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256 terms

Business Law

Business law final flashcards
A "fiduciary" relationship between a principal and agent, which relationship is based on trust and confidence
Elements of an Agency
Principal, Agent, Mutual consent from the principal that the agent will act on the principal's behalf, Agent is subject to the principal's control, Fiduciary duty - legal relationship of confidence or trust, Legal purpose and cannot be contrary to public policy (No consideration from the principal to the agent is required for an agency relationship; The principal but not the agent needs contractual capacity)
Agency Principal
The recipient (i.e. the person for whom an agent is acting)
Agent for Agency
The actor (i.e. the person who is acting on behalf of the principal)
Mutual Consent
Agreement between the principal and the agent.
Where the principal authorizes the agent to act (i.e. client - attorney; client - real estate agent) or by status the agent is authorized to act on behalf of the principal (i.e. corporation - CEO); Control over the time, manner, and method of executing the work
"Equal Dignity Rule"
Indicates that if the law requires a written contract, the Agent's authority from the principal must be in writing to be valid, except for officer acting for corporation or agent acting in the presence of the principal
Form agency by agreement (actual authority)
written agreement or oral agreement
Form agency by ratification (apparent authority)
Principal by act or agreement, ratifies conduct of a person who at the time of acting was not the principal's agent or did not have acting authority
Form agency by estoppel (apparent authority)
By the principal's actions or the environment (i.e. inferred by custom), (1) a third party believes that another person is the principal's agent and (2) the third party acts to his detriment in reasonable reliance on that belief
Form agency by operation of law (apparent authority)
The agent acting outside of the scope of his duty because of necessity or emergencies
Elements for Ratification
1- Agent acts on behalf of principal
2- Principal must affirm the the entire deal/ matter (if 3rd party, before the 3rd party withdraws from deal/matter)
3- Principal and 3rd party must have legal capacity to contract when agent made the deal/matter and the principal's legal capacity also must be at ratification
4- Principal must know all the material facts in the deal/matter
The agent must put her own needs second to the principal's interest
Duties of Agents to Principals
1. Duty of Loyalty- The obligation to act solely for the benefit of the principal and not in the agent's or a 3rd party's interest. Confidentiality is part of the duty of loyalty
2. Duty of Care- The obligation to exercise good business judgment and to use ordinary care in meeting the agency obligation
Duties of Principal to Agent
1. Compensation- Agreed upon in advance in writing to avoid legal disputes
2. Reimbursement
3. Indemnification- Subject to the terms of the agency agreement, the Principal is obligated to "make whole" the Agent for liabilities incurred because of performing authorized and lawful actions and transactions on behalf of the Principal
4. Cooperation and Safe Working Conditions
Employee vs Independent Contractor
-In an EE, the ER is liable for their actions in the scope of the agency (liable for taxes too like SS, protected under employment laws
-IC needs a "work for hire" agreement from ER
Terminate an Agency Relationship
1. Lapse of Time
2. Mutual Agreement
3. Terminate Provision- either party or both parties terminate the agreement after a reasonable time as provided in the agreement
4. Purpose Achieved
5. Occurrence of "Trigger Event"
Operation Of Law
1. Death or Insanity
2. Impossibility- due to the loss of the item or because of the law
3. Changed Circumstance
4. War or Other Political Prohibition- similar to the "force majeure" provision in a contract
(bankruptcy or Insolvency or the Inability to pay debts when due - Does not necessarily terminate the agency relationship)
At Will Employment
Employment relationship in which either party can break the relationship without liability, provided that there is no express contractual provisions providing otherwise and where the employee is not a part of a collective bargaining arrangement (i.e. union)
Contractual Employment
Employment arrangement pursuant to a formal agreement, specifying the terms of such employment arrangement
Employment Discrimination
Treating employees or job applicants unequally based on race, color, national origin, religion, gender, age, or disability
Protected Class
A group of persons protected by specific laws because of the group's defining characteristics (e.g. race, color, religion, national origin, gender, age, and disability)
Retaliatory Discharge
The firing of an employee in response to taking negative action against the Employer
Disparate-Treatment Discrimination
Intentional discrimination by an ER of persons in a protected class
Disparate-Impact Discrimination
The result to a protected class of persons who are adversely affected by an ER's practices and procedures, even though they may not appear to be discriminatory (i.e. unintentional discrimination; discrimination in effect)
Constructive Discharge
A termination of employment that occurs by making the EE's working conditions so intolerable that the EE reasonably feels compelled to quit
Immigration Reform and Control Act of 1986 ("IRCA")
Makes it illegal to hire, recruit, or refer for a fee someone not authorized to work in the United States
Immigration Act of 1990
Places caps on the number of visas (entry permits) that can be issued to immigrants each year by a U.S. business
Contract Law Purposes
1. Represents a reflection of social values, interests, policy, and expectations at a given point in time. (i.e. what promises should be upheld and acceptable excuses to society for breaking promises)
2. Sets a framework for enforcing the promises that society views should be upheld and allowing for excuses that society views as acceptable
3. Provides stability, predictability, and certainty for buyers and sellers and other contracting parties in the marketplace
4. Serves as a backup to moral obligations, protecting promises or giving relief
Sources of Contract Law
-Common Law: Governs all contracts except those that have been modified or replaced by statutory law, such as the Uniform Commercial Code (UCC), or administrative agency regulations
-UCC: Governs contracts regarding the sale and lease of goods (to the extent the UCC modified the common law)
Offer and Acceptance
Legally sufficient and bargained-for value received or promised to entice the offeree to make the arrangement
Legal Contractual Capacity
Characteristics recognized by law for one having the "quality" to engage in contractual activities
Bilateral Contract
A promise for a promise, K formed when the offeree makes response promise, Most K's are bilateral
Unilateral Contract
A promise for an act, K formed when offeree acts; K cannot be modified once Offeree starts performing, and K cannot be revoked upon substantial performance by the Offeree, unless terms specify otherwise
Formal Contract
Requires a special form for creation (i.e. international sales contracts)
Informal Contract
Requires no special form for creation, other than certain Ks must be in writing
Express Contract
K where the terms are stated, whether an oral or written K
Implied Contract
K formed, in whole or in part, by the parties' conduct
Executed Contract
Both parties have fully performed the contract; If one party has fully performed and the other party has not fully performed the contact, the completed portion is executed and the uncompleted portion is executory
Executory Contract
Neither party has fully performed the contract
Executory, Bilateral, Express Contract (becomes executed after Gloria completes acting and receives the final payment)
Identify types of Contract:
Producer says to Gloria, "I'll pay you $2 million to star in a my new romantic comedy, A Promise for a Promise, which we are shooting three months from now in Santa Fe." Gloria says, "It's a deal."
Unilateral Contract
Producer says to Theo, "I'll pay you $200 to be the set photographer on next Saturday for my new romantic comedy, A Promise for a Promise." Theo says nothing in response, but shows up to the set on Saturday and starts taking photographs.
Valid Contract
K with the necessary elements for K formation (agreement, consideration, legal contractual capacity of the parties, and legal purpose)
Enforceable Contract
A valid K that can be enforced because there are no legal defenses
Voidable Contract
A valid K where one or both parties have the option to avoid / RESCIND the K (i.e. K with a minor); If the K is voided, both parties are released, and if the K is ratified both parties are legally obligated
Unenforceable Contract
A valid K that cannot be enforced because of a legal defense (i.e. K requiring writing and no writing). The court will not enforce the contract
Void Agreement
No contract exists. Possible reasons: Purpose of "K" is illegal or a party does not have legal contractual capacity (i.e. was not competent)
b. Contract law gives parties a way to enforce many of the promises that are made to them
One of the main purposes of contract law is:
a. to ensure that one party does not threaten another.
b. to ensure that certain types of promises made among private parties are enforceable.
c. to discourage harms against society.
d. To discourage misuse of the environment.
c. To be valid, an agreement must include an offer and acceptance
An agreement to form a contract must include:
a. a fair bargain
b. a fair price
c. an offer and an acceptance.
d. a physical sample of the good for sale
a. A bilateral contract involves the exchange of promises. If all of the other requirements for a valid contract are met, both parties will be obligated to perform their respective promises
A bilateral contract is one in which:
a. two promises are exchanged.
b. a promise is given in return for an act.
c. a third party guarantees the promise of one of the parties.
d. a unilateral contract accomplishes an exchange of promises
b. Despite their drinking, boasting, and bragging, the parties created a valid contract, which had to be performed. The party seeking to void the contract would have to prove that he/she lacked the mental capacity to comprehend the legal consequences
The case of Lucy v. Zehmer involves an offer to sell property during an evening of drinking. If the decision turns on the element of legal contractual capacity, the court mostly likely will hold that:
a. because the parties were drinking, there was no valid contract.
b. despite the fact that the parties were drinking, there was a valid contract.
c. there was no clear acceptance of the contract terms.
d. the parties failed to clarify the essential terms of the contract due to excessive drinking.
a. Sam withdrew or revoked the offer prior to Rhonda accepting Sam's offer
Sam offers to Rhonda Sam's collection of rare books. Before Rhonda even has a chance to accept Sam's offer, Sam says, "Sorry, I changed my mind, no deal." This is an example of:
a. a revocation.
b. a rejection.
c. a counteroffer.
d. a restitution.
d. Once an acceptance is dispatched (sent, communicated) in an authorized way, it is effective
The mailbox rule states that:
a. an offer is valid only if mailed.
b. an acceptance is valid only if mailed.
c. an offer is valid once it is deposited in a mailbox.
d. an acceptance is effective upon dispatch by an authorized means of acceptance
b. Consideration is something of value that a person gives in exchange for a promise of some sort
Consideration may be defined as:
a. a socially approved way to provide for the poor.
b. something of value given in exchange for a promise.
c. an arrangement for transferring and allocating risk.
d. a way to promote healthy living
b. You have contractual capacity if you are legally able to enter into a contractual relationship
A definition of the term contractual capacity is:
a. the ability to enter into a void contract.
b. the ability to enter into a contractual relationship.
c. the ability to mitigate contractual damages.
d. the ability to physically with one's hand write a contract.
Current Intention to make an offer (element of a contract)
Intent is determined by the "reasonable person standard"
►Future intent ≠ an offer.
►Invitations negotiations (i.e. price lists) and RFPs ≠ an offer.
►Preliminary agreement (with all essential and no disputed terms) = offer
►Preliminary agreement (open essential terms but agreement to negotiate later) = offer
Definiteness of Offer (element of a contract)
The offer must have reasonably definite terms, including the following terms:
(1) parties (WHO);
(2) object or subject matter of, or work performance for the K (WHAT);
(3) consideration (HOW); and
(4) time of payment, delivery, or performance (WHEN)
Communication of offer to offeree (element of a contract)
The offer must be communicated to the offeree, which communication gives the offeree the power to transfer the offer to a binding, legal obligation with acceptance
Revocation (way to terminate an offer)
Unless the offer was made irrevocable, with notification to the offeree or offeree's agent (via express statement or action), the offeror can revoke an offer prior to the offeree's acceptance
Rejection (way to terminate an offer)
If the offeree rejects the offer, the original offer is terminated, effective when the offeror or the offeror's agent receives the rejection
1. Counteroffer: An offeree's response to a original offer, where the offeree rejects the original offer and issues a new offer
2. Mirror Image Rule: Requires the acceptance of an offer for the same terms as the offer, otherwise a counteroffer exists
Ways to terminate an offer by operation of law
(1) lapse of time;
**time starts counting when offer received
**midnight of the day specified in the offer
(2) death or incapacity of the offeror or offeree;
(3) subject matter destruction; and
(4) the K purpose has become illegal
Mailbox Rule
Used by a majority of courts, the acceptance occurs at the time the offeree sends or delivers the acceptance communication by the agreed upon delivery mode
2 Elements of Consideration
Legally Sufficient Value: doing or giving up something that the party has no obligation to do
Bargained-for-Exchange: The thing of value must be given in exchange for the return promise. This element distinguishes a gift from a K
c. Not a valid offer because Mary does not seriously intend to sell and one of the three elements of an offer is current intent to make an offer which is based on a "reasonable person" standard
Mary tries to start her car with no success. She yells that she will sell the car to anyone for $10. Nick, a passerby who owns Nick's Pre-owned Autos, hands Mary $10. This is
a. a valid acceptance because Mary is seriously frustrated.
b. a valid acceptance because Nick is a car dealer.
c. not a valid offer because Mary does not seriously intend to sell.
d. not a valid acceptance because Nick is a car dealer
c. This statement is a statement of future intent and thus not an offer. Because intent has to be current
Nate tells Opal, "I might sell the skis that I bought last fall since I haven't used them and the skiing season is almost over." This is
a. an acceptance of an offer.
b. an offer.
c. not an offer.
d. a firm offer
b. This statement is not a valid offer because the terms of the statement from Yvonne to Zach are not definite, and one of the three elements for an offer is definitiveness of terms.
Yvonne asks Zach, "Do you want to buy one of my fishing rods?" This is
a. a valid offer.
b. not a valid offer because the terms are not definite.
c. not a valid offer because Yvonne did not state an intent.
d. not a valid offer because Zach did not respond.
c. QT is not liable because the sale to Speedy for which Rapid has notice prior to Rapid's acceptance of the QT offer revokes the offer to Rapid
QT Transport, Inc. offers to sell a truckload of palettes to Rapid Delivery Company. Before accepting the offer, Rapid learns that the palettes have been sold to Speedy Trucking Corporation. QT is
a. Liable to Rapid for breach of contract.
b. Liable to Speedy for breach of contract.
c. Not liable because the sale revoked the offer to Rapid.
d. Not liable if QT offers substitute goods to Rapid
c. Paul rejected the original offer from NuCell and made a counteroffer because he rejects the original offer and makes a new offer
NuCell Phone Company offers to buy a laser printer, with a case of paper and an extra cartridge, for $200 from Office Products, Inc. ("OPI"). Paul, OPI's representative says, "Okay, but no paper and no extra cartridge." Paul has
a. accepted the offer.
b. made a counteroffer without rejecting the offer.
c. rejected the offer and made a counteroffer.
d. rejected the offer without making a counter offer
d. The court will most likely evaluate the adequacy of consideration if there is a gross disparity in the value of the consideration exchanged
Corporation A defends against a breach-of-contract suit by Company B claiming that the deal for the sale of assets was unfair because the consideration for their contract was inadequate.
A court is most likely to evaluate the adequacy of consideration if
a. a thing exchanged has no intangible value to one of the parties.
b. something exchanged is not of direct economic or financial value.
c. the items exchanged were of unequal value.
d. there is a gross disparity in the value of the consideration exchanged
Corporation A defends against a breach-of-contract suit by Company B claiming that the deal for the sale of assets was unfair because the consideration for their contract was inadequate.
If, as Corporation A claims, the consideration in this problem is inadequate, it may indicate a lack of
a. accord in Corporation A's satisfaction with the value of the deal.
b. bargained-for-exchange.
c. flexibility on the part of Company B.
d. "substance" or "weight" in the terms of the contract
Sal contracts with Tasty Pizza Company to deliver its products. Later, both parties change their minds and mutually agree to terminate the contract. After mutually terminating the contract, the next day, Sal again offers to deliver Tasty's products. Tasty is willing to deal with Sal, but at a new price. Sal and Tasty
a. can agree to a new contract, but it cannot include a new price.
b. can agree to a new contract that includes a new price.
c. must perform their original contract.
d. Must perform the part of their original contract that is executory.
Contractual Capacity
The legal ability to enter into a contractual relationship
Reasons not to enter in CC: minors, intoxication, mental incompetency
Legality (element of agreement)
An agreement to do something prohibited by statute or contrary to public policy= void agreement (i.e. K never existed)
Which of the following is not among the types of contracts that are often said to be contrary to public policy?
a. a contract for the sale of live farm animals.
b. an exculpatory contract.
c. an adhesion contract.
d. a contract in restraint of trade.
A definition of the term contractual capacity would be:
a. the ability to enter into a void contract.
b. the legal ability to enter into a contractual relationship.
c. the ability to physically write a contract.
d. none of the above.
Noni, a seventeen-year-old (in a state were the age of majority is eighteen), signs a contract to sell her car to OK Used Cars. The next day, Noni tells OK that she's decided not to sell the car. Noni is
a. liable to OK and must sell it a car of comparable value.
b. liable to OK and must sell it her car.
c. liable to OK for the amount of its profit on the deal.
d. not liable to OK.
Elle, a minor acting on her own without her guardian, signs a contract to buy a car. Later, after taking possession of the car, Elle disaffirms the contract. She
a. can keep the car.
b. must return the car.
c. can sell the car to her twenty-one year old brother.
d. none of the above.
Statute of Frauds
A state by state statute that specifies what types of contracts must be in writing and signed by the defending party to be enforceable
Contracts Requiring a Writing (MYLEG)
►Promise made in consideration of marriage
►Agreements that cannot by their terms be performed within one year from the date after the date of formation
►Agreements for an interest in land
►Promise made by an executor of an estate to pay debt personally (or promise to answer the debt of another) (e.g. executor or surety contracts)
►Agreements for the sale of goods at $500 (some states $5,000) or more - U.C.C
Parole Evidence Rule
When two parties make an integrated contract - intent to be final expression of agreement - neither party can use outside provisions to contradict, vary, or add to the written contract terms
Undue Influence
The situation in which the innocent party lacks free will in entering into the K, which makes the K voidable by the innocent party
►Use of threats, blackmail, or extortion to force / induce a party to enter into a K.
►Duress is both a defense to a K (i.e. allow K to be voidable by the innocent party) and allows rescission of the K by the innocent party.
►The threat to take legal action against someone ordinarily is not duress.
Jill and Karl contract for the sale of Jill's horse for $1,000. Unknown to either party, the horse has died. Karl is
a. entitled to another horse of equivalent value.
b. not required to pay due to the mutual mistake.
c. not required to pay due to the unilateral mistake.
d. required to pay because he assumed the risk the horse might die
Hillside Homes, Inc. and Idyll Builders, Inc. enter into a construction contract that includes six pages of detailed calculations. Later Hillside, whose project manager compiled the figures, discovers that some numbers were multiplied incorrectly—a significant, material mistake. Idyll refuses to make changes. A court would most likely
Gina induces Hu to enter into a contract for the purchase of a condominium about which Gina knowingly misrepresents a number of material features. When Hu discovers the truth, Hu can
a. not rescind the contract.
b. rescind the contract on the basis of fraud.
c. rescind the contract on the basis of mistake.
d. rescind the contract on the basis of undue influence
Rally offers to sell Sophie, who is seventeen years of age, a car about which Rally intentionally misrepresents several material facts. In reliance on the misrepresentation, Sophie buys the car. To prove fraud in this transaction, Sophie would have to show that
a. Rally intentionally deceived Sophie.
b. Rally made statements that were obviously exaggerated.
c. Sophie does not know anything about cars.
d. Sophie is under eighteen years of age
Rory threatens physical harm to force Susan to sell her business, Toney Tours, Inc., to Rory for a below-market price. This is
a. a legitimate business tactic.
b. duress.
c. fraud.
d. undue influence.
Dora, an accountant, uses undue influence to induce her client, Emily, to invest in Fiery Stocks, Ltd., a business with little potential. When Emily learns the truth, she can
a. do nothing as she has no defenses.
b. enforce the contract but not rescind it.
c. enforce the contract or rescind it.
d. rescind the contract but not enforce it
Clay contracts with Discount City Store to buy an MP3 player for $200 and a pair of stereo speakers for $600 from Discount City Store. Clay also downloads $300 worth of digital music from To be an enforceable contract, the contract that must be in writing is the purchase of
a. the digital music, the MP3 player, and the speakers.
b. the digital music and the speakers only.
c. the speakers only.
d. none of these items.
Privity of Contract
Traditionally only the parties to the K have rights and liabilities under the K
Third Party Beneficiary
One for whose benefit a promise is made in a K but who is not a party to the K
Intended Beneficiary
A third party for whose benefit a K is formed, who can sue the promisor if such a K is breached (i.e. privity of K exists between the promisor and the intended beneficiary)
Incidental Beneficiary
A third party who incidentally benefits from a K but whose benefit was not the reason the K was formed. Thus, such party has no rights in a K (i.e. no privity of K) and cannot sue to have the K enforced
Third Party Rights-- Assignments
Meaning of Assignments: A party to the contract assigns his contractual rights to a third party
Affects of Assignments
1. Unconditional assignment -The party making the assignment ("assignor") relinquishes all rights to the person receiving the assignment (the "assignee"), with the assignee having the ability to demand action from the other original party ("obligor"); The assignee however only has the contractual rights that the assignor had
2. Unassignable rights - Certain rights are unassignable: (1) prohibited by contract (subject to exceptions); (2) against statutory law or public policy; (3) materially increase or alter the risk or duties of the obligor unless agreed; and (4) personal in nature (unless all that remains is a money payment)
Exceptions to Prohibitions to the Assignment of Contracts
(1) the receipt of money;
(2) complete rights in real estate - (reason: against public policy for restraints on alienation); **a provision for the right of first refusal with respect to real property is permissible.
(3) negotiable instruments, including checks and promissory notes (reason: encourage the free flow of money and credit);
(4) in a contract for the sale of goods, the right to receive damages for breach of K or payment of an account owed.
Third Party Rights-- Delegations
The transfer of a contractual duty to a 3rd party
Affects of Delegation
The transferring party ("delegator") remains liable to the other party if the party to whom the duty has been delegated ("delegatee") fails to perform the contract obligation
Obligations that cannot be delegated
*Personal skills of the obligor contracted for
*Prohibited by contract
*Special trust placed on obligor
*When performance by a third party will vary materially from that expected by the obligee under the K
Third Party Rights - Third Party Beneficiaries Rights
Intended Beneficiary: As the intended beneficiary of the K, the 3rd party has legal rights and can sue the promisor directly for a breach of K.
Incidental Beneficiary: An incidental beneficiary cannot sue to enforce the K
(Most contracts will have language stating that there are no third party beneficiaries to the K. One reason that most Ks do not contain 3rd party beneficiaries is that the contracting parties want to make sure that the rights and obligations by K flow to the contracting parties)
The termination or completion of or release from a contractual obligation
The fulfillment of a contracting party's obligation arising under a K, and the typical way of discharging one's contractual responsibilities
Conditions of Performance
A qualification, provision, or clause in a K, the occurrence or nonoccurrence of which creates, suspends, or terminates the obligations of the contracting parties
Conditions Precedent
In contrast to an absolute promise, the condition in a K that must be met before a party's promise of performance becomes absolute. If the condition(s) precedent is not met or does not occur, the parties are discharged. With an absolute promise, nonperformance results in a breach of contract by the nonperforming party
Riley and Shelia enter into a written contract for the sale of Riley's condominium to Sheila. Sheila transfers her right to be recorded as the owner of the property to her daughter Tricia. This transfer is
a. a delegation.
b. an assignment.
c. a rescission.
d. a negotiation
Quality Contractors contracts to build a warehouse for Retail Storage Company. Quality completely performs pursuant to the contract. Retail Storage is entitled to
a. damages.
b. rescission.
c. specific performance.
d. nothing more.
Building Restoration, Inc. ("BRI") enters into a contract to refurbish an old train depot for Casual Dining, Inc. to open as Eat Up! Restaurant. BRI completes all but a minor piece of the work promised in the contract. BRI's performance is
a. absolute.
b. complete.
c. material.
d. substantial.
Building Restoration, Inc. ("BRI") enters into a contract to refurbish an old train depot for Casual Dining, Inc. to open as Eat Up! Restaurant. BRI completes all but a minor piece of the work promised in the contract. Casual Dining most likely is entitled to
a. damages for the uncompleted portion.
b. nothing.
c. reformation.
d. specific performance.
Bell Medical Education Service enters into a contract to employ Chris as an instructor for two years to begin May 1. One month before the term begins, Bell is underbid by a competitor and loses a major client, Delta Hospital Center. Bell now refuses to hire Chris. Bell's failure to hire Chris is
a. a material breach.
b. a minor breach.
c. Chris's breach.
d. no breach.
Bell Medical Education Service enters into a contract to employ Chris as an instructor for two years to begin May 1. One month before the term begins, Bell is underbid by a competitor and loses a major client, Delta Hospital Center. Bell now refuses to hire Chris. With respect to Chris's obligations, Bell's repudiation most likely
a. discharges Chris from the contract.
b. has no effect on Chris's obligations.
c. increases Chris's obligations under the contract.
d. suspends Chris's obligation to perform.
Roy and Sheila are parties to a contract. They subsequently agree that Tony should take Roy's place and assume all of his rights and duties under the contract. This is
a. a consideration.
b. a modification.
c. an accord and satisfaction.
d. a novation.
Purposes and Goals of Damages
•Compensatory: Compensates the nonbreaching party for the loss of the bargain of the deal and for the harm suffered as a result of the other party's wrongful act.
•Fairness: Place the nonbreaching party in the position it would have been in if the K was fully performed.
•Economic: Relieve the nonbreaching party for loss of profits (present or future).
•Deterrence: Punish the breaching party with the goal of deterring future bad behavior of that party and others.
•Predictability: Certain damages, such as liquidated damages or indemnification provisions, make the outlay and recovery of damages expectant for the parties
Compensatory Damages
To cover direct losses and costs to the nonbreaching party, compensating the nonbreaching party for loss of the bargain/agreement. Damages actually occurred and proved to arise directly from the breach of K. REMEMBER Privity of K
Consequential (or Special) Damages
To cover indirect and foreseeable losses, caused by special circumstances that does not directly or immediately result from the breach, such as lost profits
Punitive Damages (rare)
To punish and deter wrongdoing
Nominal Damages
To recognize wrongdoing when no monetary loss is shown
Liquidated Damages
To establish a predetermined damage amount
Equitable Remedies-- Purpose
Exist because damages are an inadequate remedy at law, so to seek justice or prevent unjust enrichment, the nonbreaching party may ask the court for an equitable remedy or seek it through the contract provisions
Types of Equitable Remedies and Sample K Situations
*Rescission and Restitution - Undo or cancel a K, returning the nonbreaching party to pre-transaction state and requiring the parties to return the goods, property, or funds previously conveyed.
*Specific Performance - Performance of the act called for in the K typically granted when monetary damages are inadequate. Sale of land and unique goods; personal services no because against public policy.
*Reformation - The situation where an agreement has been entered into, but the K or other memorializing instrument, in its written form, does not express the intent of the parties so the court could order the K be modified to reflect the intentions, agreement, and understanding of the parties. The courts role is to utilize the evidence and determine the intent of the parties in order to correct the K language. However, the court's role is not to develop a new K. Ks where fraud or a mutual mistake or CNCs in blue pencil states are most often when courts reform contracts.
Rescission and Restitution
Advantages: The parties are returned to their position prior to the K. There are no court obligations
Disadvantages: Not all contractual arrangements can be rescinded. If one party has performed a portion of the K, the other party has to compensate for value received - restitution. Under SOF, original contracts requiring a writing require a writing for rescission. The contracting parties have to make another K.
Specific Performance
Advantages: Attractive to nonbreaching party because it calls for the exact bargained for promise. Avoids problem of suing for damages, collecting the judgment and arranging another contract. For certain Ks, such as unique products, the actual performance is more valuable than the monetary damages
Disadvantages: Limited use as typically available only when monetary damages are inadequate. Not available for personal services Ks
Advantages: The parties' true intentions are reflected in the reformed agreement. The parties do not have to enter into a new K.
Disadvantages: There may be inadequate information to demonstrate the true intentions of the parties. The court has a large amount of control/discretion
Building Restoration, Inc. ("BRI"), enters into a contract to refurbish an old train depot for Casual Dining, Inc., to open at Eat Up! Restaurant. BRI completes most of the work promised in the contract. If Casual Dining can easily hire another contractor to complete the work, it is entitled to
a. damages.
b. nothing.
c. reformation.
d. specific performance
Carol pays Dick $10,000 to design an ad campaign for Carol's Coffee Stand chain. The next day, Dick tells Carol that he has accepted a job in New York and cannot design her campaign. Carol files a suit against Dick. Carol can hire another campaign designer for the same price without incurring any incidental expenses. As compensatory damages, Carol can recover
a. $100,000.
b. $10,000.
c. $1,000.
d. $0.
Development Associates ("DA") agrees to buy five acres of land from Eastside Properties for $15,000. Eastside fails to go through with the deal on the agreed date, when the market price of the land is $17,000. If DA cannot recover the land, DA may recover in damages in the amount of
a. $17,000.
b. $15,000.
c. $2,000.
d. $12,000
Eric holds 1,000 pounds of perishable fruit for Fresh Stuff Corporation which it was suppose to purchase. Fresh Stuff does not pay for the fruit. Eric sells the fruit to Green Grocers, Inc. This sale represents
a. a breach of contract.
b. a mitigation of damages.
c. rescission and restitution.
d. specific performance
Home Delivery Corporation and Interstate Transport, Inc. signed an agreement that provides for the payment of "$1,000 by whatever party commits a material breach of the contract that creates damages difficult to estimate but approximately $1,000." This is
a. a liquidated damages clause.
b. a mitigation of damages clause.
c. a no-damages clause.
d. a penalty clause
Rural Utility, Inc. enters into a contract with Shovel Excavation Service to dig up, replace, and rebury Rural's cables in a certain location. Rural advances Shovel 10% of its cost. If the parties rescind the contract, Shovel's refund of the payment would be
a. a penalty.
b. liquidated damages.
c. restitution.
d. specific performance
Ira orally agrees to buy a unique collection of sports memorabilia for $1,000 from Jane and sends her $250 as a down payment. When Ira sends Jane the rest of the purchase price, Jane refuses to ship Ira the collection. Ira should seek
a. damages.
b. reformation.
c. rescission.
d. specific performance
A contract for a sale of an apartment complex from Unique Properties, Inc. to Variety Investments Corporation contains an erroneous legal description, which neither party noticed. Both parties desire to continue with the contract. The most appropriate remedy for these parties is
a. damages.
b. reformation.
c. rescission.
d. specific performance
Alternative Dispute Resolution ("ADR")
The resolution of disputes in ways other than those involved in the traditional judicial process such as the court process and proceedings
Purposes and Goals of ADR
•Reduce Parties' Cost: To reduce the cost of resolving disputes, as litigation is an expensive process.
•Preserve Parties' Time: To expedite the resolution process since litigation is a time-consuming process. For example, it may take years for a case to be tried give case backlog in many courts.
•Enable Taxpayer Savings: To reduce the caseload of traditional courts and thus the costs to the public of paying for certain expenses of the court system.
•Give Parties' Flexibility: Given the various methods of resolving disputes and their processes, flexibility exists for the disputing parties in resolving disputes.
•Preserve Relationships: With litigation, the goal/environment is win/lose, "doing battle," and emphasizing how the parties' positions differ. With ADR, the goal is win/win, a mutual satisfactory resolution, trying to preserve the relationship, and emphasizing the common ground of the parties
Types of ADR
Negotiation is the simplest and least expensive form of ADR. It is where the parties come together, with or without their attorneys and try to reach a settlement without the involvement of a third party. As the attorneys are advocates for their clients, they must put their clients' interests first in the negotiation process.
Mediation is a form of ADR in which the parties select a neutral third party, the mediator, who helps the parties try to facilitate a resolution to the matter. The mediator lacks the power to resolve the matter for the parties, but may provide suggestions for resolution. In most cases, the mediation decision is final and non-appealable.
The form of ADR where a neutral third party expert or a panel of experts ("arbitrator" or "arbitrators") hear a dispute and imposes an often binding resolution on the parties.
The occurrence when an owner ceases to be associated in the continuation of the business.
The formal disbanding of an organization.
Corporation Types
Domestic Corporation - A corporation within its home state (i.e. the state of its incorporation).
Foreign Corporation - A corporation in any state outside of the home state.
Alien Corporation - A corporation formed outside of the United States but does business in the United States.
Public Corporation - A corporation that offers securities (stocks/shares or bonds/loans) for sale to the general public, typically through a stock exchange.
Private Corporation - A corporation that does not offer or trade its company's securities to the general public on through a stock exchange or over the counter market, but rather the company's securities are offered, owned, and traded or exchanged privately.
Close Corporation - A "small" corporation whose shares are held by family or relatively few persons. There is no trading market for shareholders. Shareholders are generally officers and board members.
Privately-owned Corporation - A government-owned corporation.
Nonprofit Corporation - A corporation that typically uses surplus profits to achieve its mission rather than distribute them as a dividend or use for shareholder value maximizing purposes. In the U.S., many nonprofits have the IRS designation 501(c).
Double Taxation
The taxation of profits at the corporate tax level, then again when shareholders receive dividends
Flow-through Tax Treatment
The tax treatment for entities where the income "flows through" to the investors/owners (i.e. the income of the organization is treated as the income of the investors/owners)
Limited Liability
The principle that liability is limited to an investor's capital contribution
Joint and Several Liability
A doctrine under which the owners (typically in a partnership arrangement) are liable regardless of his participation and for any and all of the liability. Thus, in a lawsuit, the 3rd party can sue all partners together or one or more partners separately to collect
The minimum number of parties within a group (e.g. directors or shareholders) that must be present to conduct official organizational business, which minimum number usually is a majority
Sole Proprietorship (Ownership Requirements)
•Simplest form of business.
•No separate entity. The owner is the business proprietor
General Partnership (Ownership Reqs.)
•Not a separate entity in most states. The owner is the partners. However, under the Uniform Partnership Act the partnership is treated as an entity.
Limited Partnership ("LP") (Ownership Reqs.)
•Name must include "Limited Partnership" or "LP".
•Legal entity separate and distinct from its owners.
•Has two or more partners one of which has to be a General Partner and the other a Limited Partner.
•Has no restriction on the type of owners.
Limited Liability Company ("LLC") (Ownership Reqs)
•Name must include "Limited Liability Company" or "LLC," as such denotes to the public the organization is a limited liability company.
•Legal entity separate and distinct from its owners.
•Can be a single member LLC, but most states require at least 2 owners. However, must have 2 or more members to be taxed as a partnership.
•There is no restriction on the number of members. Thus, in addition to individuals, members may be corporations, LLCs, or partnerships.
•Members may be residents of other countries.
•Permissible to classify membership interests into different classes.
S Corporation ("S-Corp") (Ownership Reqs)
•Name must include "Corporation," "Company," "Incorporated," "Limited," an abbreviation thereof, or another permitted.
•Legal entity separate and distinct from its owners.
•Shareholders can only be only individuals, estates,
or certain trusts.
•Cannot be a member of an affiliated group of corporations.
•Must have 100 or fewer shareholders.
•Must have only one class of stock, but shareholders in the one class of stock can have different voting rights.
•Shareholders must be U.S. citizens or residents.
*S-Corp automatically converts to a C-Corp if it does not meet the formation requirements.
C Corporation ("C-Corp") (Ownership Reqs)
•Name must include "Corporation," "Company," "Incorporated," "Limited," an abbreviation thereof, or another permitted.
•Legal entity separate and distinct from its owners.
•Has one or more shareholders, but no restriction on the type of shareholders.
•Has no restriction on the type of owners.
Sole Proprietorship (Formation and Restrictions)
No formation exists so used by one who does not want to create an organization
General Partnership (Formation and Restrictions)
•Created by express or implied agreement of the parties ("partners").
•Courts usually look for the following essential elements if a dispute on the existence of a partnership: (1) A sharing of profits and losses. (2) A joint ownership of the business. (3) An equal right to be involved in the management of the business.
*Governing Documents: Partnership Agreement.
Limited Partnership ("LP") (Formation and Restrictions)
•Formed under state law by filing an official document with the applicable state unit.
•The traditional state unit is the Secretary of State.
Created by express agreement to carry on business for a profit, with a Certificate of Limited Partnership filed with the applicable state agency.
•At least one party must be a general partner and the others limited partners.
*Governing Documents: Limited Partnership Agreement.
Limited Liability Company ("LLC") (Formation and Restrictions)
•Formed under state law by filing an official document with the applicable state unit.
•The traditional state unit is the Secretary of State.
•The typical official filing document is the Articles of Organization or Certificate of Organization.
*Governing Documents: Limited Liability Company/Operating Agreement.
S Corporation ("S-Corp") (Formation and Restrictions)
•Formed in compliance with applicable state's statutory requirements, by filing an official document with the applicable state unit.
•The traditional state unit is the Secretary of State.
•S-Corp must be a U.S. corporation.
•A legal "person" under state and federal law with rights, as with individual, to due process, equal protection, free speech, access to courts, and freedom from unreasonable search and seizure. However, has no 5th amendment right to remain silent.
•Must make a timely S-corporation election with the IRS on Form 2553 done no more than two months and fifteen days after the beginning of the tax year in which the election is to take effect.
*Governing Document: Certificate/Articles of Incorporation, Bylaws, and Shareholders Agreement (if shareholders and corporation enter into such).
C Corporation ("C-Corp") (Formation and Restrictions)
Formed in compliance with applicable state's statutory requirements, by filing an official document with the applicable state unit.
•The traditional state unit is the Secretary of State.
•A legal "person" under state and federal law with rights, as with individual, to due process, equal protection, free speech, access to courts, and freedom from unreasonable search and seizure. However, has no 5th amendment right to remain silent.
*Governing Document: Certificate/Articles of Incorporation, Bylaws, and Shareholders Agreement (if shareholders and corporation enter into such).
Sole Proprietorship (Profits)
Business proprietor personally owns all profits.
General Partnership (Profits)
Partners share the profits from the business. The partners share profits based on the Partnership Agreement arrangement and if it silent they share profits equally with losses being shared in the same manner.
Limited Partnership ("LP") (Profits)
Distributions can be specified in the LP Agreement. Otherwise they are based on ownership interests
Limited Liability Company ("LLC") (Profits)
Distributions can be specified in the LLC Agreement. Otherwise they are based on capital contribution proportion
S Corporation ("S-Corp") (Profits)
Distributions must be proportionate to stock ownership
C Corporation ("C-Corp") (Profits)
Distributions must be proportionate to stock ownership
Sole Proprietorship (Liability)
Unlimited liability as the business proprietor is personally liable for all business debts
General Partnership (Liability)
Unlimited liability as the partners jointly and severally liable for the losses of the business no matter when enter the partnership
Limited Partnership ("LP") (Liability)
Unlimited liability of all general partners, but limited liability for all limited partners beyond their capital contributions.
Limited Liability Company ("LLC") (Liability)
Limited liability as the owners ("members") have limited liability in that they are not liable for the LLC's debts/losses except to the individual member's capital contributions
S and C Corporation (Liability)
•Limited liability of shareholders typically exists, meaning that shareholders normally are not personally liable for the debts of the corporation beyond the shareholders capital investment.
•Tort liability exists meaning that the corporation is liable for the torts committed by its officers or agents within the course and scope of their employment (i.e. respondeat superior).
•Criminal liability sometimes can be transferred from the employees/agents of the corporation to the corporation.
Sole Proprietorship (Management)
Business proprietor has sole management rights
General Partnership (Management)
•Unless otherwise agreed, the partners have equal management rights.
•Decisions that significantly affect the nature of the partnership or that are not for ordinary course of business require unanimous consent (e.g. admission of new partners, amendment of articles of partnership or partnership agreement, engage in a new business, or undertake an act that would make conduct of the partnership impossible).
Limited Partnership ("LP") (Management)
Unless otherwise agreed to in the LP agreement, each General Partner has a direct and equal voice in the management of the LP. A Limited Partner may not retain limited liability if it participates in the management
Limited Liability Company ("LLC") (Management)
•Members participate in management of the LLC via the operating agreement (also called limited liability company agreement or membership agreement).
•Management can be Member-Managed or Manager-Managed, with a presumption for Member-Managed. If Manager-Managed, there can be a formal "Board of Managers."
•Managers can (but need not to) designate officers to run the LLC's day-to-day operations.
S and C Corporation
•Shareholders elect directors, who set policy/strategy for the management of the S/C-Corp and hire officers.
•The board of directors may designate certain of its decision making to committees.
•Officers run the day-to-day business of the S/C-Corp.
•Certain major decisions need shareholder approval (e.g. amendment of bylaws or article/certificate of incorporation; merger; sale of all or substantially all of assets - "Big Ticket Items")
Sole Proprietorship (Dissolution)
Duration of the sole proprietorship determined by the owner, and the sole proprietorship automatically dissolved on owner's death
General Partnership (Dissolution)
The general partnership terminated pursuant to the terms of the agreement, by the death of one or more of the partners or by the withdrawal of a partner
Limited Partnership ("LP") (Dissolution)
The LP terminated
(1) pursuant to the terms of the LP agreement;
(2) by termination of the last General Partner (whether by death, withdrawal or otherwise); or
(3) by termination of the last Limited Partner (whether by death, withdrawal or otherwise)
Limited Liability Company ("LLC") (Dissolution)
•Unless otherwise provided in the organizational documents or a single-member LLC, perpetual existence exists
•Members have a right to their share of assets upon dissolution based upon their LLC capital accounts
S and C Corporation (Dissolution)
•Can have perpetual existence or formed for a specific period of time.
•Unless otherwise provided in the organizational documents, shareholders have the right to a pro-rata share of assets upon dissolution.
Sole Proprietorship (Admission)
No admission options
General Partnership (Admission)
Admission only by agreement of the then existing partners
Limited Partnership ("LP") (Admission)
LP interest can be transferred by a partner, but to become a member the transferee partner needs the consent of the other partners and the Certificate of Limited Partnership has to be amended to reflect the transfer.
Limited Liability Company ("LLC") (Admission)
LLC interest can be transferred, but the transferee member does not have full ownership rights of a member until admitted into the LLC by the other members (i.e. transferee member will have rights to the profits and distribution allocations)
S and C Corporation
Unless otherwise provided for in an organizational document or shareholders agreement, shares are freely transferable and the transferee shareholder has full rights
Any arrangement in which the owner of a trademark, trade name, or copyright licenses another to use that trademark, trade name, or copyright, under specified conditions or limitations, in the selling of goods and services
Types of Franchises
Distributorship: The manufacturer governs how the retailer distributes its product by granting the franchisee the authority to distribute the manufacturer's goods using the manufacturer's name and trademark. The franchisee typically pays a fee or purchases a minimum inventory for these rights. Example: Automobile dealerships.
Chain-style operations: The franchisor provides the franchisee a license to make and sell its products or distribute services to the public from a retail outlet serving an exclusive territory. Example: Fast-food chains.
Manufacturing/processing plant arrangement: A franchise that provides an organization with the right to produce or manufacture a product and sell it to the public, using the franchisor's name and trademark. Example: found mostly in food and beverage industry (i.e. soft-drink bottling companies)
Governance of Franchises
Governed by contract law, agency law, and federal and state regulatory laws
Features of Franchise
*Licensor and Licensee Relationship exists.
*License Fee: Ordinarily requires the franchise purchaser ("franchisee") to pay a price for the franchise license.
*Geographical Restriction: Franchise agreement specifies the territory the franchisee firm can serve.
*Supply Purchases: The franchise agreement may require that the franchisee purchase certain supplies from the franchisor at an established price.
*Marketing: The franchise agreement may require that the franchisor's marketing platform applies to the franchise firm.
*Revenues: The franchise agreement may require that the franchisee pays a certain percentage of revenues from the franchise firm to the franchiser.
*Standards: The franchise agreement may require that the franchisee abide by certain quality standards relating to the product or service offered.
*Termination: The franchise agreement typically covers the duration and termination components, but state and federal law protects franchisees regarding good faith and fair dealings by the franchiser.
The simplest form of business is:
a. a partnership.
b. a joint venture.
c. a sole proprietorship.
d. a corporation.
b. Even though one partner may have contributed more money to the partnership than the other, Larsen and Kyle have equal management rights unless they agree otherwise.
Assume that Kyle and Larsen have a general partnership for a dog grooming business and did not agree to any special management rights. In this situation, what rights does each have regarding the management of the dog grooming business?
a. One partner must be the superior in rights.
b. They have equal management rights.
c. One partner must conduct the partnership business, while the other provides the capital.
d. The partner who put in more money has a bigger voice in management.
b. Partners must act consistently with the obligations of good faith and fair dealing.
A partner's fiduciary duty includes which of the following?
a. Undue care.
b. Duties of loyalty and care.
c. Proximate cause.
d. That the partner always has to assume a management role.
d. These are the characteristics of a limited liability company
The key characteristics of a limited liability company ("LLC") are?
a. The tax characteristics of a corporation plus the liability of directors.
b. The tax characteristics of a partnership plus the liability of partners.
c. The tax characteristics of a corporation plus the liability of a partnership.
d. The tax characteristics of a partnership plus the liability of a corporation.
b. The limited partnership must file a certificate of limited partnership with a designated state official
In order for a limited partnership to be legally valid, it must?
a. File articles of organization.
b. File a certificate of limited partnership.
c. File amended articles of partnership.
d. File a certificate of incorporation.
b. Jackson's bankruptcy will cause him to be dissociated from the partnership. He did not withdraw, and the partnership is not terminated because the other partners desire to continue the partnership
After Ross, Jones, and Jackson have been partners for three years, Jackson declares bankruptcy. What will happen to the partnership as a result if Jones and Ross determine to continue the partnership and the partnership agreement contains a provision allowing such?
a. Nothing. The partnership will continue as always.
b. Jackson will be dissociated from the partnership.
c. The partnership will terminate due to the bankruptcy.
d. The partnership will terminate due to withdrawal of Jackson
A key advantage of the LLC is that:
a. the liability of members is limited to the amount of their investments.
b. the entity is treated as a partnership for liability purposes.
c. there are no formalities associated with creating an LLC.
d. state statutes limit the flexibility of LLCs.
b. In an operating agreement, the members of the LLC can decide and document how to operate the various aspects of the business
In an LLC, the members themselves can decide how to operate the various aspects of the business by forming:
a. nothing.
b. an operating agreement.
c. the articles of incorporation.
d. articles of dissolution.
b. A Taco Bell, Chick-fil-a, Burger King, and McDonald's are examples of a chain-style business operation
A local Taco Bell restaurant is an example of which kind of franchise:
a. a manufacturing arrangement franchise.
b. a chain-style business operation.
c. a distribution franchise.
d. a processing-plant arrangement
c. The franchisee typically controls the day-to-day operations of a franchise
Who typically controls the day-to-day operations of a franchise?
a. The management of the franchisor.
b. The employees of the franchisor.
c. The franchisee.
d. The shareholders of the franchisor
A corporation is a legal entity that is:
a. created by the local government.
b. created and recognized by an entrepreneurial agency.
c. managed internally by the federal government.
d. created and recognized by state law in most case
One of the key advantages of the corporate form of business is:
a. the limited liability of shareholders.
b. the unlimited liability of shareholders.
c. the "double taxation" of the corporate form.
d. that no formalities are required to create a corporation
Articles of incorporation contain:
a. a set of governing rules adopted by a corporation.
b. resolutions of the board of directors.
c. information about the corporation, including its purpose, organization, and functions.
d. the minutes of meetings of the board of directors
Piercing the Corporate Veil
Occurs when a court, in the interest of justice or fairness, holds shareholders personally liable for corporate acts.
Reasons that Court may Pierce the Corporate Veil
►The court concludes that the shareholder(s) used the corporation as a "shield" for illegal activity.
►Statutory formalities of the corporation structure are not followed.
►Corporation was not set up to make a profit, remains insolvent, or is under capitalized.
►The corporation serves as the "alter ego" of the majority shareholder and personal and corporate interests are commingled such that the corporation has no separate identity.
►With respect to shareholder and other insider loans, arms-length loans are not made. Courts carefully scrutinize "insider loans"/"interested party" loans.
Suppose that a corporation formed in Georgia does business in Alabama. In Alabama, that corporation would be referred to as:
a. an alien corporation.
b. a foreign corporation.
c. a certified corporation.
d. an ultra virus corporation
Dependable Appliances, Inc., is a private, for-profit corporation that (a) was formed for the purpose of manufacturing and distributing a newly patented kitchen appliance for a profit; (b) is owned by five shareholders; (c) is subject to double taxation; and (d) has made no public offering of its shares. Dependable is:
a. an S corporation.
b. a close corporation.
c. a nonprofit corporation.
d. a professional corporation
"Piercing the corporate veil" occurs when a court:
a. disregards the corporate entity and holds the shareholders personally liable.
b. disregards the corporate entity and holds corporate creditors personally liable.
c. imposes liability on an alleged corporation as if it were an actual corporation.
d. decides that a corporation has de facto status and not de jure status
Farley and Gregor want to market a new line of fishing gear. To avoid income taxes at the corporate level and anticipate having more than 150 shareholders, they should form:
a. a C corporation.
b. an LLC.
c. an S corporation.
d. none of the above.
The bylaws of Retail Sales, Inc.:
a. establish the operating name of the corporation.
b. establish the value and classes of the corporation stock.
c. are adopted at the first organizational meeting or its equivalent written consent.
d. are submitted for approval to the public official in charge.
Brett and Courtney form Delite Day Care, Inc. Ultimate responsibility for policy decisions necessary to the management of corporate affairs rests with:
a. its board of directors.
b. its incorporators.
c. its officers.
d. its shareholders
Lena acts as the incorporator for NuGame Corporation. After the first board of directors is chosen, subsequent directors are elected by a majority vote of NuGame's:
a. board of directors.
b. incorporators.
c. officers.
d. shareholders
Coast-to-Coast Distribution, Inc. is a direct-mail distribution company. Like most corporations, Coast-to-Coast's employees include its:
a. board of directors.
b. incorporators.
c. officers.
d. shareholders.
Snow Corporation distributes beverages in the greater Northwest. Snow's board of directors can delegate some of its functions to:
a. Snow's incorporators.
b. Snow's officers.
c. Snow's shareholders.
d. Snow's creditors.
Shareholder Rights (Generally)
►Generally no management rights.
►Approval of "Big Ticket Items" (i.e. fundamental / functional changes to the corporation - amendments to articles of incorporation and certain bylaw provisions; approval of mergers and acquisitions and dissolution). These changes often are subject first to director approval and recommendation to the shareholders.
►Elect and remove directors.
►May enter into a shareholders' agreement.
►Shareholder meetings must occur at least annually, unless otherwise provided for. A quorum must be present at shareholder meetings. In lieu of certain meetings, shareholder written consent generally is acceptable (but usually with unanimous written consent). Special meetings require notice, indicating the time, place and the reason for the meeting, which meeting can only deal with that matter.
►Typically, common shareholders are entitled to one vote per share and preferred shareholders typically have no voting rights. The governing document(s) will specify the voting rights.
►Typically, shareholder approval is majority approval, but "Big Ticket Items" may require supermajority approval/consent.
►Receive dividends (if applicable).
►Inspect corporate records.
►Transfer sharers subject to exceptions.
►Receive a proportionate share of corporate assets upon dissolution.
Responsibilities / Liabilities of Shareholders
►Duty: Shareholders have a duty to act in the best interests of the corporation and the shareholders as a whole.
►Stock Subscription Completion: Stock subscriptions are written irrevocable contracts of the shareholder to purchase capital stock of the corporation prior to the corporation's incorporation, and a failure to sell or buy the subscribed shares is a breach of contract.
►Watered Stock: When a corporation issues shares to a shareholder for less than the FMV of the shares, the shares are "watered stock," and the shareholder is liable to the corporation for the difference between the FMV and the lesser amount paid for the stock.
►Illegal Dividends: If the shareholders knew of the illegal nature of the dividend payment, the shareholders must return the dividend.
►Piercing of Corporate Veil
Shareholder Derivative Suits
Shareholders' ability to sue a 3rd party on behalf of the corporation if the corporation's directors fail or refuse to correct the wrong or injury after demand from the shareholders, with any damages recovered in the shareholder derivative suit going to the corporation
Preemptive Rights
The preference for existing shareholders to purchase a prorated share of newly issued stock within a certain period of time, which provision is typically set forth in the Articles/Certificate of Incorporation.
►Significance: A mechanism to prevent the dilution of equity ownership in the corporation and thus the loss of control.
Increasing Minority Shareholders Voting Power
►Cumulative Voting: A voting method that improves minority SHs' chances of naming representatives to the board. As opposed to in regular or statutory voting, where shareholders apportion their votes equally among director candidates (one vote per candidate), cumulative voting allows SHs to cast all their votes for one candidate.
►Shareholder Voting Agreement (aka "Pooling Agreement"): An agreement in which two or more SHs agree to vote together as a unit on certain or all matters subject to SH vote.
-"Specific SH Voting" Agreement: Resolution in the agreement on how the SHs will vote. Example: SH1 and SH2, each owners 30% of XYZ Corp. which has three shareholders, sign a SH voting agreement in which SH1 and SH2 each agree to vote for each other as directors for so long as the SH voting agreement lasts.
-"Agreement-to-Agree" SH Voting Agreement: Parties merely commit to vote together without specifying which way to vote as the parties will agree to such in the future. Example: SH1 and SH2, each own 30% of XYZ Corp. which has three shareholders, sign a SH voting agreement in which SH1 and SH2 each promises that as to any matter on which a SH vote is required to confer with each other and vote together as a unit.
►Voting Trust: Pursuant to a voting trust, the SHs trying to increase their minority interest power create a voting trust. Such SHs transfer the legal title to their shares to the voting trust, and pursuant to the voting trust agreement, the trust votes the transferred shares.Beneficial ownership - stays with the transferring SH. Voting Rights - transfer to the Voting Trust.
►Concentrated Voting Through Proxies
Rights of Directors
*Right to participate in the corporation's strategic and major policy decisions and to inspect the corporate books and records.
*Right to Compensation.
*Right to indemnification. If a director is sued for acts as a director, the corporation typically guarantees indemnification (i.e. reimbursement) or purchases liability insurance to protect the directors from personal liability for director acts.
Duty of Care
The obligation to act in good faith and the best interest of the corporation, which includes: Making an informed and reasonable decision (i.e. perform due diligence before making a decision); If expertise is needed, engage and rely on competent consultants and experts; and *Exercise reasonable supervision over officers.
**Director Dissent: A dissenting director that has his/her dissent recorded in the minutes/consent is rarely held liable for breach of duty of care on that applicable action.
Duty of Loyalty
The obligation to subordinate personal interests to the welfare of the corporation, which includes: No competition with the corporation; No engaging in conflict of interest transactions or matters (unless a majority of the disinterested directors approve the transaction after full disclosure from the interested director); No insider trading; No taking advantage of corporate opportunities; and *No transaction that is detrimental to the minority shareholders.
**Two prong test: (1) whether the opportunity was reasonably related to the corporation's line of business and (2) whether the corporation was financially able to undertake the opportunity.
Business Judgment Rule ("BJR")
The principle pursuant to which a director or officer is immunized from liability from consequences of a business decision that turns negative as long as the decision was reasonable, informed, made in good faith, and in the best interest of the corporation.
*The courts do not require directors and officers to manager "in hindsight," so in determining BJR protection courts look at the circumstances at the time of the decision.
Disclosure of Conflicts of Interest
A corporation can enter into a transaction in which a director or officer has a conflict of interest, but the conflicting director or officer must fully disclose the conflict and abstain from voting on the proposed matter
Director or Officer Liability
The director's / officer's failure to meet the duty of care and duty of loyalty obligation subjects it to personal liability
The duty of loyalty that directors and officers owe to the corporation involves:
a. the duty of directors and officers to act in their own best interests.
b. the duty of directors and officers to subordinate their personal interests to the welfare of the corporation.
c. the duty of directors and officers to use available funds to pay themselves before paying the corporation's debts.
d. overseeing the activities of employees during their daily work.
When a corporation suffers a wrong and the corporate directors fail to take action to redress that wrong, one effective and appropriate way to obtain redress is through:
a. the issuance of preemptive rights.
b. the use of stock warrants.
c. a shareholder's derivative suit.
d. shareholders voting in new officers
Luke is a director of Motor Parts Corporation. Luke makes decisions with respect to Motor Parts in good faith, in what he believes is the firm's best interest, and without violating any duties owed to it. If, despite these circumstances, Luke makes a business decision that has a negative result for Motor Parts, under the business judgment rule he is:
a. immune from liability.
b. liable only to the extent that he gained as a result.
c. liable only to the extent that Motor Parts suffers as a result.
d. wholly liable.
Chip is a director of Diners Restaurants, Inc. Chip would breach his duty of loyalty if he:
a. becomes a director of Fluffy Mattresses, Inc., a noncompeting firm.
b. buys a controlling interest in Gulpin Foods Corporation, a competing firm.
c. votes for Diners to buy a controlling interest in Eateries, Inc., which causes Diners to suffer loss.
d. votes against Dinners' purchase of a controlling interest in Eateries, Inc., which causes Diners to suffer a loss
Denise, Ervin, and Flem occupy the positions of directors on the board of Gallery Corporation. As directors, they may not:
a. authorize major corporate policy decisions.
b. decide to issue bonds and declare dividends.
c. select and remove corporate officers.
d. support businesses that directly compete with Gallery.
Brad is a shareholder of Concert Promotion Corporation. As a shareholder, Brad can:
a. authorize major corporate policy decisions.
b. declare dividends.
c. select and remove corporate officers.
d. vote to amend the articles if incorporation or bylaws.
Paul, Prince, and Peter are shareholders in Rite Corporation, each owning 20% of Rite's shares. Before a shareholders' meeting, they agree in writing to vote their shares together in a certain manner. Usually, such agreements are held to be:
a. invalid and unenforceable.
b. oppressive and irresponsible.
c. suspect and voidable.
d. valid and enforceable
Lilly is a shareholder in Matchless Corporation with preemptive rights. With respect to these rights, Lilly can:
a. buy a prorated share of a new issue of stock before other buyers.
b. put her shares for purchase by a buyer.
c. "preempt" managerial decisions that affect shareholders.
d. sell a prorated share of new issue of stock before other sellers
Which of the following is a major power held by shareholders:
a. the power to appoint corporate officers.
b. the power to manage and supervise daily operations of the corporation.
c. the power to declare dividends.
d. the power to elect the board of directors
The best definition of a quorum is which of the following:
a. a quorum is 51 percent of all shareholders.
b. a quorum is 66 percent of all directors.
c. a quorum is the minimum number of members of a decision-making body that must be present before business may be transacted.
d. a quorum is the number of voters who must agree to a revision before corporate bylaws may be changed or otherwise amended
Rusty and Sylvia are shareholders of Tri Hotel Corporation. Tri's directors fail to declare a dividend. Rusty and Sylvia could succeed in asking a court to order the directors to meet and declare a dividend:
a. if Tri has sufficient earnings available to pay a dividend.
b. if Tri has cash reserves even if earmarked for a different purpose.
c. if withholding a dividend is an abuse of the directors' discretion.
d. under no circumstances
Generally, the liability of shareholders is:
a. unlimited.
b. just like that of partners.
c. limited to their investment in the stock of the corporation.
d. limited to a maximum of $50,000
Sal is chairman of the board of Tasty Foods Corporation. Tina, a consumer, falls sick after eating a Tasty product. Tina sues Taste and Sal, individually. Tasty may pay Sal's legal fees:
a. only if Sal wins the suit.
b. only if Tasty wins the suit.
c. only if Tina wins the suit.
d. in most cases regardless of the outcome
Instruments evidencing interest in a business organization or a promise of the repayment of indebtedness of a business organization, which instruments of interest include the following categories:
◘Stock (common stock, preferred stock, treasury stock).
◘Debt Instruments (bonds, debentures, notes, certificates of deposit, or other evidence of indebtedness)
◘Future Interests in Securities (stock options, warrant, puts, calls, or other rights to purchase security)
◘Investment Contracts (interest in land, investment schemes)
►The "Howery" Test: U.S. Supreme Court case where the Court held that a "security" exists in any transaction in which a person invests in a common enterprise reasonably expecting profits derived primarily from others' management or entrepreneurial efforts.
Securities Act of 1933 ("33 Act")
►Purpose: One-time disclosure law - Requires full disclosure regarding material information in security sales and transfers.
(1) Regulates solicitation and buying and selling of securities.
(2) Designed to prohibit fraud and stabilize the securities industry.
►Violations of the 33 Act:
Such violation provides for criminal penalties and civil sanctions.
◘Intentional or negligent defrauding of investors by misrepresenting or omitting material information in the registration statement or prospectus.
Defenses: *The statement omitted was not material.
*Plaintiff knew about the misrepresentation and purchased the stock anyway.
*Registrant believed the statements were true.
◘Selling securities before the effective date of the registration statement or under an exemption for which the securities do not quality.
Securities Exchange Act of 1934 ("34 Act")
►Purpose: Continuous disclosures law - Requires periodic information disclosure to investors by publicly traded companies with $10 million in assets and 500 or more shareholders. Also applies to brokers and dealers.
(1) Provides authority over proxy solicitation and registration of organized securities exchanges.
(2) Sets disclosure requirements for securities in the secondary market.
(3) Regulates insider trading.
►Violations of the 34 Act - Section 10(b) and Rule 10b-5:
Such violation provides for criminal penalties and civil sanctions.
◘Section 10(b) - The violator had scienter, meaning the intent to defraud by using false statements or wrongfully failing to disclose material facts.
Securities Registration (33 Act Related)
►Unless exempt, an offering of securities must be registered before offered to the "public" generally.
►The issuing corporation must file a registration statement and prospectus with the SEC, with the prospectus being later distributed to investors (i.e. the "investor disclosure document").
A written document that describes the (1) security being sold, (2) financial operations of the issuing corporation, and (3) investment risk attaching to the security. It is an abridged version of the Registration Statement.
Purposes of Registration Statement and Prospectus: To supply sufficient information to enable unsophisticated investors to evaluate the financial risk involved with the opportunity
Registration Statement (Form S-1)
A document filed with the SEC by the issuer of securities that contains detailed information about the firm that plans to sell
the securities to the public, which issuance is not exempt from registration.
Contents of Registration Statement:
◘The securities being offered for sale, including their relationship to the registrant's other capital securities.
◘The corporation's properties and business (including a financial statement certified by an independent accounting firm).
◘Management of the corporation, including managerial compensation and other benefits and any interests of directors or officers in any materials transactions.
◘How the corporation intends to use the proceeds of the sale.
◘Any pending lawsuits or special risk factors.
Registration Process (Generally) of Securities Registration
◘Pre-filing period: Securities cannot be offered or sold.
◘Filing of Registration Statement with SEC.
◘Waiting Period: Because the Registration Statement must be approved by the SEC, securities can be offered but not sold. All issuers can distribute a red herring prospectus, advertise with a tombstone ad, and a free-writing prospectus.
-Red herring prospectus: The prospectus that is given to potential investors in a new security issue before the selling price has been set and before the issuer's registration statement has been approved by the SEC for accuracy and completeness. Name comes from the statement in red that says "the issue has not yet been approved by the SEC."
-Tombstone ad: An advertisement for a securities issue, which lists the security with some specificity and a list of members of the syndicate selling the issue.
◘Post-effective Period: Issuer must provide a final prospectus (or link to download) to the parties that received a preliminary or free-writing prospectus. Securities can now be sold.
◘Registration Process Relaxation: In 2005, the SEC revised the registration process to relax it and create new categories of issuers to assist Well-Known Seasoned Issuers. Well-Known Seasoned Issuers have issued $1 billion in securities during the last 3 years or have $700 million outstanding stock with the public.
Exempt Securities and Exempt Transactions (Generally) of Securities Registration
◘Importance: Enables an issuer to avoid the time, complicated procedures, and high costs associated with registering securities.
◘Exempt Securities: Certain types of securities exempt from SEC registration. Example: Government issued securities; bank and financial institution securities, which are regulated by banking authorities; short-term notes and drafts such as negotiable instruments with a maturity date 9 months or less; securities of nonprofit, education, and charitable organizations; securities issued by common carriers (railroads and trucking companies); an insurance, endowment, or annuity contract issued by a state-regulated insurance company; securities issued in a corporate reorganization in which one security is exchanged for another or in a bankruptcy proceeding; securities issued in stock dividends and stock splits.
◘Exempt Transactions: Certain types of securities transaction offerings exempt from SEC registration subject to certain notifications and other requirements.
Insider Trading (34 Act Related)
The purchase and sell of securities on the basis of inside information, meaning information that has not been made available to the public. Liability exists to the provider of the inside information and the person taking advantage of the inside information with knowledge that the information is inside information.
◘Tipper: A person who provides inside information.
◘Tippee: A person who is given inside information
Sarbanes-Oxley Act of 2002
Attempts to increase corporate accountability by imposing stricter disclosure requirements and harsh penalties for violations in an effort to restore investor confidence in the U.S. capital markets. Applies to all publicly-traded companies
Goals and Provisions of SOX
Goals: ◘Make Reporting Company management responsible for financial reporting.◘Provide additional means of investor transparency.◘Increase the internal controls and corporate auditing standards.
Provisions:◘Requires CEOs and CFOs to take responsibility for accuracy of financial statements filed with the SEC. ◘Requires independent auditor report except for certain small companies (companies of less than $75 million market capitalization).
b. The SEC does not issue government bonds; the U.S. Treasury Department makes such issuances
Which of the following is not one of the major responsibilities of the SEC:
a. investigating potential insider trading volations.
b. issuing government bonds.
c. regulating trade in securities.
d. investigating securities fraud
c. The 1933 Act focuses on reporting requirements.
The Securities Act of 1933 was designed to do which of the following:
a. regulate the operations of national stock exchanges.
b. oversee and regulate the work of national securities associations.
c. prohibit various forms of fraud and stabilize the securities industry by requiring disclosure of all relevant information concerning the issuance of securities to the public.
d. promote the effective, efficient, and nonfraudulent use of proxies by shareholders.
b. Proxy statement because a registration does not need to contain a proxy statement
The 1933 Securities Act requires that organizations with nonexempt securities or transactions must file a registration statement with the SEC prior to issuing securities. Which of the following items must the statement contain?
a. a marketing plan for the organization
b. a financial statement certified by an independent public accounting firm
c. a tombstone ad
d. a proxy statement applicable for all new shareholders
a. Of this list, the insurance company is most likely to qualify as an accredited investor or "sophisticated" investor.
Which of the following is most likely to be an accredited investor?
a. an insurance company
b. an hourly wage shipyard worker
c. a family farmer with a small 40 acre farm in rural Georgia
d. a recent college graduate from a working class family and with moderate economic means
b. Section 10(b) of the 34 Act and SEC Rule 10b-5 prohibits insider trading of securities.
One of the major goals of Section 10(b) of the 34 Act and SEC Rule 10b-5 is:
a. to promote blue sky laws.
b. to prevent insider trading.
c. to prohibit underwriting.
d. to ensure that proxies be used when voting for directors.
d. SEC Rule 10b-5 is applicable to virtually all cases concerning the trading of securities, whether in organized exchanges, in over-the-counter markets, or in private transactions.
SEC Rule 10b-5 is applicable:
a. only when securities are traded in over-the-counter markets.
b. only when securities are traded in organized exchanges.
c. only to private securities transactions.
d. in virtually all cases concerning the trading of securities.
Blue sky laws:
a. are state laws regulating intrastate sales of securities.
b. are federal laws regulating mutual funds.
c. are municipal ordinances outlawing commercial activity on Sundays.
d. are interstate laws governing non-securities sales
Cotton Products Corporation is a publicly traded company whose shares are traded in the public securities markets. The Securities Act of 1933 requires Cotton Products to disclose financial and other significant information concerning its securities in order to:
a. increase corporate accountability by imposing responsibility on chief corporate executives.
b. prevent insiders from trading among themselves.
c. protect investors.
d. provide a "safe harbor" for companies that make forward-looking statements
Build-It-Rite Corporation is a public company that is preparing to issue securities that do not qualify for an exemption from registration. This means that Build-It-Rite must:
a. file a registration statement with the SEC.
b. issue the securities through an online registration site.
c. register the securities with a national stock exchange.
d. none of the above.
Readmore Bookstore Corporation files a registration statement with the SEC and provides a prospectus describing the securities to investors. These items are intended to provide sufficient information so that the financial risks involved can be evaluated by:
a. market professionals to explain to all investors.
b. government regulators to disclose to the general public.
c. sophisticated investors only.
d. unsophisticated investors.
Lexy, a salesperson for Fine Corporation, learns that Fine Corporation will increase the dividend that it pays to shareholders. Lexy buys 10,000 shares of Fine Corporation stock. When the price of Fine Corporation's stock increases due to the increased dividend payment announcement, Lexy sells her Fine Corporation shares for a profit. Lexy would not be liable for insider trading if the information about the dividend was:
a. material when she sold the stock.
b. public after she bought the stock.
c. public before she bought the stock.
d. speculative when she bought the stock.
Riley, an engineer for Shred-Gro Corporation, learns that Shred-Gro has developed a corn hybrid to triple the output of any farm. Riley buys 20,000 shares of Shred-Gro stock. He tells Tess, who buys 15,000 shares. After the new hybrid is announced publicly, the price of Shred-Gro stock increases. Riley and Tess sell their shares for a profit. Under the Securities Exchange Act of 1934, liability may be imposed on:
a. Riley only.
b. Riley and Tess.
c. Riley, Shred-Gro, and Tess.
d. none of these parties.
Flux Corporation is a publicly traded company whose shares are traded in the public securities markets. Under the Sarbanes-Oxley Act of 2002, Flux is subject to the direct corporate governance requirements of:
a. any other public company with which Flux exchanges shares.
b. any state in which Flux does business.
c. the federal government.
d. the state in which Flux is incorporated