Bus Ass

Front 1

Creation of an Agency relationship

Back 1

1) Principal manifests assent to have the agent act on the principal's behalf and under his control

2) The agent manifests assent or otherwise consents so to act.

--no contract needed
--parties need not intend to enter a formal agency relationship.

Front 2

Creation of Agency--Case Rule

Cyberheat

Back 2

That court applied basic principal and agent law and concluded that when a principal authorizes its independent contractor or agent to conduct and conclude a transaction with third parties on the principal's own behalf, and the principal benefits financially from the contracts, the principal will be liable, based on the agents foreseeable infringing actions upon which it would be reasonable for the third party to rely, provided the third party has no notice that the representations are unauthorized

Front 3

Fiduciary Duty of Agent to Principal

Back 3

Duty of Loyalty is most important and sort of encompasses the fuller list below:

Performance of Contract Obligations;
Care;
Competence;
Diligence;
Obedience; and
Disclosure

Front 4

Agency

What constitutes Loyalty?

Back 4

1. The agent's duty of loyalty is multifaceted and includes among other obligations, a duty " not to use or communicate confidential information of the principal for the agent's own purposes or those of a third party
2. a duty not to compete with the principal in any matter within the scope of the agency relationship
3. Duty not to act as an adverse party to the principal in a transaction connected with the agency relationship

Breach = disgorgement, damages

Front 5

Fiduciary--Duty of Loyalty: Case Note

Food Lion

Back 5

An employee who deliberately acquires a conflict of interest to his employer is disloyal.

Front 6

AUTHORITY--Express actual authority

Back 6

EAA binds the principal because they authorized the actions explicitly and should be held responsible for the consequences

Front 7

AUTHORITY--Implied Actual Authority
1. Effect
2. What is implied?

Back 7

1. IAA binds the principal because we want people to have confidence in conducting transactions

2. The power to do those things necessary to fulfill the agency. Anything that is proper, usual, and necessary to carry out express authority.

--if specifically prohibited, there can be no implied authority

Front 8

AUTHORITY--Apparent Authority
2 bases for liability

Back 8

1. Where persons appear to be agents, even though they do not qualify under the definition.
2. Where agents act beyond the scope of their actual authority.

Front 9

AUTHORITY--Apparent Authority
Creation

Back 9

Apparent authority is created by what the third party reasonably believes that the agent may do BASED upon the actions of the principal.

--the 3rd party must have REASONABLE and ACTUAL belief of the apparent authority in order for the princpal to be bound.

Front 10

Partnership

Formation

Back 10

The intent to do the things which constitute a partnership is what determines whether individuals are partners, regardless if it is ttheir purpose to create or avoud the relationship. THe existence of a partnership may be implied from the circumstances where it appears that the individuals involved have entered into a business relationship for profit, combining their property, labor, skill, experience, or money

-Usually obvious

Front 11

Partnership

Formation--Factors to look for

Back 11

1. The most important indicator is whether a partner receives a share of profits of a business. Intent controls as revealed by the terms of their agreement, conduct, and the surrounding circumstances when determining whether a partnership exists.

--without any express agreement, the law will fill the significant terms of a partnership relationship

Front 12

Partnership

Liability

Back 12

Each partner is personally liable for the debts incurred by the partnership

Hint 12

Policy basis: The person who gets control should be the one who values it the most (the person who gets a percentage of the net profit) and the one who makes the most efficient decisions.

Front 13

Partnership--Fiduciary relationship

Back 13

At a minimum, a parnter must disclose opportunities that are in the scope of the partnership

Partners must disclose informations material to the partnership

You cannot contract out of this duty--but you may define it's boundaries within reason by contract

Front 14

Partnership--Profit sharing

Back 14

IN THE ABSENCE OF ALTERNATE AGREEMENT:

Partners share profits equally

Front 15

The Partnership

Two Main Rules

Back 15

1) Partners are co-owners of the partnership

2) Partners have personal responsibility for the partnership

Front 16

What type of business entity is formed when there are a number of co-owners, without them taking any action?

Back 16

Partnership is the default business entity for a number of co-owners of a business

Front 17

Define Partnership

Back 17

A partnership is an association of two or more people who are co-owners of a business for profit

Front 18

What is ownership?

Back 18

It generally entails have a share in profits and control of a business

Sharing of profits is prima facie evidence of ownership (profit = gross - expenses)

Front 19

Exceptions to the ownership rule

Back 19

Creditors who had some control and some sharing of the profits simply as payment of debt were not parnters

Sharing of profits is not prima facie evidence of ownership if:
1) money received is in compensation for a loan

2) person is an employee

Control is not enough to determine ownership. Even if one has veto power (which lenders do) that is a completely different animal than telling a company exactly what to do.

Front 20

Partnership: Authority and governance

Back 20

The default rule is that there are equal rights in management. One partner, one vote--even if their contributions or interests in profits are unequal

Front 21

Partnership: Authority and Governance

What to do about disagreements among partners

Back 21

A difference arising as to a matter in the ordinary course of business requires a majority vote to make a decision. (if only 2 partners, then vote must be unanimous)

Ties go to inertia and things will just stay the same.

An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be taken only w/consent of all partners

Front 22

Partnership: Authority and Governance

When an act binds a partnership

Back 22

UPA § 301

A partner is an agent of the partnership and can bind copartners when acting in the ordinary course of business--unless the 3rd party knew the partner did not have the authority to act

An act outside the ordinary course of business must be specifically authorized by the other partners

Front 23

Partners and Tort Liability

Back 23

Partners are treated as servants of the parntership for purposes of torts--therefore the partnership is liable for the wrongful acts of its partners. However the CL would allow recovery from negligent partners

Front 24

Partnership

Distribution of profits/losses

Back 24

Default Rules:

UPA 18: Each partner shall be repaid their contributions, then each shall share equally in the profits or losses

A partner's labor contribution do not count as capital for distribution prior to distribution of profits

Front 25

Partnership

Dissolution

Back 25

UPA 29: change in the relation of the partners caused by any partner ceasing to be associated in the carrying on--as distinguished from winding up--of the business

It is not the business that is dissolving, it's the relationship between the partners that dissolves

Partnerships are dissolvable at will
--partners may have a partnership for a term where they agree to continue the business until a certain amount of money is earned.

--A partner may not freeze out another partner to obtain the full benefits of the business himself--there are strong fiduciary duties with regard to prospective opportunities.

Front 26

Partnership

Dissolution--3 models

Back 26

1) sell to discharge liabilities (buy-out model)

2) Sell assets to settle debts (liquidation)

3) Sell the whole business and distribute accordingly (better option if available)

--watch for conflicts of interest

Front 27

Partnership

dissolution by breach

Back 27

If one partner breaches, the other partners may keep the business and pay the breacher his share minus any damages as a result of their breach

Front 28

Limited Partnership

2 types of partners

Back 28

1) General Partners, for whom the regular rules of parntership apply. (hard to find someone to take on this unlimited liability

2) Limited Partners--as long as they abstain from controlling the business, their liability is limited to loss of investment in the business. EXCEPT: a limited partner is liable for his own personal debts (loans, tort obligations, etc.)

Front 29

Limited Partnership

Formation

Back 29

LPs are created only by virtue of statute. You must file a document with the state; this is also when the general and limited partners are designated.

Front 30

Limited Partnerships

2 Exit rules and ULPA rule

Back 30

1) General partner's exit triggers dissolution and liquidation, unless another arrangement was agreed to beforehand

2) Limited Partner's exit does not trigger dissolution

ULPA: gives general partners the right to demand their interest if their exit does not result in dissolution. Limited partners have the right to withdraw and receive payment from the LP

Front 31

LLPs

2 major aspects

Back 31

1) It is a partnership--file a piece of paper with the state

2) You are still liable for your own debts

Front 32

LLPs

Limited liability rationale

Back 32

You cannot be held liable simply because you are the owner of the firm
--many statutes only apply this rule to tort debts and not contractual debt

Front 33

LLCs

3 main concepts

Back 33

1) Everyone has limited liability
2) Owners are members
3) Statute vary across the country with regard to other default rules

Members also manage (run the business like a partnership) but there can be an alternative situation where managers are designated and some or all members don't have to manage

Front 34

LLC

Why is an attractive business form?

Back 34

It combines corporate-type limited liability with partnership-type flexibility and tax advantages
--All members have equal management rights (absent contrary agreement)
--tax liability passes through such that the LLC doesn't pay taxes, but the members pay taxes on their distribution values
--members are not personally liable for obligations of the business

Front 35

LLC

Voting Power

Back 35

Statutes vary

--some follow partnership scheme of one person one vote; others follow a more corporate model with voting power equal to interest in profits or contributions

Front 36

LLC

Fiduciary Duty

Back 36

LLC statutes are often silent regarding fiduciary duty;

It may not be waived, but its boundaries may be defined with reason

Front 37

LLC

Agreements that contradict public policy

Back 37

Agreements cannot unreasonably restrict a memebrs right to information, to eliminate a manager's duty of loyalty, or to unreasonably reduce the duty of care
--D must consider the best interests of the LLC before making a business decision regarding the LLC

Front 38

LLC

When is it bound by a members act?
Delaware?

Back 38

An LLC can be bound by an act of its members

Delaware: flexible; gives members broad discretion and full effect to freedom to contract
--furnishes default rules where member's agreement is silent
--only where the agreement is incosistent with mandatory statutory provisions will the agreement be invalidated.

Front 39

LLC

liability and exit rule

Back 39

Members only liable for personal debts and negligence

Exit rules follow the buy-out model but are not uniform across jxs

Front 40

Comparing Business Forms

Compare Limited liability for different forms

Back 40

Partnerships: Each partner is personally liable for all debts incurred by partnership

Limited Partnership: Limited partners are only liable for personal debts but they have no control of the business; General Partners are personally liable, but they have control of the business

LLC/Corps/LLP: LLC and corps provide the same limited liability to its members and managers as corps provide for its shareholders and directors; By contrast some LLP statutes only protect members from tort liability not contractual.

Front 41

Comparing Business Forms

Exit Rules; What happens when an owner departs the firm, dies, or a creditor forces a sale due to a bankruptcy?

Back 41

Businesses with multiple owners have 3 possibilities:
1) Buy-out model: If the owners wish to continue they must buy out the interest of the departing owner
a) Partnership: UPA says that any change in owners causes dissolution of the parntership. The remaining individuals may continue the business under a different partnership

b) Limited Partnership: General partner leaving triggers dissolution; bus liquidated unless contrary agreement (note: if GP departs and bus continues, he is entitled to his share of the bus immediately); Limited Partner departing does not trigger dissolution. (note: An LP may withdraw from the partnership and demand that the partnerhsip pay him his interest in the bus.

c) LLCs mostly follow some form of the buy-out scheme

These are all default rules that can be contracted around

2) Free Transfer model: can sell to any buyer--at death it passes to heirs, creditors may force a sale

3) Lock in model:

Front 42

Comparing business forms

Governance

Back 42

1) Corporations: republican/representative style of government
-stockholders elect a board of directors who are in charge of the corporations
-Directors appoint officers who run the business
--Certain fundamental decisions are made by the shareholders who vote in proportion to their interest in the company
--Director and Shareholder decisions are typically made by majority view

2) Partnership and LLC
--Direct democratic process (unless otherwise agreed)
--All owners participate in management
--For ordinary matters, majority rules
--For extraordinary matters, unanimity req'd
--partnerships are one person one vote, however some LLC statutes have voting proportionally to interest in business

3) Limited Partnership:
--General partners follow same rules of partnership; limited partners are supposed to be passive
--Management is typically decided upon formation; if partners silent, the statute will provide the default rule

Front 43

Corporations

Process of Incorporating

Internal Affairs doctrine

Back 43

The internal affairs doctrine says that Corporate law issues are governed by the state of incorporation

Front 44

Corporations

Process of Incorporating

Selecting a state of incorporation

Back 44

Factors:
1) Flexibility: Corporations desire the flexibility to run the company as they see fit with as little restriction from the state as possible
2) Reasonable default rules: Much of the law concerns gap-filling to address issues that the parties failed to agree on
3) Predictability: Comes where there is a lot of litigation and many already existing corporations (DE)

Race to the bottom theory: States will undercut each other to provide friendly climate to businesses so as to benefit from the tax revenue

Race to the top theory: Competitions between states for corporations leads to the best rules to benefit shareholder interests

Front 45

Corporations

Process of Incorporating

How to physically accomplish Inc.

Back 45

Each state's corp statute sets out the procedure
--the key to the process is the preparation and filing of a document (articles of inc., charter, certificate, etc.)

Front 46

Corporations

Process of Incorporating

Chicken and Egg problem

Back 46

Who comes first the directors or shareholders? (Since the shareholders elect the directors and directors issue shares)

To break the impasse:

1) articles of inc may (or must) contain the initial directors of the corp.
2) otherwise, the incorporators have the authority to choose the BOD

Front 47

Corporations

Process of Incorporating

Organizational meeting

Back 47

The incorporators or initial directors (if specified in the art. of inc.) hold a meeting to adopt bylaws for running the organization