Business Associations Final Exam Outline Introduction: The Diverging Incentives of Stakeholders I. Agency Law a. The Agency Relationship i. Creating an Agency Relationship 1. Agency Defined a. Restatement of Agency, §1: Agency is the relationship that results from: i. A manifestation of consent by P to A that A shall act: 1. On P‟s behalf; 2. Subject to P‟s control. ii. A‟s consent to so act. 2. Agency: The Setting a. The Parties: i. P – Principal: Person for whom action is to be taken; ii. A – Agent: Person who is to act; iii. T – Third Party: Person who deals with agent. b. The Relationships: i. (1) – The Agency Relationship (between P & A); ii. (2) – A‟s transaction with T; iii. (3) – Creation of legal liability of P to T (and of T to P) 3. Gorton v. Doty a. Elements of Agency: i. A manifestation of consent by P to A that A shall act: 1. On P‟s behalf; 2. Subject to P‟s control ii. A‟s consent to so act. 4. Gorton v. Doty - Behind the scenes… a. Significance of having insurance: i. Deep Pockets; ii. Least Cost Avoider (the car owner is able to prevent unsafe use of the car). ii. Creditors who become agents 1. A. Gay Jenson Farms v. Cargill - De Facto Control a. De facto control assumed from the combined weight of 9 factors: i. Cargill‟s constant recommendations to Warren by telephone; ii. Cargill‟s right of first refusal on grain;
iii. Warren‟s inability to enter into mortgages, to purchase stock or to pay dividends without Cargill‟s approval; iv. Cargill‟s right of entry onto Warren‟s premises to carry on periodic checks and audits; v. Cargill‟s correspondence and criticism regarding Warren‟s finances, officers‟ salary and inventory; vi. Cargill‟s determination that Warren needed “strong paternal guidance”; vii. Provision of drafts and forms to Warren upon which Cargill‟s name was imprinted; viii. Financing all of Warren‟s purchases of grain and operating expenses; ix. Cargill‟s power to discontinue the financing of Warren‟s operations. 2. A. Gay Jenson Farms v. Cargill - Creditor‟s Dilemma a. Cargill is in a similar dilemma to many creditors. We said earlier that a creditor wants the business to be managed conservatively, while the equity holders (who manage the company) want to take risks. b. How can a creditor protect his interests? c. After the Cargill ruling, what should such creditors do? d. Explanations for the outcome e. What does the casebook note (p. 12) suggest? f. Who is better able to prevent Warren‟s risk taking – Cargill or the Farmers? iii. Terminating the Agency Relationship 1. Both the principal and the agent always have the power to terminate the agency relationship, even though they do not always have the right to do so. 2. What does it mean to have the power, but not the right, to terminate the agency? iv. Fiduciary Duties of Agents 1. Rest. §13: “An agent is a fiduciary with respect to matters within the scope of his agency.” a. Fiduciary duties include: i. Duty of Care [Rest. §379] – insufficient effort/precautions ii. Duty of Loyalty – lacks pure incentives (e.g., conflict of interest) 1. Payment from T (kickbacks, bribes, tips) [Rest. §388]; 2. Secret Profits a. From transacting with principal [Rest. §389]; b. From use of position (Reading).
3. Usurping business opportunities from principal (Singer); 4. “Grabbing & Leaving”: post-relationship obligations v. Other Duties of Agents 1. Duty of good conduct [Rest. §380] 2. Duty to give information [Rest. §381] 3. Duty to keep and render accounts [Rest. §382] 4. Duty to act only as authorized [Rest. §383] 5. Duty not to attempt the impossible or impracticable [Rest. §384] 6. Duty to obey [Rest. §385] 7. Duty not to act as agent after termination of agency relationship [Rest. §386] vi. Fiduciary Duties of Agents - Duty of Care 1. Rest. §379(1): “Unless otherwise agreed, a paid agent is subject to a duty to the principal to act with standard care and with the skill which is standard in the locality for the kind of work which he is employed to perform and, in addition, to exercise any special skills that he has.” 2. Rest. §379(2): “Unless otherwise agreed, a gratuitous agent is under a duty to the principal to act with the care and skill which is required of persons not agents performing similar gratuitous undertakings for others.” vii. Duty of Loyalty – Interested Agent Transactions 1. Rest. §387: “Unless otherwise agreed, an agent is subject to a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency.” a. Duty of Loyalty may be violated if the agent has her own interest in the matter (therefore not acting “solely for the benefit of the principal”). 2. Interested agent transactions: Agent undertakes a transaction while having a conflict of interest with the principal. a. AKA “secret profits”, because the transaction would be allowed if the principal knows and approves of the conflict of interest (i.e., transaction is not “secret”) [Restatement §388]. 3. Naturally, agents have different interests. DoL violated only if the CoI occurred “in [a matter] connected with his agency”. viii. Duty of Loyalty – Secret Profits & Usurping Business Opportunities 1. In most interested agent transactions, the conflict of interest is obvious. 2. CoI less obvious when an agent enters a transaction acting on his/her own behalf. 3. Two such situations: a. Secret profits i. Profiting from the agency
ix.
x.
xi.
xii.
b. Usurping business opportunity i. Principal wants agent‟s transaction Secret Profits - Reading v. Regem 1. A British soldier in colonial Egypt escorted, while in uniform, a smuggler‟s trucks through Cairo (thus causing police not to inspect the trucks). Soldier receives £20,000 for the escort (roughly $1M in today‟s $US). 2. The British Government confiscated the money. Reading sues to get the money back. 3. Is there a conflict of interests between P & A? a. Interested agent transaction? No, since the principal is not a party to the transaction. b. Usurping a business opportunity? Would the Crown have an interest in undertaking the transaction Reading reached with the smuggler? c. Secret profits? Did Reading‟s status as an agent enhance Reading‟s interests rather than the Crown‟s interests? Secret Profits - Reading v. Regem 1. Restatement §388: “an agent who makes a profit in connection with transactions conducted by him on behalf of the principal is under duty to give such profit to the principal.” a. How was Reading‟s behavior “connected with his agency [relationship]”? 2. The disgorgement remedy a. How was the Crown harmed by Reading‟s behavior? b. What is the remedy imposed? i. Does this remedy reflect the harm to the principal? Duty of Loyalty – Usurping Business Opportunities: General Automotive Mfg. v. Singer 1. Singer is GA‟s General Manager. A customer, Husco, sends business to Singer. Singer decides that GA can‟t handle the work and sends it to other shops, earning himself a commission. GA sues to recover the commission. 2. Court rules for GA, on the theory that Singer should have exercised good faith by disclosing to GA all facts of the matter. a. Remedy: disgorgement of Singer‟s profits. 3. Principal‟s opportunism: What would GA do if Singer had disclosed in advance? Usurping Business Opportunities - General Automotive Mfg. v. Singer 1. Do we need to protect an Agent from the principal‟s opportunism by limiting the fiduciary duty to disclose? a. If we restrict the fiduciary duty to disclose, what would prevent Singer from diverting away from GA business that they can handle? b. Agent‟s opportunism: Could we solve the problem by creating a duty to disclose all cases, but only require the
agent to ask permission when the action harms the principal? 2. Bottom line: Both a disclosure and a non-disclosure rule can be abused. xiii. Usurping Business Opportunities - General Automotive Mfg. v. Singer 1. Going back in time to the formation of the employment contract: Will GA allow Singer efficient diversion to others of opportunities it cannot handle? 2. It seems that a contractual solution can be crafted for the business opportunity issue. Did the parties do that? a. In other words, does Singer‟s employment contract have any terms that can apply to the issue subject of the litigation? 3. Why did the court rely on fiduciary duty rather than on the contract‟s language (and implied terms)? a. Remedy b. “Bad person” cases c. Majoritarian default rule xiv. Duty of Loyalty – Post-Termination Duties “Grabbing and Leaving” 1. Restatement §386 – Prohibits A from acting as agent after termination of agency. 2. Restatement §396 – Limitations on A‟s use of confidential information after termination of agency. a. Limitations include a prohibition on using, in competition with the principal or to his injury, confidential information given to A only for the principal‟s use or acquired by the agent in violation of duty. b. But the agent is allowed to use general information concerning the method of business of the principal and the names of the customers retained in his memory, if not acquired in violation of duty. 3. Why do we need fiduciary duties after termination of the agency relationship? xv. Restatement (Second) on Agency (“Restatement”) § 1, 13, 379-398 xvi. 1-13 (Gorton, Cargill) xvii. 81-88 (Reading, Singer) b. Liability of Principal in Contracts i. Restatement §144: A principal “is subject to liability upon contracts made by an agent acting within his authority if made in proper form and with the understanding that the principal is a party”. 1. Why make any contract between A and T bind P? 2. Why not make all contracts between A and T bind P? ii. To balance between these conflicting interests, P is liable in contracts only if the agent acted within his authority. iii. Types of Authority 1. Actual Authority [P»A]
a. Express Actual Authority b. Implied Actual Authority 2. Apparent Authority [P»T] 3. Also: a. Inherent Authority b. Ratification c. Estoppel 4. NOTE: P‟s liability to T is the same regardless of the type of authority that exists. iv. Actual Authority - Express Actual Authority 1. Hypo: Patty owns an apartment building and hires Andy to manage it. Patty tells Andy to hire someone to fix the elevators. Andy hires Tim to do so. Is Patty bound by the contract with Tim? 2. Issue #1 – Is Andy Patty‟s agent? a. A manifestation of consent by P to A that A shall act: i. On P‟s behalf; ii. Subject to P‟s control; 3. A‟s consent to so act. a. Conclusion: Yes. Andy is Patty‟s agent. 4. Issue #2 – Was the contract between Andy and Tim within Andy‟s authority? a. Yes. Patty‟s instruction to Andy created express actual authority. 5. To determine an agent‟s express actual authority, simply look at the terms of the agency agreement. v. Actual Authority - Implied Actual Authority 1. Part 2 of Hypo: Andy also hires Tim to clean the apartment building. Patty said nothing about cleaning the building. Is she bound by the contract with Tim? 2. Issue #1 – Is Andy Patty‟s agent? Yes. 3. Issue #2 – Was the contract between Andy and Tim within Andy‟s authority? a. What does the restatement say? i. Restatement §26: “…authority to do an act can be created by written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal‟s account.” ii. Restatement §35: “Unless otherwise agreed, authority to conduct a transaction includes authority to do acts which are incidental to it, usually accompany it, or are reasonably necessary to accomplish it.” vi. Actual Authority - Mill Street Church v. Hogan (Ky.App. 1990)
1. Church hires Bill Hogan to paint the church building. Bill hires his brother Sam to help. Sam was injured while painting, and seeks worker‟s compensation. 2. This depends on whether he was a church employee, which in turn depends on whether Bill had authority to hire him. 3. Who are the principal, agent and third party in this case? a. Principal: Mill Street Church b. Agent: Bill Hogan c. Third Party: Sam Hogan 4. Did Bill have express authority to hire Sam? 5. Did Bill have implied authority to hire Sam? a. What‟s the standard? b. Apply this standard to the case. 6. Does it matter whether Sam believes Bill was authorized to hire him? vii. Apparent Authority Elements 1. Manifestations by the principal to a third party that are the source of: a. The third party‟s actual belief that the agent has authority to act; and b. The third party‟s reasonable belief that the agent has authority to act. 2. Apparent authority binds P to T, but P can sue A for violating P‟s instructions. a. E.g., Patty can sue Andy for hiring Tim. 3. Apparent Authority a. Focuses on the P-T relationship, rather than the P-A relationship: Did P do (or fail to do) something that would make T reasonably believe that A was given authority by P? i. Sometimes, the distinction between actual and apparent authority can depend on the evidence presented on trial: the third party may have evidence of her communications with the principal, but not of the principal‟s communications with the agent. viii. Apparent Authority - Lind v. Schenley (CA3 1960) 1. A misstatement of the law a. Court states (wrongly) that “usually it is not necessary for a third party attempting to hold a principal to specify which type of authority he relies upon, general proof of agency being sufficient…” b. That‟s wrong! To form P-T liability, must prove: (1) agency relationship existed; (2) agent possessed authority to enter into the transaction at issue with T. ix. Inherent Authority
x.
xi.
xii.
xiii.
xiv.
1. Restatement, §8A: “Inherent agency power is a term used… to indicate the power of an agent which is derived not from authority, apparent authority or estoppel, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent.” 2. Inherent authority requires an agency relationship, but doesn‟t look to the principal at all as a source for authority. Why do we have inherent authority? 1. The formal reason: A minimal level of liability that arises from the existence of an agency relationship. 2. A cynical view: The people writing the restatement faced case law that did not fit into existing categories (actual authority, apparent authority, estoppel or ratification). They created a new category (inherent authority) to explain these cases. Inherent Authority - Addressing It on the Exam 1. Having a vague miscellaneous category is great for lawyers; not so great for law students. 2. How should you deal with inherent authority? 3. Identify the situations in which case law tends to find inherent authority. 4. If you face such a situation, suggest application of inherent authority and analogize to the case law. Inherent Authority - Situations likely to invoke inherent authority 1. Typical pattern: General agent asserting authority that is in line with industry norms (or usual/necessary in that business). 2. Two main categories: a. Undisclosed principals i. Restatement §§194-195 b. Disclosed principals i. Restatement §161 Inherent Authority - Undisclosed Principals 1. Restatement §194: “A general agent for an undisclosed principal authorized to conduct transactions subjects his principal to liability for acts done on his account, if usual or necessary in such transactions, although forbidden by the principal to do them.” 2. Restatement §195: “An undisclosed principal who entrusts an agent with the management of his business is subject to liability to third persons with whom the agent enters into transactions usual in such businesses and on the principal‟s account, although contrary to the directions of the principal.” Undisclosed Principals - Watteau v. Fenwick 1. Court justification for inherent authority: “Otherwise, in every case of undisclosed principal… the secret limitation of authority would prevail and defeat the action of the person dealing with the agent and then discovering that he was an agent and had a principal.” 2. What‟s wrong with that?
xv.
xvi.
xvii.
xviii.
a. Fenwick thought he was dealing with Humble, and gave him credit without checking his financial situation and asking for guarantees of payment. Now, seemingly in a windfall, he gets Watteau as a „guarantor‟. b. Other justifications for this rule? Inherent Authority - Disclosed Principals 1. Disclosed general agent asserting authority that is in line with industry norms a. Restatement §161: “A general agent for a disclosed or partially disclosed principal subjects his principal to liability for acts done on his account which usually accompany or are incidental to transactions which the agent is authorized to conduct if, although they are forbidden by the principal, the other party reasonably believes that the agent is authorized to do them and has no notice that he is not so authorized.” b. How is this different from Apparent Authority? Comparing Apparent Authority to Restatement § 161 1. Apparent Authority: a. Manifestations by P to T that are the source of: i. T‟s actual belief that A has authority to act; and ii. T‟s reasonable belief that A has authority to act. 2. Restatement § 161: a. Acts which “usually accompany or are incidental to transactions which A is authorized to conduct”. b. T‟s actual belief that A has authority to act; and c. T‟s reasonable belief that A has authority to act. Disclosed Principals - Kidd v. Thomas A. Edison, Inc. (SDNY 1917) 1. Legal Analysis of the problem: 2. Issue 1: Was Fuller an agent of Edison? a. A manifestation of consent by P to A that A shall act: i. On P‟s behalf; ii. Subject to P‟s control; b. A‟s consent to so act. 3. Issue 2: Did Fuller have authority to offer Kidd a singing tour? a. Actual authority (express or implied)? b. Apparent authority? c. Inherent authority? 4. What can each party (Kidd, Edison) do to prevent this accident? a. Which of the two (P or T) is better suited to prevent this accident? Ratification 1. Restatement §82: “Ratification is the affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account, whereby the act, as to some or all persons, is given effect as if originally authorized by him.”
xix.
xx.
xxi.
xxii.
xxiii.
xxiv.
2. Ratification requires acceptance of the results of the act with an intent to ratify, and with full knowledge of the material circumstances. 3. Why do we allow ratification? a. What‟s the risk in making the standard for ratification too low (e.g., agreement is ratified unless P immediately manifests his wish not to be liable for the transaction)? Ratification - Implied Affirmance 1. Affirmance can be implied: a. By acceptance of benefits of the transaction – i. At a time in which it is possible to decline the benefits ii. No implied affirmance if principal has reasonable claim to the benefits other than due to the transaction b. Through silence or inaction – in circumstances that indicate that the silence/inaction was intended as a ratification c. Through bringing a lawsuit to enforce the contract Ratification - Limits on Valid Affirmance 1. Affirmance is valid only if at the time of the alleged affirmance the principal knew all material facts. Ratification - Limits on Valid Affirmance 1. Ratification is an all-or-nothing process: Principal either affirms the entire transaction or repudiates it entirely. a. Creative bypass: Breaking up the transaction into a series of severable transactions (each of which can be affirmed or repudiated), or combining several transactions into one (to force the other side into all-or-nothing). Ratification - Limits on Valid Affirmance 1. A transaction can only be ratified if the principal could have entered it both at the time the agent acted and the time the principal affirmed. a. E.g., when no agency relationship existed, or when the existence of an agency relationship was undisclosed. b. However, ratification is possible where the agent revealed the existence of an agency relationship, but not the identity of the principal Ratification - Limits on Valid Affirmance 1. If ratification results in harm to innocent third parties, they may receive an option to deny the ratification. Typically, this occurs when there has been a material change between time of transaction & time of affirmance. a. Example: A sells P‟s house without authority. P‟s house then burns down. P cannot ratify the sale. Ratification - Botticello v. Stefanovicz (Conn. 1979) 1. See case
xxv. Ratification‟s Effect on Authority 1. Ratification without notice to T that A was unauthorized may result in A having apparent authority in future similar transactions. a. Example: Patty hires Andy to manage her apartment building. Patty tells Andy he is not authorized to hire anyone to renovate the building. Nonetheless, Andy hires Tim to do just that. b. Upon hearing that Andy hired Tim, Patty realizes that this was a good idea. She goes along with the agreement, letting Tim do the renovations and paying him the amount he and Andy agreed on. c. Later, Andy hires Tim for another job. This time Patty objects. d. Is Patty bound by Tim‟s (second) agreement with Andy? xxvi. Ratification‟s Effect on Authority 1. Similarly, lack of notice to A that the act was unauthorized may result in implied actual authority. a. Restatement §43(1): “Acquiescence by the principal in conduct of an agent whose previously conferred authorization reasonably might include it, indicates that the conduct was authorized; if clearly not included in the authorization, acquiescence in it indicates affirmance. b. Hypo continued: Assume that Patty is forced to pay Tim for the second job. She sues Andy for violating her instructions. Is Andy liable to Patty for acting without authority? c. Would the conclusion be different if Patty only prohibited Andy from hiring people to undertake “major projects”? xxvii. Estoppel 1. Patty owns an apartment building. She does not hire Andy as an agent. Nonetheless, Andy acts as her agent, and hires Tim to clean the building. 2. Andy disappears. Tim demands his payment from Patty. a. Is Patty liable to Tim? 3. Tim sues Patty. In court, he shows some circumstantial evidence that Andy was likely Patty‟s agent and that he likely had authority to hire Tim. Patty has evidence to the contrary, but the rules of the court prohibit blue-eyed defendants (such as Patty) from presenting any evidence. a. Who wins the law suit? 4. Estoppel is similar, though the reason for precluding evidence is less nonsensical. a. Notice how a procedural matter affects substantive law. 5. Restatement §8B: a. “(1) A person who is not otherwise liable as a party to a transaction purported to be done on his account is
nevertheless subject to liability to persons who have changed their positions because of their belief that the transaction was entered into by or for him, if: i. (a) he intentionally or carelessly caused such belief, or ii. (b) knowing of such belief and that others might change their positions because of it, he did not take reasonable steps to notify them of the facts. […] b. (3) Change of position… indicates payment of money, expenditure of labor, suffering a loss or subjection to legal liability.” xxviii. Comparing Apparent Authority to Estoppel 1. Apparent Authority: a. Agency relationship i. 1. Manifestations by P to T that are the source of: ii. 2&3. T‟s actual & reasonable belief that A has authority to act 2. Estoppel: a. Possible without agency i. 1. P creates, through intentional or negligent words, acts or omissions, an appearance of authority in the purported A ii. 2&3.T reasonably and in good faith changes her position in reliance on such appearance of authority xxix. Estoppel - Hoodeson v. Koos Bros. (N.J. Super. 1957) 1. Is there agency by estoppel? a. The elements of agency by estoppel are: i. P creates, through intentional or negligent words, acts or omissions, an appearance of authority in the purported A; ii. T reasonably and in good faith changes her position in reliance on such appearance of authority; 2. Suppose that rather than paying cash, Hoodeson had signed a contract with the tall man, promising to pay upon receiving the furniture. a. Would there be agency by estoppel in this case? 3. Unlike other agency relationships, estoppel can only bind P. T is not bound. xxx. Sources of a Principal‟s Liability in Contract - Compared with Express Actual Authority 1. Express Actual Authority a. P makes an express manifestation to A of A‟s authority 2. Implied Actual Authority a. P makes no express manifestation to A of A‟s authority 3. Apparent Authority
a. P makes no manifestations to A of A‟s authority 4. Ratification a. P makes no pre-transaction manifestations of authority to anyone 5. Inherent Authority a. P makes no manifestations of authority at all (but agency relationship exists) 6. Estoppel a. P has no agency relationship with A, but makes manifestations which harm T xxxi. xxxii. Actual Authority: 14-16 (Hogan), Restatement § 4, 7, 26, 35, 144, 145, 186 xxxiii. Apparent Authority: 16-24 (Lind, Ampex), Restatement § 3, 6, 8, 27, 159161 xxxiv. Other sources of contractual liability: Restatement § 8A-8B, 82-83, 194195A; 25-31 (Watteau, Kidd); 36-43 (Botticello, Hoddeson) c. Liability of Principal in Torts i. P‟s Liability in Torts - Classification Based on Control 1. Analysis of P‟s Tort Liability a. Is A an agent of P? i. Yes – Is A a servant of P, or an independent contractor? [General Rule: §220(1); specific tests: §220(2)] 1. Servant – Was the tort committed within the scope of A‟s employment? [General Rule: §228; specific tests: §229(2)] a. Yes – P is liable for A‟s tort [Rest. §219(1)]. b. No – Does situation fall into an exception [Rest. §219(2)]? i. Yes - P is liable for A‟s tort. ii. No - P is not liable in agency law for A‟s tort. 2. Independent Contractor – Does situation fall into an exception? a. Yes - P is liable for A‟s tort. b. No - P is not liable in agency law for A‟s tort. 3. No - P is not liable in agency law for A‟s tort. ii. Scope of Employment - General Rule 1. Restatement §228(1): A‟s conduct is within the scope of employment if: a. It is of the kind A is employed to perform;
b. It occurs substantially within the authorized time and space limits (if not - it is a “frolic and detour”); c. It is actuated, at least in part, by a purpose to serve P; d. If force is intentionally used by A against another, the use of force is not unexpectable by P. 2. Restatement §229(1): “To be within the scope of the employment, conduct must be of the same general nature as that authorized, or incidental to the conduct authorized.” 3. An act may be within the scope of employment even if it is: a. Forbidden or done in a forbidden manner (Restatement §230); b. Consciously criminal or tortious (Restatement §231). iii. Scope of Employment - Frolic and Detour 1. Clover v. Snowbird Ski Resort a. Apply §228(1)‟s test b. Why isn‟t this a „frolic and detour‟? i. Not a “total abandonment of his employment”. 2. Scope of Employment - Bushey v. U.S. a. Was this within Lane‟s scope of employment? (Apply §228(1)) b. Bushey discards the purpose test in favor of a foreseeability test: If some harm is foreseeable, P is liable even if the particular harm was unforeseeable. c. Qualifications to the rule: i. P is not liable when A‟s conduct “does not create risks different from those attendant on the activities of the community in general” 1. E.g.: If Lane had set fire to the bar where he was drinking; or if he caused an accident on the street while returning to the drydock ii. A‟s conduct must relate to the employment 1. E.g., if Lane “recognized the Bushey security guard as his wife‟s lover and shot him.” d. Some courts reject the foreseeability test, and hold to the “purpose of serving principal” test (e.g., Clover v. Snowbird Ski Resort). e. Judge Friendly claims that there is a “deep seated sentiment” that requires the U.S. to be liable. i. This seems to be related to the fact that Lane would not have access to the drydock if not for his position in the Coast Guard and the Coast Guard‟s instruction to Lane that he should return to his ship at the end of his leave.
1. Bushey had a security guard, who would not have let Lane into the drydock if not for his position as an agent of the Coast Guard. f. Was Lane‟s behavior foreseeable? In other words, could Bushey predict that there‟s a chance that drunken sailors would act in ways that would damage the drydock? i. If so, what could Bushey do to protect itself, if it expected the U.S. not to be vicariously liable as a principal? g. Vicarious liability is often seen as an incentive for the “least cost avoider” (the principal) to take action to prevent the agent from causing harm to others. h. Which of the following activities are more likely to be controlled by a principal? i. A‟s action that is foreseeable but does not have a purpose of serving the employer (e.g., Lane‟s behavior in Bushey) ii. A‟s action that has a purpose of serving the employer but is not foreseeable (e.g., a paranoid Lane thinks that the Bushey security guard is spying on the ship, locates the guard‟s home and breaks into his home to uncover evidence) iv. Scope of Employment - Intentional Torts 1. Manning v. Grimsley a. Orioles pitcher Grimsley throws a fastball at hecklers, injuring Manning. Issue: Can intentional torts be of the nature A is employed to perform and actuated by a purpose to serve P? b. Court: Heckling could “presently interfere” with Grimsley‟s pitching. 2. Lyon v. Carey a. Furniture delivery person gets into argument with customer because she would not pay in cash. He then beats, rapes and stabs her. She sues furniture company. b. Court: If assault motivated by purely personal reasons – P not liable. But here the dispute arose out of the very transaction that had brought delivery person to customer‟s apartment, and argument arose out of employee insisting on receiving cash, at employer‟s instructions. 3. Haddon v. United States a. Conduct is incidental to employee‟s legitimate duties if it is foreseeable. To be foreseeable, tort must be “a direct outgrowth of the employer‟s instructions or job assignment.” It‟s not enough that job provides “opportunity” to commit tort. v. Liability to Servant‟s Actions When Not Within Scope of Employment
II.
1. Restatement §219(2): a. A master is not subject to liability for the torts of his servants acting outside the scope of their employment, unless: i. The master intended the conduct or the consequences; or ii. The master was negligent or reckless; or iii. The conduct violated a non-delegable duty of the master; or iv. The servant purported to act or to speak on behalf of the principal and there was reliance upon apparent authority, or he was aided in accomplishing the tort by the existence of the agency relation. vi. Torts of an Independent Contractor 1. General Rule: Principal not liable for torts of independent contractor. 2. Exceptions: a. Principal retains control over the aspect of the activity in which the tort occurs (if so – P is a master); b. Principal employs incompetent independent contractor [Rest. §213, §219(2)(b)]; c. Performance of contractor‟s task is inherently dangerous; i. The activity creates a peculiar risk of harm to others unless special precautions are taken d. Duty is non-delegable [Same rationale as Rest. §219(2)(c)]. 3. Majestic Realty v. Toti Contracting a. General rule: No liability of principal to torts of independent contractor. b. Which exceptions may apply? c. What should the parking authority do in the future to avoid liability? vii. viii. Restatement § 2, 4, 219-220, 228-231 ix. 47-52 (Humble Oil, Hoover) x. 61-66 (Bushey) 76-80 (Majestic) The General Partnership a. Formation of a General Partnership i. Types of Business Associations 1. Sole Proprietorship 2. Partnership a. General Partnership b. Limited Partnership (LP) c. Limited Liability Partnership (LLP) d. Limited Liability Limited Partnership (LLLP) 3. Limited Liability Company (LLC) 4. Business Trust
5. Cooperative Society (Co-op) 6. Corporation a. Closely-Held (Private) Corporation b. Public Corporation ii. Partnership 1. Governed by statutory state law. a. Uniform Partnership Act (1914) [“UPA”] b. Uniform Partnership Act (1997) [“RUPA”] 2. Definition of Partnership [RUPA §§101(6), 202(a); UPA §6(1)]: “an association of two or more persons to carry on as co-owners a business for profit.” 3. „Co-owners‟ means: a. Shared control of the business; and b. Shared profits of the business. 4. No formal creation requirements. Doing business as co-owners results in creation of partnership by operation of law. 5. Fenwick v. Unemployment Compensation Commission (NJ 1945) a. Intention of parties: No change in business‟ operation; b. Right to share in profits: Chesire gets 20% ; c. Obligation to share in losses: Chesire not obligated; d. Ownership and control of property and business: Fenwick retains; e. Community of power in administration: Chesire not involved; f. Language in agreement: Language excluded Chesire from control rights; g. Conduct of the parties toward third parties: Didn‟t hold themselves out as partners; h. Rights of parties on dissolution: Chesire‟s dissolving the agreement is similar to quitting a job. iii. An Exercise in Constructing Transactions 1. A key reason for the court‟s ruling was that „partnership agreement‟ gave Chesire no management rights. a. How would you structure an agreement that would give her formal management rights but still allow Fenwick to „run the show‟? 2. The court considered the fact that Chesire did not share in the losses. a. How could you mitigate this factor while being sensitive to increasing Chesire‟s risk? 3. Suppose Fenwick decides to hire Chesire as an independent contractor instead of making her partner. a. How would you draft an agreement that would make Chesire an independent contractor without changing the substance of the relationship? iv. The Liability Trap - (Cargill all over again)
1. RUPA §306: All partners are liable jointly and severally for all obligations of the partnership unless: a. Otherwise agreed by the claimant; b. Otherwise provided by law; c. Partner admitted into partnership after the obligation was incurred; d. Obligation incurred while the partnership is a Limited Liability Partnership 2. Due to this rule, a person who thinks she is a creditor of the partnership but is deemed a partner becomes personally liable for the partnership‟s debt. a. Compare with Martin with Cargill 3. The Fall of KNK: - Martin v. Peyton (NY 1925) a. Despite the terms of the agreement, KNK speculates in foreign currency, loses money, and becomes insolvent. b. KNK‟s creditors claim that PPF are partners in KNK i. Shared profits – PPF gets 40%. ii. Shared control? c. The court decides they were not partners, but it‟s a close call. i. How much did PPF think they were risking in this venture? ii. How much were they actually risking? v. Partnership: Separate Entity or Aggregate of Property? 1. If a partnership is a separate entity, then partnership property is its property, not the partners. Therefore, a claim arising from the property will belong to the partnership, not to the partners. 2. On the other hand, if a partnership is not a separate entity, but a relationship between partners, then partnership property is an aggregate of assets belonging to the partners. Therefore, a claim arising from the property will become a separate personal property belonging to the partners. 3. Which approach does the court in Putnam v. Shoaf endorse? 4. RUPA §201(a): “A partnership is an entity distinct from its partners.” RUPA §203: “Property acquired by the partnership is property of the partnership and not of the partners individually.” vi. Non-living Legal Entities and the Concept of „Nexus of Contracts‟ 1. Hypo: A car hits a pedestrian and kills him. The investigation reveals that the driver took proper care in her driving, but the car brakes malfunctioned. 2. So, it‟s the car‟s fault. The car is impounded (the equivalent of imprisonment) for three years for negligent homicide. 3. The car was lucky: if the brake malfunction had been deemed intentional (rather than negligent), the car might have faced dismantlement (capital punishment).
4. Why does it seem ridiculous to make a physical but non-living object a legal entity (capable of being punished), when it is plausible to give legal entity status to something that is not only non-living, but lacks any physical manifestation (e.g., partnership, corporation)? 5. A business associations as a „nexus of contracts‟. a. If a partnership is a separate legal entity, why are partners liable for partnership debts? [UPA §15] vii. viii. Uniform Partnership Act (1997) (“RUPA”) § 103, 201(a), 202-204, 401 ix. 92-102 (Fenwick, Martin) x. 134-137 (Putnam) b. Operating the Partnership i. Fiduciary Obligations of Partners - Meinhard v. Salmon 1. Cardozo‟s standard for partners‟ fiduciary duties: a. “Salmon has put himself in a position in which thought of self was to be renounced, however hard the abnegation.” (p. 114) b. “A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.” (p. 112) i. Punctilio \punk-TIL-ee-oh\: (1) A fine point of exactness in conduct, ceremony, or procedure; (2) Strictness or exactness in the observance of formalities 2. Is there any problem in applying Cardozo‟s „selfless‟ standard? 3. The selfless partnership: “You first.” “No, no. After you...” 4. But Cardozo does not seem to require a symmetrical duty: “The heavier weight of duty rested… on Salmon. He was a coadventurer with Meinhard, but he was a manger as well.” (p. 114) a. This suggests that perhaps the „selfless‟ standard only applies to managers (partners who control the partnership). b. Would Meinhard be better off if he were the manager? c. Is Meinhard in a good position to monitor Salmon? d. Is there a problem with forcing managers to be selfless in every aspect of their behavior? 5. Suppose that to get Salmon to manage the firm, Meinhard is willing to absolve him of his fiduciary duties. Can he do this? a. See RUPA §404(b) and §103(b)(3). 6. Judge Andrews‟ dissent focuses on the parties‟ intent to limit the partnership to 20 years. a. If fiduciary duties are a predefined standard, why does the parties‟ intent matter? 7. Fiduciary duty may be a majoritarian default rule. What rule would most partners want?
a. In other words, if M&S would have addressed this issue before the beginning of their partnership, what would they put in the partnership agreement? b. Stay partners forever (as long as Gerry leases them the property)? c. The „selfless‟ standard? (i.e., each has to forfeit opportunities to the other) d. Allow S to keep M in the dark about opportunities? e. Compete against each other over the property after the lease ends? 8. What does that leave us with? ii. Fiduciary Obligations of Partners - Meehan v. Shaughnessy (Mass. 1989) 1. Meehan v. Shaughnessy - Compensation Systems in Partnerships a. Compensation methods are designed (among other things) to reduce tensions between partners. Typical methods include: i. Seniority system 1. Compensation depends on the number of years the partner had worked for the firm, and sometimes on the partner‟s overall experience (e.g., all first year partners get a 1% share of the partnership‟s profits; all second year partners get a 1.5% share, etc.) ii. “Eat what you kill” 1. Compensation depends on the amount of profits a partner is credited with bringing to the firm (e.g., a partner receives 30% of the profits attributed to clients that the partner brought to the firm, or attributed to the cases the partner handled) b. Which of these compensation method is better for the partnership? 2. Meehan v. Shaughnessy - Fiduciary Duty Standards a. Meinhard requires the partner to be “selfless”. Meehan seems to require only a “fair fight”: A partner can consider her self-interests if she does not act in a way that gives her an unfair advantage. i. What might explain the difference in the requirements? ii. PCDW allowed partners to remove their cases under some conditions; this may be an indication that the business interests require some “eat what you kill”.
1. What happens if we force selflessness on a business that works most effectively under “eat what you kill”? 3. Lawlis v. Kightlinger & Gray (Ind. App.1990) - Fiduciary Duty Standards a. Suppose there was sufficient evidence that the partners expelled Lawlis to increase their draw (i.e., alcoholism was just a pretext). How would this claim be judged under: i. Meinhard‟s “selfless” standard? ii. Meehan‟s “fair fight” standard? iii. The Lawlis‟ court‟s standard? 1. The “contractual” standard (i.e., “you get what you bargained for”) b. When do courts use each of the standards? iii. Rights of a Partner - Under RUPA 1. Control Rights a. RUPA §401(f): “Each partner has equal rights in the management and conduct of the partnership business.” 2. Economic Rights a. RUPA §401(b): “Each partner is entitled to an equal share of the partnership profits… [and losses]” b. RUPA §807(b): “Each partner is entitled to a settlement of all partnership accounts upon winding up the partnership business.” c. RUPA §502: “The only transferable interest of a partner in the partnership is the partner‟s share of the profits and losses of the partnership and the partner‟s right to receive distributions.” 3. Property Rights? a. RUPA §501:”A partner is not a co-owner of partnership property and has no interest in partnership property which can be transferred…” b. RUPA §401(g): “A partner may use or possess partnership property only on behalf of the partnership.” iv. Rights of a Partner - Under UPA 1. UPA §24: The property rights of a partner are a. (1) his rights in specific partnership property, b. (2) his interest in the partnership, and c. (3) his right to participate in the management. 2. “Interest in the partnership” – UPA §26: A partner‟s interest in the partnership is his share of the profits and surplus… 3. Earlier, we said that the defining characteristics of a partnership were: a. Shared profits [“interest in the partnership”]; b. Shared control [“right to participate in the managements”] 4. What is the third right [“rights in specific partnership property”]?
v. Partnership Property - A Difference between UPA & RUPA? 1. UPA §25(1): “A partner is a co-owner with his partners of specific partnership property holding as a tenant in partnership.” a. UPA §25(2) describes the characteristics of tenancy in partnership, including: i. Equal right as other partners to possess partnership property for partnership purposes; but, no right to possess partnership property for any other purpose (unless the other partners consent); ii. Rights in specific partnership property are not assignable except in connection with the assignment of rights of all the partners in the same property. 2. But under RUPA §501: “A partner is not a co-owner of partnership property...” 3. Why do UPA and RUPA diverge on this issue? a. In other words, why do we need the concept of “tenants in partnership”? b. Hint: Partnership as a separate legal entity (Putnam v. Shoaf) vi. Liability in a Partnership 1. April, Beverly and Charlie are partners in the ABC law firm. 2. Can a creditor of Beverly‟s attach assets belonging to ABC in order to collect the debt? a. Note RUPA §501, 502 & 504 (a), (b) & (e) 3. Can a creditor of ABC attach assets belonging to Charlie? a. Note RUPA §306(a), 307(d). vii. Transferring Partnership Rights 1. Hypo: April is a partner in a three-partner law firm. She wants to cash out. 2. Can she sell a 1/3 share of the partnership assets (e.g., 1/3 of the furniture) to Brian? a. Note RUPA §501 3. Can she sell her membership in the partnership to Brian? a. Note RUPA §401(i), 502, 503(a)(3) 4. Can she sell any rights she has in the partnership? viii. Partnership Capital - Capital Account 1. Capital Account: A running balance reflecting each partner‟s ownership equity. See RUPA §401(a). 2. The capital account begins with the initial contribution of each partner, to which the partner‟s share of the profits is added, and the partner‟s share of losses and “draws” (distributions) is reduced. a. Contributions may include not just money, but also labor (e.g., service partners), assets, or anything else the partners agree on. 3. Partnership Capital: Capital Account - Example
a. April contributed $5,000 to ABC law firm in return for a 1/3 interest in the partnership. b. The firm ended the first year with a loss of $3,000 (so April‟s share of the loss was $1,000). c. The second year the firm made a profit of $9,000 (April‟s share of that was $3,000). d. At the end of the second year, the partners made a draw of $4,500 (April received $1,500). April‟s capital account at the end of the second year is: e. 5,000 - 1,000 + 3,000 – 1,500 = $5,500 ix. Division of Profits and Losses 1. RUPA provides default rules on division of profits/loss 2. Division of Profits a. Default rule: Profits divided equally between partners [RUPA §401(b)] b. What if one partner contributed 90% of capital? Equal distribution. c. What if one partner contributed 90% of work? Equal distribution. 3. Division of Losses a. Default rule: Losses divided the same way as profits. [RUPA §401(b)] 4. Partnership agreement can change this default a. E.g., there need not be symmetry between division of profits and losses. x. Partner‟s Rights in Management 1. Equal rights… a. RUPA §401(f): “Each partner has equal rights in the management and conduct of the partnership business.” 2. …but no compensation. a. RUPA §401(h): “A partner is not entitled to renumeration for services performed for the partnership, except for reasonable compensation for services rendered in winding up the business of the partnership.“ 3. Partner‟s Rights in Management - A difference between RUPA & UPA? a. RUPA §401(j): “A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only with the consent of all of the partners.” b. UPA §18(h): “Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners; but no act in contravention of
xi.
xii. xiii.
xiv.
xv.
xvi.
xvii.
any agreement between the partners may be done rightfully without the consent of all the partners.” Extent of Consent Required for Partnership Action 1. RUPA a. Ordinary course of business → majority vote b. Outside the ordinary course of business → unanimous consent c. Amendment to the partnership agreement → unanimous consent 2. UPA a. Ordinary course of business → majority vote b. Act in contravention of partners‟ agreement → unanimous consent 3. Hypo: Ralph, Sarah and Terry are partners. Their original partnership agreement said nothing about how profits are divided between them. They vote 2-1 to add a section to the agreement that divides profits: 40% R, 40% S, 30% T a. Is the new section valid under RUPA? Under UPA? 4. So, is there a difference between RUPA and UPA? Partnership and Agency Liability of Partnership to 3 rd Party RUPA §301(1): “Each partner is an agent of the partnership for the purpose of its business. An act of a partner… for apparently carrying on in the ordinary course the partnership business… binds the partnership, unless the partner had no authority to act for the partnership in the particular matter and the person with whom he was dealing knew or had received a notification that the partner lacked authority.” RUPA §301(2): “An act of a partner which is not apparently for carrying on in the ordinary course the partnership business… binds the partnership only if the act was authorized by the other partners.” Partnership and Agency - Liability of Partnership to 3 rd Party 1. Hypo: Abe is a very wealthy but peculiar person. Becky and Charlie are considering offering Abe to join their partnership, but are concerned that he will bind the partnership to third parties in half-baked transactions. 2. What can they do? a. Note RUPA §303 Partnership and Agency - Nabisco v. Stroud (N.C. 1959) 1. Stroud and Freeman are partners in a grocery store. Stroud tells Nabisco that he will not be responsible for additional bread sold by Nabisco to the partnership. 2. Freeman orders bread from Nabisco, and Nabisco supplies the bread. When the partnership doesn‟t pay, Nabisco sues. 3. Why doesn‟t Stroud‟s notification to Nabisco prevent him and the partnership from being liable? Partnership and Agency - Summers v. Dooley (Idaho 1971)
1. Summers and Dooley are partners in a trash collection business. They operate the business and provide a replacement at their own expense when they can‟t work. 2. Dooley becomes unable to work and hires a replacement at his own expense. Summers wants to hire another employee, but Dooley refuses. 3. Nonetheless, Summers hires a third employee. He then sues to have the partnership reimburse him for the expense of hiring the employee. 4. Court: Summers can‟t recover expenses. 5. Why the difference between Nabisco and Summers? a. Partnership and Agency - Nabisco compared to Summers i. “Ordinary course of business” 1. Is purchasing bread considered “carrying on in the usual way the business” of a grocery store? 2. Is hiring an employee considered “carrying on in the usual way the business” of trashcollecting? ii. Partner vs. third party suits 1. RUPA §401(j) vs. RUPA §301 xviii. Deadlocks 1. A common problem in small partnerships is deadlock – each member can prevent the other from acquiring a majority, and as a result, the partnership can‟t take any actions. 2. What can be done to prevent deadlocks? xix. Holdouts 1. Large partnerships tend to suffer from high costs of communication and negotiation between all the partners, and from a problem of “hold out” (a partner blocking decisions requiring unanimity in order to extort benefits for himself). 2. Example: Suppose that ABC law firm (which has 200 partners) is about to merge with DEF law firm, and that this merger requires unanimous consent of all of ABC‟s partners. 3. One junior partner, who has a 0.25% interest, rejects the merger, though he hints that he would be willing to go along if his share of the partnership was boosted to 1%. The merger will add all other partners more value than they would lose by the concession to the hold-out partner. a. But what will happen if they concede? xx. Centralized Management of a Partnership 1. Centralized management reduces: a. Risk of deadlocks b. Risk of hold-outs
c. Transaction costs in coordinating among many partners 2. What is the disadvantage of this mechanism? xxi. Centralized Management of a Partnership 1. Hypo: Andy and Barbara form a partnership, and state in the partnership agreement that “Andy and Barbara will each receive a specified monthly compensation for managing the partnership.” Andy‟s salary is $150,000, while Barbara‟s is only $50,000. 2. Is this provision valid? a. Note RUPA §401(b),(h); 103 3. Hypo continued: To prevent deadlocks, the agreement also states that Andy will have the right to decide every aspect of the partnership management except for adding additional partners, dismissing existing partners, and changing the partners‟ compensation. On these three issues, unanimous consent is needed. a. Are these provisions valid? i. Note RUPA §401(f); 401(j); 103 b. Is this a partnership? i. Note FN 10 of Day xxii. Centralized Management of a Partnership - Day v. Sidley & Austin 1. Sidley & Austin have a form of centralized management. According to FN 8 of the decision, the Executive Committee decides on all matters, except for determination of participation, admission and severance of partners, which require the approval of partners holding a majority of partnership interests (not majority of partners). This majority vote is considered unanimous approval by all partners. a. Day applies a fiduciary duty standard most similar to Meinhard? Meehan? Lawlis? b. When is centralized management better and when is management by consensus better? xxiii. Centralized Management - Consensus v. Authority 1. Consensus a. Collective decision-making b. Requires constituents with: i. Similar business interests ii. Comparable access to information iii. Minimal costs of acting collectively c. Partnership optimized for these characteristics. 2. Authority a. Central decision-making body b. Needed when constituents have: i. Differing business interests
ii. Unequal access to information iii. High costs of acting collectively c. Corporation optimized for these characteristics. xxiv. xxv. RUPA § 301, 303, 305-308, 401, 403-404, 501-504 xxvi. 111-116 (Meinhard), 119-132 (Meehan, Lawlis) xxvii. 142-153 (Stroud, Summers, Day) c. Terminating the Partnership i. Longevity of the Business Entity 1. Disagreements between business partners are inevitable. Law can take two approaches to enable operating the business association despite the disagreements: a. It can discourage a forced dissolution of the entity, but allow any partner to sell his interest in the entity i. This allows for the entity‟s longevity, but requires transferability of the interest in the entity. Otherwise, a lot of litigation will ensue. ii. This is, generally, the governing principle in corporations. b. It can facilitate forced dissolution of the entity i. This is, generally, the governing principle in partnerships. ii. This sacrifices longevity but allows greater restrictions on transferability. 2. Why not simply prohibit dissolution & transferability, but allow partners to sue when they‟ve been wronged? ii. The Power/Right to Dissolve Under UPA 1. “[T]here always exists the power, as opposed to the right, of dissolution” [Collins v. Lewis] What does this mean? 2. Three types of dissolution: a. By act of one or more partners [UPA §31(1)-(2)]; e.g.: i. At the termination of the partnership‟s term or particular undertaking, or, if it has none, at the will of any partner; ii. Wrongful dissolution: In contravention of the agreement between the partners, by the express will of any partner at any time. b. By operation of law [UPA §31(3)-(5)] i. Due to death or bankruptcy of a partner, or due to bankruptcy or unlawfulness of the partnership. c. By court order [UPA §31(6); §32] 3. Continuing the Business after Dissolution under UPA a. Archie, Beatrice and Chris are partners. Since under UPA each partner has the power to dissolve, Archie can unilaterally (by withdrawing from the partnership) cause
Beatrice and Chris to cease to be partners of each other, even if they desire to remain partners. Can they do anything to continue the partnership? i. Note UPA § 38(2)(b) iii. The Power/Right to Dissolve Under RUPA 1. RUPA creates disassociation as an alternative to dissolution a. Disassociation terminates the former partner‟s rights and obligations in the partnership and requires the partnership to buy out her interest in the partnership. i. Example: Archie, Beatrice & Chris are partners. Archie dies. He is no longer a partner, but Beatrice & Chris continue to be partners. b. Dissolution forces the partnership to be wound-up and eventually terminated i. Example: Archie, Beatrice & Chris vote unanimously to dissolve the partnership. The partnership assets are sold & the partnership is terminated. 2. RUPA §602(a): A partner has the power to disassociate at any time, rightfully or wrongfully, by express will…” a. Correlates to UPA‟s rule of a partner‟s power to dissolve the partnership 3. Disassociation under RUPA a. By act of a disassociating partner [RUPA §601(1)] i. By right: if the partnership is at will ii. Wrongful dissolution [RUPA §602] b. By terms of partnership agreement [RUPA §601(2)-(3)] c. By unanimous vote of all other partners [RUPA §601(4)] i. Limited to specified circumstances d. By court order [RUPA §601(5)] e. By operation of law [RUPA §601(6)-(10)] i. E.g., due to death, bankruptcy, unlawfulness f. By voluntary disassociation of a partner, if the partnership is a partnership at will [§801(1)]; g. By disassociation of a partner through operation of law, if within 90 days at least half of the remaining partners want to dissolve the partnership [§801(2)(i)]; h. By the unanimous vote of all the partners [§801(2)(ii)]; i. By the terms of the partnership agreement [§801(2)(iii)(3)]; j. By operation of law due to unlawfulness, but there are 90 days to cure the illegality [§801(4)]; k. By court order [§801(5)-(6)] i. Partner‟s suit: Economic purpose frustrated; not reasonably practicable to carry on the partnership business
iv.
v.
vi.
vii.
ii. Transferee‟s suit: if equitable and possible under the terms of the partnership agreement 4. Dissolution under RUPA a. Under UPA, a partner has the power to dissolve (i.e., her unilateral decision will cause the partnership to wind-up). Under RUPA, a partner only has the power to disassociate. b. Hypo: Anita is a partner in a law firm. The partnership agreement does not specify anything regarding its duration or regarding the right to disassociate or dissolve. Anita informs the other partners that she has disassociated from the law firm. c. What happens to the partnership? i. Note RUPA §601(1), 801(1) d. Can the partnership agreement opt out of this outcome? i. Note RUPA §103(b)(6)-(8) e. Is a partner‟s ability to dissolve different in RUPA than UPA? Implied Term of Partnership - Collins v. Lewis (Tex. 1955) 1. Building costs run up. When they reach $600,000, Collins refuses to put up more money, and sues for dissolution. 2. Why does the court deny Collins‟ suit? 3. Collins has to continue to finance partnership; Lewis doesn‟t provide any money at all. Is this fair? Rightful or Wrongful Dissolution? - Owen v. Cohen (Cal. 1941) “I had not worked yet in 47 years and do not intend to start now!” (Cohen) 1. Owen sues for dissolution. a. Why go to court? i. Note RUPA §803(a) b. What can Cohen argue to characterize Owen‟s dissolution as wrongful? c. If Cohen persuades the court that Owen‟s dissolution was wrongful, does this annul the dissolution? i. Note RUPA § 602(a), (c); 701(c); 803(a) d. If the court finds that this is a term partnership, is Owen‟s dissolution wrongful? i. Note RUPA § 602(b) Dissolution & Fiduciary Duties - Page v. Page (Cal. 1961) “We never figured on losing, I guess” (George Page) 1. Why not just sue for dissolution? 2. Does George have a possible argument against H.B. for breach of fiduciary duty? The Process of Terminating the Partnership 1. Archie, Beatrice and Chris are partners in a grocery store. On January 1, they vote unanimously to dissolve the partnership. On January 2, Archie sells bread that is in the grocery store to customers, and Beatrice orders more bread from a bakery.
2. Chris claims that these transactions do not bind the partnership, because it has dissolved and so it no longer exists as a legal entity. 3. Is he right? a. Note RUPA § 802(a), 804 4. What effect does dissolution have? Why? a. Winding-up - disposing of the partnership‟s assets/business, then dividing between the partners the remaining assets or the liability for remaining losses. b. Termination – the partnership ceases to exist viii. The Process of Terminating the Partnership 1. Under RUPA: a. Note: If partnership agreement modifies RUPA rules, check §103(b) to see if the modification is valid. b. Triggering event for disassociation [RUPA §601]? i. No – Triggering event for dissolution [RUPA §801]? 1. No – Neither disassociation or dissolution 2. Yes – Business is dissolved under Article 8 ii. Yes – Does the disassociation also trigger dissolution [RUPA §801]? 1. No – Business is continued under Article 7 a. Purchase of disassociated partner‟s interest [RUPA §701] b. Disassociated partner not automatically released from liability [RUPA §703] 2. Yes - Business is dissolved under Article 8 ix. The Process of Terminating the Partnership 1. Under UPA: a. As with RUPA, dissolution does not terminate the partnership [UPA §30]. Rather, it limits all partners‟ authority to act for the partnership [UPA §33-35], and prompts the “winding up” of the partnership. b. Subject to certain limitations, some partners may pay off other partner and continue the partnership after dissolution [UPA §38(2)(b)]. c. Prentiss v. Sheffel (Ariz. 1973) i. In a shopping center partnership, Sheffel and Iger each own 42.5% of the interests; Prentiss owns the remaining 15%. ii. P refuses to contribute his share of the operating deficit. S & I sue for dissolution. iii. Prentiss claims he was “frozen out” (kept out of the decision making process to force him to sell his interest below its value).
1. “Freeze out” – majority uses its power to reduce the value of the equity interest of the minority, usually to get the minority to sell the interest at a lower price. 2. Why can‟t the minority simply sell the interest to a third party at a fair price? iv. Court orders an auction of the property. S & I make highest bid. P appeals, claiming S & I can‟t bid since they have an unfair advantage of using “paper dollars” (their interest in the partnership equity). d. Prentiss v. Sheffel - “Paper Dollars” i. Let‟s assume the partnership is worth $1,000,000. S & I, jointly, have an 85% interest; P has 15%. ii. If S & I acquire the partnership at $1,000,000, their out of pocket expenses are $150,000 (15% of $1,000,000), paid to P. iii. If P acquires the partnership at the same value, his out of pocket expenses (paid to S&I) are $850,000 (85% of $1,000,000). iv. If a third party values the partnership at the same value, her out of pocket expenses (paid to S, I & P) are $1,000,000. v. Therefore, P claims S & I have an unfair advantage – they incur much lower out of pocket expenses to buy the partnership. Why does that happen? e. Prentiss v. Sheffel - Insider Advantages in Bidding i. Another advantage that S&I have over third party bidders: Third parties are also likely to be concerned about hidden problems with the partnership, and lower their bids to account for this risk. That‟s gives S&I an advantage over third parties. ii. Would prohibiting S&I from bidding result in a higher winning bid? iii. Why does P want to prohibit their participation? f. Prentiss v. Sheffel i. Court rules that S&I are allowed to bid. If P wanted protection from being bought out, he should have addressed that in the partnership agreement. 1. Similar standard to Lawlis, Day & Collins ii. S&I‟s fiduciary duty probably requires them to pay P for the value of any new opportunities/fortunes they are aware of. But Prentiss is unhappy that he can be forced to take cash for his interest in the partnership.
1. Why does P prefer to tag along on their coat-tails? x. Continuation per agreement (After dissolution/disassociation) 1. Effect on the partnership a. Under RUPA, disassociation does not automatically dissolve the partnership. b. Under UPA, dissolution technically creates a new partnership, but creditors of former partnership automatically become creditors of the new partnership [UPA §41] 2. Effect on the departing partner(s) a. Departing partner entitled to accounting (fair value of partnership interest) b. Departing partner generally remains liable on predisassociation partnership obligations unless released by creditors [RUPA §703] 3. Effect on a new partner a. A new partner that joins the partnership when it continues after dissolution is liable to old debts, but his liability can only be satisfied out of the partnership assets (i.e., he has no personal liability) [RUPA §306(B)] xi. Effects of Wrongful Dissolution/Disassociation 1. Under RUPA: Partnership pays the wrongful disassociator the fair value of his interest and partnership continues without him. [RUPA §603(a)] a. Under UPA: Partnership is dissolved, unless all remaining partners choose to continue it, in which case they pay the wrongful dissolver the fair value of his interest. [UPA §38(2)(b)] 2. Wrongful dissolver subject to damages for breach of the partnership agreement [RUPA § 602(c), 701(c)] a. Under UPA (but not RUPA), wrongful dissolver is not entitled to the value of the partnership‟s goodwill [UPA §38(2)(c)] 3. If the partnership is being dissolved, the wrongful dissolver does not participate in winding-up [RUPA §803(a)] xii. Allocation of Losses - UPA Rules 1. UPA §18(a): Each partner… must contribute towards the losses, whether capital or otherwise sustained by the partnership accounting to his share in the profits.” 2. UPA §40(d) requires that “partners shall contribute, as provided by [§18(a)], the amount necessary to satisfy the liabilities [set forth in §40(b)]...” 3. The default rule seems clear: Partners are personally liable for the partnership‟s liabilities, based on their agreed division of losses. 4. Allocation of Losses - Kovacik v. Reed (Cal. 1957)
a. Reed is a service partner; Kovacik contributes $10,000. Profits divided equally. No salaries paid. After 10 months of losses, the partnership has only $1,320 (i.e., it lost $8,680). Kovacik sues to dissolve and demands that Reed share half the loss ($4,340). b. Kovacik‟s capital account: $10,000 – 4,340 = $5,660 c. Reed‟s capital account: $ 0 – 4,340 = ($4,340) d. What does the court hold? 5. Allocation of Losses - Perverse Incentives Caused by Kovacik? a. Suppose Reed knew in advance what the court will decide in Kovacik v. Reed. b. As the service partner, he may be the one managing the partnership. c. The partnership is about to go bankrupt. d. What would Reed likely do? 6. Allocation of Losses - Limiting Kovacik a. Courts have distinguished Kovacik in the following circumstances: b. When service worker was compensated for work c. When service partner made a nominal capital contribution d. RUPA repeats UPA‟s rule. Comments to RUPA specifically reject Kovacik. xiii. Exit Mechanisms 1. Buy-out clauses allow disagreements to be solved by the exiting of one of the partners 2. Who buys the exiting partner‟s equity interest? a. Third parties i. Limited value if market is very thin (few buyers/sellers) ii. Undesirable partners 3. The partnership or the remaining partners a. Raises problems with liquidity of partners (recall our discussion on raising additional capital from the partners), or with liquidity of the partnership. b. Can be used opportunistically to extract benefits (or else the partner will cash out, forcing the other partners or the partnership into insolvency). 4. Exit mechanisms have at least two aspects that require careful attention: a. The price for which the equity interest is bought-out b. The triggering event – what has to happen in order to allow a partner (or the partnership) to force a buy-out i. Why do we need triggering events? Why not allow the partner or the partnership to disassociate/expel at any time? xiv. Exit Mechanisms - Triggering Event
1. [Based on Hunter v. Straube (Or. 1975)] Archie, Beatrice & Chris are partners. The partnership agreement specifies that a partner who wants to withdraw from the partnership must give a six month advance notice. 2. Archie wants to quit immediately, and therefore announces his express will to dissolve the partnership (if governed under UPA) or disassociate (if RUPA), noting that there is no advance notice requirement in the statute. a. Can Archie quit without giving advance warning? 3. When crafting the clauses governing the triggering event, make sure to cover all situations that allow dissolution/disassociation under the applicable statute. 4. Alternative hypo: Archie, Beatrice & Chris are partners. The partnership agreement specifies that the only way a partner can withdraw from the partnership is by giving a six month advance notice, and that this clause replaces the dissolution and disassociation provisions of the governing partnership statute. 5. Archie wants to quit immediately. He announces that the clause in the partnership agreement is invalid because it violates RUPA § 103(b)(6)-(8). Since the clause is invalid, Archie claims it is struck down and the statute (which has no advance notice requirement) governs. a. Can Archie quit without giving advance warning? 6. When crafting the clauses governing the triggering event, do not create broad opt-outs that violate § 103(b). xv. Exit Mechanisms - Price 1. Parties may determine the value periodically by agreement a. Parties often neglect to do so b. As interests diverge, parties may disagree 2. Parties may hire an appraiser a. It may be difficult to agree ex post on the identity of the appraiser 3. Parties may set a formula a. E.g., based on annual cash flow or earnings, multiplied by a specified number 4. Parties may use book value a. Book value is the price of the assets when purchased, reduced over the years for wear and tear (depreciation). b. Depreciation may not reflect their real value (e.g., antique that has appreciated in value; a car that lost much of its value in the first year, etc.). 5. “You Pick, I choose” a. One party names a price, and the other decides whether it will buy from the other, or sell to the other, at that price. b. Works well if both parties have sufficient cash & info xvi. “You Cut, I Choose”
III.
1. Hypo: Bank A and Bank B have a partnership that provides home financing. Bank A (which was much larger than Bank B) owns 75% of the partnership interest, and Bank B owns 25%. 2. As a result of antitrust enforcement, the banks are required to break up the partnership. The agreement has a buy-out clause that incorporates the “you cut, I choose” concept: Bank A is to decide on a price per “point” (any price it wants). Bank B then gets the option of either selling its interest to Bank A at that price per point, or buying from Bank A its points at that price. 3. Assume that both banks have no financial constraints 4. Would Bank A decide on a price that is higher or lower than the perceived value of the partnership? 5. Now assume that Bank A expects Bank B to have liquidity problems a. E.g., Bank B has less money & has to pay for three times the number of points (like the “paper dollars” in Prentiss). b. Does A expect that B will buy or sell? c. Would Bank A decide on a price that is higher or lower than the perceived value of the partnership? xvii. Exit Mechanisms - Estate Planning Issues 1. One of the most commonly implemented exit arrangements is triggered upon the death of a partner a. Why is this arrangement so common? 2. The conflict of interests in death buy-outs a. How does “you cut, I choose” work in the context of a death buy-out? b. Can life insurance reduce the difficulties to a death buyout? xviii. xix. RUPA § 601-603, 701-703, 801-804, 807; UPA § 38 xx. 154-168 (Owen, Collins, Page, Prentiss), 177-178 (Kovacik) The Corporation – Basic Concepts a. Forming the Corporation i. The Corporation - Applicable Law 1. Corporations are incorporated according to state law. 2. The ABA created a Model Business Corporation Act (1984) (MBCA), which serves as a uniform law on which some states base their corporate laws. 3. 58% of Fortune 500 companies and over 50% of publicly-traded companies are incorporated in Delaware. Therefore, the Delaware General Corporation Law (DGCL) is important to many corporate practitioners. ii. The Corporation - Some Basic Terms 1. Units of equity in a corporation are called shares. Owners of equity in the corporation are called shareholders (“SHs”).
2. Republican form of control (i.e., control by delegates of the SHs, not by direct vote of the SHs): a. Shareholders - usually lack direct control b. Board of Directors (“BoD”) – elected by SHs; oversee corporation c. Officers – appointed by BoD; day-to-day management 3. Two “constitutional” documents: a. Articles of Incorporation (“AoI”) – a publicly filed document b. Bylaws – a private document 4. Two categories of corporations a. Publicly-held corporations (public corporations) b. Closely-held corporations (close corporations) iii. Comparing Corporations & Partnerships 1. SEE THE SLIDE FOR CHART! iv. The Corporation - Main Attributes 1. Separation of Ownership and Control a. Centralized Management i. MBCA §8.01(b): “All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed by or under the direction of, its board of directors.” [See also DGCL §141] b. Transferability of interest (liquidity) 2. Independent Legal Entity a. Limited Liability i. MBCA §6.22(b): “… a shareholder of a corporation is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct.” b. Derivative Actions c. Longevity d. Taxed as a separate entity (usually) i. In contrast to a partnership‟s pass-through taxation v. Public v. Close Corporations 1. Publicly-held (“Public”) Corporation a. Main trait: a public secondary market in which the corporation‟s shares are listed and traded. b. Primary market – transactions to which the corporation is a party i. E.g., issuing or repurchasing shares c. Secondary market – transactions in which corp. is not a party i. E.g., A sells to B shares in X Corp. d. Public Secondary Market – e.g., stock exchange i. E.g., NYSE; NASDAQ
vi. Public v. Close Corporations 1. Closely-held (“Close”) Corporation a. Main trait: absence of a secondary market for its shares. b. Often (but not always) a small number of shareholders, who actively participate in the firm‟s management. c. Some states have specific criteria to qualify as a close corporation i. Qualifying corporations are known as “statutory close corporations” d. Firm exhibits characteristics somewhat similar to those of a partnership. e. Why is a difference in the liquidity (i.e., the degree of transferability of interests in the corporation) so important as to create these classifications? vii. Forming a Corporation 1. Choose the state of incorporation 2. Draft the Articles of Incorporation a. Mandatory terms – MBCA §2.02(a); Optional terms – MBCA §2.02(b) 3. File articles with the relevant state‟s Secretary of State a. The person filing articles is the incorporator (MBCA §2.01) b. State will process and send a certificate of incorporation – Corporation has been formed! (MBCA §2.03) 4. Draft Bylaws (MBCA §2.06) 5. Organizational Meeting (MBCA §2.05) a. Name directors b. Adopt bylaws 6. Directors convene and appoint officers 7. Issue Stock viii. “Defective Corporations” 1. De facto Corporation: A court may treat an improperly incorporated firm as a corporation if the promoters: a. Acted in good faith to incorporate; b. Had the legal right to incorporate; and c. Acted as if they were incorporated. 2. Corporation by Estoppel: A court may treat an improperly incorporated firm as a corporation if a third party: a. Acted as if it were transacting with a corporation; and b. Would earn a windfall if it were now allowed to deny that the business was a corporation. 3. Corporation by Estoppel compared to Agency by Estoppel a. Agency by estoppel requires that: i. P creates an appearance of authority in the purported A;
ii. T reasonably and in good faith changes her position in reliance on such appearance of authority b. Who creates the appearance of transacting with a corporation – the promoter or the third party? Who is estopped? 4. Significant overlap between de facto and estoppel doctrines, but sometimes they differ. E.g.: a. If firm did not act to incorporate, can‟t be De facto corporation. b. If firm incurred liability by doing a tort, the injured party likely did not choose to deal with the firm as a corporation. Still may be De facto corporation. ix. Liability for Pre-Incorporation Activity - Southern-Gulf Marine Co. No. 9 v. Camcraft, Inc. 1. Price of the vessel rises. Camcraft reneges on the contract. 2. Court applies incorporation by estoppel. a. SGM‟s status as a non-Texan corporation did not cause Camcraft any substantive problems b. Bowman was informed of the Cayman incorporation and accepted it. 3. Suppose you are Bowman‟s lawyer and are now drafting the agreement with Barrett. Camcraft is worried that SGM would not form, and they would lose the sale. How would you mitigate the risk of SGM not being formed as contemplated? 4. In the last sentence in the next to last paragraph of the case (p. 204), the court says: “It should be noted that defendant has not questioned plaintiff‟s right to do business within Louisiana.” 5. The case was brought by the plaintiff (SGM) in a Louisiana court. a. Why does the court question the right of SGM to do business in Louisiana? x. Liability for Pre-Incorporation Activity - Fiduciary Obligation Hypos 1. Case 1 – Third party sale: Ann buys land for $125,000, and sells it to total stranger Sean for $200,000, without disclosing her purchase price. Sean sues to recover $75,000. a. Will Sean win the suit? 2. Case 2 – Principal-agent sale: Art buys land for $125K. Paula hires him as an agent to buy that land (not knowing that he owns it), and Art sells it to Paula for $200,000. Paula sues to recover $75,000. a. Will Paula win the suit? 3. Case 3 – Another principal-agent sale: Same as before, except that instead of Paula, Art is hired by C Corp., a corporation whollyowned by Paula. a. Will C Corp. win the suit against Art? 4. Case 4 – Promoter sale
a. A promoter is an agent of the corporation he forms, and owes it a fiduciary duty. i. Case 4(a): Art forms corporation C, sells C‟s stock to Paula, and then (as part of an integrated transaction) sells land he owns to C, without disclosing his interest in it. 1. C sues to recover the $75,000. Will C win? ii. Case 4(b): Art forms C, sells C‟s stock to Paula, and sells land he owns to Paula. She gives the land to C. 1. Both C and Paula sue to recover the $75,000. Will they win? a. Is there a substantive difference between cases 4(a)&(b)? iii. Case 4(c): Art forms C, buys its stock for 200K, then has C pay the $200K to buy the land he owns (which he bought for $125K). Finally, he sells C‟s stock to Paula, without disclosing the price for which he initially purchased the land. 1. Both C and Paula sue to recover the $75,000. Will they win? a. Paula has no cause of action (under state law) unless she can prove fraud, since Art owes her no fiduciary duty in selling her shares (same as Case 1). b. But does C have a cause of action against Art? xi. Liability for Pre-Incorporation Activity - Fiduciary Obligation Hypos 1. If A breached a duty to C in selling the land for $200K, then Paula could have C sue A for the breach of duty. a. Recall Putnam v. Shoaf 2. But A owned C, and (as a director) ratified the purchase. A knew what he paid, so there was full disclosure to C. Thus, A breached no duty to C. a. Ratification is tricky: if Art has a personal interest in the transaction he is usually precluded from acting on behalf of C to ratify the transaction. But if Art is the only person owning C, who can ratify? And who can the transaction harm? 3. The only difference between cases 4(a) & 4(c) is that in the former, Art didn‟t control C when he sold the land. He was promoter but not owner/manager, so he owed fiduciary duties yet couldn‟t act for C and ratify the sale. a. Again, a slight difference in form results in a big difference in liability. xii.
xiii. Model Business Corporation Act (1984) (“MBCA”) § 2.01-2.06, 4.01; Delaware General Corporation Law (“DGCL”) § 101-102, 106-109 xiv. 199-204 (Hypos, SGM) b. Capital Structure i. Raising Additional Capital 1. In forming a business entity, the lawyer needs to anticipate the future business needs of the entity. 2. One of the more obvious needs is raising more resources (to seize a business opportunity, expand business, weather out a slump in business, etc.). 3. Most resources (e.g., labor, raw materials) can be purchased with money. But what should be done when the business entity needs more money? a. Can the corporation rely on being able to borrow money? b. Can the corporation rely on being able to tap new investors to raise money? ii. Raising Additional Capital - The Hypo 1. The Project a. Dave, a real estate developer, plans to construct an apartment building at a cost of $10 million. 2. Debt Capital a. Dave decides to borrow as much of the $10M as he can. b. A bank is willing to lend Dave $9 million, if he has equity capital of at least $1 million. 3. Equity Capital a. To raise the $1 million in equity, Dave forms Acme Corp. b. 40 investors invest $25,000 each in Acme i. 40 x $25,000 = $1 million c. Each investor receives one share for each $1,000 he/she invests (so, each investor receives 25 shares). 4. Difficulties a. Unfortunately, after the $10 million are spent, the building is not yet complete. b. The incomplete building can‟t generate rents, but can be sold for $9 million. c. If the unfinished building is sold, Acme will have $9 million in cash. After paying out the $9 million debt to the bank, Acme will have no assets left. i. Investors lose all of their investment 5. Salvaging the Project a. Dave estimates that if Acme spent another $500,000, the building can be completed. Such a building will be worth $10 million. b. If the building is completed and sold, and the debt is repaid, Acme will have a $1 million surplus.
i. In other words, if the investors can raise another $500,000, they will likely create a surplus of $1 million – a good deal. c. But how to get the $500,000? iii. Raising Additional Capital 1. 1. Shareholders‟ Voluntary Loan a. Each of the 40 investors to lend $12,500, charging zero interest b. If all investors lend the money, the corporation will have a $10 million building, and $9.5 million in debt. This leaves a surplus of $500,000, or $12,500 per investor. i. Is there a cost to the investors in lending the money? c. If one investor doesn‟t lend the money, while all other investors do, the corporation may lend the remaining money, but it will have to pay interest, which will reduce the surplus. i. Suppose the interest amounts to $400. ii. How much of that cost will be borne by the shirking investor? d. Result: Investors are likely to decline to lend the money. 2. 2. Issuing Shares at Original Price a. Instead of raising debt capital from the investors, Acme can offer each investor to buy 12.5 additional shares, at the same price as the original shares cost ($1,000/share). b. This will raise: 40 (investors) x 12.5 (shares) x $1,000 (price) = $500,000 c. The problem is that the value of Acme dropped. i. Even if it gets the additional capital, it will cost $10.5 million to build a $10 million building. ii. Therefore, the value of an Acme share dropped below the original value of $1,000. iii. A share is now worth $500 (I won‟t bother you with the math of calculating this). d. A rational investor would not pay $1,000 to buy a share worth $500, so this attempt to raise capital will fail. 3. 3. Issuing Shares at Reduced Price a. If Acme offered shares at their actual value ($500), it would need to issue 1,000 shares to raise $500,000. i. With this money it will complete the building, sell it for $10 million, pay off the $9 million debt, and divide the surplus between the 2,000 shares (1,000 original shares and 1,000 new shares), distributing $500 ($1,000,000/2,000) per share.
b. This may be too close a margin for some investors – if there are any additional costs, the value of a share will drop below $500, so why buy additional shares? c. To attract investors to buy the shares, a corporation may offer the new shares at a discount from their expected value. i. E.g., offer 2,000 new shares for $250 each. Since the expected value of a share is $500, this is a good deal for each investor. d. This is sometimes called a “penalty dilution”, because an investor who does not buy the reduced price shares will lose some of the value of her existing investment. i. An equity interest is like a slice of the corporation pie (the pie is the total assets of the corporation) ii. Issuing a new share reduces the size of each slice iii. But the money for which the share was purchased increases the corporation‟s assets, so it makes the pie larger iv. “Penalty Dilution” – Intuitive Explanation 1. Suppose a corporation issued 4 shares when it was formed. Each share represents an equal slice of the corporation‟s assets. 2. Size of each slice (i.e., value of a share) = size of pie/number of slices (i.e., corporation‟s total assets/number of shares). 3. Now the corporation has issued another share. Another slice was added to the pie, making the relative size of each slice smaller. But the money received for selling the fifth share was added to the corporation‟s assets, making the pie larger. 4. Is each slice in the lower pie larger or smaller than a slice in the higher pie? 5. What does that depend on? 6. When a point is bought for exactly its value, the size of each slice doesn‟t change – the increase to the size of the pie (money paid for the share) is equal to the size of the new “slice”. 7. If a point is sold below its value, the increase to the size of the pie was less than the size of the new slice. a. Therefore, the other slices become smaller. 8. Purchasing a share below its value results in a transfer of wealth from the owners of the existing shares to the owner of the new share. a. This is called “dilution” of the existing shareholders. 9. If the existing shareholders buy the all of the newly issued shares pro rata (i.e., at the same proportions as their current ownership), then the wealth will be transferred from them (as the owners of the existing shares) to… them (as the owners of the newly issued shares).
10. In other words, they will not be diluted – they will neither gain nor lose from buying the new shares. Meanwhile, the corporation will raise more capital. v. Problems with “Penalty Dilution” 1. 1. A shareholder that doesn‟t have available money to invest will lose value (“be diluted”) a. Example: Alice owns two of the four shares (50%) in Acme Corp. Acme offers its shareholders 6 new shares, pro rata (i.e., Alice has the right to purchase 50% of the new shares: that is 3 shares) for a price of $10,000 a share. Alice does not have $30,000 in cash. She has to decline the offer. Brian purchases the 3 shares offered to him, plus the 3 shares that Alice declined. b. He now has 8 of the 10 shares, which gives him both a larger stake in the profits and possibly control of Acme. c. Suppose Brian wanted to take over Acme. He could wait until Alice has no money and then have Acme issue new shares. 2. 2. A shareholder who doesn‟t want to invest more in the corporation will lose some of the value of his investment. a. Example: Again, Alice owns two of the four shares (50%) in Acme Corp. Acme offers its shareholders 6 new shares, pro rata for a price of $10,000 a share. Alice has the cash, but she fears that investing all of it in Acme would be irresponsible. She prefers to invest the $30,000 in government bonds, in case Acme does poorly. b. If she declines the offer, Brian will purchase the 3 shares offered to him, plus the 3 shares that Alice declined, and will dilute Alice (who will now have two of ten shares, or 20%). 3. “Penalty Dilution” – Numerical Example a. Suppose that Ted is an investor in the real-estate investment hypo presented earlier (he bought 25 shares when the corporation formed). b. Ted is upset at the failure to complete the building with the original capital, and doesn‟t want to invest more. The corporation offers 2,000 shares (50/investor) @ $250/share. c. If Ted buys the 50 additional shares he is offered, he pays an additional $12,500 (50 x $250). The corporation completes the building, sells it, repays debt, and distributes the $1 million surplus among the 3,000 shares (1,000 original + 2,000 new), for $333 a share. Ted receives $24,975 (75 x $333). d. After deducting the cost of the reduced price shares, Ted‟s profit is $12,475.
e. If Ted refuses to buy, and the other investors buy all the shares (including Ted‟s), each share will still be worth $333. Ted will not pay more money, but will have only 25 shares. When the corporation is dissolved, Ted will receive $8,325 (25 x $333). f. Thus, Ted is financially pressured to buy the shares or lose some of the value of his stake in the corporation. 4. 4. Shareholder Loans at High Interest Rate a. Another option is to raise the money as a loan (as in Option 1), but pay a very high interest rate on the loan. b. If all shareholders provide the loan, the interest rate does not matter – the interest comes out of one pocket (SHs as owners of the firm‟s assets) into their other pocket (SHs as creditors of the firm). c. But if some SHs refuse to provide the loan, they pay high interest payments (i.e., the value of their shares shrinks), but do not receive the interest payments (since they did not lend). d. The result is similar to a penalty dilution, and has the same advantages and flaws. 5. 5. Mandatory Capital Contributions a. Options 1 and 2 for raising capital from the existing shareholders were completely voluntary. Options 3 and 4 were voluntary, but refusal resulted in a loss to the refusing party. b. Another option is to determine that the directors have the right to require each shareholder to contribute more capital to the firm, pro rata. c. What are the advantages and disadvantages of this option? i. How can you mitigate the disadvantages? 6. 6. Turning to Outsiders a. Options 1-5 raised the additional capital from the existing shareholders. Another approach could be to authorize (in the AoI or the bylaws) the directors to sell shares to third parties, or to lend money/sell bonds to third parties. b. What are the advantages and disadvantages of this option? vi. Basic concepts of Capital Structure 1. A firm‟s capital structure is the set of claims to its assets and future earnings. In corporations, most of these claims are attached to ownership of securities: a. Shares – These are securities attached to equity capital. Shares entail certain voting rights in the firm, rights to dividends (distribution of profits to shareholders), and rights to the residual assets of the firm after all debts have been paid.
b. Bonds – These are securities attached to debt capital. Bonds entail rights to payment of interest and principal, often specify collateral, and may give some contractual rights of control (similar to Cargill). c. Hybrids – Custom-tailored instruments that have some of the rights typical to shares or bonds (e.g., preferred shares, convertible bonds, warrants) 2. A corporation may have several different classes of shares/bonds, with each class conveying different rights. vii. Preferred Shares 1. A class of shares that has priority over other shares in: a. Receiving dividends; or b. Rights to the corporation‟s assets upon liquidation 2. Example: A company issues 100 regular shares and 100 preferred shares that receive a $3/share dividend preference. The BoD decides to distribute $500 in dividends. a. The preferred shareholders first receive $3 a share. b. This leaves $200 to be distributed among all 200 shares (preferred and regular). Each share receives $1, so the holder of each preferred share receives a total of $4, while a holder of a regular share receives $1. 3. Shintom Co. Ltd. v. Audiovox Corp. (Del. Ch. 2005): Preferred shares are valid even if they do not have priority in dividends a. Some jurisdictions may still require (or infer) dividend preference viii. Convertible Bonds 1. A convertible bond is a bond that may be converted into stock 2. Example: Acme Corp.‟s shares are currently selling for $5/share. It issues a $100 bond, that is convertible to 10 regular shares. a. Would it make sense for a bondholder to convert it immediately? b. Would it make sense for a bondholder to convert it if the price of a share went up to $12/share? 3. Benefits for the bondholder: Convertible bonds give the creditor the security of a bond (guaranteed interest and priority over shareholders), while they also have some of the upside of rising stock prices. 4. Benefits for the corporation: The company needs to pay a lower interest rate on the bond. 5. Benefit to both parties: Aligning incentives a. Recall the conflict of interests between creditors and shareholders (e.g., Martin v. Peyton). b. What effect do convertible bonds have on that? ix. Warrants
1. A warrant is a security issued by the corporation, giving the holder the right to purchase a share, during a specified period, for a specified price. a. Example: Acme Corp. sells 100 warrants, for $2/warrant. Each warrant allows the holder to purchase a share for $6. The warrant expires a year after issue. b. Assume the current market price for a share is $10. i. Would it make sense to buy a warrant? ii. Would it make sense for the corporation to issue one? c. Assume the current market price for a share is $4. i. Would it make sense to issue a warrant? ii. Would it make sense to buy a warrant? 2. Warrants are like selling a share in two installment payments, with the share delivered only if both payments are made, and with the buyer allowed to cancel the agreement within a certain time, subject to losing the first payment. a. Warrants are often issued by the corporation in a bundle with bonds or stock (like a coupon: “Buy one, get one for $6”) b. What are the benefits of warrants to buyers? To the corporation? 3. Don‟t confuse a warrant with an option: options are issued by third parties (not the corporation), and the money paid for purchasing or exercising them does not go to the company. a. “Stock options” to employees are a type of warrant x. Misappropriating Stakeholder Rights - “Watered Stocks” 1. Acme has 10 shareholders; each owns one share. Acme is worth $100. a. How much is each share of Acme worth? 2. Acme‟s BoD issues 10 new shares to Jill, for $2/share ($20 total). a. How many shares does Acme have now? b. What is Acme worth now? c. How much is one Acme share worth now? d. Value of Jill‟s shares? Value of other SHs shares? e. What can we do to prevent this misappropriation? 3. Misappropriating Stakeholder Rights - “Watered Stocks” Solutions a. Limit the number of shares that BoD is allowed to issue without authorization from the existing shareholders. i. Authorized shares: The maximum number of shares that the company can have. ii. The articles of incorporation must specify the number of shares the corporation is authorized to issue. Their number can only be changed by changing the AoI.
iii. Both MBCA [§1.40(2)] & DGCL [§161] use this concept. b. Set a minimum price for the shares i. Par value: The minimum price (specified in the AoI) at which shares may be issued by the company. ii. DGCL uses this concept [DGCL §153(a)]; MBCA does not. xi. Misappropriating Stakeholder Rights - Excessive Dividends 1. Acme has 10 SHs; each owns one share. It has $100 in assets. Acme issues $50 of one-year bonds, bearing 10% interest. a. Acme‟s total assets are now $150. It will need to pay $55 in one year. b. A year later, Acme lost $70. It has $80 in assets ($150-70). How much are the bondholders entitled to? 2. Before Acme pays the bondholders, it declares a dividend of $8/share. It pays SHs $80. a. SHs receive 100% of the remaining assets ($80). b. Bondholders receive nothing. xii. Misappropriating Stakeholder Rights - Excessive Stock Repurchase 1. Acme has 10 SHs; each owns one share. It has $100 in assets. Acme issues $50 of one-year bonds, bearing 10% interest. a. A year later, Acme lost $70. It has $80 in assets ($150-70). 2. Before Acme pays the bondholders, it purchases eight of the shares for $10/each, paying a total of $80 and leaving it with zero assets. a. Bondholders and 2 shareholders receive zero. Other eight shareholders suffer no loss. 3. What can we do to prevent misappropriation via dividend or stock repurchase? 4. What can we do to prevent misappropriation via dividend or stock repurchase? a. Specify a minimum amount of assets that dividends cannot compromise i. DGCL approach b. Prohibit a dividend that causes insolvency i. MBCA approach xiii. Misappropriating Stakeholder Rights - Excessive dividends: DGCL solution 1. Specify a minimum amount of assets that dividends cannot compromise. 2. Total assets = (stated) capital + (capital) surplus 3. Stated capital [DGCL §154, 244]: Composed of – a. The par value of all issued shares that have par value; and b. Consideration received for all issued shares that do not have par value, except for amounts that the BoD allocates to surplus; and
c. Amounts added to or reduced from the stated capital by the BoD. 4. Surplus: Assets of the corp. other than the stated capital 5. Dividends - DGCL §170(a): Dividends permitted from: a. Surplus; or if no surplus – b. From profits for the current or preceding year (“nimble dividends”) i. But dividends prohibited if capital < stated capital of those shares having preference to the recipients of the dividend. 6. Repurchasing/redeeming shares – DGCL §160(a): Corp. may repurchase or redeem its own shares unless this causes capital to be “impaired”. This means: a. Generally, repurchase/redemption allowed only from surplus; b. Under §160(a)(1), repurchase of shares out of the capital attributable to the same shares. 7. Shares that were issued and then purchased by the corp. are called “treasury shares”. xiv. Misappropriating Stakeholder Rights - Excessive dividends: MBCA solution 1. Prohibit a dividend that causes insolvency. 2. MBCA §6.40(c) – Distribution prohibited if: a. Corp. would not be able to pay its debts as they become due in the usual course of business; or b. Corp‟s total assets < sum of its liabilities plus amount needed to satisfy preferential rights that are superior to those receiving the distribution (e.g., preferred shares). 3. MBCA eliminates the concepts of stated capital, surplus, treasury shares and par value. xv. Capital Structure Terminology - MBCA 1. Authorized shares: The maximum number of shares that the company can have. 2. Outstanding shares: The number of shares the corporation has sold and not repurchased. 3. Authorized but unissued shares: Shares that are authorized but have not been sold by the firm. a. Example: Acme Corp.‟s articles of incorporation authorize it to issue up to 1,000 shares. The firm sells 200 shares to investors. It now has 1,000 authorized shares, 200 outstanding shares and 800 authorized but unissued shares. 4. Under the MBCA, treasury shares are classified as authorized but unissued shares. a. Continuing the hypo from last slide: Acme Corp. now buys 50 of its 200 outstanding shares. After the purchase, it has
xvi.
xvii.
xviii.
xix.
1,000 authorized shares, 150 outstanding shares, and 850 authorized but unissued shares. Rights of a Shareholder 1. Control rights a. Election of directors (MBCA §§8.03-8.04) b. Amendments to articles of incorporation and bylaws (MBCA §§10.03, 10.20) c. Fundamental transactions. i. Mergers (MBCA §11.04) ii. Major asset sales (MBCA §12.02) d. Miscellaneous, such as approval of independent auditors. 2. Economic rights a. Right to share in dividends, if dividends are declared by the company; b. Right to the residual assets of the firm in liquidation. Custom-Tailoring Share Rights -- Delaware 1. DGCL §102(a)(4) allows corporations not to issue any stock a. AoI needs to state this, and state either the conditions of membership or that these conditions are in the bylaws. 2. DGCL §151(a): “Every corporation may issue 1 or more classes of stock or 1 or more series of stock within any class thereof, any and all of which classes… may have such voting powers, full or limited, or no voting powers, and such [economic rights]… as shall be stated… in the certificate of incorporation… or in [a BoD resolution] pursuant to authority expressly vested in it by its certificate of incorporation.” 3. DGCL §151(b) allows the issuance of redeemable shares as long as after redemption there are still shares with full voting powers. 4. DGCL §151(e) allows the issuance of convertible shares Custom-Tailoring Share Rights -- MBCA 1. MBCA §6.01(b) – “Minimum requirements” a. At least one class of shares with unlimited voting rights; b. At least one class of shares with a residual claim (i.e., the right to receive the net assets of the corporation upon dissolution) – doesn‟t have to be the class with unlimited voting rights. 2. MBCA §6.01(c) – Authorizes non-voting stock, convertible stock, and other characteristics of stock. Custom-Tailoring Share Rights 1. Hypo: Acme Corp. has only one class of stock. Shareholders are entitled to dividends (if the BoD authorizes dividend distribution), to Acme‟s net assets upon dissolution, but are not entitled to vote. a. Is this permitted by MBCA §6.01? b. Are there any risks to this capital structure? 2. Another hypo: Acme has instead two classes of stock.
a. Class A shares are the same as in the above hypo (entitled to dividends and net assets upon dissolution, but not entitled to vote). b. Class B shareholders have the same rights as Class A, except that each Class B share also has one vote. c. Is this permitted by MBCA §6.01? d. Are there any risks to this capital structure? xx. Problems with Non-Voting Shares - Discounting the cost of thieving directors 1. Abe is offered Acme non-voting shares. The economic value of one share of Acme‟s successful business is worth $10. 2. However, Abe thinks Acme‟s directors are a bunch of liars and thieves. He estimates that they will “steal” $10M, which amounts to $1 per share. He therefore agrees to buy a share for $9. 3. If SH can assess the decrease in share value caused by the inability to keep the BoD accountable, it seems that no one can complain. a. SH paid a price proportionate to their (limited) rights. i. Companies who want to raise capital more cheaply can give voting rights to SH and receive a higher price per share. b. Can SH assess the amount that an unaccountable BoD would take away from them? xxi. Problems with Non-Voting Shares -- Do Fiduciary Duties Suffice? 1. Suppose that there is no way to assess the discount for lacking the ability to keep the BoD accountable. A BoD action that is not in the interest of SH is still a violation of fiduciary duties. a. Why isn‟t it enough to give SH a right to sue the BoD for breach of fiduciary duties? 2. Proposed solution: - “One Share, One Vote” a. In 1988, the SEC adopted Rule 19c-4, which prohibited any stock exchange or mutual securities association from listing any stock of a corporation that takes any action to the effect of nullifying, restricting or disparately reducing the per share voting rights of existing common SH. i. Why prohibit the listing of shares on an exchange? Why didn‟t the SEC simply prohibit corporations from taking “any action to the effect of nullifying, restricting or disparately reducing the per share voting rights of existing common SH”? b. The Business Roundtable v. SEC (D.C. Cir., 1990): Court vacates the rule on the ground that it exceeds SEC‟s authority. c. SEC instead informally pressures stock exchanges to adopt similar rules. 3. Does a “one share, one vote” rule solve the problem?
a. Acme has one class of shares, with one vote each. It has 1,000 shares outstanding, and the shares sell at $5 each. b. Recently, Acme‟s SH have been dissatisfied with the directors, and plan to replace them at the next annual meeting. Before the SH meeting, the directors issue 2,000 shares to Alex for 1¢ a share. Alex likes the directors and does not plan to replace them. c. Is there anything the shareholders can do anticipating such behavior? [Recall discussion on Watered Stocks] xxii. Separating Control & Ownership Rights - Stroh v. Blackhawk Holding Corp. (Ill. 1971) 1. Twenty-one promoters form Blackhawk Holding Corp. The company has two classes of shares: a. Class A – “Normal shares” – Promoters purchase 87,868 shares for $3.40/share (company receives $298,751.20). b. Class B – Voting rights, but no economic rights (i.e., no rights to dividends or assets in dissolution) –Promoters purchase 500,000 such shares for ¼¢/share (company receives $1,250). 2. Promoters then sell 500,000 Class A shares to the public at $4/share (company receives $2M). a. Why would promoters want to buy shares with no economic rights? 3. What is the outcome of this capitalization? a. Who has control? b. How much did they invest to gain control? 4. Is this fair? a. Suppose Class A shares could not vote at all, but had rights to dividends. You know that if you buy these shares, you will never be able to affect the corporation‟s decisions. b. Assume there is a risk that Class B SH (who control the company) would use their control to appoint themselves officers and pay themselves lavish salaries. c. Would you agree to buy Class A shares? 5. But how is this different from buying one share of IBM? a. You have no realistic ability to control IBM‟s board by voting your one share. 6. Back to Stroh: Plaintiff argues that Class B shares are not shares, since shares are defined to be a proprietary interest in the corporation, and (according to the plaintiff) control rights without economic rights are not a proprietary interest. a. Court‟s analysis? xxiii. Control vs. ownership discrepancy in a single share class 1. Providence & Worcester Co. v. Baker (Del. 1977): P&W‟s AoI provided that a SH is entitled to one vote per share for the first 50
shares he owns, and one vote for every 20 shares above the first 50. 2. Baker argued that DGCL §151(a) allows different voting rights among share classes, but not within the same share class. 3. Court: P&W‟s voting rule is permissible. 4. What might be the purpose of P&W‟s voting rule? xxiv. Customizing Control/Ownership Rights 1. In Stroh, at the time Blackhawk was formed the Illinois constitution mandated that all common shares have equal voting rights. In 1970 the equal voting rights requirement was repealed. 2. Blackhawk‟s promoters hire you to streamline their capital structure while maintaining the same rights. a. Over 50% of the control rights b. 15% of the economic rights 3. Customizing Control/Ownership Rights -- Method 1: Dualclass; one share, one vote a. As in Stroh. i. Class A shares have one vote per share, full economic rights ii. Class B shares have one vote per share, no economic rights b. Promoters buy, for a symbolic price (¼¢) more Class B shares than the number of Class A shares they plan to sell to the public i. Result: Promoters have >50% of the control rights. c. Promoters buy 15% of Class A shares i. Result: Promoters have 15% of the economic rights. 4. Customizing Control/Ownership Rights -- Method 2: Dualclass; voting/non-voting a. If non-voting common shares are permissible: i. Class A shares would be non-voting, full economic rights ii. Class B would be voting, no economic rights. b. Promoters get one Class B share each for 1¢. i. Result: Promoters have 100% of the control rights. c. Promoters then they buy 15% of Class A shares i. Result: Promoters own 15% of the economic rights. 5. Customizing Control/Ownership Rights -- Method 3: Classspecific board members a. Design share classes as follows: i. Class A shareholders (as a group) appoint 2 of the 5 directors, and receive (pro-rata) 85% of the economic rights. ii. Class B shareholders appoint 3 directors, and receive 15% of the economic rights.
b. Promoters buy only Class B shares, and issue to the public only Class A shares. i. Results: Promoters control the corporation (by appointing 3 of the 5 directors), and receive 15% of the economic rights. 6. Customizing Control/Ownership Rights a. Methods 4 through 6 are more suitable for closely-held companies than publicly-held companies. Therefore, we will modify the Stroh hypo, and have instead two shareholders: Pete and Otis. b. They agree to give Pete 55% of control rights and 15% of economic rights, and give Otis 45% of control rights and 85% of economic rights. 7. Customizing Control/Ownership Rights -- Method 4: Voting Trust a. Only one class of shares. Pete buys 15%; Otis buys 85%. b. Otis then forms a trust with Pete as the trustee, and transfers to the trust legal title to shares amounting to a 40% interest. Otis is the beneficial owner of the fruits of this trust (e.g., dividends), but Pete (as trustee) gets to vote them. i. Otis – 45% ii. Trust – 40% iii. Pete – 15% c. For historical reasons, some statutes limit the duration of voting trusts [see MBCA §7.30: 10 year limit, but renewable]. d. Some states require the voting trust to be made public [e.g., DGCL §218] 8. Customizing Control/Ownership Rights -- Method 5: Irrevocable Proxies a. One class of shares. Pete buys 15%; Otis buys 85%. b. Otis gives Pete an irrevocable proxy to vote shares amounting to a 40% interest, and leaving the vote to Pete‟s discretion. i. Proxy: an agency relationship that allows the proxy holder to vote on behalf of the person giving the proxy. ii. The proxy can specify how the proxy holder must vote, or leave it to the proxy holder‟s discretion. c. An irrevocable proxy is a proxy that cannot be cancelled at the will of the person giving it. i. Why does Pete need to insist on an irrevocable proxy? d. MBCA §7.22: Proxies are ordinarily revocable at the will of the SH, but a SH can give an irrevocable proxy. Usually,
the proxy must be coupled with an interest. Acceptable interests include: i. Proxy holder is a pledgee; ii. Proxy holder has purchased/agreed to purchase the shares; iii. Proxy holder is a creditor of the corporation who required the irrevocable proxy in order to extend it credit; iv. Proxy holder is an employee of the corporation who required the irrevocable proxy in his employment contract; v. Proxy holder is a party to a voting agreement. e. Proxy is irrevocable only as long as proxy holder has an interest in the firm. 9. Customizing Control/Ownership Rights -- Method 6: Vote Pooling Agreements a. Only one class of shares. Pete buys 15%; Otis buys 85%. b. Pete and Otis sign an agreement to pool their votes and always vote as Pete instructs. i. Alternatively, they can decide that if they disagree on how the shares should be voted, a designated arbitrator would decide. ii. To make certain that the agreement is specifically enforceable, Otis may give Pete an irrevocable proxy to vote Otis‟ shares. c. Vote pooling agreements are similar to voting trusts, and are sometimes used to avoid the legal limitations on voting trusts (such as duration limits). d. See MBCA §7.31-7.32. xxv. xxvi. MBCA § 1.40 (2), (6), (13A), (22), 6.01-6.03, 6.21, 6.24, 6.30-6.31, 6.40; DGCL §151-154, 157, 160-161, 170(a), 173, 244 xxvii. 592-596 (Stroh) c. Limited Liability i. MBCA § 6.22 ii. 206-217 (Walkovszky, Sea-Land) Directors and Officers a. Centralized Management i. MBCA § 3.01-3.02, 3.04, 8.01, 8.20-8.25, 8.40, 8.43-8.44, 10.01-10.05, 10.20-10.21; DGCL § 121-122, 124, 141(a), 142 ii. 270-286 (Barlow, Dodge, Shlensky) b. Insiders‟ Duty of Care i. MBCA § 8.30, 8.31(a)(2)(ii, iv), 8.42; DGCL § 141(e) ii. 316-339 (Kamin, Van Gorkom) iii. 339-367 (Brehm, Francis, Caremark) c. Insiders‟ Duty of Loyalty
IV.
V.
VI.
i. MBCA § 8.31, 8.60-8.63; DGCL § 141, 144 ii. 368-373 (Bayer), 377-385 (Broz) iii. 395-401 (Fliegler, Wheelabrator) Shareholders a. Fiduciary Duties of Shareholders i. MBCA §8.03-8.06, 8.08-8.10 ; DGCL § 141(d), 223 ii. 385-389 (Sinclair), 700 (Zetlin) 703-711 (Perlman, Essex) b. Derivative Actions i. MBCA § 7.40-7.46 ii. Tooley, Beam, Oracle, Finley c. Shareholder Voting & Inspection Rights i. MBCA § 7.01-7.02, 7.04-7.08, 7.20-7.22, 7.24-7.28, 10.04, 16.01-16.02, 16.20; DGCL § 211-212, 214, 216, 219-220, 228, 242 ii. Licht, 597-604 (SWIB) iii. 579-585 (Crane, Pillsbury) Closely-Held Corporations a. Shareholder Agreements i. MBCA § 6.27, 7.30-7.32; DGCL § 218, 341-343, 350-351, 354-355 ii. 606-620 (Ringling Bros., McQuade, Clark) b. Fiduciary Duties in Close Corporations i. 638-659 (Wilkes, Ingle, Sugarman, Atlantic Properties) c. Statutory Dissolution i. MBCA § 14.02, 14.05, 14.30, 14.32, 14.34; DGCL § 275, 278 ii. 673-681 (Alaska Plastics), 688-694 (Stuparich)