VIEWS: 3 PAGES: 33 POSTED ON: 9/26/2012
BUSINESS ASSOCIATIONS ATTACK OUTLINE TO WRITE DOWN FOR EXAM AGENCY 1. Agency: R2 § 1: The fiduciary relation which results from the manifestation of consent by one person to another and the other shall act on his behalf and subject to his control, and consent by the other so to act a. Objective test: Reasonable person // Subjective test: Actual consent (not ‘disclaimers’) 2. Principal: The one for whom action is to be taken 3. Agent: The one who is to act; the fiduciary; the duty to act in the principal’s best interest 4. Authority: a. R2 § 7: Authority: Power of agent to bind principal to acts done in accordance with principal’s consent b. R2 § 26: Creation of Authority; General Rule: Authority to do an act can be created by written/spoken words or other conduct of principal which causes agent to reasonably believe principal is giving consent c. R2 § 140: Liability Based Upon Agency Principles: Liability of principal to third person from agent’s action can be based on: (1) actual authority, (2) apparent authority, or (3) inherent authority. d. Express Actual Authority: Principal must give explicit permission to agent to take certain action e. Implied Actual Authority: Agent has authority to do what’s reasonably necessary to get assigned job done—implied from actions and general permission to act on behalf of principal f. Botticello v. Stefanovicz i. B leased property from W (but not his wife M); refuse to let B use option to purchase because M not included in lease; was W an agent for M? (marital status is not enough) ii. No manifestation by M that W would act for her, no acceptance, no understanding; no agency g. R2 § 27: Creation of Apparent Authority: Apparent Authority is created from written/spoken words or other conduct of the principal which causes the third party to reasonably believe the principal consents to have the act done by the agent on his behalf h. R2 § 8: Apparent Authority: Power to bind principal due to manifestations of the principal to the third person giving such power (e.g. past transactions, express notice, transactions with other third parties, etc.) i. Agency v. Non-Agency Relationships: i. Agency: Longer-duration work, less expertise, more control over the person, etc. ii. Non-Agency: Independent contractor; shorter-duration, more expertise, less control over person iii. Burden to prove agency relationship = person who wants the agency relationship to exist j. Inherent Authority: Job title, description, etc.; within ordinary course of business k. Estoppel: You acted, third party reasonably relied on your representation as agent; principal bound 5. Disclosure of Principals: a. R2 § 4: i. (1) Third party has notice of agent’s principal at time of transaction; disclosed principal ii. (2) Third party has notice agent has principal; no notice of principal’s identity; partially disclosed iii. (3) Third party has no notice agent has principal; undisclosed principal b. R2 § 8A: Inherent Agency Power: Agent’s power is derived from the agency relation c. R2 § 320: Principal Disclosed: Agent is not bound; Principal is bound d. R2 § 321: Principal Partially Disclosed: Agent is bound; Principal is bound e. R2 § 322: Principal Undisclosed: Agent is bound; Principal is not bound f. R2 § 329: Agent Who Warrants Authority: Person who purports to make a contract/representation on behalf of another who has full capacity but no power to bind becomes subject to liability to third party upon implied warranty of authority unless he’s manifested he doesn’t make such warranty or third party has notice that agent has no authority g. Ratification: i. Agent contracts for Principal w/o authority; Principal ratifies contract; retroactive authority ii. Third party must have believed the agent had authority to bind the principal at time of contract 6. Fiduciary Duties: a. R2 § 838: Duty to Act Only as Authorized: Except if privileged to protect self or others’ interests, agent is subject to a duty to act in accordance with the principal’s manifestations of consent b. R2 § 835: Duty to Obey: Agent is subject to a duty to obey all reasonable directions from principal c. R2 § 837: Duty of Loyalty: Agent is subject to a duty of loyalty to his principal in all agency matters i. Keep confidential information; no competition; no self-dealing; good conduct; no dual agency 7. Liability: a. R2 § 343: Torts: General Rule: Agent is liable for tort committed unless exercising privilege for principal or where principal owes no duty or less than normal duty of care to person harmed. b. Principal liable for agent’s tort: Agent’s a “servant” + Tort done in servant’s “scope of employment” c. R2 § 219: When Master is Liable for Torts of Servants: i. (1) When tort within scope of employment = Master is liable ii. (2) When tort is not within scope of employment = Master is not liable unless: 1. (a) master intended conduct or consequences; 2. (b) master was negligent or reckless; 3. (c) conduct violated a non-delegable duty of the master; OR 4. (d) servant purported to act or to speak on behalf of principal and there was reliance upon apparent authority, or servant was aided in accomplishing the tort by existence of the agency relationship d. R2 § 220: Definition of Servant: i. (1) Person employed to perform services in affairs of another with respect to physical conduct in the performance of services is subject to master’s control or right to control. ii. (2) Servant v. Independent Contractor factors: 1. (a) extent of control; 2. (b) whether agent is engaged in distinct occupation or business; 3. (c) kind of occupation with reference to locality and whether usually done by employee or independent contractor; 4. (d) skill required; 5. (e) whether employer or agent supplies instruments, tools, and place of work; 6. (f) length of time for employment; 7. (g) method of payment by time or by job; 8. (h) whether or not work is part of employer’s regular business; 9. (i) whether parties believe they’re creating master-servant relationship; 10. (j) whether principal is in business e. R2 § 228: General Statement: i. (1) Conduct of servant is within scope of employment if, but only if: 1. (a) it is of the kind he’s employed to perform; 2. (b) it occurs substantially within the authorized time and space limits; 3. (c) it is actuated, at least in part, by a purpose to serve the master; and 4. (d) if force is intentionally used, the use of force is not unexpectable by the master; ii. (2) Conduct by servant is not within scope of employment if different from that authorized, far beyond authorized time/space limits, or too little actuated by purpose to serve master f. R2 § 229: Kind of Conduct Within Scope of Employment—10 factors in (2): i. (a) whether or not the act is one commonly done by servants; ii. (b) time, place and purpose of the act; iii. (c) previous relations between master and servant; iv. (d) extent to which business of master is apportioned between different servants; v. (e) whether act is outside master’s enterprise; if within enterprise, whether entrusted to servants vi. (f) whether master has reason to expect such an act will be done; vii. (g) similarity in quality of act done to act authorized; viii. (h) whether instrumentality by which harm was done was furnished by master or servant; ix. (i) extent of departure from normal method of accomplishing authorized result; AND x. Whether act is seriously criminal. g. Cardozo’s terms: Frolic and Detour: i. Frolic: Employee departed from employment too much; not within scope of employment ii. Detour: Employee still within scope of employment because not departed too far from it h. Hayes v. National Service Industries, Inc. i. Hayes’ attorney settled his case with NSI; Hayes wants out of the settlement ii. Attorney has apparent, plenary authority to enter into binding agreements on behalf of clients i. Miller v. McDonald’s Corporation i. Woman injured on sapphire in Big Mac; sued McD’s though restaurant was 3K, McD licensee ii. No actual or apparent authority, but apparent agency j. R2 § 267: Master-Servant Apparent Agency Test: If master manifests that person is his servant or agent and causes third party justifiably to rely on the care or skill of the apparent agent, master is subject to liability to third person for harm caused by lack of care or skill of apparent agent/servant. PARTNERSHIP 1. Is there a Partnership? a. Holmes v. Lerner i. Urban Decay nail polish company; used term “we,” didn’t pay salaries, acted as if partners ii. Partnership = two or more people associated to carry on as co-owners of business for profit = yep b. UPA § 6: Partnership Defined: association of two or more people to carry on as co-owners of a business for profit unless formed as a different entity under a statute in this state or another state c. UPA § 7: Rules for Determining Existence of Partnership: Sharing of profits necessary; not sufficient d. RUPA § 202: Formation of Partnership: i. (a) association of two or more persons to carry on as co-owners of a business for profit forms a partnership, whether or not they intended to do so; ii. (b) association formed under other statute is not a partnership; iii. (c) following rules apply in determining existence of partnership: 1. (1) joint ownership of property isn’t sufficient; 2. (2) sharing of gross returns isn’t sufficient; 3. (3) share of profits is sufficient unless profits were received in payment for: a. (i) debt; b. (ii) wages or other employee compensation c. (iii) rent d. (iv) annuity or retirement benefit e. (v) interest or other charge on loan; or f. (vi) sale of goodwill of business or other property e. Factors to Consider in Determining Whether Partnership Exists: i. Control ii. Agreement to share losses iii. Contributions of property iv. Extent profit-sharing is only from business v. Parties’ characterization of relation f. Partnership types: i. At will ii. For a term iii. For a particular undertaking g. Beckman v. Farmer i. Law firm dissociation and share of future profits from past endeavor case ii. Profit-sharing agreement; correspondence referred to them as partners; warranty on bank lease h. UPA § 16: Partnership by Estoppel i. RUPA § 308(a): Liability of Purported Partnership (partnership by estoppel): i. (a) if person purports to be partner by words/conduct, person liable to third party if third party reasonably relied on representation and entered into transaction with purported partner; ii. (b) if purported partner’s representation made in public manner, person liable even if not aware third party relied on that representation and reasonably believed person was purported partner; iii. (c) if partnership liability results, purported partner liable as if partner; if no partnership liability results, purported partner liable jointly and severally with any person consenting to representation j. McGregor v. Crumley i. Dairy cow case; whether husband and wife were partners to subject her to liability for his contract ii. No manifestation they were partners (marital status not enough); wife was partners with her father k. State v. HL&P i. Four utilities in TX agree to jointly build nuclear power plant; two state and two private utilities ii. If co-tenancy, state utilities can’t be taxed; if partnership, business is own entity; all can be taxed 2. Partnership Agreement and Aggregate/Entity Theories: a. Aggregate Theory: Partnership exists as aggregate (sum) of its partners b. Entity Theory: Partnership exists separate from the partners as its own entity a. RUPA § 101(7): “Partnership agreement” means the agreement, whether written, oral or implied among the partners concerning the partnership, including amendments to the partnership agreement b. RUPA § 103: Effect of Partnership Agreement; Nonwaivable Provisions: i. (a) Relations among partners and between the partners and partnership are governed by partnership agreement. If agreement doesn’t cover it, RUPA governs; ii. (b) Exceptions where the partnership agreement cannot trump RUPA: 1. (1) vary rights/duties under 105 except to eliminate duty to provide statements to partners 2. (2) unreasonably restrict right of access to books and records under 403(b); 3. (3) eliminate duty of loyalty under 404(b) or 603(b)(3); but a. (i) partnership agreement can identify specific activities not in violation of duty of loyalty if not manifestly unreasonable; b. (ii) all partners or specific percentage must agree if act violates duty of loyalty 4. (4) unreasonably reduces duty of care under 404(c) or 603(b)(3); 5. (5) eliminates obligation of good faith and fair dealing under 404(d)…; 6. (6) vary power to dissociate under 602(a), except requiring notice in writing under 601(1) 7. (7) vary right of court to expel partner under 601(5); 8. (8) vary requirement to wind up partnership business in 801(4), (5), or (6); 9. (9) vary law applicable to LLP’s under 106(b); or 10. (10) restrict rights of third parties under RUPA. c. RUPA § 201: Partnership as Entity: (a) Partnership is an entity distinct from partners; (b) LLP continues to be the same entity that existed before the filing of a statement of qualification under Section 1001. 3. Partnership Property: a. RUPA § 203: Partnership Property: Property acquired by partnership is its property; not partners’. b. State v. Sylvester i. One partner in beauty shop was taking money from the till; she’s restricted from taking money except for business purposes according to Iowa Supreme Court c. RUPA § 204(d): Property acquired in partner(s) name, without indication in the instrument transferring title to property of the person’s capacity as partner or of existence of a partnership and without use of partnership assets; presumed to be separate property, even if used for partnership purposes d. RUPA § 204: When Property is Partnership Property: i. If acquired in the name of the partnership; ii. If acquired with reference to the partnership in the title; or iii. If acquired in the name of a partner with reference to the partner’s capacity as a partner or existence of the partnership e. RUPA § 501: Partner Not Co-Owner of Partnership Property (can’t be transferred by partner) 4. Partnership Decision-Making: a. RUPA § 401: Partner’s Rights and Duties: i. (f): Partners are principals of the partnership—equal rights to management of the business ii. (j): Ordinary course of business = majority; Outside ordinary course of business = unanimity b. RUPA § 104(a): Unless displaced by particular provisions, principles of law and equity supplement Act c. Ordinary v. Extraordinary: Purpose clause in agreement; past practices; other similar businesses d. RUPA § 301: Partner Agent of Partnership: Subject to the effect of a statement of partnership authority under Section 303: i. (1) Ordinary act “for apparently carrying on in the ordinary course of partnership business or business of the kind carried on by the partnership” binds partnership unless partner had no authority and third person had notice partner lacked authority; ii. (2) Extraordinary act by partner requires authority of other partners. e. RUPA § 303: Statement of Partnership Authority: i. (d)(1): Grants of authority contained in statement of partnership authority; binding on partnership ii. (f): A person not a partner is not deemed to know of a limitation on the authority of a partner merely because the limitation is contained in a filed statement (exception for real property) f. Kristerin Development Co. v. Granson Investment i. Ordinary course of business; G bound to contract with K that partners made; apparent authority 5. Fiduciary Duties: a. Meinhard v. Salmon i. Joint venturers; Salmon had fiduciary duty to Meinhard, so M gets part of the new venture S obtained due to their joint venture; duty to give notice to M of the opportunity ii. Cardozo quote: “Many forms of conduct permissible in a workday world for those acting at arm’s length are forbidden to those bound by fiduciary ties…Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.” b. RUPA § 103(b)(ii)—note that you can’t entirely eliminate fiduciary duties. c. RUPA § 403: Information Obligation on All Partners to One Another i. (a) Partnership must keep books and records at chief executive office; ii. (b) Partnership shall provide partners with books and records…includes opportunity to inspect and copy books and records during ordinary business hours; may impose reasonable charge. iii. (c): Each partner and partnership shall furnish to a partner; and to legal representative of a deceased partner or partner under legal disability: 1. (i) without demand, information concerning partnership’s business and affairs reasonably required for exercise of partner’s rights/duties under partnership agreement or RUPA; 2. (ii) on demand, any information concerning partnership’s business and affairs, except to extent demand/information demanded is unreasonable or improper in the circumstances d. RUPA § 404: General Standards of Partner’s Conduct: Fiduciary Duties: i. (a): Only fiduciary duties partners owes to partnership and other partners are loyalty and care: ii. (b): Partner’s duty of loyalty to the partnership and the other partners is limited to the following: 1. (1) No taking partnership opportunities or using partnership property for personal gain; 2. (2) No self-dealing; 3. (3) No competing with partnership. iii. (c): Partner’s duty of care to partnership and other partners in conduct and winding up of partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. iv. (d): Partner shall discharge all duties to partnership and other partners under RUPA/partnership agreement and exercise any rights consistently with obligation of good faith and fair dealing. v. (e): Partner does not violate a duty or obligation under RUPA or partnership agreement merely because partner’s conduct furthers partner’s own interest. (not in new RUPA) vi. (f): Partner may lend money to and transact other business with partnership, and as to each loan or transaction, rights and obligations of partner are same as those of a person who is not a partner e. UPA § 21: Fiduciary duties are not limited to the duty of loyalty and the duty of care—common law can fill in gaps, so there could be more fiduciary duties placed on partners. 6. Partner Liabilities: a. Contract: If there is authority for partner or agent’s act on behalf of the partnership, all partners are liable for the partnership’s contractual obligations; you must obtain partnership assets before partners’ b. Tort: Agent or partner acting in ordinary course of business (under authority of partnership) who commits a tort makes the partnership vicariously liable. c. RUPA § 305: Partnership Liable for Partner’s Actionable Conduct: i. (a): Partnership liable for partner’s torts committed in ordinary course of business/with authority. ii. (b): Partnership liable for partner’s mismanagement of money received by partner in course of partnership business/with authority of partnership. d. RUPA § 306: Partner’s Liability i. (a) Joint and several liability except as provided in (b) and (c) (aggregate theory) ii. (b) New partners not liable for partnership obligations from before they became a partner. iii. (c) Obligation of partnership while LLP is solely partnership’s; no partner liability for such obligations solely by reason of being or so acting as a partner. e. RUPA § 307: Action by and Against Partnership and Partners i. (a): Partnership may sue and be sued in the name of the partnership (entity theory) ii. (b): May sue partnership or partners or both in same action or separate actions iii. (c): Judgment against the partnership is not a judgment against a partner iv. (d): Must exhaust partnership assets before obtaining partner assets unless personally liable and: 1. (1): Judgment based on same claim has been obtained against partnership and a writ of execution on judgment has been returned unsatisfied in whole or in part; 2. (2): Partnership is a debtor in bankruptcy; 3. (3): Partner has agreed creditor need not exhaust partnership assets; 4. (4): Court grants permission to judgment creditor to levy execution against assets of partner based on a finding that partnership assets subject to execution are clearly insufficient to satisfy judgment, exhaustion of partnership assets excessively burdensome, or grant of permission is appropriate exercise of court’s equitable powers; or 5. (5): Liability imposed on partner by law or contract independent of partnership existence f. RUPA § 401: i. (c): Partnership shall reimburse partner for payments made and indemnify partner for liabilities incurred by partner in ordinary course of business of the partnership or for preservation of its business or property g. RUPA § 405: i. (a): Partnership may maintain an action against a partner for a breach of partnership agreement, or for violation of a duty to the partnership, causing harm to the partnership 7. Finance: a. Sources at Outset: Equity Capital (Partner investment) and Debt Capital (Lenders) i. RUPA § 401 1. (a): Must keep track of what each partner contributes in capital accounts a. Credit account with contributions and profits; debit with losses and distributions 2. (b): Default for profit and loss sharing is equal share (losses proportionate to profits) b. Sources During the Life of the Partnership: i. Investment from Partners 1. RUPA § 404(f): Allows partners to lend money and transact business with partnership; Subsequent capital contributions, as called for by the Managing Partner, shall be made by each partner in proportion to his or her respective distributive share. In the event any partner fails to make such subsequent capital contribution, the partners who have contributed their shares may consider the sums so advanced as loans to the partnership. 2. Leverage—if you make a lot of money, loans are good; if you make less money, investments are better than loans. ii. New Partners/Investors 1. RUPA § 401: a. (i): A person may become a partner only with the consent of all of the partners iii. Reinvest Profits iv. New Loan (from current or new lender) c. Partnership Salaries: i. RUPA § 401: 1. (h): A partner is not entitled to remuneration for services performed for the partnership, except for reasonable compensation for services rendered in winding up the business of the partnership 2. (j): Ordinary course of business requires majority vote for things such as salary ii. RUPA § 103(b)(2): Can’t give salaries that go against the duty of loyalty under 404(b) d. Distributions: i. Must be evenly divided among partners unless accounted for in partnership agreement. ii. Losses allocated same percentage as profits unless agreed in partnership agreement. iii. Partners must agree to make distributions (401(f) and (j)) and pay creditors first when winding up the business. RUPA § 807. e. Sell Out: i. RUPA § 502: Partner’s Transferable Interest in the Partnership: The only transferable interest of a partner in the partnership is partner’s share of profits and losses and partner’s right to receive distributions. The interest is personal property ii. RUPA § 503: 1. (a)(3): Transferee of partner’s transferable interest has no management rights 2. (d): Transferor retains rights and duties of partner other than those transferred f. Judgment Enforcement: i. RUPA § 504: 1. (b): Foreclosing of charging order: Court sells partner’s transferable interest. If partnership attempts to freeze out judgment creditor, court can force a sale. 2. (c): Interest charged can be redeemed by the judgment debtor, with property other than partnership property by one or more other partners, or with partnership property by one or more other partners with consent of all of partners whose interest are not so charged. 3. (e): This section is the exclusive way for judgment creditor to get partner’s assets for personal liability purposes—lien on partner’s transferable assets only. ii. RUPA § 501: A partner is not a co-owner of partnership property and has no interest in partnership property which can be transferred, either voluntarily or involuntarily. (entity theory) 8. Dissociation: a. Partners pay a partner for his shares so the partner can leave without terminating the partnership b. If partnership buys out partner under UPA (not dissociation, just buy-out), it’s a new partnership c. RUPA § 101(8): “Partnership at will” means a partnership in which the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking d. RUPA § 103(a) and (b): Partnership can’t prevent a partner from dissociating. e. RUPA § 601: Partner is dissociated from partnership upon occurrence of any of the following events: i. (1): The partnership’s having notice of the partner’s express will to withdraw as a partner or on a later date specified by the partner’ ii. (2): Event agreed upon in partnership agreement as causing partner dissociation; iii. (3): Partner’s expulsion pursuant to partnership agreement; iv. (4): Partner’s expulsion by unanimous vote of other partners if: 1. (i) it’s unlawful to carry on the partnership business with that partner; 2. (ii) partner has transferred all or substantially all of transferable interest; 3. (iii) corporate partner provision… 4. (iv) partnership that is a partner has been dissolved and business is being wound up; v. (5): On application by partnership or another partner; expulsion by judicial determination… vi. (6): The partner’s… vii. (7): Upon a partner’s death viii. (8): Partner trust distributes entire transferable interests… ix. (9): Partner estate distributes entire transferable interests… x. (10): Termination of partner not an individual, partnership, corporation, trust, or estate. f. RUPA § 602: Partner’s Power to Dissociate; Wrongful Dissociation i. (a): A partner has the power to dissociate at any time, rightfully or wrongfully, by express will pursuant to § 601(1). ii. (b) Wrongful dissociation occurs when: 1. (1): In breach of express provision of partnership agreement; 2. (2): Partnership for term/undertaking and before expiration of term/undertaking: a. (i): Partner withdraws by express will (unless withdrawal follows within 90 days after another partner’s dissociation by death or otherwise under § 601(6) through (10) or wrongful dissociation); b. (ii): Partner is expelled by judicial determination; c. (iii): Partner is dissociated by becoming debtor in bankruptcy; or d. (iv): Partner not an individual, trust or estate, expelled or otherwise dissociated because willfully dissolved or terminated. iii. (c): Wrongful dissociating partner liable to partnership and partners for damages from dissoc. g. RUPA § 603: Effect of Partner’s Dissociation i. (a): Partner’s dissociation = dissolution/winding up, Article 8. Otherwise, Article 7 applies. ii. (b): Upon partner’s dissociation: 1. (1) Partner’s right to participate in management terminates (except for § 803); 2. (2) Partner’s duty of loyalty (404(b)(3)) terminates; and 3. (3) Partner’s duty of loyalty (404(b)(1) and duty of care (404(c) continue for events before partner’s dissociation unless partner participates in winding up under § 803. h. RUPA § 701: i. (a): Partnership can buy out the dissociating partner. ii. (b): Buyout price is amount distributable under 807(b) if, in date of dissociation, assets of partnership were sold at price equal to the greater of liquidation value or value based on sale of entire business as a going concern; interest must be paid from date of dissociation iii. (c): Damages for wrongful dissociation and all other amounts owing from dissociated partner to partnership must be offset against buyout price. Interest must be paid from date amount owed iv. (d): A partnership shall indemnify a dissociated partner whose interest is being purchased against all partnership liabilities, whether incurred before or after dissociation, except liabilities incurred by an act of dissociated partner under § 702 v. (e): If the person who is to be bought out can’t reach agreement with partnership, partnership can tender the amount it thinks should be paid and person can contest in court under (i) vi. (g): Partnership is supposed to tell person being bought out how they calculated the price vii. (h): Might not have to pay partner until the end of the term for wrongful dissociation i. RUPA § 702: i. (a)(1) – (3): Partnership is bound by the acts of the dissociated partner which would have bound the partnership under § 301 before dissociation only if at the time of entering the transaction the third party thought the dissociated partner had authority and didn’t have notice of dissociation. j. RUPA § 703: i. (a): A partner’s dissociation does not discharge the partner’s liability for partnership obligations incurred before dissociation. A dissociated partner is not liable for partnership obligations incurred after dissociation, except as otherwise provided in subsection (b). ii. (b): If third party doesn’t have knowledge of partner’s dissociation, he can hold dissociated partner liable for at least the next two years—apparent authority logic. 1. Must be a reasonable belief that the dissociated partner is still a partner (and no notice) 2. Dissociated partner can give notification to creditors to avoid partnership liability k. RUPA § 704: Cut off apparent authority of dissociated partners with notice to partnership’s creditors. 9. Dissolution; Wind-up; Termination a. UPA—dissolution is the only option if a partner leaves the partnership (§§ 29 and 31) b. RUPA Article 8 = Dissolution (windup and termination) c. Wind-up and ultimate termination of the partnership d. RUPA § 301—“appropriate in the course of business” changes during wind-up. e. RUPA § 801: A partnership is dissolved if: i. (1): In a partnership at will, the partnership’s having notice from a partner, other than a partner who is dissociated under §§ 601(2)-(10), of partner’s express will to withdraw as a partner, or on a later date specified by the partner ii. (2)(i): Half of the partners can trigger dissolution upon a partner’s wrongful dissociation… f. RUPA § 802: Partnership Continues after Dissolution i. (b): At any time after dissolution and before winding up of its business is completed, all partners, including any dissociating partner other than a wrongfully dissociating partner, may waive the right to have partnership’s business wound up and partnership terminated. g. RUPA § 804: Power to bind during wind-up i. Partnership is bound by partner’s act after dissolution if it is (1) appropriate for winding up partnership business; or (2) would have bound partnership under 301 before dissolution if third party didn’t have notice of dissolution. h. RUPA § 805: You can file a statement of dissolution to alert people partnership is winding up i. RUPA § 807: Settlement of Partner Accounts i. (a): Partnership must pay creditors, including, partners who are creditors, before partners ii. (b): Partner must contribute to partnership an amount equal to any excess of charges over credits in his account; partnership must make distribution to partner in amount equal to any excess of credits over the charges in the partner’s account. 1. Apply profits/losses as agreed for purposes of covering debts at dissolution 2. Use the value greater of the liquidation value or the value based on a sale of the entire business as a going concern in buyout situation iii. (d): After settlement of accounts, partners shall contribute, in proportion to their partnership losses, the amount necessary to satisfy partnership obligations not known at time of settlement. j. Creel v. Lilly—UPA: i. Whether UPA permits estate of deceased partner to demand liquidation of partnership assets and dissolution of the partnership ii. Where surviving partners have in good faith wound up the business and the deceased partner’s estate is provided with accurate accounting allowing for payment of proportionate share of business, forced sale of all partnership assets is unnecessary k. Kovacik v. Reed i. Kovacik put in money; Reed put in time and effort; K says R needs to pay at windup ii. Where one person contributes money and other contributes labor, court won’t make laborer pay moneybags half of the losses; they both run risks of their own loss types iii. (literal reading of statutes would make R pay—RUPA rejects Kovacik holding) l. Bohatch v. Butler & Binion i. Bohatch turned partner in for unethical conduct; was kicked out of partnership ii. Firm’s only duty to her was not to expel her in bad faith or for self-gain iii. RUPA § 601: 1. (3): Partner can be expelled pursuant to the partnership agreement—partnership can provide reasons above and beyond RUPA reasons 2. (4): Provides reasons for expulsion including unlawfulness of carrying on business with that partner and a transfer of the partner’s assets… 3. (5): Provides reasons for expulsion… iv. RUPA § 404: 1. (b): Fiduciary duty of loyalty… a. If you know it’s in the partnership agreement, you had notice and consented to it when you became a partner b. This provision contains ways in which you have a duty not to harm the partnership—not necessarily other partners 2. (d): Obligation of good faith and fair dealing—gives Bohatch a claim against partners. However, this section is qualified, saying that you are invoking rights under RUPA and partnership agreement, not just general loyalty as in Meinhard. m. Page v. Page i. Defendant argues this is a term partnership that was to end when the partnership began to turn a profit, “until they had regained everything they had invested in the partnership” 1. Then, plaintiff’s dissociation would be wrongful and subject him to damages ii. This is a partnership at will; partner may not, by use of adverse pressure, “freeze out” a co-partner and appropriate the business for his own use—has to compensate co-partner LIMITED PARTNERSHIP: 1. TWEN Supplement Part III-A 2. Differences between General Partnership and LP: a. Creation b. Types of Partners c. Personal Liability d. Management e. Profit and Loss-Sharing f. Dissolution g. Name Requirement 3. In General: a. Limited in liability b. Limited in number of partners c. Must have at least one general partner d. RULPA § 303(a): Control liability risks e. RULPA § 403: General partner of limited partnership has same rights as a partner in a general partnership, including management power; limited partners have no management rights 4. History: a. Statutory only b. UPA for general partnerships (1914) c. ULPA for limited partnerships (1916) i. Cases not provided for, use UPA. d. RULPA (1976) i. Linked back to UPA e. RULPA (1985) i. This is the one we’re using; linked to RUPA still—RULPA § 1105 f. Re-ULPA (2001) i. Newest version; not adopted yet by most states; Iowa has adopted it; not linked to UPA at all 5. Creation/Formation of a Limited Partnership: a. Certificate of Limited Partnership must be publicly filed with the Secretary of State i. Gives notice to public for liability purposes as to who is a general and limited partner ii. Used to require disclosure of partner contributions iii. RULPA § 102: Name of LP—must include “Limited Partnership” or “LP” in name iv. Cannot have the name of a limited partner in the name of the entity b. One general and one limited partner required c. Can’t unintentionally form one of these; typically has written partnership agreement as well d. RULPA § 201(a): Required provisions in Certificate 6. Management/Governance of the Limited Partnership: a. RULPA § 301(b)(2): Unanimous consent required to admit new partners to LP b. RULPA § 303: i. (b)(6)(v): If limited partnership agreement permits limited partners to remove general partner, the exercise of this authority will not by itself cause the limited partners to lose their limited liability c. Limited partners have limited power—no management power unless provided in partnership agreement d. General partners have regular partner management power 7. Limited Liability of Limited Partners: a. General partners have the same liability as partners in a general partnership (RUPA § 306) b. RULPA § 303: i. (a): Limited partners have no liability unless they: 1. (1) Are also a general partner, or 2. (2) Participate in the control of the business: a. (i) Even then, only liable to third parties if the third party reasonably believed, based on the limited partner’s conduct, the limited partner was general partner ii. (b): Some control acts by limited partners are not deemed to create liability for limited partner 1. (1): Exemption from liability even if he’s the partnership’s employee or agent 2. Safe Harbor Provision (e.g. voting, 303(b)(6)(i)-(ix)) iii. (c): (b) safe harbor actions are not exhaustive c. Zeiger v. Wilf i. Wilf was limited partner, but VP of corporation that was general partner of LP ii. Wilf was acting as GP—disclosed principal situation—Zeiger knew Wilf was acting as officer of corporation, so he knew Wilf was just an agent and the real “person” he should sue is corporation iii. § 303(b)(1) Safe Harbor—Wilf was acting as officer of the general partner/corporation d. Progression of Limited Partner Liability: i. ULPA § 7: “Control” = liability ii. RULPA (1976) § 303: Control “substantially the same as general partner” = liability; Control otherwise = liability to parties who reasonably relied; Safe Harbor iii. RULPA (1976 and 1985 amendments) § 303: Liable if you engage in control, but only to those who relied; Safe Harbor provisions determine what control does not create liability iv. ULPA (2001) § 303: No liability for limited partnership obligations, period. 8. Limited Partnership Finances: a. RULPA § 504: Share profits proportionately to what the partners invested; Distributions of cash or other assets of a limited partnership shall be allocated among the partners and among classes of partners in the manner provided in writing in the partnership agreement. If the partnership agreement does not so provide in writing, distributions shall be made on the basis of the value, as stated in the partnership records required to be kept pursuant to Section 105, of the contributions made by each partner to the extent they have been received by the partnership and have not been returned. b. RULPA § 702: You can transfer your interest in LP, but limited to partnership transferable interests i. Except as provided in the partnership agreement, a partner ceases to be a partner upon assignment of all of his partnership interest 9. Limited Partnership Withdrawal and Dissolution: a. RULPA § 801: Nonjudicial Dissolution i. (4): Withdrawal of a general partner (if only one) will only allow for LP to continue if within 90 days all partners agree in writing to continue the business and appoint additional general partners 1. If already another general partner, partners still need to unanimously agree to continue b. General partner can withdraw at will; limited partner must give six months’ written notice c. RULPA § 602: General partner may withdraw from LP at any time by giving written notice to other partners; however, if withdrawal violates partnership agreement, LP may recover damages for breach. d. RULPA § 603: Limited partner may withdraw from a limited partnership upon not less than six months’ prior written notice to each general partner at his address on the books of the LP at his office in this state 10. Fiduciary Duties in a Limited Partnership: a. General partners have greater fiduciary duties; Limited partners fiduciary duties in proportion to control b. Newest ULPA says limited partners don’t have any fiduciary duties LIMITED LIABILITY COMPANIES 1. TWEN Supplement: ULLCA (1996) is what we are using 2. Creation of LLC: a. ULLCA § 103: Operating Agreement: i. Similar to partnership agreement; rights of members and managers; internal matters; permissive ii. If none, default is ULLCA (note—silent on profits and losses, so that must be in agreement) iii. Requires unanimity to create (can be oral) b. ULLCA § 201: LLC is entity distinct from members. c. ULLCA § 202: One or more persons may organize an LLC (just need one person) d. ULLCA § 203: i. (a): File Articles of Organization (external matters-publicly filed) 1. Name, address, agent, organizer, term, etc.; “Limited Liability Company” or “LLC” 2. Whether LLC is member-managed or manager-managed (can put in operating agrmnt) ii. (b): Articles of Organization may set forth provisions permitted to be set forth in an operating agreement or other matters not inconsistent with law iii. (c): Articles of Organization may not vary the nonwaivable provisions of § 103(b) 3. Management Power: a. Statute defaults to member-management b. Note—managers don’t have to be members (can be hired, like directors of corporations) c. Member-managed is more like partnership; manager-managed is more like corporation d. ULLCA § 404: i. (a)(1): If member-managed, members have management power and no liability. ii. (b)(1): If manager-managed, manager has management power and no liability iii. (c): Matters requiring unanimous consent of members: 1. (1) Amendment of operating agreement; 2. (2) Authorization/ratification of acts under 103(b)(2)(ii) otherwise violating loyalty duty; 3. (3) Amendment of articles of organization; 4. (7) Admission of a new member; 5. (9) Consent to dissolve company; etc. 4. Finances: a. Taxed the same as a partnership unless the LLC opts to be taxed like a corporation (IRS 1997) b. Can only transfer your “distributional” interest (same as RUPA §§ 501, 502, and 503) c. Creditor can only get at my financial rights in LLC, like with a partnership (use piercing corporate veil) 5. Fiduciary Duties: a. ULLCA § 103(b): Restrictions on fiduciary duty issues b. Member-managed: All are managing, so all have fiduciary duties to one another and to the LLC c. Manager-managed: Managers have fiduciary duties to members and LLC; Members do not 6. Authority: a. ULLCA § 404: Actual Authority in LLC i. If member-managed, they share authority like partners—equal vote ii. If manager-managed, actual authority lies with managers—equal vote; if more than one manager, majority rules; no votes from members who aren’t managers iii. Internal management—encompasses fiduciary duties b. ULLCA § 301: Agency of Members and Managers (Apparent Authority) i. (a)(1): Each member is agent for purpose of LLC’s business…acts of member in ordinary course of business bind the company unless member had no authority to act for LLC in the particular matter and person with whom member was dealing knew or had notice member lacked authority 7. Liability: a. ULLCA § 303: Liability of Members and Managers: i. (a) LLC’s debts/obligations are solely LLC’s unless member or manager is personally liable ii. (b) failure to observe is not ground for imposing personal liability on members/managers; iii. (c) All members of LLC liable in capacity as members if Articles specify and member has consented in writing by adoption of that provision or agreement to be bound by it. b. LLC is liable—not members and managers (default) c. Webber v United States Sterling Securities, Inc. i. LLC committed tort; plaintiff tried to sue individual members ii. DE LLC statute shields LLC members from liability for things only be liable for in capacity as members; if member is personally at fault for tort, still personally liable 8. Dissociation: (§§ 601, 602, 701) and Dissolution (§ 801, etc.) are similar to partnerships and RUPA. a. Lieberman v. Wyoming.com LLC i. Lieberman fired by LLC; withdrew; DE LLC doesn’t allow withdrawal unless in agreement ii. Entitled to have liquidated distribution under agreement; pay him his share on date of withdrawal 9. Conversion: (ULLCA § 902: Convert to a different business entity; like merger, but just your entity) COPY TABLE ON PAGE 39 OF CORPORATIONS E&E LIMITED LIABILITY PARTNERSHIPS 1. 1992: Texas approved the first LLP statute. 2. RUPA procedures to get from partnership to LLP: a. RUPA § 306(c): b. RUPA § 1001 et seq. c. File statement of qualification with Secretary of State and have registered agent, use LLP in name, etc. d. Partnership doesn’t end—still the same contracts and such. 3. Limited Liability: a. Partners have individual liability for torts they commit, but not contract or other claims; b. LLP is still liable for partnership liabilities as it was with general partnership c. LLP vicariously liable for agent and partners’ torts committed within the ordinary course of business i. RUPA § 305. d. RUPA § 306(c): LLP partners not liable for partnership liabilities for obligations incurred while the partnership is a limited liability partnership solely by reason of being or so acting as a partner (have to be individually personally liable) 4. Authority: a. All partners have apparent authority to bind the LLP for acts taken in the ordinary course of business LIMITED LIABILITY LIMITED PARTNERSHIPS 1. Created so general partners aren’t personally liable for partnership obligations 2. Still general and limited partners for management purposes 3. Not all 50 states have LLLP laws. a. If your LLLP is sued in a forum that doesn’t recognize LLLP’s, the state may default to limited partnership law, or general partnership law, both of which would impact the liability of partners 4. Most states limit these to professional entities 5. Some states recognize a partial shield against tort claims against limited partners in LLLP’s, but not contract obligations—for those, limited partners may be liable due to this partial liability shield. 6. Not as much case law either. PROFESSIONAL LIMITED LIABILITY COMPANY 1. Popular for law firms and other professional associations 2. Often include professional requirements (must have license to practice law; dental license; etc.) SUBCHAPTER S CORPORATION 1. Pass-through taxation like partnerships, but otherwise treated like a corporation. 2. Requirements: a. U.S. citizen shareholders b. Human (non-entity) shareholders c. 100 shareholders maximum ACCOUNTING 1. Balance Sheet: Statement that shows on one side assets, and on the other side, liabilities and equities a. Assets = Liabilities + Equity; Assets – Liabilities = Equities b. List assets at historical cost; don’t take into consideration growth or loss of value of that item c. Have date on balance sheet—shows financial snapshot of the company d. Depreciation formulas to determine how much a particular item depreciates each year: i. Computer = $1,000 1. Depreciation = (250) (parenthesis denote it’s depreciation bringing down the $1,000) 2. Income Statement: Attempt to measure someone’s ability to make money a. Revenue – Expenses = Net Income (Profit) b. Make sure you match expenses and income each month c. Depreciate items in statement ($5,000 computer should last 5 years, $1,000 a year, so only put $1,000 on each year for the computer); Accelerated Depreciation—put more cost up front to lower profit and taxes 3. Cash Flow Statement: Modified income statement a. Measure of how much more or less cash business has at end of year than it had at beginning of year b. Investment v. Expenses: Investment appears as depreciation in income statement (purchase of equipment); Expenses appear in income statement (things bought that will be used up within year) 4. Sole Proprietor Finance: If you have a good year, loans are better than investments; If bad year, investors are better than loans you have to repay CORPORATIONS 1. Corporate Purposes: a. A.P. Smith Mfg. Co. v. Barlow i. Board of directors donated $1,500 to Princeton as charitable contribution; shareholders contest ii. No express power; implied power (NJ law is very similar to MBCA) b. MBCA § 3.01: Every corporation has the purpose of engaging in any lawful business unless a more limited purpose is set forth in the articles c. MBCA § 3.02(1): Unless articles of incorporation provide otherwise, every corporation has perpetual duration and succession in its corporate name and has same powers as an individual to do all things necessary to carrying on its business and affairs, including power: (a) To sue and be sued, etc. d. MBCA § 8.01(b): All corporate powers shall be exercised by or under authority of the board of directors of the corporation, and the business and affairs of the corporation shall be managed by or under the direction, and subject to the oversight, of its board of directors, subject to any limitation set forth in the articles of incorporation or in an agreement authorized under section 7.32. e. Although the Board/agents are subject to control of the shareholders/principals, the board must make management decisions, of which this was; shareholders then have the power to remove the directors f. Corporations must assume the modern obligations of good citizenship as other individuals do g. Intra Vires: Within your legal power/abilities h. Ultra Vires: Beyond your legal power/abilities i. Defense: Corporation in bad contract can say “our articles don’t allow for us to enter into this contract,” so it’s an illegal contract and they can void it ii. MBCA § 3.04: Ultra Vires 1. (a) Except as provided in subsection (b), the validity of corporate action may not be challenged on the ground that the corporation lacks or lacked power to act; 2. (b) A corporation’s power to act may be challenged: a. (1) In a proceeding by a shareholder against the corporation to enjoin the act; b. (2) In a proceeding by the corporation, directly, derivatively, or through a receiver, trustee, or other legal representative, against an incumbent or former director, officer, employee, or agent of the corporation; or c. (3) In a proceeding by the Attorney General under section 14.30; 3. (c) In a shareholder’s proceeding under subsection (b)(1) to enjoin an unauthorized corporate act, court may enjoin or set aside act, if equitable and if all affected persons are parties to the proceeding, and may award damages for loss (other than anticipated profits) suffered by corporation or another party because of enjoining the unauthorized act i. Hierarchy of Corporation Law: Federal Statutes // State Constitutions // State Statutes (Corporation Code) // Case Law // Articles of Incorporation // Bylaws 2. Creating a Corporation: a. Articles/Certificate of Incorporation: i. MBCA § 2.02: Articles of Incorporation: 1. (a) Mandatory provisions: name, number of authorized shares, address of office and name of agent, name and address of each incorporator. 2. (b) Permissive provisions: purpose(s); powers; par value for shares; liability; etc. b. MBCA § 2.05: Organization of Corporation: i. (a) After incorporation: 1. (1): If initial directors are named in the articles of incorporation, the initial directors shall hold an organizational meeting, at the call of a majority of the directors, to complete the organization of the corporation by appointing officers, adopting bylaws, and carrying on any other business brought before the meeting; 2. (2): If initial directors are not named in the articles, the incorporator(s) shall hold an organizational meeting at the call of a majority of the incorporators: a. (i) to elect directors and complete the organization of the corporation; or b. (ii) to elect a board of directors who shall complete the organization of the corporation ii. (b) Action required or permitted by the Act to be taken by incorporators at an organizational meeting may be taken without a meeting if the action taken is evidenced by one or more written consents describing the action taken and signed by each incorporator. c. Unanimous consent: A corporation can unanimously consent by having a lawyer draft consent minutes to cover substantive action and have incorporators or directors approve everything done. d. Bylaws: Rules of the road for the corporation e. Minute Book: Contains certified copy of articles, bylaws, minutes of shareholder and board meetings, record of stock/share ownership; typically kept at corporation headquarters f. MBCA § 2.06: If there’s a conflict between the articles and bylaws, the articles have to be consistent with the statute and the bylaws have to be consistent with the articles; hierarchy controls g. MBCA § 15.01: Authority to Transact Business Required (for Foreign Corporations): i. Must obtain certificate of authority from secretary of state to transact business under section 3. Contracting Before Incorporation: a. MBCA § 2.03: The corporate existence begins when the articles of incorporation are filed b. MBCA § 2.04: Liability for Preincorporation Transactions: All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this Act, are jointly and severally liable for all liabilities created while so acting. c. Corporation can retroactively adopt contracts entered into pre-incorporation d. If people are doing business together, and it’s not a corporation yet, the default entity is a partnership e. Liability of corporation if it’s formed for pre-incorporation contracts: i. No liability unless corporation gets novation from the third party to release the promotors from liability and take on liability itself; or it can join the promotors on the lease and share liability f. Defensive Theories: i. De Jure Incorporation 1. You incorporated effectively, even though minor defects to your incorporation ii. De Facto Incorporation 1. Corporation code must allow for it a. MBCA § 2.04 2. Must be a bona fide (colorable) attempt to incorporate 3. Promoter must have acted in good faith he was acting for the corporation iii. Corporation by Estoppel 1. If you acted as if there was a corporation, you’re estopped from that changing now 2. Corporation can’t avoid a contract due to defective incorporation = true estoppel 3. Third party can’t avoid contract due to corporation’s defective incorporation = principle of corporation law 4. Allows shareholders of defective incorporation to retain limited liability because third party knew it was a contract with a corporation = principle of corporation law iv. Cantor v. Sunshine Greenery, Inc. 1. Brunetti acted in good faith he had incorporated; de facto & estoppel corporation present v. Robertson v. Levy 1. D.C. statute doesn’t care if promoter knew he had faulty incorporation—either way, he’s liable; no good faith attempt; third party reasonably though it was contracting with a corporation; no de facto or estoppel corporation. vi. Stone v. Jetmar Properties, LLC 1. Deed invalid because delivered before incorporation and you can’t deliver a deed to a nonexisting entity; MN doesn’t recognize de facto corporations; no estoppel here because the reliance was induced fraudulently by promoter (he knew he hadn’t incorporated) 4. Capitalization: Stock Issuance: a. Who sells shares? i. Primary Market: Corporation sells shares to investors ii. Secondary Market: Stockholders sell shares to others b. Where do shares trade? i. Stock Exchanges (e.g. NYSE) and NASDAQ c. MBCA § 6.01: Authorized Shares i. (a) Must be set forth in articles of incorporation classes of shares, series within class, number in each class/series, preferences, rights and limitations for each share/class/series. ii. (b) Articles must authorize: 1. (1) one or more classes that together have unlimited voting rights; 2. (2) one or more classes together entitled to receive net assets on dissolution d. MBCA § 6.02: Terms of Class or Series Determined by Board of Directors i. (a) If articles allow, Board is authorized, without shareholder approval: 1. (1)-(3) to classify or reclassify any unissued shares; e. MBCA § 6.03: Issued and Outstanding Shares: i. (a) Corporation may issue the number of shares authorized by articles; shares are outstanding until reacquired, redeemed, converted, or cancelled. f. MBCA § 6.21: Issuance of Shares i. (a) Powers granted to Board in this section may be reserved to shareholders in articles. ii. (b) Board may authorize shares to be issued for consideration consisting of any tangible or intangible property or benefit to corporation, including cash, promissory notes, services performed, contracts for services to be performed, or other securities of the corporation. iii. (c) Board must determine whether consideration received or to be received is adequate before issuing shares. iv. (d) When corporation receives consideration for shares, they’re fully paid and nonassessable v. (e) Corporation may place shares in escrow if for contract for future services or benefits vi. (f) Shareholder approval needed for certain issuances (not for cash, greater voting rights, etc.) g. Preferred Stock: i. Dividends (non-cumulative is default) ii. Preference on liquidation iii. Redemption iv. Voting rights (fill director seats; vote on other matters; both) v. Conversion rights vi. Preemptive Rights h. Par Value: i. Creditors will believe investors paid at least par for issued shares; Payment in tangible property— consideration; Established in the Articles—very hard to lower i. DE § 151: Classes and Series of Stock; Redemption; Rights j. DE § 152: Same as MBCA, except consideration is determined under subsections (a) and (b) of § 153 k. DE § 153: Consideration for Stock i. (a): Shares of stock with par value may be issued for such consideration, having a value not less than the par value thereof, as determined from time to time by the board of directors, or by the stockholders if the certificate of incorporation so provides (can’t issue for less than par value) ii. (b): Shares of stock without par value may be issued for consideration as determined from time to time by the board of directors, or by the stockholders if certificate of incorporation so provides l. DE § 162: Watered Stock Liability (par value land) i. (a): When the whole of the consideration payable for shares of a corporation has not been paid in, and the assets shall be insufficient to satisfy the claims of its creditors, each holder of or subscriber for such shares shall be bound to pay on each share held or subscribed for or by such holder or subscriber the sum necessary to complete the amount of the unpaid balance of the consideration for which such shares were issued or are to be issued by the corporation. 1. If the corporation isn’t able to pay its bills due to issuance of shares for less than par value, shareholders may be required to chip in money to make up the difference m. DE § 154: (last sentence): The excess, if any, at any given time, of the net assets of the corporation over the amount so determined to be capital shall be surplus. Net assets means the amount by which total assets exceed total liabilities. Capital and surplus are not liabilities for this purpose. i. Whatever is put into stated capital can’t be touched—it has to be left in the corporation. 5. Choice of Law: a. Internal Affairs: i. Law of the state of incorporation applies ii. Includes procedures for corporation actions and the rights and duties of directors, shareholders, and officers with respect to one another. iii. Relationship of the constituents of the corporation to each other. b. External Affairs: i. Law of the state of the wrong/contract/etc. applies ii. Includes the rights of third parties with respect to the corporation c. Delaware Corporation Code: i. Modern statute ii. Friendly to corporations for doing business iii. Lots of precedent because of the sheer number of corporations incorporated there iv. Court system is friendly to corporate disputes (Chancery Court = court of equity) d. Qualification to do business: i. If you incorporate in DE and have your principal place of business in another state, you need to register as a “foreign corporation” in your home state ii. MBCA § 15.01: 1. You have to qualify in home state if you’re a foreign corporation “doing business” there 2. Penalty: No access to state courts; back-fees once you finally register; etc. 6. Piercing the Corporate Veil: a. Questions to ask: Which state’s law should apply? Is this internal or external? Who has the burden of proof? (typically the person who wants to pierce the veil) Who decides? Judge or Jury? Equitable or legal remedy? Who is liable for corporation obligations? b. MBCA § 6.22: (DE § 162): Liability of Shareholders: i. (a) Shareholders aren’t liable for corporation’s obligations except to pay consideration for shares ii. (b) Shareholder only liable if personally liable due to own acts or conduct. c. No vicarious liability for corporation’s obligations; limited liability for shareholders. d. Shareholder is liable if: agent for undisclosed principal; personal guaranty for loan/K e. Dewitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Company i. WRF gave oral guarantee to pay transportation costs if company didn’t; SOF won’t let oral K in ii. Dewitt says WRF is the alter ego of the corporation (wants to pierce the corporate veil) iii. External affair because it involves a third party iv. Factors relevant to piercing the corporate veil: 1. Gross undercapitalization of the corporation for the purposes of the corporate undertaking 2. Failure to observe corporate formalities // Non-payment of dividends a. Protocol: shareholders, directors, officers, all have different roles b. Procedure: getting money out, making decisions, financial separation, etc c. Paying oneself a paycheck to siphon off funds rather than using dividends 3. Unfairness to plaintiff if you don’t pierce (courts more sympathetic to tort plaintiffs) f. Parent/Subsidiary Cases: i. In re Silicone Gel Breast Implants Liability Litigation 1. Subsidiary corporation MEC is breast-implant manufacturer; parent corporation is Bristol 2. No corporate formalities; Bristol controlled MEC; undercapitalization; unfairness; pierce ii. Dow Chemical 1. Parent and subsidiary corporations; recognized corporate formalities; carried out business dealings with due regard to separate existence and interests of each = no piercing allowed iii. Best Foods and CERCLA legislation 1. Parent owned contaminated real estate for subsidiary’s use; CERCLA imposes direct liability on such owners; they could directly sue parent and didn’t have to pierce. g. Enterprise Liability: i. Carlton case with taxi companies: 1. Carlton owned 10 different corporations, all of which owned two taxi cabs; Plaintiff injured in one of the cabs; plaintiff wanted to get to assets of all of the corporations (couldn’t pierce veil to get at shareholders); no enterprise liability…tough to obtain h. Reverse Piercing: i. Family Farm: 1. Family shareholders own farm corporation, which owned farm real estate; creditor judgment on farm corporation to get at the real estate assets; family tried to get the court to pierce the veil to treat them as individuals to obtain the MN Homestead Law exemption from having the real estate available to the creditor; reverse piercing worked i. Other Entities: i. In re Suhadolnik (LLC) 1. Michael owned LLC; LLC went bankrupt; creditor wanted to pierce the veil to get M 2. LLC’s are more likely to be run with fewer formalities, so not as many corporate formalities (if any) are required to withstand piercing test CORPORATE GOVERNANCE 1. Hierarchy: Employees (agents) // Officers // Board of Directors // Shareholders 2. MBCA § 8.01(b): All corporate powers shall be exercised by or under authority of board of directors of corporation, and business and affairs of corporation shall be managed by or under direction, and subject to oversight, of board of directors, subject to any limitation set forth in articles or in an agreement under § 7.32. 3. MBCA § 3.02: Powers of Corporation 4. Board of Directors: a. Role in Corporation: i. MBCA § 8.01(b): Power to Manage Corporation ii. MBCA § 8.01(c): Public Companies: Board Oversight 1. Pay attention to whether business plans carried out; big risks; sky-high view b. Board-Officer Overlap: nothing wrong with doing both; just have to draw careful lines i. Inside directors = officer and director; more fiduciary duty requirements ii. Outside directors = director only; often director at other public companies 5. MBCA § 8.02: Articles or bylaws can specify qualifications for board membership; general rule is that director doesn’t have to be resident of state of incorporation or a shareholder 6. Berle-Means Thesis: Articles written in 1930’s by law professors: Persons running American corporations at weren’t necessarily majority owners; separation of ownership and control of American, publicly-held corporations for the first time in U.S. history. 7. How Board Functions: a. Corporation Code: i. MBCA § 8.01: Requirements for and Functions of Board of Directors ii. MBCA § 8.02: Qualifications of Directors iii. MBCA § 8.03: Number and Election of Directors iv. MBCA § 8.20: Meetings v. MBCA § 8.21: Action Without Meeting vi. MBCA § 8.22: Notice of Meeting vii. MBCA § 8.23: Waiver of Notice viii. MBCA § 8.24: Quorum and Voting ix. MBCA § 8.25: Committees b. Articles of Incorporation: i. Appoints initial Board members c. Bylaws: i. Frequently says something about the Board 8. Agency: a. Directors are agents for the shareholders/principals; but they have managing power b. Directors are not agents of the corporation (MBCA §§ 8.20 – 8.25) c. Officers are agents; Board acts collectively, not as individual agents 9. Decision-Making: a. Personnel, Operations, Acquisitions; Board will choose important stuff and leave rest to officers 10. Meetings: a. MBCA § 8.20: Meetings i. (b): Unless articles or bylaws provide otherwise, the directors may permit any or all directors to participate in a regular or special meeting through the use of any means of communication by which all directors participating may simultaneously hear each other during the meeting. Anyone participating is “in attendance.” b. MBCA § 8.21: Action Without Meeting i. (a): Each director must sign a consent describing the action to be taken and deliver it to the corporation; “Consent by Decree” (must be unanimous) c. MBCA § 8.22: Notice of Meeting i. (a): Regular meetings do not require notice to directors. ii. (b): Special meetings require two-days notice to directors. d. MBCA § 8.23: Waiver of Notice i. (a): Directors can waive notice in writing, signed by the director entitled to the notice, and filed with the minutes or corporate records. ii. (b): If you show up at the meeting, you waive notice unless the director at the beginning of the meeting objects to holding the meeting and does not thereafter vote for or assent to action taken at the meeting. e. MBCA § 8.24: Quorum and Voting i. (a): You must have a majority of the directors to have quorum (default) unless otherwise regulated in the bylaws. ii. (b): The bylaws and articles can’t authorize a quorum of less than 1/3 of the fixed or prescribed number of directors iii. (c): To pass something with the minimum number of people at the meeting, you need a majority of those present (a majority of quorum) 11. Corporate Officers: a. Corporate Code: i. MBCA § 8.40: Officers 1. (a): A corporation has the offices described in its bylaws or designated by the board of directors in accordance with the bylaws 2. (b): The board of directors may elect individuals to fill one or more offices of the corporation. An officer may appoint one of more officers if authorized by the bylaws or the board of directors. 3. (c): The bylaws or the board of directors shall assign… 4. (d): ii. MBCA § 8.41: Functions of Officers iii. MBCA § 8.43(b): Officer can be removed by the Board of Directors at any time iv. MBCA § 8.44: 1. (a): Hiring someone as an officer doesn’t create a contract (employee at will) 2. (b): Contract is a separate matter—legal right v. legal power b. Articles: i. Not usually much present c. Bylaws: i. Where the main officers are laid out d. Power/Authority: i. MBCA § 8.41: Functions of Officers: look to bylaws and articles ii. Actual express and implied authority typically comes from resolutions by the Board of Directors for senior officers, though they’ll likely just give them general grants of power and discretion iii. Apparent authority—look at what the officer has been allowed to do in the past; this is typically limited to the most senior officers within the ordinary course of business 12. Ways to Control Management of Corporation: a. Influence who’s elected to the Board b. Require unanimous voting at Board meetings c. McQuade v. Stoneham i. Three original shareholders/directors agreed to vote for each other for director and officer of the corporation; falling out; two voted the other out from office and board ii. Agreement to vote one another onto the board is valid because shareholders can bind their votes in that regard; agreement to vote one another as officers is invalid because directors are supposed to have discretion to do what’s in the best interests of the corporation, and binding their hands in that sort of agreement goes against public policy d. MBCA § 7.32: i. (a): An agreement among the shareholders of a corporation that complies with this section is effective among the shareholders and the corporation even though it is inconsistent with one or more other provisions of this Act in that it: 1. (1): eliminates board of directors or restricts discretion or powers of board; 2. (3): establishes who shall be directors or officers of the corporation, or their terms of office or manner of selection or removal; 3. (5): establishes the terms and conditions of any agreement for the transfer or use of property… 4. Etc… ii. (b): An agreement authorized by this section shall be: 1. (1): set forth in articles or bylaws and approved by all shareholders at the time of the agreement, or in a written agreement that is signed by all persons who are shareholders at the time of the agreement and is made known to the corporation; 2. (2): subject to amendment by all persons who are shareholders at the time of the amendment, unless agreement provides otherwise; 3. (3): valid for 10 years, unless the agreement provides otherwise; iii. (c): You have to put a legend on the stock certificates with the agreement information on it for new shareholders to be able to bind those shareholders. This protects future owners; iv. (d): If corporation becomes public, this sort of agreement becomes invalid; public stock owners want the board to run things—not a bunch of shareholders; v. (e): Giving this power to other people relieves the board of their full fiduciary duties vi. (f): If you use one of these agreements, can’t be used as grounds to pierce corporate veil e. Villar v. Kernan i. K and V agree they won’t take salaries from corporation; K is in charge and hires himself ii. Maine equivalent of MBCA § 7.32 requires unanimous, written consent for this sort of agreement; theirs was only oral; not enough to satisfy the statute and bind K to promise f. Note—in closely-held corporations, shareholders’ discretion may be constrained somewhat 13. Shareholder Voting: 14. Voting to Elect Directors: a. Plurality: Highest vote-getters are elected to the Board b. Majority: Run-off elections until someone gets a majority of the votes—for each seat c. MBCA § 7.28: Voting for Directors: Straight v. Cumulative Voting i. (a): Unless otherwise provided in the articles, directors are elected by a plurality of the votes cast by shares entitled to vote in election at a meeting at which a quorum is present ii. (b): Shareholders don’t have right to cumulate votes for directors unless articles provide iii. (c): If included in the articles…cumulative voting…means the shareholders designated are entitled to multiply the number of votes they are entitled to cast by the number of directors for whom they are to vote and cast the product for a single candidate or distribute the product among two or more candidates. d. Formula for Cumulative Voting: [(N x S) / (D + 1)] + 1 i. N = number of directors the shareholder wants to elect ii. S = total number of shares voting (at meeting) iii. D = total number of directors to be chosen at the election e. MBCA § 10.22: You can vote for your nominees or against other nominees—if you get more votes cast against you than for you, you must resign after the election. f. MBCA § 8.03 g. MBCA § 8.04: Election of Directors by Certain Classes of Shareholders i. We can have one class elect three directors and another class elect two directors. ii. This is one way to limit who can vote for directors. h. MBCA § 8.05: Terms of Directors Generally i. Default is directors’ terms will expire each year at annual meeting; no staggered terms i. MBCA § 8.06: Staggered Terms for Directors i. Articles can provide for staggering terms for directors (not the bylaws) ii. This is one way to limit who can vote for directors. 15. Voting Group: a. MBCA § 1.40(26): “Voting group” means all shares of one or more classes or series that under the articles or this Act are entitled to vote and be counted together collectively on a matter at a meeting of shareholders. All shares entitled by the articles or this Act to vote generally on the matter are for that purpose a single voting group. b. MBCA § 8.04: Election of Directors by Certain Classes of Shareholders 16. Shareholders can vote to remove directors (before their term is up) a. MBCA § 8.08: Removal of Directors by Shareholders i. You may remove directors with or without cause unless the articles provide the directors may be removed only for cause. ii. For cause…probably requires misconduct. iii. (c): If cumulative voting is authorized, a director may not be removed if the number of votes sufficient to elect him under cumulative voting is voted against his removal. If cumulative voting is not authorized, a director may be removed only if the number of votes cast to remove him exceeds the number of votes cast not to remove him. b. MBCA § 8.09: Removal of Directors by Judicial Proceeding i. Must show cause to kick out a director (misconduct) 17. Shareholder Meetings: a. MBCA § 7.01: Annual meetings i. Once a year, this meeting will be held when and where it is stated in the bylaws, or at the principal place of business, etc. b. MBCA § 7.02: Special meetings i. (a)(2): A sufficient percentage (10%) of shareholders must request such a meeting; board can also request a special meeting of shareholders. c. MBCA § 7.03: Shareholders can sue to compel a meeting if the corporation fails to hold an annual meeting at least once a year. d. MBCA § 7.05: Shareholder Meeting Notice i. (a): Corporation must notify shareholders of the time, date, and place of each annual and special shareholders’ meeting no fewer than 10 nor more than 60 days before the meeting ii. (b): Corporation needn’t notify what’s going to go on at the annual meeting iii. (c): Corporation does need to notify about the purpose of a special meeting e. MBCA § 7.06: Waiver of Notice i. Shareholders can waive notice of these meetings f. MBCA § 7.07: i. (b): Shareholder of record by the “record date” has right to vote at meeting ii. Earliest record date = 70 days before meeting iii. Latest date for notice to shareholders = 10 days before meeting g. MBCA § 7.25: Quorum and Voting i. (a): Majority of shareholders = quorum default ii. (c): Majority of votes cast required to pass a motion 18. Shareholder Voting on Bylaws and Articles: a. MBCA § 10.03: Amendment of Articles of Incorporation i. Shareholders can vote to amend the articles; they can only amend the articles if the directors amend it first and pass it along to the shareholders for affirmance. b. MBCA § 10.20: Amendment of Corporate Bylaws 19. Record v. Beneficial Owner: a. Not all shareholders will be record owners; can be beneficial owner and not record owner i. Brokers purchase shares from company; sell to customers; customers are beneficial owners, while brokerage firm is record owner; holding shares in Wall Street Name instead of individual name. 20. Shareholder Voting on Directors’ Decisions due to “Fundamental Corporate Changes” 21. Proxy Voting and Regulations: a. Proxy Card: Not voting for or against measures on card; appointing someone else to vote on your behalf b. Proxy: The agent of the shareholder/principal c. MBCA § 7.22: Proxies i. (a): A shareholder may vote his shares in person or by proxy. ii. (b): A shareholder, or the shareholder’s agent or attorney in fact, may appoint a proxy to vote or otherwise act for the shareholder by signing an appointment form, or by an electronic transmission. An electronic transmission must contain or be accompanied by information from which the recipient can determine the date of the transmission, and that the transmission was authorized by the shareholder, the shareholder’s agent, or the shareholder’s attorney in fact. iii. (c): An appointment of a proxy is effective when a signed appointment form or an electronic transmission of the appointment is received by the inspector of election or the officer or agent of the corporation authorized to tabulate votes. An appointment is valid for 11 months unless a longer period is expressly provided in the appointment. iv. (d): An appointment of a proxy is revocable unless the appointment form or electronic transmission states that it is irrevocable and the appointment is coupled with an interest. Appointments coupled with an interest include the appointment of: (similar to agency…revocable…but can be made irrevocable) 1. (1): A pledge; (someone who has a mortgage or security interest in the stock) 2. (2): A person who purchased or agreed to purchase the shares 3. (3): A creditor of the corporation who extended it credit under terms requiring the appointment 4. (4): An employee of the corporation whose employment contract requires the appointment; or 5. (5): A party to a voting agreement created under section 7.31. d. Federal Proxy Regulations: (starts on page 891) i. Securities Exchange Act of 1934 ii. SEA Rule 14a-8 iii. SEA 12 securities includes: 1) securities traded on national securities exchanges; or 2) any class of equity securities having more than 500 record owners issued by a company with total assets of more than $10 million. 1. Thus, only public companies are subject to proxy regulation by the SEC. iv. SEA 14(a): Solicitation of Proxies in Violation of Rules and Regulations 1. It shall be unlawful for any person, by the use of the mails or by any means or instrumentality of interstate commerce or of any facility of a national securities exchange or otherwise…to solicit proxies without following these regulations. 2. SEC is authorized to regulate proxies in respect to any security registered pursuant to section 12 of the SEA. v. 14a-3: Regulates what you have to say if you’re a proxy solicitor vi. 14a-4: Requirements as proxy vii. 14a-5: Proxy statement rules viii. 14a-6: Proxy filing requirements ix. 14a-7: Provide list of or mail soliciting material to security holders upon request x. DE § 212(b) e. Effect of Proxy Regulations: i. On corporations: 1. Cost to comply 2. Shareholder suits due to misleading/false information a. Rule 14a-9: No solicitation subject to this regulation shall be made by means of any proxy statement, form of proxy, notice of meeting or other communication, written or oral, containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading. b. Virginia Bankshares, Inc. v. Sandberg i. Shareholders thought corporation’s proxy statement misleading ii. Must be “material” fact on which investors rely to be actionable iii. Two-part test for “material” (objective and subjective components): 1. Belief given in the proxy statement must be wrong, and 2. The corporation has to have known the belief was wrong. iv. SCt in Borat recognized implied cause of action for 14a-9 v. Plaintiff also must prove damages—must prove that misleading statement swung the vote—causative link that action couldn’t have been taken without the votes of those who were misled. ii. On corporate governance: 1. Impedes shareholder communication a. Shareholders have to be very careful to not cross the line into solicitation 2. Makes it unrealistic for shareholders to solicit proxies a. Especially for private individuals—expensive and burdensome b. 14a-7: At request, company has choice of mailing your solicitation to shareholders at your expense or providing you with list to do it yourself. i. Impedes shareholders trying to get proposal out before meeting c. 14a-8: i. Shareholder must have a specified minimum of shares to submit a proposal to the corporation. ii. If company gets shareholder proposal request, they have to decide whether to include or exclude it. iii. If they decide to exclude it, they have to tell the shareholder and SEC they’re doing it and give justification to SEC and prove exclusionary grounds under 14a-8 to support the exclusion. iv. “No-action letter”; green light for future action f. What kinds of proposals can a corporation exclude under 14a-8? i. 14a-8(i)(1): Improper Under State Law: If the proposal is not a proper subject for action by shareholders under the laws of the jurisdiction of the company’s organization. ii. 14a-8(i)(4): Personal Grievance/Special Interest: Can’t air dirty laundry… iii. 14a-8(i)(5): Relevance: If the proposal relates to operations which account for less than 5 percent of the company’s total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business. iv. 14a-8(i)(7): Management Function: Cannot infringe on managerial discretion of Board v. 14a-8(i)(8): Relates to Election vi. 14a-8(i)(9): False/Misleading Information vii. 14a-8(i)(10): Substantially Implemented Already viii. Lovenheim v. Iroquois Brands, Ltd. 1. Shareholder submitted proposal to have company research the pate foie gras it bought from France to make sure the geese weren’t force-fed. 2. Company says it isn’t economically significant under exception 5. 3. Court applied “significant relationship” test and said it wasn’t related. g. If shareholder proposal passes, it will be incorporated into the bylaws. h. 14a-11: New rules for proxy regulation purposes—won’t be applied until 2011 proxy season. i. Allows shareholders, if they own significant enough interest in corporation (or collectively 3%) to nominate a candidate for the Board and have their candidate and a bio supporting election in proxy statement materials. 22. Shareholder Inspection Rights: a. 14a-7 can provide shareholders an avenue through which to obtain shareholder list for company b. Pillsbury v. Honeywell i. P wants to see H records and send proposal to get company to stop selling munitions. ii. DE § 220: 1. (b): (first few lines are most important) a. No minimum amount of shares to be considered a shareholder b. “other books or records” c. You must have a proper purpose for inspection of corporation records 2. (c): a. If corporation turns you down or ignores you, you have a right to file suit in the Court of Chancery in DE to compel inspection. b. For stock list, corporation must prove shareholder has improper purpose c. For other books and records, shareholder must prove proper purpose iii. Scope of records: 220(b) “other books or records” 1. Records requested must be reasonably related to the purpose you are purporting iv. Proper purpose: 220(b) 1. Must be related to an economic interest 2. Can’t just be social or political interest v. Burden of proof: For other books and records, so P has the burden. c. MBCA § 16.01: i. Affirmatively imposes on the corporation an obligation to maintain certain records ii. (e): Articles of incorporation; bylaws; board minutes establishing rights of preferred shares; minutes of shareholder meetings; names/addresses of shareholders; annual reports; etc. d. MBCA § 16.02: Inspection Rights i. (a): You can have access to any of the records listed under 16.01(e) (you can get this stuff no matter what); requirements = five days written notice. ii. (c): Board minutes, accounting records, and record of shareholders iii. (d): You can get the things listed in (1), (2), and (3) of subsection (c) (board minutes, accounting records, and record of shareholders) if you have a proper purpose, reasonably related to that purpose, and good faith request. e. MBCA § 16.04: Burden of Proof i. Shareholder has burden of proof because they’re the one bringing the lawsuit. f. Kortum v. Webasto Sunroofs, Inc. i. WAG wants access to financial records from WSI and to dissolve WSI; Magna resists inspection request; Magna and WAG are owners of WSI; Kortum (CEO of WAG and director of WSI) wants access as well. ii. DE: Director’s inspection right—sky’s the limit, so long as it’s related to director’s role; corporation must prove the director has an improper purpose or no reasonable relation iii. “What is a fair price for my shares if the company were to dissolve” is a proper purpose 23. Voting Agreements v. Voting Trusts: a. Typically in closely-held corporations; arrangement among shareholders regarding ability to vote b. Voting Agreement: i. Shareholders agree to vote a certain way in the future. ii. MBCA § 7.31: 1. Two or more shareholders may provide for the manner in which they will vote their shares by signing an agreement for that purpose; unanimity is not needed. 2. A voting agreement created under this section is specifically enforceable. c. Voting Trust: i. MBCA § 7.30: 1. (a): One or more shareholders may create a voting trust, conferring on the trustee the right to vote or otherwise act for them, by signing an agreement setting out the provisions of the trust (which may include anything consistent with its purpose) and transferring their shares to the trustee. a. Must give names of owners and copy of voting trust to corporation 2. (b): Limit on duration—10 years. ii. This separates the voting rights and economic rights of the shares. iii. DE § 218(c): Equivalent of § 7.31 of MBCA for voting agreements; the rest of 218 deals with voting trusts; silent on specific enforcement. d. Ringling Bros.—Barnum & Bailey Combined Shows, Inc. v. Ringling i. Voting trust expired; voting agreement in place; Aubrey and James don’t want to vote along with Edith and Robert to grab four of five seats on the board. ii. This is an enforceable voting agreement; Aubrey’s votes don’t count FIDUCIARY DUTIES: 1. Statutory Provisions: a. Delaware: almost entirely corporate common law b. MBCA § 8.30: Standards of Conduct for Directors i. (a): Duty of loyalty: Must act in good faith in the best interests of the company; must put company’s interests ahead of your own personal interests or another group’s interests. ii. (b): Duty of care: Must be informed in decisions and oversight. iii. (c): Duty of candor: Must fully disclose self-interest and knowledge you have. iv. (d) – (f): Reliance Defenses c. MBCA § 8.31: Standards of Liability for Directors i. (a)(1): Special Defenses ii. (a)(2): Business Judgment Rule Exceptions iii. (b): Burden of Proof and Causation in suit against directors 2. Duty of Care: a. The duty not to be negligent. b. Defense = Business Judgment Rule c. Shlensky v. Wrigley i. Minority shareholder Schlensky sued majority owner of the Cubs, Wrigley, derivatively 1. Cubs should pay night games to bring in more people; violation of duty of care not to ii. BJR: Not court’s role to resolve policy and business management questions unless fraud; presumption that directors are operating in best interests of corporation; plaintiff must prove fraud, illegality, or conflict of interest to rebut the presumption and survive 12(b)(6) motion iii. Actions that rebut the BJR presumption: Fraud; illegal conduct; and conflict of interest d. A.P. Smith Co.: Proposition that BJR is for the benefit of the corporation in the long run. e. Ford v. Dodge i. Ford (and Board) decided not to pay dividends and instead put money into company to expand ii. Ford wanted to keep money in the company to “extend benefits of industrial system to as many people as possible”—court said he needs to remember who he works for (owners); pay dividends; injunction denied; BJR puts owners before community but protects pure business decisions f. Note—if a corporation becomes insolvent (less assets than liabilities), the corporation has more of a duty to creditors than to shareholders—they must be paid first. g. Statutes: i. ii. MBCA § 8.31: (attempt to codify the BJR) iii. Pennsylvania Business Corporation Law: 1. (a) Gives directors ability to look at other groups affected by corporate action (e.g. employees, suppliers, customers, shareholders, etc.). 2. (b) No need to put shareholders over other constituencies; no dominant interest a. Many states have (a) but not (b) because they want shareholders to be top iv. Iowa Business Corporation Act: 1. (1) Can consider any of these constituencies… 2. (2) You can subordinate the shareholder interest with any of the other interests. v. Benefit Corporations: 1. VT and MD enacted statutes amending their corporation codes; gave corporations option to elect in articles to be a “benefit corporation,”—this means the corporation has decided some social/environmental/etc. agenda is part of their purpose. Gives them ability to benefit that agenda—allows social objectives to take the front seat in some instances. h. Joy v. North i. Justifications for BJR: 1. Shareholders voluntarily incur risk of bad business judgment; 2. After-the-fact litigation is imperfect device to evaluate corporate business decisions; 3. Potential profit corresponds to potential risk; law shouldn’t give incentives to overly cautious corporate decisions ii. Limits to BJR—doesn’t apply in cases where the corporate decision: 1. Lacks a business purpose 2. Is tainted by a conflict of interest 3. Is so egregious as to amount to a no-win decision, or 4. Results from an obvious and prolonged failure to exercise oversight or supervision iii. Derivative v. Direct Suit: 1. Derivative: a. Pursuing corporation’s lawsuit against directors/officers because the defendants aren’t going to sue themselves on behalf of the corporation. 2. Direct: a. Suing on behalf of shareholder personally. iv. Special Litigation Committee: 1. Set up to determine whether the corporation should take on the derivative suit as the corporation’s suit; typically says no; courts typically follow what it says. i. Smith v. Van Gorkom i. Class action; company merged with another company; board meeting was only a few hours; they just trusted VG that it was a good business decision ii. Directors, in discharging their power to run the company, have fiduciary duty; fourth exception to the BJR: Directors must be informed for BJR to apply iii. DE § 141(e): Directors are fully protected in relying on good faith on reports made by officers. 1. However, in this case, VG’s oral report to the Board was not thorough enough to constitute a “report” under the statute. j. MBCA § 8.30: i. (a): Directors must act 1) in good faith, and 2) in a manner the director reasonably believes to be in the best interests of the corporation. ii. (b): When becoming informed in connection with their decision-making function…shall discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances. iii. (c): Disclose…information known to them…material to the discharge of their duties… iv. (d): It’s appropriate to rely on delegation v. (e): It’s appropriate to rely on reports, statements, financial statements… vi. (f): It’s appropriate to rely on 1) officers/employees reasonably believed to be reliable 1. Read comments for this section—Dore suggests it… k. MBCA § 8.31: Standards of Liability for Directors i. (a): Burden on plaintiff to prove defendant is liable… 1. (1): 2. (2): Alternative grounds for liability: a. (i): Action not in good faith b. (ii): A decision i. (A): Not reasonably believed by director to be in best interests of corporation, ii. (B): … l. Barnes v. Andrews i. Defendant was director for 8 months; two meetings; just did what friend/president told him ii. Receiver is suing because corporation lost a lot of money during the defendant’s tenure iii. Defendant had a duty to inform himself of what is going on with the company with some particularity; he violated this duty of care by failing to take action; can’t just be a figurehead iv. If you have special information/skills, you have a higher duty of discharge m. List of exceptions to BJR, in full: Bad faith // fraud // illegality // conflict of interest // no-win decision // no business purpose // not informed n. American Law Institute’s Principles of Corporate Governance § 4.01(c) (page 301 of statute book): A director or officer who makes a business judgment in good faith fulfills the duty under this section if the director or officer: i. (i) is not interested in the subject of the business judgment; ii. (ii) is informed with respect to the subject of the business judgment to the extent the director/officer reasonably believes to be appropriate under the circumstances; and iii. (iii) rationally believes that the business judgment is in the best interests of the corporation. o. Graham v. Allis-Chalmers: i. Absent grounds to suspect decision, corporate boards/officers can’t be charged with wrongdoing simply for assuming integrity of employees and honesty of their dealings on company’s behalf. p. In re Caremark Int’l, Inc., Derivative Litigation i. Shareholder derivative suit alleging directors violated duty of care because of lack of oversight that led to fine to the government for Medicare/Medicaid violations ii. No duty to monitor is required; so long as directors rationally decide something is in the best interests of the corporation, that is enough for the BJR; no duty to engage in corporate espionage to spy on employees, but there is a duty to have an information reporting system of some kind. iii. A director’s obligation includes a duty to attempt in good faith to assure that a corporation’s information and reporting system, which the board concludes is adequate, exists, and that failure to do so under some circumstances may, in theory at least, render a director liable for losses caused by non-compliance with applicable legal standards. iv. MBCA § 8.31(a)(2)(iv): Directors have a duty to devote attention to ongoing oversight of business and affairs of the corporation. q. McCall v. Scott i. Director need not act intentionally to be liable; gross negligence or recklessness is enough ii. Company’s Certificate of Incorporation doesn’t protect directors from injunctive orders, but rather just from monetary damages, even though the duties are no different. 1. Injunctive—Business Judgment Rule a. We won’t enjoin action if the director is acting within the BJR 2. Monetary—Business Judgment Doctrine a. We won’t expose to monetary damages if director is acting within the BJD r. MBCA § 2.02(b)(4) and DE. § 102(b)(7) = Exculpatory Provisions: i. If a corporation wants to, it can include a clause protecting directors from monetary liability damages subject to four exceptions, as in McCall—this is a “raincoat” or 102(b)(7) clause. ii. This only protects directors—not officers. iii. MBCA § 2.02(b)(4): A provision eliminating or limiting the ability of a director to the corporation or its shareholders for money damages for any action taken, or any failure to take any action, as a director except liability for: 1. (A): The amount of a financial benefit received by a director to which he is not entitled; 2. (B): An intentional infliction of harm on the corporation or the shareholders; 3. (C): A violation of section 8.33; or 4. (D): An intentional violation of criminal law. a. This tries to protect directors more than DE; also, the DE act is an affirmative defense for corporation; director has to prove this is an exculpatory clause issue; in MBCA, shareholder has the burden to prove what they allege fits into the exception in the exculpatory clause. iv. Why create such provisions? 1. After Van Gorkom, directors felt they were unreasonably exposed to liability as directors, even when acting in good faith; DE thus added 102(b)(7) to allow corporations to amend their certificates/articles to protect directors. v. Exceptions to these Exculpatory Provisions: (bad faith action taken) 1. Director shall not be personally liable for monetary damages for breach of fiduciary duties unless he violates: a. (i) breach of the director’s duty of loyalty to the corporation or its stockholders b. (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law c. (iii) under Section 174 of the General Corporation Law of Delaware (can’t give illegal dividends that would make the company insolvent because that hurts the corporation and its creditors); or d. (iv) for any transaction from which the director derived an improper personal benefit s. Disney case i. Disney hired Ovitz with “golden parachute”; things didn’t work out and he got his $ and left ii. Shareholder derivative suit alleging breach of duty of care (uninformed decision) with his $ iii. Gross negligence cannot qualify as bad faith conduct; directors are not liable; conscious disregard by Disney directors could be bad faith, but this was not bad faith. 3. Duty of Loyalty: a. The duty not to be greedy—put the corporation first. b. Three main rules: i. No competition with corporation for which you’re a director ii. Can’t take property or profits from corporation without accounting to the corporation for it iii. No conflict of interest allowed—director can’t be on both sides of the transaction c. Jones Co., Inc. v. Frank Burke, Jr. i. Duane Jones Co. directors/officers didn’t like working with DJ; told him they wanted to buy him out or they would leave and start their own business; stole customers and began new company while still working at DJ Co.; DJ employees also left to work for them. ii. Duty of loyalty includes protecting confidential information and not stealing clients, employees, directly competing while still working for company, etc. d. Corporate Opportunity Doctrine: i. When director or officer encounters a business opportunity and takes that opportunity not directly competitive with the company but related enough it violates fiduciary duties. ii. Guth v. Loft 1. “Line of Business” Test: a. Presented to corporate officer or director b. Business opportunity which corporation is financially able to take on c. Whether opportunity is in same line of business as corporation d. Whether corporation has interest or expectancy to undertake opportunity e. Self-interest of officer or director (conflict with corporation) iii. Northeast Harbor Golf Club, Inc. v. Harris 1. President of golf club purchased two properties, one presented to her as President for the club’s benefit, one she stumbled upon on her own; disclosed later. 2. Golf club isn’t in business of developing real estate; but does want to prevent it 3. Interest/expectancy is met; self-interest met as well 4. Adopted ALI Principles of Corporate Governance test, § 5.05 (241-242): a. (a): General rule: Director or senior executive may not take advantage of a corporate opportunity unless: i. (1) They first offer the corporate opportunity to the corporation and made disclosures concerning the conflict of interest and corporate opportunity; AND ii. (2) Corporate opportunity is rejected by the corporation; AND iii. (3) Either: 1. (A) Rejection of opportunity is fair to corporation; OR 2. (B) Opportunity is rejected in advance… OR 3. (C) Rejection is authorized in advance or ratified… b. (b): Definition of a Corporate Opportunity: i. (1) Applies to senior executives and directors who are aware of the opportunity: 1. (A) In connection with performance of official functions or under certain circumstances that should lead the director/officer to reasonably believe the person offering opportunity expects it to be offered to corporation; OR 2. (B) Through the use of corporate information or property, if resulting opportunity is one the director or senior executive should reasonably be expected to believe would be of interest to the corporation; OR ii. (2) Only applies to senior executive: 1. (A) Any opportunity to engage in a business activity of which a senior executive becomes aware and knows is closely related to a business in which corporation is engaged or expects to engage. iv. MBCA § 8.70(a): Directors taking advantage of a corporate opportunity may not be the subject of equitable relief. (doesn’t answer when something is a corporate opportunity…) e. Conflict of Interest/Self-Dealing: i. Where director/officer has an interest contrary to that of the corporation; ii. Old rule: Any conflict of interest transaction is void. iii. Evolved rule: Any conflict of interest transaction is voidable when someone on behalf of the corporation sues to make the transaction void. iv. Two-part test at common law: 1. Disinterested approval of the transaction and 2. The transaction is fair to the corporation—then it’s not void. v. DE § 144—assume this is the law on the test; or the Cookies § 8.31 test. vi. MBCA §§ 8.59-63—don’t use this on test. vii. If Dore is director of my company and owns shares in Disney, and the two companies are going to interact, you need to ask, “how many shares does he own,” “does this constitute a ‘financial interest?’”, and will this “influence a reasonable director’s decision-making”? viii. What if you have a director on both sides? Director must make full disclosure of interest, conflicted contract must be accepted/ratified by disinterested directors; deal must be fair. ix. Duty of Care: 1. Director should leave room during the decision of whether to enter into the conflicted contract; if he leaves and doesn’t participate in that decision-making process, he’s not liable for breach of duty of care. x. Cookies Food Products, Inc. v. Lakes Warehouse Distributing, Inc. (IA SCt) 1. Herrig replaced four of five directors with friends—no independence; ratified action 2. Two ways to read the rule: a. Ratification has to be by directors consistent with duties of care and loyalty i. In which case they were not independent, so this violated duties b. Ratification not voidable if directors not financially interested themselves i. In which case they were not financially interested, so no violation xi. HMG/Courtland Properties 1. Entire Fairness: a. Directors will be found to have acted with entire fairness where they demonstrate their utmost good faith and the most scrupulous inherent fairness of the bargain. xii. Traditional remedy in these cases: Rescission of contract with conflicted party. DERIVATIVE v. DIRECT SUITS 1. Direct: a. In which a shareholder seeks to vindicate her own personal claim growing out of her ownership of stock. b. In which defendant’s conduct injured only some shareholders, rather than all of them, though it could have injured all shareholders. c. Shareholder v. True Defendant or Corporation (who can then compel action or sue the defendant). 2. Derivative: a. In which a shareholder sues to vindicate the corporation’s claim. b. The shareholder’s right to bring the suit derives from the corporation’s right. c. Corporation v. True Defendant d. If corporation v. third party, then corporation has ability to decide whether to take the derivative suit e. If corporation v. board or director, then corporation has conflict of interest; derivative suit may be allowed 3. Plaintiff must prove they’re suing directly, not derivatively—biggest hurdle to deal with (direct avoids rules) a. Eisenberg v. Flying Tiger Line, Inc. i. Shareholders Flying tiger (airline) FTC (holding company) FTL 1. FT owned FTC; FTC owned FTL; FT and FTL merged; shareholders not have FTC stock instead of stock in airline; shareholders sued. ii. Shareholders must prove they are suing for an injury felt by the shareholders, not the corporation. 4. Contemporaneous Ownership Rule: a. If you want to institute a derivative suit, you must have standing; must be shareholder when you file suit and must have been shareholder at the time the wrong complained of occurred. 5. Exception with closely held corporations—shareholder may be able to pursue derivative claim without procedural rules as a direct suit so that recovery won’t be split between majority shareholder/defendant and plaintiff. a. Principles of Corporate Governance § 701(d). CORPORATE FINANCE 1. Raising Money: a. Equity: Get people to buy more stock b. Debt: Borrow money c. Equity v. Debt illustration: If corporation has $1 million, they can earn $1000 in income if they raised it all by stock; If corporation invests $500,000 and borrows $500,000, they have to pay $25,000 in interest to borrower, so return on equity is $75,000 of the borrowed total. 2. Corporate Borrowing: a. Bank Loan i. $1 million loan from one bank; interest owed as well as collateral b. Debentures/Bonds i. Issue many $1000 debentures or bonds to raise $1 total from many people ii. Debenture: Promissory note without collateral; unsecured promise to pay iii. Bond: Promissory note with collateral; secured promise to pay 3. Issuing More Stock: a. Preemptive Rights: i. Shareholder with preemptive rights has right to purchase proportionate number of shares of new issuance of shares that will enable the shareholder to maintain her percentage of ownership. ii. MBCA § 6.30: 1. (a): No preemptive right to new shares unless provided for in corporation’s Articles. 2. (b): If Articles provide for preemptive rights: a. (1): The shareholders of the corporation have a preemptive right, granted in uniform terms and conditions prescribed by the Board of directors to provide a fair and reasonable opportunity to exercise that right, to acquire proportional amounts of the corporation’s unissued shares upon the decision of the Board of directors to issue them. b. (3): Situations in which there are no preemptive rights: i. (i) shares issued as compensation to directors, officers, agents, or employees of the corporation, its subsidiaries or affiliates; ii. (ii) shares issued to satisfy conversion or option rights created to provide compensation to directors, officers, agents, or employees of the corporation, its subsidiaries or affiliates; iii. (iii) shares authorized in articles of incorporation that are issued within six months from the effective date of incorporation; or iv. (iv) shares sold otherwise than for money. c. (4): No preemptive rights for non-voting class of shares… d. (6): If you choose to waive the right, waived shares may be issued to other people after the shareholder’s reasonable chance to buy them up. iii. MBCA § 6.21: Issuance of Shares 1. Board holds the power to issue new shares. 2. (f): Shareholders have some power regarding shares if there will be a great public offering (which would dilute shareholder shares, etc.). b. Byelick v. Vivadelli i. V 90% owner authorized issuance of more shares to dilute B’s 10% ownership to 1% ii. B is asking for preemptive rights (V got rid of them before new issuance); director or derivative? iii. Court says this is derivative, but because it’s a closely-held corporation, and under ALI’s Principles of Corporate Governance § 7.01: 1. Derivative claim in closed corporation may be pursued directly if doing so will not: a. (i) Unfairly expose the corporation or the defendants to a multiplicity of actions, b. (ii) Materially prejudice the interests of creditors of the corporation, or c. (iii) Interfere with a fair distribution of the recovery among all interested persons. 4. Raising Capital: Life of a Corporation: a. Start up: Capital from founders/owners and bank loans b. Later: Venture Capitalists c. IPO—go from private company to public company i. Investment bankers/underwriters ii. Extensive registration requirements…unneeded on test. 5. Shareholder Oppression: a. MBCA § 14.30: i. Remedy that entitles you to get dissolution of the company, though often courts will recognize a less-harsh remedy of a buyout for the minority shareholder if they find oppression. b. MBCA § 14.34: i. Builds in ADR mechanism to deal with buy-out of minority shares. c. Hollis v. Hill i. 50/50 owners; Hill fired Hollis and didn’t pay dividends; no way for Hollis to gain $ from shares ii. Closely-held corporation is sometimes like a partnership—unincorporated partnership; recognizes fiduciary duties like that in Meinhard v. Salmon—shareholder duties to other owners. iii. Expectations of owners in closely held corporations: employment; salary; ownership participation iv. Inability to exit—can’t sell shares; can’t dissociate, can’t dissolve corporation, can’t get dividends d. DE: Jungle Rule: look out for yourself; doesn’t give heightened fiduciary duties. e. Equal Opportunity Rule; Donahue i. If majority is selling shares back to corporation, minority has to be allowed the same right. f. Business Purpose + No Less Harmful Alternative; Wilkes i. If majority takes adverse action to minority shareholder, they have to provide legitimate business purpose, and there has to be no less harmful alternative to the corporation. 1. Burden on directors to prove business purpose. 2. Burden on shareholders to prove a less harmful alternative. g. Reasonable Expectations Test: i. Whether the corporation typically distributes its profits in the form of salaries; ii. Whether the shareholder/employee owns a significant percentage of the firm’s shares; iii. Whether the shareholder/employee is a founder of the business; iv. Whether the shares were received as compensation for services; v. Whether the shareholder/employee expects the value of the shares to increase; vi. Whether the shareholder/employee has made a significant capital contribution; vii. Whether the shareholder/employee has otherwise demonstrated a reasonable expectation that the returns from the investment will be obtained through continued employment; viii. Whether stock ownership is a requirement of employment. h. Gianotti v. Hamway i. MBCA § 14.30(a)(2)(ii): You can petition court to dissolve corporation if you can show that those in control have acted in a manner that’s illegal, oppressive, or fraudulent. ii. Court defines oppression as “conduct which departs from standards of fair dealing and violates principles of fair play on which persons who entrust funds to a corporation are entitled to rely.” iii. Duty of loyalty issue due to excessive salaries, so director had to prove salaries were appropriate. iv. Employees who happen to be shareholders get no protection. v. Shareholders who happen to be employees get protection. i. Exacto Spring Corp. v. Commissioner of Internal Revenue i. Can’t completely get rid of dividends and disperse money to shareholders through salary—IRS. ii. Indirect Market Test: The more the manager makes for corporation, the higher his salary can be 6. Dividends/Distributions: a. Proportionate payment to a class of shares. b. MBCA § 1.40(6): i. Distribution: Direct or indirect transfer of money or property for the benefit of shareholders c. Paying dividends is a business decision; directors have the power to declare dividends d. MBCA § 6.40—protects creditors with regard to dividends. e. Zidell v. Zidell i. Minority shareholder claims majority not declaring dividends is breach of fiduciary duties ii. Minority must prove majority acted in bad faith by not declaring dividends; can argue merits, unlike under the BJR f. MBCA § 14.34: i. Oppression suit buy-out offer: If majority offers buyout after suit filed, then if minority turns it down, the case turns into whether the buyout offer is fair/reasonable. g. Legal Restrictions on Dividends: i. MBCA § 6.40: 1. (c): No distribution may be made if, after giving effect: a. (1) The corporation would not be able to pay its debts as they become due in the usual course of business; OR b. (2) The corporation’s total assets would be less than the sum of its total liabilities plus the amount needed if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution 2. (d): Board can make determination distribution isn’t prohibited if based off financial statements created under reasonable accounting principles. 3. (e): a. (3) General rule—measure dividends on the date the distribution is authorized if it will be paid in the next three months; if more than three months later, must pass the test on the date the dividend is to be paid. 4. (f): If dividend is declared, the promise to pay the shareholders have the same right to enforce the declaration as they would of any other corporation decision. 5. (g): You have to pass distribution test when each payment or principal is paid on that indebtedness; it’s possible when people borrow money to pay X back after Y are paid ii. MBCA § 8.33: 1. (a): Director is liable to corporation to pay excess if proved violation of fiduciary duties iii. DE § 170: You must be able to pay dividends of your surplus (remember par value jurisdictions) 1. You can increase your surplus by reducing the par value of your shares. 2. Capital surplus is the amount gained from the initial sale of stock at outset. 3. Earned surplus is the amount gained in company from earning—not from sales of stock h. Stock Dividends and Share Splits: i. Company may issue new stock and just give it to the current shareholders—essentially splits their shares, dividing the worth of each share by two; way to dilute stock and keep share prices down. i. Redemption: i. Corporation can ask shareholders to sell shares back to the corporation for a lower price than was paid—acts as a distribution, but called “redemption.” Must apply § 6.40 test here as well. ii. Must be proportionate repurchase to be a redemption/dividend. j. Buy-Sell Agreement: i. MBCA § 6.27: 1. Can restrict someone’s ability to sell stock and resell stock to corporation in articles. 2. (b): If restriction is applied to strangers, you have to give notice of the restriction. 3. (c): Restriction on transfer of shares is authorized: a. (1) To maintain corporation’s status when it is dependent on the number or identity of its shareholders, b. (2) To preserve exemptions under federal or state securities law, or c. (3) For any other reasonable purpose. 4. (d): Formula for restricting transfer: a. (1) Right of first refusal: Obligate shareholder first to offer corporation or other persons opportunity to acquire restricted shares; b. (2) Obligation to buy: Obligate corporation or other persons to acquire the restricted shares. c. (3) Permission to transfer: Require corporation or shareholder or other person to approve transfer of restricted shares if requirement isn’t manifestly unreasonable, d. (4) Prohibit transfer: Prohibit transfer of restricted shares to designated persons or classes of persons, if prohibition is not manifestly unreasonable.
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