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[LAW] Business Law Summary
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Business Law Summary

The Law

Public law – the government is an actor (e.g. criminal law, administrative law)

Private law – the government is not an actor (e.g. contract law)

Federal law:

  • The Constitution
  • Federal legislation
  • Treaties – same force as a law passed by Congress, once ratified
  • Federal regulation – agencies such as the EPA or SEC

State law:

  • Common law
  • Statute law
  • UCC

Business Entities - Corporations

Types:

  • Private corporation for profit
  • Government corporations (e.g. schools)
  • Not-for-profit corporations
  • Professional corporations

Advantages:

  • Limited liability
  • Baseline provisions
  • Attractive to investors
  • Attractive to employees

Disadvantages:

  • Double taxation
  • Complexity; recordkeeping

Subchapter S corporations:

  • No double taxation
  • No more than 35 stockholders, all human and US citizens

Forming a Corporation

Incorporators file the Articles of Incorporation with the state

  • Name & addr of corp
  • Name & addr of reg agent
  • Purpose
  • Number of shares

File an annual report annually

Articles are subordinate to state law. Need a vote of the shareholders to amend.

Bylaws (procedural) are subordinate to Articles. Need a vote of the Board to amend.

Corporate Structure & Decisionmaking

Stockholders – elect directors annually by vote or proxy

  • Right of access to information
  • No right to dividends
  • Right to an appraisal (Dissenter’s Rights)

Directors – appoints officers; decides major decisions for the corporation; defines committees

Officers – make day-to-day decisions

Duties of managers (directors & officers):

  • Trust (fiduciary duty) – act in the best interests of the shareholders
  • Loyalty – corporate opportunities
  • Care

Business judgment rule – can’t sue if the manager used good judgment.

Business Entities – LLCs

Advantages:

  • No double taxation
  • More tax flexibility
  • Limited liability
  • Baseline provisions

Disadvantages:

  • More complex than corporations, so legal fees higher up front
  • Hard to find investors

LLC Structure & Decisionmaking

Member rights:

  • Right of access to information
  • No right to dividends
  • Right to an appraisal (Dissenter’s Rights)

Differences:

  • Members, not stockholders, holding “ownership units,” not stock
  • Managers, not directors/officers
  • Can have different rights for different members, and can keep it all private

 

 

Forming an LLC

Members file the Articles of Organization with the state

  • typically contains nothing of importance
  • can only be changed by a membership vote

Operating Agreement is the main document

  • covers rights & relationship among members
  • not necessary to file with the state

Business Entities – Partnerships

An agreement among 2 or more people/entities to conduct business together

Types:

  • General partnership
  • Limited partnership
  • Limited liability partnership

General Partnerships

Advantages:

  • No double taxation – same taxation as LLCs (“disregarding the entity”)
  • No state filings
  • Baseline provisions

Disadvantages:

  • No limited liability
  • Any partner can bind the partnership
  • Partnership dissolves upon withdrawals, deaths, expulsions, or bankruptcy of any partner

Partners owe fiduciary duties to each other

Can have a managing partner.

A joint venture is a type of GP, limited in purpose and lifetime.

Limited Partnerships

General partners – unlimited liability; fiduciary duty to limited partners

Limited partners – limited liability; no control

Limited partnership agreements must be filed with the state

 

Limited Liability Partnerships

For licensed professionals

Essentially identical to LLCs

Securities

A security is:

  • An investment
  • In a common enterprise
  • With the expectation of profits

Regulations (both state & federal) cover:

  • The sale of securities
  • Remedies
  • Disclosure
  • Broker/dealer regulations

Short-swing profits – capital gains w/in 6 months

Securities Forms

S-1 – IPO

10-K – annual report

10-Q – quarterly report

8-K – current report

Forms 3, 4, & 5 – insider reporting

Sarbanes-Oxley

CEO & CFO must sign certifications of reports

Civil & criminal liabilities for falsehoods

No loans to insiders

Disgorgement of compensation

Real-time reporting

Sale of Securities

NYSE & Nasdaq

Bulletin Board

Pink Sheets

Agency

Express agency

Implied agency

Apparent agency

Ratification

Respondeat Superior – employer is liable for harm caused by agents/employees while on the job

 

 

Civil Rights Act

Protected classes – race, color, religion, sex, national origin

EEOC enforces

Discrimination bad

Affirmative action okay

Sexual harassment bad

ADA Act

Disability is a physical or mental impairment that substantially limits life abilities.

Employee must be able to perform the essential functions

Employer must make reasonable accommodations

Employee cannot be an affirmative danger to other employees

ADEA

Protected class – age 40 – 70

Discrimination bad

Mandatory retirement bad

Seniority systems okay

OSHA Act

Administered by OSHA

Very broad powers

Real Property – Ownership

Ownership in Severalty – only one owner

Tenancy in Common – several owners with equal rights to use the property

Joint Tenancy – when one owner dies, his/her rights revert to the surviving owners

Tenancy by the Entirety – Joint tenancy for married couples; can only be terminated by agreement of both

Real Property – Leases

Tenancy at will – either party can terminate any time

Tenancy for xxx – specified period

Tenancy by sufferance – the tenancy is over, but the owner & tenant agree to go on

 

Real Property – Buying

State law governs buying real property

Warranty deed – the seller guarantees no one else has a claim

Quit-claim deed – the seller transfers his/her interests

Encumberances:

  • Mortgages
  • Covenants – e.g. can’t paint your house purple
  • Easements – right to access

Land Use Regulation

Zoning

Covenants

Eminent Domain

CERCLA – Superfund Act

Intellectual Property

Personal property

Protected by federal law

Trade secrets

Trade secrets:

  • Has commercial value
  • Is kept confidential
  • Is not generally known

Patents

Patents (product/process, design, & plants):

  • New
  • Useful / ornamental
  • Non-obvious

Copyrights

Copyright:

  • Original
  • Expressed in a tangible medium
  • Creative

Fair use of copyright material:

  • Noncommercial copying
  • News reporting
  • Teaching
  • Parodies

Trademarks

Distinctive trademarks used in geographic areas

 

 

 

Business Contracts

Contract law is state law (either UCC or common law)

 

Forms of Contracts

Bilateral – a promise for a promise

Unilateral – a promise for an act

5 Requirements for a Contract

1.      Offer & acceptance

a.       Regarding price quotes: “I’ll take it” is the offer and “Ok, it’s yours” is the acceptance

b.      Print ads are considered offers

c.       “You break it, you bought it” is not an offer because stores exist for customers to examine merchandise, and you cannot accept by doing something you would have done anyway.

d.      Mailbox rule: Acceptance is valid when mailed; revocation is valid when received

2.      Consideration

a.       Courts won’t judge adequacy (i.e. market value)

b.      Past consideration is not consideration

c.       Moral obligations are not consideration

d.      Preexisting duties are not consideration

e.       Part payment of a debt is not consideration

f.        Promise to pay a debt discharged in bankruptcy or beyond the statute of limitations is consideration

g.       Promise to pay a charity is consideration

3.      Legal capacity to contract (e.g. not a minor, not drunk to incapacitation)

4.      Must have a legal purpose

5.      Must be in the form required (e.g. in writing)

Types of Contracts

Express – the agreement is explicit

Implied – the agreement is implied

Quasi – no contract, but a court is doing something to prevent unjust enrichment

Status of Contracts

Executed – all of the stuff is done

Executory – not all of the stuff is done

Statute of Frauds

Contracts that must be in writing:

1.      Transfer of any interest in real estate

2.      A promise to pay the debt of another

3.      Any contract where the terms cannot be completed within one year

Other Contract Issues

Discharging contract obligations:

1.      Subsequent illegality

2.      Objective impossibility – it is impossible to fulfill the contract (e.g. the goods are destroyed)

3.      Commercial impracticability – it is practically impossible to fulfill the contract

4.      Frustration – the entire purpose of the contract no longer exists.

Unconscionable – unequal bargaining power w/harsh effects

Mistakes:

1.      Bilateral mistake – no contract.

2.      Unilateral mistake – contract. Buyer beware

Compensatory Damages

General damages – not tied to a specific calculation (e.g. ‘lost profit’)

Specific damages – tied to something specific (e.g. ‘medical bills’)

Must show:

1.      Causation

2.      Certainty – i.e. the damages are not speculative

3.      Reasonable forseeability

4.      Mitigation – the damaged party is trying to keep the damages under control

Compensatory damages do not include legal fees

Punitive Damages

Used as a deterrent, and to back-end compensation where compensatory damages won’t quite do it.

Liquidated Damages

Damages calculated ahead of time, when the parties first enter into a contract. Courts don’t usually like these, because they look too much like a penalty.

Non-Monetary Relief

Specific performance

·        e.g. sale of land (must perform; cannot simply give back the money)

·        Not for personal svcs contracts (13th Amendment)

·        Injunction – court order to do or not do

·        Rescission – unwinding the contract

M&A Contracts

State law governs basic M&A, but federal law governs public company aspects and antitrust aspects

Two types of purchases:

1.      Asset purchase

2.      Stock purchase

Asset Purchase

Buyer does not assume liabilities

Tax treatment – stepped up basis in assets

Cannot purchase licenses this way.

Stock Purchase

No tax realization

Can purchase licenses and contracts this way

Buyer assumes liabilities

M&A Process

1.      Companies come together, usu. via brokers

2.      Initial negotiations & discussions – public companies must disclose this (to prevent insider trading)

3.      Letter of intent – not enforceable

4.      Negotiate final purchase agreement & sign

5.      Closing

M&A Terms

Contingent consideration – a portion of the payment is contingent upon certain revenue goals (also called “earn out”)

Covenants – promises, e.g. to run the business in the ordinary course until the deal closes

Conditions – e.g. if a fire destroys your property, I won’t buy.

Representations & Warranties – statements about the seller’s business (e.g. no pending lawsuits)

Indemnification

Other M&A Issues

Market out exeption -- No appraisal / dissenters’ rights for public companies, (where there is an obvious valuation mechanism, i.e. the stock market)

Some states have anti-takeover laws

Must fill out governmental consents, such as Hart Scott Rodino forms

Warranties

Governed by UCC (state law) and Magnuson Moss Warranty Act (federal)

Types:

1.      Express – created by any statement of fact about a good that’s being sold:

a.       Description (not vague advertising hype)

b.      Sample

c.       Model

2.      Implied warranty of merchantability – minimum quality guarantee

a.       Only applies to sellers of goods like the one in question (no private sales)

b.      Goods must also be adequately contained, packaged, and labelled

c.       Can be disclaimed if done conspicuously

3.      Implied warranty of fitness – guarantee that the goods are suitable for the seller’s purpose

Magnuson Moss Warranty Act

Warranties must be prominent and in plain English.

Express warranties must be either ‘full’ or ‘limited’

Limited warranty must specify the scope and length of coverage, as well as procedures the consumer must follow to make a claim.

Product Liability

Major theories:

1.      Negligence – failure in a duty to take reasonable care to only design/manufacture/etc. non-defective products. Counterarguments:

a.       Assumption of risk

b.      Contributory negligence

2.      Strict liability – liability regardless of duty owed

a.       defective or

b.      unreasonably dangerous.

c.       Foreseeable misuse is not a defense

3.      Breach of warranty –

Joint & Several liability – the plaintiff can collect damages from whomever is able to pay.

Secured Transactions

Secured transaction - A debt that is backed by something that can be sold to pay back the creditor

Security – the collateral

Secured party – the creditor

Security Agreement

The agreement in which the debtor agrees to pay the creditor.

Must reasonably identify the collateral.

Creates a “security interest”

Secured party must give value in exchange for the agreement

Debtor must have rights in the collateral

Can only be verbal if the secured party takes possession of the collateral

 

 

Ways to Perfect the Security Interest

1.      Financing Statement:

  1. Perfects the security interest by giving the secured party the right to enforce its interest against 3rd parties to whom the property may be transferred.
  2. Filed with the state. First party to file gets priority on the property.
  3. Lapses after five years if not continued
  4. Creditor gives a Termination Statement when debt is paid.

2.      Certificate of title – must be marked to show the secured party’s interest

3.      The secured party takes possession of the property (risk of loss is on the debtor)

4.      Use of a purchase-money security interest

Remedies for the Secured Party

1.      Repossession (no breech of the peace)

2.      Disabling the collateral

3.      Sale of the collateral

a.       Secured party gets money owed, plus expenses

b.      Sale must be done reasonably

   

 

 

ihs_buffett@naver.com

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