Two years ago, Tectonic Wear was founded by two friends (Davis and Amies) who shared a...

 

  
 

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Two years ago, Tectonic Wear was founded by two friends (Davis and Amies) who shared a love of hiking and camping. The idea behind the business was to sell clothing that was specially designed and made for hiking and camping. This included using special durable fabric blends, unique ideas for storage and functionality as well as a color-scheme and appearance that allowed the clothing to be used for rugged wear or casual wear. They ran the manufacturing and online sales from their apartment until their inventory outgrew their living space. They never signed any agreements with each other or formally agreed to a particular business entity, but they ran the business with equal say and split the profits 50-50. Recently, the principals of Tectonic Wear decided to expand their business after meeting Benz, a potential investor. The plan was to start distributing their products through retailers that catered to Tectonic Wear customer demographics and interests. The group hired counsel to file Articles of Incorporation forming Tectonic Wear Corporation (TWC). Their counsel also drafted a set of By-Laws and a Shareholders' Agreement and asked if any principals had an objection to any of the provisions in either document. Since no one had any objections, their counsel issued shares in accordance with the Shareholders' Agreement. Read an excerpt from that document below: Document #1: Excerpt Shareholders' Agreement Obligations of the Parties A) Davis, Amies, and Benz ("Shareholders") agree to the following table setting out their shares, cash investment, position in the company, and basic responsibilities: Responsibilities Name Shares Investment Position Davis 35% Business operations (Full-time) Amies 35% Benz 30% 10K 5K 25K President Vice Pres Treasurer Design/creative (Full-time) Financial operations (Part-time) B) Shareholders also agree to execute any and all documents necessary to securing any additional funding through a bank/financial institution and or additional cash funding from the shareholders. The next big step was to apply for a bank loan of $100,000 to provide working capital for expansion. Benz negotiated a loan with Main Street Bank (MSB) for TWC, but since the company's assets were not enough to cover the loan, MSB proposed that each principal provide a personal guaranty for TWC's loan. Read the Personal Guaranty Addendum below: Document #2: Proposed Personal Guaranty RRRSR22 220 Personal Guaranty Addendum (Proposed) 1. As a condition of Main Street Bank's (MSB) loan to Tectonic Wear Corporation (TWC) guarantees payment of all present and future debts and liabides of TWC to MSB. each officer, director, and shareholder (Principals) jointly and severally and personally 2 In the event that TWC defaults on the loan (as that is defined in the loan document). the Principals, jointly and severaly, pledge their personal assets (including but not limited to retirement accounts, real estate, cash on hand, stocks/bonds) as collateral for so long as any liability due and owing to MSB still exists. Signature After looking over the Personal Guaranty Addendum, Benz decided to do some research. He found data about small business failure rates that worried him. Read a graph and a table below: Date Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 5 Ye Small Business Failure Rate Source: Composed by the authors based on data from U.S. Bureau of Labor Statistics Small Business Failure Rate Year 10 Document Tobie ustres with highest koon default o Business types with the highest SBA loan 10-year default rate Mortgage and nonmortgage loan brokers Residential property managers Offices of real estate agents and brokers Mutiramay housing construction Window treatment stores Department stores 65.6% 45.2% 45.5% 42.8% a) Sole proprietorship b) General partnership c) Limited partnership 41.6% 40.6% Travel agencies Jewelry, watch, wholesalers Computer software merchant wholesalers Title abstract and settlement offices Wireless telecommunications carriers Men's clothing and furnishings merchants Siding contractors SOURCE US Smoll Business Administration In relation to the other principals, Benz's personal assets were significant, and he was concerned about the risk associated with a personal guaranty. When he asked the other principals, they did not object and pointed out that Benz had signed a Shareholders' Agreement that governed this situation. Limited liability partnership 29.4% 38.2% 1) From 2015 to the time they incorporated Tectonic Wear, what form of entity were Davis and Amies using to operate the business? 37.1% 37.1% 37% 35.9% 35.4% 2) From 2015 to the time they incorporated, whose personal assets would be at risk if the business had no assets and suffered a liability as a result of negligence or breach of contract (e.g., a lease)? a) Davies -100% b) Amies-100% c) Davies-Amies in any combination equaling 100% of the debt d) 50% of their personal assets would be at risk for the negligence claim only e) 50% of their personal assets would be at risk for the contracts claim only 3) A personal guaranty by principals of a corporation is typically used a) to allow a creditor to obtain a judgment against the personal assets of a principal for a business debt b) to secure a mortgage a home c) when a corporation is in bankruptcy d) by landlords to secure rental payments for a residential apartment e) when there is only one principal in a business organization 4) If Benz refuses to sign the Personal Guaranty and the bank then revokes its offer to loan TWC the funds, what probable theory could the other principals use in a lawsuit against Benz? a) Business judgment rule b) Loan forgiveness duty c) Banking forgiveness doctrine d) Breach of fiduciary duty e) Bad actor rule 5) Why was Benz concerned after reading the graph and table? a) They show that banks don't lend money to start-ups. b) They illustrate that small business failures are a significant risk factor in a start-up. c) They demonstrate that TWC does not have a good product. d) They validate Benz's concerns about whether they can obtain a patent e) They explain why TWC needs a loan. 6) What strategy could Benz uses in negotiating a personal guaranty? Suggest specific language that could be deleted and/or added that could use to minimize his liability under the guaranty with MSB. 7) As a general matter, courts are reluctant to allow piercing of a corporate veil. True False 8) Name two factors that a court will consider when asked to pierce a corporate veil. 9) Breach of a fiduciary duty may result in personal liability for an officer or director. True False 10) Provide some examples of how a director could violate her (fiduciary) duty of care 11) In the context of a general partnership, what does "joint and several liability" mean Two years ago, Tectonic Wear was founded by two friends (Davis and Amies) who shared a love of hiking and camping. The idea behind the business was to sell clothing that was specially designed and made for hiking and camping. This included using special durable fabric blends, unique ideas for storage and functionality as well as a color-scheme and appearance that allowed the clothing to be used for rugged wear or casual wear. They ran the manufacturing and online sales from their apartment until their inventory outgrew their living space. They never signed any agreements with each other or formally agreed to a particular business entity, but they ran the business with equal say and split the profits 50-50. Recently, the principals of Tectonic Wear decided to expand their business after meeting Benz, a potential investor. The plan was to start distributing their products through retailers that catered to Tectonic Wear customer demographics and interests. The group hired counsel to file Articles of Incorporation forming Tectonic Wear Corporation (TWC). Their counsel also drafted a set of By-Laws and a Shareholders' Agreement and asked if any principals had an objection to any of the provisions in either document. Since no one had any objections, their counsel issued shares in accordance with the Shareholders' Agreement. Read an excerpt from that document below: Document #1: Excerpt Shareholders' Agreement Obligations of the Parties A) Davis, Amies, and Benz ("Shareholders") agree to the following table setting out their shares, cash investment, position in the company, and basic responsibilities: Responsibilities Name Shares Investment Position Davis 35% Business operations (Full-time) Amies 35% Benz 30% 10K 5K 25K President Vice Pres Treasurer Design/creative (Full-time) Financial operations (Part-time) B) Shareholders also agree to execute any and all documents necessary to securing any additional funding through a bank/financial institution and or additional cash funding from the shareholders. The next big step was to apply for a bank loan of $100,000 to provide working capital for expansion. Benz negotiated a loan with Main Street Bank (MSB) for TWC, but since the company's assets were not enough to cover the loan, MSB proposed that each principal provide a personal guaranty for TWC's loan. Read the Personal Guaranty Addendum below: Document #2: Proposed Personal Guaranty RRRSR22 220 Personal Guaranty Addendum (Proposed) 1. As a condition of Main Street Bank's (MSB) loan to Tectonic Wear Corporation (TWC) guarantees payment of all present and future debts and liabides of TWC to MSB. each officer, director, and shareholder (Principals) jointly and severally and personally 2 In the event that TWC defaults on the loan (as that is defined in the loan document). the Principals, jointly and severaly, pledge their personal assets (including but not limited to retirement accounts, real estate, cash on hand, stocks/bonds) as collateral for so long as any liability due and owing to MSB still exists. Signature After looking over the Personal Guaranty Addendum, Benz decided to do some research. He found data about small business failure rates that worried him. Read a graph and a table below: Date Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 5 Ye Small Business Failure Rate Source: Composed by the authors based on data from U.S. Bureau of Labor Statistics Small Business Failure Rate Year 10 Document Tobie ustres with highest koon default o Business types with the highest SBA loan 10-year default rate Mortgage and nonmortgage loan brokers Residential property managers Offices of real estate agents and brokers Mutiramay housing construction Window treatment stores Department stores 65.6% 45.2% 45.5% 42.8% a) Sole proprietorship b) General partnership c) Limited partnership 41.6% 40.6% Travel agencies Jewelry, watch, wholesalers Computer software merchant wholesalers Title abstract and settlement offices Wireless telecommunications carriers Men's clothing and furnishings merchants Siding contractors SOURCE US Smoll Business Administration In relation to the other principals, Benz's personal assets were significant, and he was concerned about the risk associated with a personal guaranty. When he asked the other principals, they did not object and pointed out that Benz had signed a Shareholders' Agreement that governed this situation. Limited liability partnership 29.4% 38.2% 1) From 2015 to the time they incorporated Tectonic Wear, what form of entity were Davis and Amies using to operate the business? 37.1% 37.1% 37% 35.9% 35.4% 2) From 2015 to the time they incorporated, whose personal assets would be at risk if the business had no assets and suffered a liability as a result of negligence or breach of contract (e.g., a lease)? a) Davies -100% b) Amies-100% c) Davies-Amies in any combination equaling 100% of the debt d) 50% of their personal assets would be at risk for the negligence claim only e) 50% of their personal assets would be at risk for the contracts claim only 3) A personal guaranty by principals of a corporation is typically used a) to allow a creditor to obtain a judgment against the personal assets of a principal for a business debt b) to secure a mortgage a home c) when a corporation is in bankruptcy d) by landlords to secure rental payments for a residential apartment e) when there is only one principal in a business organization 4) If Benz refuses to sign the Personal Guaranty and the bank then revokes its offer to loan TWC the funds, what probable theory could the other principals use in a lawsuit against Benz? a) Business judgment rule b) Loan forgiveness duty c) Banking forgiveness doctrine d) Breach of fiduciary duty e) Bad actor rule 5) Why was Benz concerned after reading the graph and table? a) They show that banks don't lend money to start-ups. b) They illustrate that small business failures are a significant risk factor in a start-up. c) They demonstrate that TWC does not have a good product. d) They validate Benz's concerns about whether they can obtain a patent e) They explain why TWC needs a loan. 6) What strategy could Benz uses in negotiating a personal guaranty? Suggest specific language that could be deleted and/or added that could use to minimize his liability under the guaranty with MSB. 7) As a general matter, courts are reluctant to allow piercing of a corporate veil. True False 8) Name two factors that a court will consider when asked to pierce a corporate veil. 9) Breach of a fiduciary duty may result in personal liability for an officer or director. True False 10) Provide some examples of how a director could violate her (fiduciary) duty of care 11) In the context of a general partnership, what does "joint and several liability" mean

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Question 1 Business model before incorporation b Davis and Amies were operating under a general partnership before incorporating the Tectonic Wear Com... View the full answer