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TX Business Associations


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Legal relationship where an agent is authorized to represent a principal in business dealings with third parties.
Requirements of
Agency Relationship
1. Consent by both parties
2. Control by principal
Remember: Principal must have contractual capacity.
Binding Principal
Requirements (4)
1. Actual Authority
2. Apparent Authority
3. Ratification
4. Adoption
Creation of
Actual Authority
Express (words) or Implied (conduct) by Principal. Actual authority must exist when agent enters the contract.
Termination of
Actual Authority (6)
1. by specified time or event (or reasonable time)
2. change in circumstances
3. agent acquires interst adverse to principal
4. when agent says so
5. when principal says so (unless irrevocable "coupled with an interest)
6. death, incapacity or bankrupcy unless irrevocable
Apparent Authority
Equitable doctrine designed to protect an innocent third party who relies on principal's directly or indirectly holding out another as their agent.
NOTE: Apparent authority can LINGER after actual authority terminates.
How to Ratify? (3)
1. expressly affirming contract
2. accepting benefits
3. suing on contract
Ratification Requirements:
Principal Must...
1. knowledge of material facts
2. accept entire transaction
3. K capacity BOTH at ratification and original signing.
If P does not ratify (due to lack of capacity), she may adopt the contract. The promter is not relieved from liability unless there is a novation.
Duties Owed:
A owes P
Strict Fiduciary Duties
1. Duty of Care
2. Duty of Loyalty
3. Duty of Obedience
Duties Owed:
P owes A
1. Compensation (unless gratuitous)
2. Reimbusement (expenses)
3. Indemnification (losses)
Duties Owed:
T liable to P, if
1. P is disclosed
2. P is partially disclosed
3. P is undisclosed UNLESS
- unduly burden (requriments K)
- P fraudulently conceal identity
- T was bargaining for A's skills or reputation
Agency (TORT):
Respondeat Superior
legal doctrine where law imposese "vicarious liablity" on a MASTER for acts of a SERVANT "to protect an innocent 3rd party"
Servant or Independent Contractor? More likely S if:
1. Right to control, even if not exercised
2. M supplies tools, workplace
3. Work is long term
4. Little skill required
5. Payment at regular intervals
Was the Servant Acting Within Scope of Employment? (H)
Detour: minor deviation
Frolic: major deviation
Intentional Torts are Outside Scope of Employment
- Force used to further business
- Master ratified use of force
- Master authorized use prior
Vicarious Liability
1. joint and several liability
2. indemnity rights against servant
3. release must specifically mention M
4. direct liablity for own negligence (hiring, training)
An association of two or more persons to carry on as co-owners a business for profit
Formation of Partnership
No formal requirements
* Intent
* Control, even if not exercised
* Capital Contributions
* Sharing Profit, just one factor
Not a Partnership
Safe Harbor
* Profits as wages, rent, repayment of debt, or interst on loan
* Right to share in gross receipts
Partnership Property
Right to USE for parternship purposes (unless consent)
Identifying Partneship Property
Deemed PS:
- acquired in PS Name
- acquired in partner name with indication for PS
Presumption of PS property:
- purchased with PS funds
Presumption of partner property:
- individual funds and titled in partner name without indication
Partnership by Estoppel
Applied on a creditor by creditor basis to find liability AS IF they are partners to protect reasonable reliance by third parties.
Partner Interest in PS:
Profits, Losses, Distributions
May be assigned, attached, devised or transfered.

Does not confer managment rights.
Relations Between Partners.
Unless Otherwise Agreed: (H)
Profits/Losses: Equally
Management: Equally,
- ordinary matters "majority in intest"
- new partners, unanimous consent
Liability: indemnity
Renumeration: none
Duties: Strict Fiduciaries
- Duty of care
- Act in Good Faith
- Duty of Loyalty
- Duty to inform (on demand)
Relations: Partners and Third Parties
Apply agency Principals (4)
- Actual Authority (staute)
- Apparent Authority
- Ratification
- Adoption
Real Property Conveyance
By Partner
Requires Actual Authority
Unless BFP from Grantee
LIABILITY for Partnership Obligations
Joint and Severally Liable, Subject to Exhaustion and Service Requirments
Partnership: Exhaustion (3)
1. judgement against PS, 90 days
2. PS is bankrupt
3. Agreement
Partnership: Event of Withdrawal (6)
- Death, Incapacity or Bankruptcy
- Existence Terminates (Business Entity)
- Specified Event
- Conversion Consent Denied and no notice for 60 days
- Expulsion (majority in interest)
- Notice by Partner
General Partnership:
Interest Purchased (Redemption)
If no event requiring winding up occurs within 60 days of the partner's withdrawal, the partner's interest is redeemed by the partnership as the the date of withdrawl.
Wrongful Withdrawl
Breach of Partnership Agreement
Note: look for a built in ending (definate term or particular undertaking)
General Partnership:
Deferred Payment of Interest on Withdrawl
If a partner wrongfully withdraws, the partnership may defer the redemption until the term expries, the undertaking is complete, or the event occurs, unless the purchaser can show that earlier paymnet will not unduly harm the partnership
Withdrawn Partner: Authority to Bind (3)
Bind Partership(for one year)
- no notice of withdrawl
- transacted business with PS 1 yr before
- reasonable belief still partner
Winding Up Events
- Judicial Decree
- Unanmous Consnet
- Request, unless MII
- Illegality
- Speciifed Event
- Sale of Assets
Order of Distribution
1. Creditors (including partner creditors)
- pro rata
- PS creditor priority over individual creditor in PS assets
- PS and individual creditor have same priority in individual assets
2. Partner Distribution according to capital accounts
(contributions + profits - losses)
Limited Liability Partnership
Exactly like General Parnership EXCEPT Vicarious Liablity
Formation of LLP
1. SOS and $200 per partner
2. Words:
- Registered Limited Liability Partnership
- Limited Liability Partnership
- LLP or L.L.P.
3. Insurance $100,000
LLP: Tort Liability
NONE for partner, except where
- directly involved
- supervising tortfeasor
- knowledge in advance and did not prevent it
Note: Partners still liable for torts
LLP: Contract Liability
None for partner
Limited Partnership
A partnership formed under the laws of Texas having one or more general partner and one or more limited partner.
Formation of LTD PS
1. SOS and fee
2. Words
- Limited Partnership
- LP or L.P.
- LTD or Ltd.
3. GP governs except where inconsistent. No requirement that GP have assets.
Liability of LTD Partners
Limited to Capital Contribution UNLESS:
1. partner takes control
2. reliance by third party
LTD Partners, Safe Harbors
No Control IF
- employee or agent
- consulting or advising
- acting as creditor, guarantor
- participation in meetings
LTD Partnership
Dissolution Distribution
1. Creditors
2. Limited Partner Capital Contriubiton
3. Profits Ditributed Per Limited Partnership Agreement
Limited Liability Company
A business entity that combines features of both a corporation and partenship.
LLC Formation (3)
1. Like a Corporation (SOS, fee, articles, regsitered agent, etc)
2. Words
- Limited Liability Company
- LLC or L.L.C.
- Limited Company
- LC or L.C.
3. One or more owners, called "members"
Attributes of LLC (4)
2. Taxed like PS or Corp.
3. Profits Losses split in proportion to capital contriubtions
4. Limited Liability for Members, except for own torts
Requires People, Paper and Act. The Effect is a separate legal entity govened by Texas Laws.
One or more incoporators charged with filing the articles of incorporation with the SOS
Articles of Incorporation
- Names and Addresses of incorporators, directors, and agents
- Duration: perpetual OK
- Purpose: legal OK, specific "Ultra Vires"
- Captial Structure
* Authorized Stock: maximum shares
* Shares per class
* Voting rights and preferences per class
* Par Value
File with SOS: Fax OK.
Certificate of Incorporation is conclusive proof (except as against state) of status.
Organizational Meeting to: Select Officers, Adopt Bylaws, Transact Business
Questionable validity under Texas Business Corpations Act. Result: Active S/H may be liable (not investors)
Internal Governance
Adopton: By BOD
Amendments: BOD or S/H
Article control over bylaws
Promotor Definition
A promoter is a person acting on behalf of a corporation not yet formed
Promoter Duties
A promoter must...
1. exercise good faith
2. act in best interests of all investors
3. not conceal any material fact affecting property they have for sale
Duties: Between Promotors
Joint Venturers
- Owe fiduciary duty prohibiting trickery, secret dealing, and self preference.
- full disclosure
Promoter Liability
Once board approval of pre-incoporation contract, a promoter is jointly and severally liable unless a novation. NOTE: A coporation cannot ratify, only adopt.
Corporation: Stock
Preincorpation Contract
Irrevocable for 6 months unless says otherwise or all subscribers agree
Corporation: Stock
Postincopration Contract
Revocable any time before Board Acceptance
Consideration for Stock
- money
- notes
- discharge of debt
- property
- past or future services
When Stock is Issued for
Property or Services
BOD valuation is conclusive (even if wrong) absent Fraud.
Watered Stock, Definition and Liability
Stock issued for less than par value. Immediate buyer is liable for deficiency except as to BFP.
Note: Board knowing approving transaction may be liable to creditors
Pre-Emptive Rights
SEPT.1, 2003
Prior: automatic
After: must be in articles
Pre-Emptive Rights
The right of an existing shareholder of common stock to maintain her percentage of ownership by buying stock whenever there is an issuance of stock FOR MONEY.
Directors (4H)
Number: set in articles, one or more
Election: S/H at annual meeting
Removal: S/H (with or without cause)
Vacancy Filled: S/H or BOD
Board Action (2)
1. Unanimous written signed consent (email, fax OK)
2. At meeting satifying quorum and voting rules
NOTE: If not 1 or 2, act is void except by ratificaion by vaild corporate act
Board Notice
Required for SPECIAL meetings only, not regular meetings. Email is ok with consent.
Board: Trusts and Agreements
Board: Management
Generally manages the business including setting corporate policy, supervises officers, declares distributions, recommends fundamental changes to S/H.
Binding a Corporation Requires
1. proper notice of meeting
2. quorum
3. majority of directors approval
Corporations: D&O
Duty of Care
Burden on Plaintiff
A director owes the corporation a duty of care. She must act in good faith and exercise ordinary care and prudence. She must do what a prudent person would do in similar circumstances.
Corporations: D&O
Duty of Care, Nonfeasance
Only liable when, in addition to standard, she CAUSED a loss to corporation. (tough standard)
Corporations: D&O
Business Judgement Rule
Creates a stong presumption in favor of board action preventing liablity from a bad decision. The director must act
1. in good faith
2. on an informed basis, and,
3. with the honest belief that action is taken in best interest of corporation
Corporations: D&O
Duty of Loyalty
Burden on Defendant
A director owes the corporation a duty of loyalty. She must act in good faith and with reasonable belief that what she does is in the companies best interest.
Corporation: Loyalty
Interested Director Transaction
Any deal between the director and the corporation will be set aside unless,
1. fair deal when approved
2. the interest and material facts were disclosed or known and approved in good faith by S/H or majority of disinterested directors.
Corporation: Loyalty
Corporate Opportunity Doctrine
A director cannot USURP a corporate opportunity which corporation may be reasonably interested without
1. telling the board AND
2. waiting for rejection
Have same DUTY OF CARE and DUTY OF LOYALTY as directors. They are appointed and removed by Board, NOT Shareholders.
D&O Indemnification
None: if HELD liable for willful and intentional acts
Manadory: when "wholly successful" on merits or otherwise (win entire case to judgement)
Permissive: Watch for settlement
- D&O must show good faith they acted in best interests
- if liable, costs and fees only
- eligible: w/ independent legal counsel OR majority of disinterested board or shares

Note: Articles can eliminate liability but not for willful or intentional conduct
Power of Shareholders
UOA, S/H have no power to control day to day activities of the copropration.
To manage: must be closed corporation
Duties of Shareholders
Generally, no fiduciary duties as a matter of law but courts may find one. Watch for oppressing minority s/h, selling control to looters, or selling corporate assets
Corporation: SH Defendant
Piercing the Corporate Veil (2H)
Generally, a s/h is not liable for the acts or debts of corporation. But, courts may PCV if:
1. S/H has abused the priviledge of incorporating
2. fairness requres
Corporations: PCV
Alter Ego Theory
Factors (3)
- treating corporate assets as own
- using corporate funds to pay personal debts
- failing in keeping formalities (but alone not enough)
Corporation: PCV
Where S/H failed to invest enough money to cover prospective liability.
Who can PCV?
Usually creditors (and often for tort victims over contract claimants)
Derivative Suit
To enforce the corporations claim. Damage award to corporation, fees to S/H.
Derivative Suit
1. Owned stock when claim arose (or operation of law)
2. Written demand on corporation to bring suit: 90 days or rejection
3. Fairly and adequately represent interests
S/H Voting
Who has the right to vote?
The "record shareholder" as of the "record date" has the right to vote. The cut of is generally 10 - 60 days before the meeting.
A proxy is a writing, signed by a record shareholder, directed to the secreaary of the corporation, authorizing another to vote the shares.
Note: A proxy is good for 11 months.
Voting Trust
(no time limit)
A voting trust is a written agreement controlling how the shares will be voted. There must be a copy to the corporation and transfer of legal title to trustee.
Pooling Agreement
(no time limit)
A pooling agreement is a written agreement controlling how the shares will be voted based on a majority of signers. There must be a copy to the corporation.
S/H Voting
Notice: 10-60 days, both regular and special meeting
Must contain when, where and PURPOSE (which limits scope)
S/H Voting
Special Meeting may be called by: (4)
1. Board of Directors
2. The President
3. 10% S/H
4. As permitted in Articles or Bylaws
S/H Valid Corporate Act (2)
Two Ways:
1. Unanimous consent of all S/H, or
2. Meeting that satisfies voting and quorum requirments.
S/H Quorum
UOA, Focus on majority of outstanding shares represented. Never less than 1/3. ON VOTE, majority of voting shares.
Cumulative S/H Voting
- only for BOD voting
- Sept. 1, 2003
- Notice
Shares x Directors
Stock Transfer Restriction
Right of first refusal to the corporation before selling the stock to the individual. Action against seller (if reasonable) or buyer (with knowledge)
S/H Right to Inspect Books
5% of Shares (for 6 months)
Written demand for proper purpose
Payment to S/H
(rarely tested)
Fundamental Corporate Changes
Board Resolution (20 day notice) + 2/3 of the shares entitled to vote
Corporation: Fundamental Changes INCLUDE
1. Amending Articles
2. Merger, Share Exchange or Conversion
3. Sale or Transfer of Assets
Corporations: Fundamental Changes, Appraisal Perfection
1. File notice of objection and intent to demand payment
2. Abstain or vote against change
3. Post nofication, w/in 20 days, for demand.
Shortform Mergers
No approval necessary where corporation owns 90% of shares. Appraisal rights only to subsidiary.
Sale of Assets
Fundamental change for tranferring company only. Generally buying assets does not succeed liabilities.
Dissolution Requiremnets
1. ACTION: Board + 2/3 S/H OR
Written consent of ALL S/H
2 Notice to ceditors
Upon disolution, D&O liable
Federal Security Laws:
Federal Security Laws:
10B-5 Defendants (3)
1. Company with misleading press release
2. Buyer or seller who misrepresents or trades inside info
3. Tipper or Tippee
Federal Security Laws:
10B-5 Requirements (3)
1. "instrumentality of interstate commerce" (such as mail, phone)
2. materiality or omission must concern material fact (one that a reasonable investor would consider important)
3. Scienter: intent to decieve, manipulate, defraud (reckless may suffice)
Federal Security Laws:
10B-5 Plaintiff
1. SEC
2. Private Action: But only by a BUYER or SELLER
Federal Security Laws:
10B-5 TIPPER (2)
1. Passed along material inside info in breach of duty
2. benefitted - making gift or enhancing reputation
Federal Security Laws:
1. Traded on the tip, and
2. knew or should have known info was improperly passed
Federal Security Laws:
Provides for...
Defendants (3)
recovery by the corporation of profits gained by DIRECTORS, OFFICERS and 10% S/H (when bought and sold)
Federal Security Laws:
16B Requirements
1. Reporting corporation
- national exchange
- 500 S/H & $10M assets
2. Profits from Short Swing trading
- 6 months BEFORE and AFTER

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