Malpractice Actions"<div><span style=""color: rgb(197, 155, 0);"">•</span>Civil actions brought against professionals (lawyers, doctors, architects, accountants, financial advisors, consultants, real estate brokers, etc.) are referred to as “malpractice actions.”<br><br><br><br><br>-----------------------------------------------------------------------------------------------------</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Book focuses on accountant civil liability, but the same theories apply to most professions, including lawyers.</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Regulatory actions by a state board of accountancy or the Internal Revenue Service are separate matters.&nbsp;</div>"
"<div>Three primary types of civil liability for accountants under <span style=""font-style: italic;"">common law</span>:</div>""<div><font color=""#c59b00"">1.&nbsp;</font>Negligence</div> <div><font color=""#c59b00"">2.&nbsp;</font>Breach of contract</div> <div><font color=""#c59b00"">3.&nbsp;</font>Fraud<br>(4. Fiduciary Liability)<br><br><div><span style=""color: rgb(197, 155, 0);"">•</span>Fiduciary liability applies in some instances</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Professionals are not guarantors of the accuracy of their work or that advice they give to clients will work out well&nbsp;</div></div>"
"<span style=""font-weight: bold;"">Limiting Risks of Liability in Audits and Legal Opinions<br>(aka Ways to Limit Risks of Liability)</span>""<div><div><span style=""color: rgb(197, 155, 0);"">•</span>Issue a <span style=""font-weight: bold;"">“Qualified” Opinion Letter </span>with express limitations of the scope of the services or an express disclaimer of liability</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Limit the scope of services, such as by expressly providing only an unaudited financial statement</div><span style=""color: rgb(197, 155, 0);""><br><br><br><br><br><br>------Complete Version--------------<br>•</span>Issue a <span style=""font-weight: bold;"">“Qualified” Opinion Letter </span>with express limitations of the scope of the services or an express disclaimer of liability (usually requires a statement of support rather than blanket disclaimer, such as where client did not make all financial information available or prepared the necessary information incorrectly (such as not accounting for inventory correctly))</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Limit the scope of services, such as by expressly providing only an unaudited financial statement</div>"
"<span style=""font-weight: bold;"">Professional</span><span style=""font-weight: bold;"">'</span><span style=""font-weight: bold;"">s </span><span style=""font-weight: bold;"">Duty to Clients: Negligence</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Elements of <span style=""font-weight: bold;"">Negligence</span>:&nbsp; Duty, breach of duty, causation, and damages.</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Liable to client for negligence if he/she fails to exercise the care expected of a competent, reasonable professional and that failure causes loss/injury to client</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>At a minimum, for accountants, this requires performing&nbsp; responsibilities according to generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS)</div>"
"<span style=""font-weight: bold;"">Defending </span><span style=""font-weight: bold;"">Allegations of</span><span style=""font-weight: bold;"">&nbsp; Negligence in Professional Malpractice</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Professional standards were adhered to<br><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Professional’s failure is not the cause of the loss<br><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>A few states allow the assertion of the defenses of <span style=""font-weight: bold;"">contributory negligence </span>or <span style=""font-weight: bold;"">comparative negligence </span>(many states limit these types of defenses because a professional is expected to have superior skills to the client)<br><br><br>-------Extra----------------<br>-Contributory Negligence (book):&nbsp;<span style=""color: rgba(0, 0, 0, 0.87);"">A defense to negligence whereby the defendant can escape all liability by proving that (1) the plaintiff failed to act in a way that would have protected him or her from an unreasonable risk of harm and (2) that the plaintiff’s negligent behavior contributed in some way to the plaintiff’s accident.<br><br></span><img src=""paste-d378c092a35bcae64c7b971ca04c7a212d8ea7db.jpg""><span style=""color: rgba(0, 0, 0, 0.87);""><br></span></div>"
"<span style=""font-weight: bold;"">Professional</span><span style=""font-weight: bold;"">'</span><span style=""font-weight: bold;"">s Duty to Clients: <br> Breach of Contract</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Whenever professional hired to perform specific task, he/she enters into contract (often called an engagement letter) with client</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Apply common law of contracts:</div> <div><ul><li>Express terms set out in contract</li><li>Implied terms including agreement to complete work in a competent and professional manner, according to professional standards (for accountants, GAAP and GAAS)</li></ul><br>*Me: Contracts contain explicit and implicit promises/terms</div>"
"<span style=""font-weight: bold;"">Defending Allegations of&nbsp; Breach of Contract</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Apply common law breach of contract rules:</div> <div><ol><li>Full defense where professional’s duty was discharged due to client’s breach or where client obstructed performance</li><li>Minimize damage calculation:<br></li></ol></div> <div><ul><ul><li><span style=""font-weight: bold;"">Consequential </span><span style=""font-weight: bold;"">damages </span>were not foreseeable.</li><li>The professional’s performance was “<span style=""font-weight: bold;"">substantial</span>,” and therefore, even though professional liable for damages, professional entitled to full compensation for services as an offset to any damages.&nbsp;&nbsp;</li></ul></ul></div>"
"<span style=""font-weight: bold;"">Professional</span><span style=""font-weight: bold;"">'</span><span style=""font-weight: bold;"">s Duty to Clients: Fraud</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Elements of <span style=""font-weight: bold;"">fraudulent misrepresentation</span>:</div> <div><ol><li>The professional misrepresented a material fact,</li><li>The professional acted with intent to deceive (“<span style=""font-weight: bold;"">constructive fraud</span>” generally eliminates the need to prove this element if professional acted recklessly),</li><li>The client justifiably relied on the misrepresentation, and</li><li>The client suffered an injury by relying on the fraudulent misrepresentation </li></ol></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Compensatory and <b>punitive</b> damages can be awarded for fraud<br><br><img src=""paste-cc7d839f5fcc476c5a69cc19a8497d2923e8ab83.jpg""><br></div>"
"<span style=""font-weight: bold;"">Defending Allegations of&nbsp;Fraud</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Misrepresentation was not material</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Client relied upon another (such as another professional) </div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Client’s reliance upon the professional was unjustified</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Client’s damages were not the result of misrepresentation</div>"
"<span style=""font-weight: bold;"">Fiduciary Duties</span>""<div>*Traditional <span style=""font-weight: bold; font-style: italic;"">fiduciary duties </span>include:</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Loyalty:&nbsp; Act in the best interest of the principal; avoid conflicts of interest (includes duty not to compete)</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Performance / Care:&nbsp; Use same skill and care of reasonable person in the same situation</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Obedience:&nbsp; Follow the lawful instruction and direction of the principal</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Notification / Disclosure:&nbsp; Communicate any information that may be important to principal </div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Accounting:&nbsp; Keep an accurate account of the money and property received on behalf of the principal (this is often included with duty of loyalty) and avoid misappropriation of client assets</div>"
"<span style=""font-weight: bold;"">Immediate Trends in Breach of Trust and/or Fiduciary Duty</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Lawyers are always fiduciaries, so they have always risked this type of liability</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Accountant most likely to be fiduciary when providing tax or asset management services<br><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Registered investment advisors owe fiduciary duties, but traditional stockbrokers are not required to fulfill those duties</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>All professionals owe a duty of trust to clients</div> <div><ol><li>Information and assets entrusted by client to professional may be used only to benefit the client</li><li>Duty of trust also requires a professional to maintain confidentiality of a client’s information</li></ol></div>"
"<span style=""font-weight: bold;"">Consider These Risks for Accountants in Tax and Asset Management Services&nbsp;&nbsp;</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Missed deadlines for tax elections and disclosures</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Advising on use of business entities</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Advising on next generation transitions of businesses</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Handling private financial information</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Making representations concerning value or financial condition of a company</div>"
"<span style=""font-weight: bold;"">Accountant</span><span style=""font-weight: bold;"">'</span><span style=""font-weight: bold;"">s Liability to Third Parties – Different Approaches by State<br>(Privity or Near Privity (Ultramares Rule) vs Foreseeble Users Rule)</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span><span style=""font-weight: bold;"">Privity or near-privity (Ultramares rule)</span>:</div> <div><ul><li>Requires that third party be in privity of contract with accountant, or be close enough to accountant to constitute near-privity with clear awareness of reliance (such as intended third party beneficiaries)</li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span><span style=""font-weight: bold;"">Foreseeble</span><span style=""font-weight: bold;""> users (and class of users) rule</span>:</div> <div><ul><li>Requires that accountant knew or should have foreseen recipient or class of recipients as users of the&nbsp; accountant's work</li></ul></div>"
"<span style=""font-weight: bold;"">Most Significant Federal Laws (Statues) Affecting Accountant Liability</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Securities Act of 1933</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Securities Exchange Act of 1934</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Sarbanes-Oxley Act of 2002</div>"
"<span style=""font-weight: bold;"">Securities Act of 1933</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Accountants civilly liable for misstatements and omissions of material facts made in registration statements filed with the Securities and Exchange Commission (SEC)</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Does NOT require reliance by investor, but does require that the accountant failed to exercise due diligence (i.e. didn’t follow professional standards)&nbsp;<br><br>*It's about that initial filing<br>-----------Book----------------------------<br>1. To recover damages, a plaintiff—someone who purchased a security covered by a flawed registration statement—does not need to prove reliance on the statement or to establish privity.<br><br>2.&nbsp;<span style=""background-color: rgba(252, 218, 0, 0.5);"">Accountants are liable when they do not perform their jobs according to the generally accepted standards and practices of their profession.&nbsp;</span>&nbsp;Under the Securities Act,&nbsp;accountants have a duty to perform their tasks with due diligence.&nbsp;<br><br></div>"
"<span style=""font-weight: bold;"">Securities Exchange Act of 1934</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span> Accountants liable for fraudulent financial statements (higher burden than negligence) made in annual and quarterly filings with the SEC</div> <div><ul><li>Requires statements <u>actually affected </u>the price of the security <u>and</u> investor relied upon statements</li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>This means that accounting professionals who have acted in good faith and without knowledge of the falsity of the statements have a viable defense to liability under the Act.<br><br><img src=""paste-0d748c2f66861e9527dba5a03850f7d3d750e32b.jpg""><br></div>"
"<span style=""font-weight: bold;"">Sarbanes-Oxley Act (SOX) of 2002</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Requires auditors to attest to an “<span style=""font-weight: bold;"">internal control report</span>” acknowledging management’s responsibility to maintain “<span style=""font-weight: bold;"">an adequate internal control </span>structure and procedures for financial reports”</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Attempts to assure auditor independence, primarily by limiting audit firms from supplying most types of non-audit services to their audit clients, including management and human resources services, financial information system design, bookkeeping, and other financial services<br><ul><li>ME: Prevent audit firms from doing non-audit services for a company while/when they're also Auditing that same company b/c that can cloud that audit firm's judgment.</li></ul></div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Sets five year record retention requirements for auditors</div>"
"<span style=""font-weight: bold;"">Accountants</span><span style=""font-weight: bold;"">'</span><span style=""font-weight: bold;""> and Clients</span><span style=""font-weight: bold;"">'</span><span style=""font-weight: bold;""> Rights – Papers and Records<br>(Define Workpapers. Who owns Personal Records and Workpapers?)<br><br></span>""<div><span style=""color: rgb(197, 155, 0);"">•</span><span style=""font-weight: bold;"">Workpapers</span>: Various documents used and developed during audit</div> <div><ul><li>Accountant (or firm) is legal owner of working papers, but client may access at any time upon request</li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>A client’s personal records, such as accounting records, are the property of the client and the professional must return the records at end of job </div> <div><ul><li>Accountant has the legal right to keep copies of the records that are returned.</li></ul></div>"
"<span style=""font-weight: bold;"">Client Rights – </span><span style=""font-weight: bold;"">Nonlawyer</span><span style=""font-weight: bold;""> Professional</span><span style=""font-weight: bold;"">/Client Privilege</span>""<div><div><span style=""color: rgb(197, 155, 0);"">•</span>Communications between clients and nonlawyer professionals generally are not protected from judicial and administrative agency scrutiny when the professional’s client is a party to legal or administrative action (i.e. there is “typically” no&nbsp; common law accountant/client privilege or similar rule for other nonlawyer professionals)<br><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>When granted, the “client” has right to privilege (not the professional)</div><span style=""color: rgb(197, 155, 0);""><br></span><div><br>*Privilege: The client's right/ability to give the profesional the ability to refuse to testify against that client and the client has the ability to stop the professional from testifying.</div><span style=""color: rgb(197, 155, 0);""><br>------Complete Version-------<br>•</span>Communications between clients and nonlawyer professionals generally are not protected from judicial and administrative agency scrutiny when the professional’s client is a party to legal or administrative action (i.e. there is “typically” no&nbsp; common law accountant/client privilege or similar rule for other nonlawyer professionals)</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Some states have changed the general rule by adopting a statute creating an accountant/client privilege </div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>When granted, the “client” has right to privilege (not the professional)</div>"
"<span style=""font-weight: bold;"">Malpractice Insurance (aka E</span><span style=""font-weight: bold;"">rrors &amp; omissions insurance)</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>typically available to protect professionals against most types of malpractice liability.</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Malpractice insurance is “liability insurance”</div>"
"<span style=""font-weight: bold;"">Agency (aka Agency Relationship)</span>"<div>Two-party relationship in which one party (the “agent”) has the power to act on behalf of and under the control of the other party (the “principal”).<br><br>------Extra-----------------------------------------------------------------------<br>-Agency Law and Agency Relationships are fiduciary relationships<br><br>-Agency (Book): The fiduciary relationship that arises when one person consents to have another act on his behalf and subject to his control and the other consents to do so.<br><br></div> <div></div>
<div>Agency law generally divided into two areas:</div>"<div><font color=""#c59b00"">1.&nbsp;</font>Legal relations between agent and principal (the relationship is considered a “<span style=""font-weight: bold;"">fiduciary</span>” relationship where the agent must act for the principal’s benefit)<br></div> <div><font color=""#c59b00""><br>2.&nbsp;</font>Principal’s and agent’s relations with third parties (where the central issues are the agent’s ability to bind the principal to contracts and the principal’s liability for the agent’s torts)</div>"
"<span style=""font-weight: bold;"">3 Common Types Agency Relationships<br> in Business</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>“<span style=""font-weight: bold;"">Employer-Employee” Relationships</span>:&nbsp; Employer hires employee to perform certain tasks; employer has right to <u><span style=""font-weight: bold;"">control</span></u> conduct of employees</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>“<span style=""font-weight: bold;"">Employer-Independent Contractor</span>” Relationships:&nbsp; Employer hires persons (other than employee) to conduct some sort of task; employer has <u><span style=""font-weight: bold;"">no control</span></u><span style=""font-weight: bold;""> </span>over details of conduct of independent contractor (sometimes an “agent,” but not always)</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span><span style=""font-weight: bold;"">Business Organization </span><span style=""font-weight: bold;"">Relationships</span>:&nbsp; Partners in a partnership, officers/directors in a corporation, members in a member-managed LLC, and managers in a manager-managed LLC.</div>"
"<span style=""font-weight: bold;"">Agent’s “Fiduciary” Duties To Principal</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span><span style=""font-weight: bold;"">Loyalty</span>:&nbsp; Act in the best interest of the principal; avoid conflicts of interest (includes duty not to compete); communicate any information that may be important to principal (often called the duty of “<span style=""font-weight: bold;"">Notification</span>” or “<span style=""font-weight: bold;"">Disclosure</span>”)</div> <div><span style=""color: rgb(197, 155, 0);"">•</span><span style=""font-weight: bold;"">Performance / Care</span>:&nbsp; Use same skill and care of reasonable person in the same situation</div> <div><span style=""color: rgb(197, 155, 0);"">•</span><span style=""font-weight: bold;"">Obedienc</span>e:&nbsp; Follow the lawful instruction and direction of the principal</div> <div><span style=""color: rgb(197, 155, 0);"">•</span><span style=""font-weight: bold;"">Accounting</span>:&nbsp; Keep an accurate account of the money and property received on behalf of the principal (this is often included with duty of loyalty) and avoid misappropriation of client assets by not commingling assets</div>"
"<span style=""font-weight: bold;"">3 Common Breaches of the Duty of Loyalty</span>""<div><font color=""#c59b00"">1.&nbsp;</font><span style=""font-weight: bold;"">Usurping Opportunity of the Principal </span>(often called “<span style=""font-weight: bold;"">Usurping Corporate Opportunity</span>”)</div> <div><span style=""color: rgb(197, 155, 0);""><br>2. </span><span style=""font-weight: bold;"">Self-dealing<br></span><span style=""color: rgb(197, 155, 0);""><br></span><font color=""#c59b00"">3.&nbsp;</font><span style=""font-weight: bold;"">Competing with the principal<br><br></span><div>*The principal has a right to recover any profits made by the agent as a result of any of these activities</div></div>"
"<span style=""font-weight: bold;"">Usurping Opportunity of the Principal&nbsp;</span>(often called “<span style=""font-weight: bold;"">Usurping Corporate Opportunity</span>”)"<div>personally stealing an opportunity for the agent’s own benefit rather than passing the opportunity on to the principal/company</div>
"<span style=""font-weight: bold;"">Self-dealing</span>"Utilizing contractual relationships to benefit the agent or some other person or organization that the agent has a relationship with to the detriment of the principal
"<span style=""font-weight: bold;"">Competing with the principal</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Engaging in business activities that compete with the principal without full disclosure and approval of the principal</div>"
"<span style=""font-weight: bold;"">Most Important Duties of Principal To Agent</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Compensation<br><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Reimbursement and Indemnification (meaning to compensate for harm or loss caused by the agency relationship)</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Cooperation<br><br></div> <div>*These are usually enforced using traditional contract law principles</div>"
"<span style=""font-weight: bold;"">Creation of Agency Relationship&nbsp;</span>"<div>•Generally, only two things must exist to create an agency relationship:</div> <div><ul><li>A principal with “capacity” (principal has contractual capacity)</li><li>Consent of both the principal and the agent</li></ul></div> <div>•Although not required for agency to exist, these are often contractual relationships<br></div>
<div>Only certain instances require a “written” contractual relationship:</div><div>•Agency with the authority to&nbsp;enter into&nbsp;contracts that must be in writing under the statute of frauds (ex. land sale contracts)</div><div>•Powers of attorney</div><div>•Statute of frauds (cannot be performed in less than&nbsp;&nbsp;year)<br><br>-EXTRA-<br><br>*Power of Attorney (bk):&nbsp; A specific type of express authority that grants an agent specific powers.<br><br>*Statute of Fraud: state-level legislation that require certain contracts to be in writing</div>
"<span style=""font-weight: bold;"">Agent’s Power to Contractually Bind the Principal to Third Parties:&nbsp; “Actual” Authority</span>""<div>•<span style=""font-weight: bold;"">Actual authority </span>to bind the principal to contracts entered into with third parties comes from two sources:</div> <div><ul><li><span style=""font-weight: bold;"">Expressed Authority/Agency</span>:&nbsp; Agency/authority formed by making written/oral agreement that expressly grants power to the agent</li><li><span style=""font-weight: bold;"">Implied Authority/Agency</span>:&nbsp; Authority given to the agent by implication that a person has authority necessary to carry out express authority (cannot contradict express agency authority)</li><ul><li>Implication comes from the interactions between the principal and agent</li></ul></ul></div> "
"<span style=""font-weight: bold;"">Agent’s Power to Contractually Bind the Principal to Third Parties:&nbsp; Other Sources of Authority</span>""<div>•<span style=""font-weight: bold;"">“Apparent” Authority/Agency </span>(Agency by Estoppel):&nbsp; Agency/authority formed when principal leads third party to believe that another individual serves as his/her agent (although principal had actually made no agreement with purported agent)</div> <div><ul><li>Comes from the connection between actions of the principal and reasonable belief of third parties</li></ul></div> <div>•<span style=""font-weight: bold;"">Authority/Agency By “Ratification”</span>:&nbsp; Agency that exists when individual misrepresents himself/herself as agent for another party, and principal accepts/ratifies unauthorized act<br><br>-----BOOK-----<br><strong>Apparent Agency:</strong>&nbsp;An agency relationship created by operation of law when one party, by her actions, causes a third party to believe someone is her agent even though that person actually has no authority to act as her agent. Also called&nbsp;<em>agency by estoppel.</em><br></div>"
"<span style=""font-weight: bold;"">Contractual Liability of Principal and Agent For </span><u><span style=""font-weight: bold;"">Authorized</span></u><span style=""font-weight: bold;""> Agent Acts (and define Authorized Acts)</span>""<div><span style=""font-style: italic;"">“Authorized” Acts:&nbsp; Agent acts within scope of agent’s authority</span></div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Classification of Principal:&nbsp; Must be classified as either disclosed, partially disclosed, or undisclosed</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Disclosed Principal—Agent not liable, principal liable</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Partially Disclosed Principal—Agent possibly liable, principal liable</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Undisclosed Principal—Agent liable, principal liable</li></ul></div> <div></div>"
"<span style=""font-weight: bold;"">Contractual Liability of Principal and Agent for </span><u><span style=""font-weight: bold;"">Unauthorized</span></u><span style=""font-weight: bold;""> Agent Acts (and Define Unauthorized Acts)</span>""<div><span style=""font-style: italic;"">“Unauthorized” Acts:&nbsp; Acts that go beyond scope of agent’s authority</span></div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Third Party Reasonably Believes Agent Has Authority </div> <div><ul><li>Agent liable; Principal not liable</li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Third Party Aware that Agent is Mistaken About His/Her Authority </div> <div><ul><li>Agent not liable; Principal not liable</li></ul></div>"
"<span style=""font-weight: bold;"">When is the Principal Liable for an Agent's Tortious Conduct? (Tort Liability to Third Parties / Agency Relationship Impact)</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Agent’s Tortious Conduct—Principal liable if:<br><br></div> <div>1.&nbsp;<span style=""font-weight: bold;"">Vicarious liability / </span><span style=""font-weight: bold;"">Respondeat</span><span style=""font-weight: bold;""> Superior </span>applies (this is liability without fault); or</div> <div>2. ”<span style=""font-weight: bold;"">Direct liability</span>” applies, such as where the Principal is responsible for negligent hiring or fails to provide proper instruments, tools, or adequate instructions (note, this is not the same as vicarious liability, although the book does not sufficiently distinguish it – here, the principal has independently committed a tort)</div> <div><br>*NOTE:&nbsp; Agent is always liable for his or her own torts.</div> <div></div>"
"<span style=""font-weight: bold;"">Respondeat</span><span style=""font-weight: bold;""> Superior</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Principal/employer liable for torts of agent: </div> <div>- Who is an employee; and</div> <div>- Who commits the tort while acting within the “scope of his or her employment”</div> <div></div>"
"<span style=""font-weight: bold;"">Requirements for an Act to be considered in the “</span><u><span style=""font-weight: bold;"">Course and Scope</span></u><span style=""font-weight: bold;"">” of Employment</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>It was of the kind that the employee was employed to perform,</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>It occurred substantially within the authorized time period of employee’s work responsibilities,</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>It occurred substantially within the location authorized by the employer, and</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>It was motivated, at least in part, by the purpose of serving the employer</div> <div><br>* Substantial departure relieves this liability – often called a “<span style=""font-weight: bold;"">frolic</span>”<br><ul><li>If an agent makes a substantial departure from the course of the employer's business, the employer is not liable.</li></ul></div>"
"<span style=""font-weight: bold;"">Principal’s Liability and the Independent Contractor</span>"<div>General Rule:&nbsp;A party who hires an independent contractor is generally not liable for independent contractor’s tortious actions under doctrine of “respondeat superior”</div> <div></div>
"<span style=""font-weight: bold;"">Independent Contractor v. Employee Status Affects the Following</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Tort liability</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Workers Compensation</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Workplace Safety</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Unemployment Status</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Employer Tax Contributions</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Employment Discrimination</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Rights to Unionize</div>"
"<span style=""font-weight: bold;"">Termination of Agency Relationship</span>""<div></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Because these are commonly contractual relationships, <span style=""background-color: rgb(255, 255, 0);"">the relationship can be terminated under traditional contract theories, such as where the they can be terminated by mutual agreement; or</span></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>The relationship <span style=""background-color: rgb(255, 255, 0);"">can be terminated by operation of law, such as when one of the parties dies or becomes incapacitated.</span></div>"
"<span style=""font-weight: bold;"">Major Forms of Business Organizations</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Sole Proprietorship</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>General Partnership</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Limited Partnership</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Limited Liability Partnership</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Limited Liability Company</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Corporation</div> <div>*<span style=""font-weight: bold;"">Fictitious names </span>are often used so that it is not always obvious which form of business organization is being used.</div>"
"<span style=""font-weight: bold;"">Sources of the Law for Business Organizations</span>""<span style=""color: rgb(197, 155, 0);"">•</span>Business organizations are governed almost exclusively by state statutes,&nbsp;a number of&nbsp;which are based upon “<span style=""font-weight: bold;"">uniform</span>” laws.<br><br><br><br><br><br><br><br>------Complete Version------<br><div><span style=""color: rgb(197, 155, 0);"">•</span>Business organizations are governed almost exclusively by state statutes, a number of which are based upon “<span style=""font-weight: bold;"">uniform</span>” laws.</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>To the extent federal law applies, it is typically in the area of federal taxation.</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>The purpose of most state laws is to provide basic requirements and to set up certain “default” rules for the operation of business organizations.</div>"
"<span style=""font-weight: bold;"">The Life Cycle of a (General) Partnership</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Formation--Partnership formed either by written agreement, articles of partnership, or by estoppel</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Performance—Business conducted as partners work for benefit of partnership, in accordance with partnership agreement (if any)</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Dissolution—Partnership dissolves either by act of court, act of partners (dissociation), or operation of law (doesn’t necessarily lead to winding up, as remaining partners can agree to continue the business)</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Winding Up—Partners complete unfinished partnership business, collect and pay debts, collect partnership assets,&nbsp; take inventory, and distribute assets</div>"
"<span style=""font-weight: bold;"">The Life Cycle of a Partnership: Formation</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Formation--Partnership formed either by written agreement, articles of partnership, or by estoppel</div> <div><span style=""color: rgb(197, 155, 0);""><br><br><br><br><br><br>------Complete Version-----------------<br></span><div><span style=""color: rgb(197, 155, 0);"">•</span>Formation--Partnership formed either by written agreement, articles of partnership, or by estoppel</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Performance—Business conducted as partners work for benefit of partnership, in accordance with partnership agreement (if any)</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Dissolution—Partnership dissolves either by act of court, act of partners (dissociation), or operation of law (doesn’t necessarily lead to winding up, as remaining partners can agree to continue the business)</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Winding Up—Partners complete unfinished partnership business, collect and pay debts, collect partnership assets,&nbsp; take inventory, and distribute assets</div></div>"
"<span style=""font-weight: bold;"">The Life Cycle of a Partnership - Performance</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Performance—Business conducted as partners work for benefit of partnership, in accordance with partnership agreement (if any)<span style=""color: rgb(197, 155, 0);""><br><br><br><br><br><br><br><br><br>-------Complete Version-----------------<br>•</span>Formation--Partnership formed either by written agreement, articles of partnership, or by estoppel</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Performance—Business conducted as partners work for benefit of partnership, in accordance with partnership agreement (if any)</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Dissolution—Partnership dissolves either by act of court, act of partners (dissociation), or operation of law (doesn’t necessarily lead to winding up, as remaining partners can agree to continue the business)</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Winding Up—Partners complete unfinished partnership business, collect and pay debts, collect partnership assets,&nbsp; take inventory, and distribute assets</div>"
"<span style=""font-weight: bold;"">The Life Cycle of a Partnership - Dissolution</span>""<div><div><span style=""color: rgb(197, 155, 0);"">•</span>Dissolution—Partnership dissolves either by act of court, act of partners (dissociation), or operation of law (doesn’t necessarily lead to winding up, as remaining partners can agree to continue the business)</div><span style=""color: rgb(197, 155, 0);""><br><br><br><br><br>-----------Complete Version------------------------<br>•</span>Formation--Partnership formed either by written agreement, articles of partnership, or by estoppel</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Performance—Business conducted as partners work for benefit of partnership, in accordance with partnership agreement (if any)</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Dissolution—Partnership dissolves either by act of court, act of partners (dissociation), or operation of law (doesn’t necessarily lead to winding up, as remaining partners can agree to continue the business)</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Winding Up—Partners complete unfinished partnership business, collect and pay debts, collect partnership assets,&nbsp; take inventory, and distribute assets</div>"
"<span style=""font-weight: bold;"">The Life Cycle of a Partnership: Winding Up</span>""<div><div><span style=""color: rgb(197, 155, 0);"">•</span>Winding Up—Partners complete unfinished partnership business, collect and pay debts, collect partnership assets,&nbsp; take inventory, and distribute assets</div><span style=""color: rgb(197, 155, 0);""><br><br><br><br><br><br><br><br><br><br><br><br><br>--------Complete Version----------------<br>•</span>Formation--Partnership formed either by written agreement, articles of partnership, or by estoppel</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Performance—Business conducted as partners work for benefit of partnership, in accordance with partnership agreement (if any)</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Dissolution—Partnership dissolves either by act of court, act of partners (dissociation), or operation of law (doesn’t necessarily lead to winding up, as remaining partners can agree to continue the business)</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Winding Up—Partners complete unfinished partnership business, collect and pay debts, collect partnership assets,&nbsp; take inventory, and distribute assets</div>"
"<span style=""font-weight: bold;"">Partnership </span><span style=""font-weight: bold;"">(Uniform Partnership Act Definition):</span>""<div>“Association of two or more persons to carry on, as co-owners, a business for profit”</div> <div><br><br><br><br><br><br><br><br><br>(<span style=""font-style: italic;"">NOTE:&nbsp; No written partnership agreement, articles of partnership, or approval by the state is </span><span style=""font-style: italic;"">necessary in general partnerships.&nbsp; </span><span style=""font-style: italic;"">I.e.</span><span style=""font-style: italic;""> a </span><span style=""font-style: italic;"">general partnership </span><span style=""font-style: italic;"">can be created by actions of the parties (usually by agreeing to share profits and management) or by “estoppel”&nbsp; where, out of a sense of fairness to affected third parties, a partnership will be found to exist.</span>)</div>"
"<span style=""font-weight: bold;"">Key Characteristics of&nbsp;Partnerships</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Voluntary and consensual relationship between two or more individuals, partnerships, corporations, or other forms of business organizations<br><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Rights can be governed by a written partnership agreement, but the law will set default rules/rights and responsibilities for instances where there is no written agreement<br><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Partners own a partnership interest and share profits and management of business </div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Taxed as a “<span style=""font-weight: bold;"">flow through</span>” entity</div> <div><ul><li>i.e. when the partnership makes money, the partners make money (for tax purposes) even if those funds are not paid out to the partners</li></ul></div>"
"<div style=""text-align: center;""><span style=""font-weight: bold;"">Partnership Duties&nbsp;</span></div><span style=""font-style: italic;""><div style=""text-align: center;"">Fiduciary duties that partners owe to each other</div></span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Loyalty:&nbsp; Act in best interest of partnership, avoid self-interest; avoid conflicts of interest (includes duty not to compete); communicate any information that may be important to principal (often called the duty of “Notification” or “Disclosure”)</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Performance / Care:&nbsp; Use same skill and care of reasonable person in the same situation</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Obedience:&nbsp; Follow the lawful instruction and direction of the principal</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Accounting:&nbsp; Keep an accurate account of the money and property received on behalf of the principal (this is often included with duty of loyalty) and avoid misappropriation of client assets by not commingling assets</div>"
"<span style=""font-weight: bold;"">General Partnership/Partner Rights (Default Rules)</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Right to share in management (default is equal voting rights)</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Right to share in profits (default is to share equally)</div> <div><ul><li>If allocation of losses is not addressed in an agreement, the default is to share losses in same manner as profits.</li><li>No automatic right to compensation for services but when paid, it is considered a “guaranteed payment” under the tax laws rather than profits</li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Rights to partnership property (considered owned in common as a group, even if titled in name of individual partner)</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Right to inspect books</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Right to an accounting (which, in this instance, means a right in certain circumstances to file a lawsuit allowing review of all partnership assets and/or financial transactions)</div>"
"<span style=""font-weight: bold;"">Liabilities to Third Parties</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Each general partner in a partnership has agency authority to bind the partnership contractually</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Each general partner in a partnership has unlimited personal liability (“<span style=""font-weight: bold;"">joint and several</span>” liability) for debts and liabilities of partnership, so creditor (third party) can choose to sue partners separately or all partners jointly in one action for partnership debts/liabilities</div> <div><ul><li>Liability continues after dissociation unless the debt / obligation is satisfied, released, or replaced (such as in a novation)</li><ul><li>Extra: I can't just dissociate from the partnership to eliminate my risk of a liability that occur while I was a partner. So liability continues after I leave the partnership for anything that happened while I was in a partnership.</li></ul><li>Limited to partner’s capital contribution if partner was not a partner at time debt/liability was created (note that the financial performance of the company could be impacted, though, so the actual loss to the partner is still significant)</li></ul><br><br><br>-----------Extra Info------------------<span style=""background-color: rgb(255, 255, 255);""><br></span><ul> <li><span style=""background-color: rgb(255, 255, 255);"">When you're in a general partnership, all of your obligations are unlimited for any liability of the partnership. All partners are 100% liable for every liability for the business.</span></li><li><span style=""background-color: rgb(255, 255, 255);""><strong>Joint and Several Liability:</strong>&nbsp;A type of liability in which a third party can choose to sue the partners separately or to sue all partners jointly in one action.<br></span></li></ul></div> "
"<span style=""font-weight: bold;"">Partnership Dissolution and Termination</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Dissolution can be caused by:</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Partner dissociation (ex. partner withdraws or dies)</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Court action</li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Dissolution just means the partnership relationship between the partners ceases (principal effect is termination of authority – especially for the partner triggering the dissolution)<br><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Once partnership dissolved, the remaining partners either decide to continue the business or to liquidate and distribute assets (“<span style=""font-weight: bold;"">winding up</span>”), meaning the&nbsp; partnership terminates</div>"
"<span style=""font-weight: bold;"">Order of Distribution of Partnership Assets (Upon “Winding Up”) [1st to Last]</span>""<div><ol><li><span style=""color: rgb(197, 155, 0);"">•</span>Payment to partnership creditors</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Payment of refunds/loans to partners for loans made by partners to partnership</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Payment of partners for invested capital</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Payment of profits distributed to partners per terms of partnership agreement</li></ol></div> "
"<span style=""font-weight: bold;"">Varying Partnership Structures:&nbsp; Limited Partnership</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Definition:&nbsp;Agreement between at least one general partner and at least one limited partner<br><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Must be formed by filing <b>Certificate of Limited Partnership </b>with the state</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Allows investor (limited partner) to share in profits of partnership</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Limited partner’s liability limited to amount he/she invests in business, but there must be a general partner with full liability (note, the general partner may be a limited liability entity such as a corporation)</div>"
Limited Partnership: What needs to be filed to be formed?<div>Must be formed by filing <b>Certificate of Limited Partnership </b>with the state</div>
"<span style=""font-weight: bold;"">Common Requirements for Limited Liability of Limited Partner</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Limited partner has complied in good faith with state’s certificate of limited partnership filing requirement</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Limited partner typically does not have the right to participate in management or control of business and therefore also will not have fiduciary duties to the partnership</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Limited partner’s surname is not part of partnership name</div>"
"<span style=""font-weight: bold;"">Comparison of General Partners and Limited Partners in an Limited Partnership</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>General Partner:</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Has all rights associated with controlling business</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Has unlimited personal liability for all partnership debts</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Acts as agent of partnership</li><ul><li>Extra: So General Partners can bind the partnership (to contractual relationships).</li><li>Extra: Thus General Partners have Fiduciary Duties</li></ul><li>EXTRA: This is true for General partners in General Partnerships and those in a Limited Partnership</li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Limited Partner:</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>May have limitations on the right to participate in management and control of business</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Liability limited to amount of capital partner has contributed to business</li><ul><li>EXTRA: Limited Partners are NOT at risk for unlimited liability for partnership's debts/obligations</li></ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Is <u>not</u> an agent of the partnership and has no fiduciary obligations</li></ul></div> "
"<span style=""font-weight: bold;"">Reasons For Dissolution of Limited Partnership</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Expiration of term established in certificate of limited partnership<br><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Completion of objective established in certificate of limited partnership</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Unanimous written consent of all partners (limited and general)</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Withdrawal of general partner (unless certificate establishes that other general partners will continue operation of business)</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Court action</div> <div><br>*Termination for tax purposes occurs under slightly different circumstances.</div> <div></div>"
"<span style=""font-weight: bold;"">Varying Partnership Structures: </span><span style=""font-weight: bold;"">Limited Liability Partnership</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Definition:&nbsp; Partnership in which all partners assume liability for his or her own actions and for any partner’s professional malpractice but then, only to the extent of the partnership’s assets and/or capital contributions</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Personal assets of partner exposed only to liabilities for his or her own personal malpractice or liabilities (including liabilities associated with those he or she supervises) </div> <div><span style=""color: rgb(197, 155, 0);"">•</span>In most other respects, these operate the same as general partnerships, however, more formalities are required in creation<br><br>-------EXTRA (from Intro to Business Law Notes)--------------<br>*All partners assume (unlimited/personal) liability for their own action and the actions of those they supervise.<br><br>*Partners only have personal liability for the debts and obligations caused by other partners (partners that they don't supervise) to the extent of the LLP's assets and/or capital contributions (investment) to the LLP<br><br>*LLP is better than limited partnership b/c in an LLP you can actually participate in management</div>"
"<span style=""font-weight: bold;"">Key Characteristics of the LLC</span>""<div><div><span style=""color: rgb(197, 155, 0);"">•</span>The limited liability company (LLC) combines the advantages of corporations (with regard to protection from personal liability) with the advantage of partnerships</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>LLCs are a separate legal entity from their owners</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Owners of an LLC are called&nbsp; “members”</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>An individual, partnership, corporation, or another LLC may be a member of an LLC</li><li><span style=""color: rgb(197, 155, 0);"">•</span>In <u>most</u> states, an LLC can exist with only one member</li></ul></div> <span style=""color: rgb(197, 155, 0);""><br><br><br><br><br><br><br><br><br><br>--------Complete Version-------------------<br>•</span>The limited liability company (LLC) combines the advantages of corporations (with regard to protection from personal liability) with the advantage of partnerships</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>LLCs are a<span style=""background-color: rgb(255, 255, 255);""> separate legal entity </span>from their owners</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Owners of an LLC are called&nbsp; “members”</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>An individual, partnership, corporation, or another LLC may be a member of an LLC</li><li><span style=""color: rgb(197, 155, 0);"">•</span>In <u>most</u> states, an LLC can exist with only one member</li></ul></div> "
"<span style=""font-weight: bold;"">Creation of the LLC</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>At least one person (called the “<span style=""font-weight: bold;"">organizer</span>”) must file the <span style=""font-weight: bold;"">Articles of Organization </span>with a secretary of state or other state filing agency</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Articles generally must include LLC name, duration, and the name and address of its registered agent</li></ul></div> <font color=""#c59b00""><br><br><br><br>---------------Complete Version---------------------------<br></font><div><span style=""color: rgb(197, 155, 0);"">•</span>At least one person (called the “<span style=""font-weight: bold;"">organizer</span>”) must file the <span style=""font-weight: bold;"">Articles of Organization </span>with a secretary of state or other state filing agency</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Articles generally must include LLC name, duration, and the name and address of its registered agent</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Initially distinguishable from partnerships due to the formality of creation and the recognition that these are, for most purposes, separate legal entities from their owners (creating the need for registered agents)</div>"
"<span style=""font-weight: bold;"">Maintaining the LLC</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Aside from the formality of filing articles of organization, there are very few formalities required to maintain the LLC (i.e. typically no need to file renewals, no requirement to hold meetings, etc.)</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>An LLC should have an <span style=""font-weight: bold;"">operating agreement </span>covering how members will share profits, manage the LLC, and withdraw from the LLC, but most states allow this to simply be a verbal agreement.</div>"
Operating Agreement"Used by an LLC. Covering how members will share profits, manage the LLC, and withdraw from the LLC, but most states allow this to simply be a verbal agreement.<br><br><br><br><br>-----------Original------------<br><div><span style=""color: rgb(197, 155, 0);"">•</span>An LLC should have an <span style=""font-weight: bold;"">operating agreement </span>covering how members will share profits, manage the LLC, and withdraw from the LLC, but most states allow this to simply be a verbal agreement.</div>"
"<span style=""font-weight: bold;"">Taxation of the LLC</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>An LLC may elect to be taxed like a partnership, corporation, or sole proprietorship (meaning it’s a disregarded entity for federal income tax purposes)</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Election of tax treatment is now a very informal process – often referred to as the “<span style=""font-weight: bold;"">check the box</span>” rules</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Election as partnership is historically the most common (b/c it has Flow Thr/ Taxation, not Double Taxation)</li><li><span style=""color: rgb(197, 155, 0);"">•</span>When choosing partnership taxation, the LLC pays no federal income tax and all LLC income and losses are reported by the owner-members on their individual income tax returns (i.e. the LLC will receive “<span style=""font-weight: bold;"">flow through” </span>tax treatment)</li></ul></div> "
Flow Through Taxation (online definition)"<span style=""color: rgb(17, 17, 17);"">A flow-through entity is a legal business entity that passes any income it makes straight to its owners, shareholders, or investors. As a result, only these individuals—and not the entity itself—are taxed on the revenues.&nbsp;<br><br><br></span><ul><li>With flow-through entities, the income is taxed only at the owner's individual tax rate for ordinary income: The business itself pays no corporate tax.</li></ul>"
"<span style=""font-weight: bold;"">Liability of Members</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>An LLC member has no individual liability on LLC contracts, debts, or other liabilities unless LLC contracts signed in a personal capacity (e.g., as a guarantor or surety or there’s a failure to recognize signature as an agent of the LLC)</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>A member’s liability is therefore usually limited to the member’s capital contributions</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Very little risk of losing this protection (i.e. very little risk of “<span style=""font-weight: bold;"">piercing of the company veil</span>”)</div> <div>*A member is personally liable for torts s/he committed while acting for the LLC<br><br><br><br><br><br><br><br><br>-------Extra------------------<br><div><div><div><ul><li>One of the possible reasons in corporate law why there's ""piercing of the corporate veil"" is when a corporation doesn't follow all of the formalities that are required.</li> <li>Well In LLC, there aren't as many formalities required. So the risk of piercing the veil to create personal liability for the members is relatively small.</li> </ul> </div> </div></div><br></div>"
"<span style=""font-weight: bold;"">What type of protection does LLC have?<br>(Liability Protection – “Inside and Out”)</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>LLC’s have one type of liability protection that is even better than corporation liability protections – “inside” protection</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>If someone obtains a judgment against a member, the most that the judgment creditor can obtain is a “<span style=""font-weight: bold;"">charging order</span>” (limited to the right to receive distributions/profits, but not the right to engage in management or exercise other membership rights), as compared to the judgment creditor’s ability to execute on a shareholder’s corporate stock (which results in the acquisition of voting rights)</div> <div><br><br><br><br>*Extra: Charging Order (Me) = Prevents judgment creditor from taking my voting/membership interest away (therefore judgment creditor can't vote in the LLC and can't get engage in management)<br><ul> <li>Corporations do NOT have Charging Orders and therefore judgment creditors can take a stock from a shareholder and therefore get voting rights that shareholders have&nbsp;</li></ul><br><br><br><br><br><br><br><br>---------------Complete Version----------------------------<br><div><span style=""color: rgb(197, 155, 0);"">•</span>LLC’s have one type of liability protection that is even better than corporation liability protections – “inside” protection</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>If someone obtains a judgment against a member, the most that the judgment creditor can obtain is a “<span style=""font-weight: bold;"">charging order</span>” (limited to the right to receive distributions, but not right to engage in management or exercise other membership rights), as compared to the judgment creditor’s ability to execute on a shareholder’s corporate stock (which results in the acquisition of voting rights)</div> <div>*(Note, creditors of partners in a partnership can also obtain “charging orders,” but because partnerships are not limited liability entities, the value of the protection is not as significant as with the LLC.)</div></div>"
"<span style=""font-weight: bold;"">Management of the LLC</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>An LLC must choose to be <span style=""font-weight: bold;"">member-managed</span> or <span style=""font-weight: bold;"">manager-managed</span></div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Generally, the Articles of Organization state which management format is used by the LLC</div> <div><ul><li>If manager-managed, some states require the initial managers to be named in the Articles</li></ul></div>"
"<span style=""font-weight: bold;"">Member-Managed LLC</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>The default rule is that each member in a member-managed LLC shares equal rights in the management of the business <u>and</u> each member is an agent of the LLC<br><ul><li>Extra: All members have fiduciary obligations.</li></ul></div><div><br><br><br><br><br><br><br><br><br><br><br><br><br><br><br>------------Complete Version----------------<br><div><span style=""color: rgb(197, 155, 0);"">•</span>The default rule is that each member in a member-managed LLC shares equal rights in the management of the business (regardless of other factors, such as differences in capital contributions) <u>and</u> each member is an agent of the LLC with implied authority to carry on its ordinary business</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>The LLC operating agreement may modify ULLCA default rules by granting more power to some members</div></div>"
"<span style=""font-weight: bold;"">Manager-Managed LLC</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Managers in a manager-managed LLC are elected and removed by a vote of the LLC’s members</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Managers do not have to be members<br><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>In this type of LLC,<span style=""background-color: rgb(255, 255, 0);""> only the manager(s) is/are an agent of the LLC</span> with implied authority to carry on its ordinary business</div><div><ul> <li>EXTRA: Manager Managed LLC means that the managers have fiduciary duties to the members, but members don't have fiduciary duties to each other.</li></ul><span style=""color: rgb(197, 155, 0);""><br><br><br><br><br><br><br><br>----------------Complete Version------------------------<br></span><div><span style=""color: rgb(197, 155, 0);"">•</span>Managers in a manager-managed LLC are elected and removed by a vote of the LLC’s members</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Managers do not have to be members</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>In this type of LLC, only the manager(s) is/are an agent of the LLC with implied authority to carry on its ordinary business</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>There may be securities law implications to this type of management structure.</div> <div>&nbsp; * Despite this option, an LLC cannot become a &nbsp; publicly held/traded company.</div></div>"
"<span style=""font-weight: bold;"">Duties of Manager or Members</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Each <span style=""background-color: rgb(255, 255, 0);"">member in a member-managed LLC </span>and each <span style=""background-color: rgb(255, 255, 0);"">manager in a manager-managed LLC has fiduciary duties </span>to the others managers/members</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Non-managing members of a manager-managed LLC generally owe no fiduciary duties </div> <div><br>*This is why the decision between manager-managed or member-managed is so critical.</div>"
"<span style=""font-weight: bold;"">Distributions to Members</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Subject to the provisions of an <b>operating agreement</b>:</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>A member in an LLC has the right to receive distributions of (usually profits)</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Members share profits and other distributions equally, regardless of differences in&nbsp; their capital contributions</li></ul></div> "
"<span style=""font-weight: bold;"">Transferability of Member Interest</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>A member’s ownership interest in an LLC is the member’s personal property, but ability to sell or transfer LLC rights is often limited by statute or an operating agreement</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>A member may transfer the distributional interest in the LLC to another person</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Transferee not a member, but receives right to member distributions</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Right of transfer may be altered in the operating agreement</li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Typically, membership rights only granted with consent of other members and compliance with any additional requirements stated in Operating Agreement</div>"
"<span style=""font-weight: bold;"">Dissolution of LLC</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>The default rules are that an LLC will be dissolved upon the following events:</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Member agreement or expiration of term</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Death, retirement, withdrawal, etc. of a member (unless articles or operating agreement contradict this)</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Court action</li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Perpetual existence allowed in some states</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Upon dissolution, the LLC proceeds with “winding up""<br><ul><li>Extra: After dissolution of LLC, we do winding up.</li></ul><br><br><br><br><br><br><br><br><br><br>------------------COMPLETE VERSION-------------------<br><div><span style=""color: rgb(197, 155, 0);"">•</span>The default rules are that an LLC will be dissolved upon the following events:</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Member agreement or expiration of term</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Death, retirement, withdrawal, etc. of a member (unless articles or operating agreement contradict this)</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Court action</li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Perpetual existence allowed in some states</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Upon dissolution, the LLC proceeds with “winding up,” and the LLC will be bound by reasonable acts of members during winding up</div></div>"
"<span style=""font-weight: bold;"">Winding Up After Dissolution (LLC) -&nbsp;</span>After all the LLC assets sold, proceeds distributed in this order:<div><ul><br></ul></div>""<div><ol><li><span style=""color: rgb(197, 155, 0);"">•</span>First to LLC creditors, </li><li><span style=""color: rgb(197, 155, 0);"">•</span>Then to members to repay loans from members to the LLC,</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Then, members’ contributions are returned, and</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Last, the <font color=""#ff0000"">remainder </font>is distributed as profits</li></ol></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Under most default rules, any<font color=""#ff0000""> remaining proceeds</font> are distributed in equal shares to the members (unless the Operating Agreement changes the rules on distribution)<br><ul><li>This is shown/done in step 4&nbsp;</li></ul></div>"
"<span style=""font-weight: bold;"">Basic Characteristics of Corporations</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Legal entity separate from owners</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Limited liability of shareholders (except where “veil is pierced” and shareholders are consider the “alter ego” of the corporation)</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Typically unrestricted transferability of corporate shares</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Typically has perpetual existence</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Centralized management (like a manager-managed LLC)</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Corporate taxation: C Corporation status (which has&nbsp;<span style=""font-weight: bold;"">double taxation</span>) is the default, but special flow-through treatment may be achieved through qualification as an S Corporation<br>-OWNER=SHAREHOLDER</div>"
Double Taxation (my definition)The corporation pays taxes on their annual earnings and then when the corporation pay out dividends to shareholders, the shareholders have to pay taxes on the dividend that they received.
"<span style=""font-weight: bold;"">Public Versus Private Corporation</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Public Corporation:&nbsp; Corporation created by government to administer law, with specific government duties to fulfill</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Example:&nbsp; U.S. Postal Service</li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Private Corporation:&nbsp; Corporation created for private purposes (this category includes most corporations)</div>"
"<span style=""font-weight: bold;"">For-Profit Versus Non-Profit Corporations&nbsp;</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>For-Profit Corporation:&nbsp; Objective is to operate for profit; shareholders seeking to make profit purchase stock these corporations issue<br><ul><li>EXTRA DEFN: it's a corporation that is operating to try to generate profits for the benefit of its shareholders.</li></ul><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Non-Profit Corporation:&nbsp; May earn profits, but they do not distribute these profits to shareholders (non-profit corporations do not issue stock, nor do they have shareholders); instead, corporation reinvests profits in business or other related activity<br><ul><li>Extra Defn: This simply means that we're not trying to generate profits for the benefit of shareholders. Instead, any profits that are generated are simply going to be reinvested for the basic purpose of the corporation.</li></ul></div> <div>&nbsp; *Note that non-profit corporations are not &nbsp;necessarily “tax exempt” under the Internal Revenue &nbsp; Code.<br><br></div>"
"<span style=""font-weight: bold;"">Domestic, Foreign, and Alien Corporations</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Domestic Corporation:&nbsp; Doing business within state of incorporation</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Foreign Corporation:&nbsp; Doing business in states other than state of incorporation</div> <div><br><ul style=""""><li style="""">•Foreign corporations must obtain a certificate of authority from each state in which they do business</li></ul></div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Alien Corporation:&nbsp; Doing business in country other than country of incorporation<br><br><br><br><br><br>---------------------Complete Version-----------------------<br><div><span style=""color: rgb(197, 155, 0);"">•</span>Domestic Corporation:&nbsp; Doing business within state of incorporation<br><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Foreign Corporation:&nbsp; Doing business in states other than state of incorporation (regulation by states is limited by Commerce Clause and 14th Amendment of U.S. Constitution)</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Foreign corporations must obtain a certificate of authority from each state in which they do business</li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Alien Corporation:&nbsp; Doing business in country other than country of incorporation</div></div>"
"<span style=""font-weight: bold;"">Publicly Held Versus Closely Held Corporation</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Publicly Held Corporation:&nbsp; </div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Stock available to public with outstanding shares on a major U.S. stock exchange</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Generally same meaning as “Publicly Traded Corporation” with a few slight differences</li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Closely Held Corporation (sometimes called “Close” or “Family” Corporation):</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Generally does not offer stock to public, with all stock being held by private investors</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Note:&nbsp; Term “close corporation” may also describe a specific designation in state formation laws such as a state’s “close corporation” rules</li></ul></div> "
"<span style=""font-weight: bold;"">“Subchapter S” Corporation</span>""<div>•Has flow-through taxation (It Combines advantages of limited liability and single taxation; profits and losses flow through to the shareholders’ personal tax returns)<br><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>In order to become a S corporation, it requires all shareholders to elect this special treatment in a filing with the IRS (Form 2553)</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Restrictions on qualification, such as (need to meet these requirements to be an S corp):</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>No more than 100 shareholders</li><li><span style=""color: rgb(197, 155, 0);"">•</span>No nonresident alien shareholders</li><li><span style=""color: rgb(197, 155, 0);"">•</span>No corporations or partnerships as shareholders</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Must have only one class of stock</li></ul><br>*EXTRA: Subchapter S corporation status is a way to request the taxing authority (being the IRS) to treat your corporation as a flow through tax entity. And it's to change that C Corporation default status, to give it S corporation status, which is essentially Flow-Through taxation.<br><br><br><br><br><br><br><br>---------------Complete Version---------------------<br><div><span style=""color: rgb(197, 155, 0);"">•</span>Combines advantages of limited liability and single taxation (meaning that most taxable consequences, such as profits and losses, flow through to the shareholders’ personal tax returns)</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Requires all shareholders to elect this special treatment in a filing with the IRS (Form 2553)</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Restrictions on qualification, such as:</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>No more than 100 shareholders</li><li><span style=""color: rgb(197, 155, 0);"">•</span>No nonresident alien shareholders</li><li><span style=""color: rgb(197, 155, 0);"">•</span>No corporations or partnerships as shareholders</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Must have only one class of stock</li></ul></div> <br><br><br><br><br></div> "
"<span style=""font-weight: bold;"">Professional Corporation (PC)</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Those corporate entities for which many corporation statutes make special provision, regulating the use of the corporate form by licensed professionals such as attorneys, architects, engineers, public accountants and physicians.<br><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>In instances where LLCs are permitted for the same purpose, the use of PCs has decreased substantially in recent years.<br><br><br><br><br><br><br><br><br>---------------EXTRA------------<br><div> <div> <div> <ul> <li>PC is a classification of corporation</li> <li>PC means that you've got a special type of corporation that usually is permitted only to operate in the name of the shareholder or shareholders. And it is usually only for instances where the shareholder or shareholders are licensed to perform a particular type of professional service and they want to do that through a corporate structure.</li> </ul> </div> </div></div></div>"
"<span style=""font-weight: bold;"">Pre-Formation Activities of a Corporation</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>“<span style=""font-weight: bold;"">Promoters</span>” organize corporate formation and act in a fiduciary capacity</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Promoters often enter into contracts that are necessary to start the business of the corporation.</li><li><span style=""color: rgb(197, 155, 0);"">•</span>The corporation will become bound by the contract once it agrees to be bound or accepts the benefits of the contract.</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Promoters <u>and</u> corporations generally liable on these contracts unless parties agree that promoter will be released upon formation or there is a novation.</li><li><span style=""color: rgb(197, 155, 0);"">•</span>A <span style=""font-weight: bold;"">novation</span> occurs when all parties agree that the newly formed corporation will operate as substitute for the promoter as the original party to the original contract.</li><ul><li>Novation (EXTRA): where once the corporation is formed, we basically substitute the corporation as a party for the promoter</li><ul><li>EXTRA: only can occur after a corporation is formed.&nbsp;</li></ul></ul></ul></div> "
"<span style=""font-weight: bold;"">Legal Process of Incorporation (Process for forming a corporation)</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Drafting and filing “<span style=""font-weight: bold;"">articles of incorporation</span>” – some variation of state by state requirements but must generally include:</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Name of corporation</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Name and address of registered agent</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Name and address of incorporator(s)</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Number of shares to be issued</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Purpose clause (acting outside corporate purpose is called “ultra vires “)</li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>First “<span style=""font-weight: bold;"">organizational meeting</span>”<span style=""font-weight: bold;""> </span>held</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Election of Directors</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Adoption of Bylaws</li></ul><br><br>-EXTRA: As soon as the Articles of Incorporation have been filed/issued, we hold an organizational meeting</div> "
"<span style=""font-weight: bold;"">Situations When Courts Likely To Pierce Corporate Veil (aka “Alter Ego” Theory)</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Corporation did not follow statutory mandates or formalities regarding corporate business</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Corporation lacked adequate capital when initially formed</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Shareholder(s)’ personal interests and corporate interests are commingled (corporation has no separate identity)</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Shareholder(s) attempts to commit fraud through corporation</div> <div><br>*Proper use of <span style=""font-weight: bold;"">subsidiaries</span> (one company controlled by another company, which is usually called the holding company) is acceptable and will not trigger piercing.</div>"
"<span style=""font-weight: bold;"">Overview of Roles/Duties of Directors, Officers, and Shareholders (</span><span style=""font-weight: bold; font-style: italic;"">aka Stockholders</span><span style=""font-weight: bold;"">)</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Directors</div> <div></div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Vote on important corporate decisions</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Appoint and supervise officers</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Declare and pay corporate dividends</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Manage corporation</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Fulfill fiduciary duties</li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Officers (employees of organization)</div> <div></div> <div></div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Run “day-to-day” business of firm</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Fulfill fiduciary duties</li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Shareholders<br><div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Elect board of directors</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Approve major board decisions</li></ul></div> <br></div>"
"<span style=""font-weight: bold;"">Overview of Rights of Directors, Officers, and Shareholders</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Directors<br><div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Right to Compensation</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Right to Participation</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Right to Inspection</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Right to Indemnification</li></ul></div> </div> <br> <div><span style=""color: rgb(197, 155, 0);"">•</span>Officers--</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Rights determined in employment contract</li></ul></div> <br> <div><span style=""color: rgb(197, 155, 0);"">•</span>Shareholders--<br><div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Voting Rights</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Right to Dividends</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Inspection Rights</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Right to File Derivative Suit</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Preemptive rights</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Right to Transfer Shares</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Right to File Direct Suit</li></ul></div> </div>"
"<span style=""font-weight: bold;"">Legal Role of Board of Directors</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Elected by shareholders</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Authority over all corporate matters acting through a “quorum” (minimum number of directors necessary to validate corporate decisions), with&nbsp; responsibility running directed to the shareholders </div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Sarbanes-Oxley Act attempts to improve corporate oversight of officers, board independence, and accuracy of information disclosed to shareholders of publicly traded corporations (in an effort to prevent fraud)</div>"
"<span style=""font-weight: bold;"">Liability of Directors and Officers</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Can be personally liable for corporation debts and obligations if corporate veil is pierced</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Can be held personally liable for their own torts and crimes</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Can be held personally liable for torts and crimes of other employees whom they failed to adequately&nbsp; supervise (even if no knowledge or participation)<br><ul><li>Can be held personally liable for torts/crimes committed by employees that you supervise</li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Can be held liable for wrongful transactions involving company stock</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Can be liable to corporation and/or its shareholders for breach of fiduciary duties</div>"
"<span style=""font-weight: bold;"">Business Judgment Rule</span>&nbsp;""Provides that directors and officers are not liable for decisions that harmed corporation if they were acting in good faith at time of decision<br><ul><li><span style=""font-weight: bold;"">Protection for Directors and Officers</span></li></ul>"
"<span style=""font-weight: bold;"">Liability of Shareholders</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Shareholders typically only liable to extent of their investment for debts of corporation</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Personal liability typically only extends to the shareholder if: </div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Corporate veil is pierced </li><li><span style=""color: rgb(197, 155, 0);"">•</span>Shareholder purchased “<span style=""font-weight: bold;"">watered stock</span>” (purchase price significantly below fair market value)</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Shareholder received illegal dividends (such as a dividend causing insolvency)</li></ul></div> "
"<span style=""font-weight: bold;"">Role / Voting Rights of Shareholders</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Shareholder meetings typically only once a year for purpose of electing directors, but there are often rights for shareholders to call special meetings on other matters or to present other resolutions</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Shareholders often grant a “<span style=""font-weight: bold;"">proxy</span>,” which authorizes a third party to vote in place of shareholder at shareholders’ meeting</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Generally, once a majority of shares (typically defined as a “<span style=""font-weight: bold;"">quorum</span>”) is present, action can be taken upon the vote of a majority of those present.</div>"
"<span style=""font-weight: bold;"">Voting Rights of Shareholders (pt2)</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>General Rule:&nbsp; One share = one vote</div> <br> <div><span style=""color: rgb(197, 155, 0);"">•</span>Shareholder voting agreements often align groups of shareholders who will vote together to exert more control <br><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span><span style=""font-weight: bold;"">Cumulative voting </span>(when permitted by Articles and Bylaws) is used to allow shareholders to “cumulate” share voting for directors</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Minority shareholders benefit from cumulative voting (as compared to <span style=""font-weight: bold;"">straight voting</span>)<br><br><br><br><br><br><br><br><br><br><br><br><br>---------------------------Complete Version----------------------------------<br><div><span style=""color: rgb(197, 155, 0);"">•</span>General Rule:&nbsp; One share = one vote</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Share allocation has a significant affect on the control of a shareholder (majority shareholders (51% or more) versus minority shareholders)</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Shareholder voting agreements often align groups of shareholders who will vote together to exert more control </div> <div><span style=""color: rgb(197, 155, 0);"">•</span><span style=""font-weight: bold;"">Cumulative voting </span>(when permitted by Articles and Bylaws) is used to allow shareholders to “cumulate” share voting for directors</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Minority shareholders benefit from cumulative voting (as compared to <span style=""font-weight: bold;"">straight voting</span>)</div></div>"
"<span style=""font-weight: bold;"">Do shareholders have the right to vote on all matters? <br><br>(Extent of Shareholder Voting Rights)</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Shareholders don’t have the right to vote on all matters </div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Shareholders can vote on all matters that are presented to them, but only have the “right” to vote on matters specified by organizational documents or on matters of fundamental change to the corporation (EX of Fundamental Change):</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Dissolution</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Amendments to the Articles of Incorporation that materially and adversely affect the shareholders’ rights</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Mergers, consolidations, and compulsory share exchanges</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Sale of substantially all of the assets of the corporation</li></ul></div> "
"<span style=""font-weight: bold;"">Dividend</span>"<div>Distribution of corporate profits/earnings ordered by directors and paid to shareholders</div> <br>
<div>Inspection Rights</div><div>Protects shareholders interests by giving them right to inspect corporation’s books and records after asking in advance to inspect and having proper purpose</div>
"<div><span style=""font-weight: bold;"">Derivative Suit</span></div>""Filed by corporate shareholder in the name of corporation against a third party (which can include a director or officer) when corporate directors fail to take action for the corporation to sue in situation where the corporation has been harmed by third party; the result of the lawsuit benefits all shareholders<br><br><br><br><ul><li>EXTRA:&nbsp;</li><ul><li><span style=""background-color: yellow;"">the plaintiff in the lawsuit is actually the corporation</span> (since the shareholders file the lawsuit in the name of the corporation), <span style=""background-color: yellow;"">the benefit of winning that lawsuit is shared among all shareholders.</span><br></li><li>Could have a derivative suit against the director (so the 3rd party could be the director) (ex: director failed to fulfill fiduciary or breach of fiduciary duty)</li></ul></ul><br><br><br><u>EXTRA</u><br>-""when corporate directors <span style=""background-color: rgb(255, 255, 255);"">fail to take action for the corporation to sue in situation"" =&nbsp;The board of directors has not chosen to sue the other 3rd party. Thus the shareholders are going to try to initiate the action on behalf of the corporation</span>"
"<div><span style=""font-weight: bold;"">Direct Suit</span></div>"<div>Filed by shareholder against corporation (such as improperly withholding dividends or denying inspection rights)</div>
Right of First Refusal"Bylaws can restrict ability of shareholders to re-sell stock by requiring it to be offered first to the corporation or its shareholders<br><div><ul><li>When corporation buys the stock back (thr/ the Right of 1st Refusal), it’s generally called a “stock redemption”</li></ul><br><u>EXTRA<br></u><ul> <li><span style=""background-color: yellow;"">Bylaws determines whether you have the right of first refusal.</span></li> <li><span style=""background-color: yellow;"">Right of First Refusal: when you want to sell your stock as a shareholder, you must either offer to sell it back to the corporation or offer to sell it back to other shareholders before selling it to a 3rd party.</span></li></ul></div>"
Preemptive Rights (often called a “Right of First Offer”)<div>Preferential rights given to existing shareholders to purchase shares of new stock issued; preference given in proportion to percentage of stock shareholder already owns</div><br><br><br><u>Extra</u><br><ul><li>Preemptive Rights: If the corporation issues new stock, you get the first opportunity to buy that new stock.</li></ul>
Piercing Corporate Veil (extra)meaning that shareholders and directors and officers would suddenly have personal liability for the debts and obligations of the company.
Merger"<div>A legal contract combining two or more corporations such that only one of the corporations continues to exist; in essence, one corporation “absorbs” another corporation, and all liabilities transfer to the surviving corporation</div> <div><span style=""font-style: italic;"">*These do not generally result in a taxable event.<br></span></div> <div></div>"
"<span style=""font-weight: bold;"">Consolidation</span>""<div>A legal contract combining two or more corporations, resulting in an <u>entirely new</u> corporation; in consolidation, neither of the original corporations continues to exist, but all liabilities of both transfer to the newly formed corporation (these are extremely rare)</div> <div><i>*These do not generally result in a taxable event.</i><br><br><br>-----Extra------------------<br><ul> <li>Consolidation: We're putting two corporations together and creating a new 3rd Corporation.</li> <ul> <li>&nbsp;in this instance, the surviving corporation is a brand new corporation.</li> </ul></ul></div>"
"<span style=""font-weight: bold;"">Procedures for Mergers and Consolidations</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Boards of directors of all involved corporations must approve the plan</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Shareholders typically must approve the plan (except in the instance of “short-form” mergers when a parent corporation merges with a subsidiary corporation)<br><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Appraisal right:&nbsp; Dissenting shareholder’s right (upon vote to merge or consolidate) to have his/her shares appraised and to receive monetary compensation for their value<br><ul><li>Helps protect minority shareholders</li></ul><br><br><br>---------------EXTRA-----------------------------<br>-Dissenting Shareholder (extra defn): shareholder who oppose and vote against the merger<br><div><br>-Appraisal right (book): A dissenting shareholder’s right to have his or her shares appraised and to receive monetary compensation from the corporation for their value.</div><br><br><br><br><br><br>-------ORIGINAL---------<br><img src=""paste-eb15599118beec9c6327ac0426e49a92c91d2dc2.jpg""><br></div>"
"<span style=""font-weight: bold;"">2 Types of Acquisitions</span>"1. Purchase of Assets (aka Asset Acquisition)<br>2. Purchase of Stock (aka Stock Acquisition)
Purhcase of Assets (also Define Corporate Assets)"<div><span style=""color: rgb(197, 155, 0);"">•</span>Purchase of Assets:&nbsp; One corporation can extend its business operations by purchasing the assets of another company</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Corporate Assets (Definition):&nbsp; All intangible and tangible items owned by the corporation</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Generally, a company that purchases <u>assets</u> of another company/corporation does not acquire its <u>liabilities </u></li><li><span style=""color: rgb(197, 155, 0);"">•</span>Selling corporation typically needs director and shareholder approval; acquiring corporation typically only needs director approval</li></ul></div>"
Purchase of Stock (aka Stock Acquisition)An&nbsp;acquiring corporation can take control of another corporation by purchasing a substantial amount of its voting stock (this can trigger an ultimate merger/appraisal right to deal with dissenting shareholders)
"<span style=""font-weight: bold;"">Common Forms of Stock Purchases/Takeovers</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span><span style=""font-weight: bold;"">Tender Offer</span>:&nbsp; Aggressor (acquiring corporation) offers target shareholders a price above current market value of their stock <br><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span><span style=""font-weight: bold;"">Exchange Offer </span>(aka “<span style=""font-weight: bold;"">Share Exchange</span>”):&nbsp; Aggressor offers to exchange target shareholders’ current stock for stock in aggressor’s corporation </div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>This is typically not a taxable event</li></ul></div>"
"<span style=""font-weight: bold;"">“Hostile” Takeover</span>""<div>A takeover to which management of the target corporation objects (note that fiduciary duties still apply), but can be accomplished through the various different forms of takeovers<br><br>-Book Defn:&nbsp;<span style=""color: rgba(0, 0, 0, 0.87);"">A takeover to which the management of the target corporation objects.</span></div>"
"<span style=""font-weight: bold;"">Common Approaches to (Hostile) Takeover Attempt:&nbsp; Proxy Solicitation</span>"Aggressor corporation targets shareholders in a campaign to win shareholder support (typically through requests for proxy authorization) to vote for their position, such as voting for directors [who are] favorable to the aggressor’s position<br><br><br>-Proxy solicitation (book): The process of obtaining authority to vote on behalf of shareholders.
"<span style=""font-weight: bold;"">Other Common Response to Takeover Attempt:&nbsp; Self-Tender Offer</span>"<div>Target corporation offers to buy its shareholders’ stock;&nbsp; if shareholders accept offer, target corporation maintains control of business&nbsp;</div>
"<span style=""font-weight: bold;"">Life Stages of a Corporation</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Incorporation—Company becomes incorporated when articles of incorporation signed</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Corporation Conducts Business—Directors and officers oversee business, as shareholders ensure company’s stock has value</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Dissolution—Corporation legally terminated, either voluntarily or involuntarily</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>This can effectively occur as a result of a merger, consolidation, or acquisition</li></ul></div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Liquidation—Directors convert corporate assets into cash and/or distribute them among corporation’s creditors and shareholders&nbsp; </div> <div><ul><li>Liquidations are typically taxable events.</li></ul></div>"
"<span style=""font-weight: bold;"">Common Reasons For Involuntary (State Government- Initiated) Dissolution of Corporation (aka Common Reasons for State Govt-Initiated Dissolution of Corporation)</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Corporation failed to pay taxes within prescribed due dates</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Corporation failed to submit its annual report to secretary of state within prescribed due dates</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Corporation did not have a registered agent or office in the state for prescribed period</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Corporation’s duration (as specified in its articles of incorporation) has expired</div>"
"<span style=""font-weight: bold;"">Reasons for Court-Ordered Involuntary Dissolution of Corporation</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Corporation obtained its articles of incorporation fraudulently</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Corporate directors have abused their power or acted beyond their authority (this is called “<span style=""font-weight: bold;"">ultra vires</span>” acts)</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Corporation is insolvent</div>"
"<span style=""font-weight: bold;"">Security (and Securities Laws)</span>""Security: Investment in a common enterprise with the reasonable expectation of profit gained predominantly from others’ efforts<br><br>Securities Laws:<span style=""background-color: rgb(255, 255, 255);"">&nbsp;are really about protecting those who invest money in a company and turn the management of that company over to someone else.</span>"
"<span style=""font-weight: bold;"">Securities and Exchange Commission (SEC)</span>""<div>Created in 1934 to:<br><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Interpret and enforce securities laws</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Regulate the trade of securities</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Regulate the activities of securities issuers, dealers, underwriters, brokers, and advisers (*these regulations typically do not apply to a casual seller)</div>"
"<span style=""font-weight: bold;"">The Securities Act of 1933:</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>1933 Act regulates the sale of securities while they pass from the hands of the issuer (the entity whose securities are being sold) into hands of public investors</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span><span style=""font-weight: bold;"">Registration Statement</span>:&nbsp; Document containing</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Description of securities offered</li><li><span style=""color: rgb(197, 155, 0);"">•</span><span style=""font-weight: bold;"">Prospectus</span> (used as a selling/advertising tool to attract potential investors)</li><ul><li>Prospectus (Book): A written document filed with the SEC that contains a description of a security and other financial information regarding the company offering the security; also distributed as an advertising tool to potential investors.</li></ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Description of registrant’s business and properties</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Explanation of how proceeds from sale will be used</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Information about management of company</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Description of pending lawsuits</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Certified financial statements</li></ul></div> "
"<span style=""font-weight: bold;"">The Securities Act of 1933: Filing/Registration Process</span>""<div>&nbsp;&nbsp;<span style=""font-style: italic;"">Periods of the registration statement and prospectus filing process:<br><br></span></div> <div><span style=""color: rgb(197, 155, 0);"">•</span><span style=""font-weight: bold;"">Pre-filing Period </span>(cannot actually offer to sell securities during this period)<br><ul><li><div>Before the registration statement has been filed with the SEC.&nbsp;</div></li><li><div>During that pre-filing period, there can't be sales of securities unless an exemption applies</div></li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span><span style=""font-weight: bold;"">Waiting Period </span>(SEC reviews the filed documents during this period – issuers can make oral offers and may distribute red-herring prospectus or advertise with tombstone ad)<br><ul><li><div>Once you file that registration statement, the SEC&nbsp; reviews the documents that are filed to assure their compliance.&nbsp;</div></li><li><div>During this period of time, the company that's offering the securities basically can do certain limited types of offers to sell the securities (such as oral offers)</div></li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span><span style=""font-weight: bold;"">Post-effective Period </span>(begins when SEC declares the registration effective, and issuer can now begin offering to sell the stock to the public)<br><br><br><br><img src=""paste-02edc9b6b31b9fa5cdda99579f8fb011f31afa53.jpg""><br></div>"
"<span style=""font-weight: bold;"">The Securities Act of 1933:&nbsp;Exempt Transactions (more specifically going over Limited Offers)</span>""<div><strong>Limited Offers (book):&nbsp;</strong>securities transactions that are exempt from the registration process because they either involve small amounts of money or are offered only to sophisticated investors<br><br>3 Types of Limited Offers:<br><br>&nbsp;&nbsp;<span style=""color: rgb(197, 155, 0);"">•</span>Rule 506/Private Placement Exemption: Exempts private offerings of securities</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Unlimited number of accredited investors (institutional investors (banks, mutual funds), wealthy investors, and high-level insiders of the issuer (executive officers, directors, partners))</li></ul></div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>No more than 35 unaccredited investors (who must have expertise in securities trading)</li><li>Extra: Rule 506 is when you are only offering to accredited investors or a limited number of unaccredited investors</li></ul><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Rule 505:&nbsp; Exempts small private offerings which do not exceed $5 million in a twelve-month period and which target only accredited investors or those who, there is reason to believe, have a reasonable ability to evaluate risk</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>Rule 504:&nbsp; Exempts companies that offer no more that $1 million in securities in a twelve-month period<br><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Section 4(6):&nbsp; Exempts securities offered only to accredited investors for amount less than $5 million<br><br>*NOTE: Rule 505, Rule 504, and Section 4(6) involves small private offerings where if if you're just seeking a small amount of money you don't have to go through the registration process.<br><br><br><br><br>------------------------------------------------------------------------------<br>Extra: Exempt Transactions are transactions in which securities are exempt from the registration procedures/process (So you're able to avoid registering the security. So the securites are unregistered).<br><br><br><img src=""paste-bc0f41760dee60e7cad244c114dd6028341f3ebd.jpg""><br></div>"
"<span style=""font-weight: bold;"">The Securities Act of 1933:&nbsp;Other Common Exempt Transactions</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Intrastate Issues:&nbsp; Exempts local investors in local businesses</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Security is offered only to permanent residents of the single state where the issuer of the security resides and does most of its business</li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Re-sales of Securities:&nbsp; Exempt transactions by any person other than an issuer, underwriter, or dealer</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Average investor is allowed to re-sell without registration</li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Crowdfunding:&nbsp; Exemption for issuance of securities made through a crowdfunding process (widespread internet solicitations of small amounts from numerous investors)</div>"
"<span style=""font-weight: bold;"">The Securities Act of 1933: Liabilities</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Civil liability for failing to file a required document or not giving all required documents to all investors<br><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Civil liability for “Misstatements” in filed documents</div> <div><ul><li><span style=""background-color: rgb(255, 255, 0);"">*Does not require proof of intent </span></li><li>*<span style=""background-color: rgb(255, 255, 0);"">Does not require proof of negligence</span> or even any kind of reliance upon the misstatement</li><li>*Anyone who signs can be liable – including the independent CPAs who audit the financial statements in a registration statement and sign off on their accuracy</li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span><span style=""background-color: rgb(255, 255, 0);"">Criminal liability for anyone who uses any type of fraud </span>(<span style=""background-color: rgb(255, 255, 0);"">requires “intent”</span>) <span style=""background-color: rgb(255, 255, 0);"">in </span>connection with <span style=""background-color: rgb(255, 255, 0);"">the issuance of a security</span></div>"
"<span style=""font-weight: bold;"">The Securities Act of 1933: Defenses</span>""<div><span style=""font-style: italic;"">When potential liabilities arise under the Act (such as for misleading investors), certain defenses may apply:<br><br></span></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Defendant can escape liability by proving the purchaser knew of misstatement or omission when security was purchased<br><br></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Certain defendants (including auditors but not issuers) may raise “due diligence defense” to escape liability<br><br><br><br><img src=""paste-1208c81b758ffc63ee07c75c9096b57ab667a833.jpg""><br></div>"
"<span style=""font-weight: bold;"">The Securities Exchange Act of 1934:&nbsp; Purpose</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Purpose is to protect investors after the original registration and issuance of a security once the security is being traded</div> <div><span style=""color: rgb(197, 155, 0);""><br>•</span>1934 Act:</div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span> Requires registration of securities exchanges, brokers, dealers, etc.</li><li><span style=""color: rgb(197, 155, 0);"">•</span>Requires periodic disclosure of material information by issuers</li><li>•Regulates insider transactions</li></ul><br><br><img src=""paste-a8492348027dd850c9a0038a8e2131dd64a85b4f.jpg""><br></div> "
"<span style=""font-weight: bold;"">The Securities Exchange Act of 1934:&nbsp; Applies to the Following</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Any company whose shares are traded on a national exchange<br><br><img src=""paste-1f48bf2743e9b92b6155ecd27bc98f990b32a279.jpg""><br></div>"
"<span style=""font-weight: bold;"">The Securities Exchange Act of 1934:&nbsp; Fraud and Market Manipulation</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Section 10(b):&nbsp; Prohibits use of “manipulative and deceptive devices” to bypass SEC rules and <span style=""background-color: rgb(255, 255, 0);"">creates civil liability </span>for the conduct<br></div> <div><ul><li><span style=""color: rgb(197, 155, 0);"">•</span>Protects against fraud associated with the purchase or sale of securities</li><li><span style=""color: rgb(197, 155, 0);"">•</span><span style=""background-color: rgb(255, 255, 0);"">Requires “intent” </span>to deceive <span style=""background-color: rgb(255, 255, 0);"">and reliance </span>by injured party</li><li><span style=""background-color: rgb(255, 255, 255);""><span style=""color: rgb(197, 155, 0);"">•</span>Applies even if the securities were exempt from registration</span></li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Rule 10(b–5) prohibits a person with inside information (nonpublic, confidential) from using the information when trading securities with a person without the information.<br><ul><li>ME: Rule 10(b-5) prevents insider trading</li></ul><br><br><br><img src=""paste-110b5d47082a20371a21e2ae62013642c243dd7a.jpg""><br></div>"
"<span style=""font-weight: bold;"">The&nbsp; Securities Exchange Act of 1934:&nbsp; Insider Trading<br>-Define:<br>a. Insider<br>b. Disclose-or-Refrain Rule<br>c. Tippees vs Tipper</span>""<div>•<span style=""font-weight: bold;"">Insider</span>: a<span style=""background-color: rgb(255, 255, 0);"">nyone with confidential </span>corporate <span style=""background-color: rgb(255, 255, 0);"">information for a corporate purpose</span></div><div><ul><li>Insider (prof): qualifies anyone with confidential information that's not been made public.</li></ul></div> <div>•<span style=""font-weight: bold;"">Disclose-or-refrain rule</span>:&nbsp;insider must either disclose the information before trading or refrain from trading<br><br></div> <div>•<span style=""font-weight: bold;"">Tippees</span> receive inside information from <span style=""font-weight: bold;"">Tipper<br><br></span> </div> <div>•A tipper (person who passes along the information) is liable for his own profits, profits made by a tippee, and profits made by other tippees down the chain</div> <div><br>•Tippee is also generally liable if knew or should have known the information was nonpublic<br><br><br><img src=""paste-848d43898003596f414025c432dc36c169de09db.jpg""><br></div>"
"<span style=""font-weight: bold;"">The Securities Act 1933 / 1934: Enforcement</span>""<div><span style=""color: rgb(197, 155, 0);"">•</span>Administrative Action (such as revocation of registration)</div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Injunctive Action (similarly, administrative Cease and Desist Orders)<br><ul><li><div><span style=""background-color: rgb(255, 255, 255);"">Injunction (extra; Prof): a court order that either forces someone to do something or forces them to stop doing something.</span></div></li></ul></div> <div><span style=""color: rgb(197, 155, 0);"">•</span>Criminal Prosecution</div> <div>*SEC has power to impose<span style=""background-color: rgb(255, 255, 0);""> civil penalties (</span>potential fines up to $5,000,000), criminal penalties (prison sentence up to ten years), or both.</div> <div><br>*These (those enforcements listed above) are <span style=""background-color: rgb(255, 255, 0);"">often settled through consent orders.</span><br><br></div> <div>*Aggrieved individuals can also sue for civil liability for failure to comply with the Act.<br><br><br><br><br><br><br><br><br><img src=""paste-5ef22d96afc2ef266ee9045b55de11357cb9dcf7.jpg""><br></div>"