Business law

S corporation is a special type of close corporation. It is nearly treated like partnership for federal income tax. There is only 100 or fewer shareholder.

Regulation for Profit Corporation: Corporation must complying with incorporation statues. Corporation may do business in many states but the relationship between corporation, shareholders and managers is regulated only by state of incorporation.

Regulation of foreign and alien corporation

Corporation is domestic corp. in the state that has granted its charter- it is foreign in all other states in which is doing business- and will be alien corp. in other country.

Generally, state can impose its laws to foreign corp. if those laws don’t violate the constitution of USA, due process clause, and commerce clause

Due process Clause: require corps to have sufficient contact with state before state exercise jurisdiction over the corporation. “when corporation veil itself of the protection of state’s law it should suffer any reasonable burden that the state imposed as a consequence of such a benefit. in other words foreign crop. Should be required to pay for the benefit that it receives from the states.

Commerce clause: the power to regulate interstate commerce is given to federal government. The state has NO power to exclude of to discriminate against foreign corp. that they are solely engage in interstate commerce. --- state may require foreign corp. doing interstate business in the state to imply the law if application of the law does not unduly burden interstate commerce.

A state law regulating the activates if foreign corp. does not unduly burden interstate commerce if: 1- the law serves a legitimate state interest 2- the state has chosen the least burdensome means of promoting that interest 3- the legitimate state interest out weights the statute’s burden on interstate commerce.

Doing business: to aid their determination of whether a state may constitutionally impose its laws on foreign corporation, courts traditionally use doing business concept. The court says foreign corporations are subject to follow state laws when they are doing business.

Fiduciary duties- Directors and officers owe fiduciary duties to the corporation. They are the duties to act within the authority of the position and within the objectives and powers of the corporation, and to act with loyalty to the corporation. In order to determine demand futility, there must be reasonable doubt that directors are disinterested or independent, or that the transaction was the product of sound business judgment. Absent bad faith, fraud, or breach of fiduciary duty, the judgment of board of directors in conclusive. When directors and officers have complied with the business judgment rule, they are protected from liability to the corporation for their harmful decisions. (1081). Three requirements must be met for the business judgment rule to protect managers from liability: 1. The mangers must make an informed decision. 2.The managers may have no conflict of interest. 3. The managers must have a rational basis for believing that the decision is in the best interests of the corporation.

Restructuring can be done by just the general partner but converting would require consent from all owners. Partner to partner relationships have a fiduciary duty of the highest degree of loyalty; promoting mutual trust, confidence, and honesty as well as acting in good faith and fair dealing.

Subject foreign corp. to be sue

The international shoe minimum contact test must be met. Subjecting the corporation to suit cannot offend “traditional notion of fair play and substantial justice”. a court must weigh the corporation’s contacts with in the state against the inconvenience to the corporation of requiring it to defend a suit with in the state.

Taxation

A state may tax foreign corporation If such a taxation doesn’t violate the due process and commerce clause.

Qualifying to do business

Orders that require acceptance outside the state is not doing interstate business require qualification

Isolated transaction – classified as not doing business for qualification- which is kind of business that will completed in 30 days and are unique in their business nature. (Christmas trees)

Qualification requirements

Qualification requirement for business that are doing interstate business for foreign corporation to apply for certificate of authority from secretary of state.

Regulation of foreign corporation

Piercing the corporate veil: the primary consequences of the piercing the corp. veil is that a corp. shareholders will lose their limited liability. Two requirement must exist for piercing the corp, veil 1- domination of corp. by shareholders 2- use that domination for Improper purposes. An improper purpose includes: defrauding creditors, circumventing a statute, or evading an existing obligation.”

Partnership:

Duties: partners have fiduciary duty – mutual trust, confidence, and honest order.

Duty to serve: undertake share of responsibility of running day to day operation -Silence partners: silent partners don’t have duty of serve but they have same liability to partnership debt as any other partners. – they merely contribute capital

Duty of care: partners has duty of care – partners are not liable for loss of their honest errors – but they are liable for gross negligence, reckless conduct, international misconduct, or knowing violation of the law.

Duty to Act within actual authority: partner has duty to not exceed the authority granted him by partnership agreement – partners are responsible for losses resulting from unauthorized transaction negotiated in the name of partnership.

Duty of account: partners have duty to account for their use or disposal of partnership finds and partnership property as well as their receipt of any property benefit or profit without constant of other partners. Partnership property should be used for partnership purposes. Indemnified: when partner use personal acc. For purposes of partnership it is partners right to get a refund for that expense.

Other duties: Confidentiality duty a partner must maintain the confidentiality of partnership information such as trade secret or a customer list. It means partner should not disclose the partnership info. Unless it is for benefit of the partnership.

Interest are not transferable easily

LLC: LLC has no individual liability on LLC contracts|

LLC may be member manage or manager manage; Mangers in manager manage LLC may be elected and removed by majority of members.

Duties:

Each member or manager has fiduciary duty of the LLC and its members; Members has limited ability to transfer rights; Members in LLC can transfer transferable interest to another person however transferee is not LLC member

Member dissociate: Under RULLCA a partner has power to dissociate by withdrawing from LLC at any time. Dissociation are also caused by: members death, having a guardian appointed over her affairs, being adjudged legally in competed by court, being debtor in bankruptcy, being expelled by other member.

Payment to a dissociate member: Under Rullca dissociate member has no right to force LLC to dissolve or liquidate- ; Dissociate member is not entitled to receive the value of interest until LLC dissolve.

There is one exception if LLC at will and don’t to dissolve the LLC must buy his interest at fair value in 120 days from dissolved member.

If LLC has term and not dissolved must continue its business and pay dissociated member value of interest within 120 days after LLC term.

LLC Dissolution

RULLCA has few events that that Automatically cause dissolution of the LLC:

1- juridical dissolution (event that making unlawful for the LLC business to continue) is requested by member or transferee of a member’s transferable interest 2- administrative dissolution (by secretary of state)

Distribution of dissolved LLC

First creditors – excess fund members contribution refund- excess fund give member fund for profit

If LLC asset is not sufficient to refund creditors, creditors couldn’t claim for their funds due to Limited liability. but if members didn’t pay their contribution to LLC creditors can sue the for that contribution amount

“Nonmanaging members of a manager-managed LLC owe no fiduciary duty”

“An LLC member has no individual liability on LLC contracts, unless she also signs LLC contracts in her personal capacity”

Certificate of authority-If required to do intrastate business in a state, a foreign corporation must apply for a certificate of authority from the secretary of state, pay and application fee, maintain a registered office and a registered agent in the state, file an annual report with the secretary of state, and pay annual fee.

Long-arm status- permits their courts to exercise (realize) jurisdiction under the decision of the International Shoe case.

??International Shoe case- in that case, Supreme Court ruled that a foreign corporation must have “certain minimum contracts” with the state such that asserting jurisdiction over the corporation does not offend “traditional notions of fair play and substantial justice.”

General Statutes § 33-920 (a) provides: A foreign corporation, other than an insurance, surety or indemnity company, may not transact business in this state until it obtains a certificate of authority from the Secretary of the State.

LLP & LLLP

LLP: have General Partner & Limited partners

General Partner: contribute capital in to the business, manage it, share in its profits, and possess

unlimited liability for its obligation

Limited partners: contribute capital, share profit, no management power, possess limited liability,

LLLP both general and limited partners have limited liability. In both LLP and LLLP allow partners to reduce their personal federal income tax liability by deducting limited partnership losses from their individual income tax return. General partners get grater tax shelter advantage than do limited partners.

Losses of the business allocated to a general partner offset his income from any other source

Losses of the business allocated to limited partners may be used to offset only income from other passive investment and only to extent limited partners are at risk, that is, to extent of their capital contribution to the limited partnership.

Defective compliance with LLP statues:

If a person attempting to create LLP and do not substantially comply with ULPA, limited partnership does not exist, therefore limited partnership will lose its limited liability and change the statues to unlimited liability.

And in LLLP General partner will have unlimited liability if it was found defective.

When a person believe that she is a limited partner but discover later that she has been designated a general partner or that the general partners have not filed a certificate of limited partnership” then “she may be liable as a general partner unless she in good faith believes she is a limited partner….. page 1018.

1. Causes a proper certificate of limited partnership to be filed with the secretary of state, or

2. Withdraws for future equity participation in the firm by filing a certificate declaring such withdrawal with the secretary of state.

Rights and liabilities shared by General and limited partners:

Under ULPA profits and losses are shared on the basis of the value of each partner’s capital contribution.

Voting right: under ULPA there are only few actions that needs all the partner approval 1- amendment of the limited partnership agreement 2- amendment of limited partnership certificate 3- sale or transfer of substantially all limited partnership assets outside of the ordinary course of the business – under ULPA limited partners have no voting right

Admission of the new partner: under ULPA no new partner may be admitted unless all the partners have consented to the admission. – the limited partnership agreement may also provide the power or elect the new general partner in case of retirement or death of general partner. – in general ULPA does not grant much power to partners to expel the partner

Pwer and right to withdraw: partners have the right to withdraw from limited partnership at any time. The Exception, however, limited partners have perpetual duration. As a result, ULPA gives the partners no right to withdraw. – under ULPA the withdrawing partner has no right to receive the value of her partnership interest means partner will not receive the value of his investment unless the limited partnership agreement provides for buyout his interest or limited partnership dissolve and liquidate.

Often close corporations restrict transfer to ensure control. “Four categories of transfer restrictions: (1) rights of first refusal and option agreements, (2) buy-and-sell agreements, (3) consent restraints, and (4) provisions disqualifying purchasers.”

Uses of Transfer Restrictions help a corporation and its “shareholders to maintain the balance of shareholder power in the corporation” by Buy-and-Sell agreements (1065).

According to the book “Dissociated partners remain liable to partnership creditors for partnership liabilities incurred while there were partners,” unless novation occurs.

“Novation occurs when two conditions are met:

1. The continuing partner release a dissociated partner form liability on a partnership debt, and

2. A partnership creditor releases the dissociated partner from liability on the same obligation” (999).

Duty to Account states that “Partnership property should be used for partnership purposes, not for a partner’s personal use” (976).

The duty -Having Interest Adverse to Partnership- According the book “When a partner receives a secret profit, she has a conflict of interest, and there is a risk that she may prefer her own interests over those of the partnership” (975).

According to the book “An agent has fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship.” According to a duty of loyalty “… an agent must subordinate his personal concerns by (1) avoiding conflicts of interest with the principal, and (2) not disclosing confidential information received from the principal.” Agent “may not act for both parties to a transaction without first disclosing the double role to, and obtaining the consent of, both parties” (Mallor, Barnes, Bowers, Langvardt, Page 922).

“The faithless servant doctrine provides that an agent is obligated to be loyal to his employer and is prohibited from acting in any manner inconsistent with his agency or trust and is at all times bound to exercise the utmost good faith and loyalty in the performance of his duties. To show a violation of the faithless servant doctrine, an employer must show (1) that the employee’s disloyal activity was related to the performance of his duties, and (2) that the disloyalty permeated the employee’s service in its most material and substantial part.” (Mallor, Barnes, Bowers, Langvardt, Page 925).

One of the duties’ of loyalty is the duty of confidentiality. According the duty of confidentiality, an agent may not use principal’s confidential information for his/her purposes. This duty may also exist after the agency ends.

private securities class action lawsuits

Utilitarian theory, assumes that people must consider the benefits and costs of their actions to everyone in society.

Justice theory

Rights theory, says that certain human rights are essential and must be respected by other people

the major disclosure requirements of the federal securities laws. Based on securities law companies must disclose all material information to the investing public so that the public will have the necessary information to make investment decisions