PARTNERSHIPS/SOLE PROPRIETORSHIPS
A business specializing in news broadcasting was organized as a limited partnership. There was one general partner and three limited partners. The partnership decided to try and purchase several local television stations in an effort to broaden its market. To do so, the partnership took on $40,000,000 in debt. Two years later, the debt became due, but the partnership did not have sufficient funds to cover it.
Which of the partners can be held personally liable for the debt?
If a shareholder dies, do their shares pass to their heirs?
Yes.
What fiduciary duty does the business judgement rule seek to protect?
Duty of Care
An employer had an explicit rule that employees could use company vehicles only during the workday, not to commute to and from work. A company employee nonetheless drove a company vehicle home at the end of the workday. The next morning, the employee negligently struck a pedestrian while driving the company vehicle back to work. The pedestrian sued both the employee and employer.
Is the court likely to hold the employer vicariously liable for the accident?
No, because the employee was outside the scope of employment at the time of the accident.
What business form(s) offer(s) limited liability to owners (owner shielding)?
LLCs and corporations
A florist owned a flower shop as a sole proprietor. The shop operated out of a leased downtown storefront. One day, a customer was injured when he tripped over some loose carpeting while leaving the flower shop. The customer sued and won a large tort judgment. A short time later, the shop fell behind on its lease payments for the storefront. The landlord commenced eviction proceedings and sued for breach of contract, resulting in a large judgment for the overdue rent.
For which judgment, if either, is the florist personally liable?
Both; the tort and the contract judgement
A shareholder in a corporation sought to sue the corporation on the ground that the corporation wrongfully prevented the shareholder from inspecting the corporate books and records.
Which of the following types of actions would be most suitable to redress the shareholder’s injury?
I. Class Action
II. Derivative Action
III. Direct Action
IV. Ultra Vires Action
A direct action, because the shareholder was seeking to vindicate the shareholder’s own interests.
An officer in a small business planned to leave the company to start his own competing business. While still working at the company, the officer solicited the company’s customers to follow him to his new, competing business. The officer then left the company and started his own business. Many of the company’s customers followed the officer and became customers of his new business. The company sued the officer. Did the officer owe a fiduciary duty? If so, what breach of duty should the company sue under?
Yes, corporate officers, directors, and high-level executives have a duty not to compete with the corporation if doing so could potentially harm the company. This officer breached a duty of loyalty in doing so.
A sea captain authorized an agent to act on his behalf in buying a new fleet of ships. Soon after hiring the agent, the captain became ill with a disease that made him mentally incompetent and incapable of understanding the nature and consequences of his actions. Neither the agent nor the seller was aware of the sea captain's illness and incapacity. During this time, the agent entered into a contract with a seller to buy three ships on the captain’s behalf. A month afterward, the captain recovered. When he was notified of the contract with the seller, he refused to honor it. The seller sued, arguing the captain was liable.
Is the captain liable for the contract?
Yes, because the agent and the seller had no notice of the sea captain's incapacity.
What is par value?
The minimum price at which a corporation can sell a stock for (if you establish one, it must be in the certificate of incorporation but you do NOT have to have a par value, depending on the state; DE requires that you state you have no par value)
No, when a sole proprietor dies, the sole proprietorship dies with the person.
A shareholder of a corporation wanted to inspect the corporation’s bylaws, which had been amended six months ago. The shareholder had owned shares in the corporation for the previous five years, including the time period covering the most recent amendment. The shareholder called the corporation’s secretary and asked for access to the bylaws in 10 business days, when the shareholder would be traveling to the corporation’s headquarters. The governing jurisdiction had adopted the Model Business Corporation Act (MBCA).
Is the shareholder entitled to inspect the bylaws?
No, because the shareholder’s request to inspect the bylaws was not in writing. (MBCA 16.02)
I. Can you eliminate duty of loyalty under RUPA?
II. Can you eliminate duty of loyalty under DE?
III. Can you alter duty of loyalty under RUPA?
IV. Can you alter duty of loyalty under DE?
I. YES
II. YES
III. YES
IV. YES
A corporation hired a bidding agent to represent the corporation at an auction of land. The written agreement authorized the agent to bid on a property of interest for up to $250,000. At the auction, the land in which the corporation was interested was subject to fiercely competitive bidding. The agent won the auction at $500,000, instead of $250,000. The corporation refused to pay more than $250,000.
Against whom does the auctioning party have a cause of action?
Only the bidding agent, because the corporation did not ratify.
What is the difference between preferred stock and common stock?
Preferred stock: class of shares that DO receive preferential treatment (kinds of preferential treatment: higher dividends, pay first before common shareholders, liquidation rights, redemption preference (“exit right”), privileged voting rights)
vs.
Common stock: the shares that do not receive any preferential treatment
What, if any, formal requirements are necessary to start a partnership?
No formal requirement necessary; nothing needs to be filed with any state office; partnership agreements are not legally required (but are important and advisable)
A corporation’s annual meeting, where shareholders would vote for new directors on the board, was scheduled for July 15. Because the corporation’s bylaws did not address the issue, the board of directors set the record date for the meeting as June 30. An investor acquired shares in the corporation on July 2. The governing jurisdiction had adopted the Model Business Corporation Act (MBCA).
May the investor vote for new board members at the annual meeting on July 15?
No, because the investor did not own any shares in the corporation on the record date. (See MBCA 7.07(b))
I. Can you eliminate duty of care under RUPA?
II. Can you eliminate duty of care under DE?
III. Can you alter duty of care under RUPA?
IV. Can you alter duty of care under DE?
I. NO
II. YES
III. YES
IV. YES
A hot-dog vendor wore a colorful outfit and nametag. The vendor hired a man at an hourly wage to assist in serving customers, and gave him an identical outfit and nametag. There was no written agreement between the vendor and the assistant. Each hot dog cost the vendor $1 in materials and labor to produce, and he sold each hot dog for $3. One day the assistant was alone at the hot-dog stand when a businessman, who owned a nearby company and assumed reasonably that the assistant was the owner, asked for a quote to provide 50 hot dogs for his company every day. The assistant gave a discounted price quote of $2 per hot dog.
Was the assistant an agent with authority to bind the vendor to the price quote?
Yes, because the vendor gave the assistant apparent authority and his outfit is an indication of agency in the eyes of third parties.
A corporation sold par value stock to an investor for $100 per share. The stock’s listed par value was $75 per share, but the corporation had determined internally that it would accept as low as $65 per share. Several months later, the investor sought to sell the shares to a bank.
May the investor sell the shares for less than $75?
Yes, because a stock’s par value is not relevant when the stock is sold again after issuance.
A law firm was organized as a general partnership and had five partners. The firm's written partnership agreement did not address the admission of a new partner. Among the firm's employees was one associate who did varying work for all the partners. One day, the partners held a meeting to decide whether to admit the associate as a partner of the firm. Four partners wanted to make the associate a partner by allowing the associate to buy an equity stake the firm at a very favorable price, which the associate was ready, willing, and able to pay. However, one partner opposed making the associate a partner.
May the associate be made a partner of the firm?
No. Under 402(b)RUPA, a person becomes partner either as provided in the partnership agreement OR by consent of ALL partners if the partnership agreement is silent.
Four siblings were forming a corporation to own and operate their autobody repair shop. The siblings sought to exclude anyone else from having an ownership interest in the enterprise. Therefore, the siblings formed an agreement that provided that, upon the retirement, disability, or death of any of the shareholders, the corporation was required to purchase the retiring, disabled, or deceased sibling’s shares at a price determined by an independent business appraiser.
Is this agreement permissible?
Yes, because it is a standard buy-sell agreement.
A man was the majority shareholder in a large, privately owned manufacturing corporation. The man appointed his five adult children as the sole members of the corporation’s board of directors. The man’s children had no business training or knowledge and had no experience or specialized knowledge of the industry. An entrepreneur approached the corporation offering to enter into a contract for the corporation to be the sole manufacturer of his new invention, in exchange for a percentage of the profits made from sales. The directors all liked the invention and thought that it would sell well. The directors agreed to the terms of the contract without doing any market research, consulting any experts, or ordering the preparation of any reports on the proposed contract. The invention sold poorly and the corporation lost money on the contract.
Did the directors violate the duty of care?
Yes, because their decision did not have an informed basis.
An oil worker worked on a site to which there was no public transportation. Because workers were required to drive to the site, the oil company paid the workers a daily travel allowance to compensate for having to use their personal cars. One day, the worker offered to drive a coworker home after work. As they were driving home, the worker got into a car accident with a lawyer. The lawyer sued the oil company for damages. The oil company moved for summary judgment, arguing that the worker was not acting within the scope of employment at the time of the accident.
Should the court rule in favor of the oil company?
Yes, because the worker was engaged in his ordinary commute to and from work.
An investor and a chef came together as partners to own and operate a restaurant. The governing partnership agreement provided that the chef would assume all management and control of the restaurant, and the investor would simply share in the restaurant’s profits and losses in proportion to the investor’s capital contribution. At all times, the partners adhered to the partnership agreement. Also, the partners never filed formal documents with any government agency concerning the restaurant. Sometime after the partnership's formation, a vendor sued the restaurant for breaching a contract, and the court found that the partnership was liable. The resulting civil judgment required the partnership to pay the vendor $100,000 in damages.
Is the investor personally liable for the civil judgment?
Though this looks like a limited partnership, the prompt states that the partners never filed any formal filings with any government agency. General partnerships do not need filing with state agencies; however, limited partnerships have to file a certificate of limited partnership.