Law Outline - Business Organizations and Entities

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Law Outline - Business Organizations and Entities Powered By Docstoc
					BIZ ORG OUTLINE
PART 1: PARTNERSHIPS   Definition: An assn of 2 or more persons to carry on as co-owners a business for profit—whether or not they intend for it to be PS--RUPA §201(b) Kinds of Partnerships: o General PS: (see def. above—RUPA 101)—intent is all that matters o Limited PS: You must file paperwork  General partner controls the business and is personally liable /w fiduciary responsibilities.  Limited partner provides capital and gets a share of the profit w/out incurring personal liability besides his contribution. o Limited Liability PS: A PS that has filed a statement of qualification and does not have similar statement in effect in any other jurisdiction (UPA 101(5)) Formation o When to form PS  You need more money; to share in financial risk  If your cost of equity is less than the cost of the profit then you should join a PS o Presumption of PS when a person receives a share of profits, unless profits were received as payment for: (RUPA 202(c)(3)) o RUPA § 202: whether a PS exists is a Q of law. Intent is irrelevant, facts are everything.  Receipt by a person of a share of business profits is prima facia evidence that they are a partner (creates presumption) o Holmes v Lerner  Rich person had $ and other had ideas to start retro finger nail polish co  The one w/ the idea didn't contribute the $ but worked a lot for the co and didn't get pd for it  Rich person did squeeze out and issue became whether this was PS and ct held that it was b/c it had the attributes of one o Entity v. Aggregate theory  Entity: RUPA 201: advocated the entity theory saying that a PS is an entity distinct from its partners. This is important b/c it means that the PS can still go on if it loses a partner.  Aggregate: UPA abides by the aggregate theory that the PS and the partners are one. o RUPA 103: The RUPA rules for PS are default rules that apply if the parties don't agree on certain terms in the PS agreement. Things that the PS agreement may not do: o Distribution and Indemnification: Unless an agreement otherwise, all partners share profits and losses equally

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Kovacik: One P supplied labor the other $. It was found that D should not share in the $ loss b/c he never agreed to kick in any $. Ct looked to the intent of the parties since there wasn't an express agreement.  This was a departure from the general rule

o RUPA 306: Since PS is entity, Ps are jointly and severally liable  A new partner is liable for preexisting PS obligations, using PS property— not personally liable above the amount contributed  UPA says that you're responsible for obligations before and during o RUPA 401(c): UOA, all partners are entitled to contribution for payments and liabilities incurred in the ordinary course of business. o RUPA 401(h): If partner expects supplementary comp for extra work, he better get agreement for majority  Management: o RUPA 301: Every partner is an agent of the PS for the purpose of its business & their action in apparently carrying on in an ordinary way of the business of the PS binds the PS, unless;  He has no real authority to act AND the 3rd party knew he had no such authority (broad apparent authority)  An act not in apparently carrying on in the usual way the business of the PS is not binding, unless authorized by all of the other parties (real authority) o Factors to see if apparently carrying on in an ordinary way the business of the PS  Express agreements between the partners  Actual course of PS business  Similar business custom or practice in that locality o RUPA 305: PS is bound by admissions or representations (even if fraudulent) by another partner w/in his scope of authority & it concerns the PS affairs o RUPA 401: Each partner has equal rts in mgmt and conduct of the PS business.  Acts in contravention of any agreement between the parties or an amendment to the PS agreement need unanimous consent.  This is b/c it is not an ordinary matter of the business.  Ordinary matters just need majority vote o How long do PS last  At Will: creditor can foreclose on a partner's interest and under §32 petition the ct for an order of dissolution—forcing the business to liquidate  For a term: Foreclosure and dissolution must wait until the term is over or the businesses specific purpose is accomplished Fiduciary Duties: o RUPA 404: Partners have a duty of loyalty to:  Account to the PS for any property, profit, or benefit derived by the partner  Refrain from dealings adverse to PS

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Refrain from competing w/ PS  RUPA 103 Doesn't allow a partner to K away these duties b/c the standard is gross negligence, reckless misconduct; we wouldn't want a PS operating on a standard lower than this. o Keck, Mahin, and Cate  One partner made misrep on ins form that they didn't anticipate any lawsuits when in fact they did  Issue—whether innocent partners who didn't participate in fraud are liable—ct said that they were (RUPA 301) o Gibbs  2 partners that were one firm and one to go to another  Departing partners took sensitive PS info that they couldn't have gotten if it wasn't for their position for the reason of recruiting associates  Ct found that the act was determinative on their violation of a fiduciary duty to their partners o A co-adventurer also has a fiduciary duty  Co-adventurer looks like PS  agreement  shares losses and profits  each has equal voice  Meinhard v Salmon: Co-adventurers had a 20yr lease for a hotel. One of the co-adventurers secretly renewed and now the other wants a piece of the action. The ct said that there is a high fiduciary duty between joint venturers and partners  Cardoza: when partner goes behind the other back and takes opportunity for himself, then he violates the duty of fair dealing  Financial Aspects o PS Accounting  RUPA 401: Partners rts and Duties  (a) Each partner is deemed to have an acct that is: o what you put into the PS + any profit - losses; your draw is subtracted from this  (h): services that partners do can't receive comp for unless it's for winding up  Partners can loan PS money  Acct terms  Gain: the amt that exceeds book value  Income statement o Revenues — cost = Net Profits o Capital = assets that generate production (doesn't have to be money)  Working capital (equity): the short term liability and assets

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Assets o Short term assets (ice cream)  stock  receivables (tab: billing someone that owes) o Long term:  Building  expensive equipment o Assets = liabilities + equity Liability o Short term  Rent, utilities

o PS Property and Interest  RUPA 204: All property brought into the PS or acquired on acct of the PS is PS property.  Look to intent of the parties  Subject to an agreement to the contrary, each has an equal rt to use the property, but only for PS purposes  Assignment: PS property can't be assigned (unless consent by all partners)  RUPA 502: the only rt that can be assigned is their rt to profit or surplus in the PS  No person may become a partner w/o the consent of the others U.O.A.  When a partner dies or gives to a creditor, the only rt that passes to the estate is the rt to profits, the rest goes to the surviving partners o RUPA 504: A creditor must get a charging order to get an individual partner's rt to surplus o RUPA 307: a partner may sue and be sued  A creditor of the PS can't get a judgment against a partner unless the partner is personally liable and  See §307 (1)-(5)  Dissolution o Look for rightful or wrongful: if wrongful, that partner will be liable for damages caused o RUPA 601: A partner is dissociated from a PS if any of the following occurs  see 601 o Dissociation: RUPA 601 & 602—look to see if there is a PS agreement; PS at will or term  Entity theory allows continuing of the PS once a partner w/draws. Dissociation of a partner does not necessarily cause a dissolution and winding up of the PS  RUPA 701 gives the remaining partners the option of a buyout  Following dissociation, 1 of 2 things happen:  A PS is wound up--RUPA 807: —assets are distributed as following

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o pay creditors o pay the partners (salaries, loans) o pay partners their capital investment o pay partners profit  The PS Continues o 701: Remaining partners have to indemnify the dissociated P for all liabilities except those incurred by an act of him under 702. o If wrongful: P must wait until end of term to be pd unless he can show undue hardship  Won't have in an at-will PS o PS is bound for 2 yrs after dissociation by apparent authority unless notice is given to creditors. o Dissolution: UPA 29—the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business. Distinguish for winding up. Note that UPA made PS un-necessarily unstable  UPA 30: PS not terminated by Dissolution—continues until the winding up of the PS affairs are completed  UPA 31: Causes of Dissolution  UPA 38: Dissolution; Right of partners to application of PS property— says that we should wind-up the business to see what it's worth—doesn't give the option of continuing w/out an express agreement to do so UPA 38 Rightful dissolution Liquidate to cash & get share pursuant to agreement

Wrongful Dissolution Damages Rt to continue Loss of good will

 You can have wrongful dissolution by acting in bad faith UPA suggests that liquidation is an option—this doesn't recognize that the business is a going concern o Creel v Lilly: A PS doesn't have to be wound up or liquidated to find out that share we must give the dissociated partner  Liquidation is unfair to the partners left if they want to continue the PS b/c all assets are turned to cash—if you sell all the assets, you're wasting PS assets—this goes back to the failure of UPA to recognize the business as a going concern 

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CORPORATIONS  Overview:  Why should you form a corp opposed to PS?  Mgmt aspects o PS—partners are the mgrs  Personally liable for actions o Corp—separation between ownership and mgrs (one reason corp. form has flourished is b/c the mgmt is separate from owners)  Have limited liability  You can only lose what you put into it  Free-flowing transferability of ownership/Liquidity of ownership—ready market to sell shares (SH)  Legal entity distinct from owners (SH)  Continuity of Existence: unless stated otherwise  Two Types of corporations  Public: Separation of ownership and control o Subject to a demanding set of disclosures req'd under Fed security law—more accountability o Subject to being taken over by another co gaining control of a majority of the corp's outstanding stock  Close: Formal mechanism of control is operated by SH o Many states allow elimination of bd of dir. o Organization and Corporate Structure: (3 Main Actors—SH, Directors, and Officers)  Shareholders/owners  Usually not personally liable—Exception: piercing corp veil  SH elect Bd of Directors  Bd of Directors (141)need at least 1  SH can remove dir w/ or w/out cause if there are enough votes (8.08)  Meet every now and then to make major decisions  Bd select officers  Officers(142)  Professional mgrs  Ex: President, VP  In charge of day to day decisions  Incorporation  What state o You can incorporate in any state even if you don't have any contact w/ that state o Delaware is the best b/c the statutes are favorable, there's well developed case law and judges on the ct of chancery are very knowledgeable  Articles of incorporation o Requirements included in Articles (102) 6

 Capital Structure o Public v Private Corp  Private: no open market for shares  Public  IPO: initial public offering o Will retain investment banker who has syndicate (other investment banks) and it will sell shares to the company initiated by some type of exchange o IPO process: Valuation of putting syndicate together and pumping up the shares—equity research  Will assign $ amt to each share  Investment banker then gives $ back and they go out and sell shares o Investment banks aren't actual banks but are security firms  Bonds: borrowing but unlike bank loan you break up loan and various investors take pieces: junk and investment grade— junk has a higher risk but also a higher possible payout o The difference between shares/equity and bonds/debt is that bond holders aren't owners and simply hold debt K—thus the first duty is to SH b/c they are owners  Stock: (151-153, 157, 161): Articles must specify classes of stock & rts of SH of stock o Common Stock  Only gets $ after everything has been paid  Potential gains are highest at this rung  Class A v. Class B: one might have 1 vote and the other 2 o Preferred Stock: Has first priority after debts are pd-convertibles o Authorized shares; ones that can be sold o Outstanding Stock: Shares that SH hold o Treasury Shares: Issued but not outstanding—bought back o Par Value: Minimum price that corp can issue its stock— doesn't dictate how much you can actually sell it for.  Share Value:  If your capital is costing you more $ than your returns then you're destroying your Share value  Junk Bonds: Made it possible for anyone to come in and accumulate an enormous amt of $ and then they would look for corps to take over—demonstrated the significance of share value—stock price needed boost to prevent take over  Debt Shield: The more debt you have the more you can shield that portion of your income b/c you can take a deduction on the interest you are paying

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LBO: Leverage buyout—an investment firm comes in and buys out the equity of the corp and replaces the equity w/ debt Del 202: Restrictions on the transfer of securities o 202(c)(1): Rt of first refusal

Grimes: CEO told P that he could have some stock but didn't check w/ bd of dir first. CEO/officers are just professional mgrs/employees—they don't have the power to grant such rts  152: Capital stock to be issued by a corp shall be pd in such form and manner that the bd determines  157: Reg's bd approval and written instrument to create such rts or options  141: Business affairs shall be managed by BOD

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Financial Rts of SH  Dividends and distribution  Del 154: Determination of amt of capital; capital surplus and net assets o Can't be all surplus—some has to be capital o Capital has to be > than the aggregate par value  102(a)(4): We can issue 2 sets of stock, one w/ par value and one w/out  Dividends, payments, wasting asst--Del 170: o 2 circumstances you can issue dividends  surplus  net profits for fiscal year  Authorization of share—Del 160: o (a)(3) No corp shall redeem any of its shares unless redemption is authorized  Impairment of Capital: You have a certain amt of equity (equity + liability = assets) If you structure a transaction to give assets to SH, then holders of equity/liability are screwed  Negative Net Worth: Klang ct addressed whether this was impairment of capital and said that there are several ways to determine equity value. o Just b/c value statements say (-) o Market value determined that there wasn't an impairment of capital  Limited Liability of SH and Piercing the Corp Veil  Piercing the Corp veil: used to get to the SH—very rare—most likely will see in small/close corp—no reported cases on public corps o Corp that don't observe corp form can be pierced—Piercing goes to get around LL of corp form o Cts will look at  Fraud, illegal activity  Co-mingling of personal and corp assets 8

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Failure to adequately capitalize—sufficient to meet liabilities that are certain to arise in the ordinary course of business  Separate bookkeeping  Following the formalities and procedures  Were meetings held and minutes taken  Were taxes pd Sorries: Bar owner's bar gave alcohol to minor who killed herself in car accident and parents sued the owner personally b/c the bar didn't have anything to sue for. In determining if to pierce the corp veil, the ct considered the following o Corp $ transferred to SH to o Reported higher than actual rent—probably to commit tax fraud o Not reporting cash—just redistributed it o Co-mingling of $ o Equity and fairness consideration—D let minors in

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Regulations of Corp Goverance  Directors  Del 141 (important)—Cross ref w/ 102(a)(4)  Formalities for action  Meetings and notice o 211: Meeting of SH o 141: Meeting BOD  Quorum o 216: Quorum and req'd vote for stock corp.  Voting  SH have rt to vote—but only on dir, mergers, disposition of assets, amendment to articles (large entity trans)  No rt to decide reg day to day activities—that's officers duties o 141: BOD o 212: Voting rts of SH; proxies, limitations o 214: Cumulative voting o 219: List of SH entitled to vote o Del 228(a): Consent of SH in lieu of meeting if consent is signed Ultra Vires  124: can't attack validity of corp action on ground corp lacked power to act—this effectively removes ultra vires defense o Exceptions (3)  SH sues the corp to enjoin the act  In an action by the corp against a director, officer, employee or agent

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In proceeding by Atty Gen

o Proxy (rules on Pg 259)  Proxyholder: person authorized to vote share on a SH's behalf  Proxy: Instrument authorizing this relationship  Proxy Solicitation (14(a) SEC: process by which SHs are asked to give their proxies (to either mgmt or insurgent group)  Misleading Proxies  14a-9: It is a violation for a co to make a false statement of material fact or to omit material facts in proxy statement  United Paperworkers o Ct looked at the "Total Mix" (TOC) to see if there was a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reas investor as having significantly altered the "total mix" of info made available—would it have changed opinion o 2 Systems for electing Directors  Straight Vote: each share = 1 vote and you can't vote more shares than you own on a single director (1 person has 51%--they decide everything)  Cumulative Voting(214): Multiply votes by the # of directors to be elected & cumulate them as you wish (better for the small person)  Formula: {S(total # of voting shares) / D(# of directors to be elected) + 1} + 1 o Voting agreements (218)  SH can have them but officers and Dir can't b/c its a breach of their fiduciary duty to act in the best interest of the corp—unless all SH are a party to the agreement o SH Proposals  SEC 14(a)-8(a): allows a corp to omit a SH proposal from proxy statement under certain circumstances  Corp has bop in showing that proposal fits exception  14-8(c)(7): a corp may exclude a SH proposal from a proxy statement if matter relates to the conduct of the ordinary business operations  May not be excluded if it involves a significant strategic decision as to those daily business matters  SH intruding into Bd rooms—is this good or bad?  Good b/c it provides a checks and balances system o Close Corporations o Characteristics of:  shares are held by a relatively small number of people

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 No ready market for stock  Typically managed by the SH  Basically an incorporated PS  Freeze out danger o Duty Owed  Close corps owe each other a fiduciary duty of care and loyalty (like PS)  Elements to sustain a claim for breach of fiduciary duty—Purpose is to protect minority SH  Bad faith  No legitimate business purpose  Some element of control (take adv. of majority status) o Directors' Duty of Care o Gagliardi: the point of the BJR is to allow the corp the ability to take risk (the more risks the more return) w/out having to worry about keeping every SH happy o Blasius:  Talks about equitable remedies and the BJR. An equitable remedy is available when the act isn't wrong according to statute but, but the ct will step in an provide an equitable remedy (S.P., injunction) to remedy the injustice  There was a min. SH that came in a proposed a weird transaction which the BOD opposed. In order to ensure that the SH wouldn't be able to get this transaction through, the BOD expanded the Bd to block the tran, then SH sued  Definition of BJR: The ct noted that the directors get an automatic rebuttable presumption that the BOD acted in good faith, in an informed manner w/out any conflict of interest in making a contested decision.  The BJR can only be overcome w/ P pleading particularized facts to present a doubt as to whether the BOD acted under a conflict of interest or if they were grossly uniformed or acted in bad faith then the BJR will be overcome and the suit can proceed.  Otherwise, the BJR acts as a filter to protect the BOD from unmerited suits.  Ct of equity said that dir. actions were fundamentally unfair b/c SH have rt to make such proposals and BOD motive was to block the trans.—so this was an unintended violation of the DOL—despite the BOD acting in subj good faith o To overcome the BJR, SH must show that there was a breach of the duty of care (fraud, illegality, conflict of interest) or loyalty

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o If the BJR does apply the case will be dismissed under 12(b)(6), o If it doesn't apply, (b/c there is conflict or self-interest) then the cts will apply the intrinsic fairness rule and will examine the process of the decision and see if it was rational. o Smith v. Van Gorkom BJR was rebutted in this case. Facts showed that there was gross negligence to get around BJR.  Dir. VG negotiated w/ Pritzker about a cash-out merger. The Bd after little notice rushed through a meeting and agreed to sell for $55 a share. The SH claimed this wasn't a prudent, well informed decision (breach of care). After looking to all the facts, the ct agreed  Determining factors of the BOD gross neg (TOC)  The ct used Del standard of gross neg: BJR and duty of care results in a standard of gross neg.  The Dir were held personally liable for 23.5 mil  The result of the holding: Has shown bds that they need to o ask more Q o research proposal more and look at options o get SH approval o get investment bankers to do fairness reports o hire independent advisor—show arm's length transaction  Rhee thinks this case is poorly decided—it was a close call o As a result of Smith v VG,  Del enacted 102(b)(7): that allows a corp to limit their bd's liability  P can get around the provision by alleging a breach of duty of loyalty  Malpiede v. Townson (Fredrick's Case)  Motion to dismiss under 12(b)(6); SH sued Dir for a breach of DOC but the ct dismissed b/c the corp charter had a provision limiting the bd's liability (102(b)(7) 

o Failure to Act and the Duty of Care/Loyalty o In re Caremark:  D corp had to pay big settlement for civil and criminal fines relating to health care kickbacks. Not everyone was doing it but it wasn't caught. SH sued the dir for the amt of the lawsuits  How do we handle negligence through inaction of the directors  Very high burden—hard to prove  Elements needed to hold dir liable: o Scienter—you know or should've known of bad activity

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o Culpable act (or inaction) o causation For the director to be liable for inaction, there must be proof that the dir knew or there was a substantial likelihood that they should have known what was going on and allowed it by turning their backs o Neg/unreas will probably not be enough to prove There is a presumption that the directors can rely on that employees are engaging in good faith behavior They get into trouble when there isn't an info reporting system o Failure to have an info reporting system = liability o As long as there's some sort of system in place = BJR

o Waste Standard o In re Disney (derivative Litigation)  Eisner was terminated b/c he was bad for the co and got a huge severance pay out of the deal.  SH brought lawsuit for Waste b/c of the excessive amt that E was getting  The focus was on the close relationship between Orvitz and Eisner—looked like a conflict of interest  The BJR was overcome b/c of this relationship—this just meant the case could actually be brought—the Ct eventually found that the bd wasn't liable  If this doesn't find the bd liable, what will—conduct the arises to the intentional standard. o Shareholder's primacy norms o Kahn v Sullivan  An appeal from a settlement involving other SH over a charitable contribution concerning a museum that the bd of Occidental approved.  Sullivan(SH) accepted the settlement Kahn (SH) didn't  SH were mad that part of their dividends were going to funding the museum  Kahn arg that the proposal wasn't informed or deliberate and that the actions of the special committee weren't protected by the BJ rule and the terms of the settlement were inadequate.  What were the actions of the bd/special committee that gave rise to the settlements?  They didn't use independent counsel to investigate the proposal

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Salomon Brothers o Had managing dir, Mozer who was making unauthorized bid on federal treasury securities. Under law, one corp couldn't bid on more than 35% of the securities per auction. To get around rule, Mozer makes unauthorized bids under customer's names.  Due to a screw up on one of his unauthorized bids, he needed to disclose this bid to the VP. The VP and the P discussed this matter w/ their atty and it was conceded that this should be reported to the gov but never was.  After some more violations came to light, the head dir/mgmt decided to do an investigation and it was found that there were quite a few of these bids.  The head discussed this w/ Buffet (a top investor) and it was recc. that the heads disclose that the head knew about one of these bids, but the head refused, which ended in numerous allegations.  Consequently, the truth was found out and the heads all resigned and Buffet took over  Salomon was banned from making such bids for over a year and as a result lost lots of profits Questions: o Steps to go through in analyzing Q  1st, has there been a breach of duty?  Caremark analysis  did they just choose not to act  102(b)(7) assuming articles adopted 102  Exceptions:  Does BJ shield the wrong doing  Were the head disinterested in making their decisions  Was there a violation of the duty of care (Van Gorkam) o Can the company be defended against theses actions?

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Directors' and Shareholders Duty of Loyalty o Breach of loyalty when: Dir, officers, or controlling SH direct assets, divert opportunities or info of the corp for personal gain—Can't serve you own interests at the expense of the corp. o How DOL is diff than DOC  DOC has a very high BOP to overcome for liability  D has the BOP to show that the transaction was procedurally fair and substantively fair in DOL—P has burden to show BJR shouldn't apply in DOC  DOL should be plead over DOC

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o Areas of Duty of Loyalty  Self interested Director Transaction  Compensation and Waste  Corporate opportunity doctrine  Entrenchment/ Tender offers o Self Interested Transaction  2 elements  a business transaction and  a member of the bd on both sides of the transaction (direct or indirect) o Indirect: related person o Direct: same person  Ways to get around Taint  Del 144 o bd or committee approves the K (votes must be that of disinterested members o Material facts are disclosed to Sh entitled to vote and K is approved in good faith or o the K is fair to the corp  Once P proves a conflict of interest, the BJR is overcome and the BOP shifts to the BOD—now the BOD must show  Procedural fairness o Fully inform the BOD or SH of all material facts of the director's interest before they make decision.  Approval must be made by a majority of the qualified (disinterested) directors or SH  If approved the BOP shifts to the P OR  Substantive Fairness o Cts will look at transaction price, benefits, process of decision making o BOP is on Dir  Emerald Partners  Controlling SH/CEO on both sides of trans  Allegations that proxy statement wasn't accurate—corp relied on statutory defense that dir were shielded from liability if they relied on proxy in good faith (like Malipeide case) but here there was a DOL problem b/c of conflict of interest—the ct said the problem must be analyzed by:  Entire Fairness Standard o Fair Dealing  Independent directors  SH o Fair Price  Evaluated by experts o Initial Burden

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 P pleads breach of DOL  Shifts to D to show that Transaction was fair 2 Ways the BOP will be shifted back to the P o Approval of trans by independent dir w/ real bargaining power and Controlling SH doesn't dictate terms o Approval by majority of minority SH Ct found that this trans did satisfy procedural fairness—D sustained their burden

Kahn v Lynch  Self-dealing/conflict of interest—Controlling SH Alcatel wanted to take control—DOL b/c Alcatel was on both sides  The ct reversed the judgment in favor of the P saying that the BOP should've remained on D in proving that this was negotiated at arm's length and no market test (among the other reqs from Emerald)  Bd just thought takeover was inevitable so they just turned their heads and let it happen Special Committees in an interested merger, the initial BOP of establishing entire fairness rests upon the party who stands on both sides of the transaction  A cond precedent to finding that the BOPing entire fairness has shifted is a judicial analysis of the facts of each case  Special consideration should be given to whether the special comm o was truly independent o fully informed o had freedom to negotiate at arm's length

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Ratification for DOL  Independent Director Ratification (144(a)) Conflicted transaction can be ratified by independent dir.  Kahn v Tremont o Ct said that this case must be viewed by the entire fairness standard and not by the BJR  The fairness standard should be applied here b/c there is a controlling SH standing on both sides of the transaction  This policy reflects the reality that the controlling SH will continue to dominate the corp regardless of the outcome of the transaction o The independent comm: ct found they didn't operate in an independent or informed manner—thus the BOP should've stayed on the D and not have shifted to the P

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o Main fact that showed the committed wasn't independent was that Stein was the main independent dir and his relationship w/ controlling SH could reas be Q  Interested SH Ratification: SH can ratify voidable trans where dir acted in the interest of the corp but in excess of their duties—will extinguish claim against Dir.  In re Wheelabrator Tech o The Del SC found SH ratification involving the DOL 2 cases:  Interested transactions between corp and its directors (director's have personal financial interest)  A transaction between the corp and its controlling SH o 144(a)(2) says that interested transactions of this type won't be voidable (will get BJR) if it is approved in good faith by a majority of the disinterested SH—then BJR is invoked and Judicial review is limited to issues of gift and waste— w/ BOP on party making trans o The operative effect of SH ratification acts to either  Change the standard of review to the BJR w/ BOP on P (OR)  Leave entire fairness standard w/ BOP shift to P

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The Corporate Opportunity Doctrine  General Rule (ALI): A director or Sr. Exec may not take adv of a corp opportunity unless:  Dir/Exec first offers corp opportunity and makes disclosure of conflict of interest and the corp opp.  The opp. is rejected by the corp AND EITHER o The rejection is fair to corp o Rejected, following disclosure, by dis-interested dir in a manner that satisfies the BJR o Rejected by disinterested SHs and doesn't = corp waste  Broz v CIS  Broz owned a competing cell phone co but also sat on bd of CIS o B got offered a deal through his co to acquire a license and accepted it w/out first offering it to CIS and they sued  The Delaware ct cited Guth case which says to see if this is a corporate opportunity o If the corp is financially able to exploit the opportunity o is the opportunity in the corp's line of business o does the corp have an expectation in the opportunity and o would it be a violation of his duty by taking the opportunity for himself

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USE TOC—said that the dir or officer can take the opportunity if o Presented to him in individual capacity o opportunity is not essential to corp o corp holds no interest or expectation in the opportunity and o director or officer has not wrongfully employed the resources of the corp in pursuing or exploiting this opportunity

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Litigation to Enforce Director's Duties—The Demand Requirement o The demand Requirement  In re Limited  Common SH brought derivative suit against corp and dir  It was found that the two head people on the bd were interested b/c they were acting w/ the motive of protecting their children's trust fund $. 4 other directors were interested b/c of their connections w/ the top directors  Ct said that the 2 weren't disinterested and the 4 were not independent, but there were 6 others that were independent  Ct dismissed the motion to dismiss b/c there was a cause of action for a breach of the duty of loyalty

o Direct v Derivative claims  Derivative Suit  corp SH commence suit on behalf of the corp alleging a direct injury to the corp (a separate legal entity) and indirect harm (usually nominal) to the SH  This is ct of equity gap filler b/c corp wouldn't sue themselves  example: a claim that a dividend paid was improper—depletion of corp assets  Delaware standard on demand: Zapata o If demand is required but not made & the corp moves to dismiss b/c it wasn't made, the BJR applies o If demand is excused & the complaint is filed & no committee is appointed, the likelihood of settlement is 99.9% o If demand is excused and suit is filed, but thereafter a special committee is appointed, the Zapata standard applies  BOP on corp to show disinterested and independence, proper procedures, then the ct may evaluate independently  A good way to fight off derivative suits is to appoint new bd members—they look more independent and SH will have a hard time taking away BJR 18

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Direct Suit  direct harm to the P SH as a SH (their voting rts effected)  Example: action to compel payment of dividend

o Special Litigation Committees  In re Oracle Corp Derivative Litigation o It was alleged that the Oracle directors engaged in insider trading and as a result, to investigate this matter, the appointed the Special Litigation Committee (SLC). It is alleged that there were too many connections w/ the SLC for them to actually be considered independent. The 2 SLC members were also profs at Stanford.  Report failed to identify these ties—this is significant b/c the report was so long and extensive that it's inconceivable that they didn't recognize these connections  Possibly bad faith and incompetency  Substantial reason test  Definition of independence: whether a director is for any substantial reason, incapable of making a decision w/ only the best interests of the corp in mind—impartiality and objectivity TYCO   Futility of Demand requirement in derivative lawsuit Kozlowski (former CEO), 2 other directors and a director were indicted for tax evasion, securities fraud and embezzlement for looting hundreds of Millions of dollars from the company. The bd seemed to turn their heads to the whole ordeal. Ps are suing BOD for breach of fiduciary DOL, candor, gross mismanagement, and waste of corporate assets. It was found that  the bd lacked independence—some of them were participating in the activities  The independent auditor was also providing on-going consultation services—which they were pd tens of millions of dollars for—raising Q of true independence of the audits The ct said the director Ds participated in a long-term continuing course of corporate misconduct, mismanagement and waste of corporate assets  Ds are in no position to prosecute this action b/c of the obvious conflict of interest—demand requirements  The Ds can't defend their actions by claiming independent business judgment b/ they acted knowingly or recklessly or w/ gross negligence

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Oppression of Minority Shareholders  Leslie v BSC o Close corp, 3 partners: Leslie, Khayter, and Goulart—each owned a third. Friction developed and L was ousted from the PS. The other partners offered severance packages but Leslie refused and sued. o Ct said this looks like PS and Leslie was entitled to the utmost good faith and fair dealing—this the other partners didn't do b/c there were other alternatives than totally ousting him o Ct said in response to his Direct claim (his derivative claim was dismissed) that Leslie is entitled to  fair compensation for his loss of employment  fair compensation for any amt received by Khayter or Goulart in the nature of a dividend and  provision for Leslie, while he's a SH to be able to monitor mgmt and participate in the return to SH w/out interfering unduly therein Issuing stock to only majority SH has the effect of diluting the shares of stock. If you were a minority suing the majority, what would your argument be o That there was no Legitimate Business purpose to do this and raise equity and thus they breached their fiduciary duty o If you were the majority stock holder what would you arg  There was a legitimate business purpose and they bargained for this—there was no anti-dilution provision

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Friendly Mergers and Acquisitions  Structuring an acquisition o Daimler/Chrysler  Del 251(b)  (c): SH vote is reqd in a merger acquisition  (d): a merger agreement can be terminated as long as it isn't closed  (f): Acquiring corp does not have to vote  (g) merging wholly owned subsidiaries  Del 253: once you have 90% control, you can squeeze out the minority in a short-term acquisition  Del 271: allows for the merger of assets a assumption of liabilities Weinberger v UOP o Signal Corp (controlling SH) wished to acquire the remainder of UOP stock. 2 of Signal corp directors also served on UOP bd and figured a fair price would be 21-24 per share. UOP immediately accepted a 21 offer w/out negotiations and hurriedly put a report together. UOP SH allege a duty of care was breached

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o This is a self-dealing situation b/c the controlling SH is on both sides of the transaction and getting benefit and minority isn't. Thus, BJR gets taken away and BOP shifts to the dir to show it was intrinsically fair o RULE: In order for the BJR to apply there must be complete candor in disclosing all info in the directors possession related to the transaction.  Standard that is now applied since BJR doesn't:  Intrinsic Fairness Standard—BOP on Dir o Procedural fair dealing o Fair Price  3-part test to see if tender offer is non-coercive—not hostile  Subject to a non-wavable maj of the min tender cond  Controlling Sh promises to consummate a prompt §253 merger at the same price if it obtains more than 90% of the shares  the controlling SH has made no retributive threats  Steps corp should take to ensure they get BJR o Insist on outside independent negotiating committee o Share all findings o get outside dir approval o approval by maj of the min SH

 Appraisal Remedy o Rt of a SH to dissent and demand that the corp buy them out for a fair price (shares converted to $) value is measured at the time of the transaction o What kind of transactions give a right to appraisal  merger—where the SH is req'd to approve the transaction  short-form merger at least to the subsidiary SH  sale of assets to the selling corp SH  Amendment to articles that affect rt of SH  Tender offers o corp pubically offering to buy stock from target co SH to be held pending the completion of the purchase o First the offeror will buy shares on the open mkt prior to the tender offer o Second the tender offer will be made to buy a certain amt of stocks to give control at price substantially above the FMV—usually is followed by merger  SEC REG  13(d), 14(d), 14(e)

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Hybrid Entities  LLP (limited liability PS): UPA 101(5) a PS that has filed a statement of qualification  RUPA 1001—how are they diff than PS under RUPA 101, 102  Filing requirement Frode Jensen and Pillsbury LLP o Jensen left Pillsbury to go to bigger firm--new firm made press release and then Pillsbury made press release stating that they were glad he left b/c he had made a settlement for sexual harassment and had low productivity. Jensen was no longer welcome at new firm so he sued Pillsbury o How would this be resolved under RUPA in the PS act  RUPA § 306: Partner's Liability  Partner isn't liable for acts that occurred before partner became partner  Individual partners are jointly and severely liable  (c): Obligation arising when PS is LLP a partner is not personally liable solely  RUPA § 307(d): Judgment creditor of a PS is not in itself a judgment against the partner by being a partner o Would the actions by the individual Ds bind the LLP?  RUPA 301: Partner is an agent of the PS: an act of a partner in PS name in the ordinary course of the business binds the PS  The partners would bind the PS in this case b/c they were acting to try to mitigate the damage done to the firm by Jensen leaving o Do we have enough facts to show a breach of duty of care  Possibly by looking at the reasons behind the press release and the initial departure agreement where Pillsbury was suppose to keep Jensen's leave low key. o Any arg that the partners shouldn't be liable?  RUPA 404: Partners fiduciary duty  They talked to their lawyers and the headhunters before they made this press release—they sought counsel to cover themselves—they subjectively thought they were doing the right thing

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Limited PS o §303: Liability to 3P (handout)  Limited partner is not liable unless:  He is also a general partner or he or she participates in the control of the business o Must file certificate o Must have at least one general partner and one limited partner  General partner: controls the business and is personally liable w/ fiduciary responsibilities

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Limited partner: Provides capital and gets share of profits w/out incurring personal liability  There is also an interplay w/ fiduciary duties and there is always    
some form of liability but will be more limited for such partner

But must remain a passive investor—if there is any control then liability. RULPA Safe Harbor of activity: They may vote on dissolution, sale or lease of business property, indebtness of business, partner removal, can consult or advise general partner Even if they cross the line, they are only liable to 3P if the 3P reasonably believes based on the limited partner's conduct that the limited partner was a general partner RULPA 303: No personal liability for a limited partner for the limited PS's obligations

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Advantages of General Partner  Control  Limitation of § 303  If you act like General partner, you will be treated like you're a gen partner What advantages might a limited PS have over a corporation  Taxes—double taxation in corp, flow through in LPS  Share of profits—would maybe have a higher distribution  Governance issues  More formality in the corp form  Piercing the corporate veil does apply to LLP and since it's less formal, there is a chance of getting pierced  More in control of how the business is ran  When does limited liability partner have protection of limited liability  RULPA 303  They a lot of times have the feel of SH b/c their involvement is limited  Easier to wind up PS

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Limited Liability Company o LLC is designed to provide the flexibility & tax advantages of the PS w/ the protection against personal liability of the corp. Can start LLC by filing articles. o An LLC is owned by its members—who are like partners in PS or SH in Corp.  If LLC utilizes a mgr, the LLC will more closely resemble a corp b/c the members will not participate in mgmt  If no mgr, the LLC members will more resemble partners o Liability is typically limited to the amount contributed—like SH o Distributions are allocated on the basis of capital contribution—unless otherwise agreed o PG 55 in statute book  301: Agency of Members and mgrs  Apparent authority—same language in RUPA  (b)(1) a member is not an agent for the business solely b/c he's a
member

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Benefits of LLC that you don't have in corp  Flow through taxation (although S corp has flow through, they have a lot more restrictions and governance than LLC)  To have flow through status, LLCs can't have more than 2 of the following characteristics of a corp o Limited liability o unlimited life o free transferability o centralized mgmt  no bd of dir  less regulated conduct  less formalities  LLC's are allowed to own subsidiaries w/out limitation, whereas S corps are allowed to own more than 80% of another corps shares Disadvantages  Possibility of losing flow through taxation if it's not structured properly  More paperwork and documentation is needed than a PS  if 50% or more of the capital profit interest are sold in 12 month period, the LLC will terminate for federal tax purposes  Conversion of existing business to LLC may result in recognition of appreciated assets Lanham:  W contracts w/ Clark, who is said to be agent of Lanham, but not knowing that the underlying K was w/ the LLC  The district ct held that Lanham was liable for the actions of Clark b/c there was no way for W to know that he was working w/ an LLC—the business card didn't specify LLC—the SC agreed w/ this holding  Basically Lanham was liable and Clark got off  Lanham arg that if you file articles for LLC then constructive notice is given that you are a LLC Jerez

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J was in LLC w/ Ps and J got a loan w/ out the LLC's knowledge and then took the $ for his own use and didn't repay it. The LLC didn't know about this and the loan was defaulted. There was an operating agreement that protected against this There were 2 competing statutes  One said that J had the authority to bind, the other said that J didn't bind b/c he didn't have authority to get such a loan.  Ct went w/ the more specific statute As a result, the LLC was held liable for the loan b/c they found J had the authority to bind—due to the more specific statute  As a policy standpoint, we want to hold the LLC liable b/c we don't want 3Ps to have to bear the cost of such fraud, regardless of the statutes in place

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NeoClone Biotechnology—LLC (case study)  Co was started through U of Wis  Needed small amt of finance so they went to individuals (angels) to attain it

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They then need to decide what kind of co to form—Q to ask  Liability issues  Formality—do you want to be governed more or would you like to have more freedom in running the business  Mgmt—do you want to manage? o Formality of how you want the co run o Control/managing rts that you want/authority (agency)  What is the authority of a partner to enter into a K for the co  '' '' of a SH '' ''  '' '' of a director or VP '' ''  Capital—how much money do you need up front  Tax—will there be a considerable amt of taxable earnings that you would want flow through tax  Transferability—would you want to bring in outsiders o IPO o Make an exit by selling  How decisions are made—organizational structure  Financial rts— o profit and loss allocation o dissolution/dissociation They determine that an LLC is their best option They brought in Anderson to manage and a couple of other employees The Mgmt looked like BOD--mgrs and agents are the only one that can bind the co—like corp For voting and distributions, they follow the corp rules For dissociation/dissolution they follow PS law Why did they decide to form a LLC—  they had the flexibility to take pieces of PS and Corp law to meet their needs

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Agency Theory o Agent: person who by mutual assent acts on behalf of another and subjects to the other person's control o Principal: the person for who the agent acts for

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Description: Law School Outline for Business Associations - Discusses partnerships and corporations and their formation, carrying on, and termination.