Exam 3 Review

What is the liability for sole proprietorships?
Covenant of good faith and fair dealing in franchisor/franchisee contracts as to the additional franchises given by the franchisor, and what complaint the franchisee may have in regards to this? (page 695)
Formation of sole proprietorships?

1. Written (or Electronic) Disclosures
2. Reasonanle Basis for Any Representations
3. Projected Earnings Figures
4. Actual Data
5. Explanation of Terms

How profits and losses are shared in a partnership? (pg 705)
What's a partner's liability to the partnership for actions taken by the partner?
So long as the partner is attempting to conduct business, even if negligence causes damage to the partnership, that partner is not liable to reimbursement of the partnership unless they engage in fraud, gross negligence, or violation of fiduciary duties. (pg 710)
When a partner leaves a partnership, dissociates, does the partnership continue?
What is dissociation?

For 2 years after a partner dissociates from a continuing partnership, the partnership may be bound by the acts of the dissociated partner based on apparent authority. A dissociated partner may be liable for partnership obligations entered into during the two-year period following dissociation. To avoid this, the partnership should notify its creditors, customers, and clients of a partner's dissociation. Either the partnership or the partner can file a statement of dissociation in the appropriate state office to limit the dissociated partner's authority to 90 days after the filing.

A general parter assumes management responsibility for the partnership and has fully responsibility for the partnership and for all its debts. A limited parter contributes cash or other property and owns an interest in the firm but is not involved in management responsibilities. A limited partner is not personally liable for partnership debts beyond the amount of their investment. If a limited partner takes part in the managment of the business, however, they may forfeit that limited liability.

A partner newly admitted to an existing partnership is not personally liable for any partnership obligations incurred before the person became a partner. Their liability to the partnership's existing creditors is limited to their capital contribution to the firm.

All partners have equal rights in managing the partnership. Each partner has one vote in management matters regardless of the proportional size of their interest in the firm.

Taxation treatment? (pg 726)
Joint ventures rules? (pg 733)
LLCs are entities like partnerships, they can own properties and sue and be sued.
Management of LLCs, if the articles of (incorporation) don't say who is in charge with management, most states will hold that the members will be managers. (pg 727)
The advantage of the LLC is that members are not personally liable to the debts of the company, only liable as far as their contributions are.

Tax treatment with corporations is double taxation, but there is a way around that. What is it?
Registered agents, who are they and what is their role in the formation of corporations?
What information must be given in the articles of incorporation that must be filed with the secretary of state? (pg 748-749)
Types of corporations, review close corporations. (pg 744-745)

What is the role of directors? Shareholders? Officers?
Which party from those roles would be involved in certain activities?
Piercing the corporate veil, what is it?
What is done to insulate directors (from liability)? As long as they are acting in good faith, fully informed, no pecuniary interest in the outcome.
Business judgement rule?
Conflicts of interest between directors personal business and the corporation's business...how can that be handled? Via disclosures by the director (pg 766)
Shareholders rights - shareholders can sue on behalf of the corporation. Referred to as shareholders derivative suit.
Paying dividends... review illegal dividends (pg 771)
Shareholders voting - cumulative voting, what is it? (pg 769-770) The purpose is to give minority shareholders representation on the board
Shareholders right to inspect corporate books and records... review this.
Shareholders, generally, don't have management rights. They vote for directors. They vote on mergers, acquisitions, dissolution, amending the bylaws or articles of incorporation.

What is a merger? - a new company emerges. it will be responsible for all assets and debts.
What is a consolidation? - a surviving company remains. it will be responsible for all assets and debts.

Appraisal right - the right to be paid the fair value of the shares they held on the date of the merger or consolidation.

RMBCA provides a simplified procedure for the merger of a substantially owned subsidiary corporation into its parent corporation. This can be accomplished without the approval of the shareholders of either corporation.

Parent corporation must own at least 90% of the outstanding shares of each class of stock of the subsidiary corporation. The board of directors must approve the plan, it is filed with the state, and copies are sent to each shareholder in the subsidiary.

The process of acquiring control over a corporation by purchasing a substantial number of the voting shares of a target corporation. This is done via a tender offer from the acquiring corporation directly with the shareholders of the target corporation.

1934 act requires companies to regularly report to the SEC about stock that has already been issued and is trading. Which companies have to do that? Companies with more than $10 mil in assets, or more than 500 shareholders, or any company that has their stock on the national securities exchange. 1933 Act requires new issues of securities to be registered.

It can be a stock or bond, but can also be an investment in commodities. A security is anything where there is an investment in common in cash by numerous investors, where the work to produce a profit is going to be done by other persons (not the investors). The investor has no control over the production of profits.

The person must knowingly be committing fraud in the purchase or sale of securities.

1. Tipper/tippee theory: anyone who acquires inside information as a result of a corporate insider's breach of their fiduciary duty. anyone that finds out, knowing that it is insider information, is liable.
2. Misappropriation theory: any individual who wrongfully obtains inside information and trades on it for their personal gain (temporary employees)

Regulation D
-Rule 504: Noninvestment company offerings up to $5 million in any 12-month period -Rule 506: Private noninvestment company offerings in unlimited amounts that are not generally advertised or solicited. Unlimited number of accredited investors and 35 unaccredited investors.

GAAP, GAAS - standards CPAs should follow. If these are not followed, it is prima facie that the CPA is negligent.
Constructive fraud, is gross negligence. You have knowledge that the information you're presenting is not true only because you made no attempt to verify it (wreckless).
Seander - means you know what you're doing (fraud)

Primary benefit test -
Working papers - who owns them? The accountant. As to disclosure of the workpapers, the accountant cannot do so without the consent of the client or court order.
Liability under the securities act of 1933 - section 11 - accountant is liability for including misstatements or ommissions in the registration statements to anyone who purchased securities under those statements. the suer only needs to prove they suffered a loss on the security in question.
under section rule 10b anad 10b5 - requires knowledge to be liable. the party you're sueing must have knowledge of the fraud or errors.
GAAS - if youre doing an audit and you miss something, are you liable? no, if you followed GAAS.
in order to sue an accountant for errors in the financial statements (from the perspective of a lender, lets say) you have to show that the accountant was negligent and that you relied upon it.
Working papers - these cannot be transfered if the client's business is purchased by another CPA unless the client consents. (one CPA has the working papers, another CPA is now their CPA, but cannot get papers from the old CPA unless the client consents).
Client records - on a client's request, an accountant must return any of the client's records or journals. failure to do so results in liability.

Accountants have a "duty to correct" misstatements that they discover in their certified opinions. If an accountant violates the duty to correct, the accountant becomes primarily liable under Section 10(b) and Rule 10-b5.

Investors, shareholders, creditors, corporate managers and directors, and regulatory agencies-rely on the opinions of auditors when making decisions. The requirement of privity of contract is not always clear. Ultramares rule, Reasonably Foreseeable Users rule.

Majority rule - you owe a duty to anybody that you know is going to be reliant upon your work (as a professional). Such as a bank. The bank may have an action against the accountant for negligence in the preparation of financial statements.