corps by SarahFisher


									Start the essay with: Laws regarding agency, partnership, and corporations rule Commonly Tested Issues: Agency: Agency is a consensual fiduciary relationship wherein one person-the agent-agrees to act for and under the direction or control of another-the principal. In a corporation, director owes fiduciary duty to corp. Partnership: is an association of two or more persons who share a business for profit. Partners’ profits and losses: Each partner is entitled to be repaid his contributions, whether made by way of capital or labor to the partnership property, and to share equally in the profits and surplus remaining after all liabilities, including those to partners, are satisfied. Incorporation: The first step in the formation of a corporation is the filing of the articles of incorporation with the Secretary of State by the incorporator or incorporators. Piercing the corporate veil: a corporation will be looked upon as a separate legal entity unless it is used to commit fraud or to achieve inequitable results.

FORMATION I. Formation requirements – creates de jure corp A. People [incorporator] – can be person or entity B. Paper [articles] 1. Purpose – can go on forever. If goes beyond purpose – it’s ultra vires a) ultra vires deals are valid. But s/h’s can get injunction and responsible individuals are liable to the corp. 2. Names/addresses of incorporators and registered agent. Business name must have corp, inc, co, etc. 3. Capital structure a) Authorized stock, issued stock, outstanding stock b) Number of shares per class, par value, voting rights, preferences of each class. C. Act [file with Sec of State] D. Then board holds meetings to select officers, bylaws, etc. II. Legal significance of formation A. Internal affairs governed by law of the state B. Corp is separate legal person C. People running corp are generally not liable for corp debts III. De Facto corp / corp by estoppel A. If you fail de jure requirements  still treated as corp. B. De facto: need a statute, good faith effort to create corp, and you exercise corp privilege C. Corp by estoppel: if you deal with it and treat it like a corp, you are estopped from saying there is no corp. Also, corp can’t say it’s not a corp to avoid obligations. D. ***these doctrines are abolished in many states. IV. Bylaws A. Not required when forming a corp. Most do it later – board adopts them. S/h amend/repeal them. B. If bylaws are inconsistent with articles  articles control
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V. Contracts before incorporation A. Promoter: person acting on behalf of corp not yet formed. B. Corp not liable for these K’s unless they adopt them later. Adoption: 1. Express – BoD resolution 2. Implied – if corp accepts benefits of the K C. Promoter liable until novation. (you still need novation even after adoption) VI. Secret profit rule A. Promoter can’t make secret profit on dealings with corp. (Agreed deals are ok) 1. Prop acquired before becoming P: P gives back anything received over FMV 2. Prop acquired after becoming P: P gives back anything over cost. B. Foreign Corps (corps incorporated outside the state) C. Foreign corps doing intrastate business must qualify: 1. Get cert by Sec of State 2. Pay fees and appoint agent D. If you don’t qualify  fine, or you can’t sue in that state but can be sued.

ISSUANCE OF STOCK I. Issuance (when a corp sells/trades its own stock) II. Subscriptions (written offers to buy stock from corp) A. Preincorporation offers are irrevocable for six months, unless all parties agree. B. Postincorporation offers can be revoked up until acceptance. III. Consideration A. Form 1. OK  money, property, services already performed for the corp 2. NOT OK  future services, promissory notes. 3. Trend is to allow all above. B. Amount 1. Par: minimum issuance price. (no par = no minimum) 2. Treasury stock: reacquired stock (corp can get this back and sell it again) a) If resold, treat it as no par. 3. Corp can take in property (instead of money) when issuing par value stock 4. Issuing par for less than value = watered stock. Corp can go after BoD if they did it knowingly, and always the buyer. If buyer sells to BFP, can’t go after BFP. IV. Preemptive rights (right for s/h to keep stock proportion) A. S/h has right to buy stock during new issuance to maintain proportion. 1. Only when the new issuance is for money. B. Modern trend – preemptive rights don’t exist unless mentioned in articles.

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DIRECTORS AND OFFICERS I. Statutory Requirements – Directors A. Need 3 adults. Trend – just 1. B. S/h elect them at annual meeting. Can have entire elections or staggered terms. 1. You can have classified BoD – positions are grouped into classes and each class is elected by a class of shares. C. S/h can remove them before their term expires with majority of vote. D. BoD or S/h fill empty slots. But if slot created because s/h removed someone, s/h pick. E. Board can act like this: 1. Unanimous written agreement to act w/out a meeting, OR 2. A meeting (satisfying quorum and voting rules) 3. Notice can be achieved by mention in bylaws. Special meeting require 2 day notice. 4. Proxies and voting agreements are not allowed. 5. Quorum: majority of all directors must be there (unless bylaws state otherwise). To pass a resolution, just need majority of those present. a) if no quorum, action taken can be ratified later. b) you lose quorum if directors leave. II. Role of Directors A. Manage business of the corp. B. They can delegate management duties to committee of 1 or more directors. But can’t delegate all powers to a committee. 1. Committee – can’t declare dividends, amend bylaws, recommend fund corp change, fill BoD vacancy. III. Duty of Care (burden on Π) A. Director owes fiduciary duty to corp. B. Nonfeasance (dir does nothing) (i.e. fails to attend all meetings) 1. Prudent care: a) Dir must do what a prudent person would so with respect to his own business affairs. b) Prudent care usually involves reasonable investigation into a business/opportunity so that all the necessary information are obtained for a major decision. 2. Dir liable if breach caused a loss to the corp. C. Misfeasance (BoD does something harmful) (i.e. bad business deal) 1. Dir is not liable if they meet the BJR: prudent people inquire, deliberate, etc. 2. A court will not second guess a business decision if made in good faith, was reasonably informed and had a rational basis. IV. Duty of Loyalty (burden on Δ) A. Dir owes duty of loyalty to corp – must act in good faith and in corp’s best interest. B. Interested dir transaction: deal b/w corp and a dir. 1. The deal is set aside or dir is liable unless dir can show: a) the deal was fair when entered, OR b) dir’s interest was disclosed and deal was approved by majority of disinterested dirs or shares. C. Competing ventures: if dir enters into a competing venture and breaches duty of loyalty, he may be liable for constructive trust on profits, or damages if he harmed the corp.
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D. Corporate opportunity: dir can’t usurp corp opportunity. Not unless dir discloses to BoD and waits for BoD to reject opportunity. If breached, remedy is constructive trust. (For example, if a property V. Business Judgment rule: When controversial situation arises, Directors are protected if: A. The decision is rational B. After reasonable investigation C. With no taint of self-dealing VI. Other State Law as a Basis for Director Liability A. Ultra vires: describes acts attempted by a corporation that are beyond the scope of powers granted by the corporation's charter, the laws authorizing its formation, or similar founding documents. B. Improper distributions C. Securities liabilities D. Improper loans – loans can be given out by BoD if they are reasonably expected to benefit the corporation. E. Directors will be liable for BoD action unless they filed a written dissent (in minutes, writing to corp secretary at the meeting, sending letter to corp right after meeting) 1. Exceptions: absent dirs, or if dirs relied in good faith on auditors, employees, professionals, or book value of assets. VII. Officers (owe same duties of care and loyalty as dirs) A. They can bind the corp with actual (via articles, bylaws, BoD res) or apparent (corp holds officer out as having authority). Also: 1. President can enter into K’s 2. Secretary can keep records 3. Treasurer can maintain funds B. Need P, S, T. but can have more officers. Simultaneous offices is ok, except for pres and sec. C. Selected and removed by BoD. D. SO  S/h hire/fire Dirs. Dirs hire/fire officers. VIII. Indemnification of Directors and Officers A. When dirs/officers incur costs when being sued: Claims are of the following: 1. No indem allowed  if dir/officer is held liable to corp or got an improper personal benefit. 2. Mandatory indem  if dir/officer is successful in defending suit. 3. Permissive indem  anything not above. 4. ***Court can always order reimbursement if it seems fair (usually just expenses and atty fees) B. Articles can state there is little/no liability for dir/officers, but not for breach of duty, loyalty, intentional misconduct, or improper personal benefit. C. Corps can get dir/officer insurance.

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SHAREHOLDERS I. Holding Shareholders Liable for Acts or Debts of Corporation (s/h as Δ) A. General rule: s/h is not liable for the debts of the corp. B. But court can PCV and make s/h liable if s/h abused the privilege of incorporating and giving them just limited liability would be inequitable. C. Alter ego ex: X is a s/h and CEO of corp. He commingles funds. Creditor can’t collect because of this. Court will PCV and make X liable. D. Undercapitalization ex: A court will PCV if the corp was undercapitalized when formed. E. Courts will PCV more for a tort victim than a K victim. F. Also, watch for PCV in the parent-subsidiary model. II. Shareholder Management of Corporation (s/h as manager) A. Public policy says s/h’s should not manage the corp. (BoD should) B. Judicial trend toward upholding s/h agreement that bind dirs if: no minority s/h objects, and no harm to public or corp’s creditors, and agreement is re a minor issue. C. Some states allow s/h management in closely held corps and the articles or unanimous s/h allow it. Then, the corp doesn’t need a BoD. III. Shareholder Derivative Suits (s/h as Π) A. Here, a s/h is suing on behalf of the corp. B. Test  could the corp have brought this claim? (s/h can’t sue for things like corp not honoring his preemptive rights – this is s/h’s personal claim) C. Consequences of winning a derivative suit: 1. Recovery goes to corp. 2. S/h gets costs and atty fees from the corp. D. Consequences of losing a derivative suit: 1. S/h can’t recover costs and atty fees. 2. S/h now liable for Δ’s costs and atty fees if sued without reasonable cause. 3. Now other s/h can’t sue Δ because of res judicata. E. Requirements for bringing suit: 1. Must own stock when claim arose or gotten it by operation of law (divorce, inheritance, etc) 2. Must represent interests of corp and other s/h’s. 3. Must make written demand that dirs bring suit. (demand is excused if it would be futile) 4. Might need to post bond. 5. Corp can move to dismiss if they find it’s not in their best interest. F. Litigation 1. Corp must be joined as Δ because they failed to assert claim. 2. Δ can use defenses it would have used if corp was the Π. 3. Δ can try to disqualify Π. IV. Voting A. Record owner at record date gets to vote. B. Exceptions: 1. Corp doesn’t vote it’s own treasury stock 2. Death of s/h (executor can vote) 3. Proxies – a writing signed by record s/h authorizing another to vote the shares. Good for 11 months unless it says otherwise. Can always be revoked. C. Voting trusts and agreements (block voting):
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1. Voting trusts: written, copy to corp, transfers legal title to trustee, s/h’s get certificates and retain all rights but voting. (10 year max) 2. Voting agreement: writing and signed. Split on whether they are specifically enforceable. D. S/h voting location: s/h take action by unanimous written consent of all voting shares or meeting (with quorum and voting requirements) 1. Annual meeting: s/h elect dirs, court can order this meeting if not held. 2. Special meeting: BoD, 10% of voting shares, or articles can say who can call this. Must be for proper s/h purpose – something they can act on. 3. Notice – must give written notice to all voting s/h’s (when/where and purpose of meeting) a) if notice is faulty, the action taken at the meeting is void unless unnotified s/h’s waive expressly (writing, signed) or impliedly (attend without objection) E. Quorum must be present at meeting based on number of shares represented. (i.e. 50,001 of 100,000 shares outstanding) Quorum can’t be lost if people leave meeting. Articles can alter quorum requirement, but never below 1/3. 1. With quorum, majority of shares present (modern trend: shares voting) will bind the corp unless articles/bylaws requires higher vote. F. Cumulative voting: only when voting for dirs. Multiply # of shares times # of dirs to be elected. This power must be in articles – not a default provision. V. Stock Transfer Restrictions: will be upheld if they are reasonable (i.e. right of first refusal is ok). If someone buys stock in violation of this restriction, no COA unless it’s noted on the cert or buyer had actual knowledge of the restriction. VI. Right of Shareholder to Inspect Books and Records of the Corporation: used to be 5% s/h’s can do this. Now any s/h can. S/h makes a written demand stating a purpose. s/h can move for court order if corp is not willing. VII. Distributions: these are declared at BoD’s discretion. A. Types of stock: 1. Preferred stock: pay these stocks first, then common 2. Preferred participating stock: pay these first, and pay them again with the common 3. Preferred cumulative: add up the pervious years not yet paid. 4. Common stock: B. Where does money come from: 1. Earned surplus: earnings, less losses and previous distributions. (can pay distributions with this) 2. Stated capital: money from issuing stock (can’t pay dist with this) a) Ex: 10K shares of $2 par stock for $50K  20K goes to stated capital, the remaining $30K goes to capital surplus. 3. Capital surplus: money from issuing stock – payments in excess of par (can pay dist if you inform the s/h’s) C. No dist allowed if corp is insolvent or dist would make it insolvent. D. Dirs are liable for unlawful distributions. So are s/h’s who knew it was unlawful when they received it.

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FUNDAMENTAL CORPORATE CHANGES I. Characteristics of Fundamental Corporate Change A. This requires BoD resolution and notice to all voting s/h’s AND majority approval of shares entitled to vote. B. If s/h wants out because of this change, s/h can force corp to buy his shares at FMV (Court appoints appraiser if they can’t agree on price). This right is given when: 1. Corp combines with another corp 2. Corp transfers all/most of assets or share exchange 3. ***s/h must file written notice of objection and intent to demand payment, abstain from voting, AND make written demand after the vote to be bought out. II. Amendment of the Articles A. This requires BoD approval and notice to s/h’s AND voting majority s/h approval. B. Must file amended articles with Sec of State. C. If amendment affects a class, the s/h class must also approve the change apart from the main s/h approval. D. No dissenting s/h rights of appraisal. III. Mergers [A and B form A] & Consolidations [A and B form C] A. This requires BoD (both corps) approval AND notice to s/h’s AND s/h approval. 1. No s/h approval needed for short form merger – between parent and sub B. Must file article of merger (or consolidation) with Sec of State C. Dissenting s/h right of appraisal (for both corp s/h in merger and consolidation; for subsidiary corp on short form merger) IV. Transfer of All/Most of the Assets Not in the Course of Business or Share Exchange A. Only considered fundamental for the selling corp. B. BoD approval, notice to and approval by selling corp’s s/h’s (majority of shares) C. Dissenting s/h’s rights of appraisal to selling corp s/h’s only. D. Share exchange requires filing with the Sec of State. E. Default: Buying corp doesn’t succeed to selling corp’s liabilities V. Dissolution A. Voluntary: 1. Requires a) BoD resolution and s/h notice and approval by majority voting shares OR b) unanimous written s/h agreement 2. Then file articles of dissolution and give notice to creditors. B. Involuntary: 1. S/h can request (petition) if there is: a) dir abuse, waste, misconduct, illegal, oppressive acts b) s/h failure to fill BoD position c) dir deadlock causing irreparable harm to corp. 2. Court may order buyout of complaining s/h. 3. Creditor can petition if corp is insolvent; and the creditor has unsatisfied judgment OR corp admits to debt in writing. 4. Then file articles, corp stays in existence to wind up: change assets to cash, pay creditors, then s/h.

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SECURITIES LAW CONSIDERATION I. Securities (Investments) A. Mortgage bond: when the corp has pledged collateral to secure repayment. B. Debenture: when the corp hasn’t pledged collateral. C. ------D. Debt instrument can make debt security convertible  i.e. to stock at the option of the holder. Can also be made redeemable at option of corp at price set instrument. E. Articles can make equity security convertible (i.e. to another class of stock) at option of holder or redeemable at option of corp. II. State Law Liabilities A. Selling Controlling S/h’s Interest: 1. Controlling s/h’s can sell their stock at a premium. 2. But there are duties in these situations: a) Sale to looters – controlling s/h must make reasonable investigation. Liable for damage to the corp. b) Disguised sale of corporate asset – buyer pays premium for corp asset, when all s/h’s should have shared in this premium. c) Sale of corporate office – you can’t get paid to relinquish your office. B. Controlling S/h can’t subject min s/h to detriment: 1. This is common in closed corps. 2. Must have fair price and fair dealing with min s/h. 3. Ex: controlling s/h causes the corp to sell widgets for pennies. This is hurting the min s/h. C. Fraud: Common law fraud may apply to misrep in the sale of stock – the overt lie. D. Nondisclosure of special facts: 1. Dirs/officers have duty to disclose special facts in a securities deal. 2. S/h with whom the insider dealt can sue. 3. Damages: price paid minus FMV of stock after public disclosure. III. Rule 10b-5 – Aimed at Deceit A. Rule: Illegal to use fraud in connection with purchase/sale of security. B. Elements: 1. Instrumentality of interstate commerce 2. Δ: can be anyone (entities too) 3. Π: SEC or private buyer/seller of security. 4. Bad acts by Δ: a) Misrepresentation of material information. b) Failure to disclose material inside information. c) Tipping – passing along inside info for wrongful purpose. (1) Tipper – must pass along inside info and benefit from it (2) Tippee – must trade on tip and know/should know the tipper breached their duty to their company. Take away tippee’s profit. 5. Bad act must be in connection with purchase/sale of security which includes debt or equity. 6. Bad act must involve a material fact – one a reasonable investor would consider important when making an investment decision. 7. Scienter: Δ has intent to deceive, manipulate or defraud. 8. Reliance: presumed in cases of nondisclosure or misrepresentation.
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9. Damages: Difference between price paid and price after news comes out. IV. Section 16B – Aimed at Speculation by Director, Officer, or 10% Shareholder A. Provides for recovery by the corp of profits the insiders gained from trading the corp’s stock. B. Elements: 1. Π must be a reporting corp – a) at least 500 s/h’s and $10M in assets, OR b) listed on a national exchange. 2. Δ must be a big shot in the corp (dir, officer, 10% owner) 3. Δ must have bought and sold equity securities. 4. Short swing trading: rule applies to buying and selling in a 6 month period. 5. Corp can recover these profits. Profit = purchase at a lower price 6 months before or after the sale. V. Limited Liability Companies (LLC) A. Characteristics. 1. Give investors both limited liability as corp and fed tax benefits as p-ship. 2. May be perpetual existence. 3. Member’s full interest transferable only w/ majority of other members consenting. 4. Management may be in members or they may elect managers. 5. Members/managers usually not personally liable for company debts. 6. Dissolved by unanimous written consent of all members or upon death, retirement, resignation, expulsion or bankruptcy of any member. B. Formation. 1. One or more organizers file w/ SoS, AOI that MUST state LLC name, location of principal office, name and address of registered agent, and whether LLC will be managed by member or manager. C. Limited Liability. 1. Neither member nor manager is personally liable for debts of company. 2. Manager MAY be liable for acts/omissions which are criminal, made maliciously; in bad faith; OR, in conscious disregard of the corp’s best interests. D. Powers. (Same as general corps). 1. If management is vested in membership, individual members have apparent authority to bind the company contractually. 2. Operating agreement MAY NOT: a) Unreasonably restrict right to info or access to records; b) Unreasonably reduce duty of care; c) Eliminate the duty of loyalty or obligations of good faith and fair dealing; d) Vary the right to expel a member in an event specified by statute; e) Vary requirement to wind up LLC’s business in case specified by statute; f) Restrict rights of a person, other than a member, or transferee of a member’s distributional interest. 3. May make donations for charitable, scientific, or educational purposes. E. Agency Authority – depends on whether managed by manager or member. F. Finance. 1. Profits are shared among members as provided by AOI. 2. No distributions may be made if the LLC would be insolvent after the distribution.
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3. EXCEPT in dissolution or other specified events, return of a member’s capital contribution requires unanimous consent of all members and amendment of AOI. G. Dissolution. 1. Upon expiration of period of duration, unanimous consent of all members; events stated in AOI occur; no more members; OR, when a court orders dissolution. 2. Procedure is similar to corps. H. Miscellaneous. 1. Each manager and managing member owes the duties of loyalty and care to the LLC and to the other LLC members. 2. Each member is entitled to vote – a vote which is weighed in proportion to the member’s then-current percentage. a) A vote of a majority interest of the members is required. 3. Assignee can only become member if all of the other members consent. VI. Not For Profit Corporations. A. Formation. 1. Similar to corps EXCEPT AOI MUST set forth the NPCs purpose. a) Initial bylaws must be adopted by the BOD. 2. NPC does not distribute income to its members, D/O. 3. MAY be organized for any lawful purpose other than pecuniary gain. B. Members. 1. Not necessarily needed and not personally liable for corporate obligations. 2. May not be paid any part of NPC income, EXCEPT reasonable compensation for services. C. Directors. 1. BOD MUST consist of ≥ 3 individuals in accordance w/ AOI or bylaws. 2. NPC may NOT make loans to its Ds. 3. Ds may be removed from office w/ or w/o cause by vote or agreement of a majority of all votes of the members. 4. Removed D MUST return all records in his possession w/in 72 hours. D. Dissolution. 1. Plan of distribution of assets MUST provide that all obligations and liabilities be paid, all assets be returned or donated to a similar charity if held on such condition; AND, all other assets be distributed as provided in the AOI or bylaws, which may provide for distribution to the members or other charities. E. Conversion. 1. Any for profit corp may convert to an NPC by filing a petition in the circuit court of the county where the PPB is located. a) MUST be consented to by all SHs. VII. Foreign Corporation. 1. MUST be qualified to do business in CA. 2. Formalities are similar to those for incorporation. 3. MUST maintain a registered office, appoint a reg. agent, & file an annual report. 4. NOT permitted to sue but MAY defend suit if doing business in CA w/o authority. a) Contracts are not impaired. b) State may sue to recover amt of all fees/taxes that would have been due upon qualification plus a forfeiture of $500 - $1K per year in which the foreign corp failed to qualify.
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PARTNERSHIP AND AGENCY I. (Liability of Principal (P) for acts of Agent (A)). A. Respondeat Superior/Vicarious Liability. 1. P will be liable for torts committed by A if a P/A relationship exists; AND, the tort was committed within the scope of the relationship. 2. P-A relationship requires: a) Assent – informal agreement b/t P and A. b) Benefit – A’s conduct is for P’s benefit. c) Control – P has the right to control A. 3. Unique Situations: a) Sub-agent: no assent or control by P  no liability for sub-agent’s tort. b) Borrowed Agent: probably not control  no liability for borrowed A’s tort. c) Independent Contractors: assent and benefit but no right to supervise (control)  no liability w/ two exceptions: (1) Ultra-hazardous Activities – cannot delegate to independent contractor and absolve yourself from liability. (2) Estoppel – if you hold out your independent contractor with the appearance that he is an A, you will be liable as if an A. 4. Scope. a) 3 Factors: (1) Conduct of kind of A hired to perform. (2) Tort occurred on the job. b) A intended to benefit P.\Frolic and Detour. (1) Frolic – new and independent journey  outside scope. (2) Detour – mere departure from assigned task  within scope. c) Intentional Torts – usually outside scope w/ 3 exceptions: (1) Intentional conduct was specifically authorized. (2) Intentional conduct was natural from nature of employment. (3) Intentional conduct was motivated by desire to serve P. B. Liability of P for Contracts entered into by A. 1. P is liable for contracts entered into by its agent if: a) P/A relationship exists AND the P authorized the A to enter the contract. 2. Types of Authority. a) Actual Express Authority – P used words to express authority to A. (1) May be oral and private  narrowly construed. (2) Equal Dignities Doctrine – if K must be under seal, authority to enter must be under seal. (3) Revocation may be made by: (a) Unilateral act of either party. (b) Death or incapacity of the P, but authority will not terminate on death if A has a durable power of attorney. b) Actual Implied Authority – A reasonably believes P has given him authority through: (1) Necessity – implied authority to do all tasks necessary to accomplish an express task.
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(2) Custom – implied authority to do all tasks customarily performed with A’s title or position. (3) Prior dealings b/t P and A – built up understanding of authority from prior dealings. c) Apparent Authority – P has cloaked A w/ the appearance of authority, AND, 3rd party reasonably relies on appearance of authority. (1) Secret Limiting Instruction – A has actual authority, but P has secretly limited it and the agent acts beyond the limitation. (2) Lingering Authority – actual authority has been terminated, but A continues to act on P’s behalf – P liable unless he has provided notice to all potentially deceived parties. d) Ratification – Authority granted after the K has been entered if P has knowledge of all material facts regarding the contract; AND, P adopts the K expressly or impliedly by accepting its benefits. (1) Hint – notice the retroactive effect. 3. Expand/Limit Authority. a) Statement of Authority – a p-ship may expand or limit a partner’s ability to enter into transactions by filing a “statement of authority” w/ the Dept. of State (DOS). (1) Real Property – a grant of or limit on authority to transfer real property is good only if (in addition to DOS), it’s also recorded at county recording office where prop is located. b) The buyer is deemed to know. (1) Other Transactions – if statement of authority grants partner power to enter transactions other than for realty  conclusive for a BFP (one who has no notice authority is lacking. i.e. subsequently partners voted and took away grant). c) Statement of Denial – partner listed in a statement can limit his authority by filing a Statement of Denial w/ DOS. 4. Rules of Liability on K. a) General Rules: (1) If no authority, P is not liable on K but A is liable. (2) If authority, P is liable on K and A is not liable. b) Exception – if P is partially disclosed (only the identity of P is concealed) or undisclosed (fact of principal concealed), authorized agent may be liable at the election of the 3rd party. C. Duties A owes to P. 1. Duty to exercise reasonable care. 2. Duty to obey reasonable instructions. 3. Duty of Loyalty. a) No Self-Dealing – A cannot receive a benefit to the detriment of P. b) No usurping P’s opportunity. c) No secret profits. 4. Remedy – losses caused by breach and P may disgorge profits. II. PARTNERSHIPS. A. Partnership Formation. 1. No Formalities Required.

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a) A p-ship may file a registration statement w/ DOS, but it’s a prerequisite to filing a statement of authority, denial, dissociation or dissolution. 2. Definition – An association of two or more persons carrying on as co-owners of a business for profit. 3. Sharing of Profits. a) Prima facie evidence of a p-ship (sharing of gross receipts doesn’t create presumption). 4. Limited P-ships require fling of a LP certificate. B. Liability of P’s to 3rd Parties. 1. Agency principles apply. a) Partners are agents of the p-ship for carrying on usual p-ship business. b) P-ship is bound by torts committed by Ps in scope of p-ship business. c) P-ship is bound by Ks entered by Ps with authority. 2. Ps are jointly and severally liable for debts of P-ship. a) P-ship creditor must exhaust p-ship resources before recovering from partner individually. b) If P held liable  right to indemnification from p-ship and contribution from other partners. c) Incoming partners have no liability for pre-existing debts, but capital contributed by an incoming partner may be used to pay pre-existing debts. d) Outgoing partner retains liability to existing creditors, and even on subsequent debts, for one year or until notice of withdrawal has been given to all known and potential creditors. (1) Outgoing partner can protect self by filing statement of dissociation w/ DOS (effective 90 days after filed). e) Limited partners are liable only to the extent of their capital contribution. 3. P-ship by Estoppel. a) One who represents to a 3rd party that a p-ship exists will be liable as if a p-ship does in fact exist. (P-ship will be bound too if allowed 3rd to hold themselves out as P). C. Rights and Liabilities B/t Partners. 1. Partners are fiduciaries of each other and the p-ship cannot eliminate these duties: a) Owe each other duty of loyalty – no self-dealing, no usurping, no secret profits. b) Duty of good faith and fair dealing. c) Duty of Care – partner must refrain from grossly negligent or reckless conduct, or intentional misconduct (no liability to other partners for ordinary negligence). d) A partner must provide: (1) w/o demand, info about the p-ship reasonably required for another partner to exercise her rights under the p-ship agreement. (2) on demand, any other info about the p-ship unless it’s unreasonable. e) A partner can inspect the books, can get formal accounting when reasonable. f) A partner can sue p-ship or another partner during the life of the p-ship, even if claim related to p-ship affairs. (SOL begins to run immediately).
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2. P-Ship Property. a) Property acquired in name of p-ship is p-ship property. b) Property acquired in name of partner is p-ship property if instrument transferring title suggests being acquired for p-ship. c) Property purchased w/ p-ship assets presumed to be p-ship property, although the presumption is rebuttable. d) Property acquired in name of a partner w/o using p-ship funds presumed to belong to partner if instrument transferring title doesn’t suggest otherwise. 3. Partner’s Rights in P-ship Property. a) Specific p-ship property – individual partners may not transfer w/o p-ship authority. b) Share of profits and surplus – personalty which may be transferred; passes to a partner’s heir or devisee upon death. c) Share in management – p-ship asset which individual partner may not transfer. 4. Management – absent an agreement, each partner is entitled to equal control. 5. Salary – absent an agreement, partners get no salary. a) Exception – partners get compensation for helping to wind up the p-ship business. 6. Partner’s share of profits/losses. a) Absent an agreement, profits are shared equally. b) Absent an agreement, losses are shared like profits. 7. Admission of a new partner – under the UPA, a new partner requires unanimous consent. 8. Transfer of P-ship Realty. a) Names in the title and conveyance must match (title and conveyance instruments both in p-ship name). b) If partner lacked authority to transfer, then p-ship may be able to recover property from initial transferee. (1) If conveyance gives indication that property might be p-ship’s  p-ship can get back from transferee if partner had no authority to convey. c) If transferee transfers property to another  protected as long as was a BFP. D. Dissociation. 1. Defined – occurs when partner ceases to be associated w/ p-ship. a) Express b) Expulsion, death, BR (??) or incapacity. c) Appt of receiver. d) Distribution of all partner’s interest. 2. Wrongful Dissociation – constitutes a breach of the p-ship agreement: a) If p-ship for definite term or particular undertaking  breach if walk away. b) If p-ship at will  can walk away w/o breach. 3. Consequences for dissociating partner: a) If p-ship continues in business, p-ship must buy out based on liquidation or going concern w/o dissociater, whichever is greater. 4. Consequences for P-ship.
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a) Dissociated partner retains ability to bind p-ship for one year after dissociation. b) P-ship can prevent this by notifying people or filing a statement of dissociation w/ DOS to put all potential creditors on notice. E. Dissolution. 1. Definitions. a) Dissolution – any material change like death, withdrawal or insolvency of a partner. b) Termination – real end of p-ship. c) Winding Up – remaining partners liquidate p-ship assets to satisfy p-ship creditors. 2. Partner who wrongfully dissociated has no right to wind up. 3. Partner’s receive compensation for winding up. 4. P-ship liability for winding up: a) P-ship retains liability on all Ks entered into to wind up old business. b) P-ship retains liability on new business transactions until: (1) Notice of dissolution has been given to actual and potential creditors. (2) File statement of dissolution w/ DOS. 5. Priority of Distribution. a) Outside creditors and inside creditors. b) Capital contributions. c) Profits or losses. 6. Creditors Rights. a) P-ship creditors have priority on p-ship assets. b) If individual creditors and p-ship creditors both assert claims against partner’s separate assets  both have equal claims. III. Other Entities: NOTE – always liable for own tort. A. General P-ship. (GP) 1. All partner’s are jointly and severally liable for all p-ship obligations. B. Limited Liability P-ship. (LLP) 1. Member vicarious tort liability – none unless directly supervising. 2. K liability – none for contracting member or others; only LLP liable (recent change). 3. Must file annual report. C. Limited P-ship. (LP) 1. General partners are jointly and severally liable. 2. No liability for at all for limited partners unless they have control. a) Safe Harbors – employed by limited partner, advising general partner, guaranteed note – okay to do w/o losing limited partner protection. b) If does more, then use Reliance Test – someone reasonably believed she was a general partner. Look at: (1) Conduct (2) Let name be used in comp. title

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