Good Faith
    • - That all managers of the LLC must perform their duties 1)in good faith with 2) the care that an ordinarily prudent person in a like position would exercise and 3) in the manner they reasonably believe to be in the best interest of the company.
    • Duty of Loyalty
    • - The Manager must act in the LLC's best interests and not in his own interests. **This duty can be limited or eliminated in the operating agreement**
  26. Piercing the Veil of the LLC Factors
    Alter Ego, Comingled and drained the capital and it is fraud & formality,

    • - Co-mingling with Personal Assets
    • - Draining the company assets (to ensure there are none in case of liability)
    • - Inadequate Capitalizaiton
    • - Alter Ego /used Company as an extension of their own persona
    • - FRAUD
    • - Lack of Formality... (failure to file all the forms necessary to legitimize the LLC)
  27. Corporations
    - created
    - Managed According to
    - Managed by
    Created by Filing the: Articles of Incorporation

    Managed According to: Operating agreement & BY LAWS

    Managed by Board of Directors & Officers
  28. Board Members Owe Duties of:
    • Duty of Care
    • - The board member must perform his duties 1)in good faith with 2) the care that an ordinarily prudent person in a like position would exercise and 3) in the manner the directors reasonably believe to be in the best interest of the corporation.
    • Duty of Loyalty
    • - The board member msut act in the best interests of the corporation and not for their own interests.
  29. Breach of Duty of Loyalty - USURP
    • USURP the Corporate Opportunity
    • 4 Factors
    • - Could the corp have exploited the opportunity
    • - Was it within the Corp's line of Biz?
    • - Does the Corp have an interest or expectancy where this opportunity is concerned?
    • - Will the opportunity put the director in conflict with his obligations to the corp?
  30. Breach of Duty of Loyalty - Self Dealing
    • - Was an Interested & controlling stockholder/Director involved in the transaction?
    • - Did the director make a full and complete disclosure to the disinterested board?
    • - Did the disinterested board vote to approve the transaction while not in the presence of the interested board?
    • - Was the transaction Fair?
  31. Duty of Care Test
    Business Judgement Rule- Courts will not review the business decisions of directors who perform their duties in good faith with the care that an ordinarily prudent person in a like position would exercise under similar circumstances. and in the manner that the directors reasonably believe to be in the best interest of the corporation.

    • EXCEPTIONS: BJR will not protect directors that engage in:
    • - FRAUD
    • - BAD FAITH
  32. Securities Fraud & Class Actions
    • 4 elements
    • -Material Misrepresentation
    • -Scienter (D knew or was reckless in not knowing of the misrepresentation & intended the P rely on it)
    • - in connection with purchase/sale of security
    • - Reliance (transaction causation)
    • - Economic Loss
    • - Causation (between material misrepresentation and loss)
  33. Duty of Care - Parent-subsidiary Merger
    • - Standard of Review is Entire Fairness
    • -BOP is on directors to prove the merger was fair.

    However when the merger is conditioned upon the approval of the majority of the minority, the BOP shifts to the P to prove unfairness.
  34. Good Faith Standard
    Only a sustained or systematic failure of the board to exercise oversight - such as an uter failure of the board to attempt to assure a reasonable informaiton and reporting system exists -- will establish the lack of good faith that is necessary condition to liability,
  35. Blasius Standard - Board Thwarting the Shareholders
    • - Did the board act for the primary purpose of thwarting the exercise of the shareholder vote?
    • - Did the board have a compelling justification for its action? (board has the burden of proof)
Card Set
Business Associations
Business Associations