Business Law: a QuickStudy 1423238621, 9781423238621

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TORTS

Private (civil) wrongs against persons or property for which the victim can bring a civil lawsuit

Intentional Torts PRIMA FACIE CASE

• Requirements 1. Act: Voluntary act or a failure to act when under a duty to do so 2. Intent: Deliberate act or act with substantial certainty of consequences 3. Causation: Need not be specifically proven 4. Damages: Nominal or greater for intentional disregard or invasion of rights

TORTS TO THE PERSON

• Assault: Threat of harm, or contact that arouses a reasonable apprehension in another’s mind of an imminent battery 1. Ability need not be real; apparent ability to harm is sufficient 2. Requires an overt act; words coupled with conduct • Battery: Intentional, harmful, or offensive touching of another without his/her consent 1. Touching need not be to a physical person; can occur if to something connected to victim (e.g., clothing) 2. Actual injury is not required • False imprisonment: Intentional confinement of another for an appreciable time without his/her consent 1. Victim must be aware of confinement or injured by it • Defamation: Publication of a false statement about another which harms his/her reputation; there are two types: 1. Libel (written or printed statements) 2. Slander (oral) • Invasion of privacy: 1. Intrusion of privacy EX: Wiretapping, harassing telephone calls 2. Unauthorized public disclosure of private facts EX: Sex life, humiliating illness 3. False light publicity EX: Falsely associating an author with an inferior work 4. Unauthorized use of a name EX: Commercial falsely claiming sports star uses a product • Intentional infliction of emotional distress: Extreme and outrageous conduct causes another severe emotional distress 1. Actual damages are required 2. Physical manifestation is not required (majority rule); physical manifestation is required (minority rule) EX: Sexual harassment, midnight bill collectors • Misuse of legal proceedings: Financial, emotional, and/ or reputation injury to another from wrongfully instituted legal proceedings EX: Frivolous lawsuit, wrongful criminal prosecution

BUSINESS TORTS

• Intentional misrepresentation or fraud: A false representation made knowingly or recklessly without belief in its truth 1. Misrepresentation must be of a material fact 2. There must be intent (the defendant must know there was a misrepresentation) 3. There must be reliance on the misrepresentation by party EX: Reliance on stockbroker to buy because stock is on

CRIMINAL LAW WHITE-COLLAR CRIMES

the rise (known to be false) because the stockbroker is getting kickbacks for selling to clients • Intentional interference with contractual or business relations: Intentional interference with a contractual or business relationship between the contract or business party and a wrongdoer that was known to the wrongdoer that causes economic harm 1. Must have a contractual or business relationship that wrongdoer knew about 2. Wrongdoer took deliberate action that would cause the relationship to be troubled or to end and it did so 3. Aggrieved party suffered damages as a result EX: Person alleges (falsely) to a hospital administrator that one of its doctors has a history of drug addiction, causing the doctor to lose her privileges EX: Person tells her competitor’s creditor that the competitor cannot pay his bills and the creditor refuses to extend further credit to the competitor as planned • Disparagement: Intentionally making false statements about the quality or ownership of someone’s goods EX: A former restaurant worker tells patrons entering the restaurant that it uses inferior food products in its menu offerings

DEFENSES TO INTENTIONAL TORTS

• Consent: Manifested by words or actions; silence if a reasonable person would speak; requires capacity EX: Photo of person used in a magazine is not invasion of privacy if the photo was used with permission • Self-defense: Defense of self or others EX: Battery is not an intentional tort if the person was struck trying to protect himself from being attacked • Necessity

TORTS AGAINST PROPERTY

• Trespass to land: Entry onto, remaining on, or causing something or someone to enter onto or remain on another’s land without permission EX: Tenant’s refusal to vacate • Trespass to chattel (personal property): Use without permission or damage to personal property; deprivation of use for a substantial time 1. Damage is the value of lost use of the item EX: Taking the computer of another believing it to be yours • Conversion of personal property: Failure to return or the destruction or loss of borrowed property 1. Damage is recovery of the full value of the item EX: Refusing to return a computer after borrowing it

DEFENSE TO TORTS AGAINST PROPERTY

• Permission: If the owner or possessor of the property has given permission to the trespasser to be on the property, there is no trespass EX: Possessor of property invites roofer onto property to repair roof; roofer is not trespassing while he repairs the roof

Negligence & Strict Liability • Negligence: An unintentional breach of duty causing injury, using the objective standard of the reasonable person in similar circumstances

PRIMA FACIE CASE

1. Duty of care: The obligation one person owes to another to act reasonably so as not to cause harm 2. Breach of duty: Failure to perform the obligation to act reasonably 3. Causation: The connection between action (or lack of action) and injury 4. Damage: Loss suffered as the result of injury A. Liability arises from causation in fact (actual cause) and proximate cause (legal cause) i. Actual cause is the harm that would not have occurred “but for” a person’s negligent act ii. Proximate cause is the harm that was foreseeable by the negligent act EX: Person is liable for harm caused when he negligently forgot to put warning signs on floor before mopping and person is injured when he slipped on the wet floor EX: Corporation that is responsible for oil spill is not liable to member of cleanup crew who dies of heart attack while cleaning • Defenses 1. Contributory negligence: Victim’s conduct that contributes to the legal cause of injury (complete bar to recovery in minority of states) EX: Scaffolding on a building was negligently constructed, but party sustained injuries when he fell into the scaffolding while drunk, which jury found was 40% cause of his injuries, therefore no award of damages 2. Comparative negligence: Apportionment of damages based on the relative fault of both parties (no bar to recovery in majority of states) EX: Scaffolding on building was negligently constructed, but party sustained injuries when he fell into the scaffolding while drunk, which jury found was 40% cause of his injuries; damage award reduced by 40% 3. Assumption of the risk: The injured party had reason to know of the danger and acted in spite of it EX: Signs posted in a ball park warned patrons of the possibility that sitting in that section could result in being hit by a baseball; patron who sits there anyway assumes the risk of injury if she is hit and injured by a ball

STRICT LIABILITY

• Liability regardless of fault for engaging in an activity deemed by statute to be so dangerous that the tortfeaser must take responsibility for all harm arising from the activity 1. Applies to abnormally dangerous activities considered ultrahazardous that carry an inherent high risk of injury EX: Wild animals, fireworks, some chemical or hazardous waste facilities, blasting explosives 2. Activity is abnormally dangerous if there is foreseeable risk of harm even when acting with reasonable care and activity is not commonly found EX: Corporation is strictly liable for injury caused by an explosion at a hazardous waste facility • Defenses: There are no defenses to a strict liability activity

Breach of duty to society for which government brings lawsuit

• Fraud: Obtaining the title to the property of another through deception 1. Use of mail, telephone, or telegraph for the purpose of defrauding another • Bribery: Offer of payment for a favor EX: Kickback • Forgery: Fraudulently altering a written document • Embezzlement: Fraudulent taking of employer’s property • Conspiracy: An agreement between two or more persons to commit a crime • Perjury: The willful and corrupt false swearing or affirming, under oath, as to a material matter in question

• Mail or wire fraud: Using the mail or use of a tele­ communications device to obtain money or property in a scheme to defraud • Obstruction of justice: Any corrupt attempt to influence, interfere with, or impede an investigation conducted by an officer of the court or of the law by threats, intimidation, or corrupt persuasion • Statutory violations EX: RICO, which makes racketeering illegal

CORPORATE LIABILITY

• Crime committed by employees acting within the scope of employment and for the benefit of the corporation 1

• Individual who committed crime is personally liable • Antitrust violations: Unfair marketing techniques or conduct designed to eliminate competition through unfair means EX: Price discrimination, price fixing, bid rigging, cartel activity, monopolization • Sarbanes-Oxley violations: Rules designed to regulate corporate governance and impose mandatory reporting requirements EX: Failure of corporate officers or directors to report accounting, auditing, or other financial irregularities that occur within the corporation

CONTRACTS

A promise or a set of promises that are enforced by law

Elements

Consideration: Two Elements

• Agreement: Consideration, capacity, and legality

The thing of 1) legal value that is 2) bargained for and given in exchange for an act or promise • Legal value: Can be the performance of a service, a refrainment from doing something, tangible or intangible property, or something else of value; it must also be either: 1. A legal benefit to the Promisor EX: Jane receives a new hotrod from Dick 2. A legal detriment to the Promisee EX: Dick no longer owns the hotrod • Bargained for exchange: The promisee’s act or promise must be bargained for and given in exchange for the promisor’s act or promise EX: “If you stop smoking (promisee’s act), I’ll give you $100 a month for one year” (promisor’s promise) 1. Past consideration is no consideration and cannot be enforced as a contract EX: Because you have been such a good boy (past consideration), I’ll give you $100 • Promissory estoppel: A promise that lacks consideration is enforceable if it reasonably induced the person to act on the promise 1. There must be a promise, the promise must reasonably induce reliance, the reliance must be substantial, and an injustice would occur if the promise was not enforced EX: Promise made to daughter by father to give her land on 21st birthday is enforceable if daughter, in reliance on the promise, purchases a trailer to place on the land

The Agreement • Mutual assent between two or more persons to the same terms of a bargain; requires an offer and an acceptance

OFFER

• Requirements: 1. Intent to be legally bound to the contract; objective intent (i.e., believable by the reasonable person standard) 2. Must contain definite terms (i.e., identities of parties, subject matter, time of performance, and price (the latter two may be implied in special cases)) 3. Communication of offer by Offeror to the Offeree • Termination of offer can be made by: 1. Terms of offer: Include a specified time limit and/or means of acceptance that are not met 2. Revocation: Withdrawal by Offeror 3. Rejection: Expressed through words or conduct of Offeree 4. Counteroffer: Creates new offer; Offeree becomes Offeror 5. Operation of law: Lapse of time, death, insanity, destruction of subject matter, or by a supervening law • Special offers: 1. Advertisements are invitations to receive offers from the public; advertiser has the option to accept, negotiate, or reject public’s offer to buy 2. Rewards become unilateral contracts in that the offeree must perform to receive the reward 3. Auctions are invitations for offers to buy that may be rejected by the seller, unless auction is “without reserve” where seller offers to sell for any price 4. Bids: Advertisements for bids are invitations; bidders who offer their bid are treated as offerors 5. Firm offer: Irrevocable offer in writing; if no time limit stated, reasonable time (max three months) applies 6. Option contract: For a fee and at offeree’s option, offeror makes irrevocable offer to perform on or before a set date • Counteroffers are treated as new offers rejecting the original offer; roles reverse EX: Original offer: Jake (offeror) offers to sell Mike (offeree) his computer for $200. Mike counters, “I’ll give you $150 for it.” Mike is now the offeror and Jake the offeree

ACCEPTANCE

• Restatement (2nd) of Contracts: “A manifestation of assent by the offeree to the terms of the offer in a manner invited or required by the offer” 1. Who can accept? A. Only the offeree can accept and create a contract; third persons cannot 2. Unilateral contracts: Only by offeree’s performance 3. Bilateral contracts: When offeree promises to perform 4. Mirror image rule: Acceptance must mirror the offer in that offeree accepts offeror’s terms 5. Grumbling acceptance: “Ok, I’ll take it, but I wish you would lower the price” is an enforceable acceptance 6. Silence as acceptance: Silence is not acceptance even if offeror states it is A. Exceptions: Offeree states silence is because prior dealings establish it, or Offeree accepts the benefit of goods or services without rejection 7. Modes of acceptance: A. Express authorization is stated in the offer EX: “Acceptance may be by registered mail only” 8. Implied authorization: Specific mode not required by offer, rather, the customary modes are implied EX: Where no method of acceptance is specified, can accept by mail, telephone, fax, email, or any customary mode 9. Acceptance Upon Dispatch Rule: A. Acceptance is effective upon proper dispatch, even if it is lost in transit; it must be sent before revocation is received (“Mailbox Rule”) 10. Nonauthorized modes of acceptance: If sent contrary to offer’s mode, acceptance is upon receipt

Capacity • Ability to understand action taken 1. Minors A. Generally under age 18 B. Right to cancel contract based on public policy 2. Mental incompetence A. Contract is void where judged insane B. Contract is voidable where not judged insane 3. Intoxication A. Contract is voidable where party was incapable of understanding transaction due to alcohol or drugs • Defenses to enforcement 1. Mistake: Erroneous belief about an aspect of the contract A. Unilateral mistake: One party is mistaken i. Contract is not enforced where the other party knew of the mistake or clerical error, or where enforcement would be unconscionable B. Mutual mistake: Factual assumption shared by both parties 2. Fraud A. Fraud in the factum: Deceived person does not know what he/she is signing (contract is void) B. Fraud in the inducement: Innocent party was fraudulently induced to enter into contract C. Fraud by concealment: Specific action taken to conceal a material fact 3. Duress: Innocent party is threatened, creating a non-voluntary acceptance 4. Undue influence: Innocent party is taken advantage of 5. Misrepresentation of fact A. Intentional: Innocent party was induced by a misrepresentation of material fact B. Innocent: Statement of fact was believed to be true

Legality • Statutes 1. Usury laws: Limit on annual interest rates 2. Gambling 3. Sabbath/Sunday/Blue laws 4. Licensing laws: Requirement of certain occupations to be licensed • Public policy 1. Contract is void where there would be a negative impact on society A. Contracts in restraint of trade B. Covenants not to compete C. Exculpatory clauses: Relief from tort liability

Types of Contracts COMMITMENT

• Two contract types 1. Bilateral: Both parties make promises to each other EX: Promises to exchange money for property 2

2. Unilateral: Only one party makes a promise (e.g., “I will pay you $10 to mow my yard”); offer is for a unilateral contract, created only when the yard is mowed; if you say or promise you will mow it, it becomes a bilateral contract

DEGREE

• Three contract types 1. Express: Either written or oral agreement of terms by both parties EX: Written car purchase; oral agreement to buy friend’s stereo for $200 2. Implied: Unspoken understanding between parties EX: Doctor visit: He/She will help you; you will pay his/her bill 3. Quasi-contract: One party receives a benefit from the other party without a contract (e.g., Bill silently watches Joe paint Bill’s house by mistake); courts have ruled Bill must pay because he knowingly accepted a benefit from Joe

STATUS

• Two contract types 1. Executed: Both sides have fully performed; completed 2. Executory: Either or both sides have not yet fully performed • Valid or otherwise 1. Valid contract: Contains all the essential elements 2. Unenforceable contract: Has the elements but is not enforceable EX: Time for acceptance has expired; oral when required by law to be written; subject matter is illegal 3. Void contract: An element is missing EX: Underage party 4. Voidable: Party has the right to cancel EX: Fraud, duress • Contracts that must be in writing per the Statute of Frauds 1. Executor/Administrator contracts 2. Pre-nuptial consideration of marriage contracts 3. Interest in land contracts 4. Promises that cannot be performed within one year EX: Employment contract for five years cannot be performed in one year and must be in writing, but a contract for lifetime employment can be oral because employee can die within one year 5. Goods priced over $500 6. Contracts that promise to pay the debt of another EX: Parent guarantees son’s car loan

Discharge

• Occurrence of condition (an event which limits the duty to perform) 1. Express (written) or constructive (read into contract in fairness) 2. Timing: A. Condition precedent: Occurs before the duty of performance B. Condition concurrent: Occurs at the moment of performance C. Condition subsequent: Occurrence cuts off the existing duty • Breach by other party 1. Material breach A. Non-breaching party does not receive substantial benefit B. Action for total breach if ready, willing, and able to perform but for the breach (recover all damages) C. May continue contract and sue for partial breach (recover damages caused by breach) 2. Doctrine of Substantial Performance A. Falls short of complete performance B. Damages limited to contract price less cost of cure 3. Anticipatory repudiation A. Promisor indicates inability or unwillingness to perform duties B. Promisee may sue for performance, discharge contract, or wait and see if promisor will decide to perform 4. Protected interests A. Expectation interest: Interest in obtaining expected bargain B. Reliance interest: Interest in being compensated for loss suffered by change of position in reliance on breaching party’s promise C. Restitution interest: Interest in recovery of amount by which breaching party has been enriched • Circumstances excusing performance

1. Impossibility A. Duty could not be performed by anyone B. Death or physical incapacity C. Destruction of subject matter or means of performance 2. Impracticability A. Extreme and unreasonable difficulty or expense B. Difficulty not anticipated 3. Frustration: Purpose has become valueless by unforeseeable supervening act 4. Novation A. New contract substitutes new party to receive benefits and assume duties B. Requires assent of all parties 5. Accord and satisfaction: Agreement to resolve dispute on existing contract 6. Waiver: Voluntary relinquishment of rights 7. Alteration: One party makes changes to a written contract without the other party’s consent

Third Party

BENEFICIARIES

• Incidental: No rights of enforcement • Intended: May enforce when rights vest 1. Creditor: Receives performance in satisfaction of existing obligation owed 2. Donee: Receives performance as a gift

ASSIGNMENT (TRANSFER) OF RIGHTS

• Obligor: Owes duty of performance • Assignor/Obligee: Owed right to performance under the contract • Assignee: Recipient of transferred right to performance assignor…assigns (transfers)… to Assignee…performance owed 1. Adequate description and words manifesting intent to assign rights 2. Assignment extinguishes assignor’s rights 3. Revocable except where assignee gave consideration, relied to detriment, or received payment/performance 4. Obligor may assert defenses against Assignee or Assignor EX: Homeowner (Obligor) pays mortgage to Bank #1 (Obligee); Bank #1 assigns right to Homeowner’s mortgage to Bank #2 (Assignee). Bank #1 no longer has right to mortgage paid by Homeowner. Homeowner must now pay Bank #2

DELEGATION (TRANSFER) OF DUTIES

• Delegant/Obligor: Transferor of duty • Obligee: Party to whom duty owed • Delegate: Party to whom duty is transferred 1. All duties can be delegated except: A. If prohibited by contract or law B. If personal skill C. Will materially change Obligee’s expectancy 2. Obligee must accept unless bargain would be materially altered 3. Delegant remains liable 4. Delegate must perform if consideration EX: Landowner hires X to remove trash from property; X delegates trash removal to Y; landowner must accept removal from Y, but X remains liable to landowner for removal if not done by Y

Damages

• Money—compensatory 1. Put non-breaching party in as good a position as if promise had been performed 2. Liquidated damages: Agreed to by both parties at time of contract 3. Punitive damages: Generally not available in contract cases except if independent tort is committed, such as fraud • Equitable 1. Specific performance: Balance hardship to breaching party versus benefit to non-breaching party 2. Injunction: Court order requiring party to do/not do something • Restitution (compensation for value of benefit) EX: One party must return property to other party • Quasi-contract relief 1. Prevention of unjust enrichment

BUSINESS ENTITIES

PARTNERSHIPS Characteristics

Property

GENERAL PARTNERSHIP

• General partners’ contribution 1. UPA test: All property originally brought in or subsequently acquired belongs to the partnership 2. RUPA test: Property belongs to the partnership if it was acquired in the name of the partnership or if the title is transferred into the partnership • Ownership of partnership property 1. UPA: Property is owned as a whole by the partnership; partners are owners by tenancy-in-partnership 2. RUPA: Property is owned by the entity and not by the individual partners; eliminates tenancy-inpartnership 3. Right of survivorship A. Interest passes to surviving partner(s) 4. Financial interest in property is assignable to creditor through a charging order A. Creditor is entitled to receipt of profits but not the property itself • Limited partnerships (LLP & LLC) 1. Usually limited to pro rata distribution

• Uniform Partnership Act (UPA) of 1914 and Revised UPA (RUPA) (any version after 1914) 1. Association of two or more persons 2. Co-owners of business 3. Carry on business 4. For profit 5. Income is reported on each individual partner’s tax return 6. All partners are liable for partnership debts • Limited Liability Partnership: Revised Uniform Limited Partnership Act 1. General partners manage business and are liable for partnership debts 2. Limited partners contribute capital; liability limited to amount contributed A. No personal liability except where appearance of management • Limited Liability Company: Uniform Limited Liability Company Act 1. Limited liability partners (members) with ability to manage the partnership A. Can choose to be member-managed (partnershiplike management) or management-managed (corporate-like management)

Creation • General Partnership (GP): No formalities; can be formed on a handshake • Limited Liability Partnership (LLP): Requires registration with the State • Limited Liability Company (LLC): Requires registration with the State • Joint venture: Partnership limited to single project • Partnership by estoppel 1. Party holding self out as partner 2. Third party’s justifiable reliance and injury

Dissolution • General partnerships 1. Withdrawal of partner ends partnership (under UPA—minority view); partner can withdraw (dissociate) without causing dissolution (under revised UPA—majority view) 2. Business may be continued by agreement A. Creditors retain status B. Outgoing partner’s liability is eliminated by novation (release by continuing partners and creditor(s)) • Winding up 1. Assets sold, proceeds distributed to creditors and partners 2. Notice requirement • Termination 1. Indicates partnership business has been wound up and the partnership ceases to exist

AGENCY Characteristics • Two-party fiduciary relationship created by an agreement under which one party agrees to perform for another 1. Principal: The party for whom the work is being performed 2. Agent: The party performing for another 3. Principal may control physical details 4. Duties of principal are to compensate, indemnify, and reimburse agents for expenditures A. Compensation: Payment agreed to by the principal and agent for the agent’s services B. Indemnification: Payment by the principal to the agent for expenses incurred within the scope of the agency EX: Agent for a corporation who negligently causes injury to a third party while acting within the scope of the agency relationship is indemnified by the corporation for the loss; agent is required to pay injured party C. Reimbursement for expenditures: Payments made by the agent for authorized expenses are paid for by agent while carrying out wishes of the principle EX: Agent is ordered to expedite shipment of item to customer; additional cost paid by agent is subject to reimbursement by principal • Respondeat superior: An employer (principal) is liable for torts committed by employees (agents) while acting within the scope of their employment

• Independent contractor: Person who contracts with another to do something but who is not controlled by the other with respect to the physical conduct in the performance of the undertaking 1. No agency relationship exists and no agency obligations are incurred

Termination

• Can occur by: 1. Agreement, the happening of the event, or after reasonable time 2. Operation of law (death or loss of capacity, bankruptcy, change in value, or loss of property)

Liabilities

CONTRACTS

• Principal is bound where agent has authority 1. Exception: Principal lacks capacity • Agent is bound 1. By express agreement and adequate disclosure 2. By contracting without authority

TORTS

• Doctrine of Respondeat Superior 1. Employer is liable if committed within the scope of employment • Direct liability due to principal’s fault 1. Intentional, reckless, or negligent behavior • Independent contractors 1. Liability for negligent hiring; failure to perform nondelegable important duty; highly dangerous activity • Misrepresentation

Obligations Owed to Company DUTY OF CARE

• Discharged in good faith and in a manner the director reasonably believes to be in the best interests of the corporation • Liability limited to gross negligence or willful misconduct

DUTY OF LOYALTY

• No self-dealing: Intrinsic fairness test • No seizing of business opportunity • No disclosure of confidential information

CORPORATIONS Characteristics • Legal entity created by state law 1. Powers are to sue or be sued, to own property, and to carry out business 2. Owned by shareholders who purchase stock of corporations • There are three types of corporate forms: 1. Public corporations: Corporations whose stock is 3

traded on a stock exchange and that generally have millions of shareholders 2. Closely held corporations: Smaller corporations that are privately owned, not publically traded, and generally have a small number of shareholders 3. Benefit corporations: Corporations whose purpose is both to earn money for shareholders and to have a positive impact on society

• Limited liability of shareholders 1. Piercing the corporate veil (available for closely held corporations only) A. Shareholders become liable for the debts of the corporation if they engage in fraud, siphon corporate funds, or undercapitalize the corporation

OFFICERS

Organization

• Express authority by statute, by-laws, and board of directors • Implied authority to take necessary actions • Generally, there is no personal liability 1. Exception: Act beyond powers

PROMOTERS

BUSINESS JUDGMENT RULE

• Organize business and raise capital • Gather resources and personnel for corporation • Fiduciary duty to act in good faith • Negotiate pre-incorporation contracts 1. Joint liability on pre-incorporation contracts 2. Novation: Release from liability by the agreement of all parties 3. No liability with third party’s knowledge of nonexistent corporation

• Informed, rational decisions with no conflicts of interest and no acts of gross negligence protect managers from liability

STATE OF INCORPORATION

LIABILITIES OF DIRECTORS

RIGHTS & POWERS OF SHAREHOLDERS • Elect and remove directors • Inspect records • Make recommendations to Board • Vote and amend by-laws

• Return illegal distributions • Protect investment of shareholders in corporation

• Generally, where business is conducted • Delaware statutes are considered most favorable for public corporations 1. Well-defined, predictable body of law 2. Special courts to deal with corporate issues • Internal Affairs Rule: Law of state on incorporation governs the management of a corporation 1. Statutory requirements A. Filing of Articles of Incorporation with secretary of state—conclusive proof of incorporation B. Content of Articles of Incorporation i. Corporate name (cannot be already in use) ii. Principal officer iii. Number of shares authorized, classes of shares, and rights (a) Preemptive rights: Option to buy up to proportionate interest when new shares are issued (closely held corporations only) iv. Name and address of registered agent and office v. Address of each incorporator vi. Duration of corporation: Perpetual unless otherwise stated vii. Purpose of corporation: Generally, to engage in any lawful business • Adopt by-laws (rules) • Defective incorporation: Failure to comply with all conditions 1. DeJure: Actual or substantial compliance with statute 2. DeFacto: Good-faith attempt to comply with statute plus an act made on the corporation’s behalf 3. Estoppel: No effort to incorporate, but engages in transaction with third party purporting to be a corporation; stopped from denying corporate liability

Financing • Equity: Shares of stock 1. Evidence of ownership A. Elect/Remove directors; amend by-laws B. Liabilities (return illegal distributions) 2. Common shares: Vested with voting rights A. Right to distribution of net assets B. Subordinate to claims of creditors 3. Preferred shares (generally non-voting) A. Priority over common in liquidation and distribution • Dividends 1. Payment out of earnings by the corporation to shareholders of cash, property, or additional shares of stock • Distributions 1. Payment out of capital • Debt securities: Promise to pay 1. Evidence of borrowing 2. Debentures: Long-term (unsecured) 3. Bonds: Long-term (secured by collateral) 4. Notes: Short-term (secured or unsecured) • Securities regulation: Public offering 1. Federal Securities Acts A. Sale of shares to public require full disclosure, registration, and approval of SEC 2. Exemption from full disclosure A. Government bonds, private offerings, nonprofit organizations, small dollar amount offerings, and securities regulated by other agencies 3. Rule 10b-5 liability A. Fraud on the market or of investors, price manipulation, and insider trading 4. State securities laws (“Blue Sky Laws”)

FOREIGN CORPORATION

• Organized in one state and doing business in another

Regulation • Revised Model Business Corporation Act (RMBCA): Prepared by American Bar Association; basis for state statutes • Federal regulatory statutes: Securities Exchange Act (SEC), Sarbanes-Oxley Act

Dissolution VOLUNTARY

Management

• Majority vote: File Articles of Dissolution

INVOLUNTARY

BOARD OF DIRECTORS

• Secretary of state: Failure to follow law • Judicial: If corporation is unable to break a deadlock; by creditors if corporation fails to pay its debts

• Operates business, elects/removes officers, and determines distributions • Generally, there is no personal liability except for the gross negligence of willful acts of misconduct • Generally, there is removal for cause only 1. Conflict of interest and self-dealing is prohibited

LIQUIDATION

• Assets sold, debts paid, and surplus distributed to shareholders

PRODUCT LIABILITY • Express warranty 1. Seller’s promise that goods will conform to certain standards of quality, safety, performance, and durability 2. Recovery is available for a basis of the bargain if warranty is a contributing factor in entering into the contract 3. Statement of opinion does not create warranty EX: This is the best car on the market (opinion); this car has the highest safety rating of all cars in this class (warranty) 4. Magnuson-Moss Warranty Act A. Covers written warranties relating to consumer products • Implied warranty of merchantability 1. Fit for ordinary purposes for which they are being sold A. Must meet reasonable expectations B. Adequately contained, packaged, and labeled C. The quality and quantity in each package must be consistent 2. Implied warranty of fitness for human consumption A. Applies to food and drink consumed on or off premises • Implied warranty of fitness for a particular purpose 1. Seller had reason to know of Buyer’s particular purpose and Buyer relies on Seller’s skill and judgment to select the goods for Buyer • Negligence 1. Objective test: Seller failed to eliminate reasonable risk of harm, thereby causing injury 2. Manufacturing defect: Improper manufacture or inspection of goods EX: Curling iron explodes at a normal temperature because of faulty wiring

3. Failure to provide adequate warning of danger EX: Warning on a detergent container that product can be fatal if ingested 4. Design defects: Likely to cause harm when properly used EX: Gas tank placement in rear of car made it easy to explode when car is rear-ended • Strict liability (Sec. 402A of Restatement 2d of Torts) 1. Manufacture or sale of defective and unreasonably dangerous product 2. Applies to all parties in chain of distribution, irrespective of fault • Warranty of title 1. Seller is the owner of goods, goods are free of any security interest, lien, or encumbrance, and there are no infringements • Privity with products for liability (State determines coverage) 1. All in household, including guests 2. All reasonably expected to use goods 3. Extended beyond personal injury • Disclaimers: Must be conspicuous, in writing, and mention “merchantability” 1. Unconscionable disclaimers are unenforceable • Defenses to imposition of liability 1. Supervening event: Material alteration after leaving seller’s possession 2. Assumption of the risk: Buyer knew of and voluntarily assumed risk 3. Generally known dangers: Known by general population (i.e., guns) 4. Correction of defect: Through recall and repair 5. Misuse: Defense available only if unforeseeable misuse 6. Comparative negligence: Damages are apportioned 4

UNIFORM COMMERCIAL CODE Sales (Article 2) SCOPE

• Transactions in goods 1. Goods are tangible items that are moveable, such as automobiles, clothes, textbooks, etc. 2. Requirement of good faith and a commercially reasonable manner 3. Refer to each rule to determine applicability to merchants and/or non-merchants

FORMATION OF CONTRACTS

• Greater flexibility than common law • Offer 1. Includes conduct by both parties recognizing the existence of a contract 2. Merchant’s Firm Offer Rule: Assurance that offer held open for time stated or reasonable time and not revocable for lack of consideration 3. Gap-Filling Rule A. Contract does not fail for indefiniteness B. An open term can be read into contract EX: A “reasonable price” can be the market rate at time of delivery C. Quantity may be indefinite i. Output contract: Seller is bound to sell entire output to buyer ii. Needs contract: Buyer is obligated to purchase all of its requirements from seller D. Other terms that can be left open include payment terms, place of delivery, time of performance, etc. • Acceptance 1. Any reasonable manner 2. Battle of the Forms A. Definite and timely expression of acceptance creates a contract, even if there are different or additional terms B. Extra terms part of contract, except if expressly denied or there is evidence of material alteration 3. Accommodation A. Shipment offered as replacement where goods ordered are unavailable i. Buyer is free to accept or reject shipment 4. Additional terms are permitted 5. Non-merchants A. Additional terms are proposed additions and become part of the contract if accepted by original offeror B. If additional terms are not accepted, contract is formed on basis of original terms EX: Buyer accepts offer to buy textbook only if DVD (proposed addition) is included; if salesman refuses, contract consists of textbook alone (original) 6. Exceptions to Statute of Frauds A. Specially manufactured goods B. Admission in court that contract was made C. Part acceptance requires payment for quantity accepted • Consideration 1. Modification does not require new consideration • Title 1. Goods must be identified before title can pass from seller to buyer

PERFORMANCE

• By both parties 1. According to terms of contract, practices of trade, or past dealings 2. Buyer/Seller can demand assurance A. If not given within reasonable time, party is considered to have repudiated 3. Excused from performance by commercial impracticability • By seller 1. Seller’s duty to deliver 2. Seller’s right to cure nonconforming goods • By buyer 1. Buyer’s right to inspect and duty to pay 2. Buyer’s right to revoke acceptance where nonconformity substantially impairs value 3. Buyer’s right of rejection within reasonable time and upon proper notice A. Duty to follow seller’s reasonable instructions (ship back, resell, or store)

Negotiable Instruments (Article 3) DEFINITIONS

• Negotiable instruments

Should be adopted to simplify, clarify, and modernize the law governing certain commercial transactions 1. Written promise to pay money: Promissory note and certificate of deposit 2. Order to pay money: Drafts and checks 3. Means of extending credit • Negotiation 1. Transfer of instrument where recipient becomes holder • Holder 1. In possession and has all necessary indorsements • Holder in due course 1. Has good title to instrument 2. Paid value and acquired in good faith 3. Takes instrument with no notice of its being overdue or dishonored, and without notice of any claims or defenses 4. Remains subject to real defenses affecting validity A. Minority, incapacity, duress, illegality, fraud, forgery, material alteration • Paper 1. Order (payable to specific payee) 2. Bearer (payable to bearer or cash) • Indorsement: Signature of holder 1. Special instructions transferring paper (order) EX: Indorsed; writes “Pay to the Order of Aunt Mary” 2. Blank (bearer) 3. Restrictive: Specific purpose EX: Indorsed and then writes “For Deposit Only” and account number 4. Qualified: Disclaim or limit liability EX: Indorsed and then writes “Without Recourse”

CLASSIFICATION

• Promissory notes 1. Two-party instrument (maker/payee) 2. Unconditional promise to pay money at a particular time or on demand • Certificate of deposit 1. Acknowledgment of receipt of money 2. Promise to pay money plus interest • Drafts 1. Three-party instrument A. Drawer: Party who writes order for draft B. Drawee: Party who must pay amount stated in draft C. Payee: Party who receives money • Checks 1. Type of draft 2. Drawer: Checking account holder 3. Drawee: Always a bank 4. Payee: Person to whom check is made; payable on demand to the bank on which check is written 5. Include ordinary checks and special checks, such as certified, cashier’s, and traveler’s checks

RISK OF LOSS

• Defined by terms of agreement 1. Borne by breaching party 2. Generally borne by party best able to protect against loss and most likely to be insured • Shipment contract 1. Risk passes to buyer when seller delivers goods to carrier 2. F.O.B. (“free on board”): Delivered to Carrier 3. F.A.S. (“free alongside”): Delivered alongside vessel 4. C.I.F. (price includes cost of goods, insurance, and freight) 5. C. & F.: Seller does not insure goods 6. C.O.D. (collect on delivery) • Destination contract 1. Risk passes to buyer when seller delivers to specific destination 2. F.O.B. (place of destination) • Conditional sales 1. Sale on approval: Risk of loss remains with seller until buyer accepts 2. Sale or return: Risk of loss is with buyer while goods are in his/her possession and during return to seller • Liquidated damages agreed upon

REMEDIES FOR BREACH

• Seller’s remedies 1. Cancellation 2. Withholding delivery 3. Reselling goods 4. Recovery of profit from buyer 5. Recovery of purchase price 6. Reclaim goods where buyer insolvent • Buyer’s remedies 5

1. Buying other goods and recovering additional expense from seller 2. Recovering difference between contract and market price 3. Recovering damages for nonconforming goods 4. Specific performance for unique goods 5. Consequential (lost profits) and incidental (extra expenses) damages

REGULATION

• Requirements for a valid negotiable instrument 1. In writing and signed A. Signature of authorized agent is acceptable B. Liability remains with maker/drawer 2. Unconditional promise to pay 3. Dollar amount must be fixed A. Interest can be based on variable terms 4. Payable on demand or at a definite time A. Prepayment, acceleration, and extension clauses do not affect negotiability 5. Does not contain another obligation unless authorized • Additional terms 1. Generally do not affect negotiability 2. Typewritten terms prevail over printed terms; handwritten terms prevail over both; words prevail over numbers • Exceptions to negotiability 1. Incomplete paper: Material term is blank 2. Irregular paper: Obvious alteration 3. Voidable paper: Knowledge of fraud or already paid 4. Negotiation by fiduciary • Shelter provision 1. Transferee has rights of transferor EX: If holder in due course transfers negotiable instrument to a holder, the holder gets the rights of the holder in due course • Uniform Consumer Credit Code 1. Negotiable paper eliminated in consumer credit sales • Federal Trade Commission (FTC) 1. Consumer protection A. Unfair trade practice to make duty to pay independent of seller’s duty to fulfill obligation

LIABILITY

• Contractual 1. Signature evidences contract A. Signature need not be the name of a party; any symbol executed with the intent to accept document is a valid signature 2. Liability depends on the capacity of the individual A. Authorized agent i. Personal liability where there is no indication of representative capacity B. Unauthorized signature: Principal not liable 3. Primary liability (agreement to pay) A. Maker of promissory note B. Drawee bank for certified or non-certified check C. Accommodated party (unless accommodation party signed as a maker) 4. Secondary liability (accommodation party) A. Required to pay if primary person defaults B. Drawer i. Check is dishonored and drawer is given notice ii. Drawer may not disclaim liability by qualified indorsement C. Indorser i. May avoid liability by qualified indorsement 5. Presentment for payment A. Dishonored if not paid by drawee B. Holder can seek payment from indorser after giving notice of dishonor • Warranty 1. Transfer: Transfers negotiable instrument A. Five warranties i. Good title, authorized signatures, instrument not materially altered, no party has valid defense, and no knowledge of insolvency 2. Presentment: Present instrument for payment A. Three warranties i. Good title, no knowledge of unauthorized signature, and instrument not materially altered B. Presentment can only be to drawee bank • Other liability 1. Forgery 2. Negligence inviting alteration A. Drawer who through negligence contributes to alteration cannot claim alteration as a defense

Uniform Commercial Code (continued )

3. Impostor A. Drawer of check has liability for whomever cashes the check written to an imposter 4. Fictitious payee (dishonest employee) A. Employer is responsible if employee has a fiduciary relationship to employer 5. Conversion A. Unauthorized assumption and exercise of ownership B. Bank becomes liable for honoring forgery • Defenses against payment 1. Personal (not valid against holders in due course) A. Failure of consideration B. Breach of contract and fraud C. Material alteration D. Non-delivery E. Lack of capacity, illegality, or duress, making contract voidable F. All other defenses that are not real defenses 2. Real (valid against all holders, including holders in due course) A. Lack of capacity, duress, or illegality, making contract void B. Fraud, material alteration, bankruptcy, minority, and forgery

Checks (Article 4)

• Parties 1. Drawer: Checking account holder and writer of check 2. Drawee: Bank on which check is drawn 3. Payee: Party to whom check is written; holder of check A. Right to demand payment or endorse check to third party • Regulation 1. Deposit agreement: Cannot disclaim bank’s responsibility to exercise ordinary care • Bank’s obligations 1. Duty to pay where there are sufficient funds A. Liable for damages where wrongfully or mistakenly dishonored i. Direct damage: Charge for returned check ii. Consequential damage: Injury to credit rating B. Stale checks: No duty to pay on a check over 6 months old C. Forged and altered checks i. Bank is liable for not following instructions ii. Customer’s duty to examine and report within reasonable time D. Incomplete checks i. Bank makes payment in good faith ii. Drawer assumes risk of loss E. Postdated checks: Bank must have notice to hold payment

2. Charge customer’s account 1. Classification of collateral includes paper (checks, A. Where account is overdrawn receipts, accounts), documents, intellectual property, B. For amount originally drawn where subsequently altered consumer goods, inventory, and farm products 3. Stop-payment order 2. Two-party: Buyer purchases goods on credit and seller A. Must be received in reasonable time retains security interest in goods B. Must contain sufficient description 3. Three-party: Buyer purchases goods through lender C. Subrogation financing and lender takes security interest in goods i. If stop payment order is received and check is paid in • Creation of security interest spite of the order, bank is not liable if drawer would be 1. Security agreement required to pay anyway A. Agreement giving creditor rights to collateral EX: Buyer purchases laptop with a check and immeupon receipt of value (money or goods) diately loses laptop, then issues an effective stop B. Must be in writing, signed by debtor, and describe payment order which Bank negligently ignores; Bank collateral is not required to return money to Buyer’s account C. Attachment because Buyer is obligated to pay for laptop i. Creditor has enforceable interest and can satisfy debt 4. Certified check out of designated collateral A. Bank agrees to accept when presented for payment D. Purchase Money Security Interest (PMSI) B. Debits customer’s account for amount when certified i. Seller retains interest until goods are paid for check is issued ii. Lender takes interest in goods acquired 5. Cashier’s check E. May include right to future advance and after-acquired A. Bank is both drawer and drawee property B. Bank is primarily liable • Perfect (protect) interest 6. Death/Incompetence 1. File public notice and take possession of collateral A. Bank has right to pay until notice is received 2. Automatic by attachment Documents of Title A. Creditor has PMSI in consumer goods • Store/Ship goods (article 7) • Priority • Warehouse receipt (storage) or bill of lading (transportation) 1. Secured creditor has priority over unsecured interest 1. Represents goods 2. First in time to be fixed has priority 2. Required terminology 3. Subsequent seller who files and notifies prior secured • Warehouseman/Common carrier: Bailee who contracts party takes priority to store, transport, and/or deliver goods 4. PMSI in non-inventory collateral prevails if perfected • Requirements of negotiability: Must provide for delivery when debtor takes possession to Bearer or Order of named person 5. Buyer in ordinary course of business is protected 1. Negotiated in same way as negotiable instrument • Remedies • Duty of care 1. Repossession by creditor upon default of debtor 1. Exercise same degree of care as a reasonably careful A. Creditor may retain collateral and may dispose of person under similar circumstances collateral in commercially reasonable manner • Rights of holder i. Proceeds cover expenses, satisfaction of balance, and 1. Bona fide holder satisfaction of subordinate interests A. Takes in good faith ii. Deficiency judgment brought where proceeds insufB. Takes in regular course of business ficient to satisfy debt C. Same rights as holder in due course 2. Right of redemption by debtor 2. Rights acquired A. Payment of all obligations A. Title to document and title to goods 3. Satisfaction of judgment B. Right to goods delivered to bailee; obligation of issuer A. Attachment: Seizure by creditor of debtor’s property to adhere to terms of document B. Execution: Post-judgment seizure and sale of Secured Transactions (Article 9) debtor’s property C. Garnishment: Directed against property in possession • Interest in personal property to secure payment or performance of obligation of third parties

ETHICS B. Investigate and prosecute violations C. Impose fines and penalties • Lack of accountability • Primary objective: Maximize profits 2. Executive and independent agencies • Social responsibility: Requires increased A. OSHA (Department of Labor) costs B. Federal Trade Commission (FTC) • Political influence i. Prohibit unfair competition and unfair 1. Lobbying and contributions or deceptive acts or practices Solutions • Consumer laws • Marketing forces affect substandard 1. Magnuson-Moss Warranty Act products A. Require written warranties for consumer 1. Business lost to competitors products • Specific control offices within corporation 2. Consumer credit laws EX: Environmental, safety A. Truth in Lending Act: Disclosure • Educational requirements requirements • Compliance officers 3. Consumer Financial Protection Bureau 1. Relay information to proper corporate A. Ensure banks, lenders, and other finandepartment cial companies treat consumers fairly Legal Controls • Antitrust laws 1. Purpose is to encourage and protect com• Administrative 1. Governmental powers petition, impose restraints, and control A. Promulgate rules; adjudicate disputes anti-competitive abuse

2. Sherman Act A. Prohibit monopolies and agreements in restraint of trade (e.g., price fixing) 3. Clayton Act A. Prevent practices used to create monopolies B. Attack mergers 4. Robinson-Patman Act A. Prohibit price discrimination 5. Federal Trade Commission Act A. Prohibit unfair methods of competition statutorily prohibited and those acts not specifically covered by the Sherman or Clayton Acts 6. Hart-Scott-Rodino Act A. Require potential mergers to report to the DOJ and FTC for review of anticompetitive effects • Employment law 1. National Labor Relations Act A. Right to organize and collective bargaining

Issues

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NOTE TO STUDENT: This guide should be used only as a quick reference and supplement to course work and assigned texts. Due to its condensed format, it (1) does not include jurisdictional differences and (2) should not be relied upon as a substitute for more comprehensive legal studies or as a substitute for professional legal advice. BarCharts, Inc., its writers, editors, and design staff are not responsible or liable for the use or misuse of the information contained in this guide. 6

2. Federal Labor Standards Act A. Regulate wages and hours, youth employment, and establish minimum wage 3. Title VII of 1964 Civil Rights Acts A. Prohibit discrimination in employment based on sex, race, color, national origin, and religion • Environmental laws 1. Improve quality of air and water 2. Reduce exposure to toxic substances 3. Protect ecosystems, wildlife, and endangered species • Corporate laws 1. Securities Exchange Commission A. Regulate purchase and sale of securities B. Prevent abuses by corporate insiders 2. Sarbanes-Oxley Act A. Regulate corporate governance B. Require financial reporting and independent monitoring of reporting systems