Ch10. Commercial Law — Comprehensive Review & Common Exam Pitfalls

Entity Types — Comparison Chart

┌────────────────────┬──────────┬──────────┬──────────┬──────────┬──────────┐
│ Feature            │ Gen. P'ship│Ltd. P'ship│ LLC    │ C-Corp   │ S-Corp   │
├────────────────────┼──────────┼──────────┼──────────┼──────────┼──────────┤
│ Unlimited liability│ All GPs  │ ≥ 1 GP   │ None     │ None     │ None     │
│ Limited liability  │ None     │ ≥ 1 LP   │ All mbrs │ All stk. │ All stk. │
│ Min. members       │ 2        │ 2        │ 1        │ 1        │ 1        │
│ Issues shares      │ No       │ No       │ No       │ Yes      │ Yes      │
│ Board of directors │ No       │ No       │ Optional │ Yes      │ Yes      │
│ Disclosure burden  │ Low      │ Low      │ Low      │ High     │ Medium   │
└────────────────────┴──────────┴──────────┴──────────┴──────────┴──────────┘

Corporate Voting Thresholds

Ordinary (Regular) Resolutions:
Majority of votes cast at a meeting where a quorum is present
(routine business: election of directors, ratification of auditors)

Extraordinary (Supermajority) Resolutions:
Typically 2/3 of shares outstanding or shares entitled to vote
→ Charter amendments, mergers, dissolution, significant asset sales

Special Approval:
Some state statutes or charters require 3/4 or unanimous consent
for certain extraordinary matters (e.g., going-private transactions)

Audit Committee / Independent Director Constraints:
Independent director or disinterested-shareholder approval required
for related-party transactions (analogous to conflict-of-interest rules)

Minority Shareholder Rights — Threshold Summary

Any shareholder (no minimum):
Books and records inspection (Delaware § 220 with proper purpose)

Varies by charter / state statute (commonly 10–25%):
Right to call a special meeting

Contemporaneous ownership + demand (or demand futility):
Derivative suit to enforce corporate rights

State-specific thresholds:
Appraisal rights: typically available in mergers
  (market-out exception may apply for publicly traded shares)

Judicial dissolution (oppression):
Minority shareholders in closely held corporations may petition
for dissolution if the majority engages in oppressive conduct

Negotiable Instruments Comparison

┌──────────────┬────────────────┬────────────────┬────────────────┐
│ Feature      │ Promissory Note│ Bill of Exchange│ Check          │
├──────────────┼────────────────┼────────────────┼────────────────┤
│ Primary oblig│ Maker          │ Acceptor       │ Drawee bank    │
│ Maturity     │ Fixed or demand│ Fixed or demand│ Demand only    │
│ Acceptance   │ N/A            │ Required       │ N/A            │
│ Function     │ Credit + pay.  │ Credit + pay.  │ Payment only   │
│ Presentment  │ At maturity    │ At maturity    │ ≤ 6 months     │
└──────────────┴────────────────┴────────────────┴────────────────┘

Common Exam Pitfalls

① Limited Partnership — minimum GP requirement
   → An LP requires ≥ 1 general partner AND ≥ 1 limited partner
   → Total minimum is 2; but only 1 GP is required

② Piercing the Corporate Veil ≠ automatic unlimited liability
   → Veil-piercing is an equitable remedy applied in specific
     circumstances (alter ego + injustice); it does not dissolve
     the corporate form entirely

③ Audit Committee ≠ Board of Directors
   → Audit committee members are independent directors elected
     by shareholders; management does not sit on the audit committee

④ Indorser's liability is secondary, not primary
   → The indorser guarantees payment only if the primary obligor
     dishonors; presentment and notice of dishonor are prerequisites

⑤ Check drawee = bank only
   → A draft's drawee can be any person; a check's drawee must be a bank

⑥ Duty of disclosure violation = rescission, not automatic void
   → The insurer gains the right to rescind or deny a claim;
     the policy does not automatically become void
   → Contestability period limits: typically 2 years for life policies

⑦ Co-insurance = pro-rata sharing, not double recovery
   → Multiple policies covering the same loss do not allow
     the insured to collect full amounts from each insurer;
     each insurer pays a proportionate share up to the actual loss

⑧ Minimum capital requirement for corporations
   → Most US states (including Delaware) have no minimum
     paid-in capital requirement; $0 par value shares are common
   → Single-member corporations are permitted everywhere

⑨ Director removal = ordinary resolution
   → Shareholders may remove directors by majority vote (Delaware:
     without cause); no supermajority required for removal
   → Removal without cause before term ends may trigger
     damages claim by the removed director

⑩ Stock dividend = no real increase in shareholder wealth
   → Retained earnings are reclassified to stated capital;
     total assets do not change; share price adjusts downward
     proportionally (economic value of the holding is unchanged)

Hierarchy of Commercial Law Sources ★★★★★ : Express contract → UCC/statute → common law → trade usage. Commercial code governs over general common law. Memory hook: contract → code → common law → custom

Shareholder Limited Liability ★★★★★ : Shareholders bear loss only to the extent of their investment. No personal liability for entity debts absent veil-piercing. Memory hook: shareholder = investment limit only

HDC Cuts Off Personal Defenses ★★★★★ : A holder in due course takes the instrument free of personal defenses. Real defenses (forgery, fraud in factum, bankruptcy discharge) remain. Memory hook: HDC = personal defenses gone

Comprehensive Practice Questions

Q. What vote is required for a corporation to approve a merger, and how are creditors protected?

Most state statutes require a supermajority shareholder vote (typically 2/3 of shares outstanding or shares entitled to vote). Creditor protection: the corporation must give advance notice; creditors have an opportunity to object and demand payment or adequate security before the merger becomes effective.

Q. A drawer issues a check and has no funds in the account. What are the legal consequences?

The check is dishonored (bounced). The holder may pursue: (1) a civil claim for the face amount plus statutory damages; (2) remedies under state bad-check / worthless-check statutes, which typically allow 2×–3× the check amount plus fees; and (3) possible criminal prosecution under state check-fraud laws if the drawer knew the account was insufficient.

Q. What is the insurer’s duty of utmost good faith, and how does it affect the policyholder?

The principle of utmost good faith (uberrimae fidei) requires the policyholder to voluntarily disclose all material facts that would affect the insurer’s decision to issue coverage or set the premium. Unlike an ordinary contract where disclosure is triggered only by direct questions, insurance law imposes an affirmative duty to volunteer material information. Violation allows the insurer to rescind the policy or deny claims.