CRR Test 2 Review PDF

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CRR TEst 2 Review guide...

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CRR TEST 2 REVIEW AGENCY ● Principal: someone who authorizes another to act in his or her place ● Agent: a person who has legal authority to act for another ○ Examples of principal/agent relationships ■ Client/attorney ■ Employer/employee ■ citizen /elected official ■ Shareholder/corporate management ■ homeowner/contractor ● The Agency Relationship ○ A principal interacts with an agent for purposes of obtaining that person’s assistance ○ Agents undertake responsibility on behalf of a principal ○ The agent has authority to interact with third parties on behalf of the principal ○ The scope of the agent’s authority is defined by contract ● Types of Authority ○ Actual authority ■ Specific instructions, whether spoken or written, given by an employee create actual authority ○ Implied authority ■ Implied authority can be inferred from the acts of an agent who holds a position of authority or who had actual authority in previous circumstances ○ Apparent authority (third party asserts) ■ Apparent authority is the power of an agent to act on behalf of a principal, even though that power is not expressly or impliedly granted. This power arises only is a third party reasonably infers, from the principal’s conduct, that the principal granted such power to the agent ○ Ratification (principal legitimizes agent action taken outside the scope of authority) ■ When a principal voluntarily agrees to honor an agreement which would otherwise not be binding due to agents lack of authority ● Duties of Agents to the Principal ○ The duty of loyalty ○ The duty of performance ○ The duty of notification (or information) ○ The duty of obedience ○ The duty of accounting ● Duties of Principal to Agent

○ Duty of compensation ○ Duty of indemnification ○ Duty of good faith and fair dealing (including safe working conditions) ○ Duty to meet contractual obligations (cooperation) ● Principal’s Liability for Agent’s Acts ○ Tort Liability ■ Was the agent acting within the scope of the employment? ■ Does respondeat superior (or vicarious liability) apply? ● Was the individual an employee when the injury occurred? ● Was the employee acting within the scope of his or her employment? ● Were the employee’s activities a benefit to the employer? ■ Was the agent on a frolic or detour? ● Was the employee on an independent journey outside the scope of employment or authority? ● Was the journey a mere departure from an assigned task but still within the scope of the agency? ○ Criminal Liability ■ Principals are generally immune from the criminal acts of their agents ■ Was the agent acting within the scope of employment? ■ Did the principal direct, approve, or participate in the crime? ■ Did the crime fit into one of the exceptions to general immunity? ● Independent Contractors (know difference between employee and independent contractors) ○ An independent contractor is a worker who retains control over how they do their work ○ Independent contractors are NOT employees of the principal ○ Examples: ■ Doctors, lawyers, accountants, plumbers, interior decorators, landscapers ○ Benefits/Downsides of Independent contractor classification ○ Benefits/downsides of employee classification ● Independent Contractors - State Law ○ The “ABC’ Test ○ The company bears the burden of proving the worker satisfies the following: ■ The worker is free from control and direction of the hiring entity in connection with the performance of the work, both under the contract for performance of the work and in fact ■ The worker performs work that is outside the course of hiring entity’s business; and ■ The worker is customarily engaged in an independent established trade, occupation, or business.

○ Federal Tax Factors - IRS 20 Level of Instruction

Amount of Training

Degree of Business Integration

Extent of Personal Services

Control of assistants

Continuity of relationship

Flexibility of schedule

Demands for full-time work

Need for on-site services

Method of payment

Requirements for reports

Sequence of work

Right of termination

Payment of business or travel expenses

Provision of tools and materials

Investment in facilities

Realization of profit or loss

Work for multiple companies

Availability to public

Control over discharge

● Termination of an Agency ○ Termination by Act of the Parties ■ Lapse of Time ■ Purpose Achieved ■ Occurance of a Specific Event ■ Mutual Agreement ■ Revocation or Renunciation ○ Termination by Operation of Law ■ Death or Insanity ■ Impossibility ■ Changed Circumstances ■ Bankruptcy ■ Act of War

CORPORATIONS AND CORPORATE GOVERNANCE ● Types of Business Entities ○ Sole Proprietorships ○ General Partnerships - personally liable for partnership’s debts ■ May not transfer his or her interest in the company ○ Hybrid Entities ■ Limited Partnerships (LPs) - liable only for her investment ● Not permitted to be involved in the management or operations of the entity ● May transfer his or her interest in the company without dissolving the company (pursuant to agreement) ● Limited partner’s name may not be used in the entity name ■ Limited Liability Companies (LLCs) - used by everybody else ■ Limited Liability Partnerships (LLPs) - used by professionals - law firms, accounting firms, etc. ■ LLCs and LLPs are defined by Articles of Incorporation ● A member is someone who owns an interest in an LLC ● A manager is someone elected to manage the operations of the LLC ○ Corporations ■ Subchapter S Corporations (S-Corps) ■ Traditional corporations ■ Certified B Corporations (B-corps) ○ Franchises - is a corporate arrangement in which a small business owner (the franchisee) licenses intellectual property from another company (the franchisor) in order to sell goods or services ■ Chain-Style - the franchisee operates under the franchisor’s trade name ■ Manufacturing - the franchisee manufactures the franchisor’s product according to the franchisor’s formula and then sells the product independently but using the franchisor’s name ■ Distributorship - the franchisee buys a license to sell the franchisor’s products ■ If the franchisor exercises too much control over the franchisee, it loses the legal protections offered franchisors and risks liability under the theory of respondeat superior ● Deciding What Corporate Form ○ Formation ○ Continuity and Stability (dissolution) ○ Managerial Control ○ Liability ○ Taxation

SOLE PROPRIETORSHIP Formation

● Start doing business

Continuity and Stability

● Proprietor can continue or dissolve company whenever she wants

Managerial Control

● Entirely within the proprietor's discretion

Liability

● Proprietor is personally liable for all debts and other liabilities

Taxation

● All business income is personal income

PARTNERSHIPS Formation

● Automatic based on business conduct (or agreement)

Continuity and Stability

● Dissolved when any partner leaves

Managerial Control

● Equal between partners (default) ● By agreement (defined by contract)

Liability

● Personal liability for all debts and liabilities ● Joint and several liability

Taxation

● All business income is personal income, divided equally

LIMITED PARTNERSHIPS Formation

● File a certificate of partnership with the relevant state agency ● Create a partnership agreement

Continuity and Stability

● Dissolved when the general partner leaves

Managerial Control

● General partner controls operations and strategy ● Limited partner has no management rights

Liability

● Limited partners are only liable for the amount of their investment ● General partners are personally liable for the partnership’s debts

Taxation

● All business income is subject to personal tax rates

LLCs and LLPs - are created by statute but are creatures of contract Formation

● File with the government, usually Department of State

● Articles of Organization do not need to be filed with the state Continuity and Stability

● Dissolved when a member leaves unless defined by contract

Managerial Control

● Equal management amongst members unless defined otherwise by contract

● LLC may be member-managed or run by managers Liability

● Members are agents but are liable only to the extent of their investment

● Member managers may be indemnified by the company Taxation

● Pass-through entity; all income is taxed as personal income

CORPORATIONS Formation

● File with the state ● Specific information and paperwork varies by state

Continuity and Stability

● Perpetual ● Termination process defined by agreement

Managerial Control

Liability

Managed by officers ● Officers manage day to day operations of the corporation ● They include the “C-level” officers (CEO, CFO, COO, etc) ● Officers have fiduciary duties to the corporation Officers are elected by the directos ● Directors established the goals and strategic vision for the corporation ● They include the President, VP, Treasurer, and Secretary ● Directors have fiduciary duties to the corporation Directors are elected by shareholders ● Shareholders own the corporation

● Shareholder liability limited to investment ● Shareholders may be held liable under the doctrine of piercing of the corporate veil ○ If the corporation is merely an alter-ego of the owners and the corporate form is being used fraudulently, the veil will be pierced

Taxation

● Corporate income is taxes pursuant to corporate tax rates ● Shareholders are taxes on distributions and/or profit realized on sale of stock

S-CORPS - statutory creation, subject to the terms of Chapter S of the IRS Code Formation

● File documentation with the government - usually the

Department of State Continuity and Stability

● Exists in perpetuity so long as all statutory requirements

Managerial Control

● Corporate management form - shareholders elect directors, who appoint officers

Liability

● Shareholders are limited in liability to their investment ● May vary by stockholder’s agreement

Taxation

● All business income is taxed at individual rates

● Corporations ○ Domestic Corporation = one incorporated in-state ■ Usually they are searchable on a state’s website ○ Foreign Corporation = one incorporated out-of-state ■ Subject to regulations and fees when doing business in other states ○ Alien corporation = one incorporated abroad ■ Subject to most of the same regulations as foreign corporation ○ Closely-held corporation ○ Public corporation ○ Fiduciary duty ■ The power and obligation to act for another under circumstances which require total trust, good faith and honesty ■ Avoid self-dealing and conflicts of interest ■ Duty higher than that of a casual businessperson CORPORATE GOVERNANCE ● What governs corporate behavior? ○ State charters ○ State and federal laws ○ Stock exchange listing standards ○ Corporate governance policies ● Corporate Governance is the exercise of authority over members of the corporate community based on formal structures, rules and procedures ○ Align interests ○ Distribute power ○ Settle disputes ● B-corps - corporations that have voluntarily become legally required to consider the impact of their decisions on their workers, customers, suppliers, community, and the environment ● Traditional vs. B-Corp

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○ Traditional - the purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware ○ B-Corp - the purpose of the corporation is the engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware and to promote the best interests of those materially affected by the corporation’s conduct and the public benefit of reducing food waste and promoting education regarding food system issues. Stockholder Rights ○ Sell stock ○ Vote ○ Receive information ○ Receive dividends ○ Sue ○ Residual assets in bankruptcy Shareholders have the right to propose resolutions at the annual meeting ○ Sponsors must own $2000 or more of company equity ○ Sponsor may not propose more than one resolution per year ○ Resolution cannot exceed 500 words and must be submitted at least 120 days before the annual meeting ○ Sponsor must appear at the meeting to present the resolution Corporation can reject resolution without consideration ○ 13 enumerated reasons ○ Rejection must be approved by the SEC-SEC Rule 14a-8 Board of Directors ○ Inside Director - a director who is also an officer of the company ○ Outside Director - a director who is not otherwise employed by the company ○ Independent Director - a director who is not otherwise employed by the company and has no important business dealings with the company other than sitting on the board ○ Committees - boards do their work via committees (audit committee, compensation committee, sustainability committee, etc. Board of Directors - Functions ○ Approve the issuance of securities ○ Review and approve company’s goals and strategies ○ Select CEO, evaluate his or her performance, remove CEO if necessary ○ Advise and counsel management ○ Create governance policies for company, including compensation ○ Evaluate performance of individual directors, board committees, and the board (self-regulating) ○ Nominate candidates for election as directors

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○ Exercise oversight of ethics and compliance programs Securities Act of 1933 (the ‘33 Act) ○ Register Securities ○ Provide financial information to investors Securities Act of 1934 (the ‘34 Act) ○ Created SEC ○ Required regular financial disclosures The Implosion of Enron ○ Off-balance sheet partnership created by Andy Fastow (CFO) was approved by the Board despite conflict of interest ■ Fastow was both a manager at Enron and an investor in an outside entity that bought and sold asset with Enron ■ Fastow personally netted $30,000,000 from those transactions ○ Approved partnerships concealed Enron’s true financial situation ○ Ken Lay (Chairman of the Board) and Jeff Skilling (CEO) fostered a climate of illegal activity ○ Board investigative committee absolved the Board of sole responsibility ■ “severely hampered by the fact that significant information was withheld from them” ■ The Board “did not fully appreciate the significance of some information that came before it” ○ Senate investigation was less forgiving ■ Excessive executive compensation ($430,000,000 in bonuses versus entire net income $975,000,000) ■ “The Enron board failed to provide the prudent oversight and checks and balances that its fiduciary obligations required and that a company like Enron needed” Sarbanes - Oxley (SOX) ○ Congress responded to Enron with the Sarbanes-Oxley in 2002 ■ Public Company Accounting Oversight Board ■ Audit firms cannot also consult; audit firms must rotate every 5 years ■ Companies must have audit committees with a financial expert ■ CEO and CFO must personally guarantee accuracy of financial disclosures ■ Must reveal off-balance-sheet transactions ■ Board is forbidden from approving personal loans for company executives ○ 4 years after SOX, Lehman Brothers was in the news ■ Subprime mortgages ■ Commercial real estate ■ High-yield bonds ■ Leveraged loans ■ Mortgage backed securities

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■ Fraud Lehman concealed its true financial situation from everybody, using accounting tricks Lehman incentivized risky investment by making stock a large part of compensation and requiring employees to hold stock awards for at least 5 years Fall of 2008, Bear Sterns failed and was saved by the government People freaked out and there was a run on Lehman’s holdings… Lehman didn’t have enough in reserve to pay out withdrawals ■ Stock fell from $60+ in January to $3 in September Dodd-Frank - focused on financial reform but included corporate governance ■ Executive compensation must be submitted to stockholders for approval but vote is not binding ■ Stockholders must be allowed to vote on executive special compensation in case of change of control ■ Executive compensation committee must be independent directors ■ Proxy statements must disclose relationship between executive compensation and corporate financial performance ■ Executive compensation must be recouped if financial performance and reporting are restated

BUSINESS ETHICS ● Outcome-based ethics (utilitarianism) ○ Greatest good for the greatest number of people ○ The ends justify the means ● Duty-based ethics (deontology) ○ There are fundamental ethical rules that must always be followed ○ Social contract ● Utilitarianism is the ethics theory that the happiness of the greatest number of people in the society is considered the greatest good ○ An action is morally correct if its consequences result in happiness (the absence of pain) and wrong if it ends in unhappiness (pain) ○ Because the link between actions and their happy or unhappy outcomes depends on the circumstances, no moral principle is absolute or necessary in itself under utilitarianism ○ Utilitarianism is a theory of moral relativism ○ Utilitarians oppose policies that aim to benefit only a small social, economic or political minority ○ Cost/benefit analysis ● Utilitarianism and the Invisible Hand of the Free Market ○ Free and competitive markets are the best means for attaining utilitarian goals ○ Free markets accomplish the greater good most efficiently by allowing individuals to decide for themselves what they most want and then bargain for these goods in a free and fair market ● Public Policy approach is more regulation-based ○ The legislative branch establishes public goals that we assume will maximize overall happiness ○ The administrative branch executes the policies designed to fulfill those goals ○ Government regulation will lead to business activities that contribute to the overall good ● Duty-based Ethics ○ Fundamental rules and principles create obligations that bind us ■ Legal rules ■ Organizational Rules ■ Role-based rules ■ Professional rules ○ Ethical duties are categorical imperatives - they do not contain any wiggle room ○ Individuals must obey fundamental ethical rules no matter what ● Caux Principles for Responsible Business ○ 1. Respect stakeholders beyond shareholders ○ 2. Contribute to economic, social and environmental development ○ 3. Respect the letter and spirit of the law

○ 4. Respect rules and conventions ○ 5. Support responsible globalization ○ 6. Respect the environment ○ 7. Avoid illegal activities ● Current issues ○ Eminent Domain ○ Autonomous vehicles ○ Opiates ○ Vaping ● Issues in developing countries ○ Corruption ○ Low wages ○ Few worker protections ● Broader social issues ○ Divestment in the 1980s ○ Sweatshops ○ Labeling and worker protection...