Business Law 5 parts

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29.4 Right of Limited Partners to Bring Derivative Actions Like shareholders of a corporation (see chapter 30 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch30#ch30) ), limited partners in a partnership have the right to bring derivative actions on behalf of the limited partnership if the general partners refuse to do so. A derivative action is an action by a limited partner to enforce a partnership cause of action against third parties that the general partners are unwilling to enforce themselves. ULPA provides that if a derivative action by a limited partner on behalf of the partnership succeeds, a court has the power to award reasonable costs, including attorney’s fees, to the limited partner bringing the lawsuit on the partnership’s behalf. Any recovered amount beyond the costs of litigating the case is then turned over to the partnership. A derivative action can be brought only by a limited partner (while still a partner) for any action that accrued after he or she was admitted as a partner to the limited partnership. In order to bring a derivative action, the limited partner must show that the general partners have been unwilling to bring the action themselves on behalf of the limited partnership and that they are unlikely to do so on their own.

The following case excerpts exemplify the circumstances under which a derivative lawsuit might arise.

Cases to Consider: Day et al. v. Stascavage et al.

Day et al. v. Stascavage et al., Colorado Court of Appeals

The entity at issue is HMC, Ltd., a Colorado limited partnership formed to invest in real property in the Gar�ield County Town of Parachute. Investors hoped a referendum would allow gambling in the nearby City of Ri�le. But the referendum failed. Some of the partnership’s properties were sold in prior transactions that are not challenged. Two limited partners, Judith Day and Bryan Barnes, brought the derivative claims against general partners Hayden C. W. Rader, Michael P. Stascavage, and Chalmers I. Morse. The claims involve the sale of the remaining partnership lots (the property) to general partner Rader. The contract was signed in November 2005, and the sale closed in September 2007. Rader paid $258,000 and also assumed obligations of $66,000.

The limited partners alleged that the sale price was far below the property’s fair market value. Though Gar�ield County had assessed the property at $258,000, the limited partners alleged this tax assessment was formulaically discounted and based on outdated information. They alleged the property was worth well in excess of $1 million and perhaps as much as $4 million. The limited partners asserted several derivative claims, including breaches of �iduciary duty and civil theft. Each veri�ied claim alleged that the property had been sold to Rader for less than its fair market value. The limited partners alleged it would be "futile" to demand that the general partners pursue the claims, as "it is the wrongdoing of the general partners which is at issue."

The general partners responded by agreeing to a court order appointing an SLC (Special Litigation Committee). Ultimately, a Vail, Colorado, lawyer served as the SLC to decide whether the partnership should pursue the claims asserted in the derivative lawsuit. The lawyer’s investigation spanned ten weeks, totaling some thirty hours, and yielded a fourteen-page report recommending that the claims be dismissed. Relying on the SLC report, defendants moved to dismiss the derivative claims. To respond to that motion, the limited partners were allowed to depose the SLC. The court concluded the attorney SLC (1) was "independent and disinterested" and (2) followed "appropriate" investigative procedures. Accordingly, as the SLC had recommended, the court dismissed the limited partners’ derivative claims. The court issued a C.R.C.P. 54(b) certi�ication allowing immediate appeal.

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Derivative actions provide shareholders an equitable remedy "to protect the interests of the corporation from the misfeasance and malfeasance of ‘faithless directors and managers.’" [citations omitted]. Derivative suits raise two distinct issues: "�irst, the plaintiff’s right to sue on behalf of the [entity] and, second, the merits of the [entity] claim itself." The �irst is for the court to decide, while the second is for a jury if the claims are otherwise jury-triable. There are prerequisites—including making a demand (or showing futility of a demand) on directors or general partners—to such actions. The limited partners here indisputably complied with these procedures, and no one challenged their allegation regarding the futility of a demand. The question in this case is whether the SLC’s report required dismissal of the derivative claims. Under Colorado law, which follows the New York rather than Delaware approach, a "court may not second-guess [the SLC’s] business judgment in deciding not to pursue the derivative litigation." But before deferring to the SLC, a court must determine that the SLC "was independent, and did employ reasonable procedures in his or her analysis." As our supreme court has explained, "[u]nlike evaluation of a business judgment, trial courts are well equipped to evaluate the methodology and procedures best suited to conduct such an investigation." [citation omitted]

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The issue thus is whether the SLC’s investigation was suf�iciently thorough to support his or her conclusion. The undisputed facts of this case show the investigation was legally inadequate. The "cornerstone of a court’s review of the SLC’s procedures" is "the thoroughness of that committee’s investigation." Relevant factors include "the length and scope of the investigation, the use of experts, the corporation or defendant’s involvement, and the adequacy and reliability of information supplied to the committee." Courts will not defer to an SLC whose "‘investigation lacked the thoroughness which is necessary for a truly objective and meaningful recommendation.’" Here, the SLC was charged with evaluating the essential fairness of a self-dealing transaction between the partnership and a general partner. Under Colorado

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law, such a transaction is not categorically precluded, but it must be "demonstrate[d] that the transaction took place in good faith, was fair to the [entity], and was accompanied by full disclosure."

There is no dispute that the critical issue in evaluating whether pursuing the derivative claims was in the partnership’s best interests was the value of the partnership property sold in the insider transaction. The derivative claims alleged that the general partners had sold the property to one of their own for much less than the property’s fair market value. The SLC’s report recognized that the focus should be on the transaction’s "fairness" and "whether full value was received in the transaction." And the district court recognized "[t]he key factor" in evaluating fairness was "the price" at which the property was sold.

Despite spending some thirty hours (including general legal research) and writing a fourteen-page report (including general legal discussion), the SLC conducted no independent investigation into this critical point. In a case that cried out for an expert appraisal of the property’s value, the SLC never sought an appraisal.

The district court wrote that the SLC "did not have the Property appraised because such an appraisal would re�lect today’s value, and not the value . . . in November 2005" when two general partners agreed to sell it to the other. That reasoning ignores the availability of "retrospective appraisals," which are necessary and appropriate in a variety of legal contexts. ("Retrospective appraisals [effective date of the appraisal prior to the date of the report] may be required for property tax matters, estate or inheritance tax matters, condemnation proceedings, suits to recover damages, and similar situations."); see generally Hice v. Lott, 223 P.3d 139, 144 (Colo. App. 2009) (noting that Colorado’s "Division of Real Estate adopted USPAP [Uniform Standards of Professional Appraisal Practice] as ‘the generally accepted standards of professional appraisal practice’") (quoting regulation). Here, for example, the limited partners presented the SLC with a historical market analysis of allegedly comparable land. While the SLC was not required to accept that analysis, he could not decline to investigate the property’s fair market value at the time of the insider sale.

The SLC simply accepted, without any independent scrutiny or any expert opinion, the general partners’ reliance on the tax assessment. The limited partners, however, presented the SLC with information that this assessed value was signi�icantly lower than the property’s actual fair market value because it was outdated and based on a statutory formula arti�icially discounting the value of vacant land. Again, the SLC was not required to credit those contentions. But neither could he blithely accept the tax assessment as a fair appraisal of then-current market value.

The SLC admittedly made no effort to investigate whether the county’s tax assessment accurately depicted the property’s fair market value at the time of sale. He was unfamiliar with a possible statutory discounting formula, and he never contacted the Gar�ield County Assessor’s Of�ice to investigate this issue.

It is not our role to consider whether in fact the property was worth more than general partner Rader paid for it. But "courts are well equipped to evaluate the methodology and procedures best suited" to an SLC investigation. Plainly, the SLC’s investigation was procedurally inadequate to support any independent determination of the critical issue whether a general partner bought the property at a price that was fair to the partnership as a whole.

***

Because the SLC did not employ reasonable investigative procedures, the SLC’s conclusion that the partnership should not pursue the derivative claims is not entitled to deference. Accordingly, the limited partners’ derivative suit may now proceed. 13 Fletcher, supra, §  6019.50, at 250 (result of de�icient SLC investigation is that "[t]he shareholder-plaintiff may then resume immediate control of the litigation with a view toward prosecuting it to a conclusion regardless of the position taken by the committee appointed by the board"); see also Janssen v. Best & Flanagan, 662 N.W.2d 876, 889 (Minn. 2003) ("the derivative suit proceeds on its merits" after a court concludes that an SLC investigation was inadequate) (citing cases). The order dismissing the derivative claims is reversed, and the case is remanded for further proceedings consistent with this opinion.

Read the full text of the case here (http://www.courts.state.co.us/Courts/Court_of_Appeals/opinion/2010/09CA2488.pdf) .

Questions to Consider

1. Why did the limited partners have to resort to a derivative action in this case?

2. What are the objectives of a Special Litigation Committee (SLC)?

3. Who won the case? What happens next?

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Key Terms

Click on each key term to see the de�inition.

assignment of a partnership interest (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Transfer of the right to receive pro�its from a partnership to an outside third party. 

certi�icate of limited partnership (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The initial paperwork �iled with the secretary of state to form a limited partnership.

certi�icate of registration (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The form that a foreign limited partnership must �ile in order to legally do business in the United States. In some states, this is also the name given to the form that must be �iled by a domestic limited liability partnership.

derivative action (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A legal action brought by a limited partner to enforce a partnership cause against third parties that the general partners are unwilling to enforce themselves.

domestic limited partnership (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A partnership is domesticated in the state where it �iled its original certi�icate of limited partnership.

foreign limited partnership (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A domesticated limited partnership that is doing business in a state or state other than the one it was organized in.

general partners (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Co-owners of the partnership who owe the business the �iduciary duties of agents and who share in the management and the pro�its of the business, as well as in its debts.

limited partners (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Co-owners of a partnership who share only in the pro�its of the business and are liable for its debts only up to the limit of their capital investment. They are prohibited from participating in the control of the business.

limited partnership (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A special type of partnership that comprises both general and limited partners.

Special Litigation Committee (SLC) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Legal experts that help decide whether a partnership should pursue the claims asserted in a derivative lawsuit.

Uniform Limited Partnership Act (original act, 1916; amended in 1976, 1985, and 2001) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The law governing limited partnerships promulgated by the National Conference of Commissioners of Uniform State Laws. The 2001 enactment, which combined the ULPA and its revised version (RULPA), has been adopted by 18 states and the District of Columbia.

Chapter 29 Flashcards

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Critical Thinking and Discussion Questions

1. How is a limited partnership formed? What information must be contained in the certi�icate of limited partnership?

2. What is the basic difference between a limited partner and a general partner in a partnership?

3. In most states, may a corporation be a limited or general partner?

4. If the partnership agreement is silent as to the withdrawal of members, what is the effect of a general partner withdrawing from the partnership? What is the effect of a limited partner withdrawing?

5. De�ine foreign and domestic limited partnerships.

6. May foreign limited partnerships do business in states other than the one they were organized in? If so, do they need to follow any speci�ic procedures before they can do business?

7. Tom, Dick, and Harriet start a new tax preparation and �inancial planning business together. Their state does not require any special licensing for such businesses, and, since the three partners are good friends, they do not draw up any speci�ic agreement relating to the business. They do, however, verbally agree that all pro�its of the business are to be shared equally, and so are all losses, except that Harriet will be responsible only up to the extent of her capital contribution in the business. They further agree that Harriet will not have any direct role in managing the business but rather will be an investor. a. What form of business organization do the friends have? Explain. b. Is Harriet a limited partner, since that is obviously the role that the parties intended for her to play in the business? c. Assume that Harriet had invested $50,000 in the business, while Tom and Dick had invested $5,000 each in the venture. What is each party’s potential liability should the business fail?

8. Dominick, Jerry, and Joan are partners in a general partnership involving a lucrative used automobile dealership in northern Pennsylvania. Because of the success of their business, they want to expand their operations to New York and New Jersey, opening two new dealerships in those states. a. Can they reorganize the general partnership into a limited partnership to attract new investors? b. What requirements would have to be met by the limited partnership before it could start doing business in New York or New Jersey?

Transfer of the right to receive profits from a partnership to an outside third party.

C l i c k c a rd t o s e e t e r m 👆

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Chapter 30

Corporations Like the limited partnership, the corporate form of business organization owes its existence to statutory law. New York was the �irst state to enact a corporate statute, in 1811, with other states following soon thereafter. Today, every state has enacted a business corporation statute, with about two-thirds of the states basing their business corporation law on the Model Business Corporation Act (MBCA) of 1950. This chapter will discuss the unique character of the corporation, types of corporations, how to form and dissolve a corporation, and how to manage this type of business.

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30.1 The Corporation as an Entity Unlike sole proprietorships and traditional common law general partnerships (both discussed in Chapter 28 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch28#ch28) ), a corporation is viewed as a separate entity from its owners. The law grants a corporation status as an arti�icial being much like a person for most purposes. This means that the corporation has certain rights and responsibilities not traditionally enjoyed by other business organizations. As an arti�icial being, a corporation has the right to own property in its own name, borrow or lend money, and sue and be sued, and it is entitled to the protection of most laws, the same as natural persons. On the other hand, like a natural person, a corporation must pay taxes (although at a lesser rate than individuals) and can be found guilty of crimes for which the punishment is a �ine. In addition, a corporation can be set up to enjoy perpetual existence, unlike sole proprietorships and partnerships, which may be dissolved upon the death or incapacity of the sole proprietor or of a general partner.

The limited liability offered by a corporation to its owners is its greatest appeal. Because a corporation is deemed to be an entity separate from its owners, the owners of a corporation (its stockholders) are not personally liable for corporate debts beyond their investment in the company. All that a shareholder risks in purchasing a share of stock is the money paid for its purchase. On the other hand, stockholders pay a premium for this protection. Corporations pay taxes in their own right, including federal income taxes as well as state income taxes, where applicable. This means that the pro�its of the corporation are subject to double taxation: The corporation pays income taxes on corporate pro�its, and then the shareholders pay personal income taxes on corporate pro�its distributed to them as dividends. Some maintain that the taxation is in fact "triple" because shareholders also pay taxes on capital gains realized from the sale of their stock.

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30.2 Classi�ication of Corporations Corporations are commonly classi�ied in accordance with their purpose, the nature of their activities, and their ownership.

Public and Private Corporations

The corporate form serves both private and public interests equally well. Public corporations are organized by federal, state, or local governments in order to carry out necessary public services. Municipalities, such as cities and towns, are often organized as public corporations, as are companies entrusted with the administration of public services. Private corporations, on the other hand, are organized by private individuals to carry out private business.

For-Profit and Nonprofit Corporations

Corporations can be created for pro�it and nonpro�it purposes. Public corporations are by nature nonpro�it entities, since their purpose is not to make money but rather to advance the public good in some way. Private corporations, on the other hand, can be either for-pro�it or nonpro�it, depending on their purpose. A nonpro�it corporation is one that is organized for the purpose of achieving some artistic, humanitarian, or philanthropic purpose or rendering a public service, as opposed to a for-pro�it corporation, or a traditional business, which is organized to make a pro�it. Like Chapter S corporations (discussed below), nonpro�it corporations are exempt from having to pay federal income taxes (as well as state and local income taxes in states that assess these).

Domestic, Foreign, and Alien Corporations

Corporations are classi�ied as domestic, foreign, or alien depending on where they were organized and where they do business. Like limited partnerships, corporations are deemed to be domestic corporations in one state only: where they originally �iled their Articles of Incorporation. In all other states, they are foreign corporations—once they �ile the correct paperwork, that is. Corporations organized under the laws of another country are considered alien corporations when they do business anywhere in the United States. As is true of limited partnerships, corporations wishing to transact business in a state other than that of their incorporation must register with the secretary of state in each such state. The address of a registered of�ice in the state and the name and address of a registered agent of the corporation for the state must be provided to the secretary of state as part of the registration process and accompanied by the appropriate fee.

Closely Held and Publicly Traded Corporations

A closely held corporation is one whose shares are not traded to the general public in any stock exchange. Rather, the stock is usually only available to the owners, who may be a small group of people or a family. Such corporations are usually (but not always) small companies owned by a few investors. A publicly traded company, on the other hand, is one whose shares are traded in any stock exchange.

Professional Corporations

Professional corporations (PCs) are for-pro�it corporations organized to provide a professional service. Physicians, lawyers, architects, accountants, and engineers are but a few of the professions whose members commonly form PCs. A PC must have the words Professional Corporation (or the letters PC) following the corporate name instead of the normal words or abbreviations appended to corporate names (e.g., Corp., Inc., Co., or Ltd.).

Chapter S (Subchapter S) Corporations

The greatest disadvantage of organizing a business as a corporation is the double taxation to which corporate pro�its are subject. The Internal Revenue Code (IRC), however, grants a tax exemption to small business corporations, which can qualify as S corporations, also called subchapter S corporations. This is because the S corporation rules are contained in Subchapter S of Chapter 1 of the Internal Revenue Code (IRC).

To qualify, the business must be "a small business corporation for which an election under section 1362(a) is in effect for such year." Under IRC § 1361(b) (1), in order to qualify as an S corporation and enjoy the bene�it of tax exemption, a small business may not:

Have more than 100 shareholders;

Have as a shareholder a person (other than an estate, a trust described in subsection (c)(2), or an organization described in subsection (c)(6)) who is not an individual;

Have a nonresident alien as a shareholder; and

Have more than one class of stock (however, voting and nonvoting classi�ications within a class of stock are permitted).

Financial institutions and insurance companies are generally ineligible for S corporation status. S corporations are permitted to have wholly owned subsidiaries as long as the corporation owns 100% of the subsidiary S corporation’s stock.

Undistributed corporate income must be treated as taxable income to the shareholders. (Such income is not treated as taxable income in a regular C corporation until it is actually distributed to shareholders, such as by cash dividends.) Shareholders are allowed to deduct net operating losses from their gross income, whereas shareholders in a standard corporation may not take such deductions.

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The purpose of Chapter S incorporation is to allow relatively small, closely held businesses that would otherwise be organized as partnerships or limited partnerships to take advantage of the corporate form of business organization without being subjected to double taxation or to the formalities of corporate governance, such as annual meetings and boards of directors. Since S corporations were �irst recognized in 1958, the trend has been to expand the eligibility requirements, at least as related to the maximum number of allowed shareholders, which has been incrementally increased during the past two decades from 15 to 100.

Some states require corporations to �ile for Chapter S treatment with the state as well as with the federal government. After all, federal tax-exempt status does not automatically guarantee that a given state or city may not tax the corporation or apply different standards for income tax exemption under state and local law.

Chapter C Corporations

Corporations subject to taxation that do not elect S corporation status are referred to as Chapter C corporations under IRC § 1361(a)(2). A Chapter C corporation (or C corporation) is, broadly speaking, a large, publicly traded corporation that may have an unlimited number of shareholders, both domestic and foreign.

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30.3 Corporate Formation Corporations are formed in accordance with their state’s business corporation act. Therefore, corporations can be formed only by complying with the relevant state statute that makes the corporate form of business organization possible. To begin a corporation, someone must �irst have an idea for a service or product. The people who form the initial group who aim to create a new corporation are called the incorporators (or sometimes the promoters) because they are usually the founders of the company and put up or help raise the money to begin the venture.

Preincorporation Activities

One way in which promoters raise money is through stock subscriptions. These are promises from third parties to purchase stock when the corporation comes into existence and, as such, are contracts (see Unit III (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/unit03#unit03) , Contracts). Because promoters are acting on behalf of a nonexistent entity when they sell subscriptions, they are not held to be agents of the corporation; a corporation that is not yet in existence cannot be a principal and, thus, cannot consent to the agency (see Chapter 27 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch27#ch27) for concepts of principal–agency law). What this means is that promoters are personally liable for any contracts they enter into on the future corporation’s behalf before the corporation comes into existence. In most instances, this does not present a problem for promoters because the new corporation will ratify the contracts, thereby taking the promoters off the hook with regard to liability.

Nevertheless, there is an element of risk for promoters when they carry out their preincorporation duties because there is no guarantee that the board of directors of the company will ratify the promoters’ contracts on the corporation’s behalf. In fact, the corporation may never even be formed. In such cases, promoters can �ind themselves in the very uncomfortable position of retaining personal liability for contracts entered into on the corporation’s behalf and monies extended on behalf of the corporation. They put themselves at risk as they fronted money for such necessary preincorporation activities as hiring lawyers, accountants, and other professionals to assist in getting the corporation off the ground; paying �iling fees; and arranging commercial leases or employment contracts.

Once the promoters’ initial groundwork for the corporation is completed, the promoters must select one or more persons to act as incorporators (alternatively, the promoters can act as incorporators themselves).

Articles of Incorporation

The incorporators are responsible for writing the Articles of Incorporation. This document forms the skeleton of the corporation by clearly outlining the following:

The name for the corporation. Incorporators must meet two requirements in selecting a corporate name: 1. With few exceptions, the name may not currently be in use by another corporation in the same state. 2. The corporate name must include one of the following words in its title: corporation, incorporated, company, limited, or one of the following abbreviations for such words: Corp., Inc., Co., or Ltd.) (The abbreviation Ltd. is more commonly used in Great Britain and Canada; in those U.S. states that allow such an abbreviation, it means Inc.)

The number of shares of stock that the corporation is authorized to issue;

The address of the corporation’s initial registered of�ice and its initial registered agent at that of�ice; and

The name and address of each incorporator.

In addition to the above mandatory minimum information, Articles of Incorporation may contain some or all of the following types of information:

The names and addresses of the individuals who are to serve as the initial directors;

Provisions regarding the purpose of the corporation, its management, and its regulation;

Limits on powers of the corporation or its board of directors and its shareholders;

The par value of its authorized shares or classes of shares; and

The imposition of personal liability on shareholders for the debts of the corporation.

Classes of shares refers to the types of shares of stocks that a corporation issues. For example, most corporations issue both common and preferred stock. Preferred stock gives its owners priority with regard to the distribution of dividends and a more elevated status if the corporation goes through bankruptcy. As you can see, the Articles of Incorporation have similar requirements to the certi�icate of limited partnership (see Chapter 29 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch29#ch29) ). The required information serves a similar purpose: to give notice to the public at large of the existence of the corporation and to provide an agent on whom process can be served by anyone seeking to initiate legal action against the corporation.

The incorporators next send the Articles of Incorporation to the secretary of state’s of�ice in the state in which they wish to form their corporation. This is the state where the corporation is domesticated, or initially formed. The secretary of state examines the Articles and, if all is in order and accompanied by the appropriate �iling fee, stamps and �iles them. At that moment, the corporation "comes into existence." A stamped copy of the Articles of Incorporation is

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then returned to the corporate of�ice, along with a stamped receipt for the paid �iling fee. The exact time of the corporation coming into existence is signi�icant because it is only after it is in existence that it can have liability for corporate acts.

If the corporation’s directors are named in the Articles of Incorporation, an organizational meeting is called by a majority of the directors. The primary purpose of this meeting is the appointment of corporate of�icers and adoption of the corporate bylaws—the internal rules governing the operation of the corporation. During this �irst meeting, the directors also typically ratify any contracts entered into on the corporation’s behalf by the promoters, thereby relieving them of personal liability. In the event that the directors are not listed in the articles of incorporation, the majority of the incorporators call the organizational meeting. At this meeting, the �irst order of business is the appointment of directors by the incorporators. Once appointed, the directors appoint the corporate of�icers, adopt the corporate bylaws, and ratify the incorporators’ preincorporation contracts on the corporation’s behalf.

Defective Incorporation

Given all the rules and paperwork surrounding the formation of a corporation, it is not unusual that mistakes are made. Sometimes, there is a defect in the Articles of Incorporation submitted for �iling, for example. The problem could be something as simple as a typographical error or something as serious as fraud. If the corporation is correctly formed with no mistakes in the paperwork, then we say it is a de jure corporation, or a corporation by virtue of law. Sometimes a good-faith effort is made to comply with the law, but necessary information is negligently omitted from the Articles of Incorporation, such as an incorporator’s address. The business enterprise will be considered a de facto corporation, or a corporation in fact, and treated as a valid corporation until such errors or omissions are legally corrected.

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30.4 Management of the Corporation The day-to-day operation of a corporation is carried out by corporate of�icers. The of�icers are elected by the board of directors, which is elected by the shareholders. Thus, one may argue that the shareholders hold the power, since ultimately they decide who is elected to the board. Figure 30.1 illustrates the management structure of the corporation.

Figure 30.1: Corporate management structure

The management structure of a corporation involves three groups, the shareholders, the corporate of�icers, and the board of directors. Shareholders are those who have purchased shares of stock. This group elects the board of directors, who oversee the corporation and set policy. The board of directors appoint corporate of�icers, who are responsible for running the day-to- day operations of the business.

Corporate Directors

Corporate of�icers carry out the day-to-day decisions of the corporation, but corporate directors are in charge of policy decisions. Should the corporation expand? Who should be the next president? Does the current plant in Indiana need to be re�itted, or should a new one be built? Additionally, the board appoints the corporate of�icers, who run the business and who determine the fate of the business. Depending on how they tackle these questions, the corporation will be pro�itable or not. If it is pro�itable, the shareholders will most likely be pleased and retain the members by voting them on to successive terms; if not, they will be voted out.

By law, corporate directors have a highly re�ined legal duty called a �iduciary responsibility (see Chapters 9 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch09#ch09) and 27 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch27#ch27) for more on this topic) to the corporation they serve. As such, they must exercise their responsibilities in good faith and use reasonable care in their efforts to further the best interest of the corporation. Directors are personally liable to the corporation if they breach these duties.

In addition to having the right to vote for directors at the annual shareholders’ meetings, shareholders can remove directors by calling a special meeting for that purpose at any time and then voting them out of of�ice. The Articles of Incorporation can stipulate that removal be only for cause; however, if the Articles of Incorporation are silent as to removal of directors, then they can be removed with or without cause (e.g., with or without a valid reason).

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The term of the �irst board of directors named in the Articles of Incorporation or by the incorporators expires at the �irst shareholders’ meeting. After this initial term, the Articles of Incorporation can provide for staggered terms for board of directors members, such as two or three staggered groups that are as nearly equal in size as possible. If such a scheme is selected, the board members in the �irst group serve for one year, the members in the second serve for two years, and the third group serves for three years.

The board of directors of a corporation meets a few times a year to consider and vote on important policy decisions. The meetings may involve experts and corporate of�icers who meet with the directors and provide information on a speci�ic topic. In this way, members of the board can be informed on matters. The board then votes, and an af�irmative vote becomes an of�icial action recorded in the corporate minutes. One question that arises is how informed board members have to be before they vote. The law holds them to a standard known as the "business judgment rule," which states that boards must make their decisions on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company. Failure to come up to this standard may result in individual liability for the directors.

Corporate Officers

Corporate of�icers are appointed by the board of directors and serve at the pleasure of the board. The speci�ic duties of corporate of�icers can be set out in the corporate bylaws or prescribed by the board of directors. The board of directors, acting in a manner consistent with the corporate bylaws, can also appoint an of�icer to prescribe the duties of other of�icers. Like directors, of�icers serve in a �iduciary capacity: They must exercise their responsibilities in good faith, using reasonable care, and make a good-faith effort to further the best interests of the corporation.

The precise number and titles of corporate of�icers can be spelled out in the corporate bylaws, but every corporation must have a secretary or the equivalent: an of�icer whose duty it is to keep records of directors’ and shareholders’ meetings and to authenticate records of the corporation. A single person can act in various capacities as an of�icer, so it is possible to have one of�icer who acts as both president and secretary of the corporation. Some states, though, require there to be at least two corporate of�icers in every corporation (e.g., a president and a secretary) even if a single shareholder owns all the corporation’s stock, as in some closely held corporations.

Shareholders

The owners of a corporation are its shareholders. Each shareholder owns a part of the corporation equal to the number of shares owned divided by the total number of shares issued and outstanding. As an example, if a corporation has 1,000 shares issued and outstanding and a shareholder owns 100 of those shares, he or she would own a one-tenth interest in the corporation.

Even though they are the corporation’s owners, shareholders do not have the right to directly participate in the management of the company. Instead, they participate indirectly by voting for the board of directors at the annual shareholders’ meetings. The responsibility for managing the corporation falls to the directors, who in turn hire corporate of�icers to implement their policies and manage the day-to-day operations of the corporate enterprise.

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30.5 Special Types of Corporate Lawsuits This section will discuss two unique situations involving corporate lawsuits, derivative actions and piercing the corporate veil.

Derivative Actions

Directors and of�icers of a corporation have the responsibility to manage and further the interests of the corporations they serve. When shareholders believe that corporate actions have damaged the corporation, or when management refuses to enforce the rights of the corporation in civil proceedings against third parties, one or more shareholders can seek to bring a derivative action on behalf of the corporation to recover civil damages.

Before a shareholder can begin a derivative action on behalf of the corporation, the corporation must be given notice and the opportunity to entertain the shareholder’s demand. Under corporation law, 90 days are required to pass from the date that notice is given by the shareholder, or rejection of the demand by the corporation, before the derivative action can commence. If a corporation begins an inquiry into the allegations of the complaint, a court can stay the action for a time period it deems appropriate to allow the corporation to investigate and possibly address the substance of the complaint. If the derivative action continues and is successful, any proceeds obtained in the proceedings go to the corporation on whose behalf the suit was brought by the shareholder(s). For an example of how complex a derivative lawsuit involving a large multinational conglomerate is, see In re the Dow Chemical Company Derivative Litigation (http://courts.delaware.gov/opinions/download.aspx?ID=132000) (January 11, 2010).

After a derivative action �inishes, a court can order the corporation to reimburse the reasonable costs of the suit, including attorney’s fees, to the shareholder(s) who brought the derivative action if the proceedings result in a substantial bene�it to the corporation.

Corporate Organization & Operation

Click here (https://media.thuze.com/MediaService/MediaService.svc/constellation/book/AUBUS670.12.2/{pdfs}ch30.pdf)

for a pdf of this slideshow.

Piercing the Corporate Veil

If shareholders are to enjoy the limited liability offered by the corporate form of business organization, it is crucial that the separate entity status of the corporation be maintained. This means, for example, that shareholders are protected if there is a lawsuit against the corporation. There is, in effect, a shield protecting their personal assets; shareholders are liable up to the amount of their investment only.

Failure to comply with the formalities required of a corporation, however, can result in a court ignoring the corporate entity and holding its owners subject to unlimited personal liability for all corporate debt. A court will pierce the corporate veil in instances where it �inds that a corporation has been created to defraud creditors, where corporate funds or property are not kept separate from those of its shareholders, or when required formalities (such as keeping minutes of directors’ and shareholders’ meetings) have been ignored.

The following are excerpts from one of the most famous cases involving a request to pierce the corporate veil.

Cases to Consider: Walkovszky v. Carlton

Walkovszky v. Carlton, 18 N.Y.2d. 414 (N.Y. Ct. App. 1966)

This case involves what appears to be a rather common practice in the taxicab industry of vesting the ownership of a taxi �leet in many corporations, each owning only one or two cabs.

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The complaint alleges that the plaintiff was severely injured four years ago in New York City when he was run down by a taxicab owned by the defendant Seon Cab Corporation and negligently operated at the time by the defendant Marchese. The individual defendant, Carlton, is claimed to be a stockholder of 10 corporations, including Seon, each of which has but two cabs registered in its name, and it is implied that only the minimum automobile liability insurance required by law (in the amount of $10,000) is carried on any one cab. Although seemingly independent of one another, these corporations are alleged to be "operated as a single entity, unit and enterprise" with regard to �inancing, supplies, repairs, employees and garaging, and all are named as defendants. The plaintiff asserts that he is also entitled to hold their stockholders personally liable for the damages sought because the multiple corporate structure constitutes an unlawful attempt "to defraud members of the general public" who might be injured by the cabs.

***

The law permits the incorporation of a business for the very purpose of enabling its proprietors to escape personal liability but, manifestly, the privilege is not without its limits. Broadly speaking, the courts will disregard the corporate form, or, to use accepted terminology, "pierce the corporate veil," whenever necessary "to prevent fraud or to achieve equity." In determining whether liability should be extended to reach assets beyond those belonging to the corporation, we are guided, as Judge Cardozo noted, by "general rules of agency." In other words, whenever anyone uses control of the corporation to further his own rather than the corporation’s business, he will be liable for the corporation’s acts "upon the principle of respondeat superior applicable even where the agent is a natural person." Such liability, moreover, extends not only to the corporation’s commercial dealings but to its negligent acts as well.

In the Mangan case (247 App. Div. 853, mot. for lv. to app. den. 272 N.Y. 676, supra), the plaintiff was injured as a result of the negligent operation of a cab owned and operated by one of four corporations af�iliated with the defendant Terminal. Although the defendant was not a stockholder of any of the operating companies, both the defendant and the operating companies were owned, for the most part, by the same parties. The defendant’s name (Terminal) was conspicuously displayed on the sides of all of the taxis used in the enterprise and, in point of fact, the defendant actually serviced, inspected, repaired and dispatched them. These facts were deemed to provide suf�icient cause for piercing the corporate veil of the operating company—the nominal owner of the cab which injured the plaintiff—and holding the defendant liable. The operating companies were simply instrumentalities for carrying on the business of the defendant without imposing upon it �inancial and other liabilities incident to the actual ownership and operation of the cabs.

In the case before us, the plaintiff has explicitly alleged that none of the corporations "had a separate existence of their own" and, as indicated above, all are named as defendants. However, it is one thing to assert that a corporation is a fragment of a larger corporate combine which actually conducts the business. It is quite another to claim that the corporation is a "dummy" for its individual stockholders who are in reality carrying on the business in their personal capacities for purely personal rather than corporate ends. Either circumstance would justify treating the corporation as an agent and piercing the corporate veil to reach the principal but a different result would follow in each case. In the �irst, only a larger corporate entity would be held �inancially responsible while, in the other, the stockholder would be personally liable. Either the stockholder is conducting the business in his individual capacity or he is not. If he is, he will be liable; if he is not, then, it does not matter—insofar as his personal liability is concerned—that the enterprise is actually being carried on by a larger "enterprise entity."

***

The individual defendant is charged with having "organized, managed, dominated and controlled" a fragmented corporate entity but there are no allegations that he was conducting business in his individual capacity. Had the taxicab �leet been owned by a single corporation, it would be readily apparent that the plaintiff would face formidable barriers in attempting to establish personal liability on the part of the corporation’s stockholders. The fact that the �leet ownership has been deliberately split up among many corporations does not ease the plaintiff’s burden in that respect. The corporate form may not be disregarded merely because the assets of the corporation, together with the mandatory insurance coverage of the vehicle which struck the plaintiff, are insuf�icient to assure him the recovery sought. If Carlton were to be held individually liable on those facts alone, the decision would apply equally to the thousands of cabs which are owned by their individual drivers who conduct their businesses through corporations organized pursuant to section 401 of the Business Corporation Law and carry the minimum insurance required by subdivision 1 (par. [a]) of section 370 of the Vehicle and Traf�ic Law. These taxi owner- operators are entitled to form such corporations and we agree with the court at Special Term that, if the insurance coverage required by statute "is inadequate for the protection of the public, the remedy lies not with the courts but with the Legislature." It may very well be sound policy to require that certain corporations must take out liability insurance which will afford adequate compensation to their potential tort victims. However, the responsibility for imposing conditions on the privilege of incorporation has been committed by the Constitution to the Legislature (N.Y. Const., art. X, § 1) and it may not be fairly implied, from any statute, that the Legislature intended, without the slightest discussion or debate, to require of taxi corporations that they carry automobile liability insurance over and above that mandated by the Vehicle and Traf�ic Law.

While the complaint alleges that the separate corporations were undercapitalized and that their assets have been intermingled, it is barren of any "suf�iciently particular[ized] statements" that the defendant Carlton and his associates are actually doing business in their individual capacities, shuttling their personal funds in and out of the corporations "without regard to formality and to suit their immediate convenience." Such a "perversion of the privilege to do business in a corporate form" would justify imposing personal liability on the individual stockholders. Nothing of the sort has in fact been charged, and it cannot reasonably or logically be inferred from the happenstance that the business of Seon Cab Corporation may actually be carried on by a larger corporate entity composed of many corporations which, under general principles of agency, would be liable to each other’s creditors in contract and in tort.

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In point of fact, the principle relied upon in the complaint to sustain the imposition of personal liability is not agency but fraud. Such a cause of action cannot withstand analysis. If it is not fraudulent for the owner-operator of a single cab corporation to take out only the minimum required liability insurance, the enterprise does not become either illicit or fraudulent merely because it consists of many such corporations. The plaintiff’s injuries are the same regardless of whether the cab which strikes him is owned by a single corporation or part of a �leet with ownership fragmented among many corporations. Whatever rights he may be able to assert against parties other than the registered owner of the vehicle come into being not because he has been defrauded but because, under the principle of respondeat superior, he is entitled to hold the whole enterprise responsible for the acts of its agents.

In sum, then, the complaint falls short of adequately stating a cause of action against the defendant Carlton in his individual capacity.

The order of the Appellate Division should be reversed, with costs in this court and in the Appellate Division, the certi�ied question answered in the negative and the order of the Supreme Court, Richmond County, reinstated, with leave to serve an amended complaint.

Read the full text of the case here (http://www.courts.state.ny.us/reporter/archives/walkovszky_carlton.htm) .

Questions to Consider

1. Did the court decide to pierce the corporate veil?

2. What factors did the court say were necessary before the corporation lost its shield against personal liability?

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Key Terms

Click on each key term to see the de�inition.

alien corporation (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A corporation organized under the laws of another country that does business anywhere in the United States.

Articles of Incorporation (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The initial paperwork �iled by the incorporators with the secretary of state that, if approved, begins the corporation.

arti�icial being (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The concept that a corporation is a separate entity (separate from its owners) and can sue and be sued, borrow or lend money, etc., in the corporate name, much like a natural person.

board of directors (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The group of people that oversee a corporation and set policy. They are elected by the shareholders at the annual meeting.

business judgment rule (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A standard known for of�icers of a corporation, stating that boards of directors must make their decisions on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company. Failure to come up to this standard may result in individual liability for the directors.

bylaws (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The internal rules governing the operation of the corporation.

Chapter C corporation (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A corporation that can have unlimited shareholders, foreign or domestic.

Chapter S corporation (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A corporation with no more than 100 shareholders, all of whom are individuals, which the IRS exempts from paying federal corporate taxes but is treated as a partnership for federal tax purposes.

classes of shares (stock) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Corporate stock comprises several types, including common stock and preferred stock. Different classes of stock confer different voting rights on their owners.

closely held corporation (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Also known as a close corporation, a business entity whose shares are not traded to the general public in any stock exchange but that has a close-knit group of shareholders (or in some cases, only a single shareholder).

corporate of�icers (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The persons responsible for the day-to-day operation of a corporation who are appointed by the board of directors.

corporation (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

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A business entity that is separate and distinct from its owners, the shareholders. The law grants a corporation status as an arti�icial being, much like a person, in that it has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes.

de facto corporation (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A corporation in fact, and treated as a valid corporation.

de jure corporation (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A corporation properly formed by virtue of law.

derivative action (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A lawsuit brought by the shareholders of a corporation instead of the board of directors, whom the shareholders believe did not take proper and timely action.

distributions (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

In a Chapter C corporation, a distribution occurs when pro�its of the corporation are sent to the shareholders in the form of dividends.

dividends (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Pro�its divided equitably among stockholders.

domestic corporation (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A corporation operating only in the state in which it �iled its Articles of Incorporation.

double taxation (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The concept that corporations are taxed twice: �irst, when the corporation pays income taxes on corporate pro�its, and second, when the shareholders pay personal income taxes on corporate pro�its distributed to them as dividends.

for-pro�it corporation (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A traditional business that is organized for the purpose of returning a pro�it to the owners.

foreign corporation (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A corporation operating in states in which it did not �ile its original Articles of Incorporation. To become a foreign corporation, the business must �ile with the secretary of each state where it seeks to operate.

incorporators (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

People who form the initial group who aim to create a new business by making investments, selling stock subscriptions, and performing preincorporation activities at their own risk. Also known as promoters.

Model Business Corporation Act (MBCA) of 1950 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The basis of corporate law in most states, a model statute created by the American Bar Association.

nonpro�it corporation (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A corporation organized for the purpose of achieving some artistic, humanitarian, or philanthropic purpose or the rendering of some public service. By de�inition, all public corporations are nonpro�it.

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piercing the corporate veil (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

When a court allows a plaintiff to reach beyond the corporate assets and corporate immunity and allows the personal assets of the company owners or directors to be subject to a lawsuit, usually when there has been fraud in the formation of the corporation or other serious misconduct.

preferred stock (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A class of stock shares that gives its owners priority with regard to the distribution of dividends and a more elevated status if the corporation goes through bankruptcy.

private corporation (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A type of corporation organized by private individuals to carry out private business, either pro�it or nonpro�it, depending on its purpose.

professional corporation (PC) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A type of corporation that is for pro�it and organized to provide a professional service such as for physicians, lawyers, architects, accountants, and engineers.

promoters (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

See incorporators.

public corporation (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A type of corporation organized by the federal, state, or local government to carry out a necessary public service that is by nature nonpro�it.

publicly traded company (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A type of corporation whose shares are traded in any stock exchange.

registered agent (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The person designated by a corporation to receive service of process on behalf of the corporation.

secretary (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A corporate of�icer whose duty it is to keep records of directors’ and shareholders’ meetings and to authenticate records of the corporation.

shareholders (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The owners of a corporation whose interest in the corporation is represented by shares of stock. Shareholders exercise decision-making authority over the corporation at the annual meeting by electing members of the board of directors, rather than in the daily operations of the company.

stock subscription (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A contract in which the person agrees to buy shares of stock when the corporation comes into existence.

stockholder (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Person owning shares of stock in a corporation.

wholly owned subsidiary (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A company whose common stock is 100% owned by another company, commonly called the parent company.

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Chapter 30 Flashcards

Critical Thinking and Discussion Questions

1. What information must be contained in a corporation’s Articles of Incorporation?

2. Under the Model Business Corporation Act, when does a corporation’s existence begin?

3. De�ine the terms de jure corporation and de facto corporation.

4. Is a corporation responsible for the preincorporation contracts of its promoters once it comes into existence? Explain. Are promoters agents of the corporation? Explain.

5. What is the difference between a domestic, a foreign, and an alien corporation?

6. Under what circumstance might a court "pierce the corporate veil"?

7. Marlene, Charlene, and Phillip wish to start a band. They call their group MCP (Musically Challenged Persons) and begin booking gigs at local parties. Worried about the potential liability to which they may be subjected as a partnership, the three friends agree to incorporate their business. They sign an agreement that states, "We, the undersigned, hereby establish the MCP Corporation, an entertainment company devoted to �illing the needs of musically challenged audiences everywhere." Each person then signs the agreement. a. Is a corporation formed by the agreement? Explain. b. Under these facts, what type of business organization is involved? c. Assume for the moment that a de jure corporation is not formed under the facts given. Is a de facto corporation formed? Explain. d. What procedure should the three artistic entrepreneurs follow to incorporate their business?

8. José, Karen, and Lenny are partners in a very successful restaurant business in New Jersey. José is a citizen of Mexico who is a legal resident alien in the United States. Karen is a Canadian national who lives in Toronto but travels frequently to the United States on business. Lenny is an American citizen who lives in Elizabeth, New Jersey. The partners have recently decided that they would like to expand their business to numerous other sites in the state and would like to incorporate to lessen their personal liability risks. a. May the partners opt to �ile as a Chapter S corporation? Explain fully. b. What is the downside of creating a standard Chapter C corporation for the partners?

A corporation organized under the laws of another country that does business anywhere in C l i c k c a rd t o s e e t e r m 👆

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Chapter 31

Federal Securities and Antitrust Laws Now that you have studied corporations and are familiar with the concept of stock (see Chapter 30 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch30#ch30) ), this chapter turns to the study of some of the rules that govern the sale and purchase of such stock (also called securities) and the issuance of stock, as well as the preservation of free economic markets. The �irst half of this chapter examines the major laws governing securities and the stock exchanges, and the second half reviews the legislative efforts to keep competition fair and unfettered under antitrust laws.

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Listing and selling stock on public stock exchanges, such as the New York Stock Exchange, is heavily regulated by both federal and state governments.

31.1 Securities Laws The Securities Act of 1933 applies only to initial public offerings (IPOs). Issuance refers to listing the stock on a public stock exchange, such as the New York Stock Exchange, thereby making the stock available for purchase by anyone. Listing and selling stock on public stock exchanges is heavily regulated by both federal and state governments. In the aftermath of the stock market crash of 1929, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These landmark acts regulate the original issuance of securities and the subsequent trading of securities in the secondary markets, respectively. These acts, as amended, require companies to provide investors with accurate information about their �inances and set forth penalties for fraudulent and deceptive activities in the issuance and sale of securities. In these ways, the government seeks to keep the markets free from illegal and deceptive activities that might take advantage of the average investor on the street.

This federal law requires that securities be registered before being offered for sale for the �irst time. Registration means that the corporation that plans to sell the stock must �ile paperwork with the Securities and Exchange Commission (SEC), a federal agency that oversees public sales of securities. The paperwork that is �iled must meet the precise requirements of the law, whose purpose is to protect the public by requiring that companies �ile detailed information about their companies. In that way, initial investors can make an intelligent decision about whether or not to invest in the securities offered by the company. The act de�ines securities broadly to include a range of instruments such as stocks, bonds, debentures, evidence of indebtedness, voting trust certi�icates, investment contracts, and fractional undivided interests in oil, gas, or mineral rights. In SEC v. W. J. Howey Co. (328 U.S. 293), the U.S. Supreme Court held that an investment contract constitutes a security under the act. Affectionately called the "Howey test," an investment contract is de�ined as any transaction in which a person:

Invests

In a common enterprise

Reasonably expecting pro�its that are

Derived primarily or substantially from the managerial or entrepreneurial efforts of others.

Registration

Before any new security can be offered to the public through the mails or through any interstate commerce facility (such as a stock exchange or the Internet), the issuer must �ile a registration statement with the SEC. The registration statement must be written in plain language and include all of the following elements:

A description of the signi�icant provisions of the security offered for sale that includes the relationship between the security and other capital securities of the company;

A description of the company's properties and business;

A description of the company's management that includes information on the management's security holdings, compensation, and bene�its;

A �inancial statement certi�ied by an independent public accounting �irm; and

A description of pending lawsuits involving the company.

Before �iling for registration with the SEC (the pre�iling period), a company must avoid publicity about the new security and may not sell or offer to sell the security to anyone. Once the company �iles the registration statement with the SEC and its approval is pending (the waiting period), the company may still not sell the security, but may begin to offer it for sale through limited advertisements in ads that tell prospective investors where they may request a prospectus for the new security (see Figure 31.1 for a sample).

Figure 31.1: A sample prospectus

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At this point, a company may make available a preliminary prospectus to investors that does not include the price of the security. Once the SEC declares the registration effective and prospective buyers are given a �inal prospectus (the posteffective period), the company may �inally offer and sell the new security.

Securities Exempt From Registration

As noted previously, there are some limited exemptions to the requirement that new securities be registered with the SEC prior to their being offered to the public. According to the Securities Act of 1933, the following securities are exempt from registration:

All bank securities sold prior to July 27, 1933;

Commercial paper (such as checks, drafts, notes, and certi�icates of deposit) with a maturity date of not more than nine months;

Government-issued securities;

Securities issued by nonpro�it religious, charitable, educational, benevolent, or fraternal organizations;

Securities issued by a bank or savings and loan;

Securities issued by common carriers regulated by the Interstate Commerce Commission; and

An insurance policy or an annuity contract.

Under Rule 147, securities offered for sale solely in one state by a company that does at least 80% of its business in the state are also exempt from �iling. State securities regulations, however, may require the company to �ile with the SEC. Resale of these securities is also restricted to residents of the state for nine months following the initial sale. In addition to the intrastate sales and security exemptions noted above, the act allows several exemptions involving small securities offerings:

Rule 506 of Regulation D: Exempts private offerings to accredited investors (expert investors such as banks, executive of�icers, directors, and partners of the business issuing the security and wealthy investors) and limited offerings to not more than 35 nonaccredited investors (e.g., regular, nonexpert investors).

Rule 504 of Regulation D: Nonpublic issuers may sell up to $1 million of securities in a 12-month period to any purchaser. General advertising of the issue is permitted, as long as the dollar limit of the issue is not exceeded.

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Rule 505 of Regulation D: Any issuer may sell up to $5 million of securities in a 12-month period to fewer than 35 nonaccredited investors and to an unlimited number of accredited investors. However, general advertising of the issue is not permitted.

Regulation A: Any nonpublic issuer may sell up to $5 million of securities in a one-year period with no limit on the number of purchasers and no purchaser sophistication requirement. The offering circular is considered the disclosure document for such a �iling and must be �iled with the SEC, but registration of the offering itself is not required.

Securities purchased under Rules 504, 505, and 506 must generally be held for one year prior to resale, or the seller may be subject to penalties as an underwriter of an unregistered security.

Sanctions Under the Securities Act of 1933

Section 12(a)(2) of the Securities Act of 1933 prohibits misstatements or omissions of material fact in any written or oral communication in connection with the general distribution of any security by an issuer. Section 17(a) of the Securities Act of 1933 prohibits the use of any device or arti�ice to defraud, or the use of any untrue or misleading statement, in connection with the offer or sale of any security.

The act provides for civil and criminal sanctions for willful and negligent violations. It gives the SEC the power to investigate and bring civil enforcement proceedings under the act and allows the SEC to seek injunctive relief against violators of the act. Section 11 of the Securities Act of 1933 provides civil liability for damages when a registration statement misstates or omits a material fact on its effective date. A purchaser may �ile suit for damages caused by misstatement or omission. The purchaser does not have to prove reliance on the misstatement or omission in purchasing the securities or prove that the defendant negligently or intentionally misstated or omitted a material fact. However, a defendant can escape liability by proving that the purchaser knew of the misstatement or omission when the security was purchased. In addition, defendants can successfully assert the defense of due diligence and escape liability if they can establish that after a reasonable investigation, they had reasonable grounds to believe, and did believe, that the registration statement was true and contained no omission of material fact.

Section 24 of the Securities Act of 1933 provides for criminal liability for any person who willfully violates the act or its rules and regulations. Violators are subject to �ines of up to $10,000 and/or imprisonment for up to �ive years for each criminal violation of the act, which are prosecuted by the Department of Justice.

Securities Exchange Act of 1934

Unlike the disclosure requirements of the Securities Act of 1933, which apply only to the IPO of a security, the Securities Exchange Act of 1934 regulates the trading of securities after their original public offering. The act also regulates securities brokers, dealers, securities exchanges, and national securities associations. In addition, the act created the SEC and empowered it to enforce the securities laws under the 1933 and 1934 acts.

Scope

Under the Securities Exchange Act of 1934, companies whose securities are traded on any public securities exchange, and companies whose assets exceed $10 million whose stock is owned by 500 or more shareholders, are required to �ile information on an annual and quarterly basis with the SEC. Companies are also required to provide the SEC with noti�ication of material changes when they occur by means of a monthly report. The reported information is then made available to prospective investors and to the general public through the Electronic Data Gathering Analysis and Retrieval (EDGAR) database maintained by the SEC. EDGAR is available online at http://www.sec.gov/edgar.shtml (http://www.sec.gov/edgar.shtml) .

The act also requires company insiders (de�ined as corporate of�icers, directors, and anyone who controls 10% or more of any company's class of equity securities) to disclose their holdings and transactions in company securities. Proxy solicitations, which are attempts by a group of shareholders to garner votes from other shareholders on speci�ic issues, are also regulated under the act.

Violations of the Securities Exchange Act of 1934

Both civil and criminal sanctions are available under the act. These include the following:

Section 18 imposes liability on any person responsible for a false or misleading statement of a material fact in any �iling under the act. Anyone who relies on the false or misleading statement may sue for damages without the need to prove that the defendant was negligent in providing the false or misleading information to the SEC. However, a defendant may avoid liability by proving that the false or misleading information was provided in good faith.

Section 10(b) prohibits the use of manipulative or deceptive devices through misstatement or omission of a material fact in the sale of securities. A material fact can be de�ined as any information where there is substantial likelihood that a reasonable investor would consider it important in making the decision to purchase the security. A seller is not liable under section 10(b) unless he or she acts with scienter (the mental state embracing the intent to deceive, manipulate, or defraud). The prohibition is made applicable to all transactions in securities under Rule 10(b)(5), whether or not the securities need to be registered with the SEC under the 1933 or 1934 acts.

Section 32 provides criminal liability for violations of the act of up to $5 million in �ines and imprisonment for up to 20 years for willful violations of the act. Businesses may be �ined up to $25 million for violations of the act.

Sarbanes–Oxley: The Public Company Accounting Reform and Investor Protection Act of 2002

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One of the most important pieces of legislation with which you need to be familiar as a business manager is the Sarbanes–Oxley Act of 2002 (SOX). The highly publicized management and accounting scandals involving Enron, Tyco International, WorldCom, Arthur Andersen, and other companies in the recent past led Congress to adopt this law in 2002, with near unanimity in both the House of Representatives and the Senate. The legislation established new or enhanced standards for the boards of all U.S. publicly traded companies, their management, and all public accounting �irms. It imposed criminal penalties for certain violations of the act and charged the SEC with implementing rules for complying with the provisions of the act. SOX created a new agency: the Public Company Accounting Oversight Board (PCAOB), which it charged with the oversight, inspection, regulation, and disciplining of accounting �irms in their roles as auditors of public companies. Its website can be found here (http://pcaobus.org/Pages/default.aspx) .

Key provisions of the act include:

Section 906 requires chief executive of�icers (CEOs) and chief �inancial of�icers (CFOs) of most publicly traded companies to certify the accuracy of �inancial statements �iled with the SEC.

Section 302 requires both quarterly and annual statements to be certi�ied by the chief executive of�icer (CEO) and chief �inancial of�icer (CFO) of reporting companies as having been reviewed by a signing of�icer of the company and to contain no factual errors to the best knowledge of the signing of�icer. The signing of�icer must also certify the existence of an internal control system to identify all material information that must be reported by the company.

Section 806 provides protection for employees who report securities violations (whistleblower protection), preventing employers from �iring or taking other retaliatory action against such employees.

Enhanced penalties, including �ines of up to $5 million and/or up to 20 years in jail for criminal violations of the Section 906 certi�ication requirements.

For an interesting and comprehensive look at the Enron scandal, go to "Behind the Enron Scandal (http://www.time.com/time/specials/packages/0,28757,2021097,00.html) ". See Chapter 4 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch04#ch04) , Business Ethics, for more on this topic.

Securities Regulation by the States

Federal securities regulation does not preempt the states from also regulating the sale of securities within their borders. In cases where the issuance or sale of securities is not covered by the federal acts (such as in the case of intrastate offerings), states impose their own regulatory requirements on issuers under what are often referred to as blue sky laws. Every state has its own regulatory scheme covering the issuance and sale of securities. In most states, securities regulation is patterned after the federal acts.

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Microsoft vs. the Government

31.2 Federal Antitrust Law The integrity of our economic system depends not only on regulating the stock markets but also on maintaining a system that allows for free and fair competition. But the system can be undermined if companies are allowed to engage in anticompetitive practices that arti�icially manipulate prices, restrict the availability of products, or �ix prices by agreements that undermine basic market forces. While the states and the federal government both regulate and punish anticompetitive practices, it is the federal government that regulates anticompetitive practices that can impact interstate commerce, primarily through the Sherman Antitrust Act of 1890 and the Clayton Act of 1914 as amended. In this section, we will focus on these two acts and examine the basic tenets of federal antitrust law.

Sherman Antitrust Act of 1890

As noted above, the U.S. economy depends on a �luid exchange and needs unfettered and fair competition to �lourish. Trusts and monopolies are arrangements among competitors that destroy competition and regulate pricing. Thus, the courts have determined that trusts defeat competition and should be outlawed. The act also prohibits cartels, which involve the collusion of companies in the same industry to �ix prices. While restricted in the United States under the Sherman Antitrust Act, cartels are still allowed to some extent in Europe. For example, in 1999, Hoffman–La Roche pleaded guilty to a worldwide conspiracy involving international cartels to �ix the price of vitamins and paid a $500 million �ine.

Violations of the Sherman Act

Section 1 of the Sherman Antitrust Act (15 U.S.C. § 1), as amended, declares illegal every "contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations." Violation of the act is punishable as a felony and carries a maximum penalty of $10 million if the violator is a corporation and a maximum �ine of $350,000 and/or imprisonment of up to three years if the violator is an individual. Because contracts and conspiracies require the participation of two or more persons, Section 1 of the act applies only to concerted efforts by two or more persons or entities to restrain trade or commerce. (Section 3 of the act extends the same prohibition and penalties for conduct in restraint of trade affecting Washington, D.C., and U.S. territories.)

Section 2 of the act (15 U.S.C. § 2) makes it a felony to "monopolize . . . or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations." The maximum penalty for persons or corporations found guilty of violating Section 2 of the act is the same as for violations of Section 1: namely, a maximum �ine of $10 million for corporations and $350,000 and/or imprisonment for up to three years for individuals. Under this section, individual and concerted action to arti�icially create a monopoly is criminalized. Note that monopolies as such are not prohibited; rather, it is the effort to arti�icially create a monopoly by restraining trade that is criminalized.

To successfully prosecute individuals or companies for a conspiracy to monopolize, the prosecutor must establish that the defendants planned a course of action with the intent to destroy competition in order to create a monopoly and that they engaged in some overt act to carry out that plan.

In addition to the criminal penalties discussed above, Section 4 of the act (15 U.S.C. § 4) gives U.S. Attorneys, under the direction of the U.S. Attorney General, the power to obtain injunctive relief (such as cease and desist orders) in federal district courts against violators of the act.

The Sherman Act also provides civil penalties to individuals or companies harmed by those who violate the act that include treble damages (triple the amount of actual damages suffered by a plaintiff due to a defendant's violation of the act).

An individual or corporation may in theory create and maintain a monopoly as long as it is done without engaging in illegal anticompetitive activity. Thus, if an inventor were to invent an engine that runs on tap water, the inventor could patent the invention and be guaranteed a manufacturing monopoly for a period of 20 years from the date that the patent application was �iled, once the patent was issued. Likewise, if a corporation discovered a new process for genetically engineering a bacterium that ingests waste products and excretes crude oil, it could either patent the new organism or protect its manufacturing as a trade secret and thereby guarantee for itself a monopoly without violating the Sherman Antitrust Act (see Chapter 20 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch20#ch20) , Intellectual Property, for more on patents and trademarks). In other words, dominating a market by producing a superior product or service at a lower price than the competition does not violate the act.

The overwhelming majority of suits against violators of the Sherman Act have come from private parties. For an example of a recent case involving the Sherman Act, see U.S. v. Microsoft (http://www.microsoft.com/en-us/news/download/legal/RemediesTrial/PubIntDeterm11-1.pdf) , Civil Action No. 98-1232.

Legal Standards

Microsoft vs. the Government From Title: Microsoft vs. the Justice Department: Playing ... (https://fod.infobase.com/PortalPlaylists.aspx?wID=100753&xtid=8621)

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The courts apply a "rule of reason" test, �irst announced by the U.S. Supreme Court in Standard Oil Co. v. United States (221 U.S. 1 (1911)), to determine whether speci�ic actions that may arguably result in restraint of trade under the act are illegal. Under the rule of reason test, conspiracies in restraint of trade are held to be illegal under the Sherman Act only if they constitute undue or unreasonable restraints of trade and unreasonable attempts to monopolize. Therefore, only contracts or actions that unduly restrict trade are deemed to violate the act.

Some types of agreements are so harmful to free competition that they are held to be per se violations of the Sherman Act and punishable in themselves without having to be examined for their reasonableness or potential restraint on commerce. Common examples of per se violations of the act include agreements among competitors to �ix prices or limit the availability of commodities, group boycotts in which groups of sellers refuse to deal with a speci�ic company or person, and agreements by competitors to carve out geographic areas in which they will not compete with one another. The following examples will illustrate:

Three book publishers conspire to �ix the price of e-books. This is a price-�ixing agreement and a per se violation of Section 1 of the Sherman Antitrust Act (for more information on the actual case, see "Settlements in e-book price-�ixing suit (http://www.upi.com/Business_News/2012/08/30/Settlements- in-e-book-price-�ixing-suit/UPI-12161346368728/) ".

Slick's Lube Works and Do-Em-Fast Oil Changes, two national competing chains specializing in oil changes and related automotive services, agree to divide areas of each state in which they do business so that only one of the companies does business in any given city or town in each state. This agreement, intended to lessen competition and increase the pro�itability of each franchise for both companies, is a per se violation of the act.

Three major food retailers, ABC Corp., DEF Corp., and GHI Corp., agree not to purchase produce from JKL Corp., a produce wholesaler, until JKL makes major price concessions to each company. This is an illegal boycott and a per se violation of the act.

Clayton Act of 1914

The Clayton Act modi�ies and strengthens the antitrust provisions of the Sherman Act in a number of signi�icant ways. We'll explore some of these next.

Prohibition on Price Discrimination

Section 2 of the Clayton Act (15 U.S.C. § 13) prohibits sellers from charging different competitive buyers different prices for "commodities of like grade and quality." Temporary price reductions are permitted if made in a good-faith effort to meet a competitor's price reductions. Different prices may also be charged to re�lect higher shipping costs when delivering commodities to buyers in different geographic areas. Quantity discounts are also allowable, provided they are available to all buyers who purchase similar quantities of goods. Giving and soliciting discriminatory pricing are punished equally under the act. Schools, colleges, universities, public libraries, churches, hospitals, and not-for-pro�it charitable institutions are not subject to the provisions of this section of the act. Violation of this section of the act is punishable by �ines of not more than $5,000 and/or imprisonment for not more than one year.

Prohibition on Sale and Lease Contracts That Prevent the Buyer From Purchasing Commodities From the Seller's Competitors

Section 3 of the Clayton Act (15 U.S.C. § 14) makes it illegal for sellers of commodities involved in commerce to enter into sale or lease contracts that restrict the ability of buyers to purchase the goods or services of the seller's competitors when the effect is to lessen competition or tend to create a monopoly in any line of commerce. The effect of this section is to prohibit exclusive dealing contracts and tie-in sales arrangements in which a buyer must agree to purchase one or more product lines as a precondition to being able to purchase what is typically a highly desirable product line with limited availability.

Antitrust Laws Inapplicable to Labor Organizations

Section 6 of the Clayton Act (15 U.S.C. § 17) exempts labor organizations from coverage under antitrust laws, stating that "[t]he labor of a human being is not a commodity or article of commerce" and that the lawful activities of unions cannot be "held or construed to be illegal combinations or conspiracies in restraint of trade, under the antitrust laws."

Acquisition by One Corporation of the Stock of Another

Section 7 of the Clayton Act (15 U.S.C. § 18) generally prohibits the acquisition of one company's stock by another company when "the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly." Corporations may, however, expand their operations through subsidiaries and purchase the stock of subsidiary companies when the effect is not to substantially lessen competition.

Premerger Noti�ication

Section 7A of the Clayton Act (15 U.S.C. § 18a) requires premerger noti�ication by the companies involved. Such notice must be given to the Federal Trade Commission (FTC) and the Assistant Attorney General in Charge of the Antitrust Division of the Department of Justice prior to the acquisition of voting securities when the acquisition would leave the acquirer with voting securities and aggregate assets in the company whose securities are being acquired of $200 million or more. In certain circumstances, the threshold amount is set at $50 million. The amounts are adjusted annually and, as of February 27, 2012, were raised to $272.8 million and $68.2 million, respectively. A waiting period of 30 days (15 days for cash tender offers) is imposed prior to the consummation of acquisitions requiring noti�ication of the FTC and Department of Justice, with the waiting period starting on the day that the noti�ication is received by the FTC. In 2011, AT&T attempted a merger with T-Mobile. The Justice Department sued under the act, claiming that the merger would constitute a violation of the antitrust laws, and in 2012 AT&T dropped its attempt at the acquisition. See "AT & T Ends $39 Million Bid for T- Mobile (http://dealbook.nytimes.com/2011/12/19/att-withdraws-39-bid-for-t-mobile/) ".

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Prohibition on Of�icers and Directors Serving Competing Companies

Section 8 of the Clayton Act (15 U.S.C. § 19) prohibits interlocking directorates and of�icers serving competing companies if both companies have aggregate capital, surplus, and undivided pro�its of $10 million or more each. (The amount is also adjusted annually by the FTC on September 30 and was $27.784 million as adjusted for 2012.) Directors and of�icers serving two companies that meet the minimum capital amount may still lawfully serve both companies as long as one of the following conditions is met:

1. The competitive sales of either company are less than $1,000,000 ($2,778,400 as adjusted for 2012);

2. The competitive sales of either corporation are less than 2% of that corporation's total sales; or

3. The competitive sales of each corporation are less than 4% of that corporation's total sales.

Directors and of�icers of banks, banking associations, and trust companies are exempt from the provisions of this section.

Violations of the Clayton Act

The Department of Justice through the Assistant Attorney General in Charge of the Antitrust Division, state attorneys general, and the FTC all have jurisdiction over violations of the act. The federal and state attorneys general may seek injunctive relief, such as cease and desist orders, in federal district courts. The act also provides treble damages and reasonable attorney's fee reimbursement in private actions against violators of the act. As with the Sherman Act, the overwhelming majority of suits against violators have come from private parties.

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Key Terms

Click on each key term to see the de�inition.

accredited investors (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Expert investors such as banks, executive of�icers, directors, and partners of the business issuing the security and wealthy investors.

blue sky laws (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

State laws that regulate the issuers and sellers of securities; often modeled after federal laws.

cartels (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Prohibited by the Sherman Antitrust Act, cartels involve the collusion of companies in the same industry to �ix prices. While restricted in the United States, cartels are allowed to some extent in Europe.

cease and desist order (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A type of injunctive relief or court order wherein the person or entity must refrain from undertaking or continuing a certain type of conduct.

Clayton Act of 1914 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Act that modi�ies and strengthens the antitrust provisions of the Sherman Antitrust Act.

due diligence (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A level of care in which a business takes reasonable care to investigate all facts, repercussions, and legal and �inancial aspects of making a decision.

Electronic Data Gathering Analysis and Retrieval (EDGAR) database (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Electronic data gathering analysis and retrieval database maintained by the Securities and Exchange Commission.

exempt from registration (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Refers to securities that do not have to be registered with the Securities and Exchange Commission prior to becoming public offerings.

Federal Trade Commission (FTC) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The federal agency that has jurisdiction over business practices that are anticompetitive, deceptive, or unfair to consumers.

Howey test (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The test developed by the U.S. Supreme Court in SEC v. W. J. Howey Co. to determine whether paper (an investment contract) is in fact a security.

initial public offering (IPO) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The �irst time a stock is offered for sale on a stock exchange to the public.

insiders (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Corporate of�icers, directors, and anyone who controls 10% or more of any company's class of equity securities.

interlocking directorates (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

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Under the Clayton Act, an of�icer or director of one corporation is prohibited from serving as an of�icer or director of another competing corporation if each corporation has capital, surplus, and undivided pro�its aggregating to more than $10 million.

issuance (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Listing of stock on a public stock exchange, such as the New York Stock Exchange, thereby making the stock available for purchase by the public.

per se violations of the Sherman Act (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Types of agreements that are so harmful to free competition that they are punishable in themselves without having to be examined for their reasonableness or potential restraint on commerce.

posteffective period (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Period in which the SEC declares the registration effective and prospective buyers are given a �inal prospectus, after which the company may �inally offer and sell the new security.

pre�iling period (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Period before the �iling for registration with the Securities and Exchange Commission, when a company must avoid publicity about the new security and may not sell or offer to sell the security to anyone.

prospectus (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A booklet of information provided by a corporation for buyers to read so that they may determine whether the stock is a good investment.

proxy solicitation (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Prior to the annual meeting, a mailing to shareholders by the corporation giving each shareholder an option to vote on corporate matters via a proxy card, that is, giving their voting rights over to a group who will vote on the issues on their behalf rather than the shareholder voting individually.

Public Company Accounting Oversight Board (PCAOB) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A new agency created by the Sarbanes–Oxley Act of 2002, charged with the oversight, inspection, regulation, and disciplining of accounting �irms in their roles as auditors of public companies.

registration (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The �iling of paperwork with the Securities and Exchange Commission by a corporation that plans to sell stock.

registration statement (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Initial paperwork �iled with the Securities and Exchange Commission that must be approved by the SEC before stock can be issued.

Regulation A (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Any nonpublic issuer may sell up to $5 million of securities in a one-year period with no limit on the number of purchasers and no purchaser sophistication requirement.

Rule 147 of the Securities Act of 1933 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Securities offered for sale solely in one state by a company that does at least 80% of its business in the state are also exempt from �iling. State securities regulations, however, may require the company to �ile with the Securities and Exchange Commission.

Rule 504 of Regulation D (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Nonpublic issuers may sell up to $1 million of securities in a 12-month period to any purchaser.

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Rule 505 of Regulation D (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Any issuer may sell up to $5 million of securities in a 12-month period to fewer than 35 unaccredited investors and to an unlimited number of accredited investors.

Rule 506 of Regulation D (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Exempts private offerings to accredited investors and limited offerings to not more than 35 nonaccredited investors (e.g., regular, nonexpert investors).

"rule of reason" test (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A test employed by the courts to determine whether an action is a restraint of trade contracts or action unduly restrictive.

scienter (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The mental state embracing the intent to deceive, manipulate, or defraud.

Section 2 of the Clayton Act (15 U.S.C. § 13) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Prohibits sellers from charging different competitive buyers different prices for "commodities of like grade and quality."

Section 3 of the Clayton Act (15 U.S.C. § 14) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Makes it illegal for sellers of commodities involved in commerce to enter into sale or lease contracts that restrict the ability of buyers to purchase the goods or services of the seller's competitors when the effect is to lessen competition or tend to create a monopoly in any line of commerce.

Section 6 of the Clayton Act (15 U.S.C. § 17) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Exempts labor organizations from coverage under antitrust laws.

Section 7 of the Clayton Act (15 U.S.C. § 18) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Prohibits the acquisition of one company's stock by another company when "the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly."

Section 7a of the Clayton Act (15 U.S.C. § 18a) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Requires noti�ication of the Federal Trade Commission and the Assistant Attorney General in charge of the Antitrust Division of the Department of Justice prior to the acquisition of voting securities when the acquisition would leave the acquirer with voting securities and aggregate assets in the company whose securities are being acquired of $200 million or more.

Section 8 of the Clayton Act (15 U.S.C. § 19) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Prohibits interlocking directorates and of�icers serving competing companies if both companies have aggregate capital, surplus, and undivided pro�its of $10 million or more each.

Section 10(b) of the Securities Exchange Act of 1934 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Prohibits the use of manipulative or deceptive devices through misstatement or omission of a material fact in the sale of securities.

Section 11 of the Securities Act of 1933 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Provides civil liability for damages when a registration statement misstates or omits a material fact on its effective date.

Section 12(a)(2) of the Securities Act of 1933 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

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Prohibits misstatements or omissions of material fact in any written or oral communication in connection with the general distribution of any security by an issuer.

Section 17(a) of the Securities Act of 1933 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Prohibits the use of any device or arti�ice to defraud, or the use of any untrue or misleading statement, in connection with the offer or sale of any security.

Section 18 of the Securities Exchange Act of 1934 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Imposes liability on any person responsible for a false or misleading statement of a material fact in any �iling under the act.

Section 24 of the Securities Act of 1933 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Provides for criminal liability for any person who willfully violates the act or its rules and regulations. Violators are subject to �ines of up to $10,000 and/or imprisonment for up to �ive years for each criminal violation.

Section 32 of the Securities Exchange Act of 1934 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Provides criminal liability for willful violations of the act of up to $5 million in �ines and imprisonment for up to 20 years.

securities (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A range of instruments such as stocks, bonds, debentures, evidence of indebtedness, voting trust certi�icates, investment contracts, and fractional undivided interests in oil, gas, or mineral rights.

Securities Act of 1933 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Federal law governing initial public offerings (IPOs) of securities. Requires that investors receive �inancial and other signi�icant information concerning securities being offered for public sale; prohibits deceit, misrepresentations, and other fraud in the sale of securities.

Securities and Exchange Commission (SEC) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Federal agency that regulates the securities markets. Created by the Securities Exchange Act of 1934.

Securities Exchange Act of 1934 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Created the Securities and Exchange Commission (SEC), which it empowers with broad authority over all aspects of the securities industry, including brokerage �irms and the various securities exchanges; oversees, identi�ies, and prohibits certain types of conduct in the markets; and empowers the SEC to require periodic reporting of information by companies with publicly traded securities.

Sherman Antitrust Act of 1890 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Federal law that prohibits monopolies or other devices that restrain free trade.

trusts and monopolies (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Arrangements among competitors that destroy competition and regulate pricing.

waiting period (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Once the company �iles the registration statement with the Securities and Exchange Commission and its approval is pending, the company may still not sell the security, but may begin to offer the security for sale through limited advertisements in ads that tell prospective investors where they may request a prospectus for the new security.

Chapter 31 Flashcards

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Critical Thinking and Discussion Questions

1. Under the Securities Act of 1933, when must securities be registered with the SEC? What types of securities are covered under the 1933 act?

2. What is the de�inition of an investment contract under the Howey test?

3. What kinds of securities are exempt from registration under the 1933 act? What are the maximum penalties for violating the Securities Act of 1933?

4. What is the threshold for registering securities under the 1934 act and having to �ile periodic reports about these securities? What is the maximum criminal penalty available under the 1934 act?

5. What is the function of the Public Company Accounting Oversight Board (PCAOB) created by Sarbanes–Oxley? What is the maximum criminal penalty for violating the certi�ication requirements of Sarbanes–Oxley?

6. What are interlocking directorates? When are directors and of�icers of corporations forbidden from working for or serving on the boards of competitors?

7. Private University, a private nonpro�it educational institution located in California, decides to issue "Shares in Learning" certi�icates in a one-time offering to the public. These shares will be sold for $500 each and entitle the bearer to redeem each certi�icate for two undergraduate or one graduate college credit in any of its schools at any time in the future. The shares may also be resold without restriction by the initial purchaser. The offering will be made via the Internet. a. Assuming that the "Shares in Learning" are securities for purposes of the Securities Act of 1933, will the issue need to be registered with the SEC under the act? Explain.

b. Assume that the "Shares in Learning" are issued by Private College, a proprietary for-pro�it institution licensed to do business in California. Will the securities need to be registered with the SEC if the college does business only in California, the securities are advertised and sold only to California residents via telephone solicitation, and 5 of the 500 current students are from out of state? Explain fully.

c. If State University is a proprietary, for-pro�it institution that does business in all 50 states and around the world by offering its degrees online, will the securities offering come under the 1933 act?

8. Carlos is the owner of a small business that specializes in refurbishing and selling used laptops for under $300 each. His business has been doing well, and he decides to expand his operation by purchasing 10 similar small businesses from around the country and consolidating them under his brand name of Under $300 Laptops, Inc. a. Assuming that all the businesses purchased by Carlos were closely held corporations, that he purchased the entire voting shares for these, and that the total assets of each business were under $10 million, would these purchases require FTC noti�ication?

b. Given the niche market in which Carlos operates, if the acquisitions left him with 70% of the laptop refurbishing and resale market and if he had a 5% interest in that market prior to the acquisitions, is Carlos likely to be in violation of the Sherman or Clayton Act?

c. If Carlos provides used laptops to schools at cost, is Carlos guilty of illegal price discrimination under the Clayton Act?

Expert investors such as banks, executive officers, directors, and partners of the business C l i c k c a rd t o s e e t e r m 👆

Choose a Study ModeView this study set

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The Constitution of the United States of America Preamble

We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

Article I

Section 1

All legislative Powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives.

Section 2

The House of Representatives shall be composed of Members chosen every second Year by the People of the several States, and the Electors in each State shall have the Quali�ications requisite for Electors of the most numerous Branch of the State Legislature.

No Person shall be a Representative who shall not have attained to the Age of twenty �ive Years, and been seven Years a Citizen of the United States, and who shall not, when elected, be an Inhabitant of that State in which he shall be chosen.

Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three �ifths of all other Persons. The actual Enumeration shall be made within three Years after the �irst Meeting of the Congress of the United States, and within every subsequent Term of ten Years, in such Manner as they shall by Law direct. The Number of Representatives shall not exceed one for every thirty Thousand, but each State shall have at Least one Representative; and until such enumeration shall be made, the State of New Hampshire shall be entitled to chuse three, Massachusetts eight, Rhode-Island and Providence Plantations one, Connecticut �ive, New-York six, New Jersey four, Pennsylvania eight, Delaware one, Maryland six, Virginia ten, North Carolina �ive, South Carolina �ive, and Georgia three.

When vacancies happen in the Representation from any State, the Executive Authority thereof shall issue Writs of Election to �ill such Vacancies.

The House of Representatives shall chuse their Speaker and other Of�icers; and shall have the sole Power of Impeachment.

Section 3

The Senate of the United States shall be composed of two Senators from each State, chosen by the Legislature thereof for six Years; and each Senator shall have one Vote.

Immediately after they shall be assembled in Consequence of the �irst Election, they shall be divided as equally as may be into three Classes. The Seats of the Senators of the �irst Class shall be vacated at the Expiration of the second Year, of the second Class at the Expiration of the fourth Year, and of the third Class at the Expiration of the sixth Year, so that one third may be chosen every second Year; and if Vacancies happen by Resignation, or otherwise, during the Recess of the Legislature of any State, the Executive thereof may make temporary Appointments until the next Meeting of the Legislature, which shall then �ill such Vacancies.

No Person shall be a Senator who shall not have attained to the Age of thirty Years, and been nine Years a Citizen of the United States, and who shall not, when elected, be an Inhabitant of that State for which he shall be chosen.

The Vice President of the United States shall be President of the Senate, but shall have no Vote, unless they be equally divided.

The Senate shall chuse their other Of�icers, and also a President pro tempore, in the Absence of the Vice President, or when he shall exercise the Of�ice of President of the United States.

The Senate shall have the sole Power to try all Impeachments. When sitting for that Purpose, they shall be on Oath or Af�irmation. When the President of the United States is tried, the Chief Justice shall preside: And no Person shall be convicted without the Concurrence of two thirds of the Members present.

Judgment in Cases of Impeachment shall not extend further than to removal from Of�ice, and disquali�ication to hold and enjoy any Of�ice of honor, Trust or Pro�it under the United States: but the Party convicted shall nevertheless be liable and subject to Indictment, Trial, Judgment and Punishment, according to Law.

Section 4

The Times, Places and Manner of holding Elections for Senators and Representatives, shall be prescribed in each State by the Legislature thereof; but the Congress may at any time by Law make or alter such Regulations, except as to the Places of chusing Senators.

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The Congress shall assemble at least once in every Year, and such Meeting shall be on the �irst Monday in December, unless they shall by Law appoint a different Day.

Section 5

Each House shall be the Judge of the Elections, Returns and Quali�ications of its own Members, and a Majority of each shall constitute a Quorum to do Business; but a smaller Number may adjourn from day to day, and may be authorized to compel the Attendance of absent Members, in such Manner, and under such Penalties as each House may provide.

Each House may determine the Rules of its Proceedings, punish its Members for disorderly Behaviour, and, with the Concurrence of two thirds, expel a Member.

Each House shall keep a Journal of its Proceedings, and from time to time publish the same, excepting such Parts as may in their Judgment require Secrecy; and the Yeas and Nays of the Members of either House on any question shall, at the Desire of one �ifth of those Present, be entered on the Journal.

Neither House, during the Session of Congress, shall, without the Consent of the other, adjourn for more than three days, nor to any other Place than that in which the two Houses shall be sitting.

Section 6

The Senators and Representatives shall receive a Compensation for their Services, to be ascertained by Law, and paid out of the Treasury of the United States. They shall in all Cases, except Treason, Felony and Breach of the Peace, be privileged from Arrest during their Attendance at the Session of their respective Houses, and in going to and returning from the same; and for any Speech or Debate in either House, they shall not be questioned in any other Place.

No Senator or Representative shall, during the Time for which he was elected, be appointed to any civil Of�ice under the Authority of the United States, which shall have been created, or the Emoluments whereof shall have been encreased during such time; and no Person holding any Of�ice under the United States, shall be a Member of either House during his Continuance in Of�ice.

Section 7

All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.

Every Bill which shall have passed the House of Representatives and the Senate, shall, before it become a Law, be presented to the President of the United States: If he approve he shall sign it, but if not he shall return it, with his Objections to that House in which it shall have originated, who shall enter the Objections at large on their Journal, and proceed to reconsider it. If after such Reconsideration two thirds of that House shall agree to pass the Bill, it shall be sent, together with the Objections, to the other House, by which it shall likewise be reconsidered, and if approved by two thirds of that House, it shall become a Law. But in all such Cases the Votes of both Houses shall be determined by yeas and Nays, and the Names of the Persons voting for and against the Bill shall be entered on the Journal of each House respectively. If any Bill shall not be returned by the President within ten Days (Sundays excepted) after it shall have been presented to him, the Same shall be a Law, in like Manner as if he had signed it, unless the Congress by their Adjournment prevent its Return, in which Case it shall not be a Law.

Every Order, Resolution, or Vote to which the Concurrence of the Senate and House of Representatives may be necessary (except on a question of Adjournment) shall be presented to the President of the United States; and before the Same shall take Effect, shall be approved by him, or being disapproved by him, shall be repassed by two thirds of the Senate and House of Representatives, according to the Rules and Limitations prescribed in the Case of a Bill.

Section 8

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

To borrow Money on the credit of the United States;

To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;

To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;

To coin Money, regulate the Value thereof, and of foreign Coin, and �ix the Standard of Weights and Measures;

To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;

To establish Post Of�ices and post Roads;

To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;

To constitute Tribunals inferior to the supreme Court;

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To de�ine and punish Piracies and Felonies committed on the high Seas, and Offences against the Law of Nations;

To declare War, grant Letters of Marque and Reprisal, and make Rules concerning Captures on Land and Water;

To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years;

To provide and maintain a Navy;

To make Rules for the Government and Regulation of the land and naval Forces;

To provide for calling forth the Militia to execute the Laws of the Union, suppress Insurrections and repel Invasions;

To provide for organizing, arming, and disciplining, the Militia, and for governing such Part of them as may be employed in the Service of the United States, reserving to the States respectively, the Appointment of the Of�icers, and the Authority of training the Militia according to the discipline prescribed by Congress;

To exercise exclusive Legislation in all Cases whatsoever, over such District (not exceeding ten Miles square) as may, by Cession of particular States, and the Acceptance of Congress, become the Seat of the Government of the United States, and to exercise like Authority over all Places purchased by the Consent of the Legislature of the State in which the Same shall be, for the Erection of Forts, Magazines, Arsenals, dock-Yards, and other needful Buildings;—And

To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Of�icer thereof.

Section 9

The Migration or Importation of such Persons as any of the States now existing shall think proper to admit, shall not be prohibited by the Congress prior to the Year one thousand eight hundred and eight, but a Tax or duty may be imposed on such Importation, not exceeding ten dollars for each Person.

The Privilege of the Writ of Habeas Corpus shall not be suspended, unless when in Cases of Rebellion or Invasion the public Safety may require it.

No Bill of Attainder or ex post facto Law shall be passed.

No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.

No Tax or Duty shall be laid on Articles exported from any State.

No Preference shall be given by any Regulation of Commerce or Revenue to the Ports of one State over those of another; nor shall Vessels bound to, or from, one State, be obliged to enter, clear, or pay Duties in another.

No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.

No Title of Nobility shall be granted by the United States: And no Person holding any Of�ice of Pro�it or Trust under them, shall, without the Consent of the Congress, accept of any present, Emolument, Of�ice, or Title, of any kind whatever, from any King, Prince, or foreign State.

Section 10

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing its inspection Laws: and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the Use of the Treasury of the United States; and all such Laws shall be subject to the Revision and Controul of the Congress.

No State shall, without the Consent of Congress, lay any Duty of Tonnage, keep Troops, or Ships of War in time of Peace, enter into any Agreement or Compact with another State, or with a foreign Power, or engage in War, unless actually invaded, or in such imminent Danger as will not admit of delay.

Article II

Section 1

The executive Power shall be vested in a President of the United States of America. He shall hold his Of�ice during the Term of four Years, and, together with the Vice President, chosen for the same Term, be elected, as follows:

Each State shall appoint, in such Manner as the Legislature thereof may direct, a Number of Electors, equal to the whole Number of Senators and Representatives to which the State may be entitled in the Congress: but no Senator or Representative, or Person holding an Of�ice of Trust or Pro�it under the United States, shall be appointed an Elector.

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The Electors shall meet in their respective States, and vote by Ballot for two Persons, of whom one at least shall not be an Inhabitant of the same State with themselves. And they shall make a List of all the Persons voted for, and of the Number of Votes for each; which List they shall sign and certify, and transmit sealed to the Seat of the Government of the United States, directed to the President of the Senate. The President of the Senate shall, in the Presence of the Senate and House of Representatives, open all the Certi�icates, and the Votes shall then be counted. The Person having the greatest Number of Votes shall be the President, if such Number be a Majority of the whole Number of Electors appointed; and if there be more than one who have such Majority, and have an equal Number of Votes, then the House of Representatives shall immediately chuse by Ballot one of them for President; and if no Person have a Majority, then from the �ive highest on the List the said House shall in like Manner chuse the President. But in chusing the President, the Votes shall be taken by States, the Representation from each State having one Vote; A quorum for this purpose shall consist of a Member or Members from two thirds of the States, and a Majority of all the States shall be necessary to a Choice. In every Case, after the Choice of the President, the Person having the greatest Number of Votes of the Electors shall be the Vice President. But if there should remain two or more who have equal Votes, the Senate shall chuse from them by Ballot the Vice President.

The Congress may determine the Time of chusing the Electors, and the Day on which they shall give their Votes; which Day shall be the same throughout the United States.

No Person except a natural born Citizen, or a Citizen of the United States, at the time of the Adoption of this Constitution, shall be eligible to the Of�ice of President; neither shall any Person be eligible to that Of�ice who shall not have attained to the Age of thirty �ive Years, and been fourteen Years a Resident within the United States.

In Case of the Removal of the President from Of�ice, or of his Death, Resignation, or Inability to discharge the Powers and Duties of the said Of�ice, the Same shall devolve on the Vice President, and the Congress may by Law provide for the Case of Removal, Death, Resignation or Inability, both of the President and Vice President, declaring what Of�icer shall then act as President, and such Of�icer shall act accordingly, until the Disability be removed, or a President shall be elected.

The President shall, at stated Times, receive for his Services, a Compensation, which shall neither be increased nor diminished during the Period for which he shall have been elected, and he shall not receive within that Period any other Emolument from the United States, or any of them.

Before he enter on the Execution of his Of�ice, he shall take the following Oath or Af�irmation:—"I do solemnly swear (or af�irm) that I will faithfully execute the Of�ice of President of the United States, and will to the best of my Ability, preserve, protect and defend the Constitution of the United States."

Section 2

The President shall be Commander in Chief of the Army and Navy of the United States, and of the Militia of the several States, when called into the actual Service of the United States; he may require the Opinion, in writing, of the principal Of�icer in each of the executive Departments, upon any Subject relating to the Duties of their respective Of�ices, and he shall have Power to grant Reprieves and Pardons for Offences against the United States, except in Cases of Impeachment.

He shall have Power, by and with the Advice and Consent of the Senate, to make Treaties, provided two thirds of the Senators present concur; and he shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Of�icers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Of�icers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.

The President shall have Power to �ill up all Vacancies that may happen during the Recess of the Senate, by granting Commissions which shall expire at the End of their next Session.

Section 3

He shall from time to time give to the Congress Information of the State of the Union, and recommend to their Consideration such Measures as he shall judge necessary and expedient; he may, on extraordinary Occasions, convene both Houses, or either of them, and in Case of Disagreement between them, with Respect to the Time of Adjournment, he may adjourn them to such Time as he shall think proper; he shall receive Ambassadors and other public Ministers; he shall take Care that the Laws be faithfully executed, and shall Commission all the Of�icers of the United States.

Section 4

The President, Vice President and all civil Of�icers of the United States, shall be removed from Of�ice on Impeachment for, and Conviction of, Treason, Bribery, or other high Crimes and Misdemeanors.

Article III

Section 1

The judicial Power of the United States shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish. The Judges, both of the supreme and inferior Courts, shall hold their Of�ices during good Behaviour, and shall, at stated Times, receive for their Services a Compensation, which shall not be diminished during their Continuance in Of�ice.

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Section 2

The judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority;—to all Cases affecting Ambassadors, other public Ministers and Consuls;— to all Cases of admiralty and maritime Jurisdiction;—to Controversies to which the United States shall be a Party;—to Controversies between two or more States;—between a State and Citizens of another State,—between Citizens of different States,—between Citizens of the same State claiming Lands under Grants of different States, and between a State, or the Citizens thereof, and foreign States, Citizens or Subjects.

In all Cases affecting Ambassadors, other public Ministers and Consuls, and those in which a State shall be Party, the supreme Court shall have original Jurisdiction. In all the other Cases before mentioned, the supreme Court shall have appellate Jurisdiction, both as to Law and Fact, with such Exceptions, and under such Regulations as the Congress shall make.

The Trial of all Crimes, except in Cases of Impeachment, shall be by Jury; and such Trial shall be held in the State where the said Crimes shall have been committed; but when not committed within any State, the Trial shall be at such Place or Places as the Congress may by Law have directed.

Section 3

Treason against the United States, shall consist only in levying War against them, or in adhering to their Enemies, giving them Aid and Comfort. No Person shall be convicted of Treason unless on the Testimony of two Witnesses to the same overt Act, or on Confession in open Court.

The Congress shall have Power to declare the Punishment of Treason, but no Attainder of Treason shall work Corruption of Blood, or Forfeiture except during the Life of the Person attainted.

Article IV

Section 1

Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State. And the Congress may by general Laws prescribe the Manner in which such Acts, Records and Proceedings shall be proved, and the Effect thereof.

Section 2

The Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States.

A Person charged in any State with Treason, Felony, or other Crime, who shall �lee from Justice, and be found in another State, shall on Demand of the executive Authority of the State from which he �led, be delivered up, to be removed to the State having Jurisdiction of the Crime.

No Person held to Service or Labour in one State, under the Laws thereof, escaping into another, shall, in Consequence of any Law or Regulation therein, be discharged from such Service or Labour, but shall be delivered up on Claim of the Party to whom such Service or Labour may be due.

Section 3

New States may be admitted by the Congress into this Union; but no new State shall be formed or erected within the Jurisdiction of any other State; nor any State be formed by the Junction of two or more States, or Parts of States, without the Consent of the Legislatures of the States concerned as well as of the Congress.

The Congress shall have Power to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States; and nothing in this Constitution shall be so construed as to Prejudice any Claims of the United States, or of any particular State.

Section 4

The United States shall guarantee to every State in this Union a Republican Form of Government, and shall protect each of them against Invasion; and on Application of the Legislature, or of the Executive (when the Legislature cannot be convened), against domestic Violence.

Article V

The Congress, whenever two thirds of both Houses shall deem it necessary, shall propose Amendments to this Constitution, or, on the Application of the Legislatures of two thirds of the several States, shall call a Convention for proposing Amendments, which, in either Case, shall be valid to all Intents and Purposes, as Part of this Constitution, when rati�ied by the Legislatures of three fourths of the several States, or by Conventions in three fourths thereof, as the one or the other Mode of Rati�ication may be proposed by the Congress; Provided that no Amendment which may be made prior to the Year One thousand eight hundred and eight shall in any Manner affect the �irst and fourth Clauses in the Ninth Section of the �irst Article; and that no State, without its Consent, shall be deprived of its equal Suffrage in the Senate.

Article VI

All Debts contracted and Engagements entered into, before the Adoption of this Constitution, shall be as valid against the United States under this Constitution, as under the Confederation.

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This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.

The Senators and Representatives before mentioned, and the Members of the several State Legislatures, and all executive and judicial Of�icers, both of the United States and of the several States, shall be bound by Oath or Af�irmation, to support this Constitution; but no religious Test shall ever be required as a Quali�ication to any Of�ice or public Trust under the United States.

Article VII

The Rati�ication of the Conventions of nine States, shall be suf�icient for the Establishment of this Constitution between the States so ratifying the Same.

The Word, "the," being interlined between the seventh and eighth Lines of the �irst Page, the Word "Thirty" being partly written on an Erazure in the �ifteenth Line of the �irst Page, The Words "is tried" being interlined between the thirty second and thirty third Lines of the �irst Page and the Word "the" being interlined between the forty third and forty fourth Lines of the second Page.

Attest William Jackson Secretary

done in Convention by the Unanimous Consent of the States present the Seventeenth Day of September in the Year of our Lord one thousand seven hundred and Eighty seven and of the Independance of the United States of America the Twelfth In witness whereof We have hereunto subscribed our Names.

Amendments

[The �irst 10 amendments are known as the "Bill of Rights."]

Amendment I

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

Amendment II

A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.

Amendment III

No Soldier shall, in time of peace be quartered in any house, without the consent of the Owner, nor in time of war, but in a manner to be prescribed by law.

Amendment IV

The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or af�irmation, and particularly describing the place to be searched, and the persons or things to be seized.

Amendment V

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

Amendment VI

In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the State and district wherein the crime shall have been committed, which district shall have been previously ascertained by law, and to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him; to have compulsory process for obtaining witnesses in his favor, and to have the Assistance of Counsel for his defence.

Amendment VII

In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law.

Amendment VIII

Excessive bail shall not be required, nor excessive �ines imposed, nor cruel and unusual punishments in�licted.

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Amendment IX

The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.

Amendment X

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

AMENDMENT XI

Passed by Congress March 4, 1794. Rati�ied February 7, 1795.

Note: Article III, section 2, of the Constitution was modi�ied by amendment 11.

The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.

AMENDMENT XII

Passed by Congress December 9, 1803. Rati�ied June 15, 1804.

Note: A portion of Article II, section 1 of the Constitution was superseded by the 12th amendment.

The Electors shall meet in their respective states and vote by ballot for President and Vice-President, one of whom, at least, shall not be an inhabitant of the same state with themselves; they shall name in their ballots the person voted for as President, and in distinct ballots the person voted for as Vice-President, and they shall make distinct lists of all persons voted for as President, and of all persons voted for as Vice-President, and of the number of votes for each, which lists they shall sign and certify, and transmit sealed to the seat of the government of the United States, directed to the President of the Senate;— the President of the Senate shall, in the presence of the Senate and House of Representatives, open all the certi�icates and the votes shall then be counted;—The person having the greatest number of votes for President, shall be the President, if such number be a majority of the whole number of Electors appointed; and if no person have such majority, then from the persons having the highest numbers not exceeding three on the list of those voted for as President, the House of Representatives shall choose immediately, by ballot, the President. But in choosing the President, the votes shall be taken by states, the representation from each state having one vote; a quorum for this purpose shall consist of a member or members from two-thirds of the states, and a majority of all the states shall be necessary to a choice. [And if the House of Representatives shall not choose a President whenever the right of choice shall devolve upon them, before the fourth day of March next following, then the Vice-President shall act as President, as in case of the death or other constitutional disability of the President.—]* The person having the greatest number of votes as Vice-President, shall be the Vice-President, if such number be a majority of the whole number of Electors appointed, and if no person have a majority, then from the two highest numbers on the list, the Senate shall choose the Vice-President; a quorum for the purpose shall consist of two-thirds of the whole number of Senators, and a majority of the whole number shall be necessary to a choice. But no person constitutionally ineligible to the of�ice of President shall be eligible to that of Vice-President of the United States.

*Superseded by section 3 of the 20th amendment.

AMENDMENT XIII

Passed by Congress January 31, 1865. Rati�ied December 6, 1865.

Note: A portion of Article IV, section 2, of the Constitution was superseded by the 13th amendment.

Section 1

Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.

Section 2

Congress shall have power to enforce this article by appropriate legislation.

AMENDMENT XIV

Passed by Congress June 13, 1866. Rati�ied July 9, 1868.

Note: Article I, section 2, of the Constitution was modi�ied by section 2 of the 14th amendment.

Section 1

All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.

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Section 2

Representatives shall be apportioned among the several States according to their respective numbers, counting the whole number of persons in each State, excluding Indians not taxed. But when the right to vote at any election for the choice of electors for President and Vice-President of the United States, Representatives in Congress, the Executive and Judicial of�icers of a State, or the members of the Legislature thereof, is denied to any of the male inhabitants of such State, being twenty-one years of age,* and citizens of the United States, or in any way abridged, except for participation in rebellion, or other crime, the basis of representation therein shall be reduced in the proportion which the number of such male citizens shall bear to the whole number of male citizens twenty-one years of age in such State.

Section 3

No person shall be a Senator or Representative in Congress, or elector of President and Vice-President, or hold any of�ice, civil or military, under the United States, or under any State, who, having previously taken an oath, as a member of Congress, or as an of�icer of the United States, or as a member of any State legislature, or as an executive or judicial of�icer of any State, to support the Constitution of the United States, shall have engaged in insurrection or rebellion against the same, or given aid or comfort to the enemies thereof. But Congress may by a vote of two-thirds of each House, remove such disability.

Section 4

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

Section 5

The Congress shall have the power to enforce, by appropriate legislation, the provisions of this article.

*Changed by section 1 of the 26th amendment.

AMENDMENT XV

Passed by Congress February 26, 1869. Rati�ied February 3, 1870.

Section 1

The right of citizens of the United States to vote shall not be denied or abridged by the United States or by any State on account of race, color, or previous condition of servitude—

Section 2

The Congress shall have the power to enforce this article by appropriate legislation.

AMENDMENT XVI

Passed by Congress July 2, 1909. Rati�ied February 3, 1913.

Note: Article I, section 9, of the Constitution was modi�ied by amendment 16.

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

AMENDMENT XVII

Passed by Congress May 13, 1912. Rati�ied April 8, 1913.

Note: Article I, section 3, of the Constitution was modi�ied by the 17th amendment.

The Senate of the United States shall be composed of two Senators from each State, elected by the people thereof, for six years; and each Senator shall have one vote. The electors in each State shall have the quali�ications requisite for electors of the most numerous branch of the State legislatures.

When vacancies happen in the representation of any State in the Senate, the executive authority of such State shall issue writs of election to �ill such vacancies: Provided, That the legislature of any State may empower the executive thereof to make temporary appointments until the people �ill the vacancies by election as the legislature may direct.

This amendment shall not be so construed as to affect the election or term of any Senator chosen before it becomes valid as part of the Constitution.

AMENDMENT XVIII

Passed by Congress December 18, 1917. Rati�ied January 16, 1919. Repealed by amendment 21.

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Section 1

After one year from the rati�ication of this article the manufacture, sale, or transportation of intoxicating liquors within, the importation thereof into, or the exportation thereof from the United States and all territory subject to the jurisdiction thereof for beverage purposes is hereby prohibited.

Section 2

The Congress and the several States shall have concurrent power to enforce this article by appropriate legislation.

Section 3

This article shall be inoperative unless it shall have been rati�ied as an amendment to the Constitution by the legislatures of the several States, as provided in the Constitution, within seven years from the date of the submission hereof to the States by the Congress.

AMENDMENT XIX

Passed by Congress June 4, 1919. Rati�ied August 18, 1920.

The right of citizens of the United States to vote shall not be denied or abridged by the United States or by any State on account of sex.

Congress shall have power to enforce this article by appropriate legislation.

AMENDMENT XX

Passed by Congress March 2, 1932. Rati�ied January 23, 1933.

Note: Article I, section 4, of the Constitution was modi�ied by section 2 of this amendment. In addition, a portion of the 12th amendment was superseded by section 3.

Section 1

The terms of the President and the Vice President shall end at noon on the 20th day of January, and the terms of Senators and Representatives at noon on the 3d day of January, of the years in which such terms would have ended if this article had not been rati�ied; and the terms of their successors shall then begin.

Section 2

The Congress shall assemble at least once in every year, and such meeting shall begin at noon on the 3d day of January, unless they shall by law appoint a different day.

Section 3

If, at the time �ixed for the beginning of the term of the President, the President elect shall have died, the Vice President elect shall become President. If a President shall not have been chosen before the time �ixed for the beginning of his term, or if the President elect shall have failed to qualify, then the Vice President elect shall act as President until a President shall have quali�ied; and the Congress may by law provide for the case wherein neither a President elect nor a Vice President shall have quali�ied, declaring who shall then act as President, or the manner in which one who is to act shall be selected, and such person shall act accordingly until a President or Vice President shall have quali�ied.

Section 4

The Congress may by law provide for the case of the death of any of the persons from whom the House of Representatives may choose a President whenever the right of choice shall have devolved upon them, and for the case of the death of any of the persons from whom the Senate may choose a Vice President whenever the right of choice shall have devolved upon them.

Section 5

Sections 1 and 2 shall take effect on the 15th day of October following the rati�ication of this article.

Section 6

This article shall be inoperative unless it shall have been rati�ied as an amendment to the Constitution by the legislatures of three-fourths of the several States within seven years from the date of its submission.

AMENDMENT XXI

Passed by Congress February 20, 1933. Rati�ied December 5, 1933.

Section 1

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The eighteenth article of amendment to the Constitution of the United States is hereby repealed.

Section 2

The transportation or importation into any State, Territory, or Possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.

Section 3

This article shall be inoperative unless it shall have been rati�ied as an amendment to the Constitution by conventions in the several States, as provided in the Constitution, within seven years from the date of the submission hereof to the States by the Congress.

AMENDMENT XXII

Passed by Congress March 21, 1947. Rati�ied February 27, 1951.

Section 1

No person shall be elected to the of�ice of the President more than twice, and no person who has held the of�ice of President, or acted as President, for more than two years of a term to which some other person was elected President shall be elected to the of�ice of President more than once. But this Article shall not apply to any person holding the of�ice of President when this Article was proposed by Congress, and shall not prevent any person who may be holding the of�ice of President, or acting as President, during the term within which this Article becomes operative from holding the of�ice of President or acting as President during the remainder of such term.

Section 2

This article shall be inoperative unless it shall have been rati�ied as an amendment to the Constitution by the legislatures of three-fourths of the several States within seven years from the date of its submission to the States by the Congress.

AMENDMENT XXIII

Passed by Congress June 16, 1960. Rati�ied March 29, 1961.

Section 1

The District constituting the seat of Government of the United States shall appoint in such manner as Congress may direct:

A number of electors of President and Vice President equal to the whole number of Senators and Representatives in Congress to which the District would be entitled if it were a State, but in no event more than the least populous State; they shall be in addition to those appointed by the States, but they shall be considered, for the purposes of the election of President and Vice President, to be electors appointed by a State; and they shall meet in the District and perform such duties as provided by the twelfth article of amendment.

Section 2

The Congress shall have power to enforce this article by appropriate legislation.

AMENDMENT XXIV

Passed by Congress August 27, 1962. Rati�ied January 23, 1964.

Section 1

The right of citizens of the United States to vote in any primary or other election for President or Vice President, for electors for President or Vice President, or for Senator or Representative in Congress, shall not be denied or abridged by the United States or any State by reason of failure to pay poll tax or other tax.

Section 2

The Congress shall have power to enforce this article by appropriate legislation.

AMENDMENT XXV

Passed by Congress July 6, 1965. Rati�ied February 10, 1967.

Note: Article II, section 1, of the Constitution was affected by the 25th amendment.

Section 1

In case of the removal of the President from of�ice or of his death or resignation, the Vice President shall become President.

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Section 2

Whenever there is a vacancy in the of�ice of the Vice President, the President shall nominate a Vice President who shall take of�ice upon con�irmation by a majority vote of both Houses of Congress.

Section 3

Whenever the President transmits to the President pro tempore of the Senate and the Speaker of the House of Representatives his written declaration that he is unable to discharge the powers and duties of his of�ice, and until he transmits to them a written declaration to the contrary, such powers and duties shall be discharged by the Vice President as Acting President.

Section 4

Whenever the Vice President and a majority of either the principal of�icers of the executive departments or of such other body as Congress may by law provide, transmit to the President pro tempore of the Senate and the Speaker of the House of Representatives their written declaration that the President is unable to discharge the powers and duties of his of�ice, the Vice President shall immediately assume the powers and duties of the of�ice as Acting President.

Thereafter, when the President transmits to the President pro tempore of the Senate and the Speaker of the House of Representatives his written declaration that no inability exists, he shall resume the powers and duties of his of�ice unless the Vice President and a majority of either the principal of�icers of the executive department or of such other body as Congress may by law provide, transmit within four days to the President pro tempore of the Senate and the Speaker of the House of Representatives their written declaration that the President is unable to discharge the powers and duties of his of�ice. Thereupon Congress shall decide the issue, assembling within forty-eight hours for that purpose if not in session. If the Congress, within twenty-one days after receipt of the latter written declaration, or, if Congress is not in session, within twenty-one days after Congress is required to assemble, determines by two-thirds vote of both Houses that the President is unable to discharge the powers and duties of his of�ice, the Vice President shall continue to discharge the same as Acting President; otherwise, the President shall resume the powers and duties of his of�ice.

AMENDMENT XXVI

Passed by Congress March 23, 1971. Rati�ied July 1, 1971.

Note: Amendment 14, section 2, of the Constitution was modi�ied by section 1 of the 26th amendment.

Section 1

The right of citizens of the United States, who are eighteen years of age or older, to vote shall not be denied or abridged by the United States or by any State on account of age.

Section 2

The Congress shall have power to enforce this article by appropriate legislation.

AMENDMENT XXVII

Originally proposed September 25, 1789. Rati�ied May 7, 1992.

No law, varying the compensation for the services of the Senators and Representatives, shall take effect, until an election of representatives shall have intervened.

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Cases Discussed Asahi Metal Industry v. Superior Court of California (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec2.2#box2.2b) —in personam jurisdiction

Asahi Metal Industry v. Superior Court of California, 480 U.S. 102 (1987)

Brame v. Western State Hosp. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec5.3#box5.3c) —workers' compensation

Brame v. Western State Hosp., 136 Wash. App. 740, 150 P.3d 637 (2007)

Burlington Industries v. Ellerth (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec25.1#box25.1c) —sexual harassment

Burlington Industries v. Ellerth, 524 U.S. 742 (1998)

Day et al. v. Stascavage et al. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec29.4#box29.4) —derivative action

Day et al. v. Stascavage et al., Colorado Court of Appeals

Christie v. Foremost (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec26.4#box26.4) —age discrimination

Christie v. Foremost Ins. Co., 785 F.2d 584 (7th Cir. 1986)

Dothard v. Rowlinson (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec24.1#box24.1b) —discrimination based on sex

Dothard v. Rowlinson, 433 U.S. 321 (1977)

Eckis v. Sea World (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec21.1#box21.1b) —employment relationship

Eckis v. Sea World, 64 Cal. App. 3d 1 (1976)

Grande v. Jennings (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec19.1#box19.1) —found property

Grande v. Jennings,_P.3d._ 2012, 635 Ariz. Adv. Rep. 19 (May 2012)

Griggs v. Duke Power Company (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec23.1#box23.1) —race discrimination

Griggs v. Duke Power Company, 401 U.S. 424 (1971)

Guijosa v. Wal-Mart Stores (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec7.3#box7.3) —shoplifting

Guijosa v. Wal-Mart Stores, 101 Wn. 777 (2000)

Harris v. Forklift Systems (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec25.1#box25.1b) —sexual harassment

Harris v. Forklift Systems, 510 U.S. 17 (1993)

Heart of Atlanta Motel, Inc. v. United States (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec22.1#box22.1a) —Civil Rights Act

Heart of Atlanta Motel, Inc. v. United States, 379 U.S. 241 (1964)

In re: Lane (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec18.4#box18.4) —credit counseling

In re: Lane, Slip Copy 2012 WL 1865448, Bkrtcy, N.D. Okla. (2012)

International Union, United Automobile, Aerospace & Agricultural Implement Workers of America, UAW, et al. v. Johnson Controls, Inc. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec24.2#box24.2a) —discrimination based on sex

International Union, United Automobile, Aerospace & Agricultural Implement Workers of America, UAW, et al. v. Johnson Controls, Inc., 499 U.S. 187 (1991)

Katzenbach v. McClung (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec22.1#box22.1b) —Affectation Doctrine

Katzenbach v. McClung, 379 U.S. 294 (1964)

Kohler v. Inter-Tel Technologies (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec25.1#box25.1d) —sexual harassment

Kohler v. Inter-Tel Technologies, 244 F.3d 1167, 1176 (9th Cir. 2001)

Malorney v. B&L Motor Freight, Inc. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec21.2#box21.2) —negligent hiring

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Malorney v. B&L Motor Freight, Inc., 146 Ill. App.3d 265, 496 N.E.2d 1086 (1986)

Meritor Savings Bank v. Vinson (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec25.1#box25.1a) —sexual harassment

Meritor Savings Bank v. Vinson, 477 U.S. 57 (1986)

Northern Assurance Company v. Lark et al. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec27.1#box27.1) —agent authority

Northern Assurance Company v. Lark et al., 845 F. Supp. 1301 (1993)

Price Waterhouse v. Hopkins (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec24.1#box24.1a) —discrimination based on sex

Price Waterhouse v. Hopkins, 490 U.S. 228 (1989)

Richman v. Workers' Compensation Board (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec5.3#box5.3a) —workers' compensation

Richman v. Workers' Compensation Board, 936 N.Y.S. 2d 722 (Jan. 2012)

Sánchez-Rodriguez v. AT&T Mobility Puerto Rico (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec26.1#box26.1) —religious discrimination

Sánchez-Rodriguez v. AT&T Mobility Puerto Rico, Inc., 673 F.3d 1 (1st Cir. 2012)

Schmidt v. Falls Dodge, Inc (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec5.3#box5.3b) .—workers' compensation

Schmidt v. Falls Dodge, Inc, N.Y.S. Ct. App. (2012)

Smith v. Greystone Alliance LLC (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec16.2#box16.2) —debt collection

Smith v. Greystone Alliance LLC, N.D. Ill. (2011)

U.S. v. Nosal (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec6.3#box6.3) —Computer Fraud and Abuse Act

U.S. v. Nosal, 676 F.3d 854, C.A.9 (Cal. 2012)

Wal-Mart Stores, Inc. v. Dukes (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec24.1#box24.1c) —discrimination based on sex

Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011)

Walkovszky v. Carlton (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec30.5#box30.5) —piercing the corporate veil

Walkovszky v. Carlton, Court of Appeals of New York, 18 N.Y.2d. 414 (1966)

Williamson v. Coastal Physician Services of Southeast, Inc. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec21.1#box21.1a) — employment relationship

Williamson v. Coastal Physician Services of Southeast, Inc. 251 Ga. App. 667, 554 S.E.2d 739 Ga. App. (2001)

Wilson v. Southwest Airlines Co. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec24.2#box24.2b) —discrimination based on sex

Wilson v. Southwest Airlines Co., 517 F. Supp. 292 (Tex. 1981)

World Wide Volksagen v. Woodson (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec2.2#box2.2a) —in personam jurisdiction

World Wide Volkswagen v. Woodson, 444 U.S. 286 (1980)

List of Cases Discussed, by Chapter

Chapter 2:

World Wide Volkswagen v. Woodson (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec2.2#box2.2a) —in personam jurisdiction

World Wide Volkswagen v. Woodson, 444 U.S. 286 (1980)

Asahi Metal Industry v. Superior Court of California (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec2.2#box2.2b) —in personam jurisdiction

Asahi Metal Industry v. Superior Court of California, 480 U.S. 102 (1987)

Chapter 5:

Richman v. Workers' Compensation Board (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec5.3#box5.3a) —workers' compensation

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Richman v. Workers' Compensation Board, 936 N.Y.S. 2d 722 (Jan. 2012)

Schmidt v. Falls Dodge, Inc (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec5.3#box5.3b) .—workers' compensation

Schmidt v. Falls Dodge, Inc, N.Y.S. Ct. App. (2012)

Brame v. Western State Hosp. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec5.3#box5.3c) —workers' compensation

Brame v. Western State Hosp., 136 Wash. App. 740, 150 P.3d 637 (2007)

Chapter 6:

U.S. v. Nosal (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec6.3#box6.3) —Computer Fraud and Abuse Act

U.S. v. Nosal, 676 F.3d 854, C.A.9 (Cal. 2012)

Chapter 7:

Guijosa v. Wal-Mart Stores (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec7.3#box7.3) —shoplifting

Guijosa v. Wal-Mart Stores, 101 Wn. 777 (2000)

Chapter 16:

Smith v. Greystone Alliance LLC (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec16.2#box16.2) —debt collection

Smith v. Greystone Alliance LLC, N.D. Ill. (2011)

Chapter 18:

In re: Lane (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec18.4#box18.4) —credit counseling

In re: Lane, Slip Copy 2012 WL 1865448, Bkrtcy, N.D. Okla. (2012)

Chapter 19:

Grande v. Jennings (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec19.1#box19.1) —found property

Grande v. Jennings,—-P.3d.—-, 2012, 635 Ariz. Adv. Rep. 19 (May 2012)

Chapter 21:

Williamson v. Coastal Physician Services of Southeast, Inc. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec21.1#box21.1a) — employment relationship

Williamson v. Coastal Physician Services of Southeast, Inc. 251 Ga. App. 667, 554 S.E.2d 739 Ga. App. (2001)

Eckis v. Sea World (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec21.1#box21.1b) —employment relationship

Eckis v. Sea World, 64 Cal. App. 3d 1 (1976)

Malorney v. B&L Motor Freight, Inc. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec21.2#box21.2) —negligent hiring

Malorney v. B&L Motor Freight, Inc., 146 Ill. App.3d 265, 496 N.E.2d 1086 (1986)

Chapter 22:

Heart of Atlanta Motel, Inc. v. United States (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec22.1#box22.1a) —Civil Rights Act

Heart of Atlanta Motel, Inc. v. United States, 379 U.S. 241 (1964)

Katzenbach v. McClung (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec22.1#box22.1b) —Affectation Doctrine

Katzenbach v. McClung, 379 U.S. 294 (1964)

Chapter 23:

Griggs v. Duke Power Company (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec23.1#box23.1) —race discrimination

Griggs v. Duke Power Company, 401 U.S. 424 (1971)

Chapter 24:

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Price Waterhouse v. Hopkins (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec24.1#box24.1a) —discrimination based on sex

Price Waterhouse v. Hopkins, 490 U.S. 228 (1989)

Dothard v. Rowlinson (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec24.1#box24.1b) —discrimination based on sex

Dothard v. Rowlinson, 433 U.S. 321 (1977)

Wal-Mart Stores, Inc. v. Dukes (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec24.1#box24.1c) —discrimination based on sex

Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011)

International Union, United Automobile, Aerospace & Agricultural Implement Workers of America, UAW, et al. v. Johnson Controls, Inc. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec24.2#box24.2a) —discrimination based on sex

International Union, United Automobile, Aerospace & Agricultural Implement Workers of America, UAW, et al. v. Johnson Controls, Inc., 499 U.S. 187 (1991)

Wilson v. Southwest Airlines Co. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec24.2#box24.2b) —discrimination based on sex

Wilson v. Southwest Airlines Co., 517 F. Supp. 292 (Tex. 1981)

Chapter 25:

Meritor Savings Bank v. Vinson (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec25.1#box25.1a) —sexual harassment

Meritor Savings Bank v. Vinson, 477 U.S. 57 (1986)

Harris v. Forklift Systems (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec25.1#box25.1b) —sexual harassment

Harris v. Forklift Systems, 510 U.S. 17 (1993)

Burlington Industries v. Ellerth (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec25.1#box25.1c) —sexual harassment

Burlington Industries v. Ellerth, 524 U.S. 742 (1998)

Kohler v. Inter-Tel Technologies (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec25.1#box25.1d) —sexual harassment

Kohler v. Inter-Tel Technologies, 244 F.3d 1167, 1176 (9th Cir. 2001)

Chapter 26:

Sánchez-Rodriguez v. AT&T Mobility Puerto Rico (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec26.1#box26.1) —religious discrimination

Sánchez-Rodriguez v. AT&T Mobility Puerto Rico, Inc., 673 F.3d 1 (1st Cir. 2012)

Christie v. Foremost (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec26.4#box26.4) —age discrimination

Christie v. Foremost Ins. Co., 785 F.2d 584 (7th Cir. 1986)

Chapter 27:

Northern Assurance Company v. Lark et al. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec27.1#box27.1) —agent authority

Northern Assurance Company v. Lark et al., 845 F. Supp. 1301 (1993)

Chapter 29:

Day et al. v. Stascavage et al. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec29.4#box29.4) —derivative action

Day et al. v. Stascavage et al., Colorado Court of Appeals

Chapter 30:

Walkovszky v. Carlton (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec30.5#box30.5) —piercing the corporate veil

Walkovszky v. Carlton, Court of Appeals of New York, 18 N.Y.2d. 414 (1966)

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Timeline of Major Modern Legal Developments That Affect Modern Businesses

Sherman Antitrust Act of 1890

Industrial Insurance Act of 1911

Clayton Act of 1914, as amended

Uniform Partnership Act (UPA) and Revised Uniform Partnership Act (RUPA) (1914–1997)

Uniform Limited Partnership Act (ULPA) (original act, 1916; amended in 1976, 1985, and 2001)

Norris–La Guardia Act of 1932

Securities Act of 1933

Securities Exchange Act of 1934

National Labor Relations Act of 1935

Social Security Act (1935)

Federal Insurance Contributions Act (FICA) (1935)

Fair Labor Standards Act (1938)

Administrative Procedures Act (1946)

Labor Management Relations Act (1947)

Model Business Corporation Act (MBCA) (1950)

Internal Revenue Code of 1954

Labor Management Reporting and Disclosure Act (1959)

Equal Pay Act of 1963

Civil Rights Acts of 1964 (in particular, Title VII, which prohibits discrimination against protected classes)

Age Discrimination in Employment Act of 1967 (ADEA)

Occupational Safety and Health Act (1970)

Federal Copyright Act of 1976

Foreign Corrupt Practices Act (FCPA) of 1977

Electronic Funds Transfer Act (1978)

Consumer Credit Protection Act (1978)

Fair Debt Collection Practices Act (part of Consumer Credit Protection Act of 1978)

Pregnancy Discrimination Act of 1978

Immigration Reform and Control Act of 1986

Americans with Disabilities Act of 1990

Family and Medical Leave Act (FMLA) of 1993

North American Free Trade Agreement (NAFTA) treaty, approved in 1994

Computer Fraud and Abuse Act (18 U.S.C. § 1030) (1994 and 1996)

Model Partnership Act of 1997

No Electronic Theft Act of 1997

Digital Millennium Copyright Act of 1998

Anticybersquatting Consumer Protection Act (ACPA) of 1999

Uniform Electronic Transactions Act (1999)

USA PATRIOT Act (2001)

Sarbanes–Oxley (The Public Company Accounting Reform and Investor Protection Act) of 2002

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)

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Consumer Product Safety Act; the Consumer Product Safety Improvement Act, 2008

Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010

Patient Protection and Affordable Care Act of 2010

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Glossary

abandoned property Intentionally placed property given up by the debtor.

absolute liability Also called liability without fault, imposed by law for injuries that result from certain kinds of activities that are, by nature, highly dangerous (e.g., wild animals, ultra-hazardous activities, and defective products).

acceleration clause A contract provision that enables a lender to demand payment of a loan if a certain event happens (e.g., the debtor misses payments), making the entire debt due and payable.

acceptance When the offeree agrees to the offeror's offer.

acceptance under the UCC If both parties are merchants, the offeree can give a non–mirror image acceptance, and all new terms become part of the contract. If the parties are nonmerchants, then any new terms in the acceptance become proposals to the contract.

accessibility In public and private facilities that are open to the public, a level of availability that is required for disabled people under the terms of the ADA.

accommodation parties Parties who cosign a note. They can be a codrawer, a coendorser, or a comaker. Depending on their signing capacity, they are either primarily or secondarily liable on the instrument.

accounting The process in which an agent reports the expenses incurred in the course of duty to the principal and provides proof of costs.

accredited investors Expert investors such as banks, executive of�icers, directors, and partners of the business issuing the security, and wealthy investors.

actionable tort A recognized civil wrong (other than breach of contract) for which a court may grant civil relief.

actual damages A monetary amount for which the plaintiff must produce a receipt showing speci�ic damages.

actual express authority A grant of power to an agent from a principal, either orally or in writing.

actual notice or noti�ication Personal notice from a principal to a third party that the agent is no longer employed by the principal and has no authority to bind the principal to contracts.

adjudicate To take a matter to court, to litigate, or to sue in a civil action.

administrative agency A governmental entity established to regulate a particularly complex, technical area of business or industry (e.g., nuclear power, communications, securities exchanges) that relies on special expertise.

administrative law judge Government employee (state or federal) who presides over agency hearings and writes opinions upon the conclusion of the hearing that resemble a judicial decision and are therefore quasi-judicial.

administrative law Law made by a state or federal administrative agency.

Administrative Procedure Act Speci�ies the procedures that administrative agencies must follow in promulgating new rules.

admitted as true If the defendant does not answer the allegations in the plaintiff's complaint, then the allegation in the complaint is considered true.

adverse impact Employment practices that appear facially neutral but in application are discriminatory.

adverse possession A means of acquiring property by maintaining possession of it during a statutorily de�ined period and meeting certain additional criteria.

Affectation Doctrine A theory developed by the U.S. Supreme Court that says if local activity affects people in other states, then intrastate commerce becomes interstate commerce.

af�irmative defense A defense raised by the defendant that, if proven, will result in dismissal of the lawsuit.

Age Discrimination in Employment Act (ADEA) of 1967 Federal law that describes the rules for hiring and �iring employees above the age of 40 and protects these older workers from being unfairly treated in employment decisions.

agency A consensual relationship that comes into existence when one person authorizes another to enter into a contract on his or her behalf.

agency by estoppel When a principal misleads a third party into believing that an unauthorized person is his or her agent (e.g., by silent assent).

agency law The body of law governing the formation, termination, and existence of principals and agents.

agency rules Guidelines under which an agency operates and that must be followed by persons over whom the agency is given regulatory powers.

agent A special type of employee, contractor, or third party who has the power to enter into contracts on behalf of the employer.

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Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) An international treaty dealing with intellectual property issues.

aiding in the commission of a crime Rendering assistance to a criminal in the commission of a crime, hiding, or converting the proceeds of criminal activity; punishable as a misdemeanor.

alien corporation A corporation organized under the laws of another country that does business anywhere in the United States.

allegations in the complaint The individually numbered paragraphs in the plaintiff's complaint.

allonge A separate piece of paper that is permanently attached to an instrument.

alternative dispute resolution A way to settle a dispute, sometimes using a third party, without going to court.

Americans With Disabilities Act (ADA) of 1990 Spells out how employers must accommodate disabled workers. This is a federal law that applies to all businesses, as opposed to a state law that applies only to businesses within that particular state.

Americans With Disabilities Act Amendments Act (ADAAA) In 2008, Congress amended the ADA and expanded the de�inition of disability to mean an impairment that substantially limits a major life activity.

anarchist A person who rebels against any authority, established order, or ruling power.

Answer The formal paper �iled by the defendant in response to the plaintiff's complaint.

antedating When a check or other instrument is issued on a particular date but the date written on it is earlier (it is still a negotiable instrument).

Anticybersquatting Consumer Protection Act (ACPA) Codi�ied at 15 U.S.C. §1125(d), the purpose of this law is to prevent someone from registering an Internet domain name that is confusingly similar to another's and then to "squat" on that domain.

apparent authority The authority an agent seems to have to a reasonable third party.

appeals court A court that reviews litigation after it has gone to trial and determines whether errors were made by the trial court.

appropriation In tort law, using a person's name or likeness for commercial purposes without his or her permission.

arbitration The process of hiring or employing a designated third party as an arbitrator who renders an opinion that is binding on the parties.

arson Intentional burning of any property, including one's own, for the purpose of collecting insurance.

Article 2 of the UCC The section of the Uniform Commercial Code that governs contract law for the sale of goods.

Article 3 of the UCC The section of the Uniform Commercial Code that sets out the rules for commercial paper.

Article 9 of the UCC The section of the Uniform Commercial Code that governs secured transactions.

Article I of the U.S. Constitution Part of the U.S. Constitution that establishes the legislative branch, or Congress.

Article II of the U.S. Constitution Part of the U.S. Constitution that establishes the executive branch.

Article III of the U.S. Constitution Part of the U.S. Constitution that establishes the federal judiciary or federal courts (the judicial branch).

Article I, Section 8, of the U.S. Constitution Part of the U.S. Constitution that sets out the powers of Congress.

Article 9 transactions Another name for secured transactions, governed by Article 9 of the UCC.

Articles of Incorporation The initial paperwork �iled by the incorporators with the secretary of state that, if approved, begins the corporation.

arti�icial being The concept that a corporation is a separate entity (separate from its owners) and can sue and be sued, borrow or lend money, etc., in the corporate name, much like a natural person.

assault Placing someone in apprehension of imminent, unwanted touching (battery), to which the person did not consent.

assignee The person who is assigned rights under a contract from an assignor.

assigning partnership property for the bene�it of creditors To resolve a debt with a creditor, the partnership transfers its interest in speci�ic partnership property to a creditor.

assignment of a partnership interest Transfer of the right to receive pro�its from a partnership to an outside third party.

assignment of rights Transferring one's rights under a contract to a third party.

assignor The person who transfers rights under a contract.

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Association of Certi�ied Fraud Examiners A U.S. organization that publishes literature and educates the public in the areas of fraud and certi�ies fraud examiners.

assumed name (D.B.A.) A name for a business, other than the owner's real name. Also known as doing business as, or D.B.A.

assumption of risk A situation in which a plaintiff suffers some injury from engaging in an activity he or she knows to be dangerous. That person cannot sue for any injury sustained as a result because he or she has assumed the risk.

attachment Seizure of personal property by a court-appointed of�icial, usually the sheriff.

attorney's fees The amount paid to an attorney for services rendered, which may include an hourly fee or a percentage of a �inal judgment in a civil case.

authentication Providing a description of the debtor's personal property either in a signed writing or in an electronic form (by a unique symbol, encryption, or similar process) to complete a security agreement with the creditor.

avoidance In contract law, to annul, cancel, or make void. Also called disaf�irmance.

bad debt Debt that is not collectible by the creditor.

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) A federal amendment to the Bankruptcy Code that makes it more dif�icult and expensive to �ile for bankruptcy and requires all debtors to engage in credit counseling.

Bankruptcy Code Title 11 of the U.S. Code, which was amended by BAPCPA in 2005.

bankruptcy decree A �inal decision in a Chapter 7 bankruptcy entered by the bankruptcy court, permanently discharging all the debtor's outstanding debts and allowing creditors to recover.

battery Unpermitted touching that is either harmful or offensive.

bearer instruments Instruments payable to bearer, cash, or the order of cash.

bearer paper An instrument that includes the word bearer or cash (e.g., "Pay to Bearer," "Pay to the Order of Cash") but names no speci�ically ascertainable person.

beyond a reasonable doubt The burden of proof in a criminal case, which states that every single member of the jury must be convinced of the defendant's guilt.

Bill of Rights The �irst 10 amendments to the U.S. Constitution, enumerating the individual rights and powers of citizens.

black letter law Theories of law in the context of business and employment contracts.

blank endorsement The signature of the payee written alone on the back of the check.

Blue Laws Laws in some states, based on traditions of religious morality, that ban certain commercial activities on Sundays and render contracts entered into then invalid.

blue sky laws State laws that regulate the issuers and sellers of securities; often modeled after federal laws.

board of directors The group of people that oversee a corporation and set policy. They are elected by the shareholders at the annual meeting.

bona �ide occupational quali�ications (BFOQs) According to the EEOC, acceptable reasons to discriminate because they are "reasonably necessary to the proper operation of the business."

bona �ide religious belief Under Title VII, a sincerely held religious tenet within the plaintiff's own scheme of things.

breach Failure of a party to perform part of a contractual agreement.

bribery of a public of�icial Promising to give something of value in exchange for a public of�icial's of�icial conduct.

burden of proof The degree to which the plaintiff or the state must convince the jury in order to prevail in the lawsuit or criminal case.

burden shifting After the plaintiff has established its prima facie case, the burden shifts to the defendant, who must counter the plaintiff's claims by rebutting the plaintiff's presumption and showing its good-faith actions to reasonably accommodate the plaintiff (if doing so would not have caused undue hardship).

burglary Breaking and entering any occupied structure with the intent of committing any crime inside.

business ethics The application of moral codes or values to problems faced by companies or managers in their work.

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business judgment rule A standard known for of�icers of a corporation, stating that boards of directors must make their decisions on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company. Failure to come up to this standard may result in individual liability for the directors.

business necessity defense An argument the defendant employer can advance to justify discriminatory employment actions against an employee. Bona �ide occupational quali�ications (BFOQs) fall into this category.

bylaws The internal rules governing the operation of the corporation.

capacity The mental ability to understand that one is entering into a contract. Also, the ability of a person of average mental abilities who is above the age of 18 to enter into contracts.

capital contribution The initial amount of money each partner contributes to begin the business; "seed money."

cartels Prohibited by the Sherman Antitrust Act, cartels involve the collusion of companies in the same industry to �ix prices. While restricted in the United States, cartels are allowed to some extent in Europe.

case law Law made by a judge (or panel of judges) as the result of a controversy between two parties. Also called judicial law.

cashier's check A check in which the bank is both the drawer and drawee.

cause of action An underlying legal right that is the basis of a lawsuit and the plaintiff's grievance.

cease and desist order A type of injunctive relief or court order wherein the person or entity must refrain from undertaking or continuing a certain type of conduct.

certi�icate of deposit (CD) A type of two-party commercial paper issued by a bank or other �inancial institution as evidence of its debt to a named creditor or depositor. In it, the maker agrees to pay the payee a set amount of money after a certain amount of time.

certi�icate of limited partnership The initial paperwork �iled with the secretary of state to form a limited partnership.

certi�icate of registration The form that a foreign limited partnership must �ile in order to legally do business in the United States. In some states, this is also the name given to the form that must be �iled by a domestic limited liability partnership.

certi�ication marks Speci�ic words or symbols adopted by a group of companies or government agencies to denote the quality, origin, or some other attribute relating to the goods.

certi�ied class A group of plaintiffs that have a common cause of action against the defendant(s).

certi�ied or bank check A negotiable instrument that is clearly marked "CERTIFIED," "ACCEPTED," or similarly. The bank agrees to guarantee payment on the check and to assume primary liability. The bank will set aside funds from the customer's account for this and charge the customer a convenience fee.

C&F Cost and freight (a shipping term). The cost of shipping (freight) is included in the sales price but not the cost of insurance.

Chapter 7 bankruptcy A type of bankruptcy that is also called a "fresh start" because it involves paying off creditors with whatever money or assets are available and being discharged from whatever debts remain.

Chapter 11 bankruptcy A type of bankruptcy that includes reorganization (restructuring) of debt and paying off creditors.

Chapter 13 bankruptcy A type of bankruptcy for individuals with stable income that allows them to reorganize their debt according to an agreed-upon plan with creditors and the court.

Chapter C corporation A corporation that can have unlimited shareholders, foreign or domestic.

Chapter S corporation A corporation with no more than 100 shareholders, all of whom are individuals, which the IRS exempts from paying federal corporate taxes but is treated as a partnership for federal tax purposes.

chattel Tangible, movable personal property.

check Three-party commercial paper in which the drawer orders the drawee (usually a bank) to pay the payee.

choses in action The right to bring a lawsuit to recover chattels, money, or a debt.

CIF Cost, insurance, and freight (a shipping term). In a CIF contract, the cost of shipping and insurance are included in the sale price.

citation The abbreviations following legal sources that tell the reader where to �ind the original text of the law.

civil action A lawsuit based on a civil action and usually requesting monetary damages.

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civil law system Found in most of Europe, a form of government that includes detailed legal codes prescribing individual rights and responsibilities, swiftly administers justice, and limits the power of judicial interpretation. This system tends toward an absolutist or deontological ethical philosophy.

Civil Rights Act of 1964 Also known as Title VII, the major federal law in the United States that prohibits discrimination on the basis of race, color, national origin, sex, or religion.

class action A lawsuit involving a large group of plaintiffs who have a common cause of action against the defendant.

classes of shares (stock) Corporate stock comprises several types, including common stock and preferred stock. Different classes of stock confer different voting rights on their owners.

Clayton Act (1914) An act of Congress that made all conspiracies to restrain trade or interfere with commerce illegal.

closed shop agreement One that requires employers to hire only union workers for that site.

closely held corporation Also known as a close corporation, a business entity whose shares are not traded to the general public in any stock exchange but that has a close-knit group of shareholders (or in some cases, only a single shareholder).

collateral Personal property that can be sold if the debtor defaults to make the creditor whole. Also known as security.

collective bargaining The negotiation of employment-related matters between employers and employees using an agent designated by the majority of employees, e.g., a union representative.

collective mark Any word, phrase, symbol, or design owned by a cooperative, association, or other group or organization that indicates the source of the goods or services.

color Skin pigmentation, such as light or dark skin.

Commerce Clause A passage contained in the U.S. Constitution in Article I, Section 8, that gives Congress the power to regulate interstate commerce.

commercial bribery To solicit, accept, or agree to accept anything of value in exchange for violating a duty of �idelity owed to one's employer, client, or company as an employee, of�icer of a corporation, partner, trustee, guardian, or member of a profession; a misdemeanor in most states.

commercial paper Also called a negotiable instrument, paper used in business in the place of money: a note, draft, check, or certi�icate of deposit.

committee of creditors In a Chapter 11 proceeding, a group of unsecured creditors appointed by the bankruptcy court that consults with the debtor about how debts will be paid off.

common carrier A form of transportation for goods or people that is available to the public.

common law The name given to the body of law established by the English and brought to the United States as the �irst law established in the colonies. Can also mean case law or the aggregate body of case law.

common law system A form of government that leaves the judiciary with latitude for interpreting the governmental edicts found in legislative enactments and provides a system of appellate courts to review trial courts' application of the law; determinations of fact are usually left to juries. This system adapts to the local customs, traditions, and needs of a people.

comparative negligence The plaintiff's negligence is �igured into the �inal award in a tort case.

compensatory damages Money awarded to the nonbreaching party to restore that person's position as though there had not been a breach of contract. The same as restitution.

complaint The initial paper served on the defendant in a civil lawsuit that tells the defendant he or she is being sued, the cause of action, and the amount of damages sought.

Computer Fraud and Abuse Act Federal law (18 USC §1030), which makes it illegal to intentionally access a computer without authorization to obtain consumer �inancial or U.S. government information, or to access a protected computer with the intent to defraud (through hacking).

concurrent ownership When two or more people own the same real property.

confessing a judgment A legally binding agreement in which a party admits that he or she owes another money; thus, the creditor does not have to sue the debtor in court but can use the confession to collect the money from the debtor.

con�irmation of a reorganization plan The bankruptcy court approval of a Chapter 13 plan submitted by the debtor.

Congress The federal legislative body that enacts federal statutes.

consideration When the offeree does something that he or she was not previously legally bound to do because of the offeror's promise. Distinct from a gift.

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Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Amended ERISA to provide workers and their families who lose their health bene�its owing to a qualifying event the right to choose to continue group health bene�its provided by their group health plan for a limited period of time.

constructive notice Notice "to the world" via a communication of mass media that the agent is no longer employed by the principal.

Consumer Financial Protection Bureau (CFPB) Agency created by the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 to enforce federal consumer protection laws. It also has a mandate to educate and inform consumers about terms of the agreements they make with �inancial companies.

continuation statement A document that can be �iled within six months before a �inancing statement's expiration to extend the latter an additional �ive years.

contract modi�ication Changes to a contract after contract formation.

contract of sale The agreement entered into between the seller and the buyer setting out the terms of the sale of real property.

contractual liability The obligation that arises on a negotiable instrument because of the relationship between the parties.

contributory negligence At common law, a person suing another for negligence can recover damages only if he or she was free of any negligence.

controversy A dispute between two or more parties that may be decided in court.

controverted Refers to a workers' compensation case in which the employer refuses to pay following a worker's injury or death.

conversion Permanently depriving the owner of personal property of its use and enjoyment through theft or destruction.

copyright An exclusive right to pro�it from literary, dramatic, musical, choreographic, and artistic works for 70 years plus the life of the author.

corporate culture The values, goals, and character of an organization.

corporate of�icers The persons responsible for the day-to-day operation of a corporation who are appointed by the board of directors.

corporate social responsibility The role of the organization as a corporate citizen rather than merely a pro�it-making enterprise; the notion that corporations should use their wealth and power to take on voluntary roles to support social good.

corporation A business entity that is separate and distinct from its owners, the shareholders. The law grants a corporation status as an arti�icial being, much like a person, in that it has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes.

counteroffer An offer by the offeree that kills the original offer and creates the power of acceptance in the offeror.

credit card fraud Using a forged or stolen credit card to obtain goods, services, or cash advances or using a credit card after it has been canceled or recalled.

creditor The party to a �inancial relationship who has the right to demand money at a given time.

crime of attempt Taking a substantial step toward committing a criminal act, wherein the defendant acted with criminal intent.

criminal action A court action brought by the state through the district attorney or the federal government through the U.S. Attorney seeking con�inement of the defendant for a wrong.

criminal act or omission A wrong as de�ined by state or federal statute.

criminal conspiracy Either planning and agreeing to commit a crime with others or agreeing to assist others in the commission of a crime.

criminal intent Also known as mens rea (literally, guilty mind), the de�inition of criminal intent varies from crime to crime. The mens rea for murder is the intent to kill; for robbery, it is the intent to permanently deprive the owner of his property.

criminal law An area of the legal system that tries to prohibit and punish antisocial behavior; it re�lects society's ethical standards and attempts to discourage behavior that society deems immoral.

criminal mischief Damaging the personal or real property of another purposely, recklessly, or negligently by the use of explosives, �ire, or other dangerous means.

criminal trespass Knowingly entering (or refusing to leave when asked) real property owned by another without permission to do so.

damages Monetary loss that results from the breaching parties' actions or some sort of physical or bodily injury suffered by the plaintiff. Bodily injuries may include both physical and mental harm.

debtor The party to a �inancial relationship who has the duty to pay the creditor money.

debtor–creditor relationship A contractual arrangement between, for example, a customer and a bank, where the creditor can demand money from the debtor, who has the duty to pay from that account. Can also be an informal relationship created by a private transaction.

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debtor in possession In a Chapter 11 proceeding, a debtor who is allowed to keep his or her assets while the reorganization is being processed.

deed The document that conveys title to real property.

de facto corporation A corporation in fact, and treated as a valid corporation.

defamation Publishing false statements about a person that damage his or her reputation.

default When a debtor fails to make payments on a loan.

default judgment A judgment entered by the court when the defendant fails to answer the complaint or show up for the court proceedings.

defendant The person either sued in a civil action or against whom charges are brought in a criminal action.

defenses to contracts Legally valid excuses for not performing a contract.

de jure corporation A corporation properly formed by virtue of law.

delivery upon a family member One of the ways to serve process on a defendant if the defendant cannot be found.

demand instrument A type of commercial paper that is payable at whatever time it is presented for payment.

denial of a writ of certiorari When the U.S. Supreme Court will not hear the appeal, ending the case.

deontology A duty-based ethical theory that emphasizes individual rights and good intentions.

deposition A form of discovery whereby the parties can ask questions about the upcoming lawsuit and the other side has to answer. The deposition testimony can be in the form of a written record, an audiotape or videotape, or both.

derivative action A lawsuit brought by the shareholders of a corporation instead of the board of directors, whom the shareholders believe did not take proper and timely action or a legal action brought by a limited partner to enforce a partnership cause against third parties that the general partners are unwilling to enforce themselves.

destination contract A type of contract for the sale of goods in which the risk of loss is on the seller until the goods are tendered at the buyer's city or destination.

detriment Doing something that one is not previously, legally obligated to do.

Digital Millennium Copyright Act of 1998 Federal legislation criminalizing technology that circumvents measures that control access to copyrighted works.

direct causation Close cause-and-effect relationship between an action and its consequences. Also known as foreseeability.

disability An impairment (e.g., deafness, epilepsy, diabetes, cancer, HIV infection, bipolar disorder) that substantially limits a major life activity.

disaf�irmance When a minor opts out of a contract before the age of 18.

disaf�irming Choosing to get out of a contract or principal–agency relationship by an incompetent person (one lacking mental capacity) or a minor.

discharged The parties to a contract have performed all their obligations under the agreement and have no obligations remaining or when a debtor no longer has any legal obligation to pay the debt; the goal of bankruptcy proceedings.

disclosed principal A principal whose existence and identity are known to the third party.

discovery Prior to a civil trial, a proceeding in which the evidence and testimony are divulged to the other side.

dishonor Refusal to make payment on a negotiable instrument when it is presented for payment.

disparagement Closely related to defamation, a tort that consists of willful misrepresentations about the quality of a competitor's goods or services that are untrue or misleading and that are meant to in�luence the public not to buy or use the product or services.

disparate impact The result of the employer's discriminatory actions (even if unintended) that have an adverse impact on a protected class. The EEOC uses statistics to determine whether disparate impact is occurring (the four-�ifths rule).

disparate impact discrimination Policies that are neutral on their face but in practice have a discriminatory effect.

disparate treatment Intentional employment discrimination against females or another protected class.

dissociation When a partner leaves a partnership either voluntarily, because of the partnership agreement terms, or owing to egregious conduct. Upon dissociation, partners lose the authority to bind the partnership to new contracts.

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distributions In a Chapter C corporation, a distribution occurs when pro�its of the corporation are sent to the shareholders in the form of dividends.

district attorney A state government employee who prosecutes crimes on behalf of the citizens of the state.

diversity of citizenship When all the plaintiffs are from different states than all the defendants.

dividends Pro�its divided equitably among stockholders.

Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 Legislation that increased oversight of the �inancial industry and sought to prevent the types of risk-taking and deceptive practices that led to the 2008 �inancial crisis.

domestic corporation A corporation operating only in the state in which it �iled its Articles of Incorporation.

domestic limited partnership A partnership is domesticated in the state where it �iled its original certi�icate of limited partnership.

domiciliary An individual living in the state.

dominant estate The land that bene�its from an easement.

donee Person who receives a gift.

donor Owner of property who transfers it to another.

double taxation The concept that corporations are taxed twice: �irst, when the corporation pays income taxes on corporate pro�its, and second, when the shareholders pay personal income taxes on corporate pro�its distributed to them as dividends.

draft Three-party paper in which the drawer orders the drawee to pay the payee; here, the drawee is not a bank, but an individual or a private company.

draw A partner's share of the pro�its, withdrawn on a regular basis from the partnership's account.

drawee The party on which an order for payment is made by the drawer. For checks, the drawee is always a bank.

drawer The maker of a draft ordering the drawee to make payment to a speci�ied payee.

due diligence A level of care in which a business takes reasonable care to investigate all facts, repercussions, and legal and �inancial aspects of making a decision.

due process The concept, grounded in the U.S. Constitution, that to ensure "fairness," all defendants must be given notice of a lawsuit.

duress A defense to a contract that involves a threat of physical or mental harm to force a party to enter into a contract.

duties The obligation under a contract.

duty of care The standard of behavior expected of a person in a particular situation.

duty of cooperation The legal obligation of the principal to render any reasonable assistance necessary to allow the agent to carry out the responsibilities of the agency.

duty of reimbursement The legal obligation of a principal to pay back the agent for monies expended in carrying out the principal's business.

duty to exercise due care The obligation of an agent to exercise the duties of agency with reasonable care.

duty to indemnify The legal obligation of the principal to reimburse the agent for losses suffered in carrying out the principal's business.

duty to render an accounting The duty of an agent to keep accurate records of expenses incurred on behalf of the principal.

easement Right to use private property of another for a limited purpose, e.g., as a thoroughfare.

Electronic Data Gathering Analysis and Retrieval (EDGAR) database Electronic data gathering analysis and retrieval database maintained by the Securities and Exchange Commission.

embezzlement The misappropriation of property in one's care belonging to another.

eminent domain The right of the government, granted by the U.S. Constitution, to take property from an owner for a public purpose but requiring the government to pay the owner reparations.

employee A worker that the employer characteristically directs in terms of hours, manner of doing the job, and location of work.

employment at will A work relationship that may be terminated by either party at any time and for any reason as long as the reason is not based on a protected area of discrimination.

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employment contract A document that determines the rights and responsibilities of the parties; can be oral or written and must not con�lict with federal or state law.

Employment Retirement Income Security Act of 1974 (ERISA) Sets standards for most retirement and health plans voluntarily administered by employers in the private sector.

endorsement Writing on a negotiable instrument that has the effect of transferring all the rights represented by that instrument to another party.

endorser (or indorser) Someone who lends a signature to an instrument and thereby has secondary liability for payment of the instrument.

entrapment Being enticed or convinced to commit a crime by law enforcement agents when not otherwise predisposed to do so; a defense that can be asserted to escape criminal liability.

equal dignities rule A rule that states if the contract between the agent and third party must be in writing, then the contract between the principal and the agent must also be in writing.

Equal Employment Opportunity Commission (EEOC) The federal administrative agency that oversees discrimination complaints based on Title VII of the Civil Rights Act of 1964.

errant employee An employee who does not follow the instructions of his or her employer.

escape clause Contract language that says, if you made any mistakes before the contract has been reviewed by an attorney, you can be released from the contract.

ethical absolutism An ethical philosophy tied in to the central idea that there are certain universal standards by which to measure morality and justice.

ethical philosophy A set of beliefs about right and wrong that guides decision making both in individuals and in societies at large.

ethical relativism A system of thought that denies the existence of absolute moral values. Also known as "situational ethics."

ethics The branch of philosophy concerned with the study of morality.

exclusive remedy The concept that employees may not sue their employers for injuries or death on the job but can seek a remedy only through the workers' compensation process.

exculpatory clause Also known as a waiver of liability, states in writing that the owner is not liable for injury or harm to users of the facilities.

executive agencies Agencies that have been created to assist the executive branch in carrying out its responsibilities.

exempt employees Under the Fair Labor Standards Act, employees who do not receive overtime pay (time and a half of their hourly wage), including executive, administrative, and professional workers.

exempt from registration Refers to securities that do not have to be registered with the Securities and Exchange Commission prior to becoming public offerings.

exempt property Property of the debtor that is not subject to the bankruptcy proceeding and therefore survives the bankruptcy.

extension clause A contract provision allowing the parties to lengthen the term of the contract, after its expiration date.

Fair Debt Collection Practices Act A federal law enacted in 1978 (15 U.S.C. § 1692) that regulates how businesses must act when collecting debts from consumers, to curb abusive debt collection practices.

Fair Labor Standards Act of 1938 Sets minimum wage and hour standards.

fair use The use of copyrighted materials without paying the author in limited circumstances such as literary criticism and news reporting.

false accusation in the workplace A type of defamation lawsuit in which the employer makes a statement about the employee, such as accusing that person of stealing from the business.

false imprisonment Intentionally interfering, without just cause, with a person's right to freely move about.

false light Publishing true facts about someone but in such a way that unpopular views or actions are attributed to that person.

Family and Medical Leave Act (FMLA) of 1993 Federal legislation that allows employees to take off 12 weeks unpaid leave from work, keep their insurance bene�its, and have their job to return to when the 12-week period is over.

FAS Free alongside a vessel (a shipping term). The seller bears the responsibility (and cost, if any) of transferring the goods into the possession of the carrier or to a named destination.

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Federal Copyright Act of 1976 Legal protection to authors of literary, dramatic, musical, choreographic, and artistic works, including motion pictures and other audiovisual works.

federal question A question or issue "arising under the U.S. Constitution" or having a basis in federal law.

Federal Sentencing Guidelines (FSG) Voluntary parameters that companies can implement to reduce their liability and penalties if one of their employees commits a crime; the guidelines encourage employers to adopt ethics and compliance programs.

federal statute A law passed by Congress and signed into law by the president.

federal tax identi�ication number (TIN) The number the government assigns to a business entity (e.g., a sole proprietorship) in the form of a nine-digit number; used for �iling tax returns.

Federal Trade Commission (FTC) The federal agency that has jurisdiction over business practices that are anticompetitive, deceptive, or unfair to consumers.

federal (U.S.) Constitution The "supreme law of the land" to whose standards all laws must be submitted.

felony The most serious type of crime; punishable by more than one year's imprisonment in a state or federal penitentiary.

�ictitious payee A sham account holder created by an employee who then deposits company checks into that account for personal use.

�iduciary relationship A relationship of special trust, carrying with it increased responsibilities toward the other party.

�inancing statement (UCC-1 form) More commonly called a UCC-1 form, a record or records composed of an initial �inancing statement and any �iled record relating to the initial �inancing statement (UCC §9-102(a)(39)); the third step in creating a secured transaction.

�ixtures Property that is �irmly attached to land or buildings that is characterized as real property.

FOB A shipping term that means "free on board." The seller bears the responsibility (and cost, if any) of transferring the goods into the possession of the carrier or to a named destination.

foreclose Action taken by a creditor who seeks to enforce the terms of a mortgage by taking possession of a debtor's home and selling it in order to pay the balance of the debt owed.

foreign corporation A corporation operating in states in which it did not �ile its original Articles of Incorporation. To become a foreign corporation, the business must �ile with the secretary of each state where it seeks to operate.

Foreign Corrupt Practices Act (FCPA) An act that made it unlawful for American companies to make payments to foreign governments and of�icials to assist in obtaining or retaining business.

foreseeability Knowledge that a particular action will have a certain (harmful) consequence, as viewed by a reasonable person. Same as direct causation.

forgery Material alteration to a written document issued by another that is made in order to defraud or mislead.

four-�ifths rule A quantitative analysis used by the EEOC to determine if an employer's selection rates have an adverse impact on a protected class.

fraud A tort that consists of one person intentionally misleading another into undertaking an action that causes tangible harm.

fraud in the execution Causing a party to enter into a contract by intentionally encouraging that party to execute a legal instrument and misrepresenting the nature of the instrument being signed.

fraud in the inducement Causing a party to enter into a contract under false pretenses, e.g., when one party enters into a contract because the other party knowingly lied. The resulting contract is voidable at the option of the defrauded party.

fraudulent transfer A transfer of property made by the debtor to try to hide the property from the bankruptcy court and creditors.

future goods Goods that are not in existence at the time of entering into a contract, such as goods to be manufactured or ordered by the seller for the buyer.

gap creditor A person who becomes a creditor in the normal course of business after the �iling of the bankruptcy petition but before the appointment of a trustee.

gap-�illing The rule under the UCC that the court will �ill in any term not agreed upon by the parties, other than de�inite quantity.

garnishment Obtaining an interest from a third party (e.g., an employer) in the debtor's property or wages.

garnishment of wages A court proceeding against a defendant who refuses to pay a judgment. In it, money is taken out of the defendant's paycheck and given to the plaintiff.

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general jurisdiction Refers to a court that can hear any type of controversy and award any amount of money.

general partners Co-owners of the partnership who owe the business the �iduciary duties of agents and who share in the management and the pro�its of the business, as well as in its debts.

general partnership A type of business formed by two or more persons for the purpose of engaging in a business for a pro�it. Also can exist de jure (by law).

gift A freely given, voluntary transfer of property without consideration.

Good Samaritan law Legislation to protect medical personnel, such as doctors, nurses, and medical technicians, who administer emergency assistance at accident sites from liability.

goods Items that are tangible and movable.

goodwill The intangible "name recognition" of a business that has meaning to customers and, in some cases, may be worth a great deal of money.

grand jury Group of jurors convened by the state or federal prosecutor for the purpose of presenting evidence; the jury determines whether evidence is suf�icient to indict (formally charge) the defendant with a crime.

grant of a writ of certiorari When the U.S. Supreme Court has agreed to hear an appeal.

grantee The purchaser of real property.

grantor The owner of real property who transfers the property to the grantee.

gratuitous agent An agent who works for free and whom the principal has no legal obligation to pay.

guaranteed Funds that are certain to be paid on an instrument because they are backed up by a bank's special account or certi�ication.

Health Insurance Portability and Accountability Act of 1996 (HIPAA) Protects individuals and families covered by group health plans from the exclusion of coverage for preexisting medical conditions when employees change health plans.

holder in due course The third party to a transaction, following a payee, who has elevated status and can get paid on commercial paper even if a dispute arises between the seller and the buyer, in most circumstances.

homestead exemption The amount of equity value on a primary residence that the �iler is allowed to keep; set by state law.

hostile work environment A workplace that is discriminatory and laden with sexual intimidation, ridicule, and insult.

Howey test The test developed by the U.S. Supreme Court in SEC v. W. J. Howey Co. to determine whether paper (an investment contract) is in fact a security.

identi�ication of goods to the contract The moment at which a buyer's goods are selected and picked out as that particular buyer's.

Immigration Reform and Control Act of 1986 A major piece of legislation affecting employers. Under this federal law, employers must keep detailed records on employees' immigration status or risk signi�icant monetary sanctions.

impaneling a jury Choosing the jury; also called voir dire.

impeach To place the integrity and veracity of a witness in doubt by demonstrating before a jury the inaccuracies and contradictions between the witness's testimony and deposition.

implied authority The permission necessary to carry out the work ordered under express authority; the authority that �lows from express authority.

impossibility In contract law, being unable to ful�ill the terms of the contract without undue hardship.

imputed knowledge The principal's constructive awareness of any relevant information the agent learns during the course of performing his or her duties under the agency.

inadmissible Evidence that a jury cannot hear because it is not part of the �inal contract. Under the parol evidence rule, a previous but unwritten agreement between two parties to a contract.

incompetent A person who lacks mental capacity. An incompetent who has been declared so by the court is non compos mentis, and that person's contracts are void.

incomplete instrument A negotiable instrument that has not been completely �illed out by the maker or drawer and that cannot be enforced until it is.

incorporators People who form the initial group who aim to create a new business by making investments, selling stock subscriptions, and performing preincorporation activities at their own risk. Also known as promoters.

indemnify To secure against loss or damage that may occur; to compensate for loss or damage that took place; to insure or hold harmless.

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independent contractor A self-employed worker who is not an employee but who is typically hired to work one job for one-time payment, provides his or her own tools and equipment, and is not under the close supervision of the employer.

independent federal agencies Agencies created by Congress to assist it in exerting regulatory control or to carry out governmental administration.

indictment Formal written accusation of a criminal charge against a defendant, brought by a grand jury.

industry standard of care The duty of care established by experts in a particular �ield.

in�luence peddling To solicit, receive, or agree to receive any consideration for the trading of political in�luence by a public servant; a misdemeanor.

initial public offering (IPO) The �irst time a stock is offered for sale on a stock exchange to the public.

injunction A court order prohibiting a trespasser from continuing to do trespass in the future.

injunction A judicial remedy that requires a party to refrain from (or not initiate) certain actions in order to prevent future injuries or harm. Can be temporary (as in prior to litigation during a trial) or permanent (issued upon completion of a trial).

injunctive relief A court order prohibiting a continual trespasser from trespassing on a particular property.

in personam jurisdiction The power of the state over the defendant's assets so that if the plaintiff prevails in the lawsuit, the plaintiff can collect money from the defendant.

in rem jurisdiction Jurisdiction of a court over the person's real or personal property.

insiders Corporate of�icers, directors, and anyone who controls 10% or more of any company's class of equity securities.

insolvency Inability to pay debts as they become due.

instrument Another name for commercial paper.

insurable interest Suf�icient property interest in goods so that one can obtain insurance against his or her loss.

intellectual property Intangible personal property; covers ownership rights over things that do not have physical existence, e.g., music, copyrights, trademarks, and trade names.

intent The defendant's understanding of the consequences of his or her act.

intentional in�liction of emotional distress Deliberately causing someone to suffer extreme psychological pain by engaging in extremely cruel, outrageous conduct.

interim trustee During a stay, a bankruptcy court–appointed person whose responsibility it is to collect nonexempt property from the debtor.

interlocking directorates Under the Clayton Act, an of�icer or director of one corporation is prohibited from serving as an of�icer or director of another competing corporation if each corporation has capital, surplus, and undivided pro�its aggregating to more than $10 million.

interrogatories A form of discovery whereby the other side is given a set of written questions to answer.

interstate commerce Commerce that takes place across state lines.

intervening cause In a tort case, any outside circumstance not caused by the defendant and not within the defendant's control.

intrastate commerce Commerce that takes place within a state.

intrusion into seclusion Willfully observing the private conduct of others under circumstances where an expectation of privacy exists.

invasion of privacy Publication of private facts that a reasonable person would �ind objectionable. Appropriation of a person's name or likeness for commercial use, false light, intrusion into seclusion, and public disclosure all constitute invasion of privacy torts.

involuntary liquidation When creditors force a debtor into Chapter 7 bankruptcy, requiring that person to sell off his or her assets.

issuance Listing of stock on a public stock exchange, such as the New York Stock Exchange, thereby making the stock available for purchase by the public or the process wherein the drawer makes a check payable to the payee and hands it to the payee.

issuing a bad check To issue a check drawn on an account that no longer exists or on an account with insuf�icient funds to honor the check when it is presented.

Jim Crow laws State and local laws enacted between 1876 and 1965 that mandated racial segregation in all public facilities in southern states of the former Confederacy. Starting in 1890, they established a standard of "separate but equal" status for African-Americans.

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joint and several liability The concept that partners can be sued individually or collectively for debts the partnership owes or to pay damages in tort lawsuits.

joint tenancy A form of concurrent ownership in which the last survivor obtains title to all the property.

judgment The �inal order by a court in which one side is declared the winner and the other the loser; the declaration that the loser has to pay the winner a certain sum of money. A monetary judgment.

judgment lien An interest acquired by the creditor in the debtor's real or personal property as the result of a judgment.

judgment notwithstanding the verdict At the conclusion of a trial, a judgment whereby a judge overturns the decision of the jury in the interest of justice, thereby reversing the jury decision.

judicial law See case law.

judicial review The power of courts to declare the acts of legislative bodies, including the U.S. Congress, void if they violate the courts' interpretation of the U.S. Constitution.

justice ethics A philosophical system based on the concept of fairness guiding actions.

justiciable cause of action A cause of action that involves a protected legal right and is "able to be adjudicated," as opposed to a nonjusticiable cause of action, which involves subjective wrongs, such as hurt feelings or a bruised ego.

Labor Management Relations Act of 1947 Modi�ied the National Labor Relations Act of 1935 by forbidding unions to engage in unfair labor practices.

Labor Management Reporting and Disclosure Act of 1959 (Landrum–Grif�in Act) Further modi�ied the National Labor Relations Act of 1935, primarily by tightening up control of unions' internal affairs.

lapse The end of an offer; when too much time has gone by and the offeree has not accepted.

larceny The intentional taking and carrying away of the property of another with the intent to permanently deprive the owner of its use.

large communicating medium Means of broadcasting a message, e.g., television, the Internet, newspapers, webpage, Tweet, or radio advertisement.

lawsuit A controversy brought to court by litigants: the plaintiff and defendant.

levy on earnings An interest acquired by the creditor in the debtor's wages as the result of a judgment; results in the garnishment of the debtor's pay.

libel A form of defamation in which false statements about a person are written or in a tangible form (e.g., as electronic data on the Internet).

license In real property, a temporary, revocable privilege to enter onto the lands of another for a limited time and purpose.

lien An interest in the debtor's property.

limited jurisdiction Refers to a court that cannot hear all types of controversy and is limited as to how much money it can award a party.

limited liability company (LLC) A type of business formed by permission of the secretary of state's of�ice; usually applies to professionals such as doctors or lawyers.

limited partners Co-owners of a partnership who share only in the pro�its of the business and are liable for its debts only up to the limit of their capital investment. They are prohibited from participating in the control of the business.

limited partnership A type of partnership in which there are general partners and limited partners who are investors in the general partnership.

liquidation Process whereby a debtor's assets are sold to pay off creditors.

litigants Parties to a lawsuit; the plaintiff and defendant.

litigation The act of suing someone in court; a plaintiff bringing a lawsuit against a defendant.

long-arm statute A law that allows a state to acquire in personam jurisdiction over a defendant who comes into the state and commits a tort or enters into a contract.

lost property Belongings unintentionally placed whose owner forgets where they were left.

majority Reaching the age of 18, at which time one's contracts are binding.

malice Making a false statement either with the actual knowledge that it is false or with reckless disregard for its truth or falsity.

malpractice Improper conduct, negligence, or incompetent performance of professional duties.

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master An employer who has an employee who commits a tort.

means test Under the BAPCPA, how the debtor must show that his or her monthly income, compared with allowed expenses, is not higher than the act allows and thereby enables Chapter 7 �iling.

mediation Bringing in a third party to assist with a dispute.

meeting of creditors Bankruptcy court proceeding in which the defendant answers questions set forth by the creditors.

merchant A person who regularly deals in goods of a certain kind.

merchant's con�irming memorandum A writing following an oral contract that con�irms the agreement between merchants for the sale of goods worth more than $500, thereby making the contract enforceable.

minimal contacts The least contact a defendant must have with a state before the state will have jurisdiction over that defendant and his or her assets.

minor A person under the age of 18.

mirror image rule Required by the common law for contract formation; when the offeree's response to an offer matches every aspect of the offer and changes nothing.

misdemeanor Offense that can carry a maximum penalty of one year's imprisonment.

misplaced property Property intentionally placed whose owner forgets where.

Model Business Corporation Act (MBCA) of 1950 The basis of corporate law in most states, a model statute created by the American Bar Association.

Model Penal Code Criminal law guidelines promulgated by the American Law Institute in 1962 and revised in 1981.

modi�ied comparative negligence A concept governing jurisdictions that allows plaintiffs to recover damages only if they are less than 50% negligent themselves.

mortgage An interest that the creditor (mortgagee) has in the debtor's real property.

National Labor Relations Act of 1935 (Wagner Act) Granted employees the rights to organize, to bargain collectively through representatives of their own choosing, and to engage in activities for the purpose of collective bargaining or other mutual aid or protection; also prohibited �ive unfair labor practices by employers.

National Labor Relations Board (NLRB) A government body established by the Wagner Act to hear and adjudicate complaints from employees about employers' unfair labor practices.

necessaries What minors are liable for when entering into a contract: food, clothing, and shelter.

negligence When a person falls short of a reasonable or statutory standard of care and causes foreseeable injury to others.

negligent hiring If an employer is grossly negligent for the acts of an employee, in some states, a court might add liability for the fact that the employer hired the person in the �irst place.

negotiable instrument Instrument meeting all six requirements of negotiability so that the third party receiving it can be a holder in due course.

negotiated The transference of a negotiable instrument by physical delivery or by endorsement plus delivery.

negotiation Attempting to work out a resolution to a dispute with the other party or the physical transfer of commercial paper to the third party in the transaction.

neutral on its face A test that does not appear to be discriminatory at �irst; it is only when the test is actually implemented that it becomes discriminatory.

nihilism Derived from the Latin word for nothing, a philosophy that denies the existence of any ethical standards.

No Electronic Theft Act of 1997 Federal legislation that provides for criminal sanctions for certain types of copyright infringement.

nominal damages Damages in name only, usually $1.

noncompetition clause Part of a contract establishing that, after employment ends, the employee can work for a competing business in the same market only after a certain amount of time or beyond a certain distance from the employer.

non compos mentis Not being of sound mind; insane. Deemed by a court to be legally incompetent and thus incapable of entering into contracts, for instance.

nonconforming use The continued use of private land for a nonzoned purpose after the zoning laws have changed; usually this use expires with the owner's loss of title.

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nonexempt employees Under the Fair Labor Standards Act, those who must be paid overtime (time and a half of their hourly wage) after working 40 hours per week.

nonexempt property Property of the debtor, other than personal residence, that is subject to the bankruptcy proceeding and therefore can be taken from the debtor.

nonmerchant A person who does not deal regularly in goods of that kind.

nonpro�it corporation A corporation organized for the purpose of achieving some artistic, humanitarian, or philanthropic purpose or the rendering of some public service. By de�inition, all public corporations are nonpro�it.

Norris–La Guardia Act of 1932 Made illegal an agreement that prohibits workers from joining unions as a condition of being hired and restricted the power of federal judges to issue injunctions against union boycotts.

note A document that represents the debt between the creditor and the debtor; the �irst step in creating a security agreement or two-party commercial paper in which the maker promises to pay the payee.

notice of dishonor Communication that an instrument presented for payment has not been honored, given by a bank or other party to the person who may be liable on the instrument or any other holder or third party.

Notice of Right to Sue For discrimination cases that are never resolved at the agency level, the EEOC issues this notice, which allows the claimant to pursue the matter in court.

objective test How an interaction appears to a reasonable third party and whether it appears that the parties involved in the interaction are entering into a contract.

obstruction of justice Any intentional interference with the administration of justice in a person's of�icial or private conduct; a misdemeanor.

Occupational Safety and Health Act of 1970 Regulates employee health and safety on the job; sets standards for worker safety.

offer A statement of intent to enter into a contract.

offeree The party to whom the offer is made.

offeror The party making an offer.

Online Assessment System A website tool provided by the EEOC in which a potential claimant can analyze his or her discrimination claim via a series of questions, to determine whether bringing a claim is warranted.

opening statements In a civil trial, the phase in which the lawyers tell the jury what they are going to prove in the trial.

option contract In this contract, the offeree pays money to hold the offer open for a certain amount of time, pending acceptance.

Order for Relief A bankruptcy court order that effectively shuts down the ability to collect on the debt, giving the debtor time off from payment; also called a stay.

order instrument Commercial paper ordering the drawee to pay the payee. An instrument is payable to order if it states that it is payable to a speci�ically ascertainable person, company, or group of people.

order paper This type of instrument includes the word order and is payable to a speci�ic person or entity.

original tenor The amount the drawer drew the check for; its face value.

overdraft Taking more money out of your account than is available for withdrawal, or that is available to you but is later reversed.

parol agreement Oral, rather than written, agreement.

parol evidence rule Holds that all prior or contemporaneous oral or written agreements that vary or contradict the �inal integrated contract are inadmissible in court.

partially disclosed principal A principal whose existence is known to the third party, but whose identity is not.

partnership agreement The contract entered into by the partners setting forth their respective rights and duties.

partnership A type of business formed by two or more people in which they are engaged in a business as co-owners with the intent to make a pro�it.

partnership books The records showing the �inancial transactions of the partnership. The books must be kept at the principal of�ice of the partnership and made available to every partner, at all times, for inspection and copying.

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partnership by estoppel When partners are prevented (estopped) from denying the nonpartner's partnership status with regard to any innocent third person who justi�iably relied on the misrepresentation by an apparent partner.

part performance Suf�icient proof of an oral contract's existence (i.e., a party begins to ful�ill its terms) to make it enforceable.

party to be charged The party to be sued or the defendant (who has signed a contract) in a breach of contract lawsuit; the party sought to be bound by a contract.

patent The right given to an inventor by the U.S. government to pro�it from an invention.

patent infringement Use of someone else's invention without his or her permission (during the time period in which the patent is exclusive).

patentable Describes when the subject matter for which a patent is sought is new and does not infringe on any other existing patent.

Patient Protection and Affordable Care Act (ACA, or "ObamaCare") Sweeping health care reform law passed by Congress in 2010 that is set to fully go into effect in 2014. Under its terms, insurance companies will not be able to deny anyone health coverage on the basis of previous medical history. Also, individual citizens will be required to purchase health insurance, and employers with more than 50 employees will be required to offer health insurance coverage to their employees or face penalties.

payee The person who is paid.

perfected security interest or perfection A security interest in personal property that is protected against other creditors who claim the same collateral. Perfection is obtained by �iling a �inancing statement or being in physical possession of the collateral.

performance Ful�illment of one's obligations under the terms of a contract.

perjury Making a material misrepresentation while under oath or through a sworn statement.

permanent partial disability A determination in workers' compensation that the disability suffered by the employee covers part of the body but will be permanent, thereby converting it to a "schedule loss of use award." The injury is given a �ixed number of lost weeks' compensation according to the bodily member injured.

per se violations of the Sherman Act Types of agreements that are so harmful to free competition that they are punishable in themselves without having to be examined for their reasonableness or potential restraint on commerce.

personal defenses Defenses that the holder in due course takes "free from"; thus, the holder in due course still gets paid if the defense is personal.

personal delivery One way to serve the defendant with notice of the lawsuit; hand delivering the summons and the complaint to the defendant.

personal jurisdiction Jurisdiction of the court over a person, meaning that all of the person's assets are subject to a taking and sale by the court.

personal property All tangible, movable property other than land and �ixtures.

petition for a writ of certiorari A request to the U.S. Supreme Court asking the Court to review a decision from a lower court.

physical presence When the defendant is in the state where he or she is handed the summons and the complaint, thus giving that state in personam jurisdiction over the defendant and his or her assets.

piercing the corporate veil When a court allows a plaintiff to reach beyond the corporate assets and corporate immunity and allows the personal assets of the company owners or directors to be subject to a lawsuit, usually when there has been fraud in the formation of the corporation or other serious misconduct.

plaintiff The party bringing a civil lawsuit.

Ponzi scheme An investment fraud in which multiple investors are promised a high rate of return on their money. The fund managers then divert the money to pay early investors as if they really did make a pro�it on their investment.

postdated check A check that is dated in the future, when the writer expects he or she will have money in the account to cover the amount.

postdating When a check or other instrument is issued on a particular date but the date written on it is later (it is still a negotiable instrument).

posteffective period Period in which the SEC declares the registration effective and prospective buyers are given a �inal prospectus, after which the company may �inally offer and sell the new security.

postjudgment The phase of a lawsuit after a judgment has been entered in court.

power of acceptance The inherent power that resides in the offeree to accept the offer or not.

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power of attorney An instrument in writing by which one person, as principal, appoints another as his or her agent and confers upon the agent authority to perform speci�ied acts or kinds of acts on behalf of the principal.

prayer for relief The last paragraph in a complaint in which the plaintiff requests damages in a dollar amount.

precedent A previous case or body of cases that holds sway over current legal decisions in a common law system.

predominant test The test used to determine whether a contract is under the common law or the UCC by asking which is greater: the cost of the sale of goods or the cost of the services rendered (the common law component).

preferred stock A class of stock shares that gives its owners priority with regard to the distribution of dividends and a more elevated status if the corporation goes through bankruptcy.

pre�iling period Period before the �iling for registration with the Securities and Exchange Commission, when a company must avoid publicity about the new security and may not sell or offer to sell the security to anyone.

Pregnancy Discrimination Act of 1978 (PDA) Federal legislation that amended the Civil Rights Act of 1964; protects women from discrimination on the basis of pregnancy or taking maternity leave as well as prohibits discrimination on the basis of a woman's ability to become pregnant.

prejudgment The phase of a lawsuit before a judgment has been entered in court.

preliminary negotiations Discussions that take place before contract formation that might lead to contract formation.

preponderance of the evidence The burden of proof in a civil case. In most states, the plaintiff must convince a majority of the jury "more so than not," or by 51% or more, that the defendant did a civil wrong and should be liable.

presentment A demand, made by a person entitled to enforce an instrument, that it be paid or accepted.

presentment warranty Promises made in the action of presenting a check for payment. They include the right to payment, the fact that the instrument is genuine and has not been altered, and a valid signature.

pretextual An employer's reason for discrimination that is not true or is an invalid reason for the action taken.

prima facie case The plaintiff has met the burden of proof initially, and the defendant may now rebut that �inding.

primary and secondary liability The order in which people are liable for paying; if the party primarily liable refuses to pay, then the party secondarily liable will have to pay.

principal The name given to an employer in a principal–agency relationship.

principal–master A principal who is held responsible for a tort committed by the agent–servant while conducting work-related business for the principal.

principled negotiation A system of principled business negotiation that aims to improve, and at least not damage, relationships; reach a fair conclusion; and avoid wasting time, money, or emotional energy.

privacy BFOQ Situations where discrimination is allowed to protect a third party's privacy, as in a single-sex workplace (e.g., dormitory, prison, gym).

private corporation A type of corporation organized by private individuals to carry out private business, either pro�it or nonpro�it, depending on its purpose.

private insurance carrier An insurance carrier for an employer to cover matters like workers' compensation claims.

private judge, consultation with Another form of alternative dispute resolution in which a former practicing judge is hired by both sides to make a decision.

probable cause More likely than not, a crime has been committed: standard used by police before arresting a person or seizing property.

product liability A type of lawsuit in which the plaintiff sues under three theories: warranty, negligence, and strict liability for injuries sustained as the result of a product malfunction.

professional corporation (PC) A type of corporation that is for pro�it and organized to provide a professional service such as for physicians, lawyers, architects, accountants, and engineers.

pro�it à prendre In real estate, a right that gives its holder the ability to go onto the land of another and to remove something from it or to make use of another's soil.

pro�its and losses Pro�its refers to the money accrued after paying any debts owed; losses refers to not having any money accrue or having less money after paying debts.

promoters See incorporators.

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Proof of Claim A form �iled with the bankruptcy court by creditors to verify their claims against the defendant.

proposal An offer for consideration or acceptance.

prosecution The state district attorney or U.S. Attorney who brings criminal charges against a defendant on behalf of the government.

prospectus A booklet of information provided by a corporation for buyers to read so that they may determine whether the stock is a good investment.

protected class A category of people that the U.S. Supreme Court has decided deserve added protection owing to a history of extreme discrimination. Protected classes include persons of a particular race, color, national origin, or religion.

proximate cause A close link in space and time established between a harmful consequence and a negligent act.

proxy solicitation Prior to the annual meeting, a mailing to shareholders by the corporation giving each shareholder an option to vote on corporate matters via a proxy card, that is, giving their voting rights over to a group who will vote on the issues on their behalf rather than the shareholder voting individually.

public accommodation Accessible facilities, including restaurants, hotels, theaters, doctors' of�ices, retail stores, libraries, parks, and private schools; private clubs and religious organizations are exempt.

Public Company Accounting Oversight Board (PCAOB) A new agency created by the Sarbanes–Oxley Act of 2002, charged with the oversight, inspection, regulation, and disciplining of accounting �irms in their roles as auditors of public companies.

public corporation A type of corporation organized by the federal, state, or local government to carry out a necessary public service that is by nature nonpro�it.

public domain Free for anyone to use without payment to the original author or inventor.

publicly traded company A type of corporation whose shares are traded in any stock exchange.

purchase money security interests Transactions involving consumer credit where the seller extends credit to the consumer for goods sold and retains a security interest in the goods.

pure comparative negligence A concept governing jurisdictions that allows a plaintiff to recover damages no matter what his or her percentage of negligence.

pure contributory negligence A concept governing jurisdictions that allows a plaintiff to recover damages only if he or she were free of any negligence.

qualifying event Under COBRA, the loss of a job or reduction of hours making an employee (or dependents) ineligible for employer group health bene�its.

quasi-judicial In the context of administrative agencies, describes the process of adjudicating disputes over agency rules or their application in hearings similar to trials, presided over by administrative law judges—that is, when an agency acts "like a court."

quasi-legislative Describes the process of creating one's own rules (such as when an administrative agency exercises a legislative power).

quid pro quo sexual harassment The exchange of sex for employment bene�its or advancement.

quitclaim deed A deed that transfers whatever interest the grantor has in the property but without guaranteeing good title.

race Ancestry or physical or cultural characteristics associated with a certain group of people, such as skin color, hair texture or styles, or certain facial features.

racial harassment An atmosphere in the workplace in which employees engage in ethnic or racial slurs.

rati�ication When a principal agrees to an agent's contracts after the fact; this assumes that the agent had no authority to enter into the contract in the �irst place. Can apply to contracts by minors or incompetent persons as well; or when the minor agrees to remain in the contract upon reaching the age of 18.

real defenses Defenses that the holder in due course takes "subject to"; thus, the holder in due course does not get paid if the defense is real.

real property Land and all things attached thereto.

reasonable accommodation Under the ADA, when an employer changes the structure of the job, application process, or bene�its so that the employee with a disability can perform the tasks. Under Title VII, employers must make reasonable accommodations for employees to eliminate employees' con�licts between work and practicing their religion, unless doing so would cause "undue hardship on the conduct of the employer's business."

reasonable care The degree of caution that would be exercised by an ordinary, prudent person under the given circumstances. A question for a jury to decide in tort cases about the defendant's actions.

reasonable efforts In the context of workplace harassment, measures the employer can take to prevent such incidents, e.g., by formulating and distributing company policies that prohibit harassment and swiftly punishing those who violate the policies.

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reasonable factor other than age (RFOA) A defense in an age discrimination inquiry where the employer can establish that its behavior was reasonable; does not require the trier of fact to ask whether there were other ways for the defendant to achieve the goals that would not have resulted in a disparate impact.

reasonable person (care) standard Standard that requires each person in society to act in keeping with the level of consideration a reasonably prudent person would apply under the same circumstances.

rebut the presumption The second step in a discrimination lawsuit, where the defendant must give counterevidence to the plaintiff's prima facie case.

recission When the innocent party who has been the victim of fraud withdraws from a contract.

Record, the The bound transcript of the trial, which includes all the testimony, objections, and admitted evidence.

recording statutes Rules that vary from state to state about how to �ile a deed and who has priority ownership with regard to when the deed was �iled.

registered agent The person designated by a corporation to receive service of process on behalf of the corporation.

registration The �iling of paperwork with the Securities and Exchange Commission by a corporation that plans to sell stock.

registration statement Initial paperwork �iled with the Securities and Exchange Commission that must be approved by the SEC before stock can be issued.

Regulation A Any nonpublic issuer may sell up to $5 million of securities in a one-year period with no limit on the number of purchasers and no purchaser sophistication requirement.

Rehabilitation Act of 1973 Prohibited discrimination in hiring on the basis of handicap in federal employment and by federal contractors and companies receiving federal assistance.

rejection A response by the offeree that kills the offer.

religious fundamentalism A theory of ethics that relies on the existence of certain immutable truths. Ethical norms can be found by studying the lives and writings of prophets or by consulting holy scriptures.

remand When an appeals court sends a case back to a lower court from which it was appealed so that the lower court can correct an error.

reorganization A Chapter 11 bankruptcy proceeding in which the debts are restructured through a plan to facilitate repayment.

reorganization plan The court- and creditor-approved plan for how the debtor will pay off his or her debts.

respondeat superior The legal theory that employers (masters) are liable for the torts committed by their employees (servants) as long as the servant is an employee and is within the scope of employment.

restrictive covenant A voluntary, private limitation on otherwise legal land use by a community or association that applies to its member landowners.

restrictive endorsement Writing that places a condition on further negotiating the instrument.

restructuring See reorganization.

Revised Uniform Partnership Act (RUPA) Approved by the National Conference of Commissioner Uniform State Laws (NCCUSL) in 1994 and amended in 1996 to add the Limited Liability Partnership (LLP) provisions. Each state adopted the RUPA on a different date.

revocation When the offeror takes back the offer prior to acceptance.

right of survivorship In a joint tenancy, the concept that the last surviving tenant acquires title to all the property regardless of interest share.

rights Entitlements of a person who enters into a contract.

rights in the collateral Requirement of a secured transaction that debtors may give a security interest only in property that they own or otherwise have the right to possess, and only to the extent of their ownership or interest in the property.

risk of loss rules Guidelines for determining who must pay for damages or loss of goods in a contract or exchange.

robbery A theft that is accomplished through either the use of force or the threat of force.

Rule 147 of the Securities Act of 1933 Securities offered for sale solely in one state by a company that does at least 80% of its business in the state are also exempt from �iling. State securities regulations, however, may require the company to �ile with the Securities and Exchange Commission.

Rule 504 of Regulation D Nonpublic issuers may sell up to $1 million of securities in a 12-month period to any purchaser.

Rule 505 of Regulation D Any issuer may sell up to $5 million of securities in a 12-month period to fewer than 35 unaccredited investors and to an unlimited number of accredited investors.

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Rule 506 of Regulation D Exempts private offerings to accredited investors and limited offerings to not more than 35 nonaccredited investors (e.g., regular, nonexpert investors).

rule of nonmerchants Either a contract between a merchant and a nonmerchant or a contract between two nonmerchants.

"rule of reason" test A test employed by the courts to determine whether an action is a restraint of trade contracts or action unduly restrictive.

safety BFOQ Situations where discrimination is allowed to protect a third party's safety, as in where allowing women to be employed would cause a workplace hazard (e.g., in a male correctional facility).

sale on approval contract A contract in which the buyer may try the seller's goods and keep them or send them back at the seller's expense.

sale or return contract A contract in which the buyer sells the goods to a third party and returns whatever goods are not sold at his or her own expense to the original seller.

Sarbanes–Oxley Act of 2002 Act that enhanced accountability standards for the boards of all U.S. publicly traded companies, their management, and all public accounting �irms.

schedule of assets and liabilities A form �iled with the bankruptcy court that sets forth the debtors' property and debts.

schedule of creditors A form �iled with the bankruptcy court that lists the names and addresses of creditors as well as how much money is owed to each.

scienter The mental state embracing the intent to deceive, manipulate, or defraud.

scope of employment The boundaries outlining what a speci�ic person is authorized to do at work.

secretary A corporate of�icer whose duty it is to keep records of directors' and shareholders' meetings and to authenticate records of the corporation.

secretary of state The state of�icial responsible for registering business entities.

Section 2 of the Clayton Act (15 U.S.C. § 13) Prohibits sellers from charging different competitive buyers different prices for "commodities of like grade and quality."

Section 3 of the Clayton Act (15 U.S.C. § 14) Makes it illegal for sellers of commodities involved in commerce to enter into sale or lease contracts that restrict the ability of buyers to purchase the goods or services of the seller's competitors when the effect is to lessen competition or tend to create a monopoly in any line of commerce.

Section 6 of the Clayton Act (15 U.S.C. § 17) Exempts labor organizations from coverage under antitrust laws.

Section 7 of the Clayton Act (15 U.S.C. § 18) Prohibits the acquisition of one company's stock by another company when "the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly."

Section 7a of the Clayton Act (15 U.S.C. § 18a) Requires noti�ication of the Federal Trade Commission and the Assistant Attorney General in charge of the Antitrust Division of the Department of Justice prior to the acquisition of voting securities when the acquisition would leave the acquirer with voting securities and aggregate assets in the company whose securities are being acquired of $200 million or more.

Section 8 of the Clayton Act (15 U.S.C. § 19) Prohibits interlocking directorates and of�icers serving competing companies if both companies have aggregate capital, surplus, and undivided pro�its of $10 million or more each.

Section 10(b) of the Securities Exchange Act of 1934 Prohibits the use of manipulative or deceptive devices through misstatement or omission of a material fact in the sale of securities.

Section 11 of the Securities Act of 1933 Provides civil liability for damages when a registration statement misstates or omits a material fact on its effective date.

Section 12(a)(2) of the Securities Act of 1933 Prohibits misstatements or omissions of material fact in any written or oral communication in connection with the general distribution of any security by an issuer.

Section 17(a) of the Securities Act of 1933 Prohibits the use of any device or arti�ice to defraud, or the use of any untrue or misleading statement, in connection with the offer or sale of any security.

Section 18 of the Securities Exchange Act of 1934 Imposes liability on any person responsible for a false or misleading statement of a material fact in any �iling under the act.

Section 24 of the Securities Act of 1933 Provides for criminal liability for any person who willfully violates the act or its rules and regulations. Violators are subject to �ines of up to $10,000 and/or imprisonment for up to �ive years for each criminal violation.

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Section 32 of the Securities Exchange Act of 1934 Provides criminal liability for willful violations of the act of up to $5 million in �ines and imprisonment for up to 20 years.

Section 703 of Title VII The portion of Title VII (part of the Civil Rights Act of 1964) that sets forth the types of prohibited discrimination in the workplace as well as exceptions to the rule.

secured debt A debt that gives the creditor certain rights in property such that if the debtor defaults, the creditor can sell the property to recover all or part of the loan amount.

secured loan A loan that has collateral (security) in its terms in order to secure payment in case of a default by the debtor.

secured party Any creditor who has a security interest in the debtor's collateral, including a person who holds an agricultural lien, a consignor, or the purchaser of chattel paper, payment intangibles, or promissory notes (UCC § 9-102(a)(72)).

secured transaction A loan governed by Article 9 of the UCC.

securities A range of instruments such as stocks, bonds, debentures, evidence of indebtedness, voting trust certi�icates, investment contracts, and fractional undivided interests in oil, gas, or mineral rights.

Securities Act of 1933 Federal law governing initial public offerings (IPOs) of securities. Requires that investors receive �inancial and other signi�icant information concerning securities being offered for public sale; prohibits deceit, misrepresentations, and other fraud in the sale of securities.

Securities and Exchange Commission (SEC) Federal agency that regulates the securities markets. Created by the Securities Exchange Act of 1934.

Securities Exchange Act of 1934 Created the Securities and Exchange Commission (SEC), which it empowers with broad authority over all aspects of the securities industry, including brokerage �irms and the various securities exchanges; oversees, identi�ies, and prohibits certain types of conduct in the markets; and empowers the SEC to require periodic reporting of information by companies with publicly traded securities.

security agreement An agreement that creates or provides for a security interest (UCC § 9-102(a)(73)).

security interest The right of a creditor to have speci�ic property sold to satisfy a debt.

security interest The rights a creditor has in the debtor's collateral; if the debtor defaults, the creditor can sell the property and recoup some of its losses.

segregation A system of laws or social policies that keep blacks and whites (or other groups) separated.

servant An employee who has committed a tort at work.

service mark Any distinctive mark used by a service industry for purposes of advertising or sales.

service of process Delivery of the summons and the complaint to the defendant, giving him or her notice of the lawsuit.

servient estate The land over which an easement crosses.

settling out of court When both sides agree to a monetary settlement rather than having the case go to trial.

sexual harassment Unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature by someone of the same or opposite sex that is tied to job status or that permeates the workplace environment with sexual innuendo.

shareholders The owners of a corporation whose interest in the corporation is represented by shares of stock. Shareholders exercise decision-making authority over the corporation at the annual meeting by electing members of the board of directors, rather than in the daily operations of the company.

Sherman Antitrust Act of 1890 Federal law that prohibits monopolies or other devices that restrain free trade.

shipment contract A type of contract for the sale of goods in which the risk of loss is on the buyer once the seller places the goods on a carrier in the seller's city.

Shopkeepers' statutes State laws that protect store owners from lawsuits claiming false imprisonment, etc., if the store's agents exercised reasonable actions and used probable cause in detaining a person on their premises.

signature liability This sort of obligation arises from the act of signing a negotiable instrument in order to create or transfer it.

signature loan An unsecured personal bank loan without collateral to guarantee payment.

simple subpoena A court order to appear at a criminal proceeding to testify.

slander A form of defamation in which false statements are spoken about a person.

small claims courts Courts that are usually limited to claims �iled for $5,000 or less.

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Social Security Act of 1935 Provided the framework for unemployment compensation funded through mandatory contributions by employers and employees.

sole proprietorship A type of business in which the owner personally operates the business and is solely responsible for all aspects of the enterprise.

special endorsement On an instrument, writing that speci�ies the person or persons to whom the instrument is made payable.

specialized courts Courts within the federal system that have been established to hear very narrow types of disputes, e.g., bankruptcy or trademarks.

Special Litigation Committee (SLC) Legal experts that help decide whether a partnership should pursue the claims asserted in a derivative lawsuit.

specially manufactured goods Goods that are custom-made.

speci�ic performance A remedy in which the court orders the breaching party to perform the contract.

stale check A check that is outstanding for longer than six months.

stare decisis The use by a judge of previous decisions (precedent) to make a legal decision or ruling.

state constitution Each state's governing document that sets the standard for all laws within its borders. State constitutions are established, written, and amended by the state legislature.

state fund A general statewide fund to which employers contribute and which then pays out workers' compensation claims.

state statute A law passed by a state legislature and signed into law by the governor.

statute A law passed by either a state or federal legislature.

Statute of Frauds The law governing which contracts have to be in writing to be enforceable, e.g., under UCC Article 2, those for goods worth more than $500.

statute of limitations A law that sets the speci�ic time in which parties must bring a lawsuit to protect or enforce their rights. The statute of limitations is different for each cause of action. For example, for breach of contract, it might be six years in one state and four in another.

statutory duty of care Duty of care de�ined by statute rather than the reasonable person standard.

stay A bankruptcy court order that effectively shuts down the ability to collect on the debt, giving the debtor time off from payment; also called an Order for Relief.

stockholder Person owning shares of stock in a corporation.

stock subscription A contract in which the person agrees to buy shares of stock when the corporation comes into existence.

stop order A request made in writing, valid for six months, or made orally, valid for 14 days, for a bank to refuse payment on an outstanding check.

strict liability Also called strict liability under Section 402 A of the Restatement of Torts. The concept that manufacturers, wholesalers, and retailers are liable to consumers for injuries caused by defective goods.

subject matter jurisdiction Which court can hear the case, based on the legislation establishing what that particular court has power to adjudicate.

subject matter of the contracts Goods or services the parties are selling in the contract.

subpoena Legal document issued by a court ordering the receiving party to testify in court or to bring documents to court.

subpoena duces tecum A court order issued to produce records.

subpoena test A court order to appear at a deposition to give testimony.

summons A paper served on the defendant that tells the defendant he or she is being sued, by whom, and how long he or she has to respond, but that offers little other information.

tampering with public records To knowingly falsify, destroy, or attempt to hide any of�icial government record or document; a misdemeanor.

tangible employment action An of�icial act of an enterprise or company that causes a signi�icant change in employment status, e.g., hiring, �iring, failing to promote, reassigning with signi�icantly different responsibilities, or signi�icantly changing bene�its.

tenancy by the entirety A form of joint tenancy reserved for husbands and wives in which a tenant cannot transfer his or her interest in the underlying property without the signature of the cotenant, or spouse.

tenancy in common A form of joint ownership of real property.

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tendered As part of a shipping agreement, the seller has noti�ied the buyer that the goods are available for pickup.

termination by consent of the parties When both the principal and the agent mutually agree to end the agency relationship.

termination by operation of law The end of a principal–agency relationship owing to death, incompetence, or bankruptcy of the principal; death of the agent; or illegality or impossibility of performance.

terms and conditions Speci�ic parts of the contract that detail the parties' agreement.

testamentary gift A gift given through a will.

testimony The statements made by witnesses in court that become part of the Record.

theft of services Knowingly receiving the bene�it of services that are available for compensation through the use of deception or any physical means to avoid paying for such services.

third party The third person in line when commercial paper is transferred from the maker to the payee or from the drawer to the payee.

time instrument An instrument that is payable at a certain time, as stated on the face of the instrument.

title by gift Transfer of personal property from the donor to the donee with intent to transfer.

title by possession Acquiring title by taking property into one's possession, e.g., by capturing a wild animal or taking over abandoned property.

title by purchase Acquiring title to personal property pursuant to UCC Article 2.

title Having the right to legal ownership, e.g., of a car. Also, the instrument (paper) that gives evidence of that right.

Title I of the ADA Forbids discrimination against quali�ied individuals with physical or mental disabilities in hiring, �iring, or promotion and requires employers to make reasonable accommodations for disabled employees.

Title III of the ADA Mandates accessibility for the disabled to new and existing public and private facilities that are open to the general public.

Title II Section of the Civil Rights Act of 1964 that provides injunctive relief against discrimination in places of public accommodation. It requires hotels and motels to serve transients without regard to their race or color.

Title VII Section of the Civil Rights Act of 1964 that prohibits employment discrimination based on race, color, religion, sex, and national origin.

tort A civil wrong, other than breach of contract, for which the court can award money damages.

tortfeasor A person who perpetrates a tort.

trademark Any symbol, picture, design, or words adopted by a manufacturer to distinguish its products from other similar products in the market; capable of being registered with the USPTO.

trade secrets Business plans, mechanisms, manufacturing techniques, and compiled data that give a business an advantage over its competitors.

transfer warranty The chain of endorsements for commercial paper that gives everyone who touches it some liability.

treasure trove Property that is veri�iably antiquated and has been concealed for a suf�iciently long time to indicate that the owner is probably dead or unknown.

trespass to land An intentional physical act that results in an unjusti�ied intrusion onto another's land without the owner's consent.

trial court A court that is empowered to hold trials consisting of taking testimony before a judge or jury, rendering decisions, and awarding damages.

TRIPS See Agreement on Trade-Related Aspects of Intellectual Property Rights.

trusts and monopolies Arrangements among competitors that destroy competition and regulate pricing.

ultra-hazardous activities Inherently dangerous activities that cannot be made safe. Anyone who is injured as a direct result of the activity is entitled to compensation as a matter of law, regardless of the level of care employed by the defendant to ensure safety.

undisclosed principal Neither the existence nor the identity of the principal is known to the third party.

undue hardship According to the EEOC, signi�icant dif�iculty or expense that would be necessary for an employer to accommodate an employee's disability, religious practice, etc.

undue in�luence If the parties have a �iduciary relationship, when the �iduciary uses his or her in�luence to induce the other party to enter into a contract for the �iduciary's monetary bene�it.

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Uniform Limited Partnership Act (original act, 1916; amended in 1976, 1985, and 2001) The law governing limited partnerships promulgated by the National Conference of Commissioners of Uniform State Laws. The 2001 enactment, which combined the ULPA and its revised version (RULPA), has been adopted by 18 states and the District of Columbia.

Uniform Partnership Act (UPA) A set of laws articulating how to create, dissolve, and run a partnership, originally written by the National Conference of Commissioner Uniform State Laws (NCCUSL) and adopted by every state except Louisiana. Each state's adoption of the UPA varies; all states follow the gist of the law, but states may have changed parts of the law in their adoption of it.

union shop agreement One that stipulates that employees need not be union members when hired but must join the union after being hired.

unlimited personal liability In a partnership, once the partnership assets are exhausted, the personal assets of the partners are subject to collection by a creditor. For a sole proprietor, all debts incurred by the business are the personal responsibility of the owner.

unsecured debt A debt without any collateral guaranteeing its payment.

unsecured loan A loan without any collateral guaranteeing its payment.

USA PATRIOT Act A 2001 federal act to combat terrorism. It requires strict oversight of banks' standards for identifying customers in transactions and verifying their signatures.

U.S. Attorney The federal government employee who prosecutes federal crimes.

U.S. Code (U.S.C.) The set of books that contains all the federal statutes passed by Congress.

U.S. Court of Appeals One of 11 federal courts that hear appeals from the U.S. District Courts.

U.S. District Court The trial court of limited jurisdiction in the federal system; limited to trials involving either diversity of citizenship plus $75,000 or more in requested damages, or a federal question.

U.S. Patent and Trademark Of�ice (USPTO) The federal agency responsible for granting U.S. patents and registering trademarks. Also advises the president, the secretary of commerce, and U.S. government agencies on intellectual property policy, protection, and enforcement and promotes intellectual property protection around the world.

U.S. Trustee Appointee who makes sure that regular reports are made to the court and holds a meeting of the creditors.

utilitarianism The assignment of value to actions based upon their outcome. De�ines the ultimate good as actions to bring about the greatest utility (or greatest good) for the greatest number of people.

valid constructive delivery The donor's af�irmative steps to deliver property, or the means of obtaining it, to the donee.

value In a secured transaction, what the debtor receives from the creditor in exchange for the promise to pay on the debt, e.g., a car, boat, house, or loan of cash; also could be an intangible bene�it, e.g., the avoidance of a default judgment.

values Core, underlying, or guiding principles that form the basis for one's ideas about right and wrong and are an expression of an ethical philosophy.

variance Permission given by a governmental entity to use property in a way that violates zoning laws.

verdict The �inal decision of a jury about guilt or liability.

vicarious liability In tort law, the placing of responsibility on one party (e.g., an employer) for the actions of another (e.g., an employee in the scope of employment).

violation Minor offense that is typically punishable by a �ine or prison sentence of 30 days or less.

virtue ethics A philosophical theory that looks at the basic values one needs to develop to have a good moral character.

void No longer in force. For an instrument, if a completion is unauthorized, it generally becomes void.

voidable Capable of being later annulled, as in a contract by a minor.

waiting period Once the company �iles the registration statement with the Securities and Exchange Commission and its approval is pending, the company may still not sell the security, but may begin to offer the security for sale through limited advertisements in ads that tell prospective investors where they may request a prospectus for the new security.

warranties Guarantees that apply to goods sold pursuant to the UCC but do not apply to contracts under common law.

warranty deed A deed that transfers title in the grantor's property and guarantees that there are no claims against the property.

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whistleblowers Individuals who come forward with information about unlawful business acts. Both federal and many state laws protect these people from recriminations, retaliation, and �iring.

white collar crime Nonviolent state or federal crime committed in a business setting.

wholly owned subsidiary A company whose common stock is 100% owned by another company, commonly called the parent company.

wildly �luctuating market A commodities market in which the prices change very quickly, sometimes in seconds.

winding up The period after dissociation, when partners may continue to carry out business that is reasonably necessary to complete contracts in progress and to otherwise bring the partnership's business affairs to an orderly close.

workers' compensation A statewide system that oversees payments to workers for injuries and death on the job.

workers' compensation board A state administrative agency that adjudicates cases requesting compensation to workers for death or injury on the job.

work-sharing arrangement An arrangement between the EEOC and the states that automatically �iles a discrimination suit with the plaintiff's state. This process preserves any rights the plaintiff might have under state law that are not available through the federal government.

World Trade Organization (WTO) An organization that deals with and attempts to resolve trade issues between countries.

writing requirements The rules regarding what terms have to be in a contract for it to be considered "in writing." To be considered a contract, it must state what the consideration is and include the signature of the party to be charged.

writ of attachment An order by the court to seize some of the debtor's property.

writ of certiorari A request for a review of the record from the trial court.

writ of execution An order by the court to place a lien on a debtor's personal property.

writ of garnishment An order by the court to seize some of the debtor's property from a third party, e.g., an employer.

wrongful state of mind The mindset necessary to �ind in the defendant for a criminal conviction.

yellow dog contracts Agreements prohibiting workers from joining unions as a condition of being hired.

zoning Local governmental regulation of approved uses of private property.

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References 15 USC § 1692 – Congressional �indings and declaration of purpose [Fair Debt Collection Practices Act]. (n.d.). Retrieved from Cornell University Law School

Legal Information Institute (LII) website: http://www.law.cornell.edu/uscode/text/15/1692 (http://www.law.cornell.edu/uscode/text/15/1692)

2010 world's most ethical companies. (2010). Ethisphere, Quarter 1, 28. Retrieved from http://ethisphere.com/past-wme-honorees/wme2010/ (http://ethisphere.com/past-wme-honorees/wme2010/)

ADR in action. (n.d.). Retrieved from http://www.youtube.com/watch?v=H0_h1BDOhtw (http://www.youtube.com/watch?v=H0_h1BDOhtw)

Agency: An overview. (2010, April 19). Retrieved from Cornell University Law School Legal Information Institute (LII) website http://www.law.cornell.edu/wex/agency (http://www.law.cornell.edu/wex/agency)

Akula, J. L. (2000, April 15). Business crime: What to do when the law pursues you. MIT Sloan Management Review. Retrieved from http://www.mitexeced.com/lal/images/51333_sloan-rev.pdf (http://www.mitexeced.com/lal/images/51333_sloan-rev.pdf)

Alexander, R. (1995, December). Understanding the legal fees agreement: Consumer rights. Retrieved March 26, 2008, from http://practice.�indlaw.com/�inancing-a-law-�irm/understanding-the-legal-fees-agreement-consumer-rights.html (http://practice.�indlaw.com/�inancing-a-law-�irm/understanding-the-legal-fees-agreement-consumer-rights.html)

American Arbitration Association: www.adr.org (http://www.adr.org)

American Civil Liberties Union. (n.d.). Non-discrimination laws: State by state information map. Retrieved from http://www.aclu.org/maps/non- discrimination-laws-state-state-information-map (http://www.aclu.org/maps/non-discrimination-laws-state-state-information-map)

American Law Institute (ALI). (n.d.). Publications catalog: Codi�ications and studies—criminal law—model penal code. Retrieved from http://www.ali.org/index.cfm?fuseaction=publications.ppage&node_id=92 (http://www.ali.org/index.cfm?fuseaction=publications.ppage&node_id=92)

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