Subject outline

Business Associations (Agency, Partnership, and Corporations)

61 core rule statements, organized the way the California Bar tests them.

• Agency Formation - The Three C’s

  An agency relationship arises when a principal authorizes an agent to act on the principal’s behalf and subject to the principal’s control, and the agent consents to do so.

  Elements / Factors

  1. 1Consent: the principal manifests assent that the agent act on the principal’s behalf, and the agent consents. Consent may be express or implied from conduct.
  2. 2Capacity: the principal must have capacity to authorize the act the agent is to perform. The agent generally needs only sufficient capacity to consent and act; an agent may bind the principal even if the agent could not personally enter the transaction.
  3. 3Control: the principal has the right to control the objectives of the undertaking. The principal need not control every physical detail.
  4. 4On-behalf-of requirement: the agent acts primarily for the principal’s benefit, not merely at arm’s length for the agent’s own business.

  Exceptions / Limitations

  • •No writing or consideration is ordinarily required to create agency unless the agent is appointed to perform an act that governing law requires to be authorized in writing.
  • •The parties’ label is not controlling; the facts and right of control govern.

  California distinction

  • California Civil Code section 2295 defines an agent as one who represents another, called the principal, in dealings with third persons. California recognizes actual and ostensible agency.

• Employee or Independent Contractor

  An employee is an agent whose principal controls or has the right to control the manner and means of performance. An independent contractor ordinarily controls the manner and means of accomplishing the agreed result. No single factor is invariably dispositive.

  Elements / Factors

  1. 1Extent of the hiring party’s right to control the manner and means of the work.
  2. 2Whether the worker is engaged in a distinct occupation or independently established business.
  3. 3Whether the work is usually performed under the hiring party’s direction or by a specialist without supervision.
  4. 4Skill required in the particular occupation.
  5. 5Who supplies the instrumentalities, tools, equipment, and place of work.
  6. 6Length and continuity of the working relationship.
  7. 7Method of payment: time-based wages versus payment by the job or project.
  8. 8Whether the work is part of the hiring party’s regular business.
  9. 9Whether the parties believe they are creating an employment relationship.
  10. 10Whether the hiring party is itself in business and bears entrepreneurial risk.

  Exceptions / Limitations

  • •Exam six-factor shorthand: control; distinct occupation; supervision; skill; tools/place; and duration/payment. Then mention regular business and the parties’ belief if facts support them.
  • •An independent contractor can still be an agent for matters within the contractor’s authority; “independent contractor” answers the degree-of-control question, not necessarily the existence of agency.

  California distinction

  • California uses different tests for different statutes. For wage-order claims, the ABC test generally presumes employee status unless the hiring entity proves: (A) freedom from control; (B) work outside the usual course of the hiring entity’s business; and (C) an independently established trade or business. Common-law agency and tort questions continue to emphasize right of control and secondary factors.

• Actual Authority

  Actual authority exists when the principal’s manifestations cause the agent reasonably to believe the principal wants the agent to act.

  Elements / Factors

  1. 1A manifestation by the principal to the agent.
  2. 2The agent’s reasonable understanding that the principal authorized the act.
  3. 3Action within the scope of that understanding.

  Exceptions / Limitations

  • •Actual authority may be express or implied.
  • •The agent’s own statement cannot create authority without a manifestation traceable to the principal.

  California distinction

  • California calls authority “actual” when the principal intentionally confers it or allows the agent to believe the agent possesses it.

• Express Actual Authority

  Express authority is created by explicit oral or written words authorizing the agent to perform the act.

  Exceptions / Limitations

  • •A writing is required where the equal-dignities rule or another statute requires written authorization, including specified transactions involving real property.
  • •Ambiguous instructions are interpreted in light of surrounding circumstances and the agent’s reasonable understanding.

  California distinction

  • Under California Civil Code section 2309, authority to enter a contract required by law to be in writing generally must also be given in writing.

• Implied Actual Authority

  Implied authority includes authority reasonably necessary or incidental to carry out express authority and authority inferred from the principal’s conduct, custom, prior dealings, position, or acquiescence.

  Elements / Factors

  1. 1Expressly assigned objective or position.
  2. 2The additional act is reasonably necessary, usual, or incidental to accomplish that objective.
  3. 3The agent reasonably believes the principal authorized the additional act.

  Exceptions / Limitations

  • •Authority may arise from emergency circumstances when action is reasonably necessary to protect the principal’s property or interests.

• Termination of Actual Authority

  Actual authority terminates by the principal’s revocation, the agent’s renunciation, expiration of time, occurrence of agreed circumstances, completion of the purpose, loss of capacity where applicable, or operation of law.

  Exceptions / Limitations

  • •A power given as security or an agency coupled with an interest may be irrevocable to the extent necessary to protect the agent’s interest.
  • •Termination of actual authority does not automatically terminate apparent authority as to third parties who have not received notice.

  California distinction

  • California recognizes termination by extinction of the subject, death, incapacity in specified circumstances, renunciation, and revocation, subject to powers coupled with an interest.

• Apparent Authority

  Apparent authority exists when the principal’s manifestations cause a third party reasonably to believe the agent is authorized, and the third party relies on that appearance.

  Elements / Factors

  1. 1A manifestation attributable to the principal, including words, conduct, position, prior dealings, or knowing acquiescence.
  2. 2The third party’s actual and objectively reasonable belief that the agent is authorized.
  3. 3The third party changes position or enters the transaction in reliance on that belief.

  Exceptions / Limitations

  • •The agent cannot create apparent authority solely by claiming to have authority.
  • •A third party with notice of a limitation, suspicious circumstances, or knowledge that the agent lacks authority cannot reasonably rely.
  • •Apparent authority may linger after actual authority ends until affected third parties receive appropriate notice.

  California distinction

  • California generally uses the term “ostensible authority.” Ostensible authority exists when the principal intentionally or by lack of ordinary care causes or allows a third person to believe the agent possesses authority.

• Agency by Estoppel

  A person who intentionally or carelessly causes a third party to believe another acts with authority, or who knows of the belief and fails to correct it when reasonable, may be estopped from denying agency if the third party detrimentally relies.

  Elements / Factors

  1. 1Intentional or negligent creation of an appearance, or failure to correct a known appearance.
  2. 2Reasonable and detrimental reliance by the third party.
  3. 3A causal connection between the appearance and the loss.

  Exceptions / Limitations

  • •Estoppel protects reliance; it does not necessarily create actual authority between principal and agent.

• Ratification

  Ratification is the principal’s affirmance of a prior act done or purportedly done on the principal’s behalf, giving the act the same effect as if originally authorized.

  Elements / Factors

  1. 1The actor acted or purported to act on behalf of the principal.
  2. 2The principal existed and had capacity when the act occurred and when ratified.
  3. 3The principal had knowledge of all material facts or chose to ratify despite incomplete knowledge.
  4. 4The principal affirmed the entire transaction by words, conduct, acceptance of benefits, or failure to repudiate where circumstances required action.
  5. 5Ratification occurred before the third party withdrew and before circumstances made ratification inequitable.

  Exceptions / Limitations

  • •The principal may not ratify only favorable portions of a transaction.
  • •Ratification cannot prejudice intervening rights of third parties.
  • •Silence alone is insufficient unless the principal knows of the act and circumstances reasonably call for repudiation.

  California distinction

  • California permits ratification by accepting or retaining the benefit with notice of the facts and generally treats ratification as retroactive, subject to third-party rights.

• Principal’s Contract Liability - Disclosed Principal

  When an authorized agent contracts for a disclosed principal and manifests that the agent acts in a representative capacity, the principal is a party and the agent ordinarily is not.

  Elements / Factors

  1. 1The agent had actual or apparent authority, or the principal ratified.
  2. 2The third party knew the principal’s identity and knew the agent acted for the principal.

  Exceptions / Limitations

  • •The agent remains liable if the agent expressly agrees to be liable, guarantees performance, acts without authority, or the contract provides otherwise.

• Partially Disclosed or Unidentified Principal

  When the third party knows the agent acts for a principal but does not know the principal’s identity, both principal and agent are ordinarily parties to the contract.

  Exceptions / Limitations

  • •Contract terms or contrary agreement may alter the result.

• Undisclosed Principal

  An undisclosed principal is generally liable on an authorized contract made by an agent acting on the principal’s behalf, and the agent is also liable as a party.

  Exceptions / Limitations

  • •The principal is not liable where the contract excludes the principal, performance by the principal would materially change the third party’s rights or burdens, or the agent falsely represented that no principal existed in circumstances making identity material.
  • •The third party must elect against double recovery, not necessarily between liability theories at the pleading stage.

• Agent’s Warranty of Authority

  A person who purports to act as an agent impliedly warrants having authority and may be liable to the third party if authority is lacking.

  Elements / Factors

  1. 1Representation of authority.
  2. 2Lack of actual authority.
  3. 3Reasonable reliance by the third party.
  4. 4Resulting loss.

  Exceptions / Limitations

  • •No liability where the purported agent fully discloses the lack or uncertainty of authority, or the third party knows authority is absent.

• Respondeat Superior

  An employer is vicariously liable for an employee’s tort committed within the scope of employment.

  Elements / Factors

  1. 1An employer-employee relationship.
  2. 2A tort committed by the employee.
  3. 3The tort occurred within the scope of employment.

  Exceptions / Limitations

  • •Vicarious liability does not require employer fault. The employee remains personally liable for the employee’s own tort.
  • •An employer may also be directly liable for negligent hiring, supervision, retention, or entrustment.

  California distinction

  • California generally asks whether the employee’s conduct was required by or incidental to the duties, or whether the misconduct was a generally foreseeable consequence of the enterprise.

• Scope of Employment

  Conduct falls within the scope of employment when it is of the kind the employee was hired to perform, occurs substantially within authorized time and space, and is motivated at least partly to serve the employer, or is a foreseeable incident of the enterprise.

  Elements / Factors

  1. 1Nature of the employee’s assigned work.
  2. 2Time, place, and purpose of the conduct.
  3. 3Similarity to authorized conduct and whether commonly performed by employees.
  4. 4Extent of departure from normal methods or route.
  5. 5Whether the enterprise created or increased the risk.

  Exceptions / Limitations

  • •A minor detour ordinarily remains within scope; a substantial personal frolic does not. Liability may resume when the employee returns to the employer’s business.
  • •Intentional torts may fall within scope if the employment predictably creates the risk, even if the act is forbidden or partly personal.

  California distinction

  • California applies a foreseeability/enterprise-risk approach more broadly than a strict motive-to-serve test. The going-and-coming rule generally excludes ordinary commuting, subject to exceptions such as special errand, required vehicle, and employer-created risk.

• Independent Contractor Torts

  A principal is generally not vicariously liable for the torts of an independent contractor.

  Exceptions / Limitations

  • •Liability may arise for inherently dangerous activities, nondelegable duties, negligent selection or instruction, retained control negligently exercised, apparent agency, illegal work, or the principal’s own negligence.

  California distinction

  • California recognizes the peculiar-risk doctrine primarily to protect innocent third parties; workers of the contractor face significant Privette-line limitations and exceptions.

• Agent’s Duties to Principal

  An agent is a fiduciary and must act loyally, carefully, within authority, and in accordance with the principal’s lawful instructions.

  Elements / Factors

  1. 1Duty of loyalty: no secret profits, self-dealing, adverse representation, misuse of confidential information, or usurpation of opportunities.
  2. 2Duty of care, competence, and diligence appropriate to the undertaking.
  3. 3Duty to obey lawful instructions and act within actual authority.
  4. 4Duty to disclose material information relevant to the agency.
  5. 5Duty to account for money and property and keep principal property separate.

  Exceptions / Limitations

  • •The principal may consent to otherwise conflicted conduct after full disclosure.

  California distinction

  • California agents owe duties of utmost good faith and must disclose material facts concerning the subject of the agency.

• Principal’s Duties to Agent

  A principal must perform contractual commitments to the agent, indemnify the agent for authorized and proper expenditures or liabilities, compensate the agent when agreed or reasonably expected, and deal fairly and in good faith.

  Exceptions / Limitations

  • •No indemnity is required for losses caused solely by the agent’s unauthorized misconduct or breach of duty.

• Formation of a General Partnership

  A partnership is an association of two or more persons carrying on as co-owners a business for profit, whether or not they intend to form a partnership.

  Elements / Factors

  1. 1Two or more persons.
  2. 2A business for profit.
  3. 3Co-ownership, shown by sharing control and economic returns.

  Exceptions / Limitations

  • •Sharing gross returns alone does not establish partnership.
  • •Receipt of a share of profits creates a presumption of partnership unless received as payment of debt, wages, rent, annuity, interest on a loan, or consideration for sale of goodwill or property.
  • •No filing or written agreement is required, though a writing may be required for terms within the Statute of Frauds.

  California distinction

  • California Corporations Code section 16202 follows this test and recognizes partnership formation regardless of subjective intent.

• Partnership Property

  Property acquired in the partnership’s name or with partnership assets is partnership property. Property acquired in a partner’s name without indication of partnership capacity and without partnership assets is presumed separate.

  Exceptions / Limitations

  • •A partner is not a co-owner of specific partnership property and has no transferable interest in particular assets.

• Partner as Agent

  Each partner is an agent of the partnership for its business. A partner’s act in the ordinary course binds the partnership unless the partner lacked authority and the third party knew or had notice of the lack.

  Elements / Factors

  1. 1Partner status.
  2. 2Act apparently carrying on the partnership’s ordinary business.
  3. 3No effective limitation known to the third party.

  Exceptions / Limitations

  • •An act outside the ordinary course binds the partnership only if authorized by the other partners.

  California distinction

  • California Corporations Code section 16301 adopts this agency rule.

• Partnership Management and Voting

  Absent agreement, partners have equal rights in management. Ordinary-course matters are decided by a majority; acts outside the ordinary course and amendments to the partnership agreement require unanimous consent.

  Exceptions / Limitations

  • •A partner is not entitled to remuneration for partnership services except reasonable compensation for winding up.

• Partner Liability

  A general partnership is liable for obligations incurred in its business. Partners are jointly and severally liable for partnership obligations, subject to statutory and procedural limits.

  Exceptions / Limitations

  • •A person admitted as a partner is not personally liable for obligations incurred before admission merely by becoming a partner.
  • •A creditor generally must exhaust partnership assets before levying against an individual partner unless a statutory exception applies.

  California distinction

  • California provides joint and several liability, with judgment-enforcement protections under Corporations Code sections 16306 and 16307.

• Incoming and Dissociated Partners

  An incoming partner’s exposure for old debts is ordinarily limited to partnership property. A dissociated partner remains liable for obligations incurred while a partner and may face limited post-dissociation liability to a third party lacking notice.

  Exceptions / Limitations

  • •Filing and notice can cut off lingering authority and liability after statutory periods.

• Partner Duty of Loyalty

  A partner must account for partnership benefits, refrain from adverse dealing, and refrain from competing before dissolution.

  Elements / Factors

  1. 1Account and hold as trustee any property, profit, benefit, or partnership opportunity obtained from partnership business, property, or information.
  2. 2Refrain from dealing with the partnership as or for an adverse party.
  3. 3Refrain from competing with the partnership before dissolution.

  Exceptions / Limitations

  • •A partner does not breach merely because conduct furthers the partner’s own interest. Informed authorization or ratification may validate a specific transaction.

  California distinction

  • California Corporations Code section 16404 states these loyalty duties and also imposes good faith and fair dealing.

• Partner Duty of Care

  A partner’s statutory duty of care in conducting and winding up partnership business is limited to refraining from grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.

  Exceptions / Limitations

  • •The partnership agreement may shape performance standards but may not unreasonably reduce the duty of care or eliminate the obligation of good faith and fair dealing.

  California distinction

  • California follows this statutory formulation rather than an ordinary-negligence rule.

• Partnership Distributions and Losses

  Absent agreement, partners share profits equally and contribute to losses in the same proportion as profits. The partnership must reimburse advances beyond agreed capital and indemnify partners for proper payments made in the ordinary course.

• Transferable Interest

  A partner may transfer the partner’s economic interest in distributions, but a transferee does not thereby become a partner or obtain management, information, or inspection rights.

  Exceptions / Limitations

  • •Admission as a partner ordinarily requires consent of all partners unless the agreement provides otherwise.

• Dissociation

  A partner is dissociated upon events including express withdrawal, agreed event, expulsion, bankruptcy in specified circumstances, death, incapacity, or termination of an entity partner.

  Exceptions / Limitations

  • •Dissociation may be rightful or wrongful. Wrongful dissociation can create damages but still ends the person’s status as a partner.

• Dissolution and Winding Up

  A partnership dissolves and must wind up upon specified statutory events, including notice in an at-will partnership, expiration or completion of a term or undertaking, agreed vote after a partner’s dissociation in a term partnership, illegality, or judicial decree.

  Elements / Factors

  1. 1Finish existing business and preserve value.
  2. 2Collect and liquidate assets as appropriate.
  3. 3Discharge creditors, including partner-creditors.
  4. 4Return contributions and distribute remaining surplus according to positive account balances.

  Exceptions / Limitations

  • •Partners may waive winding up and continue the business where the statute and agreement permit.

• Limited Partnership

  A limited partnership requires a certificate of limited partnership. It has at least one general partner and one limited partner. General partners ordinarily manage and bear general-partner liability; limited partners receive statutory limited liability.

  Exceptions / Limitations

  • •A limited partner may lose protection for separate personal wrongdoing or by becoming liable under another doctrine, but participation in control alone does not automatically create general liability under modern statutes.

  California distinction

  • California limited partnerships are governed by Corporations Code section 15900.101 et seq.

• Limited Liability Partnership

  An LLP is a partnership that files the required registration and maintains statutory compliance. Partners generally are not personally liable solely by reason of being partners for partnership obligations.

  Exceptions / Limitations

  • •A partner remains liable for the partner’s own torts and may be liable for persons under the partner’s direct supervision or control as provided by statute.

  California distinction

  • California restricts LLP practice to qualifying professional partnerships and imposes security/insurance requirements.

• Formation

  A corporation is formed by filing articles of incorporation with the Secretary of State.

  Elements / Factors

  1. 1Proper articles stating the required corporate name, purpose where required, authorized shares, and agent for service.
  2. 2Execution and filing by an incorporator.
  3. 3Organizational action: bylaws, initial directors, officers, share issuance, and other startup approvals.

  Exceptions / Limitations

  • •Defective formation may implicate de facto corporation or corporation-by-estoppel doctrines, but modern statutes and filing systems narrow their use.

  California distinction

  • California formation is governed by the General Corporation Law, Corporations Code section 100 et seq.

• Promoter Liability

  A promoter who enters a contract for a not-yet-formed corporation is personally liable unless the contract provides otherwise or a novation releases the promoter.

  Exceptions / Limitations

  • •Corporate adoption makes the corporation liable but does not by itself release the promoter. A novation requires agreement among the promoter, corporation, and third party.

• Preincorporation Contract - Adoption

  A corporation may adopt a promoter’s contract expressly by board action or impliedly by accepting benefits with knowledge. Adoption creates corporate liability prospectively.

  Exceptions / Limitations

  • •Ratification technically requires an existing principal at the time of the act; because the corporation did not yet exist, the proper term is adoption.

• Share Issuance and Consideration

  The board authorizes issuance of shares for consideration it determines adequate, subject to the articles, statutory requirements, and fiduciary duties.

  Exceptions / Limitations

  • •Watered-stock liability may arise when shares are issued for inadequate consideration under applicable law.
  • •Preemptive rights exist only if granted by the articles or statute.

  California distinction

  • California generally does not provide preemptive rights unless the articles grant them, subject to rules for older corporations.

• Board Authority

  Corporate powers are exercised by or under the direction of the board, which acts collectively through properly noticed meetings or valid written consent.

  Elements / Factors

  1. 1Proper notice if required.
  2. 2Quorum present.
  3. 3Required vote of directors present.
  4. 4No disabling conflict or other statutory defect.

  Exceptions / Limitations

  • •Directors ordinarily cannot vote by proxy.
  • •Unanimous written consent may substitute for a meeting, subject to statutory exceptions.

  California distinction

  • California generally permits board action by unanimous written consent and remote participation when statutory conditions are satisfied.

• Director Duty of Care

  A director must act in good faith, in the corporation’s and shareholders’ best interests, and with the care, including reasonable inquiry, that an ordinarily prudent person in a like position would use under similar circumstances.

  Elements / Factors

  1. 1Good faith.
  2. 2Reasonable belief that action serves corporate and shareholder interests.
  3. 3Informed decision after reasonable inquiry.
  4. 4Ordinarily prudent care under similar circumstances.

  Exceptions / Limitations

  • •A director may rely in good faith on competent officers, employees, experts, counsel, accountants, or a board committee when reliance is reasonable and no red flags make it unwarranted.

  California distinction

  • California Corporations Code section 309 states this standard and reliance protection.

• Business Judgment Rule

  The business judgment rule protects disinterested, informed, good-faith board decisions made with a rational belief that the action serves the corporation.

  Elements / Factors

  1. 1A business decision rather than inaction caused by failure to consider the matter.
  2. 2Disinterested and independent decisionmakers.
  3. 3Good faith.
  4. 4Reasonable information and inquiry.
  5. 5A rational business purpose.

  Exceptions / Limitations

  • •The rule does not protect fraud, illegality, bad faith, waste, self-dealing, disabling conflict, or uninformed abdication.

  California distinction

  • California treats the rule as both a judicial noninterference doctrine and, in proper circumstances, protection from liability.

• Duty of Loyalty and Conflicting-Interest Transactions

  Directors and officers must place corporate interests above personal interests and may not obtain an unfair personal benefit through their position.

  Elements / Factors

  1. 1A conflict, personal financial interest, adverse interest, or diverted corporate opportunity.
  2. 2Failure to disclose material facts.
  3. 3Lack of approval by disinterested decisionmakers or shareholders, or substantive unfairness.

  Exceptions / Limitations

  • •A transaction may be cleansed by full disclosure and approval by disinterested directors or shareholders, or by proof the transaction was just and reasonable to the corporation.
  • •Cleansing may shift standards or burdens but does not excuse waste or bad faith.

  California distinction

  • California Corporations Code section 310 provides statutory safe-harbor routes for interested-director transactions.

• Corporate Opportunity

  A fiduciary may not take for personal benefit an opportunity belonging to the corporation.

  Elements / Factors

  1. 1The corporation has an interest or expectancy in the opportunity, or it falls within the corporation’s current or prospective line of business.
  2. 2The corporation is financially and practically able to pursue it.
  3. 3Taking it creates a conflict between fiduciary self-interest and corporate duty.
  4. 4The fiduciary did not make full disclosure and obtain proper rejection by disinterested decisionmakers.

  Exceptions / Limitations

  • •A fiduciary may pursue an opportunity properly presented to and rejected by disinterested corporate decisionmakers after full disclosure.

• Officer Duties

  Officers are agents and fiduciaries. They owe duties of care, loyalty, good faith, disclosure, and obedience within the authority assigned by the board, bylaws, and ordinary incidents of office.

  Exceptions / Limitations

  • •The business judgment rule may not protect officer conduct to the same extent as board decisions, particularly where the officer did not participate as a director.

  California distinction

  • California statutory and common-law rules should be distinguished when analyzing officers versus directors.

• Controlling Shareholder Duties

  A controlling shareholder owes fiduciary duties when using control to obtain a unique benefit or to influence corporate action at the expense of minority shareholders.

  Exceptions / Limitations

  • •A controller may generally vote shares in self-interest, but may not use control for fraud, oppression, diversion of corporate assets, unfair self-dealing, or sale to a known looter.

• Piercing the Corporate Veil

  A court may disregard limited liability when unity of interest and ownership makes the corporation and shareholder effectively indistinguishable and treating the acts as corporate would produce an inequitable result.

  Elements / Factors

  1. 1Unity of interest: commingling, undercapitalization, disregard of formalities, identical ownership/control, diversion of assets, shell use, or failure to maintain separateness.
  2. 2Inequitable result caused by respecting the entity form.

  Exceptions / Limitations

  • •Failure to follow formalities alone is ordinarily insufficient.
  • •Veil piercing is an equitable remedy, not an independent cause of action.

  California distinction

  • California calls the doctrine alter ego and requires both unity of interest and an inequitable result; difficulty collecting a debt alone is not enough.

• Shareholder Voting

  Shareholders elect directors and vote on fundamental changes. Action requires proper notice, a record date, quorum, and the required vote, or a valid written-consent procedure.

  Exceptions / Limitations

  • •Voting agreements and proxies are generally permitted subject to statutory form, duration, revocability, and public-policy limits.
  • •Cumulative voting may permit minority shareholders to aggregate votes in director elections where applicable and not eliminated.

  California distinction

  • California preserves cumulative voting for many corporations unless validly eliminated under the governing provisions.

• Fundamental Changes

  Mergers, certain asset sales, dissolution, and amendments affecting shareholder rights ordinarily require board approval and shareholder approval by the statutory vote.

  Exceptions / Limitations

  • •Dissenters may receive appraisal rights for specified transactions, subject to strict notice, demand, voting, and valuation procedures.

• Dividends and Distributions

  The board may authorize distributions subject to solvency and statutory balance-sheet tests and any preferential rights.

  Exceptions / Limitations

  • •Directors may be liable for unlawful distributions, subject to good-faith reliance and contribution rights. Shareholders may have repayment liability if they knew the distribution was unlawful.

  California distinction

  • California Corporations Code section 500 applies statutory distribution limitations.

• Direct Shareholder Action

  A shareholder may sue directly for an injury personal to the shareholder, such as denial of voting rights, inspection rights, or a contractual right, and recovers personally.

  Exceptions / Limitations

  • •A claim is not direct merely because the shareholder’s stock value fell; injury to the corporation belongs in a derivative action.

• Derivative Action

  A derivative action enforces a corporate claim when those controlling the corporation fail to do so.

  Elements / Factors

  1. 1Plaintiff was a shareholder when the challenged transaction occurred or acquired shares by operation of law, subject to statutory exceptions.
  2. 2Plaintiff fairly and adequately represents shareholder interests.
  3. 3Plaintiff made the required demand on the board or pleads legally sufficient grounds excusing demand under governing law.
  4. 4The corporation is joined as a nominal defendant.
  5. 5Any required security, verification, and procedural conditions are satisfied.

  Exceptions / Limitations

  • •Recovery ordinarily goes to the corporation. Settlement or dismissal generally requires court approval.

  California distinction

  • California Corporations Code section 800 requires particularized pleading of efforts to secure board action or reasons for not doing so and permits a motion for security in specified circumstances.

• Inspection Rights

  Shareholders and directors have statutory inspection rights. A shareholder generally must state a purpose reasonably related to shareholder interests; a director’s right is broader but may be limited when used adversely to the corporation.

  Exceptions / Limitations

  • •Scope and procedure depend on the records sought, percentage ownership, purpose, and statutory demand requirements.

• Close Corporation

  A statutory close corporation has the required statement in its articles and no more than the statutory maximum number of shareholders. A valid shareholder agreement may transfer management power from the board to shareholders.

  Exceptions / Limitations

  • •Shareholders who assume management powers may assume corresponding director duties and liabilities. Loss of close-corporation status can affect the agreement.

  California distinction

  • California’s statutory maximum is
  • shareholders.

• Federal Rule 10b-5

  Rule 10b-5 prohibits fraud or material misrepresentation or omission in connection with the purchase or sale of securities using interstate commerce.

  Elements / Factors

  1. 1Material misrepresentation, misleading omission where a duty to disclose exists, deceptive scheme, or fraudulent practice.
  2. 2Scienter: intent or recklessness.
  3. 3Connection with purchase or sale of a security.
  4. 4Reliance in a private action, including an available presumption.
  5. 5Economic loss.
  6. 6Loss causation.
  7. 7Interstate-commerce or jurisdictional means.

  Exceptions / Limitations

  • •Mere negligence is insufficient. Silence is actionable only when there is a duty to disclose.

• Insider Trading

  A person with material nonpublic information may violate Rule 10b-5 by trading in breach of a duty of trust and confidence or by tipping another for an improper personal benefit.

  Elements / Factors

  1. 1Material nonpublic information.
  2. 2Purchase or sale of securities.
  3. 3Scienter.
  4. 4Classical theory: breach of duty to shareholders by a corporate insider or temporary insider; or misappropriation theory: deceptive use of information in breach of duty to its source.
  5. 5For tipping: tipper breach for personal benefit and tippee knowledge or reason to know of that breach.

  Exceptions / Limitations

  • •Information is material if a reasonable investor would consider it important or it would significantly alter the total mix of available information.

• Section 16(b) Short-Swing Profits

  Section 16(b) requires statutory insiders of reporting companies to disgorge profits from matching purchases and sales within a six-month period, regardless of intent or use of inside information.

  Elements / Factors

  1. 1Reporting issuer equity security.
  2. 2Defendant was a director, officer, or more-than-10-percent beneficial owner under the statutory timing rules.
  3. 3Purchase and sale, in either order, within six months.
  4. 4Profit calculated by matching transactions to maximize disgorgement.

  Exceptions / Limitations

  • •A shareholder may sue derivatively if the issuer fails to act after demand.

• LLC Formation

  An LLC is formed by filing articles of organization. The operating agreement governs internal affairs subject to nonwaivable statutory rules.

  Elements / Factors

  1. 1Filed articles of organization.
  2. 2At least one member.
  3. 3Operating agreement, which may be written, oral, implied, or a combination where permitted.

  Exceptions / Limitations

  • •Members ordinarily have limited liability but remain liable for personal torts, guarantees, and obligations imposed by alter ego or other law.

  California distinction

  • California’s Revised Uniform Limited Liability Company Act is Corporations Code section 17701.01 et seq.

• Member-Managed LLC Authority

  In a member-managed LLC, each member is generally an agent for the LLC’s activities, and ordinary-course acts may bind the LLC subject to actual authority and notice rules.

  Exceptions / Limitations

  • •Acts outside the ordinary course require the approval specified by statute or operating agreement.

• Manager-Managed LLC Authority

  In a manager-managed LLC, management authority rests with the manager or managers. A member is not an agent solely by being a member.

  Exceptions / Limitations

  • •Actual or apparent authority can still arise from separate manifestations or appointments.

  California distinction

  • California requires the articles to state that the LLC is manager-managed for the statutory allocation to apply.

• LLC Fiduciary Duties

  In a member-managed LLC, members owe duties of loyalty and care and the obligation of good faith and fair dealing. In a manager-managed LLC, these fiduciary duties generally apply to managers, not passive members solely by reason of membership.

  Elements / Factors

  1. 1Loyalty: account for benefits and opportunities; avoid adverse dealing; avoid competition during the LLC’s activities.
  2. 2Care: refrain from grossly negligent or reckless conduct, intentional misconduct, or knowing violation of law.
  3. 3Good faith and fair dealing in exercising rights and performing duties.

  Exceptions / Limitations

  • •The operating agreement may modify duties within statutory limits but may not eliminate specified core duties or the contractual obligation of good faith and fair dealing.

  California distinction

  • California Corporations Code section 17704.09 states these duties and the manager-managed allocation.

• LLC Distributions

  Distributions are made as provided by the operating agreement and statute, subject to solvency restrictions. Improper distributions may create liability for participating managers or members and knowing recipients.

• LLC Transfer and Admission

  A member may transfer the economic interest, but the transferee ordinarily does not obtain management or member rights without the required consent.

  Exceptions / Limitations

  • •Charging-order statutes may limit a judgment creditor to distributions rather than management or ownership of LLC property.

• LLC Dissociation and Dissolution

  Dissociation ends governance rights upon statutory or agreed events. Dissolution occurs upon events in the operating agreement, member consent, prolonged absence of members, or judicial grounds, followed by winding up.

  Exceptions / Limitations

  • •A dissociated member may retain an economic interest and may remain liable under separate obligations or lingering-authority rules.