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CORPORATIONS
I. ORGANIZATION OF A CORPORATION
A. FORMATION REQUIREMENTS

1. People - one or more incorporators. 2. Documents: Information in Articles a. Corporate Name XYZ Co, ABC Inc, QRS Corp.
Assumed Name Issue b. Numbers and Names of Important People

c. Statement of Duration - perpetual duration is o.k. d. Statement of Purpose General statement of purpose is o.k. unless
Ultra Vires Doctrine Ultra Vires Ks cannot be voided.

e. Capital Structure Articles must include the (1) # of authorized stock and (2)
number of shares per class (3) par value (4) voting rights as to each share 3. Filing the Articles a. File with the Sec. of State

b. Certificate of Incorporation issued by the Sec. of State The Corp. is a De

Jure Corporation. B. LEGAL SIGNIFICANCE OF FORMATION OF CORPORATION

1. Corporation is a Legal Person Limited Liability unless PCV. 2. Limited Liability of SH- SH are only liable for the price of their stock. C. DE FACTO CORPORATION DOCTRINE 1. De Facto Corporation - the incorporators made a good faith attempt to make a
corporation but just didnt do it right. Used as a defense for incorporators.

2. Corporation by Estoppel A 3rd Party dealing with a business as a corporation,

treating it as a corporation, will be estopped from denying the businesss corporate status.

II.

PRE-INCORPORATION KS & ISSUANCE

A. PROMOTER LIABILITY
1. Adoption - The corporation is liable until the it actually ADOPTS the K.
Adoption can be express or implied.

2. Adoption & Novation

B. FIDUCIARY DUTY - SECRET PROFIT RULE C. ISSUANCE OF STOCK

1. Subscription An Offer to buy Stock in the future a. Revocability of Pre-incorporation subscription irrevocable for six
months unless it says otherwise.

b. Post-incorporation subscriptions revocable any time before acceptance. 2. Consideration - Any Form of Consideration is o.k. - house, future interest, K for
services, notes

3. Watered Stock Selling stock below the par value corp. and buyer of
watered stock will be liable to creditors for the difference of par value and watered stock.

4. Preemptive Rights

III.

DIRECTORS AND OFFICERS

A. STATUTORY REQUIREMENTS

1. No. of Directors 1 or + 2. Election of Ds Annually elected by the SH B. ROLE OF DIRECTORS - Declares Distributions, recommends Fundamental
Corporate Changes, Supervises over Officers, Sets Corporate Policy. C. BOARD OF DIRECTOR: MEETINGS &ACTIONS

1. Valid Corporate Act Anything thats not a fundamental change a. Informal Actions - Unanimous written consent by Director to act without a
meeting

b. Formal Action A meeting that satisfies the quorum and voting rules.

3 (1) Notice: Notice is required for special meetings (2) Quorum If a quorum is present, then all you need is a majority vote of
those present to pass a resolution Proxies Not allowed

2. Removal By SH with or without cause

D. FIDUCIARY DUTIES

1. Duty of Care Director must act in (1) good faith and (2) exercise ordinary
care and prudence. DEFENSE: The BJR Business Judgment Rule

2. Duty of Loyalty - Director must act in (1) good faith (2) with reasonable belief
that it was in the corporations best interest.

a. Analysis: (1) Was the Deal FAIR? (2) Full disclosure to Corp. (3)
Majority of Disinterested SH approved of the Deal at issue. b. Remedy: Constructive Trust on profits

3. Usurpation Of a Corporate Opportunity Director must act in (1) Good

Faith; (2) D must have reason to know that the corp. opportunity would be interested in that opportunity.

a. Analysis (1) Full disclosure (2) Give the Corp. the opportunity first. b. Remedy Constructive Trust E. LIABILITY OF DIRECTORS FOR A BREACH OF CARE 1. Rule A Director is presumed to have agreed with the Board Action unless he
(1) expresses dissent in writing; (2) in the corporate records

a. Absent Directors - are not liable b. Defense (1) Good faith reliance of financial statements prepared by an
Officer or a competent professional; (2) BJR F. INDEMNIFICATION FOR DIRECTORS

1. No Indemnification for intentional misconduct 2. Mandatory Indemnification successful in defending a claim on the merits.

4 3. Permissive Indemnification If D is held liable, but D acted in good faith and

with reasonable belief that her actions were in the companys best interest. BAR FAV The articles can limit or eliminate Director and Officer liability for damages, but NEVER for intentional misconduct. G. OFFICERS

1. Agents of the Corporation Apply Agency Rules Actual/Apparent Agency.

Corp is liable for under agency principles 2. President & CEO

a. Ordinary Course of Business Transactions Inherent Authority to bind the

corporation for contracts entered in the ordinary course of business.

b. Real Estate Transactions Board needs to give actual authority before

liability ever attaches for real estate transactions!!

3. Selection/Removal of Os - Board of Directors selects and removes

IV.

SHAREHOLDERS

A. SHAREHOLDERS AS DEFENDANTS Piercing the Corporate Veil 1. When To Pierce the Veil Two Ways to Abuse the Corporate Form. a. Alter Ego Theory Personal and Corp. are commingled - The corporation is
a shell - SH commingle funds personal w/ corporate funds, SH use corp. property for personal use. SH have abused the privilege of incorporating

b. Undercapitalization Corp. carries no insurance, assets are less than $1000. 2. Plaintiff Claims and Recover a. Breach of K No recovery unless proof of FRAUD b. Tort - Plaintiff can always recover
3. Liability of SH only active SH will be personally liable.

B. SHAREHOLDER MANAGEMENT OF CORPORATION 1. Close Corporation You create a close corporation by specifically mentioning
in the Articles, This is a Close Corporation. There is no board of directors.

2. Shareholders Agreement Controls

3. Special Fiduciary Duties As a Mater of A Law

C. VOTING

1. Who Votes RECORD Shareholder 10 to 60 days BEFORE the meeting.

a. Exceptions

(1) Death of SH the executor can vote (2) Proxies

(a) Only valid for 11 months (b) Always Revocable 2. The Meetings

a. Annual Meeting - Must be Held in order to select Directors b. Special Meetings called by (1) Ds (2) Os (3) 10% SH.
NOTICE REQUIREMENT Every record SH must get notice 10 to 60 days before the meeting, or else meeting is VOID. Express Waiver in writing by the SH Implied Waiver attend the meeting anyway 3. How To Vote

a. Have A Quorum Present A majority of Shares must be represented. And

it can NEVER be less than 1/3 of shares represented. b. of those Shares represented. for the proposal to be accepted

4. Voting Trusts and Voting Agreements Block Voting Strategy a. Voting Trusts transfer legal title of shares to a voting trustee b. Vote Pooling Agreements
RESTRICTION The Agreement is only for a proper SH purpose.

c. Cumulative Voting
[# of shares that the SH owns] [# of Ds up for election]. D. STOCK TRANSFER RESTRICTIONS

1. Right of First Refusals its o.k. 2. 3rd Parties Takes free if it did not have notice of the transfer restriction.
E. RIGHT OF SH TO INSPECT BOOKS AND RECORDS

1. SH (owned stock for at least 6 months OR be a 5% owner) must have a Proper

Purpose to inspect the books. F. DISTRIBUTION

1. Distributions are declared by the Board of Directors - declaring a distribution

may be a breach of fiduciary duties and abuse of discretion if a. Distribution is made when the Corp. is insolvent or distribution causing insolvency DEFENSES BJR, Good faith, LIABILITY Directors are JSL for unlawful distributions to the extent it was impermissible, unless Director dissents in writing. G. SHAREHOLDER DERIVATIVE LAWSUITS

a. Generally The SH is suing to enforce the corporations claim. b. Standing SH must have been a record shareholder when the act or omission
occurred. c. Procedure

(1) SH Makes a Written Demand to Directors that the corporation bring suit (2) Wait 90 days for the Disinterested Directors response
(3) If rejected, SH may seek recourse from a court who can (4) Recovery All goes to the corp, but AH can recover attorney fees.

V.

FUNDAMENTAL CORPORATE CHANGE

A. PROCEDURE 1. 2. 3. 4. 5. Directors Propose Fundamental Change Call a Special Meeting Give Notice to All SH Have a Quorum of all outstanding Shares Get 2/3 Approval of all outstanding votes entitled to vote.not just those represented at the meeting

B. EVENTS OF FUNDAMENTAL CHANGE

1. Mergers Surviving entity assumes all rights and liabilities

2. Amendment to Articles 3. Conversions No ultra vires violation

7 4. Transfer of Assets / Sale of Shares Only concerns the transferring/selling

corporation and Not the buying corporation.

C. DISSENTING SH APPRAISALS RIGHTS 1. Situations Sale of Shares, Transfer of Assets, Mergers, Conversion 2. Procedure (1) File a written Notice of objection before the vote and demand
for payment; (2) Dont Vote or Vote against the corp. action; (3) After the vote, make a written demand that corp. buys out its shares for FMV calculated on the day prior to the vote; (4) If a price is not agreed upon, court will decide a FMV.

VI.

DISSOLUTION
A. VOLUNTARY/INVOLUNTARY

1. 2.

Voluntary 2/3 SH agree entitled to vote Involuntary Court Ordered a. Transacting business beyond the scope provided in the Articles corporation administratively for failure to pay franchise taxes, but the incorporators can seek reinstatement. Between the reinstatement and the dissolution, Corp is liable & Defendants are all personally pliable for the debts incurred.

b. Failure to pay franchise taxes - The Sec. of State can dissolve the

B. WINDING UP
1. 2. 3. 4. Gather Assets Sell and Convert assets into Cash Pay creditors and liabilities Pay SH- pro-rata share if liabilities exceed assets

C. Claims arising before dissolution can be asserted within 3 years after

dissolution.

D. Abandoning the Corporation Without Liquidating the Corp. - Directors and

Shareholders ARE PERSONALLY LIABLE for debts incurred after abandonment.

Agency & Partnerships I. LIABILITY ON CONTRACT

A. GENERAL RULE OF AGENCY Principal becomes liable to a 3rd party on a
contract entered into by his (principals) agent if

8 1. Consent: Agent and Principal both Consented 2. Control: Agent is subject to Principals control
B. Principal MUST have K capacity, but Agent does not need K capacity

C. Statute of Frauds - requires a writing if the employment K between A & P is for more
than a year, or the Agent is selling real property to a 3rd person.

II. Actual Authority

A. CREATION OF ACTUAL AUTHORITY

1. Express - Thats true even if the Principle is mistaken about the subject matter or
the agents identity.

2. Implied Actual Authority Principles conduct leads Agent to believe that Agent
has the authority to act on Principles behalf.

B. Actual Authority must exist at the time Agent enters in a Contract with 3rd for
liability to attach.

C. Termination of Actual Authority effective upon receipt!!

1. Change of circumstances (subject matter is destroyed) 2. When Agent acquires an interest adverse to Principles (Joining Ps competitor). 3. When Agent or Principle says so (Agency is consensual), unless coupled with an interest making it irrevocable.

D. Delegation of Duties Agent can delegate duties as long as Principle consents. III.

SUBSTITUTES FOR ACTUAL AUTHORITY

A. APPARENT AGENCY - Principle leads 3rd party to believe that Agent has
authority.

1. 3rd Reasonable belief that Agent has authority MUST be created by Principle. 2. Lingering Agency after Termination + Justifiable Reliance Key: Look at the
transaction from the perspective of the 3rd party is it reasonable for 3rd party to believe that agent still has authority to act on Principles behalfif yes, then theres apparent authority. B. RATIFICATION

1. Rule - Even if A had no actual authority, P can ratify by (1) Expressly

affirming the K (2) By Conduct: Accepting the benefit of the K.

2. Effect Agent is not liable, but Principle is liable.

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1. Requirements a. Principle must have knowledge of all material facts surrounding the Kontract

b. Principle must accept the entire transaction and the contract along with it.
(Principle cannot ratify a K while disavowing the representations made by Agent). c. Principle must have contractual capacity both at the time of ratification and at the time the original K because ratification is retroactivesee promoter liability of a not yet formed corporation.

d. Intervening Rights of BFPs If the BFP doesnt have notice of an earlier

transaction entered into by Agent and that Principle would like to ratify, BFP can enforce his agreement even though its later in time. Key: Cant cut off a BFPs intervening rights.

C. ADOPTION - acts currently. Liability attaches at the time of adoption.

Novation If the Principle Adopts and makes an agreement to substitute the corporation for the promoter as the party who is obligated under the K.

IV. RELATIONSHIP OF PARTIES

A. RELATIONSHIP OF PRINCIPLE AND AGENT 1. Fiduciary Duties Agent owes Principle strict fiduciary duties
a. Duty of Care b. Duty of Loyalty

2. Principle must compensate, reimburse, and indemnify Agent for actions done for
the purpose of the agency (or partnership)

B. RELATIONSHIP OF PRINCIPLE AND 3RD PERSON 1. Principles Liability - Principle is liable to a 3rd party for As Ks with 3rd 2. 3rds Liability to Principle generally liable to principle a. Disclosed Principle & Partially Disclosed Principle 3rd is liable to Principle
and can be liable to partially disclosed Principle.

b. Undisclosed Principle 3rd is liable unless (1) Holding 3rd would unduly burden 3rd (requirements K).
(2) Principle fraudulently concealed her identity. (3) 3rd bargained for As personal performance

10 C. RELATIONSHIP BETWEEN AGENT AND 3RD not liable to 3rd unless (1)
Tort; (2) Agents power is coupled with an interest; (3) Principle is partially disclosed or undisclosed or Agent breached her scope of authority.

V. LIABILITY IN TORT
A. KEY: Was the tort committed by a servant acting within the scope of employment? If so
the master (P) and servant (A) are jointly & severally liable to the injured party.

a. Detour minor deviation b. Frolic substantial deviation A. Intentional Torts outside the scope of employment unless, B. Plaintiffs Recovery vs. P & A - M & S are jointly & severally laible to 3rd 1. Indemnification - If Agent is sued but was acting within the scope of
employment, Agent can seek indemnity from employer or principle.

2. Release only parties specifically released by the plaintiff will be released C. Principles Own Liability Negligent training of Servant, or Negligent Supervision,
or Negligent hiring. ________________________________________________________________________

TEXAS GENERAL PARTNERSHIPS

VI. FORMATION OF PARTNERSHIPS association of 2+ people to run a business for
profit

A. LOOK FOR THE FOLLOWING INDICIAS 1. Intent or Agreement always consider partnership by estoppel
2. Control 3. Capital Distribution 4. Sharing in Profits a. b. profits. Sharing in gross receipts is NOT sharing in profits. Sharing in repayment of a debt, rents, wages is NOT sharing in

5. Written Agreement NOT required, unless the partnership terms are within
the SOF.

B. Partnership by Estoppel If no formal partnership has been formed, the parties may
still be liable as if they are partners in order to protect reasonable reliance by 3rd parties. Key: Look at the transaction from 3rd partys perspective.

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VII. Property Interests

A. PARTNERSHIP PROPERTY

1. Property acquired in the name of the Partnership 2. Property acquired with PS funds is presumed to be PS property. 3. NON-Partnership Property - Property acquired in the name of one or more
partners without using PS funds is presumed to belong to the partners individually

B. RIGHTS IN PARTNERSHIP PROPERTY - Since Partnership owns the property,

the Partnership has unrestricted rights in how it uses partnership property. So a Partnership can freely encumber its property interest as collateral for a loan.

1. Partners rights in Partnership Property A partner may use partnership

property ONLY FOR PARTNERSHIP PURPOSES

2. Transferring Rights of Partnership Property a. For Partnership Purposes b. For Personal Reasons - NO PARTNER has the right to transfer the rights of
partnership property for personal reasons.

3. Transferring Partnership Interests its personal to the partner -Assignable,

Deviseable, or Transferrable to 3rd Parties non-partners BUT DOES NOT confer management rights or any other attributes of ownership.

VIII. RELATIONS AMONG PARTNERS

A. THE PARTNERSHIP AGREEMENT - outlines the duties the partners owe to one
another and the profit sharing plan.

B. STATUTE DEFAULT RULE TRPA When PA is silent follow TRPA 1. Sharing Profits and Losses Equally among partners NO MATTER how much
capital partners put in.

2. Limiting 3rd Parties Recover - Any agreement limiting the liability of a partner
is VOID.

C. REMUNERATION/COMPENSATION Partners are NOT entitled to

remuneration or compensation for the work they did. They are only entitled to share in partnership profits. D. MANAGEMENT RIGHTS & VOTING

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1. Ordinary Course of Business decided by % of interest owned by each partner

and NOT by the number of partners in the partnership.

2. Extraordinary Decisions decided by the majority of partners. E. INDEMNIFICATION & INTERESTS Individual Partners are entitled to
indemnification for PARTNERSHIP PURPOSES.

F. FIDUCIARY DUTIES
1. 2. 3. 4. Care Loyalty cant take advantage of a business opportunity Good Faith Full Disclosure

G. Admission of New Partners

1. Admittance - Unanimous consent by all Partners is NECESSARY 2. Liabilities New partners are personally liable for debts incurred after admission
BUT NOT pre-existing obligations!!

IX. RELATIONS BETWEEN PARTNERS AND 3RD PARTIES

A. APPLY BASIC AGENCY PRINCIPLES

1. Actual Authority - Express Partnership expressly authorizes or commands

Partner to act on Partnerships behalf.

2. Apparent Authority Partnership leads 3rd party to believe that Partner has
authority to act on behalf of PS to run the ordinary course of businesseven though agent may not have actual authority. a. b. c. Partners Title The way the Partnership has conducted business in the past; or The way similar firms in the area conduct business

Key: Look at the transaction from the perspective of 3rd parties

B. IF NO AUTHORITY ALWAYS consider Ratification and Adoption X. PARTNERS CONVEYANCE OF PARTNERSHIPS REAL PROPERTY A. NO ACTUAL AUTHORITY TO SELL Any transfer of a partnerships real
property to a 3rd Party is voidable w/o actual authority to sell

13 B. TRANSFER FROM 3RD PARTY TO 4TH PARTY (BFP) The transfer cannot be
voided.

XI. LIABILITY FOR PARTNERS & PARTNERSHIP

A. The Partnership itself is liable for all breaches of K (through agency principles)
and for torts (through respondeat superior). Partnership is also liable for losses occurring in the ordinary course of business and misapplied by a partner committing fraud. But the partnership can seek indemnification from the fraudulent partners. Key: The plaintiff must exhaust its remedies and resources from the Partnership before he recovers from the Partners joint & severally.

B. Liability of Partners: Joint & Several in Tort and K, but entitled to indemnification
& contribution from the PS.

XII.

WITHDRAWAL OF A PARTNER
A. WITHDRAWN PARTNERS LIABILITY 1. Liable to existing creditors

2. Liable to subsequent creditors who reasonable believed she was then a partner &
were unaware of the withdrawa.- Exposure lasts for 2 years

3. Liable to Other Partners if Withdrawal was Wrongful theres liability based on

breach of the Partnership Agreement.

B. APPARENT AUTHORITY LINGERS A withdrawn partner may have apparent

authority to bind the PS for 1 year after withdrawal if the 3rd party who was unaware of the partners withdrawal, but the The Partnership can seek indemnification from the withdrawn partner because she has no actual authority to bind Partnership. To avoid this problem altogether - The PS can protect itself by notifying potential creditors of the withdrawal.

C. WINDING UP A PARTNERSHIP 1. Apparent Authority Lingers A partner may continue to have apparent authority to
bind the PS even after an event requiring winding up has occurred, even on a new business. Therefore 3rd can sue PS and partners are JSL. But if partner did not have notice of the event of winding-up, then he will not have to indemnify anyone for the loss. Notice Notice to potential creditors will extinguish apparent authority.

2. Distribution of Assets Order a. Liabilities & Creditors pay first

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(1) Partners who are creditors paid first (2) Just creditors paid second

b. Partners pay seconddepending on how much is in their capital accounts

(contributions + profits losses). A partnership account in the red means that the partner is liable to partnership for his losses done in the ordinary course of business.

3. Insolvency of Partnership - Partnership Assets insufficient to Cover Liabilities

a. Pay all creditors pro-rata b. Remainder of Debt not paid The losses are shared proportionately among the partners depending on their capital accounts (contribution + profits).

c. Priority Rules Creditors of the Partnership have priority over creditors of

partners.

XIII. LIMITED LIABILITY PARTNERSHIPS

A. TORT LIABILITY 1. Partner is NOT liable for torts committed by other partners

2. LLP is vicariously liable for the torts within the scope of the business B. CONTRACT LIABILITY main advantage - Broad Shield Partners are NOT
JSL on LLP Kontracts.Main feature of LLP. Only the LLP is liable.

XIV. LIMITED PARTNERSHIPS (L.P., Ltd.) A. LIABILITY OF LIMITED PARTNERS All LPs require at least 1 GP and 1 LP. 1. The general partner Liability - JS-Liable and personally liable on partnership
Ks and torts.

2. Liability of Limited Partner - limited by their capital contribution and

investment, unless the EXCEPTIONS

a. Crossing the Control Line - Reliance Test (1) If the Limited Partner leads 3rd person to reasonably believe that hes a
general partner. actively participating in the day to day functions of the Partnership.

(2) If Limited Partner knowingly lets his name be included in the L.P.s
(Kwamu & Meyrat L.P.)

b. Safe Harbors Guaranteeing a note, giving advice no liability attaches.

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B. OBLIGATIONS

1. Limited Partners A promise to contribute is enforceable only if the promise is

IN WRITING.

2. General Partners Doesnt have to put any money in the partnership, or have
any assets from his own pockets to pay off potential liabilities.

3. Liability The LP, Ltd. is liable on Ks & torts under agency principles. 4. TAX not taxed as an entity XV. LIMITED LIABILITY COMPANIES A. Formation: Like a corporation
1. No contribution required B. Management: 1. LIMITED LIABILITY except in Piercing the Corp. Veil cases 2. EQUAL MANAGEMENT RIGHTS Just split stock equally 3. Investing Partners Management unlike an LP, they can manage the day to day functions if the bylaws and articles allow them to without subjecting themselves to liability like an LP.

4. TAX income gets 2 (1) the corp. (2) the dividend

5. Transferability of Interest need consent of other partners

XVI. ASSUMED NAME CERTIFICATE Failure to file a n assumed name

certificate does not impair the validity of Ks, but it bars the partnership from bringing suit in TX. Ct. in which the PS used the assumed name.